Who Owns Renewable Energy Certificates: An Exploration of Policy Options and Practice

1. Who Owns Renewable Energy Certificates:An Exploration of Policy Options and Practice Edward A. Holt June 2006 My topic today is regulatory actions taken to clarify the ownership of renewable energy certificates where contracts are silent as to ownership. This is the subject of a research report published by Lawrence Berkeley National Laboratory earlier this year.My topic today is regulatory actions taken to clarify the ownership of renewable energy certificates where contracts are silent as to ownership. This is the subject of a research report published by Lawrence Berkeley National Laboratory earlier this year.

2. Acknowledgements Co-authors Ryan Wiser and Mark Bolinger of the Lawrence Berkeley National Lab Funding from U.S. DOE Office of Electricity Delivery and Energy Reliability (Electric Markets Technical Assistance Program), in particular Larry Mansueti Staff at many state utility commissions First I want to acknowledge my co-authors, Ryan Wiser and Mark Bolinger, and the financial support of the US Department of Energy, as well as many state utility commission staff.First I want to acknowledge my co-authors, Ryan Wiser and Mark Bolinger, and the financial support of the US Department of Energy, as well as many state utility commission staff.

3. Purpose and Methodology Purpose: Provide information and insight to state policy-makers, utility regulators, and others about different approaches to clarifying the ownership of renewable energy certificates (RECs), focusing on the following areas in which REC ownership issues have arisen: Qualifying Facilities (QFs) that sell their generation under the Public Utility Regulatory Policies Act (PURPA) of 1978 Customer-owned distributed generation that benefits from state net metering rules Generation facilities that receive financial incentives from state or utility funds Methodology: Review how federal government and multiple states have addressed REC ownership issues to date, and highlight arguments made on both sides; goal is not to provide policy recommendations, but to instead summarize debate Our report focuses on three areas where REC ownership may be at issue: Qualifying Facilities or QFs that sell their output to utilities under the PURPA; customer-owned distributed generation that benefits from state net metering rules; and generation facilities that receive financial incentives from state or utility funds.Our report focuses on three areas where REC ownership may be at issue: Qualifying Facilities or QFs that sell their output to utilities under the PURPA; customer-owned distributed generation that benefits from state net metering rules; and generation facilities that receive financial incentives from state or utility funds.

4. Outline of Report Introduction PURPA QF Contracts�Federal Perspective State Action on PURPA QF Contracts Net Metering and Distributed Generation State Incentives Conclusions In this presentation, I am going to restrict my comments to the question of REC ownership under PURPA QF contracts.In this presentation, I am going to restrict my comments to the question of REC ownership under PURPA QF contracts.

5. Why is this important to you? Clarifying ownership of RECs applies to cooperatives and municipal utilities if: You must comply with an RPS mandate You have voluntary utility targets or internal goals You offer voluntary green pricing programs You make any claims about renewable energy or green power If you are making claims to the above, you should be obtaining and retiring RECs to back up your claims Only one party can own the REC or make claims on the same MWh. If the RECs are being sold to another party, then you may be double-counting RECs convey the right to make claims about energy attributes

6. Introduction Under 1978 federal law (PURPA), utilities are required to purchase the output from certain Qualifying Facilities, including cogeneration and renewable energy generators PURPA requires that utilities make avoided cost payments to QFs for energy and capacity, but does not mention RECs RECs began to be recognized in the late 1990s, after many QF agreements were signed With the introduction of renewables portfolio standards (RPS) in a number of states, those RECs may have significant value Most pre-existing QF contracts are silent as to which party � the generator or the utility � owns the RECs�thus setting the stage for conflict Avoided costs are those costs the utility would have incurred for energy and capacity had it not been required to contract with the QF. Many QF contracts were entered into between generators and utilities in the 1980s and 1990s, before RECs entered the market.Avoided costs are those costs the utility would have incurred for energy and capacity had it not been required to contract with the QF. Many QF contracts were entered into between generators and utilities in the 1980s and 1990s, before RECs entered the market.

