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Changing Resources, Changing Market

Posted on: Saturday, 17 May 2008, 06:00 CDT

By Fershee, Joshua P

Synopsis: The U.S. Congress recently passed a new energy bill that, until that last minute, included provisions that would have established a national renewable portfolio standard (RPS). The RPS would have required electric utilities to procure a certain percentage of their electricity from renewable resources or purchase renewable energy credits from other sources to meet the standard. The recent energy bill is just the latest of repeated, and thus far failed, efforts to impose a national RPS. As such, there has been much debate about the potential merits and hazards of a national RPS, and more is sure to follow. Rather than joining this part of the policy debate, this Article considers the effects implementing a national RPS would have on the operation of the energy industry. More specifically, the Article considers what a national RPS would mean for electric utilities, regulators (state and federal), and consumers. The Article begins with an introduction to the most recent national RPS proposal, including a brief summary of both the program's goals and major criticisms of the proposal. This introduction also includes an overview of the current and pending state-level RPS standards. The Article then discusses the primary issues a national RPS would raise for key stakeholders. First, the Article considers what a national RPS would mean for electric utilities-focusing on necessary compliance activities and the possible effects on short- and long-term investment decisions- including infrastructure and RPS compliance sources. Next, the Article discusses the impacts on state and federal regulators, focusing on the development of a renewable energy credit tracking system, the enforcement of the national RPS, and the role regulators at each level will have in the process. Finally, the Article considers the impacts a national RPS could have on consumers with regard to short- and long-term electricity costs. The Article concludes that, although the implementation of any major policy initiative takes significant resources, the biggest hurdle facing a national RPS is political, not technological or economic. I. INTRODUCTION

Across the country and around the world, renewable energy sources are creating interest and excitement as alternatives to traditional fuel sources for electricity generation. Proponents of mandating the use of renewable energy sources cite many potential benefits, including expanded economic development, improved national security, lower electricity prices, and reductions in greenhouse gas emissions. Although the extent and net value of such benefits are subject to debate, as are the best methods to achieve the benefits,1 the broad range of potential benefits has created interest from a wide variety of constituencies, including business leaders, academics, environmental advocates, and even national security experts.2

The most common method for requiring the use of renewable fuel sources3 is the imposition of a renewable portfolio standard (RPS).4 The U.S. Congress recently considered, until the last moment,5 legislation that would have established a national RPS, which would have required electric utilities to procure a certain percentage of their electricity from renewable resources or purchase renewable energy credits from other sources to meet the standard.6 Instead, the energy bill moved forward, once again, without establishing a national RPS. Twenty-five states and the District of Columbia already have some form of an RPS in place.7 Nonetheless, both literally and figuratively, renewable energy is not going away.

A national RPS would create a national market for renewable energy credits (RECs),8 which are earned by generating electricity from qualified renewable generators, such as those using wind, solar, and biomass as their energy source.9 Covered electricity retailers would be required to hold RECs in the specified proportion to the amount of retail energy they sold.10 These RECs could be self- generated or purchased from other qualifying renewable generators.11

Such legislation has been proposed several times in the past,12 but the increased profile of climate change issues and the increasing number of state RPS programs make a national RPS appear more likely, if not imminent. Since the earliest RPS proposals,13 there has been much debate about the potential merits and hazards of a national RPS, and more is sure to follow. Rather than joining this part of the policy debate, this Article considers the effects implementing a national RPS would have on the operation of the energy industry. More specifically, the Article considers what a national RPS would mean for electric utilities, regulators (state and federal), and consumers.

This Article begins with an introduction to the most recent national RPS legislative proposal, including a brief summary of both the program's goals and major criticisms of the proposal. This introduction also includes a synopsis of the current and pending state-level RPS standards. The Article then considers what a national RPS means for electric utilities-focusing on necessary compliance activities and the possible effects on short- and long- term investment decisions-including infrastructure and RPS compliance sources. Next, the Article discusses the impacts on state and federal regulators, focusing on the development of a renewable energy credit tracking system, the enforcement of the national RPS, and the role regulators at each level will have in the process. Finally, the Article considers the impacts a national RPS could have on consumers with regard to short- and long-term electricity costs. The Article concludes that, although the implementation of any major policy initiative takes significant resources, the greatest hurdle facing a national RPS is political, not technological or economic.

II. RPS OPTIONS: FEDERAL PROPOSALS AND CURRENT STATE PROGRAMS

Legislation instituting a national RPS has passed the Senate three times since 2002,14 and the House of Representative recently passed such a proposal for the first time.15 Although a national program has not been implemented, significant interest abounds. 6 At least twenty-five states and the District of Columbia have RPS programs in place, including the nation's three most populous states: California, Texas, and New York. This Part will first consider the recently failed national RPS proposal presented in House Bill 3221, and will then discuss the variety of RPS programs already implemented at the state level.

A. National RPS: Halfway There - Failed Again

Energy issues, from climate change to economic development to fuel costs, have played a prominent role in the energy legislation debates of the 110th Congress.17 Both houses passed new energy legislation, but only the House of Representatives' proposal included a national RPS as part of the plan. House Bill 969, the original source of the national RPS that eventually passed in House Bill 3221,18 proposed, among other things, "to establish a Federal renewable energy portfolio standard for certain retail electric utilities."19 The Senate, in passing its version of energy legislation that began in the House, added an amendment providing a Renewable Fuel Standard (RFS), but did not include a national RPS.20 Ultimately, the final legislation included a version of the RFS, but left the national RPS for another day.

