Crafting a Renewable Portfolio Standard for Rhode Island

1. Crafting a Renewable Portfolio Standard for Rhode Island Robert C. Grace Sustainable Energy Advantage, LLC R.I. Greenhouse Gas Action Plan Renewable Portfolio Standard Working Group October 15, 2002

2. Designing a R.I. RPS:Overview • RPS – definition & experience • First Steps in RPS Design: • Objectives & Design Principles • Starting Point • Key decision points • Other issues to be addressed • Overall Work Plan

3. RPS Mandates in Practice • A requirement for retail electricity suppliers to support (or source from) a defined percentage of retail sales from eligible renewables • Market based: encourage competition to meet targets at lowest cost • Experience to date: 13 states have adopted RPS or similar mandates • 7 retail choice states: AZ, CT, ME, MA, NV, NJ TX • 3 regulated states: IA, MN, WI • Newest just adopted in CA • 2 other states have similar mandates on the provider of last resort: NM, PA • Under consideration: several other states; Federal • Distinguishing features of successful mandates becoming apparent  best practices

4. Objectives of RPS • Objectives dictate design (e.g. target, eligibility, geography) • Lack of clear objectives hinders creating effective design • Proposed Objectives for R.I. (by priority): • Substantial greenhouse gas reductions • Local and regional air emission co-benefits • Providing a hedge against volatility and enhancing energy security • Not recommended: • Local economic development • unrealistic due to land-use constraints, and the wrong tool for the job (SBC) • Stimulating renewables markets • RI too small to transform markets alone – RPS wrong tool (SBC) • Fish/water quality benefits • e.g. options for achieving GHG, air benefits become limited, costs increase, feasibility questionable if hydro with dams or reservoirs totally excluded • Goals balanced against limiting cost impacts to R.I. customers

5. “Obvious” Design Principles for Best Practices • Leads to desired environmental benefits • Complementary with competitive market structure • Cost-effective and efficient at meeting objectives • Credible • Enforceable • Applied fairly, consistently and proportionately to all market participants and customers • Predictable (market stability, reduced perception of regulatory risk) • Consistent with other regulations  Sometimes a balance will need to be achieved between competing principles

6. Key Design Issues and Decision Points • For each decision point on RPS design features: • Why is this important? • Relevant benchmarks and best practices • Recommendations and/or design options for consideration • Goal: • reach definitive decisions (if possible), OR • identifying scenarios for modeling the potential impacts

7. Historical Contribution of Renewables to R.I. Estimate: 1997

8. Decision Point #1:The RPS Structure • Background: Is objective simply verifiable incremental emission reductions resulting from particular actions, or actual achievement of net emission reductions? • The answer dictates treatment of existing resources & vintage • In competitive markets with significant existing renewables, existing renewable resources have been included in RPS structure to prevent “backsliding” • Historical baseline dictates both structure and percentage targets. • Benchmarks & Best Practices: Options include 2-tier or single tier • 2-tier approaches use “growth” & “maintenance” tiers, two alternative approaches • Growth tier has rapidly increasing percentages over time: • CT, NJ: “Class 1” includes environmentally preferable technologies with low historical penetration • MA: “new” (post-restructuring) plus incremental generation from a cleaner subset of existing biomass • Maintenance tier (roughly stable percentage): • CT, NJ: “class 2” includes all renewables (e.g. most hydro, biomass, MSW) not eligible for Class 1 • MA: (tentative) would establish “baseline” requirement for existing renewables, broader eligibility • Single tier likely to fail in RI… without universal RPS requirements, renewables flow from elsewhere and now incremental benefit likely to result • CA & WI give credit but not value for existing renewable supply (not tradable), will not work in competitive market • Recommendations/Options: Use a 2-tier approach for RI • Seek some regional consistency • Consider historical contributions and eligibility

