David Chambers
Energy Law (Fall 2013)
Renewable Portfolio Standards: Unconstitutional State Promotion of Renewable Energy?
Abstract
In 2012, nearly 12 percent of the electricity consumed in the United States was generated from
renewable sources. While, this market share may seem insignificant in comparison to fossil fuels
and other more traditional sources of electricity, concerns regarding the environmental impact,
sustainability, and safety of these more traditional sources have spurred lawmakers to find ways
to encourage the development, economic competitiveness, and use of clean, renewable sources
of electricity. State implementation of Renewable Portfolio Standards has been effective in this
regard, and increasingly wide enactment of these policies has driven the growth of both the
amount of renewable energy consumed across the United States and renewable energy’s role in
the overall energy mix. This discussion focuses on the benefits and issues associated with
Renewable Portfolio Standards, their impact on the growth of renewable resources as a source of
electricity, and potential changes in the legal landscape that may affect future state
implementation of these policies.
What are Renewable Portfolio Standards?
Renewable Portfolio Standards are state policies that promote renewable sources of
electricity by requiring electricity suppliers to generate or acquire a certain portion of their power
supplies from renewable sources of energy within a defined timeframe for compliance. EIA:
What Are Renewable Portfolio Standards?. By requiring electricity suppliers to meet these target
thresholds, RPS programs stimulate market demand for renewable and clean energy, and
encourage the development of new technology to increase the economic competiveness of
renewable energy. EPA: How Does a RPS Encourage Clean Energy?.
While the requirements imposed by state RPS programs are diverse, utilities can
generally achieve compliance in one or more of the following ways: (1) owning an eligible
renewable energy facility and its output generation, (2) purchasing “bundled electricity” that
retains its renewable attributes from an eligible renewable facility, or (3) purchasing Renewable
Energy Certificates (RECs). EPA: How Does a RPS Encourage Clean Energy?. Compliance
through any of these methods requires that both the renewable resource and the facility used to
generate the electricity be eligible under the particular state’s RPS statute. EPA: What Are the
Key Features of a RPS?.
Which States Have RPS Programs?
Currently, 42 U.S. jurisdictions have implemented some form of RPS requirement or
goal. DSIRE: Status and Trends. Thirty two of these areas impose mandatory RPS obligations,
19 of which set a target of 20 percent or higher. DSIRE: RPS Summary Map. These policies
include 29 states and the District of Columbia, which account for 55 percent of U.S. demand of
electricity. UCSUSA: Primary Driver of Renewable Energy. Collectively, the RPS targets of
these areas require that nearly 10 percent of domestic U.S. electricity come from RPS-eligible
renewables by 2020. CPI: What’s Working?. The majority of these policies were enacted by the
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state legislature, but a few of these policies were adopted through regulatory action (NY, AZ), or
ballot initiative (CO, WA, MO). UCSUSA: Primary Driver of Renewable Energy. The U.S.
territories Puerto Rico and the Northern Mariana Islands also impose mandatory RPS
requirements. DSIRE: RPS Summary Map. While the remainder of state polices are not
enforceable, an additional 8 states, American Samoa, Guam and the U.S. Virgin Islands, have
also adopted some form of non-binding RPS goal. DSIRE: Status and Trends.
How do States Implement RPS Programs?
While nonrenewable resources, such as coal, natural gas, and nuclear energy, can be
identified as resources that will eventually run out or become economically or environmentally
unfeasible as a means of generating electricity, the term “renewable resource” covers a much
broader range of replenishing, inexhaustible sources of energy that can be used to generate
electricity. NREL: Renewable Energy Basics. These resources include energy from the sun,
wind, plant matter and other forms biomass, hydrogen, the earth’s internal heat, ocean waves and
currents, and water flow or “hydroelectric” energy. NREL: Renewable Energy Basics. Although
a variety of these resources may theoretically be available in any given location, state legislatures
shape renewable portfolio standards in accordance with the specific policy objectives, electricity
market needs, and logistical feasibility and potential of renewable resources in their particular
jurisdiction. EIA: How Have RPS Programs Been Implemented?. To accommodate these
particularized objectives and considerations, RPS statutes provide which renewables are eligible
to count toward a power supplier’s RPS obligation, often including specific targets, limits, or
deadlines depending on the operator, technology, fuel, age, or geographical location of a
supplier’s renewable source of electricity. EPA: What Are the Key Features of a RPS?. The RPS
may also “carve out” a portion of the overall requirement that must be generated using a specific
renewable source. DSIRE: Glossary-RPS.
