On March 29, 2011, the California Assembly passed Special Session Senate Bill 2 (“SBX1 2”) amending the state’s existing Renewables Portfolio Standard (RPS). SBX1 2 calls for 33% renewables by 2020, which is the most ambitious RPS target in the nation. The full text of the bill is available here.1
Prior to the passage of SBX1 2, California RPS law — originally passed in 2002 and accelerated in 2006 — provided that all retail sellers of electricity must increase the amount of renewable energy they procure each year by at least 1% until 20 percent of their retail sales are served with renewable energy by December 31, 2010. Governor Schwarzenegger called for 33% renewable electricity by 2020 — first in November 2008 and again in September 2009 — but multiple legislative attempts to implement this goal failed prior to the passage of SBX1 2. SBX1 2 has been submitted to Governor Brown, who is expected to sign it.
Major Changes to the California RPS Program
SBX1 2 makes several changes to the existing RPS program in California. Some of the most substantial changes include:
Portfolio Requirements: Retail sellers must procure 20% of their electricity from eligible renewable resources by December 31, 2013; 25% by December 31, 2016; and 33% by December 31, 2020. To meet these portfolio requirements, all retail sellers will be required to procure a balanced portfolio of electricity products from eligible renewable resources. (Pub. Res. Code § 25740; Pub. Util. Code §§ 399.11, 399.16(c), (e))
Publicly Owned Utilities: While the prior version of the RPS law excluded local publicly owned utilities (POUs) from the 20% portfolio requirements (and instead required each POU to adopt a portfolio standard of its own choosing), SBX1 2 now extends most RPS requirements to POUs. Responsibility for implementation of the RPS, however, lies with the POUs’ governing board rather than with the California Public Utilities Commission (CPUC) which oversees RPS implementation for investor-owned utilities (IOUs). The California Energy Commission (CEC) and California Air Resources Board (CARB) will each have some enforcement authority over POU’s compliance with the RPS. (Pub. Res. Code § 257419(a)(2)(C)(ii); Pub. Util. Code §§ 399.12(h)(3)(D)(i), 399.30)
Delivery of Energy: SBX1 2 clarifies the two ways to transmit out-of-state renewable energy into California for RPS purposes: direct transmission and dynamic transfers. With direct transmission, electricity is scheduled from the eligible facility directly to a California grid balancing authority area, such as the area served by the California Independent System Operator (CAISO), without substituting electricity from another source. With dynamic transfers, arrangements are made between a non-California balancing authority and a California balancing authority which permit interchange scheduling that transfers all, or a portion of, the actual, real-time electricity output of a specific generator located in the non-CA balancing authority area into a CA balancing authority area. The CAISO is in the process of making changes to its tariff relating to dynamic transfers. Materials are available here.2
Directly transmitted energy can also be firmed and shaped within the calendar year. In other words, intermittent renewable energy may be backed up or supplemented with delivery from another source to meet customer load. However, retail sellers are limited in the amount of firmed and shaped renewable electricity products providing incremental electricity that can count towards their RPS compliance. Additionally, retail sellers can use non-renewable sources to provide real-time ancillary services to directly transmitted electricity, but only the fraction of the schedule actually generated by the eligible renewable facility will count towards RPS compliance. (Pub. Util. Code § 399.16(a)(b))
Renewable Energy Credits (RECs): SBX1 2 maintains the same basic definition of a REC as existed in prior legislation: “a certificate of proof. . .that one unit of electricity was generated and delivered by an eligible renewable energy resource,” that “includes all renewable and environmental attributes associated with the production,” except for emissions reduction credits issued by a California air district or any credit or benefits associated with reduction in solid waste from use of biomass or biogas. However, the new law limits the ability to earn RECs from hydroelectric generation facilities and combustion of municipal solid waste. (Pub. Util. Code § 399.11(h))
Unbundled or Tradable Renewable Energy Credits (TRECs): Retail sellers can satisfy their RPS requirements through “unbundled renewable energy credits.” The percentage of a retail seller’s procurement requirements that can be met with unbundled RECs declines over time: up to 25% through 2013, up to 15% through 2016, and up to 10% thereafter. (Pub. Util. Code § 399.16(c)(2))
In the original RPS legislation, the CPUC had the ability (but not the mandate) to authorize the use of TRECs. In January 2011, the CPUC issued its final decision which also authorized the use of TRECs.
Procurement Plans: IOUs and other electrical corporations must annually prepare a renewable energy procurement plan to be reviewed and adopted by the CPUC as part of the general procurement plan process. (Pub. Util. Code § 399.13)
Cost Limitations: SBX1 2 requires the CPUC to establish a limitation for each electrical corporation on the procurement expenditures for all eligible renewable energy resources used to comply with the RPS, which replaces “market price referent” provisions under the prior RPS law. In developing each cost limitation, the CPUC would be allowed to consider only: the most recent RPS procurement plans; procurement expenditures that approximate the cost of building, owning, and operating renewable resources; and the potential of project delay or cancellation.
If new procurement by an IOU would exceed this cost limitation, the utility may refrain from entering into new contracts or constructing facilities, unless eligible renewable resources can be procured without exceeding a de minimis increase in rates, consistent with the utility’s general procurement plan. It remains uncertain to what extent these provisions will allow utilities to escape strict compliance with the RPS obligations. (Pub. Util. Code § 399.15(c)-(g))
Utility-Owned Facilities: SBX1 2 clarifies that an IOU can construct, own and operate new renewable facilities to meet a portion of its RPS obligations — an amount up to 8.25% of a utility’s anticipated retail sales. To do so, the IOUs must apply for approval from the CPUC and meet new certification requirements, including demonstration of reasonable costs for the rate-payers and comparable or superior value when compared to recent procurement contracts. (Pub. Util. Code § 399.14)
Although SBX1 2 sets a clear direction for California’s renewable policy, the means of its implementation and its consequences are far from certain. At least four separate entities will continue to develop regulations and policies to implement the RPS, and will continue to do so under SBX1 2: the CEC, the CPUC, the CARB, and the CAISO. Additionally, serious questions remain regarding retail sellers’ ability to comply with the steep requirements, given difficulties in permitting new facilities and transmission shortages. But, for the foreseeable future, California will most likely remain a strong market for renewable energy — both within and outside of the state’s borders.
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This article was originally published by Bingham McCutchen LLP.