Nearly a year ago, I wrote about the unanimous decision of the California Public Utilities Commission (CPUC) to allow Tradable Renewable Energy Credits (T-RECs) in California.  If you’re not familiar with the T-REC, it is, quite simply, an environmental commodity representing the environmental attributes associated with one megawatt-hour of renewable energy generation.

According to the CPUC, under the new rules, T-RECs “can be purchased by a utility and traded separately from the underlying energy produced by a renewable generating facility.  These energy credits can then be applied, by the utility, toward their renewable energy compliance goals.”

Within days of last year’s March 11 decision, a flurry of controversy erupted.  A joint petition to modify the decision was filed by San Diego Gas and Electric, Southern California Edison and Pacific Gas and Electric, the three investor-owned utilities (IOUs) most affected by the T-REC ruling.  Additional modifications were requested in a petition from the Independent Energy Producers Association. 

Increasing pressure was felt throughout Sacramento, from the governor’s desk to the state legislature.  A stay of the T-REC decision was issued on May 6, 2010.  For more than eight months, the short-lived T-REC program remained in a frozen, fossil-like state.

Back From Extinction

“I think most of you are painfully aware that this commission has gone round and round on the issue of the role of Tradable Renewable Energy Credits in the RPS program,” said CPUC Commissioner Michael Peevey in his opening remarks at the January 13, 2011 CPUC meeting, held to consider a new decision for the T-REC program.

The CPUC’s January 13, 2011 decision reverses the stay from May 6, 2010 and reaffirms the original March 11, 2010 ruling -- with some minor modifications. 

“In largely rejecting the petitions to modify that were filed by the utilities and the IEPs, this decision effectively restores the decision that this commission voted [on] in March of last year.  It was, I think, a sensible and reasonable decision.  I supported it at the time, and I support today’s decision,” said Commissioner Nancy Ryan.

In short, the rules going forward allow the use of Tradable RECs, including out-of-state generation, to meet compliance requirements under California’s Renewable Portfolio Standard (RPS), with the following notable exceptions:

  • T-RECs can only be used to meet 25 percent of an entity’s compliance obligation.
  • Transactions are capped at $50 per T-REC.
  • The 25 percent and $50 per T-REC limitations are temporary and remain in effect only until December 31, 2013.

“The basic approach of the March decision and today’s decision is to wade gradually into the emerging market for Tradable Renewable Energy Credits, and I think that’s a prudent thing to do,” said Commissioner Ryan.

Since the limitations expire at the end of 2013, it provides an opportunity to revisit and make adjustments as necessary.

“This training-wheels approach to market development will give the Commission an opportunity to more closely monitor dynamics through the end of 2013, at which time this commission will evaluate the need for these particular regulatory mechanisms,” said Commissioner Timothy Alan Simon, adding this hint about the possible sun-setting of the restrictions: “I look forward to a more robust and less restrained T-RECs market in the near term to enable cost-effective RPS compliance for our rate payers.”

This sentiment was echoed by Commissioner Ryan, who said, “I think it’s appropriate that we have some role for RECs at the present and I hope to see a more open market in the future.”

Do more T-RECs mean lower costs for rate payers?  Will the broader adoption of out-of-state T-RECs translate into a better deal for California consumers?

Renewable Generation Civil War

Among the most contentious and controversial issues surfacing in the T-REC battle was the question of allocating in-state versus out-of-state production.  Under a T-REC program, a compliance obligation in California could be met by a T-REC generated in any of 14 states participating in the Western Electricity Coordinating Council (WECC).

“For many, the issue of Tradable RECs has become a proxy dispute over the role of in-state versus out-of-state facilities in meeting that state’s renewable objectives,” said Commissioner Peevey.

The core of this issue seems to be that T-RECs, which allow out-of-state generation, will stimulate green jobs outside of the state subsidizing that generation.  On the other hand, if California utilities are forced to purchase “Made in California” T-RECs exclusively, it will increase the cost of compliance, which is a price ultimately borne by the rate payer.

In short, multiple positions are in conflict.  This underscores the question: is the goal to stimulate jobs in California, or is the goal to stimulate renewable energy generation?  Is California trying to have its cake and eat it too?

“T-RECs is a very controversial issue, and I think the reason that it’s so controversial is that it casts in very high relief some of the internal conflicts about the RPS program and the concept of a renewable portfolio standard in California,” said Commissioner Ryan.

Among the goals mentioned by Commissioner Ryan are the reduction of GHG emissions, improvements in local air quality, local economic development, saving consumers money and promoting the development of new technologies.

“That’s just a few of the items on the list,” said Ryan.  “We can’t have all of those things at once.”

A Balanced Approach

In striking its compromise, the Commission appears to be supporting the general principle of T-RECs as a mechanism to lower costs, but with safeguards (albeit temporary) to experiment with and demonstrate the viability of the program.

“This will give us ample experience with the emerging T-REC market, as well as providing sufficient time to develop appropriate methods to assess the value of different contracts to ratepayers,” said Commissioner Peevey.

“It is, has always been and remains my opinion that having a role for Tradable RECs in the RPS program is a consumer protection measure,” said Commissioner Ryan. “It provides necessary competition to bundled projects to contain their costs and bring the best value to consumers.”

New Life for T-RECs

It’s taken several years and one false start, but it now appears that the T-REC market in California is ready for its first trial run.

In closing the T-REC discussion, Commissioner Peevey added some comments in his characteristic light-hearted and humorous style.  “I think we finally resolved something.  Maybe it took a November election to do so, but it’s resolved for the moment.  I know not everybody is happy with this, but that’s how it is and we’re going forward.”

With that, Commissioner Peevey moved the item for a vote and it was adopted.  Welcome to California, mighty T-RECs.

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Lee Barken, CPA, LEED-AP is the IT practice leader at Haskell & White, LLP and serves on the board of directors of CleanTECH San Diego and as Vice-Chair of the WREGIS Stakeholder Advisory Committee.  Lee writes and speaks on the topics of renewable energy finance, green building, IT audit compliance, and wireless LAN technology.  You can reach him at 858-350-4215 or lbarken@hwcpa.com.