California's Evolving Renewable Portfolio Standard

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Navigant experts Dan Bradley, Frank Stern and Fred Wellington presented California's Expanded Renewable Portfolio Standard on an interactive web conference hosted by Infocast.

For more insight on Renewable Energy, visit http://www.navigant.com/insights/industry_and_services/energy/.

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California's Evolving Renewable Portfolio Standard

  1. 1. California’s Evolving Renewable Portfolio Standard Trends and Implications February 2011 D I S P U T E S & I N V E S T I G AT I O N S • E C O N O M I C S • F I N A N C I A L A D V I S O RY • M A N A G E M E N T C O N S U LT I N G©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.
  2. 2. Important Notice This presentation was prepared by Navigant Consulting, Inc. exclusively for the benefit and internal use of Infocast and/or its affiliates or subsidiaries. No part of it may be circulated, quoted, or reproduced for distribution outside these organization(s) without prior written approval from Navigant Consulting. This presentation is incomplete without reference to, and should be viewed solely in conjunction with the oral briefing provided by Navigant Consulting. February 3, 2011©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.
  3. 3. Navigant is a specialized consulting firm and global leaderin renewable energy technology and strategy. Navigant Energy Practice Renewable Energy (2,100 Employees) (270+ Employees) (60 Employees)» Power Systems, Markets » Publicly traded since 1996 Professionals and Pricing (NYSE: NCI) » Expertise in wind, solar,» Business Planning and » 2009 revenues - $707 geothermal, biomass, Performance Improvement million hydropower, storage and» Energy Efficiency » 40 offices in North America, smart grid» Emerging Technologies and Europe, and Asia » Recognized thought leaders Renewable Energy committed to RE Global Practice » Over 200 RE engagements world wide in last 3 yrs » Public and private sector clients in 10+ countries Navigant named "Best Advisory – Renewable » 25% of clients are non-U.S. Finance, North America" in the 9th and 10th Annual Environmental Finance and Carbon Finance Market Surveys Page 3
  4. 4. Overview This presentation will: » Present an overview of the RPS policy landscape. » Highlight current renewable energy supply and demand in California and the broader Western region. » Illustrate the factors affecting valuation of Tradable Renewable Energy Credits (“TRECs”). » Highlight potential implications for renewable energy developers, investors and utilities.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.
  5. 5. Presenter Bios Dan Bradley Dan Bradley is a Director with Navigant’s Energy Practice where he specializes in resource planning, procurement, and electric markets. He has assisted clients in procuring over 2,000 MW of generation and transmission and in excess of 2,000,000 Renewable Energy Credits (RECs/SRECs), resource strategies, resource decision making, and development of market intelligence databases. Mr. Bradley regularly represents clients in meetings at the PJM Interconnect and has participated in FERC settlement conferences. Mr. Bradley holds an MBA from Clemson University. Frank Stern Frank Stern is a Director with Navigant’s Energy Practice. He works with utilities and related organizations helping them make wise choices about energy resources. Mr. Stern has over 20 years of experience, has been an invited speaker at major industry conferences, has over 20 publications in journals and conference proceedings, and has testified a variety of energy industry issues before state commissions and regulatory agencies. He is a registered professional engineer and an accredited appraiser. Fred Wellington Fred Wellington is a Managing Consultant in Navigant’s Energy Practice, where he specializes in clean energy markets. He advises project developers, financiers and investor/publicly-owned utilities on renewable energy markets, Renewable Energy Credits (REC/SREC) valuation and trading, solar business strategies, and clean energy options and costs. Mr. Wellington also advises state and federal government agencies on clean energy policies and greenhouse gas reduction strategies. Mr. Wellington has authored several publications on clean energy topics including articles in the Harvard Business Review and Public Utilities Fortnightly. He is a Chartered Financial Analyst (CFA) and holds an MS and an MBA.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.
