On April 12, 2011, California Governor Jerry Brown signed Senate Bill 2 of the 1st Extraordinary Session (SB 2X) into law. SB 2X requires California retail electric providers to procure 33 percent of their retail energy sales from eligible renewable sources by 2020. Previously, they were required to procure 20 percent of those sales from renewable sources by 2010.

SB 2X provides a broad mandate to the California Public Utilities Commission (CPUC) and to local publicly owned electric utilities to implement the requirements of the bill, which are both wide-ranging and esoteric. SB 2X also adds regulation that further clouds the ability of out-of-state renewable projects to enter the California renewables market, but may also include a silver lining for existing projects that have entered into power purchase agreements which were previously approved by the CPUC.

This advisory explores that ambiguity and its implications on the California renewables market.

Background

As described in an earlier advisory, the CPUC issued a decision in January 2011 authorizing the use of tradable renewable energy credits (TRECs) to satisfy the requirements of the California Renewables Portfolio Standard (RPS) program (2011 TREC Decision).

Prior to the 2011 TREC Decision, CPUC-regulated entities had been required to procure RPS power exclusively through “bundled” contracts (i.e., an integrated transaction in which the CPUC-regulated entity purchases both the physical energy and TRECs from one seller). The 2011 TREC Decision allows CPUC-regulated entities to procure TRECs separate from their associated energy (i.e., an RPS generator may now sell its physical energy to one entity, and in a separate transaction, sell the TRECs associated with that physical energy to a CPUC-regulated entity). This additional flexibility for CPUC-regulated entities should provide incentives for the development of RPS power by offering additional revenue streams potentially available to RPS project developers, both in- and out-of-state.

Through the 2011 TREC Decision, the CPUC limited the three largest California Investor Owned Utilities’ (IOUs) use of TRECs for RPS compliance to not more than 25 percent of the IOU’s annual RPS megawatt-hour purchases. In addition, the 2011 TREC Decision determined that most, if not all, transactions involving firmed and shaped products that provide incremental power would be considered transactions involving TRECs subject to the 25 percent cap—including contracts involving firmed and shaped products previously approved by the CPUC as bundled.