Meet chicken and egg.
Renewable energy technology developers cannot get access to capital without guarantees that they will have customers. Customers cannot buy energy from a generating/supply facility that does not exist. Since the technology developers do not have a pile of cash from a century of previous development sitting around to fund their own development, we end up at a stalemate whereby people who know how badly we impact our environment through our current use of energy cannot make the choice to move to more renewable means because the marketplace does not have supply able to meet their demand.
Enter the renewable portfolio standard (RPS).
A unit of government (in the US this mostly happens on the state level) sets a minimum percentage of the energy supply that suppliers must meet through one of several means that the unit determines meets the definition of "renewable". This varies by state, however the top contenders usually include wind, solar, hydro, biomass, and geothermal. States that still have utilities as the only means of supplying energy monitor the utility purchases and make sure each complies. In state, like Illinois, that had both utility purchasing of energy and deregulated, private corporations supplying energy to customers that no longer wanted to purchase from the utility, this requires a more complicated - but manageable - regulatory effort. In either case, the market then has a "carve-out" of annual revenue that will go to the renewable energy industry, and developers with the best technology can (or should) use that leverage to obtain financing to develop. How this regulation happens, and how these financial mechanisms spur development, and where the energy comes from all determine the relative strength or weakness of a state RPS, and provide the framework for why the Illinois RPS is so out of whack and needs adjusting...and not just a simple revision to address a slight issue, but a major revamping to accomplish what the RPS in Illinois set out to do: "ensure adequate, reliable, affordable, efficient, and environmentally sustainable electric service at the lowest total cost over time".
The need for a standard
In the last years of last century, and the first few years of this century, the technology for wind-generated electricity improved to the point where analysts predicted that the price for wind-generated electricity would compete favorably with coal and nuclear-generated electricity. (This has proven to be the case.) As one would expect, states looking to get early entry into the market for supplying products and labor to build and install wind energy systems jumped at the opportunity. As early as 1990, Iowa had incentive programs in place to develop wind energy projects, which resulted in Iowa remaining mostly in the top three nationally in terms of installed wind capacity for the past decade (behind Texas and California). Through 2002, Illinois had almost no installed wind generation capacity (despite Iowa, Wisconsin and Minnesota developing measurable capacity), and through 2006, had only about 100 MW installed (about 0.2% of total capacity compared with Iowa and Minnesota's over 6% each). Illinois was losing out on expertise, manufacturing, and jobs.
In 2007, the Illinois General Assembly passed theIllinois Power Agency Act (IPAA) which established in law two main goals:
1. Established a state agency to oversee
procurement of electricity for residential and small
retail customers of the state's two utilities (ComEd
for the northern half of the state and Ameren for
the southern). This agency - in theory - would then be able to procure electricity at better rates than the utilities, and lower prices for retail electricity.
2. It called for a RPS to require 25% of all electricity sold in the state to come from renewable sources by 2025. The agency would manage this process by entering into direct contracts with generators and wholesale suppliers, with priority given to Illinois generation, then adjoining states, then other states. The agency had the ability to tap into Illinois Finance Authority bonds, and back the payment up with renewable energy certificate purchases over up to twenty years.
By 2012, Illinois had moved up to 4th in the country in installed capacity, with just over 3.5 GW (1,000,000,000 watts) of wind capacity in the state. Illinois still lags Iowa, but has surpassed Minnesota, and relatively quickly has become a leader nationally on wind energy development. Growth rates have slowed - due to the recession of 2008/9 and particularly after questions about the production tax credit renewal in 2013 lessened expectations in 2012 - as have most of the US, but the RPS appears to have done what it said it would do. So why fix it?The challenge: municipal aggregation
Unbeknownst to the legislators at the time, establishing the Illinois Power Agency would prove a good long-term solution to renewable energy purchase, but a bad short-term solution to purchasing electricity. The charge to deliver "adequate, reliable" electric service served as the primary goal of the agency, much as it had the utilities previously. The agency took over the existing utility contracts, some extending out five years, then entered into some of its own long-term arrangements to "layer" supply contracts. (Layering is a term of art in the energy procurement business to describe a purchasing plan that takes the whole projected usage and purchases chunks of that future usage at regular intervals at the best price possible at that time. It minimizes risk that a future spike in prices will cause a major disruption, but it also means that consumers do not get the full benefit of future declines.) As we all know, in 2008-2009 we experienced a "Great Recession" that stagnated the economy. This stagnation reflected in significantly decreased energy use from which we have started to rebound, but that drop in demand caused an immediate drop in prices. This left the previous utility contracts and the new IPA contracts at well above market price, leaving an opportunity for those who had the information about those contracts.
