Primers on Renewable Law Topics

A few weeks back I discussed the importance of robust Renewable Energy Standards for the future of renewable energy development in the United States.  It seems that the the state of California agrees, as yesterday the state legislature passed legislation which will give California the most ambitious renewable energy standard in the nation.  This legislation, which was introduced by State Senator Joe Simitian, will require private and public utilities to utilize renewable energy for 33% of their total energy portfolios by the year 2020.

Previously, under legislation that was also introduced by State Sen. Simitian, state utilities were required to generate 20% of their total portfolios from renewable sources by 2010.  A study performed by the California Public Utilities Commission found that the state utilities have met this goal.  Specifically, they had achieved 18% renewable energy as of the end of 2010, and are expected to be at 20% by the end of this year.

Interestingly, the previous law included a rate cap which the new legislation would remove.  I’ve discussed the significant impact of rate cap provisions in a previous post, but suffice it to say that this move should help spur renewable production even further.

The legislation has now passed both houses, and all the remains for it to become effective is the signature of Gov. Jerry Brown.  Congratulations to State Senator Simitian for once again helping to raise the bar on renewable energy policy in the United States.

The full text of the bill is available on the California Legislature’s Bill Information Site, here, and an excellent “Fact Sheet” prepared by a member of Senator Simitian’s staff can be found here.

*Update:  Gov. Brown officially signed this legislation into law on April 12, 2011.  Angela Binewal wrote an excellent article for North American Windpower about the signing, and provides great insights into the industry’s response to the new standard.

Oklahoma has undergone a significant legislative overhaul over the course of the last year to help advance its agenda of encouraging the development of renewable energy projects within the state.  A few of the most important legislative measures for project developers are as follows:

  • Oklahoma has established a voluntary Renewable Energy Standard (17 Okla. Stat. 801.1 et seq.), which calls for 15% of the total installed generation capacity in Oklahoma to be derived from renewable sources, including wind, by 2015.  Energy efficiency may be used to meet up to 25% of the goal.   For a primer on RES standards in the United States, see my post on the issue.
  • Oklahoma has passed SB 1787, codified as 60 Okla. Stat. 820.1 et seq., which states that access to the airspace is tied to the ownership of the land.  Thus, any wind or solar leasing arrangements associated with the airspace must be made with the landowner that owns the land below the air.
  • Oklahoma also recently passed HB 2973, codified as 17 Okla. Stat. 160.11 et seq., known as The Oklahoma Wind Energy Development Act.  This act specifies that, rather than utilizing a system of Renewable Energy Credits to track compliance with the state RES, each utility in Oklahoma must file a report with the OCC each year by March 1 which documents the total installed capacity and the energy source for each generation facilities, as well as the number of kilowatt-hours (kWh) generated by those facilities during the prior year.

The Oklahoma Wind Energy Development Act also provides rules related to decommissioning, payments, and insurance for wind projects, went into effect on January 1, 2011.  A few of the most significant provisions are as follows:

  • Equipment from wind energy facilities must be removed and the land, excluding roads, must be returned to its condition prior to the facility construction within one year of abandonment of a project.
  • Wind facility owners must file an estimate of the decommissioning costs and proof of financial security covering such costs after 15 years of operation.
  • For any wind energy facility that makes payments to the landowner dependent upon the amount of electricity produced, facility owners are required, within  to provide a statement to the landowner within 10 business days of the payment which explains the payment calculation to the landowner, allow for landowners to confirm the accuracy of payments and inspect records, and make records available to the state of Oklahoma.
  • The developer shall report to the OCC on an annual basis by March 1 of each calendar year the power generated from the facility, the nameplate capacity of the turbines, and the location of the wind turbines.
  • Wind energy facilities must have commercial general liability insurance, which must name the landowner as an insured party. Proof of such insurance must be provided to the landowner before construction begins.

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.

Rate Caps

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.