7. The FERC Case Disputes about REC ownership under QF contracts led to a FERC case in 2003 FERC ruled that: Avoided cost payments by utilities to QFs do not transfer the RECs to utilities, unless contract says otherwise It is up to the states to decide REC ownership in such cases based on state law, not based on PURPA and avoided cost payments This ruling has caused confusion: Both sides continue to cite the FERC decision Has led antagonists into state regulatory forums for resolution FERC Docket No. EL03-133-000, Petition for Declaratory Order and Request for Expedited Consideration, American Ref-Fuel Company, Covanta Energy Group, Montenay Power Corporation, and Wheelabrator Technologies, Inc. June 16, 2003. Many of you are probably somewhat familiar with the FERC ruling�it�s now over two years old�so this may not be new to you. But the ensuing work underway at the state level doesn�t typically have the same visibility that FERC decisions have, so I�ll turn my attention there. FERC Docket No. EL03-133-000, Petition for Declaratory Order and Request for Expedited Consideration, American Ref-Fuel Company, Covanta Energy Group, Montenay Power Corporation, and Wheelabrator Technologies, Inc. June 16, 2003. Many of you are probably somewhat familiar with the FERC ruling�it�s now over two years old�so this may not be new to you. But the ensuing work underway at the state level doesn�t typically have the same visibility that FERC decisions have, so I�ll turn my attention there.

8. State QF Cases 16 states have adopted positions or are in process Most states have assigned RECs from pre-existing QF contracts to utilities Especially where states include existing renewables in RPS Regulators concerned that doing otherwise would raise the cost of RPS In several states, QFs retain the RECs in new contracts Two states determined that QFs must be compensated for RECs All but one state has addressed issue through regulation, as opposed to through legislation, though legislation has often informed regulatory decisions Going straight to the results so far� Pre-existing QF contracts matter if the state RPS includes existing renewables. Where a state RPS is limited to new renewables, however, the RECs from older facilities under QF contracts don�t have value in RPS compliance markets. Most states distinguish between old and new contracts�Going straight to the results so far� Pre-existing QF contracts matter if the state RPS includes existing renewables. Where a state RPS is limited to new renewables, however, the RECs from older facilities under QF contracts don�t have value in RPS compliance markets. Most states distinguish between old and new contracts�

9. State Actions re: QF RECs This table summarizing state actions regarding QF RECs shows that most states have decided that RECs are conveyed to the utility purchasing the QF power (the first column). Ten states have taken this approach. Most of them limit their decision to contracts already in place. Note that North Dakota requires that the QF receive compensation for the RECs at a price that is included in a tariff proposed by the utilities and approved by the PUC. In the middle column, Arizona, California and Pennsylvania all have regulatory proceedings ongoing, without resolution at this time. The right hand column shows states that have determined that the RECs belong to the QF unless the contract is explicit to the contrary. Significantly, all of these determinations apply to new QF contracts. Two states that require compensation: ND, the other is Utah, but I didn�t note that in the table because QFs essentially have the option to take the compensation, based on previous contracts for wind power, or to keep the RECs and sell them on the open market.This table summarizing state actions regarding QF RECs shows that most states have decided that RECs are conveyed to the utility purchasing the QF power (the first column). Ten states have taken this approach. Most of them limit their decision to contracts already in place. Note that North Dakota requires that the QF receive compensation for the RECs at a price that is included in a tariff proposed by the utilities and approved by the PUC. In the middle column, Arizona, California and Pennsylvania all have regulatory proceedings ongoing, without resolution at this time. The right hand column shows states that have determined that the RECs belong to the QF unless the contract is explicit to the contrary. Significantly, all of these determinations apply to new QF contracts. Two states that require compensation: ND, the other is Utah, but I didn�t note that in the table because QFs essentially have the option to take the compensation, based on previous contracts for wind power, or to keep the RECs and sell them on the open market.

