California’s Renewable Energy Credits (REC) Market Update

1. California’s Renewable Energy Credits (REC) Market Update Sara Kamins California Public Utilities Commission March 30, 2012

2. Presentation • California’s 33% RPS Legislation • Progress towards achieving RPS goals • Our RECs policy

3. About the California Public Utilities Commission • The CPUC regulates privately owned electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies. • CPUC mission: to ensure safe and reliable services at just and reasonable rates, with a commitment to environmental enhancement and a healthy California economy.  • Five Governor-appointed Commissioners • CPUC implements the RPS for California’s retail sellers: utilities, energy service providers, community choice aggregators I am an advisor to CPUC Commissioner Mark Ferron

4. CPUC Renewable Energy Programs Utility Scale (generation sold to the utility) Customer Side (generation used onsite*) • Renewables Portfolio Standard • Annual RPS solicitations / bilateral negotiations • Renewable Auction Mechanism • Feed-in Tariff • Utility Voluntary Solar Programs • California Solar Initiative • Self-Generation Incentive Program • * and can be net metered with utility • Renewable Energy Credits (RECs) are used to determine compliance with the RPS • RECs represent the renewable and environmental attributes of renewable energy generation. • Qualifying Facilities • (PURPA)

5. 33% RPS becomes law in 2011

6. 33% Law Overhauls RPS Framework • CPUC adopted over 40 decisions to implement 20% RPS • We are in the process of modifying most program rules to implement new 33% RPS law, including: • Targets and timetables • Eligible products (e.g. bundled transactions, RECs) • Compliance rules (e.g. banking) • Cost containment • Contract terms and conditions • Standards for reviewing utility contracts with renewable facilities

7. So, what’s our progress so far?

8. We have added much renewable generation IOU self-reported RPS percentages: 2010 2011 PG&E: 15.9% 20.9% SCE: 19.3% 21.07% SDG&E: 11.9% 20.80%

9. We are on our way to achieving 33% 33% 25% 20%

10. RPS market continues to mature rapidly 2011 RPS solicitation was very robust • >3,000 pricing proposals (~1,000/IOU), up 250% from 2009 • ~500,000 GWh/yr bid, up more than 300% from 2009 • ~2% of all proposals were shortlisted (~14,000 GWh/yr) • ~50% of shortlisted projects are solar PV; ~25% wind • Average price for 1st quartile bids (~250 projects) was <$100/MWh • Overall bid prices were down ~30% from 2009

11. Solar PV and Wind Dominate 2011 Bids

12. What REC products can retail sellers buy to comply?

13. CA’s Tumultuous REC History • RPS as initially implemented only allowed bundled RPS procurement transactions (RECs + energy) • In 2008, CPUC adopted a REC definition for RPS compliance • From the end of 2008 through 2010, CPUC issued many versions of proposed decisions to authorize REC-only transactions • Meanwhile, CA Legislature was working on 33% RPS bills • In January, 2011, CPUC finalized REC rules for the 20% RPS program and in March 2011, Legislature adopted 33% RPS legislation overhauling the RPS rules

14. Problem Statement • California’s RPS is regional in scope • However, there are rules limiting the transfer of intermittent renewable generation across balancing authority areas • To overcome these limitations, developers “firm and shape” –RPS energy is consumed locally outside CA, fossil energy is imported instead and “matched” with RECs • There are MANY ways to execute this type of transaction, and to the extreme, they be unbundled REC deals • These transactions have different ratepayer value than bundled and unbundled REC products • We needed a clear way to distinguish RPS products and eliminate loopholes

15. 33% Law Creates Three Categories • Bundled • RPS facility is directly interconnected to CA balancing authority • RPS facility has a dynamic transfer agreement • RPS generation is scheduled hourly into CA without substitute energy • Firmed and Shaped • The buyer purchases energy and RECs from RPS facility • RPS energy is available to buyer; not sold back to generator • Incremental substitute energy is imported within calendar year • The substitute energy is acquired after the RPS energy is contracted for and before the renewable energy is generated • Other, including Unbundled RECs Source: CPUC Decision (D.)11-12-052, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/156060.PDF

16. Procurement Limits • This new classification system will apply to all RPS contracts and ownership agreements executed after June 1, 2010 • ≥ 50% must be from category 1 in first compliance period, rising to 75% in the third compliance period • ≤ 25% can be from category 3 in the first compliance period, falling to 10% in the third compliance period • Statute also has limitations on banking unbundled REC and short-term transactions

17. Have we resolved the issue? • Mostly Yes – with the 33% legislation and CPUC’s decision adopted, we have officially finalized the policy. We have resolved the market uncertainty issues. • But the market response is not yet crystal clear– market is digesting the rules and working to make sure they will have sufficient information about their transactions to meet the requirements for the intended category

18. Sara Kamins • Advisor to Commissioner Ferron • California Public Utilities Commission • smk@cpuc.ca.gov • 703-1388 • For more information: • www.cpuc.ca.gov/Renewables