Almost half of U.S. states now insist that their investor-owned electric utilities serve a specified percentage of their load with electricity from renewable resources by a date certain. Utilities struggling to comply with their mandate increasingly warn that they will be unable to achieve the required level on time.

Yet even as utilities express these doubts, more states are considering adopting renewable portfolio standards (RPS), and those with existing mandates are considering beefing them up. For example, the California Legislature is now debating whether to increase its requirement from the current target of 20% by 2010 to 33% by 2021.
 

Edicts aren’t enough

State imperatives to foster development of renewable power projects should be applauded. However, legislative and regulatory initiatives to do so cannot remain one-way streets. They call on utilities to procure more renewable capacity sooner but ignore the technical, political, regulatory, and economic obstacles standing in their way.

Three factors cap the absolute amount of renewable power that can be environmentally produced and economically delivered within a specific time frame. First, political preferences have served to arbitrarily reduce the supply of "renewable" power by denying that status to some objectively renewable resources, such as most hydroelectric plants.

The second factor is limited transmission capacity from the remote areas where wind farms and solar power projects tend to be sited. This shortage significantly constrains the economics of proposed renewable energy projects. More projects would be developed if the ability to construct, and the schedule to complete construction of, new lines and expand existing corridors were more certain. But current regulatory policies and procedures for determining whether and where new transmission capacity should be constructed (and who will pay for it) are unwieldy and time-consuming. Extended hearings of environmental and economic opposition to a transmission project make its permitting less certain and thereby increase the risk borne by its developer.

Third, state renewable mandates are beginning to jostle one another for space. For example, California utilities are now looking to satisfy their mandates by pursuing renewable capacity from northwestern and southwestern states. A single cross-border outreach initiative by a big utility could accelerate renewable development over a broad region. But having many procurement programs competing for the same scarce resources may produce an anomalous result: Utilities in states rich in renewable energy potential may be unable to meet their renewable targets.
 

SOS for RPS

It should be clear why state officials—both elected and appointed—are enamored of renewable mandates: They represent a risk-free policy choice. An official can simultaneously embellish his "green" credentials and demonstrate his fiscal responsibility simply by advocating for an unfunded renewable power mandate. If the mandate is not met, the utilities—not the politicians or regulators who imposed it—shoulder the blame.

However, insisting that utilities buy and deliver an unrealistic amount of renewable power is as unworkable as simply decreeing that they lower their rates by, say, 10%. Neither "policy" has a chance of achieving its goal because the laws of economics and physics rule the electric power industry.

Experience teaches that not all proposed renewable projects should be developed. If mandated levels are too high or aggressive, marginally viable projects (with low expected reliability or in an inaccessible location) will go forward. When they fail, their development expense (as well as the expense of penalizing utilities for banking on the projects’ success) will raise overall industry costs by increasing even "good" projects’ risk premium.

Unrealistic renewable power requirements may collapse under their own weight unless states streamline the procurement process and give utilities and project developers the tools for managing it. Almost no power project can be financed today without a long-term contract for its output. Yet:

  • State and utility processes that are unnecessarily costly, time-consuming, and plagued by the uncertainly of potential judicial challenges belie the credibility of the state’s professed desire to foster renewable power development.
  • Mandates at levels that require purchases of solar and wind capacity from remote locations are unlikely to be met in the absence of a state, regional, or national policy that removes the obstacles to and scheduling uncertainties of constructing necessary transmission capacity.
  • Tax incentives intended to promote long-term investment in renewable energy projects will not achieve their purpose if they continue to be renewed on a short-term basis only.

Paved with good intentions

State RPS mandates have successfully jump-started desirable growth in the generation and use of renewable power. However, their continued imposition of risks and responsibilities on utilities alone is undesirable in the face of business, technological, and market realities.

Given current levels of renewable power production and consumption, escalating and/or accelerating renewable mandates in isolation makes sense only in the context of political expediency. Such a one-dimensional strategy is more likely to impede the development of renewable energy projects than to advance it. Who will bear the costs of the short-sightedness? Ratepayers—in the form of less-reliable, less-renewable, and more-costly service.

Christopher A. Hilen is assistant general counsel at Sierra Pacific Power Co. in Reno, Nevada. He can be reached at 775-834-5696 or chilen@sppc.com. Steven F. Greenwald leads Davis Wright Tremaine’s Energy Practice Group. He can be reached at 415-276-6528 or stevegreenwald@dwt.com.