RPS: Certainty Now
by Roger Feldman --
Andrews Kurth, LLP
Renewables have been positioned in such a prominent place in the new Administration’s broadly outlined national recovery and transformation plan that, unwittingly, they may be setting themselves up to provide disappointments to their friends, and to become flashpoints of resistance for their non-friends. The debate over a Federal Renewable Portfolio Standard (“RPS”) may be the first such point of ignition. If renewables are to really lead in replacing job loss, displacing foreign oil, and turning back the ocean of global warming, the regulatory climate has to be right for them to do so.
Perhaps one thing the Federal RPS debate will do is put a spotlight on the opportunities and the limits of trying to use renewables to effect such transformational policy. This has been an ongoing debate. One matter seems clear: a Federal RPS will require an ever-increasing interest and involvement by the players who provide (through traditional means) the great bulk of our power today. It will also require a new focus on our transmission and distribution systems.
This institutional fact is, of course, not a new revelation coming from the new Administration. In proposed legislation last year, Renewable Portfolio Standards were proposed as utility quotas, and Renewable Energy Certificates held out as mechanisms to goad that industry to action. The Senate almost pushed through a Federal RPS, straightforwardly proposing minimum renewable purchase quotas for all utilities and empowering the Secretary of Energy to create a program for certificates for compliance purposes. Provision for use of state RECs in the Eastern Interconnect was sketched out, but the statute clearly was preemptive in nature in terms of RECs definitions. Proceeds collected as penalties for non-compliance were to have been dedicated to a fund to promote efficiency results. Utility recovery of costs necessary for RPS compliance were to have been insured ratemaking treatment, as prudent.
Utilities have expressed the concern that the intrusion on state/formulated RPS by Federal legislation would undo the tailored progress being made by these “laboratories of democracy.” More materially, they would intrude on states’ individual determinations of what local resource development should be favored by local RPS requirements, and could effectively cause residents of renewable-poor states to transfer funds to those in renewable-rich ones. Shades of socialistic wealth redistribution!
Shades, too, of potentially imposing significant transmission construction costs on utilities not garnering sufficient benefits for the investments made in renewables, adding to the already foreseeable demands for new grid transmission costs. This Federal RPS could thus (absent adjustment for the current ratemaking system) be extremely deleterious to utilities.
It is not necessarily a quick fix to shift the mandate for RPS compliance from the individual utilities to the individual states, with the directive that the states may exceed but not fall below Federal standards. This is, of course, the general approach taken in the Clean Air Act context. But it leaves open the issue of whether the states’ RPS requirements should only be based on their ability to internally produce renewables proportionate to their power consumption. The proceedings to establish each state’s renewable resource production capability certainly would be a stimulus package for economists and lawyers, but it also might well prove a retardant to renewables’ economic growth. In addition,, the states where renewables’ use might be the most beneficial from an environmental standpoint are certainly not necessarily those where they are produced. As Lincoln might have put it if her were an energy wonk: “One union, quite divisible, with winners and losers.” Bottom line: Federal RPS may have some difficulty even getting passed, let alone operating efficiently.
There looms over the Federal RPS debate a larger issue: it all assumes that the highest national priority should be creating a mechanism simply to institutionalize the (once) revolutionary leap of separating the environmental attributes from the power attributes of electricity (the so-called “null power”) and allowing the separate sale of each, principally in the interest of promoting renewables. It does not address the question of reconciling RPS with the emerging goals of carbon regulation, e.g., running a cap and trade system where REC’s environmental attributes can be “disaggregated” and sold as carbon credits to meet a more embracing Federal climate change program, while still avoiding double counting the value of the environmental attributes for RECs purposes. For traders, the possibility for arbitrage between RECs and carbon credits is, of course, financially very interesting, but it is hard to see what public policy benefits can be obtained. So ultimately, the proponents of promoting renewables through RPS may find themselves vying with those for whom renewables are viewed as one--but perhaps as one relatively inefficient--way of achieving carbon neutrality.
Some programmatic guidelines rationally should prevail. The goal of the renewables industry should be to focus governmental decision-makers on renewables’ compatibility with the exercise of policy options with respect to, e.g., carbon, so that renewables do not get stalled in the kind of anticipatable policy controversy outlined above. Certainty right now, “to help the economy by facilitating renewables’ development,” should be the industry’s byword. “Simple and implementable” should be its motto. “Provision for future incremental expansion” should be its accommodating longer-term strategy. Legislative experts may differ on how to achieve these goals. In any case, they should avoid taking positions which have a reasonable probability of working against the increased use of renewables, becoming either centers of irreconcilable controversy or the subject of patched together, unduly complicated, administrative mechanics.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.