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The De-Localization Sustainability Initiative: Renewable Energy by Lana Chow

Posted by: | April 6, 2011 Comments Off on The De-Localization Sustainability Initiative: Renewable Energy by Lana Chow |

            “Stay local, grow local, buy local.”  From t-shirts to bumper stickers, green messaging everywhere says that “local” is the way to go.  Advocates of sustainability in all areas have touted “localization”–the use of local sources of energy and other resources–as a way to increase efficiency and reduce waste. “Locavores” advocate for food to be grown as close as possible to where it is consumed to reduce green house gas emissions.  “Bioregionalists” seek to create ecological, political, and cultural regions where sustainable processes are kept within natural local boundaries.  Green building initiatives encourage the use of locally grown forest wood in an effort to boost their sustainability objective.  Even state governments are pushing localization through initiatives which effectively require local consumption of resources.  New sustainability regulations aimed at protecting state resources, however, may violate the dormant Commerce Clause of the U.S. Constitution.

            Recent state legislation that limits the geographical source of renewable energy from out-of-state is another example of localization.  The motive for states to localize renewable energy differs from other sustainability initiatives in that the aim is less about reducing environmental impacts, but about improving the local economy.  States are interested in ensuring that renewable energy development creates green jobs and stimulates the economy.  However, states must draft legislation carefully in order to avoid violations of the dormant Commerce Clause.

            Recently, Massachusetts and California have both faced dormant Commerce Clause challenges to their RPS statutes.  In April 2010, an out-of-state developer and distributer, TransCanada Power Marketing, Ltd., sued government actors in Massachusetts for passing an RPS which benefitted local operators and discriminated against out-of-state operators.[1]  The “Green Communities Act” mandated that energy distribution companies only solicit long-term contracts with developers located in Massachusetts.  Additionally, the state added a carve-out provision to its RPS which required utilities to purchase a specified amount of solar power from in-state sources.  Unfortunately, the constitutional issues did not make it to court because the parties settled.  The settlement provided for reduced fees for those suppliers who were not in compliance with Massachussett’s renewable energy goals, and had signed contracts prior to January 1, 2010.[2]

            In California, dormant Commerce Clause challenges to the RPS remain up in the air, with pressure rising.  In January of this year, the California Public Utilities Commission (PUC) lifted a moratorium on a rule which limits out-of-state renewable energy eligible for the state’s RPS to 25% per major utility.[3]  The PUC additionally extended the effective term of the rule to 2013.  This rule is discriminatory on its face, in violation of the Commerce Clause by favoring in-state generators and depriving out-of-state generators from an equal seat at the bargaining table.  To pass muster under the dormant Commerce Clause, the state must show that “the law serves a legitimate local purpose and that this purpose could not be served as well by available nondiscriminatory means.”[4]  The purported purposes of the rule are to incentivize renewable generation, diversify the utilities’ energy portfolios, and improve the value of the RPS program to ratepayers.[5]  However, all of these objectives may be satisfied regardless of the physical source of the renewable energy.  Whether it is transmitted from a longer distance or shorter distance, the energy loss is accounted for at each balance station.  Therefore, the quality of the energy is in no way compromised by the place of importation.  So, the same purposes may certainly be achieved through the nondiscriminatory means of abolishing the 25% cap on imported energy.  In fact, if out-of-state players are kept out of the bargaining game, it is unclear how the  economic value will be passed on to ratepayers.  With more bidders (both in-state and out-of-state) vying for contracts with the utility companies, the rates will be reduced, and the savings may be passed on to the public.  As a practical matter, it is also questionable whether California itself can generate enough renewable energy to satisfy its RPS objectives (33% by 2020[6]) without help from no more than 25% out-of-state sources.  As the rule stands, it discriminates against out-of-state suppliers for the benefit of California based suppliers.