In most states, RPS requirements primarily apply to investor-owned utilities; however,
some states also impose requirements on municipal utilities and cooperatives, and may
differentiate the deadlines and compliance targets of these categories, or apply the standards
uniformly across all suppliers. EPA: What Are the Key Features of a RPS?. Additionally, states
often schedule interim RPS requirements that increase over an extended period of time so that
the overall target is achieved gradually. EIA: Today in Energy.
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When a power supplier’s eligible facilities lack the capacity to meet its RPS obligation, it
may necessitate the supplier’s purchase of “bundled” physical electricity from another eligible
source, meaning that the electricity has not been separated from its renewable attributes.
However, a supplier may not lack general capacity, and may only need the renewable attributes
of the electricity to meet the requirements of the RPS. Many states deal with this issue by
incorporating a Renewable Energy Credit (REC) trading system into their RPS. EIA: How Have
RPS Programs Been Implemented? A REC is the tradable right to the environmental and other
beneficial non-power attributes associated with one megawatt-hour of renewable electricity from
an eligible generation facility. EPA: What is a REC? These attributes can be “unbundled” by the
producer and sold separately from the underlying physical electricity. EPA: What is a REC?. In
addition to renewables, depending of the statute, an RPS program may also allocate RECs for
fuel cells, renewable space and water heating systems, reduced energy consumption through
efficiency measures, and clean fossil-fuel technologies. EIA: What Are RPS?. In some instances,
states issue and sell RECs to suppliers who are unable to meet their obligation under the RPS.
EIA: How Have RPS Programs Been Implemented?. Thus, REC trading systems allow suppliers
to fulfill their RPS obligation by acquiring unbundled renewable attributes from another eligible
source without forcing suppliers to purchase the actual physical electricity. EIA: How Have RPS
Programs Been Implemented?
In addition to benefiting acquiring suppliers, REC systems are also beneficial to
producers whose eligible renewables generate a surplus of electricity. After a producer has met
its RPS obligation, that producer can then sell any excess electricity its renewables generate as
bundled electricity, or unbundle that electricity, separating the physical electricity from its
renewable attributes, and use it to meet the demand of its ratepayers while selling the the
renewable attributes of that electricity as RECs to other suppliers who fall short of their RPSeligible electricity requirement. EIA: How Have RPS Programs Been Implemented?. However,
only one entity, the generator or the REC acquiring holder, can take credit for the renewable
attribute of a RPS-eligible source. EPA: How do RECs work?.
Dealing with the Cost of Implementing an RPS Program
“Cost,” specifically the impact of supplier compliance on consumers, is a major issue that
policy makers contend with when shaping a state’s RPS. NREL: Implementation Issues. The
concern is that power suppliers will pass the cost of meeting their RPS obligations on to their
customers, which potentially could cause political backlash, and untimately undermine the
program. CPI: Cost Caps. Besides simply providing suppliers an alternative method of achieving
compliance, REC trading systems also lower the cost of supplier compliance by allowing
suppliers to avoid incurring the expense of purchasing unnecessary bundled electricity or
building additional RPS-eligible generation facilities, thus mitigating the impact of an RPS on
consumers. EIA: How Have RPS Programs Been Implemented?.
