Renewable Energy Development Incentives: Strengths, Weaknesses and the Interplay. Gunnar Birgisson Erik Petersen Bracewell & Giuliani LLP 1

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1 Renewable Energy Development Incentives: Strengths, Weaknesses and the Interplay Gunnar Birgisson Erik Petersen Bracewell & Giuliani LLP 1 The article originally appeared in the Electricity Journal, April 2006, Vol. 19, Issue 3 Introduction Renewable energy development, and in particular wind energy, is enjoying a sustained period of growth that shows no sign of slowing down. 2 The growing support for renewable energy is demonstrated by the numerous incentives that exist to encourage its development, particularly the two-year extension of the federal production tax credit (PTC) in the 2005 Energy Policy Act (EPAct 2005) and the proliferation of state renewable portfolio standards (RPSs). This support derives from concerns about fossil fuel costs, energy independence, and the environmental impacts of other energy sources, as well as awareness of the improving economics of renewable energy technology. The U.S. has no comprehensive federal policy on maximizing renewable energy development. Instead, there is a patchwork of federal and state (as well as local) policies and programs aimed at facilitating renewable energy development. This article discusses the various incentives, requirements and marketing methods that are currently being used to support renewable energy. It then explores the strengths and weaknesses of these mechanisms, considers their interaction, and evaluates their respective ability to achieve long-term growth of renewable energy. The article concludes that most of the mechanisms cannot be relied on to achieve long-term growth of renewable energy, either because of their own weaknesses or because of unpredictable variables. As a result, if there is widespread support for pursuing the benefits of renewable energy, then its growth should be ensured through ambitious, long-term and widespread mandatory objectives, rather than by relying on voluntary choices or competitive forces. 1 The views expressed in this article are those of the authors and not necessarily those of Bracewell & Giuliani LLP or its clients. Nothing herein should be considered legal advice. 2 According to the American Wind Energy Association (AWEA), approximately 2,500 MW of wind energy generation will be installed in the U.S. in 2005, increasing the total amount of installed wind capacity by 35% to approximately 9,200 MW. AWEA, U.S. Wind Industry to Break Installation Records, Expand by More Than 35% in 2005, November 3, 2005, available at Installed capacity of photovoltaic solar panels has increased 35% per year worldwide over the last five years. Solar Energy Industries Association website, available at 1

2 The Benefits of Renewable Energy Development Fossil fuels are the predominant source of energy in the United States and will remain so for the foreseeable future. 3 However, the desire to obtain the perceived benefits of renewable energy (many of which are not shared by fossil fuels) has led to increased interest in the growth of renewable energy. While these benefits vary depending on the particular resource, e.g., wind, solar, geothermal, biomass or others, there is a core set of benefits touted for renewable energy in general. These can be sorted into four main categories. First, there are environmental benefits, which include avoiding carbon dioxide (CO 2 ) emissions, which helps to combat climate change; avoiding air-borne pollution by sulfur dioxide (SO 2 ), nitrogen oxides (NO x ) and mercury, which are to varying degrees byproducts of most fossil fuel generation; and avoiding potentially harmful side-effects of the extraction of fossil fuels through drilling and mining. Second, there are national security benefits, such as achieving greater energy independence, as renewable energy is largely a domestic resource; and reducing overall payments to potentially hostile regimes or other groups in countries with oil and natural gas reserves. 4 Third, there are general economic benefits, including possible reductions in the price of fossil fuels by lessening demand for them; and increased stability in energy prices through diversification of power supplies. 5 Fourth, in some cases there is a specific economic benefit, when developing renewable energy is the lowest-cost option available, based on avoiding fuel costs and other economic considerations. 