Portfolio Standards
Renewable Portfolio Standard
Renewable Portfolio Standards (RPS) require that affected electricity providers include a specified amount of renewable energy as part of its portfolio of generating fuels. There are many varieties of RPS; no two states have enacted exactly the same provisions.
Most states have enacted the portfolio standard to help ensure diversity in the fuel mix and to encourage an environmentally benign method of generating electricity.
States need to consider a number of specific issues when implementing an RPS:
Definition of Eligible Resources
To enact an RPS, states must define the resources that qualify for the minimum standard. Maine, for instance, includes cogeneration — whether or not from renewable fuels — among the resources that qualify for the standard. However, most states include solar, wind, biomass, small hydro projects, landfill gas, and some types of municipal solid waste-based power plants as qualifying resources.
Portfolio Purchase Requirement
States have set numerous plans and standards. Some define the standard as a percentage of total electricity generation; others express the standard in terms of capacity (i.e., in megawatts).
Enforcement and Penalties
States decide how to enforce the standard and may set penalties for failure to meet the standard. For the RPS to be effective, penalties probably should exceed the cost of complying with the standard.
Responsible Agency
Legislation may also identify the agency responsible for setting and enforcing the standard.
Energy Efficiency
Some states free up significant energy resources by managing load growth through energy efficiency. Market data and experience with energy efficiency programs suggest that a large part of the nation's anticipated load growth over the next two decades can be displaced through energy efficiency, pricing reforms, and load management programs.
Displacing new load growth through energy efficiency can also reduce electricity prices. The Electric Power Research Institute (EPRI) finds that a 1% reduction in load during high peak periods can reduce wholesale electricity prices by 10%, and a 5% reduction in load can reduce peak prices by as much as 19%. Faced with blackouts, California adopted a series of new energy efficiency policies and reduced overall electricity use by 5% in 2001 alone.
Some policies treat energy efficiency as an invisible power plant and require that a certain amount of electricity load come from this source. Besides other policies discussed on this site, two innovative models have been adopted by some states:
Energy Efficiency Portfolio Standard
An EEPS requires electricity service providers to meet a portion of their annual increase in electricity demand through energy efficiency measures. This type of policy treats energy efficiency as an invisible power plant and requires that a set percentage of new electricity come from this source. Texas pioneered this policy.
The EEPS essentially sets a goal for energy savings and requires that utilities meet that goal. The Texas legislature enacted a law in 1999 that set an energy efficiency goal for each Texas utility, which requires them to meet at least 10% of each year's annual growth in demand through energy efficiency rather than electricity sales.
The EEPS is performance-based—it sets a goal for energy savings and requires that utilities meet that goal. This characteristic is attractive to lawmakers interested in funding results-oriented energy efficiency efforts. The EEPS can be increased or decreased over time.
The Texas legislature adopted the Energy Efficiency Goal in conjunction with both the Texas System Benefits Fund, and the Texas Renewable Portfolio Standard (RPS).
The Texas rule requires that the distribution utilities, not the deregulated electric service providers, are responsible for meeting the EEPS. Utilities must contract to outside energy efficiency service providers to meet these goals; they may not be directly involved in providing customers any energy efficiency services.
Each affected utility is required to file a four-year plan, detailing how it will meet the 10% energy efficiency goal and what it will cost. Administrative costs are capped as a percentage of total costs — 10% in the beginning and 5% later in the program. Once it has accepted a utility's plan, the Public Utility Commission of Texas adjusts the utility's rates to cover the cost of these services.
Energy Efficiency Utilities
In Vermont, the legislature and the Public Service Board created Efficiency Vermont — an energy efficiency utility designed to help all Vermonters save energy, reduce energy costs, and protect the environment. Efficiency Vermont is operated by an independent nonprofit entity under contract to the Vermont Public Service Board.
After only 22 months in operation, Efficiency Vermont calculated that one in seven electric utility customers made energy-saving improvements that have resulted in 60,359 megawatt-hours of electricity saved annually. The equivalent annual output of three hydroelectric dams on the Winooski River in Vermont, these savings were 72% of the three-year savings goals established by the Vermont Public Service Board. Annual reports show that the cost of energy efficiency was about $0.026 per kilowatt-hour at a time when wholesale electricity prices in the state are $0.052 per kilowatt-hour.
Efficiency Vermont targets a numbers of sectors to promote energy efficiency. Programs include education programs for residential consumers, services for commercial building designers, programs targeting new residential construction, campaigns focused on large commercial and industrial consumers, and work with economic development agencies and business associations.
The programs are run by the Vermont Energy Investment Corporation, a non-profit entity that was awarded a performance-based contract. Targets for saved electricity were stipulated in the contract. This mechanism ensures a certain level of efficiency gains while keeping budget costs within a predictable level.
The Efficiency Vermont Web site has more information.
Arguments for Renewable Portfolio Standard
Helps to diversify a state's energy supply.
Promotes environmentally benign forms of electricity.
Creates initial market demand to help make fledgling industries viable.
Arguments against Renewable Portfolio Standard
Might increase costs to consumers.
Electricity generating fuels should be determined by electricity providers, not government mandates.
Environmental benefits may accrue elsewhere rather than in-state.
Provides an unfair market advantage to renewable energy technologies.
Arguments for the Energy Efficiency Standards
Besides offsetting the need for new power plant construction, using energy efficiency as a virtual power plant reduces water use, fossil fuel use, and pollution.
The energy efficiency savings resulting from these programs are monitored and verified by an independent third party, thus guaranteeing energy efficiency and environmental improvements.
Standardizing a state's approach to energy efficiency can create a robust market for energy efficiency services. Because these services tend to be labor intensive, this can create local jobs and foster economic development.
Experience with these pilot policies has shown that significant energy savings can be gained in a cost-effective and efficient manner.
Past energy efficiency programs and current market data support the conclusion that as much as 40%-50% of the nation's anticipated load growth over the next two decades can be displaced through energy efficiency, pricing reforms, and load management programs.
Early results show that the Texas and Vermont programs are successful and enjoy broad public support.
Energy efficiency lowers customer bills.
Innovative energy efficiency programs are needed to get the market penetration that is missing for many cost-effective measures.
Energy efficiency relieves stressed distribution, generation and transmission constraints.
Arguments against the Energy Efficiency Standards
The experience of Efficiency Vermont may not translate as easily to larger states.
Creating new programs such as these can require significant up-front planning.
Some utilities are not likely to support new reporting requirements.
Mandating that energy efficiency be used to meet new electricity demand requires government involvement and intervention in what should be a market decision.
For more information on Renewable Portfolio Standards, visit the Lawrence Berkeley National Laboratory's Energy Analysis office. Lawrence Berkeley has many publications relating to renewable portfolio standards and many other renewable energy and energy efficiency topics. Their March 2004 publication Evaluating Experience with Renewables Portfolio Standards in the United States (PDF 684 KB) provides a comprehensive analysis of state RPS programs in the United States. Download Adobe Reader.