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New Vermont Clean Energy Policies:

Effective Implementation

Renewable Energy – A Vision for Vermont

4th Annual Renewable Energy Conference

Mark Sinclair, Vice PresidentClean Energy Group

September 21, 2005

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Presentation Overview

I. States as New Clean Energy Leaders

II. Vermont Energy Context

III. Vermont’s New Renewable Tools

IV. Renewable Portfolio Standard

V. State Clean Energy Funds

VI. Recommendations for Vermont Implementation

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Clean Energy Group

CEG is a US-based, NGO that works to accelerate commercialization of clean energy technologies through:

Advocacy & Education Funds Support Technology Innovation New Financial Vehicles

www.cleanegroup.org

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I. Clean Energy Action at the State Level

Renewable Energy Policy in the US is largely driven by state actions

Renewable Portfolio Standards (RPS) and State Purchase Mandates in 20 States and Washington, DC

Renewable Energy Funds in 17 States

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States As New Leaders

Explosion of state action:

1990s – 2005

SBCs, RPS, FCs, climate

Nonpartisan, bottoms-up learning, collaborative

Clean energy is Development

Texas leading; Vermont following

State Clean Energy Support28 States + District of Columbia

28 + DC 17 State Funds + DC, 20 RPS + DC,

Fuel Cells and Hydrogen, and Carbon Trading

“It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

-Justice Louis Dembitz Brandeis

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II. Where Vermont Is Today: Undiversified Portfolio

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Vermont’s Electricity Portfolio

47% Hydropower; 34% Nuclear; 4% Biomass

Lower generating emission rates (CO2, NOx, SO2) than other states

Electricity growth: 1 to 2% per year, greater in Chittenden County

Load growth since 1984 fulfilled by renewables: McNeil, Searsburg, small hydro

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Challenges for Vermont

Replace 550MW of Vermont Yankee and Hydro Quebec Power 2012-2015Maintaining low carbon portfolioMore portfolio diversityWind siting challengesNeed for distributed generationNeed for more efficiency investmentVolatile wholesale market prices

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III. New Vermont Renewable Laws:Gaining Control of Vermont’s Destiny

Act 61 & Act 74: Response to Vermont challenges

Legislative objective – stimulate development of in-state renewables, combined heat & power, and efficiency

Goals Diversify portfolio with renewable generation Achieve more cost effective efficiency Promote small-scale, customer-sited generation, especially in

load pockets Induce development of in-state renewable resources

One major failing: focus is only on putting breaks on load growth, not on replacement of power supply contracts

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Vermont’s New Policy Tools

Renewable procurement requirement

“Sustainably Priced Energy Enterprise Development” or SPEED program

Easier grid interconnection standards for renewables

Elimination of cap on Energy Efficiency Utility budget

Performance-based regulation

Least cost integrated planning requirement for transmission

CHP program

Clean Energy Development Fund

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IV. Renewables Portfolio Standard

WHAT IS IT???

Requirement on retail electric suppliers…

to supply a minimum percentage or amount of their retail load…

with eligible sources of renewable energy.

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State Renewables Portfolio Standards and Purchase Mandates – 20 States and D.C.

WI: 2.2% by 2011

NV: 15% by 2013

TX: 2880 MW by 2009

PA: 8% by 2020

NJ: 6.5% by 2008

CT: 10% by 2010

MA: 4% new by 2009

ME: 30% by 2000

NM: 10% by 2011CA: 20% by 2010

MN (Xcel): 825 MW wind by 2007 + 10% by 2015

IA: 105 aMW

MD: 7.5% by 2019

RI: 16% by 2019

HI: 20% by 2020

AZ: 1.1% by 2007

NY: 24% by 2013

CO: 10% by 2015DC: 11% by 2022

MT: 15% by 2015

New since Jan 1, 2004

Significant revision since Jan 1, 2004

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Potential Impacts of State RPS Policies Are Significant

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Total: 25,778 MW

Montana & Vermont not included in tabulation

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The Early Positive Impacts of State RPS Policies

Texas: Over 1100 MW of wind installed since RPS establishedMinnesota: 425 MW wind and 33 MW biomass under original mandate; lots more wind on the wayIowa: Policy met with 250 MW of wind some time agoWisconsin: 140 MW of RE so far, with more on the wayNevada: Initial procurement led to 277 MW of RE contracts; more since thenArizona: 7 MW PV, 5-10 MW LFG, 3 MW biomass, 15 MW wind (contract), 20 MW geothermal (contract)New Mexico: Contributor to 204 MW wind project installed in 2003; additional projects on the wayMassachusetts and Connecticut: Merchant LFG, wind development, biomass repowering and re-development

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RPS Design Problems

Lack of Long Term Contracts Major problem in Northeast, where retail competition exists and

where renewable energy sources are more expensive

Force Majeure Clauses and Cost Caps New RPS policies increasingly including a lot of “wiggle room”

to possibly allow escape from full compliance (e.g., MT, PA)

Use of Non-Compliance Penalties Full compliance not being achieved (NV, AZ) or unlikely to be

achieved (CA) in some cases… will penalties be used to enforce compliance?