6 The extent to which one can measure these benefits varies. Many of the environmental benefits are ascertainable; for example, a wind turbine does not emit SO 2, NO x, or mercury. The national security benefits, while the object of increased attention, are not as readily measurable. Specific economic benefits can be quantified on a case-by-case basis for individual purchasers of renewable energy, while the general economic benefits are harder to quantify. That said, it is the premise of this article, that there is a wide range of benefits that can be realized from the development of renewable energy, and the purpose of this article is to consider the best approach to realizing these benefits. Obstacles to Development of Renewable Energy Renewable energy resources have to date been relegated to a relatively small role in a power generation market dominated by coal, natural gas, oil, nuclear, and large hydro 3 See Energy Information Association, Forecasts and Analyses, U.S. Energy Consumption by Fuel Chart ( ), available at 4 See, e.g., Jesse Broehl, National Security to Lead Renewable Energy Deployment, Renewable Energy Access, December , available at See also 5 See, e.g., National Wind Coordinating Committee, Wind Energy and Natural Gas: Balancing Price and Supply Volatility, June 9, 2005, available at 6 In Texas and Colorado, some wind power offerings have been offered at rates lower than conventional power products. See Megawatt Daily, Direct Energy beat 'price-to-beat' in Texas, August 24, 2005; see also Steve Raebe, Xcel's Windsource goes full tilt, The Denver Post, November 25,

3 plants. 7 The lower market share of renewable energy has been caused by the traditionally greater costs of renewable energy generation, the intermittent nature of many types of renewable energy, and negative perceptions about the reliability of renewable energy. The siting of renewable energy generators can cause controversy in affected communities, or may be considerable distances from load centers, which creates additional transmission requirements. In addition, some claim that the benefits of renewable energy are low and that further development to reap greater benefits from it would be too costly. 8 More so than any other renewable energy resource, wind has emerged as the key renewable energy resource both in the U.S. and elsewhere, and much of the discussion herein uses wind energy for illustrative purposes to address the challenges faced by many renewable energy projects. As an energy source, wind energy has certain drawbacks, primarily due to the intermittent, non-dispatchable qualities of wind generators, the distance of most prime wind resources from load centers, and wind energy s historically higher operational costs. Yet in recent years, with increased interest in renewable energy development, greater attention has been given to wind energy, particularly since wind may at present provide not only environmental, national security, and general economic benefits, but in some cases also specific economic benefits. The key advantage is that wind can be harvested in numerous locations throughout the U.S. and is one of the most cost-effective renewable resources, as a result of lower turbine costs combined with the effect of existing incentive programs. Despite growing awareness of the benefits of renewable energy, its proponents have faced a substantial hurdle as they attempt to obtain a larger share of overall power production. To help obtain the perceived benefits of renewable energy, the federal government and many states have created a range of mechanisms to support its development. These mechanisms can be classified according to whether they operate at the retail or wholesale level, and whether they are based on mandatory or voluntary purchases of renewable energy. Overview of the Mechanisms for Promoting Renewable Energy Development Inducing Voluntary Retail Purchases This mechanism, known as green power marketing, uses the virtue of renewable energy as a marketing tool to interest consumers. The customer, whether an individual, business or institution, typically can join a program offered by its local utility or a retail marketer to purchase renewable energy. Alternatively, the customer can make voluntary 7 There are divergent views on whether large hydro projects should be considered renewable energy sources on account of their adverse environmental effects. In any event, few, if any, such projects are expected to be built in the United States in the future. 8 See, e.g., Jerry Taylor & Peter VanDoren, Evaluating the Case for Renewable Energy, Is Government Support Warranted?, Cato Institute Policy Analysis No. 422, January 10, 2002, available at 3

4 payments, for example through the purchase of Renewable Energy Certificates (RECs), to support the development of renewable energy, whether nearby or in a different region. Given the laws of physics, the electricity used by participants in green power programs does not come exclusively, if at all, from a renewable source. Rather, their participation in the program obligates the retail provider to purchase or develop an amount of energy from renewable resources equal to the amount purchased by the customer. In some cases, the retail provider achieves this by purchasing RECs from a renewable energy developer (e.g., a windfarm) that may be located elsewhere in the state or even farther away. To date, more than 600 utilities in 34 states offer some form of green power. 9 In some regions, the current high price of natural gas used for power generation has led to some wind power offerings costing less than default energy options. 10 To date, this is the exception rather than the rule, and the price of green power is typically higher than that of energy generated by fossil fuels. 