The Senate has supported an RPS in the past, but there were significant roadblocks this time around. Most prominently, even if the House and Senate had been able to come to some sort of consensus, the Bush Administration had indicated that the President would veto any energy legislation that included, among other things,21 an RPS or tax increases on the oil industry.22 Instead, the President favors "expanded U.S. production, new fuel economy standards and a big mandate for ethanol and other alternative fuels."23 The final legislation apparently allayed the President's concerns; the President signed the bill into law on December 19, 2007.24

Significant hurdles to a national RPS thus remain. However, a review of the potential impacts of a national RPS is necessary and prudent, especially given the recurring interest of both houses of Congress and the fact that more than half of the U.S. population lives in a state (or federal district) with an RPS.

1. The RPS Proposal

For purposes of this Article, the impact of a national RPS will be considered under the plan passed by the House in House Bill 3221 (the Proposed RPS).25 Like the prior three RPS proposals that passed the Senate, the Proposed RPS would have been enacted as an amendment to Title VI of the Public Utility Regulatory Policies Act of 1978 (PURPA).27 As such, it is likely that a national RPS, if passed, would be included as part of PURPA.

The Proposed RPS required all "retail electric suppliers]" to provide 15% of their energy sold from renewable sources by the year 2020. That is, 15% of each covered retail electricity supplier's energy would have needed to be either generated from renewable energy resources or the retail electric supplier would need to otherwise purchase or exchange credits derived from renewable generation.29 The plan provided one additional option for a portion of the requirement: utilities were permitted to achieve up to 4% of this requirement through efficiency programs.30 The Proposed RPS provided that renewable energy meant electric energy that is generated by a "renewable energy resource," which "means solar (including solar water heating), wind, ocean, tidal, geothermal energy, biomass, landfill gas, or incremental hydropower."31 The plan would have been phased in, starting with a requirement of 2.75% renewable energy beginning in 2010, increasing gradually (but significantly) through 2020 up to 15%.32

RPS Requirements As Proposed in H.R. 3221

The Proposed RPS would have exempted retail electricity sellers who sold less than one million megawatt-hours of electricity for purposes other than resale use in the preceding year, as well as all municipal and rural cooperative suppliers.33

Under the Proposed RPS, the Secretary of Energy would have been charged with establishing a program to verify and issue Federal renewable energy credits (RECs).34 The RECs were to be issued to generators of renewable energy, and the program planned to track the sale, exchange, and retirement of RECs. The proposal also provided that, "[t]o the extent possible, in establishing such program, the Secretary shall rely upon existing and emerging State or regional tracking systems that issue and track non-Federal renewable energy credits."36 As a general rule, one REC would have been issued for each kilowatt hour of renewable electric energy generated under the statute.37 In addition, the plan provided a premium (i.e., additional RECs) in certain situations. Two RECs were to be issued per kilowatt hour of renewable energy generated on Indian land,38 and three RECs would have been issued for renewable energy generated at an on-site facility where that renewable energy was used to offset all or part of the customer's electricity requirements.39

Finally, the Proposed RPS expressly preserved the validity of state programs, including those that exceeded the national RPS.40 In recommending reliance upon state and regional systems that track "non-Federal renewable energy credits" in the development of a federal REC tracking system, House Bill 3221 contemplated the coexistence of such state programs.41 Further, the proposal stated, all retail electricity supplier payments made, "directly or indirectly, to a State for compliance with a State renewable portfolio standard program, or for an alternative compliance mechanism, shall be valued . . . based on the amount of electric energy generation from renewable resources and electricity savings that results from those payments."42 The Proposed RPS thus would have kept intact state RPS programs and allowed for the issuance of both federal RECs and state RECs where the renewable energy source satisfied both the federal and state requirements. This does not mean that there would not have been lawsuits claiming some sort of preemption, but the Proposed RPS made the intent quite clear.43

2. The Goals: The Case for a National RPS

Congressional proponents of the Proposed RPS (and most versions of an RPS) cite several goals, including: reduced pollution, improved national security, job creation, and lower consumer prices.44 Additionally, a national program, rather than a state-by- state program, is more likely to provide a strong national market, thus leading to more renewable energy projects.45

In May 2007, the House Committee on Energy and Commerce sent a letter to more than forty "interested parties" from varying constituent groups inviting responses to several questions regarding a possible renewable energy portfolio standard.46 Not surprisingly, the constituent groups supporting an RPS emphasized these key areas in their responses.47 One of the broader descriptions of the potential benefits of a national RPS can be found in the Union of Concerned Scientists' response, which stated that a national RPS "standard can provide many benefits for the nation, including increasing energy security, fuel diversity, price stability, jobs, farm and ranch income, tax revenues, technology development, customer choices, and reduced environmental impacts, water consumption, and resource depletion, as well as reduced compliance costs with current and future environmental regulations."48

If the claimed benefits are accurate (and, as noted below, there are many who believe they are not), there are several ways in which these benefits would be achieved. Probably the most obvious would be the potential environmental benefits.49 Although electricity accounts for less than 3% of U.S. economic activity, "the burning of coal, oil, and natural gas for power currently accounts for more than 26 percent of smog-producing nitrogen oxide emissions, one- third of toxic mercury emissions, and 64 percent of acid rain- causing SO^sub 2^ emissions."50 One expert has asserted that if "20 percent of our electricity in 2020 were to be provided by renewables, then we would be displacing the equivalent of 71 million cars from the nation's highway."51 Others have noted that the increased use of renewable energy would reduce harmful emissions or reduce the cost of compliance with requirements to reduce pollution.52 "And by reducing the need to extract, transport, and consume fossil fuels, a national RPS would limit the damage done to our water and land and conserve natural resources for future generations."53

