Charting a Course for Renewables

Roger Kranenburg, CFA, Director, Business Development, Edison Electric Institute

CONCERNS OVER GLOBAL CLIMATE CHANGE and rising energy prices are boosting interest in renewable energy at both the state and the federal level. As of July 2007, 24 states and the District of Columbia have created renewable portfolio standards (RPS) that require a certain percentage of their electricity be generated from renewables. Three more have voluntary programs. And Congress is now discussing whether the federal government should mandate that the nation as a whole generate a set amount of its electricty using renewables.

The electric utility industry supports the development of renewable energy sources. But the states should continue taking the lead in promoting them. A federal RPS mandate could end up raising electricity prices, disrupting existing renewable programs in the states, and place new burdens on electric reliability. And without any guarantee of actually getting renewable generation built and brought online.

The states are taking advantage of local resources and technologies that work best for them. These strategies, coupled with a long-term extension of federal tax incentives, would enable renewables to play a more important role in meeting the nation's growing demand for electricity.

Growth Outlook

Currently, hydro and non-hydro renewables together produce about 10 percent of the country's electricity, accounting for more than 200 gigawatts (GW) of electric generation capacity in 2006. The amount of hydropower electric generation capacity has remained relatively constant over the past 10 years at approximately 175 GW. But the share supplied by non-hydro renewable energy sources—wind, solar, biomass, geothermal—has almost doubled since 2000, growing from 16 GW to more than 29 GW last year. Out of the newly added 13 GW, 11.3 GW were wind turbines.

In 2006, wind generating capacity increased 27 percent to 11,603 megawatts (MW)—representing a $4 billion capital investment—according to the American Wind Energy Association. Wind is also expected to provide the bulk of non-hydro renewable generation additions in coming years. For example, more than 3,000 MW of wind power is expected to be installed in 2007.

Driving this growth in electric utility investment in wind and other renewables has been state RPS and federal tax incentives. Along with the 24 states and the District of Columbia that have adopted an RPS, over 30 states have put in place or announced green pricing programs to support investment in renewable energy technologies. Forty-eight states also support programs that offer incentives, grants, loans or rebates to consumers using renewable energy resources. And, nine states with competitive retail markets are offering green power products to consumers.

The federal government has helped to spur the development of renewable energy resources through the renewables production tax credit (PTC) and the investment tax credit (ITC) for solar and geothermal energy. The PTC provides renewable generators with an inflation-adjusted $0.015/kilowatt-hour (kWh) sold. The ITC gives a 10 percent or higher investment tax credit.

With support at the state and federal levels, non-hydro renewables are indeed growing as an energy source for generating electricity, but they still comprise a small part of the nation's electric generating portfolio—less than three percent. And looking ahead to 2030, this percentage is expected to grow only slightly to 3 percent, according to the U.S. Energy Information Administration's (EIA) 2007 forecast. Hydro-based renewables, due to environmental concerns and the scarcity of untapped large-scale sites, are expected to see their share of total generation fall.

Limiting Factors

Many factors account for the limited growth outlook. One is that renewable energy sources vary widely in various parts of the U.S., with some regions enjoying an abundance of certain resources while others are comparatively resource poor. Just two states—California and Washington—accounted for almost 40 percent of the nation's renewable generation (including hydropower generation) last year. Non-hydroelectric output was even more concentrated. California provided almost a quarter of the nation's electricity from non-hydro renewables. Texas was the second largest producer, contributing about 7 percent. And Texas alone accounted for nearly a third of the new wind capacity additions in 2006.

New, high-voltage transmission lines must also be built to accommodate the new renewable energy facilities. The siting of renewable generation, especially wind power, is generally in remote, rural areas, far from existing transmission wires. These transmission expansions can cost approximately $1 million to $3 million per mile to build. And these lines can also take years to complete due to red-tape delays (especially when involving federal lands, which are particularly common in western states) and public concerns.

The intermittent nature of wind and solar resources also can have costly impacts on the electric grid related to generation interconnection and integration, transmission planning, and system and market operations, all of which must be taken into account by utility planners. And because many renewable energy resources are intermittent, in that they do not operate consistently, electric utilities will still need to build generating facilities using conventional fuels—most likely natural gas, which has experienced volatile price swings of late—to support the grid reliability.

Federal RPS Impact

A federal RPS could also undercut or preempt the existing state renewable programs. Each state RPS plan includes carefully considered timetables and targets based on what makes sense in that particular state. And all have chosen to add technologies and resources, such as hydropower and fuel cells, as well as alternative means of compliance such as energy efficiency programs, which have not been included in discussions to date. Imposing different targets, technologies, and timetables through a federal RPS on top of the state programs would create uncertainty and drive up the cost of meeting renewable mandates even further for electricity suppliers and consumers in those states.

In addition, if retail electric suppliers cannot meet a federal RPS requirement through their own generation, they will be required to purchase higher cost renewable energy from other suppliers or purchase renewable energy credits. Thus, a nationwide RPS mandate will mean a massive wealth transfer from electric consumers in states with little or no renewable resources to the federal government.

A better solution for expanding the use of renewable energy resources for generating electricity is a long-term extension of the Production Tax Credit (PTC). This could be the single most effective thing Congress could do to promote renewables. The electric power industry supports a five-year extension of the PTC, which is due to expire on December 31, 2008. The industry also supports extending, expanding, and revising the ITC for eight years, and eliminating the utility exclusion for the solar ITC.

In the past, the short-term, start-and-stop nature of renewable tax credits has dissuaded utilities, developers, manufacturers and investors from maximizing the potential of renewable technologies and resources, where they are available. A long-term extension of these credits will give the private sector the stability necessary to plan and finance renewable energy projects.

Renewable energy sources are important for the electric power industry to meet demand while reducing air emissions and greenhouse gases. But they, like all fuel sources, have their limitations. The industry will continue to encourage their use where they make economic, engineering, and regulatory sense. In this way, they will continue to play an important role in meeting the country's ever growing demand for reliable, affordable, and environmentally sensitive electricity.