11 Consumers who voluntarily purchase green power therefore typically pay a price premium while not receiving any greater a share of the benefits from renewable energy than their neighbors who purchase conventional power. In other words, this is a "free rider" mechanism funded by voluntary participants in green power programs. Another benefit bears noting, however, and this benefit is not socialized among the public. Some voluntary purchasers of green power receive a public relations benefit from their green power purchasing commitment. One example is the World Bank's widely publicized commitment to purchase renewable energy credits corresponding to all of the electricity requirements of its Washington, D.C. headquarters buildings. 12 Corporate entities have likewise capitalized on their power purchases to generate favorable publicity. 13 Mandating Retail Purchases Mandatory retail purchases by a class of end users stand in contrast to voluntary retail purchases. The mandatory approach requires certain retail consumers to purchase, or strive to purchase, given quantities of renewable energy. While retail customers as a whole include residential, commercial, industrial, and government users, to date it appears governments have subjected only themselves and their instrumentalities to such requirements. 9 Lori Bird and Blair Swezey, Green Power Marketing in the United States: A Status Report (Eighth Edition) at 1 (hereinafter Green Power Marketing Report), National Renewable Energy Laboratory, October 2005, available at See also 10 See supra note Green Power Marketing Report at World Bank, World Bank to Purchase 100 Percent Renewable Energy for Headquarters, December 21, 2004, available at 13 The Department of Energy has compiled a list of large purchasers of green power. See 4

5 For example, EPAct 2005 used this mechanism to establish new retail purchase obligations for the federal government. It requires that "to the extent economically feasible and technically practicable, of the total amount of electric energy the federal government consumes during any fiscal year, the following amounts shall be renewable energy: (1) not less than 3 percent in fiscal years 2007 through 2009; (2) not less than 5 percent in fiscal years 2010 through 2012; [and] not less than 7.5 percent in fiscal year 2013 and thereafter." 14 This follows earlier mandatory purchase obligations undertaken by the U.S. Government. By Executive Order, President Clinton required each executive agency to "strive to expand the use of renewable energy within its facilities and in its activities by implementing renewable energy projects and by purchasing electricity from renewable energy sources." 15 Various state governments likewise have committed to purchasing a certain amount of their power from renewable resources. 16 While the mandatory retail purchase mechanism resembles the voluntary retail mechanism, there are also important differences. First, insofar as mandatory retail obligations are imposed by governments on themselves, they socialize the costs of the renewable energy across a broader class namely, all taxpayers. Second, rather than leave it to individual consumers to decide whether to buy renewable energy in the retail market, this mechanism sets targets that are supposed to be mandatory. As such, it produces a certain degree of renewable energy development, subject to the possibility that the government agencies, despite best efforts, cannot meet the requirements. Inducing Voluntary Wholesale Procurement Under this mechanism, the retail provider voluntarily buys or develops renewable energy. In the resale to consumers, the renewable energy then constitutes a portion of the overall energy provided for retail consumption. Because renewable energy is usually more expensive than other energy, such voluntary purchases may not take place without other incentives. Typically, the retail provider is induced to buy the renewable energy through economic incentives or through awareness of the benefits of renewable energy. Financial support from governments, whether through grants or subsidies, is one way to induce voluntary purchases of renewable energy. Other sectors of the economy, including energy interests, also receive subsidies, so this is a tool not designed solely for renewable energy development. Most industries, including those in the energy sector, can point to some unique and desirable benefits they provide, whether economic, environmental, employment-related or other, and which purportedly justify the subsidy. 14 EPAct 2005, Sect The Department of Energy has since announced that the federal government already obtains more than 2.5 percent of its electric power from renewable resources. Department of Energy, Federal Government Increases Renewable Energy Use Over 1000 Percent since 1999; Exceeds Goal, November 3, 2005, available at 15 Executive Order 13,123, Greening the Government Through Efficient Energy Management, 64 Fed. Reg. 30,851 (June 8, 1999). 16 These states include Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Tennessee, Illinois, Iowa, and Wisconsin. Green Power Marketing Report at

