By Sandy Beauregard, Director of Sustainability Services
Renewable portfolio standards (RPS) are regulatory mandates that require a percentage (or absolute MWh amount) of the electricity supplied in a given state be generated from renewable resources by a target date. Iowa was the first state to enact an RPS in 1983. As of September 2020, 38 states, the District of Columbia, and 4 U.S territories have a renewable portfolio standard or renewable portfolio goal. RPS have proven to be an efficient market-based tool for states to meet renewable electricity goals that serve to diversify energy supply, incentivize domestic electricity production, reduce greenhouse gas emissions, and provide economic benefits such as job creation, development of new industries, and increased tax revenue.
Due to industry economic conditions, renewable portfolio standards have typically been met through utility-scale wind projects. In response to this, some states have created incentive structures or “carve outs” to boost other renewable industries and further diversify electricity supply. Some states have also categorized renewable resources into different classes depending on the technology or whether the generating resource is new or existing. There is significant variation in renewable portfolio standards between states as each state has adopted a program suited to their specific energy goals, renewable resource availability, and political and economic conditions. States continue to update their RPS, with 16 states enacting higher targets in the last five years. Approximately half of the growth in renewable electricity in the United States since 2000 can be attributed to renewable portfolio standards and RPS-driven demand will require an additional 90 gigawatts of renewable electricity by 2030.
Figure 1: 2030 state RPS targets
A renewable energy credit (REC) is a market-based instrument that represents the rights to the environmental, social, and other non-power attributes of renewable electricity generation. RECs are issued when one megawatt-hour (MWh) of electricity is generated and delivered to the electricity grid from a renewable energy resource. Electricity suppliers can comply with renewable portfolio standards by:
- owning a renewable energy project and retaining the electricity and associated RECs,
- purchasing energy and associated RECs from an eligible project built by a third party, or
- purchasing the RECs, but not electricity, from an eligible renewable project (unbundled RECs)
Unbundled RECs allow the purchase and sale of RECs among generating resources and electricity suppliers in different geographic regions. However, most state RPS programs have geographic eligibility criteria that require generation sources to be located in-state or within the same regional electricity grid. To achieve compliance, the RECs must be retired to ensure that they cannot be sold again and double-counted. If an energy supplier does not procure enough RECs to comply with the state’s renewable portfolio standards, it must make an Alternative Compliance Payment (ACP) to the state as a penalty.
What Is the Impact of Renewable Portfolio Standards?
To comply with renewable portfolio standards, retail electricity suppliers incur additional costs to procure RECs, enter into power purchase agreements, or to build and operate new renewable electricity facilities. These costs are passed through to ratepayers, incrementally increasing electricity supply costs above what they would otherwise be in the absence of an RPS. Many states have adopted mechanisms to limit the cost impact for consumers. The latest evaluation available from the Lawrence Berkeley National Laboratory indicates that RPS costs averaged 2.6% across retail electricity bills in 2019 in states with renewable portfolio standards and ranged from 0.5% to 4.5%. With many states setting more aggressive RPS targets in recent years, compliance costs are expected to increase even as the cost of renewable electricity continues to decrease. In New England, compliance costs in 2040 are projected to range from under $10/MWh in New Hampshire, which has the lowest RPS target in the region, to more than $30/MWh in Massachusetts.
Figure 2: Total estimated RPS compliance costs by state 2020-2040 ($/MWh)
Because renewable portfolio standard compliance costs are passed through to consumers as part of the retail electricity supply rate, there is no way to avoid these added costs. However, renewable portfolio standards have also created a market for RECs, allowing you to participate as either a buyer or a seller. For some entities, the ability to contract as an offtaker from a renewable electricity project can help offset the higher supply rates. Long-term offtake contracts are critical for a developer to secure financing and build a new renewable generator, which means those participating as offtakers create additionality—the development of new renewable electricity and a change to the overall power generation mix that wouldn’t have happened in the absence of that investment. There are several renewable procurement pathways available and CES is well suited to provide technical assistance with the solicitation and evaluation of proposals due to our expertise with forward energy markets, developed during the course of thousands of energy commodity procurement actions on behalf of our clients. Our efforts are never designed to “sell” a project but only to provide unbiased information and recommendations grounded by economic analysis.
If you own or are considering an onsite renewable generation project such as onsite solar, you may be able to sell or retire the associated RECs. In compliance markets, like those that cover much of the Northeast, RECs have significant positive value that can be sold to generate revenue and offset project costs or avoid the need to purchase additional RECs to meet carbon reduction goals. CES provides sustainability consulting services related to onsite generation feasibility studies, incorporating our knowledge of forward energy markets and regulations to develop a detailed 20-year pro forma, a commonly oversimplified component of renewable energy project financial analysis. We help clients understand the many different factors that influence REC pricing, including changing compliance regulations, and asses how the sale of RECs could maximize the value of onsite renewable or efficient generation systems.
Renewable portfolio standards have endured for nearly 40 years because they have proven to be an efficient, cost-effective, market-based strategy to meet renewable electricity goals. These policies do have a direct impact on consumer electricity prices, but a well-designed RPS includes measures to mitigate cost increases and ensure costs are borne fairly by all ratepayers. Increasing amounts of renewable electricity supplied to the grid, driven by RPS, are a critical part of climate change mitigation. Additionally, they create a more secure and diverse energy supply that relies on domestic resources, reduce the volatility of electricity prices, and stimulate economic growth through job creation and increased tax revenue. The compliance REC market allows onsite renewable or efficient generation systems to generate revenue or offset costs through the sale of these high-value RECs. Work with your Energy Services Advisor to understand exactly how changing RPS targets are projected to impact your electricity supply rate and any opportunities to participate in the compliance market to save money and meet your own carbon reduction goals.