STATE OF CALIFORNIA
ENERGY RESOURCES CONSERVATION
AND DEVELOPMENT COMMISSION
Implementation of Renewables Portfolio Standard Legislation (Public Utilities Code Sections 381, 383.5, 399.11 through 399.15, and 445; [SB 1038], [SB 1078]) / Docket No. 03-RPS-1078RPS Proceeding
COMMENTS OF
RIDGEWOOD RENEWABLE POWER, LLC
ON
RENEWABLE PORTFOLIO STANDARD, RENEWABLES COMMITTEE DECISION ON PHASE 2 IMPLEMENTATION ISSUES - DRAFT REPORT
July 17, 2003
Carol A. Smoots
Paul C. Lacourciere
Thelen Reid & Priest LLP
101 Second Street, Suite 1800
San Francisco, CA 94015
Daniel V. Gulino
Senior Vice President & General Counsel
Ridgewood Power, LLC
947 Linwood Avenue
Ridgewood, New Jersey 07450
Attorneys for
Ridgewood Renewable Power, LLC
9
SF #769425 v4
COMMENTS OF
RIDGEWOOD RENEWABLE POWER, LLC ON
RENEWABLE PORTFOLIO STANDARD, RENEWABLES COMMITTEE DECISION ON PHASE 2 IMPLEMENTATION ISSUES - DRAFT REPORT
Ridgewood Renewable Power, LLC (“Ridgewood”) is a developer, owner and operator of renewable electricity generating facilities in California, throughout the United States and in the United Kingdom. Ridgewood has actively participated in the development of renewable portfolio standards (“RPSs”) in many states, and, through its affiliate Ridgewood Olinda, LLC, has participated extensively in the California Public Utility Commission (“CPUC”) proceedings to implement the California RPS. Ridgewood has reviewed the Renewable Portfolio Standard, Renewables Committee Decision on Phase 2 Implementation Issues - Draft Report (the “Draft Report”) and, while Ridgewood believes the Draft Report represents a positive step towards the development of a successful RPS in California, there are several matters the Commission should clarify before the Draft Report is adopted.
I. The Definition Of “Repowered” Should Be Clarified.
Ridgewood supports the Commission’s Renewable Committee’s (the “Committee”) requirement that an existing facility must be repowered in order to qualify for supplemental energy payments (“SEPs”). However, the proposed standards for this requirement should be clarified to ensure that the “repower” is material before the generator is eligible for SEPs. Clarity on this definition is needed so that renewable generators, and their investors and lenders, will know in advance what investments in a power plant will qualify for supplemental energy payments.
A. The Meaning Of “Prime Generating Equipment” Should Be Clarified.
Under the Draft Report, in order for a facility to be repowered, “its prime generating equipment must be replaced with new prime generating equipment, that is, equipment that has not been used before.”[1] Ridgewood strongly supports this requirement and believes it is one of the most critical aspects of the test. If a renewable generator does not replace the prime generating equipment with new equipment, there is a significant risk that even minor rebuilding or refurbishment of the prime generating equipment could qualify for SEPs. Given that the Committee has acknowledged that the goal of the RPS program is to promote the development of new renewable resources, awarding SEPs for minor rebuilds or refurbishment of existing equipment could undermine that intent. Further, because only limited funds are available to make supplemental energy payments, it is important that these funds be directed toward major modifications and additions.
The term “prime generating equipment” requires further clarification in order to eliminate any ambiguity. As the Committee recognizes, for wind generators, the prime generating equipment is the wind turbine generator. For landfill gas-fired generators, however, the prime generating equipment is the gas-turbine or engine used to turn the generator. Similarly, for geothermal generators, the primary generating equipment is the steam turbine, and for biomass generators, the primary generating equipment is the boiler. Ridgewood requests that the Commission clarify that these components constitute the “prime generating equipment” and must be replaced with new equipment in order for a facility to be considered “repowered.”
B. The Definition of “Repowered” Should be Modified To Require That Replacement Of Prime Generating Equipment Results In Performance Improvements.
In order to qualify for SEPs, when an existing renewable generator is repowered, the modification should go beyond simply extending the life of the existing facility. The Committee has concluded that the reason the Legislature made repowered facilities eligible to receive SEPs is that this would encourage modifications that enhance the efficiency of these existing facilities. Despite this conclusion, this concept has not been incorporated into the definition of “repowered”.