6 The most important renewable energy subsidy in the U.S. is the federal production tax credit (PTC), which currently gives renewable energy generators a tax credit worth 1.9 per kwh produced over a ten-year period after a project starts operation, provided it starts operation by the end of The original justification for the PTC derived from the environmental benefits of renewable energy and was intended to help these generators compete in the marketplace. 18 The PTC does not guarantee any development of renewable energy; rather, it reduces the costs for developers of renewable energy to enable them to compete more effectively. Renewable energy supporters, and in particular wind energy proponents, cite the PTC as one of the keys to growth of wind energy because it brings the cost of wind energy within striking distance of conventional energy sources. 19 The PTC has not, however, sufficed to materially increase the development of renewable resources other than wind, such as geothermal and solar. Their production costs are still high enough to prevent them from being able to compete directly with conventional energy sources. 20 The PTC socializes the costs of renewable energy projects across all federal taxpayers. By granting the tax break discussed above, the federal government loses tax revenue in its coffers in exchange for the realization of the benefits of renewable energy. The benefits and costs appear to be distributed widely, although some regions may benefit more than others with respect to the reduction in emissions of particulates. Take, for example, the effect of the PTC on the residents of states such as Florida. The characteristics of the wind in Florida do not allow for the profitable operation of an onshore wind farm with today's technology. 21 Thus, until renewable energy development becomes more cost efficient in Florida, the state's residents are, in effect, subsidizing the environmental benefits received by the residents of states such as California and Texas, where extensive wind energy development does occur. However, the national security, other environmental and general economic benefits would still be shared more widely. Voluntary wholesale purchases of renewable energy can also be stimulated by social concerns about environmental issues. Organized activists or other means of social pressure can lead utilities to purchase renewable energy regardless of whether they have 17 The PTC was originally enacted in the 1992 Energy Policy Act and expired in June, The PTC was revived in December, 1999 only to expire again in It was reinstated in March, 2002, only to expire again in December, 2003 before the extension currently in effect. 18 When the PTC was first enacted, the House of Representatives noted "the production incentive provides financial assistance for a limited time to projects generating electricity from renewables, in recognition for their positive environmental characteristics and domestic fuel supplies." H. R. Rep. No (I)) at 146, reprinted in 1992 U.S.C.C.A.N. 1953, The report further stated that the PTC was "intended to enhance the development of technology to utilize the specified renewable energy sources and to promote competition between renewable energy sources and conventional energy sources." H.R. Rep. No (VI) at 42, reprinted in 1992 U.S.C.C.A.N. 1953, See, e.g., AWEA, Energy Bill Extends Wind Power Incentive through 2007, July 29, 2005, available at 20 See, e.g., Alyssa Kagel & Karl Gawell, Promoting Geothermal Energy: Air Emissions Comparison and Externality Analysis, The Electricity Journal, Aug./Sept. 2005, Vol. 18, Issue For political reasons, among others, off-shore development may not be viable in Florida. 6

7 any legal obligation to do so. Municipal utilities, for example, may purchase renewable energy for this reason. Integrated resource planning is a form of social pressure placed on utilities to procure certain kinds of generation. This exists primarily in states where there is no retail competition or vertically integrated utilities still exist, such as the Pacific Northwest. Integrated resource planning requires the utility to produce forward-looking generation procurement plans, taking into account issues such as load growth, the availability, costs and risks of various types of fuels, and other issues. The utility and other parties with input in its resource planning will examine numerous factors in deliberating what resource mix to include in the utility s future. Mandating Wholesale Procurement As a way of promoting renewable energy development, governments have devised various methods of requiring retail providers to acquire renewable energy, which then constitutes part of the mix of power resold to retail customers. An early example of the use of this mechanism in the U.S. was the Public Utility Regulatory Policies Act of 1978 (PURPA). This federal statute required utilities to purchase power produced by Qualifying Facilities (QFs), which were certain types of generators with positive environmental attributes, at the avoided cost of the purchasing utility, i.e., the cost to generate or purchase the increment of power being purchased. The utilities' renewable energy purchases were not controlled by predetermined minimum or maximum purchase obligations, but rather by costs and other factors. PURPA thus did not guarantee a given level of renewable energy development, but did create purchasers for renewable energy, and this led to much of the wind energy development in the U.S. in the late 1970s through the 1990s. EPAct 2005 amended PURPA to prospectively eliminate utilities obligation to purchase power from a QF if the QF has access to a competitive power market. 