Environmental Market Insights: Legislative impacts on RECs at the federal and state level

Author Argus

This fourth and final episode will discuss updates in environmental market programs at the federal and state level.

Over the coming weeks we will be discussing growth in the US environmental markets including the new NOx allowance program, expansion of cap-and-trade programs, expansion of LCFS programs, and an update on renewable energy certificates. 

In this fourth episode, Michael Ball and Patrick Zemanek, break down the impacts of various environmental market programs at the federal and state level due to Biden’s infrastructure plan and other legislation across the country. 

Related links:

Listen to other episodes in the Environmental Market Insights mini-series
Learn more about Argus Air Daily
Check out our Energy Transition hub 




Michael: Hello, and welcome to our podcast mini-series that focuses on growth in the U.S. departmental markets. So far, we've discussed EPS news on our trading program and the expected growth in state cap-trade and in North American LCFS programs. Today, we're going to wrap up the series with a dive into the U.S renewable energy markets at the federal and state levels, including some of the recent and potential changes to key programs. This podcast is brought to you by Argus Media, which as many of you may know, is leading independent provider of an energy and commodity pricing information. My name is Michael Ball, and I'm the editor of Argus' environmental markets publication Air Daily, and I'm based in Washington, D.C. And with me today is Patrick Zemanek, who's our REC markets reporter based in Houston.

All right. So, Patrick, let's just get dived right in. I wanted to ask you what's going on at the federal level? It looks like President Joe Biden has called for achieving a zero-emissions power grid by 2035, with a clean electricity standard, also called a CES, designed to meet that goal as part of our infrastructure spending plans. Is that a mandate that we really should expect to see at the federal level right now?

Patrick: That's a good question. The very short answer is maybe. The Biden administration has been pretty qualified in its discussions about how it could force the transition to carbon-free energy with a clean electricity standard being only one of the options on the table. Senate Democrats have said that the CES is part of their $3.5 trillion budget plan. But there are a couple of hurdles they're going to have to clear. The first is the 50-50 split in the Senate, which means their success will probably depend on their ability to approve the mandate through a procedural process called "budget reconciliation." At a high level that would allow them to enact the mandate with a simple majority, rather than the 60 votes typically required to clear the Senate due to that Chamber's filibuster rules. If they can't do that, then the odds against the bill increase considerably as convincing 10 Republicans to back a CES could be difficult.

And the elephant in the room is, can Congress actually enact a clean electricity standard with budget reconciliation? Which is a really good question. And one to which the answer is, again, maybe. By congressional rules, budget reconciliation can only be used on bills that change spending or revenue, which means that using it to pass a clean electricity standard is hazy. Senate Democrats seem to believe that it can be done, but those restrictions could result in a program that looks quite a bit different from the state renewable portfolio standards that we all know and love.

The other challenge for Biden is convincing the moderate segment of his own caucus. Democrats from states with stronger ties to the fossil fuel industry have to answer to their constituents back home. So, if the package doesn't include guarantees that workers in those industries aren't going to be left behind as traditional energy producers are phased down in the power mix, that could be a tough sell. Including carbon-capture and nuclear could help with that, as could guaranteeing job training for growing clean energy industries.

It's also worth considering that not all Democrats are necessarily behind the idea of a clean electricity standard. West Virginia Senator Joe Manchin, who is popularly considered a "kingmaker" these days because of his more conservative tendencies and how closely the Senate is divided, has expressed some skepticism about a CES being the most practical approach to de-carbonizing the sector. That could be a roadblock as well.

Michael: All right. Thanks. And Biden has made offshore wind a big part of his climate strategy as well, in addition to the clean electricity standard. And he's been calling for 30 gigawatts of new offshore generation by 2030. How has that translated so far into how federal regulators are handling things?

Patrick: So, the Bureau of Ocean Energy Management, or BOEM, the division of the Department of the Interior responsible for permitting offshore wind in federal waters finally approved the 800MW Vineyard Wind I project in May after around two years of supplementary environmental reviews that were designed to assess how the region would be affected by a sheer number of projects that federal regulators really weren't anticipating. It was a long, twisting process that I won't dive into here, but those reviews were essentially bottlenecking the entire offshore sector, as most of the capacity in the pipeline is off the coast of states in New England and the Mid-Atlantic.

Because of that, when federal regulators were reviewing Vineyard Wind for those cumulative impacts, they were effectively reviewing the sector as a whole. Vineyard Wind’s approval is therefore a huge hurdle cleared. And that's big news for states in the region most of which have aggressive renewable portfolio standards and expect offshore wind farms to feed an increasing number of renewable energy certificates into the compliance markets over the coming decade. That's especially true for the NEPOOL markets where Vineyard Wind is under contract to supply Massachusetts. But it's also so for the PJM markets, as New Jersey and Maryland are both developing projects, and New York, which is counting on our offshore wind to solve one of their big problems, which is getting carbon-free energy downstate load centers like New York City.