  6. 6. Table of Contents 1 » California RPS Policy Landscape 2 » Renewable Energy Supply and Demand 3 » Factors Influencing Forward TREC Prices Curves 4 » Implications and Key Takeaways©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 6 ENERGY
  7. 7. California RPS Policy Landscape>>History of California’s RPS There has been quite a bit of activity concerning the California RPS over the past two years. CARB 33% Rules Finalized TREC Draft CARB RPS Decision Rules Released Finalized SB 722 SB 14 (33% Target) Amended / Vetoed Debated RPS Introduced 2002 2009 2010 2011 EO S-21-09 Issued Requiring 33% by 2020. SB 722 Fails to CARB Begins Rulemaking Pass Assembly CPUC Authorizes TRECs Then Stays SB 722 Introduced Decision (33% target bill) SB 23 Introduced (33% Target Bill)©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 7 ENERGY
  8. 8. California RPS Policy Landscape>>Major Agencies Involved in Implementing RPS There are multiple agencies involved in the RPS in California, with CEC, CPUC, CARB, and WREGIS all playing significant roles. CA Energy CA Public Utility CA Air Resources Western Renewable Energy Commission Commission Board Generation Information System • The CEC certifies eligible • CPUC sets the RPS baseline & • CARB is the lead implementing • WREGIS is a renewable facilities for RPS generation. procurement targets and agency for AB 32, the state’s energy generation and REC • CEC is also responsible for approves/denies IOU GHG law, which now includes a monitoring system. siting and permitting. procurement plans and PPAs. Renewable Energy Standard requiring utilities to meet 33% • CPUC also determines if of retail sales with renewable Other Agencies: compliance with the RPS is energy. achieved. • CAISO • Joint Powers Authorities such a SCPPA, NCPPA, TANC. • Federal agencies such as BLM, FERC, Dept. of Interior. IOUs Must Comply with Both Structures©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 8 ENERGY
  9. 9. California RPS Policy Landscape>>Different Jurisdictions There are different jurisdictions that promulgate renewable energy mandates in California. Market Structure Under 20% Market Structure Under 33% Proposed Market Structure Under Target (CPUC) Target (CARB) SB 23 (Assembly Bill) • This is the structure currently • Under Executive Order S-21-09, • Following the failure of SB 722 (33% RPS governing the market. California Air Resources Board bill that failed to pass in 2010), Senators (CARB) was instructed to promulgate Simitian, Kehoe and Steinberg introduced • It is administered by the CPUC and rules governing a 33% target. SB 23 in Dec. 2010. results from the original RPS law, SB1078 (2002) and revised by SB • This was ordered after Gov. • SB 23 largely mirrors the structure in SB 107 (2006). Schwarzenegger under the 722. authority of AB 32, the state’s • The recent TREC ruling applies to sweeping greenhouse gas law. • Support for the bill and its timing is unclear. this structure. • This is a separate regulation from the • It is also unclear how it would eventually 20% target RPS. interact with the existing RPS systems. Each jurisdiction envisions a different underlying market structure which can have important impacts on renewable energy development.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 9 ENERGY
  10. 10. California RPS Policy Landscape>>Differences in RPS Structure There are different market structures under the different jurisdictions, that dictate compliance with renewable energy mandates. Market Structure Under 20% Market Structure Under 33% Proposed Market Structure Under Target (CPUC) Target (CARB) SB 23 (33% Law) » 20% by 2013 Targets » 1% annually until 20% by 2010 » 20% by 2014 » 28% by 2019 » 25% by 2016 &Timing » 3 year grace period » 24% by 2017 » 33% by 2020 » 33% by 2020 » The three IOUs » The three IOUs, Covered » Electric Service Providers (ESPs) » ESPs and CCAs Entities » Com. Choice Aggregators (CCAs) » Municipal Utilities (> 200 GWh in sales) » >=50% by 2013, 65% by 2016 and 75% thereafter of renewables must interconnect with CA Balancing Authority or dynamically » Qualifying renewable energy delivered to a transferred to CA Location/ Type California Balancing Authority » Qualifying renewable energy of generated in Western Electricity » <=25% by 2013, 15% by 2016 and 10% Transactions » Bundled contracts that make use of Coordinating Council (“WECC”) thereafter can be unbundled TRECs dynamic transfer arrangements » <=25% by 2013, 20% by 2016 and 15% thereafter can be firmed and shaped transactions » TRECs allowed for up to 25% of a utility’s TREC Trading obligation and capped at $50/MWh until » Unlimited » See above 2013 » Various – considered a violation of Penalty » $50/MWh up to $25m annually emission limitation under Health and » Delegated to CPUC Safety code©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 10 ENERGY
  11. 11. Table of Contents 1 » California RPS Policy Landscape 2 » Renewable Energy Supply and Demand 3 » Factors Influencing Forward TREC Prices Curves 4 » Implications and Key Takeaways©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 11 ENERGY
