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Federal Law May Impede Development of State Feed-In Tariffs

Feed-in tariffs are a relatively frequent topic here at Renew NewEngland.  Mostly we've been curious about the strange absence of this proven method of spurring renewable energy development, as New England states tried seemingly everything to build a green economy.  It's a sign of just how fast the field is changing that in the year that we've been writing this blog, feed-in tariffs have moved from speculation to reality in North America, with new FITs in Hawaii, Oregon, Vermont, California, and Ontario, along with smaller efforts like Gainesville, Florida.  Purists--or at least energy lawyers of a certain vintage--will note that FITs in the US are actually old news, citing PURPA, which partially explains why US policymakers are reluctant to try anything that sounds like fixed price, long term contracts for renewable energy. 

An NREL report issued earlier this year explores the impending collision between these new FITs and this legacy legal framework. The report, entitled Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions (pdf), discusses the limits imposed by PURPA and the Federal Power Act on states' ability to craft feed-in tariffs, and lists possible steps FERC or Congress might take to remove (or at least clarify) those constraints.  Perhaps more importantly, the report provides guidance to state regulators and legislators in crafting feed-in tariffs in the existing legal landscape.

The report's detailed analysis of PURPA and the FPA doesn't easily lend itself to summary in a blog post, but the overall conclusions are relatively straightforward: under current law, a state cannot simply require a utility to purchase electricity from a seller at specified prices for a specified duration (the essence of a FIT) without conforming its actions to the mandates of PURPA.  At the very least, this complicates--and may ultimately frustrate--any effort to enforce a FIT.  Moreover, "given the FPA's requirements, a state-level feed-in tariff, as defined above, outside of PURPA, is not legally possible in the United States today."

It's unclear to what extent states are aware of these constraints as they craft their FIT legislation.  PURPA doesn't apply in Hawaii (no interstate commerce) so that state was free to craft a PURPA-free FIT; the convoluted structure of Vermont's SPEED program may reflect these concerns.  In California, Southern California Edison challenged the PUC's jurisdiction to set rates, a decision is expected soon. Unlike renewable portfolio standards, where state efforts to go it alone undermine the potential of larger markets for renewable energy credits, state (or municipal) level FITs allow for much needed experimentation, to craft FITs that account for differences in market structure, renewable resources and policy goals.  For example, California's unique new solar FIT will include an auction mechanism and vary in price based on the time of day during which the electricity is generated.  While successes are great, even failures can be instructive.  To the extent that these requirements needlessly hinder such experimentation, they are a barrier to renewable energy development in the US.

Bill Implementing Maine Ocean Energy Task Force Recommendations Released

The Governor's Bill implementing the recommendations of Maine's Ocean Energy Task Force has been printed as LD 1810. Senators Hobbins and Raye and Representatives Fitts and Berry are the bill sponsors.  

The 41 page bill, drafted as emergency legislation, contains a broad range of provisions that are designed to overcome the economic, technical and regulatory obstacles to to provide economic incentives for vigorous and efficient development of marine renewable energy sources.  The provisions include authorization for the PUC to conduct a competitive solicitation for proposals for offshore wind, tidal and wave energy produced in state or federal waters and to negotiate a long-term contract with a technically competent generator if the contract terms would not have an unreasonable rate impact.  A hearing on the bill are scheduled for March 11 at 1 pm at the Utilities and Energy Committee.

Previous posts on the Ocean Energy Task Force:

Maine Ocean Energy Task Force Submits Final Report

The Straw Proposal: Offshore Wind and Tidal Power Seek Surer Footing on Maine’s Submerged Lands

FERC and Maine Sign MOU on Ocean Tidal Power

Safe Passage for Ocean Energy

Has the Obama Administration Really Given Up On Cap-and-Trade?

President Obama’s response to an audience question during his appearance at a Nashua, New Hampshire, high school on Tuesday has been pronounced by the media as the beginning of the end for a national cap-and-trade program.  According to numerous news reports, the President “acknowledged” that controversial cap-and trade could be separated from the Senate energy bill; “retreated” from cap-and-trade (“a maneuver that could kill what once had been one of the administration's top policy priorities”); and “opened the door to disassembling the climate change legislation” currently under consideration in the Senate.  Reading the complete text of his remarks, however, reveals that cap-and-trade is hardly on its death bed. 

