An assessment of Renewable Portfolio Standards and potential for expansion in the southeastern United States

April 20, 2012

PREPARED FOR:

Rich Crowley North Carolina Sustainable Energy Association

1111 Haynes Street, Suite 109 Raleigh, NC 27604

(919-832-7601

PREPARED BY:

Matt Jentgen Candidate for Masters of Public Policy

Sanford School of Public Policy Duke University

Box 90239 Durham, NC 27708-0239

ADVISOR:

William A. Pizer Associate Professor of Public Policy and Environment

Sanford School of Public Policy Duke University

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EXECUTIVE SUMMARY

We currently face a tremendous challenge to transition away from carbon-intensive fossil

fuels as our primary energy source to more sustainable and cleaner options, including renewable

energy. A Renewable Portfolio Standard (RPS), which requires a minimum share of renewable

power generation, is one policy mechanism that has been adopted by many states in the US to

stimulate generation and investment. The recent passage of the North Carolina Renewable

Energy and Energy Efficiency Standard (REPS) represents the first example of such a program

in the South. Attempting to learn from this experience, this paper evaluates and offers lessons for

other southern states who might adopt a renewable portfolio standard. This work responds to

interest by the North Carolina Sustainable Energy Association (NCSEA) on the potential for

other southern states to adopt a renewable portfolio standard.

Combining historical experience with RPSs, recent experience with the NC REPS, and

interviews with policymakers and energy sector stakeholders in neighboring South Carolina, I

have concluded that while there are barriers to RPS adoption, there are also tremendous

opportunities. There are three elements of a renewable portfolio standard that can be attractive to

South Carolina policymakers:

1. Job growth potential: A renewable industry in North Carolina has been bolstered by the

state’s renewable standard. A similar industry can be built in South Carolina.

2. A state mandate is better than a federal mandate: South Carolina’s ideological

makeup is more inclined to state regulations based on a state’s needs. Other traditionally

conservative states have enacted renewable portfolio standards: Utah, Arizona, South

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Dakota, and North Dakota.

3. Benefits to rural electricity cooperatives: Rural electricity cooperative members in

South Carolina have historically been skilled technicians with experience installing

appliances and equipment. These cooperatives could benefit from a new industry that

installed renewable technologies such as solar photovoltaic and solar thermal systems.

While the elements discussed above can drive RPS adoption in South Carolina, the policy

design of North Carolina’s REPS can serve as a template to create the next renewable standard in

the South. It is important to balance the renewable energy goals with the realities of regulated

energy markets in the region. Based upon insights from North Carolina’s experience and general

research of renewable energy policies, I recommend four policy mechanisms that will make the

next renewable standard sustainable and effective:

1. Make the renewable standard mandatory. Twenty-nine states have enacted

mandatory renewable portfolio standards, while four other states have enacted

voluntary renewable targets. A voluntary standard may appear to be more politically

palatable, but it lacks the certainty utilities covet and the mandate utilities need to

procure anything other than “least-cost” generation.

2. Include an alternative compliance payment (ACP) mechanism to clarify non-

compliance. An ACP has been successfully implemented in most RPS states. Such a

mechanism helps to establish an acceptable price for renewable generation in the

state. If funds are generated through an ACP, they can be distributed to potentially

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viable energy technology projects.

3. Design requirements according to various state resources. The annual renewable

generation requirements have been met by most RPS states. The benefit of these state

standards is that they can be tailored to local resources. Set-asides, such as those for

hog and poultry in North Carolina, can be used to address state-specific resources,

expertise, and industry.

4. Allow energy efficiency programs and out-of-state renewable credits to meet

some portion of renewable standard. The energy efficiency provision gives

electricity retailers greater flexibility to meet the standard and gives greater control of

assets. The out-of-state renewable credits enable the purchase of low-cost renewable

generation that still meets broader emissions reduction goals. However, these

advantages need to be balanced against the local economic interest of keeping

resources in state and focused on renewable energy.

Conclusion

A renewable portfolio standard is a proven policy tool that can help to guide our

transition away from fossil fuels. The lessons learned from other RPS programs, from North

Carolina’s recent and pioneering effort, and from on-the-ground, local stakeholders, can and

should be used to help other southern states to adopt an RPS. This will in turn help them to meet

their energy needs, to diversify their energy sources, and to mitigate climate change.

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INTRODUCTION

Energy from renewable sources can be harnessed to produce cleaner and more

sustainable electricity generation that has the potential to reduce our dependence on carbon

dioxide emitting fossil fuel resources. Since the late 1990s, renewable portfolio standards (RPS)

have been implemented on a state level in the United States as a driver for renewable energy

adoption. An RPS policy was first discussed in the Electricity Journal in 1996, finding that

“market imperfections will hinder the commercial advance of renewables” and that a renewable

portfolio standard can be used to correct market imperfections and move toward greater

sustainability in electricity generation.1 Renewable energy represented 8.2% of US energy

supply in 2010 and greater renewable adoption can reduce carbon dioxide emissions, increase

local employment and technical expertise, and enhance fuel diversity. 2 An RPS is designed to

capture these public benefits.

While the structure of an RPS can vary and incorporate state-specific needs, at its core an

RPS requires retail electricity suppliers to procure a certain minimum quantity of energy from

eligible renewable energy resources.3 A retail power supplier within the state is required to

purchase renewable energy credits (RECs) equivalent to a percentage of total annual energy sales

covered by the standard. A REC is created when a qualifying renewable energy resource is used

to generate one kilowatt hour of electricity. A retail supplier can invest in renewable facilities

and certify its own RECs or purchase RECs separately from an established RECs market.

                                                                                                                         1  Rader  and  Norgaard.  “Efficiency  and  Sustainability  in  Restructured  Electricity  Markets:  The  Renewables  Portfolio  Standard.”  Electricity  Journal.  July  1996.    2  Gruenspecht,  Howard.  “AEO  2012  Early  Release  Rollout  Presentation.”  EIA  Annual  Energy  Outlook  2012.  Early  2  Gruenspecht,  Howard.  “AEO  2012  Early  Release  Rollout  Presentation.”  EIA  Annual  Energy  Outlook  2012.  Early  Release  Reference  Case.  Presented  at  John  Hopkins  University.  January  23,  2012.  3  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  

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Most RPS policies are enacted through state legislation. However, some policies have

been established through regulatory channels (Arizona and New York) and voter-approved

initiatives (Colorado and Washington).4 The federal government has also considered a national

RPS and various bills have been proposed in the US House of Representatives and the US

Senate, but have not been enacted. The proposed American Clean Energy and Security Act of

2009 (ACESA) and American Clean Leadership Act of 2009 (ACELA) would have required

electricity providers to meet a combined renewable energy and energy efficiency standard for

qualifying activities that gradually increased to 20% by 2020.5,6

While RPS policies have proliferated throughout the United States, there are geographic

regions where it is noticeably lacking. These regions are generally more conservative and

maintain a traditional regulatory structure. The Great Plains is one area, but blessed with

abundant wind resources and little native load, states such as Wyoming, South Dakota, and

Kansas can avoid political and regulatory barriers that would otherwise limit renewable energy

growth. These states are able to develop aggressive energy export strategies through state

transmission authorities that attract significant renewable energy investment.7 The South is the

other region, but lacking similar wind potential and needing to supply significant native load, it

is without a similar viable alternative to an RPS. The region must directly address political and

regulatory barriers to stimulate renewable energy adoption.

North Carolina enacted a renewable portfolio standard in 2007, known as the Renewable

Energy and Energy Efficiency Standard (REPS). This was significant because a mandatory

                                                                                                                         4  Ibid.  5  H.R.  2454.  111th  Congress.  6  S.  1462.  111th  Congress.  7  Hurlbut,  David.  “State  Clean  Energy  Practices:  Renewable  Portfolio  Standards.”  National  Renewable  Energy  Laboratory.  Technical  Report:  NREL/  TP-­‐670-­‐43512.  July  2008.  

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renewable energy requirement was passed through a state legislature in the South for the first

time and in a region where the electricity market is heavily regulated. North Carolina lead the

way, but other southern states have yet to follow in its path and adopt an RPS.

North Carolina’s state law, Senate Bill 3, overcame significant political and regulatory

barriers to promote a small but promising renewable energy industry in North Carolina. The

provisions in the REPS could be stronger and are more effectively coupled with other policies,

but it has clearly had a positive impact on the energy industry in North Carolina. Given that

North Carolina has similar energy resources as other southern states, North Carolina’s REPS can

serve as a template. South Carolina, in particular, is rich in certain renewable resources and the

business-friendly environment could support a potent renewable energy industry in the state. A

renewable portfolio standard would provide the mandate South Carolina’s electric utilities and

other retailers need to bolster a renewable industry and establish a more sustainable energy mix

for the state.

