Introduction

On April 12, 2011, Governor Jerry Brown signed Senate Bill 21 to increase California’s Renewables Portfolio Standard (RPS) to 33 percent by 2020, among the most aggressive renewable energy goals in the United States.2 The new RPS requires regulated sellers of electricity to procure 33 percent of their total energy supplies from certified renewable resources3 according to the following schedule:

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Senate Bill 2 represents a substantial new statutory requirement that will have significant ramifications on energy markets, electricity generation and transmission line development in California and throughout the western states. The California Public Utilities Commission (CPUC) has estimated that a 33 percent by 2020 RPS will require almost a tripling of current renewable generation from 27 terawatt hours in 2009 to 75 terawatt hours in 2020, potentially necessitating $115 billion in new infrastructure investment including at least seven new major transmission lines at a cost of $12 billion.5

Key Changes and Implications of the New RPS

Originally enacted in 2002, California’s RPS previously set a 20 percent by 2010 standard (referred to as the Previous RPS).6 The Previous RPS covered the state’s three large Investor Owned Utilities (IOUs)—Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric—as well as Community Choice Aggregators and Electric Service Providers.7 Notably, the Previous RPS did not cover Publicly Owned Utilities (POUs), such as the Los Angeles Department of Water & Power.

In addition to raising the RPS to 33 percent by 2020, Senate Bill 2 implements a number of other important changes that will impact how renewable resources are developed, transmitted and purchased under the RPS program. Significantly, over the long term, Senate Bill 2 contemplates that no more than 25 percent of a California retail seller’s renewable portfolio come from resources located out-of-state (with some narrow exceptions). While the CPUC has discretion under certain defined circumstances to permit up to 35 percent of a utility’s renewable resources to come from outside California, the minimum in-state procurement features of the RPS are quite significant even if that action is taken.

Accordingly, Senate Bill 2 should be beneficial to owners and developers of resources within California, who will face more limited competition from out-of-state projects.

In addition, the longer-term ineligibility of most out-of-state projects for the RPS could impose a particular hardship on POUs in their renewables procurement. Unlike IOUs, POUs typically cannot enter into power purchase agreements (PPAs) for in-state energy projects prior to the adoption of an environmental clearance for project under the California Environmental Quality Act (CEQA). For that reason, many POUs have in recent years entered into PPAs for out-of-state energy projects. The longer-term ineligibility of most out-of-state projects for the RPS will likely make the POUs’ past alternative of procuring renewables from out of state an infeasible approach.

The following summarizes the key changes:

Publicly Owned Utilities Covered By New RPS

Under Senate Bill 2, the RPS now also covers POUs, which will be responsible for implementing the requirements through their own governing boards. This represents a significant expansion of the RPS because POUs currently serve approximately 25 percent of the state’s electricity customers.8 Although many POUs have already been pursuing significant renewables procurement,9 the inclusion of POUs after Senate Bill 2 is expected to increase demand for development of renewable resources in California and the western states.

Senate Bill 2 Increases Compliance Flexibility But Continues to Restrict Long-Term Use of Out-of-State Renewable Resources

Senate Bill 2 mandates that regulated entities obtain maximum and minimum allocations of the following three types of renewable energy resources to comply with the new RPS:10

  1. In-State and Limited Out-of-State Renewable Resources. This type of renewable resource includes those that: (1) have a first point of interconnection with a California balancing authority,11 have a first point of interconnection with distribution facilities used to serve end users within a California balancing authority area, or are scheduled from the eligible renewable energy resource into a California balancing authority without substituting electricity from another source;12 or (2) have an agreement to dynamically transfer electricity13 to a California balancing authority.14 Senate Bill 2 mandates minimum allocation requirements for this type of renewable resource to satisfy the RPS:
    • At least 50 percent of their renewable energy supplies until December 31, 2013;
    • At least 65 percent during the December 31, 2014 to December 31, 2016 compliance period; and
    • At least 75 percent thereafter.15 
  2. Tradable Renewable Energy Credits (TRECs).16 TRECs represent the renewable attributes of renewable generation that can be bought or sold in a market-based trading regime separate or "unbundled" from the underlying electricity.17 Senate Bill 2 sets maximum limits for using TRECs:18
    • Up to 25 percent of RPS requirements until December 31, 2013;
    • Up to 15 percent during the December 31, 2014 to December 31, 2016 compliance period; and
    • Up to 10 percent thereafter.19
  3. Out-of-State Firmed and Shaped Renewable Resources.20 This type of renewable resource involves combining energy schedules from a renewable energy resource (typically located out-of-state) with a non-intermittent, traditional energy resource to address the intermittent nature of wind and solar generation and facilitate the firm delivery and scheduling of energy into California (this process is often referred to as "firming and shaping").21 Senate Bill 2 appears intended to allow firmed and shaped electricity to satisfy compliance obligations for the portion of a utility’s compliance obligation that is not required to be satisfied pursuant to the minimum allocation requirements described in paragraph 1, above.22

