Recommended
Guidelines for the Adoption of a Renewables Portfolio Standard (RPS) in the
State of Washington
Kristy
Fruit
CAUSE
2000
Introduction
A renewables portfolio
standard (RPS) requires that a minimum percentage of each electricity
generator’s or supplier’s resource portfolio be comprised of renewable energy1. Because an RPS encourages the enhancement of
existing renewable forms of energy coupled with the implementation of new
renewable projects, it helps to promote a sustainable energy future. Companies can meet the minimum standard for
renewables by earning renewable energy credits (RECs)—tradable credits awarded
for each unit of renewable energy produced.
The RECs would resemble paper currency, and would list the number of kilowatt-hours,
the year and origin, and the type of generation. Renewable generation companies would be the original owners of
the RECs, but electricity providers could purchase them to successfully comply
with the RPS. The use of RECs makes RPS
compliance easier to monitor and transactions more efficient. In the event of a non-compliance, the
generator will not be permitted to certify any RECs for a given time period and
will consequently miss out on credit payments.
RECs correct the bias faced
by renewable energy sources in the electricity market by providing renewable
generation companies with payment for the public benefits they provide. Air and water pollution produced by
conventional fossil fuel plants lead to unacknowledged costs, including health
problems and environmental degradation.
Renewable power plants provide the benefits of reduced pollution, waste
and risk. The RECs serve as a commodity
for these benefits, since they are not otherwise recognized in the cost of
electricity. With RECs, renewables
companies will have a new product that represents the “clean”.
The state RPS could be
administered by many different candidates: the state energy office, utility
commissions, the department of natural resources, etc. The program administrator has the
responsibility of setting performance goals and living up to them.
Several states have already adopted their own
RPS, and many other states have an RPS under construction and consideration1. The terms of the RPS vary from state to
state; it is designed to address the specific energy needs of each individual
state. This paper demonstrates how the
state of Washington would benefit from the adoption of an RPS, and outlines the
specific terms that should be included.
Renewable technologies eligible for credit under Washington's RPS
include: solar thermal electricity, photovoltaics, wind, biomass, alternative
fuels, fuel cells, landfill gas and geothermal.
The
main criticism of an RPS is that the cost of obtaining the required amount of
RECs cannot be pre-determined. While
cash incentives paid to customers or other subsidies used to promote renewables
can be budgeted in advance, the cost of RECs depends on market forces. These market forces, however, have an
important benefit of their own: they result in competition that serves as an
ongoing incentive to reduce costs. This
market approach provides the greatest amount of clean power for the lowest
price.
To
insure that REC prices do not become too high as a result of low supply or high
demand, a fair price cap can be established.
The program administrator can offer “proxy credits” for sale at a fixed
price, set just slightly above the expected price of RECs1. If the cost of RECs on the open market
remains less than the cost of the “proxy credits”, a retailer will save money
by purchasing RECs. If, however, there
is an unanticipated shortage in the REC market, a retailer can satisfy the RPS
by writing a check to the program administrator for the number of RECs required
multiplied by the posted price cap. The
program administrator will use the money collected to buy the lowest priced
RECs in the market. This allows the
retailer to save money while supplying renewables to the greatest possible
extent.
The
price cap protects power retailers against unanticipated shortages in the REC
market. However, none of the states
that have adopted the RPS to date have felt that the added costs for purchasing
renewable energy are significant enough to require one1. Although settling a price cap may interfere
with the natural market forces, it is recommended that Washington adopt a price
cap to ensure that earning RECs will not become too much of an economical
burden. With the adoption of a price
cap, it is guaranteed that companies will not have to pay more to comply with
the RPS than the actual value of the benefits of using renewable energy
sources. As stated above, a price cap
will allow renewables to be supplied to the greatest possible extent, and will
not force companies to expend an unreasonable amount of money on renewable
energy sources. This will prevent
renewables from earning a bad reputation—if earning RECs is too expensive, no
one will want to comply with the RPS and everyone will resent the renewables
requirement. This is obviously
counterproductive to the goals of the RPS.
An
alternative to setting a price cap is to link the use of renewables to desired
atmosphere CO2 reductions.