From a national security perspective, the primary benefit would come from a reduced dependence on foreign energy supplies, because renewable resources such as wind, sun, and biomass, tend to come from domestic sources.54 In the electricity sector, the most significant source would be reduced need for natural gas, which is increasingly coming (in liquefied form)55 from overseas.56 Enormous amounts of natural gas are used for electric generation, including as much as 90% or more of new electric generation.57

A reduction in the use of natural gas would also, by many accounts, lead to lower prices for consumers. A recent study by Woods Mackenzie, an energyindustry consultancy, indicated that a 15% national RPS would "drive down" the demand for, and price of, natural gas and "lower the overall price of power."58 The company found that regardless of whether a national RPS is implemented, the "United States needs to build 420 GW of capacity over the next twenty years to replace aging facilities and meet its ever-growing need for electricity." 9 A national RPS would create incentives ensuring, essentially requiring, that some of that new generation be fueled by renewable sources. This switch, according to the Woods MacKenzie study, to renewable generation sources would lower fuel costs and reduce fossil fuel consumption, leading to lower electricity costs, amounting to approximately $100 billion in savings.60

Perhaps the most important, if not the most obvious, potential benefit of a national RPS is economic development and job creation. In projecting the impact of a 20% national RPS, the Union of Concerned Scientists determined that, by 2020, such an RPS "would generate more than 355,000 jobs in manufacturing, construction, operation, maintenance, and other industries-nearly twice as many as fossil fuels, representing a net increase of 157,480 jobs ... ."61 Further, it was determined that renewable energy would "provide an additional $8.2 billion in income and $10.2 billion in gross domestic product in the U.S. economy in 2020."62 Although premised on a national RPS percentage higher than that in the Proposed RPS, these numbers nonetheless indicate that a national RPS could provide significant economic benefits.

The most compelling job creation claims come from a report developed by the Renewable Energy Policy Project (REPP). The group determined that more than 16,000 firms in all fifty states have the technical potential to enter the growing wind turbine manufacturing sector.63 The twenty states that would potentially benefit the most, receiving 80% of the job creation, are the same states that account for "76% of the manufacturing jobs lost in the [U.S. over the] last 3 1/2 years."64

The report considered the impact on U.S. manufacturing jobs if there were eight times more wind energy installations, which would mean a capital investment of $50 billion.65 Again, while this report is an estimate based on a number of major assumptions, the conclusions are still compelling, especially in states that have lost hundreds of thousands of jobs in the past six years.66

3. The Criticisms: The Case Against a National RPS

Like any major energy policy in which there will be winners and losers, there are several arguments against a national RPS. Even if an energy policy ends in a net gain, there will be those who will not come out ahead in the game.67 The primary arguments against a national RPS are that it could lead to increased consumer costs, that the RPS amounts to a wealth transfer from states with lower levels of renewable resources to states with high levels, and that it is unnecessary and better handled at the state level. There are additional arguments against the Proposed RPS that are critical of the current plan as drafted, including complaints about the limited scope of what is renewable68 and the actual level of the RPS,69 but this section of the Article focuses only on criticisms of a national RPS.

Some major studies indicate a potential increase in consumer electricity costs if a national RPS were implemented. The Energy Information Administration (EIA) released a study in June 2007 of a proposed 15% RPS by 2030, which indicated that "cumulative residential expenditures on electricity from 2005 through 2030 are $7.2 billion (0.4 percent) higher, while cumulative residential expenditures on natural gas are $1.0 billion (0.1 percent) lower."70 For a 25% RPS by 2025, the costs would likely be much more significant: "the cost of complying with the [25% RPS] is projected to increase the price of electricity by about 3.3 percent and 6.2 percent in 2025 and 2030, respectively."71 On a more local level, opponents of the Proposed RPS have claimed that consumers in some states could see electricity bills rise as much as $15 per month.72 Such increased costs are also part of the second major argument against a national RPS-that it essentially amounts to a wealth transfer from states with few renewable resources to those with significant renewable resources. States like North Dakota, Montana, Texas, and Kansas have significant renewable energy sources available, especially wind.73 Southeastern states,74 like Florida75 and Virginia,76 have very limited wind resources available, which could mean that such states would need to purchase RECs from renewable-rich states to stay in compliance with the national RPS requirements.77 The risk of this wealth transfer is apparent in certain scenarios. For example, the EIA determined that under a 25% RPS by 2025, the RPS would lead to higher overall electricity prices, but could,

result in lower electricity prices in some areas of the United States. The Western Regions have considerable renewable resources that could enable suppliers to provide renewable generation in excess of their own requirements and sell surplus credits to producers in other areas with less economical renewable options. The resulting revenue could more than offset the costs of building renewable plants in the West.78

A major component of the wealth-transfer complaint of a national RPS is that it unfairly promotes wind and solar energy, thus requiring states with limited solar and wind resources to pay other states for the renewable resources.79 However, there are indications that other renewable sources, biomass in particular, would help balance this potential inequity.80 "[B]iomass generation is considerably higher than the output from wind capacity . . . because of a higher biomass capacity factor."81 Additionally, energy efficiency provisions, like those in the Proposed RPS, could further assist in the "uneven geography of renewable resources."82 Nonetheless, this risk remains a significant criticism of a national RPS.