Ridgewood agrees with the Committee’s interpretation of the intent underlying the legislation and with the decision to allow repowered facilities to receive SEPs. Because the costs incurred by a renewable generator to improve the performance of the prime generating equipment can be substantial, and there are substantial benefits to California if these improvements are made, the decision to award SEPs for these modifications serves an important purpose. To make sure that supplemental energy payments are properly targeted, however, where the improvements are not intended to improve facility performance, the repowered facility should not be eligible to receive SEPs.
Because the concept of enhanced efficiency is an important justification underlying the eligibility of repowered facilities for SEPs, it should be incorporated into the definition of “repowered.” Ridgewood recommends that the definition of “repowered” be modified to provide that the replacement of the prime generating equipment with new prime generating equipment must result in improved facility performance above the performance of the facility as originally constructed, either through improved efficiency in generating electricity or through reduced air emissions on a per kilowatt-hour basis.
C. The January 1, 2002 Eligibility Date Should Be Retained.
Ridgewood supports the Draft Report’s requirement that in order for a facility to be eligible for SEPs it must have begun commercial operation after January 1, 2002. The Draft Report appropriately adopts a single, fixed date rather than adopting a date that changes, such as requiring facilities to be on-line after the date of a utility solicitation. Renewable generators that begin commercial operation after January 1, 2002 should be permitted to bid into RPS solicitations without losing their ability to obtain SEPs at a later date. Any other result would discourage investment in renewable generation facilities in California prior to the date when RPS contracts are awarded.
This requirement should be extended to apply to repowered facilities as well. The justifications underlying the Committee’s decision to preclude renewable generators that were operational before January 1, 2002 from receiving SEPs are equally applicable to repowered facilities. Such investments would have been performed by the generators without reliance on the availability of SEPs and thus there is no need to consider such investments when determining eligibility for SEPs. As a result, as long as the repowering commences after January 1, 2002, the generator should be eligible for supplemental energy payments irrespective of the date on which the repower is finally compete.
D. The Tax Basis Of All Tangible Property Owned Or Leased By A Generator Or Its Affiliates And Used To Generate Electricity Should Be Accounted For When Evaluating The 80 Percent Threshold.
Ridgewood supports the Draft Report’s requirement that, in order for a facility to be “repowered,” the capital investments associated with the repowering must equal at least eighty percent of the tax value of the facility. Ridgewood further supports the Draft Report’s use of tax records to make this determination and basing this determination on the depreciated value of the existing equipment plus the original tax basis of the capital improvements. The Draft Report should be modified to clarify, however, that the tax value of the facility is the federal tax value of the facility’s United States Internal Revenue Code, Title 26 of the U.S. Code (26 USC) Section 1245 and 1250 tangible property. The tax value of the existing tangible property should be the pre-2002 tax basis of the Section 1245 and 1250 property, less accumulated tax depreciation (the adjusted tax basis) and the tax value of the capital improvements should be the post-2002 tax basis of the Section 1245 and 1250 tangible property.
In addition, it is also important to recognize that generators do not always own all of the equipment necessary to generate electricity. Some of this equipment is leased from third parties pursuant to sale-lease back financing. Where equipment is leased from third parties, the depreciated value of such leased equipment should be included when calculating the tax basis of the entire facility. Those generators using leased equipment should be required to obtain appropriate tax information from the actual owner.
Further, some of the equipment necessary to generate electricity is neither owned nor leased by the electricity generator. Such equipment may include landfill gas collection systems, gas clean-up equipment, compressors or flares. Because the generator neither owns nor leases such equipment and the generator has no control over such equipment, this equipment should be excluded from the calculation of the federal tax value of the generating facility.
Finally, some of the tax value associated with a generating facility may be assigned to intangibles such as power purchase and sales agreements, landfill gas rights or goodwill. Because these intangibles are not part of the actual generating facility, the Draft Report should be modified to clarify that the tax value of such intangibles will not be included when calculating the federal tax value of the facility.