Because of the increasing concentration of greenhouse gases in the
atmosphere, companies have been encouraged to seek clean technologies that
reduce CO2 emissions and consequently help to mitigate climate
change. If companies are able to cut
back on emissions without the use of renewables (by improving efficiency,
reducing energy consumption, etc), they will not be penalized under the RPS
because they have still achieved the desired end goal (CO2
reduction).
The
percentage of renewable required by the RPS should be set at a level that can
create a viable, predictable and safe market for a still young renewable energy
industry1. Many people are
still uncomfortable with upcoming renewable technologies—they prefer to stick
with the conventional energy sources they are familiar with, even if they are
detrimental to public health and the environment. Therefore, it is important to not overwhelm companies and
consumers by requiring too much too fast.
The RPS should be designed to maintain the current level of renewable
generation and lead to slow and steady growth over time.
Of
the 83,700,146 MWh of electricity sold in 1997, only a very small proportion
came from biomass or other renewables.
In fact only 0.23% of the electricity was generated from biomass, and an
insignificant percentage was generated from other renewable sources2. The percentage of renewables required under
the RPS should reflect societal values and goals for environmental protection,
economic independence, and sustainability1. It is therefore important that Washington
increases its percentage of renewables to a level that is high enough to
demonstrate social and environmental responsibility, but not so high that
renewables are viewed as an invasive technology. It is recommended that Washington increase its percentage of renewables
used for electricity by 0.5% per year for 10 years, resulting in 5% of
electricity sales coming from renewable sources by 2010.
Adopting
the RPS will create a market for nonfossil fuel and nonnuclear electricity, and
will lead to the diversification of the nation’s energy supplies1. There is great potential for the utilization
of renewable energy in Washington. In
1997 electricity sales from all utilities totaled 83,700,146 MWh2. It has been estimated that Washington has
the resources (available land and sufficient wind) to produce at least
39,000,000 MWh of wind power2, representing over 45% of the total
energy sold in 1997. There is also
sufficient sunlight to install photovoltaic panels that can be combined in
systems that provide up to 37,000 MWh at any one location2, not to
mention the potential for the decentralized installation of PV panels on homes
and businesses. Constructing large,
centralized PV systems may not be the most efficient way to utilize solar
power. However, installing PV panels on
individual buildings can greatly reduce the electricity required from other
non-renewable sources and is therefore eligible for earning RECs. There are also a sufficient number of
geothermal resources throughout the state that can be tapped as a clean source
of energy.
Although
wind power appears to be the renewable technology with the greatest potential
in Washington, it is important that advancements in other renewables are
encouraged as well. It is recommended
that Washington set a limit on the use of any two technologies to meet the
standard. No more than 60% of the
credits can be earned from wind power, and no more than 25% can be earned from
solar. Therefore, no more than 85% of the
credits required can come from any two technologies. The remaining 15% of the credits will be generated by other
technologies such as landfill gas, fuel cells, biomass and geothermal. This restriction preserves diversity and
eliminates the possibility of picking a single favored technology.
It
is also recommended that there are two different classes of RECs having values
of one and two credits. In most cases,
new renewable plants will have difficulty competing with existing plants
because of high capital costs.
Therefore, every unit of renewable energy generated and sold by these
plants creates two RECs. A very small
portion of Washington’s electricity is currently generated by renewable
sources. However, every unit of
renewable energy generated and sold by existing plants creates one REC. Because Washington acquires almost 88% of
its electricity from hydropower2, an energy source that emits only a
very small amount of greenhouse gases, one might argue that Washington should
earn credit for this abundant energy source.
However, large-scale hydro dams are not always environmentally friendly
and therefore not considered a truly sustainable energy source. Also, allowing hydropower to be eligible for
credit would make compliance with the RPS extremely easy because of the
abundance of hydropower already in existence.
To ensure that the development of other renewable energy sources is
encouraged, it is recommended that hydropower not be eligible for credit.