22 The previous mandatory purchase obligation of PURPA has thus been turned to more of a fallback option if competition is inadequate. The most significant current example of the mandatory wholesale procurement mechanism in the U.S. is the renewable portfolio standard system. While there is no federal RPS, approximately 20 states have adopted their own RPSs that require retail providers located within that state to procure a certain amount of the power they sell to end-users from renewable energy sources. 23 Typically, this obligation increases over a number of years to a maximum threshold. California is one of the leaders in this field, with an RPS that requires utilities to purchase 20% of their electricity from renewable sources by An RPS statute or regulation lists the types of renewable energy that qualify under the program, and sometimes creates specific procurement levels for given 22 EPAct Sect By 2005, RPSs had been adopted in Maine, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Pennsylvania, Delaware, Maryland, the District of Columbia, Illinois, Wisconsin, Minnesota, Iowa, Montana, Colorado, Texas, Nevada, New Mexico, Arizona, California, and Hawaii. Legislation has also been adopted in Vermont for a prospective RPS. 7

8 types of renewable energy. For example, both the Arizona RPS and the Nevada RPS require the affected utilities to procure certain minimum amounts of solar energy. 24 Other countries have also used a variation of the mandatory wholesale procurement mechanism. Examples include the feed-in tariffs in Germany and Spain, which stimulate renewable energy development by guaranteeing certain prices for wholesale sales of renewable energy to utilities. Also, the "renewables" obligation in the U.K. requires retail providers to supply a specified portion of their electric power from renewable energy sources or purchase RECs commensurate with their obligation. The mandatory wholesale procurement mechanism spreads the costs of purchasing renewable energy among all of the utility's customers. The RPS mechanism is specifically intended to produce certain levels of renewable energy development, rather than just create conditions for renewable energy growth. Ideally, the market will provide a sufficient response to opportunities created by the RPS so that project developers or marketers of RECs will compete for contracts with the utilities. 25 Even this requirement, however, does not always guarantee steady renewable energy development. Utilities in Nevada, for instance, have lagged in meeting their required renewable energy purchases reportedly because their credit ratings at the time rendered it harder for prospective counterparties to obtain financing. 26 Strengths and Weakness of the Various Mechanisms The mechanisms discussed above, while all designed to promote renewable energy development, differ conceptually and operate in different ways. Naturally, this results in different effects on the industry and the country. Following is an analysis of the strengths and weaknesses of these various mechanisms. Inducing Voluntary Retail Purchases The strength of voluntary retail purchases is that it allows customers of utilities that are not subject to an RPS or other mandatory wholesale mechanism to support development of renewable energy. Green power purchasing thus allows individual consumers to advance beyond the status quo in the area where they reside. The voluntary nature of this mechanism may also entail simpler administrative and regulatory procedures than are needed for mandatory mechanisms. Free market proponents are also likely to welcome leaving green power decisions to the marketplace. The essence of this mechanism is that it increases the range of energy options available to consumers. Retail consumers can choose renewable energy, and may do so for various reasons, including cost if renewable energy happens to be a more affordable option at a 24 Arizona Administrative Code, Title 14, Chapter 2, Article 18; Nevada Revised Statutes, Title 58, Chapter See, e.g., AWEA, The Renewable Portfolio Standard: How It Works and Why Its Needed, October 1997, available at 26 See the Nevada Public Utilities Commission proceeding in Docket No

