November 2005 ISSUE
ENVIRONMENT
Renewable Portfolio Standards
to Influence Electricity
Generation
BY BRUCE TANNER, P.ENG.
PEGG Contributor
 |
Catching the Wind |
Electricity generation produces roughly one-third of global greenhouse gas emissions. This ratio could, however, increase to 40 per cent by 2020.
What should we do? Several initiatives are, in fact, being pursued to address greenhouse gases and other pollutants from this sector. These include the Kyoto Protocol, Canadian wind and renewable power production incentives, U.S. federal and state production tax credits, and renewable portfolio standards.
Incentives and tax credits improve the economics of renewable energy investments. A renewable portfolio standard, or RPS, influences investment through other means.
These standards — the subject of this article — are similar to those imposed in other areas, such as building codes that ensure energy efficiency or standards imposed on automakers on emissions or fuel efficiency. An RPS creates new markets to provide for the allocation of the intangible benefits of this energy through the trading of renewable energy certificates.
The standards are an effective and widely accepted policy tool for influencing the development of a sustainable supply of renewable energy. They’ll have to interact with other related initiatives to successfully achieve their goals in the future.
An RPS At Work
A typical RPS requires that retail sellers of electricity provide a specified
minimum amount of their energy from a renewable energy source. These renewable
energy sources are defined within the RPS and commonly include wind, solar and
small hydro.
Certain other sources, such as tidal, geothermal and municipal solid waste, are accepted as renewables only in some jurisdictions.
The amounts of energy and definition of allowable sources can vary widely between jurisdictions. The amount of required energy generally increases over time.
Two examples of future RPS requirements are found in Ontario, with a target of 10 per cent or approximately 2,700 MW by 2010, and Massachusetts, with a target of four per cent or approximately 1,970 MW by 2010. Experts project that between 25,000 and 50,000 MW of renewable energy projects will need to be developed in the U.S. during the next 15 years to satisfy the expanding RPS requirements.
This represents a sizable investment in renewable energy infrastructure, but is only a small portion — five or 10 per cent — of the overall U.S. market. Twenty states in the U.S. have pursued RPS initiatives. Ontario is the only Canadian province to begin work.
Alberta, meanwhile, has acknowledged the benefits of renewable power, and has proposed a voluntary target to increase renewable and alternative energy by 2008.
Trading Certificates
Renewable energy certificates, or RECs, are a key component of any renewable
portfolio standard initiative. These are tradable certificates that represent
the environmental attributes of power generated from a renewable source.
Recent pricing of these certificates in some jurisdictions can be in the same order of magnitude as the wholesale value of the energy — currently as much as $50 US per MW/hour in some New England states.
RECs trade in two types of markets: mandatory and voluntary.
Mandatory markets serve the need for sellers to substantiate their RPS requirements. If a seller does not own the required amount of renewable energy generation, RECs will be purchased to fulfill the legislated requirements. Failure to fulfill the requirements usually results in penalties being imposed, sometimes as much as $50 per MW/hour on the shortfall.
Voluntary markets allow interested parties such as retailers or special interest groups to validate or support their brands or causes.
The RPS works in conjunction with other market influences. The U.S. has seen growth rates in both wind and solar power of 20 per cent per year for several years, due to the implementation of federal production tax credit legislation, which offers tax credits of $18 per MW/hour.
The U.S. is expected to build a record amount of 2,500 MW of wind power in 2005. Continuation of the production tax credit legislation in the U.S. (due to expire at the end of 2005) would support continued development of renewables, with RPS requirements also influencing where investments occur.
More Goes On
There are other activities occurring in the U.S. that address the greenhouse
gas issue, even though the U.S. did not ratify the Kyoto Protocol. The largest
effort to date is the Regional Greenhouse Gas Initiative being developed in nine
New England and mid-Atlantic states, which will be released sometime in 2005.
This is a cooperative effort between these states to cap greenhouse gas emissions from the electricity sector through the allocation and trading of credits between thermal and renewable power sources. This initiative has many interested parties eagerly awaiting this system’s design to see how it will affect wholesale power markets and the price of RECs.
Canada is currently working on a similar system under the Climate Change
Plan for Canada.
Since RPS initiatives have developed on a non-uniform basis just as the markets
they exist in, they are sometimes difficult to apply on a regional basis or in
concert with other initiatives. RECs generated in one state may or may not be
eligible for sale in another state, causing significant price differences between
regional markets.
For example, New England RECs can trade for less than $10 per MW/hour in Maine and greater than $40 in Massachusetts. Implementation of the regional initiative will likely have an effect on these markets and may require changes to either of the initiatives to work more effectively.
Many current and future rules and logistical issues in these markets also need more definition and optimization. For example, will Canadian RECs from Ontario or Quebec be eligible for sale in New England? Or will RECs from only certain sources or regions be eligible?
These policy developments are yet to be defined, and could eventually lead to a federal renewable portfolio standard policy on either or both sides of the border.
The degree existing and future standards influence the supply of power will increase as RPS requirements increase. Many policy decisions will be made to improve their effectiveness and allow other related initiatives to work successfully with the RPS and REC markets.
Success in aligning these initiatives will lead to investments that will form a base, albeit small, supply of sustainable energy in North America.
Bruce Tanner, P.Eng., is manager of evaluations and business analysis at TransCanada Corporation. He has been involved in the acquisition and development of TransCanada’s power portfolio, which includes waste heat, nuclear, hydroelectric, biomass, wind power, cogeneration, and gas and coal-fired generation.
Renewable Portfolio Standards in the U.S. |
|
Arizona |
1.1% by 2017 |
California |
30% by 2017 |
Colorado |
10% by 2015 |
Connecticut |
10% by 2010 |
District of Columbia |
11% by 2022 |
Hawaii |
20% by 2020 |
Iowa |
105 MW |
Maine |
30% by 2000 |
Maryland |
7.5% by 2019 |
Massachusetts |
4% by 2009 |
Minnesota |
1,125 MW wind by 2010 |
Montana |
15% by 2015 |
Nevada |
15% by 2013 |
New Jersey |
6.5% by 2008 |
New York |
24% by 2013 |
New Mexico |
10% by 2011 |
Pennsylvania |
18% by 2020 |
Texas |
2,880 MW by 2009 |
Rhode Island |
15% by 2020 |
Wisconsin |
2.2% by 2011 |
MORE RESOURCES
Canada
www.canren.gc.ca
http://climatechange.gc.ca/english/publications/offset_dp/dp/
Alberta
http://casahome.org/uploads/EPT_Emissions_Mgmt_Recommendations.pdf
(see Recommendations 55 through 64)
Ontario
www.energy.gov.on.ca/index.cfm?fuseaction=english.renewable
United States
www.ies.ncsu.edu/
www.rggi.org
www. awea.org/policy/rpsbrief.html
www.nepoolgis.com/newsRoom/update01.asp