Finally, many opponents of a national RPS argue that it is unnecessary83 to have a national plan because state and regional initiatives are already handling the issue in regions where it is appropriate and the states, individually or regionally, are better situated to implement plans that account for regional differences.84 For example, in the case of the Proposed RPS, a major complaint is that a "one-size-fits-all Federal mandate does not take into account the specific energy and economic needs of individual States by requiring that 15 percent of retail electricity sales be generated from specific renewable resources which are not prevalent" in all regions.85 Although there are arguably benefits that a national plan can achieve that individual state plans cannot, as discussed in Part II.B, many state plans are already well established and effective.

B. State-Level RPS Programs: Halfway There; More to Come?

Half the U.S. states and the District of Columbia have implemented an RPS at some level.87 State RPS expectations vary significantly from state to state-from as low as 8% by 2020 in Pennsylvania88 to 25% by 2013 in New York.89 Two RPS states have not fixed a percentage target, and have instead set specific megawatt goals: Iowa-105 MW per year,90 and Texas-5880 MW by 2015.91 Additionally four states-Missouri,92 North Dakota,93 Vermont,94 and Virginia95-have passed non-binding goals or objectives to provide incentives, but not obligations, to promote renewable energy generation.

As might be expected, the retail electric suppliers in states with an RPS are expected to account for the bulk of the renewable energy generating capacity in the United States.97 It is clear that RPS states have built, and are building, more renewable energy generation facilities than non-RPS states, but it is not clear to what extent this is the result of an RPS policy. That is, an RPS policy provides incentives for building new renewable generation capacity, but other factors, especially the availability of renewable energy resources, also play a significant role.98

III. IMPACT ON RETAIL ELECTRICITY SUPPLIERS

The addition of a national RPS would heavily impact the investment decisions of retail electricity suppliers, and would have significant administrative and operational effects. Capital-heavy investment decisions are always difficult, and a national RPS would add a new wrinkle to an already complex analysis. From the administrative side, a national RPS would add compliance activities related to monitoring and reporting, as well as to the process of obtaining RECs. From an operational perspective, a national RPS will impose new variables in each supplier's business decision-making efforts. Utilities will, for example, need to decide whether to invest in new generation infrastructure, directly or indirectly," or purchase from other renewable generators.100 The ability to purchase RECs from others, though, can help retail electric suppliers defer some investment decisions and plan for more cost-effective uses of capital.101

A. Electric Generation Investment Decisions: From Hard to Harder

The most significant difficultly in making investment decisions regarding new generation, which exists without a national RPS, is calculating the expected return on that investment. Deregulation in electricity markets has, in some cases, increased competition, but has also "had the side effect of increasing risk in a highly capital- intensive industry."102 Before deregulation, "utility debt was considered virtually risk-free since the rate of return was guaranteed by the public utility commission, and the costs of new construction could be passed on to ratepayers."103 Now, in many places, return on new generation investment depends solely on the market.

The Proposed RPS provides some rate protection for electric utilities that are subject to rate regulation at the state or federal level. The Proposed RPS provides that covered utilities "shall not be denied the opportunity to recover the full amount of the prudently incurred incremental cost of renewable energy and energy efficiency obtained to comply with the requirements [of the national RPS]."104 However, some risk would remain, because "[i]n most states, electric rate structures are based on sales volume, and utility companies lose money if sales decrease."105 As such, a national RPS "could create financial risks for electric companies unless states change their regulatory structure."106

The mere existence of a national RPS would provide some incentive for all utilities to invest in renewable generation because that investment would have two markets-the market for its electricity and the market for its RECs-instead of just the market for its electricity for a traditional generation facility.107 In addition, it is likely that power projects will require "more equity, less debt, and shorter debt repayment periods" than in the past.108 "Developers will probably attempt to sign bilateral contracts with large end users, marketers, aggregators, and utilities, but contract terms are likely to be shorter than in the past."109 In fact, "[c]orporate balance-sheet financing may also become more common."110 If a utility buys RECs and energy from another supplier, there is also a risk that purchase agreement would end up showing as a long-term debt on the utility's balance sheet.111 Thus, how a national RPS would impact such capital-intensive investments is hard to predict.

The implications of a national RPS may not be quite as burdensome as they initially appear, however, because, many states have RPS programs already, and, as explained below, even those operating in non-RPS states are often served by organizations, e.g., Regional Transmission Operators (RTOs) and Independent System Operators (ISOs),112 with the expertise necessary to facilitate compliance. Nonetheless, it is retail electricity suppliers that would bear the greatest burden of a nationally imposed RPS, because they would need to participate in facilitating compliance, as well as facilitating the renewable generation market.

Another significant issue facing investment decisions is what a national RPS would mean for decisions related to other types of generation that utilities have considered. Some utilities, for example, have been considering building new nuclear generation facilities.113 A national RPS would seem to make that less appealing, although it is not entirely clear that new nuclear facilities were that likely, or the best option, anyway. Nonetheless, a national RPS, at least absent a corresponding greenhouse gas emissions' cap, would add another hurdle for nuclear investment. Clean coal technologies, another major generation source in development,114 would face similar hurdles, unless, of course, the national RPS were to include clean coal as a renewable source. And, of course, what constitutes "clean" is never an easy answer.115

B. Compliance Requirements

A national RPS would mean new federal reporting requirements for retail electricity suppliers. For those operating in RPS states, a federal RPS would mean a second, potentially duplicative, reporting requirement. Electricity industry representatives (such as the Edison Electric Institute) have argued that a federal RPS, which mandates "different targets, technologies, and timetables through a federal RPS on top of the state programs would create uncertainty and drive up the cost of meeting renewable mandates even further for electricity suppliers and consumers in those states."116

For covered utilities operating only in non-RPS states, a federal mandate would mean initiating a new program for tracking and reporting RECs. As such, it does appear that it would be more burdensome for such facilities because it would require setting up a process to deal with RECs in the first place. For those utilities that already track RECs for state compliance, the adaptability of many of the RECs tracking systems should make compliance with the additional federal requirement less burdensome and more straightforward than it would be otherwise. C. RECs: Where Will They Come From and How to Decide?