9 given time. While those consumers committed to obtaining benefits (including the public relations benefits) are likely to pay a premium for green power, consumers with no particular environmental concerns might buy green power to save money, i.e., solely for the specific economic benefits. The corollary is that higher relative renewable energy prices can cause green power purchasers to switch to a different energy mix. If renewable energy becomes comparatively more expensive, for example if natural gas prices drop or renewable energy subsidies decrease, conventional energy sources may become more attractive to consumers purchasing on the basis of price, as well as those otherwise not willing to pay a significant premium for renewable energy's benefits. Voluntary switching away from green power then means that the other benefits from renewable energy environmental, national security, and general economic will no longer be obtained. This illustrates that the option of green power can increase competition between various energy sources and expand consumer choices, but it alone is not well-suited for achieving long-term renewable energy development. Consumers more concerned with all of the benefits from renewable energy might be more inclined to continue purchasing it even if it becomes comparatively more expensive. However, the lack of predictability inherent in voluntary choices means that they cannot be counted on to have serious environmental impact. The history of environmental law shows that significant changes are achieved more often through legislation and mandatory requirements than just strictly voluntary behavior. For example, even the much-touted "market-based" trading of SO 2 and NO x is driven by caps mandated by legislation that are then implemented by industry through market mechanisms. 27 Increased energy security would likewise seem to be a matter of sufficiently great importance not to be left to consumer choice. Finally, even if voluntary measures were capable of achieving a portion of the benefits from renewable energy development, the question arises whether it is equitable to impose the costs of its development on only a portion of the expected beneficiaries. Mandating Retail Purchases The chief strength of the mandatory retail mechanism appears to be the incremental increase in renewable energy it is intended to produce. However, its effectiveness is limited by its application solely to government entities, which are but a small fraction of overall energy consumers. 28 In addition, the applicable standards may be too easy to meet, or, be more ambitious, but non-binding. The authors are not aware of any laws requiring private sector retail users to purchase renewable energy rather than conventional energy. Imposing such obligations on certain classes of consumers, and 27 See, e.g., 42 U.S.C See Progressive Policy Institute, Toward Tomorrow's Energy: Speeding the Commercial Use of Fuel Cells and Hydrogen, January 22, 2003, available at While the federal government is the nation's largest energy consumer, it only amounts to approximately 1.5% of the total electricity consumed in the country each year. See id. 9

10 not others, would likely be controversial. And applying it to all retail consumers would likely entail great administrative complexities, particularly when compared with wholesale procurement where the retail provider procures renewable energy on behalf of all its customers. Inducing Voluntary Wholesale Procurement The greatest strength of the voluntary wholesale purchase mechanism may be its administrative ease: voluntary purchases by utilities can largely rely on existing regulatory procedures. A drawback, however, is that voluntary purchases do not reliably ensure any given level of renewable energy development, whether in the near or far term. Hence there is no guaranteed prospect of achieving the benefits of renewable energy development, other than perhaps the short-term specific economic benefits tied to the cost of renewable energy at a given time. In addition, voluntary wholesale sales of renewable energy typically are dependent on financial subsidies to render them more attractive to utilities. An examination of the PTC, which is one of the key incentives of renewable energy development in the U.S., shows some of the weaknesses of relying on subsidies. For instance, subsidies can have uncertain duration. Congress has extended the PTC only for a few years at a time, and it is currently only in effect through This creates uncertainty for project developers that rely on the PTC for devising their future revenue streams. In addition to the record of PTC expirations and short-term extensions, a realistic view of the worsening federal budget raises doubts about the long-term commitment of Congress to keeping the PTC in effect. Even the bipartisan National Commission on Energy Policy in its December 2004 report recommended that the PTC be extended only through The Commission did not suggest it opposed a longer extension, but rather indicated that a longer-term extension was unrealistic because the PTC involves competition for "limited federal resources." 