Investments in energy efficiency and renewable energy have the potential to lower the long-term costs of electricity and increase the diversity of electric services. The question before the Legislative Transition Task Force (LTTF) is whether the market structure anticipated by SB 1269 will result in a level of investment consistent with the Commonwealth's long-term interests, or whether some adjustment to SB 1269 is necessary to monitor and adjust this level of investment.
In considering this issue, decisionmakers can ask a number of important questions. Can promoting the development of new technologies, fuels, and suppliers make the market more reliable and competitive in the long run? Can energy efficiency policies contribute to the competitive market envisioned in Virginia's restructuring legislation? If so, what tools are available to achieve these goals?
Many states that have introduced competition have chosen to create or retain methods for encouraging this type of investment. To some extent, these methods can be seen as substitutes for the efficiencies and conservation of resources envisioned by integrated resource planning (IRP) which, prior to industry restructuring, had been adopted in Virginia and most other states as an important energy policy strategy for vertically integrated electric utilities. The focus of these states has been on designing alternative investment policies that are compatible with the introduction of competition. As Virginia begins the transition initiated by SB 1269, it has an opportunity to review these policies and determine their suitability for the Commonwealth.
This memorandum is intended to assist the LTTF in exploring these important questions. It examines (i) Virginia’s current statutory and regulatory policies that advance renewable energy and energy efficiency objectives, and (ii) actions taken by other states in their restructuring legislation that promotes these policies.
Integrated Resource Planning (IRP) methods were developed to encourage long-term utility planning and consideration of a variety of supply-side options, including renewable energy resources and demand-side (energy efficiency) options. By 1992, utility regulators in 41 states had begun to implement IRP. IRP methods became increasingly refined to consider the direct and indirect costs and benefits of supply- and demand-side options. IRP processes led to steadily increasing utility investments in demand-side management programs and renewable energy during the 1980s and 1990s. In anticipation of competition, however, many utilities began cost-cutting programs in an effort to drive electricity prices down.1 DSM programs have been scaled down by utilities in Virginia and across the country.
Demand-side management (DSM) consists of programs and rate design strategies that reduce electricity consumption and shift usage patterns in order to lower overall system costs. DSM includes resource options—such as improving the efficiency of light bulbs and appliances—that can provide conserved power and energy at a lower cost than producing power from a new power plant.
Renewable energy is energy that is naturally regenerated. Wind, solar, hydro, geothermal, and biomass resources are usually viewed as renewable fuel sources, while coal, natural gas and petroleum are not. Waste converted to energy has also been treated as a renewable energy fuel source. However, for purposes of establishing public policy, the definition of renewable energy is dependent on the legislative or regulatory process for its meaning.
Energy Efficiency and IRP
The General Assembly and the Commission have historically supported energy efficiency in connection with the sale of electricity service within the Commonwealth.
Renewable Energy
Several Virginia laws encourage the use of renewable energy resources.
1. § 56-594 establishes "net energy metering" as part of Virginia's restructuring program. "Eligible customer-generators," as defined in this section, self-generate electric power using solar, wind or hydro energy. Excess electricity self-generated from these renewable resources over and above household or business use is fed back to the electric grid and netted against the electricity supplied to the household or business by its electric service provider during a twelve-month period. If, at the end of a year, the customer has supplied to the provider more electricity than the customer has consumed, the statute permits arrangements to be made between the parties to compensate the customer for this excess.2. § 56-592 encourages the development of full and fair disclosures concerning the sale of renewable energy by directing the Commission to establish standards governing all generation fuels and emissions information in (i) competitive suppliers' marketing materials, and (ii) electricity customers' billing statements.
To date, Virginia’s support for the goals of integrated resource planning have generally resulted from statutory and/or regulatory intervention. However, with the enactment of SB 1269, market forces will guide much of Virginia’s future electricity market. A key question is whether IRP objectives should be left to market forces as well.
