BILL ANALYSIS SB 107 Page A Date of Hearing: August 17, 2006 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Lloyd E. Levine, Chair SB 107 (Simitian and Perata) - As Amended: August 7, 2006 SENATE VOTE : 25-14 SUBJECT : Renewable energy. SUMMARY : Accelerates California's Renewables Portfolio Standard (RPS) to require retail sellers of electricity to procure at least 20% of their retail sales from renewable power by 2010 instead of 2017. Clarifies existing rules to allow renewable power to count toward a retail seller's RPS even if the associated electricity is not delivered to the retail seller. Specifically, this bill : 1)Requires that all retail sellers of electricity, excluding local publicly owned electric utilities (municipal utilities), procure at least 20% of the total electricity sold from eligible renewable resources by 2010. 2)Allows renewable electricity that is provided to any location within California or is scheduled and settled for delivery in California to count toward a retail seller's RPS obligations. 3)Changes the definition of "eligible renewable resource" to allow renewable power that is produced outside of California from a facility that commences operation after January 1, 2005, to count toward a retail seller's RPS if the associated electricity is delivered to an in-state location, and it complies with California environmental quality standards. Electricity from a facility that was operating prior to the year 2005 can count toward a retail seller's RPS if the electricity is part of incremental load resulting from repowering or that facility has been part of the baseline of renewable power of a retail seller. 4)Prohibits the awarding of Supplement Energy Payments (SEPs) for the purchase of Renewable Energy Credits (RECs) or for renewable electricity purchase agreements of less than 10 years in length. 5)Allows eligible renewable generation facilities located SB 107 Page B outside of California to receive SEPs. 6)Allows renewable energy projects to receive SEPs for the above-market cost of the renewable electricity for the value of the life of the contract instead of just for the first 10 years of the contract. 7)Requires municipal utilities to annually prepare a report to the California Energy Commission (CEC) on the mix of eligible renewable resources used in their portfolio and on their progress toward meeting the municipal utility's RPS. 8)Defines Renewable Energy Credit to mean a certificate that one unit of electricity was generated by an eligible renewable energy resource and includes all renewable and environmental attributes associated with the production of electricity, except for emission reduction credits. 9)Allows municipal utilities to sell RECs to retail sellers of electricity if the municipal utility has established a RPS that is comparable to the RPS of the Investor Owned Utilities (IOUs) and is in compliance with that RPS. 10)Allows the Public Utilities Commission (PUC) to authorize the use of RECs to meet the RPS once the CEC has developed a system to track RECs. 11)Deletes a requirement in current law that prohibits an IOU from sharing the results of any competitive solicitation for eligible renewable energy resource until the PUC has established a market price referent (MPR). 12)Requires the PUC to develop flexible rules for compliance with the RPS that shall address situations where, as a result of transmission constraints, a retail seller is unable to procure eligible renewable energy resources sufficient to satisfy their RPS obligations. 13)Allows a contract for eligible renewable resources that is less than 10 years in duration to count toward a retail seller's RPS. Such contracts shall not be eligible for SEPs. 14)Allows the PUC to authorize a procurement entity to enter into contracts for renewable energy on behalf of a retail seller. The procurement entity will be allowed to recover SB 107 Page C administrative and procurement costs through the retail rates of the end-use customers whom directly benefit from the procurement of the renewable electricity. 15)States that a retail seller that has met its 20% renewable obligation in one year shall not be required to increase its renewable energy procurement in the following year. 16)Requires the CEC to develop a system to certify, track and verify that RECs are produced by renewable energy resources. 17)Specifies that a renewable energy project selected by an Energy Service Provider (ESP) may only receive SEPs if the ESP selects the project through a "least-cost best-fit process" and the SEPs are reasonable in comparison to other projects. 18)Provides that renewable power generated under terms of a contract executed before January 1, 2002, shall count toward a retail seller's RPS obligations. 19)Provides renewable power generated under terms of contracts awarded to Qualifying Facilities (QFs) under the Public Utility Regulatory Policies Act (PURPA) of 1978, shall count toward a retail seller's RPS obligations. 20)Provides that the cost of a new transmission facility that is built to deliver electricity from areas with high concentrations of renewable power shall be paid for by all electricity customers in California. 