Adding it All Up for Voluntary Buyers of Renewable Energy

Posted by Caitlin Marquis and Danny Waggoner on Jan 28, 2021 1:37:35 PM

Adding it All Up for Voluntary Buyers of Renewable Energy

The substantial growth in renewable energy in the U.S. comes from two sources: purchases made by utilities and retail suppliers to comply with mandatory targets such as state Renewable Portfolio Standards (compliance purchases), and purchases from customers that go beyond these targets (voluntary purchases), usually in pursuit of sustainability goals. These two types of purchases in combination drive renewable energy development in the U.S., but how they interact gets tricky, especially as states ramp up their clean energy targets to 100%. How do voluntary purchasers get what they pay for – and states reach their ambitious targets – in a way that’s fair for both? It’s all about “additionality,” and to date, states have taken different approaches.

Voluntary renewable energy purchases are made by every type of energy consumer, such as households, universities, municipalities, and companies that range from small businesses to large enterprises. These voluntary purchases span from small renewable energy credit (REC) purchases through a retail electric provider to long-term power purchase agreements to direct ownership of large solar and wind facilities. While compliance purchases are a significant driver of renewable development, voluntary purchases are substantial, now representing 32% of non-hydro renewable generation in the U.S.  

Voluntary purchasers want their private investments to count for something. As such, ensuring additional renewable energy generation results from purchases is an essential requirement for the voluntary market. In general, this “additionality” is protected by making sure that there’s no double counting between the voluntary and compliance purchases (i.e., a voluntary REC is not counted toward compliance goals) and that compliance purchases are not reduced to offset voluntary purchases, leaving total renewables left unchanged. 

To date, states have generally guarded against endangering additionality by making compliance targets completely independent from voluntary market purchases. That is, states would leave compliance targets unchanged, regardless of the volume of voluntary renewable energy purchases. As states increase their renewable or clean energy goals to 100% of energy consumption, maintaining this practice becomes impractical, as it sets states on a path to achieve total clean energy deployment (from both compliance and voluntary purchases) in excess of 100% of electricity consumption.

Another issue that can emerge if voluntary renewable purchases are not adequately considered is double charging, which penalizes companies that have taken early action and threatens to depress voluntary demand for renewable energy. This occurs when a compliance target fails to take into account action by customers also covered by that compliance mandate, resulting in such customers paying once for renewable generation to meet compliance targets (through a retail rate rider, for example) and again for renewable purchase agreements it has entered into voluntarily (through a virtual power purchase agreement or other procurement mechanism). Many large companies have set, and are on pace to achieve, renewable energy targets that predate and outpace state compliance targets, yet these early actors risk being penalized for doing what they thought was the right thing. States and other customers ultimately serve to lose out as well if voluntary demand for renewable energy dries up as a result of this double-charging effect; left to its own devices, the voluntary market will willingly pick up the tab for a significant portion of the transition to a cleaner grid.

As state goals approach 100%, some reconciliation of the compliance targets with voluntary purchases is reasonable. Failure to do so risks dampening demand for renewable energy among voluntary buyers and increasing the cost of reaching 100% goals.  States have begun grappling with this, and how they do the math matters.  In this post, we examine the approach of three states and their impact on the viability of the voluntary market.

New York

The Empire State has some of the most aggressive renewable energy targets in the country, with a legal mandate for load-serving entities (LSEs) to purchase enough renewable energy to cover 70% of energy consumption in the state by 2030. The PSC recently implemented this requirement, building off a 2016 order that established a 50% target by 2030. The target is set as a statewide Clean Energy Standard, where both voluntary purchases and compliance purchases count toward the goal. Every two years, the Commission reviews progress toward the Clean Energy Standard, accounts for growth in voluntary market purchases, and sets new compliance purchase requirements for LSEs to make up the difference. To express it mathematically, voluntary plus compliance purchases make up the numerator, and total energy consumption in New York is the denominator. Under this method, new increases in voluntary purchases are quickly offset by lowered compliance purchase targets during the two-year review cycles. As a result, while companies and individuals are investing their dollars in renewable energy, no net increases in renewables result over the compliance requirement and no associated greenhouse gas reductions take place. Instead, their purchases represent a voluntary shift in cost from electric customers to voluntary purchasers for the same amount of renewables. Indeed, the New York Commission’s latest order acknowledges voluntary purchases as a means of financing state targets (see page 101).

Virginia

Voluntary renewable energy buyers can arguably be credited with jumpstarting the renewable energy industry in Virginia: When the Commonwealth’s voluntary RPS sat at just 15%, large companies from the technology, retail, and manufacturing sectors were pushing for increased access to renewable energy and pursuing projects at every possible turn. During the 2020 legislative session, AEE pushed the Commonwealth to establish a compliance  target through the Virginia Clean Economy Act (VCEA), which is now law. The VCEA requires utilities to achieve 100% clean energy by 2045 or 2050, depending on the utility. Importantly, the law also acknowledges the role that large voluntary buyers have played in getting the state to where it is today and allows for the continued growth of the voluntary market. 

