Race to the Top: The Expanding Role of U.S. State Renewable Portfolio Standards

Race to the Top Cover

Race to the Top: The Expanding Role of U.S. State Renewable Portfolio Standards

Prepared for the Pew Center on Global Climate Change
June 2006

By:
Barry G. Rabe, University of Michigan

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Since the release of our 2002 report on state-level climate activity, Greenhouse and Statehouse: The Evolving State Government Role in Climate Change, the pace of innovation and adoption has quickened. States are taking a broad range of actions that reduce greenhouse gas emissions. One of the most widely-used policy tools is the creation of a renewable portfolio standard (RPS). These standards generally mandate that renewable energy provide an increasing share of state's electricity. As of mid 2006, 22 states and the District of Columbia have implemented an RPS.

In this Pew Center report, author Barry Rabe of the University of Michigan concentrates on this subset of the increasingly broad range of state climate policy initiatives. This work presents an overview of this policy tool, focusing on case studies of five states: Texas, Massachusetts, Nevada, Pennsylvania and Colorado. These cases reveal a number of themes with implications for other states considering adoption of an RPS, as well the implementation of a federal renewable portfolio standard.

RPS enactment and expansion appear to draw strong political support independent of party lines. States are enacting or expanding RPSs for multiple reasons, including economic development opportunities and a more reliable and diversified supply of electricity. Environmental factors, such as reduction of conventional pollutants or greenhouse gas emissions, are often seen as secondary drivers in many states. RPSs are already boosting renewable energy supplies in a cost-effective manner, and appear to hold considerable potential for more dramatic gains. They are driving the expansion of important homegrown industries. However, this report also identified a number of challenges that could potentially deter future development and successful implementation of this policy tool.

Many RPS programs remain in very early stages of implementation, and many states are facing serious implementation challenges. How should renewable energy be defined? How should individual states deal with intra-state and inter-state transmission capacity, an issue that calls for greater inter-state collaboration in policy development? Should special status be accorded specific, disadvantaged renewable sources, which might lead to a collision between competing special interests and end up by raising costs?

This report illustrates a classic case of federalism in energy and environmental policy. States adopting RPSs are providing actual data and real-world models, and the early successes of these states are changing the debate about what states can individually accomplish with their energy systems, how states can cooperate regionally, and whether a federal RPS may be feasible. These states are also, however, pushing up against the limits of what states can do without federal support and coordination. Engagement between state and federal policy makers on this issue has been surprisingly limited, and is overdue. These policy experiments may prove a deciding factor in the energy path that the United States chooses to take, demonstrating that renewables can be a viable part of our energy future.

The Pew Center would like to thank Margaret Kriz, a Nieman Fellow at Harvard University, Kirsten Engel, Professor of Law at the University of Arizona, and Rick Gilliam, Senior Energy Policy Advisor at Western Resource Advocates for their comments on an earlier draft of this report. Barry Rabe would like to thank Katie Kerfoot for her research assistance, and Joshua Bushinsky, the States Solutions Fellow at the Pew Center, who authored the Appendix.

Executive Summary

The role of American state governments in developing policies to reduce greenhouse gases continues to expand at a steady clip, measured both in the sheer number of policies and their potential impact on emissions. One of the most widely-used policy tools involves creation of a renewable portfolio standard (RPS). Such policies mandate that utilities operating within a state must provide a designated amount or percentage of power from renewable sources as a portion of their overall provision of electricity. This policy is not unique to the United States, as it is employed by a number of national governments as well as subnational entities that range from the state of South Australia to the province of Prince Edward Island. But they have proliferated among the American states at a rapid rate, having been adopted by 22 states and the District of Columbia as of mid 2006, with a strong likelihood of continued expansion in coming years. Well over half of the American public now lives in a state in which an RPS is in operation and at least one state has such a policy in every region of the nation except the Southeast.

This report builds on earlier Pew Center analyses of the evolving state role in climate policy development, placing a particular focus on the RPS experience to date. It presents an overview of this policy tool and examines key factors in both policy formation and implementation. This work considers the experience of all RPS states but devotes particular attention to five case studies that illustrate both common themes and points of divergence among individual state programs. The analysis concludes with an examination of RPS performance to date and some of the leading opportunities and challenges facing future development.

The continued proliferation of state RPSs and the decision in many states to establish second-generation policies illustrate that these policies tend to draw a fairly broad base of political support that often crosses partisan lines. States are compelled to enact or expand RPSs for multiple reasons, and greenhouse gas emissions may or may not be central factors in prompting adoption. Instead, states consistently anticipate significant economic development benefits from promoting renewables, particularly given the promise of developing home-grown energy sources that could lead to instate job creation. In turn, states are also attracted to RPSs by the prospect of greater reliability of electricity supply in coming decades and the prospect of reducing conventional air pollutants through a shift toward expanded use of renewables. Virtually all state RPSs make some use of flexible compliance mechanisms, including tradable renewable energy credits, although there is some inter-state variation in defining what constitutes a renewable energy source.