In last week’s overview of Renewable Energy Standards, I briefly described the concept of Renewable Energy Credits (“RECs”).  Generally speaking, RECs are one of the most common mechanisms that states use to ensure that utilities are complying with the state’s RES.  A REC is essentially a certificate that gives the holder credit for developing a certain amount of energy from a renewable source.

However, because we are dealing with legislation and regulations, you can safely assume that the clean and easy description doesn’t tell the whole story.  With that in mind, over the next few days I’ll outline some of the various nuances 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.

Because this is a large topic, I thought it would be best to break it into the following pieces:

  • Part 1  gives an overview of why states modify their REC laws and describes the concepts of “bundling” and “geographic sourcing.”
  • Part 2 will discuss the concepts of “rate caps” and the “shelf-life” of RECs.

Overview of REC modifications:  It’s politics, folks

Before we get into the nuts and bolts that make up the REC laws, it might be useful to step back and consider for a moment why a state would want to strengthen or weaken its REC requirements.

As we all know, there are a number of significant advantages to renewable energy: (1) reduced dependence on foreign oil; (2) greatly reduced environmental impacts; (3) sustainable energy source for the future; (4) economic development and job growth, etc.   However, because public utilities often have to make significant capital investments to generate renewable energy, it is possible that the average electricity rates in the state will increase as a result.

Every state addresses this balance between incentivizing renewable projects and avoiding increased electricity bills differently.  In essence, in the war over  the impact of the RES on renewable energy development in the state, the concepts that we will be discussing over the next few days make up the battleground.

Bundled Energy vs. RECs

One of the most basic principles that a legislature has to address when drafting a RES is whether it will allow RECs to be separated from the underlying energy.  This can be a difficult concept to wrap your head around, so let’s spend a moment fleshing it out.

Imagine a wind farm develops 1MW of energy.  That MW of energy is valuable two reasons.  First, the actual energy itself can be sold to a utility.  Second, because the energy was generated from a renewable resource, it counts towards compliance with the state’s RES.

This dual-value can be addressed by legislators in one of two ways when drafting the RES and REC laws.  They can either “bundle” the electricity and the REC together, or they can allow the REC to be sold separately from the underlying energy (or “unbundle” the REC from the energy).

If they “bundle” the energy and the RECs, a utility can only comply with the RES if it has purchased the actual energy from the renewable developer, like so:

If the energy and RECs are “unbundled”, the developer can sell the energy to one utility (for our purposes “Utility A”) and the REC to another (“Utility B”), like so:

Now, you may be asking yourself why unbundling doesn’t effectively double a developer’s profits, as they can sell the energy to count towards Utility A’s RES requirement, and sell the REC to count towards Utility B’s RES requirement.  States typically address this “double counting” by prohibiting the REC and the underlying energy from both being counted towards compliance with the state RES.

The actual impact of the bundling vs. unbundling decision on developers depends upon a number of factors.  If the RECs and energy are bundled, utilities are largely limited to purchasing energy from the renewable projects that are geographically close to their service area.  Therefore, if you are a developer that only has projects within a single state, you might be in favor of bundling because it limits the number of competing projects that can sell power to the utilities.

However, if you are a developer with projects scattered across the United States, you might prefer that the energy and RECs be unbundled.  That would allow you to sell your energy to utilities that are close to your projects, and sell the RECs to utilities in other states.

Geographic Sourcing

An issue that is often linked to bundling is “geographic sourcing.”  When drafting the RES, legislators have to decide whether and to what extent they should limit the geographic area for renewable projects that can comply with their RES.

For example, a RES statute can require that, in order to count towards the RES threshold, utilities must purchase renewable energy or RECs from projects located within the state.  Legislators might include this type of provision if they are particularly interested in encouraging renewable development within the state.

Let’s use Kansas as an example, because I really enjoy coloring it blue…

If the geographic sourcing provision requires that the energy be generated in Kansas, then obviously only Kansas projects will be allowed to count towards a utility’s RES threshold.