In order to implement these clarifications, the Commission should modify the definition of the equipment to be included when calculating the federal tax value of a repowered facility. Thus, the equipment included in calculating facility tax value should be all new and/or existing equipment and structures at the facility, owned or leased by the generator or its affiliates, that is used to generate electricity, but excluding the tax basis of any land or intangibles owned or leased by the generator and equipment or structures owned by unrelated third parties.
E. The Commission Should Establish A Pre-Certification Process For Repowered Facilities.
It may be difficult for renewable generators to ascertain with an adequate degree of certainty whether their proposed repowering will allow the facility to qualify for supplemental energy payments. Eligibility for supplemental energy payments, however, will be a critical factor when a generator decides whether to undertake a repowering project and bid into an RPS solicitation. Without knowing whether a repowered facility is eligible for supplemental energy payments, a renewable generator may not be willing to devote the resources necessary to bid into an RPS, obtain a contract, and commence performance of a costly repowering project. As a result, the Commission should commit to establish a pre-certification process. Under such a process, renewable generators could submit information to the Commission and obtain certification that the proposed repowering will make the renewable generator eligible for supplemental energy payments before bidding into an RPS solicitation. This will ensure that those renewable generators prepared to make large capital investments, but which need to qualify for supplemental energy payments in able to go forward with their projects, obtain the regulatory assurances needed to proceed.
II. Supplemental Energy Payments Should Be Available To Those Renewable Generators Selling Electricity Or Renewable Energy Credits To Non-Utility Purchasers.
Under SB 1078 and SB 1038 (the “RPS Legislation”), all non-utility, electricity service providers (“ESPs”) and community aggregators (“CAs”) have an obligation to purchase renewable electricity similar to the obligation that is placed on utilities. However, as with the utilities, ESPs and CAs are only required to purchase this renewable electricity if there are sufficient funds available under SB 1038 to cover the above-market cost of the purchases. As a result, if supplemental energy payments are not available to renewable generators to cover the above-market cost of their electricity, the ESPs and CAs will not be required to purchase renewable electricity under the RPS.
In the Draft Report, there is no mechanism to allow a renewable generator to sell electricity to ESPs or CAs and receive supplemental energy payments. Further, under the Draft Report, in order to be eligible to receive SEPs the renewable generator must have obtained a contract with a utility as a result of an RPS solicitation. This mechanism may be appropriate for awarding SEPs to those renewable generators that obtain contracts with utilities, but it clearly does not allow renewable generators interested in selling electricity to non-utility RPS participants to receive supplemental energy payments. This defect could preclude new renewable generators from selling electricity to ESPs and CAs and make it almost impossible for ESPs and CAs to comply with the RPS legislation.
Further, it is not appropriate to use the same mechanism to award supplemental energy payments to renewable generators selling electricity to ESPs and CAs as is used for utility sales. As noted by Constellation/New Energy at the Commission’s workshop, many ESPs are simply unable to enter into long-term contracts with renewable generators. As a result, a mechanism that does not rely on long-term contracts must be adopted for ESPs and CAs.
One mechanism that the Commission should explore, and which would seemingly allow ESPs and CAs to comply with the RPS requirements, is to set aside a certain portion of the funds available under SB 1038 for these buyers. The Commission could use the set-aside funds to procure renewable energy or renewable energy credits on behalf of ESPs and CAs through an RFP process. This mechanism could be clarified at a later date, but it is important that the Commission commit now to establishing some type of mechanism to enable ESPs and CAs to comply with the RPS requirements.
III. The REC Definition Adopted Here Should be Consistent With the Definition Adopted by the CPUC.
In the Draft Report, the Committee finds that renewable energy credits (or RECs) are fully aggregated and that no individual sub-attributes may be traded separately from the REC. This finding is inconsistent with CPUC decision No. 03-06-071 (the “RPS Decision”). In the RPS Decision, the CPUC heard extensive testimony and arguments on this issue, and, based on an extensive factual record, concluded that while there will be a general presumption that all environmental attributes associated with generating electricity using renewable resources will be included in the REC and transferred to utilities, there will be specific exceptions to this presumption as well. Most notably, the CPUC found that certain payments or subsidies related to fuel-use are not included in the REC. These payments include credits that may be awarded to landfill gas-fired generators associated with the destruction of methane gas.