BOEM has also tipped its hand, and the agency is planning a number of lease sales for states that haven't yet entered the fold. The agency has selected two areas off the California coast that could host projects, and the agency is also planning lease sales further down the Atlantic coast from North Carolina. In addition to those, it's also looking at a sale in New York Bight which runs from the eastern tip of Long Island to the Cape May inland in New Jersey. So, there could be even more projects in the Northeastern Pipeline soon. And also, BOEM is in the early stages of opening up the Gulf of Mexico for potential developers.

Michael: Interesting. Now, you mentioned California, offshore wind in California specifically. Given that the three states along the West Coast all have adopted or will soon adopt very aggressive renewable energy policies that call for eliminating greenhouse gas emissions from the power sector in the next, say, like 20 to 25 years. Why doesn't that sector have a bigger foothold in the Pacific yet?

Patrick: Engineering. States along the Atlantic coast are mostly dealing with shallower waters, which means they can use fixed turbines. Maine is something of an exception to that, but for the most part, they're dealing with a more developed, less expensive technology relative to the floating turbines California is going to need as the waters off their coast are deeper. But that's not to suggest that California isn't getting around to it. There's a bill in that legislature that lawmakers are currently working on that would task state agencies with setting concrete targets for California in the coming years. That bill appears to have strong bipartisan support and has already passed in the State Assembly on a 71 to 1 vote.

I've also heard people in the offshore wind industry express a lot of interest in the West Coast, but the sentiment seems to be it'll still be a few years. Potentially, in the late 2020s, but more likely the 2030s before we really see an offshore wind boom in the Pacific.

Michael: Okay. And, speaking of legislation, what changes, if any, have we seen so far this year to state REC mandates?

Patrick: Yeah, it's been relatively tame on the state level, at least in so far as we're talking about REC markets. Massachusetts and Delaware both gave modest bumps to their RPS requirements earlier this year. And while Oregon is on the brink of enacting a law that would require its two biggest investor-owned utilities to eliminate greenhouse gases from their power supplies by 2040, it's not going to do much in terms of directly lifting the RPS requirements.

[Note: This podcast was recorded on July 16, before Oregon governor Kate Brown signed the clean energy mandate into law on July 19.]

Perhaps the biggest changes were in Maryland, which actually went in the other direction by lowering their renewable energy requirements for 2020 through 2029. But that's not really the state backing away from its previous commitments. Lawmakers are still expecting utilities to use renewables for 50% of their retail sales by 2030. And the changes in the interim were more to accommodate the solar industry, which had expressed some concerns about development timelines that were set back thanks to the COVID-19 pandemic.

But Maryland did make some other updates that were worth mentioning. For one they extended the state's Tier II allotment, which covers large hydroelectric plants indefinitely at a flat 2.5% per year rate. And the reason they did that was pretty simple, as they want to keep their in-state hydro in-state. If you're not awarding RECs to those plants, then the owners have more incentive to shift that power into neighboring PJM states, which might award that electricity with incentives under their RPS programs.

They also added a carve-out for geothermal projects that begins in 2023 and peaks at 1% in 2028. Geothermal was already a Tier I resource, which is the category that includes your "premium renewables" like wind and solar. But it's contributed very little to the RPS so far. By adding it as an explicit allotment within Tier I, similar to solar, it will force electricity suppliers to support the expansion of the industry.

The other big change is that lawmakers, after years of hemming and hawing, cut black liquor from the list of eligible tier one resources. Black liquor is a paper mill by-product the Democrats and environmental advocates have been trying to cut out of the RPS for years. But up until recently, there was still one paper mill in Maryland benefiting from the credits. Well, it closed in 2019, which smoothed over some of that resistance. The catch is that utilities in Maryland used black liquor RECs for 23% of their obligations in 2019, which is the latest year for which the Public Service Commission has released data. That's second only to wind, which was 43%. So, power suppliers are likely going to have to rely more heavily on RECs from other sources.

That said, there's still one other caveat. The new rules will not exclude black liquor RECs from contracts executed prior to the new law taking effect, which did prompt a rush to get contracts enacted before the law was finalized. So, we could still see black liquor credits meeting some of those Tier I requirements into the future.

Michael: Thanks, Patrick. It's interesting. Sounds like Maryland's going to be a state worth watching and to see how that market develops and how the changes affect things. What about some other states? What can we expect in terms of RPS legislation for the rest of the year?

Patrick: There've been several cases of delayed action already, where legislators couldn't quite make deals before key deadlines, but have decided to reconvene later for mop-up duty. Illinois is the most prominent example in this case, as Democrats had explicitly said, they will reconvene to pass the 100% clean energy bill that's been circulating in some form or fashion for 2.5 years now. And while, Illinois handles its REC program differently than states like New Jersey, Maryland, and Pennsylvania, in that they have the Illinois Power Agency to procure credits on behalf of the utilities, that bill could still represent an influx of new generators interconnected into the PJM grid. 

