BILL ANALYSIS
SB 107
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Date of Hearing: August 17, 2006
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Lloyd E. Levine, Chair
SB 107 (Simitian and Perata) - As Amended: August 7, 2006
SENATE VOTE : 25-14
SUBJECT : Renewable energy.
SUMMARY : Accelerates California's 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. Clarifies existing rules to allow renewable
power to count toward a retail seller's RPS even if the
associated electricity is not delivered to the retail seller.
Specifically, this bill :
1)Requires that all retail sellers of electricity, excluding
local publicly owned electric utilities (municipal utilities),
procure at least 20% of the total electricity sold from
eligible renewable resources by 2010.
2)Allows renewable electricity that is provided to any location
within California or is scheduled and settled for delivery in
California to count toward a retail seller's RPS obligations.
3)Changes the definition of "eligible renewable resource" to
allow renewable power that is produced outside of California
from a facility that commences operation after January 1,
2005, to count toward a retail seller's RPS if the associated
electricity is delivered to an in-state location, and it
complies with California environmental quality standards.
Electricity from a facility that was operating prior to the
year 2005 can count toward a retail seller's RPS if the
electricity is part of incremental load resulting from
repowering or that facility has been part of the baseline of
renewable power of a retail seller.
4)Prohibits the awarding of Supplement Energy Payments (SEPs)
for the purchase of Renewable Energy Credits (RECs) or for
renewable electricity purchase agreements of less than 10
years in length.
5)Allows eligible renewable generation facilities located
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outside of California to receive SEPs.
6)Allows renewable energy projects to receive SEPs for the
above-market cost of the renewable electricity for the value
of the life of the contract instead of just for the first 10
years of the contract.
7)Requires municipal utilities to annually prepare a report to
the California Energy Commission (CEC) on the mix of eligible
renewable resources used in their portfolio and on their
progress toward meeting the municipal utility's RPS.
8)Defines Renewable Energy Credit to mean a certificate that one
unit of electricity was generated by an eligible renewable
energy resource and includes all renewable and environmental
attributes associated with the production of electricity,
except for emission reduction credits.
9)Allows municipal utilities to sell RECs to retail sellers of
electricity if the municipal utility has established a RPS
that is comparable to the RPS of the Investor Owned Utilities
(IOUs) and is in compliance with that RPS.
10)Allows the Public Utilities Commission (PUC) to authorize the
use of RECs to meet the RPS once the CEC has developed a
system to track RECs.
11)Deletes a requirement in current law that prohibits an IOU
from sharing the results of any competitive solicitation for
eligible renewable energy resource until the PUC has
established a market price referent (MPR).
12)Requires the PUC to develop flexible rules for compliance
with the RPS that shall address situations where, as a result
of transmission constraints, a retail seller is unable to
procure eligible renewable energy resources sufficient to
satisfy their RPS obligations.
13)Allows a contract for eligible renewable resources that is
less than 10 years in duration to count toward a retail
seller's RPS. Such contracts shall not be eligible for SEPs.
14)Allows the PUC to authorize a procurement entity to enter
into contracts for renewable energy on behalf of a retail
seller. The procurement entity will be allowed to recover
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administrative and procurement costs through the retail rates
of the end-use customers whom directly benefit from the
procurement of the renewable electricity.
15)States that a retail seller that has met its 20% renewable
obligation in one year shall not be required to increase its
renewable energy procurement in the following year.
16)Requires the CEC to develop a system to certify, track and
verify that RECs are produced by renewable energy resources.
17)Specifies that a renewable energy project selected by an
Energy Service Provider (ESP) may only receive SEPs if the ESP
selects the project through a "least-cost best-fit process"
and the SEPs are reasonable in comparison to other projects.
18)Provides that renewable power generated under terms of a
contract executed before January 1, 2002, shall count toward a
retail seller's RPS obligations.
19)Provides renewable power generated under terms of contracts
awarded to Qualifying Facilities (QFs) under the Public
Utility Regulatory Policies Act (PURPA) of 1978, shall count
toward a retail seller's RPS obligations.
20)Provides that the cost of a new transmission facility that is
built to deliver electricity from areas with high
concentrations of renewable power shall be paid for by all
electricity customers in California.
21)Requires all long-term procurement plans entered into by an
electrical corporation or a municipal utility to adopt a
strategy to achieve efficiency in the use of fossil fuel and
to address carbon emissions.