First, the statements quoted in the news as signaling a change in priority for cap-and-trade came in response to a long question from an audience member pushing an energy efficiency and technology plan that would “help us to avoid having to do cap and trade and other aspects with environmental controls that are going to have negative impacts on our economy.”  After touting the benefits of energy efficiency and technology at length, the President admitted the controversy over cap-and-trade:

The most controversial aspects of the energy debate that we've been having -- the House passed an energy bill and people complained about, well, there's this cap and trade thing. And you just mentioned, let's do the fun stuff before we do the hard stuff. The only thing I would say about it is this: We may be able to separate these things out. And it's conceivable that that's where the Senate ends up.

While Obama’s response certainly could be read as an invitation to consider a bifurcated approach to moving the energy bill forward, the news reports of cap-and-trade’s death may be, with apologies to Twain, greatly exaggerated.  Following this statement, the President immediately emphasized that market-based incentives to pollution control – cap-and-trade – offer the most realistic and workable solution:

But the concept of incentivizing clean energy so that it's the cheaper, more effective kind of energy is one that is proven to work and is actually a market-based approach.  A lot of times, people just respond to incentives.  And no matter how good the technology is, the fact of the matter is if you're not factoring in the soot that's being put in the atmosphere, coal is going to be cheaper for a very long time. …

And so the question then is: Does it make sense for us to start pricing in the fact that this thing is really bad for the environment? And if we do, then can we do it in a way that doesn't involve some big bureaucracy in a control and command system, but just says, look, we're just going to -- there's going to be a price to pollution. And then everybody can adapt and decide which are the -- which are the best energies.

One day after the New Hampshire speech, the President announced a “Comprehensive Federal Strategy on Carbon Capture and Storage,” which established an interagency task force (co-chaired by representatives from the DOE, and EPA, and including FERC and the Treasury Department, among others) charged with developing a plan that will result in bringing 5 to 10 commercial demonstration carbon capture and storage projects online by 2016.   In this announcement, the President reiterated his endorsement of a cap program: “Ultimately, comprehensive energy and climate legislation that puts a cap on carbon pollution will provide the largest incentive for CCS because it will create stable, long-term, market-based incentives to channel private investment in low carbon technologies.“  The President’s recently submitted budget also assumes enactment of a cap-and-trade program, with a “placeholder” expectation (i.e., unquantified) that cap-and-trade legislation would be “deficit neutral.”

Perhaps Obama’s comment was a carefully planned gesture to the opposition; perhaps the news media made more out of it than was warranted by the context.  It remains to be seen whether the combined effects of "Climategate", the struggling economy, and political necessities doom enactment of a national cap-and-trade program this year.  But worldwide trends, and the experience of states that have moved forward to develop regional programs, support a cap-and-trade approach.  For example, New England (with four other northeast states) has an established carbon cap-and-trade program, the Regional Greenhouse Gas Initiative (RGGI), designed to cap and reduce power sector CO2 emissions 10% by 2018.  Since the first auction in September 2008, this program has raised almost a half billion dollars for energy efficiency and renewable energy programs (with Maine receiving over $15 million to date).  The next auction is scheduled for March 10.  

Offshore (Data) Mining

Together with Senator Mark Begich of Alaska, Maine Senator Olympia Snowe has introduced the Renewable Energy Environmental Research Act of 2009 (pdf).  The proposed legislation aims to coordinate the collection and dissemination of environmental data so crucial to the development of marine energy resources.  Under the proposed bill, $100M would be appropriated to NOAA each year 2010 through 2014, with the requirement that up to 50% of the funds would be made available to educational institutions and to states with federally-approved coastal zone management programs (pdf). 

As shown on this interactive map, every New England state (other than Vermont,  which lacks a seacoast) is already working with NOAA on coastal and ocean management issues.  Of course, as Senator Snowe’s press release suggests, the University of Maine’s Advanced Structures and Composites Center, which has partnered with Norway’s StatoilHydro to investigate the potential of off-shore wind, would be a natural recipient for this kind of funding.  (For more on this program, see our previous post.)  But with multiple off-shore energy projects in various stages of development in Maine, Massachusetts and Rhode Island, the impact of this bill would be felt throughout the region.