My client, the North Carolina Sustainable Energy Association (NCSEA), is interested in

the following policy question: Given the impact of North Carolina’s Renewable Energy and

Energy Efficiency Standard (REPS) on the energy industry in North Carolina, what is the

potential for other southern states to adopt a renewable portfolio standard?

To answer this policy question, this paper will analyze the potential for adopting

mandatory renewable portfolio standards in the South and the possible impact that an RPS can

have on a state’s energy industry. After a brief discussion of RPS history, this paper first will

review the electricity industry in the South and identify trends in electricity generation for North

Carolina. Secondly, this paper will assess the initial impact of the North Carolina REPS. Lastly,

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this paper will assess the potential for North Carolina’s neighbor, South Carolina, to adopt a

renewable standard and recommend a policy framework to enact such a measure. South Carolina

is a state that is typically cautious of government mandates and its electricity market has a

traditional regulatory structure, but there is potential to overcome many of the challenges and

present a renewable portfolio standard as a feasible policy option for South Carolina. The lessons

learned from North Carolina’s REPS policy design and implementation can help to inform South

Carolina and other southern states that consider a similar renewable energy policy.

BACKGROUND – RPS HISTORY

It is often difficult to capture the public benefits of renewable generation through entirely

private-sector investment practices. Therefore, government policies are designed to value these

public benefits and provide the appropriate incentives to develop the industry. A renewable

portfolio standard is a policy mechanism that sets a requirement for electricity retailers to

provide a minimum portion of delivered electricity sales from defined renewable sources. The

primary goals of an RPS include environmental enhancement, economic development, and

greater energy security.8 To achieve these goals, an RPS can contribute to the following

objectives: (1) reduce emissions from carbon dioxide emitting fossil fuel generation sources by

setting a statewide minimum requirement for low emissions energy sources; (2) increase local

employment through local procurement of electricity generation service delivery; and (3)

enhance fuel diversity by setting requirements for investment in specific local energy resources.

Taken collectively, the state renewable standards, which cover more than half of total electricity

                                                                                                                         8  Hurlbut,  David.  “State  Clean  Energy  Practices:  Renewable  Portfolio  Standards.”  National  Renewable  Energy    Laboratory.  Technical  Report:  NREL/  TP-­‐670-­‐43512.  July  2008.  

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sales in the US, can also enhance environmental, economic, and national security factors for the

US as a whole.

An RPS can be somewhat flexible to a state’s needs in terms of the acceptable level of

compliance costs, qualifying renewable technologies, and other design features. Typically credit

trading is allowed, and banking and borrowing of RECs is accepted within stipulated time

horizons. Regulated utilities are usually allowed to recover any investment costs by passing the

excess costs on to the ratepayer. With retail competition, cost recovery is somewhat less certain,

but costs are typically also transferred to the electricity consumer. Recovery costs are capped at a

specific level to ensure that compliance costs are not overly burdensome to the electric retailer

and ultimately the ratepayer. Procedures can vary by state, but if an electricity retailer claims to

have exceeded the cap, the regulatory authority will review the requirements of the standard

before determining non-compliance. If an electricity retailer is non-compliant and has not

exceeded the cost cap, the retailer can have its electricity license revoked and face monetary

fines. A form of alternative compliance may also be included where an entity can pay a fixed

amount per unit of generation (generally exceeding an average cost of renewable generation)

rather than purchase the requisite renewable generation. The alternative compliance payments

are typically fed into a state renewable energy development fund.

RPS policies first gained traction in the 1990s as states in the West, Northeast, and

Midwest looked to increase renewable generation. By 2006, twenty-one states had enacted

renewable standards. In 2007, for the first time in the South, North Carolina enacted a mandatory

state renewable portfolio standard. As of 2012, twenty-nine states plus the District of Columbia

have adopted a renewable portfolio standard (seven additional states have voluntary standards).

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Figure 1 below displays the various renewable portfolio standards and renewable energy goals

that have been adopted by states.

Figure 1. States with Renewable Portfolio Standards

Source: Brown, et al. “Renewable Energy in the South.” Southeast Energy Efficiency Alliance. December 2010.

While many of the state requirements are in their early stages or will soon be

implemented, there are encouraging results thus far. According to a National Renewable Energy

Laboratory (NREL) report published in 2008, of the fifteen states that exceeded the national

average for renewable energy as a percentage of overall generation between 2001 and 2007,

eleven states have an RPS: Colorado, Hawaii, Iowa, Maine, Minnesota, Montana, New Mexico,

Nevada, Oregon, Texas, and Washington. The other four states – South Dakota, Oklahoma,

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Kansas, and North Dakota - are located in the Great Plains region where wind is an abundant

energy resource. These non-RPS states also benefit from an RPS because they can sell renewable

credits to a number of RPS states. Renewable generation, as a percentage of total US generation,

increased from 1.7% to 2.3% between 2001 and 2007.9

Given the brief history of renewable portfolio standards, it is difficult to measure the full

impact of these policies. There have been several studies of the projected costs and benefits of a

state renewable standard. Chen et al. (2007) performed an analysis of the projected impact of the

state policies.10 Wiser and Barbose (2008) provided a comprehensive summary of the various

policy designs of state renewable portfolio standards and policy impacts across the country up to

2007.11 The North Carolina Utilities Commission (NCUC) contracted a study, the La Capra

Report, to evaluate the renewable energy and energy efficiency potential in the state.12 Tuerk et

al. (2009) discussed the potential impact of North Carolina’s renewable standard and the

challenges the industry will face.13 Brown et al. (2010) evaluated the resource potential of

renewable power generation in the South overall.14 These studies conclude that there are

sufficient renewable resources in each state to fulfill renewable generation goals, RPS policies

have been an effective means to stimulate investment in renewable generation while mitigating

                                                                                                                         9  Hurlbut,  David.  “State  Clean  Energy  Practices:  Renewable  Portfolio  Standards.”  National  Renewable  Energy    Laboratory.  Technical  Report:  NREL/  TP-­‐670-­‐43512.  July  2008.  10  Chen,  Wiser,  and  Bolinger.  “Weighing  the  Costs  and  Benefits  of  State  Renewables  Portfolio  Standards:  A    Comparative  Analysis  of  State-­‐Level  Policy  Impact  Projections.”  Ernest  Orlando  Lawrence  Berkeley  National  Laboratory.  LBNL-­‐61580.  March  2007.    11  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States:  A  Status  Report  with  Data  through  2007.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  12  “Analysis  of  a  Renewable  Portfolio  Standard  for  the  State  of  North  Carolina.”  La  Capra  Associates.  December  2006.  13  Tuerck,  Head,  Bachman.  “The  Economic  Impact  of  North  Carolina’s  Renewable  Energy  and  Energy  Efficiency  Portfolio  Standard.”  Beacon  Hill  Institute.  August  2009.    14  Brown  et  al.  “Renewable  Energy  in  the  South.”  Southeast  Energy  Efficiency  Alliance.  December  2010.  

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cost increases to the ratepayer, and the La Capra report ensured North Carolina policymakers

that a renewable portfolio standard was feasible for the state.

The previous literature evaluated the benefits of RPS policies, examined general

attributes of successful programs, and identified certain differences across RPS states. However,

there has yet to be a specific assessment of the initial impact of North Carolina’s renewable

standard and the potential for expansion in the South – a region with the greatest barriers to

renewable energy adoption. We now turn in more detail to the southeast region and analyze the

initial impact that the North Carolina REPS has had on the state energy industry. The goal is to

build a template from the successful provisions within the REPS to inform other southern states

as they consider a similar policy.

1. ELECTRICITY GENERATION IN THE SOUTH

An RPS in the South likely will look different than renewable standards elsewhere based

on its differing characteristics. The US South15 consumes more energy per-capita than the US

average and is heavily reliant on fossil fuel generation. The warm summer temperatures and low

retail electricity rates have made the region a large consumer of electricity. In 2008, the South

accounted for 44% of US energy consumption, while its share of total population in the country

                                                                                                                         15  By  US  Census  region,  includes:  Alabama,  Arkansas,  District  of  Columbia,  Delaware,  Florida,  Georgia,  Kentucky,  Louisiana,  Maryland,  Mississippi,  North  Carolina,  Oklahoma,  South  Carolina,  Tennessee,  Texas,  Virginia,  West  Virginia  

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is only 36%.16 Coal dominates electricity generation in the South, accounting for nearly 54% of

generation in 2008 – 3% higher than the US average.17

Contrary to other regions in the US that have pursued electricity deregulation, the

electricity market in the South remains centrally controlled by state regulatory commissions and

vertically integrated utilities. Vertically integrated utilities sell the electricity to the final

consumer and own the generation that produced it, transmission facilities to transport it, and the

distribution network to deliver it to consumers.18 In a wholesale market, the transmission

network is operated by an independent entity and distribution companies buy power in a

competitive market for customers.19 The region has not developed a regional transmission

organization (RTO) or an independent service operator (ISO), so much of the investment and

procurement decisions remain within the state and its respective utility commission. See

Appendix 2 for a US map of regional electricity transmission authorities. The structure of the

electricity market in the South appears to influence the development of renewable standards in

the region. Figure 2 below illustrates the predominance of electric utilities in the South and the

relative lack of renewable portfolio standards in the region.