  12. 12. Renewable Energy Supply and Demand The IOUs are moving towards the 33% targets; delays and cancellations of projects under development will be key to meeting the obligation. Current Level of Renewable Energy Additions for California IOUs 35,000 Contracts Pending Approval Approved Contracts in Development 30,000 Existing Projects plus Projects Online in Previous Year 33% target 25,000 20,000 GWh 15,000 10,000 5,000 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 PG&E SCE SDG&E Source: CPUC©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 12 ENERGY
  13. 13. Renewable Energy Supply and Demand>>Projected Load and Renewable Energy Demand Adding POUs to the RPS target significantly increases the amount of renewable energy needed to meet the 2020 target. Projected Load for IOUs and Publicly-Owned Utilities (POUs) 350,000 Total POUs Total IOUs 300,000 250,000 Projected Load (GWh) 200,000 150,000 2020 Target 33% Target Incl. 100,000 POUs 33% Target Only IOUs 50,000 - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CPUC 33% RPS Calculator v1.3©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 13 ENERGY
  14. 14. WECC Renewable Energy Supply Significant generation capacity could be delivered within California over existing the transmission system, although more lines are needed. TWh of Renewable Energy Potential That Could be Delivered Breakdown of Potential TWh of Renewable Within California by Transmission Requirements Energy Delivered over Existing Transmission Source: CPUC 33% RPS Calculator v1.3©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 14 ENERGY
  15. 15. California RPS Policy Landscape>>Major Agencies Involved in Implementing RPS There are several issues that can impact the level, timing and cost of renewable energy generation to satisfy California’s RPS targets. Major Issues Affecting Supply Available to Meet California RPS Transmission Competition for Resources Project Development Risk » The transmission situation in » Other Western states have RPS » Renewable energy projects face California and the broader Western targets and demand for local multiple hurdles to bring the project interconnect is complex, with renewable energy resources. to completions. congestion in some areas and » This can result in competition for » Issues such as permitting, available capacity in others. the lowest cost / highest quality interconnection requirements, » This can affect not only bringing resources between local utilities in financing and PPA negotiations all out of state renewable resources to these states and California utilities can impact whether a given project serve California load, but also can looking to import this power. will be developed, and equally as impact in-state generators that » This can also impact unbundled important, when the project will need to build interconnection. TREC supply insofar as unbundling come online. » The location of renewables with the renewable attributes leaves the » Permitting, in particular, is a big respect to the location of the underlying null power less hurdle especially for major various load pockets is a major attractive to local utilities (because transmission additions and for factor. it would not count towards its RPS large renewable projects. targets).©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 15 ENERGY
  16. 16. Transmission Situation in California The transmission system in California is complex, with new lines being considered to accommodate new renewable generation. » Depending on the level of “pre-existing” uses for High /Medium Potential Transmission Upgrades and Corridors the transmission system and the location of potential renewables, the following segments of Malin Captain Jack Northwest the transmission system within California could be Corridor NEVADA heavily congested: Round Mountain Northern › The facilities between the Pacific Northwest Olinda Nevada Dixie Valley and Northern California NV Tracy Table Mountain Bellota-Cottle B › The facilities between the Sacramento area  Cottle B-Warnerville and the Bakersfield area Vaca Dixon › The facilities between the Bakersfield area and Collinsville Tracy Bellota Tesla Eastside 500 kV Southern California Westley Silver Peak Bordon Control Los Banos Wilson › The facilities extending into Southern California Gregg W hir from Southern Nevada and Western Arizona Gates lwi Eldorado New Substations nd /W Primm Existing Carrizo1 in » Studies done to date by the California Morro Bay dhKramer 500 kV Midway Ivanpah High Potential ub Barren Ridge Southwest Templeton Medium Potential Transmission Planning Group (CTPG) have Llano Pisgah 500 kv Corridor Haskell Canyon Lugo Devers Vincent indicated that the “High and Medium Potential’ New Lines San Bernardino/Vista Red Bluff V Mirage Colorado River sub. transmission facilities and corridors shown on the High Potential Coachella Valley Medium Potential following map could allow the State to meet a Sycamore Cyn Dixieland El Centro North Gila New Corridors Central majority of its 33% RPS by 2020. High Potential IID Imperial Valley » The CTPG will be continuing its studies regarding the required transmission facilities during 2011.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 16 ENERGY
