Conservation Update: A Look Behind the Texas Renewable Portfolio Standard
This article was featured in the March-April 2008 edition of the State Energy Program's bimonthly newsletter, Conservation Update.
by David Hurlbut, National Renewable Energy Laboratory
A renewable portfolio standard (RPS) is the tool of choice for many policy makers concerned about climate change and the role played by electric generation. 25 states have adopted RPSs. Other states, as well as Congress, are considering an RPS to encourage greater use of technologies that generate power using wind and other renewable resources.
An RPS is a statutory requirement to achieve a renewable energy goal by a certain date. The goal can take many forms (usually some percentage of retail electricity consumption, or a specified amount of nameplate capacity), with varying degrees of specificity as to implementation rules. The essential features of a statute provide regulators with authority to set up the necessary administrative structures, assign requirements, and enforce compliance. A wide variety of state RPS models already exist, responding to different policy drivers and incorporating various features.
Texas established its RPS as part of the legislature's restructuring of the state's electricity market in 1999. The original statutory goals were to install 400 megawatts (MW) of new renewable capacity by 2003, increasing every two years after that to 2,000 MW by 2009. These goals represented a marked increase in the state's renewable capacity, which at the time was 880 MW, most of which was hydroelectric capacity built by the state's river authorities. Still, the goals were modest next to the 76,000 MW of total generating capacity Texas had at the time.
By the numbers, Texas has done the most of any state with its RPS and has rapidly outpaced its original goals. The state has added 4,268 MW of wind power since 2001. Not only is that more than any other state has installed (California is a distant second with 2,376 MW), it is more than in any other country except Germany, Spain, and India.
Once the statute took effect, the Public Utility Commission of Texas (PUCT) ensured it was linked letter and spirit to the state's competitive electricity market. The RPS' success in adding capacity has been due in no small part to the fact that the PUCT promulgated rules governing the RPS, green power, and renewable energy tracking as an integrated package in the context of wholesale and retail electric competition.
This article examines how the PUCT implemented the RPS, and the reasoning behind key design decisions. Others have described what the PUCT did; the task here is to examine why particular choices were made. The commission and its staff took what Barry Rabe describes as an entrepreneurial approach to the policy task. (Read a brief description of Barry Rabe published online by the University of Michigan.)
Instead of doing no more than what the letter of the statute required, the PUCT looked for opportunities in various areas under its authority to encourage market-consistent renewable energy strategies. The PUCT's rules followed a renewable energy course that had not been taken before, yet was still grounded in the statutory authority creating the RPS.
The manner in which the PUCT implemented the RPS statute has been a key driver behind the success of renewable energy in Texas. In contrast to the frenzied pace of a legislative session, PUCT rulemakings provided a chance for all members of the public to present their arguments and proposals in thoughtful detail. PUCT staff conducted an initial workshop on July 27, 1999, after which four stakeholder working groups met six times to negotiate details of the rule. As the commission noted in its final order:
The rule reflects the work products of the task force and working groups, incorporating numerous compromises reached by parties in the technical workshops conducted in this proceeding. Where consensus could not be reached, staff considered all views presented in the workshops and in written comments in drafting the proposed rule.
An important principle has guided the way the PUCT implemented the statute: the RPS is what the state is legally authorized to require, but is not the extent of what the state can and should accomplish. The distinction is more than semantics. The original RPS was part of competitive restructuring, which meant that the law needed to be implemented as consistently as possible with market principles. To do that, the PUCT needed to build a practical policy framework in which renewable energy development overall would be a response both to the RPS mandate and to customer-driven demand.
The policies adopted by the PUCT reflected a "carrot and stick" approach. The mandated goal was the stick – 2,000 MW translated into requirements that incurred penalties if not met. The carrot was a portfolio of measures to ensure that the market was fully able to respond to voluntary demand for green power – in particular, reducing the potential for consumer fraud and giving customers the information they needed to make an informed commercial choice.
