renewable portfolio standards: landscape, strategies, cost
TRANSCRIPT
Renewable Portfolio
Standards:
Landscape, Strategies,
Cost Control
Robert C. Grace
Sustainable Energy Advantage, LLC
RAP Workshop for CT DEEP & PURA
September 20, 2012
Sustainable Energy Advantage, LLC
Practice Areas
• Power market and public policy analysis,
tracking, development & implementation.
• Strategy development.
• Financial analysis & economic feasibility
• Renewable Energy supply & procurement.
• Quantitative analysis and modeling.
• Transaction facilitation, contract development
and negotiation support.
• Business infrastructure development.
• Green power product development & pricing
Services • Interdisciplinary consulting &
advisory services (regional &
national)
• New England Renewable
Energy Market Outlooksm
(REMO) subscription briefings
• New England Eyes & Earssm
Regulatory, Policy & Legislative
Tracking and Analysis
Subscription Service
1
Mission: Sustainable Energy
Approach: Sustainable Advantage
We help build Renewable Energy Businesses, Markets, Policies & Projects…
through Analysis, Strategy & Implementation
My Relevant Regional RPS
Experience • Design: MA, RI, NY (IL)
• Studies: MA, CT (CCEF, CEAB), RI, VT, WI, CA, NV, OH, and
national RPS best practices study
• Other involvement: IL, CA, ME, NH, NJ
• Support for Stakeholder Processes: MA, RI, CT (CEAB RPS Study),
NY
• Extensive work with CCEF on Project 150
• Market analysis (ongoing, since late 2005): New England
Renewable Energy Market Outlook (REMO) fundamentals analysis
(a subscription service that DEEP subscribes to)
• (also – private sector work, market analysis and other consulting work – for disclosure &
perspective)
2
Policy Objectives…
(Should) Drive:
RPS & Complementary Policy Design Choices Objectives….
RPS Generator Location & Technology Eligibility
Permissive vs. Restrictive
3
Typical Renewable Energy
Policy Objectives 1. General RE Objectives
• Reducing:
– Emissions
– Fossil fuel use
– Other environmental impacts
– Volatility
– Long-term prices
• Increasing:
– Fuel diversity
– Energy security
– Reliability
– Regulatory risk
2. Additional Targeted “Tilt”
Objectives
• Technology Policy:
Encouraging emerging
technologies
• Local economic
development
• Diversity among RE
technologies
4 Source: Grace, R., D. Donovan & L. Melnick, When Renewable Energy Policy Objectives Conflict: A Guide for Policymakers. NRRI (Oct. 2011)
“Additionality”
Constraints:
•Accomplishing Objectives cost-effectively
(cost containment/control)
•Interstate Commerce Clause
Conflicting Objectives, Emerging Patterns
Best Bang for the Buck (Least-Cost)
Local Benefits
Emerging Technologies
Diversity
Ubiquitous tension
Dynamic, can be unstable
Regulators &
Agencies,
Ratepayers
Legislators
5
Most Common Policy Approaches to
Address Conflicting Objectives…
• (Hybrids) or “P-in-P” of…
• ‘Pure’ RPS +
• Procurement via LT Contracts
(financing, sometimes tilt)
• RPS Enhancements – tiers, set-
asides, multipliers, eligibility tilts
(geographic, emerging tech. pref.)
• Complementary ‘tilt’ policies
“Pure” RPS does
not support ‘tilt’
objectives
Source: Grace, R., D. Donovan & L. Melnick, When Renewable Energy Policy Objectives Conflict: A Guide for Policymakers. NRRI (Oct. 2011)
Least Cost, Regional
“Tilt” Policies:
In-state or Emerging Tech.
Preferences
CT Utility-Owned solar, LT Contract RFP,
CT Residential PV Program MA Commonwealth Wind & Solar
In-State OSW Development & Contracting Policies;
RFPs & Bilateral Purchases
VT FITs, CT ZREC/LREC procurements,
RI DG Standard Offers
Solar REC Carve-outs, Virtual Net Metering,
Community-based RE Pilot
NESCOE Regional Procurement (?)
Pushes for new ties, increased imports,,
eligibility expansion (lg. hydro)
Appetite for cost premium of Tilt
policies?
Long-Term Contracting Policies (RI, MA)
2012 New England Snapshot: Dearth of Financing Constrains Large Projects, States Tilt toward DG
CT LREC,
ZREC, Res PV
& 30 MW utility-
owned ~35%
of CT-I demand,
while indirectly
reducing targets
Policy-Driven or
Approved LT
Contracts:
Supported much
of 2010-2013
supply
Scarce
opportunity now for
most cost-effective
RE to get financed
a real barrier
6
Policy Objectives of RE Tilt Policies
7
Support Category
Mechanisms Emerging
Tech.