However, the RES statute could also require that the energy or RECs be purchased from projects located within the state, or that deliver their energy to utilities within the state.  This effectively expands the footprint to include renewable projects from the surrounding states.

Similarly, the RES statute could allow the energy or RECs to be purchased from any project located within a particular RTO…

Legislators could settle on either one of these provisions as a compromise position between those that are primarily interested in encouraging renewable energy development in the state and those that are worried about the cost impacts on the utilities and the ratepayers.

Finally, the legislators could draft the geographic sourcing provision very broadly, so the energy or RECs could be purchased from anywhere in the United States…

This is the position that is likely to lead to the least amount of renewable development within the state. The utilities will almost certainly be able to find RECs from resource-rich states like North or South Dakota which would be cheaper than those sold by in-state projects, and as a result the guaranteed revenue stream for in-state projects would dry up.  As a result, renewable energy companies that want to encourage development of project’s within a particular state tend to oppose particularly broad geographic sourcing provisions.

This concludes Part 1 of our overview of REC provisions, but be sure to stay tuned because tomorrow we will discuss the concepts of “rate caps” and “shelf-life.”

As this is a new blog, I thought it would be a good idea to have the first few posts give a broad overview of some of the big concepts in renewable energy law before diving into the more nuanced issues that are dominating the current conversation.  With that in mind, it seemed appropriate to start with one of the biggest forces driving the current renewable energy boom in the United States, Renewable Energy Standards.

While it may seem that governmental renewable energy incentives have gained an increasing amount of momentum in our national discourse in recent years, it may surprise you to know that some states have been on the cutting-edge of renewable energy promotion for just shy of three decades.  In fact, in 1983 Iowa became the first state to implement a program known as Renewable Energy Standards (“RESs”) to encourage the development of alternative energy projects within its borders.

Though today RES programs come in many varieties, they are essentially state legislative initiatives that require a certain threshold percentage of a utility’s total energy portfolio be generated from renewable sources (such as wind, solar, biomass, geothermal or other sources) by a certain date in the future.  For example, the state of Kansas requires all public utilities within the state to derive 10 percent of their total energy from renewable sources by the year 2011, 15 percent by the year 2016 and 20 percent by the year 2020.

Though this is a reasonably simple concept on paper, under most state RES programs, each utility does not necessarily have to construct renewable projects to meet these threshold amounts.  To account for utilities that do not currently have sufficient access to a renewable resource, or that have not yet developed renewable energy projects to take advantage of the resources that are available, most RES programs allow an alternative path to compliance through Renewable Energy Credits (“RECs”).  It is perhaps easiest to think of a REC as a piece of paper which states that the holder has generated 1 MW of renewable energy that can be counted toward satisfying the state RES.  If Utility A cannot generate enough renewable energy to meet the RES, they may purchase RECs from Utility B who has generated more than enough renewable energy to meet its RES threshold.

If the laws and regulations are drafted carefully, creating a market for these RECs allows states to exert additional pressure on utilities to build their own renewable projects, as this will inevitably be cheaper than purchasing RECs on the open market.  There are numerous issues that can strengthen or weaken the total impact of a RES standard as it is being drafted (such as rate caps, geographic sourcing, etc.), and I am planning on getting into these issues in more detail in an upcoming post.

With that background, you may be wondering how common these Renewable Energy Standards have become in the United States.  Currently, 36 states plus the District of Columbia and Puerto Rico have enacted some form of RES.  Because these RESs were implemented independently of one another, they vary significantly from state-to-state, with goals ranging from Hawaii’s 40% by 2030 to Arizona’s 15% by 2025.  Similarly, the penalties for not meeting the standards range significantly, from mandatory fines (the most common result) to no fines at all (as in North Dakota).

The wide-spread adoption of RES by the states has not gone unnoticed by the lawmakers in Washington.  However, though there have been several bills introduced by this and the previous Congress which would enact a federal RPS that must be followed by each state, as of this writing, it does not appear that any action will be taken any time soon.