The environmental data covered by the proposed legislation is of great interest to environmental advocates, who want to make sure off-shore development won’t cause unreasonable harm to the habitats where they’re built.  The data is also of critical importance to developers – and their potential investors - who have been calling (pdf) for the refinement, integration and standardization of this kind of environmental data in order to minimize the risks associated with both permitting these projects and their eventual productivity. 

Maine Narrows Offshore Wind Sites to Four

After a series of public information workshops in September along the coast of Maine, the Maine Department of Conservation announced (pdf) on Tuesday that it has narrowed the potential sites for an offshore wind energy demonstration site from seven to four sites.  The four sites include areas off Boon Island, Damariscove Island, Monhegan Island and the town of Cutler.  This site will be used by the University of Maine national offshore wind demonstration project, recently awarded an $8 Million grant from the Department of Energy, to test deepwater wind turbine technology. The State explained that the consultation process has allowed the State to choose the areas with the fewest impacts on existing fisheries and wildlife.

The Department of Conservation will be accepting comments until November 30th.  Legislation passed this June requires the Department to select a site by December 15th, 2009.

Regulatory Oversight: Who Will Regulate Cap and Trade?

As climate legislation slowly wends its way through the Senate and the economy struggles to recover from the impact of toxic assets, concerns over climate trading fraud abound.  Skeptics are wondering whether a cap and trade regime will inevitably render the market vulnerable – again – to under-regulated trades of little-understood assets.

Somewhat less discussed is who will regulate the trades in a federal cap and trade program.  The EPA has the authority to regulate emissions and has recently announced mandatory reporting rules (pdf) for greenhouse gasses.

There is some debate about whether EPA has the authority to implement a cap and trade program, however.  Most acknowledge the EPA could regulate carbon under the existing Clean Air Act rules; others believe (pdf) that the EPA has sufficient existing authority to implement its own cap and trade system.  But both Industry and the Obama administration have reservations about leaving the regulation of carbon emissions to the EPA.  And legislation proposed by Republicans, longstanding opponents of EPA regulation of carbon, would limit the EPA’s authority to implement cap and trade.

Assuming the EPA can’t or won’t take the regulatory lead, FERC seems like a likely contender.  Under EPAct 2005 (pdf), FERC has authority to prosecute manipulation of energy prices. 

But this summer, the Commodity Futures Trading Commission announced its intent to evaluate whether the Chicago Climate Exchange (CCX), an unregulated market, should be regulated because it “performs a significant price discovery function.”  (This authority over Significant Price Discover Contracts (SPDC (pdf)) is new; it was exercised by the CFTC for the first time in July, 2009, making CCX only the second target.) 

And so, a jurisdictional dispute (pdf) between FERC and CFTC is brewing, but not for the first time:  a similar dispute between the agencies prior to re-authorization of the CFTC is described here (pdf).  A detailed description of the regulatory gaps between these two agencies can be found here (pdf):  one key gap is that while FERC regulates contracts for “physical energy,” that energy is often traded through standardized forward contracts, which could also be considered futures and subject to CFTC jurisdiction.  Will energy-related emissions be traded as futures under the CFTC or as energy under FERC?  Bridging that gap will be critical when it comes to implementing any federal cap and trade legislation that may emerge. 

Connecticut v. EPA: Public Nuisance Holding May Spur Federal Legislation

On September 21, 2009, the Second Circuit Court of Appeals issued a decision reversing the dismissal of a public nuisance claim brought by eight states, New York City and three land trusts against six power companies.  The decision, Connecticut v. American Electric Power Co., which reversed the district court’s finding that the claims constituted “non-justiciable political questions,” has significant implications for a wide range of businesses, and may provide some incentive to move forward with clear, federal regulation of carbon emissions.  

In the case, the plaintiffs are seeking the abatement of the defendants’ “ongoing contributions to the public nuisance of global warming” by emitting carbon dioxide.  Concluding that deciding the case would require the “identification and balancing of economic, environmental, foreign policy and national security interests,” a job properly left to the legislative and executive branches, the district court dismissed the case.  The Second Circuit, on the other hand, found that “well-settled principles of tort and public nuisance law provide appropriate guidance to the district court in assessing Plaintiff’s claims and the federal courts are competent to deal with these issues.”

The Second Circuit also held that the federal common law of public nuisance had not been “displaced” by federal legislation (the Clean Air Act) addressing carbon dioxide emissions.  While the EPA has authority to regulate greenhouse gas emissions under Massachusetts v. EPA (pdf), the Second Circuit found that because the EPA’s proposed findings do not regulate those emissions in a way that “speaks directly” to Plaintiff’s claims, the federal common law of public nuisance may still apply.