In-State
Generation
In-State
Manufacturing
RPS Solar or DG Tiers
RPS Credit Multipliers
RPS Geographic Eligibility
Targeted RPS Eligibility
Enhanced Net Metering
Feed-in Tariffs & Standard
Offers
Renewable Energy Fund
Programs
Long-Term Contract
Procurement Policies
Community-Based Programs
Local Content Requirements
CT
uses….
RPS Overview
8
Renewable Energy Support Dominant U.S. Policies
Tax Incentives
• Shift relative cost
• Fed PTC, ITC
• (State)
RE Funds (State)
• Reduce risk, barriers or costs
• State System Benefit Charge (SBC)/Public Good Fund (PGF)
• Grants vs. Performance-based
Renewable Energy Portfolio Stds. (RPS)
• Create market
• States
Federal
• PTC
• ITC in lieu of PTC
• ITC
• Expired:
• Cash grant in lieu of ITC
• Loan guarantees
• Grants (ARRA)
Emerging State/Regional
• Solar RPS tiers
• GHG Cap & Trade
• Revenue certainty
• Long-term contracting
• Feed-in-tariffs (FITs)
• ‘Aggregate Net Metering’
• Siting/permitting reform
Future Federal?
• RPS?
• GHG Cap & Trade?
9
Major Demand-Driving RE Policies
PAYMENT
STRUCTURE
SET A PRICE SET AN ENERGY
GENERATION
TARGET
Performance Based
Incentive (PBI)
Standard Offer PBI (e.g. Feed-in Tariff)
Renewable Energy
Quantity Obligation (e.g. RPS Program)
Capacity-based
incentives
Up-front Payment
Standard Offer
(e.g. grant or rebate)
-
Expenditure-based
incentives
Up-front Payment
Standard Offer (e.g. Federal
Investment Tax Credit)
-
10
With or without
revenue-stability
mechanisms
What Is a Renewable Energy Portfolio
Standard (RPS)?
• A requirement on retail electric suppliers…
• to supply a minimum percentage or amount of
their retail load…
• with eligible sources of renewable energy.
…Typically backed with penalties of some form
…Often accompanied by a tradable renewable energy
credit (REC) program, to facilitate compliance
…Never designed the same in any two states
11
Traditional ‘Pure’ RPS: A Regulatory Requirement that Uses a Market Mechanism
RPS Policy Pros
• Known quantity
• Favors least cost
commercial RE
technologies
• Best bang for the buck
• Competitively neutral
• Low admin. burden
• Fits restructured &
regulated markets
RPS Policy Limitations
• Unknown cost
• Price volatility/instability
• Difficult financing without
long-term contracting
• Little support for
emerging technologies
• Lack over control of
where
12
RPS Typically Comes in 2 Shapes…
Growth (offense)
• More, new, incremental
• Increasing targets
• Creates a competitive market to attract investment
• Dynamic
Maintenance (defense)
• Prevent attrition of pre-existing generators
• Stable targets
• Often binary… either near maximum or minimum price
• Can be unstable... fixed % target to support ‘new’ without LT contracts once met, price crashes
13
… Lots of Flavors Key RPS Design Elements Vary Substantially
Structure, Size and Application Structure (e.g., single tier or multiple tiers)
% targets & timeframes
Duration of purchase obligation
Resource diversity requirements/incentives (e.g. set-asides or multipliers for emerging or favored technologies)
Eligibility
Geographic eligibility/delivery requirements
Resource type eligibility
Eligibility of existing renewable generation
Definition of new/incremental generation
Administration Compliance verification mechanisms (RECs or
contract-path)
Enforcement mechanisms
Price/cost caps/ACPs
Flexibility mechanisms (banking, borrowing, etc.)
