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California dreaming (of renewable energy)


Felicity Carus

California reached a landmark achievement last year by hitting a keystone renewable energy target just before Christmas, raising hopes of a prosperous new year for investors, project developers and manufacturers.

Renewable energy output in the poster-child State for the U.S. renewables industry increased by 350MW in 2010 alone, mainly from new solar installations, according to the State's energy regulator, the California Public Utilities Commission (CPUC).

A number of issues drove this, but the main one is California's Renewable Portfolio Standard (RPS) target – which required California's largest public utility companies to purchase 20% of their electricity from renewable sources by the end of last year.

Vishal Shah, Author of the Barclays Capital Clean Technology 2011 report, says that the RPS is a flagship policy behind this success: “RPS targets are very important mandates because otherwise it's going to be very difficult for the utilities to try something new. Utilities tend to be very risk averse. They won't always do it if there is no mandate.”

Although figures for 2010 will not be available until March 2011, the CPUC also said that California's three largest utilities had already reached 15% of their target by 2009, and on current trends would easily reach the new RPS target of 33% by 2020.

Legislative snapshot

In addition to California's new RPS target, three key decisions made at the very tail end of 2010 provided rays of hope for the State's renewables industry, after the failure of climate legislation at the national level:

  • A feed in tariff system for mid-sized renewable installations;
  • The adoption of California's cap and trade scheme;
  • The extension of federal grants for another 12 months.

Todd Foley, Senior Vice President of Policy and Government Relations at the American Council On Renewable Energy (ACORE), said that the renewables industry in the US had thrived despite the ongoing global recession. He added, “this suite of financial policies had a huge impact in driving market development and growth”.

In addition, California has a fleet of state-based initiatives for small-scale solar installations, such as the Million Solar Roofs programme, which aims to create 3,000 MW of PV capacity by 2018, and the Californian Solar Initiative which aims for 1940 MW of solar capacity by 2016.

But large-scale solar projects in California were the cornerstone of its RPS achievement, with California's Energy Commission approving 4193 MW of solar thermal electricity plants in the last three months of 2010 alone.

The Renewable Auction Mechanism (RAM) approved by the CPUC on 16 December 2010 aims to fill the gap between these initiatives for small and large-scale projects. The RAM is designed to encourage development of between 1.5 MW and 20 MW – and fill the gap between domestic and large scale solar.

California's three main utilities, Pacific Gas & Electricity, Southern California Edison and San Diego Gas & Electric will hold biannual competitive auctions, which renewable developers can take part in. Utilities must award contracts worth up to a total of 1GW per round to developers who can offer the most competitive price.

Although broadly welcomed by the renewables industry, some experts urged caution:

Seth Hilton, for example, partner at law firm Stoel Rives, which specialises in renewable power, expressed concern over the ‘bottom up’ bidding system where projects are awarded to developers which offer the cheapest price. He said, “California's RPS was successful in encouraging investments in renewable [energy] projects and the RAM may provide an opportunity for smaller renewable projects.

“But there is still a question [of]whether the prices mean that you're really going to have people bidding into the process and getting prices that you can actually get projects built with. I've talked to clients that are very excited about it and they think they can do it. But we'll have to see as it gets implemented.”

On the same day as the CPUC approved the RAM, the Californian Air Resources Board (CARB) adopted the regulations for the world's second largest cap and trade scheme. California's carbon trading scheme is the cornerstone of its AB32 legislation, which aims to reduce GHG emissions in the world's eighth largest economy to 1990 levels by 2020, equivalent to 273 million tonnes of CO2 equivalent.

Some 360 businesses, electricity generators and importers, refineries, manufacturers, and cement and steel plants are counting down the months to January 2012 – when they will face a cap on their emissions. And from 2015, distributors of transportation fuels, natural gas and other fuels will begin compliance.

As with the EU Emissions Trading Scheme (ETS), the Californian scheme will get off to a soft start with free allocation of 90% of allowances.

Six hundred installations that each emit more than 25,000 tonnes of CO2 equivalent are covered by the scheme, but from 2012, if they exceed their cap, they will be forced to pay US$40 per tonne, rising to US$75 per tonne in 2020.

Mary Nicholls, CARB's Chairwoman, said, “it is a historic venture and we know we haven't got everything right, but we can say we've done all we can. We are being cautious and careful within the context of a very bold effort, and it's something that is going to have to be nurtured. It's a cap stone of this Administration's work.”

Opposition

However, California's Chamber of Commerce has raised concerns that the State's system would not be linked to other regional and international programmes, except the relatively small Western Climate Initiative.

“Emissions are a cost, whether it’s local air quality or CO2. Cap and Trade is merely a mechanism to recognise those costs…”
- Todd Foley, ACORE

Robert Callahan of CalChamber, said Californian businesses in the State may suffer because of its relative isolation due to the lack of Federal climate legislation. He said, “the political window has all but shut for any chance of a national programme, so any extra costs imposed by cap-and-trade will fall heavily on California businesses. Those businesses could face serious competitive disadvantages as a result of a California-only program. This only magnifies the importance of CARB getting cap-and-trade right: the goals of avoiding leakage and minimising costs cannot be emphasised enough.”