Put together, these two Second Circuit findings - that carbon emissions issues may be justiciable and are not necessarily pre-empted by current federal legislation - indicate that, without a comprehensive set of regulations governing greenhouse emissions including carbon dioxide, emitters bear the risk of tort claims brought under the common law.  When viewed in that light, comprehensive regulation may hold new appeal to a wide array of business interests.  While conventional wisdom now holds that comprehensive cap-and-trade legislation won’t likely come to pass until 2010 or later, this Second Circuit decision may inspire some traditional foes of regulation to push for federal legislation sooner rather than later. 

The Straw Proposal: Offshore Wind and Tidal Power Seek Surer Footing on Maine’s Submerged Lands

Maine’s Ocean Energy Task Force (OETF) Regulatory and Permitting Subcommittee met this Tuesday, September 8th, to discuss a Straw Proposal for a set of recommendations to the full OETF.  The Subcommittee chair, State Planning Office (SPO) Director of Coastal Zone Management Planning, Kathleen Leyden, and SPO staffer Todd Burroughs reviewed the proposal with Regulatory Subcommittee members, accepting comments from members of the public. The Subcommittee meeting minutes will be posted at its page on the OETF website.

The Straw Proposal would establish that development of renewable ocean energy resources, including tidal and wind power, is an authorized use of state submerged lands.  But some commenters noted that the proposed language requiring "due consideration" and even compensation to be provided by renewable developments for other existing commercial uses, such as fishing, gives commercial fishing a superior right to use of submerged lands, rather than putting renewable resource uses on equal footing with fishing interests.  It was noted that the Subcommittee Recommendation to the OETF should include the option that renewable energy projects be recognized as an appropriate use of submerged lands, equal (or even higher) in priority to other uses, given the urgency of the need for renewable energy.

Tidal developers also pointed out that the straw proposal is focused exclusively on wind, and has not taken into account the unique aspects of tidal power projects.  DEP and SPO staff indicated that they believe that the Maine Waterways Act is sufficient to regulate tidal power, and that only the submerged lands, tax, and federal state coordination provisions of this proposal would apply to tidal power.  Members of the public were encouraged to provide more detailed commentary on this point, especially the unique aspects of the FERC Pilot Project process used for tidal projects.

The Subcommittee has been asked to complete its recommendation on legislation to the OETF by September 15, 2009.

For more information regarding the Straw Proposal or OETF, please contact Lib Butler, Sarah Verville or Chip Ahrens. 

Cash for Clunkers Extension Takes $2 Billion from DOE Loan Guarantee Program

With a flurry of last-minute sales, the federal government's Car Allowance Rebate System (aka "CARS" aka "Cash for Clunkers") program ended last Tuesday at 8 PM.  A late extension gave dealers an extra day to file the necessary paperwork, but it was the earlier, $2 billion extension of the program that caught our eye.  CARS (a clever, underused acronym, so we'll use it here) initially received a $1 billion appropriation under the ARRA, but the program proved so popular with consumers and beleagured auto dealers and manufacturers that those funds were used up after just a week. Congress gave the program an additional $2 billion that lasted until this past Tuesday.

Many news reports neglected to mention the source of the additional $2 billion in funding: the ARRA's $6.5 billion appropriation for loan guarantees to fund renewable energy and transmission projects.  Though renewable energy advocates were assured the money will be restored, Congress can be forgiven for redirecting ARRA money toward efforts that have a more immediate stimulus effect.  Earth2Tech suggests that CARS may offer a model for other cleantech initiatives: create a small but popular/successful government program then use that success/popularity to push for additional appropriations later.  The Department of Energy's loan guarantee program offers another, perhaps more familiar model: create a small and by most accounts unsuccessful program and then deliver a massive additional appropriation alongside an aggressive effort at reform.  (The DOE loan guarantee program was created by the Energy Policy Act of 2005 but didn't offer its first loan guarantee--to solar panel manufacturer Solyndra--until March of this year.) If the program can show that it can effectively issue guarantees and encourage energy development, Congress may be more easily persuaded to restore the pilfered funds.