Implementing future changes to the RPS
Long-term contracting standards
Interactions with other renewable energy and
environmental policies
14
…and Different Market Structures
Regulated Markets
• Dominated by long-term ‘bundled’ contracts for
electricity and RECs
• Utility RFP solicitations or bilateral negotiations
15
Hybrids (MA, CT; RI; ME)
• Growing attention on contracting approaches for
regulated providers of last resort
Restructured Markets
• More often dominated by short-term trade in RECs to multiple parties, without PUC oversight
• Developers often sell electricity and RECs separately
Central Procurement
• Government-directed agency conducts
procurement for RPS (NY, IL)
Obligated
Entities =
LSEs
Role for EDCs in contracting,
procurement or collections
Resource Type & Geographic Eligibility Dictates type, quantity, location, cost of RE that get built, & benefits
• Most complex & contentious design issues
• Pervasive tensions :
– Local RE or emerging tech. more RE at lower cost
– Broader access . higher revenues (attract investment)
• Resource owner/investor/trader incentives threaten
stability
– If shut out lobby for change (access)
– If included lobby to exclude (keep prices from crashing)
• Policymaker challenges
– Establish (initial) eligibility based on various criteria, objectives
– Balancing stability vs. accommodate technological advance
– Understanding implications & filtering the lobbying
16
Common Design Pitfalls
• Poorly Balanced Supply-Demand – S>>D: low prices, can’t increase RE supply
– D>>S: high costs, undermines political support
• Policy Instability (duration, targets, eligibility) impedes commitment, investment
• Inadequate Enforcement
• Lack of Long-Term Contracts – Lack of Creditworthy Long-Term Purchasers
– Long-term contracts usually required for financing
• Insufficient Duration and Stability of Targets
• Design Complexity
• Transmission Bottlenecks
17
RE Project Economics:
the Big Picture
18
Levelized Cost of Energy
(LCOE) $/MWh or ¢/kWh
Capital
Costs
Operating
Costs
Financing
ParametersTax Inputs Incentives Performance
A metric for comparing
project revenue
requirements, with the
value of electricity
produced
(similar to a long-term
contract price over
economic life of
project)
Up-front $
Ongoing fixed &
variable
Cost of capital, capital
structure, financing
requirements
Cash Flow
Pro forma
Renewable Energy Cost
19
Renewable Energy Costs
• Most (non-fuel) RE
technologies:
– Capital-intensive
– Low marginal cost
– Strong economies of project
scale
• Amortization of up-front
costs
– Revenue certainty, finance
• Technologies:
– Mature vs. emerging
– Role of innovation (cost,
materials, O&M costs)
– Performance (examples)
• Solar (efficiency)
• Wind (capacity factor) (height,
length, low-wind production)
• Biomass (efficiency, CHP,
scale)
• Offshore wind (competent
reliability for harsh environment,
O&M strategy)
– Scale economies of
production
• Especially for ‘manufactured
technologies’
20
REC “Spot” Markets Unstable, Fragmented
What Determines Spot REC Prices?
Source: Evolution Markets; LBNL; Spectron
Expectations! – Economics
– Eligibility
– Shortage or surplus
– Banking
– Caps & Floors
– Cost of Entry
– Regulatory &
Legislative risk
perceptions
21
• Cost of entry & competition:
– Gap between ‘cost’ (revenue
requirement) & commodity revenues
• Energy, capacity (ancillary services)
• Impact of energy prices (volatile)
• Role of carbon price
• Federal policy/incentives
• Transmission cost, allocation
• What REC price will it take to get the next
cheapest new renewables financed?
– Supply curve – Available Supply sorted from lowest to highest
renewable premium
– Demand curve
• RPS targets vertical line (?)
Drivers of Long-Term REC Prices for Growth Tiers (new RE)
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
- 500 1,000 1,500 2,000 2,500 3,000
REC
Pre
miu
m $
/MW
h
Cumulative GWh
Sample NE Supply Curve
marginal resource
required to clear the
market long-term REC
price for market entry
22
RE Economics Also Encompass Costs
and Benefits Beyond the Power Plant • Cross-Subsidy
– Limitation on net metering
• Transmission
– If far from load centers
– Bottlenecks
– Needed for access to balancing
resources and markets
– Key issues:
• How to get built?
• Who pays? (cost allocation)
• Intermittent Generation (wind, solar)
– Can only supply portion of portfolio
– Integration
– Key issues:
• Can other resources ramp to
accommodate variability
• Added costs to maintain reliability
• Who pays?
• Storage
– Can increase potential penetration.
– Key issues = high cost, limited potential
to move large amounts of energy over
time
• Price Suppression
– Reduced demand for fuel-burning
generators by adding low-variable cost
resources reduces spot market prices for
all
– Natural gas
– Capacity?
• (minimum offer price rule would reverse this
potential impact)
• Externalities: Costs & Benefits
– Value of reduced external costs
– Value of avoided losses, T&D investment
23
Long-Term Contracting for
Renewables
24
Why Long-Term Contract Policies?
• Generators:
– Access to financing
– Lower cost of financing
– Lack of credit-worthy counterparties
– Limited options for effectively hedging long-term revenue
streams at reasonable cost
• Load:
– Hedge/stability
– Reduce cost
• State:
– Influence where projects get built (and economic benefits
accrue) [mandate vs. tilt]
– Influence ‘favored’ technologies
25
Why Long-Term Contracts?
Financing • Investment decisions based on evaluation of risks vs. return
• High risk = high return, or don’t invest
• Risks: demand, and “renewable revenue” (REC value) is
largely a political/legislative/regulatory creation, subject to
rapid and unpredictable change
• Policy-makers can increase or reduce risk
• Long-term Contracts can:
Overcome inability to attract financing
Lower cost of financing by reducing (real and perceived) risk
26
Why not? Arguments against LT contracting policies?
