Making a Case for Rationality in [Renewable] Energy Deployment

It has become increasingly evident that there is a serious need for some clear thinking in the energy debate. As I have often said, the sum total of all of the vested interests (utilities, environmentalists, renewable energy advocates, etc., etc.) does not equate to the public interest. In an earlier blog on the Western Wind & Solar Integration Study, I noted that we are becoming increasingly adept at operating the electric grid with greater amounts of intermittent renewable resources. But there are many proponents who are becoming positively irrational about this. It seems that some of the policy makers who are closest to the problem are the farthest from reality. To some I would grant the benefit of the doubt and suggest that they simply know no better. Other proponents would clearly subjugate the public interest to their own economic and/or political self interest. Unfortunately, the result is the same.

As anyone familiar with this field knows, California's renewable standard will likely soon require major utilities to provide one-third of their energy from renewable resources by 2020. It seems to matter little whether or not this is an attainable goal. And, I used to think that California was on the right track in requiring that these renewables actually deliver renewable power into the state in order to qualify. But as the likelihood of meeting this ambitious goal becomes increasingly problematic, the policy makers and stakeholders seem willing to make tradeoffs that will dilute the effectiveness of the goal.

Let's start with an article in the Sacramento Bee describing how the various stakeholders are debating the sourcing requirements for renewable energy to comply with the standard (see Utilities, groups at odds over sources for renewable energy). Utilities are now claiming -- perhaps rightfully so -- that they cannot meet this aggressive standard unless they are allowed to procure resources from out of state, and a California PUC analysis supports this contention. So, if you were in California, which would you find to be the more rational approach: a standard that cannot be met and which encourages utilities to procure out-of-state resources, often at exorbitant costs, or a more reasonable ramp-up in renewables that fosters in-state development at reasonable cost? Would California ratepayers benefit more from sending their utility dollars out of state to essentially purchase RECs or keep that money in state to develop local projects? They may as well propose to get solar energy from a satellite! Oh, sorry, they're proposing that too. And then everyone laments the high contract failure rate in renewable energy.

The lesson seems to be: Set a standard that you cannot achieve and then simply change the way you measure compliance to make it appear that you did. This situation has become so bizarre that Colorado's major utility has now hatched a scheme to combine brown power from unspecified sources with its excess RECs and sell the bundle to California utilities as green power to comply with the standard that they cannot otherwise meet. Of course, the Colorado utility in question hopes to profit handsomely from the sale of these RECs which, incidentally, were already paid for by Colorado ratepayers. What makes this possible from the Colorado utility's perspective is that it has acquired too many RECs, too soon, at too high a cost. This is beginning to look like a zero-sum game. The same amount of renewables will ultimately be developed, the only question is where? Call me old fashioned but how about a scenario in which each utility develops its own renewable resources to serve its own local needs?

I mentioned that the Colorado utility had acquired too many RECs, too soon, at too high a cost. I made this comment back in 2007 when I showed that the utility proposed to purchase more solar RECs than it needed for compliance in an environment where solar costs were projected to diminish rapidly, thereby saddling ratepayers with higher costs than they would otherwise have to pay. This prevented the utility from taking advantage of the inevitable cost reductions that were sure to result from technological advance and deployment experience. But it is this myopic belief that if some is good, more must be better that is responsible for the irrational behavior that is inflicting policy makers with regard to renewable energy. As stated in a recent op-ed piece on cap-and-trade by Paul Gerlach in the South Florida Sun-Sentinel, this "preoccupation with setting unrealistic targets for renewable sources has blinded policy makers to the almost unlimited opportunities for technological breakthroughs in the production and use of conventional fuels..." and, I might add, in the deployment of renewable energy technologies.

The Proposed Federal Renewable Energy Standard

One of the provisions in the Waxman-Markey climate change bill calls for a federal renewable energy standard (RES), often referred to as a renewable portfolio standard or RPS. Long favored by the renewable and environmental communities, a federal RPS has come up short several times in Congress in the past. And, former President Bush threatened to veto any legislation containing one.

Now, with the Dems in control of Congress and the White House, the prospects for passage are the best they’ve ever been. Colorado has a reasonably aggressive and generally successful RES that has successfully stimulated wind and solar electricity generation, at least in the investor owned utility (IOU) territories. And, while our experience has been largely positive, I have gone on record in the past, and continue to believe, that a federal RPS is NOT the way to go.

Presently, some 28 states have mandated RES requirements for at least their investor owned utilities. Some extend them to cooperative rural electric associations and municipal utilities and a few states have renewable targets or goals as opposed to mandates. Most of the resistance to renewable standards has come from the southeastern states although even some of the states with the best wind energy resources have no RPS (North and South Dakota have goals, Wyoming not even that).

In spite of the fact that I generally favor a transition toward more renewable energy, there are a number of reasons why I do not favor a federal RPS. First, most of the states with existing RPS already have more stringent targets than are contained in the Waxman-Markey bill. So, all the federal requirement would accomplish is force the recalcitrant states to make some progress toward producing clean electricity. What’s wrong with that you may ask? Nothing, per se. But it should be understood that each state with an existing RPS has tailored it to its own resources and needs. No two look alike. Each has different requirements for sourcing the generation, the vintage of facilities, the lifespan or bankability of renewable energy certificates (RECs), etc. Some even have different definitions of what constitutes a renewable resource (Pennsylvania, for instance, allows waste coal to count toward its RPS... we won't go there).

Now, along would come a federal RPS which would eliminate some of that discretion. It is generally acknowledged that a state may have a more stringent RPS (at least in terms of the target renewable percentages) but that in itself could create an administrative nightmare since we could have RECs that are retired with respect to one requirement and not the other. And, with both a state agency and the FERC to report to for RPS compliance, utility costs of compliance will only increase.

To avoid further confusion, states would (or should) harmonize their definitions of eligible resources and REC characteristics with the federal standard. And, while this could be a positive step (Colorado, for instance, presently has a ridiculous 6-year shelf life for RECs and accepts unbundled RECs for compliance from anywhere), the principal beneficiaries will be the REC marketeers who make a living in trading paper. This is no different from trading in problematic carbon offsets or financial derivatives. If you consider that renewable standards are sold to the public on the basis of clean energy, job creation, and other local benefits, shipping ratepayer money across the country for the purchase of unbundled RECs (that is, RECs without the associated green energy) helps those ratepayers exactly how?

So, what is the solution? Simple. Rather than have a federal RPS with utilities reporting to the FERC, mapped over the top of a cornucopia of different state standards, why not simply mandate that each state create its own state RPS and leave it to the individual states to administer. This is no different than was done years ago with the 55 mph speed limit and a number of other federally mandated, but state administered, programs. The feds could mandate a minimum set of requirements that each state program must meet and, once that state program is approved by the FERC, administration and compliance is left to the state. We get renewables across the country, each state gets to tailor its program to its own needs, the benefits accrue locally, and utilities report to only one task master. And given the weak RPS that is contained in Waxman-Markey, no one could argue that it would result in a weaker standard than we will see with the current proposal.