Background

To stimulate an increase in the use of renewable fuels to generate electricity, several bills in Congress call for the establishment of a renewable portfolio standard (RPS) for all electricity retail suppliers. A typical RPS requires that a share of the power sold in the United States must come from qualifying renewable facilities. Companies who generate power from qualifying renewable facilities will be issued credits that they can hold for their own use or sell to others. To meet the RPS requirement, each individual electricity seller must hold credits - issued to their own qualifying renewable facilities or purchased from others - equal to the share required in each year. For example, a supplier with 100 billion kilowatt-hours of retail electricity sales in a year with a 5-percent RPS requirement would have to hold 5 billion kilowatt-hours of credits.  In a competitive market, the price of renewable credits should rise to the level needed to stimulate power plant developers to bring on the amount of qualifying renewable capacity needed to meet the RPS requirement.  Thus, the RPS provides a subsidy to renewables to make them competitive with other resource options. However, it allows the market to determine the most economical renewable options to develop to comply.

The RPS program in S. 1766 has the following characteristics:

• The program begins in 2003 with the required renewable share growing from 2.5 percent of retail electricity sales in 2005 to 10 percent in 2020 in annual 0.5 percentage point increments.  The shares required for 2003 and 2004 are to be set by the Secretary of Energy at a value under the 2.5 percent required in 2005. For this analysis it was assumed that the 2003 share would be set to 0.5 percent and the 2004 share would be set to 1.5 percent. The program expires (sunsets) on December 31, 2020.

• All power sellers with retail sales of 500,000,000 kilowatt-hours per year are required to hold credits.  Small utilities with retail sales below 500,000,000 kilowatt-hours per year are exempt.

• The amount of qualifying renewable generation required each year is calculated by multiplying the total electricity retail sales minus renewable generation times the required share. Subtracting for the sales from small utilities the qualifying renewable generation is given by:

Qualifying renewable generation =  RPS share X (Total Electricity Sales – Small
                                                   Utility Sales – Total Renewable Generation).

• Qualifying renewable facilities include all new renewable generation facilities (including upgrades, repowerings, and co-firing changes) that are placed in service on or after January 1, 2002. Qualifying fuels include hydroelectric, geothermal, biomass, solar, wind, ocean and landfill gas. Renewable facilities in service prior to January 1, 2002 do not receive credits.

• If a qualifying renewable facility is built on Indian land, two renewable credits will be issued for each kilowatt-hour generated.

• Renewable credits will also be issued to utilities for the portion of renewable generation at customer sites that flows to the grid if the utility paid part of the cost of the facility. For example, if a utility pays part of the cost of a photovoltaic system in a customer’s house the utility will receive renewable credits equal to the net sales to the grid from the system.

• A civil penalty of up to 3 cents per credit may be applied for each required renewable credit not submitted by a covered retail electricity supplier.⁵

Notes