Some of the changes that the Legislature made to the renewable energy goal in 2005 corroborated the PUCT's carrot-and-stick framework. At the same time it raised the mandate to 5,000 MW, the Legislature added a target of 10,000 MW. This suggests that the Legislature intended half the job to be done by mandate, and half by a well-functioning market.
Three objectives guided the PUCT rulemakings to implement the new renewable energy policy framework:
- Create a standard currency for Texas renewable energy, applicable to any commercial use.
- Make renewable energy developers compete with each other.
- Make it easy for retail customers to choose green power.
Consequently, when the PUCT devised its rules governing the RPS and consumer protection between 1999 and 2002, it treated the RPS, REC trading program, and green power marketing as an integrated package. All these pieces were in place when the RPS requirement began together with retail competition on January 1, 2002.
Renewable Energy Certificates Are the Currency for Renewable Power
The Texas REC trading program was the first of its kind, although California had been exploring the concept as early as the mid-1990s. First and foremost, Texas RECs needed to enable Texas retailers to satisfy their RPS compliance burdens. RECs had to provide an accurate account of eligible renewable energy production, and they had to be tradable between producers and retailers. The law imposed no further explicit requirement on the program, giving the PUCT considerable discretion in its design.
If RECs are designed to be an easily traded commodity for the purposes of compliance with the RPS' legal mandates, they can serve non-mandatory purposes just as effectively, depending on the market environment and the attributes of the RECs. The instrument would function in exactly the same manner – accurately representing the exclusive value of a given quantity of a rivalrous commodity – but in different contexts. The specific attributes of Texas RECs facilitate their use for either purpose.
The Texas RPS does not distinguish between different types of eligible renewable-resource-generating technologies. A REC from wind power satisfies an RPS obligation just as well as a REC earned by a photovoltaic or a biomass facility. The requirements of the RPS were therefore relatively simple.
Simplicity in the RECs' design also kept them functional for renewable power demand apart from the RPS. The PUCT anticipated that customer demand apart from the RPS could at some point follow different preferences for different technologies. An important question that was unanswered at the time of the rulemaking was how finely customers would discriminate between products. Would a typical green power customer care whether one biomass facility's nitrous oxide (NOx) emission rate was twice that of another? Or would the customer's main reference point be simply binary: does the technology produce air emissions (e.g., burning wood waste) or not (e.g., wind or solar)?
In the restructured Texas market, retail entities that offer green power products do so by aggregating RECs from various sources into a single product. So even if two biomass facilities had different emission rates, they would be averaged into a composite rate if combined in the same retail product; customers were not likely to see the difference between the two plants even if they cared about it. Moreover, if an individual REC were to include emission data, someone would have to provide it. Acquiring reliable emission data would impose a tradeoff: significantly higher costs if the data were obtained by the REC trading program administrator, or the need for verification if the data were self-provided by the facility owner.
Given the questionable commercial usefulness and high cost of obtaining reliable emissions data, the PUCT decided not to include emission data on a REC. Instead, it determined that customers would most likely discriminate broadly among technology types, and required identifying the type on the REC itself.
The PUCT opted for a parsimonious REC design. Each Texas REC carries a serial number that comprises:
- Specific facility that generated the electricity
- Type of renewable resource generating the electricity
- Year and quarter the electricity was generated
- Unique identifier for the amount of electricity produced by the facility that quarter.
At the same time, however, the PUCT approved protocols for the REC trading program that called for posting a table containing carbon dioxide (CO2), sulfur dioxide (SO2), NOx, and particulate matter emissions data for certified REC generating facilities. The table initially contained average emission rates for all units of a given technology type, but the protocols allow for reporting unit-specific rates if so directed by the PUCT.
As the program has transpired, the differences in emission rates between renewable energy generators that have emissions are not yet commercially significant. About 98% of the renewable energy production in Texas to date has been from wind power, which is all zero-emission. Such differences may become commercially significant if the Texas Legislature establishes a separate RPS for non-wind technologies, which was proposed but not enacted in 2007.