10. Some Key Arguments (1) Point: Renewable attributes are inextricably linked to energy and must be conveyed to utility; without them QF would not be eligible for PURPA contract Counterpoint: Avoided cost payments are for energy and capacity only; attributes are merely a qualifying characteristic that makes QF eligible for contract Point: Utilities are already paying above-market prices for QFs; payments were sufficient when contract was signed Counterpoint: Payments based on utility avoided cost, not QF economic need; price paid for energy and capacity is not relevant to REC ownership It has been interesting to observe the arguments that are made in these proceedings, both federal and state. Old arguments are refined and new arguments introduced as attorneys study what has been said and what appears most convincing. While almost every case begins with jurisdictional arguments (whether the regulatory commission has the right to rule on REC ownership) state commissions have been willing to accept that they have the authority to clarify REC ownership. I set aside those jurisdictional arguments and summarize some of the arguments made on the merits. An argument made in nearly every case is that� Another frequent argument relates to the payments made by utilities to QFs. When the contracts were approved, avoided costs were expected to be higher than they turned out to be. As a result, utilities are paying above-market prices for QF power, and it sticks in their craw (a legal term) to think they might have to pay more for the RECs. Besides, the utilities argue, the QFs don�t need more money because they were content with the avoided cost payments when they signed the contracts. The QFs respond by saying that the price paid for energy and capacity is not relevant to REC ownership and that the payment is based on avoided cost and not based on need.It has been interesting to observe the arguments that are made in these proceedings, both federal and state. Old arguments are refined and new arguments introduced as attorneys study what has been said and what appears most convincing. While almost every case begins with jurisdictional arguments (whether the regulatory commission has the right to rule on REC ownership) state commissions have been willing to accept that they have the authority to clarify REC ownership. I set aside those jurisdictional arguments and summarize some of the arguments made on the merits. An argument made in nearly every case is that� Another frequent argument relates to the payments made by utilities to QFs. When the contracts were approved, avoided costs were expected to be higher than they turned out to be. As a result, utilities are paying above-market prices for QF power, and it sticks in their craw (a legal term) to think they might have to pay more for the RECs. Besides, the utilities argue, the QFs don�t need more money because they were content with the avoided cost payments when they signed the contracts. The QFs respond by saying that the price paid for energy and capacity is not relevant to REC ownership and that the payment is based on avoided cost and not based on need.

11. Some Key Arguments (2) Point: Payments are intended to compensate the QF for the entire output of the facility, including its non-power characteristics Counterpoint: QFs are paid the same avoided costs as are fossil-fueled cogeneration QFs; therefore avoided cost payments by utilities compensate only for energy and capacity, and not for environmental benefits Point: When an asset or commodity is not specifically reserved for the seller, the full asset or commodity is deemed to have been transferred to the buyer Counterpoint: When a contract does not expressly convey RECs, those severable property interests are reserved for the seller; a utility can only be entitled to those products specifically enumerated in a contract Point: --- Counterpoint: But some state calculations of avoided cost are currently based on costs associated with fossil fuel-fired plants that do not have associated RECs. Thus it is argued that avoided cost compensation does not include any recognition of the economic value of the renewable attributes. An interesting argument arose in Colorado based on an analogy to mineral rights. The utility argued that if the RECs were not specifically reserved by and to the QF, then the full asset is deemed to have been transferred to the utility. The QFs argued the opposite�that if a contract does not expressly convey RECs, those severable property interests are reserved to the QF. I might note here that the Colorado PUC decision in favor of utility ownership of the RECs is being appealed by the City of Boulder, which owns some hydropower qualifying facilities.Point: --- Counterpoint: But some state calculations of avoided cost are currently based on costs associated with fossil fuel-fired plants that do not have associated RECs. Thus it is argued that avoided cost compensation does not include any recognition of the economic value of the renewable attributes. An interesting argument arose in Colorado based on an analogy to mineral rights. The utility argued that if the RECs were not specifically reserved by and to the QF, then the full asset is deemed to have been transferred to the utility. The QFs argued the opposite�that if a contract does not expressly convey RECs, those severable property interests are reserved to the QF. I might note here that the Colorado PUC decision in favor of utility ownership of the RECs is being appealed by the City of Boulder, which owns some hydropower qualifying facilities.