                                                                                                                         16  Brown  et  al.  “Renewable  Energy  in  the  South.”  Southeast  Energy  Efficiency  Alliance.  December  2010.  17  Ibid.  18  Wolak,  Frank.  “The  Benefits  of  an  Electron  Superhighway.”  Policy  Brief.  Stanford  Institute  for  Economic  Policy  Research.  November  2003.  19  Ibid.  

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Figure 2. States with the highest electricity generation by utilities

Rank StateNet)generation)by)utilities)(MWh)

Total)retail)sales)(MWh)

Net)generation)(MWh) State)RPS?

1 Florida* 206,062,185 231,209,614 229,095,935 No2 Alabama* 122,766,490 90,862,645 152,150,512 No3 N..Carolina* 121,251,138 136,414,947 128,678,483 Yes4 Georgia* 120,425,913 140,671,580 137,576,941 No5 Indiana 107,852,560 105,994,376 125,180,739 No6 S..Carolina* 100,610,887 82,479,293 104,153,133 No7 Kentucky* 97,472,144 93,569,426 98,217,658 No8 California 96,939,535 258,525,414 204,125,596 Yes9 Texas 95,099,161 358,457,550 411,695,046 Yes10 Ohio 92,198,096 154,145,418 143,598,337 Yes

*State.in.southeast.region.of.USSource:.EIA.State.Electricity.Profiles,.2010

US)States)with)Largest)Electricity)Generation)by)Utilities

According to Hurlbut (2008), the regulatory environment within a state “affects how an

RPS is implemented, but need not constrain what it can accomplish.”20 There is simply greater

utility influence when designing incentives for renewable generation in regulated markets. The

electricity generation infrastructure is owned and operated by a limited number of large,

vertically integrated energy companies. Since these companies control the generation and

distribution assets, they are likely reluctant to support policies that jeopardize their infrastructure

control, require purchases from intermittent resources, and threaten their low-cost mandate to

their customers. While these electric utilities can own and operate the renewable facilities, it may

often times be more cost-effective to purchase the renewable generation. Therefore, these issues

must be addressed when designing renewable policies in these regulated electricity markets.

                                                                                                                         20  Hurlbut,  David.  “State  Clean  Energy  Practices:  Renewable  Portfolio  Standards.”  National  Renewable  Energy    Laboratory.  Technical  Report:  NREL/  TP-­‐670-­‐43512.  July  2008.  

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North Carolina was able to overcome these regulatory barriers and enact a renewable

standard in the state heavily dominated by electric utilities and in a region that has continued to

rely on fossil fuel resources for its energy needs. The analysis will now turn to greater details

about North Carolina’s electricity profile and evaluate how the regulatory barriers were

overcome to implement the renewable energy policy.

North Carolina’s electricity profile and clean energy activities

North Carolina has an electricity generation mix that is similar to most other southern

states. It is a state that relies on coal, nuclear power, and natural gas for the majority of its

generation needs. In order to enact a renewable standard, North Carolina needed to account for

the market structure of its electricity generation industry, and its current electricity generation

mix.

As of 2009, North Carolina consumed 128 million megawatt hours of total electricity

retail sales, ninth highest of US states. The top five electricity retailers in the state generated the

following portions of total retail sales: Duke Energy – 42%, Progress Energy – 29%, Dominion

Power – 3%, Energy United Cooperative – 2%, and Fayetteville Public Works – 2%. Duke

Energy and Progress Energy own the majority of power generating assets and influence any

significant investment in power generation resources in the state.

The electricity generation mix is based primarily on fossil fuels and nuclear power. As of

2010, hydroelectric power and biomass resources combined contribute more than 5% of net

generation. Distillate fuel (oil), landfill and waste gas, and solar power contribute fractions of a

percentage. Figure 3 below illustrates the energy mix within North Carolina:

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Figure 3. Net Generation (MWh) in North Carolina 2010

Source:  US  Energy  Information  Administration,  EIA-­‐923  data

While fossil fuels and nuclear power maintain a strong presence, there is an interesting

trend developing in the state. In five years, coal generation has decreased, while natural gas and

various renewable sources have significantly increased. Figure 4 below illustrates that change in

generation between 2006 and 2010. While renewable sources are increasing, wind generation is

still not part of North Carolina’s electricity generation mix.

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Figure 4. Sources of Electricity in North Carolina, 2006 and 2010

Fuel%Type 2006 2010 Percent%change,%200662010Coal 75,487,005 71,951,214 .4.68%Nuclear 39,963,184 40,739,529 1.94%Natural9Gas 3,195,563 8,447,237 164.34%Hydroelectric 3,970,354 4,756,549 19.80%Biomass 1,736,565 1,933,165 11.32%Oil 515,810 321,752 .37.62%Landfill/9Waste9gas 74,205 138,636 86.83%Solar 0 11,340 complete(growth(since('06Total(generation 124,942,685 128,299,422 2.69%

Electricity%Net%Generation,%North%Carolina%(MWh)

Source:(US(Energy(Information(Administration,(EIA@923(data

The growth of biomass, landfill and waste gas, and solar generation should be an

encouraging sign of modest success in the state’s renewable energy sector. According to the

North Carolina Sustainable Energy Association’s (NCSEA) 2011 industries census, North

Carolina’s clean energy (renewable and energy efficiency) sector includes 1,084 active

businesses and 14,800 full-time employees, an 18% growth since 2010.21

Within the industry, the energy efficiency segment has the highest employment levels,

followed by the solar, geothermal, and wind segments. According to the survey, a growing

number of industry respondents stipulated that the state regulatory structure was of growing

importance to the clean energy sector, as over 75% of respondents believed it was “important” or

“very important.”22 The analysis will now focus specifically on the REPS bill and evaluate the

impact it has had on the energy industry in North Carolina.

                                                                                                                         21  Quinlan  and  Crowley.  2011  North  Carolina  Renewable  Energy  &  Energy  Efficiency  Industries  Census.  North  Carolina  Sustainable  Energy  Association.  November  2011.  22  Ibid.  

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Overview of North Carolina REPS

The North Carolina REPS bill was passed in the General Assembly in 2006 and enacted

in 2007. The passage of the bill proved it was possible to pass a renewable standard in the South.

It also demonstrated that a utility-dominated state is capable of adopting a renewable standard.

As noted above, Duke Energy and Progress Energy accounted for 72% of retail sales in 2010 and

North Carolina ranks third amongst states in electricity generation by utility companies.23

The REPS requirements are implemented on a bi-annual step scale. A solar set-aside

(0.02% of electricity retail sales) is required in 2010. The comprehensive renewable energy

requirement is set to begin at 3% of retail sales in 2012 and increase gradually until it reaches

12.5% in 2021. Specifically, publicly owned utilities must meet the 12.5% requirement while

municipal utilities and electricity cooperatives must reach only 10% of retail sales. The other two

set-aside requirements, hog waste (ultimately 0.02% of electricity retail sales) and poultry waste

(ultimately 900,000 MWh), begin in 2012.

To help meet the requirements, energy efficiency measures can be used to meet 25% of

the standard (increasing to 40% after 2021). Additionally, 25% of the standard can be met

through the purchase of out-of-state renewable energy certificates (RECs). It is also worth noting

actions against non-compliance are not specified in the REPS and there is no alternative

compliance mechanism. Most other RPS states have specific procedures to treat non-compliance.

See Appendix 1 for additional details about the REPS.

The passage of the REPS was a significant achievement for North Carolina. It sent a

signal to the renewable energy industry that the state was willing and determined to invest in the

                                                                                                                         23  EIA  State  Electricity  Profiles.  North  Carolina.  

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renewable resources. However, the optimism in the renewable energy industry was countered by

stern opposition that predicted dire consequences. A Beacon Hill Institute report predicted that

North Carolina will shed 3,592 jobs by 2021 and ratepayers will face exceedingly high electricity

prices as a result of the law.24 This analysis will now evaluate the initial impact that the North

Carolina’s REPS has had on the energy industry and provide evidence that the REPS bill has so

far been counter to the alarming forecasts.

2. OBSERVATION OF NC REPS IMPLEMENTATION

North Carolina has been a leader of energy and environmental policy in the South. In

2002, the NC General Assembly enacted the Clean Smokestacks Bill (SB 1078), which requires

significant emissions reductions (77% nitrogen oxide by 2009 and 73% sulfur dioxide by 2013)

from coal-fired power plants in the state.25 The state has also utilized tax expenditures to

facilitate cleaner energy use in the state. Since 1977, North Carolina has offered a generous

corporate renewable energy tax credit, up to 35% of project costs, which has incentivized

renewable installation.26 The REPS bill was yet another step taken by the state to diversify its

electricity generation mix and further develop a burgeoning industry. As noted above, the bill

was designed with state-specific needs and interest groups in mind, so evaluating the impact of

the REPS will help to determine the viability of RPS policies in the region and the potential for

future expansion in other states.

