Energy Portfolio Standards Creating New Opportunities for Increased Use of Clean Energy Katrina Pielli Clean Energy Program Manager Climate Protection Partnerships Division U.S. Environmental Protection Agency Florida PSC Renewable Portfolio Standard Workshop July 26, 2007

2 Agenda What is clean energy Introduction to EPS Resource eligibility Incorporating EE and CHP Scope of EPS Using RECs to meet EPS requirement Penalties for not achieving EPS requirement Elements of successful implementation Aligning other policies to achieve EPS

3 What is Clean Energy? Clean energy includes demand- and supply-side resources that deliver clean, reliable, and low-cost ways to meet energy demand and reduce peak electricity system loads. – Energy Efficiency reduces demand for energy and peak electricity system loads. Common energy efficiency measures include hundreds of technologies and processes for practically all end uses across all sectors of the economy. – Renewable Energy is partially or entirely generated from non-fossil energy sources. Renewable energy definitions vary by state, but usually include solar, wind, geothermal, biomass, biogas, and low-impact hydroelectric power. – Combined Heat & Power, also known as cogeneration, is a clean, efficient approach to generating electric and thermal energy from a single fuel source. Inherently an energy efficiency measure.

4 Clean Energy Benefits Primary Clean Energy Benefits Reduce energy demand Meet load growth with fewer environmental consequences State Energy Challenges Electricity demand continues to rise Electricity transmission systems are overburdened Many base-load plants are aging Volatile natural gas prices and financial risk as well as high energy prices Reducing emissions to improve air quality and comply with clean air rules. Clean energy can reduce electricity demand and meet load growth to help address many state energy challenges Additional Clean Energy Benefits Reduced energy-related air emissions Increased power reliability Increased fuel diversity Efficient use of natural resources Increased state economic development

5 Energy Portfolio Standards (EPS) Many states are creating Energy Portfolio Standards (EPS) – Renewable, Alternative Energy, Energy Efficiency Since FL is in initial discussion stages, I will use EPS Policy Objective: EPS requirements create market demand for clean energy supply by mandating that utilities and electricity providers serve load with a minimum requirement of clean energy. Policy Advantages: Due to market-based approach, has potential to achieve policy objectives efficiently and at relatively modest cost (ratepayer impacts generally range from less than 1% increases to 0.5% savings). Spreads compliance costs among all customers. Functions in both regulated and unregulated state electricity markets. Provides a clear and long-term target for clean energy generation that can increase investors and developers confidence in the prospects for renewable energy Provided the state sends strong signals that this is a policy that will last.

6 = CHP/waste heat recovery eligible States With EPS Requirements

7 States with EPS requirements mandate that between 1 – 25% 1 of electricity be generated from renewable sources by a specified date. Note: 1. Higher percentages are typically for states that already have a relatively large amount of RE, like NY, CA and ME Source: Navigant Consulting, Inc, Database of State Incentives for Renewable Energy (DSIRE) and California Energy Commission. States With EPS Requirements (2)

8 EPS Design States tailor EPS requirements to fit policy objectives, electricity market conditions and clean energy potential. Key features of EPS design: Goals and Objectives Applicability Eligibility Compliance Overall design of EPS requirements can influence investor confidence, the ability of markets to develop, and opportunities for project developers and investors to recover capital investments.

9 Key features in EPS design Accounting methods (e.g., energy production versus installed capacity requirements; RECs or bundled energy only). Resource eligibility Time horizons for compliance periods Mandatory or voluntary participation Flexible compliance mechanisms to guard against high prices or the lack of supply of renewable energy Coordination with Federal and State energy policies Cost recovery mechanisms for utilities Enforcement mechanisms for non-compliance Incorporate technology tiers and/or credit multipliers to encourage particular technologies. Several best practices for EPS design features have emerged based on state experiences. Key Features in EPS Design

10 * Renewable CHP systems are eligible; fossil-fueled CHP systems are not eligible. Includes only those states that allow fuel cells using nonrenewable energy sources of hydrogen. Some states allow only renewable fuel cells (Arizona, California, Colorado, Delaware, Massachusetts, Maryland, New Mexico, New York, Rhode Island, Wisconsin) as eligible technologies. Source: U.S. EPA Clean Energy-Environment Guide to Action (2006), Database of State Incentives for Renewable Energy (DSIRE) last accessed July 2007, Resource Eligibility Eligibility of technologies varies by state and depends on whether an energy resource or technology supports state goals.

