“Harmonizing” California’s TRECs with AB 32 Cap-and-Trade

by David Niebauer

Now that the California Public Utilities Commission (CPUC) has lifted its moratorium on the use of renewable energy credits (RECs or TRECs) by investor owned electric utilities (IOUs) for compliance with the State’s renewable portfolio standard (RPS), observers may ask themselves this logical question:  what is the future of RECs under Assembly Bill 32?

Assembly Bill 32, the California Global Warming Solutions Act, authorizes the California Air Resources Board (CARB) to establish a cap-and-trade mechanism designed to reduce the State’s greenhouse gas (GHG) emissions.  How will RECs and GHG allowances and offsets relate to one another?  Will one mechanism obviate the other or is there a place for both in the State’s overarching environmental initiative?

To answer these questions, we need to review some history and understand the roles of the various State agencies that are tasked with implementing the sometimes-conflicting legislative and executive mandates.

California’s Renewables Portfolio Standard (RPS) was established by the State legislature in 2002.  After various amendments, the law resulted in a requirement for the State’s IOUs to increase their sales of eligible renewable-energy resources so that 20% of their retail sales are derived from such resources by December 31, 2010.  According to the CPUC website, 2009 renewable energy procurement for the three IOUs in the state were as follows:  PG&E – 14.4%; So Cal Ed – 17.4%; SDG&E – 10.5%.

On September 15, 2009, Governor Schwarzenegger signed Executive Order S-21-09, which directed an increased renewable energy standard (RES) to 33% by 2020, made the requirement apply to all electric utilities (not just the three IOUs) and shifted the responsibility for implementing and overseeing the RES to the CARB.

However, the 33% standard was mandated by executive order, not by the legislature, which failed to pass a 33% RPS bill at the end of 2010.  Influential voices within the legislature opposed the expansion of the RES and have argued that CARB lacks the authority to proceed with RES adoption.  A 33% RPS bill is still pending in the legislature (SB 23)  which, if adopted, could pre-empt and/or modify the current CARB regulatory framework.

CARB is required by the legislature under AB 32 to regulate sources of greenhouse gasses to meet the State’s goal of reducing emissions to 1990 levels by 2020, and an 80% reduction of 1990 levels by 2050.

Renewable Energy Credits

The use of renewable energy credits to track RPS requirements has significant momentum.  The Western Renewable Energy Generation Information System (WREGIS) began operation in June 2007.  It is designed to track renewable energy generation in 14 western states and two Canadian provinces.  It is a system for authenticating WREGIS certificates for each REC, which are used to demonstrate compliance with RPS goals. One REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.

On January 13, 2011, the CPUC published its final rules on the use of TRECs, lifting a moratorium on its earlier decision.  In the final ruling, the State’s IOUs can procure TRECs to satisfy up to 25% percent of their RPS, with a $50/REC price cap. Both of these provisions expire at the end of 2013, when the CPUC “will consider modifying or removing those limitations all together.”

AB 32 to trump TRECs?

CARB’s resolution adopting the RES regulations directed the agency’s Executive Officer to monitor the ongoing CPUC proceeding on TRECs and to institute a rulemaking no later than 30 days after the CPUC issues a decision on the use of TRECs “to ensure the continued harmonization of the [RPS and RES] programs, specifically incorporating provisions related to [TRECs] for all regulated parties under the RES regulation.”

But what would this “harmonization” look like?  To answer this question we must look at the current framework of the State’s cap-and-trade mechanism.

Cap-and-Trade on the Way

On December 16, 2010, CARB adopted Resolution 10-42, approving the California cap-and-trade program.  The program takes effect January 1, 2012.  In the first phase, covered entities will include electricity generation, large industrial facilities that emit 25,000 metric tons or more carbon dioxide equivalent (MTCO2e) of greenhouse gases (GHG) per year, such as petroleum refineries, cement production facilities and food processing plants.  Phase two will begin in 2015 and will expand to cover all commercial, residential and small sources.

CARB will begin the program by issuing allowances sufficient to meet the capped amount.  Allowances will be reduced during the course of the program with the goal of eventually auctioning 100% of the allowance.

A facility can meet up to 8 percent of its annual GHG compliance obligation through offsets. An offset is a reduction or removal of GHG emissions by an activity (or facility) not covered by the Cap and Trade Program that can be measured, quantified, verified and approved by CARB.

CARB has set a minimum reserve price of $10/MTCO2e for auctioned allowances, but ultimately expects market prices for allowances to increase to $15-$30 by 2020.

What Might “Harmonization” Look Like?

First, it is important to understand the differences between a REC and a GHG allowance or offset.  RECs are designed specifically to encourage an increase in the use of renewable energy by electric utilities.  As noted above, one REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.  A GHG allowance or offset represents one MTCO2e.  Generating electricity from burning fossil fuels emits CO2e.  When coal is burnt, approximately one MTCO2e is produced for every MWh of electricity produced.  A combined cycle natural gas power plant will generate less than one-half the amount of MTCO2e for every MWh of electricity produced.

“Harmonization” will likely be governed by “ratepayer pain”.  Assuming that the State’s IOUs hit the 20% renewables mark established under the RPS, Executive Order S-21-09 will likely provide the framework to move to 33% by 2020.  RECs will be valuable in assisting energy generators to hit this mark.

When the GHG caps for the electricity generation sector are put into place, they will most likely take into account the “early adopter” status of the State’s IOUs.  In this way, we should avoid ratepayers from bearing an undue share of the burden of the environmental initiatives.  RECs will be used to satisfy the utilities’ new RES requirements while GHG allowances and offsets will be used to meet the emissions cap for the industry.  After 2020, when we have achieved our renewable energy goals, new goals can be implemented – whether they relate to renewable energy generation, GHG emissions or another achievable sustainability goal.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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