California TREC Decision Side-steps Energy Infrastructure of the Future

By David Niebauer

Most of the discussions of tradable renewable energy credits (TRECs) in California revolve around the extent to which the State’s large utilities can use TRECs for compliance with the California renewables portfolio standard (RPS) program.  The utilities would like a free hand to use as many RECs as possible, derived from sources both in-State and out-of-State – presumably RECs will be easier and cheaper to acquire than new renewable generating facilities are to build.  The interests of the utilities are balanced by those of rate-payers as well as policy initiatives, such as AB 32.  These interests move sometimes in opposite directions, one toward less expensive retail energy and one toward more environmentally sustainable energy generation.

As the revised decision on TRECs winds its slow and tortuous way through the California Public Utilities Commission (CPUC), it is becoming clear that there will be a price cap ($50) and there will be a limit on use (30% likely) and that the cap and limit will expire at the end of 2013 “to give Energy Division sufficient time to develop [an] evaluative framework” to make sure the system works without snafu.  See procedural trail to CPUC Proceeding R06-02-012.

Lost in the shuffle, however, is what many believe will be the energy infrastructure of the future – distributed generation (DG).  The California Energy Commission (CEC) defines DG in the California Distributed Energy Resource Guide as “small-scale power generation technologies (typically in the range of 3 to 10,000 kW) located close to where electricity is used (e.g., a home or business) to provide an alternative to or an enhancement of the traditional electric power system.” The term “distributed” is borrowed from the computer industry where it has long been recognized that widely disbursed or “distributed” computing is more economic, more efficient and more secure than centralized systems.

In energy generation, “distributed” means fewer centralized generation facilities and little or no transmission.  Utilities don’t like it, naturally, because a fully implemented distributed generation infrastructure would obviate the need for a publicly subsidized electric utility monopoly – the institution feels justifiably threatened.  Whether DG will ever supply all of our energy needs is a question for the future.  In the meantime, policy makers should guard against steering the market away from its proper implementation.

Because there are a number of technologies and a variety of ways to implement DG, the California Public Utilities Commission (CPUC) and the CEC have defined DG as those technologies and implementations that generate electricity on the “customer side of the meter”.   See the CEC’s Renewables Portfolio Standard Eligibility Guidebook (3d ed., December 2007), at 17-19. These would include home installations of solar photovoltaics (PV) and would also include commercial PV such as rooftop and ground-based solar being implemented by large energy users (food processing, cold storage, manufacturing, etc.) and others.  For this purpose, DG does not include solar rooftop programs being sponsored by the large utilities that utilize commercial rooftop space in order to generate energy that is then sold into the grid.  It is energy used on-site that does not require a central transmission and distribution system.

To some extent, DG has been an afterthought in the TREC considerations and decisions.  This is because the market is currently quite small compared with utility-scale projects.  However, it seems likely that DG is the next frontier in renewable energy generation.  As PV continues to drop in price, and new technologies are developed, more and more commercial enterprises will come to realize that generating their own energy from the sun (or from fuel cells or other new technologies) is simple, safe, and less expensive than being beholden to large utility monopolies.
The CEC is concerned that TRECs for DG would provide an excessive subsidy in light of current programs in place for such projects.  The CEC’s current position is as follows:

“Facilities that receive funding under the Energy Commission’s New Solar Homes Partnership program, Emerging Renewables Program, or Pilot Performance‐Based Incentive Program, under the CPUC‐approved Self Generation Incentive Program or California Solar Initiative, or any similar ratepayer‐funded program, and facilities that benefit from net metering programs or tariffs approved by the CPUC or any POU, are considered distributed generation and may not be certified as RPS‐eligible at this time.”  RPS Eligibility Guidebook p. 25.

However, as argued persuasively by the Solar Alliance in its comments on the revised RPS Eligibility Guidebook:  “given the reality that, as the incentives under the California Solar Initiative [and other programs] decline, the sale of TRECs is likely to become a critical means for financing distributed solar generation.” To meet the state’s aggressive RPS goals, it only makes sense to allow TRECs for DG.  The CPUC anticipates this eventuality as it takes great pains in the revised proposed decision of Commissioner Peevey to “clarify the relationship of [the CPUC’s] discussion of TRECs from DG sources to the CEC’s authority…to determine what resources are RPS eligible.”

The CEC has also stated “[t]he Energy Commission will not certify distributed generation [DG] facilities as RPS-eligible unless the CPUC authorizes tradable RECs to be applied toward the RPS.”  This pronouncement, combined with the revised proposed decision on TRECs, which will permit tradable RECs to be applied toward the RPS, will presumably make customer-side DG eligible for the sale and trading of TRECs, notwithstanding the CEC’s concern over excessive rate-payer subsidies.

The numbers for DG are small at present.  As pointed out by the CPUC, the California Solar Initiative (CSI) will have provided incentives for approximately 1,100 GWh by 2011.  At $50 per TREC, this would amount to only about $50 million State-wide in additional financing for solar DG projects (1 TREC = 1,000 kW hrs of renewable generation).  However these numbers are anticipated to grow significantly.

It’s useful to look at TRECs for DG from a commercial application perspective.  A 250 kW solar PV system can be expected to generate at least 300,000 kWh per year in a relatively high solar radiation area, such as the LA basin.  Even at the $50 per TREC cap set by the CPUC, this is still $15,000 per year in new financing for a commercial system.  At $200 per TREC, it amounts to $40,000 per year.  Assuming the facility owner could forward-sell these TRECs, even discounted to present value, this is a significant amount of money that could be used to finance installation and maintenance of the system over its useful life – especially in the face of declining or vanishing solar incentives.

We agree with the Solar Alliance and others who urge the PUC and the CEC to coordinate their agency actions so as to accommodate TRECs for DG and to do it soon.  Other states are way ahead of California in allowing RECs to stimulate the renewable energy markets.  For example, New Jersey, which has a specific solar set-aside, has allowed RECs for RPS compliance for a number of years.  Solar RECs sold at auction in New Jersey were recently trading for as much as $600 per REC (see  California cannot afford to continue to ignore the energy infrastructure of the future.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on clean energy and environmental technologies.