Because
Washington imports some of its electricity from neighboring states, it is
recommended that RECs can be earned for any renewable generation sold to
customers in the state, whether generated in state or not. Washington may wish to continue the use of
large-scale hydro dams because it is a cheap source of electricity. (In 1996 the average revenue per kilowatt-hour
was 4.19 cents across all sectors, which was the third least expensive
nationally3. This is largely
due to cheap hydropower.) To keep
compliance costs low, Washington will look outside its boundaries for states
with more attractive renewable resources.
If in-state generation were required, interstate commerce would be
restricted: there would be no incentive for Washington to purchase renewable
energy from other states because there would be no RECs awarded. Washington might find it more economical to
purchase “proxy credits” rather than switching from large scale hydro to other
renewable sources. These “proxy
credits” will most likely be more expensive than RECs from a neighboring state,
and are therefore a waste of money for Washington.
The
RPS is designed to bring renewables into the market at the lowest cost to
society; therefore, the renewables with the current least-cost will be
implemented. However, some renewables
cost more now but may have important future benefits. In order to ensure that these renewables are not overlooked, it
is recommended that a public benefit trust fund be created. The money generated in this fund could support
the research, development, and commercialization of innovative renewable technologies. It could also help to overcome specific
market barriers, provide financing for renewables projects, and build a
renewable industry infrastructure1.
Some
states have opted to build the trust fund by adding a small charge on each kWh
of electricity. It is proposed that
Washington adopt funding for renewable energy of 0.3 cents per kWh. Since the average revenue per kWh in
Washington in 1996 was the third least expensive nationally3, the
people of Washington will most likely continue to pay a significantly lower
price than the national average for their electricity, even with the addition
of public benefits funding. Stable,
long-term funding is important for the success of renewables. Therefore, the duration of this funding will
be ten years, with potential for renewal in 2010.
Disclosure
Labels and Education
Many
customers are not aware of the sources being used to produce their energy, and
do not understand the benefits of utilizing clean, renewable resources. People generally overestimate how much of
their electricity comes from renewable sources and underestimate how much comes
from polluting fossil fuel sources4. Many suppliers make confusing environmental claims that can be
misleading to the average customer.
Therefore, it is recommended that Washington require disclosure labels
that are uniform, simple and easy to understand. Companies should be required to disclose the content of different
electricity products. Also, disclosure
should allow averaging of renewable generation over a period of time. For example, averaging over monthly or
seasonal periods will allow wind generators in Washington to sell more of their
generation to customers.
It
is recommended that 20% of Washington’s public benefits fund be allocated per
year to increase consumer education about renewables. This funding could also be used for general education on retail
choice.
In
conclusion, it is proposed that Washington develop an RPS to ensure the orderly
development of renewable energy technologies.
The RPS will use market forces to create competition among renewable
developers, which will lead to the lowest possible cost for compliance. The adoption of a price cap will help to
ensure that the cost of compliance remains reasonable, even in the
unanticipated event of an REC shortage.
The percentage of renewables required by the RPS will grow steadily over
time, but will not overwhelm people who are accustomed to conventional energy
sources. By placing a limit on how much
renewable energy can be generated from any one source, the RPS will encourage
the development of a diverse energy supply.
Inter-state commerce will be encouraged, since RECs will be awarded for
any renewable energy consumed in Washington, regardless of the origin of
generation. A public trust fund will be
used to generate money for renewables research and development, as well as
public outreach programs. The slight
increase in the customers’ electricity bills resulting from the fund will not
be burdensome because Washington already has one of the lowest rates
nationwide. Finally, mandatory
disclosure labels will help to eliminate confusion as to which sources are
truly clean and renewable.
RESOURCES
1. Union of Concerned Scientists (January 1999)
Powerful Solutions: Seven Ways to Switch
America to Renewable Electricity: pg. 22-40, Appendices B-D.
2. U.S. Department of Energy, Office of Energy
Efficiency and Renewable Energy Network (1997) State Energy: available on line at http://www.eren.doe.gov.
3. Washington State Office of Trade &
Economic Development (1997) Fact Sheet:
available on line at http://www.energy.cted.wa.gov.
4. Consumer Information Disclosure Project,
Regulatory Assistance Project (January 1998) Consumer Knowledge, Practices, and Attitudes, Electric Utility
Deregulation and Consumer Choice: available on line at http://www.rapmaine.org.