BILL ANALYSIS
SB 1478
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Date of Hearing: June 21, 2004
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 1478 (Sher) - As Amended: June 16, 2004
SENATE VOTE : 26-8
SUBJECT : Renewable energy.
SUMMARY : This bill makes numerous changes to the Renewable
Portfolio Standards Program (RPS) and the Renewable Energy
Program (REP). Specifically, this bill :
1)Advances the deadline for achieving a 20% renewable portfolio
from 2017 to 2010.
2)Provides that a renewable energy project may only receive an
award of Supplement Energy Payments (SEP) if the project is
selected by an investor owned utility (IOU) pursuant to a
competitive solicitation or by other retail electricity
providers through a solicitation process approved by CPUC.
3)Repeals the requirement that the California Energy Commission
(CEC) direct 10% ($13.5 million/year) of renewable funds
collected via the Public Goods Charge (PGC) for credits to
existing renewable direct access customers (CEC has suspended
the customer credit program and redirected the funds to other
renewable programs).
4)Authorizes a renewable energy credit (REC) trading program to
allow the sale of the renewable attribute of renewable
electricity as a commodity unbundled from the physical
production and delivery of renewable electricity, subject to
the following limitations:
a) RECs may not be counted more than once for compliance
with a RPS or for verifying a retail product claim.
b) RECs may not be counted for compliance with RPS unless
it is purchased from an instate renewable generator,
another retail electricity provider, or and entity that has
procured the electricity associated with REC under a long
term contract.
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c) RECs must originate from an eligible renewable resource.
d) Revenues from the sale of RECs by an IOU must be
credited to ratepayers.
e) RECs must be certified by CEC and comply with all the
provision of this bill before a utility can recover REC
procurement expenses in rates.
f) Retail sellers are not obligated to procure RECs if
funds are not available to award SEP for above market costs
of renewable power.
5)Provides that CEC may not award SEPs for the sale or purchase
or RECs.
6)Provides that a contract for the purchase of electricity
generated by an eligible renewable resource shall include REC
associated with all electricity generation specified in the
contract.
7)Provides that there are no RECs associated with renewable
power generated under terms of a contract executed before
January 1, 2005, that did not contain explicit terms
specifying ownership of energy credits.
8)Provides that there are no RECs associated with contracts
awarded to Qualifying Facilities (QFs) under the Public
Utility Regulatory Policies Act (PURPA) of 1978, but
deliveries under these contracts shall count toward RPS
obligations.
9)Allows an IOU serving less than 60,000 customers in California
that also serves customers in another state (i.e. PacifiCorp
and Sierra Pacific Power) to count out of state renewable
resources toward its RPS compliance.
EXISTING LAW :
1)Requires CPUC to reserve a portion of future electrical
generating capacity for renewable resources.
2)Expresses legislative intent to increase renewable electricity
to 17% of consumption in the state by 2006 (SB 1038, Sher,
Chapter 515, Statutes of 2002).
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3)Requires IOUs to increase their existing level of renewable
resources by 1% of sales per year until a 20% renewable
resources portfolio is achieved (AB 57, Wright, Chapter 835,
Statutes of 2002).
4)Creates RPS which requires IOUs and certain other retail
sellers to meet essentially the same renewable procurement
goals as AB 57, but sets a deadline of 2017 for achieving a
20% renewable portfolio and establishes a detailed process and
standards for renewable procurement. Local publicly-owned
electric utilities (municipal utilities) are exempt from the
statutory requirements of RPS and instead required to
implement and enforce their own RPS programs (SB 1078, Sher,
Chapter 516, Statutes of 2002).
FISCAL EFFECT : Unknown.
COMMENTS : In 2002, the Legislature passed SB 1078, SB 1038, and
AB 57. These bills taken together created a RPS in California.
Under RPS, IOUs are required to increase their renewable
procurement each year by at least 1% of total sales, so that 20%
of their sales are from renewable energy sources by December 31,
2017. Once a 20% portfolio is achieved, no further increase is
required. CPUC is required to adopt comparable requirements for
direct access providers and community choice aggregators.
RPS also allows new renewable energy providers to apply to CEC
for SEP. SEPs will be awarded to renewable energy providers to
cover the difference between the prices they bid in a
competitive solicitation and a market price established by CPUC.
RPS requires IOUs, and certain other retail energy providers,
to buy renewable electricity to the extent PGC funds<1> are
available to pay for SEP. If no PGC funds are available, the
retail energy providers are not required to purchase additional
renewable power.
RPS applies to:
a) IOUs.