            This dormant Commerce Clause issue has made it increasingly important for states to be able to track renewable energy generated with Renewable Energy Certificates (RECs) to avoid “double dipping.”  RECs are non-tangible energy commodities which may be traded, sold, or bartered within the United States.  Each REC respresents 1 megawatt-hour (Mwh) of electricity generated from a renewable source.  The owner of a REC may claim that it has purchased renewable energy, though technically, the certificates are not tied to the energy.  For every 1MWh of renewable energy a source produces, it is credited with 1 REC.  A certifying agency then assigns a tracking number to the REC, and it is released to the open market for sales or trading.  It is important to track RECs carefully to avoid “double dipping.”  “Double dipping” is where renewable energy is counted twice.  This may happen if a source generates renewable energy and decides to sell it to an out-of-state utility.  The problem with this is that the source of generation may recover a REC unit from both the state of generation, as well as the state where the purchaser is located.  Thus, if not carefully tracked, the generator could recover tax breaks from its home state, even though the state itself would not reap the benefit of the renewable energy.  Also, erroneous tracking would result in false accounting of RPS requirements and inflated reporting of overall renewable energy generated in the U.S..

            The dormant Commerce Clause issue that in-state renewable energy generation legislation poses also begs the question whether Congress should consider a law which expressly allows limited in-state renewable energy generation requirements.  This may instigate renewable energy development in states which have been slow to engage in local projects due to their ability to purchase from out-of-state sources.  Additionally, this would incentivise more states to raise their RPS requirements if they knew that their efforts would create more in-state jobs and boost local economies, free clear of dormant Commerce Clause problems.

            On the other hand, the adverse impacts of local requirements may outweigh the benefits. Reduced competition from out-of-state sources could lead to higher prices for energy in each state.  These higher prices would likely be transferred to ratepayers.  Moreover, if Congress waived Commerce Clause restrictions on in-state preferences, states may permit development of renewable energy sites where it would be more efficient both environmentally and economically to instead import energy across state borders.  Moreover, isolated technological development within the state would be inefficient without pressure from out-of-state competition.  Therefore, it may not be economically, environmentally, or technologically advantageous for Congress to allow limited in-state renewable energy generation requirements.

            It remains to be seen where this push for localization of renewable energy generation will take us.  However, unlike the trend towards localization in other sustainability initiatives, renewable energy regulations pose a substantial constitutional issue.  States may need to lift limiting out-of-state generation requirements in their RPS’s in order to avoid dormant Commerce Clause violations.  In the alternative, Congress may dispel of the issue by expressly allowing in-state renewable energy generation requirements.  However, overall nationwide economic and environmental efficiency may increase if in-state and out-of-state energy generators are allowed to bid and sell equally.  It may be that the greenest policy is the de-localization of renewable energy.

[1]    William H. Holmes, TransCanada challenges Massachusetts RPS, http://www.lawofrenewableenergy.com/2010/04/articles/renewable/transcanada-challenges-massachusetts-rps/ (last updated Apr. 22, 2010).

[2]    Erin Allworth, TransCanada reach partial settlement in lawsuit,  http://www.boston.com/business/ticker/2010/05/state_transcana.html (last updated May 28, 2010).

[3]    Renewableenergyworld.com, The California Public Utilities Commission Lifts Moratorium on Approval of Tradable Renewable Energy Credit Transactions; Limits Use of Out-of-State Generation for California RPS Compliance, http://www.renewableenergyworld.com/rea/partner/stoel-rives-6442/news/print/article/2011/01/the-california-public-utilities-commission-lifts-moratorium-on-approval-of-tradable-renewable-energy-credit-transactions-limits-use-of-out-of-state-generation-for-california-rps-compliance (last updated Jan. 19, 2011).

[4]              Maine v. Taylor, 477 U.S. 131, 138 (1986).

[5]    Independent Energy Producers Association, Application of the Independent Energy Producers Association for Rehearing of Decision 11-01-025, http://docs.cpuc.ca.gov/efile/R/130775.pdf (accessed Feb. 28, 2011).

[6]    California Public Utilities Commission, RPS Program Overview, http://www.cpuc.ca.gov/PUC/energy/Renewables/overview.htm (last updated Nov. 17, 2010).

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