Lifespan of RECs
Another threshold issue the PUCT had to decide was the REC life cycle. The need for tradability creates a puzzle with respect to how long a REC is valid. RECs that exist for a long time are easier to trade, but more RECs are in existence at any given time. Greater supply of RECs means less incentive to add more renewable energy capacity, yet the objective of an RPS is to stimulate more renewable energy production.
On the other hand, the risk associated with short-lived commodities is difficult to manage. The balance between demand and supply, including their respective price elasticities, tend to determine the market price of a commodity. If supply or demand change faster than the ability of prices to respond, prices tend to be unstable and the market becomes a riskier place to enter into fixed-price contracts. Thus, if RECs have a short life span, supply is solely a function of immediate production, which in the case of Texas is a function of how much the wind blows. Prices are volatile, which can deter market participation and market expansion.
The PUCT set the life of a REC at three years. The intent was to give renewable energy producers and electric retailers alike a hedge against year-to-year fluctuations in REC production, so that one year's surplus production could be used in the event of an unusual decline in production or surge in demand the following year.
At the same time, the lifespan was considered short enough to encourage traders to "churn" their inventories – pricing older RECs below new RECs – so that the greatest number of RECs would be used productively. RECs that expire unused amount to leaving money on the table, which any profit-maximizing producer, trader, or retailer always seeks to avoid. Maximizing REC use tends to reduce market prices, both reducing the cost of RPS compliance and aiding the development of voluntary green power demand.
The life cycle of a REC has three stages: production, trading, and termination. The rules adopted by the PUCT treat trading as entirely within the private sector, with very little PUCT involvement. A REC may be traded any number of times between its creation and its ultimate use, and it is not even necessary for each intermediary transaction to be recorded with the trading program administrator.
The PUCT, through the REC trading program administrator, certifies the production and awarding of new RECs, and the ultimate retirement of RECs either for the satisfaction of an RPS requirement or for voluntary purposes. In neither of these functions is the market value of a REC germane; therefore the PUCT does not require the disclosure of the prices at which RECs are traded. What matters from a legal and regulatory standpoint is who the bona fide owner is at the time a REC is retired.
RECs are initially awarded to the owner of a certified renewable energy facility; every megawatt-hour produced by the facility during the quarter earns one REC. Once a new REC is placed in the producer's account, it may be traded any number of times at whatever price the seller and buyer negotiate. Within three years, each REC is terminated in one of three ways: it may be applied to a retailer's RPS requirement; it may be retired for a purpose other than the RPS, at the discretion of the current REC owner; or it expires unused if not applied to one of the two other uses.
In short, the PUCT sought to make RECs as commercially functional as possible. It avoided encumbering RECs with information and requirements that were not necessary to the transactions that were likely to occur. It also made the life of a REC long enough to permit risk management, and short enough to prevent supply stagnation.
The Role of Competition
The RPS requirement is a guarantee that a minimum amount of demand for renewable energy will exist in the Texas market. Yet no individual renewable energy supplier is guaranteed any part of that demand; those who want it have to compete for it. Those who compete take upon themselves the capital risk. A developer's ability to earn a return on investment depends on its ability to find a buyer for the energy it generates and the RECs it accrues.
Combining the growing demand for green power into the same market as the RPS means that there is no fixed upper limit to total renewable energy demand. In a normal market, competition among potential suppliers reduces prices, and as prices fall, demand increases. So while the RPS provided a fixed minimum demand, renewable energy developers themselves have the ability to stimulate additional demand through aggressive price competition in the voluntary green power market.
Robust competition requires easy entry into the market. PUCT rules established a streamlined administrative certification for eligible REC generators; if a renewable energy facility meets the criteria, it will be approved within 30 days. The facility must meet the statutory definition of renewable energy, must have been built after 1999 (if 2 MW or larger), must be metered, may obtain no more than 2% of its annual heat input from fossil fuel combustion, and may not be an existing fossil fuel plant that has been re-powered to use biomass or some other renewable energy input. All of these requirements are simple findings of fact that, if uncontested, allow quick review and ministerial approval.
