Preliminary Issue: Renewable Energy Credits

The second preliminary issue is the appropriate use, if any, of renewable energy credits (RECs).⁶

The potential use of RECs was a contentious issue in this proceeding. CEERT defines a REC as consisting "of all renewable and environmental attributes associated with a specific renewable resource separated from its underlying energy." (Ex. RPS-1, p. I-3) CEERT goes on to state: "A REC is created only when the associated renewable resource generates one unit of electricity. This means that the generator has only as many units of RECs as energy generated to sell and no more. A REC is "retired" once it has served its purpose, whether that purpose is to meet an RPS obligation or to substantiate claims for a "green" power content label." (Id.) Ridgewood defines a REC more narrowly, with only those non-energy attributes necessary to comply with the RPS program being represented by the REC. Fuel use, greenhouse gas, and other environmental attributes would not be included in the REC. (Ex. RPS-8, p. 2.)

Some parties advocated that the Commission should ultimately adopt a REC trading system, where RECs could be bought and sold separately from their associated underlying energy. (See, e.g., Ridgewood, Ex. RPS-8, p. 3.) Under this scenario, a utility could meet its RPS obligation by purchasing RECs from a renewable generator without purchasing the corresponding energy from that same generator, and a generator would be free to sell its RECs to someone other than the buyer of its energy.

ALJ Allen ruled that a REC trading system would not be considered in this phase of this proceeding, and we confirm that ruling here. We understand that a number of parties believe a REC trading system to be highly desirable, but the creation of such a trading system is far beyond the scope of what we must accomplish by the statutory deadline of June 30.

While we will leave open the possibility that a REC trading system may be implemented in the future, we note that creation of such a system raises a number of significant issues that would need to be addressed. Before we consider adoption of a REC trading system, we will need a clear showing that a REC trading system would be consistent with the specific goals of SB 1078, would not create or exacerbate environmental justice problems, and would not dilute the environmental benefits provided by renewable generation. Our recent experience in California with electricity markets has also sensitized us to issues of market manipulation, and we would want to be sure that a REC trading system could not be gamed to the detriment of the residents of California.

In contrast to a REC trading system, there appears to be less controversy, but not total agreement, that a REC-based accounting system provides the best way of ensuring compliance with the requirements of the RPS program. Supporters of a REC-based system, including CEERT, AReM, SDG&E, and CalWEA, argue that a REC-based system should be adopted.

PG&E, however, argues that the time is not ripe for determining whether to use a REC-based accounting system, and observes that the CEC is the agency responsible for developing a tracking and verification system. (PG&E Reply Brief, p. 30.) SCE notes that a REC-based accounting system is not necessary for this phase of this proceeding, as a system that tracks delivered energy would be adequate. (SCE Opening Brief, p. 15) CalWEA acknowledges that, since all renewable attributes are assumed to be transferred with the energy sold, an accounting system that tracks RECs is essentially the same as a system that tracks energy by MWh. (CalWEA Opening Brief, p. 16.)

Nevertheless, a REC-based system has a number of advantages. First, if the Commission were to ultimately adopt REC trading, the process of doing so would be simplified if a REC accounting system was already in place, as opposed to dismantling some other accounting system and then restarting from scratch. (See, CalWEA Opening Brief, p. 16.) Second, REC-based systems are relatively simple and efficient, particularly when compared to the alternative contract path system. (SDG&E Opening Brief, p.24; CEERT Opening Brief, p. 19.) Finally, a REC-based system appears to be particularly well suited to preventing double counting of attributes, as required by § 399.13(b). (SDG&E Opening Brief, supra; CalWEA Opening Brief, supra.)

While the CEC is ultimately responsible for the design and implementation of the accounting system to be used to verify compliance with the RPS standard (§ 399.13(b)), based on the record before us, it appears that a REC-based accounting system is preferable to a contract-based system. We accordingly recommend to the CEC that they consider using a REC-based accounting system.

In order to implement a REC-based accounting system, a REC must be defined. The utility must know what renewable attributes it is acquiring, primarily to ensure that those acquisitions satisfy the requirements of the RPS program. Similarly, renewable generators need to know exactly what attributes they have sold to the utilities. Finally, the statute requires that renewable energy output is counted only once for RPS purposes. (§ 399.13(b).)

In response to requests from parties for a definition of RECs, ALJ Allen ruled that, for purposes of this phase of this proceeding, a REC incorporates all of the environmental attributes of a particular resource. (Tr. p. 2468.) This ruling was consistent with the positions taken by many parties, including PG&E, CEERT, TURN, and SDG&E.

