Court ruling: a boost for renewables or can of worms?

Appeals court ruling will allow wind energy from the northern Plains to reach population centers in the Midwest. But the ruling may force states to rewrite their renewable portfolio standards, opening them up to attack.   

Last week the 7th Circuit Court of Appeals upheld a FERC plan to apportion costs of new transmission, designed primarily to carry wind from the sparsely populated parts of Minnesota, Iowa and the Dakotas into more populated parts of the MISO region, by spreading the cost of the transmission across ratepayers in the populated regions where the power would be delivered. The decision has been hailed as a victory for renewable energy. FERC's ability to structure recovery from a broad pool of ratepayers to support new transmission capacity for prime renewable development sites that have been undeveloped because they were too remote from existing transmission capacity will create opportunities for many new large scale wind, solar and geothermal developments.   

The ruling was challenged by utilities and regulators in Illinois and Michigan on the basis that each state had its own renewable energy mandate and within that mandate there was a preference to meet goals with in-state renewable generation. The argument followed that by forcing its ratepayers to carry these transmission costs FERC was effectively forcing the use of out of state renewable power. The key to the Court's decision was that it viewed the in-state limits as violating the Commerce Clause. In its simplest form the Commerce Clause ensures fairness in interstate commerce and in this case the in-state preference was viewed as creating an unfair advantage for in-state produced power over out-of-state produced power.

The potential ramifications of this decision on renewable portfolio standards (RPS) are significant. Most state RPS programs are structured with a bias for in-state renewable power production, and many (if not all) of these out-of-state restrictions may now be unenforceable.

It is just a matter of time before someone challenges another state's in-state preference rules. In fact, based on what I have seen in the neighboring markets, a challenge to California's restrictions on imported renewable power seems inevitable in light of this ruling. Whether a challenge is raised, many states will now begin re-examining the structure of their portfolio standards, and in this review lurks a substantial risk for renewable development supported by RPS programs.

The most serious concern for clean energy supporters should be the effect of programmatic uncertainty. Most states will try to structure modest, nuanced work-arounds keeping programs mostly in tact while resulting in some in-state bias without violating the commerce clause. Others may undertake more sweeping reform efforts. In either case, changes to the programs create uncertainty with the market value of these programs. Already many RPS programs are seen by some investors as too volatile (politically or because of market volatility) to invest in, resulting in many investors simply refusing to back projects in these markets. Greater programmatic uncertainty would likely further reduce capital available to these markets.

Additionally, the timing isn't great for an RPS reboot. Groups like ALEC have been actively trying to roll back RPS programs across the country. Opening the legislative process for re-writing, or even modification, will create a number of new opportunities to challenge renewable mandates both in concept and in application.

Another potential outcome from this decision is that adjustments to RPS programs to find other ways to support in-state development without violating the Commerce Clause may (intentionally or not) lead to a bias away from utility scale projects and towards greater support for distributed generation. Given the pace of growth in the distributed markets, especially photovoltaics, this kind of change bears careful watching as it could quickly reshape the entire energy landscape.