Renewable Energy Credit Targets Need a Tweak

One of the many arcane dimensions of the energy world is the requirements of the Massachusetts Renewable Energy Portfolio Standard (RPS). In a nutshell, the RPS requires electricity suppliers to utilize a certain percentage of renewable energy in their sales. Suppliers meet that requirement by purchasing Renewable Energy Credits (RECs), which are generated from qualifying renewable energy sources, e.g. wind, solar, methane gas, etc.

In order to prevent the price of RECs from being too outrageously high when there is an inadequate supply, suppliers can pay an Alternative Compliance Payment (ACP) instead to meet the requirements. These payments are made to the Massachusetts Clean Energy Center (MassCEC) to be invested in furtherance of the renewable energy goals of the Commonwealth.

Have I lost you yet? Good, keep reading. Here’s where it gets interesting.

When the RPS was established in 1997, the eligibility of projects was limited to ones in commercial operation after 1998, thereby providing financial support for the creation of new renewables in the region. The primary objective of the RPS was to not only increase the amount of renewable energy in the state but to also stimulate the development of new technology. The Green Communities Act increased the target percentage under the RPS for this category, now called Class I renewables. It also established a new category for resources which were commercial before 1998, Class II renewables thereby providing support for older renewable projects which generally includes landfill gas plants and small hydro. Without getting into the wisdom of providing support for old renewable projects, the recent RPS compliance report of the Department of Energy Resources suggests that this regime needs a little tweaking.

DOER reports that the ACP payments for 2010 came to $54.8 million, significantly up from $14.8 million in 2009. The lion’s share of the payments, $35 million, was to cover the Class II or vintage renewable requirements.

A high level of ACP in and of itself is not a bad thing. When it happened in the early years of the RPS, it was simply an indication that the REC market needed maturing. But the 2010 Class II ACP payments suggest that the Class II requirements were set too high and are simply impossible to meet. Remember these are for projects built before 1998. By definition, there can be no new ones to increase the pool of available RECs.

Indeed, the DOER report suggests that the problem will get worse, not better, because many retail sales were initially exempt when the program started. Those exemptions are expiring so the required number of RECs will increase but the pool will not.

The program is vulnerable to calls for refunds to customers and elimination of the Class II category. The solution is to lower the Class II targets to match the pool of RECs and let suppliers use Class I RECS to meet the Class II requirements. The Class I REC price is relatively low and the industry could use a little tightening in that market. This would reduce the level of ACPs for Class II and reduce the supply of Class I RECs, thereby increasing the financial support for the newer projects and technologies. After all, isn’t that the goal of the RPS?

The overall effect will be to continue to support the development of renewable energy through a market based incentive regime but provide some rationality to the Class II goals. While ACP provides a nice funding source to further the Commonwealth’s clean technology objectives, the RPS was not intended to generate revenue in this manner. It was intended to provide a market based revenue stream to developers to sustain a robust renewable energy market in the region.

Steps should be taken immediately to reduce the cost to consumers for Class II compliance and keep the program market driven.

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