Design Complexity Will design complexity grind state RPS program to a halt

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The Most Important Lesson Learned to Date

Elegant, cost effective, flexible policy to meet

RE targets

Poorly designed, ineffective, or costly way

to meet RE targets?

The regulatory design details matter!!!

An RPS Can Be A…

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Vermont Procurement Performance Standard

A uniquely Vermont tool – not an RPS

Instead, a “renewable procurement performance standard” to encourage utilities to meet 2005-12 load growth w/ new renewables

PSB to impose RPS in 2013, only if utilities fail to meet incremental loads with new renewable energy from in or out-of-state resources.

Utilities decide whether RPS goes into effect; have choices

Incentive for conservation; DSM is of equal value

Requires PSB to establish system of tradable credits

Since mandatory RPS does not go into effect until 2013, if ever, utilities can sell RECs to neighboring states

Coupled with SPEED program to facilitate in-state renewable projects – PURPA-like program

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SPEED Program

Attempt to induce in-state renewables development by providing producers with access to long-term contracts at below market prices Eligibility: In-state renewables and CHP with 65% efficiencyEstablish agent to purchase and sell the electricityUtilities must buy SPEED electricity on pro rata basisEconomic development focus (VEDA link)Envisions multiple cash flows – electrons, RECs, CHP heat, Vermont Fund incentives – to make projects viableReduced regulatory requirements under section 248Guarantees utility buyer for long-term contract to assist in financing

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RPS/SPEED Implementation Issues

Success will depend on simple PSB rules & regulatory process to induce in-state renewables development

Need strong political & utility support; PSB regulatory commitment that is expected to continue over the duration of the policy

Are objectives achievable given state permitting challenges (e.g., wind wars)?; need for clear regulatory pathway

Need for credible enforcement – penalties must exceed cost of compliance

Will producers be enticed to Vermont with below market contracts?

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V. State Clean Energy Funds

17 clean energy funds ranging in size from less than $4 million/year to over $135 million/yearGenerally created as part of electric utility restructuring, but not alwaysManaged by state agencies, utilities, and independent nonprofitsSome offer subsidies and grants while others operate like venture capital funds

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States As New Clean Energy Investors

As a result of electric utility restructuring, the states will have over $3 billion to invest in clean energy activities over the next decade. This is one of the single largest sources of new funding for clean energy.

Figure 1: Aggregate Annual and Cumulative State Funding of Renewable Energy Programs

0

50

100

150

200

250

300

350

400

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Mil

lion

US

$

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Bil

lion

US

$

Annual, all states (left scale)

Cumulative (right scale)

(Source: Mark Bolinger, Ryan Wiser, Lew Milford, Michael Stoddard, and Kevin Porter:

“States Emerge as Clean Energy Investors: A Review of State Support for Renewable Energy”,

Electricity Journal, p. 84, November 2001.)

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State Funds Funding Levels

State Approximate Annual Funding ($ million)

Per Capita Annual Funding

Per-MWh Funding

Funding Duration

CA $135 $4.0 $0.58 2001-2011

CT $15 to $30 $4.4 $0.50 2000 – indefinite

DE $ 1 (maximum) $1.3 $0.09 10/1999 – indefinite

IL $5 $0.4 $0.04 1998—2007

MA $30 to $20 $4.7 $0.59 1998 - indefinite

MT $2 $2.2 $0.20 1999 – 2005

NJ $30 $3.6 $0.43 2001- 2008

NM $4 $2.2 $0.22 2007- indefinite

NY $6 - $14 $0.7 $0.11 7/1998 – 6/2006

OH $15 to $5 (portion of) $1.3 $0.09 2001 – 2010

OR $8.6 $2.5 $0.17 March 2002 – Feb. 2011

PA $7 (portion of) $0.9 $0.08 1999 - indefinite

RI $2 $1.9 $0.28 1997- 2006

VT $2.5 2006-2012

WI $1 to $4.8 $0.9 $0.07 4/1999 – indefinite

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Vermont Clean Energy Development Fund

Dedicated fund to promote renewables, CHP & efficiency $2.5 million per year from Entergy through 2012 if and when all

VY uprate approvals are obtained Plus $6 million from Entergy as condition of PSB uprate approval Legislative goal: to diversify power supply Fund administered by DPS DPS required to develop 5-year plan Eligible projects: small-scale residential/business; farm; priority to

commercial generation facilities that commit to sell power to Vermont utilities on favorable terms; projects that would not happen without support; public buildings

Look to success of Minnesota precedent

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Fund Strategic Goals

Accelerate development of renewable energy

Economic development strategy

Flexibility & portfolio of program tools: incentives, market barriers, education, etc.

