United States: California Poised to Embrace Tradable Renewable Energy Credits

The Climate Report - Winter 2011

California's Renewables Portfolio Standard ("RPS") program promotes the development and use of renewable energy by requiring the state's load-serving entities to meet a targeted percent of their load obligations with energy generated from renewable resources. The California Public Utilities Commission ("CPUC") is responsible for ensuring that California's load-serving entities meet their RPS targets. Historically, the CPUC has only permitted use of "bundled" renewable energy credits ("RECs"), meaning RECs transferred with renewable energy delivered to California load, for RPS compliance.

Transition to a Bundled and Tradable REC Compliance Regime. In March 2010, the CUPC issued a decision that authorized California's load-serving entities to also procure and use "tradable" RECs, meaning RECs unbundled from the underlying renewable energy, to meet their RPS compliance obligations. The CPUC stayed its decision shortly after it was issued, amid petitions from California's largest investor-owned utilities and independent power producers asking the CPUC to scale back some of the restrictions the decision imposed on the use of tradable RECs. The CPUC is scheduled to address its tradable REC policies at its January 13, 2011 open meeting, and based on alternative proposals that have been circulated in the proceeding, the CPUC may implement the substance of the March 2010 decision, subject to a few clarifications or modifications.

Once the CPUC acts, parties will be able to use tradable RECs to help meet their RPS obligations, although in the first few years of implementation, the CPUC will treat bundled RECs and tradable RECs as slightly different RPS compliance mechanisms. For example, California's three largest investor-owned utilities will be permitted to use only tradable RECs for up to 25 or 30 percent of their RPS compliance obligations until the end of 2011 and possibly longer. Also, all investor-owned utilities will be subject to a $50 price cap on tradable RECs for some initial period.

In addition, load-serving entities will have limited ability to "earmark" tradable RECs to help them avoid penalties for failing to satisfy their RPS compliance requirements. Earmarking allows an RPS-obligated entity to designate RECs that will be produced and delivered in a future year to make up shortfalls in RPS procurement for the current compliance year. Bundled RECs will remain eligible for earmarking. In many other respects, however, bundled RECs and tradable RECs will be treated interchangeably for RPS compliance purposes.

Producing and Using Bundled and Tradable RECs. Parties interested in producing or acquiring bundled RECs will have to establish that the generator from which the RECs are produced is delivering its energy to a California balancing authority. To do so, the generator can either interconnect to the Western Electricity Coordinating Counsel transmission system in a California balancing authority area, or dynamically transfer its energy to a California balancing authority through dynamic scheduling or a pseudo tie arrangement. The CPUC may also recognize firm transmission arrangements as another method for verifying that energy is delivered to California load, but it has not yet developed this approach.

Meanwhile, tradable RECs will be obtainable through almost any other REC transaction or contract. An entity will be able to acquire tradable RECs through transactions that expressly convey RECs and not energy, or through transactions that convey both energy and RECs, but where the energy associated with the RECs does not serve California load.

Of course, tradable RECs, like bundled RECs, will only be useful for RPS compliance if they meet other RPS requirements. For example, the facility producing the RECs must meet the California Energy Commission's RPS-eligibility and certification requirements. It also must register with the Western Renewable Energy Generation Information System, and the RECs it produces must be tracked in that system. Any generator located in the Western Electricity Coordinating Counsel transmission system will be able to produce tradable RECs, provided it meets the other RPS requirements. All RECs, whether bundled or tradable, will be available for RPS compliance only if used within three years of production.

The CPUC's decision on tradable RECs, expected in early 2011, will provide parties with more flexibility to meet their RPS targets and, importantly, create longer-term incentives for the development of renewable generation projects both inside California and in the western U.S. In the near term, however, parties should expect that once the CPUC votes to allow the use of tradable RECs, California's demand for this type of REC will exceed supply and that most available tradable RECs will come from short-term deals with existing RPS-eligible facilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.