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GLREA
RPS Position Statement
4/25/2002
Renewable
Portfolio Standards (RPS)
An
RPS is a law compelling energy companies to produce
some fixed percentage of the energy they sell from renewable
sources. Such laws can greatly aid the renewable energy
industry in its early formation and assist in achieving
economies of scale. They are most often applied to the
electrical utilities, requiring them to use renewable
energy sources to generate the electrical energy they
sell.
Current
Federal Incentives
There are currently a number of Federal incentives in
place. Electrical power produced from renewable sources
qualifies for a production tax credit of 1.5 cents/kWh.
This was recently extended for 2 years, through the
end of 2003. Ethanol production currently receives a
generous tax credit of about 50 cents per gallon through
2007.
The
Economics of Current RE Technologies
The lowest-cost methods of generating electricity from
renewable sources are currently hydropower and landfill
gas. Existing hydropower is not eligible for RE credits
under the Senate RPS bill. Upgrades to existing hydropower
are eligible, but this is a very limited resource. Landfill
gas is cheap because the gas is produced as an undesirable
byproduct of waste disposal and regulations require
venting the gas out of the landfill to keep pressure
from building up and driving it into area basements.
This resource is quite limited, however, and will shrink
over time as more biodegradable items are removed from
the waste stream prior to land filling.
The
next lowest-cost source of renewable electricity is
the utility-scale wind farm. Wind turbine systems have
strong economies of scale, and over the past 20 years
the size of individual turbines has grown twenty fold,
from 50-100 KW to 1-2 MW. Building the turbines in large
groups in places with exceptional wind speeds reduces
operations and maintenance costs. Wind energy generation
is highly site specific; a site with twice the average
wind speed will generate eight times the electrical
energy. In the Midwest, wind generated power doesn't
match electrical demand well, since more wind is available
at night and in the winter. Electrical demand, driven
by air conditioning and industrial loads, peaks on summer
afternoons.
The
Case for Government Incentives
GLREA strongly favors carefully crafted government incentives
for renewable energy production. Incentives for renewable
energy are justified because it has societal benefits
not captured in the current energy markets:
1)
Renewable energy provides significant environmental
benefits, including reductions in air pollution, water
pollution, and the destruction that fuel extraction
entails.
2)
Renewable energy reduces our vulnerability to foreign
governments, providing more latitude in foreign policy
and reducing the need for overseas military commitments
and actions.
3)
Renewable energy does not require providing capital
to nations hostile to the US.
4)
Distributed renewable energy systems providing on-site
generation to customers do not provide attractive
targets for terrorist strikes.
5)
Renewable energy is domestic, reducing our trade deficit.
6)
Renewable energy produces jobs here in the US rather
than exporting them overseas.
7)
Renewable energy is growing around the world and the
development of a strong domestic industry can position
the US for significant exports of these technologies
in the future.
8)
Many forms of renewable energy are distributed in
nature, reducing the need for large-scale power transmission.
This is not true of large-scale wind systems.
9)
Renewable energy does not require the extraction of
irreplaceable fossil resources that should be reserved
for higher value uses.
10)
Renewable energy prices are not subject to wild swings.
Just as having a portion of a financial portfolio in
cash or bonds reduces the risk of the entire portfolio,
drawing a portion of our energy needs from renewable
sources reduces electric energy price volatility.
Senate
Bill Under Consideration
What
It Says
The
Senate Bill would require utility companies (but not
government-owned utilities nor rural electric cooperatives)
to buy RE credits for a percentage of their total electrical
energy sales, with the percentage escalating from 1%
in 2005 to 10% in 2020. From 2020-2030, the DOE will
decide the RPS percentage, but it must be at least 10%.
These credits would be issued to each entity generating
electricity from RE sources. The price for these credits
will be determined by the mandated demand and whatever
supply may arise, but is capped at 3 cents for each
credit. RE generation systems get a double credit if
they are on Indian lands or if they are on a customer
premise and reduce the customer's consumption of utility
power. The bill attempts to be technology neutral; all
RE sources are treated the same as long as their output
is electrical energy. States are free to add further
requirements; including specifying that certain amounts
of the RE must be from certain technologies (e.g. PVs).
Except for the provisions regarding Indian lands and
customer-based installations, it is also geography neutral.
Utilities can buy the RE credits from any RE generator
in the country. The RE credits and the actual electricity
can be sold separately. A wind farm in Kansas may sell
the electricity to the local utility, and the RE credits
to a utility in Florida.
