Environmental Attributes Update:  California's Embrace of Tradable Renewable Energy Credits (TRECs) 

By Matt DuVal, Principal

Energy Asset Advisors, LLC

May 4, 2010

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The State of California’s renewable portfolio standard mandates that the state investor-owned utilities (“IOUs”) increase the amount of power they obtain from renewable sources to 20% by 2010 and 30% by 2020.  According to the California Public Utilities Commission while many of the states utilities have increased supplies from renewable sources, it does not appear that the state’s utilities are going to meet the 2010 goal.

In order to alleviate some of the pressures and concerns around the inability of the IOUs to meet the 2010 RPS target, the California Public Utility Commission announced on March 11, 2010, that the utilities can now purchase tradable Renewable Energy Credits (“TRECs”) to meet their RPS mandates.  This represents a significant departure from the previous CPUC position, which required utilities to purchase the electrons and the RECs together.

TRECs are renewable energy credits that can be traded separate and apart from the energy associated with their creation.  Enabling the evolution of the TREC is a relatively small step, given the flexible requirements adopted by the California Energy Commission ("CEC") for determining whether generation should be certified as meeting California's RPS.  Under California law, the CEC, not the CPUC, is tasked with certifying whether generation is an eligible renewable resource that can be used to meet the California RPS.  Under California's RPS statute, power must not only be generated using certain defined renewable resources (wind, solar, biomass, small hydro, geothermal), it also must be delivered to California.  The CEC, however, allowed the power delivered to California to be generated at a different time and in a different location than the power associated with the renewable energy credits ("RECs").  This allowed intermittent generation from outside California to firm and shape the power delivered to California; in a number of transactions, utilities bought both the RECs and the power from a renewable generator then sold the power either back to the generator or to another party, retaining the RECs.  It then delivered power to California from a different source, nevertheless allowing it to count the RECs toward its RPS goals. Under the CPUC's new decision, the utility can simply purchase the TRECs from the renewable generator without having to purchase the associated power.  The delivery requirement still remains, however, and the RECs must be associated with the delivery of some power to California in order to be counted toward a utility's RPS requirement.

In the past utilities were required to buy "green power" directly from the various renewable facilities throughout the state, and purchase both the electricity and the green attributes of that energy generation together.  The new ruling effectively allows for the "unbundling" of this transaction.  It separates the "green" and the "power," such that utilities can purchase the green attributes of renewable generation even if the actual electrons being generated are consumed elsewhere.

Given that most of the utility-scale renewable energy project pipeline in California is already contracted to utilities to meet their RPS requirements, this ruling creates some interesting opportunities to monetize the green attributes of renewable energy projects in ways not previously considered such as the qualification of rooftop and distributed generation systems registered under WREGIS.

The CPUC ruling lays the groundwork for a robust TREC marketplace. "Although the tradable REC market may be modest in the next two or three years, the market rules put in place in this decision will both allow this new market to develop and provide robust rules as the tradable REC market matures," said CPUC President Michael Peevey.

Overall the new TREC marketplace in California appears to be a welcome change to state utilities and industry participants. Many participants view the new ruling as the vehicle that will move the state one step closer to meeting its RPS goals. The TREC marketplace could potentially provide the liquidity required to encourage and promote large-scale project development. Incentivizing developers to construct renewable energy projects without bundled contracts may provide a market opening outside the RPS and RFP process, leading potentially to a development market that is similar to the one that exists for traditional generation.

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