1. Confidential and Proprietary, ©2007 Navigant Consulting, Inc. Renewable Portfolio Standards: A Review of Compliance and Enforcement Options Ryan Katofsky Presentation to: Florida Public Service Commission Staff Workshop September 27, 2007 www.navigantconsulting.com

2. ©2007 Navigant Consulting, Inc Confidential and Proprietary 1 RPS Compliance Mechanisms Presentation Topics Renewable Energy Certificates Enforcement Options

3. ©2007 Navigant Consulting, Inc Confidential and Proprietary 2 RECs support numerous regulatory and market needs that require a system for defining the attributes of power sold to retail customers. Generator Registration Administrator Accreditation of Generator Renewable Energy Generation (1 MWh) 1 REC Null Energy (1 MWh) Environmental attributes Locational attributes Technology/fuel attributes Labor attributes Electrons without attributes RECs can support multiple regulatory and market needs: RPS, Labeling, EPS (emissions performance standards), green marketing and claim substantiation. An electronic certificate is issued to generators. Retail suppliers purchase RECs for RPS and other purposes. Settlement period – after RECs are issued there is a defined period of time to trade them or lose them (in compliance markets). Some systems are quarterly (New England GIS) and other others based on 12 months or longer. Banking provisions may allow RECs to remain viable for longer periods of time. RECs » How a REC is Born

4. ©2007 Navigant Consulting, Inc Confidential and Proprietary 3 Renewable Energy Generation Bundled Renewable Energy 1 RECs Null Energy 2 Bundled Retailer/ Aggregator 3 REC Aggregator/ Retailer REC Product Customer Renewable Energy Customer 1.Energy + attributes 2.Energy without attributes 3.Includes regulated utilities Electricity Generation Renewable Energy Products Retailers/ Aggregators Retail Customers Customer buys electrons and attributes (green power) Customer buys attributes only RECs are used in mandatory and voluntary markets. Traditional Electricity Markets RPS Obligated Party Obligated Party retires RECs equal to RPS obligation and collects cost from customers RECs » How RECs are used

5. ©2007 Navigant Consulting, Inc Confidential and Proprietary 4 A range of issues will need to be addressed if RECs are used for compliance. RECs » Additional Considerations REC price can be thought of as: The above-market cost of RE generation, OR The premium people are willing to pay for the attributes. In RPS markets, supply and demand determine price, subject to price caps, credit multipliers, and shelf life In voluntary markets price is based on customer willingness to pay, and the type of REC (e.g., from new or existing facility, type of facility) Determinants of REC value Ownership Pre-existing contracts with eligible facilities (e.g., PURPA) Customer-side resources subject to net metering Projects receiving state incentives Relationship between mandatory and voluntary markets Best practice: Voluntary purchases are in addition to RPS requirements Relationship with current and future emissions cap/trade programs REC eligibility issues

6. ©2007 Navigant Consulting, Inc Confidential and Proprietary 5 REC tracking systems record production, ownership, transfer/sale and retirement of RECs. Two types of REC tracking systems: Part of a broader generation attribute system applied to all generators (e.g. the PJM GATS, ISO-NE GIS) For RPS compliance only (e.g. Texas). Except for ERCOT, all existing tracking systems cover multiple states Tracking systems are policy neutral Tracking systems are not trading platforms Centralized registration, issuing, tracking, retiring, and accounting of RECs Verification that the generator is a qualifying facility as defined by the RPS Ensuring that no two credits represent the same MWh of energy Ensuring that a REC is used to meet only one RPS requirement or voluntary green power product Tracking property rights and verifying/maintaining the balance of credits in a specific account Functions of a REC tracking system RECs » REC Tracking Systems

7. ©2007 Navigant Consulting, Inc Confidential and Proprietary 6 There are three types of RPS compliance mechanisms in use today. RPS Compliance Mechanisms » Overview Renewable Energy Certificates (RECs) Separates attributes from electrons and uses attribute purchases for compliance Most common approach by far Contract Path Uses physical delivery of bundled renewable energy (electrons + attributes) Typically via PPAs between generators and obligated parties Central Procurement Designated state agency acts as a single obligated party (only 1 example) Three types of RPS compliance mechanisms Create a viable market in which companies will invest but that controls overall costs to ratepayers Ensure compliance with RPS targets Verify that only eligible resources are being used

8. ©2007 Navigant Consulting, Inc Confidential and Proprietary 7 REC-based systems are the most common means of RPS compliance RPS Compliance Mechanisms » REC-based Systems How it works RECs from eligible generators are sold to and retired by obligated parties REC registries can track multiple attributes and therefore be used for more than one RPS as well as for other purposes. Obligated Parties Utilities (load serving entities) Pros Compliance is easily tracked Allows for banking, early compliance and other flexibility mechanisms Facilitates use of credit multipliers for technology tiers Eases potential problems due to transmission constraints More easily incorporates customer-side resources Cons Requires the creation and proper functioning of a new market Potential issues with overlapping policies will need to be addressed (e.g., emissions cap and trade) Examples Texas Massachusetts All PJM states with RPS

