Latham & Watkins Environment, Land & Resources Department

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1 Number 1322 April 16, 2012 Client Alert Latham & Watkins Environment, Land & Resources Department The Commission Abruptly Suspends Eligibility of Biomethane Under California s Renewables Portfolio Standard Significant regulatory uncertainty remains following the Commission s suspension of the RPS eligibility guidelines for certifying power plants that generate electricity from biomethane. On March 28, 2012, the California Energy Commission voted unanimously to suspend the Renewables Portfolio Standard (RPS) eligibility guidelines for certifying power plants that generate electricity from biomethane. The suspension came after only a 12-day notice period. 1 The Commission declined to delay the suspension despite warnings from public utilities, investor-owned utilities and the biogas industry that an unexpected regulatory shift could significantly impact the growing biogas industry and jeopardize millions of dollars of RPS-compliant investments. 2 Although the Commission approved a last-minute revision to allow continued processing of RPS certification applications filed before the suspension, applicants cannot remedy incomplete applications after the suspension, potentially diminishing the benefit of this change. 3 The Commission s abrupt suspension comes at a time when regulated utilities and energy suppliers must meet an increased RPS and amid growing concerns about maintaining electrical grid reliability while integrating an increasing percentage of intermittent renewable energy. 4 RPS-eligible electricity from biomethane can provide important benefits by supporting baseload and peaking generation which supports grid stability and the integration of intermittent renewable resources, such as wind and solar without typically requiring significant new transmission or infrastructure development. 5 Background California s RPS has long had one of the most aggressive renewable energy mandates in the United States. 6 First adopted in 2002, the RPS set an ambitious renewable energy standard of 20 percent by However, following calls by former Governor Schwarzenneger to raise the RPS further 8 and several failed legislative attempts, 9 Senate Bill X1-2 was signed by Governor Jerry Brown on April 12, 2011, 10 requiring regulated sellers of electricity to procure 33 percent of their total energy supplies from certified renewable resources 11 according to the following schedule: Compliance Period RPS 12 Through Dec. 31, percent Dec. 31, 2013 to Dec. 31, percent By Dec. 31, 2020, and in each year thereafter 33 percent Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2012 Latham & Watkins. All Rights Reserved.

2 The increased RPS represents a substantial new statutory requirement with significant ramifications on energy markets, electricity generation, and transmission line development in California and throughout the western states. The California Public Utilities Commission (CPUC) has estimated that the new 33 percent by 2020 RPS will require almost a tripling of current renewable generation from 27 terawatt hours in 2009 to 75 terawatt hours in 2020, potentially necessitating $115 billion in new infrastructure investment, including at least seven new major transmission lines at a cost of $12 billion. 13 In addition, Senate Bill X1-2 extended the RPS to California s publicly-owned utilities, while previously the RPS had covered only investor-owned utilities as Community Choice Aggregators and Electric Service Providers. 14 Electricity cannot satisfy requirements under the RPS until the California Energy Commission certifies the generating facility as an RPS-eligible renewable energy resource based on guidelines established by the California Energy Commission. 15 Pre-certification is available for facilities that are not yet online or not yet using an eligible renewable resource. 16 Even if the Commission approves the pre-certification, the facility must still submit an application and receive full certification once it is capable of generating RPS-eligible electricity. 17 Commission Previously Recognized Biomethane As Potentially Renewable Fuel Source The RPS at Public Resources Code Section 25741(b)(1) expressly recognizes the use of biomass digester gas, [and] landfill gas as potentially renewable fuel sources. Accordingly, the Commission long recognized that power plants using landfill gas, digester gas and biomass to generate electricity can satisfy RPS requirements. 18 Prior to the suspension, these biogases could either be delivered directly to the RPS-certified power plant or injected into the existing natural gas pipeline system as biomethane provided certain monitoring and reporting requirements were met. 19 Specifically, according to the presuspension standard, for RPS-eligible facilities that use biogas 20 delivered by natural gas pipeline, [t]he biogas [must be] conditioned to become pipeline biomethane, injected into a natural gas pipeline, and withdrawn at the designated RPS-eligible electric generation facility. 21 Pipeline biomethane is defined as: biogas that has been upgraded or otherwise conditioned such that it meets the gas quality standards applicable to the natural gas transportation pipeline system into which the biogas is first accepted for transportation. The pipeline owner/operator must have written gas quality standards that are publicly available. 22 Commission s Suspension On September 20, 2011, staff for the Commission held a public workshop on the use of biomethane for RPS compliance. Staff received a number of comments at the workshop and in written materials, warning against a sudden change of rules that would impede longstanding reliance on the use of biomethane as a reliable, cost-effective means to satisfy RPS compliance obligations. Staff did not respond to written comments or hold another workshop. Notice of a possible suspension was provided for the first time on March 16, 2012, only 12 calendar days before the suspension hearing. The notice cited potential concerns that biomethane does not advance the preference of Senate Bill X1-2 for electricity generation that 2 Number 1322 April 16, 2012

