Thursday, January 26, 2012
An Insider’s Perspective on Colorado's Renewable Energy Standard – Some Critical Thinking about Colorado's "Successful" RES
As indicated in Mark Jaffe’s article, Power Surge Slows (The Denver Post, January 22, 2012), Colorado’s Renewable Energy Standard (RES) has in many respects been one of the more successful ones in the country. With rare exception, such as California’s 33% by 2020 goal, it is certainly one of the most ambitious. But, there is more to understand before we declare it an unqualified success. Importantly, the slow-down described in the article did not have to occur if only the state’s principal utility, bolstered by lax regulatory oversight, had acquired renewable resources in a more fiscally responsible and sustainable manner.
Among the benefits derived from the RES is that Colorado has attracted a handful of big name manufacturers such as Vestas and General Electric in wind turbine and solar panel manufacturing, respectively. Hopefully their local operations will prosper in spite of a difficult economic climate and tenacious competition from abroad. Colorado also has had, until recently, a thriving small solar installer industry but its success was predicated on too-generous incentives that broke the Ratepayer Bank while the Public Utilities Commission was late in recognizing the severity of the problem. Mark Jaffe’s article noted that Xcel Energy’s renewable fund – known as the Renewable Energy Standard Adjustment (RESA) account – is $51 million in the red and headed for worse before it gets better. What is less well known is that the utility earns its Commission approved rate of return on this deficit – a great deal if you can get it.
Xcel has asserted that it has already met Colorado's 30% RPS clear out to 2028. On the surface, that sounds great. But let’s come back to that RESA deficit. What achieving compliance with the renewable standard a decade early really means is that ratepayers have been on the hook for resources that were not needed for compliance or to serve load. As the PUC Staff warned more than once, Xcel was purchasing “too much, too soon, at too high a cost” and that, especially with regard to the small solar program, this would lead to the same boom and bust that has afflicted myriad other solar incentive programs that over-compensated solar customers. One needn’t have been prescient to predict this outcome. Rather than stage its acquisition of renewable resources commensurate with the ramp-up in the RES, and in so doing take advantage of the rapidly declining cost of renewable energy in the process, Xcel spent future receipts from the renewable fund driving it deep into the hole until the deficit became so severe that even the most ardent supporters of renewable energy had to take notice. It was at that point that Xcel came to the PUC with a drastic plan to cut back on the incentives it was doling out to solar customers. Xcel and its customers were not alone. The same affliction befell the state’s other investor owned utility (IOU), Black Hills Colorado Electric, though at a much smaller scale. The result was inevitable – a boom and bust that did not have to be and one that the Commission’s staff warned about as early as 2007. Moreover, the slow-down described in Mark Jaffe’s article extends to the development of utility scale projects as well as the small solar market.
Xcel has argued that, while it has exceeded the goals for the renewable energy mandate, it has stayed within the 2% cap established in the enabling legislation for the RES. This misrepresents the true situation due to the convoluted and opaque rate cap formula used in Colorado’s RES which makes it difficult to discern the actual rate impact. Xcel argues that it is only charging an additional 2% on each customer’s bill. That is true, but it does not consider the accrued liability in the hemorrhaging RESA deferred account nor does it include the cost of resources for which the PUC has granted a “waiver” from the rate impact calculation. As demonstrated in numerous PUC Staff analyses, when all of the costs are accounted for, the actual costs of renewable energy penetration in Colorado have far exceeded the 2% rate cap by any reasonable, common sense definition of the term. Unfortunately, the IOUs have been allowed to redefine the plain meaning of 2% in a way that masks the true cost of renewable energy in Colorado. Were this not the case, and had the PUC under the prior administration exercised proper oversight of the regulated utilities' renewable expenditures, the small solar industry in Colorado would not now be decrying the drastic, but necessary, reductions in incentive payments available to their customers.
A sufficiently skeptical observer might ask why a utility that fought the imposition of the renewable standard so vigorously back in 2004 would later reverse course and spend more than necessary to blow the compliance targets away and brag that it has met its compliance obligation more than a decade early. Many observers believe that it is because the utility figured out how to make money at it! Bear in mind that the utility has invested none of its own money in renewable energy and is promised full recovery of every dime – often plus interest – of consumer funds that it does spend. In my post on the 12th of January, I wrote about the PUC's rejection of Xcel's attempt to profit unconscionably from this behavior (Click here for that column).
The evidence from multiple PUC proceedings is that Xcel has acquired renewable resources (primarily wind energy) that it does not need either to serve load or for RES compliance so that it can profit from the sale of the excess renewable energy credits (RECs) to other utilities. As I wrote in testimony in Xcel’s 2010 Amended Resource Planning proceeding, this provides the utility with a perverse incentive to acquire more RECs than needed, bought and paid for with interest by Colorado ratepayers, allowing the utility to profit on both ends of the transaction.
Not surprisingly, the utility has gone to great lengths to prevent the disclosure of this fact – something that the PUC's own Staff has warned about for several years now. But, the data do not lie. Fortunately, with a new governor and under the leadership of new PUC Chairman Joshua Epel, the Commission is now taking steps to right the ship. But it's a big job and it will take a while to pay down the deficit in the renewable energy accounts. Thus vigilance by an informed public is still needed.
Unfortunately, balancing the renewable budget now will not mitigate the boom and bust I spoke about earlier or the need to transition to clean energy in a sustainable manner as the utility, in its current resource planning docket, has made it clear that it has very modest needs for additional renewable generation for some time to come.
So, how do we move forward from here? Clearly we need to restructure some of the details of the RES including, most importantly, the way it is administered. Obviously, the widely discussed tax incentives available to renewable developers, including the soon to expire production tax credit for wind energy, are important, but the individual states have limited ability to influence that. So, here is a short list of things that we may want to consider:
- Modify the liberal REC banking rules, i.e. the shelf life of RECs, in the Colorado RES. At the present time, a REC may be used for compliance for as long as five years beyond the year in which it was generated. Restricting the bankability of RECs would more closely tie actual renewable generation to current compliance obligations and discourage making expenditures far in advance of requirements.
- Consider a different mechanism for funding renewable energy development – perhaps a Public Benefits Fund paid into by all utility customers in Colorado with investment in renewable projects flowing back to the areas in approximate proportion to their level of contribution. As all the rest of us must do, set a transparent, firm budget and manage to it.
- Increase the renewable compliance targets for the state’s rural electric coops and municipal utilities (presently only 10% by 2020) to something akin to that for the two investor owned utilities. The obligation for compliance with the renewable standard should be shared equally by all of the residents of Colorado, not just the 55% who are customers of the state’s two IOUs. Furthermore, it seems unfair for the availability of consumer benefits, such as solar incentive payments, under a statewide program such as the renewable energy standard to be solely a function of your address.
- Perhaps the most important change would shift responsibility for administration of the renewable standard away from the utilities and into the hands of a public agency (perhaps the PUC or the Governor’s Energy Office) or a non-profit third party administrator. The state’s investor owned utilities, upon whom the bulk of the obligation for compliance with the renewable standard has fallen, have not shown themselves to be good stewards of the public’s investment in renewable energy.
There are many people, including me, who would be willing to pay more than 2% to aid the transition to a clean energy infrastructure – if the money is spent responsibly. But, a promise made to the voters to limit the cost impact should be a promise kept. With proper management and guidance, compliance with the RES could have been achieved in a responsible manner and at reasonable cost. Unfortunately, you cannot build a sustainable energy infrastructure on the back of unsustainable economics.