Evolving the RPS: A Clean Peak Standard for a Smarter Renewable Future
Lon Huber and Edward Burgess, December 1, 2016 (Strategen Consulting for the Arizona Residential Utility Consumer Office)
Renewable Portfolio Standards (RPS) have been fundamental to jump-starting the renewable energy (RE) industry, accounting for over 60% of the growth in RE generation since 2000. However, the simple MWhbased approach used by traditional RPS policies does not differentiate between each renewable MWh based on its value to the grid or for reducing fuel consumption. Already some states are experiencing challenges as renewable energy production during certain times is beginning to provide diminished value in terms of reduced fuel consumption or capacity contribution. As states continue to achieve their RPS goals and reach increasingly higher levels of RE penetration, new approaches will likely be needed to guard against diminishing returns of a simple MWh based approach.
As a way of encouraging clean energy resources to provide all the necessary attributes of a reliable power system, we propose building upon the traditional RPS framework by adding one or more new supplemental components that would work in parallel with the foundational MWh-based retail sales component. The first and foremost of these new components would be the Clean Peak Standard (CPS). The CPS builds upon the RPS construct, by adding a new dimension whereby a certain percent of energy delivered to customers during peak load hours must be derived from clean energy sources. For example, a 30% CPS would mean that 30% of MWh delivered to customers during a predetermined peak period would need to come from qualifying clean peak resources.
Many additional design features can be included in the implementation of the CPS such as tradable compliance credits, locational adders, multi-part peak periods, and periodic updates to continually align new investments with system needs. Ultimately, if successful, the proposed RPS framework can help to achieve clean energy resource procurement that is aligned with the full suite of grid services that electric power system operators need to supply.
Background and Context
Renewable Portfolio Standards: A Strong Start Towards a Clean Energy Future
Twenty-nine states and Washington D.C. have adopted renewable portfolio standards (RPS), which today apply to 55% of electric sales in the U.S.1 These policies have been fundamental to jump-starting the renewable energy (RE) industry, accounting for over 60% of the growth in RE generation since 2000.2 While each state has its own unique variations on an RPS, all state policies generally require retail electric providers to supply a minimum percentage of their retail load (in MWh) from renewable resources. Frequently, states use Renewable Energy Certificates (RECs) both to track compliance and to create a marketplace for renewable energy. The success of RPS policies stems, in part, from the simplicity of this framework. The retail sales requirement and associated REC construct creates a degree of certainty and transparency on which prospective developers and installers can rely to assess the value of renewable energy.
However, as states achieve their goals and reach increasingly higher levels of RE penetration, many are beginning to decide what policies should come next. Some states have already doubled down on the traditional approach, simply expanding their retail sales targets. Others are considering more targeted procurement methods that focus on specific resources, such as solar. As more states move towards the next chapter of clean energy policies, it will be increasingly important to consider benefits and drawbacks of the traditional RPS approach and explore improvements that will maximize public policy benefits.
Potential Pitfalls in Expanding Traditional RPS Frameworks
While each state has its own reasons for advancing RPS policies, many have done so primarily to reduce overall fuel consumption, which is associated with price volatility, fuel dependency, and other externalities. In this context, an energy-centric standard based on MWh sales is a sensible approach. Moreover, a MWh-based component will continue to be an important part of maintaining these policy objectives. However, a simple MWh-based standard lacks specific market signals that differentiate between the value of each renewable MWh based on the time when it is produced. Discrepancies in this value could lead to RPS compliance being met by a set of MWhs with very unequal grid-related benefits and unequal fuel-related benefits, both of which are described below.
Unequal Grid-Related Benefits From an electric provider’s standpoint, the total MWh of energy supplied is only one component of what’s needed to ensure reliable electric service. The system must also have sufficient MW of capacity to meet peak demand. Beyond energy and capacity, there are other types of essential grid services that a supplier’s portfolio of resources must provide, such as frequency regulation, load following, and spinning reserves. Providing capacity during peak hours is a time-specific grid service that is not well matched with an indiscriminate MWhbased standard. A traditional RPS would not necessarily encourage clean energy resources to provide these services; in the absence of a clear market signal, they are instead likely to be provided by conventional resources (often operating in standby mode), thereby prolonging fuel dependency and potentially increasing costs for customers. Moreover, the MWh-based standard may not adequately reward the enhanced value of resources that can deliver clean energy more flexibly and adapt to the grid’s needs. In some states, such as California, high renewable energy penetration has also led to new challenges, in large part due to the changing set of grid services needed to accommodate high penetrations of solar PV.
Unequal Fuel-Related Benefits
From the perspective of reducing fuel consumption and reducing externalities, the incremental impact of renewable energy can also be very time-specific. In reality, this benefit depends largely on the marginal generation unit at the time of production. Reductions in fuel consumption and environmental impacts (e.g. emissions of criteria air pollutants, greenhouse gas emissions, etc.) due to renewable energy can vary over the course of the day and by season. As renewable penetration increases, this benefit could even fall to zero at certain times. For example, during some hours there may be overgeneration of renewable resources causing curtailment. At other times, the marginal resource may not be a non-fuel based resource (e.g. hydro). Figure 2 and Figure 3 illustrate the growing overgeneration problem in California and Hawaii due to recent increases in the penetration of solar PV resources.
