Last week, the California Public Utilities Commission (CPUC) issued a Proposed Decision authorizing the use of unbundled and tradable renewable energy credits (RECs) for compliance with California’s Renewable Portfolio Standard (RPS).  This Proposed Decision also sets forth the structure and rules for a tradable REC market and for the integration of RECs into the RPS flexible compliance system.          

Established in 2002 and accelerated in 2006, California’s RPS program requires electric corporations to increase procurement from eligible renewable energy resources by at least 1% of their retail sales annually, until they reach 20% by 2010.  Currently, California is considering raising the RPS to an even more ambitious 33% by 2020.

A REC generally represents the environmental and renewable attributes of renewable electricity as a separate commodity from the energy itself.  A REC can be sold either “bundled,” with the underlying energy, or “unbundled” into a separate REC trading market.  When traded in the voluntary market, a company may acquire non-renewable energy from its local energy provider and at the same time purchase an equivalent amount of RECs that have been “unbundled” from renewable energy produced elsewhere, and claim that it is powered by clean energy.  In an RPS compliance market, the RPS-obligated load serving entities can use unbundled RECs, rather than actual renewable energy, to comply with their RPS mandates.   

In August 2008, the CPUC defined an REC for RPS compliance purposes as “a certificate of proof, issued through the Western Renewable Energy Generation Information System (WREGIS), that one megawatt-hour of electricity was generated by an RPS-eligible renewable energy resource and delivered for consumption by California end-use customers.”  The CPUC’s follow-on Proposed Decision, authorizing the use of tradable RECs for RPS compliance is expected to provide more options and flexibility for entities with RPS compliance obligations.  

As the Proposed Decision stated, the CPUC’s REC market rules were developed “with a view to simplicity, transparency, fairness and ease of administration.”  In order to “both allow a new market to develop and provide robust rules for a mature [tradable] REC market,” the rules do not restrict participation in tradable REC transactions, but do require participants to meet CPUC REC trading requirements and requirements set by the WREGIS.  To protect ratepayers from excessive payments for tradable RECs in the early years of the market, the rules also set a transitional cap of $50 per REC, which is the amount of the penalty for noncompliance with RPS procurement obligations.           

Comments on the Proposed Decision are due November 18, 2008.

For further information about this topic, please contact Akin Gump.