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How the Illinois energy reform ‘fixed’ the state’s RPS, promising a renewables boom

Among the provisions of the sweeping energy legislation just passed in Illinois are reforms that aim to fix the state’s renewable portfolio standard and that could revive renewable energy development, which has been dormant in the state for several years.

The changes could bring $12 billion to $15 billion in private renewable energy investment into Illinois and could “jump start the solar industry” there, says Andrew Barbeau, senior clean energy consultant for the Environmental Defense Fund.

The centerpiece of the legislation, the Future Energy Jobs Bill (SB 2814), is a $235 million a year, 10-year bailout of Exelon’s Clinton and Quad City nuclear power plants, but the law also includes provisions for energy efficiency and $750 million targeted for low income programs, as well as changes to the RPS.

The RPS target itself has not changed. It still requires investor-owned electric utilities and alternative retail electric suppliers (ARES) to source 25% of eligible retail electricity sales from renewable energy by 2025 and exempts electric cooperatives and municipal utilities from RPS requirements. But the legislation provides a fix for funding mechanisms that in the past had brought the state’s RPS program to a standstill.

The law streamlines funding for RPS compliance projects and puts the state’s utilities in the center of the payment stream, collecting and retaining the funds until they are needed. That alone is a big improvement over the past plan.

Since the RPS program was implemented in 2008, the funds have been collected in three buckets and held by the Illinois Power Agency (IPA), which administered the renewable energy credits (RECs) used to comply with the RPS.

But after the passage of the Municipal Aggregation Act in 2010, the RPS program began to run into problems. The aggregation act allowed utility customers to switch electricity suppliers, but that worked at cross purposes to the RPS.

To meet the RPS targets, utilities and ARES could either build a renewable energy project or buy RECs. ARES were able to purchase up to half of their renewable commitment by buying RECs. For the rest, they had to make alternative compliance payments to the IPA, which can use the funds to buy RECs.

But because customers were able to switch suppliers, both ARES and utility offtakers were reluctant to sign long-term power purchase agreements with renewable energy developers if the customers behind those agreements were constantly in flux. And, without the security of a long-term PPA, many developers were unable to line up financing for their projects.

There was another problem in that the funds collected from consumers served by utilities and by ARES are maintained in separate accounts, and the funding of those accounts fluctuated as customers switched suppliers. The fluctuations created enough uncertainty that the funds sat unused.

There was also the matter of the state’s ongoing budget crisis, raising concerns that the state would divert the funds for other uses. Last year the legislature borrowed $98 million from renewable energy funds.

The net effect was a broken RPS. Wind power development in Illinois came to a halt. In 2009, $1.3 billion was invested in wind power and 632 MW of wind turbines were installed in the state. The projects in the pipeline had enough momentum to carry development into 2012 when $1.6 billion was invested and 823 MW of wind power was installed, but since 2013 there has been essentially zero investment and no new wind capacity installed in the state.

One bucket

The newly passed legislation consolidates the three funding buckets into a single fund. The monies for the fund will come from a charge on electric customers’ bills that will be shown as a single line item to create more transparency.

Under the old plan funding also came from ratepayers, but the charge was less apparent on the bill. The charge will move from the supply side of the bill to a line item on the distribution side. (If it were included as a transmission charge that would include municipal utilities, which are not subject to the RPS.) The utilities will hold the funds until they are required by the IPA, keeping them further from the reach of lawmakers seeking to redirect the funds for other purposes.

While the funding for the RPS program comes from ratepayers, the level of funding is determined by the cost of complying with the milestone RPS targets. Funding will start at around $140 million a year, going up to $240 million annually by the third year of the program. Over time, as load goes down as a result of energy efficiency measures, the available budget is expected to go down, to around $200 million a year in 2030.

For many environmental advocates, RECs would not be their first choice as a compliance mechanism for an RPS program because RECs bought on the secondary market do not encourage “additionality” – that is, the building of new resources that displace higher emitting generation sources.

To address those concerns, the Future Energy Jobs Bill included provisions requiring that 4 million wind RECs and 4 million solar RECs come from new build projects. That translates into about 3 GW of solar projects and 1,300 MW of wind projects.