Rhode Island, on the New England grid, is in a similar boat though they haven't singled out renewable energy in the same way. The state Senate in early June passed a bill that would raise its RPS to 100% by 2030, effectively codifying a goal set by former governor and current U.S. Secretary of Commerce Gina Raimondo back in early 2020. The session hit its scheduled end on June 30th without the House passing it. But the General Assembly could come back to later this year to work on some bills that didn't quite get done. So, that's potentially on the table as well. 

I don't know that either of those states are guarantees, as deals have obviously not yet been made, but I think the partisan breakdowns are favorable to passage in both cases. At the same time, it's worth keeping in mind that Illinois had Democratic majorities and a supportive governor during the previous session as well and couldn't close the deal. So, until it actually gets signed into law, it's probably prudent not to count chickens.

Michael: Okay. Great. And any other states that you know going to be worth keeping an eye on for some potential RPS changes?

Patrick: Yeah. Pennsylvania is another state we're kind of keeping an eye on as its Tier I RPS – again, the category that incentivizes resources like wind and solar – will flatten this year unless they lift it during the 2021 session. It's a bit different from either of the previous two states, as it's both a purple state and one with stronger ties to fossil fuel production. So, RPS bills are inherently facing more hurdles to passage.

There are two bills that are circulating in Harrisburg right now that could accomplish it though. The first would require utilities to use Tier I resources for 18% of their sales with a 1.75% carve-out for solar by the 2025/'26 reporting year. It has bi-partisan sponsorship and is more moderate than a separate Democrat-backed proposal that would lift the tier one requirements to 30% by the 2030/'31 period. And that bill would feature a 10% carve-out for solar. Pennsylvania's legislative session runs until the end of December, so they're working with a longer timeline than some of the other states, and both of those bills are currently still in committee.

And finally, there's Ohio. As a bit of background, Ohio lowered its RPS to 8.5% of utility sales by the end of 2026 during the state's 2019 legislative session with a piece of legislation known as House Bill 6 or HB 6. Those changes also eliminated the solar carve-out in the RPS and reduce the load to which the percentage requirements were applied. In short, it was actually a greater reduction and then the straight 4% loss implies.

Well, fast forward to 2020 and the U.S. Department of Justice arrested former Ohio Speaker of the House Larry Householder, alleging that he had used a complicated dark money scheme to dole out $60 million in bribes to ensure the bill passed and survived a campaign to have it overturned with a ballot initiative during the 2020 elections. That sparked widespread backlash on both sides of the aisle initially, and even Governor Mike DeWine, who supports what HB 6 did, says it needs to be repealed to restore voters’ faith. Repealing it outright would return the RPS to the higher levels from before the bill passed back in 2019.

But the thing about HB 6 is that it was a massive policy suite. It had subsidies for nuclear plants and coal plants and updated a lot of other things. So, Republicans who control the legislature have taken a piecemeal approach to rolling back HB 6, which doesn't necessarily bode well for renewable energy supporters. There is a Democratic standalone bill that would bring the RPS back to the previous 12.5% level. But it's been in committee for a while with no action taken to hearing in early May. For context, typically, bills have multiple hearings and if lawmakers are intent on advancing it, those hearings tend to happen back to back over a series of weekly meetings. So, the fact that nothing happened later in May or June is noteworthy.

On a similar tack, Governor DeWine on July 12th signed the bill that gives local jurisdictions more say in which utility-scale solar and wind farms get approved. Renewable energy advocates have come out strongly against the new law fearing it will discourage developers from building in Ohio. And there could be validity to those concerns. While not directly related to this new law, I've spoken with developers in the past who were reluctant to get involved in Ohio because the policy landscape has been so unpredictable. And those companies are typically looking for certainty with their investments. The point being that it's not necessarily the sort of law you're going to pass as a legislature if you intend to turn around and raise the RPS.

So, while I wouldn't bet a dime on what Ohio will do with renewables given the back and forth that characterizes the legislature's record, a higher rate RPS is probably less likely here than in other states.

Michael: All right. Thanks, Patrick. That sounds like a lot to keep an eye on. I know that those states could have a big effect in the markets or who knows, we'll see what happens in Ohio. It's always an interesting case for sure. So anyway, we hope you enjoyed this podcast episode, and please be sure to check out the other episodes if you haven't had a chance yet. And for more information on Argus emissions coverage, please visit
argusmedia.com/emissions/airdaily. And we also wanted to let you know that we will be returning to Napa, California, this October 18th through 20th, for our North American & Carbon Biofuels and LCFS Summit. Registration is now open online on the Argus Media website, and we hope to see you there. Thank you very much for joining us.

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