EXISTING LAW :
1)Requires retail sellers of electricity, except municipal
utilities, 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 include all generation
from a renewable electricity generation facility that uses
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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. Requires the renewable resource to be
located in California or be directly connected with the
California transmission system.
3)Exempts municipal utilities from the statutory requirements of
RPS and instead requires municipal utilities to implement and
enforce their own RPS programs that recognize 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, but SEPs may not be paid to one project for more than
10 years.
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 address issues that may make compliance with
the RPS difficult.
1) Brief history : In 2002, the Legislature approved SB 1078
(Sher), Chapter 516, Statutes of 2002, and SB 1048 (Sher),
Chapter 515, Statutes of 2002. Together these bills created
California's RPS. Under the RPS, the 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
(Energy Service Providers or ESPs) and community choice
aggregators (CCAs). Municipal utilities 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
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a competitive solicitation and a market price as established by
the PUC (known as the Market Price Referent or MPR). 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. These RFPs have resulted in the
IOUs signing a number of contracts for renewable power. To date
all contracts have been for prices below the MPR and thus no
SEPs have been issued. However, reports from parties involved in
the current renewable procurement process indicate that SEPs
will be needed for contracts that will be approved this year and
next.
2) Accelerated RPS compliance : The "Energy Action Plan"(EAP)
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. The PUC has mandated this accelerated goal without
additional legislation.
Currently, all of the three major IOUs may have difficulty of
meeting 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 16.7% of eligible renewable
power in its portfolio. San Diego Gas & Electric (SDG&E)
currently only receives 5.4% of its electricity from renewable
resources.
---------------------------
<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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3) Making 20% an achievable goal: Currently, provisions in the
RPS statute may prevent some retail sellers from meeting the
mandate to procure 20% of their electricity from renewable
resources by 2010. Transmission constraints may limit SDG&E's
ability to buy new renewable electricity and have that
electricity delivered to its service territory. The current RPS
statute requires that ESPs procure their renewable resources
through contracts that are at least 10 years in length, but
because of the long-term uncertainty of direct access markets in
California, ESPs may not be able to sign enforceable contracts
of that length.
4) Transmission constraints : This bill attempts to address the
problem of transmission constraints by clarifying that
electricity from eligible renewable resources does not have to
be delivered to the service territory of the retail seller and
instead only requires that the electricity be provided to the
retail seller at a location within California. This provision
would maintain the RPS's objective of reducing consumption of
fossil fuels within California, but would allow for more
flexibility in the delivery of electricity. If the renewable
electricity were actually provided to the retail seller in
another IOU's service territory, the retail seller and the IOU
would merely arrange to swap other electricity. This type of
swapping has been a common practice in the past. The PUC has
already issued a decision that allows for renewable power that
is delivered anywhere in the state to count toward an IOU's RPS
obligations.
The bill also addresses problems with transmission constraints
by allowing a retail seller to meet its RPS obligations through
the purchase of tradable RECs. A tradable REC is a credit for
the renewable attributes of the renewable generation. It allows
a retail seller to purchase the renewable attributes while
another party can buy the actual electricity.
5) Contract length: This bill attempts to address the problems
ESPs have in signing long-term contracts by allowing the PUC to
approve renewable contracts that are less than 10 years in
length. Such contracts, however, will not be eligible for SEPs.
The ESPs believe that restrictions in the bill will still
prevent them from signing long-term contracts. First the bill
provides that they cannot receive SEPs for contracts that are
shorter than 10 years. The ESPs believe that any term contract
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should be eligible for SEPs since any term contract results in
added renewable power to the state's portfolio. Alternatively,
TURN argues that determining the market price for these
shorter-term contracts, which would be necessary before SEPs
could be issued, would require a new proceeding at the PUC which
could delay implementation of parts of the RPS for another 18
months. TURN also believes that allowing SEPs for long-term
contracts will encourage inefficient buying behavior and
potentially sabotage the RPS program goals by allowing
higher-priced short-term contracts to reap large amounts of the
available SEPs.
ESPs are also concerned with language that requires the PUC to
set a minimum amount for each utility that must come from
long-term contracts. The ESPs believe that they should be
allowed to sign as many short-term contracts as they need to
meet their RPS obligations and to meet the flexibility they need
to serve their customers.