                                                                                                                         24  Tuerck,  et  al.  “The  Economic  Impact  of  North  Carolina’s  Renewable  Energy  and  Energy  Efficiency  Portfolio  Standard.”  Beacon  Hill  Institute.  August  2009.  25  North  Carolina  Department  of  Environment  and  Natural  Resources,  Division  of  Air  Quality.  Retrieved  from:  http://www.ncair.org/news/leg/.  26  Database  of  State  Incentives  for  Renewables  and  Efficiency  (DSIRE).  Retrieved  from:  http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=NC19F&re=1&ee=1  

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To evaluate the impact the REPS has had on the energy industry, I researched REPS

proceedings, utility commission reports, news articles, and energy forecasting reports.

Additionally, I conducted interviews of stakeholders within the state’s energy industry to further

inform research findings and provide various industry perspectives. Relevant insights about the

progress and impact of the REPS law were collected. As part of the interview, certain questions

were directed to specific aspects of the bill, while other questions were more general in nature.

Nearly all interview responses were positive, but there were differing views as to the

degree of the policy’s success. Each interviewee recognized unique aspects of North Carolina

that had to be incorporated into the bill and the need for compromise to enact the bill into law.

Overall, 13 interviews were conducted. The responses provided an informative summary of the

impact of the REPS. Below are observations of the initial impacts of the bill that were gathered

from interviews with industry participants and additional industry research.

Structure of the REPS

Most importantly, the requirements of the REPS give the electric utilities the requisite

statutory authority to purchase and invest in renewable generation. An industry participant

emphasized the legal obligation of the utilities to its customers - that it must provide energy in a

“prudent and reasonable” manner. Without the statutory authority, the utility companies are

directed by the public utility commissions to purchase electricity from low-cost energy sources.

The REPS allows these companies to purchase something other than the lowest-cost energy,

while also creating greater certainty in the electric market. Additionally, the utilities are given

clear expectations about acceptable levels of renewable generation through 2021.

  17  

While the North Carolina electricity retailers are expected to meet the overall mandates,

the long-term plans by at least some utilities are not developed yet. One industry participant

believes that the utility companies do not have an “exact vision” as to how it will meet the

mandates in the later years and that “not everything is lined up yet.” This uncertainty is not

necessarily a detriment. It forces utilities to discuss and evaluate renewable investments on an

annual basis. Since the REPS requirements are tied to each year’s annual retail sales, the utilities

must meet a continually changing standard. In contrast, the voluntary renewable portfolio

standard in Virginia is fixed on 2007 base levels, which makes resource planning easier, but such

a fixed level implies a lower actual share of renewable generation as electricity use rises.

It is a difficult task to set appropriate levels for a renewable standard and the final levels

are often based on conservative projections of renewable potential. According to a Lawrence

Berkeley National Laboratory report, nearly all of the renewable standards that were enacted in

the 1990s have been revised, typically to strengthen the requirement. No RPS has yet to be

repealed by later legislative action. See Appendix 3 for a timeline of state renewable standard

implementation and revisions. Each state must account for its energy resources and the political

dynamics in the state. Some states such as California (33% renewable generation by 2020) and

New Jersey (22.5% renewable generation by 2021) are able to set high expectations and send a

clear signal to the energy industry. North Carolina needed to establish requirements that were

politically feasible and amenable to the large utilities.

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Specific, minimum REPS requirements

To date, the solar minimum requirements have established a solar presence within the

industry, while the poultry and hog waste provisions have been slow to develop and have not met

industry expectations. While there is some sentiment from renewable developers that the

potential of the North Carolina solar industry is much greater and would benefit from a higher

standard, there is a near consensus from the respondents that the solar set-aside is achievable and

that it has helped spur investments in a nascent solar industry. One industry participant asserts

that Duke Energy has blown the solar requirement “out of the water.”

Figure 3 above shows the presence, albeit small, that solar power has in the state (0.009%

of total retail generation in 2010). The REPS law has triggered the local investment. In 2011,

Duke Energy acquired three (1 MW) solar farms in North Carolina and now owns seven solar

facilities in the state.27 According to a Progress Energy representative, the company has chosen a

different approach than Duke Energy – opting to purchase renewable credits from outside the

company rather than invest in renewable assets. Regardless, Progress Energy fully expects to

meet the solar requirements.28

There is greater concern about the hog and poultry waste-to-energy requirements. In the

2011 NCUC REPS Status Report, both Duke Energy and Progress Energy expressed significant

concerns about meeting the hog and poultry set-asides. A hog waste-to-energy system is a type

of anaerobic digester that converts the energy stored in the hog manure into biogas. The biogas

can then be fed directly into a gas-fired combustion turbine.29 Poultry litter can be fed directly

                                                                                                                         27  “Duke  Energy  Renewables  Acquires  Three  N.C.  Solar  Farms.”  Press  Release.  Duke  Energy.  Nov.  15,  2011.  28  2011  NCUC  REPS  Status  Report  29  “Anaerobic  Digestion  and  Bio-­‐Gas.”  Midwest  Rural  Energy  Council.  Retrieved  from:  http://www.mrec.org/anaerobicdigestion.html  

  19  

into the combustion turbine. Harvesting the energy is currently too expensive for farmers to

shoulder alone.30 One hog waste-to-energy farm in North Carolina, Lord Ray Farms, is building

a 65-kilowatt micro-turbine that will cost $1.2 million. The project has attracted Duke

University, Duke Energy, and Google as investors.

While hog waste projects are slowly developing, a source within the renewable industry

was disappointed with the progress of the hog and poultry minimum requirements (commonly

termed “set-asides”). The set-asides were designed with input from both the industry and the

utilities, but both sides have apparently grown apart since the REPS was enacted. The poultry

waste-to-energy projects are even further behind the hog waste projects.

Another industry participant noted the benefits of using a “state commodity” to meet

energy needs while also reducing environmental risks from poultry and hog waste. Besides self-

interest, these diverging views likely reflect the emerging economics of digester technology and

views about North Carolina’s role in promoting them. Jay Lucas, an engineer with the NCUC

Public Staff, acknowledges that this “one-state technology push” has yet to get off the ground.31

The concerns with the minimum requirements might also be an issue of timing. A new

industry, such as hog and poultry waste energy generation, needs time to reach commercial scale

development. The solar requirement has been successfully tested in a number of other states,

while the hog and poultry requirements were implemented for the first time in North Carolina.

North Carolina can play a critical role in developing this new technology that can then be applied

in other states. For one industry participant, the situation suggests a trade-off: there can be a

balance between investing ratepayer’s money in proven technologies and testing new, scalable

                                                                                                                         30  Henderson,  Bruce.  “Alternative  energy  in  N.C.:  Pig  waste  proves  powerful.”  Charlotte  Observer.  Oct.  27,  2011.  31  Murawski,  John.  “Waste  to  electricity  push  lags.”  Charlotte  Observer.  March  9,  2012.  

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technologies. Further, the participant added “I think it’s good to test this stuff. What if it can be

an advantage for North Carolina? And then the technology can be shared with similar markets

such as Iowa.”

While it is evident that each electricity retailer subject to REPS is having difficulty

meeting the 2012 set-aside requirements, there is greater optimism about meeting expectations in

later years. Duke expects to meet the hog waste requirement in 2013.32 Six hog farms in North

Carolina have converted to waste-to-energy systems. Fibrowatt, a company based in

Pennsylvania, has invested more than $1 million in an attempt to build a poultry waste-to-energy

facility in North Carolina.33 Meanwhile, the number of waste-to-energy systems is growing every

year – with 162 digester systems on US farms producing 435,000 megawatt hours of electricity

and reducing methane emissions by 51,000 metric tons in 2010.34 Farms are installing digesters

to help meet their waste storage and energy needs. This may only be the beginning as

approximately 15 systems come on line each year, and there are 8,200 eligible dairy and hog

farms nationwide.

Alternatives to in-state renewable energy generation

Half of the REPS obligations can be met through energy efficiency programs and out-of-

state renewable credits. While the alternative measures may appear to weaken the in-state

mandate for renewable generation, they do provide a low-cost alternative to electricity retailers

that still serve to support emissions reduction goals. These two components were critical factors

                                                                                                                         32  Murawski,  John.  “Waste  to  electricity  push  lags.”  Charlotte  Observer.  March  9,  2012.  33  Ibid.  34  “U.S.  Farm  Anaerobic  Digestion  Systems:  A  2010  Snapshot.”  US  Environmental  Protection  Agency.  Retrieved  from:  http://www.epa.gov/agstar/documents/2010_digester_update.pdf  

  21  

to the passage of the REPS at its specified level, and they were strongly supported by the state’s

large energy companies. The public utility companies are able to develop low-risk energy

efficiency programs that are under their control, while the out-of-state credits allow the utilities

to purchase low-cost renewable generation credits and stay informed about projects in other

energy markets. These measures are discussed below.

