State renewable energy requirements. In addition, more than half the states have enacted renewable energy standards. These standards are a crazy quilt of requirements, calling all different types of technologies renewable. For example, in Montana, were one to burn scrapped, creosote-laced railroad ties in a boiler for the production of electricity, this would be classified as renewable. But all the standards similarly have the requirement that local utilities purchase a particular amount of renewables, usually on the basis of a percentage of a utilitys total sales. In California, for instance, the state requirement is 33 percent by 2020, although the president of the states senate has proposed increasing the requirement to 100 percent by 2050, and hastening an existing requirement for 50 percent to 2025, down from 2030. To comply with these laws, utilities and other suppliers of power must acquire a sufficient number of RECs, or renewable energy credits, which are government-created commodities equal to one megawatt-hours production of a qualified renewable. It all makes for a great bumper sticker25% by 25!but these laws have the practical, and rather anti-conservationist, effect of introducing additional power plants into markets where they are not necessary to supply customers.
These twin policiesthe federal tax credit and the state renewable standardshave led to a glut of power sluicing around the sun-soaked southwest and the windy Great Plains, and have had significant unintended consequences for the market in electric power. Wind and solar facilities, unlike coal or gas, have no variable or fuel cost. So one would think that they would bid, or be willing to take a market price, of zero or slightly more. That supposition is wrongand not because they need a number larger than zero to make their projects pencil out. Since the IRS awards the tax credit on the basis of production, and since RECs likewise are created only when a wind farm or solar plant is producing energy, these renewable power plants have a negative marginal cost equal to the inverse of the value of the PTC plus whatever a REC is worth to a utility under state law. In other words, renewable power plants are willing to pay consumers to take their energy output, up to $23 per megawatt-hour, lest they lose out on the PTC and the piece of paper that is the REC. This is not an insignificant amount of money. Audits from one large utility, the federally owned Bonneville Power Administration, suggest that some renewable plants earn twice the amount of money from these twin government policies as they do from the actual sale of electricity.
As the amount of renewable energy grows, there are occasions when non-dispatchable energy, including renewables and other power plants that cannot easily be ramped down, such as nuclear reactors, outstrips actual customer demand. In these situations, electricity prices go negative. Thereupon an amusing game of arbitrage begins. In California, a REC is worth morebecause of the states renewable energy policy, which is often called ambitiousthan a REC in, say, Arizona. So when there is a surplus of solar energy in California, producers look to dump the excess on someone else to ensure they still produce a REC. Arizona may not need the power either, but its solar producers wont accept as low of a negative price as the Californians. Thus, in the past year of trading, California solar has exported to Arizona, in circumstances where solar production there must be shut off to make room for it.