Certification as a REC generator means the facility receives RECs when it generates power, but it confers no other approval. A renewable energy facility still has to meet all other environmental and siting requirements imposed on other generators. Under the rules of the Electric Reliability Council of Texas (ERCOT), any entity generating power and selling it at wholesale must register with the PUCT as a power generating company (PGC), regardless of the type of fuel being used to generate power. Any new unit connected to the ERCOT grid must cooperate with ERCOT in a transmission interconnection study prior to generating power for the grid, and must follow ERCOT market and operating protocols.
In short, REC generators are on a level playing field with respect to all other generation technologies and the rules for transmission interconnection. State law guarantees nondiscriminatory access to both the transmission system and to the wholesale power market by any generation entity. The only significant difference between renewable technologies and all other generating technologies is the ability to earn RECs.
Both the RPS mandate and the voluntary green power market turn to the same supply pool, for which Texas RECs are the standard currency. One large supply pool tends to be more competitive than many small ones, and competition changes supplier behavior. Not only do developers operate more efficiently and price their products lower, they also tend to speculate. As with other commodities such as real estate, speculative investment by competitors trying to keep ahead of the market has resulted in surplus supply. For example, about 3,100 MW of renewable capacity existed in Texas at the beginning of 2007. The RPS required 1,400 MW for that year, while green power demand (based on a simple linear growth trend) was expected to take up 350 MW or more. The difference was an expected surplus of about 1,350 MW over total 2007 demand, not including the new capacity – more than 1,300 MW – that came on line during 2007. The chart below shows the historical utilization of renewable energy capacity in Texas, divided between the RPS mandate, green power sales, and supply surplus.
Surplus is a sign that the market is functioning normally. It is also an important input to price determination. Rental vacancy rates and the average length of time a house is on the market are indicators of surplus supply, and higher vacancy rates usually signal lower rents. Like their real estate counterparts, competitive renewable energy suppliers will build a certain amount of supply speculating on future demand, especially if they believe the green power market will continue to grow. As in other commodity markets where prices are determined by relative supply and demand, prices fall as surpluses grow.
The Role of Green Power
Commission rules with respect to green power have two closely related policy drivers. One is legal: to deter deceptive trade practices. The other is to ensure that all customers have sufficient information to make reasoned choices that satisfy their various consumer preferences.
Both these drivers were addressed by the PUCT through product labeling requirements. Customer protection rules direct any retail electric provider to give its residential and small commercial customers an electricity facts label. The rules specify a standard label content and format, with the objective of providing customers with an easy means of comparing different retail electricity offerings. Each label displays the product's estimated cost, fuel mix, and air emission profile.
Deceptive Trade Practices
Consumer confidence is important to the development of new markets such as green power. Fraud is one of the quickest ways to destroy consumer confidence, especially if a poorly constructed law or a lax regulatory framework enables fraud to become widespread.
Double-counting renewable energy sold to customers is regarded as a deceptive trade practice. Two kinds of double-counting are pertinent to green power: fraudulently selling the same electricity to rivalrous users, and fraudulently selling the same electricity for rivalrous purposes. In other words, selling a given amount of green power to a given customer for a given purpose should make that power unavailable to any other customer or for any other purpose.
There is no physical distinction between electricity generated by wind power and electricity generated by a coal plant once the electrons get on the transmission system. Consequently, PUCT rules treat the electrical work value of renewable power as an economically distinct commodity. However, the fact that the power is generated by a renewable resource is another distinct source of economic value responding to both the RPS and to green power demand, a value separate from the electricity's work value. Fluctuations in the renewable source value are independent of the generic work value of the electricity passing through the meter.
To illustrate, assume that the owner of a wind farm receives a REC for each megawatt-hour (MWh) of electricity generated. If the owner sells 1 MWh of electricity under a green power contract to Buyer A, and sells the RECs to Buyer B, then the owner would be double-counting that 1 MWh of renewable energy production. Buyer A would sell the electricity to retail customers as green power (combining both the work value and the renewable value), while Buyer B would buy generic power from elsewhere and combine its work value with the renewable value of the RECs.