  17. 17. RPS Requirement in WECC In addition to California, seven other states in the broader WECC region have RPS requirements. RPS Requirements in Western States Excluding California RPS mandate MT WA 15% by 2015 RPS goal 15% by 2020 OR SD 25% (large utilities), 5%- 10% by 2015 goal 10% (small utilities) by 2025 NV 25% by 2025 UT 20% by 2025 goal CO 30% by 2020 (IOUs), 10% munis and co-ops AZ 15% by 2025 NM 20% (IOUs), 10% (co- ops) by 2020 Source: January 2011, Database of State Incentives for Renewable Energy (DSIRE)©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 17 ENERGY
  18. 18. Current RPS Generation Queue in California A significant number of projects in the generation queue are in very early stages of development; some having no estimated online date. CAISO Renewable Generation Queue by Estimated CAISO Renewable Generation Queue by Current Status Online Date 0.0% 2.0% 0.3% 0.0% 35.1% 45.2% 35% 65% 6.5% 6.8% 4.1% App Pending Feasibility Operating Estimated Online Date Permitted Proposed Restarted No Estimated Online Date Site Prep Testing Under Const©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 18 ENERGY
  19. 19. Table of Contents 1 » California RPS Policy Landscape 2 » Renewable Energy Supply and Demand 3 » Factors Influencing Forward TREC Prices Curves 4 » Implications and Key Takeaways©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 19 ENERGY
  20. 20. California TREC Decision TRECs can now be used to comply with the California RPS. CPUC TREC Decision Update (R. 06-02-012) » Final ruling was issued January, 13, 2011 reinstated the original ruling (issued in March, 2010). » Decision allows unbundled TRECs to be used towards a utility’s RPS compliance obligation under the following conditions: › Unbundled TRECs may not be used for more than 25% of an entities compliance obligation through to 2013. › The cost of the TREC must not exceed $50/MWh through to 2013. » Decision defines a TREC transaction as: › An unbundled transaction in which an entity procures only a TREC and not the underlying energy. › A bundled transaction (conveying both TRECs and energy) where the generator’s first point of interconnection is not with a California Balancing Authority and the transaction does not make use of dynamic transfer arrangements. » TRECs cannot be banked for more than 3 years. Once retired, they can be counted towards a utility’s target under the flexible compliance rules.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 20 ENERGY
  21. 21. Unbundled versus Bundled Renewable Energy TRECs convey title to renewable energy attributes and can be unbundled and sold separately from the underlying energy. “Null” Energy The underlying null energy, if separated from (1 MWh) the TREC, can be used to meet load but not an Bundled Renewable RPS obligation. Generation (1 MWh) A TREC, whether bundled with or unbundled from 1 TREC the energy, is required to demonstrate RPS compliance. Definitions differ by state California TREC Definition “A renewable energy credit (REC) for compliance with the California renewables portfolio standard (RPS) is a certificate of proof, issued through the Western Renewable Generation Information System, that one megawatt-hour of electricity was generated by an RPS-eligible renewable energy resource and delivered for consumption by California end-use retail customers. A REC includes all renewable and environmental attributes associated with the production of electricity from the eligible renewable energy resource, including any avoided emission of pollutants to the air, soil or water; any avoided emissions of carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, or any other greenhouse gases that have been determined by the United Nations Intergovernmental Panel on Climate Change, or otherwise by law, to contribute to the actual or potential threat of global climate change;* and the reporting rights to these avoided emissions, such as Green Tag reporting rights.”©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 21 ENERGY
  22. 22. Factors Influencing Forward TREC Prices Curves TREC prices are sensitive to supply/demand, the wholesale cost of energy at which the market clears and the mix of renewables in the market. Key Variable Driver Directional Impact on TREC Prices » Increases in wholesale power prices in pools typically » Natural gas prices decrease REC prices Power Prices » Power market fundamentals » Renewable integration costs » Higher integration costs could increase TREC prices insofar as developer needs to recover costs » RPS targets and compliance rules » Increases in demand typically increase REC prices TREC Demand » Future load growth » Conversely, lower demand results in lower prices » Regulatory limits on TREC usage » Resource availability » Increases in renewable energy supply beyond RPS » Market conditions and production of existing projects requirements depress REC prices TREC Supply » Project development constraints » Localized REC demand can limit exports to other states, thereby limiting supply » Other utility demand for TRECs » Environmental constraints (e.g. water, » RECs prices are tied to least cost generators habitat, etc.) Renewable » Regions with higher capacity factor facilities (e.g., biomass, » NIMBY issues Supply Mix » Technological development, particularly geothermal) generate lower cost RECs in larger quantities solar than regions that depend on wind and solar facilities©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 22 ENERGY