Energy consultants and municipalities lead a charge to allow residents within smaller government entities - on their own and in combination - to do what industrial, institutional, and large commercial customers had done many years before: separate themselves from the utilities completely and negotiate directly with suppliers. In 2009, the Illinois General Assembly granted their wish and amended the IPAA to allow for community aggregation. The municipal entity (or entities in combination) could immediately establish a contract with a supplier to which their residents and small businesses could choose to join (or "opt-in"), or these governments could hold a referendum, and if it passed, they could move almost all customers over to a supplier. In this case, any resident who did not want to leave the utility could "opt-out" in writing. (The aggregation did not apply to any customer who had already chosen a retail supplier, or who participated in a utility real-time program where they pay the hourly price for electricity.) These supplier contracts were guaranteed to be cheaper than the IPA, and thus legislators took the easy victory and delivered cheaper electricity to their constituents in the short-term.
Lawmakers had the foresight to make sure that the renewable energy purchase requirements in the IPAA applied to any retail supplier chosen by a municipality. However, the compliance path for the suppliers who aggregated customers took an odd form. Instead of requiring that the ARES (or alternative retail electricity suppliers, as they are known in the law) follow the same procedure as the IPA and establish long-term deals, something they could not do because they had neither the state's bonding ability nor the assured customer base to use as leverage, they gave them the choice of purchasing through agreement or making a compliance payment.
The agreements could be power purchase agreements - as the IPAA envisioned with long-term purchases supporting development, or renewable energy certificates or credits (REC) in which a generator of renewable energy anywhere in the country can sell the "environmental attributes" of the generation (basically the cost above the local price for fossil-fuel/nuclear-generated electricity) to the highest bidder. The REC market in the US has declined in price to the point where existing REC do not cost enough to justify new development, and only provide additional revenue to existing generators.
The alternative compliance payment (ACP) provides another way for the ARES to meet its obligation to purchase renewable energy. In this case, that payment goes into a fund controlled by the IPA separate from the funds generated by contracts managed by the agency. In a quirk of lawmaking, the General Assembly gave the IPA the power to spend the money in funds obtained through direct contracts with the suppliers and utilities (covering about 10% of consumers across the state), but not funds coming from ACP (which covers the remaining 90% of consumers). Those sit, unspent, until the agency gets power, or the lawmakers move the funds to pay other bills as they did the first year it existed. So not only do we have less investment potential in new renewable sources, but those purchases that the ARES and the IPA make for REC go not only to local generation, but to any generator in the country.
The proposed solution (as found in Senate bill 103 from earlier this year) is to simplify. Advocated near and far recommend a simple change to the structure of the IPA and the ACP: instead of having ARES make payments into a fund, have the utilities collect the fees from consumers and place them into the fund that IPA can use for development. This restores the customer base to the IPA, as now it would be 100% of consumers in Illinois who would pay for the "additional cost" of renewable energy that would incentivize development. However, it does not change the ability of the IPA to use REC instead of purchasing agreements, and it does not change the balance of energy from mostly wind. Easy fix that should easily pass the General Assembly...except that it did not.
The counter-argument: everything's fine
Turns out that Exelon, the parent company of ComEd, does not want to change the way the law has been adjusted to work. Prices in Illinois have dropped over the last several years, and those declining revenues have created problems for the unregulated supply industry - especially those generators who use coal or nuclear as fuel, like Exelon. Anything that increases the growth of wind especially, which has shown promise against even natural gas as of late, jeopardizes the bottom line of these suppliers, and intentional or not, this adverse scenario at the very least slows the growth of wind. Those arguing against change have a point. Looking at wind development since 2006, the growth has remained steady and above the national average. The growth rate is comparable to Minnesota, and trails only Iowa, which one could argue we would no matter what. Until we see a drop, projected or real, in the growth of wind, why make any change?