Overall, the allocations in Senate Bill 2 will likely increase compliance flexibility for regulated entities during the initial two compliance periods (i.e., until December 31, 2016), and provide a certain degree of additional flexibility thereafter. Under the Previous RPS, most procurement from out-of-state renewable resources was limited by the CPUC’s policy determination that most out-of-state procurement constituted unbundled TRECs, coupled with the CPUC’s temporary cap on TRECs.23 Under Senate Bill 2, however, regulated entities will have greater flexibility to procure out-of-state resources using TRECs or firmed and shaped electricity, particularly through December 31, 2016, when up to 50 percent (through December 31, 2013) and then 35 percent (through December 31, 2016) of RPS compliance can be met with out-of-state renewables procurement. The initial compliance periods notwithstanding, long-term RPS obligations (i.e., after December 31, 2016) must be satisfied with 75 percent in-state renewable resources (or out-of-state resources that fit narrow exceptions) and only up to 10 percent of compliance from TRECs. These long-term restrictions on procuring out-of-state renewables may continue to make compliance difficult in light of the inherent difficulties of obtaining approvals in California for infrastructure projects as well as increased costs of such compliance.24

RPS Compliance Obligations May Be Waived by the CPUC

Senate Bill 2 authorizes the CPUC to assess penalties on non-POU sellers25 that fail to procure sufficient renewable energy resources to comply with the RPS requirements.26 However, Senate Bill 2 incorporates protections for CPUC-regulated sellers who encounter difficulties in complying. The Previous RPS allowed the CPUC to delay compliance requirements for up to three years if certain conditions were satisfied.27 In contrast, Senate Bill 2 allows for a potentially unlimited waiver of compliance obligations if these sellers can demonstrate that any of the following conditions are beyond their control and will prevent timely compliance:28

  • Inadequate transmission capacity for delivery of sufficient renewable energy
  • Unanticipated permitting, interconnection, or other related delays for renewable energy projects or an insufficient supply of eligible renewable energy resources available to the retail seller
  • Unanticipated curtailment of renewable energy necessary to address the needs of a balancing authority

The CPUC cannot approve this waiver unless the seller demonstrates that it has "taken all reasonable actions under its control" to ensure compliance.29 In a similar manner, the CPUC has the discretion to approve lowering the portfolio allocation requirements discussed above, provided, however, that in no instance can the CPUC reduce the minimum requirement for in-state (or limited out-of-state resources) to less than 65 percent.30 The seller must demonstrate to the CPUC that it requires the reduction for reasons outside its control.31

The applicability and usefulness of these relief provisions will likely depend on whether sellers can demonstrate to the CPUC that they have taken all reasonable actions to achieve compliance because at least one, and probably all, of the enumerated constraints will likely continue to apply for the foreseeable future.

Investor Owned Utilities May Construct and Own Renewable Resources

Senate Bill 2 expressly provides for IOUs to apply to the California Public Utilities Commission to construct, own and operate eligible renewable resources in order to meet unmet RPS compliance requirements, up to a level that represents 8.25 percent of the entity’s retail sales by Dec. 31, 2020.32 To date, the vast majority of development has occurred by independent wind, solar and other renewable energy companies. This new feature of California’s RPS policy—by expressing a legislative approval for IOUs to build and own a significant number of MWs of new generation to serve the state’s renewables mandate—may impact the dynamic of who builds and owns renewable resources within the state.