  23. 23. Factors Influencing Forward TREC Prices Curves There are specific factors to California influencing TREC supply and demand, which differ in their likely impact on forward price curves. » Requiring POUs to comply with the RPS effectively increases the demand curve Inclusion of POUs in RPS which puts upwards pressure on prices. » A cap percentage on TRECs usage effectively reduces the demand curve for 25% Cap of TRECs to 2013 TRECs, leading to downward pressure on prices. $50/TREC Cap to 2013 » Price caps effectively act as ceiling on TREC price curves. Lack of TREC Price » A lack of transparency in the marketplace on transacted prices for unbundled TRECs Transparency can lead to increased price volatility. RPS Demand in Western » RPS targets in other states – or a new RPS program in a state that currently does States not have an RPS – can decrease TREC supply available for California. » The availability of unbundled TRECs necessarily requires native demand for energy. Energy Demand in Other » Local utility demand for energy-only contracts could be small or require firming and States shaping from natural gas. » Financing projects based on projected TREC revenue is dependant on long term Renewable Project Financing contracts.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 23 ENERGY
  24. 24. Table of Contents 1 » California RPS Policy Landscape 2 » Renewable Energy Supply and Demand 3 » Factors Influencing Forward TREC Prices Curves 4 » Implications and Key Takeaways©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 24 ENERGY
  25. 25. Implications for Developers and Investors The recent reinstatement of the TREC rules reduces some uncertainty, but some questions remain. Should I build • Rule allows only 25 percent of REC requirements to be met with TRECs until 2013. CARB structure allows more. in CA or • Development outside CA may be less expensive in some cases and will depend on transmission and local outside? demand for energy if targeting unbundled TREC sales. Do I have to • For the most part yes, under CPUC rules deliver power to • Not necessarily, under CARB rules. CA? • Permitting and interconnection processes takes time. When should I • The 25% limit and $50/MWh price cap sunset in 2013. build? • Competition for resources can lead to pricing issues. • Transmission interconnection and the development of new transmission facilities will impact timing, cost Will there be and location of project. transmission? • Developers need to understand the transmission issue. Can I use RECS • Given competition for resources and cost consideration, valuation of TRECs will increasingly be important. for financing? • Investors will have to become comfortable with the market structure and liquidity.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 25 ENERGY
  26. 26. Implications for Utilities The recent changes in the RPS structures provide conflicting signals for utilities. TRECs provide another option for compliance, however different procurement strategies may be required. Sunset of 25% cap on TRECs provides some motivation to delay procurement plans–more options become available as the market opens up. Sunset of $50/TREC cap on TRECs provide motivation to acquire now – supply of out of state unbundled TRECs depends on local demand for energy in that state - at a higher cost and without ability to claim it against RPS targets. Competition for lowest cost resources provide motivation to secure good projects sooner, especially in other states that need them for native RPS requirements. IOUs will need to comply with both CPUC and CARB requirements, which differ substantially.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 26 ENERGY
  27. 27. Key Takeaways The California RPS is Complex and Evolving – Watch This Space. » The underlying RPS market structure determines when, where and how Underlying RPS Market renewable facilities get built. Structure is Important and » The different CARB and CPUC markets structures continue to change. Watch Changing this space closely. » Forward TREC price curves are driven by supply and demand characteristics in Accurate TREC Valuation is the market – which in turn is driven by RPS market structure and underlying Complex and Increasingly power market fundamentals. Important » Accurate TREC valuation is increasing important to both buyers and sellers. Costs Will Be Driven by » While significant eligible renewable resources are available for RPS compliance, transmission constraints (and timing of new lines), project development risk and Supply and Demand in competition for resources will dictate the value ascribed to both physical WECC, not only California renewable energy and their attributes.©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. 27 ENERGY
  28. 28. ©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.KeyKeyC O N T T C T ST SC O N AAC Dan Bradley Director New York, NY 917-498-3846 dbradley@navigantconsulting.com Frank Stern Director Boulder, CO 303-728-2513 frank.stern@navigantconsulting.com Fred Wellington, CFA Managing Consultant San Francisco, CA 415-356-7132 fred.wellington@navigantconsulting.com©2010 Navigant Consulting, Inc.Confidential and proprietary. Do not distribute or copy. 28 ENERGY

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