Energy efficiency programs are frequently paired in some way with renewable energy

standards. Nevada and Hawaii are two other states that include energy efficiency provisions

within their state RPS.35 Other states including Colorado, Connecticut, Illinois, Minnesota, New

Jersey, New Mexico, Pennsylvania, and Texas have established separate energy efficiency

programs that are in addition to the renewable energy standards.36 A North Carolina industry

participant emphasized the benefits of including the energy efficiency option, stating that energy

efficiency is the least expensive manner in which to meet the REPS requirements. The

participant cites the fact that the cost to reduce electricity by one megawatt hour through energy

efficiency is a much lower cost than adding a megawatt hour of renewable energy. There is also

a large presence of energy efficiency companies in the state that has grown since the REPS was

implemented. According to the 2011 North Carolina Sustainable Energy Association survey, the

energy efficiency segment is the largest segment within the industry.

Since the REPS was enacted, both Duke Energy and Progress Energy have developed

residential, commercial, and industrial energy efficiency programs. Through the Smart Saver

program that provides purchase incentives for lighting and HVAC equipment and five other

energy efficiency initiatives, Duke Energy claims to have displaced 745,000 megawatt hours, the

                                                                                                                         35  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States:  A  Status  Report  with  Data  through  2007.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  36  Ibid.  

  22  

equivalent of 1,700 MW of capacity.37 Progress Energy claims to have reduced demand by

224,000 megawatt hours through its seven energy efficiency programs that have been launched

in the past four years.38

The cost of energy efficiency programs is small, but sometimes the benefits of reduced

energy consumption can be overstated. According to the 2006 La Capra Associates report, there

was concern that the “measurement of energy efficiency savings for RPS compliance purposes

can be difficult” and that there is potential for claimed savings to include some improvements

already included in industry forecasts of energy demand.39 One respondent asserted that meeting

the energy efficiency allotment is “pretty easy to meet and pretty painless.” The respondent

believed that the way of measuring energy efficiency is misleading. For instance, once a

megawatt hour is saved, it is considered saved into perpetuity. You can therefore create a stream

of energy efficiency credits (i.e. if a customer is provided an energy efficient light bulb one year,

the energy provider can assume it will be used every year thereafter). If the consumer was

expected to adopt such light bulbs in the future in any case, those future savings are already built

into the utilities energy demand forecast.

While the actual benefits to ratepayers may be disputed, there are clear benefits to the

electricity retailers even beyond their low cost. The REPS stipulates that energy efficiency

programs will be managed by the respective public utilities, municipal utilities, and cooperatives.

Therefore, according to one industry participant, they are “dealing with their own assets.” Many

of the renewable projects are not operated by the utilities. It is perhaps no surprise that this

                                                                                                                         37  Duke  Energy  website.  Retrieved  from:  http://www.duke-­‐energy.com/north-­‐carolina-­‐large-­‐business/energy-­‐efficiency/nclb-­‐energy-­‐efficiency-­‐plan.asp  38  Progress  Energy  Integrated  Resource  Plan.  Appendix  E.  2011.  39  “Analysis  of  a  Renewable  Portfolio  Standard  for  the  State  of  North  Carolina.”  La  Capra  Associates.  December  2006.  Pg.  49.  

  23  

option is popular with utility companies. One participant in the energy efficiency industry that

works with utilities on program implementation observed that there has been “noticeable growth

in the past 4 years.”

The energy efficiency provision elicited some of the stronger reactions for and against its

inclusion within a renewable standard. By including this alternative, some argued the effective

renewable generation requirement had been significantly reduced. These industry participants

argued that without the standard the renewable requirements would be much greater. However,

were energy efficiency not included, the overall renewable requirements may have been merely

set at a lower level. Therefore, it is unclear whether renewable generation has been constrained at

all by the energy efficiency provisions.

On the other hand, the energy efficiency programs provide greater flexibility and are

typically implemented at a much lower cost than renewable generation, so it can mitigate fears of

significant program costs as a result of a renewable standard. The 2006 La Capra Associates

report estimated that the energy efficiency provision would reduce REPS program costs by

14%.40 The provision also provides incentives for energy reduction research and program

development.

Another alternative to the general renewable generation requirements, out-of-state

renewable energy credits (RECs), also gives North Carolina electricity retailers greater flexibility

when planning for REPS compliance. The availability of these credits reduces the cost of the

REPS requirements, but also requires less in-state renewable energy industry growth. Electricity

retailers with more than 150,000 customers in North Carolina can meet 25% of their

                                                                                                                         40  “Analysis  of  a  Renewable  Portfolio  Standard  for  the  State  of  North  Carolina.”  La  Capra  Associates.  December  2006.  Pg.  50.  

  24  

requirements through out-of-state RECs. Other retailers (representing no more than 5% of state

generation) can obtain an unlimited amount of their RECs from out-of-state renewable energy

suppliers to fulfill the REPS requirements. For example, Dominion Power, North Carolina’s

third largest retailer in North Carolina, has thus far met its entire REPS requirement through out-

of-state requirements.

All states with an RPS have certain geographic eligibility and electric delivery

requirements that define their renewable energy credits. North Carolina is the only state to set a

specific maximum level of “unbundled” RECs from outside of the state.41 According to the

Lawrence Berkeley National Laboratory report, other RPS states, mostly states within regional

transmission authorities, are able to purchase RECs generated in other states that are theoretically

delivered to the state along shared transmission lines “bundled” with actual generation. To meet

REC eligibility requirements, states such as Nevada, Texas, Arizona, California, Montana, New

Mexico, New York, and Wisconsin stipulate that electricity must be delivered to the state or load

serving entity (LSE). Other states such as Delaware, Maine, New Jersey, Connecticut, District of

Columbia, Massachusetts, Maryland, New Hampshire, and Rhode Island (states largely within

the PJM and New England ISO territories) require that the renewable generation credit can only

be applied to generation delivered to the region. Illinois provides a cost-effectiveness test so that

unbundled out-of-state RECs can be purchased if an in-state purchase is not financially viable.

North Carolina could not rely on a regional transmission authority to deliver renewable

generation to the state, so a provision was included in the REPS to allow for a certain amount of

lower cost generation to be purchased outside state boundaries, with no requirement that credited

electricity generation actually be delivered to the state.

                                                                                                                         41  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States:  A  Status  Report  with  Data  through  2007.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  

  25  

One industry participant in North Carolina stated that there are two purposes behind the

out-of-state provision. First, this mechanism lowers the cost of the REPS and therefore the

impact on customers. Second, it allows utilities to stay in touch with the national renewables

market. The utilities can help support renewable projects across the country and stay informed of

projects and technology trends elsewhere. Due to this provision, the repondent mentioned that a

utility is able to support promising, cost-effective projects across the country. Another repondent

said it is a “balancing act” that makes the REPS requirements “as affordable as possible.” The

manager further added that this provision could actually help local businesses by forcing

competition and leading to cheaper prices in the long run.

The view from the in-state renewable community differs from the utility perspective. One

participant asked “what is the benefit of spending our tax money out of state?” The participant

further added that this “doesn’t create jobs in North Carolina.” Other industry participants called

this a “bad provision” and “way overkill.”

While this clause reduces the homegrown nature of the bill, it is another mechanism to

reduce costs of the REPS while also reducing emissions from carbon dioxide emitting power

plants - one of the main goals of a renewable standard. One industry participant emphasized that

the out-of-state provision provides greater flexibility to manage the electricity retailer’s

renewable portfolio, which is important for ratepayers and cooperative members. It is also is a

financing tool for renewable programs across the country. The REPS has not brought substantial

wind development to North Carolina, but according to one industry participant, it has enabled the

utility companies in North Carolina to invest in wind generation in Texas, where the costs are

almost down to 10 cents per megawatt hour.

  26  

Ensuring REPS compliance

Concerning RPS policies, debate continues over how strictly to enforce compliance, what

the maximum costs to develop the renewable industry should be, and who should bear those

costs. It is a balance to provide sufficient oversight while also maintaining an efficient market.