Likely
Impacts of This Bill
Because wind energy is currently significantly lower
cost than other renewable energy sources such as PVs,
this proposal will drive the development of the entire
wind energy industry. The 1.5 cent/kWh production tax
credit and the ability to sell wind as green energy
have already made wind power a rapid growth industry.
From
the AWEA (American Wind Energy Association) website:
"Of the new wind power capacity installed last
year, nearly 1,700 MW were from wind farms built across
the U.S., including more new wind capacity in a single
state, Texas (915 MW), than had ever been installed
before in the entire country in a single year. Some
$3 billion worth of wind power investments (about 3,000
MW) are being proposed or planned for the next several
years in the U.S., according to AWEA estimates…[Texas]
more than tripled its wind capacity, and would rank
sixth among the nations of the world in wind capacity
if it were a country, based on one year's development
alone."
If
this bill passes, there will be a massive wind industry
scale up, and the focus of installations will shift
from optimum wind sites to good wind sites on a consumer
premise (to quality for the double credit). The credit
is so generous that the bill may over-stimulate the
already rapidly growing wind industry, creating demand
faster than the industry can scale up to meet it. As
a result, the RE credit price may remain close to the
cap of 3 cents/kWh.
Because
PV capital costs are significantly higher than utility-scale
wind, PVs have difficulty competing for grid-connected
power. Selling RE credits under this bill will require
metering the output of the RE system. The cost of the
metering and reporting requirements may dissuade small
PV installations from selling the credits at all.
The
bill focuses exclusively on electrical power generation,
doing nothing for the solar thermal industry, which
cost-effectively reduces fossil fuel consumption.
RE
generators are currently marketing their product as
green power for sale to ecologically concerned consumers
for higher rates. Because this bill mandates RE use,
there will be little incentive to continue green power
programs.
The
utility companies' cost of buying these RE credits will
be passed on to electricity consumers. Wholesale electricity
currently sells in the range of 1.5-2.5 cents/kWh. If
the utilities must buy RE credits for 10% of their electrical
sales at 3 cents/kWh, this could raise the wholesale
cost of electricity 12-20%. The effect on electrical
power service costs would be smaller, since this includes
transmission and distribution costs which would be unaffected
by the bill
Because
strong wind sites are not geographically distributed,
the bill will have the affect of collecting money from
consumers across the country and transferring it to
those regions with strong wind sites. While Michigan
has some very good wind sites, they are mostly in the
UP or in Lake Michigan itself. The difficulty of transmitting
power out of the UP to the population zones of the Lower
Peninsula or building wind towers in a lake subject
to very destructive ice flows makes it unlikely Michigan
will participate in the boom of grid-connected wind-power
development.
Suggestions
for Improving the Bill
This Bill would provide a powerful incentive for the
development of the electrical RE industry, especially
large wind systems on customer sites. It provides a
long-term (25 years!) commitment to RE. Because its
costs are imposed on the utilities/consumers it does
not require annual review through the budgetary process.
Imposing the costs on consumers rather than taxpayers
should encourage conservation. It provides a strong
incentive for actual RE production, rather than reducing
capital costs of installation. It also provides a flexible,
market-based means to price the RE production credits.
While
GLREA favors government incentives for RE, there are
several policy principles and incentive provisions a
renewable energy bill should contain:
1)
Any renewable standard should be applicable to all
utilities, not just investor-owned. Proposals that
exempt municipal utilities as well as Co-ops, create
an incentive for energy customers to move or restructure
their purchases to these other entities to avoid the
RPS requirements.
2)
A major problem with respect to wind energy is the
lack of adequate transmission capacity. Many areas
of the country have encountered local resistance to
construction of Extra High Voltage (EHV) transmission
lines that have delayed projects for years. Without
the construction of these lines, it is not possible
to transmit renewable generation from areas where
it is most cost-effective to build wind energy. The
bill should ensure that the generator locating the
facility and not the utilities pays the cost of additional
transmission capacity.
3)
Companies should receive credit for renewables that
have already been installed. When proposals are offered
that do not give credit for activities already undertaken,
companies that have made significant investments in
renewables are punished. This sends the wrong economic
signal and discourages companies from making investments
prior to passage of government incentives.
4)
Fuel cells should be part any renewable measure. (Currently,
fuel cells are designated as renewable for mandatory
federal purchase requirements only, but not for any
other sector.) While fuel cells currently use natural
gas that is not renewable, creating a fuel cell infrastructure
is a necessary precursor for the future hydrogen economy
to be driven by renewable energy sources.