• Appropriateness of shifting risk?
– most risks still with generator in per-MWh contract structure
• Risk of price being too high if costs go down
– ‘stranded cost’ vs. stranded benefit
• Incompatibility with market structure (retail choice)
– Competitive issues
• Customer migration risk
• Imputed debt to buyer? (maybe)
27
How to minimize the cost of financing
RE?
Identify and mitigate risk
28
• Policy Maker Influence = Policy Maker Ability to Increase or Decrease Risk
• The decision to invest is an evaluation of the combined risk relative to the return
• In general, the greater the risk the higher the required return
This, and following slides from: Corfee, Karin, W. Rickerson, M. Karcher, B. Grace, J. Burgers, C. Faasen, H.
Cleijne, J. Gifford, and N. Tong. KEMA. Feed‐In Tariff Designs for California: Implications for Project Finance,
Competitive Renewable Energy Zones, and Data Requirements. California Energy Commission. Publication
Number: CEC‐300‐2010‐006. Sacramento, Calif.
Risks Associated with RE Financing that can be
Mitigated with Long-Term Contract Policies
29
Risk Mitigation Strategy RFP FIT
Revenue Adequacy of revenues to provide target
returns
Revenue volatility
Long-term fixed-price
contract for both energy and
RECs
Contract Price
Risk
Setting a firm power purchase price
before development contingencies are
resolved and project costs fully known
Minimize time gap between
finalizing project costs and
financial closing
?
Development
(Contracting)
Investment in development, proposal
development, contract negotiations
without yielding off-take agreement
Assured access to off-take
contract
Development
(Timing)
Project will be delayed or not be
completed at all
Missed milestones increase (1) cost of
development capital, risk of achieving
permanent financing; (2) exposure to
contractual penalties (liquidated
damages), loss of security, off-take
contract termination risk
Clearly defined process for
siting, permitting and
interconnection
Off-take contract (contract
for the sale of electricity
and/or RECs) flexibility in
commercial operation date
?
Adapted from: Presentation to 2009 California Energy Commission IEPR Workshops, Feed-in Tariff Design Implications for
Financing of Renewable Energy Projects Over 20 MW, by KEMA, Inc., Deacon Harbor Financial, L.P., Meister Consultants
Group, Inc., Sustainable Energy Advantage, LLC (May 28, 2009)
Policy Can Dictate Financing
Structure, Cost of Capital, Tenor • Duration of revenue certainty, stable policy/market Structure
– More debt leverage, longer tenor lower LCOE
– Amortization of fixed costs over longer period lower LCOE
• Tax incentives
– Constrain who are equity investors
– Less debt?
• Types of investors
• Scale
• Standardization
• Leases
• Syndication
• Aggregation
30
Illustrative Impact of Expiring Federal Incentives,
Revenue Stability on RE Premium (gap)
Longer terms can
offset some of
potential of Fed
incentives
Hedge Value, if
prices increase
(e.g. shale gas
environmental
constraints, carbon
C&T, economic
upturn)
31
#s are not current, for
illustrative purposes only
Laboratory of the States: Complementary Programs to Help
Achieve Objectives
32
Massachusetts Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
LT RE Contracting Program
Sec. 83 (pilot), 83a (recent
extension)
Supports RE-related
transmission (also studying central proc.)
LT RE Contracting Program
Carveout for DG<6 MW Excl.
wind, solar
Eligibility expansion (low-
impact hydro added to class
I, up to 30 MW)
Aggressive virtual net
metering, to 6+% of load ?
RPS Solar Carveout
MA CEC rebates, feasibility,
design & constr. grants (wind,
solar, hydro)
?
Utility-owned PV (limited)
DG Interconn. streamlining
Commitment to NESCOE
Regional Coord. Proc. Achieve scale econ,
support RE-related Tx.
33
Rhode Island Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
RES LT Contracting
Legislation
(PV, OSW
included)
Requires substantial
direct econ. Benefits to RI (can be met be reducing
cost to ratepayers)
LT RE Contracting
Program Offshore Wind In state waters (pilot proj.)
or adj. Fed waters
Distribute Generation
Standard Offer (cost-based
LT Contracts, 40 MW total)
Solar, wind (ADG, hydro
to come)
Virtual net metering for
municipalities Limited impact after
recent change
Interconn.streamlining
Renewable Energy Siting
Partnership –planning,
infrastructure, inventory
Ocean SAMP– streamline
siting OSW
Renewable Energy Dev.
Fund grants ?
