New Vermont Clean Energy Policies: Effective Implementation

1. New Vermont Clean Energy Policies: Effective Implementation Renewable Energy – A Vision for Vermont 4th Annual Renewable Energy Conference Mark Sinclair, Vice President Clean Energy Group September 21, 2005

2. Presentation Overview • States as New Clean Energy Leaders • Vermont Energy Context • Vermont’s New Renewable Tools • Renewable Portfolio Standard • State Clean Energy Funds • Recommendations for Vermont Implementation

3. Clean Energy Group CEG is a US-based, NGO that works to accelerate commercialization of clean energy technologies through: • Advocacy & Education • Funds Support • Technology Innovation • New Financial Vehicles www.cleanegroup.org

4. I. Clean Energy Action at the State Level • Renewable Energy Policy in the US is largely driven by state actions • Renewable Portfolio Standards (RPS) and State Purchase Mandates in 20 States and Washington, DC • Renewable Energy Funds in 17 States

5. State Clean Energy Support 28 States + District of Columbia 17 State Funds + DC, 20 RPS + DC, 28 + DC Fuel Cells and Hydrogen, and Carbon Trading States As New Leaders • Explosion of state action: 1990s – 2005 • SBCs, RPS, FCs, climate • Nonpartisan, bottoms-up learning, collaborative • Clean energy is Development • Texas leading; Vermont following “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” -Justice Louis Dembitz Brandeis

6. II. Where Vermont Is Today: Undiversified Portfolio

7. Vermont’s Electricity Portfolio • 47% Hydropower; 34% Nuclear; 4% Biomass • Lower generating emission rates (CO2, NOx, SO2) than other states • Electricity growth: 1 to 2% per year, greater in Chittenden County • Load growth since 1984 fulfilled by renewables: McNeil, Searsburg, small hydro

8. Challenges for Vermont • Replace 550MW of Vermont Yankee and Hydro Quebec Power 2012-2015 • Maintaining low carbon portfolio • More portfolio diversity • Wind siting challenges • Need for distributed generation • Need for more efficiency investment • Volatile wholesale market prices

9. III. New Vermont Renewable Laws:Gaining Control of Vermont’s Destiny • Act 61 & Act 74: Response to Vermont challenges • Legislative objective – stimulate development of in-state renewables, combined heat & power, and efficiency • Goals • Diversify portfolio with renewable generation • Achieve more cost effective efficiency • Promote small-scale, customer-sited generation, especially in load pockets • Induce development of in-state renewable resources • One major failing: focus is only on putting breaks on load growth, not on replacement of power supply contracts

10. Vermont’s New Policy Tools • Renewable procurement requirement • “Sustainably Priced Energy Enterprise Development” or SPEED program • Easier grid interconnection standards for renewables • Elimination of cap on Energy Efficiency Utility budget • Performance-based regulation • Least cost integrated planning requirement for transmission • CHP program • Clean Energy Development Fund

11. IV. Renewables PortfolioStandard WHAT IS IT??? • Requirement on retail electric suppliers… • to supply a minimum percentage or amount of their retail load… • with eligible sources of renewable energy.

12. State Renewables Portfolio Standards and Purchase Mandates – 20 States and D.C. ME: 30% by 2000 MT: 15% by 2015 WI: 2.2% by 2011 MA: 4% new by 2009 MN (Xcel): 825 MW wind by 2007 + 10% by 2015 NY: 24% by 2013 RI: 16% by 2019 CT: 10% by 2010 PA: 8% by 2020 IA: 105 aMW NV: 15% by 2013 NJ: 6.5% by 2008 MD: 7.5% by 2019 CO: 10% by 2015 DC: 11% by 2022 CA: 20% by 2010 NM: 10% by 2011 AZ: 1.1% by 2007 TX: 2880 MW by 2009 HI: 20% by 2020 New since Jan 1, 2004 Significant revision since Jan 1, 2004

