The Government's Renewable Energy Problem

 | Dec 20, 2013 | 4:00 PM EST  | Comments
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Several weeks ago, an investment bank and a financial advisory group asked me to explain the federal government's role in renewable energy. The answer surprised the Washington-based bank. Frankly, it surprised me.

The federal government is making a big mistake. It appears they do not understand the difference between energy and a derivative of energy. Consequently, they have been buying the wrong product, which is causing them to miss statutory requirements by a mile.

Federal agencies are required by Energy Policy Act of 2005 (EPACT 2005) to buy renewable energy. Under Section 203(a) (42 USC ยง 15852) it states, "The President shall seek to ensure that, to the extent economically feasible and technically practicable, of the total amount of electric energy the Federal Government consumes during any fiscal year, the following amounts shall be renewable energy: Not less than 7.5 percent in fiscal year 2013 and each fiscal year thereafter."

The law has been incorporated into the Code of Federal Regulations (48 CFR 23) and the related Federal Acquisition Regulations (FAR). Executive Orders 13423 (President George W. Bush) and 13514 (President Barack Obama) directed federal agencies, except the National Security Agency, to comply.

Notwithstanding the statute, federal agencies did not buy renewable electric energy. Instead, many agencies took the advice offered by the U.S. Department of Energy's (DOE) Office of Energy Efficiency and Renewable Energy (EERE) and bought renewable energy certificates instead.

Actually, it appears EERE's Federal Energy Management Program (FEMP) was the federal group, which provided guidance for other agencies. FEMP issued a report called, "Renewable Energy Requirement Guidance for EPACT 2005 and Executive Order 13423," where, among other things, FEMP instructed federal agencies how to comply with EPACT 2005's renewable energy mandate. In section 2.2.12 of that report, FEMP asserts, "Renewable Energy Certificates (RECs) -- also known as green tags, green energy certificates, renewable energy credits or tradable renewable certificates, -- represent the technology and environmental (non-energy) attributes of energy generated from renewable sources. A certificate can be sold separately from the mega-watt hour (sic) of generic electricity with which it is associated. This flexibility enables customers to offset a percentage of their annual energy use with certificates generated elsewhere. RECs from renewable sources of electricity defined in this section may be used to meet the EPACT 2005 Goal and EO13423 goal."

By following FEMP's guidance, government's non-energy executives believed they complied fully with the EPACT 2005. They are wrong.

As EERE points out, RECs are not the same as energy. REC certificates are like stock options. RECs are derivatives of the underlying energy asset. Like stock options, RECs have a limited lifespan; they become worthless at the end of their life.

Unlike stock options, there are no federal regulators overseeing RECs. It turns out that RECs are governed by individual state policies, which mean there is no consistency between the states.

Accordingly, the federal government appears to be shopping states in search of the cheapest and easiest RECs. After acquiring them, they move and bank them in other states where RECs are most needed to comply with EPACT 2005.

Here is the rub. Of course, having the federal government buy renewable energy helps the wind and solar industry. However, the private sector would like the same deal advocated by DOE/FEMP.

Unfortunately, manufacturers, commercial and retail companies operating in New Jersey, Ohio and Massachusetts are forced to buy local RECs through their native utilities. In those cases, consumers are forced by state governments to buy costly in-state RECs. Those same consumers are forced to take long-term positions; as long as they own their property, they are force-fed RECs.

While the private sector must accept state rules, the federal government operating in the same states happily bypasses those same rules.

Then there are the private-sector companies who are not only following the law, they are following the spirit of the law. As I mentioned in Computing Firms Move Into Utilities' Turf, companies such as Google (GOOG), Apple (AAPL), Microsoft (MSFT), Facebook (FB) and Rackspace (RAX) are committing billions of dollars in long-term commitments to buy not only the REC, but also the energy. In addition, Google, Apple and others are also investing in physical facilities to produce their own renewable energy.

There are strong business reasons for the private sector to make long-term investments in renewable energy. Those same reasons map over to the federal government, yet the government choses to cop out.

I believe EERE's position on RECs is borne out of a misunderstanding. Specifically, I do not think they understand the concept of derivatives. Nevertheless, I do not believe they should take any credit for complying with the statute, regulations or executive orders.

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