Early in the life of a national RPS, the income received from REC sales will provide an incentive for investment in qualifying renewable technologies even if they involve higher costs than other non-qualifying generating technologies.117 However, as the end date for the RPS program grows near (2030 in the EIA study),118 the lesser amount of time remaining where REC payments can be expected will reduce the expected benefit of the investment in qualifying renewable generation.119 As such, any new later-in-time investor will seek higher REC prices to compensate the shorter time horizon under which they can recoup their investment.120 This puts retail electricity suppliers in a difficult position under plans such as the Proposed RPS. As the amount of energy that must come from qualifying renewable resources is increasing, the incentive for building qualifying generation facilities is decreasing.

This could lead to perverse results. Under the Proposed RPS, as originally drafted, there was a cap on REC prices,121 but according to the EIA's analysis of a 15% RPS, by 2020, investors would be "unwilling to invest in sufficient amounts of qualifying generation to meet the RPS target unless the credit price were to exceed the 1.9-cent price cap [used in the EIA analysis]."122 As a result, covered retail electricity suppliers would opt to stay in compliance with the RPS program by purchasing RECs from the federal government at the price cap rather than purchasing RECs from new renewable generation.123 Interestingly, the "EIA analysis of an alternative RPS requirement with no cost cap and no sunset provision indicates that the same targets as in the proposed program could be met in all years, and the credit price would generally fall below the 1.9-cent- perkilowatthour cap."124 If, in fact, the market were to react as the EIA analysis predicts (assuming passage of the Proposed RPS), it is hard to imagine that Congress would not act to extend or repeal the sunset date. Regardless, any uncertainty related to the sunset and the availability of RECs to satisfy the RPS puts an additional burden on retail electric suppliers by making the RECs market even harder to predict.

In fact, it is this kind of uncertainty in federal renewable energy policy that has been a recurring complaint from the electric industry. Particularly in the context of tax credits for renewable projects, the industry has argued that longterm planning for the use of renewable energy sources is harmed by a lack of a coherent and consistent plan: "In the past, the short-term, start-and-stop nature of renewable tax credits has dissuaded utilities, developers, manufacturers and investors from maximizing the potential of renewable technologies and resources . . . ."125 The industry has thus supported long-term extension of such tax credits to ensure the stability needed for long-term planning and financing of renewable energy projects.126

D. The Great Unknown: Operational and Infrastructure Implications

Considering the major operational impacts on electric utilities is exceedingly difficult. Many of the studies discussed in Part II provide significant caveats related to the assumptions used in developing the respective models. The outcomes of the currently available studies are so broad mat the results seem to add little more than quantified speculations, at least in terms of making specific predictions about the implications of a national RPS. That is, the studies provide a lot of numbers to consider, but the results indicate that the impact of a national RPS could be revolutionary or exceedingly moderate.

For instance, the study from Woods MacKenzie indicates that a national RPS would lead to such significant amounts of renewable energy that consumers could save as much as $100 billion on their electric bills.127 If this is to become a reality, it will mean a fundamental change in how utilities operate.

Whether from wind, solar, biomass, or other renewable sources, massive amounts of renewable energy generation would require tremendous investment in new generation facilities. Some sources, like solar or wind, could even require additional investment in additional traditional-fuel generation to support the intermittent energy sources (i.e., to provide energy when the wind or sun is not available).129 Furthermore, to provide renewable energy at that level, major investments in the transmission grid would need to occur.130 Infrastructure changes at such a high level would fundamentally change how electricity is delivered, and thus how utilities operate.

It is not clear how quickly, if at all, major transmission infrastructure can be made available.131 Some western states have worked to develop a renewableonly transmission, the Frontier Line.132 The proposed Frontier Line is a transmission line that would run as long as 1300 miles, from Wyoming to California (through Nevada and Utah).1 It would "leverage up to 6,000 megawatts of wind power and 6,000 megawatts of clean coal power,"134 at an estimated cost of $3.3 billion, with estimated annual benefits of between $926 million and $1.7 billion annually for the area.135

More significantly, "development of a nationwide transmission super highway" would likely be needed to satisfy major new wind generation at a level leading to cost savings of $100 billion.136 Whether related to renewable energy or not, a national transmission superhighway would provide additional benefits, in terms of reliability and, potentially, financially.13 In fact, in the CapX 2020 project is one such program that is intended to help (among other things) facilitate compliance with Minnesota's renewable energy138 objectives.139 The CAPX 2020 Vision Plan includes a $1.25 billion transmission infrastructure project of 1620 miles of 345kV transmission lines. A CapX 2020 study concluded that the covered region, which includes Minnesota, North Dakota, South Dakota, and Wisconsin, "will experience specific and numerous transmission overloads, outages, and voltage problems" if transmission additions are not made between 2005 and 2020. The fact that the need for this transmission infrastructure was clear before Minnesota's RPS was even mandatory141 indicates that a national RPS would likely trigger similar needs throughout the country. A national RPS would thus also require additional, and more aggressive, legislation to facilitate transmission investment on the scale needed to satisfy the RPS goals.142