While REC systems are an effective way to minimize supplier cost, to further protect
consumers from exorbitant electric bills, 23 states currently include some form or combination of
cost limiting mechanism or "escape clause" provision that excuses or reduces an otherwise
obligated utility from meeting full compliance if the cost of such compliance exceeds a certain
threshold. CPI: Cost Caps. In 14 states, (CT, DC, DE, IL, MD, ME, NH, NJ, OR, OH, PA, RI,
TX), utilities are permitted to make Alternative Compliance Payments to fulfill their RPS
obligation. For example, Oregon allows suppliers to satisfy their RPS requirements by making
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Alternative Compliance Payments to the Oregon Public Utilities Commission if they cannot
fulfill their obligation by acquiring RECs or obtaining electricity from an eligible source. Oregon
also uses a Cost Cap, which excuses complete compliance with the RPS if compliance exceeds a
certain cost threshold. DSIRE: Oregon RPS. Ten states (CO, DE, IL, KS, MD, MO, NM, OH,
OR, WA) include a Rate Impact or Revenue Requirement Cap, which limits the amount that an
RPS can increase electricity rates or exceed the utilities revenue from renewables. CPI: Cost
Caps. Three states (MI, NC, NM) use a Per-Customer Cost Cap which limits the dollar amount
any particular customer’s bill can increase because of the RPS. CPI: Cost Caps. Additionally,
one state (MT), uses a Contract Price Cap, which limits the price that a renewable energy
generator can contract to sell power to a utility, and another state (NY) has a Funding Limit,
which caps the amount of funding that can be used to cover the costs of renewable energy. CPI:
Cost Caps.
Overall, these mechanisms have been effective in minimizing the impact RPS policies on
cost, and meeting RPS obligations is becoming a cost effective way for utilities to add generation
capacity without increasing use of fossil fuels. UCSUSA: Good Deal for Customers. A 2012
analysis of the 2009 and 2010 RPS compliance-cost data that was made available in 14 states
revealed that only one state (AZ) experienced cost increased higher than about 1.6 percent, and
even then, Arizona’s estimated cost impact of three to four percent was due to certain frontloaded renewable energy projects, where utilities paid in advance for renewable energy
generation over the life of the projects. UCSUSA: Good Deal for Customers. In some cases,
RPS polices actually lowered or had no significant impact on supplier costs. For example, after
Oregon’s RPS was enacted in 2011, growth in renewable energy lowered the total annual costs
of one utility, PacifiCorp, by $6.6 million, while increasing total costs for another utility,
Portland General Electric, by only 0.04 percent ($630,000). UCSUSA: Good Deal for
Customers.
While the issue of potential consumer impact is a major consideration, ambitious targets
create a higher deployment of renewable energy, and state lawmakers must balance whether
some immediate cost increases are worth the long term benefits of renewables. States that have
higher targets and large markets are a large factor in the overall growth of renewable generation
of electrical power. For instance, California, the nation’s second-largest electricity market,
requires that a third of its electricity come from renewable sources, and comprises about 25
percent of the combined national RPS target through 2020.
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An Example of State Implementation: North Carolina
North Carolina’s Renewable Energy and Energy Efficiency Portfolio Standard (REPS),
N.C. Gen. Stat. § 62-133.8, is a good example of how states approach the aforementioned RPSimplementation issues. The North Carolina Utilities Commission (NCUC) administers the
statute and is responsible for implementing rules and modifying the compliance schedule.
DRISE: North Carolina. NCUC rules do not specify penalties or alternative payment for
noncompliance, but the NCUC does have authority to enforce compliance with REPS. DRISE:
North Carolina.
Under REPS, investor-owned utilities must generate 12.5 percent of their electricity
supply using these renewables by 2021, and compliance with this overall target requires these
utilities to incrementally integrate their supplies in accordance with a compliance schedule.
DRISE: North Carolina. REPS-eligible renewables include solar water and space heat, solar
thermal electric, solar thermal process heat, solar PVs, landfill gas, wind, biomass, geothermal
electric, CHP/cogeneration, hydrogen, anaerobic digestion, small hydroelectric (up to 10 MW
capacity), tidal energy, and wave energy. DRISE: North Carolina. REPS also specifies demand
reduction as a permissible way for suppliers to meet their obligation. DRISE: North Carolina.
Investor-owned utilities may use energy efficiency measures, including CHP using waste heat
from non-renewables to meet up to 25 percent the initial 2021 target, and up to 40 percent after
2021. DRISE: North Carolina. However, demand reduction, which is defined as "a measurable
reduction in the electricity demand of a retail electric customer that is voluntary, under the realtime control of both the electric power supplier and the retail electric customer, and measured in
real time, using two-way communications devices that communicate on the basis of standards,"
S.L. 2011-75, does not count against the supplier’s “efficiency measures” allowance. DRISE:
North Carolina.
