Will the California RPS and TREC program promote solar and SRECs?

Posted November 30th, 2011 by SRECTrade.

Many solar advocates are hoping that the California TREC program will boost solar development the way SREC markets have in the country’s fastest growing solar markets on the East Coast. After much delay, the program is finally set to launch on December 10th. Unfortunately, the odds are stacked against the distributed solar industry and here is why:

The first hurdle was whether or not the California Public Utilities Commission (CPUC) would allow distributed generation (DG) projects to be eligible for the state Renewable Portfolio Standard (RPS). For the sake of clarification, DG is often referred to as smaller, commercial size projects, but in California, the technical definition extends to all projects that are considered onsite generation, meaning the electricity produced by the system is used locally, rather than transmitted through the broader electricity grid (think residential, small commercial and community solar projects. Based on recent proposed revisions (pdf), the CPUC will likely approve DG projects for RPS eligibility and has already started to layout the process for approving projects (a service that will be provided by SRECTrade).

The next hurdle centers around how DG TRECs are classified within the RPS. There are three categories used for RPS compliance:

  1. In-State: At least 50% of the renewable energy must be sited in California.
  2. Out-of-state: Up to 50% of the renewable energy can come from projects outside California that supply electricity to the California grid.
  3. TRECs: Up to 25% of the RPS can be met through the purchase of Tradable Renewable Energy Certificates, a cap that will be reduced to 10% by 2020.

This is a key battle for the relevance of TRECs in supporting DG projects in California. Proponents for DG have argued that TRECs from in-state distributed projects should be included in the 1st bucket. A few reasons supporting this position include the added benefits from reduced transmission costs inherent in DG projects and the fact that the state should favor supporting distributed renewable energy projects sited in California over utility-scale projects outside of California. In a rare occurrence, advocates for the solar industry and the major utilities in California share this opinion. The only opponents we can think of are regulators and lawyers choosing a strict interpretation of a poorly written portion of a legislative mandate and unfortunately, it appears the only way to fix this would be to go back to the legislature. It is likely that the legislature envisioned tradable RECs as those coming from systems sited outside of regional territories and/or outside the state of California, without proper consideration for what that meant for legitimate, local, distributed renewable projects. The CPUC is scheduled to vote on this issue tomorrow, December 1st ahead of the December 10 launch.

The impact of this decision will effectively curtail the ability for distributed solar projects to count towards the RPS, while also making TRECs a non-factor in the financing of distributed solar projects. The RPS incentive scheme will first favor utility-scale hydro, wind and solar from within the state borders, followed by counterparts outside California and then, TRECs produced by renewable facilities anywhere in the Western U.S. and a portion of Canada (WREGIS). This means TREC prices will be next to nothing and the market will be dominated by regional utility-scale hydro and wind projects able to produce at a much larger scale than local DG solar. To put that into perspective, the fastest growing solar markets in the U.S. today (SREC states driven by RPS laws such as New Jersey, Pennsylvania and Massachusetts) are made up primarily of DG solar projects! As a result, California will need to find ways outside the RPS to encourage the growth of distributed solar energy. This most likely means a continuation of short-term, taxpayer funded, grant/rebate based programs like the California Solar Initiative (CSI).

Even if the CPUC decides to include DG in the in-state bucket, questions still exist around whether or not the potential TREC values will be enough to impact solar DG development. Compared to other states, California is backward in its approach to DG projects. Here we have an industry fighting to be on a level playing field with utility-scale renewables, where other states (16 at the most recent count) have DG or solar set-asides that recognize the value of distributed generation and favor it in their RPS incentive structure over utility-scale renewables. We have often written about the need for a solar carve-out specifically because of different cost structures and the need to support solar separately. The reality is that wind and other distributed renewables have traditionally been more cost-effective, and therefore more competitive within DG carveouts. In addition, the small-scale inherent with solar relative to wind or hydro add transaction costs that also favor the larger producers. Even in an ideal world, where California distributed solar is in bucket #1, the fear is that it will be crowded out by large scale producers with cheaper alternatives to solar and lower transaction costs. The hope has always been that the RPS and the TREC program could be a stepping stone towards a solar-only SREC program in California with long-term, sustainable growth targets similar to those seen on the East Coast.

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