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States’ renewables mandates offer hope to US industry

With the US outlook uncertain for renewables incentives at the federal level, the industry is taking a closer look at the role state mandates can play to enhance development in the coming years.

A study by a group within the non-profit American Council on Renewable Energy finds that 3.25GW a year of new renewable generating capacity will be needed to meet mandates in 29 states and the District of Columbia – a total of 61.5GW by 2030.

“This is not an unreasonable amount of power,” says Mark Fulton, global head of investment research at Deutsche Bank, a member of the US Partnership for Renewable Energy Finance (US PREF), which conducted the study. US PREF is a coalition of 20 companies and service providers that invest in the energy industry.

By comparison, new non-hydro renewable-energy installations in the US will probably exceed 12GW this year, up from about 9GW in 2011. Wind represents most of that amount, with utility-scale solar playing an increasingly important role.

“State renewable portfolio standards [RPSs] basically create demand for a diverse, sustainable and secure asset,” Fulton says. “They are such a good planning tool for a country to have. States can seriously look at expanding them.”

Should Congress decide not to extend tax credits for wind production and solar investment that expire on 31 December and at the end of 2016, respectively, it would remove two key incentives that have sustained renewable-energy supply.

The US invested $48.1bn in clean energy in 2011, including biofuels, geothermal, hydro and solar, as well as advanced batteries, fuel cells and other non-traditional energy sources.

Investors note that large-scale deployment of renewables sources in recent years has produced dramatic cost reductions, while fostering innovation that has increased efficiency across entire supply chains.

Solar PV, for example, can potentially achieve grid parity with fossil fuels in both retail and wholesale power by 2025, according to Steve Corneli, senior vice-president for sustainability policy and strategy at NRG Energy.

He says there is a pressing need to maintain federal and state incentives until full commercialisation can be achieved. State mandates will continue to make a valuable medium-term contribution to deployment of renewables in the US, says the 53-page study, but they would not fully compensate for any loss of federal incentives.

It notes that some states are much closer to meeting their ultimate RPS targets or have exceeded them, while others will require a sizeable capacity build-out to do so. In California, for example, renewables generation accounted for 13% of retail electricity sales in 2010, with a 33% goal by 2020. By contrast, South Dakota achieved 12%, exceeding its 10% target for 2015.

All state programmes allow utilities to meet a percentage of RPS obligations by importing power and renewable-energy credits (RECs) from states within the same regional power market.

The study also shows that states can enforce compliance by utilities with the mandates. In states with the most significant RPSs, enforcement mechanisms vary from fines of up to $25m per utility in California, and a $50-per-MWh compliance payment in New Jersey, to discretionary financial penalties by public utility commissions in Arizona, North Carolina and Oregon.

On the cost side, it notes that existing RPS mandates are expected to emerge largely intact from several state legislature hearings on the topic.

But “achievement of RPS targets is contingent on staying within prescribed economic constraints”, it says, adding that broadly speaking, the costs of new renewable electricity are sufficiently below the caps embedded in mandates.

Opponents of mandates argue that they drive up electricity prices and hurt the ability of businesses and industry to remain competitive. Some states give regulators discretion to delay implementation of RPS targets if costs are higher than expected.

This has raised questions over whether mandates in some states are politically vulnerable and could be watered down, or even eliminated. Efforts to do so in a handful of state legislatures have not gained traction, a sign of continued public support for affordable renewable energy.

The study suggests several ways to make RPS programmes more effective: strengthen targets, utilise best-practice procurement mechanisms, support transmission development and, potentially, broaden interstate trading of RECs.