The EIA studies, on the other hand, indicated moderate increases in costs to consumers.143 Depending on the parameters of the RPS, it is possible that a national RPS could change almost nothing operationally, if the cost of the major infrastructure changes is too high or the incentives too low. For instance, if the RPS includes a cost cap that is too low, most utilities would simply buy RECs from the government rather than invest in renewable projects. In this scenario, only the easiest renewable energy programs would be pursued, and it is likely those programs will occur with or without a national RPS. As discussed in Part III.C, the EIA predicted this kind of outcome in the latter stages of a proposed 15% RPS.144 Quite simply, developers of renewable energy projects will not invest in projects if most of their customers have a cheaper way out.

Whether a national RPS would trigger fundamental change or have only moderate impact adds to the difficulty utilities would face in making investment and policy decisions. What should be clear is that generation investment and transmission investment are not separate issues, and any national RPS should be part of a comprehensive energy package to help utilities make informed and more accurate decisions.

IV. IMPACT ON STATE AND FEDERAL REGULATORS

A national RPS would require new or expanded activity by state and federal regulators. The first order of business for state and federal regulators would be the implementation or expansion of a REC tracking program. Second, state and federal regulators would each have a role in enforcing the national RPS.

A. Development of REC Tracking Program

Under the Proposed RPS, the federal government within one year of enactment, must establish by rule "a program to verify and issue Federal renewable energy credits to generators of renewable energy, track their sale, exchange and retirement and to enforce" the RPS.145 To the extent possible, such a program "shall rely upon existing and emerging State or regional tracking systems that issue and track non-Federal renewable energy credits."146 Given that, in some form, twenty-five states already have an RPS, there is a substantial framework for implementing the program.

It is not as though the federal program can simply parallel an existing state program, however. Each state program is unique in some manner,147 and not all state laws are consistent with the Proposed RPS.148 For instance, in Connecticut, the definition of renewable energy includes "hydropower that meets the lowimpact standards of the Low-Impact Hydropower Institute."149 Connecticut, thus, permits all hydropower meeting the prescribed standards,150 but the Proposed RPS only permits "incremental hydropower."151 Thus, under the federal program, related state RECs could not be used for federal compliance. Similarly, it is possible that an activity that would not satisfy a state RPS, and thus not be eligible for a state REC, could still satisfy the federal RPS.152

Ultimately, although such issues will require effort and coordination, the process should be manageable because independent efforts are already underway to "create a common currency for renewables, prevent double counting, and support existing and emerging markets for renewables."153 Regional programs, such as PJM's154 Generation Attributes Tracking System (GATS), already track RECs in a way that should be transferable to a federal program because it already handles multiple state programs.155 GATS "tracks generation attributes and the ownership of the attributes as they are traded or used to meet government standards."156 Further, GATS creates generator-specific electronic certificates that list the attributes electricity suppliers need to satisfy state policies and document renewable generation. "Data in the GATS include megawatt- hours produced, emissions data, fuel source, location, state program qualification and ownership of attributes for each megawatt-hour tracked."158 Similar REC tracking programs-including those affiliated with ERCOT,159 ISO New England,160 and the Western Electricity Coordinating Council (WECC)161-exist, or are in development, throughout the country.

In fact, most U.S.-based RECs are tracked by technology created by a single company: "APX technology is now the system of choice for every major renewable energy market in North America, including the PJM (GATS), ISO New England (NEPOOL GIS), WECC (WREGIS), MISO (M- RETS) and ERCOT (Texas REC) markets."162 The various state and regional REC tracking programs were developed by state regulators who watched and learned from other states, then implemented programs to meet the requirements of their own state.163 "As a result, today a well proven, richly functional infrastructure is in place to create, track and manage RECs and related environmental commodities across the nation's largest regional markets."164 Already, data indicates that a significant number of "regional stake holders have cross regional interests" in the three fully operating major regional markets.165 Given that the predominant technology for tracking RECs is already working across regions with significant differences, a national solution should be feasible, if not simple.166

An effective national RPS would require oversight and enforcement of the program. The additional burden created by tracking federal RECs should be manageable because monitoring compliance largely requires only that the regulator review the number of approved federal RECs submitted by the covered utility, much of which can be done electronically.167 As long as the technological solution is trusted, such monitoring should be achieved largely via electronic RECs tracking mechanisms,168 thus easing the administrative burden.169

For covered utilities that fail to meet the RPS requirements, the enforcement provisions of the Proposed RPS would require additional review and possible adjudication. The Proposed RPS provides that a retail electric supplier that does not comply with the RPS requirements "shall be liable for the payment of a civil penalty,"170 meaning that the Department of Energy would need to review filings from, and assess penalties upon, those failing to report compliance with the national RPS.171 This enforcement, while adding an additional administrative burden, is necessary for an effective RPS. State RPS programs with ineffective or under- enforced penalties have been less effective than those with strong enforcement policies. In Arizona, for instance, the "lack of enforcement and non-compliance penalties has resulted in significant under-compliance with the [renewable energy] standards."173

