Policy Instability in REC Markets = A Threat to Renewable Energy

One thing that successful markets require is continuity and the assurance of stability for many years. At a minimum, investors need to know that the business climate for an investment will be stable for the amount of time required to recoup their initial investment and required rate of return on that investment. For most states with a Renewable Portfolio Standard (RPS), the RPS has been in place for a decade or more. Most RPS were designed with incremental increases in the mandated amount of renewable energy and these increases send a signal to the marketplace in the form of a guaranteed and increasing market size. At Energy Tariff Experts, we feel that RPS markets provide a transparent market based price signal to spur renewable energy development that should be understandable to anyone who can do math. 

Unfortunately we've seen a worrisome amount of meddling in RPS markets by legislators in various states, both positively or maliciously inclined to renewable energy, that we believe raise risk premiums on renewable energy investments. While some RPS programs may require adjustments based on experience in the marketplace, these adjustments are best worked out in transparent stakeholder forums, not through legislative fiat which can be opaque and partisan.  In this post, we will walk through recent developments in North Carolina, Connecticut, and Massachusetts that illustrate worrisome trends in REC markets.

North Carolina joined the states with RPS mandates in 2007 through the passage of Senate Bill 3. It requires the Investor Owned Utilities (IOUs) in the state to obtain 12.5% of retail sales from qualified renewable energy or energy efficiency resources by 2021. In addition to an RPS, NC also has favorable tax incentives, partial property tax exemptions, utility Power Purchase Agreements (PPAs), and net metering rules to spur the development of renewable energy. Solar energy has benefited greatly from policy in NC and its rapid expansion likely has more to do with the tax benefits than the RPS, but the RPS is certainly beneficial to continued build-out. In early 2013, NC became a target for opponents of renewables through an organized legislative assault on renewable energy. NC H.B. 298 was introduced this spring and would have repealed the NC RPS. It ultimately failed in its last committee vote as many moderate Republicans joined Democrats in the NC House Public Utilities and Energy Committee in opposing it. A similar bill was introduced in the NC Senate, and while not dead, this bill has been sent to committee for further study. In addition to the assault on the RPS, NC S.B. 394 threatened to repeal the tax incentives for renewable energy that have been crucial to the growth of the industry in the state. As of June 2013, the NC RPS and tax environment appears to have withstood the attacks, but is has demonstrated that NC is "politically unstable" insofar as renewable energy policy stability and continuity are concerned. As a result, NC projects may face higher risk premiums which increase ratepayer costs and developers will likely be more cautious.

Connecticut has long been a supporter of renewable energy. When the New England marketplace was deregulated in the 90s, the RPS was part of the deal and CT has mandated that 23% of its retail load be supplied by renewables by 2020. CT has a lot of strong policy programs to support the development of renewables such as its LREC and ZREC programs and the relatively new C-PACE program.  In addition, CT was a leader in the mid-2000s by allowing energy efficiency resources to qualify for RECs through the Class III REC program. Most renewable energy stakeholders were horrified by the provisions in the just passed S.B. 1138 that re-wrote the Class I eligible REC resources to include large hydro. Although Hydro-Quebec was not mentioned by name, its the only source of large hydro in the region and its also convenient that the largest utility in CT is building a merchant transmission project to import Quebec hydropower and is in need of subsidies since the project is uneconomic. Although CT S.B. 1138 specifies that large hydro can only constitute 5% of the Class I RPS mandate, many fear that this will be expanded in time and will crowd out local CT renewable resources. Most worrisome is the way S.B. 1138 played out in CT. The language in the bill was clearly written by lobbyists and there was minimal outreach to renewable energy, ratepayer, or merchant generator communities. If the rules of the CT RPS can be changed behind closed doors in the legislature without any input from relevant stakeholders, then the stability and continuity of CT's renewable energy policy should certainly be re-evaluated. Although the situation in CT isn't as serious as NC, S.B. 1138 sets a very dangerous precedent. 

In Massachusetts, if you state a vocal opinion against renewable energy you are likely to be banished from the colony (see Anne Hutchinson and Roger Williams) as punishment. Like CT, MA has had strong support for renewables and an established RPS since the electric industry restructuring of the late 1990s. MA has incrementally expanded its RPS to include alternative energy (e.g., CHP, flywheel storage, etc.) and devised an aggressive and successful solar program. Recently an ardent supporter of renewable energy, MA House Rep. Thomas Calter, proposed H.2915. This bill would require that the MA IOUs purchase all unsold SRECs from the Clearinghouse Auction at a price near $300/MWh. Current MA SREC prices are around $190/MWh and these current prices are supportive of any project that was reasonably financed. It has become apparent that many developers and financiers erroneously understood the Clearinghouse Auction as a price floor, even though that never was the case. It is a price support mechanism and any careful read of the regulations should have made this clear. H.2915, while well intentioned, has the effect of rewarding developers who were unable to assess SREC price risk and punishes ratepayers who will ultimately pay the costs associated with these "make whole" payments to solar developers and financiers. Developers and financiers are big boys (or girls) and should be exposed to profits and losses just like any other infrastructure investor. If a solar developer can't assess SREC price risk, should they still be in business? H.2915 sets two unsettling precedents: 1) Its a bailout for weak developers paid for by consumers and 2) It opens the door to future legislative price adjustments in the REC market. The second precedent is most worrisome. What good is a thoughtful REC price forecast in your project pro-forma if it could be rendered irrelevant by future legislated price changes? What if legislators in the future decide REC prices are too high and adjust them down? H.2915 sets a precedent that could lead to legislatively controlled REC prices, which would raise risk premiums.

In summary, we love REC markets at ETE, but the key word for us is "markets."  If we ever want to achieve grid parity for renewables we must free renewable energy policy from partisan attacks and also ensure that the invisible hand of the marketplace is driving investment decisions. Although many legislators want to aid the advancement of renewable energy, too much legislation can produce instability, inefficiencies, and sub-optimal outcomes for consumers in renewable energy deployment.