RECs, RTOs and RPSs: The Three Rs of Renewable Energy

RECs, RTOs and RPSs: The Three Rs of Renewable Energy Paul N. BelvalDay, Berry & Howard LLPCityPlace IHartford, CT 06103 (860) 275-0381pnbelval@dbh.comDecember 14, 2005

Background: RTOs (Regional Transmission Organizations) • Administer and operate wholesale power markets and transmission systems • Typically multi-state • Federally regulated by FERC (except ERCOT)

Background: RTOs Source: Federal Energy Regulatory Commission

Background: RPSs (Renewable Portfolio Standards) • State statutory requirements • Certain percentage of generation portfolio from renewable resources • Periodically increasing targets • Defines “renewable energy” for each state • Imposed on various load serving entities • Enforced and administered at state level, typically by PUC

Background: RPSsRenewable Portfolio Targets Source: Pew Center, Updated August 2005

Background: RECs (Renewable Energy Certificates/Credits) Source: EnergyPulse.net

Active REC Tracking Systems • Life span of RECs generally dependent on banking requirements of state RPS

REC Tracking Systems Under Development • Western Renewable Energy Generation Information System (“WREGIS”) • Will cover the 11-state Western Interconnection • RFP released on Sept. 19, 2005; Bid submittal deadline: Feb. 3, 2006 • New York • Initially contemplated system in 2009, but now considering earlier implementation • Summer 2005 Program Opportunity Notice issued by New York State Energy Research and Development Authority (“NYSERDA”) • Midwest Renewable Energy Tracking System (“M-RETS”) • Will cover Dakotas, Illinois, Manitoba, Minnesota and Wisconsin • Two year initiative to design and implement by end of 2006

Advantages of Using RTOs as Basis for REC Tracking Systems • Readily Available Source of Generation Data • Existing Technical Staff and Expertise • Economies of Scale among Multiple States • Forum for Stakeholder Input and Consensus Building

RTOs and REC Trading Systems “In regions where there are state-established Renewable Energy Credit trading programs to monetize the value of renewable energy, the ISO/RTOs – including ERCOT, ISO-NE and PJM – are administering renewable energy credit trading programs, providing low-cost, high value services that benefit renewable resources and improve electricity retailers’ ability to offer ‘green’ electricity products cost-effectively.” -The Value of Independent Regional Grid Operators, a report by the ISO/RTO Council November 2005

Challenges of Using RTOs as Basis for REC Tracking Systems • Federal/State Regulatory Issues • Differing RPS requirements • Cost Allocation and Collection Issues • Seams Issues

Challenges: Regulatory Issues • RPSs and RECs are creations of state law • (American Ref-Fuel Company, et al., 105 FERC ¶61,104 (2003)) • Environmental compliance is primarily the role of state regulators • (New England Power Pool, et al., 103 FERC ¶ 61,304 (2003)) • RTOs are generally regulated at federal level; RPSs and RECs are regulated at state level • Need for cooperative relationship between RTOs and state regulators outside of traditional regulatory context • RTOs had already created model for this relationship to some extent

Challenges: Regulatory Issues (cont.) Solutions: • NEPOOL • Working Group comprised of representatives of NEPOOL participants, environmental and utility regulators and ISO representatives formed to design system and draft and amend operating rules. Only NEPOOL participants took part in hiring of APX to develop and administer system • PJM • State Agency Advisory Committee that provides input on GATS design and operation • ERCOT • Not federally regulated • PUCT appointed ERCOT as program administrator

Challenges: Differing RPS Requirements • RPSs define “renewable” fuel sources differently • RPSs cover different areas (e.g. labor characteristics in Massachusetts) Solution: • PJM and NEPOOL have “lowest common denominator” systems that are policy neutral

Challenges: Cost Allocation • Majority of RTO stakeholders not subject to RPS • REC tracking systems not FERC jurisdictional and not RTO-related costs Solutions: • NEPOOL • Costs allocated to LSEs subject to RPS • Presumed LSEs recover costs through rates or competitive charges • PJM • PJM EIS – Separate corporate entity to capture and allocate costs to GATS subscribers • Subscriber fees – annual fee and transactional fee • ERCOT • Costs included in ERCOT budget and collected through ERCOT fee – no separate fees

Challenges: Seams Issues • Rules for moving RECs between RTOs are evolving • NEPOOL • RECs must be imported with energy • Imports from adjacent control areas only • Hourly matching with imported energy with NERC tags • “Green” energy only • PJM • Imported RECs without energy if pre-qualified by a PJM state • Conversion of RECs from compatible system • Monthly matching with imported energy with NERC tags • ERCOT • Only Texas generation and out-of-state generation serving Texas load exclusively eligible for RECs

Systems in development are not being developed by RTOs • New York – NYSERDA and NY Public Service Commission • WREGIS – California Energy Commission, Western Governors Association and WECC • M-RETS – Great Plains Institute, Center for Resource Solutions and Izaak Walton League of America • Sources of generation data?

RECs, RTOs and RPSs: The Three Rs of Renewable Energy