In April, California Governor Jerry Brown (D) signed Senate Bill 2 (SB2) into law. When it becomes effective later this year, SB2 will be the primary legislation governing implementation of the California Renewables Portfolio Standard (RPS) program.
Governor Brown embraced SB2 for “stimulating investment in green technologies,” “creating tens of thousands of new jobs,” and “promoting energy independence.” The governor projected that SB2 would “ensure that California maintains its long-standing leadership in renewables” and that an RPS target of “40%, [and] at reasonable cost, is well within our grasp in the near future.” The resulting sound bite delivered the desired political message: By 2020, the percentage of renewable generation that California utilities must purchase increases from 20% to 33%—clearly making California’s RPS target the nation’s most aggressive.
SB2: Same Old, Same Old
The “green technology” hype aside, SB2 will likely not advance the development of, or any investment in, RPS power, nor create “green” or any other types of jobs, within or outside of California. SB2 will inflate demand for RPS power and concurrently restrict supply—circumstances that economics teaches will trigger price increases, not decreases. The uncertainties of California regulation, combined with the idiosyncrasies of the RPS policies of other states, have deterred RPS development throughout the West. SB2 adds layers of regulatory complexity, causing inevitable delay; the California Public Utilities Commission initiated a rulemaking to implement SB2, but cautions that it needs at least two years to adopt final rules.
Significantly, SB2 authorizes the utilities to procure “Tradable Renewable Energy Credits” (TRECs) to satisfy part of their RPS purchase requirements. In the traditional “bundled” RPS transaction, the generator sells both the physical power and associated RECs in one integrated transaction; recognition of TRECs allows the RPS generator to sell the physical generation to one buyer and separately convey the REC associated with the generation to a second purchaser. Proponents promise authorization of TRECs will add flexibility, reduce transaction costs, increase supply, and thus reduce RPS compliance costs.
However, SB2 purposely limits a utility’s TREC purchases to no more than 10% of its total RPS MWh. It establishes a “Bucket” priority for different RPS products and accords TREC purchases the lowest-priority Bucket 3 (subject to the 10% cap). In contrast, bundled transactions are awarded “Bucket 1” priority, and are thus guaranteed a minimum of 75% of the RPS market and are eligible to fill the utility’s entire RPS obligation (negating any TREC transactions).
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