9. ©2007 Navigant Consulting, Inc Confidential and Proprietary 8 The contract path approach is less common but fits within existing market structures. RPS Compliance Mechanisms » Contract Path How it works Obligated parties enter into PPAs with eligible generators and purchase both the energy and the attributes (bundled renewable energy) PPA term (yrs) and pricing typically subject to RPS rules Contracts may need approval from state regulators In some cases, utilities can also build and own the assets Obligated Parties Utilities (load serving entities) Pros Works within existing market structure (e.g., competitive RFPs) Provides revenue certainty for project owners, which facilitates financing Cons Requires the ability to physically deliver all the RE to the utility Requires that an auditable contract exist Examples California Colorado (RECs can also be used) Xcel Energy (Minnesota) wind and biomass generation mandate 1 1. This specific mandate preceded, and is separate from, the current state-wide RPS.

10. ©2007 Navigant Consulting, Inc Confidential and Proprietary 9 New York has adopted a central procurement approach that is a hybrid of REC procurement and the contract path approaches. RPS Compliance Mechanisms » Central Procurement How it works State agency procures and retires RECs 1 from eligible generators under long- term purchase agreement State solicits bids via competitive RFP Power, devoid of attributes, is sold into the power market (spot or bilateral contracts) Utilities collect a per kWh surcharge and transfer to state agency Obligated Parties State agency Pros Attribute-based but does not require creation of REC market Competitive solicitations ensure competitive pricing Relatively simple tracking and compliance State offers long-term contracts to encourage RE project development ConsLacks an automatic compliance mechanism to encourage development ExamplesNew York (with NYSERDA as implementing agency) 1. New York does not have a REC registry and tracking system.

11. ©2007 Navigant Consulting, Inc Confidential and Proprietary 10 Alternative Compliance Mechanisms and penalties are the two main RPS enforcement mechanisms. Two aspects of RPS enforcement Alternative Compliance MechanismsPenalties Alternative Compliance Mechanisms (ACMs) are used if insufficient renewable energy is available to meet RPS targets. Alternative Compliance Payments (ACPs) are subject to price caps to control overall compliance costs Fines imposed for fraudulent actions or failure to comply with the rules. Disallowance of ACP cost recovery MonetaryNon-Monetary Obligated party barred from accepting new customers 1 Obligated partys operating license revoked 1 Enforcement Options » Overview 1.In restructured markets.

12. ©2007 Navigant Consulting, Inc Confidential and Proprietary 11 An ACM is a key RPS design feature and serves three basic functions. Purpose of ACMs Ensure RPS functions Cost cap Stimulate project investment Provides confidence to renewable energy developers that a financially viable market for renewable electricity will exist. Can spur RE project development as the more cost-effective means of RPS compliance. With a ceiling price, protects ratepayers from excessive rate increases associated with RPS compliance. Alternative manner for an obligated party to comply with the RPS, if insufficient RE available or if cost of available RE is too high. However, if ACM kicks in, this means that the RPS target is not being achieved. Enforcement Options » Alternative Compliance Mechanisms

13. ©2007 Navigant Consulting, Inc Confidential and Proprietary 12 ACP pricing issues are the most significant ACM best practices. ACM Best Practices ACP Price Level: Significantly higher than expected cost of RECs but low enough to control overall ratepayer impacts. Texas ACP is the lesser of $50/MWh or 200% of the average cost of credits traded during the year. Can be subject to inflation adjustment (e.g., MA). States with solar set-asides have separate S-REC ACP, typically set much higher than non-solar REC ACP. Cost Recovery: ACPs are commonly (but not always) subject to cost recovery. In Delaware, ACPs are recoverable in rates only if they are the least cost measure or if sufficient renewable energy is not available. ACPs are not recoverable in PA, and therefore act as a penalty. Use of ACM funds: Reinvested in renewable energy projects Pennsylvania ACM revenues are deposited into a sustainable energy fund, and may only be used for developing additional alternative energy sources, though the PUC may utilize up to 5% of the funds for RPS administrative expenses. Enforcement Options » Alternative Compliance Mechanisms

14. ©2007 Navigant Consulting, Inc Confidential and Proprietary 13 Penalties serve to deter fraudulent behavior and encourage compliance, although collaboration and cooperation are preferred. Penalties can be automatic, but there should be an appeal process Appropriate accommodations need to be made for force majeure events Examples of RPS Penalty Provisions EntityTriggerPenalty Options RE generators False eligibility and production reporting Fines Revocation of RPS qualification Obligated parties Failure to acquire sufficient renewable energy or RECs Fines Disallowance of ACP cost recovery, e.g., if utility deemed to have not made a good faith effort In restructured markets: Obligated party barred from accepting new customers or operating license revoked Failure/fraud in meeting resource eligibility requirements Enforcement Options » Penalties

15. ©2007 Navigant Consulting, Inc Confidential and Proprietary 14 Ryan Katofsky Associate Director phone: 781.270.8317 RKatofsky@navigantconsulting.com