9. Decision Point #2:RPS % Targets: Magnitude, Starting Point, Rate of Increase • Background: % target depends on: • Answer to #1 • Objectives • Eligibility (e.g. broader eligibility = higher targets) • Other Important considerations: feasibility; ensuring competition at the outset; ensuring certainty in amount of current supply • Benchmarks & Best Practices: • MA: starts its “new” RPS in 2003 @ 1% + ½%/yr through 2009, +1% thereafter until stopped; “baseline” requirement not yet established, but 2000 study indicates baseline of 5.7-13.3% of sales, depending on eligibility issues not decided at the time • CT: “maintenance” RPS requires 5.5% from Class 1 or 2 in 2000, ramps slowly to 7% in 2009. “Growth” Class 1 tier ramps from 0.5% in 2000, at first slowly then more steeply to reach 6% by 2009\ • CT legislature considering a 2-year delay while it fixes a problematic loophole • CA: 1% annual increase over existing level (~10%) until reach (and maintain) 20% • Recommendations/Options: RI should: • Start requirement with sufficient lead time for development (2004?) • base its targets on (a) answer to #1; (b) eligibility decisions, and (c) specific CO2-equivalent emissions reductions targets (translated to energy terms based on displaced emissions)

10. Decision Point #3:Geographic Eligibility • Background: • Global environmental objectives suggest seeking GHG reductions from anywhere (may be less costly if implemented far from RI) • Local environmental objectives dictates constraining eligible location to regional (to achieve reductions in smog, acid rain, etc.) • Benchmarks & Best Practices: • NEPOOL GIS creates certificates for compliance with regional RPS, disclosure and EPS mandates, for all generation within NE, and for “source-specific” energy transmitted into NE • Recommendation: • Seek displacement of generation within NEPOOL, RI’s electric market (NEPOOL GIS is consistent with this recommendation) • Costs could be further reduced (if analysis suggests too high) by expanding eligibility to upwind regions (e.g. NY, Mid-Atlantic) • But such expansion undermines objectives of regional resource diversity and energy security, and may assure that few if any renewables are built in NE

11. Decision Point #4:Treatment of Biomass • Background: • Local air quality objectives suggest narrow (e.g. low-emission, advanced biomass) eligibility; broader environmental benefits suggest broad (e.g. any biomass). Decision impacts % targets, cost, feasibility • Major potential biomass source is renewable fraction of co-firing biomass at fossil fuel plants • Many “low-emission advanced conversion technologies” still in early R&D or quite costly • Benchmarks & Best Practices: Precedent for different eligibility btw. “growth” & “maintenance” RPS • CT & NJ: “sustainably managed” biomass (difficult to define) eligible for the Class 1(along with landfill methane), while all other biomass eligible as Class 2 (including MSW) • MA: new: narrow biomass eligibility as “low-emission advanced conversion technologies” (proven difficult to precisely define… case-by-case determinations); excludes MSW. Maintenance eligibility not yet defined (but would include MSW) • ME requirement all-inclusive (including MSW, co-firing) • Co-firing: MA has allowed co-firing, but as entire plant must meet “low-emission” requirement, effectively foreclosed co-firing at coal plants which has the biggest environmental benefit • Recommendation: Based on recommendation 2-tier approach: • Maintenance: all-inclusive definition of biomass eligibility, potentially including MSW, for a maintenance tier • Growth: depends on the structure chosen, but eligibility must be realistic with respect to technology availability and cost, and feasibility for meeting desired targets • Critical to be more precise, clear than MA and CT (consider emissions threshold) • Co-firing has significant benefits and should be included in both tiers

12. Decision Point #5:Treatment of Conventional Hydro • Background: • Role of hydro dictated by balance of air versus other environmental benefits, answer to #1. • Conventional hydro (not pumped storage) plays substantial role in region’s supply mix, provides substantial air and diversity benefits. • Some facilities have non-air impacts of major concern to some stakeholders • Many large plants have low O&M costs, not exposed to closure at market prices • Many other plants cannot meet O&M costs with available revenues • However, size is not the only determinate of cost and viability • Benchmarks & Best Practices: hydro eligibility can be broad, narrow, or excluded - clearly an open issue • MA: excluded hydro from its new, included “naturally flowing water and hydroelectric” in broader definition to which maintenance requirement would apply • CT: all licensed hydro in Class 2 • NJ: (on an interim basis) all hydro under 30 MW as class 2 • ME: all hydro under 100 MW • The RI draft bill excluded hydro • Most Federal RPS proposals have excluded hydro, or given it some form of partial credit • Recommendations: Consider: • Maintaining historical contribution of hydro through eligibility in the maintenance tier • Eligibility exclusion to avoid windfalls to those plants not requiring additional revenue to continue operation • Incremental hydro not requiring new impoundment in growth tier