Therefore, 2 MWh of renewable power value would be accounted for in the market, although only one had been generated. The commercial expectation on the part of either buyer — that the purchase was an exclusive entitlement to the production of 1 unique MWh of electricity from renewable energy — would be violated, with both buyers unaware of the violation.
Double counting for rivalrous purposes is similar to selling to rivalrous users, except that it involves an additional step and different actors. A retail electric provider conveys to the customer 1 MWh of renewable energy value when it applies a REC to the sale of green power to that customer. Here, too, the commercial expectation is that the green power purchase represented by the REC becomes the customer's exclusive entitlement to the use of 1 unique MWh of renewable power. If in addition it were to count the green power sale towards its RPS requirement, however, the retailer would be retaining 1 MWh of renewable energy value. Again, the market would be accounting for 2 MWh of renewable energy value when only 1 MWh had actually been produced.
Fraud can be established if the seller makes a material representation that is false, the seller knows the representation is false, the seller intends to induce the buyer to act upon the representation, and the buyer actually and justifiably relies on the representation and thereby suffers injury. It would be economically irrational for a customer to willingly pay a premium for a good or service such as green power unless the premium conveyed something of additional worth to the customer. If the value sought by the customer were a personal, additional, and distinct contribution to the reduction of greenhouse gas emissions and the use of fossil fuels, and the seller represented that the purchase would secure such value, then the buyer would suffer injury if he or she were to pay the premium and the purchase failed to effect the reduction that was represented. Therefore, double-counting the value of the same megawatt-hour of green power raises the question of fraud, because the personal, additional, and distinct reduction expected by the buyer is eliminated.
PUCT rules require that all services provided by Texas retail electric providers to residential and small commercial customers must carry a label, and that "the retirement of RECs shall be the only method of authenticating generation for which a REC has been issued." Thus, the owner of a wind farm is prohibited from selling "renewable" electricity under a power purchase agreement to one customer, and separately selling to another the RECs earned by that wind farm. The rule encourages what has become a common business practice: to sell both the energy and the RECs to the same customer under the same contract.
The PUCT addressed the problem of double counting for rivalrous purposes by requiring a retailer to distribute its RPS obligation on a pro rata basis among all of its retail products. For example, if a retailer's RPS obligation amounts to 2% of its total sales, each retail service it offers — green or not — must show at least 2% renewable content on its electricity facts label. This requirement makes it mathematically impossible for a retailer to use its RPS requirement to back a premium-priced green power product. Instead, a retailer would have to buy and voluntarily retire additional RECs to authenticate customer sales made under a green power label.
Stakeholder positions were split on this provision during PUCT rulemakings. Incumbent retail providers that had been spun off from the old utilities opposed it, while new retail electric providers — especially those planning to serve the green power market — supported it. The new market entrants were concerned that, given the sheer size of the incumbents' legacy customer bases and the resulting volume of an incumbent's RPS requirement, the incumbent retailers would hold an unfair competitive advantage at the genesis of the Texas green power market. Unless rules required it, an incumbent would not need to purchase additional RECs in order to offer green power services, because it could simply segregate its large REC requirement into a single product. A market entrant seeking to sell green power would not have a legacy customer base, would have to purchase RECs above its numerically small RPS requirement, and would consequently face an additional cost of doing business.
The PUCT conducted a statewide customer education program a year before retail competition began on January 1, 2002, and it continued throughout the first years of full market operation. The campaign aimed to inform customers of their right to choose a retail electric provider.
The electricity facts label was part of the PUCT's customer education campaign. The intent was to make the label a standard, objective, state-certified source of consumer information, so that customers could rely on the label's summary information without having to research the methodology underlying the provider's claims. Retailers providing the label must follow PUCT rules governing the calculation of label information, and the PUCT monitors and enforces compliance.