Enforcement of a national RPS would create an additional case load, but not one that should prove problematic. Unfortunately, the Proposed RPS called for EPA enforcement when a better alternative for compliance monitoring was readily available. The DOE has little, if any, experience in administering a program on the scale of a national RPS, and has shown no indication that enforcement of a major program is within the agency's capabilities. Further, the Proposed RPS includes a program providing RECs for certain energy efficiency measures, an area in which the DOE has already failed to show effective leadership. The DOE was charged with the task of promulgating energy efficiency standards for household appliances in 1987,174 but failed to update the efficiency standards, leading to a lawsuit brought by fifteen states.175 Even when DOE has acted to increase efficiency standards, the agency has not indicated a willingness to push for significant progress.176

In contrast, the Federal Energy Regulatory Commission (FERC) has indicated the ability to handle, and, in fact, even the interest in having, additional powers to assess civil penalties for activities under the FERC's jurisdiction.177 FERC Chairman Joe Kelliher made this clear:

In the past, the Commission lacked the enforcement power it needed to prevent market manipulation and uphold its tariffs and market rules. We asked Congress to give us the right regulatory tools to do our job. Congress agreed, and gave FERC new enforcement powers and significant civil penalty authority. Today we exercise that power for the first time. We are committed to firm but fair enforcement and our actions today make that plain. Any drafter of a future national RPS proposal should strongly consider the

FERC, a commission with the demonstrated interest and ability in energy-related enforcement, as the overseer of the program.

Other options exist for those unable to meet the RPS requirement in a given year. That is, retail electric suppliers that are not able to obtain a sufficient number of RECs are not automatically going to be assessed civil penalties. As a means of compliance, the Proposed RPS also provides for a "Renewable Energy Credit Borrowing."179 Under this provision, a retail electric supplier can submit a compliance plan to the Secretary of Energy demonstrating that sufficient federal RECs would be earned "within the next 3 calendar years which, when taken into account, will enable the retail electric supplier to meet the [RPS] requirements ... for calendar year 2012 and the subsequent calendar years involved."180 Once the plan is approved, the federal RECs that will be earned under the plan can be applied to meet the RPS requirements each calendar year involved. Failure to repay any borrowed RECs would subject the retail electric supplier to civil penalties. Oversight and enforcement of the RECs borrowing program, and any resulting proceedings to assess civil penalties, would also add administrative burdens.

Most of these burdens appear minimal at the federal and state levels. On the federal level, the Congressional Budget Office (CBO) concluded "that transactions associated with the proposed federal permits would have no impact on the federal budget."183 On the state level, the CBO observed that state "[r]egulatory entities would not be allowed to prohibit utilities from recovering prudent costs associated with meeting the portfolio standard."184 However, the CBO estimated that the administrative costs related to that restriction, "if any, would be minimal."185

V. IMPACT ON CONSUMERS

The impact on consumers of a national RPS is one of the most hotly contested issues surrounding possible legislation. As one might expect, varying proposals provide widely varying projected impacts. Even small changes can lead to significant differences. For example, the EIA determined that under a 15% national RPS, "retail electricity prices [would] rise by an average of 0.9 percent over the 2005 to 2030 period in the RPS case," as compared to the reference case, and RECs would cost 1.9 cents per kilowatt hour between 2020 and 2030.186 In contrast, under a proposed 25% national RPS, the EIA determined that the average retail electricity price is 6.2% higher in 2030 and the REC prices would vary between 3.8 cents and 4.8 cents per kilowatt hour from 2025 to 2030.187 This is not an apples-to-apples comparison because there are a significant number of variables in each study,188 beyond just the RPS percentage. Nonetheless, this helps underscore the point that measuring the specific impact of a national RPS is complex and difficult. On a more general level, however, it is clear that there are some consistent issues consumers will face, regardless of the specific national RPS put in place.

From a practical perspective, consumer impacts of a national RPS would be limited, although not insignificant. Important in considering the likely consumer impact of a national RPS is that many consumers (indeed, roughly half of the country) are already subject to some form of RPS. As such, the question is not a decision between a national RPS and no RPS; instead, the question is whether all consumers will be subject to an RPS or just some.189

For those consumers not currently buying electricity under an RPS, a state RPS may be pending.190 Further, as one study advocating a federal RPS stated, "Not only does reliance on state-based action make for an uncertain regulatory environment for potential investors, it creates inherent inequities between ratepayers in some states that are paying for 'free riders' in others."191 The study explained that renewable energy generation has a free-rider problem because "everyone benefits from the environmental advantages of renewable energy."192 As such, private companies might invest millions of dollars in researching and developing clean energy technologies, yet be unable to recover the full profit of their investments.193 To the extent this is accurate, consumers not under an RPS, even those with less renewable generation resources in their state, would reap the benefits of technologies developed under state RPS programs, without paying their fair share.

In the short term, direct consumer impacts are limited to cost concerns. By most accounts, consumers throughout the country would face a relatively mild increase or mild decrease in the cost of electricity. One report that reviewed the RPS program analysis of both the Union of Concerned Scientists and the EIA found cumulative energy bill savings throughout the country in each of the four scenarios considered. ' The savings by region varied significantly, though. For example, in the review of EIA assumptions if there were a 20% RPS, savings, by Census region, ranging from as high as 8.1% in the West South Central to 0.1% in the South Atlantic were reported.195 All of the review studies showed a significant variance by region, which explains some of the resistance to an RPS from regions, like the South Atlantic, with less renewable energy resources. Potential savings are far more limited under an RPS for the region, and if costs were to increase, those regions would likely face a greater share of the cost increase. A long-term reduction in natural gas costs as a result of a mandatory national RPS could lead to increased consumer use of natural gas. In fact, even without a national RPS, future residential heating applications are expected to continue to drive residential demand for natural gas.196 "Between 1991 and 1999, 66 percent of new homes, and 57 percent of multifamily buildings constructed used natural gas heating. In 2003, 70 percent of new single family homes constructed used natural gas."197 If natural gas prices do, in fact, continue to decline as a result of a national RPS, this trend can only be expected to continue.