21)Requires all long-term procurement plans entered into by an electrical corporation or a municipal utility to adopt a strategy to achieve efficiency in the use of fossil fuel and to address carbon emissions. EXISTING LAW : 1)Requires retail sellers of electricity, except municipal utilities, to increase their existing level of renewable resources by 1% of sales per year such that 20% of their retail sales are procured from eligible renewable resources by 2017. 2)Defines eligible renewable resources to include all generation from a renewable electricity generation facility that uses SB 107 Page D biomass, solar thermal, photovoltaic, wind, geothermal, fuel cells using renewable fuels, small hydroelectric generation of 30 megawatts or less, digester gas, municipal solid waste conversion, landfill gas, ocean wave, ocean thermal, or tidal current, and any additions or enhancements to the facility using that technology. Requires the renewable resource to be located in California or be directly connected with the California transmission system. 3)Exempts municipal utilities from the statutory requirements of RPS and instead requires municipal utilities to implement and enforce their own RPS programs that recognize the intent of the Legislature to encourage renewable resources. 4)Allows the CEC to award SEPs to generators of eligible renewable resources to cover above market costs of renewable energy, but SEPs may not be paid to one project for more than 10 years. FISCAL EFFECT : Unknown. COMMENTS : The purpose of this bill is to accelerate the state's existing RPS requirements so that 20% of retail sales of electricity in California come from renewable resources by the year 2010 and to address issues that may make compliance with the RPS difficult. 1) Brief history : In 2002, the Legislature approved SB 1078 (Sher), Chapter 516, Statutes of 2002, and SB 1048 (Sher), Chapter 515, Statutes of 2002. Together these bills created California's RPS. Under the RPS, the IOUs are required to increase their renewable procurement each year by at least 1% of total sales, so that 20% of their sales are from renewable energy sources by December 31, 2017. Once a 20% portfolio is achieved, no further increase is required. The PUC is required to adopt comparable requirements for direct access providers (Energy Service Providers or ESPs) and community choice aggregators (CCAs). Municipal utilities are not required to meet the same RPS as the IOUs, but instead must implement and enforce their own RPS program that recognizes the intent of the Legislature to encourage renewable resources. The RPS also allows new renewable energy providers to apply to the CEC for SEPs. SEPs will be awarded to renewable energy providers to cover the difference between the prices they bid in SB 107 Page E a competitive solicitation and a market price as established by the PUC (known as the Market Price Referent or MPR). The RPS requires IOUs, and certain other retail energy providers, to buy renewable electricity to the extent Public Goods Charges (PGC) funds<1> are available to pay for SEPs. If no PGC funds are available, the retail energy providers are not required to purchase additional renewable power. The RPS requires the PUC to adopt a rulemaking within six months of its enactment (January 2003), to implement the RPS and to determine market prices from which SEPs can be determined. On June 9, 2004, the PUC approved two decisions that established standard market terms for renewable contracts and a method for calculating market prices for renewable resources. Since then, the IOUs have issued Requests for Proposals (RFPs) for renewable energy contracts that would comply with the RPS and potentially be eligible to receive SEPs. These RFPs have resulted in the IOUs signing a number of contracts for renewable power. To date all contracts have been for prices below the MPR and thus no SEPs have been issued. However, reports from parties involved in the current renewable procurement process indicate that SEPs will be needed for contracts that will be approved this year and next. 2) Accelerated RPS compliance : The "Energy Action Plan"(EAP) adopted by the PUC, the CEC and the Power Authority (PA) pledges that the agencies will accelerate RPS implementation to meet the 20% goal by 2010, instead of 2017. The Governor has also endorsed "20% by 2010" and proposed an additional goal of 33% by 2020. The PUC has mandated this accelerated goal without additional legislation. Currently, all of the three major IOUs may have difficulty of meeting the 20% by 2010 goal. Pacific Gas & Electric's (PG&E) current baseline of renewable power is at 12%, while Southern California Edison (SCE) already has 16.7% of eligible renewable power in its portfolio. San Diego Gas & Electric (SDG&E) currently only receives 5.4% of its electricity from renewable resources. --------------------------- <1> Existing law requires electric utilities to identify and collect a separate rate component to fund energy efficiency, public interest renewable energy research, and related "public goods" programs. SB 107 Page F 3) Making 20% an achievable goal: Currently, provisions in the RPS statute may prevent some retail sellers from meeting the mandate to procure 20% of their electricity from renewable resources by 2010. Transmission constraints may limit SDG&E's ability to buy new renewable electricity and have that electricity delivered to its service territory. The current RPS statute requires that ESPs procure their renewable resources through contracts that are at least 10 years in length, but because of the long-term uncertainty of direct access markets in California, ESPs may not be able to sign enforceable contracts of that length. 