1. 1 Renewable Energy Certificates and the California RPS NARUC 2006 Summer Meeting San Francisco, CA Andy Schwartz Division of Strategic Planning California Public Utilities Commission

2. 2 Twenty-two states plus the District of Columbia have RPS Programs/Goals State Goal ☼ PA: 18%¹ by 2020 ☼ NJ: 22.5% by 2021 CT: 10% by 2010 MA: 4% by 2009 + 1% annual increase WI: requirement varies by utility; 10% by 2015 Goal IA: 105 MW MN: 10% by 2015 Goal + Xcel mandate of 1,125 MW wind by 2010 TX: 5,880 MW by 2015 *NM: 10% by 2011 ☼ AZ: 1.1% by 2007 CA: 20% by 2010 ☼ NV: 20% by 2015 ME: 30% by 2000 State RPS – No REC Trading *MD: 7.5% by 2019 ☼ Minimum solar or customer-sited requirement * Increased credit for solar ¹PA: 8% Tier I, 10% Tier II (includes non-renewable sources) HI: 20% by 2020 RI: 15% by 2020 ☼ CO: 10% by 2015 ☼ DC: 11% by 2022 DSIRE: www.dsireusa.org May 2006 ☼ NY: 24% by 2013 MT: 15% by 2015 *DE: 10% by 2019 IL: 8% by 2013 VT: RE meets load growth by 2012 State RPS – REC Trading

3. 3 California Has One Of The Most Aggressive Renewable Portfolio Standards In The Country SB 1078: 20% Renewable Energy By 2017; Energy Action Plan: 20% Renewable Energy by 2010. – An expanded goal of 33% by 2020 has been identified as one of the strategies to facilitate Gov. Schwarzenegger’s CO2 emission reduction goals. Obligated entities include the IOUs, ESPs, CCA, as well as small and multi-jurisdictional utilities. California has relatively strict rules governing RPS-eligible resources and contracting terms. – In-state delivery: first point of interconnection to the grid must be within California. – Long-term contracting requirements (10,15 or 20 years). – Compliance is assessed on the basis of energy deliveries.

4. 4 California Faces a Number of Significant Challenges to Achieving Its Renewable Energy Goals Resources are not equally distributed throughout the state. Significant transmission constraints impede energy delivery. For ESPs in particular, long-term contracting requirements are problematic.

5. 5 The Costs Of Achieving The RPS Goals Are Unclear And Depend On The Shape Of The Renewable Supply Curve S High Cost S Low Cost D P High Cost P Low Cost Q Renewables

6. 6 A Statewide Supply Curve Would, Theoretically, Lower The Overall Costs Of Achieving The RPS Goals S D1D1 P1P1 QRQR S D2D2 P2P2 QRQR S 1 + S 2 D 1 + D 2 P3P3 QRQR Although intuitively the overall costs of compliance should be lower, it is important to recognize that not all players necessarily benefit (P 3 P 2 ). Utility 1Utility 2Combined Utility 1 & 2

7. 7 Unbundled RECs Allow Obligated LSEs To Benefit From Low Cost Renewables, Irrespective Of Their Location A REC represents claim over the renewable attributes of one MWh of generation from an eligible renewable resource. – RECs are “generated” simultaneous to the energy output of a renewable energy resource – RECs can be sold bundled with the associated energy, or on an unbundled basis, as a stand-alone product. From the generator’s perspective, unbundled RECs expand the number of customers to whom they can sell the renewable attributes associated with their energy output.

8. 8 Bundled Versus Unbundled RECs Renewable Energy Commodity Energy REC Unbundled Regime Renewable Energy LSE 1 LSE 2 Voluntary Market Market Intermediary Bundled Regime Commodity Energy REC

9. 9 The Possibility of Unbundled REC Purchases is of Particular Interest to ESPs ESPs are likely to be significantly challenged if their RPS compliance options are limited to long-term renewable energy contracts given their uncertain future. Unbundled RECs, purchased on a short-term basis, would reduce the risk of stranded costs associated with long-term renewable energy contracts.