Specifically, the bill included an “Accelerated Renewable Energy Buyers Provision” exempting renewable energy buyers from the costs of the RPS as long as their renewable energy purchases met certain criteria, including exceeding the targets of the RPS. In exchange, an equivalent amount of consumption would be taken out of the denominator of the utilities’ compliance requirements. In effect, this provision removed eligible voluntary buyers entirely, leaving them free to pursue renewable projects without fear of being double-charged, thereby enabling the voluntary market to accelerate the Commonwealth’s transition to a cleaner grid. This approach also avoids shifting any costs onto other ratepayers and even benefits ratepayers by enabling voluntary buyers to take on some of the upfront cost of the energy transition.

Illinois

Other than ensuring that the same REC will not be counted twice, Illinois currently has no provisions in its RPS to accommodate the voluntary market. With the state now halfway toward  its RPS target of 25%, the concerns around double-charging are minimal. However, as the state considers legislative proposals that would get it to 100% clean energy, whether or not the RPS takes into account voluntary purchases will be make-or-break for the continued viability of the voluntary market. Illinois is currently ranked the #1 state in the U.S. for corporate procurement opportunities, with more than 1.6 GW of new renewable energy projects with corporate offtakers (see table, below). These voluntary purchases have contributed significantly to the state’s overall renewable energy buildout, accounting for roughly one third of all wind and solar in the state—meaning that there’s a lot to lose if Illinois fails to enable voluntary buyers to continue to make purchases above and beyond the renewable energy procured through the Illinois Power Authority. In addition, most voluntary buyers have public commitments to move significantly faster than the state’s goal of 100% clean energy by 2050, and many even have targets to drive emission reductions beyond their own operations. 

Yet none of the current legislative proposals in Illinois take the voluntary market into account. AEE has been working with the Advanced Energy Buyers Group to advocate for inclusion of an Accelerated Renewable Energy Buyers Provision, similar to that included in the VCEA. The provision would establish criteria for voluntary renewable energy purchases (including parameters like the location, vintage, and contract duration of voluntary renewable purchases), remove voluntary purchases from both the numerator and denominator of the RPS, and remove energy sales covered by voluntary purchases from also being charged RPS compliance costs. To the extent that the RPS charge recovers the cost of other priorities (such as the cost of certain equity and just transition provisions), additional parameters would be set to ensure that voluntary buyers are still contributing a fair amount. With such a provision, Illinois will be on a path to achieve 100% clean energy faster and more cost-effectively through the combined efforts of voluntary buyers and compliance purchases—better for businesses and better for ratepayers. Without it, Illinois risks seeing its robust voluntary renewable energy market wither away.

Table Voluntary RE Purchases in Illinois

Numerator or Denominator? Why it Matters

If voluntary purchases are added directly to the numerator of renewable generation and compliance purchases are sized to make up the difference to fulfill the current requirement, the effect is a 1-to-1 reduction of compliance purchases. When voluntary purchases are subtracted from the denominator of total consumption, some compliance purchases are still displaced, but at a slower rate. Some displacement needs to happen at the point of achieving 100% renewable energy, as both voluntary and compliance purchases combine to equal 100% of consumption. However, with the denominator approach, at least some additionality is preserved, especially at lower levels of renewable generation. With the numerator approach, however, no additionality is preserved.

Take for example the two graphs below. The two lines represent necessary compliance purchases given a renewable target that rises over time, ultimately reaching 100%, and assuming a specific amount of voluntary purchases (for simplicity, we have assumed that voluntary purchases do not grow, but in reality they are likely to rise over time as well). In Figure 1, which assumes total state consumption of 100 GWh and voluntary purchases of 20 GWh, subtracting voluntary purchases from the denominator shows increased compliance purchases, though the increase over adding voluntary purchases to the numerator decreases as the target approaches 100%. 

Figure 1 20 GW-745

Now look at the second graph (Figure 2), where voluntary purchases are doubled to 40 GWh. Both the denominator and numerator approaches decrease compliance purchases, but the numerator approach dramatically decreases purchases at lower renewable levels compared to the denominator approach.

Figure 2 40 GW-745

As states — and potentially the federal government — set increasingly ambitious clean energy targets, they would be wise to consider the potential for the voluntary market to enable a  faster transition to a clean grid at a lower cost to ratepayers. Failure to acknowledge and adjust for voluntary renewable energy purchases will have the consequence of diminishing or even erasing voluntary demand due to double-charging. On the other hand, setting criteria and properly accounting for voluntary renewable energy purchases will enable voluntary buyers to continue to play a role as accelerators of advanced energy technologies. Above all, in pursuit of 100% clean energy, there’s no reason for the voluntary and compliance markets to be working against each other.

For more on voluntary purchases of renewable energy, download the Advanced Energy Buyers Group report, “Organized Wholesale Markets and Corporate Advanced Energy Procurement," by clicking below. 

Download the Report