Duke Energy was concerned about the “availability and costs” associated with the procurement

of renewable generation when the renewable standard was being proposed in North Carolina.42

The North Carolina Farm Bureau Federation was “deeply concerned about the negative impact

of rising energy costs” as a result of the REPS implementation.43 These comments from

influential organizations in the state likely reduced the severity of non-compliance of the REPS

requirements. Nearly all RPS states have an alternative compliance payment (ACP) mechanism

(a predetermined payment per megawatt of non-compliance) or explicit financial penalties, only

North Carolina and New Mexico have unspecified compliance procedures administered by the

state’s public utility commission.44

Fears of rising costs to ratepayers as a result of renewable standard implementation have

thus far been unfounded. According to a Lawrence Berkeley National Laboratory report, the

highest estimated electricity rate impact has been 1.1% in Connecticut, while most rate impacts

have been below 0.5%.45 To further protect North Carolina ratepayers, there is a cost cap on the

                                                                                                                         42  Comments  of  Duke  Energy  Carolinas.  “Notice  Announcing  the  Avilability  of  an  Analysis  of  a  Renewable  Portfolio  Standard  for  the  State  of  North  Carolina  and  Request  for  Public  Comment.”  North  Carolina  Utilities  Commission.  January  19,  2007.  43  Sherman,  M.  Paul.  Letter  to  North  Carolina  Utilities  Commission.  Comments  of  North  Carolina  Farm  Bureau  Federation.  January  19,  2007.  44  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States:  A  Status  Report  with  Data  through  2007.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  45  Ibid.  

  27  

effective retail rate increase of 1.9% in the REPS statute. Therefore, it would make sense to

impose explicit non-compliance measures, given that ratepayers are already protected from

sudden rate increases.

For example, five northeastern states including Massachusetts, Maine, New Hampshire,

New Jersey, and Rhode Island have established ACPs with payments applied to a renewable

energy fund. If North Carolina had such a fund, it could be used to support the under performing

hog and poultry waste-to-energy industry. The fund could be administered by the North Carolina

Public Utilities Commission to incentivize pilot projects for the new technologies. The shortfalls

in REC requirements have been fully met through alternative compliance payments in

Massachusetts and New Jersey.46 In 2006, $18.2 million was paid in the form of ACPs that went

to respective renewable energy funds administered by the state.47

While an ACP intuitively provides the electricity retailers with yet another option to

avoid paying for renewable generation, it provides for a transparent debate about the appropriate

cost of the RPS. It can be set at a high enough rate to ensure investment in financially viable

projects and set expectations for project costs of early stage, newly developed energy

technologies. It can also be set low enough to protect consumers. Pennsylvania included an ACP

in its Alternative Energy Portfolio Standard at $45 per megawatt hour for non-compliance.48

New Jersey implemented an ACP in its Renewable Portfolio Standard at $50 per megawatt hour.

While setting a maximum price for renewable generation, an ACP also reduces the costs

of enforcement action and administrative burden. In the case of North Carolina, an ACP could

help resolve the case of early stage non-compliance in hog and poultry waste set-asides by                                                                                                                          46  Ibid.  47  Ibid.  48  http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=PA06R&RE=1&EE=1  

  28  

setting a clear maximum price per megawatt hour that the utilities would agree to pay and the

producers would need to provide in order to meet the standard. There are a number of provisions

that protect electricity retailers and ratepayers from potentially high costs of renewable energy

procurement, but some of these provisions can be better designed to be more transparent and to

benefit the renewable industry as well.

Coordination with renewable energy tax expenditures

A renewable portfolio standard establishes a minimum requirement for renewable

generation, but other policies can help provide incentives that make renewable investments more

attractive and beneficial. Historically, federal and state governments have used income-tax

credits as one of the predominant tools to stimulate investment in renewable energy

technologies.49 The tax credit is often not the motivating factor influencing investment decisions,

but it often helps to “seal the deal.”50 The North Carolina renewable energy tax credit is limited

in size, but the policy along with the renewable portfolio standard eases the burden of renewable

energy compliance.

There were a number of comments from industry participants about the role the energy

tax credit plays alongside the REPS. The state of North Carolina provides a corporate tax credit

equal to 35% of eligible renewable energy property constructed, purchased, or leased by a

taxpayer and placed into service in North Carolina.51 Along with the federal business energy

                                                                                                                         49  Gouchoe  et  al.  “Case  Studies  on  the  Effectiveness  of  State  Financial  Incentives  for  Renewable  Energy.”  National  Renewable  Energy  Laboratory.  September  2002.  50  Ibid.  51  Credit  must  be  taken  in  five  equal  installments  and  may  not  exceed  50%  of  taxpayer  state’s  tax  liability.  http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=NC19F&re=1&ee=1  

  29  

investment tax credit (ITC),52 there is a significant discount on renewable investment in the state.

Several industry participants that were interviewed believe this sets North Carolina apart in the

region. The tax credit coupled with the REPS provides a viable subsidy and a mandate for the

state renewable industry.

There are, however, constraints associated with the tax credit. A National Renewable

Energy Laboratory report found the percentage of project costs eligible for a tax credit in North

Carolina are “adequate to stimulate interest”, but the 50% cap on tax liability “may reduce the

effectiveness of the incentive.”53 The tax credit could also be more flexible to attract a broader

range of investors. According to one renewable industry participant, currently in North Carolina

the federal tax equity and the state tax equity cannot be separated (i.e. one party cannot supply

the federal tax equity while another party supplies the state tax equity). Furthermore, it is

difficult to find companies in North Carolina with sufficient tax equity to fund scalable

renewable projects. The industry participant asserts that the federal and state tax equities should

have the option to be split between two separate funding entities and tax equity streams.

As of March 2012, twenty-four states offer renewable energy tax credits, including the

following southern states: North Carolina, South Carolina, Georgia, Kentucky, and Louisiana.54

See Appendix 4 for a US map of states that offer tax credits for renewable projects. One

renewable industry participant suggested the Louisiana corporate tax credit for solar and wind

energy systems as a model. This credit allows for a 50% credit for the first $25,000 of the cost of

                                                                                                                         52  30%  credit  for  solar  thermal  and  solar  electricity,  fuel  cells,  and  small  wind  turbines  (less  than  100  kW).  10%  credit  for  geothermal  systems,  microtrubines  (up  to  2  MW),  and  combined  heat  and  power  (CHP).  Additional  information:  Business  Energy  Investment  Tax  Credit.  http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US02F  53  Gouchoe  et  al.  “Case  Studies  on  the  Effectiveness  of  State  Financial  Incentives  for  Renewable  Energy.”  National  Renewable  Energy  Laboratory.  September  2002.  54  Tax  Credits  for  Renewables.  Database  of  State  Incentives  for  Renewables  and  Efficiency.  www.dsire.org.  

  30  

each energy system. There is not a limit based on tax liability and, in fact, any excess funds

beyond the taxpayer’s liability will refunded to the taxpayer. A report by the Bipartisan Policy

Center also suggested that a similar “refundable tax credit” could be a beneficial reform to the

current federal renewable tax credit. The refund could be issued in the form of a loan that is paid

back once the project generates taxable income.55

The viability of the North Carolina corporate renewable tax credit has increased since the

adoption of the REPS. In 2005, the North Carolina Department of Revenue estimated the cost of

the renewable tax credit to be between $2-5 million.56 In 2011, the tax expenditures were valued

at $6.3 million.57 The sluggish economy in recent years makes the tax expenditures even more

significant. This growth provides evidence that investment is increasing in the state.

Summary of REPS findings

The requirements of the REPS have proven to be reasonable as both Duke Energy and

Progress Energy are optimistic that they will meet the overall requirements. While the REPS can

be strengthened in later years, it appears the escalating requirement through 2021 has been

appropriately set to pass the main hurdle: enacting legislation.

The state’s electricity retailers have easily met the solar set-aside requirements, but are

struggling to meet the hog and poultry set-asides. Since North Carolina is the first state to

support these technologies through a renewable standard, it is facing high initial costs. However,

there are projects coming on line and the utility companies are partnering with private companies

                                                                                                                         55  Mackler,  Sasha.  “Reassessing  Renewable  Energy  Subsidies.”  Bipartisan  Policy  Center.  Issue  Brief.  March  22,  2011.  56  North  Carolina  Biennial  Tax  Expenditure  Report.  2005.  57  North  Carolina  Biennial  Tax  Expenditure  Report.  2011.  

  31  

to invest in these new and promising technologies. North Carolina has the potential to be the first

state to adopt these new renewable energy generators and it can benefit from sharing these

advancements to other states.

The energy efficiency provision was critical for the bill to pass through the legislature,

but there were actions that could have been taken to improve its credibility. As mentioned above,

the manner in which future energy reductions are calculated could be more precise and realistic.

This should avoid double-counting and overly optimistic adoption behaviors of energy efficiency

technologies.

The out-of-state credit option is another provision that is based on the reality of North

Carolina’s electricity market. North Carolina is a traditionally regulated state and part of a

traditionally regulated region, so regional coordination on clean energy policies is more difficult

than other areas in the country. An alternative policy could limit out-of-state REC purchases to

the southeast region, so that the local ratepayer benefit and job opportunities have greater

emphasis in this portion of the REPS.