34
New Hampshire Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
Ad hoc approval of
utility-initiated LT
contracts
Contracts have been
with in-state
generators
ACP $ spent on DG
grants & rebates
Streamlined one-stop
siting
North Country
Transmission
Commission
Studied ways to get
RE-driven
expansions of
northern NH Tx built,
funded
35
Maine Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
Long-Term Contracting for
Capacity & Associated
Energy
Doesn’t include
RECs Only 2 contracts, further
efforts appear unlikely.
Have been with in-state
Generators
Community-based
Renewable Energy Pilot
Program
Revenue options incl.150%
REC premium or 10-yr fixed
price contract (like FIT)
Wind Siting Law (expedited
areas); Siting Reform
(shifting all major reviews
to DEP)
LT PPA program with deep-
water OSW or tidal
projects (up to 30 MW)
3 MW tidal contract
approved; 12-MW floating
OSW pilot PPA under
consideration
Governor’s Ocean Energy
Task Force, pilot projects
Transmission corridors
commission To enable leasing of
publicly-owned corridors,
incl. for RE-related Tx
36
Vermont (has no RPS) Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
SPEED DG Standard Offer
program (expanded from
50 MW to 127.5 MW over
10 yrs) Cost-based Feed-in
Tariffs for proj. up to 2.2
MW
SPEED
targets
Utilities may sell off RECs
to LSEs in other states
SPEED long-term contract
(bundled) program –utility
bilateral contracts
Utilities may sell off RECs
to LSEs in other states
Clean Energy
Development Fund grants,
small scale renewable
energy incentive program
Law to expedite
development of in-state
hydro projects @ existing
dams
37
Connecticut Objective
Policy
Help achieve
RPS targets
Minimize
Cost
Local
Benefits
Emerging
Tech
Other
ZRECs/LRECs (so far) looks to be well-
designed, substantial
contribution to meeting RPS
incremental demand
Utility-owned RE(FC & PV)
Project 150
(Now defunct except for a
few pending legacy
projects.)
for
Biomass
project
Policy had many effective
features; Biggest flaws in
process were extensive time
lag between offer and approved
contract, and lack of method to
kick out non-performers
Emerging tech grant/rebate
programs (PV, CF, on-site)
Solar PV RFP
IRP and related long-term
procurement provisions
from PA 11-80
? ? ? ?
Commitment to NESCOE
Regional Coord. Proc.
38
NESCOE Coordinated
Regional Procurement • Challenges:
– Few long-term contract opportunities
– Scale: Large regional projects (best scale economies) >> annual demand of any buyer
– ISO projects much new transmission needed to access regional wind potential
– RPS cost impact depends on funding model, marginal resources, contracting approach
– Path to funding required transmission unclear
• Summer 2012 NE Governors commit to ‘significant’ coordinated regional
procurement of renewables among states
• NESCOE released draft work plan with ~ 2 yr timeline to contract approvals • To create ‘scale’ procurement, tap large, lowest cost regional supply including assoc. TX
– MA appears committed to contribute at least part of their Sec. 83A procurement (4% of load)
Commitment from other states is unclear.
– CT final IRP references participation
– States can opt-in out; Interest from other states uncertain
– Quantity undefined.
– Appears unlikely any supply could result before mid-2016
– Could go a long way to meeting regional objectives for most of forecast horizon.
39
50%
of C
ape W
ind
NY RPS Central Procurement (2004)
• Structure:
– NYSERDA Periodic competitive RFPs
– 10-year fixed price REC contracts
– 70/30 price/economic development benefit scoring
– Funded via SBC-like collection from EDC’s T&D customers
• Motivation
– Assist financing state goals/RPS
– Reduce compliance costs
– Encourage in-state economic benefits (tilt)
• Results & observations:
– Lot’s of MW built; generator frustrations with process; geographic equity
– Generators left with substantial commodity price risk risk premium in pricing
• Lessons learned: LT Contracts can work with the right ingredients
• Looking forward – PSC has (and may again) consider CfD-like approach
(lower cost + hedge), longer purchase duration
40
Successful , Proposed or Promising
Cost Control Measures
• Cost Caps
• Target Adjustment
• Stability
• Eligibility
• Long-term Contracting
• Coordinated Regional Procurement
• Financing
41
Cost Caps Challenge: Traditional RPS has Unbounded Cost.
State RPS Models Cap Costs in Different Ways
• Regulated: PUC oversight,
approval of PPAs
• LSE-based in Restructured
Markets: price or rate caps,
penalties or Alternative
Compliance Payments (ACP)
• Central Procurement:
– NY: a set budget based on
regulator pre-approved collections
amount procured varies, driven
by price (low price = buy more,
high price = buy less)
– A benchmark or reserve price,
analytically-defined, above which
won’t buy…
42
Note: NH just reduced it’s NH-I
ACP to fall between MA-I/RI-
new/ME-I and CT-I
All NE RPS policies use
ACP to cap price – an
effective approach
Adjustment of Targets Challenge: With increasing targets, supply & demand could diverge
high ACP reliance and cost impact.