12. Some Key Arguments (3) Point: QFs get a long-term assured revenue stream and thus avoid the risk of market forces. Utilities are guaranteed cost-recovery, but the energy market risk is shifted to the utility and its ratepayers. By now asserting ownership of the RECs, however, QFs seek to retain the benefits of PURPA protection but gain the benefits of market participation through the separate sale of RECs. Counterpoint: If utilities are granted ownership of the beneficial environmental attributes, they should also be responsible for the environmental attributes and liabilities of non-renewable generators from which they purchase power�contingencies that are not recognized on the utilities� books. Utilities should not be able to pick and choose which attributes they want to own among all their purchased energy contracts Utilities argue that QFs want assured revenue without risk, plus the benefits of market participation through ownership of RECs�an unbalanced deal, in their view. QFs argue that utilities want the monetary value of the generator�s attributes, but do not accept the environmental attributes and liabilities from other generators they contract with. Utilities shouldn�t be able to pick and choose which attributes they want to own among all their purchased energy contracts.Utilities argue that QFs want assured revenue without risk, plus the benefits of market participation through ownership of RECs�an unbalanced deal, in their view. QFs argue that utilities want the monetary value of the generator�s attributes, but do not accept the environmental attributes and liabilities from other generators they contract with. Utilities shouldn�t be able to pick and choose which attributes they want to own among all their purchased energy contracts.

13. Some Key Arguments (4) Point: Giving RECs to QFs would unfairly enrich QFs at the expense of ratepayers and would increase cost of RPS compliance Counterpoint: The sale of RECs separate from power is intended to compensate for development risk and encourage development of new resources Point: Utilities would be forced to pay QFs twice, once for energy and a second time for RECs, with no additional benefit to ratepayers Counterpoint: Utilities and ratepayers receive the benefits even without the RECs: increased fuel diversity, a local and secure fuel supply, increased efficiency of energy production, and a fixed price not subject to fluctuations Going to the second point, utilities argue that they would have to pay QFs twice, once for energy and a second time for RECs, with no additional benefit to ratepayers. QFs argue that utilities and ratepayers receive the benefits even without the RECs: �.Going to the second point, utilities argue that they would have to pay QFs twice, once for energy and a second time for RECs, with no additional benefit to ratepayers. QFs argue that utilities and ratepayers receive the benefits even without the RECs: �.

14. Conclusions RPS is forcing states to address REC ownership questions QFs would lose significant value if they cannot claim ownership of RECs Utilities would incur additional cost to acquire RECs independently of QF contracts Uncertainty about ownership limits REC marketability State policy-makers are key to determining ownership FERC ruling still subject to differing interpretations Most state determinations made in regulatory proceedings, but some state rulings (CT, NJ) are under appeal to the courts State legislative action may reduce appeals and uncertainty Longer term, the issue may diminish Fewer QF contracts in future due to EPAct 2005 changes to PURPA New contracts will likely specify who owns the RECs State adoption of RPS policies is forcing states to address the REC ownership question. A lot is at stake: either additional cost to a utility if RECs are awarded to the QF, or loss of value to the QF if RECs are awarded to the utility. In addition to Connecticut and New Jersey appeals, the City of Boulder is suing the Colorado PUC over a ruling that awards RECs from the City�s hydro plants to Xcel Energy. 2005 revisions to PURPA state that where FERC determines that a competitive wholesale power market exists, utilities will no longer be obligated to purchase QF output.State adoption of RPS policies is forcing states to address the REC ownership question. A lot is at stake: either additional cost to a utility if RECs are awarded to the QF, or loss of value to the QF if RECs are awarded to the utility. In addition to Connecticut and New Jersey appeals, the City of Boulder is suing the Colorado PUC over a ruling that awards RECs from the City�s hydro plants to Xcel Energy. 2005 revisions to PURPA state that where FERC determines that a competitive wholesale power market exists, utilities will no longer be obligated to purchase QF output.

15. For More Information... Download the full report from: http://eetd.lbl.gov/ea/ems/re-pubs.html Contact the authors: Ed Holt, edholt@igc.org, 207-798-4588 Ryan Wiser, RHWiser@lbl.gov, 510-486-5474 Mark Bolinger, MABolinger@lbl.gov, 603-795-4937