Will Massachusetts Meet its RPS?

I live in Massachusetts, where the annual increase in the state’s Renewable Portfolio Standard is scheduled to double in 2009 (from 0.5% increase per year to 1%). Where is all this extra renewable energy going to come from? – Eric Omar, Provincetown, MA

Eric, thanks for the question. State Renewable Portfolio Standards are certainly a factor in helping drive the adoption of renewables. Most of these requirements are ratcheting up, and that is very good for the environment. But many people question whether enough sources of renewable power will be put in place to meet the growing requirements — especially in a densely populated state like Massachusetts.

First, some background about Renewable Portfolio Standards. An RPS is a state policy that requires certain amounts of the power consumed in the state to come from renewable resources by specified dates. Currently there are 24 states that have RPS policies in place; in aggregate these states account for more than half of the electricity sales in the U.S. A few other states have nonbinding goals for adoption of renewable energy instead of an RPS.

Individual state RPS’s differ in some detail, but are very similar in basic framework. Typically the RPS establishes some amount of renewable power (either generation or capacity) that power suppliers in that state are required to provide by a particular date. Most often the amount is expressed as a percentage of the total power (generation, sales, or capacity) in the state, although in some cases an absolute amount is specified; typically this amount ratchets up over time. The varying RPSs also differ to some extent in what sources qualify as renewable.

In the absence of a federal RPS, it will be highly instructive to watch how each of the state RPS’s play out. The states are truly the laboratories of invention in the implementation of renewable energy, and it will be especially interesting to watch what occurs in Massachusetts because of the prominent role the state is playing in the renewable energy field. The clean tech sector in Massachusetts has been booming (30% annual growth rate for renewable energy companies), buoyed by the high concentration of leading universities, development programs and a vibrant venture capital and private equity community.

The Massachusetts RPS was adopted in April 2002. It requires that 1% of the state’s electricity supply come from renewable sources by January 1, 2003. Sources that count toward the standard include solar, wind, ocean thermal, wave, tidal, fuel cells using renewable fuels, landfill gas, and certain types of biomass.  After January 1, 2003 the requirement has been increased at a rate of 0.5% per year, reaching 4% by 2009. At this point, the legislation creates an open-ended increase of one percent per year, until the state suspends the annual increase.

So how successful has the Massachusetts RPS been in meeting its goals so far? The state successfully met its initial requirement in 2003 (primarily because utilities had been able to “bank” credits for a number of years). Since then, however, Massachusetts has fallen short of being able to satisfy the requirement. New renewable capacity has been provided from landfill methane, biomass, anaerobic digester systems, wind, and solar PV sources, although the RPS has not triggered an exponential growth of renewable energy (as in, say, Texas).

Now, let’s get to your question. With the annual increase doubling starting in 2009, and Massachusetts already failing to meet its targets, how will it meet its goals with an increased annual renewable energy rate of growth? The MA RPS contemplates three avenues for power producers to comply with the requirements: (a) produce power from qualifying renewable resources within the state, (b) purchase Renewable Energy Credits (RECs) from power produced outside the state (anywhere in New England; or if from outside New England the power itself must be delivered to New England); or (c) pay “alternative compliance payments” (ACPs) that began at $50 per MWh in 2003 and are adjusted thereafter for inflation.

Let’s take these in reverse order:

  • Paying over $50 per MWh on an ongoing basis is definitely not the outcome that legislators envisioned when they established the RPS in the first place, and it is not a good outcome for consumers. As things stand today, consumers are paying over $50 per MWh for renewable power that they aren’t getting. Further, continued noncompliance with the RPS is cause for punitive action by the state. So simply ignoring the requirements will not be a viable strategy, although electric providers may find themselves utilizing this “escape hatch” for some portion of their requirements on an ad hoc basis.

  • Purchasing RECs may also play a role in meeting some portion of the requirements, but even here there will be difficulties. As the RPSs for the various New England states ratchet up, the New England region will soon require, in the aggregate, on the order of 400 MW of new sources of renewable power every year. Not only will it be very difficult to achieve this goal; it also means that there will not be a lot of spare RECs floating around in New England. Suppliers can also purchase RECs from outside New England, but the requirement that the power actually be delivered to the state means that the cost of power from New York wind farms, for example, will be at a cost disadvantage after paying for transmission. Also, there is only so much transmission capacity into New England from its neighboring states and provinces, which will limit the number of RECs they will be able to sell there.

  • This leaves us with adding renewable power sources in Massachusetts. The state does not have the wind resources that a Texas has, or the vacant land that a Nevada has. Large-scale wind development in a heavily populated state has proven to be difficult (e.g., Cape Wind). One advantage that Massachusetts does have, however, over those large western states, is that where wind energy can be produced, it is relatively close to the consumer and doesn’t require construction of new, expensive transmission lines. Smaller-scale wind should see quite a bit of growth as communities choose more tangible manifestations of their renewable choices, and as large-scale wind farms are ruled out. Solar may also have continued and increasing potential, particularly as costs decline and efficiencies improve. Other technologies, including waste gasification and anaerobic digesters, will also need to play a role.

In short, meeting the ratcheting RPS requirements in Massachusetts will be very difficult, and I don’t think anyone has a clear view as to how exactly this will play out. It is clear, however, that there is no single answer; no one strategy or technology will get us there. As the requirements begin to tighten, it will also be interesting to watch if the state, and its constituents, have the political will to continue with the annual RPS increases. As mentioned earlier, it isn’t reasonable to continue asking consumers to pay for renewable energy they aren’t getting (by paying RPS non-compliance penalties), but state incentives, when properly designed, can go a long way to facilitating renewable energy development, and actually give consumers something for their money.

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Al has held a number of leadership positions in the renewable energy and finance fields, and most recently was COO and EVP of Environmental Power Corporation/Microgy, a publicly-traded developer of commercial-scale biogas facilities. Previously Al worked for many years in the capital raising and M&A fields, having acted as a merchant banker, investment banker and corporate lawyer. Al has his JD and MBA degrees from Columbia University, and his undergraduate degree from Cornell University.

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