On October 31, 2008, the Department of Energy Resources ("DOER") issued its Imports Feasibility Study (the "Report"), finding that it is not feasible to implement a capacity commitment or netting requirement for generators seeking renewable energy credits ("RECs") in Massachusetts for energy imported into ISO-NE. The Report is mandated by subsection 105(g) of the Green Communities Act (the "Act"), which directs DOER to determine the feasibility of implementing two subsections, 105(c) and 105(e), governing the eligibility for RECs for energy imported from outside the ISO-NE control area. Subsection 105(c) would have required an importer to commit its capacity to the Forward Capacity Market (the "FCM"). Where an entity has generation assets both inside and outside ISO-NE, subsection 105(e) would have netted the entity's energy exports against renewable energy imports when calculating the number of RECs that may be sought. Although the Report concluded that both provisions are not feasible to implement as drafted, it proposed a series of recommendations designed to capture what DOER believes is the policy behind those subsections. Those recommendations may appear as part of DOER's new regulations governing renewable portfolio standards ("RPS"), due to be promulgated by January 1, 2009. Although the contours of those regulations are unknown, the Report's proposals indicate potential new business opportunities and regulatory risks for renewable energy generators.
Import Requirements Pose No Clear Violation of Dormant Commerce Clause
DOER rejected the assertion made by several stakeholders that implementing subsections 105(c) and 105(e) would constitute a clear violation of the Dormant Commerce Clause. After noting uncertainty about what standard of review might apply if those subsections were challenged, the Report ultimately concludes that the presumption of the Act's constitutionality is not overcome. Whatever limits the Dormant Commerce Clause might impose on energy import rules, the practical importance here is muted by DOER's determination that neither the capacity commitment requirement nor the netting requirement is feasible as drafted.
DOER Finds Capacity Commitment Requirement Not Feasible for Intermittent Resources
DOER found two barriers to implementing the capacity commitment requirement, related to (1) the intermittency characteristic of many renewable technologies, and (2) the physical limitations of the tie lines connecting ISO-NE to adjacent control areas. FCM rules attempt to accommodate intermittency-related difficulties, but only for internal resources. The FCM rules exempt wind, solar, and other intermittent renewable resources located within ISO-NE from the "availability penalty" by which a resource can be disqualified if it is consistently not available during shortage events. There is no such exemption for intermittent resources outside ISO-NE. The result, the Report found, was that intermittent resources external to ISO-NE could be disqualified from participating in the FCM and consequently become ineligible for RECs. DOER further concluded that requiring external intermittent resources to participate in the FCM could negatively impact system reliability, since such resources would displace more predictable generators seeking space on the tie lines connecting ISO-NE with adjacent control areas.
DOER Finds Netting Requirement Not Feasible
The Report found that the data necessary to support the netting requirement is not available, thus implementing that provision is not feasible. As the La Capra Study commissioned by DOER explains, "the data necessary to track contractual relationships would not be available", and disclosure of the limited data that are collected poses substantial confidentiality problems. Moreover, it is unclear whether ISO-NE has the legal authority to ask market participants for the additional information needed to net exports against imports. Lacking any means of compelling this information, DOER concluded that it could not feasibly implement the netting requirement as drafted.
Scaled-Back Recommendations from DOER
Although the Report concluded that neither the capacity commitment nor the netting requirement could be implemented, DOER proposes several recommendations that have important business implications for generators internal and external to ISO-NE. Concluding that intermittent resources are better utilized as energy resources rather than capacity resources, DOER suggests requiring only non-intermittent resources to commit their capacity to ISO-NE in order to qualify for RECs. Specifically, the Report recommends that internal and external non-intermittent resources – those with a capacity factor greater than 50% – commit their capacity by submitting a Show of Interest by July 14, 2009 and subsequently clear into the fourth Forward Capacity Auction ("FCA4") for the period beginning July 1, 2013. The 50% capacity factor threshold proposed by DOER means that the obligation to participate in the FCM would affect only a subset of renewable technologies, including some landfill gas, biomass, and anaerobic digester facilities. By contrast, wind, solar, and eligible hydro projects would likely be exempt from having to participate in the FCM. It is unclear what capacity factor, and thus what FCM participation requirement, would apply to marine renewables such as wave and tidal generation. If the new RPS regulations adopt this recommendation, the result would likely be greater compliance burdens for non-intermittent projects.
Adopting the recommended capacity commitment requirement for non-intermittent resources could also have revenue impacts. Although the FCM presents potential revenue opportunities for participating resources, there is some risk that the capacity commitment requirement suggested in the Report would result in price suppression. Beginning with FCA4, there is no minimum clearing price for generators bidding to participate in the FCM. Thus, a non-intermittent renewable resource may need to bid $0 in order to clear into the FCM and earn RECs. It is not clear how substantial this risk is, largely because even if the recommendation were adopted the price impact would be tied to the volume of low-cost renewables bidding into the FCM. La Capra Study at § 1.8.4. Whereas non-intermittent resources might be required to participate in the FCM, the Report suggests that DOER "explore the possibility" of using long-term contracts to procure energy (rather than capacity) from intermittent resources. The relative value of FCM revenue and long-term energy contract revenue is unclear, but if these recommendations are adopted they could provide competitive advantages for certain projects.
The Report also appears to acknowledge the policy behind the netting provision, which it reads as a preventative measure against "greenwashing", the practice of importing energy into a control area to claim RECs and then exporting that energy (or an equivalent amount) to another control area. To protect against such conduct, DOER proposes to adopt a self-certification procedure whereby generators would be required to attest that they will not engage in greenwashing either directly or through an affiliate or contracting party. Although DOER lacks the data necessary to monitor each generator for such conduct, an investigation would begin if information were obtained that "greenwashing might have occurred over a material time period." What records an entity keeps regarding energy sales by generation assets internal and external of ISO-NE may be an important tool in the event of such an investigation.
Although it is unclear precisely how renewable energy imports will impact the New England energy markets, the recommendations presented in the Report suggest potential business opportunities – and regulatory risks – that might accompany the new RPS regulations.
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.