4) Transmission constraints : This bill attempts to address the problem of transmission constraints by clarifying that electricity from eligible renewable resources does not have to be delivered to the service territory of the retail seller and instead only requires that the electricity be provided to the retail seller at a location within California. This provision would maintain the RPS's objective of reducing consumption of fossil fuels within California, but would allow for more flexibility in the delivery of electricity. If the renewable electricity were actually provided to the retail seller in another IOU's service territory, the retail seller and the IOU would merely arrange to swap other electricity. This type of swapping has been a common practice in the past. The PUC has already issued a decision that allows for renewable power that is delivered anywhere in the state to count toward an IOU's RPS obligations. The bill also addresses problems with transmission constraints by allowing a retail seller to meet its RPS obligations through the purchase of tradable RECs. A tradable REC is a credit for the renewable attributes of the renewable generation. It allows a retail seller to purchase the renewable attributes while another party can buy the actual electricity. 5) Contract length: This bill attempts to address the problems ESPs have in signing long-term contracts by allowing the PUC to approve renewable contracts that are less than 10 years in length. Such contracts, however, will not be eligible for SEPs. The ESPs believe that restrictions in the bill will still prevent them from signing long-term contracts. First the bill provides that they cannot receive SEPs for contracts that are shorter than 10 years. The ESPs believe that any term contract SB 107 Page G should be eligible for SEPs since any term contract results in added renewable power to the state's portfolio. Alternatively, TURN argues that determining the market price for these shorter-term contracts, which would be necessary before SEPs could be issued, would require a new proceeding at the PUC which could delay implementation of parts of the RPS for another 18 months. TURN also believes that allowing SEPs for long-term contracts will encourage inefficient buying behavior and potentially sabotage the RPS program goals by allowing higher-priced short-term contracts to reap large amounts of the available SEPs. ESPs are also concerned with language that requires the PUC to set a minimum amount for each utility that must come from long-term contracts. The ESPs believe that they should be allowed to sign as many short-term contracts as they need to meet their RPS obligations and to meet the flexibility they need to serve their customers. The bill also attempts to address problems the ESPs have with signing long-term contracts by allowing the PUC to authorize a procurement entity that could purchase power on behalf of other retail sellers. The procurement entity would have the ability to sign long-term contracts for renewable electricity and could then provide this electricity to ESPs. While most retail sellers support the idea of a procurement entity they all are concerned that the language in the bill could result in the PUC ordering an IOU to act as a procurement entity and forcing ESPs to purchase renewable power from that entity. They have suggested that the procurement entity should be voluntary. To meet this suggestion, the committee may wish to consider amending the bill to provide that the PUC may authorize the creation of a procurement entity but may not require any party to act as or purchase from a procurement entity. 6) Out-of-state delivery: Current law is ambiguous as to whether renewable power produced outside of California can count toward California's RPS and can qualify for SEPs. One of the main goals of the RPS is to reduce the need for fossil fuel fired electricity in California. This goal can still be achieved if electricity from other states is allowed to count toward the RPS, provided the electricity is actually delivered to the state. Allowing out-of-state produced renewable electricity to count toward the RPS will create a significantly larger market for renewable power and could potentially lower the overall cost SB 107 Page H of renewable power. This bill addresses the issue by allowing renewable power that is produced outside of California to count toward a retail seller's RPS obligations, provided it is delivered to California. The bill also allows these projects to qualify for SEPs. While allowing out-of-state produced renewable power to count toward California's RPS could lead to lower costs for renewable power, the committee may want to consider if these projects should also qualify for subsidies from California ratepayers in the form of SEPs. The goal of creating more California jobs may be better maintained if California ratepayer money is only used to fund California projects and is not used to subsidize out-of-state projects. Therefore, the committee may want to consider amending the bill to provide that only projects located within California can qualify for SEPs. 7) Credit is as good as cash: This bill allows retail sellers of electricity