Plotting a Rational Approach to the Development of Renewable Energy

By Cynthia A. Arcate 30 September, 2011

Lots of attention has been paid to the financial subsidies the state and federal government have provided for the development of renewable energy (see last week’s blog). What the general public is much less aware of are the subsidies that come directly from ratepayers through their electric rates. These subsidies are part of a patchwork of regional programs supporting the development of renewable resources.

As part of the Electric Restructuring Act of 1997, Massachusetts became the first state in the nation to adopt a renewable energy portfolio standard. Under the RPS, electric suppliers are required to meet a certain portion of their sales with certain qualified “new” renewable resources. It started with a small percentage in 2003 (1%) and has grown to 6 percent of sales for 2011. In the Green Communities Act of 2008, that standard was extended with greater annual increases, from 0.5 percent annually to a full 1 percent, toward the goal of reaching 15 percent by 2020.

Suppliers meet this state obligation by purchasing renewable energy credits (commonly referred to as RECs). Initially, there weren’t enough RECs for the suppliers to meet their obligation. To ensure that suppliers were not held hostage to a tight market and have to pay unreasonably high prices for these RECs – thereby likely driving up rates for end-users, regulators set an Alternative Compliance Payment or ACP to establish a ceiling on the cost of compliance.

Experience has proven that this regime has worked well in furthering the development of renewable energy in Massachusetts and the region. Other New England states have similar RPS requirements. RECs can be from qualified projects throughout the region – including New York – as long as the power is deliverable to the New England grid. Today, there is adequate supply of RECs and suppliers no longer pay the ACP. Make no mistake, ratepayers are still paying more for renewable energy than for conventional supply. This is an add-on or “greening –up” of supply, but the regime has resulted in an increase in renewable energy in the region and, in our view, at reasonable cost.

Massachusetts has now set out to create a subset of the REC market for a targeted, specific technology – solar. The Green Communities Act allows the Department of Energy Resources (DOER) to establish an RPS requirement for solar as a part of, not in addition to, the annual RPS requirement. While the complicated formula had a bumpy start, we believe the DOER has landed on an innovative approach that should prove to provide the strong financial support needed to further develop solar in the state and, in the end, at reasonable cost. Similar “solar carve-outs” have been done in other states, such as New Jersey. There, while starting out very high, these REC prices have come down considerably. As a small percent of the supplier sales, the cost of the RECs has a small impact on the overall price of electricity. As we have learned from the exploration of our solar program, these REC prices are critical to the pricing of the output of solar facilities and must be placed in a predictable and certain fashion to attract investors to build the installations.

Recently, the New England states have been examining a regional approach to renewable energy procurement and it should be given time to germinate. Currently, there is a patchwork of goals, subsidies and rules. We applaud the New England States Committee on Electricity (NESCOE) for exploring the potential for a more coordinated regional approach to the development of renewable energy in the region. National Grid has also put forth a proposal mimicking the Forward Capacity Market auction, which is administered by the ISO-NE, to procure renewables through a similar auction approach. This too is worth exploring and could dovetail very effectively with the NESCOE coordination.

The important thing would be for the states to agree on a goal and live by it. We can’t have states adding on to the regional goal while, at the same time, continuing the current patchwork of approaches – thereby resulting in consumers in some states paying more for electricity so that the region as a whole benefits from the increased diversity of supply and reduced emissions. That’s what we have now and the inequities are clear on a lot of fronts. Massachusetts consumers currently pay for the development of renewable energy in other New England states. Our state doesn’t get the benefit of the economic development that comes with the growth of the technology, yet we pay the price. A regional approach would address that inequity while continuing the important march toward cleaner, more renewable energy without significant further strain on end users.

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