Subsequently, as a result of issues raised in cross-examination on this issue, and in particular what became known as the "cow manure" hypothetical,⁷ ALJ Allen requested parties address the definition of "all" attributes. (Transcript, pp. 3265 and 3539.)

Ridgewood (the proponent of the cow manure hypothetical), argues that attributes associated with generation inputs (such as fuel use) should not be included in the definition of all of the environmental attributes that must be transferred to the utilities under the RPS program. (Ridgewood Opening Brief, p. 3.) According to Ridgewood, generation input or fuel-use attributes include the environmental benefits associated with destroying methane and methane producing products produced because a particular fuel is used to generate electricity. (Id.)

Among the other parties, TURN appears to have given Ridgewood's arguments the most careful consideration. Ridgewood managed to persuade TURN (albeit with reservations) that the transfer of environmental attributes necessary for RPS program compliance need not include fuel related subsidies, or local subsidies received by the generator for the destruction of particular pre-existing pollutants. (TURN Opening Brief, pp. 32-33.)

Nevertheless, TURN conditioned its agreement with Ridgewood, and would require transfer to the utility of any tradable environmental attributes associated with existing landfill gas QFs under long term contract to the utility, and would also require contracts with new biomass or landfill gas facilities to specify that the net carbon emissions associated with delivered electricity are no greater than zero (so the utility would be credited with the purchase of a zero emission generation source). (Id., p. 32.)

TURN recommends that the Commission adopt the general presumption that all environmental and renewable energy attributes associated with the production of electricity be transferred to the utility and retired in order to verify compliance. (TURN Opening Brief, p. 31.) TURN also recommends that the Commission defer resolution of this issue, with workshops on the issue in the second half of 2003. (Id., p. 33.)

PG&E's position is somewhat similar to TURN's position. PG&E asserts that "all renewable and environmental attributes associated with the generation of electricity are bundled with and conveyed to the purchaser of electricity." (PG&E Reply Brief, p. 30.) PG&E would allow benefits "associated with the renewable developer's remediation of the site" to stay with the developer. (Id.) PG&E also recommends that a REC system, even if used only for accounting, be addressed in subsequent workshops or in a second phase of this proceeding. (Id.)

While the parties are far from consensus, there is some convergence of positions. We have concerns about unbundling too much of a REC, particularly at this stage. Utilities that procure renewable energy and associated environmental attributes must procure the attributes necessary to satisfy their requirements under the RPS program. A utility that in good faith purchases energy and environmental attributes should not later find out that the developer had sold to some other purchaser the attributes necessary for RPS compliance, leaving the utility in a potentially non-compliant position. Utilities need to know in advance that what they are buying will meet the requirements of the RPS program.

The appropriate starting point for the definition of a REC should be that a REC incorporates all environmental attributes associated with the generation of electricity, and that the REC is transferred to the utility and retired. As a record is developed indicating that specific and well-defined attributes need not or should not be transferred to the utility (such as site remediation or fuel use attributes), such attributes may be separated from the REC that the utility must obtain for purposes of the RPS program. For the time being, we adopt the REC definition and conditions recommended by TURN, as described above. We will examine this issue further, in coordination with the CEC. Parties may also provide comments on the issue of the correct definition of the REC that is transferred to the utility.

Ridgewood also attempts to raise a takings argument by assuming a link between the value of environmental attributes associated with electricity generation and the amount of payment received by a generator from PGC funds. Ridgewood then uses that assumption to argue that if a generator does not receive PGC funds, it should not have to transfer its environmental attributes to the utility, and if it is required to do so, that transfer amounts to a taking of the generator's environmental attributes. In short, this would be because "[T]he portion of the contract price that was intended to account for the value of Environmental Attributes would not be received," and the generator cannot be required to transfer those attributes to the utilities without just compensation. (Ridgewood Opening Brief, pp. 5-6.)

Ridgewood's argument is based on a false assumption. There is no such rigid correlation between the value of environmental attributes and the level of PGC funding. Generators may bid what they want, and may place whatever value they want on their environmental attributes. Presumably this would go into a generator's calculation of its bid, and its decision whether or not it wants to participate in the RPS program at all.

A generator may bid its energy and environmental attributes at a price below the market price referent, or a generator may bid above the market price referent based solely on its operating costs. It is up to the generator to decide how much its environmental attributes are worth, how much it wants to bid into the RPS program for its energy and environmental attributes, and even if it wants to bid at all. Since the generator gets to decide what it wants to do with its environmental attributes, there is no taking.