On September 23, 2010, the California Air Resources Board (CARB) unanimously adopted the "Renewable Electricity Standard" (RES) to require a 33 percent by 2020 renewable energy procurement mandate for most retail sellers of electricity in California, including but not limited to publicly owned utilities (POUs) and the state’s three largest investor-owned utilities (IOUs), Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E).1 The RES is an independent requirement from California’s existing Renewables Portfolio Standard (RPS), which requires a 20 percent by 2010 renewable energy procurement mandate.2

The RES compliance deadlines are phased in over time - to see the deadline please click here.

The RES is a major new regulatory requirement. A 33 percent by 2020 renewable mandate will require almost a tripling of available renewable electricity supplies.4 The California Public Utilities Commission (CPUC) has estimated that the "magnitude of the infrastructure that California will have to plan, permit, procure, develop and integrate in the next ten years is immense and unprecedented,"5 potentially requiring $115 billion in new infrastructure investment and at least seven major new transmission lines.6 However, the RES’s enhanced flexibility compared to the RPS — including eliminating delivery requirements for out-of-state renewable resources and allowing an unlimited use of tradable renewable energy credits — is expected to reduce costs and facilitate compliance.7

Governor Schwarzenegger’s Executive Order Initiated CARB’s Rulemaking

The RES was prompted by Governor Schwarzenegger’s Executive Order S-21-09, issued September 15, 2009, directing CARB to adopt a new renewable standard by July 2010 under its existing regulatory authority to reduce greenhouse gas emissions pursuant to California’s Global Warming Solutions Act of 2006, commonly known as Assembly Bill 32.8 The Executive Order was triggered by the Governor’s veto of twin bills approved at the end of the 2009 legislative session that would have raised the RPS to 33 percent by 2020 but may have placed overly burdensome restrictions on out-of-state renewable resources.9

CARB Delayed RES Adoption Until After the California Legislature Failed to Raise RPS

CARB initially scheduled the RES adoption hearing for July 22, 2010.10 However, on July 15, 2010, Governor Schwarzenegger sent a letter to Mary Nichols, Chairman of CARB, requesting a postponement of the hearing pending the Legislature’s effort to pass proposed Senate Bill (SB) 722.11 SB 722 would have raised the RPS to 33 percent by 2020. SB 722 passed through the Assembly12 but ultimately failed to pass the Senate at the eleventh hour.Following the end of the 2010 legislative session, CARB scheduled the RES hearing for September 23, 2010, where it was unanimously approved.13

RES Complements RPS But Expands Requirements to Publicly Owned Utilities and Increases Flexibility For Procuring Out-Of-State Electricity

Overview of the RPS

The RPS applies to large and small investor-owned utilities, electric service providers and community choice aggregators, but does not apply to publicly owned utilities. The RPS program is collaboratively implemented by the California Energy Commission (CEC) and the California Public Utilities Commission (CPUC). The CEC is responsible for certifying renewable facilities as eligible for the RPS and operating the accounting system to track and verify RPS compliance. The CPUC is responsible for determining annual procurement targets, reviewing and approving each utility’s renewable energy procurement plan, reviewing contracts for RPS-eligible energy and ensuring compliance.

Under the RPS, the procurement of energy from a renewable facility cannot be counted toward an affected retail seller’s compliance unless that facility has been certified as RPS-eligible by the CEC and the facility’s energy production has been tracked through the Western Renewable Energy Generation Information System (WREGIS). The WREGIS is an independent renewable energy tracking system developed by the CEC for the region covered by the Western Electricity Coordinating Council (WECC).14 WREGIS issues a certificate for a renewable energy credit (REC). An REC represents one megawatt-hour (MWh) of renewable electricity generated from a certified renewable facility.

