Catching the wind: a legal and economic comparison between South Dakota's Renewable, Recycled and Conserved Energy Objective and a Renewable Portfolio Standard.

• Author: Cwach, Ryan

1. INTRODUCTION

   In rural Bon Homme, Hutchinson, Charles Mix, and Douglas Counties, a group of local investors and landowners have leased enough land to support a significant wind farm. (1) This is no small feat; their efforts represent years of preparation and the leasing of over 30,000 acres of land. (2) They even have requested three interconnection points to integrate potential turbines to the Western Area Power Administration's power transmission grid. (3) If ever there were a place in South Dakota deserving of a wind farm, this is it. But despite their efforts, they cannot find a buyer of the wind energy they would like to produce in their counties. (4)

   The local investors and landowners in Bon Homme County represent a story that South Dakotans have come to accept as truth: South Dakota's wind industry is not what it should be. South Dakota ranks fourth in wind potential (5) but was ranked sixteenth in total installed wind capacity at the end of 2010. (6) Unfortunately, this discrepancy is likely to continue. Development has come to a halt despite continued development in North Dakota. (7) Now, wind development has slowed nationally due to Congress' failure to extend the wind production tax credit. (8) As a result, 92 South Dakotans lost their good-paying jobs creating wind turbines. (9)

   With all state economies suffering from the same national paralysis, we believe South Dakota has the unique opportunity today to revive South Dakota's wind industry by implementing a Renewable Portfolio Standard ("RPS") to kick start our wind economy rather than simply waiting for one transmission line to develop after 2015. In fact, the South Dakota legislature already took significant steps to create the kind of regulatory framework necessary to develop wind energy when the legislature passed the South Dakota Renewable, Recycled, and Conserved Energy Objective ("RRCEO") in 2008. (10) While the RRCEO was a step in the right direction, the law suffers from one substantial flaw and must be changed. South Dakota would benefit from restructuring the RRCEO to create an RPS that would require South Dakota retail electricity generators to dedicate a portion of their electricity generation to renewable energy, or be subject to penalties.

   This Article uses an econometric model to compare the estimated wind production the current South Dakota RRCEO is expected to generate with the estimated wind production generated by a typical RPS. Specifically, Part II will describe the RRCEO's legal structure and the basic changes necessary for the South Dakota legislature to amend the RRCEO to create an RPS. Part III will explain the model developed to compare the RRCEO and an RPS and conclude by reporting the results of the model.

2. A COMPARISON OF THE RRCEO AND AN RPS

   1. RENEWABLE, RECYCLED, AND CONSERVED ENERGY OBJECTIVE

      The South Dakota legislature enacted, and Governor Rounds signed, the RRCEO in February 2008. (11) The RRCEO establishes a goal for each retail electricity provider to dedicate ten percent of retail electricity sales to renewable or recycled energy by 2015. (12) The law was amended in 2009 to also allow conserved energy to count towards the ten-percent objective. (13) The South Dakota Public Utilities Commission ("SD PUC") promulgated rules for the RRCEO in January 2012. (14) This section will explore the laws and rules that constitute the RRCEO.

      S.D.C.L. section 49-34A-101 establishes that "a state renewable, recycled, and conserved energy objective that ten percent of all electricity sold at retail within the state by the year 2015 be obtained from renewable, recycled, and conserved energy sources." (15) The RRCEO applies to all retail electricity providers in the state "regardless of the ownership status of the electricity retailer." (16) This means that the objective applies to municipal and rural electric cooperatives as well as public utilities such as Northwestern Energy or Xcel Energy.

      An electricity retailer can satisfy the ten-percent objective by either delivering qualifying renewable and recycled energy megawatt hours ("MWh") to retail consumers or by purchasing and retiring renewable or recycled energy credits to offset non-qualifying generation by 2015. (17) Qualifying renewable and recycled energy includes wind, solar, hydroelectric, hydrogen, biomass, geothermal, and recycled energy that "produce[s] electricity from currently unused waste heat resulting from combustion or other processes and which do not use an additional combustion process." (18) In-service Hydroelectric generation in-service before July 1, 2008 cannot be used to satisfy the objective, but can be deducted from a utility's 2008 baseline total generation for purposes of calculating the required renewable generation necessary to reach ten percent by 2015. (19)