13. Decision Point #6:Treatment of Resources “Not Exposed to Market Forces” • Background: For existing renewables, does the resource need financial support to continue providing benefits? • may wish to consider eligibility exclusion for resources with long-term PURPA contracts which confer certificates to buyer, or IOU-owned renewables included in captive customers’ rate base (i.e. where not open to competition) • Benchmarks: • NJ: Hydro and waste-to-energy qualifies as Class II only if located in a state that allows retail competition • Options: Depends in part on previous decisions. • Administrative challenges to determining with precision which resources are exposed • % targets for a maintenance tier might have to be adjusted if such exclusions were made

14. Decision Point #7:Eligibility of Off-Grid, or Customer-Sited Renewables • Background: • Off-grid resources don’t directly offset grid-based fossil fuels • but may displace electric loads if alternative to line extension or displacing off-grid fossil-fueled generation usage • Customer-sited grid-connected renewable generation clearly creates benefits sought • Benchmarks & Best Practices: • MA allows off-grid & customer-sited generation if located in MA • Recommendation: So long as supported by the NEPOOL GIS… • Allow off-grid generation if located in RI; • Allow customer-sited generation if located in (a) RI, or (b) NE,

15. Decision Point #8:Interaction with Federal RPS • Background: • Federal RPS being considered • Should define how Federal and State RPS would interact • RI RPS is likely to be higher standard than Federal • Benchmarks & Best Practices: WI: Only RPS to consider interaction (so far)… • Generation used to meet Federal RPS may also be used to meet WI RPS if WI-RPS-eligible • Excludes generation used for other state RPS even if also required by Federal RPS • Options: The interaction depends on the specifics: • If Federal RPS passed that provides sufficient support to serve the role of a “maintenance” RPS tier by protecting the historical contribution of renewables the region, may be acceptable to do away with, phase out or reduce RI maintenance tier • RI should consider whether the RI RPS should be additive to Federal RPS or whether compliance with the RI RPS by a retailer should offset, supplant, or be incremental to any Federal RPS requirement

16. Decision Point #9:Contracting Standards for Utility (DS/SO) Supply • Background: In competitive markets (particular those with generation divestiture) where utility supplier selected via short-term bids, few (if any) credit-worthy parties positioned to offer contracts of sufficient term to allow financing of new renewables • Especially important where renewables are scarce and more costly • Benchmarks & Best Practices: • CA & NV require long-term contracting by regulated utilities to assure financing… emerging as a best-practice • Has been recognized by many as biggest problem with MA new RPS • Recommendations/Options: • PUC should implement requirements for procurement of RPS portion of default and standard offer supply (or just corresponding certificates) over sufficient term to support the ability for renewables to get financed • Consider a minimum 10 year contractual commitment requirement

17. Energy basis (not capacity) Line loss treatment Eligibility: retrofits/expansions Fuel cell w/non-renewable fuel Penalties & price caps Use of penalty/cap funds Exemptions? Applicability (Munis, self-generators) Product vs. company basis Compliance flexibility Certifying generator eligibility Administration, tracking & compliance mechanism SBC Interaction (cost, eligibility) Treatment of emission credits Future changes (eligibility, target) Minimum duration & end game Other Issues to be Addressed in 1st Draft Anything else important that I have missed?

18. Preliminary Work Plan:Going Forward • Finalize RPS design work plan, finalize RPS objectives, & get direction/decisions on key issues, or identify modeling scenarios @ Mtg#1 • RPS Design Outline distributed ~ late October • Distribute 1st Draft Findings & Recommendations Memo on RPS design features & options based on best practices and objectives ~ 1 week before Mtg#2 • Discuss 1st Draft Memo, identifying modifications & options requiring further discussion, research or analysis @ Mtg#2 • Distribute 2nd (revised) Draft Findings & Recommendations Memo based on input at MTG #2 and modeling results ~ 1 week before Mtg#3 • Identify key next steps: revised legislation; implementing regulations; compliance/verification options @ Mtg#3 • Discuss 2nd Draft Memo, identifying modifications@ Mtg#3 • Distribute 3rd (final) Findings and Recommendations Memo based on input at MTG #3 and modeling results ~ 2-4 weeks after Mtg#3 • Note: more steps may be added if funded -- e.g. political feasibility analysis, drafting enabling legislation & implementation regulations

19. Sustainable Energy Advantage, LLC4 Lodge LaneNatick, MA 01760tel. 508.653.6737fax 508.653-6443bgrace@seadvantage.comwww.seadvantage.com