11 Resource Eligibility (2) EPS requirements should fit policy objectives, electricity market conditions and clean energy potential. Important to complete a potential study Clearly understand implications of eligible vintage resources Increasingly, states are including non-renewable energy in EPS (e.g. EE, CHP) By including EE, North Carolina found the overall cost of a RPS was reduced over the long-term By including CHP, states promote the efficient generation of electricity and thermal energy

12 Incorporating CHP into EPS States are increasingly including CHP as an eligible EPS resource. Inclusion may require a minimum efficiency requirement (e.g., 50% total efficiency in Connecticut) or designation as a qualifying facility under the Public Utilities Regulatory Policy Act (such as in Maine ). These efficiency requirements also usually require some minimum threshold of recovered electric and/or thermal energy, such as Connecticuts 20% minimum thermal threshold. EPS eligibility requirements may set emission limits for emitting technologies. Through 2005, California sources were required to produce zero emissions or meet the 2007 state emission limits for DG to qualify as eligible. In Connecticut, emission limits apply to biomass facilities.

13 Incorporating CHP into EPS (2) CHP systems that are fueled with a qualifying renewable resource are eligible under traditional EPS. In this context, typically only the electric output of the CHP system is eligible. States can also include the thermal output for these systems in EPS to fully value CHP benefits. There are numerous states that credit thermal output in their environmental regulations: California, Maine, Rhode Island, and Texas include thermal output in their Small DG Rule. As well as EPAs Combustion Turbine New Source Performance Standards. To account for the thermal output of CHP units, convert the measured steam output (Btu) to an equivalent electrical output (MWh) through a unit conversion factor (1 MWh = MMBtu). By adding the thermal and electric output together, states are recognizing the full environmental and emissions benefits of CHP. EPS language can be modified to state that CHP output will be calculated as the electric output plus the thermal output in MW, based on the conversion of 1 MWh = MMBtu of heat output.

14 Incorporating EE into EPS Increasingly, states are setting EE goals Goals include: % of demand growth (TX, CA), % of supply (CT), % of sales (HI) Important to have clear EM&V established Recent ACEEE report for FL assumed EE goal of 0.2% of electricity sales in 2009, an additional 0.4% in 2010 until savings of 1% per year are being achieved. Gas sales 0.1% in year one, 0.2% in year two, increasing to 0.5% savings in year five and thereafter. Including EE as part of an ERS can reduce the overall cost to achieve goals over the long term (NC)

15 Incorporating EE into EPS (2) CA, CO, CT, HI, IL, NV, NJ, PA, TX, VT Hawaii, Nevada, and Pennsylvania have indirect EEPS as part of their RPS/AEPS. Illinois's EEPS is a goal (not a requirement) under the state's Sustainable Energy Plan. Colorado EEPS is part of a utility/PUC settlement agreement; Vermont EEPS is incorporated into statewide contracts for energy efficiency. As of 1/1/07.

16 Incorporating EE into EPS (3) North Carolina RPS Study Results

17 Tiers and Multipliers States regularly incorporate technology tiers and/or vintage tiers and/or credit multipliers to encourage particular technologies. By using tiers, different types of resources arent competing for the same percentage. Connecticut = 3 tiers. Tier I and II are new renewable generation and Tier III is EE, CHP and DR. Credit multipliers are an effective method of placing increased value on a specific resource. AZ 1.5 for in-state solar generation installed pre-2005; 1.3 for renewables installed in 2001, 1.2 for 2002, 1.1 for 2003; in-state manufacturing and DG multipliers; proposed rule would eliminate multipliers for projects installed after 2005 DE 3 for solar or fuel cells before 2014; 1.5 for wind sited in DE before end of 2012 CO 1.25 for in-state renewable resources NV 1.15 for distributed renewable generation; 2.4 for PV (2.55 for DG PV); 0.7 for customer-sited reverse polymerization waste tire facilities NM 2 for biomass, geothermal, LFG, or fuel cell; 3 for solar DC 1.2 for wind and solar through 2006 and 1.1 from 2007 to 2009; 1.1 for methane gas through 2009 MD 1.2 for wind through 2005 and 1.1 for wind from 2006 to 2008; 1.1 for landfill methane through 2008; 2.0 for solar Credit Multipliers* * = Table from Ryan Wiser, LBNL, 2006