10. 10 The Value of RECs, From A Compliance Cost Perspective, Hinges on the Rules Governing Their Use Geographic flexibility – Where must the energy from renewable generators be delivered in order for the associated RECs to be eligible under the California RPS? Temporal flexibility – When can RECs be traded relative to their date of creation? Participatory flexibility – What market actors can buy and sell RECs? Contracting flexibility – What are the terms and conditions of REC transactions? Economic theory would suggest that greater flexibility across all of these dimensions will result in lower overall costs.

11. 11 From a Policy Perspective, The Value Of Purchasing RECs In Lieu Of Energy Is A Critical Question For a variety of benefits, the value of renewable energy depends on where renewable energy is generated, or where/to whom it is delivered. – Hedge value of a diversified energy portfolio – In-territory economic development benefits – In-territory air quality benefits For other categories of benefit, where a facility is located and where/to whom it delivers is irrelevant. – GHG emission reductions The ability of unbundled REC purchases to stimulate new renewable development is arguable. – Development of renewable energy is California remains very much dependent on long-term contracts. – Thus there is an inherent tension between facilitating ESP compliance by allowing short- term, unbundled REC purchases and stimulating new development.

12. 12 Whether the CPUC has the Authority to Implement Unbundled RECs Absent Legislative Direction is a Point of Contention A number of parties have argued that REC unbundling would require legislative action. – The RPS enabling legislation does not expressly prohibit the use of unbundled RECs, however compliance is referred to in terms of energy deliveries and electricity, not credits. – The manner in which ESPs, CCAs and small multi- jurisdictional utilities comply with the RPS was expressly left to the PUC.

13. 13 California’s Existing RPS Compliance Framework Involves the Implicit Use of Unbundled RECs. In 2006 the delivery rules were changed to allow renewable energy delivered anywhere in California to count toward RPS. – Further builds upon earlier decision to expand delivery options from requiring delivery into the service territory of the contracting utility to anywhere in the CAISO-grid. – Ultimate disposition of the energy doesn’t matter; the contracting LSE still gets credit for renewable energy under the RPS. Existing rules re- banking of renewable purchases in excess of annual procurement targets is tantamount to allowing unbundled RECs.

14. 14 The Cost Protections Under the Existing Regime Are Predicated on the Use of Bundled, Long-Term Contracts S D P 20% Q Renewables Market Price Referent Costs above the MPR are paid for out of a fund generated from a public goods charge. This caps the total above-market cost of the RPS to the amount of funds available. P Capped Area of this triangle represents the amount of funds available to cover the above market costs of renewable energy.

15. 15 An Unbundled REC Regime Will Need to be Harmonized with Other State Policies The CPUC is moving forward with its plans to impose a cap on the GHG emissions of the IOUs. – In June 2004 a PUC decision determined that RECs include avoided emissions, suggesting that GHG accounting will need to recognize the emissions value of RECs. A number of REC ownership issues have yet to be resolved. – Who owns the RECs from renewable distributed generation facilities, in light of rate-payers subsidies? – Who owns the RECs generated by qualifying facilities under existing PURPA contracts.

16. 16 A Number of Practical Matters Must also be Addressed Before REC Unbundling Can Proceed Outstanding questions regarding whether legislative action is necessary to move forward with REC unbundling Need for a robust tracking system – WREGIS is expected to come online in the second half of 2007. – Existing interim tracking system might be able to support limited REC trading.

17. 17 Questions for the Panel Does it make sense to pursue a hybrid regime, in which some defined portion of the RPS obligation can be met through unbundled RECs? How significant is the risk that unbundled RECs might actually increase the costs of RPS compliance? – Given existing supply constraints, will RECs result in windfall gains to renewable generators in the near term, particularly QFs coming off contract? – What mechanism(s) might be implemented to limit this risk? Is there greater risk that under an unbundled REC regime, the RPS will result in the development of one type of renewable resource to the near exclusion of the other resource types? – If yes, should this be considered a problem? Is there a way to organize/aggregate ESP demand for renewable energy in a way that will stimulate additional renewable energy development? – Can the market be relied upon to provide this solution or is a regulatory solution necessary? – What would it take for renewable developers to be willing to build facilities on a merchant basis in California?