BILL ANALYSIS AB 1362 Page A Date of Hearing: April 18, 2005 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Lloyd E. Levine, Chair AB 1362 (Levine) - As Amended: April 11, 2005 SUBJECT : Renewable energy: California Renewables Portfolio Standard Program: renewable energy credits. SUMMARY : Accelerates California Renewables Portfolio Standard (RPS) to require retail sellers of electricity to procure at least 20% of their retail sales from renewable power by 2010 instead of 2017. Allows Renewable Energy Credits (RECs) to be counted toward a retail electricity provider's RPS requirement. Specifically, this bill : 1)Requires that all retail sellers of electricity, excluding local publicly owned electric utilities (munis), to procure at least 20% of the total electricity sold from eligible renewable resources by 2010. 2)Authorizes a renewable energy credit (REC) trading program to allow the sale of the renewable and environmental attributes of renewable electricity as a commodity unbundled from the actual electricity produced, subject to the following limitations: a) RECs may not be counted more than once for compliance with the RPS or for verifying a retail product claim. b) RECs must originate from an eligible renewable resource. c) Revenues from the sale of RECs by an IOU must be credited to ratepayers. d) RECs must be certified by California Energy Commission (CEC) and comply with all the provisions of this bill before a utility can recover REC procurement expenses in rates. e) Retail sellers are not obligated to procure RECs if funds are not available to award Supplement Energy Payments (SEPs) for above market costs of renewable AB 1362 Page B power. 3)Provides that the CEC may not award SEPs for the sale or purchase of RECs. 4)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. 5)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. EXISTING LAW : 1) Requires retail sellers of electricity, except local publicly owned electric utilities (munis), to increase their existing level of renewable resources by 1% of sales per year such that 20% of their retail sales are procured from eligible renewable resources by 2017. 2) Defines eligible renewable resources to in clued all generation from an in-state renewable electricity generation facility that uses biomass, solar thermal, photovoltaic, wind, geothermal, fuel cells using renewable fuels, small hydroelectric generation of 30 megawatts or less, digester gas, municipal solid waste conversion, landfill gas, ocean wave, ocean thermal, or tidal current, and any additions or enhancements to the facility using that technology. 3) Exempts munis from the statutory requirements of RPS and instead are requires munis to implement and enforce their own RPS program that recognizes the intent of the Legislature to encourage renewable resources. 4) Allows the CEC to award SEPs to generators of eligible renewable resources to cover above market costs of renewable energy. AB 1362 Page C FISCAL EFFECT : Unknown. COMMENTS : The purpose of this bill is to accelerate the state's existing RPS requirements so that 20% of retail sales of electricity in California come from renewable resources by the year 2010 and to allow retail sellers of electricity to apply RECs toward their RPS requirements. 1) Brief history : In 2002 the Legislature approved SB 1078 (Sher), Chapter 516, Statutes of 2002, which created California's RPS. Under the RPS, the Investor Owned Utilities (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 PUC is required to adopt comparable requirements for direct access providers and community choice aggregators. Munis are not required to meet the same RPS as the IOUs, but instead must implement and enforce their own RPS program that recognizes the intent of the Legislature to encourage renewable resources. The RPS also allows new renewable energy providers to apply to the CEC for SEPs. 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 the PUC. The RPS requires IOUs, and certain other retail energy providers, to buy renewable electricity to the extent Public Goods Charges (PGC) funds<1> are available to pay for SEPs. If no PGC funds are available, the retail energy providers are not required to purchase additional renewable power. The RPS requires the PUC to adopt a rulemaking within six months of its enactment (January 2003), to implement the RPS and to determine market prices from which SEPs can be determined. On June 9, 2004, the PUC approved two decisions that established standard market terms for renewable contracts and a method for calculating market prices for renewable resources. Since then the IOUs have issued Requests for Proposals (RFPs) for renewable energy contracts that would comply with the RPS and potentially be eligible to receive SEPs. While the IOUs have received --------------------------- <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. AB 1362 Page D responses to the RFPs, no renewable contract under the RPS which would qualify for the SEPs have been publicly announced. The PUC has also approved a number of renewable contracts through an ad hoc process. These contracts have resulted in the IOUs agreeing to purchase renewable power that will count toward their RPS obligations but that will not be eligible to receive SEPs. 2) Accelerated RPS Compliance : The "Energy Action Plan" adopted by the PUC, 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 13%, while Southern California Edison (SCE) already has 18% of eligible renewable power in its portfolio. San Diego Gas & Electric (SDG&E) currently only receives 5.5% of its electricity from renewable resources. Due to SDG&E's small 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. 3) Renewable Energy Credits : The REC program established in this bill will help the 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 traded 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 AB 1362 Page E resources, can buy RECs instead. Since AB 1362 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, the 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 this bill leaves much of the task of developing a REC program to the CEC and the PUC, 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 the 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) 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. c) The PUC may limit the total amount of RECs that can be separately procured to meet annual procurement targets. 4) 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 a commodity separate from the generated energy. A logical assumption is that they are a bundled product. 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 with the IOUs, the current baselines of renewable power for IOUs will decrease, since the AB 1362 Page F IOU can no longer count that power 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 AB 1362 provides that there are no RECs associated with renewable power generated under terms of a contract executed before January 1, 2006, that did not contain explicit terms specifying ownership of energy credits. RELATED LEGISLATION : SB 107 (Perata & Simitian) accelerates the RPS requirement to require retail sellers to procure at least 20% of their electricity from eligible renewable resources by 2010 and allows RECs to be applied toward a retail seller's RPS obligation. The bill also makes changes to existing provisions in the RPS statute that regulated what types of power can be counted toward the RPS and what procedures parties must follow to qualify for SEPs. This bill is currently awaiting action in the Senate Energy, Utilities and Communications Committee. AB 1585 (Blakeslee) accelerates the RPS requirement to require retail sellers to procure at least 20% of their electricity from eligible renewable resources by 2010; allows the PUC to require an IOU to continue to add 1% of new renewable resources per year to its portfolio even after the IOU has reached the 20% threshold; requires munis to procure at least 20% their electricity from renewable resources by 2017; and allows RECs to be applied toward a retail seller's RPS obligation. This bill is set for hearing on April 18, 2005, in the Assembly Utilities and Commerce Committee. AB 1555 (La Malfa) allows electricity generated from an existing hydroelectric facility that generates more than 30 megawatts of electricity to count toward the California Renewable Portfolio Standard (RPS). This bill is set for hearing on April 18, 2005, in the Assembly Utilities and Commerce Committee. SB 1478 (Sher) in the 2003-2004 session accelerated the RPS requirement to require retail sellers to procure at least 20% of their electricity from eligible renewable resources by 2010 and allows RECs to be applied toward a retail seller's RPS AB 1362 Page G obligation. This bill was vetoed by the Governor. REGISTERED SUPPORT / OPPOSITION : Support Amended Federation State County Municipal Employees (AFSCME) Coalition of Utilities Employees (CUE) California Public Utilities Commission (CPUC) (in concept) Clean Power Campaign (with amendments) East Bay Municipal Utility District (with amendments) National Resources Defense Council (NRDC) (with amendments) Pacific Gas & Electric (with amendments) Sempra Energy (with amendments) Opposition None on file. Analysis Prepared by : Edward Randolph / U. & C. / (916) 319-2083