Actions against REPS non-compliance are not specified in the law, and this has hampered

some aspects of the policy. A mechanism such as an ACP would set an acceptable price for

renewable generation. This would ease administrative burdens and resolve some of the disputes

between the utility companies and those involved with the hog and poultry waste-to-energy

projects.

Despite positive signs, the impact of the tax credits is somewhat constrained. As

mentioned above, the state legislature should consider the decoupling of the federal and state tax

credits to increase investor options. Such a policy would attract greater investment into the state.

  32  

Other state action could aim to increase the tax liability cap (currently 50% of tax liability) to

encourage greater investment. This reform would likely increase the costs of the tax credit, but it

will also provide the benefits of less-constrained investment in the energy industry. The

increased investment would likely stimulate job growth within the energy and innovation

industries that would likely outweigh the increased cost to the taxpayer.

North Carolina has provided a very relevant example as to how a renewable standard

coupled with other incentives can be implemented in a southern state. While it is not perfect, it

has proven to be an effective policy tool to stimulate a small renewable industry in the state.

Now the analysis will turn to applying these lessons to other southern states.

3. EXPANDING THE REPS TO OTHER SOUTHERN STATES

The southeastern region in the US is largely a regulated electricity market that operates

without a regional transmission organization. Throughout the South, vertically integrated utilities

dominate the electricity generation profile of each state. Therefore, utility company support will

be critical to enacting any similar renewable energy policy. See Appendix 2 for additional

information about the regulatory profile of the South.

The South relies heavily on fossil fuel and nuclear energy generation and this affects

politics and policymaking in the region. In response to a proposed national renewable standard,

Senator Lindsay Graham of South Carolina said “From my part of the country, that’s a bad

proposal because it doesn’t acknowledge nuclear power as being a low, carbon-free source of

  33  

energy, and it disadvantages nuclear power”.58 This sentiment is especially true in South

Carolina. At a recent conference on South Carolina’s Energy Economy, George Fletcher,

Executive Director of the South Carolina Council on Competitiveness identified nuclear power

as a critical component to the growth of his state’s energy economy.59

While there are challenges to expanding state renewable standards, there are also

opportunities. The region has a number of states with pro-business, right-to-work policies. Its

low corporate tax rates and incentive structures have attracted notable manufacturing companies

such as BMW, Honda, and Boeing. There are also renewable energy projects under way. BMW

Manufacturing Co. won an EPA award for its 11-megawatt landfill gas-to-energy project at its

plant near Spartanburg, South Carolina. According to report to the South Carolina Energy

Advisory Council, the state has significant renewable resources such as (capacity in parenthesis):

offshore wind (3,300 MW), solar photovoltaic (850 MW), landfill gas (12.1 MW), and wood

biomass (317 MW).60

South Carolina, like North Carolina is a regulated electricity market with a strong utility

presence. In 2010, South Carolina Electric & Gas Company accounted for 22,921,978 megawatt

hours in electricity retail sales while Duke Energy had 21,703,078 megawatt hours, the two

companies combined accounted for 54% of retail sales in South Carolina.61 The energy industries

in both North Carolina and South Carolina are dominated by vertically integrated utilities that

                                                                                                                         58  Howell,  Katie.  “Sen.  Graham’s  Plan  for  Clean-­‐Energy  Bill  Could  Drain  RES  Support.”  New  York  Times.  Sept.  29,  2010.  59  “Managing  Risk  and  Realizing  Opportunity  for  South  Carolina’s  Energy  Economy.”  Ceres.  Business  for  Innovative  Climate  and  Energy  Policy.  Conference  held  in  Charleston,  South  Carolina.  March  16,  2012.  60  “South  Carolina  Resource  Study.”  South  Carolina  Energy  Advisory  Council.  Report  by:  Black  &  Veatch.  January  2012.  61  EIA  State  Electricity  Profiles.  http://www.eia.gov/electricity/state/southcarolina/  

  34  

can exert great political influence. However, North Carolina has shown that renewable energy

policies and vertically integrated utilities can co-exist.

While North Carolina has been moving toward natural gas and even some solar

generation (MWh), South Carolina has increased coal generation, and to a lesser extent, natural

gas. Hydroelectric power and landfill gas are the only renewable sources that increased

generation between 2006 and 2010.

Figure 5. Sources of Electricity in South Carolina, 2006 and 2010

Fuel%Type 2006 2010 Percent%change,%200662010Coal 26,845,672 37,671,118 40.32%Nuclear 50,797,372 51,988,079 2.34%Natural8Gas 6,068,061 10,927,237 80.08%Hydroelectric 687,049 1,441,743 109.85%Biomass 1,804,384 1,742,067 A3.45%Oil 267,251 186,251 A30.31%Landfill/8Waste8gas 61,042 130,997 114.60%Solar 0 0 0.00%Total&generation 86,530,830888888888 104,087,4928888888 20.29%

Electricity%Net%Generation,%South%Carolina%(MWh)

Source:&US&Energy&Information&Administration,&EIA:923&data

According to a South Carolina policymaker and former member of the US Congress, the

policy window for any sort of renewable policy in the state is heavily reliant on current economic

conditions “once the economy improves, more things are possible.” The policymaker cautioned

that a conservative state such as South Carolina is naturally opposed to government mandates.

Further, he stipulated that a renewable standard proposal would face a significant “up-hill” battle

in South Carolina.62

                                                                                                                         62  Interview  with  former  South  Carolina  congressman.  Febraury  29,  2012.  

  35  

That said, the former congressman kindly provided advice as to how a renewable

standard could be implemented in his state. Additional research was conducted at a South

Carolina Energy Conference where stakeholders in the state discussed South Carolina’s clean

energy potential.63 Based upon local interviews and industry analysis, there are three elements of

a renewable portfolio standard that can be attractive to South Carolina policymakers. These are

discussed below:

1. Job growth potential: Organizations such as NC Greenpower were bolstered and

GreenCo Solutions, Inc. were created as a result of the North Carolina REPS. Other

companies such as Advanced Energy and FLS Energy directly benefitted from the

emphasis of renewable generation in the state. A similar industry can be built in South

Carolina. The South Carolina Council on Competitiveness is aggressively pursuing state

business investment. Companies with a physical presence in South Carolina such as

Amazon and BMW, lured by generous tax incentives and right-to-work policies, are

“hailed as heroes.”64

2. A state mandate is better than a federal mandate: South Carolina has a conservative

governor and a majority of the state legislature that is Republican. The ideological

makeup is more inclined to state regulations based on a state’s needs. The value of a state

renewable standard is that it is driven by the states and can be tailored to South Carolina’s

needs and resources. Other traditionally conservative states have enacted renewable

                                                                                                                         63  “Managing  Risk  and  Realizing  Opportunity  for  South  Carolina’s  Energy  Economy.”  Ceres.  Business  for  Innovative  Climate  and  Energy  Policy.  Conference  held  in  Charleston,  South  Carolina.  March  16,  2012.  64  “Economic  Woes  Loom  Larger  as  G.O.P.  Heads  South.”  New  York  Times.  

  36  

portfolio standards: Utah, Arizona, South Dakota, and North Dakota.

3. Benefits to rural electricity cooperatives: The Electric Cooperatives of South Carolina,

an umbrella group for all 20 state cooperatives, operates the largest electric distribution

system in the state and supplies more than 1.5 million residents across all 46 counties.65

Rural electricity cooperative members in South Carolina have historically been skilled

technicians with experience installing appliances and equipment. These cooperatives

could benefit from a new industry that installed renewable technologies such as solar

photovoltaic and solar thermal systems. Berkeley Electric Cooperative is the fifth largest

electricity provider in the state (1.7 million megawatt hours in electricity retail sales in

2010).66 These rural cooperatives also carry tremendous political influence in the state.

Designing the next RPS

There were numerous concessions made in order to get a renewable energy bill passed for

the first time in the South. The REPS was only one part of Senate Bill 3 that passed in 2007.

Additional sections of the bill allowed for the utilities to obtain cost recovery for “non-fuel

costs” such as chemical re-agents that are used as controls in power plants. Additionally, the

utilities were given a “mini CWIP” (construction work in progress) that allowed for cost

assurances of “on-going review of construction costs.” Essentially, this allowed for a much

greater risk reduction in power plant modernization than the utilities had previously. These

provisions were deemed necessary to get utilities to support the REPS.

                                                                                                                         65  The  Electric  Cooperatives  of  South  Carolina.  Website.  www.ecsc.org  66  EIA  State  Electricity  Profile.  South  Carolina.  2010  

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The REPS allows the utilities to pass through all the costs of renewable energy and

energy efficiency investment to its customers. According to one industry participant, the cost

recovery mechanism allows a utility to obtain $100-200 million annually from its ratepayers to

meet its REPS obligations. In the long term, this generates an expected budget of $1.2 billion for

renewable and energy efficiency projects for one large utility. These are all factors that must be

considered in another highly-regulated utility market.