Expedited Permit Review for Renewable Projects by The California Department of Fish and Game

The Previous RPS goals placed tremendous strain on the California Department of Fish and Game to ensure that new renewable energy projects complied with the state’s natural resource laws.33 Given the California Department of Fish and Game’s limited resources to handle the deluge of applications, a number of energy generation and transmission projects critical for progress towards California’s RPS goals experienced significant delays.34 To address these delays, Senate Bill 2 includes organizational changes to the California Department of Fish and Game creating an "internal division with the primary purpose of performing comprehensive planning and environmental compliance services with priority given to projects involving the building of renewable energy resources."35 The creation of this new division to expedite review of renewable projects may alleviate resource shortfalls, bolstering California’s ability to meet its aggressive renewable electricity goals.

New RPS Likely Pre-empts Renewable Electricity Standard

On September 15, 2009, former Governor Arnold Schwarzenegger issued an executive order directing the California Air Resources Board to adopt regulations that would require California utilities to meet a 33 percent renewable energy target by 2020.36 On September 23, 2010, the California Air Resources Board unanimously adopted a Renewable Electricity Standard to require most retail sellers of electricity to procure 33 percent of their electricity from renewable resources by 2020.37 Although the Renewable Electricity Standard adopts many of the same requirements as the Previous RPS, it is a separate requirement from the RPS and is intended to increase compliance flexibility and the availability of out-of-state renewable resources.38 With the enactment of Senate Bill 2, however, it appears likely that that the Renewable Electricity Standard will be repealed by the California Air Resources Board or pre-empted by the new RPS.39

Some Implications for Publicly Owned Utilities

Under CEQA, decisions by POUs to enter into PPAs for power from in-state energy projects generally are considered discretionary actions in furtherance of a project.40 For such projects, a POU typically must wait until the lead agency adopts a CEQA clearance for the project before entering into a PPA or, alternatively and where the California Energy Commission does not have exclusive jurisdiction, assert lead agency status and prepare its own CEQA clearance, which POUs have not traditionally done. By contrast, IOUs are not subject to CEQA in entering into PPAs (only the CPUC’s later approval of the PPA is subject to CEQA).41 Accordingly, POUs have for many years faced a significant disadvantage in comparison to IOUs in the competition to enter into PPAs.

In past years, POUs have often been able to properly conclude that entering into a PPA for power from an out-of-state energy project was not subject to CEQA and that therefore the POU could lawfully enter into a PPA even at an early stage in a project’s development. Senate Bill 2 does not change the CEQA analysis, but the longer-term ineligibility of most out-of-state projects for the RPS will make procurement from out-of-state projects less practical. For example, a 10-year PPA signed in 2011 for a project with a commercial operation date of January 1, 2012 would only have five years of operation before the utility buyer would only have 25 percent eligibility for out-of-state procurement, and five years is not likely to be a long enough term for any project to get financed. Senate Bill 2 should result in greater competition among buyers to get PPAs with in-state projects. In that competition, the POUs will generally have to wait until a later date (CEQA clearance) to enter into a PPA, by which date the developer may have long since signed a PPA with an IOU. Accordingly, Senate Bill 2 could impose a particular hardship on POUs in their renewables procurement.

Conclusion

The new RPS represents a significant new statutory requirement for California’s retail sellers of electricity that will have important ramifications on power producers, transmission line development and energy markets throughout the western states. Senate Bill 2 significantly expands the RPS by covering POUs. Senate Bill 2 also likely increases compliance flexibility compared to the Previous RPS for the initial compliance periods but ultimately may continue to restrict access to out-of-state renewable resources, potentially making compliance more difficult and raising costs by limiting the majority of procurement options to in-state facilities. Moreover, Senate Bill 2 expressly provides for regulated Investor Owned Utilities to apply to the CPUC for the option of constructing and owning their own renewable generation facilities to meet a portion of unmet RPS compliance obligations. We will closely track these issues and are available to advise clients accordingly.