Wednesday, May 10, 2017

New Hampshire’s Renewable Portfolio Standard – Part 1

Just like the regular attempts to repeal New Hampshire’s participation in the Regional Greenhouse Gas Initiative, there are perennial attacks on the NH Renewable Portfolio Standard. It is important to know about these programs so that the associated debates can be fact-based. In my next couple of posts, I have assembled information on the Renewable Portfolio Standard and how it impacts NH. This post presents some general information; in follow up posts, I will dig into the details, money flows, and costs of these programs.

A Renewable Portfolio Standard (RPS) is a mandate by a government, local or state, that requires electrical utilities to source a certain amount of their electricity supply from renewable energy sources. The intent of an RPS is to promote and subsidize the use of renewable energy sources such as those produced by natural processes such as solar, wind, hydro, ocean, biomass, or geothermal sources. The use of renewable energy decreases the burning of fossil fuels, which, in turn, reduces emissions of greenhouse gases and other associated pollutants. In the process, it improves public health, uses local natural resources, and creates local business opportunities and jobs.

Most states already have an RPS in place: by April 2017, 29 states had a mandated RPS program, eight had renewable energy goals, and only 13 did not have any renewable energy requirements. The map below shows the RPS status across the US. The site from which I copied this information, the National Conference of State Legislatures, has a very useful interactive map that provides specific information for each state. Each state has different regulations and requirements for their RPS programs. The most ambitious is Hawaii, which mandates that 100% of their energy needs will be generated by renewable sources by 2045.

New Hampshire’s RPS was implemented in 2007. Its main components are as follows:
  • By 2025, 24.8% of electricity sold in NH must come from renewable energy sources;
  • Four classes of renewable energy sources are considered;
  • Sourcing of renewable energy by electricity suppliers is demonstrated by the purchase of Renewable Energy Credits (RECs) in each of the classes;
  • An alternative compliance payment has been established for each class to provide a cost cap on  REC prices;
  • The total amount of renewable energy increases each year: from 4% in 2008 to 24.8% in 2025 (although adjustments in the total amount and amounts in each class can be —and have been— made to accommodate market conditions).
The four NH classes of renewable energy are shown in the figure below. Classes I and II refer to newer renewable energy technologies and operations that have been commissioned since 2006. Class II is a special carve out for solar power. Classes III and IV are for the older biomass and smaller hydro operations that were established before the end of 2005.

The implementation of an RPS occurs through the generation, sale, and purchase of renewable energy credits, RECs.  A REC is a digital certification that the particular generator has produced 1 megawatt hour (MWh) of electricity from a renewable energy source, such as those listed above. Each megawatt of renewable electricity gets assigned a unique certificate number and a date of production and it then becomes a tradable instrument - a REC that can be bought and sold like a stock or bond. They give renewable generators two products to sell: the actual electricity that they produce and the RECs. The RECs therefore provide an extra revenue stream – in effect, a subsidy – for renewable energy generation.

RECs are issued and tracked by the New England Power Pool Generation Information System (NEPOOL GIS) and there is a regional market for these certificates. The sellers are generators of renewable energy and the buyers are usually electricity suppliers, like Eversource, that are looking to comply with the RPS program. Like any other market, there are supply and demand aspects and, should there be a shortage due to insufficient renewable generation, REC prices go up, signaling to the market that more RE sources are required. It is important to note that the price of RECs has little correlation with the price of electricity: REC prices are set by supply and demand in the markets where they are traded. The supply is set by the amount of renewable energy that is generated and the demand by the amount of renewable energy the utilities are required to source, which, in turn, is dictated by different RPS regulations in each state.

To comply with the RPS, the NH electricity suppliers, utilities (such as Eversource), and competitive suppliers (such as Constellation) are required to purchase a sufficient number of RECs to match their renewable energy obligations in each class for any particular year. This demonstrates that the required portion of their supplied electricity is generated by renewable energy sources. NH is a deregulated state, so utilities are not allowed to own power plants, even renewable ones: they must therefore meet their renewable energy requirement by purchasing RECs that are generated by non-affiliated renewable energy generators.

REC prices can fluctuate with changing demand and supply; in the case of short supply and/or high demand, prices can escalate so a price-cap mechanism has been built into the program. This is known as the Alternative Compliance Payment (ACP). It sets an upper limit on what the utilities are required to pay for each REC. If prices of RECs are above the ACP, the utilities are obligated to pay the ACP instead. A table of recent ACP prices published by the NH Public Utilities Commission is provided below, showing a separate ACP for each class of renewable energy. Adjustments in the ACP are made from year to year, depending on the rate of inflation and legislative modifications to the RPS program.

Before wrapping up this introductory post, I thought it would be useful to get a sense of what is involved in producing 1 MWh of electricity from a renewable energy source, which is the requirement to produce a single REC. One megawatt hour (MWh) is equivalent to 1000 kilowatt hours (kWh), which represents approximately six weeks of electricity use in an average NH home (assuming a monthly use of 600 kWh). This is also the approximate amount of electricity that a three-panel solar array, rated at 0.75 kW, would produce in one year. Most residential solar systems are larger, ranging from 2 to 5 kW, and produce ~2 to 7 MWh/year, or 2 to 7 RECs per year. At the other end of the scale, the Lempster wind operation,  which has 24 wind turbines each rated at 2 MW, would generate ~105,000 RECs per year (assuming a 25% capacity factor).

Having covered some introductory information about the RPS program, such as the different classes, RECs, and the ACP, I will turn my attention in my next posts to the renewable energy quotas for each class, REC pricing, and the money flow in the RPS program. Until then, reduce your need for both fossil and renewable energy by turning off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University

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