13. Potential Impacts of State RPS Policies Are Significant Montana & Vermont not included in tabulation

14. The Early Positive Impacts of State RPS Policies • Texas: Over 1100 MW of wind installed since RPS established • Minnesota: 425 MW wind and 33 MW biomass under original mandate; lots more wind on the way • Iowa: Policy met with 250 MW of wind some time ago • Wisconsin: 140 MW of RE so far, with more on the way • Nevada: Initial procurement led to 277 MW of RE contracts; more since then • Arizona: 7 MW PV, 5-10 MW LFG, 3 MW biomass, 15 MW wind (contract), 20 MW geothermal (contract) • New Mexico: Contributor to 204 MW wind project installed in 2003; additional projects on the way • Massachusetts and Connecticut: Merchant LFG, wind development, biomass repowering and re-development

15. RPS Design Problems • Lack of Long Term Contracts • Major problem in Northeast, where retail competition exists and where renewable energy sources are more expensive • Force Majeure Clauses and Cost Caps • New RPS policies increasingly including a lot of “wiggle room” to possibly allow escape from full compliance (e.g., MT, PA) • Use of Non-Compliance Penalties • Full compliance not being achieved (NV, AZ) or unlikely to be achieved (CA) in some cases… will penalties be used to enforce compliance? • Design Complexity • Will design complexity grind state RPS program to a halt

16. Elegant, cost effective, flexible policy to meet RE targets Poorly designed, ineffective, or costly way to meet RE targets The Most Important Lesson Learned to Date An RPS Can Be A… ? The regulatory design details matter!!!

17. Vermont Procurement Performance Standard • A uniquely Vermont tool – not an RPS • Instead, a “renewable procurement performance standard” to encourage utilities to meet 2005-12 load growth w/ new renewables • PSB to impose RPS in 2013, only if utilities fail to meet incremental loads with new renewable energy from in or out-of-state resources. • Utilities decide whether RPS goes into effect; have choices • Incentive for conservation; DSM is of equal value • Requires PSB to establish system of tradable credits • Since mandatory RPS does not go into effect until 2013, if ever, utilities can sell RECs to neighboring states • Coupled with SPEED program to facilitate in-state renewable projects – PURPA-like program

18. SPEED Program • Attempt to induce in-state renewables development by providing producers with access to long-term contracts at below market prices • Eligibility: In-state renewables and CHP with 65% efficiency • Establish agent to purchase and sell the electricity • Utilities must buy SPEED electricity on pro rata basis • Economic development focus (VEDA link) • Envisions multiple cash flows – electrons, RECs, CHP heat, Vermont Fund incentives – to make projects viable • Reduced regulatory requirements under section 248 • Guarantees utility buyer for long-term contract to assist in financing

19. RPS/SPEED Implementation Issues • Success will depend on simple PSB rules & regulatory process to induce in-state renewables development • Need strong political & utility support; PSB regulatory commitment that is expected to continue over the duration of the policy • Are objectives achievable given state permitting challenges (e.g., wind wars)?; need for clear regulatory pathway • Need for credible enforcement – penalties must exceed cost of compliance • Will producers be enticed to Vermont with below market contracts?

20. V. State Clean Energy Funds • 17 clean energy funds ranging in size from less than $4 million/year to over $135 million/year • Generally created as part of electric utility restructuring, but not always • Managed by state agencies, utilities, and independent nonprofits • Some offer subsidies and grants while others operate like venture capital funds

21. States As New Clean Energy Investors As a result of electric utility restructuring, the states will have over $3 billion to invest in clean energy activities over the next decade. This is one of the single largest sources of new funding for clean energy. Figure 1: Aggregate Annual and Cumulative State Funding of Renewable Energy Programs 400 4.0 Annual, all states (left scale) 350 3.5 Cumulative (right scale) 300 3.0 250 2.5 Billion US$ Million US$ 200 2.0 150 1.5 100 1.0 50 0.5 0 0.0 1998 1999 2000 2004 2005 2006 2009 2010 2011 2001 2002 2003 2007 2008 (Source: Mark Bolinger, Ryan Wiser, Lew Milford, Michael Stoddard, and Kevin Porter: “States Emerge as Clean Energy Investors: A Review of State Support for Renewable Energy”, Electricity Journal, p. 84, November 2001.)