• Goal: avoid S-D divergence without destabilizing markets
• Best Practices in NE: allow only subtle changes with ample notice, to allow supply to
catch up to demand
• RI RES
– Periodic resource adequacy assessment (Jan. 2010, 2014)
– PUC may open a docket to determine the adequacy, or potential adequacy, of RE supplies to
meet the target % increase in the following year.
– If supply inadequate, after taking into account historic and projected supply, PUC may delay
the implementation of the scheduled % increase & all subsequent increases for 1 yr.
• NH RPS
– Upon a petition or on its own motion, after notice & hearing, PUC shall for good cause
accelerate or delay by up to one year any annual increase in NH-1 of NH-II targets on or
before September 30 of the preceding year.
– “Good cause” means that the acceleration or delay of an increase is reasonably expected to:
• (1) Increase investment in renewable energy generation in New Hampshire; or
• (2) Mitigate cost increases to retail electric rates for New Hampshire customers without materially
hindering the development of renewable resources
43
Stability of Targets: Challenge: Insufficient Clarity of Long-Term Standard to Incentivize
Investment Near End of RPS Target Schedule
• Stability of targets… Is the schedule of targets to be relied upon?
• Future expectations… What happens after the last date of published schedule?
• Financing and pricing benefit to clarity and predictability: – Longer amortization of fixed costs, lower cost of capital (perceived risk) lower LCOE
– Without clarity… perceived risk that RPS goes away… why invest without LT contract?
• Best Practices: create clarity and confidence – MA: Post-2020 Standards. After 2020, the RPS Class I Minimum Standard shall increase by
1% per Compliance Year unless modified by law.
– RI: The minimum RES established in such year that the ultimate target is reached shall be
maintained indefinitely unless the Commission determines that such maintenance is no
longer necessary for either amortization of investments in New Renewable Energy
Resources or for maintaining targets and objectives for renewable energy
• Poor practices: – NH: recent dispute (PPA approval case, legislature) illustrates the problem
– Parties claiming standard does, or doesn’t, continue after 20__
• CT: undefined
44
LT Contracting Policy Details Can Influence Ratepayer Cost
• Extending contract duration can
reduce (or eliminate) premium.
Example:
– MA Green Communities Act (pilot
program) = 10-15 yrs
– MA Sec. 83A = 10-20 yrs
• Bundled vs. unbundled products
(energy, capacity, RECs)
– RECs: unhedgeable (political) risk =
greatest need for revenue certainty
– But, difficult to lock in energy revenues
long-term (illiquid market), and harder to
lock in capacity revenues in bilateral
markets
– ‘unbundled’ places revenue risk on
generators reflected in risk premiums
(in today’s market)
• NY: RECs only, 10 yrs, no clarity on REC
revenue thereafter = high risk premium
• MA, RI: Bundled= most competitive price
• Disposition of products after long-term
purchase. EDCs with LT contracting
obligations can… – Retained by EDC less than ACP,
mitigate risk exposure to shortage
– Resell @ market expose LSE
customers to ACP if short , but less
distortion of market
• … but confounds end-user self-hedging when
buy-sell spread passed through to T&D
customers
– Hybrid: RI (NGRID 2013 RES
Compliance Plan) = retain but price to
customers at ‘spot’
• Contracting across the PTC-
expiration divide – see MA (Cape Wind alternative pricing)
– RI (NGRID seeks with & without pricing)
– NY (next round considering possible Federal
incentive price adjustment mechanism)
45
Changing Eligibility (Type, vintage or geography)
• Expanding eligibility can shift supply-demand balance.
• Implications: – Reduce market price = ratepayer savings
– Undermines perception of regulatory/political stability necessary to attract future investment
– If change rules retroactively without insulating earlier investors degrade investment
prospects for past investors, further undermining future investment
• Observations: – Balance: Bait & switch vs. fair competition… what is the implicit promise to investors?
• Best practices: – Proceed with extreme caution
– Talk of changes can ‘freak out the marketplace’
– Include long notice
– Grandfathering
– Subtle steps taken with solid analytical foundation
– Keep an eye on objectives… NEVER worth diluting just for price if newly eligible supply is
not consistent with advancing objectives
• Examples: MA (hydro – not bad; biomass – messy); ME (refurb); CT (graph)
46
Vintage Eligibility Letting ‘old’ RE compete with ‘new’ RE…
• Other states: Class I = ‘new’ (generally, post-restructuring)
– Other tiers designed to prevent attrition of pre-restructuring renewables
• CT’s Class I is different… allows:
– Generation not ‘new’
– Conversion of ‘old’ hydro to run-of-river
• Question/Observations:
– Does this meet CT’s objectives? (role of additionality)
– Are all objectives created equal? (is more RE = avoiding attrition?)