18 Scope of EPS (entities that must meet requirement) EPS requirements are most commonly applied to investor- owned utilities and electric service providers. Unusual for mandatory EPS requirements to extend to municipal utilities and cooperatives, as these entities are predominately self-regulated. Hawaii and Wisconsin require public utilities to fully comply with RPS Some states have created EPS provisions for munis and coops: Colorado RPS includes municipal and cooperative utilities, but they can opt-out or self-certify. If they self-certify, compliance reports are for informational purposes only. Washington RPS passed by ballot initiative; calls for electric utilities that serve more than 25,000 customers in the state to obtain 15% of their electricity from new renewables by 2020 and to undertake cost-effective energy conservation.

19 EPS Compliance Generally, there are two types: Regulated markets Tend to use long-term bundled contracts for electricity and RECs Utility RFP solicitations or bilateral negotiations with PUC oversight Restructured markets Tend to use short-term RECs trade to multiple parties, without PUC oversight Developers often sell electricity and RECs separately NYSERDAs central procurement approach intended to (in some degree) replicate regulated market outcomes in a restructured environment

20 Using RECs to Meet EPS Requirement EPS Compliance Generally three ways that affected entities may comply with the EPS requirements: Own a renewable energy facility, Purchase Renewable Energy Certificates (RECs), Purchase electricity from a renewable facility inclusive of all renewable attributes. Clearly identifying accounting methods for the EPS is critical (e.g., energy production versus installed capacity requirements; RECs or bundled energy only).

21 Using RECs to Meet EPS Requirement (2) Most states require affected entities to meet EPS through surrender and retirement of RECs. Increases flexibility and reduces compliance cost Can provide income to project developers Important to understand tradeoff of accepting out- of-state RECs (reduce compliance cost) and the development of in-state clean energy and economic development. Policymakers should have clear understanding of available in-state resource potential

22 Using RECs to Meet EPS Requirement (3) Most cases, formation of a REC = amount of electricity generated (and thermal if CHP eligible) EPS must have system of tracking the generation in place to ensure it actually comes from eligible resource. Many existing tracking systems used to meet emissions disclosure requirements: Northeast = NEPOOL GIS Mid-Atlantic = PJM GATS West = WREGIS TX = ERCOT

23 Penalties for Not Achieving EPS Requirement States have found having a credible non-compliance mechanism in place in the form of penalties is helpful; however, states provide flexibility in compliance. Many states use alternative compliance payments (ACP) which an affected entity can pay if they are unable to procure the required amount of clean energy. If the affected entities cant purchase RECs below the ACP price, they pay the state the ACP as an alternative. The state typically use these funds to promote clean energy projects ACP price typically escalates over time

24 Elements of Successful Implementation A number of best practices have emerged for implementing effective EPS requirements based on state experiences. Elements of Successful Implementation Develop broad support, including top-level support of the Governor and/or legislature and hold action–oriented facilitated discussions among key stakeholders. Determine mix and amount of clean energy desired. (Careful analysis and modeling of expected impacts prior to establishing target is key to success.) Establish a long timeline to encourage private investment. Establish cost caps on the price to comply with EPS requirements, high enough to encourage use of a range of eligible technologies but low enough to protect electricity suppliers. Make sure a credible non-compliance mechanism is in place in the form of penalties; however, provide flexibility in compliance.

25 Aligning Other Policies to Achieve EPS Ensuring other key policies are aligned with promoting increased use of clean energy can greatly increase the success of the EPS Utility throughput-incentive Standby-rates Interconnection rules Output-based emission for DG Consider other policy options, such as a resource loading order as in California

26 EPA EPS Resources EPA Clean Energy-Environment Guide to Action Chapter 5.1: Renewable Portfolio Standards and Chapter 4.1: Energy Efficiency Resource Standards htm EPA Fact Sheet: Renewable Portfolio Standards An Effective Policy to Support Clean Energy Supply EPA white paper: Energy Portfolio Standards and the Promotion of Combined Heat and Power

27 Summary Numerous opportunities for Florida to increase use of clean energy, including EPS. Existing barriers the PSC can address to achieve EPS EPA can provide assistance to the PSC.

28 Katrina Pielli U.S. Environmental Protection Agency Clean Energy Program Manager (202) For More Information