Why States Should Adopt A Renewable Portfolio Standard

Source: by NAW Staff • Posted: Friday, September 12, 2014

Some states throughout the U.S. have implemented various policies to encourage renewables and energy efficiency that could be adopted by neighboring states to improve local economies, provide energy security and reduce emissions, according to a new study. In addition, the report says these innovative policies could be particularly valuable as states develop plans to meet the U.S. Environmental Protection Agency’s (EPA) pending rules to cut power plant emissions.

One effective clean energy policy, the study points out, is a renewable portfolio standard (RPS).Dubbed “The State Clean Energy Cookbook,” the study was created by Stanford University’s Steyer-Taylor Center for Energy Policy and Finance and Hoover Institution’s Shultz-Stephenson Task Force on Energy Policy. It was led by former U.S. Sen. Jeff Bingaman and former Secretary of State and Treasury George Shultz. Overall, the study analyzes and makes specific recommendations regarding 12 clean energy policies.RPS According to the report, states seeking to increase renewable power generation significantly should consider adopting or expanding an RPS. An RPS mandates that electricity suppliers generate or procure a certain percentage of electricity from a set of specific clean energy technologies.

Currently, 29 states and Washington, D.C., have RPSs in place, with about half extending through 2020 and most of the rest through 2025. Five additional states have non-binding renewable power deployment goals. The report notes that RPS policies have taken different forms in light of the relative cost of renewable energy technologies and availability of resources.

The study says renewables can be an important part of a state’s electrical generation portfolio. However, sometimes they are more expensive than conventional power generation. Nevertheless, experience to date suggests that any resulting rate increases from RPS implementation have been relatively modest compared to those attributed to other power system infrastructure costs. The study cites a 2014 Lawrence Berkeley National Laboratory (LBNL) analysis that pegs the increase at approximately 1% of retail rates, with significant state-to-state variation.

The study says RPS policies clearly are effective at increasing renewables generation: Only five of 29 states have fallen below 90% of expected annual progress toward RPS targets. The impacts of the policy are generally well understood, with 10 states having a decade or more of RPS operational experience. Furthermore, the study says RPSs operate at significant scale and drive substantial new investment.

Because they are generally long term and politically stable year-to-year, RPSs have helped to build markets for the supply of renewable generation technologies. The study says the mandates are also one of the few explicit tools available to policymakers and regulators to improve diversity in the power-generation mix. This helps provide a hedge against overall electricity rate volatility, such as from changing natural-gas prices.

Such diversity could also help in the event of fuel supply disruption, the report adds. From an environmental standpoint, RPSs can help reduce local or regional pollutants and associated health impacts from a state’s power sector. An RPS also reduces carbon-dioxide emissions in cases where new renewable generation displaces more carbon- intensive incumbents throughout the regional grid.

The study notes that an RPS, on its own, should be seen as helpful to environmental goals but not a comprehensive strategy to meet power-sector carbon-dioxide emission targets. It is one of several avenues, particularly under the EPA’s proposed carbon emission standards.

A Closer Look

The study also provides analyses of two states with RPS policies. Minnesota, for example, has an RPS ranging from about 25% by 2025 for public utilities to 32% by 2020 for the state’s largest investor-owned utility. The policy was first set out as a voluntary goal in 2001 and now consists of mandatory, utility-specific targets adopted in 2007.

The study says that although Minnesota’s current electric load is served primarily by existing coal and nuclear power, newly added generation in recent years has consisted primarily of wind-generated electricity.

Wind power is an important element of the state’s RPS planning. In 2006, before the mandatory renewable standard was adopted, the state’s utility commission and the state’s second-largest utility both commissioned studies to determine the impact on reliability of operating the Minnesota grid with higher levels of wind power (approximately 20%).

The reports found that doing so would be technically feasible given sufficient thermal power backup and if new transmission development kept up with new renewable deployment. By 2013, about 16% of the state’s electricity was supplied by wind power. Xcel Energy, the state’s largest utility, is the nation’s largest wind-energy provider and is required to meet 25% of its electricity supply with wind by 2020 as part of the state’s RPS.

To help address wind’s dominance in the renewable portfolio, legislators added a 1.5% solar photovoltaic carve-out to the existing overall RPS in 2013, with 10% of that required to be customer-sited distributed generation. The RPS also allows hydropower plants with capacities up to 100 MW, recognizing the surrounding regional grid’s hydro resources.

The study says that although Minnesota’s RPS contains no explicit cost cap, the state’s utility commission is specifically authorized – through “off-ramps”- to intervene and modify the RPS if it determines it to be in the public interest – that is, if it finds unacceptable cost or reliability impacts, as well as transmission bottlenecks. Although this clause is vague, the study says it has a potential advantage by preventing utilities from “racing to the cap” through development of expensive and potentially ineffective renewable projects.

Legislation in 2011 required the state’s utilities to report on how much the RPS was costing customers. The study says that although results have been mixed, the data has helped improve policymaker, regulator, utility and customer understanding of this important policy.