Requiring a standard format allows a customer to put two labels side by side and see at a glance which product has the most renewable energy content and which has the least impact on emissions. Estimated monthly costs also appear in a standardized format on the same label, thus enabling a customer to compare both price and renewable content at the same time.
Labeling rules are interlocked with rules governing the RPS and REC trading. For example, if a retailer sells service under a label that represents the electricity as coming entirely from renewable energy sources, the retailer has only to retire voluntarily the same number of RECs as the amount of megawatt-hours sold. The RECs provide the retailer with considerable flexibility in managing the uncertainty of actual sales volume. The retailer can purchase under contract the amount of RECs that it projects it will need for the coming year based on its business plan and forecasts. If the forecast is too low, the retailer can simply buy more RECs on the spot market; if the forecast is too high, the retailer can keep the excess RECs for use next year.
Other Implementation Issues
In addition to the preceding, the PUCT addressed a number of major issues that had not been addressed explicitly in the statute. The most controversial issue was the treatment of renewable energy capacity that had been in existence prior to the RPS.
The purpose behind an RPS is to create an incentive to build new renewable capacity; logically, there would be little purpose in providing such an incentive to capacity that already exists. Many states with an RPS have had to address the same issue.
Most of the renewable power capacity in Texas prior to the RPS was hydroelectric, and most of that served electric cooperatives and municipally owned utilities (MOU). Senate Bill 7 (SB-7) gave each co-op and municipally owned utility the option of opening its service territory to retail competition. Only if it opted in would a co-op or have an RPS obligation. Consequently, how the PUCT decided to treat existing capacity had the potential to change the way a co-op or MOU estimated the net benefit of opting into competition.
In the end, the PUCT decided to allow a retail entity that had historically owned or purchased power from a pre-existing renewable energy facility to apply the output of a typical year towards its RPS requirement. Each existing unit's "offset" was a fixed number based on recent production. Most important, the offset could be used only by the entity purchasing the power as of 2001, and it could not be conveyed to any other party.
The PUCT also determined that ERCOT was the logical entity to administer the RPS and the REC trading program according to PUCT rules. Administering the RPS would require access to detailed data on generation and load, and as system operator, ERCOT already had nearly all of the data required.
Post-Implementation Stakeholder Issues
The first years of the RPS program saw a regulatory tug-of-war between the PUCT and different parties with different economic interests in the RPS. The PUCT was attempting to create a self-sustaining market for Texas renewable power, and a stable market requires stable rules. Once the RPS took effect in 2002, the PUCT made a number of changes addressing minor procedural issues, but for the most part avoided major substantive changes.
Nevertheless, various stakeholders petitioned the PUCT for substantive revisions that had the effect of changing the size of the mandate in the RPS calculation. Retailers sought changes reducing requirements; the wind industry sought changes to increase them.
Both attempts were consequences of the McCamey transmission congestion. McCamey is a sparsely populated area in West Texas with little native load. The transmission system in 2001 had been sufficient to serve the historical needs of the area's oil and gas production (which then was in decline), but was not sufficient to accommodate all the wind power generation added in 2000 and 2001. Consequently, ERCOT had to curtail wind power production frequently during the spring of 2002, which is normally the most productive season for wind power.
Transmission congestion resulted in less wind power production and fewer RECs on the market during the first year of retail competition. REC prices increased significantly just before the first RPS requirement was assessed, and retailers asked the commission to defer all of their 2002 RPS requirement until the McCamey congestion problem was solved.
The rule implementing the RPS said that events beyond a retail electric provider's control could be grounds for waiving a compliance penalty. While it said lack of transmission capacity could be beyond a retailer's control, "[a] party is responsible for conducting sufficient advance planning to acquire its allotment of RECs. Failure of the spot or short-term market to supply a party with the allocated number of RECs shall not constitute an event outside the competitive retailer's reasonable control."
Even with the curtailments, production from the 755 MW of McCamey wind power provided the market with enough RECs to meet a 400-MW RPS requirement. The PUCT did not change any retailer's requirement, but it did agree to increase to 10% from 5% the amount of an RPS allocation that a retailer could carry over to 2003 and 2004.
