States should cede control of renewable power to regional markets

 

State policy makers are characteristically reluctant to recognize that they have advanced a policy as far as they can, and that they must cede some control to fully realize its ultimate benefits. Ceding control often runs counter to policy makers’ political instinct to serve their constituents. Doing so is even harder when a new policy has achieved some success. However, it is time for the states to reduce the individual control they have exercised over renewable energy development in deference to a national or regional approach.

The significant gains in renewable energy usage achieved so far this decade are a direct result of the adoption of renewable energy mandates by individual states. Many states have responded to Washington’s failure to develop a coherent national policy that promotes renewable energy by establishing comprehensive renewable portfolio standard (RPS) programs. Using the opportunity afforded by our federalist system of government, states have served as "policy laboratories" for renewable energy support. Today, RPS programs in more than half of the 50 states require local electric utilities to derive a certain percentage of their capacity portfolio from approved renewable energy resources.

Although these state policies deserve credit for jump-starting the expansion of renewable energy usage, the inevitable differences among them that have emerged now impede the further development of renewable power.

All power plants are local

The vagaries of state and local politics have yielded a diverse set of state RPS programs with inconsistent eligibility requirements and complex rules for procuring renewable power. The net effect has been the creation of several small, uncoordinated "markets" that force states to compete for available renewable resources.

This competition is unproductive because it is not based on price or product quality, but rather on political preferences. For instance, aggressive RPS targets are driving California utilities to look to neighboring states for renewable power. However, imports of renewable capacity across a state’s borders reduce, at least in the short run, the amount of capacity available to the utilities in the neighboring states for satisfying their own RPS. If transmission losses are considered, the renewable capacity that California imports would be more efficiently used if used locally.

The economics of developing and selling renewable power should reflect its fundamental value. Today, however, state RPS programs allow political differences to distort economics. For instance, to satisfy RPS requirements for total megawatt-hour consumption, utilities may be tempted to dispatch out-of-state renewable power even during off-peak times, when less-expensive local resources are available and when the imported power would be more economically used to serve load in its state of origin.

Differences in state accounting rules for RPS power also complicate the movement of power among control areas and states. It is critical to prohibit any RPS-inspired variant of "megawatt laundering" (contracting for renewable power, but receiving "brown" power). Standardizing the RPS rules and criteria for the flow of renewable power among states in a region promises a more efficient and cost-effective alternative to the complicated RPS accounting and "megawatt tracing" rules now in place.

Generators and utilities should be expected to respond to economic signals. But it is imperative that the signals driving renewable energy markets are based on economics, not politics. Washington’s willingness to leave renewable energy policy making to the states has inevitably resulted in state programs that distort price signals with inconsistent and uncoordinated RPS mandates.

Renewables’ benefits are regional

The problems inherent in allowing individual states to establish distinct RPS programs can and should be ameliorated by transitioning to a regional or national approach. The benefits of renewable energy are not limited by geographical boundaries. If one state increases its use of renewable energy, neighboring states will benefit from cleaner air, fewer greenhouse gas emissions, and reduced fossil-fuel demand and prices.

The benefits of renewable power will be best achieved by allowing fundamental market economics to work without distortion by state political agendas. Creating a regional or national authority to establish, implement, and account for consistent RPS criteria and rules will best encourage the development and most cost-effective use of new renewable resources. State initiatives have driven a tangible increase in renewable energy usage. But if its benefits are to be maximized, the states must let go.

Steven F. Greenwald leads Davis Wright Tremaine’s Energy Practice Group. He can be reached at stevegreenwald@dwt.com. Jeffrey P. Gray is a partner in the firm’s Energy Practice Group. He can be reached at jeffgray@dwt.com.

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