The most ambitious renewable portfolio standards (RPS) energy legislation in the United States was signed into law by California Governor Edmund G. Brown, Jr., on April 12, 2011. Authored by Senate President Pro-Tempore Darrell Steinberg (D) and Senator Joseph Simitian (D), SB2X1 requires both public- and investor-owned utilities to procure 33 percent of the electricity delivered to retail customers from renewable sources by December 31, 2020. Energy resources that are eligible for compliance credit under SB2X1 include biomass, solar thermal, photovoltaics, wind, geothermal, fuel cells, “small” hydro-electric (30MW or less), digester gas, solid waste conversion, and ocean wave, thermal or tidal technology.
Law Before SB2X1
Before SB2X1, California law required investor-owned utilities (IOUs) to procure 20 percent of electricity from renewable sources by the end of 2010, and did not cover publicly owned utilities (POUs). California's three large IOUs collectively served 18 percent of their 2010 retail electricity sales with renewable power: Pacific Gas and Electric (PG&E), 17.7 percent; Southern California Edison (SCE), 19.4 percent; and San Diego Gas & Electric (SDG&E), 11.9 percent. Only two municipal utilities—Los Angeles Department of Water and Power, and Sacramento Municipal Utility District—currently obtain more than 20 percent of their power from renewable sources.
Former Governor Arnold Schwarzenegger vetoed similar legislation in 2009 because he objected to provisions in the measure that limited options for compliance with RPS with regard to use of Renewable Energy Credits (RECs) and mandates on the procurement of power from renewable energy generation facilities located in California. Gov. Schwarzenegger then directed the California Air Resources Board (CARB) to develop its own renewable energy guidelines under its existing authority to implement California’s Global Warming Solutions Act of 2006 (AB32). CARB adopted its own regulations in December of 2010. SB2X1 largely overrides those guidelines, but directs CARB to continue some aspects of the existing scheme.
New Compliance Requirements
SB2X1 changes utilities’ options for RPS compliance, by mandating minimum and maximum use of eligible renewable energy products from three “buckets.”
To encourage development of new renewable generation facilities located within the state, the first “bucket” mandates use of eligible renewable energy products that (i) have a first point of interconnection with a California balancing authority or with distribution facilities used to serve end users within a California balancing authority area or (ii) are scheduled from an eligible resource into a California balancing authority on an hourly basis, or pursuant to an agreement to dynamically transfer the energy into a California balancing area. Utilities are required to acquire 50 percent of their RPS-compliant power from this bucket by December 31, 2013, 65 percent by December 31, 2016, and 75 percent thereafter.
The second bucket covers “firmed and shaped” renewable resources providing incremental electricity and scheduled into a California balancing area. (This involves matching intermittent renewable energy with traditional energy sources to ensure that deliveries are firm, within the required specifications.) SB2X1 limits the use of products from this bucket to not more than 25 percent in the compliance period ending December 31, 2013, 15 percent for the period ending December 31, 2016, and 10 percent thereafter.
The third bucket allows utilities to comply with RPS by using other eligible renewable energy products, including unbundled RECs. In contrast with the 2010 CARB RPS regulations, which allowed unlimited use of unbundled RECs, the new law limits use of products from this bucket to no more than 25 percent in a compliance period though 2013, 15 percent through 2016, and 10 percent thereafter.
Treatment of Existing Contracts
A renewable power contract that complies with prior RPS eligibility standards and was executed prior to June 1, 2010, will fully count toward the new procurement requirements, provided that the contract has not been modified since to increase expected quantities of annual electricity generation or to substitute a different renewable energy product. This limitation may create some difficulties for projects that have PPAs in place, but are still finalizing the plans for development and construction.
SB2X1 allows utilities to “bank” or carry forward excess renewable compliance generation from one period to the next, but only for sources with a contract lasting 10 years or more. This provision has been criticized by some utilities as too onerous because some contracts, particularly for smaller scale renewable energy projects, run for shorter terms.
Under SB2X1, the California Public Utilities Commission (CPUC) and California Energy Commission (CEC) will be responsible for determining penalties for non-compliance with RPS during the enforcement period. Current law provides for penalties of $50 per MW up to $25 million annually for regulated entities that do not meet the RPS benchmark. SB2X1 also creates an “off ramp” for regulated entities that cannot comply with the RPS mandates due to circumstances beyond their control.
Issues for Implementation
SB2X1 promises to be a major boost for the renewable power industry in California. At the bill signing ceremony, Gov. Brown asserted that SB2X1 “will bring many important benefits to California, including stimulating investment in green technologies in the state, [and] creating tens of thousands of new jobs.” California’s three major IOU’s are already close to the 20-percent benchmark in the prior law, and will not be required to meet additional benchmarks until 2016. However, many of the state’s smaller POUs will scramble to meet the 2013 deadline under the new statute. That will stimulate demand for renewable energy projects over the next 3 years.
Still, there are many unanswered questions about the long term impact on investment in renewable energy in California. The new RPS requirements will motivate utilities to purchase power from renewable sources, but they do not help the developers of those facilities in their efforts to construct the facilities in a timely and efficient manner.
Critics point out that the legislation does little to address the myriad permitting obstacles that have hamstrung renewable developers in California. In recent months, funding and financing for utility-scale solar projects in San Bernardino and Imperial counties have been jeopardized by a lengthy permitting process and litigation over the California Environmental Quality Act and the National Environmental Protection Act. Siting and construction of new transmission capacity also remains a major obstacle to renewable energy development.
Utilities and consumer groups have complained about potential costs of compliance with SB2X1. The new requirements may create difficulties if California energy prices increase measurably and other states or the federal government do not adopt similar renewable targets.
It is unclear how SB2X1 will impact the CPUC’s recent efforts to facilitate a California REC market. While the new law tracks the CPUC’s initial limits on REC use for RPS compliance, it imposes much stricter limits on REC use after 2013. SB2X1 is silent on the controversial REC price caps adopted by the CPUC. It seems likely that the CPUC will have to reexamine its recently promulgated REC regulations in light of the new statute.
For more information about SB2X1 or any other matter raised in this Legal Update, please contact Dario J. Frommer at +1 213 229 5158, David I. Bloom at +1 202 263 3204, Kevin L. Shaw at +1 713 238 2665, or J. Paul Forrester at +1 312 701 7366.