The flip side of the congestion argument came a year later, when wind power developers petitioned the PUCT to change its computational procedures to account for the transmission constraints and curtailments. Commission rules convert each year's capacity requirement into an annual energy requirement by formula:
The capacity conversion factor (CCF) is the estimated annual capacity factor for all units receiving RECs. The rules require that every two years "the CCF shall be readjusted to reflect actual generator performance data associated with all renewable resources in the trading program" (emphasis added).
The wind power curtailments resulting from transmission congestion in the McCamey area, however, depressed the calculated CCF to 27%, below the initial 35% set for the first two years of the program, and far below the 35% to 40% that wind developers said could have been produced had there been no transmission congestion.
The PUCT voted to set aside the 27% calculation and maintain the CCF at 35% for the next two years. The higher CCF increased retailers' RPS allocations by about 20%, and some of them appealed the decision in district court. The court remanded the decision back to the PUCT on procedural grounds, and the CCF was recalculated as provided in the rule. Each retailer's overassessment for 2004 was applied as a reduction to its 2005 RPS obligation, reducing the total RPS requirement for 2005 by about 25%. The market was suddenly glutted, contributing to a precipitous drop in REC prices.
Lessons Learned from the Texas Renewable Portfolio Standard
The PUCT implemented the RPS with the intent of making competition the engine of a market transformation process in which clean technologies could grow economically. Competition worked despite the compromises made along the way, in large part because the PUCT crafted mechanisms for achieving the RPS' legal mandates that at the same time smoothed the way for retailers to surpass the mandates and approach the RPS' more aspirational goals.
Perhaps even more importantly, the Texas experience suggests a broader public policy conclusion: that the best opportunities for renewable energy policy are often embedded in a state's unique political, economic, and historical circumstances. Barry Rabe contends that many of the most effective state agency efforts to address global climate change are not so much due to standard policy formulas, but rather to the ability of "policy entrepreneurs" to seize sometimes hidden opportunities that arise on the state political landscape and to build coalitions that can turn the opportunities into effective policy. These policy entrepreneurs are "individuals who command widespread respect for their expertise on a given issue and their integrity as credible brokers of information." They may be political appointees, career civil servants, or advisors outside the official structure, but whatever they may be officially, they are "well positioned to see opportunities for new policy and to literally translate ideas for innovation into workable policies."
The Texas experience, therefore, is unique only in the form of the particular opportunities that arose. A different state will have different circumstances, but the Texas experience suggests a number of general principles that can guide a state's policy entrepreneurs as they attempt to seize their own opportunities.
- The real goal is renewable energy that is economically sustainable.
While a literal and narrow reading of statutory language may suggest that an RPS is simply a quantitative goal, it matters how the state achieves its numbers. An entrepreneurial approach to implementing an RPS would regard the statutory goal as a means of achieving economic sustainability — a qualitative goal that more fully embodies the public interest. This implicit goal constitutes a test: does an RPS implementation strategy promote technological transformation toward an end state in which renewable energy is economically competitive with fossil fuel generation? The PUCT approached the test by designing the RPS as a springboard for a green power market. The RPS seeded demand, on the expectation that over time competition for the RPS will reduce costs, with lower costs leading to greater voluntary demand and greater economies of scale.
- Competition works.
While ERCOT may be the most competitive electricity market in the country, it does not follow that other states must adopt the Texas model in order to make competition work. An entrepreneurial approach to RPS implementation would look for opportunities to make renewable energy suppliers compete with each other for market share. The opportunities would be unique to each state's political and regulatory circumstances. The more competitors enter the market, the more all will work to keep costs low. If the policy entrepreneurs can somehow build competition into how an RPS is implemented, prices paid by end-use customers will be lower, promoting further demand for renewable energy.
- An RPS, a REC tracking system, and green power policies are best implemented as a package, not separately.