In each interview, an industry stakeholder identified certain benefits of the REPS. It has

helped the industry grow, it has helped stabilize certain segments, and it has forced the utilities

and the utility commission to consider alternatives to fossil fuel electricity generation.

Therefore the next RPS in the South should seek to contain the following mechanisms

that are politically feasible and ensure a sustainable impact of a renewable standard:

1. Make the renewable standard mandatory. Twenty-nine states have enacted

mandatory renewable portfolio standards, while four other states have enacted

voluntary renewable targets. A voluntary standard may appear to be more

politically palatable, but it lacks the certainty utilities covet and the mandate

utilities need to procure anything other than “least-cost” generation. For

example, Virginia’s voluntary requirement has primarily provided a cost-

recovery mechanism for existing, large-scale hydroelectric facilities.67 It has thus

far failed to provide the proper incentives to develop even a modest solar

industry such as in North Carolina.

                                                                                                                         67  Virginia  Electric  and  Power  Company.  “Annual  Report  to  the  State  Corporation  Commission  on  Renewable  Energy,  in  accordance  with  Section  56-­‐585.2.H  of  the  Code  of  Virginia.”  November  1,  2010.  

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2. Include an alternative compliance payment (ACP) mechanism to clarify non-

compliance. An ACP has been successfully implemented in most RPS states.

Such a mechanism helps to establish an acceptable price for renewable

generation in the state. If funds are generated through an ACP, they can be

distributed to potentially viable energy technology projects to stimulate growth.

3. Design requirements according to various state resources. The annual

renewable generation requirements have been met by most RPS states. The

benefit of these state standards is that they can be tailored to local resources.

Minimum requirements have recently become the preferred policy mechanism

– rather than credit multipliers (additional value added per credit for specific

types of renewable generation) – to develop specific renewable technologies.68

The impact of the hog and poultry set-asides in North Carolina has been

inconclusive thus far, but recent projects and partnerships are positive signs of

progress.

4. Allow energy efficiency programs and out-of-state renewable credits to meet

a small portion of renewable standard. Energy efficiency program incentives

might be most effective as a separate policy initiative, but utilities strongly

prefer the energy efficiency option as part of the standard. As in North

Carolina, the energy efficiency provision gives electricity retailers greater

flexibility to meet the standard and gives greater control of assets. The out-of-

                                                                                                                         68  Wiser  and  Barbose.  “Renewables  Portfolio  Standards  in  the  United  States:  A  Status  Report  with  Data  through  2007.”  Lawrence  Berkeley  National  Laboratory.  April  2008.  

  39  

state renewable credits enable to purchase of low-cost renewable generation

that still meet broader emissions reduction goals.

CONCLUSION

Renewable portfolio standards were first analyzed in the mid 1990s as a means to correct

market imperfections. These policies have since proliferated across twenty-nine states and the

District of Columbia, but they have not been widely adopted in the southeastern US. The lack of

renewable standards in the South leaves nearly half of the electricity generation in the US

without sufficient incentives for renewable generation.

North Carolina was the first state in the South to enact a renewable standard in 2007. The

REPS has had a positive impact on the state’s energy industry. It has enabled a nascent solar

industry to grow and has stimulated biomass and waste-to-energy projects. Most importantly, a

renewable standard gave the influential vertically integrated utilities the regulatory authority it

needed to invest in renewable generation. While certain aspects of the bill could be strengthened

and improved, it has had a noticeable impact on the industry.

The lessons learned from North Carolina’s pioneering effort can and should be used to

help other southern states meet their energy needs and diversify their energy sources. A

renewable standard is most likely to succeed if it can balance renewable energy goals with the

obligations of regulated electric utilities. It should be mandatory, tailored, and flexible with clear

compliance mechanisms. An expansion of renewable portfolio standards across the South will

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incentivize clean energy technologies, create economic opportunity, and ensure a more

sustainable future.

APPENDIX 1

Summary of North Carolina Renewable Energy and Energy Efficiency Standard (REPS)

State: North Carolina

Policy: North Carolina Renewable Energy and Energy Efficiency Standard (REPS)

Originated: 2007

Initial compliance years: 2010 (solar minimum only) and 2012 (full requirement)

Eligible renewable energy resources:

Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Landfill Gas, Wind, Biomass, Geothermal Electric,

CHP/Cogeneration, Hydrogen, Anaerobic Digestion, small hydroelectric (less than 10 MW), Tidal Energy, Wave Energy

Requirements for electric public utilities:

-­‐ 2010: 0.02% from solar -­‐ 2012: 3% (including 0.07% from solar + 0.07% from swine waste +

170,000 megawatt hours (MWh) from poultry waste) -­‐ 2013: 3% (including 0.07% from solar + 0.07% from swine waste +

700,000 MWh from poultry waste -­‐ 2014: 3% (including 0.07% from solar + 0.07% from swine waste +

900,000 MWh from poultry waste) -­‐ 2015: 6% (including 0.14% from solar + 0.14% from swine waste +

900,000 MWh from poultry waste) -­‐ 2018: 10% (including 0.20% from solar + 0.20% from swine waste +

900,000 MWh from poultry waste) -­‐ 2021: 12.5% (including 0.20% from solar + 0.20% from swine waste +

900,000 MWh from poultry waste)

Requirements for electricity cooperatives and municipalities:

-­‐ 2012: 3% (including 0.07% from solar + 0.07% from swine waste + 170,000 MWh aggregate from poultry waste)

-­‐ 2015: 6% (including 0.14% from solar + 0.14% from swine waste + 900,000 MWh aggregate from poultry waste)

-­‐ 2018: 10% (including 0.20% from solar + 0.20% from swine waste + 900,000 MWh aggregate from poultry waste) -­‐ Permitted to use demand side management or energy efficiency to

satisfy standard without limitation. -­‐ Permitted to use large hydropower (greater than 10MW) to meet up

to 30% of requirement

Demonstrating compliance: Procurement of renewable energy credits (RECs), equivalent to 1 MWh or

1MWh avoided through efficiency. Banking allowed of excess RECs allowed for following calendar year.

Energy efficiency provision:

-­‐ 25% of the requirement may be met before 2021 (approx. 255,315 MWh in 2009)

-­‐ 40% of the requirement may be met after 2021 -­‐ No specific technology: Equipment, physical, or program change

implemented after Jan. 1, 2007 that results in less energy used to perform the same function. Includes energy produced from CHP system, but does not include demand side management

Out-of-state renewable energy credit provision:

-­‐ Unbundled RECs from out-of-state renewable facilities can meet up to 25% of requirement

-­‐ Suppliers with fewer than 150,000 customers are not limited in the amount of out-of-state renewable energy RECs they may procure to meet the standard

Credit multiplier:

-­‐ Triple credit for every one REC generated by the first 20 MW of a biomass facility located at a "cleanfields renewable energy demonstration park"

Oversight and compliance:

-­‐ The North Carolina Utilities Commission (NCUC) is responsible for administering the REPS and may adjust or modify the REPS schedule if the commission deems such modifications to be in the public interest

-­‐ There are no specified penalties or alternative payments for noncompliance, but the commission has existing authority under Chapter 62 of the N.C. General Statutes to enforce compliance

APPENDIX 2

The southeastern US is has largely remained a regulated electricity market. Virginia is the only

state in the South that has been deregulated.

The Southeastern US is also one of the few regions without a strong presence of regional

transmission organizations (RTOs) or independent service operators (ISOs). The reliability of the

electricity markets is primarily controlled by the vertically-integrated utilities.

Source: http://www.ferc.gov/industries/electric/indus-act/rto.asp

APPENDIX 3

Chronology of state renewable energy standards in the US though 2007 (extracted from

Lawrence Berkeley Laboratory report1):

                                                                                                                         1  Wiser,  et  al.  “Renewables  Portfolio  Standards:  A  Factual  Introduction  to  Experience  from  the  United  States.”  Lawrence  Berkeley  National  Laboratory.  April  2007.  

APPENDIX 4

APPENDIX 5

List of North Carolina renewable energy and energy efficiency stakeholders interviewed for project:

Felt, Emily. Duke Energy. February 13, 2012.

Ham, Roshena. Duke Energy. February 9, 2012.

Harkrader, Richard. Carolina Solar Energy. February 14, 2012.

Huck, Ken. Ecosavvy Energy. February 27, 2012.

James, Harold. Progress Energy. March 1, 2012. Class presentation.

Kelso, Paul. Fibrowatt. February 6, 2012.

Kolomeets-Dorovsky, Daniel. Clean Hatch. February 8, 2012.

Lips, Brian. NC Solar Center. February 24, 2012.

Maurer, Christine. Advanced Energy. February 24, 2012.

Nemeth, Jay. GreenCo Solutions. March 9, 2012.

Phelps, Peter. Sun Stuff Energy. February 6, 2012.

Shore, Michael. FLS Energy. February 16, 2012. Email response.