--------------------------
<1> Existing law requires electric utilities to identify and
collect a separate rate component to fund energy efficiency,
public interest renewable energy research, and related "public
goods" programs.
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b) Direct access providers, for any new customers or new
contracts, and for all customers beginning January 1, 2006.
c) Community choice aggregators.
RPS explicitly does not apply to:
a) Co-generation supplying customers on-site and via "over
the fence" transactions.
b) The State Department of Water Resources (DWR).
c) Municipal and other municipal utilities. These
utilities are responsible for implementing and enforcing
their own, unspecified, RPS.
RPS requires CPUC to adopt a rulemaking within six months of its
enactment (January 2003), including processes for determining
market prices, ranking renewable bids according to cost and fit,
flexible compliance rules, and standard contract terms and
conditions. On June 9, 2004, CPUC approved two decisions that
established standard market terms for renewable contracts and a
method for calculating market prices for renewable resources.
CPUC has also approved a number of renewable contracts through
an ad hoc process lacking clear rules or consistency with the
statutory scheme of RPS. To address concerns with this ad hoc
process, this bill provides that an IOU may count renewable
resources toward its RPS requirements and receive PGC funds only
if the contract is selected pursuant to a competitive
solicitation that complies with RPS and is approved by CPUC.
Accelerated RPS Compliance.
The "Energy Action Plan" adopted by CPUC, CEC and the Power
Authority (PA) pledges that the agencies will accelerate RPS
implementation to meet the 20% goal by 2010, instead of 2017.
The Governor has also endorsed "20% by 2010" and proposed an
additional goal of 33% by 2020.
Currently, two of the three major IOUs appear to be able to meet
the 20% by 2010 goal. Pacific Gas & Electric's (PG&E) current
baseline of renewable power is at 12%, while Southern California
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Edison (SCE) already has 17% of eligible renewable power in its
portfolio. However, San Diego Gas & Electric (SDG&E) currently
only receives 1.8% of its electricity from renewable resources.
Due to SDG&E's miniscule renewable electricity baseline and
transmission constraints that will limit its ability to procure
new renewable power from outside its service territory, SDG&E
believes they will not be able to meet a 20% by 2010 goal
without the addition of a REC program.
Renewable Energy Credits
REC program established in this bill may help IOUs and other
retail electric providers meet the accelerated RPS goals by
allowing them to purchase the attributes of renewable power
without having to purchase unneeded or undeliverable generation.
A REC program will allow the environmental attributes of
renewable energy to be unbundled from the energy itself and
allow the energy and the attributes to be trade as separate
commodities. A REC program would allow SDG&E to purchase RECs
from a wind farm in Northern California while the wind farm
sells its electricity output to another retail electricity
provider that does not need the environmental attributes. SDG&E
would not need to rely on congested transmission lines for
delivery of the actual electricity and instead could produce the
needed energy from non-renewable sources within its service
territory. Alternatively, a small retail seller, such as an
ESP, who may not be able to sign the long-term contracts
necessary to develop new renewable resources, can buy RECs
instead.
Since SB 1478 contains explicate provisions against double
counting of RECs, the same amount of new renewable power would
need to be built to meet RPS as would be needed without a REC
program. However, REC program will allow the retail providers
to more efficiently meet their renewable obligations.
Similar trading programs are already in place in Texas and
Massachusetts. Additionally, programs have been in place for
some time that allow for the trading of the environmental
benefits of reduced SO2 and NOx emissions.
While SB 1478 leaves much of the task of developing a REC
program to CEC and CPUC, this bill establishes a narrow
definition of RECs and further limits how RECs can be traded.
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The limits are an effort to prevent a wide open REC market,
which might undermine RPS goal of promoting investment in new
renewable resources in California and could create the potential
for market gaming. Specifically, under this bill:
a) RECs may only be counted once for compliance with RPS.
b) RECs may not be counted for compliance with RPS unless
it is purchased from an instate renewable generator,
another retail electricity provider, or and entity that has
procured the electricity associated with REC under a long
term contract.
c) Renewable generators who elect to contract with an IOU
under the preferential terms provided to a QF under PURPA
may not separately sell the renewable attributes of the
electricity they produce as RECs.
d) RECs may not be resold by a retail electricity provider
and still be counted toward RPS obligations.
e) Provides that no party may receive SEP for the sale of
RECs.
f) CPUC may limit the total amount of RECs that can be
separately procured to meet annual procurement targets.
Even with these limitations, opponents of this bill are
concerned that a poorly structured REC program will be a target
for market manipulation.