to use RECs to meet their RPS obligations. REC trading may help retail sellers meet the accelerated RPS goals by allowing them to purchase the attributes of renewable power without having to purchase unneeded or undeliverable generation. A REC program will allow the environmental attributes of renewable energy to be unbundled from the energy itself and allow the energy and the attributes to be trade as separate commodities. A REC program would allow SDG&E to purchase RECs from a wind farm in Northern California while the wind farm sells its electricity output to another retail electricity provider that does not need the environmental attributes. SDG&E would not need to rely on congested transmission lines for delivery of the actual electricity and instead could produce the needed energy from non-renewable sources within its service territory. Alternatively, a small retail seller, such as an ESP, who may not be able to sign the long-term contracts necessary to develop new renewable resources, can buy RECs instead. Since SB 107 contains explicit provisions against double counting RECs, the same amount of new renewable power would need to be built to meet RPS as would be needed without a REC program. However, a REC program will allow the retail providers to more efficiently meet their renewable obligations. SB 107 Page I Similar trading programs are already in place in Texas and Massachusetts. Additionally, programs have been in place for some time that allow for the trading of the environmental benefits of reduced SO2 and NOx emissions. While SB 107 leaves much of the task of developing a REC program to CEC and PUC, this bill establishes a narrow definition of RECs and further limits how RECs can be traded. The limits are an effort to prevent a wide-open REC market, which might undermine RPS goal of promoting investment in new renewable resources in California and could create the potential for market gaming. Specifically, under this bill: a) RECs may only be counted once for compliance with RPS. b) The associated electricity must be delivered for use within California so that the renewable power actual offsets the need for non-renewable power within the state. c) No party may receive SEPs for the sale of RECs. d) The PUC may limit the total amount of RECs that can be separately procured to meet annual procurement targets. The bill however fails to address some issues of REC trading for situations where an IOU is required to purchase the renewable power from a third party today, but the existing contracts or statutes do not address who owns the associated RECs. The problem is that the IOUs are paying a premium for the renewable power. But if it is not clear that the IOU owns the RECs or if no RECs are created in this situation, the third party may be able to collect the premium and sell the RECs and the IOU will not be able to count this power toward their RPS. The end result will be that ratepayers pay for the renewable power twice-once through the IOUs purchase of the electricity at a premium price and again when the IOU must by the REC. To address this problem the committee may want to consider amending the bill to: 1) Clarify that renewable generators who elect to contract with an IOU under the preferential terms provided to a QF under PURPA may not separately sell the renewable attributes of the electricity they produce as RECs; 2) provide that there are no RECs associated with renewable power generated under terms of a contract executed before January 1, 2005, that did not contain explicit terms specifying ownership SB 107 Page J of energy credits. 8) Flexible rules for compliance: Along with the changes to the RPS to make compliance with the 20% by 2010 easier, the bill also requires the PUC to create flexible rules for complying with the RPS that, among other considerations, take into account situations where due to transmission constraints, a retail seller cannot procure sufficient renewable resources. Given that the bill now allows a retail seller to count renewable power that is delivered to any part of California to count toward a retailer seller's RPS obligation and that retail sellers can use RECs, it is unclear when transmission constraints would make it difficult for a retail seller to procure sufficient renewable resources. 9) Related legislation : AB 1362 (Levine), which was approved by this committee on an 8 to 3 vote in 2005, mandated the acceleration of the RPS to 20% by 2010. AB 1362 is on the Senate Inactive File. AB 1585 (Blakeslee & Levine), which passed this committee on an 11 to 0 vote in 2005, requires the CEC to study the feasibility of attaining a 33 percent RPS standard. AB 1585 was signed by the Governor, however it contained language to make its enactment contingent on the enactment of SB 107. AB 2189 (Blakeslee), which was approved by this committee in April on an 11 to 0 vote, provides that a small hydroelectric generation facility shall not lose its eligibility as a renewable energy resource even if efficiency improvements increase the facility's capacity to greater than 30 megawatts. AB 2189 is pending action on the Senate Floor. REGISTERED SUPPORT / OPPOSITION : Support Pacific Gas & Electric (PG&E) (with amendments) Southern California Edison (SCE) (with amendments) Opposition None on file. SB 107 Page K Analysis Prepared by : Edward Randolph / U. & C. / (916) 319-2083