CARB's assistant executive officer, Kevin Kennedy, admitted that there were still flaws in the regulations, which will be finalised in July. He said, “clearly there's a significant amount of work that needs to be done in terms of finalising the industrial allocation, the electricity sector allocation; [and] the leakage assessment needs some revisiting. We now have some additional data so that's one area where we will be continuing to work.”

But the costs of the scheme could be far outweighed by the benefits, as the scheme is not only designed to reduce emissions from heavy industry, but also encourage the development of low-emission technologies and investments in renewable energy projects, which have been classified by CARB as carbon neutral.

Foley said: “Cap and trade will begin to put a price on carbon emissions and that will serve as an important economic driver. The more that we're able to put a price on the externalities, the more competitive these technologies become. Emissions are a cost, whether it's local air quality or CO2. Cap and trade is merely a mechanism to recognise those costs.”

At Federal level, policy initiatives will continue to play a vital role in renewable energy development. The Treasury Grant Programme 1603 (TGP 1603), created under the American Recovery and Reinvestment Act 2009, was extended at the 11th hour for another 12 months.

The Solar Energy Industries Association (SEIA) claimed that the so-called TGP 1603 had paid out US$18bn, and enabled 1,100 solar projects in 42 States to progress. If the extension had failed, many of those projects were at risk, said the SEIA. Projects now have until 31 December 2011 to begin construction under the extended scheme.

A SEIA spokeswoman said, “this was a huge win for US solar. We expect it to stimulate further growth in 2011.”

Todd Foley said that the extension of TGP 1603 was vital to balance the weakened incentives for the renewable energy tax credit scheme, which allows investors, developers and householders to offset the costs of installation by 30% through their tax bill. These Federal tax credits on renewable energy production expire for wind projects in 2012, and 2016 for solar.

Foley said that TGP 1603 had propped up investments at a time when tax revenues were severely weakened by the global recession. ACORE has estimated that in 2010, TGP 1603 stabilised the renewable energy market by providing US$3.65 billion of cash grants in lieu of tax credits, keeping the level of renewable energy project finance nearly constant with 2008.

Reasons to be cheerful

  • Renewable Portfolio Standard: California's RPS target required large utilities to purchase 20% of their electricity from renewable sources by the end of last year. California's three largest utilities have already reached 15% of their target by 2009, and on current trends will easily reach the new RPS target of 33% by 2020 (ref – CPUC);
  • Possible Feed-in Tariff (FiT) for mid-sized installations;
  • The adoption of California's cap and trade scheme; California's carbon trading scheme is the cornerstone of its AB32 legislation, which aims to reduce GHG emissions in the world's eighth largest economy to 1990 levels by 2020;
  • The extension of Federal grants (in lieu of tax credits) for another 12 months;
  • California has a fleet of State-based initiatives for small-scale solar installations, such as the Million Solar Roofs programme, which aims to create 3,000 MW of PV capacity by 2018, and the Californian Solar Initiative which aims for 1,940MW of solar capacity by 2016;
  • The Renewable Auction Mechanism (RAM) approved by the CPUC on 16 December 2010 aims to fill the gap between the above initiatives for small and large-scale projects.

Reasons to be cautious

  • A Federal Renewable Portfolio Standard looks to be doomed, though a few remain optimistic that this could still happen;
  • The chances of an extension of the loan guarantee scheme are slim now that there is a Republican resurgence in Congress.

Foley said, “it had a very important impact because the financial crisis has not ended. The tax equity market is expected to be very limited for the next year or two. TGP 1603 was meant to get us through the financial crisis and it has been a very successful programme for two years, but the financial crisis is not over. If we want to maintain market momentum it's important to maintain the cash grant.”

Loan Guarantee scheme ends?

Another powerful policy tool for renewable development is due to expire this year, however. The Department of Energy claims so far to have underwritten federal loans worth some US$24.75bn for renewable energy projects across the country, creating 56,194 jobs. But problems with loans for renewable projects have already emerged, and when the scheme begins to sunset from September 2011, the impact will hit hard at large renewables projects.

Allan Bedwell, Vice President and Director of Sustainable Strategies at analysts CantorCO2e, said the chances of an extension of the loan guarantee scheme were slim because of the Republican resurgence in Congress. He said, “the loan guarantee programme is a critical element in the analysis on whether to make a ‘go’ decision on these projects. The GOP [Republicans] has signalled that it would push hard on the Environmental Protection Agency as well as some of the other environmental programmes.”

California prolongs success

Prospects for the renewable industry in California are expected to remain bright, however, with the election of Jerry Brown as the State's new Governor. At his inauguration speech, he restated his commitment to 20GW of new renewables in the state, sending a highly significant signal to investor and project developers. Foley concludes, “Jerry Brown's commitment to long-term policy is extremely important to send that market signal to the private sector. In the USA, renewables policy is all focused on unleashing private capital and investment and the most important element for investors is a commitment to long-term policies. That's what California has done – it's a very important message to the rest of the country and beyond.”


About:

Felicity Carus previously worked on the environment desk at the UK's Guardian newspaper. She covers renewable technology and clean energy policy and finance out of San Francisco, USA.


Renewable Energy Focus, Volume 12, Issue 1, January-February 2011, Pages 20-22

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