In recent years, important trends have emerged in RPS development. These include increasingly ambitious levels of renewable energy mandated over future periods, such as 25 percent of New York electricity by 2013 and 20 percent of Nevada electricity by 2015. In turn, many states have begun to differentiate between various sources of renewable electricity, providing special provisions to support certain forms of renewables that have lagged behind others due to high costs, and some are beginning to incorporate energy efficiency as a way to meet RPS goals. In a number of instances, RPSs have clearly played a central role in fostering rapid and significant expansion of the amount of renewable energy provided in a state.

Looking ahead, RPSs face a number of opportunities and challenges. As the number of state policies continues to grow, inevitable questions of cooperation across state boundaries arise. This may be particularly evident in those parts of the country, such as the Northeast and Southwest, in which de facto RPS regions are emerging through the independent actions of neighboring states. In turn, states increasingly face implementation challenges, including issues of siting new renewable energy facilities and, in some instances, expanding transmission capacity. Furthermore, there has been remarkably little engagement between state and federal policy makers on this issue and clearly a strong need for greater intergovernmental collaboration in thinking about sustaining the advances of individual state policies while consideration of a federal version of an RPS continues.

Conclusions

Challenges and Opportunities: The Next Round of RPS Development

A decade and a half after Iowa's enactment of the first state RPS, this policy has diffused to the point where more than one-half of the nation's citizens are covered by some version of a standard. The 22 states that currently operate an RPS represent nearly every region in the country, working from the same basic principles but tailoring their particular program to the special circumstances presented by each individual state. If anything, the trend toward proliferation and diversification has intensified in the last few years. More and more states are adopting RPS programs, a growing number have begun to give serious attention to an RPS, and existing RPSs are being revisited legislatively and increasingly expanded in scope and ambition.

Many of these programs remain in very early stages of implementation, reflecting the complexity of organizing renewable energy credit systems and other key features. But early indicators suggest that RPSs have considerable promise for boosting renewable energy supplies and doing so in a cost-effective manner. The basic structure of an RPS involves a blending of regulation and delegation of many choices to the marketplace that is clearly appealing to a diverse set of elected officials and organized interests. RPS enactment-and expansion-continues to occur in states with Republican, Democratic, and divided control of state political institutions.

States are clearly drawn to the RPS concept for multiple reasons. Economic development opportunities are paramount in all cases, as a growing set of states see significant job and investment opportunities in expanding their base of renewable energy. In turn, states envision advantages in creating a more reliable supply of electricity for coming years, a direct response to mounting concerns over both the price and availability of more conventional energy sources such as natural gas. Environmental factors, including reduction of conventional air emissions as well as greenhouse gases, figure differently in various cases but are clearly seen as a secondary driver in many states. Collectively, the evolving and expanding state experience with RPSs confirms the very real potential of policy development that simultaneously advances economic and environmental concerns.

Looking to the future, it appears reasonable to assume that additional states will enact RPSs in the coming years, just as existing RPS states continue to pursue implementation and revisit their goals. In anticipating the next generation of RPS development, a series of important challenges and opportunities appears to loom, concerning both continued policy development by individual states and increasingly salient interstate and intergovernmental factors.

First, a series of important issues has begun to emerge that may not have been fully anticipated at the point of enactment but could potentially deter successful implementation. Part of the initial attraction of the RPS concept was that while it did impose regulatory requirements specifying the amount of renewable energy that would be provided, it did not favor one source over another as long as it was deemed eligible. This meant that an initial regulatory intervention was followed by deference to the market, allowing different renewables to compete and demonstrate their ability to emerge as a viable alternative to traditional sources. The growing tendency to accord specialized status to more expensive renewable sources removes the level playing field originally intended in most states and, in some instances, may require significant financial subsidies from state sources or rate payers and thereby raise the cost of the policies. Moreover, the shift toward differential treatment has changed some of the recent debate over renewable energy policy in state capitals toward a collision between competing special interests, each seeking preferential treatment for its particular source (Rabe and Mundo 2007). Over time, one could envision a transformation whereby a well-intended effort to supplement select renewable sources altered RPSs into a complex formula with differential treatment for varied sources, thereby removing much of the flexibility of this policy tool and increasing the cost of implementation.

