Posted on April 1, 2015 by Mark R. Sussman
In February 2015, the states of Connecticut, Massachusetts and Rhode Island announced their intent to seek new large-scale clean-energy projects through a multi-state procurement process. According to the draft Request for Proposal (RFP) the “essential purpose” of this procurement is to “identify any projects that offer the potential for the Procuring States to meet their clean energy goals in a cost-effective manner that brings additional regional benefits.” The draft RFP seeks bids for the delivery of Class I renewable energy projects (i.e. solar, wind, biomass, fuel cells in Connecticut, and some hydroelectric) through power purchase agreements, combined power purchase agreements and transmission upgrades, or transmission projects with clean energy delivery commitments. Because each state has different procurement laws and different definitions of “renewable energy”, the draft RFP notes that contracts for any selected projects must be negotiated with the relevant electric distribution companies (EDC) and approved in accordance with applicable state and federal laws.
To encourage the generation of renewable energy, many states have adopted Renewable Portfolio Standards (RPS) to require electric distribution companies and retail electric suppliers to include an increasing percentage of renewable energy in their mix of generation resources. Unfortunately, the RPS alone seems insufficient to encourage the development of enough renewable energy resources to address the renewable energy and climate change policies of the states. Therefore, the three New England states, as well as others, are experimenting with different methods to incentivize renewable energy generation. Given the substantial capital requirements for constructing new electric generating facilities and the need for an assured revenue stream, long-term power purchase agreements are increasingly being used to encourage the construction of new energy resources. The RFP to be issued by the three New England states seeks to attract new large scale renewable energy projects by offering successful bidders long-term energy contracts.
One question raised by this new approach to encourage the construction of reasonably-priced renewable energy resources is whether federal law preempts the states from contracting for large wholesale electric generation, despite independent state policies designed to encourage the development of more renewable energy resources. This issue has been raised in several recent federal lawsuits.
Last year, both the Fourth and Third Circuit Courts of Appeals concluded that state programs awarding long term contracts to new electric generating facilities were preempted by the Federal Power Act. In PPL EnergyPlus, LLC v. Nazarian, 753 F.3d 467 (4th Cir. 2014), the Fourth Circuit held that a fixed, twenty-year energy contract for a new Maryland generating facility was preempted by federal law. Using an RFP process, Maryland selected a company to build a power plant and sell its energy and capacity on the federal interstate wholesale market. Under the approved contract, the winning project was eligible for payments from the local EDC that amounted to the difference between the price paid in the interstate market and the amount approved in its EDC contract. The Fourth Circuit concluded that the Maryland law was field preempted because it functionally sets the rate that the generator receives for sales in the interstate energy market, an area within the exclusive jurisdiction of FERC.
Similarly, the Third Circuit, in PPL EnergyPlus, LLC v. Solomon, 766 F.3d 241 (3d Cir. 2014), held that federal law preempted a New Jersey statute under which the state solicited and awarded bids for new electric generating capacity using long-term energy capacity agreements. The Third Circuit, however, acknowledged that states have a role to play in energy markets, and stated that not every state program that has an effect on interstate electric rates will be preempted. The court explained that states may utilize measures that subsidize generators without being preempted, as long as such subsidies do not essentially set wholesale prices.
In 2013, Connecticut solicited proposals for large scale renewable energy through an RFP process. That solicitation resulted in the selection of a 250 MW wind project in Maine and a 20 MW solar project in Connecticut. Both projects were awarded long term power purchase agreements for the energy produced by these projects. A disappointed bidder, Allco Finance Limited, filed suit alleging preemption, following Nazarian and Solomon. On December 10, 2014, the district court dismissed the case, finding that a disappointed bidder lacks standing. Allco Finance, Ltd. v. Klee. Nevertheless, the court ruled on the merits. The district court concluded that the state RFP process was not preempted, rejecting Allco’s argument that the state-approved contracts set the wholesale price for energy produced by the successful bidders. The court ruled that the effect of the Connecticut program on the interstate market was at most indirect and would cause no market distortion. Allco has appealed the district court’s decision to the Second Circuit.
The use of an RFP process to encourage the development of renewable energy projects through the award of long term energy contracts is an effective way to procure lower cost renewable generation. The Connecticut Z-REC program, which awards long term Renewable Energy Credit (“REC”) contracts, has proven to be successful in driving down the cost of solar renewable energy credits from small (less than 1 MW) solar projects. In light of the federal preemption obstacles in awarding long-term wholesale electricity contracts, another approach may be to support large scale renewables by procuring long term contracts for RECs and allowing the energy price to be set by the interstate markets. Since a REC represents the renewable attribute of electricity, and not the energy itself, such procurement should avoid the preemption issues identified by the Third and Fourth Circuits. This may provide a path forward for states to pursue their clean energy goals by incentivizing larger scale renewable resources.