Tailor to a state’s needs: SPEED program, CHP in Vermont

Longer-term perspective to complement renewable portfolio standards and other policies

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Strategic Models

Project Development Model: incentives & grants to directly subsidize project installation (CA,

NJ)

Investment Model: loans & equity investment in companies & projects (CT)

Industry Development Model: business development grants, marketing support, technical

assistance & education to build industry infrastructure (WI)

Research & Development Model: CA & NY

Combination of Approaches: MA

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Funds: Technology Scope/Project Areas

Solar

Wind

Biomass

Distributed Generation

Energy Efficiency

Green Buildings

Public Education

Business Development

Strategic Market Research

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Common Programs

Financial incentives: production & performanceCapital buy-downsEquity investmentProject and company financingSupport for green power marketsConsumer educationResearch and development grantsBusiness development support & technical assistanceMarket transformation programs

Renewable energy funds are flexible, and allow states to target a multitude of technologies and programs

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Technology-Specific Support: Wind

Common Programs for Wind Projects Production incentives for large wind

projects (most funds) Technical and permitting assistance

(MA, OR) Rebates for small residential wind (CA,

MA, WI) Assistance to host communities (MA,

NY) Public education (PA) Wind R&D – offshore wind studies; wind

integration studies (MA, NJ, MN)

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Technology-Specific Support: Solar PV

Common Programs for Solar PV Applications Buy-down programs (most states) Low interest loans (NJ, OR) Technical support (WI, NY) Installer training & certification (NY) High-value PV installations (NY) Low income green housing (MA) Funding of PV manufacturers (MA)

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Technology-Specific Support: Biomass

Programs for Biomass Incentives & buy-down grants

for biogas projects on dairies (OR, WI, CA)

Outreach, technical assistance & feasibility studies (WI)

Business & marketing grants (WI)

Overcoming regulatory barriers such as streamlining interconnection process (OR)

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Incentive Designs Used by State Funds Are Diverse

$156,380,452

$16,975,000

$16,238,965

$4,880,000

$7,810,000

up-front, lump-sumproduction incentives or

TRC purchases (PA, OR, IL)

TRC price insurance (MA)

debt (PA, IL)

grants (IL, MN, NY, NJ)

real-timeproductionincentives

(CA, MN, NJ, NY, PA) 4%

2%

8%

8%

77%

93% of funding is production-based Source: Ryan Wiser, LBNL

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Administration Issues to Consider

How to allow for some risk-taking with fund intended to innovate for long term?

How to balance risk with ensuring return to ratepayers? – need for new definition of return

Not a classic “regulatory” activity: requires new forms of administration

How to balance need for oversight versus flexibility?

How to address tension between political accountability and sound investment criteria?

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Fund Administration: Many Models

Regulatory Administration – NJ, CA, RI (collaborative model); run by energy regulatory commission

Quasi-Government Administration - public corporation or executive agency – NY, CT, WI Fund manager is state employee Oversight varies – board of public/private parties (w/ some utility reps)

to no regulatory oversight

Non-profit Administrator - PA (community development financial institution); OR (non-profit organization); IL (community foundation) Independent control Public utility commission oversight of budget & strategic plan, but not of

specific projects Board oversight w/ separate investment committee (PA)

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Innovative Organizational Structures: Taking Best From All Approaches

Organizational Structure: Energy Trust of Oregon

Independent, nonprofit organization Utility commission oversight of budget & strategic plan, NOT projects

Programmatic Structure: Sustainable Development Fund in PA; Mass Renewable Energy

Trust Diverse programs Market-driven investment approach Ability to avoid politicization of funding decisions Capacity to leverage additional capital Staff with financial expertise

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VI. Vermont Fund Recommendations

No Single Fund Program is Optimal: Use multiple program designs and be willing to experiment

Goals Should Drive Program Design: Link program design & fund allocation to strategic plan goals (portfolio diversification, SPEED program success, renewable business cluster)

Discretion & Flexibility Can Enhance Success: capitalize on rapid learning about how best to support clean energy markets

Markets for Smaller, Distributed Projects are More Difficult to Build

Working Closely with Utilities Will Prove Critical to Success

Use Fund to Support Other Renewable Programs