• ME-I: refurbishment/operating beyond useful life provisions
– Can increase supply quickly… but, is it a level playing field?
– Is it meeting similar objectives that merit head-to-head?
• NY Maintenance Tier: requires “old” to make demonstration of need to get “new”
treatment (or cost-of-service contract)
• Occasional Question: Should generators receive Class I RECS forever? Or should
Class I eventually become Class II once fully paid (targets adjusting accordingly)?
– Concept explored but not adopted in recent NH RPS study
– Implicit treatment in current NY RPS (RPS = LT contracts; no promise post contract)
47
Political/Regulatory Risks Create Unhedgeable Volatility Ex: Historic CT-I REC Prices Sensitive to Major Actual or Expected Changes
DPUC Actively Working towards Geographic expansion
to include PJM
Statutory change to geographic eligibility to just
ISO-NE or imports from adjacent control areas
New technology allows older
biomass plants to meet previously
unattainable NOx emission limit
Declaratory Ruling sought from
DPUC to certify LFG by pipeline
at large NGCC plant (ultimately
approved) Marketplace
realizing
degree of
surplus
DPUC Adopts
Banking CT Policymakers
discuss major
changes to RPS
48
Under what conditions will investors be willing to invest, build an
industry, without long-term revenue certainty?
Conclusion
49
Conclusions
• Objectives matter Should drive major decisions – Important for legislators, regulators to have rational & coherent policy
– Awareness of tensions between cost minimization and other objectives
is critical
– Observation: CT has already devoted almost half of RPS to other
objectives
• The design details matter… as does market context – Need solid analytical support for targets to have any hope of getting
desired results
• Stability is a recurring theme attracting investment – Everybody is watching… and reacting
– Important to focus on getting the incentives right
• Lot’s of experience, opportunity to harvest best practices
50
Sustainable Energy Advantage, LLC
10 Speen Street
Framingham, MA 01701
www.seadvantage.com
Bob Grace
tel. 508.665.5855
51
Appendix:
Long-Term
Contracting Policies
Details
52
CT Project 150 (2004)
• Structure:
– Periodic competitive RFPs involving CCEF, EDCs and then DPUC
– To qualify must be in-state and have CCEF funding
– 10-20 year fixed price bundled contracts (fuel cells may retain 50% of RECs)
– Set pricing options (fuel cells get favored option)
– CCEF multi-attributed scoring; EDC price-based ranking
– Funded via utility rates (whether G or T&D, whether purchases retained or liquidated, TBD)
• Motivation
– Assist financing, provide credit-worthy counterparties RPS
– In-state generation, economic benefits (requirement)
– Support favored technology (fuel cells)
• Results & observations:
– 150 MW of contracts, no projects, none replaced
– Cumbersome process; substantial Contract Price Risk
• Lessons learned:
– Not well-designed to handle contract price risk streamline;
– Method needed to kick out non-performers
53
MA GCA LT K Sec. 83 Pilot (2008)/Sec. 83a LT PPA (2012)
• Structure:
– 2 RFPs for 3% of load over 5 yrs (EDCs + DOER, initially); bilateral negotiation allowed
• Sec. 83a adds another 4% of load btw. 2013-2016 added in 2012; must be competitively bid
– 10-15 yr fixed-price contracts for energy, capacity and/or RECs (bundled or unbundled)
• Sec 83A expands up to 20 yrs, allows transmission to be bundled
– 80/20 Price/other evaluation
– EDCs to liquidate purchases, profits/losses born by T&D customers
– EDCs receive remuneration of 4% of annual payments (2.75% for Sec. 83A)
• Motivation:
– Assist financing, provide credit-worthy counterparties RPS
– Reduce cost
• Results & observations:
– First round successful in getting substantial participation, low price contracts
– Cape Wind contracting highly controversial, let to competitive bid rqmt. In Sec 83a
• Lessons learned: Just getting started (first RFP proposals due Feb. 19)
54
VT SPEED Standard Offer (Feed-in Tariffs) (2009)
• Structure:
– Requirement to purchase from in-state generators up to 2.2. MW @ fixed price for 15-25 yrs
– EDC fixed tariff rate for bundled energy/capacity/RECs, differentiated by technology
– Interim rates set by statue; PSB determines initial (2010) rates based on estimates of ‘cost’
– Energy & capacity used to serve load, RECs may be sold off elsewhere
– 50 MW max; initially capped @ 12.5 MW per technology; queue procedures established
• Motivation:
– Financing; In-state generation (requirement); Generation diversity
• Results & observations:
• Under interim rates, applications for most generation types hit the cap on 1st day
• Unless attrition, limited additional activity
• Suggests either speculative queuing or price too high, especially for solar (172 MW)
• Lessons learned:
• Queue rules are important
• Establishing tariff based on analysis of costs is critical
• Learning will be limited due to immediate full subscription
• Looking forward: How many of initial projects were real, and what happens if/when
project failures under revised more cost-based rates
55
ME Long-Term Contracting for Capacity & Associated Energy (2009)
• Structure:
– Periodic all-source RFP by PUC for EDC contracts at least every 3 yrs
– Priority order for environmental, reliability objectives favor new RE capacity resources in ME
– Energy & Capacity… not RECs; Flexible pricing
– Flexibility re: disposition of energy & capacity purchases (reselling @ spot is anticipated)
– Term up to 10 years unless PUC finds longer term in ratepayer interest
• Motivation:
– Resource adequacy/grid reliability, reduce GHG emissions
– Minimize electricity costs & hedge against price volatility for ME's electricity consumers
– Location: Increase share of new renewable capacity resources in Maine by 10% by 2017 (tilt)
– Note: intent was not to support what it perceives as above-market contracts
• Results & observations:
– Late 2009 PUC announced 20-yr contract with wind farm @ price indexed at discount to
LMPs with cap & floor
• Lessons learned:
• Providing guaranteed revenue stream can support financing while reducing ratepayers costs!
