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.

              

Price Cap       

            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).

 

Renewables Percentage

            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. 

Resource Diversity

            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.

Regional Issues

            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.

Public Benefits Trust Fund

            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.