5)
This bill's RPS schedule is too much too fast. AWEA
predicts that with strong incentives, wind could provide
6% of the US electrical demand by 2020. The DOE's
"Wind Powering America" program has a goal
of producing 5% of the nation's electricity from wind
by 2020. This bill requires 10% renewable electricity
by 2020. Any consideration of increasing renewables
by a large volume should take into account the shortage
of existing construction and engineering resources
and skilled labor necessary to meet such renewables
requirements. With the nameplate ratings of wind being
2x to 3x that of conventional generation needed to
meet the same kilowatt-hour production mandate, the
infant U.S. wind equipment manufacturing industry
could have a captive market of as much as 20 to 30
percent of the nation's generating capacity by 2020.
Can the industry grow fast enough to meet the RPS
schedule while maintaining quality? Is there sufficient
access to ready capital to make these major changes?
Will the mandated demand drive system production to
other countries?
6)
Credit sales of up to 6 cents per kWh (on Indian lands
or on a customer site) are quite generous. The DOE's
"Wind Powering the Midwest" document estimates
current wind electrical costs in the range of 4-6
cents/kWh today, dropping to 2-3.5 cents/kWh by 2010.
Credits of this size combined with the mandatory RPS
schedule may push the industry faster than it can
grow.
7)
The Bill should be expanded to provide incentives
for non-electrical RE production. Solar thermal systems,
including pool heaters, hot water heating, and space
heating are highly effective in saving fossil fuels,
especially natural gas. This makes gas available for
other uses, including electrical generation. Solar
Thermal systems have been proven effective at Demand
Side Management (DSM). Since thermal systems do not
have a meter, RE credits would be computed based on
the FREC rating of the system and the location in
which it is installed. Annual certification of its
proper operation would be required to have credits
issued.
8)
We strongly support distributed generation, and would
like to see the current double-credit for customer-sited
RE systems ("generation offset") increased
to a triple credit. This will have the additional
effect of reducing the overall cost of the mandate.
9)
The price-cap should be reduced gradually over the
life of the bill. This will ensure that the industry
can make gradual adjustments to the phase-out of incentives
and stand on its own two feet. Previous government
incentives have created boom and bust cycles in the
industry when the incentives were abruptly eliminated.
10)
Consideration should be given to the regional effect
of this bill. Areas with weaker wind and solar resources
may need stronger incentives to encourage nation-wide
development. Credits could be multiplied for utility
service areas with weak RE resources. This is particularly
important for wind, where the variation in resource
is very great. High wind resource areas of Class 6
and 7 require no incentive to be developed economically.
However, DOE studies indicate that the levelized annual
cost of wind energy generated in Class 2 and 3 areas
may be about 2.5 to 1.5 cents/kWh above the market
price of electricity in 2005 and close to competitively
priced by 2010. This approach will assure that renewable
energy is developed across the country, not only in
regions of high renewable energy resources. It will
help assure that funding is available for the development
of renewable energy technologies that can operate
economically in moderate renewable energy regions.
11)
Solar energy should be given greater amount of credits
based upon the technology's high capital cost and
its importance in achieving a distributed renewable
energy supply located at the consumers' point of use.
Without adequate incentive, solar energy and its potential
for optimizing the fuel cell cycle in hybrid distributed
generation applications will go undeveloped in the
U.S. Solar energy holds potential for production of
hydrogen at the customer's site where it will be needed
to power fuel cells. The development of efficient,
cost effective distributed solar electric facilities
in the U.S. will be an important component of the
hydrogen economy, minimizing the need for a national
infrastructure to support hydrogen storage and transmission.
12)
The high capital cost and low energy production of
renewable energy technology (e.g. PVs) can result
in property tax effects that approach or exceed the
market value of the energy produced. Property tax
relief would promote the development of distributed
renewable energy facilities.
13)
The public benefit of renewable energy should be recognized
and promoted through access to funding and tax incentives
provided to facilities such as airports and waste treatment
plants. This could easily be accomplished by adding
Renewable Energy systems under section 142 of the IRS
code. This could provide up to a 30% reduction in the
interest expense associated with renewable energy and
eliminate the need to provide renewable energy credits
in most situations involving wind energy projects that
are within 2 cents/kWh of competitive prices.
Great
Lakes Renewable Energy Association
URL: www.glrea.org
Email: info@glrea.org
Lansing:
(517) 646.6269
Toll Free:
1.800.434.9788
Join GLREA
Go to our membership
area and find out how you can join GLREA!
Contact GLREA
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us if you have any additional questions or comments.
GLREA
is a 501c3 nonprofit organization and contributions
may be tax deductable.
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