May 05, 2011

States' Proposal for Meeting Federal Climate Change Rules an Opportunity to Think Seriously about Regional RPS

States are seeking EPA approval to meet climate change-related standards through programs that the states themselves have pioneered. Greenwire reported last month that California, New York and Minnesota, as well as about a dozen power companies and advocacy groups, are urging U.S. EPA to let states meet the forthcoming New Source Performance Standards under the Clean Air Act through the Regional Greenhouse Gas Initiative, California’s forthcoming greenhouse gas cap and trade plan, as well as through clean or renewable portfolio standards (RPS).

This development could address an odd anomaly: while several major state-led programs to cap greenhouse gases are regional in nature (the Regional Greenhouse Gas Initiative, the Midwest Accord and the Western Climate Initiative), thus far the most powerful engine for the growth of renewable power – renewable portfolio standards, which require utilities to obtain a certain share of their energy from renewable sources – are primarily state-based. This should change. States would be better off employing the regional approach in their renewable energy incentive programs.

By mandating a certain percentage of renewable power in a utility’s energy portfolio, these laws enact a rate-payer subsidy for renewable power. RPSs have proven politically popular and extremely effective in growing the market for renewable energy. At last count, 26 states have adopted an RPS, another six have adopted a renewable portfolio goal and another five states have adopted an alternative energy standard. The Union of Concerned Scientists estimates that, by 2025, state standards will provide support for 76,750 megawatts (MW) of new renewable power. This will not only reduce conventional pollutants and help jump-start a greener economy, but is expected to reduce annual carbon dioxide emissions by more than 183 million metric tons, or the equivalent of taking 30 million cars off the road. 

Although many states employ regional organizations for the registration of renewable energy credits (in many states, provision of such a credit satisfies a utility’s obligation under the state’s RPS), unlike greenhouse gas emissions limits, no states have yet adopted regional RPSs. Instead, each state that has an RPS has its own renewable energy target, its own rules and definitions for the type of renewable energy that satisfies the RPS, its own rules for renewable energy credits, and its own system for penalizing noncompliance. 

This state-only approach has numerous drawbacks. Most obviously, such variation can be costly for utilities operating in more than one state, as they must master and comply with more than one state’s laws. Less obviously, the state-level approach impedes a more fluid market for renewable energy. Through their RPS laws, states create a market in renewable energy by allowing utilities to satisfy their RPS obligation with the use of renewable energy credits (RECs). However, many states restrict the fluidity of the market by prohibiting utilities from using RECs to satisfy their RPS obligation that represents renewable power generated out of state, for example, or power that is sold to consumers in other states or regions. Such restrictions are understandable, given that RPSs constitute a subsidy by the enacting state’s ratepayers. States have every incentive to impose various geographic eligibility and delivery requirements upon the renewable energy that satisfies the state’s RPS in order to ensure that as many of the benefits promised by renewable power – the displacement of more polluting sources of power,, jobs, taxes, a basis upon which to attract other high technology firms – stay within the state. 

The potential economic inefficiencies represented by these location restrictions are augmented by a growing concern that some are vulnerable to legal attack under the dormant Commerce Clause. Since 1824, the Supreme Court has found implicit in the affirmative grant of power to Congress to regulate commerce among the several states a negative aspect according to which, in the absence of federal authorizing legislation, states are prohibited from discriminating or unduly burdening interstate commerce. While a court has yet to rule on the constitutional validity of state geographic restrictions upon, or preferences for, RPS-eligible renewable power, three legal challenges have been filed in the past year, one of which – a challenge to the Colorado RPS – was just filed in April.

Seeking to overcome many of the drawbacks of reliance upon state-level RPSs, some scholars have advocated the adoption of a national RPS. Indeed, in 2009, the House-passed American Clean Energy and Security Act contained a national RPS mandating utilities buy a minimum of 15 percent of their energy from renewable sources by 2020. That bill didn't become law, however, and there is no indication that Congress will enact a national RPS in the near future. 

In view of Congress’s failure to enact a national RPS, states should consider doing what some states have done in view of Congress’s failure to enact climate legislation: collaborate to develop a largely uniform regulatory approach at the regional level. The most developed example of this is the northeastern states’ RGGI program whereby each member state collaborated in the development of uniform model rules for the regional carbon dioxide cap and trade program for utilities but then let each state actually adopt the model rules within their state. 

There is much to favor such an approach with respect to renewable energy mandates. First off, uniformity in the particulars of state RPS laws would assist the growing interstate renewable energy market. Second, allowing renewable power that is generated anywhere but delivered into the region to satisfy the RPS of any of the states within the region would enhance the reliability of the market for renewable power, increase the amount of intermittent power accommodated by the grid and lower the price of renewable power. Each of these effects would strengthen the regional market for renewable power to the overall benefit of each state within the region. Finally, while facially discriminatory laws prohibiting the eligibility of power generated outside the region likely run afoul of the dormant commerce clause, in-region delivery requirements are likely to impose less of a burden upon interstate commerce than in-state delivery requirements and to be more defensible since many of the benefits of an RPS, especially the air quality benefits, inure to the benefit of the region as a whole, as opposed to any one state.

Kirsten Engel, Professor of Law, James E. Rogers College of Law, University of Arizona. Bio.

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