To some, the idea of directly supporting or subsidizing the development of certain energy resources or energy efficiency programs runs counter to the notion of "competition" embodied in SB 1269. According to this argument, these programs may actually increase the short-term cost of electricity and therefore contradict the idea of furnishing Virginians an opportunity to shop for cheaper electricity. In addition, it is argued that consumers can purchase energy efficiency and renewable energy in the market if they deem it to be desirable. Suppliers will offer these resources if there is consumer demand for them.
The other side of the argument is that defects in the marketplace, which will not be corrected by competition, will leave renewable energy and energy efficiency resources facing potentially insurmountable market barriers. Such barriers may include: (a) any external environmental costs that are not reflected in fossil fuel costs, (b) retail transaction costs (e.g., marketing and advertising) associated with sales of "green energy" and energy efficiency services to residential consumers, (c) limited access to financing capital by small consumers wishing to invest in energy efficient equipment and by renewable energy producers (both resources have high up-front capital costs compared to gas-fired power plants), and (d) institutional barriers (e.g., unfamiliarity with renewable energy by major industry participants). Supporting their development could provide long-term economic benefits as well as societal benefits, e.g., advancement of new renewable energy technologies and greater system reliability achieved through energy efficiency strategies.
In the process of unbundling the functions of electric utilities into competitive and noncompetitive services, it is possible to encourage energy efficiency and renewable energy using strategies consistent with competitive markets. To do so, any public programs supporting renewable energy or energy efficiency must be competitively neutral. They must be applied equally to all competitors or all customers, as appropriate.
Methods that have been developed and adopted in a number of restructuring states include (i) renewable energy "portfolio standards," and (ii) "system benefits charges" supporting energy efficiency and renewable energy programs.
Renewable energy portfolio standards ("portfolio standards") require retail electricity suppliers to purchase or generate electricity from renewable resources in an amount equal to a specified percentage of its total retail sales. Thus, for example, a portfolio standard requirement of 5 percent would require that for every 100 kWh of electricity sold within the Commonwealth, a retail seller would have to demonstrate that it supported the sale of at least 5 kWh of renewable electricity in the market. A regulatory authority would have the crucial responsibility of verifying and enforcing compliance.
To date, portfolio standards have been adopted as a means of promoting renewable energy in connection with electric utility restructuring in Maine, Massachusetts, Connecticut, New Jersey, Nevada, and Texas. To coordinate these policies with the new retail competitive environment, some states’ standards also seek to establish a market for "trading" portfolio standard credits.5 "Trading" means that a retail seller subject to a portfolio requirement (such as the 5 percent requirement noted in the preceding paragraph) need not produce the renewable energy itself, but rather can pay others to do so. The result of this "trading" of obligations" is that competitive market forces would determine which sellers actually produce the renewable energy.
1. Texas’ portfolio standards require that 2,000 MW (approximately 3% of demand) of new renewables be phased in by 2009.
2. Nevada requires 0.2% renewables—half of which must come from solar resources—by January 2001, increasing by 0.2% biennially to a total of 1% by 2009.
3. Connecticut’s portfolio standards establish two renewable energy source tiers, denominated Class I and Class II.6 By the year 2000, Connecticut's electricity suppliers must obtain at least 0.75% of their output from Class I renewable energy sources and 5 % from Class II sources. The Class I requirement is increased incrementally until 2009 when suppliers must have output as follows: at least 6% from Class I and at least 7% from Class I or Class II renewable energy sources.
4. Maryland's 1999 restructuring bill requires a feasibility study of portfolio standards.7
5. Pennsylvania's restructuring legislation authorizes that state's public utility commission to require renewables funding on a utility by utility basis.
6. In Congress, restructuring proposals by Senator Jeffords, Representative Kucinich, and the Clinton Administration would establish a national Portfolio Standard. The Jeffords' and Kucinich proposals rise gradually to a 10% requirement by 2010, while the Clinton Administration proposal rises to 7.5% by 2010.