Second, much of the early planning for RPS targets assumed public support for renewable energy not only in general terms but also in presumed receptivity to siting facilities and related transmission capacity. In two of the five cases, one of the most important determinants of RPS success will involve siting issues. In Massachusetts, the formidable opposition to the Cape Wind project and the controversy surrounding development of biomass capacity raise the question of whether strong political support for renewables in abstract terms will actually translate into new renewable capacity that can be successfully sited. Without some breakthrough on siting issues within the state, Massachusetts could be forced to backtrack on its RPS targets. This problem may become increasingly common for those states with relatively concentrated and populated areas for outstanding renewable sources and it raises a new set of challenges for policy proponents. In Texas, perhaps the biggest potential impediment to achievement of its ambitious RPS goals is the construction of transmission capacity to move robust sources of wind power toward more populous areas. More generally, the development of both intra-state and inter-state transmission capacity remains a significant challenge, particularly in those regions of the country where there is substantial physical distance between the energy source and its potential consumers.

Third, the challenge of developing superior transmission capacity and RPS proliferation more broadly suggests an increasing likelihood that states may benefit from greater interaction and collaboration with each other. Case studies confirm that individual states are keen to maximize economic and environmental benefits from RPS implementation but they also highlight instances in which cross-state cooperation may be essential. This may include agreements for common definitions of renewables and related credits as well as shared efforts to promote regionally-based renewable resources with high potential. States will also need to guard against "double counting," ensuring that renewable generation can only count toward RPS and greenhouse gas reduction requirements in one state. Such collaboration is most evident at present in the Northeast, where states are physically small and their economic and energy systems are closely connected. But interstate collaboration is also emerging as an issue in other regions, particularly the Southwest with its growing cluster of individual state RPSs. Indeed, one of the strongest cases against "bottom-up" policy design in a federal system involves those situations in which multiple states fail to work cooperatively and instead establish a patchwork quilt of provisions that preclude interstate cooperation. States need to begin to look beyond their own borders and seize multi-state or regional opportunities that would benefit all parties. One early model for such collaboration involves an 11-state effort convened by the Western Governors' Association in attempting to develop a common regional system for the issuance, tracking, and retirement of renewable energy credits. The so-called Western Renewable Energy Generation Information System (WREGIS) has been working in recent years to establish such a unified system for credit definition and oversight (Xenergy, Inc. 2003) and also includes authorities from western Canadian provinces and Mexican states.

Thus far, states are clearly learning lessons from one another, just as Nevada has closely monitored developments in Texas in refashioning its own RPS. Much of this cross-state interaction, however, occurs only sporadically and state officials across the continent acknowledge that they lack resources to carefully evaluate other programs and draw important lessons. Review of legislative testimony in all of the states examined as case studies suggests only occasional and often imprecise reference to the experience of other states. State budget woes in recent years have clearly eroded the capacity of some state agencies to maintain policy analysis expertise, attend conferences and workshops out of state, and monitor developments in neighboring states. In turn, pressures to maximize the capture of economic development benefits within state boundaries can serve to deter serious exploration of cross-state collaboration.

One area with considerable potential for inter-state collaboration is the development of a common metric for determining the greenhouse gas emissions impacts as various levels of renewable energy are brought on line in concert with RPS requirements. Of the five case studies, only Massachusetts has attempted to estimate in a systematic manner the greenhouse gas reduction achieved through RPS implementation (Massachusetts Office of Consumer Affairs and Business Regulation 2005, 2006). But Commonwealth officials acknowledge that this reflects only an initial estimate. "There are lots of debates over the assumptions that one uses and disagreement among stakeholders," noted one senior Massachusetts official. "I do not see a consensus here anytime soon." In contrast, other states have been reluctant to even venture a guess as to likely greenhouse gas impacts, noting methodological complexities and resource constraints in developing the needed analytical capacity. "The RPS is clearly having an impact on greenhouse gases but it is hard to get the model right," noted a senior Texas official. "If you add a big wind farm, where exactly is that off-setting generation? It is hard to track all of that and determine how much thermal source is being replaced." State officials generally concur that the methodological issues can likely be resolved and would clearly welcome a mechanism to help establish a commonly accepted metric as RPSs promote higher levels of renewable energy. The appendix outlines the key issues for making these calculations, and a set of options that state officials might explore in working toward common methodology in this area.

Interstate collaboration could also take other forms, allowing neighboring RPS states to trade RECs and encourage integration between RPS implementation and other state policies designed to reduce greenhouse gases. One could also envision common efforts to build respective renewable sources through both informal and formal agreements between states. In recent years, multiple states have demonstrated new ways to work toward common cause in areas ranging from tax policy to vehicle registration to regional attainment of ozone standards, all with the intent of benefiting all participating states (Greenblatt 2005; Engel 2005; Zimmerman 2004). Renewable energy-and RPSs-may offer similar opportunities for states, much as other states are beginning to join common cause on other climate initiatives. In the case of cap-and-trade programs, for example, New York and seven other eastern states have concluded that it makes more sense to work together than separately, leading to the evolution of the Regional Greenhouse Gas Initiative (De Palma 2005). More broadly, states might also expand opportunities to work with other neighbors, such as Canadian provinces, in instances where considerable energy is already shared and similar policies are emerging between respective states and provinces.

