BILL ANALYSIS SB 1478 Page A Date of Hearing: June 24, 2004 ASSEMBLY COMMITTEE ON NATURAL RESOURCES Hannah-Beth Jackson, Chair SB 1478 (Sher) - As Amended: June 23, 2004 SENATE VOTE : 28-6 SUBJECT : Renewable energy. SUMMARY : This bill makes numerous changes to the Renewable Portfolio Standards Program (RPS) and the Renewable Energy Program (REP). EXISTING LAW : 1)Requires the California Public Utilities Commission (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). 3)Requires investor owned utilities (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 programs that require 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 are required to implement and enforce their own RPS programs (SB 1078, Sher, Chapter 516, Statutes of 2002). 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 SB 1478 Page B award of Supplement Energy Payments (SEP) if the project is selected by an 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 an entity that has procured the electricity associated with REC under a long term contract. 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. g) RECs can be sold by municipal utilities only if they are in compliance with the same RPS standards as other retail providers. 5)Provides that CEC may not award SEPs for the sale or purchase SB 1478 Page C 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 fewer 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. FISCAL EFFECT : According to the Senate Appropriations Committee analysis, $85,000 for the first year, to PUC, offset by fee revenues. COMMENTS : 1)Background In 2002, the Legislature passed SB 1078, SB 1038, and AB 57. These bills taken together created a RPS in California. Under the 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. The CPUC is also required to adopt comparable requirements for direct access providers and community choice aggregators. The RPS requires IOUs, and certain other retail energy providers, to buy renewable SB 1478 Page D electricity to the extent PGC funds<1> are available. If no PGC funds are available, the retail energy providers are not required to purchase additional renewable power. Specifically, the RPS applies to: a) IOUs; b) Direct access providers, for any new customers or new contracts, and for all customers beginning January 1, 2006; and, 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): and, c) Municipal utilities. These utilities are responsible for implementing and enforcing their own, unspecified, RPS. The RPS required the CPUC to adopt a rule by July 1, 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, the CPUC approved two decisions that established standard market terms for renewable contracts and a method for calculating market prices for renewable resources. The 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 -------------------------- <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. SB 1478 Page E approved by CPUC. 1)Accelerated RPS Compliance The "Energy Action Plan" adopted by the CPUC, the 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 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 it will not be able to meet a 20% by 2010 goal without the addition of a REC program. 2)Renewable Energy Credits 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. SB 1478 Page F Since SB 1478 contains explicit 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. 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. SB 1478 Page G 4)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 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. SB 1478 Page H 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. REGISTERED SUPPORT / OPPOSITION : Support American Lung Association of California California Public Utilities Commission Clean Power League of Women Voters of California Sierra Club Sempra Energy TURN Opposition PG&E City of Roseville Analysis Prepared by : Kyra Emanuels Ross / NAT. RES. / (916) 319-2092