Rl’s Renewable Portfolio Standard: Remaining Design Decisions

1. Rl’s Renewable Portfolio Standard:Remaining Design Decisions Robert C. Grace Sustainable Energy Advantage, LLC R.I. Greenhouse Gas Action Plan Renewable Portfolio Standard Working Group January 24, 2003

2. Overview • Updates/Refinements • Product vs. Company • Standard Offer/Default Service Contracting Standards • Implementing Future RPS Rules Changes • New Territory: Interaction With Other Policies • RI’s Renewable Energy System-Benefits Charge • Possible Future Federal RPS • Treatment of Emissions Credits • Other Issues • Transition to Legislation and Regulations

3. Product vs. Company • Recommendation: • RPS percentage standard applies to each product • Rationale: • Consumer protection – maintain credibility and viability of voluntary green power market • Promotes credible product differentiation • Consistent with fairness principle • NEPOOL GIS built to support product-level tracking • Since last meeting, dissenters have agreed to recommendation  now have consensus

4. Contracting Standards for SO/DS Providers • Modified Recommendation #1: Legislation should authorize PUC to develop minimum contracting standards for SO and/or LRS provider to address potential (transitional) market failure • Balance desires to: • Assure new renewable generation can attract commercial financing • Assure ratepayers bear minimum cost of compliance • Minimize interference with emerging competitive market opportunities • Address: • Contract term, quantities associated w/ SO & LRS, either independently or in aggregate, appropriate for prevailing market conditions • If PUC concludes that contracting only through end of SO is insufficient to attract financing, should consider collective SO and LRS obligations • taking into account expected penetration & RPS % target • If (and as long as) considered necessary, such standards might include medium- to long-term contracting for certificates • If/when shown unnecessary, PUC should discontinue standards going forward

5. Contracting Standards for SO/DS Providers (cont.) • Modified Recommendation #2: Require annual compliance plan filings by the SO/LRS supplier, addressing: • How DISCO plans to meet objectives of creating stable markets; minimizing costs to rate payers; maximizing term commitments to support financing new renewables • How procurement plan interacts with pre-existing commitments • Minimizing interference with competitive opportunities • Recommendation #3: PUC should allow cost recovery for certificate purchases by the SO/LRS supplier if fully consistent with compliance plan and contracting standards • Note: Narragansett dissent regarding need for standards

6. Implementing Future Changes • Essential to maintain regulatory certainty and stability • If adequately defined in legislation & rules, few changes to design should be required • Changes to the policy should only be made by legislature except… • Recommend authority for PUC to consider in the future: • possible future application of the RPS to self-generators • possible elimination of the maintenance tier under a Federal RPS • accelerating or slowing the target RPS percentage increases over time • Discretion to be used with great care, e.g. slow increases only if > 30% ACM compliance for 3 yrs; accelerate only of cost for 3 years < $10/MWh • duration of the RPS policy, and • expanding or changing resource eligibility (minor changes and clarifications only) • All material changes that may greatly influence financing or contracts should require hearings & at least 2 - 3 years notice

7. System-Benefits Charge Interaction • Ignoring interactions (RPS eligibility and targeting/use of SBC funds) can: • add costs for RI customers without adding benefits • create inefficiencies and unnecessary windfalls • Recommendations: • RI RPS should remain largely silent on SBC interactions • RIREF & other SBC administrators in region should consider establishing standards & guidance for interaction • e.g. target SBC funds to renewables that would not thrive under RPS • e.g. prospectively prohibit generators receiving substantial SBC funding from use for RPS compliance • RI RPS administrator should be given discretion to address interaction directly if major inefficiencies arise in the future

8. Federal RPS Interaction • Recommendations: • RPS administrator should anticipate & monitor Federal policy efforts on RPS, and be ready to assess interaction issues as they arise, including coordination of accounting and verification mechanisms • Anticipate interaction in legislation • Two options for consideration: • compliance with RI RPS would offset federal RPS requirements, but excess credits cannot be sold elsewhere, (e.g. if RI>Federal, incremental RI % is truly incremental); or • compliance with RI RPS would not offset or reduce federal RPS obligations (RI RPS is truly additive to Federal) Consider eliminating maintenance tier if a Federal RPS adopted that has a similar effect

9. Treatment of Emissions Credits • Air quality regs and efforts to reduce GHGs increasingly rely on market mechanisms… Evolving emission markets create potential challenge to relying on RPS for emission reductions • Legislation should: • clearly state objectives of greenhouse gas and air pollutant emissions reductions • require that production from plants receiving tradable emission rights will not be eligible for RPS compliance to the extent that such rights are sold • Documentation and attestations to this effect are necessary to the extent that such treatment is not tracked in the NEPOOL GIS.

10. Other Issues • 5 cent cost cap/alternative compliance payment: • Should it conform to MA and escalate with CPI?

11. Next Steps: Transition to Legislation & Regulations • Key decisions include determining what design features to define in legislation, and which to leave to regulatory implementation • Most important lesson learned from other states is: beware of the RPS design details! • Inadvertent or seemingly unimportant legislative language can substantially undermine RPS effectiveness. • If legislative process can handle the details, all RPS design elements should be addressed in some way in legislation • With clear legislative guidance but minimal detail, many details can best be addressed in administrative process: • detailed definition of new, incremental generation • certification of eligible generators • compliance filings • certain aspects of flexibility mechanisms, and • contracting standards for SO/DS providers

12. Sustainable Energy Advantage, LLC4 Lodge LaneNatick, MA 01760tel. 508.653.6737fax 508.653-6443bgrace@seadvantage.comwww.seadvantage.com