Welcome to Part 2 of our outline of some of the various provisions of REC laws that legislators use to either strengthen or weaken particular aspects of the state RES, and how those slight changes can have significant impacts on your particular renewable project. If you haven’t already done so, please take a look at Part 1, where we discussed how state legislatures use the concepts of “bundling” RECs and the underlying energy and “geographic sourcing” to tip the scale towards either incentivizing renewable projects within the state or minimizing the financial impact on utilities and ratepayers.
Today we will discuss two additional provisions which legislator’s use to define the impact of the state RES on renewable projects within the state: Rate Caps and Shelf-Life.
It is often the case that energy generated from renewable projects is more expensive than energy generated from natural gas plants. Because of this, when a utility either builds its own renewable project or purchase energy from a renewable project, its customers’ rates could increase.
With this fact in mind, many legislatures have drafted “rate caps” into their RES and REC laws. Essentially, with a “rate cap” a utility is exempt from complying with the RES if doing so would cause its rates to increase by more than a set percentage over what it would have cost to generate that energy from a traditional source.
The impact of these rate caps is fairly obvious. If this rate cap is set too low, it can severely undercut the effectiveness of a state’s RES, as utilities will not have to fully comply with the laws. Ultimately, by looking at how high a particular state sets its rate cap can be a good way to tell how truly committed that state is to implementing an effective RES.
Another important aspect of REC laws that often flies under the radar is the concept of a REC’s “shelf-life.” Most RES laws include an expiration date for RECs, or a date by which the utility must utilize a REC to comply with the RES. After that date, the REC “shelf-life” will have lapsed and it will no longer be useable.
This concept of “shelf-life” can be extremely important, as it allows developers and utilities to “bank” their RECs in hopes that the price of the RECs will either rise or fall in the future, or if they believe the need and demand for those RECs will increase in the future.
Say, for example, that you are a developer of a large solar project in a state that has just passed a new RES. New solar projects are being announced every day, so there does not look like there will be any shortage of RECs to meet the lowest threshold of the RES. However, as the RES threshold increases over time, utilities will need more and more RECs to stay in compliance.
Because your solar facility can generate more energy than the market demands right now, you would want the ability to “bank” those excess RECs and have them still be useable for compliance in the later RES periods. Otherwise, any excess RECs that you generate would go to waste.