A "system benefits charge"8 is a charge, usually based on the amount of electricity consumed, which is collected by the distribution utility. Such charges generate revenues to support public programs promoting renewable energy, energy efficiency, low-income energy assistance, and research and development. As discussed below, a number of states have adopted system benefits charge in connection with the restructuring of their electric utility industries.
System benefits charges for energy efficiency.
At least 17 states are implementing system benefits charges-funded energy efficiency programs through their restructuring legislation or orders. These states include California, Connecticut, Delaware, Illinois, Maine, Massachusetts, New Hampshire, New Jersey, New Mexico, Ohio, Oregon, Rhode Island and Texas. Some of these charges will be collected for a limited number of years; others are indefinite.
1.Maryland's 1999 restructuring bill funded energy efficiency efforts (including low-income weatherization) as part of a $34 million per year "universal service program," created through a non-bypassable wires charge. The program will also fund other public benefit services during a four-year period following restructuring's implementation (July 1, 2001 for investor owned utilities; date to be set by Maryland's Commission for co-ops and municipals).9 The program will be administered by Maryland's Department of Human Resources.
2. Delaware's 1999 restructuring legislation also requires funding for energy efficiency programs through non-bypassable wires charges.10 Separate system benefits charges will fund energy efficiency incentives, and low income energy efficiency programs.
3. Pennsylvania's 1996 restructuring legislation requires energy efficiency funding by Pennsylvania utilities to continue at existing levels of $10 million per utility, per year. However, the levels in individual utility restructuring cases have reportedly been higher than this minimum amount.
4. Ohio's 1999 restructuring legislation established a system benefits charge that will generate a $15 million revolving loan fund for energy efficiency programs. The fund will be used for investments in energy efficiency products, technologies or services, including energy efficiency initiatives directed at low-income housing.
5. Pending federal legislation11 would create a national system benefits charge which would be used to match state system benefits charges. Together, these funds are intended to continue recent historical levels of state spending, estimated at $4 - $8 billion, on low income programs, energy efficiency, and renewable energy R&D. The concept of a national matching system benefits charge is patterned after precedents in the telecommunications industry.
System benefits charges for renewables.
At least 10 states—Arizona, California, Connecticut, Illinois, Massachusetts, Montana, New Mexico, New York, Rhode Island and Pennsylvania—have adopted system benefits charges that either set specific funding levels for renewables or for a range of purposes that include renewables.
1. Rhode Island's system benefits charges requires a charge of 2.3 mills per kilowatt-hour to fund renewable energy resources and DSM programs. Money generated from system benefits charges will fund renewable energy projects with the oversight of the state's public service commission.
2. Connecticut's legislation establishes a system benefits charge of not less than one-half of one mill per kilowatt hour to be deposited into "the Renewable Energy Investment Fund."12
3. For comparison purposes, 1997 jurisdictional sales for all Virginia electric utilities totaled approximately 106,000,000,000 kwh. If the 2.3 mills per kwh charge specified in the Rhode Island statute were applied to Virginia, approximately $245,000,000 would be produced; while the one-half mill charge from Connecticut would collect approximately $53,000,000.
4. California's restructuring legislation established a system benefits charge which will generate $135 million annually for renewables development through 2001.13
Investments in energy efficiency and renewables can serve the same goals and objectives embraced in SB 1269; namely, diverse suppliers of varied electric service products, competitive prices, and reliability through numerous substitutes.
This report has addressed various factors regarding the issue of whether the electricity markets emerging from SB 1269 will generate a level of investment in energy efficiency and renewable energy consistent with the Commonwealth's long-term interests; or whether some adjustment to SB 1269 is necessary to monitor and adjust this level of investment. Electricity competition, as mandated by SB 1269 and other state laws, may not necessarily generate the appropriate level of investment, due to historic and future defects and barriers in energy markets.