Recent proposed changes could help that happen.  On August 6, the DOE issued proposed regulations that would remove the requirement in the existing program's rules that the DOE receive a first lien position on all project assets of any loan guarantee recipient. Many potential applicants were disappointed that the first round of ARRA-funded loan guarantee solicitations retained the existing program's rules, including the first lien requirement. Often, large projects involve other owners and sources of financing who would expect to share, pari passu, any collateral used to secure the project's debt.  These new changes, if approved, will allow for more flexible lending arrangements, and hopefully, more financing for renewable energy and transmission projects through the loan guarantee program.

Long Term PPA’s: Avoiding Déjà vu All Over Again

A significant key to financing a renewable energy project is an offtake agreement.  If a developer starts explaining to lenders the concept of “bidding zero” into the wholesale market and being a “price taker” resource, the lenders will go into shutdown mode pretty quickly (that’s especially true in New England today, where the market clearing price is linked to natural gas prices which are at a seven year low).  In these tight credit markets, lenders want to see a steady and predictable revenue stream coming into the project from a creditworthy counterparty. 

So what is a project developer to do?  ARRA-related incentives and state programs only go so far, and they simply aren’t geared toward providing long-term stable revenue streams.  Developers need someone willing in this economy to sign up for a 10-20 year contract to take renewable (and variable) resource at a rate that may not be attractive today, let alone just a few years from now.  Any takers . . . ?  Anyone . . . ?

As we’ve noted previously, to address this issue, states have returned to a familiar idea: require the state’s utilities to enter into long-term contracts with the developers.  After all, the utilities are serving load either as a vertically integrated utility or, if the state has restructured its electric industry, then the utility likely has a standard offer or default service that it provides to consumers.  A fine idea, conceptually.  But let’s remember where we’ve been recently and try to avoid going back there. 

Do PURPA, state mini-PURPAs and the avoided cost debacle ring any bells?  Back in the late 70’s, while the US was in the throes of an earlier energy crisis, vertically integrated utilities were perceived as building too much big, fossil-fired generation.  In response, the Public Utility Regulatory Policies Act of 1978 (PURPA) and the state PURP-ettes were enacted to require local utilities to enter into offtake deals with small QF generators.  (A concise history of the creation and implementation of PURPA can be found here (pdf).)  The term for those contracts?  Well, the project developers demanded 10-20 year terms because that’s what bankers needed to finance the projects (sound familiar?).  The contract price?  By law, it was tied to the utility’s long-term “avoided costs,” or the cost to the utility to generate or procure that same energy which the utility “avoided” by purchasing instead from the small generator.  Brilliant.  Policy makers achieve the goal of developing small, distributed non-fossil generation resources and consumers would pay the same price they would have paid for fossil-fuel generated power! 

Long story short:  the predictions made in the early 80’s as to what a utility’s avoided costs would be in the 1990’s and beyond turned out to be overstated.  And not by just a little.  By a lot.  PURPA contract prices that were five to six times the then-existing market wholesale price were not unheard of.  Consumers overpaid.

Trying to predict anything twenty years into the future is a daunting task.  The complexity and dynamic nature of the US energy industry provokes sleepless nights in even the most accomplished energy forecaster.  So, the fact that the PURPA avoided cost predictions were proved wrong by reality isn’t a knock against the forecasters.  It does, however, serve as a reminder that we need to think long and hard before going back down the road of requiring utilities to enter into long-term PPAs to provide a buyer that the market is not self-supplying.

If states are going to head down this path again, here are a few suggestions to help ensure that long-term PPAs are successful for all concerned: 

1. Avoid avoided costs.   Period.
2. Drive project efficiency.  Use competitive processes such as auctions to wring efficiencies from project developers.  Use industry published development costs to ensure bidders are being realistic. 
3. Procure in stages.  Don’t purchase all of your long-term capacity needs in your first auction.  Rather, take advantage of the likelihood that renewable industries will become more efficient as technologies and methodologies mature over time. 
4. Consider innovative deal structures.  For example, a contract for differences may allow the developer to satisfy its lender’s need to finance against a predictable income stream, but consumers benefit when wholesale markets exceed the strike price. 
5. To thine own self (and thine constituents) be true:  Consumers are smarter than politicians often give credit.  Consumers know they will be paying more in the “short” term for long-term environmental benefits and the development of diverse and secure renewable resources.  Be up front about the objectives, the costs and ensure fairness to all stakeholders.