Time for a real solution: change the utilities and the RPS
Even though the growth of wind-generated electricity capacity has remained steady over the past five years, and does not show signs of significant slowdown, overall growth of renewable energy generation in Illinois lags the rest of the country. The original RPS looked for 5% of electricity generation from renewables in 2010, and per the Energy Information Administration, Illinois generated only 4%. Trends suggest that the growth needed to recover and meet future targets will not come with the market and policies as constructed.
Opponents of the RPS in Illinois, or at least those who oppose changing it, do have a point that the RPS does focus on wind, and even though a carve-out for solar was made in 2009, it is so small as to suggest that the current law picks favorites. Although challenges to RPS across the country have, to date, had little success, having the appearance of favoring one technology over another puts those advocates for real change in our energy economy at a disadvantage since they regularly rail against subsidies to fossil fuels that skew the marketplace. Providing the capability for long-term contracts has enough power in it to drive the marketplace, and carve-outs should remain only for technologies that have a proven track record of performance but need scale to drive investment...and wind no longer needs this.
In order to preserve the RPS, make it relevant again, and retain support from utilities, the legislature needs to consider a package of small changes to the law that will reinvigorate the renewable energy industry in Illinois, while providing incentive for utilities and consumers to get involved in the development process. Advocates for development will argue that we should make the easy fix now and pursue other alternatives later, but in politics, as in life, opportunity only comes along once in a while. Without the specter of the General Assembly "stealing" more of the taxpayer money allocated to renewable, and the urgency that creates, there may be no incentive down the road to make real fixes. Also, since the largest political donor in the whole arena, Exelon/ComEd, opposes the change and the House of Representatives does not appear in a hurry to touch the issue, we need a solution that brings all sides to the table.
1. Follow other states that have capped or given less credit for REC
The goal of an RPS is new renewable development to meet the growing need for energy. REC reward existing generation, but do not yet provide incentive for future development. By capping how much of the RPS an ARES or the IPA can accomplish through REC, the incentive for new development increases. As with most provisions of an RPS, this could slide in scale similar to California that caps at 25% but declines eventually to 10%. Alternatively, the state could recognize 100% of a REC today, but decline to recognizing only 75% of a REC as applicable to the requirement in a couple of years.
2. Provide more credit for community-level renewable generation (and include geo-exchange)
Communities in Illinois have ever-increasing possibilities to generate electricity through solar, and to store heat energy in the ground in summer to reclaim it in winter. This latter strategy (sometimes referred to as geothermal exchange, or geo-exchange so as to not confuse it with true geothermal energy from hot springs and geysers) significantly reduces the amount of electricity needed to provide the peak demand of the summer. Although similar to energy efficiency, in that it reduces load, it has infrastructure investments similar to energy generation, thus facing the same hurdles. These investments should receive 1.25-1.50 times the credit that a utility scale-development receives because they not only reduce the generation by polluting means, but they also reduce losses and preserve the grid infrastructure through reduced load. By recognizing these forms of community energy, it helps overcome the resistance to these technologies from homeowners who see themselves as "temporary" occupants that should not have to bear infrastructure investments. Which leads to...
3. Open up the utilities to get more credit for renewable energy and geo-exchange that they fund through on-bill financing
Utilities need to recognize that their model as single-point generator/supplier (which although dead in Illinois still exists across the country) or even as "manager of distribution infrastructure" will not survive in a world where we need to reduce the per-household consumption in order to survive. In order for municipal, and especially investor-owned, utilities to exist, they need a consistent revenue stream that coincides with the quality of life that energy provides each household. One way to transition to this eventual future where utilities bill you for the amount of light, heat, and preserved food in your house (and where they take ownership of the appropriate appliances and their maintenance) is to incentivize them to make investments outside of their normal transmission infrastructure and collect revenue through the shift in usage from off-site to on-site or near-site sources. Utilities will welcome interconnect if they have a financial stake in its success, and will drive for ever more efficient appliances and technologies if their bottom lines are not hurt by the reduced revenue from traditional per-unit-of-energy-consumed billing.
4. Restore the centralized purchasing power of the IPA relative to renewables
This should happen, but as a final piece of the solution, and not just the only piece.
With these common sense, and achievable, revisions to the RPS, Illinois can move from distant 4th in wind, and well below that in overall generation, to a leader in renewable energy generation and community energy development. For a state that has floundered in the last fifteen years to lead in anything but financial mismanagement and corruption, this would be a welcome - and potentially prosperous - change of pace.
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