The Renewables Portfolio Standard
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THE RENEWABLES PORTFOLIO STANDARD A Practical Guide Nancy Rader Scott Hempling Prepared for the National Association of Regulatory Utility Commissioners February 2001 DISCLAIMER This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, expressed or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Referenced herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise, does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United State Government or any agency thereof. The report was authored by Nancy Rader and Scott Hempling. Throughout the preparation process, the members of NARUC Committee/Staff Subcommittee on Energy Resources and the Environment provided the authors with editorial comments and suggestions. However, the views and opinions expressed herein are strictly those of the author and may not necessarily agree with positions of NARUC or those of the U.S. Department of Energy. Written comments are encouraged Table of Contents Acknowledgments .............................................................................viii Executive Summary ........................................................................... ix Chapter One: Introduction . 1 I. The Renewable Portfolio Standard: A Brief Description ........................1 II. The Goals of the Renewables Portfolio Standard ..............................2 A. The Market-Based Nature of the RPS Maximizes Efficiency ...................3 B. Various Benefits Are Associated with Renewable Energy .....................3 III. Overview of The Report ..................................................5 Chapter Two: Shaping the Statewide Renewable Energy Goal .......................7 I. How Large Should The Goal Be? ..........................................7 II. Should The Goal Be For Renewable Energy or Capacity? .......................9 III. Should The Goal Be a Fixed Amount or a Percentage Of Sales? ..............................................................9 IV. What Schedule Will Best Achieve The Goal? ...............................10 A. Ensuring Competition at the Outset .....................................10 B. Ensuring Certainty in the Amount of Current Supply ........................11 C. Rate of Interim Increases in the Target ..................................11 V. How Long Should The RPS Last? .........................................12 i VI. What Provisions for Mid-course Adjustments in the Goal Might States Make? ...............................................14 Chapter Three: Selecting the Eligible Resources ...................... 15 I. Selection Principles .....................................................15 A. What are the State's Policy Goals? .....................................15 1. Environmental benefits ........................................15 2. Resource diversity ...........................................16 3. Promoting technologies .......................................16 4. In-state economic development .................................17 5. Respond to public support for renewables .........................17 B. Does the Resource Need Financial Support? .............................17 II. Issues That Arise in Applying The Principles ................................18 A. Should Existing Renewables Be Included? ...............................19 1. Existence is an insufficient characteristic upon which to include or exclude resources ..................................19 2. Practical problems with including existing resources ...................19 3. Terminology issues associated with "existing" ........................21 B. Should Projects Already Receiving Benefits from Other Policies Also Receive Benefits from an RPS? .............................23 1. Policies benefitting existing projects: stranded cost recovery and PURPA contracts .................................24 a. Projects with existing PURPA contracts .....................24 b. Projects with future PURPA contracts ......................25 c. Projects affected by stranded cost treatment ..................25 d. For projects with financial need, who gets the benefits from the RPS premium? ..........................26 2. Policies benefitting new or existing projects: public goods charges and others ......................................28 ii a. Relationship of other policies to the RPS .....................28 b. Projects benefitting from public goods charge policies ...........29 c. Projects benefitting from other types of policies ................31 C. Should Generators Have to Meet Location Requirements? ...................32 D. How Can Policy Makers Resolve Competing Policy Goals? ..................36 1. Structure the RPS with a resource tier ............................36 2. Adopt companion policies to the RPS ............................37 3. Reconsider the RPS approach ..................................37 E. What Special Issues Are Associated with Specific Technologies and Fuels? ......38 1. Unique characteristics of hydropower ............................38 2. Facilities using eligible and ineligible fuels ...........................40 3. Problems of terminology .......................................41 Chapter Four: Translating the Statewide Renewables Goal Into Retail Seller Obligations ........................................ 43 I. Who Should Have The Obligation to Buy Renewables? .......................43 A. States Must Place the Obligation on Retail Sellers .........................43 B. Default Suppliers Should Not Be Exempted ..............................45 C. Self-Generators Should Also Carry the Obligation .........................46 II. How Does One Allocate The Statewide Goal to Those Having The Obligation? ............................................47 A. Method of Apportionment ...........................................47 B. Factoring in Line Losses .............................................48 iii III. Product V. Portfolio Obligation: Should The Retail Seller Include The Obligated Amount in Sales Overall or in Each Product Sold? ............................48 A. The Product Approach Protects Consumers From Confusion and Fraud .........49 B. The Product Approach Promotes Market Competition and Investment in Renewable Energy ................................................50 C. Example: Maine ..................................................51 Chapter Five: The Interdependency of Statewide Goals, Eligible Resources and Retail Seller Obligations in Achieving Policy Effectiveness ................................................. 52 Chapter Six: Designing Mechanisms for Retail Seller Compliance ........ 55 I. Should Retailers Meet Their Obligation Through Ownership of Tradable Credits? ..........................................55 A. How Would an Obligation Based on Tradable Credits Work? ................55 B. What Are the Advantages of Tradable Credits? ...........................57 II. What Methods Are Available to Verify Compliance With The Renewables Obligation? .................................................58 A. Verifying Compliance Using a Credit Accounting System ....................58 B. Verifying Compliance Using a Contract-Path Accounting System ..............59 C. Comparing the Credit and Contract Path Accounting Approaches ..............62 1. Credibility of approach ........................................62 2. Cost and complexity ..........................................63 3. Compatibility with tradable RPS .................................64 4. Ability of retailers to shape and deliver products .....................65 5. Ability to handle small generation resources .........................66 6. Institutional demands .........................................66 iv 7. Ability to scale up system for regional or national use ..................66 D. Coordinating Attribute Accounting Systems Within a Region ..................66 III. How Does The State Make Compliance Flexible? ............................67 A. Measures for Achieving Flexibility .....................................68 1. True-up period ..............................................68 2. Credit banking ..............................................68 3. Credit borrowing ............................................69 4. Force majeure penalty exceptions ...............................70 B. Coordinating Flexibility Measures with the Disclosure of Generation Attributes ........................................................70 Chapter Seven: Enforcing the RPS -- Generator Eligibility and Retail Seller Obligations ................................... 72 I. Why Are Effective Penalties Important? ....................................72 II What Penalties Should Apply to Noncomplying Retail Sellers? ..............................................................74 III. What Penalties Should Apply to Renewable Energy Generators Who Violate The Rules? .......................................76 IV. How Should Penalty Revenues Be Used? ...................................77 V. How Does The Cost Cap Relate to The Noncompliance Penalty? ..............................................................78 Chapter Eight: Administering the RPS ............................ 79 I. To