A Sound Solution to the Vintage Renewable Energy Credit Problem

By Cynthia A. Arcate 6 February, 2013

About a year ago, we reported on an arcane but no less important problem of the inadequate supply of Renewable Energy Credits (RECs) for Class II resources. To its credit, the state has moved to address this – through legislation, research and, recently, a new proposal that bears examination.

Class II resources are the renewable energy projects operational before 1998, when the Renewable Energy Portfolio Standard was created for new resources. This Class II category was created as part of the Green Communities Act in 2008 to provide financial support for these older projects, such as small hydro projects, to ensure that they remain viable so as not to lose their important contribution to the regional generation mix.

After the first year review of the Class II program, we noted that the Department of Energy Resources (DOER), which administers these programs, found that the percentage of Class II resources that electricity suppliers could purchase RECs from was far below the percentage level established by DOER. This resulted in a significant amount ($35 million) of Alternative Compliance Payments that suppliers paid in lieu of purchasing Class II RECs. (This is a pretty complicated regime but see our February 28, 2012 blog for more details). In our earlier blog on this subject, we called for a reduction in the requirement. In the energy bill passed last August, the Legislature directed DOER to study what should be done to reduce the reliance on ACP and provide it with a study by January 1, 2013.

The DOER produced a thoughtful and thorough examination of the market and the factors affecting the availability of these resources in the future to meet the REC supply demand. Bottom-line, DOER concluded that the percentage was set too high given the market potential for projects meeting the environmental requirements for qualification, essentially Biomass (mostly wood) emission standards and low impact small hydro rules. But some level of financial support remains necessary for those projects that can and will meet the environmental qualifications, primarily small hydro. So, the challenge is to set a percentage that is realistic yet leaves room for growth where projects can become qualified as market conditions change.

The resolution proposed by DOER in its study report is to develop a 3-Year Forward Schedule Minimum Standard. Under this approach, the percentage of support would start at a level close to what is in place under the program today with review annually to provide 3-year forward adjustments based on changes warranted in the market.

This makes sense, with one caveat.

The DOER study recognizes the need for electric suppliers to have sufficient advance notice of their Class II REC obligations to accurately reflect those costs in their pricing to consumers. Three years may still not be enough notice given the current competitive retail environment. With the drop in electric prices as a result of the shale gas supply phenomena, many suppliers are meeting customer demand with guaranteed pricing five years out. Exposure to potential cost increases for unknown Class II REC requirements beyond the three years DOER suggested in its report will cause suppliers to place a premium on their pricing for the out years, resulting in potentially unnecessary costs to consumers. We think a 5-year forward schedule makes more sense.

It also would be helpful to know how much of a reduction in Class II costs will result from this move. As Attorney General Martha Coakley launches her laudable energy summit examining ways to make the Commonwealth’s energy costs more competitive, we need to keep a running tally of actions taken to reduce our costs. This is one item on the list which can be crossed-off, at least for now. But we should know what the value is so it can be added to that calculation.

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