Design Considerations

According to the report authors, there are a number of considerations in designing an effective, cost-efficient and fair RPS, including the following:

Which technologies should be eligible to meet RPS targets? Recognizing that an RPS is essentially a technology mandate, the report authors say they believe that the eligibility pool should be defined as broadly as reasonable. This helps ensure that already-deployed and suitable clean energy technologies remain in the mix and that emerging renewable technologies do not face barriers to deployment as they become commercially available. At the same time, if overall RPS eligibility is kept broad, then it may be useful to limit the level of a single technology so it does not dominate the RPS portfolio. Another issue is whether renewable generation on the customer side of the meter should count toward RPS targets.

Should an RPS allow energy efficiency improvements to count in meeting targets? Some states have included energy efficiency as an RPS-eligible resource. While this can provide flexibility, the study says it can also detract from the basic purpose of the RPS – that is, to encourage investment in and deployment of renewable generation and supporting infrastructure. In the report authors’ view, the preferred approach is to encourage improvements in energy efficiency through other policies, such as an energy efficiency resource standard, and adjust RPS targets accordingly.

At what overall level should the RPS be set? Because states may choose to include existing renewable energy or other low-carbon technologies in an RPS, and because compliance periods may vary, the report says there is no correct or universally appropriate RPS target level. Current levels range from 8.5% in Pennsylvania, to 20% in Kansas, to 30% in Colorado, to 33% in California, to 40% in Hawaii. Importantly, the study says experience to date suggests that grid-integration issues have not been major barriers to the deployment of renewable technologies. At the same time, research into cost and reliability issues at higher penetration levels of variable generation is needed as a next generation of likely higher RPS levels is considered.

Should carve-outs be created to encourage diversity in deployed technology type, scale, form or location? The study says LBNL estimates that 88% of RPS capacity additions from 1998 to 2012 came from one technology: wind power, the cost of which for many years has benefited from a relatively mature technology and federal tax benefits. Carve-outs can be used to specify a mix of renewable generation. For example, they can require a share of distributed generation or a modest level of an emerging technology. However, the study says it is important to avoid being too detailed or prescriptive in establishing carve-outs that may not be attainable for reasons of technology, grid integration or cost.

How will RPS costs be allocated among customers in utility cost recovery? 
If utilities are allowed to pass on the increased costs of renewable power to customers, it is important to ensure that the existing rate design does this fairly across and within user classes. The study says evidence to date suggests that the cost of renewable deployment is manageable in the aggregate, but it is important that it does not become too concentrated and burdensome for any particular subset of customers.

What form will cost-containment measures take?
 The study says RPS policy should be designed to limit costs in a reasonable way – e.g., through a percentage cost cap or a utility “safety valve” whereby a ceiling is set on per-kilowatt-hour compliance obligations and alternative compliance payments are established. A regulator may also be able to improve RPS cost-effectiveness through the adoption of additional procurement rules and mechanisms. California, for example, has adopted a standard contract and least-cost competitive bidding procedures for utilities to use, with independent oversight. The study says because attributing electric system costs is not trivial, the RPS should designate responsibility and provide funding for independent monitoring and reporting on total cost impacts to consumers, including those related to transmission and capacity as well as avoided costs such as fuel or environmental compliance. The report says this is important for ongoing policy support, especially given the existence of simultaneous, non-RPS power system cost drivers, such as generation replacement, grid investment or new environmental compliance costs.

To what degree will out-of-state renewables count toward RPS targets? The study says that, all else equal, allowing cross-border trade of renewable power will generally reduce total costs by giving states with fewer renewable energy resources access to larger – and perhaps cheaper – supplies in other states. At the same time, the study says the use of out-of-state generation can affect the overall diversity, reliability and security of a state’s electricity supply. For example, long-distance imports may be more subject to point disruption, but they can also help reduce overall weather-related intermittency by providing greater geographic diversity. Also, there are pending cases based on the Commerce Clause challenging the authority of states to limit RPS to in-state sources.

How will responsibility for and costs of supporting grid infrastructure be determined? Because RPSs mandate the development of new-generation infrastructure, this may require investment in new transmission, firming or other supporting infrastructure. The study says protocol for this should be set out explicitly in an RPS, as the cost and availability of new transmission, distribution and firming can significantly affect the success of an RPS. Texas established a Competitive Renewable Energy Zone model, which socializes the cost of developing new transmission lines in advance across all customers. And in California, billions of dollars have been spent developing new transmission capacity, following a structured stakeholder initiative, to help bring rural renewable power resources to coastal demand centers. Much of those costs have likewise been socialized across the state’s investor-owned utility transmission grid.

This article is an adapted excerpt from “The State Clean Energy Cookbook: A Dozen Recipes for State Action on Energy Efficiency and Renewable Energy.” The full report, which analyzes 12 policies, is available  here.