In addition to investor-owned utilities, REPS also imposes mandatory requirements on
municipal utilities and electric cooperatives. DRISE: North Carolina. Cooperatives and
municipal utilities must meet a target of 10 percent by 2018, but these suppliers are not subject to
a compliance schedule to meet this overall target, are not limited in their use of demand
reduction or energy efficiency to meet their obligation, and may generate up to 30 percent of
their target supply using large hydroelectric facilities (at least 10 MW capacity). DRISE: North
Carolina. REPS also provides mandatory targets for specific renewables that apply to all utilities,
including technology minimums for Solar (.2% of supply by 2018), Swine Waste (.2% of supply
by 2018), and Poultry Waste (900,000 MWH by 2015). DRISE: North Carolina. While the
overall targets, as well as the solar technology minimum, apply to each utility, the swine and
poultry waste targets apply to the state as a whole, and REPS does not impose individual swine
or poultry waste requirements on each individual utility. DRISE: North Carolina.
Additionally, REPS allows utilities to acquire RECs to facilitate compliance. DRISE:
North Carolina. NCUC rules define RECs as the equivalent of one MWH of electricity derived
from a renewable energy source, the equivalent of one MWH of thermal energy in the case of
CHP and solar water heating, or one MWH of reduced consumption through an efficiency
measure. DRISE: North Carolina. To be eligible, RECs must be purchased within three years of
the renewable electricity’s generation, and retired within seven years of the recovery of the RECs
cost. DRISE: North Carolina. Major utilities may use unbundled RECs from out-of-state
renewable energy facilities to meet up to 25 percent of their target requirement. DRISE: North
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Carolina. REPS defines eligible out-of-state facilities as small hydroelectric facilities (up to 10
MW capacity), or renewable energy facilities placed into service on or after January 1, 2007.
DRISE: North Carolina. However, suppliers with less than 150,000 customers have no such
limit, and may acquire out-of-state RECs to meet the entirety of their obligation. DRISE: North
Carolina.
To further insulate customers, North Carolina implements a per-customer cost cap that
limits customer account increases from supplier cost according to an incrementally increasing
schedule. DRISE: North Carolina. This provision not only provides customers shelter from large
cost increases, but also encourages development of renewable technology by allowing utilities
recover research expenditures up to $1 million which may be included under the per-customer
cost cap schedule. DRISE: North Carolina. These cost limiting provisions have proven effective,
and already low customer costs are decreasing. For instance, as a result of Duke Energy’s
compliance with REPS, residential customers paid only 21 cents per month in 2012, down six
cents from two years earlier, and the residential customers of another utility, Progress Energy,
paid 41 cents per month, down 14 cents from the previous year. UCSUSA: Good Deal for
Customers.
What Impact Have State RPS Programs Had on Renewables as a Source of Electricity?
As discussed, 29 states and the District of Columbia currently impose mandatory RPS
requirements. UCSUSA: RES Compliance Record. The requirements of these 30 existing RPS
programs applied to 55 percent of all U.S. electricity sales in 2012. LBNL: Status Update. In the
same year, renewables accounted for 12 percent of all electricity generated in the U.S. EIA: 2012
Sources of Generation. In comparison, renewables accounted for 8.1 percent of the electricity
generated in the US in 2007, and only 7.2 percent in 2001. NREL: Fuel mix for total U.S.
electric generation. While this increase cannot be attributed to any single factor, between 2001
and 2011 the RPS programs of 26 states began to require their first compliance targets, 2012
being the first year that electricity providers in all 30 RPS areas had a compliance target to meet.
LBNL: Enactment Timeline.
Hydroelectric power comprises a majority
of renewable power generation capacity. EIA:
Today in Energy. In 2011, the states with the
largest shares of renewable power generation,
including hydroelectric, were Idaho (93%),
Washington (82%), and Oregon (78%). EIA:
Today in Energy. However, hydroelectric power
generation is subject to large fluctuations from
year to year, and the increase during this period
was driven by renewables other than
hydroelectric. EIA: Today in Energy. Of these
other renewables, wind accounted for the biggest
increase across all states, rising from 6 billion
KWH in 2000, to 140 billion KWH in 2012. EIA:
Non-Hydro Renewables.
