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RPS Requirement: The Impact on Energy Supply

November 30, 2016

November 2016 Edition: Renewable energy policies across the United States have assisted in driving the nation’s $36 billion market for wind, solar and other renewable energy sources. These policies can be integral to many state efforts to diversify their energy mix, promote economic development and reduce emissions.


Market Overview

Jason Jarecki


November 2016 Natural Gas and Power Market Activity

Natural Gas

  • During the month of October, natural gas prices were modestly down in the front months, but up starting in 2017.
  • The prompt month (October) Henry Hub natural gas contract rallied to a high of $3.285/MMBtu midway through the month before selling off to settle at $3.026/MMBtu, down $0.106/MMBtu for the month.
  • Calendar year 2017 increased $0.061/MMBtu to $3.152/MMBtu.
  • Calendar year 2018 was down $0.113/MMBtu to $3.026/MMBtu.

Power: PJM – Ohio

  • Power was steadily higher throughout the pricing complex, as outages impacted liquidations providing some upwardspark. December 2016 delivery On-Peak power at AEP Dayton (AD) Hub rose $0.85/MWh to $36.45/MWh.
  • Winter 2017 (Jan/Feb) delivery was up $0.71/MWh to $45.40/MWh.
  • Further out the price curve, 2017 delivery AD was up by $0.76/MWh to $37.36/MWh.
  • 2018 delivery increased $0.35/MWh to $35.27/MWh.

Power: ERCOT – Texas

  • In ERCOT, power mostly followed natural gas with higher prices for summer (July/Aug) 2017 up $1.61/MWh to $54.39 MWh.
  • Summer 2018 was up $2.02/MWh to $55.81/MWh.

Power: Illinois

  • As anticipated, Exelon/ComEd proposed legislation (SB 1585) in Illinois to prevent the retirement of Exelon’s distressed nuclear generation assets. The initial Exelon/ ComEd bill was estimated by some in the ~$24B range over 23 years which would translate into significant rate increases in distribution for Illinois customers.
  • As reported in major news outlets, initially, the bill also included a coal subsidiary to obtain Dynegy’s favor. This was in contrast to Dynegy’s position against subsidies for similar legislation in Ohio and its positioning as a supporter of markets and market based solutions. The inclusion of a coal subsidy was recently pulled, however, through a revised bill because of the strong dissatisfaction from renewable energy interests who were not supportive of aiding coal generation.
  • The revised legislation (with seven recent Amendments) cleared the Illinois House and Senate at the 11th hour December 1st. The latest legislation (according to Crain’s) provides Exelon with more than $200 million a year over the next decade to keep the money-losing Clinton and Quad Cities plants operating. In addition, rates will rise for ComEd and Ameren customers to fund a significant expansion of energy efficiency (“EE”) programs (currently ComEd administers rate payer EE funding in the amount of approximately $250 million/year). Also included in the Bill is rate payer funded support to build new wind and solar installations as well as a scaled down micro-grid buildout. Governor Rauner is expected to sign the subject energy Bill being dubbed as the largest Illinois energy bill in twenty years.

As we head into November and December, expect volatility through the winter months as the market will be paying close attention to the long-term weather forecasts.

Please speak with your AEP Energy representative with any questions on these issues.

Any references made to prompt month natural gas will normally be associated with a range starting the first day of the month through the final settlement of the respective prompt month natural gas contract. Other references to forward natural gas prices and all power prices will be based on a range starting the first day of the month through the final day of the month.


Renewable Portfolio Standards (RPS) 

RPS Requirement: The Impact on Energy Supply

In 2000, eight states adopted a Renewable Portfolio Standard (RPS) policy designed to promote renewable generation. Since then, RPS policy requires utilities, municipalities, electric cooperatives and retail energy suppliers to sell to consumers a specified percentage of their kilowatt hours of energy supply from designated renewable electricity sources such as wind, solar or biomass. Iowa was the first state to establish an RPS policy with Hawaii having the most aggressive RPS requirement. Today, 29 states, the District of Columbia, and two territories have implemented an RPS policy.

Renewable energy policies across the United States have assisted in driving the nation’s $36 billion market for wind, solar and other renewable energy sources. These policies can be integral to many state efforts to diversify their energy mix, promote economic development and reduce emissions.renewableenergy_greenleafx360

AEP Energy meets these requirements by purchasing Renewable Energy Certificates (RECs). For every unit of renewable energy generated, an equivalent amount of RECs are produced. In other words, one megawatt hour equates to one REC. The purchase of RECs supports renewable generation, which helps reduce conventional electricity generation in the region where the renewable generator is located.

Agreeing to fix or pass-through RPS cost is an important decision to understand. RPS does not have spot markets. Therefore, passing-through charges for RPS is not recommended. Energy suppliers have the potential to mark-up costs for RPS without the consumer’s knowledge because there is no market index in order to confirm accuracy of the pass-through price.