      An electricity retailer can either generate its own renewable energy or can buy Renewable Energy Credits ("RECs") from another retailer who is generating renewable energy. (20) In practice, a utility demonstrates compliance towards the RRCEO by retiring RECs that a utility receives from their generation or REC purchase. (21) An REC is "the property rights to the environmental, social, and other nonpower qualities of renewable electricity generation." (22) The value of one REC is the equivalent of one generated MWh of renewable energy. (23)

      If an electricity retailer does not generate their own renewable or recycled generation, they can purchase RECs to satisfy the objective. (24) An REC effectively serves as a medium of exchange within a market between utilities. (25) A utility with excess renewable energy generation for their state standard can "sell" that excess generation to another utility that has not produced enough renewable energy. (26) While the purchasing utility does not in fact generate the renewable electricity, the credit they purchase will offset a portion of their nonrenewable generation to make them compliant with a state standard. South Dakota allows an electricity retailer to purchase credits from an in-state or out-of-state generator. (27)

      RECs can be purchased on regional and national markets. The South Dakota PUC, pursuant to Elouse Bill 1016 and S.D. Codified Laws 49-34A-106, joined the Midwest Renewable Energy Tracking System ("M-RETS"). (28) "M-RETS tracks renewable energy generation in participating States and Provinces and assists in verifying compliance with individual state/provincial or voluntary Renewable Portfolio Standards and objectives'" while also producing and issuing "RECs for each renewable MWh." (29) Therefore, any retail electricity provider who generates renewable energy is required to report to M-RETS in order for M-RETS to issue RECs for that generation.

      The South Dakota Legislature in 2009 made a very important addition to the law by requiring all retail electricity providers participating in the RRCEO to provide an annual report to the SD PUC about the provider's efforts to meet the objective. (30) Each report must include information about any "qualifying electricity delivered and renewable and recycled energy certificates purchased and retired as a percentage of annual retail sales, [and] the amount of conserved energy as a percentage of annual retail sales...." (31) The reports must also include a "brief narrative report" about efforts and challenges to reach the ten-percent objective. (32)

      The final and most important component of the RRCEO is that it is voluntary. In other words, there is no penalty or reward to a retail electricity provider for meeting the ten-percent objective. (33) By allowing the ten-percent objective to be voluntary, the state legislature developed a regulatory structure for a state goal that an electricity retail provider may or may not strive to meet. South Dakota utilities have no incentive to develop South Dakota's renewable resources or purchase RECs. Steve Wegman, former Executive Director of the South Dakota Wind Energy Association ("SDWEA") is more blunt: "[I]f I can't get a reward for it and I will not get penalized, I'm only going to [invest in renewables] for customer goodwill, and that is not enough." (34)

      Despite the economic and environmental benefits associated with wind energy, South Dakota utilities have not responded to the ten-percent goal called for in the RRCEO. In fact, South Dakota electricity providers are currently planning to build low cost natural gas power plants instead of wind farms. For example, Otter Tail Power Company plans to add 250 megawatts ("MW") of natural gas capacity by 2018 and only 50 MW of wind capacity by 2012. (35) Northwestern Energy plans to add an additional 50 MW of natural gas capacity in 2012. (36) The combined 300 MW of additional natural gas capacity overwhelms the 50 MW of wind power capacity these companies propose to add. (37)

      The goal of the RRCEO was to provide an incentive to South Dakota utilities to develop our wind resources. (38) Yet, our utilities are choosing the natural gas alternative. Clearly, the RRCEO is failing. Though our state legislature failed to capitalize on wind energy potential in previous sessions, South Dakota's wind potential still exists today.

   2. RENEWABLE PORTFOLIO STANDARD

      This section will outline the necessary changes that must be made to the South Dakota RRCEO to create an RPS that matches South Dakota's actual wind production with its potential. There is no model RPS. However, there are common components of state renewable portfolio standards that appear in every state. Due to the varying goals and constituencies among states, "[s]tate RPS programs vary widely in terms of their specific provisions." (39) Despite the difference in the details of these components, a general description of RPS compliance schedules, monetary penalties for failing to meet the compliance schedules, and how a state can utilize those RPS penalty funds will suffice to guide South Dakota policy makers in implementing a South Dakota RPS.

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