30 If the PTC is not renewed or is scaled back significantly, this may adversely affect the ability of new plants to come on line without support of the PTC, and create a competitive advantage for older renewable energy generators that still benefit from the PTC. The PTC is not targeted towards achieving specific long-term goals for renewable energy development, nor is it tailored for each type of renewable energy resource. Because the costs related to wind energy are lower than those of other renewable energy technologies, wind developers have benefited far more from the PTC than have various other renewable energy sources. In addition, because the PTC is a tax credit rather than a direct payment, it distorts the industry structure. Developers without the need for significant tax credits, whether because of their size or lack of profitability, cannot use it themselves. Developers have adapted to this by jointly undertaking project development with larger entities that have an appetite for the tax credit, but the efficiency of these arrangements is debatable. 29 The National Commission on Energy Policy, Ending the Energy Stalemate, A Bipartisan Strategy to Meet America's Energy Challenges, The National Commission on Energy Policy, December 2004, at xii. 30 Id. at

11 The competitive approach to fostering renewable energy development currently helps wind to date the greatest beneficiaries of the PTC but might not help as much in the future. It is possible that even if the PTC continues in effect, it may not suffice at times. For example, if prices of fossil fuels, primarily natural gas, drop significantly, it may be harder for wind projects to compete. In addition, if wind projects have to pick up additional costs, e.g., regarding construction of transmission or resolution of imbalances, they may also have greater difficulty competing. 31 The voluntary wholesale approach is thus fraught with uncertainty. Integrated resource planning and other quasi-voluntary or consensual means of promoting renewable energy development can lead to increased development of renewable energy by a given utility, but it does not by definition guarantee any particular renewable energy development. In a nutshell, what comes out of the IRP process depends on what goes into it. Promoting growth of renewable energy will not automatically be given any higher a priority than various other factors such as siting concerns, or low capital or marginal costs associated with various energy sources. Mandating Wholesale Procurement Mandatory wholesale mechanisms are the other key driver in the U.S. A variation of this, PURPA, led to much of the early wind energy development in the U.S. Other countries, such as Spain and Germany have also used variations of this mechanism. A weakness of the PURPA/feed-in tariff approach is that is doesn't guarantee any particular long term growth. In contrast, the chief strength of the current U.S. version, the RPS, is that it sets long-term, often ambitious goals for renewable energy development. It can also be tailored to foster development of renewable energy resources that are not pricecompetitive with wind energy, and thereby help develop a broad range of renewable energy resources. Forcing long-term development of renewable energy also should lead to better long-term planning of transmission expansion and other requirements of renewable energy growth. RPSs are not without their own set of drawbacks, however. The fact that they exist only on the state level has led to a certain degree of balkanization of energy markets. For example, the various states have different criteria for eligibility of resources, and different rules for the deliverability of the renewable energy, and whether RECs can be traded independent of the energy. Complaints have also been aired about the administrative complexity of some RPSs, such as the California RPS. 32 As with the mandatory retail mechanism, there is also the possibility that utilities, despite good faith efforts, will not be able to keep up with the rate of renewable energy acquisition required by the RPS. This can alternatively lead to 31 The Federal Energy Regulatory Commission has turned increased attention to wind energy-specific transmission issues, including with respect to interconnection, but many issues are still evolving. 32 See Ryan Wiser, et al, Does It Have to be this Hard? Implementing the Nation's Most Complex Renewables Portfolio Standard, The Electricity Journal, October 2005, Vol. 18, Issue 8. 11

12 charges that RPSs set unattainable or unreasonable goals, or that regulatory means for enforcing compliance are inadequate. Other complaints include that RPSs, particularly if they are aggressive, inflate the cost of electricity and thereby harm the economy. 33 Some of these issues regarding RPSs might be resolved through a federal RPS, but the current administration opposes such a measure, claiming that RPSs are more appropriate at the state level. 