VI. CONCLUSION

Often lost in the debate about the value and appropriateness of a national RPS is that there is little dispute about the value and appropriateness of renewable energy itself. Awareness that energy issues intersect with other key issues like national security and climate change has never been higher. Support for renewable energy, at least as a concept, is overwhelming.198 A recent poll indicates that 85% of those polled believe that existing federal incentives for renewable energy technologies should be extended.199 Other polls have indicated support across the political spectrum for renewable energy200 and, more specifically, a renewable portfolio standard.201

In addition, more than thirty states have taken some kind of legislative action to promote renewable energy programs, and more programs are being proposed. Some states have even increased their commitment to energy from renewable resources. Colorado, for example, implemented a 10% RPS in 2004, against the wishes of the state's utilities; in 2007, "with utility support, Colorado increased its RPS to 20% by 2020."203

Public support, and even support from individual utilities, for renewable energy, of course, does not translate into national support for a particular program, policy, or fuel source. The best methods for promoting and providing renewable energy-and who should pay for it-are issues in search of a solution. Ultimately, though, renewable energy has moved well beyond the theoretical stages. If desired, a national RPS can be efficiently and effectively implemented. That does not mean it would not require significant upfront expense, and perhaps long-term expense, as well. But those risks face any energy policy, including the status quo.

It is important for proponents and opponents alike to recognize that the debate over a national RPS is only one piece of the puzzle. The cost studies indicate that a national RPS is likely to be neither a panacea nor a disaster.204 The country still needs to address, to name just a few: an aging and insufficient energy infrastructure,205 including a significant lack of transmission capacity;206 increasing gasoline costs;207 and climate-change issues.208 A national RPS would impact all of these issues, but all of these issues would impact the potential success of a national RPS. By most accounts, a national RPS is technologically achievable and, notwithstanding some potentially higher costs, economically feasible. That does not make it good policy, but it should move the debate forward.

Although this Article has attempted to raise a number of questions that should be resolved, or at least considered, before imposing a national RPS, an element of uncertainty is bound to remain. There are those who believe that a national RPS is only a valid option once all scenarios are considered, and, in essence, all potential problems solved. This would, certainly, be ideal, but it is not feasible. Legislation designed to tackle difficult issues requires making, hopefully, educated decisions, but is inherently uncertain. In fact, the vast majority of current studies indicate that results from a national RPS would range between either: (1) a fundamental change in how electricity markets operate; or (2) a moderate price increase for consumers, with moderate changes to the current system.

Any major policy decision imposes risks; but, despite the histrionics, a national RPS actually appears to present limited downside, along with significant upside. That is, a national RPS, along the lines of those recently proposed, that fails (or is moderately successful) would likely lead to minor increases in consumer rates. A major success could reduce natural gas consumption and lower rates by a significant margin.

The reality is that, without major advances in technologies, a national RPS is likely only to have moderate success. However, the implementation of an RPS could be the catalyst needed to trigger major advances in technologies. No major policy change should be implemented without careful consideration. But, while more study and analysis will help the debate, the potential upside to a national RPS appears to outweigh the downside, at least from a nationwide perspective.

Risk is a part of all major policy changes, and the downside in this situation is far lower than in many other cases. If nothing else, a national RPS would further highlight the lack of necessary transmission in the United States. It is likely that the local nature of renewable energy generation would provide an awareness of infrastructure issues at a more local level than exists today, and that could help address the NIMBY (not-in-my-backyard) problem that has long plagued transmission projects.209 Although it is unlikely anyone would welcome transmission lines in their backyard, local jobs created from both renewable generation and transmission projects may make siting more palatable than it has been in the recent past.

Renewable energy has great potential for expanded economic development, improved national security, lower electricity prices, and reductions in greenhouse gas emissions. And, while a national RPS is one way to help realize this potential, it should also be clear that for a national RPS to lead to more than moderate change, a comprehensive national energy policy is necessary.

That is not to say that all questions must be answered before moving forward. In fact, without a national RPS in place, it may be impossible to determine the potential of renewable energy because even a moderately increased market for renewable energy could lead to significant technological advancements. All the planning in the world will not necessarily translate into effectiveness in the marketplace. At some point, an idea must be tested to find out if it will actually work.

Public opinion polls, growing support from utilities, and continually increasing state RPS legislation indicate that support for a renewable energy mandate is stronger than ever. However, opposition remains strong. Rightly or wrongly, the majority of Americans appear ready to take a calculated risk to find out if renewable energy can fulfill its promise. The question remains: Is Congress?

Joshua P. Fershee*

Assistant Professor of Law, University of North Dakota School of Law; J.D., Tulane Law School, 2003; B.A., Michigan State University, 1995. The author thanks all those who provided comments and insights on this Article, including the editors of the Energy Law Journal and other peer reviewers. This Article is infinitely better for their efforts. The author also thanks Mary Anne Sullivan for her thoughts and comments regarding renewable energy and climate change; her knowledge, passion, and commitment are an inspiration. The opinions and conclusions in this Article are exclusively those of the author, as are any errors or omissions.

Copyright Foundation of the Energy Law Journal 2008

(c) 2008 Energy Law Journal. Provided by ProQuest Information and Learning. All rights Reserved.

Source: Energy Law Journal

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