Renewable Portfolio Standards:
A Review of Compliance and
Enforcement Options
Ryan Katofsky
Presentation to:
Florida Public Service Commission
Staff Workshop
September 27, 2007
Confidential and Proprietary,
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www.navigantconsulting.com
Presentation Topics
Renewable Energy Certificates
RPS Compliance Mechanisms
Enforcement Options
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RECs » How a REC is Born
RECs support numerous regulatory and market needs that require a
system for defining the attributes of power sold to retail customers.
1 REC
Generator
Registration
Administrator
Accreditation
of Generator
Renewable
Energy
Generation
(1 MWh)
• Environmental attributes
• Locational attributes
• Technology/fuel attributes
• Labor attributes
“Null”
Energy
(1 MWh)
• 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.
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RECs » How RECs are used
RECs are used in mandatory and voluntary markets.
Electricity
Generation
Renewable
Energy Products
Retailers/
Aggregators
Bundled
Renewable
Energy1
Bundled
Retailer/
Aggregator3
Renewable
Energy
Customer
Customer buys
electrons and
attributes
(“green power”)
RECs
REC
Aggregator/
Retailer
REC
Product
Customer
Customer buys
attributes only
RPS
Obligated
Party
Renewable
Energy
Generation
Obligated Party retires RECs
equal to RPS obligation and
collects cost from customers
Traditional
Electricity
Markets
“Null”
Energy2
1. Energy + attributes
2. Energy without attributes
3. Includes regulated utilities
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Retail
Customers
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RECs » Additional Considerations
A range of issues will need to be addressed if RECs are used for
compliance.
Determinants of REC value
REC eligibility issues
• REC price can be thought of as:
• Ownership
 The above-market cost of RE
generation, OR
 Pre-existing contracts with eligible
facilities (e.g., PURPA)
 The premium people are willing to
pay for the attributes.
 Customer-side resources subject to
net metering
 Projects receiving state incentives
• In RPS markets, supply and demand
determine price, subject to price caps,
credit multipliers, and shelf life
• Relationship between mandatory and
voluntary markets
• 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)
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 Best practice: Voluntary purchases
are in addition to RPS requirements
• Relationship with current and future
emissions cap/trade programs
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RECs » REC Tracking Systems
REC tracking systems record production, ownership, transfer/sale and
retirement of RECs.
Functions of a REC tracking
• Two types of REC tracking systems:
system
— Part of a broader generation
• Centralized registration, issuing,
tracking, retiring, and accounting
attribute system applied to all
of RECs
generators (e.g. the PJM GATS,
ISO-NE GIS)
• Verification that the generator is a
qualifying facility as defined by
— For RPS compliance only (e.g.
the RPS
Texas).
• Except for ERCOT, all existing
tracking systems cover multiple
states
• Tracking systems are policy neutral
• Tracking systems are not trading
platforms
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• 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
RPS Compliance Mechanisms » Overview
There are three types of RPS compliance mechanisms in use today.
Three types of RPS compliance
mechanisms
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)
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• 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
RPS Compliance Mechanisms » REC-based Systems
REC-based systems are the most common means of RPS compliance
How it
works
Obligated
Parties
• 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.
• 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
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RPS Compliance Mechanisms » Contract Path
The contract path approach is less common but fits within existing
market structures.
How it
works
Obligated
Parties
• 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
• 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 mandate1
1. This specific mandate preceded, and is separate from, the current state-wide RPS.
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RPS Compliance Mechanisms » Central Procurement
New York has adopted a central procurement approach that is a
hybrid of REC procurement and the contract path approaches.
How it
works
Obligated
Parties
• State agency procures and retires RECs1 from eligible generators under longterm 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
• 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
Cons
• Lacks an automatic compliance mechanism to encourage development
Examples
• New York (with NYSERDA as implementing agency)
1. New York does not have a REC registry and tracking system.
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Enforcement Options » Overview
Alternative Compliance Mechanisms and penalties are the two main
RPS enforcement mechanisms.
Two aspects of RPS enforcement
Alternative Compliance Mechanisms
• 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
Penalties
Monetary
Non-Monetary
• Fines imposed
for fraudulent
actions or failure
to comply with
the rules.
• Obligated party
barred from
accepting new
customers1
• Obligated party’s
operating license
revoked1
• Disallowance of
ACP cost
recovery
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1. In restructured markets.
Enforcement Options » Alternative Compliance Mechanisms
An ACM is a key RPS design feature and serves three basic functions.
Purpose of ACMs
Ensure RPS
functions
Stimulate project
investment
Cost cap
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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.
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.
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Enforcement Options » Alternative Compliance Mechanisms
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.
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Enforcement Options » Penalties
Penalties serve to deter fraudulent behavior and encourage
compliance, although collaboration and cooperation are preferred.
Examples of RPS Penalty Provisions
Entity
Trigger
RE
generators
False eligibility and
production reporting
Obligated
parties
Penalty Options
• Fines
• Revocation of RPS qualification
• Fines
• Disallowance of ACP cost recovery,
e.g., if utility deemed to have not made
a “good faith effort”
Failure/fraud in meeting • In restructured markets: Obligated
party barred from accepting new
resource eligibility
customers or operating license revoked
requirements
Failure to acquire
sufficient renewable
energy or RECs
• Penalties can be automatic, but there should be an appeal process
• Appropriate accommodations need to be made for force majeure events
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Ryan Katofsky
Associate Director
phone: 781.270.8317
RKatofsky@navigantconsulting.com
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