The question is whether reasonable measures might be formulated that can encourage these investments, in a manner compatible with the goals and objectives of electricity competition. Those states with competition statutes have offered varied responses, from portfolio standards to system benefits charges to future studies. Intervention to correct market defects can be phased and moderated in a variety of ways.
The Commission is prepared to work with the LTTF to identify and design specific measures that can accommodate the encouragement of energy efficiency and renewable energy, compatible with the goals and practices of competition enacted by SB1269.
1 In one study, the median annual growth rate for DSM expenditures among 37 electric utilities was 16% between 1992 and 1994. In contrast, the median utility projected an annual 3% decline in DSM expenditures for 1994-1998.
2 Established by 1993 legislation (further amended in 1996), the grant program authorizes incentive payments to manufacturers of solar photovoltaic panels manufactured in Virginia. These manufacturers are paid the sum of seventy-five cents per watt of the rated capacity of panels sold in a calendar year. The payments are made from a special grant fund. See, Va. Code § 45.1-392.
3 Va. Code § 9-145.1
4 These small producers were defined as those using renewable or nondepletable primary energy sources with a rated generation capacity of 7.5 megawatts or less, and whose output is not sold to residential customers. Aggregators of such small power producers were similarly exempted from SCC regulation by this bill.
5 Texas and New Jersey. In Maine and Massachusetts, the renewables obligation is not currently tradable. The issue of portfolio standards credit trading is being studied in Connecticut and Nevada.
6 A Class I renewable energy source means energy derived from solar power, wind power, a fuel cell, methane gas from landfills, or a biomass facility (beginning operation after July 1, 1998). A Class II renewable energy source means energy derived from a trash-to-energy facility, hydropower facilities, and biomass facilities that do not qualify as Class I renewable energy sources.
7 House Bill 703 of 1999. The bill directs the Maryland Public Service Commission and the Maryland Energy Administration to make specific recommendation to Maryland's Governor and its General Assembly, on or before February 2000, concerning the feasibility of requiring a renewable portfolio standard, and the estimated costs and benefits of establishing such a requirement.
8 Also called a "wires charge," "public benefits charge," "universal service charge," or "distribution charge."
9 Maryland’s program will also provide low-income billing assistance and assist in the payment of low-income customer billing arrearages. The wires charges will be paid by all classes of customers; $24.4 million annually will be paid by commercial and industrial customers, and $9.6 million will be paid by residential customers.
10 The Delaware bill (HB 10 of 1999) establishes two system benefits charges: one for energy efficiency incentive programs to be overseen by the Delaware Economic Development Office, and the other for low income energy efficiency and billing assistance administered by the Delaware Department of Health and Social Services.
11 Legislation includes that of Senator Jeffords and the Clinton Administration proposal. The Administration's Comprehensive Electricity Competition Plan calls for the creation of a $3 billion per year public benefit fund to provide matching funds to states for low-income assistance, energy efficiency programs, consumer education and the development and demonstration of emerging technologies, particularly renewables. The fund would be funded through a generation or transmission interconnection fee on all electricity, capped at 1/10 of one cent (1 mill) per kilowatt-hour. It would be overseen by a Joint Board composed of Federal and State officials who would set standards for fund eligibility.
12 The Fund's predominant purpose is the advancement and commercialization of renewable energy technologies through grants, equity investments, contracts, etc., which will advance the development and commercialization of renewable energy. (This is in addition to the state's portfolio standards.) The Fund will be administered by a nonprofit organization known as "Connecticut Innovations, Incorporated."
13 The fund is divided into several categories. Forty-five percent of the fund provides production incentives to support existing renewable energy projects; 30% provides production incentives for new projects; 14% supports "green marketers;" 10% provides commercialization support for "emerging" renewable technologies; and 1% supports consumer education efforts related to renewables. The fund is being administered by the California Energy Commission.