confidential and proprietary, ©2007 navigant consulting, inc. renewable portfolio standards: a...

Confidential and Proprietary, ©2007 Navigant Consulting, Inc.

Renewable Portfolio Standards:

A Review of Compliance and Enforcement Options

Ryan Katofsky

Presentation to:

Florida Public Service CommissionStaff Workshop

September 27, 2007

www.navigantconsulting.com

©2007 Navigant Consulting, IncConfidential and Proprietary

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RPS Compliance Mechanisms

Presentation Topics

Renewable Energy Certificates

Enforcement Options


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RECs support numerous regulatory and market needs that require a system for defining the attributes of power sold to retail customers.

Generator Registratio

n

Administrator

Accreditation of

Generator

Renewable Energy

Generation(1 MWh)

1 REC

“Null” Energy

(1 MWh)

• Environmental attributes

• Locational attributes

• Technology/fuel attributes

• Labor attributes• Electrons without

attributes

• RECs can support multiple regulatory and market needs: RPS, Labeling, EPS (emissions performance standards), green marketing and claim substantiation.

• An electronic certificate is issued to generators. Retail suppliers purchase RECs for RPS and other purposes.

• Settlement period – after RECs are issued there is a defined period of time to trade them or lose them (in compliance markets). Some systems are quarterly (New England GIS) and other others based on 12 months or longer. Banking provisions may allow RECs to remain viable for longer periods of time.

RECs » How a REC is Born


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Renewable Energy Generatio

n

Bundled Renewab

le Energy1

RECs

“Null” Energy2

Bundled Retailer/

Aggregator3

REC Aggregator/ Retailer

REC Product

Customer

Renewable Energy Customer

1. Energy + attributes2. Energy without attributes3. Includes regulated utilities

Electricity Generation

Renewable Energy

Products

Retailers/ Aggregators

Retail Customers

Customer buys

electrons and attributes (“green power”)Customer

buys attributes

only

RECs are used in mandatory and voluntary markets.

Traditional

Electricity Markets

RPS Obligated

Party

Obligated Party retires RECs equal to RPS

obligation and collects cost from customers

RECs » How RECs are used


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A range of issues will need to be addressed if RECs are used for compliance.

RECs » Additional Considerations

• REC price can be thought of as:

The above-market cost of RE generation, OR

The premium people are willing to pay for the attributes.

• In RPS markets, supply and demand determine price, subject to price caps, credit multipliers, and shelf life

• In voluntary markets price is based on customer willingness to pay, and the type of REC (e.g., from new or existing facility, type of facility)

Determinants of REC value

• Ownership

Pre-existing contracts with eligible facilities (e.g., PURPA)

Customer-side resources subject to net metering

Projects receiving state incentives

• Relationship between mandatory and voluntary markets

Best practice: Voluntary purchases are in addition to RPS requirements

• Relationship with current and future emissions cap/trade programs

REC eligibility issues


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REC tracking systems record production, ownership, transfer/sale and retirement of RECs.

• Two types of REC tracking systems:— Part of a broader generation

attribute system applied to all generators (e.g. the PJM GATS, ISO-NE GIS)

— For RPS compliance only (e.g. Texas).

• Except for ERCOT, all existing tracking systems cover multiple states

• Tracking systems are policy neutral

• Tracking systems are not trading platforms

• Centralized registration, issuing, tracking, retiring, and accounting of RECs

• Verification that the generator is a qualifying facility as defined by the RPS

• Ensuring that no two credits represent the same MWh of energy

• Ensuring that a REC is used to meet only one RPS requirement or voluntary green power product

• Tracking property rights and verifying/maintaining the balance of credits in a specific account

Functions of a REC tracking system

RECs » REC Tracking Systems


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There are three types of RPS compliance mechanisms in use today.

RPS Compliance Mechanisms » Overview

Renewable Energy Certificates (RECs)

• Separates attributes from electrons and uses attribute purchases for compliance

• Most common approach by farContract Path• Uses physical delivery of bundled

renewable energy (electrons + attributes)

• Typically via PPAs between generators and obligated parties

Central Procurement• Designated state agency acts as a

single obligated party (only 1 example)

Three types of RPS compliance mechanisms • Create a viable

market in which companies will invest but that controls overall costs to ratepayers

• Ensure compliance with RPS targets

• Verify that only eligible resources are being used


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REC-based systems are the most common means of RPS compliance

RPS Compliance Mechanisms » REC-based Systems

How it works

• RECs from eligible generators are sold to and retired by obligated parties

• REC registries can track multiple attributes and therefore be used for more than one RPS as well as for other purposes.

Obligated Parties

• Utilities (“load serving entities”)

Pros

• Compliance is easily tracked• Allows for banking, early compliance and other flexibility

mechanisms• Facilitates use of credit multipliers for technology tiers• Eases potential problems due to transmission constraints• More easily incorporates customer-side resources

Cons• Requires the creation and proper functioning of a new market • Potential issues with overlapping policies will need to be addressed

(e.g., emissions cap and trade)

Examples

• Texas• Massachusetts• All PJM states with RPS


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The contract path approach is less common but fits within existing market structures.