An alternative to the purchase of RECs, some significantly larger users of electricity (large corporations) have purchased renewable energy from generation projects to satisfy both RPS requirements and more aggressive corporate sustainability/carbon initiatives. Often, their choice to buy into new projects is driven by a commitment to bring “additive” renewables to the grid (as opposed to buying into an existing renewable project).

An alternative to the purchase of RECs, some significantly larger users of electricity (large corporations) have purchased renewable energy from generation projects to satisfy both RPS requirements and more aggressive corporate sustainability/carbon initiatives. Often, their choice to buy into new projects is driven by a commitment to bring “additive” renewables to the grid (as opposed to buying into an existing renewable project).

While it is a benefit to the environment to add these types of projects to the grid, it is prudent to consider the pros and cons of buying RECs and/or offtake arrangements from renewable projects. Generation projects of any fuel source have their own complexities in terms of risk and their incorporation into larger power supply portfolios on both a retail and wholesale service level.

Renewable Portfolio Standards requirement specified percentage varies by state as well as for different renewable sources. RPS costs and requirements can be hedged by purchasing and inventorying RECs.

U.S. State Renewable Portfolio Standards or Voluntary Targets
State
Title
Established
Requirement
Cost Cap
Details
DE
REPS
2005
25% by 2025 - 2026
3%; 1%(PV)
Photovoltaics: 3.5% requirement by 2025 - 2026.
The state has multiple credit multipliers that apply to different technologies.
IL
RPS
2001
(voluntary target) 2007 (standard)
25% by 2025 - 2026
0.013
Distributed Generation: 1% of annual requirement beginning in 2015 for IOUs.
Wind: 75% of annual requirement for IOUs, 60% of annual requirement for alternative retail electric suppliers.
Photovoltaics: 6% of annual requirement beginning in 2015 - 2016.
MD
REPS
2004
20% by 2022
0.065
Solar: 2% by 2020.
Offshore wind: 2.5% maximum by 2017.
NJ
RPS
1999
24.5% by 2020
0.126
20.38% Class I or Class II (resource recovery or hydropower) renewables by 2020 - 2021.
4.1% solar-electric by 2027 - 2028.
Offshore wind: 1,100 MW.
OH
AERS
2008
25% by 2026
0.018
12.5% Renewable Energy Resources.
Senate Bill 310 (2014) creates a two-year freeze on the state’s standard while a panel studies the costs and benefits of the requirement.
12.5% Advanced Energy Resources (advanced energy resources includes co-generation, advanced nuclear power and clean coal).
Solar: 0.5%.
PA
AEPS
2004
18% by 2020 - 2021
None
Tier I: 8% by 2020-2021 (includes photovoltaic)
Tier II (includes waste coal, distributed generation, large-scale hydropower and municipal solid waste, among other tech nologies): 10% by 2020 - 2021.
Photovoltaic: 0.5% by 2020 - 2021.
D.C.
RPS
2005
20% by 2020
0.076
Solar: 2.5% by 2023.
50% by 2032 (currently under
30-day Congressional review)

Renewables Energy Portfolio Standard (REPS)
Renewable Portfolio Standard (RPS)
Alternative Energy Resource Standard (AERS)
Alternative Energy Portfolio Standard (AEPS)

Source: National Conference of State Legislature/Energy/Renewable Energy

The U.S. Department of Energy Renewable Portfolio Standards Annual Status Report 2016 edition provides key points of interest associated with the RPS requirement.

  • RPS policies collectively apply to 55% of total U.S. retail electricity sales
  • Significant recent policy revisions include new or increased RPS targets in California, Hawaii, Oregon, Vermont, and New York (in development), while Kansas replaced its RPS with a voluntary goal
  • More than half of all growth in renewable electricity (RE) generation (60%) and capacity (57%) since 2000 is associated with state RPS requirements, though other drivers also likely contributed to that growth
  • Wind energy has been the primary form (64%) of all RPS-driven RE capacity growth to-date, but solar was the largest source (69%) of RPS builds in 2015
  • Total RPS demand will double from 215TWh in 2015 to 431TWh in 2030; U.S. non-hydro RE generation would need to reach 12.1% of retail sales to keep pace
  • RPS demand could require an additional 60GW of RE capacity by 2030, roughly a 50% increase from current non-hydro RE capacity (114GW through 2015)
  • Achievement of RPS requirements has thus far been high, with states collectively meeting roughly 95% of their interim RPS targets in recent years
  • RPS compliance costs totaled $2.6 billion in 2014, averaging $12/MWh-RE and equating to 1.3% of average retail electricity bills; though costs rose from 2013, future growth will be capped by RPS cost containment mechanisms in most states

Source: https://emp.lbl.gov/projects/renewables-portfolio
For more information regarding Renewable Portfolio Standards, the purchase of Renewable Energy Certificates or assessing the risks of renewable energy projects contact your trusted AEP Energy advisor.

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