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What is a Renewable Portfolio Standard?

A Quick Rundown of Renewable Portfolio Standards 

On Monday, April 8, 2019, on the last day of the Maryland Legislative Session, the Clean Energy Jobs Act was passed in both houses of the Maryland Legislature. The act requires an increase in the state’s Renewable Portfolio Standard (RPS)  to 50% by 2030, including a 14.5% carve-out for in-state solar energy. It’s expected to result in approximately 20,000 new solar jobs and $10 billion dollars in economic value to the state over the next 10 years. With the passing of this most recent RPS legislation, Maryland joins the ranks of D.C. and 29 other states (representing 55% of total U.S. retail electricity sales) who’ve established or expanded their RPS policies to increase the amount of electricity that comes from renewable energy resources. 

So, What Is A Renewable Portfolio Standard (RPS) & Why Does It Matter?

A Renewable Portfolio Standard (RPS) is state legislation (there is no federal Renewable Portfolio Standard as of yet) which requires that a specified percentage of a state’s electricity production be generated by renewable resources.  States are able to use Renewable Portfolio Standards as a way to leverage long-term policy stability to help grow the local renewable energy industry. RPS requirements apply to utilities, and many states also include municipalities and electric cooperatives (Munis and Co-ops). Utilities that are subject to these mandates, but don’t generate enough renewable energy themselves, must buy eligible renewable energy certificates (RECs). One REC represents the environmental benefits of one megawatt-hour of renewable energy generation. The requirement feature in an RPS creates a market mechanism for compliance, i.e. the purchase of RECs.  Like all markets, REC supply and demand set the market price for those attributes. By increasing an RPS, a state is increasing demand for RECs (and thus the price) which incentivizes new renewables deployment.  For a corporate energy buyer, a strong RPS leads to increased availability of projects to meet your specific needs and innovative structures for procuring renewable energy and meeting your goals.

Renewable Portfolio Standards by State

The first RPS was passed by Iowa in 1983, and since then over half the country has followed suit. Twenty-nine states, Washington DC, and three US territories have passed an RPS, while eight states and one US territory have passed non-binding renewable energy goals. However, the details can vary significantly from state to state as shown in this map by DSIRE.  

Most states’ renewable energy targets are between 10 and 45 percent, although Washington, D.C. and seven other states, including Maryland, have requirements of 50 percent or greater. Eligible resources for RPS compliance include wind, solar, biomass, geothermal, and some hydroelectric facilities. Several states also include additional resources such as landfill gas, tidal energy, combined heat and power, trash incineration and even energy efficiency in their Renewable Portfolio Standard. Many RPS’ also include specific “carve-outs” which require a certain percentage of the overall renewable energy requirement to be met with a specific technology, or “multipliers” which award additional RECs for electricity produced by these technologies. The ranking preference for different resource classes is often referred to as different Tiers (Tier 1 RECs).

If you’re buying REC’s in your company’s service footprint, it’s important to know what resources are covered by your state’s RPS. Since some states allow waste-burning and “dirtier” resources to produce Tier 1 RECs, there’s a chance you could be getting renewable energy from a resource that could violate, or taint your sustainability claims. 

The RPS Effect on Renewable Energy Growth

According to Berkeley Lab’s Electricity Markets and Policy Group, RPS’ have been responsible for roughly half of the growth in renewable energy since 2000. However, in recent years RPS policies have played a declining role, accounting for only 34% of all national renewable capacity additions in 2017NB1. This is due in part to declining costs and other pro-renewable energy policies. Nevertheless, RPS policies continue to play a significant role in supporting renewable energy growth in the Northeast, Mid-Atlantic, and West.

As discussed, in most cases, a Renewable Portfolio Standard sets up a market for RECs.  In markets with a strong RPS impact, it makes building renewable energy projects more cost-competitive, so more projects can be built.  

General RPS Trends

Most RPS programs are over 10 years old, but states continue to make revisions. More than half of all states with a Renewable Portfolio Standard have raised their overall RPS target and carve-out percentages due to achieving the target early or policymakers wanting to increase renewable deployments. For example, California increased its RPS requirement to 60% by 2030 and added a goal of 100% zero carbon electricity by 2045. Some states have also refined the eligible resources, with particular attention on hydro and biomass. 

REC Pricing Trends

REC prices vary greatly by state and can be volatile. RECs that are eligible to meet state RPS compliance requirements tend to be relatively expensive compared to RECs in states with voluntary wholesale markets. Even the wholesale values for compliance-eligible RECs can vary greatly depending on the specific policy and current supply-demand dynamics.  For example, in states with a solar RPS carve-out, solar RECs (SRECs) tend to be more expensive. Over time, as RPS goals are reached and demand declines, an oversupply of RECs may result, with a subsequent decline in REC prices. The overall success of renewables has enabled many states, including Texas to meet their RPS requirement early.

Be aware of the market dynamics in the state in which you are looking to procure renewable energy as the value of the additional income from RECs can have a major impact on the deal’s economics.

If you’d like to discuss how solar project development can help you meet your renewable energy goals, or need help understanding the market dynamics of your state, give us a call at (866) 256-0912.

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