RPS Compliance Mechanisms » Contract Path

How it works

• Obligated parties enter into PPAs with eligible generators and purchase both the energy and the attributes (bundled renewable energy)

• PPA term (yrs) and pricing typically subject to RPS rules• Contracts may need approval from state regulators• In some cases, utilities can also build and own the assets

Obligated Parties

• Utilities (“load serving entities”)

Pros• Works within existing market structure (e.g., competitive RFPs)• Provides revenue certainty for project owners, which facilitates

financing

Cons• Requires the ability to physically deliver all the RE to the utility• Requires that an auditable contract exist

Examples

• California• Colorado (RECs can also be used)• Xcel Energy (Minnesota) wind and biomass generation mandate11. This specific mandate preceded, and is separate from, the current state-wide RPS.


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New York has adopted a central procurement approach that is a hybrid of REC procurement and the contract path approaches.

RPS Compliance Mechanisms » Central Procurement

How it works

• State agency procures and retires RECs1 from eligible generators under long-term purchase agreement

• State solicits bids via competitive RFP• Power, devoid of attributes, is sold into the power market (spot or

bilateral contracts)• Utilities collect a per kWh surcharge and transfer to state agency

Obligated Parties

• State agency

Pros

• Attribute-based but does not require creation of REC market• Competitive solicitations ensure competitive pricing• Relatively simple tracking and compliance• State offers long-term contracts to encourage RE project

development

Cons• Lacks an automatic compliance mechanism to encourage

development

Examples • New York (with NYSERDA as implementing agency)1. New York does not have a REC registry and tracking system.


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Alternative Compliance Mechanisms and penalties are the two main RPS enforcement mechanisms.

Two aspects of RPS enforcement

Alternative Compliance Mechanisms Penalties

• Alternative Compliance Mechanisms (ACMs) are used if insufficient renewable energy is available to meet RPS targets.

• Alternative Compliance Payments (ACPs) are subject to price caps to control overall compliance costs

• Fines imposed for fraudulent actions or failure to comply with the rules.

• Disallowance of ACP cost recovery

Monetary Non-Monetary

• Obligated party barred from accepting new customers1

• Obligated party’s operating license revoked1

Enforcement Options » Overview

1. In restructured markets.


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An ACM is a key RPS design feature and serves three basic functions.

Purpose of ACMs

Ensure RPS functions

Cost cap

Stimulate project

investment

Provides confidence to renewable energy developers that a financially viable market for renewable electricity will exist. Can spur RE project development as the more cost-effective means of RPS compliance.

With a ceiling price, protects ratepayers from excessive rate increases associated with RPS compliance.

Alternative manner for an obligated party to comply with the RPS, if insufficient RE available or if cost of available RE is too high. However, if ACM kicks in, this means that the RPS target is not being achieved.

Enforcement Options » Alternative Compliance Mechanisms


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ACP pricing issues are the most significant ACM best practices.

ACM Best Practices

• ACP Price Level: “Significantly” higher than expected cost of RECs but low enough to control overall ratepayer impacts.— Texas ACP is the lesser of $50/MWh or 200% of the average cost of

credits traded during the year.— Can be subject to inflation adjustment (e.g., MA).— States with solar set-asides have separate “S-REC” ACP, typically

set much higher than non-solar REC ACP.

• Cost Recovery: ACPs are commonly (but not always) subject to cost recovery.— In Delaware, ACPs are recoverable in rates only if they are the least

cost measure or if sufficient renewable energy is not available.— ACPs are not recoverable in PA, and therefore act as a penalty.

• Use of ACM funds: Reinvested in renewable energy projects— Pennsylvania ACM revenues are deposited into a sustainable energy

fund, and may only be used for developing additional alternative energy sources, though the PUC may utilize up to 5% of the funds for RPS administrative expenses.

Enforcement Options » Alternative Compliance Mechanisms


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Penalties serve to deter fraudulent behavior and encourage compliance, although collaboration and cooperation are preferred.

• Penalties can be automatic, but there should be an appeal process

• Appropriate accommodations need to be made for force majeure events

Examples of RPS Penalty Provisions

Entity Trigger Penalty Options

RE generato

rs

False eligibility and production reporting

• Fines

• Revocation of RPS qualification

Obligated parties

Failure to acquire sufficient renewable

energy or RECs

• Fines

• Disallowance of ACP cost recovery, e.g., if utility deemed to have not made a “good faith effort”

• In restructured markets: Obligated party barred from accepting new customers or operating license revoked

Failure/fraud in meeting resource

eligibility requirements

Enforcement Options » Penalties


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Ryan KatofskyAssociate Directorphone: [email protected]

confidential and proprietary, ©2007 navigant consulting, inc. renewable portfolio standards: a...

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