The law lays out a schedule that calls for half of the solar and wind RECs to be procured by 2020. An additional 1 million of wind and 1 million of solar RECs would be procured by 2025, and the last 1 million of solar and wind RECs need to be procured by 2030.

Within the solar portion of the RPS is a 2% carve-out for brownfield solar projects, an 8% carve-out marked as discretionary, and a 50% carve-out for distributed and community solar. That portion is further subdivided into 25% for small solar, 25% for medium solar, 25% for community solar, and 25% for the utility’s discretion.

All of the utility-scale projects will be selected for 15-year REC contracts through competitive solicitations administered by the IPA. For the distributed and community solar projects, the IPA will set up a schedule of adjustable blocks of RECs with defined values. When the RECs in one block are used, the next block price kicks in. The IPA will be charged with setting REC pricing to ensure that targets are met while keeping within the budget.

To set the REC prices, the IPA will set up a long-term plan that includes a stakeholder engagement process. The REC prices will be updated every two years. If the IPA finds the market is moving too slowly, it can propose new prices, subject to approval by the Illinois Commerce Commission (ICC).

Rooftop solar installations will also benefit from what is not in the new law. Changes to Illinois’ residential net metering program were removed from the Future Energy Jobs Bill during negotiations in the final days before the bill’s passage, as were proposed subsidies for coal plants in the southern part of the state. The net metering program is capped at 5% of customers and then the net metered payments are energy only (instead of energy and capacity). When the 3% mark is hit, it acts as a trigger for the ICC to begin to develop a solar rebate based on the value of solar to the grid.

Meanwhile there is still money in one of the three buckets that collected funds under the existing law, which stands until the new law takes effect on June 1, 2017. Two of the buckets did not hold funds but collected funds as money was spent on projects. But the fund that collected alternative compliance payments, known as Renewable Energy Resources Fund (RERF), has about $200 million.

All the unused RERF money will go to the Solar-for-All program that the new law put in place and will help get pending projects under way until the funding from the law kicks in the second half of 2017. The Solar-for-All program includes support for programs such as community solar, as well as low income job training.

Separate from the new law, the IPA has a procurement plan for rooftop solar before the ICC that could make compliance payment funds available as soon as March 2017.

Fast forward to wind

Under the new law, the IPA is also directed to come up with a long term resource plan for renewable procurements, a regulatory process that will involve time for stakeholders to comment.

“That process could easily bleed into 2018,” said Brian Granahan, chief legal counsel for the IPA.

In the interim, there are concerns that pending projects, especially wind power projects, that are ready to go could suffer because the federal production tax credit for wind begins the first in a series of step-downs next year, dropping to 80% of its current value.

In order to get projects off the ground quickly and to enable developers to get more value out of the PTC, the IPA is working on an initial forward procurement of wind power. Nothing can take place before the effective date of the bill, says Granahan, but the IPA has begun the planning process already to “hit the ground running on June 1.”

“How much work we can actually get done in advance is something that we’re still working out,” says Granahan.

There are already quite a few wind projects that were started and put on hold that could qualify to bid in a 2017 solicitation, said Kevin Borgia, public policy manager at Wind on the Wires.

“There are at least 1,000 MW of wind projects in advanced development with county permits,” Borgia told Utility Dive. (Illinois does not require state level permitting.)

That does not mean all of those projects would be revived. It costs money to keep a mothballed project live, Borgia said, but the passage of the new energy law is a good sign. “It is a big move for renewables.”

Overall, for developers of renewable energy projects, the last minute negotiations that went into the passage of the Future Energy Jobs Bill appear to have paid off. The law fixed the state’s RPS, paving the way for thousands of megawatts of wind and solar projects in the years to come.

“The RPS is absolutely fixed,” Barbeau says, “It is not perfect, but without a doubt, it is fixed.”

It is also significant, he said, that one month out from the Trump presidency, Illinois, a state with a Republican governor, passed the largest clean energy bill in the country on a bipartisan basis – and without coal subsidies.