• Looking forward:
• Ad hoc nature of PUC process leaves uncertainty as to how often this tool will be used
56
ME
Community-based Renewable Energy Pilot Program (2009/10)
• Structure1:
– 20-year contract from interconnecting EDC
– Community-based = (>51%) locally-owned, no bigger than 10 MW
– Price set/capped at $0.10/kWh for energy
– Capacity & RECs may be sold separately by generator
– Small Generators (<1 MW): fixed $0.10/kWh Feed-in Tariff-like guarantee for energy
– Larger Generators (>=1 up to 10 MW) PUC to conduct periodic RFPs for long-term contracts
– EDCs can use energy for meeting SO requirements, or resell (at PUC direction)
• Motivation:
– Encourage local RE generation (required)
– Assist financing, provide credit-worthy counterparties RPS
– Encourage favored generators not otherwise RPS-competitive
• Results & observations:
• Large generator category fully subscribed for one utility
• Small generators generally unable to move forward at established price
57 1. Options: long-term contracts or 150% REC Multiplier
RI RES Long-term Contracting Legislation (2009)
• Structure
– EDC RFPs for up to 90 aMW regional new RE, 3 aMW solar in RI; and ‘commercially
reasonable’ contract for Block Island Offshore Wind project up to 10 aMW
– Negotiated Utility Scale Offshore Wind contract for 100 -150 aMW in or adj. to RI Federal
waters by a developer selected by the state
– 10-15 years contracts (or longer with PUC approval) for Bundled energy, capacity, RECs
– Provide ‘substantial’ direct economic benefits to RI (jobs, property taxes) regardless of location
– EDC receives remuneration of 2.75% of annual payments
• Motivation:
– Assist private financing, provide credit-worthy counterparties RES
– ‘Commercially reasonable’ contracts; stabilize energy prices, enhance environmental quality
– Encourage development of in-state RE resources; direct economic benefits (Jobs!) to RI
[mandate & tilt]
– Spark an in-state off-shore wind industry (enable RI to be leader)
• Results & observations:
– Has led to several PPAs, RFP on the street got significant interest
– So far appears to be successful at getting generation contracted, most contracted plants still
under development or construction
– Other than OSW, has yielded low pricing
58
Notes from D. Farnsworth
• Renewable Portfolio Standards (Bob Grace, Sustainable Energy Advantage—Invited)
– What strategies other New England states are pursuing to meet their targets
– Regulatory strategies around renewables in New England states
• Emphasis = RPS, but recognize – NESCOE is doing stuff,
• ID significant complementary steps
– Successful programs in other states that lower the cost of meeting RPS
•
• Address NESCOE
• Address what NYSERDA is doing
• (explain how IL does what they are doing, how that example will help CT improve what it is doing – don’t need to drill down.
But, it’s a viable example that CT thinks about)
•
• Successful examples are more important
•
• Don’t; have to explain what an RPS is – but a framework for what I think is important for EFFECTIVE – design details,
objectives, pitfalls, getting solid analytical support for targets… (working with Newbies but not total beginners)
• I have 35-40 min to talk to staff & cmmrs re: what they must do to squeeze the most out of their RPS – that is the emphasis.
• LT contracting policies
• Tensions local vs. least cost – the local is largely taken care of and (so far) looks to be well-designed
• (sensitively mention P150 shortcomings.. process not necessarily wrong)
• small window to talk to these folks - -what are the 3-4 key points I want to leave.
59