Over the long run, indiscriminate procurement of renewable resources based solely on annual MWh of production could exacerbate some of these discrepancies while introducing new challenges. For example, in the Southwest, the addition of solar PV resources could have diminishing returns in reducing fuel consumption if a significant portion of PV generation is already being curtailed due to overgeneration. Meanwhile, solar PV’s contribution towards peak demand will also be diminished as net load shifts into evening hours.
In fact, a 2014 CAISO study examined a scenario in which California increased its RPS from 33% to 40%. The results indicated that despite a 7% increase in the standard, greenhouse gas emissions (GHGs) were only reduced by 2% in California (see Figure 4).4 Further, the study predicted peak demand related capacity shortfalls and over 13 GW of renewable curtailment in one spring month.
These results are consistent with findings from another study exploring a 50% RPS for California, which demonstrated that as more renewables are added, the marginal fossil generator displaced is increasingly efficient. This means that increasing the RPS would result in fewer greenhouse gas emissions savings per MWh of RPS target.5 The 50% study further concluded that due to overgeneration, “more renewable resources must be procured than would be the case if all renewable resource output could be accommodated by the grid.” Under an alternate case in which RE procurement was better matched with the grid’s capabilities and needs, rate impacts of achieving the RPS were reduced by 10-39%.6
Thus, as RPS policies are scaled up in the future, the incremental benefits of complying with an RPS could become dampened under a traditional approach. A more sophisticated approach is needed to help target renewable energy procurement towards incremental clean energy resources that yield the greatest value to the grid and to customers.
Finally, another potential pitfall of traditional RPS policies is that market activity can slow down or stop abruptly once compliance is achieved. This is problematic since it tends to create boom and bust cycles within the industry that may not be sustainable over the long term. Different policy designs could be developed to help extend market signals and direct appropriate investment beyond the immediate targets.
A New Approach: RPS 2.0
Introducing a Multi-Component Clean Energy Standard - Electric power system operators must plan the for the grid to meet a variety of needs. To better capture the multiple attributes of a properly planned system, and to ensure clean energy resources can participate in providing all of them, we propose building upon the traditional RPS framework by adding one or more new building block components that would work in parallel as a supplement to the foundational MWhbased retail sales component. The full suite of RPS 2.0 components can be summarized as follows, and as illustrated in Figure 5:
• Block 1 (foundation) – Traditional MWh-based Renewable Portfolio Standard
• Block 2 (new) – Clean Peak Standard
• Additional Blocks (new, optional) – Example: Clean Flex Capacity Standard
Thus, the foundation would be comprised of the traditional MWh-based RPS. Meanwhile, a second, complementary building block would introduce a capacity-based standard that would focus on peak demand needs. This component is designed to encourage clean energy resources to provide capacity during peak demand hours. Under this framework, a minimum percentage of energy dispatched during a predefined peak window (e.g. 4 hours) must come from qualifying clean energy resources. The following sections of this paper provide a more detailed description of how the Clean Peak Standard could be implemented.
While the peak demand attribute (Block 2) is perhaps most readily included in the multi-component RPS, it would be possible to add other grid services that are identified and evaluated for system planning. For example, a new component could be added to encourage clean energy resources to provide flexible capacity during high flexibility need hours, if this was determined to be an important system constraint from a planning perspective.
As new blocks are added, the policy design increases in sophistication as it becomes more closely tailored to system needs. The overarching intent of this general framework is to better align clean energy procurement with the full suite of grid services that energy providers need to supply. While we acknowledge that most jurisdictions have not yet reached penetration levels where this is an urgent problem (with possible exceptions of Hawaii and California), we anticipate that this will increasingly become an issue over the coming years. Renewable penetration is poised to increase due to both RPS procurement and increased economic competitiveness of renewable resources. In anticipation of these trends, the table below summarizes some of the grid services that could be subject to a corresponding standard.
Whatever components are ultimately included, it is vital that each additional component not be viewed as a substitute for the traditional MWh-based standard, but rather as parallel complementary policies. This is necessary to ensure that no component is pursued at the expense of other components. However, while each reflects a discrete system planning constraint, a single resource can be used to simultaneously contribute towards each component. For example, generation that counts towards Component 1 (i.e. overall MWh) could also contribute to Component 2 (i.e. peak-coincident generation)…
Clean Peak Standard (CPS) – Detailed Overview…Qualifying Clean Peak Resources…Peak Demand Window…Clean Capacity Credit…Containing Costs of Resource Procurement…
As states continue to achieve higher penetrations of renewable energy, some have begun to grapple with new challenges in terms of maximizing the benefits reducing the costs of additional RE procurement. The advanced RPS approach presented in this paper can help to better target procurement towards the needs of the grid and provide a sustainable path for renewable energy deployment into the foreseeable future. A cornerstone of this new approach is the introduction of the Clean Peak Standard which will help to encourage clean energy resources that generate energy during peak hours, when it is needed most. Additional components and implementation details can be added over time to create a more sophisticated RPS that is more aligned with the true needs of the grid.