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Maine had the highest percentage of non-hydroelectric renewable generation, at 27
percent of total in-state generation, up from 20 percent in 2001. EIA: Today in Energy. This
increase coming after Maine amended its RPS to require 40 percent of the state’s electrical
power come from renewables by 2017. DSIRE: ME. South Dakota and Iowa also had significant
increases in the output of their non-hydroelectric renewables. EIA: Today in Energy. South
Dakota’s RPS goal of 10 percent of retail electricity be generated renewables by 2015 was
enacted in 2008. DRISE: SD. Iowa’s RPS, which was amended in 2003, requires that its
investor-owned utilities generate or acquire 105 MW of renewable electricity. DRISE: IA. The
non-hydroelectric capacity of these states increased 21 and 17 percent, respectively in 2011, up
from one percent, and less than one percent, in 2001. EIA: Today in Energy.
Currently, the combined renewable output of RPS states exceeds the requirements
imposed the policies of those states.
EIA: Forecasts. This trend is expected
to continue into the foreseeable future,
and existing state policies require
utilities to add an additional 93 GW of
electricity generated by renewables by
2035. LBNL: Future Impacts. This
additional capacity will be a major
factor in the growth of renewables
contribution to the overall electrical
supply, which is currently projected to
be 16 percent of all generation by
2040. EIA: Forecasts.
RPS Programs and the Constitution
The U.S. Supreme Court has interpreted the Commerce Clause to include a Dormant
Commerce Clause, which prevents states from engaging in economic protectionism by favoring
their own industry over out-of-state competition. Under this doctrine, state laws that facially
discriminate against interstate commerce must meet strict scrutiny, requiring the state to show
that the policy is narrowly tailored to achieve a compelling state interest. Additionally, Statutes
reviewed under such scrutiny will be found to be an unconstitutional impingement on interstate
commerce if the sufficiently legitimate state interest could be served as well by an available
nondiscriminatory means. Maine v. Taylor, 477 U.S. 131 (1986).
The Dormant Commerce Clause appears to be a major issue for state renewable portfolio
standards. As discussed, when enacting or amending an RPS, states usually tailor their policies in
accordance with the specific policy goals, electrical needs, and renewable resources. Because a
state can only impose obligations on suppliers within its jurisdiction, RPS statutes typically favor
in-state production of renewable energy, not competition from out-of-state suppliers. In W. Lynn
Creamery, Inc. v. Healy, the Supreme Court found that an over-arching goal of environmental
preservation is not a sufficient state justification to render a discriminatory regulation valid. W.
Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 206 (1994).Therefore, while an RPS-enacting
jurisdiction may justify its policy by citing more than the mere economic benefits associated with
the increased use and viability of renewable energy, where a state attempts to realize these
benefits by requiring in-state generation or limiting out-of-state sources, it is likely that a court
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will find that the state’s RPS is tainted by economic protectionism and is an unconstitutional
impingement on interstate commerce.
While this issue currently has no clear answer, clarification seems to be on the horizon. In
a recent decision by the 7th Circuit, Illinois Commerce Commission v. FERC, Case Nos. 11-3421
(7th Cir. 2013), Chief Judge Richard Posner announced his opinion regarding Michigan’s RPS,
which favors in-state sources of renewable energy by requiring that at least 10 percent of the
supply its utilities provide to retailers be from in-state renewable sources of electricity by 2015.
While Michigan’s RPS was not at issue in the case and remains intact, Chief Judge Posner found
Michigan’s promotion of in-state renewable sources of electricity to be economic protectionism,
writing that “Michigan cannot, without violating the Commerce Clause of Article I of the
Constitution, discriminate against out-of-state renewable energy.” Illinois Commerce
Commission v. FERC, Case Nos. 11-3421 (7th Cir. 2013).
If RPS programs come under scrutiny, similar analysis could potentially render all state
RPS programs that favor in-state production of renewable energy unconstitutional as economic
protectionism. The impact of such a decision would be widespread, and seriously affect the
ability of states to effectively promote renewable energy within their jurisdiction. For example,
under N.C.G.S. § 62-133.8 only 25 percent of a major supplier’s REPS obligation can be met by
acquiring RECs from qualifying out-of-state renewable facilities. According Chief Judge Posner,
such a policy is subject to what he called “an insurmountable constitutional objection.” Illinois
Commerce Commission v. FERC, Case Nos. 11-3421 (7th Cir. 2013).
