Alternative Energy Credits for a Renewable Energy Market

The passing of the Alternative Energy Portfolio Standards act in 2004 may spur a renewable energy and energy conservation industry in PA.
Alternative Energy Credits for a Renewable Energy Market - Articles

Updated: August 8, 2017

Alternative Energy Credits for a Renewable Energy Market

Not since the period from 1973 through 1982 has there been much recognition of the value of energy conservation in limiting energy demand and of the utilization of renewable energy for the displacement of the use of fossil fuels. The fact that the available technologies and market acceptance of their inherent value were underdeveloped in those years certainly aided the shift in emphasis away from energy conservation and renewables as practical solutions to energy issues by the end of that time frame.

The one remaining legacy from those years, which is the Public Utility Regulatory Policy Act (PURPA), is to this day an administrative burden to electric utilities and a cost adder to rate payers. It does provide a history lesson on what needed to be done to re-ignite this long dormant industry. PURPA requires utilities to purchase electricity from a well-defined class of Non-Utility Generator (NUG) at the utilities "avoided costs". NUGs were limited to renewable or waste fuels generators and include wind, low-head hydro, geo-thermal, waste coal, municipal solid waste or bio-derived gases. "Avoided costs" were defined to be costs that the purchasing utility would have incurred if they had built a competing facility from the ground up and generated the same amount of electricity. This policy design was put in place in the late seventies with the intention of developing non-fossil fuel based, and waste material-fired generation resources that on a purely economic basis would otherwise not be developed.

Today with Act 213 on the books and being phased in, a new model with similarities to PURPA is emerging that has the potential to incentivize a renewable and energy conservation industry that is significantly deeper and will produce lasting impact than the PURPA prescription of old provided. Act 213 establishes a new commodity unique to Pennsylvania called an Alternative Energy Credit (AEC). Within the Act are provisions for two distinct classes of credits categorized into one of two tiers. Tier I is a "premium" class of AEC and Tier II is a "catch-all" class. Specifically, Tier I class credits include electric generation resources such as wind, certain types of biomass, coal bed methane, low-head hydro, and a special sub-category for solar photovoltaic generation. Tier II class credits include generation from resources such as waste coal, coal mine methane, distributed generation, and a sub-category for conservation that includes demand side management, demand response, and energy efficiency. The purpose of both Tiers is to provide a commodity of value determined by a transparent market that can be bought and sold to meet the legislated obligations of retail sellers of electricity.

Sellers of electricity for the purpose of the legislation are either franchised regulated Electric Distribution Companies or non-regulated Competitive Suppliers who are licensed to sell electricity by the Pennsylvania Public Utility Commission. Act 213 directs Sellers to provide a portion of their electricity supply from a combination of Tier I and Tier II resources beginning with the expiration of rate cap protection of the purchasing retail electric customer. This obligation to provide from Tier I and II resources grows progressively from compliance year to compliance year ending in 2016 with a requirement that 10% be supplied from Tier I and 8% supplied from Tier II resources. Obligations can be met in three ways; by generation of the electricity (kWhrs) from a Seller owned facility, by Seller direct purchase from a third party of electricity (kWhrs) from a Tier I or II qualified facility, or by purchasing and equivalent number of AECs. An AEC is defined as being equal to 1,000 kWh or 1 mWh. AECs can be originated by the owners of qualified facilities or by entities who have acquired the rights of ownership in a contractual written form.

When 1,000 kWh have been generated from a qualified Tier I or II facility the owner of the rights to the credits or their designee must post the required information into an internet based information tracking system called the Generation Attribute Tracking System (GATS). GATS will originate a certificate number for each AEC. The certificate number is used to track current and future ownership as well as the certificates one time use in meeting a Buyer obligation. Once a Buyer has used a certificate to meet an obligation that certificate and its number is permanently retired.

The result of the successful completion of this cycle of events is that the generation that relies on a qualified renewable energy resource is valued at a price higher than the fossil fuel or grid-sourced generation that it replaces. This new commodity is an incentive to build and operate clean, renewable generation that is not, in the majority of cases, economically justified. Failure to accurately monetize this new commodity has the negative effect of under-valuing the contribution of the project in terms of environmental benefits and fails to stimulate development of additional generation sources with similar highly desirable attributes.

The challenge to moving the overall industries forward involves connecting the owners of the qualified renewable energy facilities with the entities in the electricity supply market charged with the obligation to meet the supply standards enacted into law by the legislation. The vast majority of owners of these facilities have no knowledge of or experience with the wholesale electric market within which these obligations are settled. Furthermore, the amount of credits associated with most of these systems is small and the ability to successfully shop around and attract competitive bids will be time-consuming and difficult to achieve.

It is therefore logical to conclude that the formation of aggregation groups allows a scale-up of the number of available credits while minimizing the number of Seller/Buyer transactions. An aggregation group that provides these benefits simplifies the market, saves time, and allows generation owners who would otherwise be excluded to participate. Aggregation helps guarantee equitable pricing and promotes market development. It is also logical to conclude that as the obligations of electricity suppliers to purchase credits grows the need to provide simplified handling of these transactions will be greatly valued by the buyers, sellers, and the administrators charged with oversight of the process to the point that compensation as a percentage of deal volume will be warranted. At that time competition for the supply of these services will exist and generation owners wishing to sell and those obligated to purchase will have the option to compare price and level of service and make choices as to where, and with whom, they choose to do business. Entities involved in this new business opportunity may be for-profit or not-for-profit depending on the area of the market they wish to serve, and the business model they are pursuing. There are also numerous alternate business opportunities that may be spun out of this market derived service.

If this need is left undeveloped and unmet there will likely be a shortfall of credits resulting in an overall illiquid market causing a general collapse of the industry. It is, based on this potential for collapse, important for participants knowledgeable in the market design and its shortcomings to step forward to meet these needs, at a minimal cost, to help this fledgling industry become established until such time as the opportunities described herein gain the momentum to the point they become self-sustaining.

Prepared by Ed Johnstonbaugh, Extension Educator, Agri-Energy Economic Development, Penn State Extension.

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