Treatment of REC in Existing Contracts
Since no REC program currently exists in California, very few
contracts between the retail providers and the renewable
generators address the ownership of the environmental attributes
as an unbundled commodity from the generated energy. A logical
assumption is that they are a bundled product. However, with
the creation of a REC program, there is a need to determine how
to treat existing contracts that are silent as to how to treat
the environmental attribute.
If generators are allowed to sell RECs associated with
generation already under contract to the IOUs, the current
baselines of renewable power for IOUs will decrease, as IOU can
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no longer count power it has under contract toward RPS. This
could also lead to a double dipping situation for some renewable
generators as they would continue to receive payments from IOUs
that reflect that increased costs of renewable generation, but
will also be able to sell off the environmental attributes of
that generation.
To avoid this problem SB 1478 provides that there are no RECs
associated with renewable power generated under terms of a
contract executed before January 1, 2005, that did not contain
explicit terms specifying ownership of energy credits.
Application to Municipal Utilities
Prior versions of SB 1478 required municipal utilities to comply
with the RPS program on the same terms as any other retail
provider of electricity. However, this bill was amended before
it left the Senate to strike the municipal utility provisions.
Without these provisions, municipal utilities will only have to
comply with current law which requires them to develop their own
renewable programs, but does not require them to meet the same
standard as other retail providers.
Under existing law, many municipal utilities have adopted
renewable portfolios but a survey of these plans shows that most
of the plans do not come close to meeting the goals of RPS and
that most municipal utilities include sizeable amounts of large
hydroelectric generation as part of their portfolio, which other
retail providers are not allowed to do. Given the fact that
municipal utilities serve close to 30% of the total electrical
load in California, allowing municipal utilities to set
renewable portfolio that are significantly less than the other
retail providers could undermine the state's overall renewable
objectives and make it impossible to ever reach a statewide
benchmark of 20% renewable power.
Municipal utilities have argued that they should not be required
to meet the same RPS goals as other retail providers. They
believe that as municipal utilities they are accountable to
voters and not shareholders, and this accountability will
ultimately lead them to make sound decisions on renewable
procurement. Additionally, most of the municipal utilities
serve very small customer bases and have already procured most,
if not all of their power needs for next few years.
Consequently, they have no ability to build or buy additional
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power to meet a state mandated RPS. In order to meet a 20% RPS
standard, many municipal utilities would be forced to buy
significantly more power than they actually need.
With municipal utilities representing close to 30% of the total
electricity demand in the state, there is concern that any RPS
that excludes the municipal utilities will always fall short of
meeting its statewide goals. To assure that the RPS succeeds
statewide, the committee may want to consider amending this bill
to require municipal utilities to meet the same RPS standards as
other retail providers.
Additionally, under the terms of this bill, municipal utilities
will be allowed to sell RECs. If municipal utilities are not
required to meet the same RPS as other retail providers, they
may have a distinct incentive to reduce their own renewable
portfolio in order to sell available RECs. This would result in
increased profits to municipal utilities but will not add to the
overall renewable portfolio of the state. To avoid this risk,
the committee may want to consider amending this bill to allow a
municipal utility to sell RECs only if they are in compliance
with the same RPS standards as other retail providers.
Use of Public Goods Charges
Under RPS program, renewable energy providers can apply to CEC
for supplement energy payments (SEP) to cover the difference
between the market price for electricity and the higher costs of
some renewable electricity generation. SB 1078 provided that
retail provider's RPS obligations are limited to the
availability of supplemental payments to pay any costs above the
market price benchmark set by CPUC. The New Renewable Resources
Account, from which supplemental payments will be drawn, will be
funded through the PGC at about $70 million/year until 2007
under current law. Because the market price benchmark hasn't
been established by CPUC and availability and cost of renewable
resources haven't been indicated through a competitive
solicitation, it's not yet known how far the money might go.
While this bill specifically states that SEP may not be used to
pay for RECs, there is a strong possibility that there will not
be sufficient funds to meet the accelerated goals established in
this bill.
To assure that this bill does not result in increased rates to
refund the New Renewable Resources Account, the committee may
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wish to consider amending this bill to clarify that the
accelerated RPS should only be implemented to the extend there
are available PGC funds.
REGISTERED SUPPORT / OPPOSITION :
Support
Sempra
CPUC (Support if amended)
League of Women Voters of California
Sierra Club
American Lung Association of California
Clean Power
TURN
Opposition
PG&E (Oppose unless amended)
City of Roseville (Oppose unless amended)
Analysis Prepared by : Edward Randolph / U. & C. / (916)
319-2083