Rhode Island’s Renewable Portfolio Standard: A Draft Design Proposal

1. Rhode Island’s Renewable Portfolio Standard:A Draft Design Proposal Robert C. Grace Sustainable Energy Advantage, LLC R.I. Greenhouse Gas Action Plan Renewable Portfolio Standard Working Group December 4, 2002

2. Designing a R.I. RPS • Design Memorandum – Overview • Design Objectives and Principles • The Proposed Design: • RPS Structure • RPS Eligibility • RPS Administration • RPS Interactions with Other Policies • Next Steps

3. Design Memo Structure • For each decision point on RPS design features: • Why is this important? • Relevant benchmarks and best practices • Recommendations and/or design options for consideration

4. Objectives of RPS • Objectives dictate design (e.g. target, eligibility, geography) • 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 • Fish/water quality benefits • Balanced against limiting cost impacts to R.I. customers to politically acceptable level

5. Design Principles • 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 in state and region  Sometimes a balance will need to be achieved between competing principles

6. 1. Structural Issues • Energy vs. Capacity Basis • Structure (2-tier) • Start Date • Percentage Targets • Duration/end-game • Addressing resource diversity • Applicability • Product vs. company • Federal RPS Interaction

7. Energy vs. Capacity Basis • Recommendation: • Energy based purchase obligation as a percentage of retail electricity supplier’s end-use load • Benchmarks and Best Practices: • Energy basis used in nearly all cases • Alternative approach (capacity targets) only used in 2 states with regulated monopoly structure

8. Structure • Recommend 2-tier standard, described as increasing target %, with no more than x% to be met from existing resources • maintenance tier to maintain pre-restructuring contribution of renewables deemed susceptible to closure in competitive market environment (subject to competition from new) • Growth tier to assure increase in renewables (only incremental renewables eligible) • Legislation should give administrator authority to eliminate maintenance tier if supported by future Federal standard

9. Structure (cont.) • Rationale • RI should so its share to support existing infrastructure, but not more than its share • A single tier allowing new and existing to compete head-to-head would likely fail to meet objectives, because either: • Existing renewables from throughout region would flow to RI, few new renewables would result, or • If new renewables set the clearing price, many existing renewables would reap windfalls (higher compliance costs) • Mimicking MA structure (new/incremental, and existing tiers) maximizes regional consistency and encourages market depth and liquidity

10. Start Date • Recommendation: • First compliance period 2005 • Allow early compliance in 2004 for 2005 (only for the growth tier) • Rationale • Need minimum development lead time • Early compliance takes pressure off first year

11. Percentage Targets • Recommendations: • Maintenance Tier: 2.2% based on historic contribution • Overall Initial Target: 3% in 2005, with not more than 2.2% from existing resources [consider rounding up or down] • Annual compliance period • Design Options for Consideration • Option 1: Ultimate Target = 20% by 2020 • Option 2: Ultimate Target = 15% by 2020 • Rates of Increase: 0.5%-1.5%/ year depending on ultimate target, year • Driven by GHG targets tempered by cost impact • Choice between clearly specifying all targets in advance, or providing RPS administrator some discretion to slow the rate of increase after 2010 with significant advance notice • E.g. if non-compliance, penalties, price cap are frequently encountered

17. Duration & End-Game • Two options for consideration: • Option 1: No specified end-date for the policy – indefinite policy • Some discretion for eventual elimination by administrator in far future with advance warning only if clear that renewables market transformed, RPS no longer needed to maintain desired benefits • Option 2: Leave standard at 15% or 20% from 2020 until (at least) 2030, at which point the RPS ends • Rationale: • important that standard be phased out or eliminated in a way that provides regulatory certainty to all involved • Prevents costs from needlessly increasing in later years due to shorter amortization periods/increasing market risk

18. Addressing Resource Diversity • Primary reason to consider: additional resource diversity among renewable resource types • Options include: • Resource bands or tiers • Minimum or maximum contribution limits • Credit multipliers (unequal value) • Downside: • Cost, complexity, ability to meet primary policy goals • Recommendation: no specific features to encourage resource diversity • SBC fund better suited to achieve these goals in targeted manner

19. Applicability • Recommendations: • Apply RPS to competitive electricity suppliers and standard offer and default service providers • Doing otherwise undermines policy objectives, market stability and fairness principles • Other considerations: • Should standard apply to publicly owned utilities? • Often not applied due to jurisdictional issues • What about Block Island? • Apply to self-generators, or exempt from RPS (initially)? • Despite fairness arguments to the contrary, level may currently be too small to justify complexity • Possibly reconsider at standard increases over time (avoid incentive for bypass)

