Legislation for a federal US renewable energy target risks slowing existing state and voluntary efforts – unless it is properly designed.
Winning the fight against climate change requires a rapid shift to clean energy. Properly designed federal energy and climate legislation in the US will accelerate renewables development. A strong federal renewable electricity standard (RES) and carbon cap should set a national floor for renewable generation and enable state RES policies and voluntary markets to deliver additional clean energy. However, if legislation allows for the double-counting of the renewable energy certificates (RECs) used to show RES compliance, or the carbon cap is not lowered to take account of voluntary renewable energy purchases, then the national programme becomes a ceiling on renewable generation. That would be like driving with our foot on the brake.
Whether double-counting occurs depends on the overall market design of federal legislation and how states choose to operate their RES programmes. It also depends on assuring consumers that voluntary purchases of renewable energy go beyond those that would be required by law.
There are five important market design steps that enable state RES and voluntary renewable markets to complement and exceed federal targets:
No federal pre-emption of higher state RES standards.
the requirement by states that a federal REC be retired for each non-federal REC used for compliance with a state RES.
Bundling together federal and non-federal RECs to perfect voluntary claims.
Conveying of federal RECs to purchasers of the non-federal RECs in existing contracts.
The retiring of allowances on behalf of voluntary renewable energy purchases.
One challenge in the design of a federal RES market is the definition of the new compliance instrument, the federal renewable energy credit (F-REC). The House of Representatives and Senate RES bills pending in Congress1 contemplate a dual REC system – in which each unit of energy is the basis for issuing one federal REC in addition to the nonfederal REC that is already the standard currency in today’s state RES and voluntary market. The federal REC would be used for compliance with the federal RES, but nothing prevents the other REC – ie, the non-federal REC – from being used for a variety of purposes. As a result, double claims on the same renewable MWh may occur whereby one party claims the F-REC and another party claims the non-federal REC.
In states that have higher RES targets than a federal programme, utilities will have more FRECs than needed for their own federal compliance and could sell their surplus F-RECs to utilities in other states to be used for compliance, without creating any additional generation. Fortunately, both federal RES bills allow state programmes to exceed the federal target (step 1). Both bills also give states the authority to regulate F-RECs within their jurisdictions, including requiring that an Federal REC be retired for each non-federal REC used for compliance with a state RES. If states exercise this right (step 2) then a federal RES will be a floor, but where states allow surplus F-RECs to be traded away the federal RES becomes a ceiling.
Voluntary markets trade the same commodity that most state RES and the future federal RES trade: RECs, and thus provide an economic liquidity backstop in the market for clean generation. Despite the economic recession, voluntary markets pumped $200 million into the clean energy economy in 2008. This financial support helps develop renewable energy capacity beyond what mandatory compliance targets contribute alone.
Under proposed legislation, nothing prevents marketers from retiring an F-REC with each non-federal REC sold to voluntary customers (step 3). Parties can freely contract for F-RECs going forward, but the bills may inadvertently create uncertainty about ownership rights under existing contracts that are silent about F-RECs. In their current form, if an existing utility power purchase agreement is silent as to ownership of F-RECs, the F-RECs are issued to the utility purchasing the power. Existing standard REC contracts convey exclusive ownership of all non-power attributes of renewable energy, including compliance with any state or federal mandate. Thus, there is a legitimate argument that, because F-RECs did not exist prior to enactment of the RES, parties contracting for the renewable energy attributes separate and apart from the underlying MWh might not have thought about specifying in the contract that the F-REC is part of the deal.
To prevent this kind of double-counting, ownership of and rights to F-RECs for existing REC agreements should be made clear in the RES bills. For example, unless existing contracts state otherwise, F-RECs should be conveyed to the purchaser of the non-federal RECs (step 4). This clarification of F-REC ownership will provide essential market certainty.
Voluntary buyers also expect that renewable energy purchases reduce carbon emissions. However, if a cap-and-trade programme is not designed to account for carbon reductions associated with renewable energy, voluntary renewable energy purchases would simply free up federal carbon allowances for someone else to use because emissions will occur up to the level of the cap. The Regional Greenhouse Gas Initiative (RGGI) carbon cap-and-trade programme, covering power generators in 10 north-eastern US states, includes ‘off-the-top’ treatment of voluntary renewable energy purchases, under which allowances are set-aside and retired in an amount equal to the emissions avoided due to voluntary renewable energy purchases (step 5). The RGGI ‘off-thetop’ rule demonstrates that it is possible to maintain the ability of voluntary purchasers of renewable energy to provide additional carbon reductions under cap and trade.
Assuring the regulatory additionality and net emissions reduction benefits of state RES and voluntary renewable markets is eminently achievable with minor adjustments to pending federal legislation and some action by states with RES programmes.