3 provides more environmental benefits to the state by displacing in-state fossil fuel consumption, reducing air pollution within the state and helping the state meet its climate change goals by reducing emissions of greenhouse gases (GHGs) associated with electrical generation. 23 No explanation was provided for how Senate Bill X1-2 created this purported preference. The notice included a supporting letter from four members of the Legislature but did not include letters from other Legislators who opposed the suspension. 24 The notice stated that a suspension may be necessary to provide it additional time to evaluate the RPS eligibility of biomethane as a result of Senate Bill X The Commission unanimously approved the suspension following the hearing on March 28, The suspension grandfathers certain power plant activities if already certified as RPS-eligible by the California Energy Commission and permitted to use biomethane as part of that certification, subject to limitations that will restrict future changes to certified plants using biomethane. 27 Further, in a partial concession to opponents of the suspension, the Commission determined that it would consider pending applications for certification or pre-certification based on the pre-suspension standards. 28 However, applicants cannot remedy incomplete applications, potentially reducing the benefit of this change. The Commission also directed staff to gather additional information on the biomethane supplies identified in applications for certification and pre-certification and to report back to the Commission. 29 Conclusion Significant regulatory uncertainty remains following the Commission s suspension of the RPS eligibility guidelines for certifying power plants that generate electricity from biomethane. Ultimately, the Legislature may act to resolve how biomethane can be used to satisfy RPS requirements. Until that time, however, the suspension could result in higher RPS compliance costs while jeopardizing millions of dollars in investments. Endnotes 1 Commission, Notice to 2 See, e.g., Inside Cal/EPA, March 30, 2012, California Faces Lawsuit Over Suspension Of RPS Biomethane Credit, available at cleanenergyreport.com/ / Clean-Energy-Report-Daily-News/News/ california-faces-lawsuit-over-suspension-of-rpsbiomethane-credit/menu-id-202.html. 3 4 See, e.g., California Public Utilities Commission, 33 Percent Renewables Portfolio Standard Implementation Analysis Preliminary Results at 1-4 (June 2009); Patrick Sullivan, The Importance of Landfill Gas Capture and Utilization in the U.S. at 28 (Apr. 6, 2010), available at earth/wtert/sofos/importance_of_lfg_capture_ and_utilization_in_the_us.pdf.; Eastern Research Group, Inc., Protocol for Quantifying and Reporting the Performance of Anaerobic Digestion Systems for Livestock Manures at 12 (March 2011), available at agstar/documents/protocol.pdf. 5 6 The State of Maine has a 40 percent by 2017 renewable portfolio standard that is arguably more stringent than California s RPS. See Department of Energy, Energy Efficiency & Renewable Energy, last visited on April 6, 2011, at: renewable_portfolio_states.cfm. 7 See S.B. 1078, Gen. Assem. 2002, Reg. Sess. (Cal. 2002); Cal. Pub. Util. Code (b)(1), repealed and replaced by SBX1 2 (Cal. 2011). 8 See former Governor Schwarzenegger s Executive Order S-21-09, issued September 15, Number 1322 April 16, 2012

4 9 In 2010, Senate Bill 722 would have raised the RPS to 33 percent by SB 722 passed through the Assembly but ultimately failed to pass the Senate at the eleventh hour. 10 SBX1 2, Cal. Leg., 1st Extraordinary Sess. (Cal. 2011). The new law was authored by Sen. Joe Simitian (D-Palo Alto). It was approved by the State Senate on Feb. 24, 2011 and by the Assembly on Mar. 29, Cal. Pub. Res. Code 25741(a)(1). Renewable resources can include facilities that generate electricity from biomass, solar thermal, photovoltaic, wind, geothermal, fuel cells using renewable fuels, small hydroelectric generation of 30 megawatts or less, digester gas, municipal solid waste conversion, landfill gas, ocean wave, ocean thermal, or tidal current. 12 The new RPS requires regulated parties to procure a percentage of their electricity sales from eligible renewable energy resources that meet or exceed the percentage required by the applicable standard during the applicable period. 13 California Public Utilities Commission, 33 Percent Renewables Portfolio Standard Implementation Analysis Preliminary Results at 1-4 (June 2009). 14 See Cal. Pub. Util. Code (g), amended by SBX1 2 (Cal. 2011) ( Retail seller means an entity engaged in the retail sale of electricity to end-use customers located within the state, including any of the following: (1) an electrical corporation...; (2) a community choice aggregator... ; or (3) An electric service provider.... ). 15 See Cal. Pub. Util. Code (a); Renewables Portfolio Standard Eligibility Guidebook (4th ed., January 2011), available at index.html#rps, ( RPS Eligibility Guidebook ), p RPS Eligibility Guidebook, p Id., p See RPS Eligibility Guidebook, pp. 13, The Commission Renewables Portfolio Standard Overall Program Guidebook, Third Edition, January 2011, p. 19, defines biogas as including digester gas, landfill gas, and any gas derived from an eligible biomass feedstock. Digester gas is defined as gas from the anaerobic digestion of organic wastes, including, but not limited to animal wastes, remains, tallow, and biosolids, and landfill gas is defined as gas produced by the breakdown of organic matter in a landfill. RPS Overall Guidebook, pp. 21, RPS Eligibility Guidebook, p Overall Program Guidebook, p Commission, Notice to 24 Commission, Notice to 25 Commission, Notice to 26 Commission, Suspension pdf. 27 Commission, Suspension pdf. 28 Commission, Suspension pdf; See also Frequently Asked Questions About The Energy Commission s Suspension Of RPS Eligibility Guidelines Related To Biomethane Revised, April 5, 2012, available at energy.ca.gov/portfolio/documents/ _ biomethane/ _rps_biomethane_ suspension_faq_rev.pdf. 29 Id. 4 Number 1322 April 16, 2012

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