Such collaborative precedents might fruitfully guide states away from steps that significantly constrain interstate movement of renewable energy and potentially violate the Commerce Clause of the U.S. Constitution. This is simply not an issue in those states with a strong recognition of cross-state interdependence. But it is conceivable that policies that are in some way designed to minimize the role of out-of-state renewables in meeting RPS targets could face a Constitutional challenge. Examples of such policies include those that confine acceptable imports to those that arrive via a dedicated transmission line, most notably Nevada and Texas. The Constitutional boundaries are not at all clear in this area, especially given the recent departure from the Supreme Court of Justices William Rehnquist and Sandra Day O'Connor, who held strong views on the power of states in relation to the federal government. To date, no legal challenges invoking the Commerce Clause have been brought against a state RPS but the very possibility of such a test further underscores the potential benefits of greater interstate collaboration to minimize the likelihood of such a confrontation.

Fourth, as the United States moves toward a de facto national RPS through a tapestry of state-based programs, it is important to find ways that the federal government can play a constructive and supportive role. President George W. Bush signed the Texas RPS into law in 1999 and two former cabinet-rank officers took similar steps when they served as governors of their respective states (New Jersey and Wisconsin). That statehouse experience has not, however, necessarily translated into constructive federal engagement and support for continued state experimentation with RPSs. Indeed, it is difficult to understate the antipathy individuals responsible for different areas of RPS development and implementation at the state level express over their dealings with the federal government. This cuts across partisan and regional lines and reflects a deep state-based desire that, in the words of one official, "the feds not come in and mess up all the good stuff we've been trying to do."

Repeated fluctuation in the federal production tax credit for renewable energy has fostered a boom-and-bust cycle for renewable development in a number of states, leaving significant lags in the development of renewables during those periods in which the credit has been terminated or its status has remained uncertain. Officials in Texas and other states with large renewable targets contend that this fluctuation has been the single biggest impediment to even further expansion of renewable capacity. In this instance, most state officials welcome the recent extension of the credit in the 2005 Energy Act as one of the more constructive federal actions in many years.

States also remain concerned by their very limited inclusion in Congressional debates over various energy and climate initiatives. Most state officials interviewed for the case studies readily acknowledge they knew little or nothing about various federal RPS proposals that have been advanced in the U.S. Senate; they are adamant that states have taken the lead amid federal inertia and that the collective state experience with this policy tool should be studied carefully in guiding any future federal actions. In particular, state officials are opposed to any federal legislation that would preempt or constrain existing state policies and are very concerned about any steps that would penalize them for taking early actions. There appears to be particular concern among state officials about avoiding one of the unexpected consequences of the 1990 Clean Air Act Amendments. In that case, the level of sulfur dioxide allowance authorized for expanding renewable energy was set quite low (one ton of emissions for each 500 mWh of new renewables). The small number of allowances provided to incentivize renewable energy was not sufficient to make renewables competitive with the cheaper compliance options of switching to lower-sulfur coal or SO2 scrubbers.

One constructive step that could be taken early in the next Congress would be a sequence of hearings designed to distill lessons from state practice that could guide future consideration of the design of a federal RPS. Such hearings might also explore models for a two-tier RPS system, with one tier that established a national framework and national REC trading process alongside another that allowed them to sustain renewable targets above any federal level through their own programs. These systems could be linked through allocating credits to states for early action. Terms for state entrance into a possible federal program have been a major focus in the creation of the Regional Greenhouse Gas Initiative. This experience and lessons from other forms of intergovernmental collaboration in environmental policy could also afford useful guidance for possible models of state and federal cooperation under a multi-tier RPS.

Despite persisting intergovernmental concerns, state officials generally recognize and welcome constructive forms of federal engagement. They perceive the federal production tax credit as an essential step to equalize the playing field with conventional sources that have long received a range of governmental subsidies. They also acknowledge the need for federal assistance in improving transmission capacity, particularly given the challenge of tapping renewable sources in remote areas and finding ways to transfer such electricity to high-demand areas. In turn, many state officials note that the federal government could also promote interstate learning about RPS experience and help with the development of common metrics to determine greenhouse gas impacts as well as foster cross-state collaboration.

It remains unclear whether the federal government might at some point draw larger lessons from the states and develop a nation-wide version of an RPS that thoughtfully and systematically builds on the best practices of state experience. At present, the American experience resembles that of other federated systems of government, such as the European Union and Australia. In all of these cases, RPSs continue to proliferate and mature, with the possibility of eventual incorporation into a policy that applies across jurisdictions. For now, states have moved to the cutting edge of this issue both domestically and internationally, having evolved in recent years from modest experimentation to the assumption of central roles in this area of climate policy development.

All references are cited in the report, which can be downloaded here.