34 A federal RPS also raises questions about how to apply it in regions such as the Southeast U.S. that are considered to have less renewable energy potential than other regions. Interplay between the Mechanisms The mechanisms discussed herein were created on a piecemeal basis at the federal level and in various states. In some cases, links between some of the mechanisms exist. For example, the New York RPS relies on voluntary retail purchases to satisfy a portion of the RPS. 35 However, in most cases, it is up to project developers, regulators and other interested parties to see how these mechanisms may interrelate to promote renewable energy development. The PTC is a major element of the effort to drive renewable energy development in the U.S. Of all the major drivers, it is the one with the widest scope, both geographically and with respect to the number of entities that can take advantage of it. Because of this, the PTC in turn affects other mechanisms. It not only induces voluntary wholesale purchases, but it also helps subsidize voluntary retail purchases. Without the PTC or another comparable mechanism, green power would be more expensive, and voluntary retail purchases would likely be less attractive to cost-conscious consumers. The interplay between the PTC and RPSs also warrants consideration. While the PTC at present is a key factor in developing renewable energy, its future raises many questions. One concern is whether the continued growth of wind energy might in fact threaten the PTC and turn it into a victim of its own success. The PTC gives tax credits for the entire output of a qualifying generator for ten years and there is no yearly cap on each plant or all plants. As more wind and other renewable energy projects come on-line and earn the ten-year PTC, the impact on the federal budget grows. This acceleration will be magnified as RPSs ramp up, greater amounts of renewable energy are generated, and PTC allocations rise. As RPS requirements increase, there will be increasingly large tax credits to entities that hold PTCs. It is an open question whether or not this is sustainable. It would also appear that well-developed mandatory wholesale procurement standards render subsidies such as the PTC redundant. Mandatory wholesale procurement requires 33 See, e.g., March 8, 2005 Testimony on behalf of National Association of Manufacturers, before the House Committee on Energy and Natural Resources, on Renewable Portfolio Standards, available at 34 See March 8, 2005 Testimony of David K. Garman, Assistant Secretary, Energy Efficiency and Renewable Energy, before the Senate Committee on Energy and Natural Resources, available at 35 New York Public Service Commission, Case 03-E-0188, Order Issued September 24,

13 retail providers to procure renewable energy. The costs of the renewable energy and the conventional energy that the retail provider procures are included in the retail rates paid by customers. Providing subsidies outside this structure would be redundant if all utilities were subject to mandatory wholesale procurement. Conclusion Those states and countries that have opted for mandatory wholesale procurement mechanisms appear to have done so out of recognition of the benefits provided by renewable energy. These jurisdictions appear to have decided that to try to reduce harmful emissions, strengthen energy independence, and achieve other economic benefits, it is beneficial to establish mandatory standards that can correlate to those goals, rather than just create conditions that may promote competition between various sources of energy. While voluntary choices and market competition can lead to increased levels of renewable energy development, other developments affecting markets and consumers can also cause a reversal of course and lead to increased selection of conventional energy. Mandatory purchase requirements spread across all users remove this uncertainty and foster the necessary long-term planning such as for transmission projects needed to bring the renewable energy to load centers. Ambitious, long-term, mandatory wholesale standards do not preclude financial subsidies, but in effect make them redundant: mandatory requirements by definition do not require incentives. Widespread mandatory wholesale procurement requirements also spread the costs of renewable energy development across a wide range of consumers just as most of the benefits are also shared by a wide range of consumers. Mandatory standards also do not supplant competition. Rather, a well-structured mandatory wholesale procurement mechanism creates competition by giving project developers opportunities to compete for sales to retail providers. If there is widespread support for pursuing the benefits of renewable energy, efforts to obtain the maximum level of benefits should include consideration of an appropriate wholesale procurement mechanism that would foster the development of all reasonably cost-effective renewable energy sources. Wind, biomass, geothermal, solar, and other technologies could all be promoted within limits determined by their availability, potential, costs, and other issues. A well-designed standard would also take into account that some regions have lower renewable energy potential than others, based on the quality of the renewable energy resources in the region. Achieving the benefits of renewable energy requires long-term planning and long-term goals. A great deal of certainty would be added to these efforts through the adoption of ambitious, long-term, mandatory wholesale procurement mechanisms. 13