Renewable Portfolio Standards (RPS) are regulatory mandates requiring electric utilities and electricity suppliers (ESCOs) to produce a certain percentage of their electricity from renewable energy sources such as wind, solar, biomass, and hydroelectric power. RPS policies aim to promote clean energy, reduce greenhouse gas emissions, and support sustainable energy development. As these standards become more stringent, costs in most markets have risen and will continue to increase, impacting costs for end users.
RPS Costs are Typically Included in an Electric Supply Contract
When an end user enters into a contract for electricity with a third-party energy supplier, also known as an ESCO, there are several components beyond the cost of supplying the physical electrons to the meter. These additional charges, often referred to as non-energy cost components, help cover costs such as transmission expansion, construction of new power plants, and the integration of renewable energy. One significant non-energy cost component is the renewable portfolio standards (RPS), which varies from state to state.
Renewable Portfolio Standards (RPS)
RPS mandates require utilities and suppliers to obtain and deliver the state specific percentage of renewable energy across the load they serve in that state. As these percentages increase over time, so do the associated costs. Suppliers can meet the RPS mandate in two ways: generating the required portion of renewable energy themselves or purchasing renewable energy certificates (RECs) to prove compliance.
Compliance and Alternative Compliance Payment (ACP)
If suppliers fail to meet RPS requirements, they must pay an alternative compliance payment (ACP), which is often much higher than the cost of procuring the necessary RECs or generating the required renewable energy. As a result, end users are charged not only the costs incurred by suppliers to meet these requirements but also a risk premium to protect suppliers from potential ACP penalties.
Solar RECs (SRECs)
In some states, RPS percentages come with specific solar carve-outs, requiring a specific percentage of renewable energy from solar resources. SRECs are typically more expensive due to higher cost of solar generation and limited availability. Although the SREC percentage is generally smaller, it still contributes significantly to overall RPS costs.
Understanding Supplier Practices
End users need to be aware that not all suppliers handle RPS costs the same way. Some suppliers will fix these costs for the duration of the contract, while others may adjust the costs if RPS percentages or associated risks increase during the contract term. It is imperative for end users to understand these nuanced differences in their contract terms and conditions, as the perceived rate can change depending on how this language is defined.
The Future of RPS Costs
RPS costs are expected to continue rising as states support the transition to renewable energy. While some states have seen significant cost increases, as indicated in the chart above, others have been slower to raise their mandated renewable percentages. However, the overall expectation is that states with RPS mandates will continue to increase percentages as we approach 2030 and beyond, driving up costs for end users in those states.
Conclusion
As RPS targets rise, compliance costs will increase, leading to higher electricity rates. End users can mitigate future pricing risks by understanding the terms and conditions of their supplier agreements and conducting due diligence to manage contractual risks effectively.
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