20. Product vs. Company • Recommendation: RPS percentage standard applies to each product • Rationale: • Consumer protection – maintain credibility and viability of voluntary green power market • Promotes credible product differentiation • Consistent with fairness principle • NEPOOL GIS built to support product-level tracking

21. Federal RPS Interaction • Recommendations: • RPS administrator should anticipate & monitor Federal policy efforts on RPS, and be ready to assess interaction issues as they arise, including coordination of accounting and verification mechanisms • Anticipate interaction in legislation • Two options for consideration: • compliance with RI RPS would offset federal RPS requirements, but excess credits cannot be sold elsewhere, (e.g. if RI>Federal, incremental RI % is truly incremental); or • compliance with RI RPS would not offset or reduce federal RPS obligations (RI RPS is truly additive to Federal) Consider eliminating maintenance tier if a Federal RPS adopted that has a similar effect

22. 2. Eligibility Issues • Where can resources be located to participate? • Resource type • Multi-fuel • Definition of new/incremental • Off-grid and behind the meter • Exposure to market forces

23. Geographic Scope • Relevant “Market Area” defined as NEPOOL • A single wholesale market (today) • Alternative #1: Rely on creation of NEPOOL GIS Certificates • All generation within New England, plus imports meeting strict delivered eligibility (e.g. bilateral bundled import of energy + attributes transmitted to NE in real time) receive source-specific certificates • Relaxing rules to allow monthly settlement being considered later this month • Rationale: multiple objectives; policy coordination; consistency with neighbors; deep and fluid markets • Alternative #2: Rely on NEPOOL GIC Certificates plus attributes from upwind New York generation (supported by RECs or other evidence) without requiring energy import • If resources are too short, costs too high… • Requires reliable evidence; currently may not be adequately supported by NY rules, but this may change • Modeling analysis will provide data to aid in decision

24. Resource Type (Definition of Eligible Renewable) • Recommendations discussed in 1st Working Group mtg: • Hydro: • not to exceed 30 MW eligible for maintenance tier; • growth tier limited to incremental hydro generation so long as it does not require any new impoundment • Biomass: • meeting the MA definition of eligible fuels; • no emission requirement other than valid permit; • co-firing with fossil fuels allowed; • MSW excluded. • Solar electric; Wind; Ocean; Geothermal • Fuel cells using renewable fuels

25. Multi-Fuel Resources • Recommendation: Allow as eligible the renewable energy portion of multi-fuel facilities • As per NEPOOL GIS, allow incidental use of fossil fuels in biomass start-up without penalty • Rationale: • Provide important benefits, fuel diversity at low incremental cost • GIS prepared to support this feature • Open for consideration: apply emissions requirements on overall facility, as Massachusetts has done? • Based on objectives, we recommend no specific emissions limitations (will still need to meet local air permits)

26. Definition of New/Incremental • Recommendation: Based on recommended structure, and for regional consistency, mirror the Massachusetts treatment: • Generation with Commercial Operation after 12/31/1997 • Vintage generation at eligible plants above historical baseline generation (1995-1997 average) • Treat as vintage generator any plant on a site with renewable generation between 1995 and 1997 • Addresses potential complications with new fuel at existing facilities, expansions, retrofits, repowering, moving equipment, etc.

27. Off-grid and Behind-the-Meter Generators • Recommendation: • So long as generator is certified as eligible… allow off-grid and customer-sited renewable energy facilities that are located in Rhode Island, as long as supported by the NE-GIS • Question: include Block Island? • Presume that owner of DG unit has initial title • Rationale: • in both cases, renewables generation is typically offsetting other, more traditional sources of electricity • minimal administrative complexity

28. Exposure to Market Forces as an Eligibility Basis? • Recommend only consider excluding resources not exposed to market due to inclusion in regulated rate base or which result in stranded cost mitigation to non-RI customers • To assure incrementality, avoid unneeded transfer payment • Options for consideration: • Place no requirements on eligible generators on this basis • recommended due to administrative complexity, difficulty in drawing clear line • For “existing resources” only - apply an “exposure to market forces” standard on existing facilities • could be addressed in generator certification step • Default presumption of non-eligibility, with possibility of waiver • Burden of proof on generator to demonstrate

29. 3. Administrative Issues • Oversight and Administration – Who? • Accounting and verification • Certification of generator eligibility • Compliance filings • Penalties/cost caps • Flexibility mechanisms