It makes little sense for a state to develop a REC tracking system if there is neither an RPS nor a coherent demand for green power. RECs facilitate RPS compliance, and they provide the liquidity necessary for a green power market to evolve, but by themselves they create no value. The design of an RPS should also mesh with marketing requirements for green power, so that the RPS provides suppliers with a reasonable assurance of market demand, and customers can have confidence in what they purchase.
- An RPS goal should leave room for green power to grow.
As counterintuitive as it may seem at first glance, the ideal RPS goal is modest rather than ambitious. This is a particularly difficult lesson to apply politically, because larger numbers attract more attention. Nevertheless, Texas has succeeded because its relatively modest RPS is not intended to be (as Texans say) the whole enchilada. A state's renewable energy achievement is actually the sum of its RPS requirement, its voluntary demand for green power, and speculative development by competitors seeking to stay ahead of the market. An over-ambitious RPS will squeeze the voluntary green power market, thereby undermining what should be the policy end game: economically sustainable renewable energy deployment. If policy makers aim to develop an RPS in conjunction with customer-chosen green power (see previous lessons), the level of the RPS should be high enough to seed the market, but low enough to give green power a realistic chance to grow.
- The regime of rules must be stable.
Stakeholders always want what is better for them, but most also place a high premium on predictability. Policies need not be perfect as long as they are workable. Participants with invested capital at stake tend to prefer a good, stable regime to one that is nearly perfect but constantly changing. Indeed, one of the most tangible price disruptions the Texas REC market has experienced so far was a consequence of the one time the PUCT attempted to set aside its own rules on an ad hoc basis. It is normal for a market to react to external shocks and influences; if the rules are consistently enforced, the players can manage.
Policy entrepreneurs committed to renewable energy find opportunities by regarding an RPS as one causal element in a complex system of economic interests, legal constraints, political history, and physical and human resources. Opportunities may present themselves in various forms unique to a particular state.
An RPS, a REC tracking system, and a green power market all work best when designed as a package. Similarly, the success of the package depends on how well it works with external factors. The RPS has not been the only driver for wind power development in Texas; much of the credit goes also to the federal production tax credit (PTC). Yet while the PTC was a major factor in making wind power economically feasible, that benefit was not unique to Texas. A wind farm built anywhere in the United States would get the same PTC. What made developers go to Texas rather than other states with better wind resources was the market potential afforded by the Texas RPS, and easy entry to compete for that market by virtue of ERCOT's nondiscriminatory transmission access.
Integrating an RPS with customer-chosen green power changes the political and economic rationale for increasing renewable energy capacity. Many previous state and federal renewable energy policies — especially those relying on rebates and other buy-downs — have reflected a "whatever it costs" approach to increasing renewable energy use. Sustainability has an economic side, however: it will be impossible to deploy enough renewable capacity to reduce the amount of fossil fuel used to generate electricity if the cost of the technology remains high. Only by bankrupting itself could a society deploy enough of the technology to make a significant difference, and political organisms do not willingly commit economic suicide.
In Texas and in many other states, opponents of renewable energy frequently argue that wind power and other clean technologies should compete economically with fossil fuel technologies, without any state assistance at all. Economic sustainability does not imply laissez-faire policies, however. Opportune technologies mature toward competitiveness over time, and a progressive policy would aim to remove impediments to technological evolution. Such an approach is anything but laissez-faire, but it does require more than simple subsidies. Program designs must contemplate a longer time horizon, accommodate a host of external factors (many of which are also evolving), and adapt to the reality of risk and uncertainty.
The Texas RPS is not an off-the-shelf policy than can work anywhere as is. A number of other states have implemented RPS policies, and the results have varied as much as the wind itself. Details matter, but perhaps the most important and applicable lesson arising from the Texas experience is that it also matters how the RPS fits into the big picture.
About the Author
National Renewable Energy Laboratory
The author is a senior analyst with the National Renewable Energy Laboratory in Golden, Colorado. Prior to joining NREL, Hurlbut was a senior economist with the Public Utility Commission of Texas, where he served as staff lead on several rulemaking projects addressing the Texas RPS and the green power market.