The bill also attempts to address problems the ESPs have with
signing long-term contracts by allowing the PUC to authorize a
procurement entity that could purchase power on behalf of other
retail sellers. The procurement entity would have the ability to
sign long-term contracts for renewable electricity and could
then provide this electricity to ESPs. While most retail sellers
support the idea of a procurement entity they all are concerned
that the language in the bill could result in the PUC ordering
an IOU to act as a procurement entity and forcing ESPs to
purchase renewable power from that entity. They have suggested
that the procurement entity should be voluntary. To meet this
suggestion, the committee may wish to consider amending the bill
to provide that the PUC may authorize the creation of a
procurement entity but may not require any party to act as or
purchase from a procurement entity.
6) Out-of-state delivery: Current law is ambiguous as to whether
renewable power produced outside of California can count toward
California's RPS and can qualify for SEPs. One of the main
goals of the RPS is to reduce the need for fossil fuel fired
electricity in California. This goal can still be achieved if
electricity from other states is allowed to count toward the
RPS, provided the electricity is actually delivered to the
state. Allowing out-of-state produced renewable electricity to
count toward the RPS will create a significantly larger market
for renewable power and could potentially lower the overall cost
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of renewable power.
This bill addresses the issue by allowing renewable power that
is produced outside of California to count toward a retail
seller's RPS obligations, provided it is delivered to
California. The bill also allows these projects to qualify for
SEPs.
While allowing out-of-state produced renewable power to count
toward California's RPS could lead to lower costs for renewable
power, the committee may want to consider if these projects
should also qualify for subsidies from California ratepayers in
the form of SEPs. The goal of creating more California jobs may
be better maintained if California ratepayer money is only used
to fund California projects and is not used to subsidize
out-of-state projects. Therefore, the committee may want to
consider amending the bill to provide that only projects located
within California can qualify for SEPs.
7) Credit is as good as cash: This bill allows retail sellers of
electricity to use RECs to meet their RPS obligations. REC
trading may help retail sellers 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 107 contains explicit provisions against double
counting 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, a REC program will allow the retail providers
to more efficiently meet their renewable obligations.
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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 107 leaves much of the task of developing a REC program
to CEC and 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 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) The associated electricity must be delivered for use
within California so that the renewable power actual
offsets the need for non-renewable power within the state.
c) No party may receive SEPs for the sale of RECs.
d) The PUC may limit the total amount of RECs that can be
separately procured to meet annual procurement targets.
The bill however fails to address some issues of REC trading for
situations where an IOU is required to purchase the renewable
power from a third party today, but the existing contracts or
statutes do not address who owns the associated RECs. The
problem is that the IOUs are paying a premium for the renewable
power. But if it is not clear that the IOU owns the RECs or if
no RECs are created in this situation, the third party may be
able to collect the premium and sell the RECs and the IOU will
not be able to count this power toward their RPS. The end result
will be that ratepayers pay for the renewable power twice-once
through the IOUs purchase of the electricity at a premium price
and again when the IOU must by the REC.
To address this problem the committee may want to consider
amending the bill to: 1) Clarify that 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; 2)
provide 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
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of energy credits.
8) Flexible rules for compliance: Along with the changes to the
RPS to make compliance with the 20% by 2010 easier, the bill
also requires the PUC to create flexible rules for complying
with the RPS that, among other considerations, take into account
situations where due to transmission constraints, a retail
seller cannot procure sufficient renewable resources. Given that
the bill now allows a retail seller to count renewable power
that is delivered to any part of California to count toward a
retailer seller's RPS obligation and that retail sellers can use
RECs, it is unclear when transmission constraints would make it
difficult for a retail seller to procure sufficient renewable
resources.
9) Related legislation : AB 1362 (Levine), which was approved by
this committee on an 8 to 3 vote in 2005, mandated the
acceleration of the RPS to 20% by 2010. AB 1362 is on the Senate
Inactive File.
AB 1585 (Blakeslee & Levine), which passed this committee on an
11 to 0 vote in 2005, requires the CEC to study the feasibility
of attaining a 33 percent RPS standard. AB 1585 was signed by
the Governor, however it contained language to make its
enactment contingent on the enactment of SB 107.
AB 2189 (Blakeslee), which was approved by this committee in
April on an 11 to 0 vote, provides that a small hydroelectric
generation facility shall not lose its eligibility as a
renewable energy resource even if efficiency improvements
increase the facility's capacity to greater than 30 megawatts.
AB 2189 is pending action on the Senate Floor.
REGISTERED SUPPORT / OPPOSITION :
Support
Pacific Gas & Electric (PG&E) (with amendments)
Southern California Edison (SCE) (with amendments)
Opposition
None on file.
SB 107
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Analysis Prepared by : Edward Randolph / U. & C. / (916)
319-2083