30. Oversight and Administration – Who? • Roles: • Design detailed rules and adapt over time (if needed) • Verify compliance • Rule on eligibility • Enforce compliance • Recommendation: Rhode Island PUC as primary oversight and administrative body for the RPS • Rationale: jurisdiction, ability to enforce, interaction with disclosure (potential) • Alternative: State Energy Office, but only if well-coordinated with PUC

31. Accounting and Verification • Recommendation for geographic scope alternative #1: • Use NEPOOL GIS system to maintain regional consistency • For geographic scope alternative #2 (adding NY generation): • Rely on a compatible REC registry or GIS • Must support unbundling; does not currently exist but being studied

32. Certification of Generator Eligibility • Recommend applying the MA RPS process to qualify eligible generators through advance filings • Issue statement of qualification (within 90 days of application) • Supported by spot checks, audit powers, rights to withdraw certification, advisory rulings • Where eligibility is the same, allow utilization of Massachusetts qualification results • Rationale: • Regional consistency • Limits admin burden • Clarity and certainty for market • NEPOOL GIS check-box

33. Compliance Filings • Recommend following MA approach: process for annual compliance filings of REPs, due July 1 following each compliance year • Rationale: • Supported by NEPOOL GIS reports, regional consistency • Filing details for each compliance year: • MWh sales to RI end-use customers (total, by product) in compliance yr • Current-year renewable energy attributes allocated to those sales • GIS reports confirming ownership • For transactions not included in GIS, document independent verification consistent with specified protocol • Identify (a) attributes allocated from early compliance, (b) banked compliance, (c) alternative compliance credits, (d) attributes banked for future compliance • Additional documentation required for Non-NEPOOL attributes under geographic scope alternative #2

34. Penalties/Cost Caps • Recommendations (mimics MA approach): • Establish “alternative compliance mechanism” of 5¢/kWh • Funds collected to be provided to the RI SBC administrator to support maximum quantity of eligible renewable facilities • Require compliance plans for those that fail to comply • Rationale: • Regional consistency, market stability, avoid inter-state arbitrage • Provide certainty of demand to developers & investors • Consider requiring compliance plans for SO & DS providers as a matter of policy • Assure progress being made • Otherwise, lack of clear signals to developers, investors & middlemen regarding plans of biggest players stifles investment

35. Flexibility Mechanisms • Rationale is strong, due to characteristics of renewables, and challenges to bringing new renewables on-line • But must avoid conflicts with other regional requirements, green market claims • Recommendations – “must haves”: • Annual settlement period • Banked compliance for two subsequent compliance periods, capped at 30% as done in Massachusetts (new only) • Could consider greater banking percentage • May be helpful: • Early compliance allowance for 2004 for “new” tier, to meet 2005 requirement (Could be eliminated if found too complex) • Deficit banking unnecessary with alternative compliance

36. 4. Interaction between RPS and Other Policies • Contracting Standards for SO/DS Providers • System-Benefits Charge Interaction

37. Contracting Standards for SO/DS Providers • Recommendations: • Require long-term contracting for at least a portion of SO and DS supply (for at least a small portion of the supply representing the RPS percentage) • apply to the DISCo itself, or to contract w/ DS and/or SO suppliers • Different contracting standards, contract terms may be appropriate for SO and DS, given their distinct terms, volumes (level and certainty), trends, and commitments for commodity electric supply. • Require annual compliance plan filings by the DISCO, addressing: • how DISCO plans to meet objectives of creating stable markets; minimizing costs to rate payers; maximizing term commitments to support financing new renewables • how procurement plan interact with pre-existing electric energy commitments

38. Contracting Standards for SO/DS Providers (cont.) • Administrator (PUC) should be empowered by RPS legislation to address issues of reasonableness of cost, prudence and cost recovery • Consider whether reasonable to provide the DISCO with some earnings upside for procuring effectively, minimizing cost of RPS to customers.

39. System-Benefits Charge Interaction • Ignoring interactions (RPS eligibility and targeting/use of SBC funds) can: • add costs for RI customers without adding benefits • create inefficiencies and unnecessary windfalls • Recommendations: • RI RPS should remain largely silent on SBC interactions • RI & other SBC administrators in region should consider establishing standards & guidance for interaction • e.g. target SBC funds to renewables that would not thrive under RPS • e.g. prospectively prohibit generators receiving substantial SBC funding from use for RPS compliance • RI RPS administrator should be given discretion to address interaction directly if major inefficiencies arise in the future

40. Left for Next Time • Future changes • Treatment of Emissions Credits in Cap and Trade Environment

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