On Thursday March 11, 2010, the California Public Utility Commission (the "CPUC") created a market for tradable renewable energy credits ("TRECs") in the state. That’s big news. In its 149-page decision, the CPUC stated that investor-owned utilities ("IOUs"), energy service providers, and community choice aggregators may now use TRECs to comply with California’s ambitious renewable portfolio standard ("RPS"). These entities are now permitted to purchase a portion of their RPS compliance from generation sources other than those they own (e.g., distributed solar generation facilities within the state and certain out-of-state facilities).
Think of a renewable energy credit as the "green" portion of a unit of electricity generated from an RPS-eligible facility (e.g., wind, solar, geothermal). Together, the "green" renewable energy credit and the unit of electricity that it came with are bundled; separate them, and they become unbundled. The CPUC’s decision allows an RPS-eligible generator to unbundle the renewable energy credits and sell them separately from the electricity they were generated with. Thus, the renewable energy credits become tradable (i.e., TRECs).
The CPUC made its decision to allow the unbundling of renewable energy credits for two main reasons, both of which seem perfectly reasonable in light of California’s push toward distributed solar generation and the conflict that is created when utilities need to meet ever-increasing RPS requirements in an atmosphere of stringent siting regulations for new projects under the California Environmental Quality Act.
- First, the CPUC created a market for TRECs to aid utilities with RPS compliance.
- Second, the TREC market is intended to incentivize development of more RPS-eligible generation, like rooftop solar modules.
A few highlights of the CPUC decision deserve particular attention:
25% Cap on TRECs: IOUs may only meet 25% of their RPS requirement with TRECs under the program. However, that 25% cap will be lifted in 2011 (unless the CPUC changes its mind).
Interim Price Cap: The CPUC set a price cap of $50 per TREC that is used for compliance by an IOU. However, that price cap will also be lifted in 2011 (unless the CPUC changes its mind).
3-Year Tradable Life: To count TRECs toward its RPS requirement, a participating utility must meet CPUC requirements for TREC-trading and Western Renewable Energy Generation Information System ("WREGIS") requirements for TREC-tracking. During the first 2-3 years of the program, the CPUC does not expect much activity in the market; so to ensure liquidity, new TRECs must be retired with WREGIS within 3 years from the date the TREC was created. "Retiring" a TREC means that the ultimate owner has applied the TREC’s compliance value to the owner’s California RPS requirement with WREGIS and the TREC is taken out of the market. However, once retired, a TREC’s compliance value may be banked indefinitely.
TRECs Under Existing Contracts: TRECs generated in future years under existing RPS contracts (i.e., TRECs generated from this day forward) may be unbundled and sold separately under certain conditions set out in the CPUC’s ruling.
Out-of-State Suppliers & Bundled Transactions: Bundled transactions must benefit California-customer load. Therefore, only electricity that comes from (1) California-connected generators and (2) out-of-state suppliers that can demonstrate that the bundled product that they deliver to California is not "shaped" using non-RPS-eligible resources, may qualify.
No Bundled Transactions for In-State Generators Selling Out-of-State: When an IOU purchases renewable energy credits (whether bundled or unbundled) from a generator located in California that sells its electricity outside of the state, the CPUC will consider that an unbundled purchase for purposes of reporting and retiring the credits. Therefore, renewable energy credits bought from an RPS-eligible generator serving out-of-state loads will count toward the IOU’s 25% cap.
From an economic standpoint, the CPUC hopes that creating a market for TRECs will increase the overall efficiency of the RPS program. By allowing the market to set separate prices for TRECs and for the electricity associated with generating them, the CPUC believes that the public will benefit because the price of each will reflect its actual value.