Similarities and Differences Between the RES and RPS

CARB designed the RES to maximize compatibility with the RPS.15 The RES relies on many of the same compliance mechanisms as the RPS. For example, the RES allows the same pool of renewable technologies (e.g., solar, wind, biomass, etc.) and uses the REC-based WREGIS accounting system to track compliance.16 However, the RES is intended to broaden the scope of California’s renewable energy requirements and increase the flexibility of procuring electricity from out-of-state renewable resources.17 As such, key distinctions between the RES and RPS include the following:

RES Eliminates Delivery Requirement. The RES eliminates "delivery" requirements under the RPS that generally mandate the delivery of renewable electricity into California.18 Elimination of the delivery requirement is expected to facilitate the use of out-of-state renewable resources for RES compliance because it expands the pool of available out-of-state renewable resources beyond those that can meet the RPS delivery requirements.19

RES Allows Unlimited Unbundled/Tradable RECs. The RES allows an unlimited use of "unbundled" or "tradable" RECs (TRECs) for compliance purposes. In contrast, the CPUC has limited the use of TRECs under the RPS, at least temporarily.20 TRECs allow the environmental benefits associated with renewable electricity to be sold or traded separately from the underlying electricity.21

RES Offers More Flexible Certification Process. Similar to the RPS, facilities must be certified under the RES before electricity can count towards compliance obligations. The RPS requires certification by the CEC.22 However, the RES also allows certification by: (1) the CEC under an interagency agreement with CARB based on the RPS program guidelines except for any delivery requirement; or (2) by the CARB Executive Officer, his/her designee, or a third-party contractor using the same criteria listed above.23 Thus, out-of-state renewable facilities can be certified as RES-eligible facilities even if the RPS delivery requirements cannot be achieved.

RES Applies to Publicly Owned Utilities. The RES applies to a broader range of regulated entities than the RPS — most notably — POUs.24 The RES allows the grandfathering of certain POU-qualifying RECs for contracts executed prior to September 15, 2009.25

CARB Potentially Considering Post-Approval Changes

CARB has indicated that additional changes to the RES may be forthcoming. At the approval hearing, Staff stated its intent to propose changes to the RES that would be considered de minimis in nature and would not require approval by the Board.26 Staff also indicated at the approval hearing that CARB intended to "initiate expeditious rulemaking to ensure continued harmonization of the two programs, specifically incorporating provisions related to tradable credits."27

CARB Staff did not elaborate on the extent to which the treatment of RECs would be "harmonized" with the CPUC’s treatment of RECs under the RPS. Interested parties, including California’s three large investor-owned utilities, have commented that the CPUC’s definition of TRECs limits access to eligible renewable energy resources.28 Although CARB has expressed its general intent to make the RES compatible with the RPS, expanding access to a variety of renewable energy resources — including out-of-state resources — remains a fundamental goal of the RES.29 As such, CARB may be reluctant to adopt a definition of TRECs that could significantly restrict access to out-of-state renewable resources.30

Implementation of the RES May Be Challenged

Implementation of the RES may be challenged from a variety of sources. On September 20, 2010, Senate President Pro Tempore Darrell Steinberg and Speaker of the California Assembly John Perez sent a joint letter to Mary Nichols, calling on CARB to delay approval of the RES because it may be beyond the scope of CARB’s regulatory authority, it creates economic uncertainty and it establishes a duplicative state bureaucracy.31 The letter even recommended that the Legislature de-fund CARB staff positions that would implement the RES.32 CARB proceeded with approving the RES on September 23, 2010 and it remains unclear whether any legislation will be proposed to potentially impede implementation of the RES.

Results of the November 2010 election could also affect the implementation of the RES. Meg Whitman, the Republican nominee for Governor, has proposed suspending AB 32 for one year, if elected.33 If passed by voters, Proposition 23 would suspend AB 32 until unemployment levels drop to 5.5 percent for four consecutive quarters (far below recent reported rates of more than 12 percent).34 Because CARB relied on its AB 32 authority to implement the RES, a suspension of AB 32 may lead to a suspension of the RES.

Changes in executive policy could affect the RES. Unlike the RPS, which is a codified statute, the RES remains a CARB regulation. A new Governor could order CARB to revise the RES, similar to Governor Schwarzenegger’s Executive Order S-21-09, which prompted the RES in the first instance. CARB would likely be obligated to comply with any such order but would need to complete a formal amendment process. If the RES is significantly weakened or eliminated, such an action may potentially be challenged as having a significant adverse impact under the California Environmental Quality Act (CEQA) by causing an increase in greenhouse gas emissions.

Conclusion

California’s renewable energy standard remains a rapidly evolving area of law and regulation. The RES raises California’s renewable energy mandate to 33 percent by 2020, one of the most aggressive standards in the United States. The RES represents a significant new regulatory requirement for California’s retail sellers of electricity and will have important ramifications on energy markets throughout the western states. We will closely track these issues and are available to advise clients accordingly.