Back in 2009, Deutsche Bank Climate Change Advisors ("DB") published a study tracking 270 major climate policies in 109 countries. The study concluded that successful programs were those that offered investors "TLC" — transparency, longevity, certainty — a comprehensive, stable, and predictable set of rules that infused markets with a sense of clarity and security. The research went on to find that the United States lacked TLC and was lagging behind other countries, notably China and Germany. A more recent DB paper found little to cheer about at the Federal level in the U.S. Referring to the gridlock in Congress on energy policy, the paper noted "…while Congress stumbles, the U.S. stands to fall behind."
While other countries have adopted strong policy frameworks with integrated plans and clear targets, incentives and mandates, the Federal regulatory regime has been described as a “chaotic patchwork, constantly changing,” with short-term approaches that amount to nothing more than just stop gap measures, with many sun-setting in 2011. A glaring example of this shortsightedness is Congress’ failure thus far to extend the Production Tax Credit (PTC) for wind projects, which expires at the end of 2012.
Given the long lead-time needed for siting, permitting, interconnecting, and financing wind projects, the industry has come to a virtual standstill with only projects certain of qualifying for the PTC moving forward. Other PTCs expire in 2013, and other programs such as the 1603, 1703, and 1705 incentives ended last year. (The recently proposed rule for reducing greenhouse gas emissions from new power plants announced by the Obama administration may restore some credibility in the U.S., but it is too early to tell.)
Nevertheless, although the U.S. is losing ground, it is still a significant economic force in the clean energy arena. This is due in some measure to the various programs referred to above but even more so because of initiatives at the State level. Some 30 states now have some kind of renewable energy and energy efficiency standard. The standout among them is California with the most ambitious goals in the country. California’s most recent step is called the California Renewable Energy Resources Act (CRERA), which obligates all California electricity providers to obtain at least 33 percent of their energy from renewable resources by the year 2020.
CRERA, which took effect in December last year, is the latest in a series of California laws enacted over the last 6 years which are designed to radically change the State's energy profile, reduce its greenhouse gas emissions, and reinforce its position as a global environmental leader. At the same time, these measures are intended to attract capital to the State, drive economic activity, and produce jobs here at home.
These laws include California's landmark AB 32 (2006), which obligates the State to decrease it emissions down to 1990 levels by 2020, SB 1368 (2008) which prohibits the importation into California of electricity from plants failing to meet certain environmental standards, AB 2021 which mandates the adoption of energy efficiency targets by utilities, and various Feed-in-Tariff mechanisms. Additionally, Governor Brown last year called for the development of 12,000 Megawatts of local renewable energy and 8,000 Megawatts of “utility scale” renewable energy facilities.
Furthermore, California, recognizing the need to streamline permitting has enacted not one, but three, amendments to the California environmental Quality Act (“CEQA”) and has launched the Desert Renewables Energy Conservation Plan (“DRECP”) to identify suitable areas for renewables development and facilitate the issuance of permits. The DRECP joins four State and Federal agencies into the Renewable Energy Action Team, with the goal of identifying RESAs (Renewable Energy Study Areas). The Bureau of Land Management is also working to enable renewable energy development to proceed on an expedited basis with the initiation of a Programmatic Environmental Impact Statement and the identification of Solar Energy Zones.
California’s bold leadership stance on clean energy has clearly paid dividends in terms of attracting investment to the Golden State. It is reported that clean tech investment in California exceeded $2 billion in 2009, 60% of the total in North America. Venture capital investments in California approximated $6.6 billion from 2006 to 2008, more than all other states combined. California attracts 60% of the clean-tech venture capital in the entire U.S. Clean energy jobs and businesses have grown much faster than the economy as a whole in the past fifteen years, and have continued to grow even during the economic downturn.
However, if we ask whether we presently have TLC the California renewables market, the answer has to be: “not yet, but we’re getting there."
First, it needs to be stated that CRERA itself has fomented some confusion by its tortuous formulae for determining what kinds of energy would qualify under the three allowable “buckets” the law stipulates. While the California Public Utilities Commission (“CPUC”) may have now cleared up some of the ambiguities, the utilities, under the gun to meet the 2013, 2016 and 2020 milestones in the law, have necessarily proceeded with urgency to enter into contracts that would be sure to satisfy the criteria of Bucket 1 power (generally, energy produced within California or having its first point of interconnection to a California balancing authority).
This incongruous combination of alacrity and safety on the part of utilities has, in turn, invited unqualified speculators into the market which have fueled an artificial inflation of land prices and have clogged the interconnention and RFP queues with some under-capitalized and ill-conceived projects which will never see the light of day, but which must, nevertheless, be vetted one by one by the purchasing utility. Further, the recent moratorium by the California Energy Commission on biomethane, which now casts a pall of doubt over the future eligibility of biomethane as a Bucket 1 resource, is also symptomatic of an unsettled, evolving regulatory environment still looking for solid ground
The market is also being pulled in diametrically opposing directions. The utilities continue to demand ever lower prices while, at the same time, ratcheting up the amount of deposits and other payments to be posted by developers to navigate the complex process of interconnection and power purchase agreements. To compound matters, local jurisdictions are also trying to extract monies from solar projects to benefit their communities, thus putting upward pressure on prices. One such effort in Riverside County, dubbed the “sun tax”, has now been challenged as unconstitutional, thus placing the particular fee regime and others that mimic it in limbo. This means that utilities, developers, lenders, and local jurisdictions must either wait, or somehow adapt, until the legal proceedings are over.