Until a court renders binding decision that provides a standard for the permissible bounds
of state RPS programs, the constitutionality of these requirements will remain unclear. In the
interim, this question of constitutional validity will likely impact the ways that states craft their
RPS statutes when joining the ranks of jurisdictions with these policies or amending existing
statutory requirements. Some academics believe that there will be major implications for the RPS
landscape going forward, and that many states will have to either amend their requirements or
face constitutional challenges down the road. Others contend that states might have specific
logistical or environmental justifications, such as displacement of local pollution from traditional
power plants and improving local grid reliability, that might be sufficiently compelling reasons a
state would want to purchase electricity from a closer, in-state, renewable source.
In either case, while the dormant commerce clause may limit a state’s ability to
discriminate against out-of-state renewable facilities, the market participant exception still
provides a window for states to promote renewable energy. In applying the market participant
exception in White v. Massachusetts Council of Const. Employers, Inc., the Supreme Court held
that where a state government participates in the market by issuing or supplying its own funds to
supply a good or service, the Dormant Commerce Clause does not apply, and a state regulation
of that market is permissible, even if it discriminates against out-of-state competition. 460 U.S.
204 (1983). Therefore, when a state issues RECs, it becomes a market participant, and may
require the utilities operating within its jurisdiction to purchase them. However, in S.-Cent.
Timber Dev., Inc. v. Wunnicke, the Supreme Court defined the scope exception as applying only
to the market in which the state actually participates, not markets merely affected by the state’s
market activity, and held that a state “may not impose conditions, whether by statute, regulation,
or contract, that have a substantial regulatory effect outside of that particular market.” 467 U.S.
82, 97 (1984). Accordingly, while a state can issue RECs and, as a market participant, require
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utilities within its jurisdiction to purchase them, if the state is not a market participant in regard
to generation of electricity, the state cannot require the renewable facility that generates the
electricity representing that REC to be within the issuing state. While states that wish to utilize
their specific resources to increase in-state renewable energy generation may not find this
solution preferable, issuing RECs to impose requirements on suppliers would still create overall
demand for renewable energy. Thus, where states recognize the importance of increasing overall
generation of renewable energy, with no guarantee of in-state generation growth, the market
participant exception provides an avenue to promote renewables.
Federal legislation could also have a major impact on the future of renewable portfolio
standards. In W. & S. Life Ins. Co. v. State Bd. of Equalization of California, the Supreme Court
held that where “Congress ordains that the States may freely regulate an aspect of interstate
commerce, any action taken by a State within the scope of the congressional authorization is
rendered invulnerable to Commerce Clause challenge.” 451 U.S. 648, 652-53 (1981).
Accordingly, Congress could resolve any potential Dormant Commerce Clause issue by enacting
legislation that expressly permits states to implement RPS provisions that favor in-state
renewable energy facilities. Congress could also enact Federal RPS-like statute. In his 2011
State of the Union Address, President Barack Obama encouraged Congress to establish a
national goal of 80 percent of the U.S. electricity coming from “clean energy” sources by 2035.
President Obama cited a need to create a steady market for clean energy to facilitate clean energy
innovations, and projected that such innovations and market expansion would create a substantial
number of jobs, justifications are closely resemble the goals of many state RPS policies.
While national RPS-type laws have had success in a number of countries, it seems that
the wide diversity, and sometimes disparity, of renewable resources, as well as the current
political climate, would likely impede the efficient implementation of a Federal renewable
energy requirement across the 50 states. The Federal Power Act already recognizes qualified
state authority to regulate the sale of electricity and interstate exportation of hydroelectric power.
16 U.S.C. § 824(b)(1) (giving FERC jurisdiction over "transmission of electric energy," but
recognizing state jurisdiction over "any ... sale of electric energy" other than "sale of electric
energy at wholesale"). Therefore, amending the FPA to expand state authority and expressly
allow states to continue shaping renewable portfolio standards may be the most reasonable and
effective way for Congress to cure the constitutional question surrounding state RPS programs
and promote renewable energy as a source of electricity.
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