22. State Funds Funding Levels

23. Vermont Clean Energy Development Fund • Dedicated fund to promote renewables, CHP & efficiency • $2.5 million per year from Entergy through 2012 if and when all VY uprate approvals are obtained • Plus $6 million from Entergy as condition of PSB uprate approval • Legislative goal: to diversify power supply • Fund administered by DPS • DPS required to develop 5-year plan • Eligible projects: small-scale residential/business; farm; priority to commercial generation facilities that commit to sell power to Vermont utilities on favorable terms; projects that would not happen without support; public buildings • Look to success of Minnesota precedent

24. Fund Strategic Goals • Accelerate development of renewable energy • Economic development strategy • Flexibility & portfolio of program tools: incentives, market barriers, education, etc. • Tailor to a state’s needs: SPEED program, CHP in Vermont • Longer-term perspective to complement renewable portfolio standards and other policies

25. Strategic Models • Project Development Model: • incentives & grants to directly subsidize project installation (CA, NJ) • Investment Model: • loans & equity investment in companies & projects (CT) • Industry Development Model: • business development grants, marketing support, technical assistance & education to build industry infrastructure (WI) • Research & Development Model: • CA & NY • Combination of Approaches: • MA

26. Funds: Technology Scope/Project Areas • Solar • Wind • Biomass • Distributed Generation • Energy Efficiency • Green Buildings • Public Education • Business Development • Strategic Market Research

27. Common Programs Renewable energy funds are flexible, and allow states to target a multitude of technologies and programs • Financial incentives: production & performance • Capital buy-downs • Equity investment • Project and company financing • Support for green power markets • Consumer education • Research and development grants • Business development support & technical assistance • Market transformation programs

28. Technology-Specific Support: Wind • Common Programs for Wind Projects • Production incentives for large wind projects (most funds) • Technical and permitting assistance (MA, OR) • Rebates for small residential wind (CA, MA, WI) • Assistance to host communities (MA, NY) • Public education (PA) • Wind R&D – offshore wind studies; wind integration studies (MA, NJ, MN)

29. Technology-Specific Support: Solar PV • Common Programs for Solar PV Applications • Buy-down programs (most states) • Low interest loans (NJ, OR) • Technical support (WI, NY) • Installer training & certification (NY) • High-value PV installations (NY) • Low income green housing (MA) • Fundingof PV manufacturers (MA)

30. Technology-Specific Support: Biomass • Programs for Biomass • Incentives & buy-down grants for biogas projects on dairies (OR, WI, CA) • Outreach, technical assistance & feasibility studies (WI) • Business & marketing grants (WI) • Overcoming regulatory barriers such as streamlining interconnection process (OR)

31. Incentive Designs Used by State Funds Are Diverse Source: Ryan Wiser, LBNL 93% of funding is production-based

32. Administration Issues to Consider • How to allow for some risk-taking with fund intended to innovate for long term? • How to balance risk with ensuring return to ratepayers? – need for new definition of return • Not a classic “regulatory” activity: requires new forms of administration • How to balance need for oversight versus flexibility? • How to address tension between political accountability and sound investment criteria?

33. Fund Administration: Many Models • Regulatory Administration – NJ, CA, RI (collaborative model); run by energy regulatory commission • Quasi-Government Administration - public corporation or executive agency – NY, CT, WI • Fund manager is state employee • Oversight varies – board of public/private parties (w/ some utility reps) to no regulatory oversight • Non-profit Administrator - PA (community development financial institution); OR (non-profit organization); IL (community foundation) • Independent control • Public utility commission oversight of budget & strategic plan, but not of specific projects • Board oversight w/ separate investment committee (PA)

34. Innovative Organizational Structures: Taking Best From All Approaches • Organizational Structure: • Energy Trust of Oregon • Independent, nonprofit organization • Utility commission oversight of budget & strategic plan, NOT projects • Programmatic Structure: • Sustainable Development Fund in PA; Mass Renewable Energy Trust • Diverse programs • Market-driven investment approach • Ability to avoid politicization of funding decisions • Capacity to leverage additional capital • Staff with financial expertise

35. VI. Vermont Fund Recommendations • No Single Fund Program is Optimal: Use multiple program designs and be willing to experiment • Goals Should Drive Program Design: Link program design & fund allocation to strategic plan goals (portfolio diversification, SPEED program success, renewable business cluster) • Discretion & Flexibility Can Enhance Success: capitalize on rapid learning about how best to support clean energy markets • Markets for Smaller, Distributed Projects are More Difficult to Build • Working Closely with Utilities Will Prove Critical to Success • Use Fund to Support Other Renewable Programs