#1 in our “Key Solar Concepts” series.
A Renewable Portfolio Standard (RPS) is a law used to require electric utilities to generate a certain percentage of electricity from renewable sources by a certain date. If a utility company fails to meet these goals, it can be subject to large fines.
Therefore, utilities are inclined to offer perks to homeowners to meet these targets. The RPS is also used to determine the amount and type of incentives available for solar buyers. 33 states and the District of Columbia have RPS laws, though 4 of those are voluntary goals instead of mandates.
That’s about as simple as we can put it. But as you might imagine, since an RPS is a state law, it can get quite complicated. Below, we’ll get into how RPS laws work, how they vary from state to state, and what the best states are doing to encourage renewable energy growth.
Why are RPS laws important?
30 states (including Washington DC) have non-voluntary RPS laws. All of the top 10 states for solar (per capita) have RPS laws. In fact, of the top 25, only 2 have no form of RPS at all. Check out this chart:
How RPS laws work:
In general, an RPS law is set up to require utility companies to generate either a certain percentage of their total electricity, or a certain amount of electricity (measured in in megawatts (MW) from renewables. The goals are set by lawmakers working with experts from the scientific and energy communities, to come up with goals that are realistic but strong.
Typically, a main goal is set for several years in the future, with interim goals for years in between. For example, California has a goal of 50% of retail energy sales by 2030, with increases of 5-8% every 4 years or so in between. As the goals are reached (or not) the state enforces compliance, which means they assess fees to the utilities that haven’t met the goals.
Each state gets to define the kinds of electricity generation that qualify as “renewable.” Nearly all count solar, wind, and geothermal power generation, but other technologies aren’t as widely included. Hydroelectric power, for example, is sometimes dis-included from a state’s RPS because of its relatively high impact on the environment, and sometimes simply because the power already existed as part of the state’s energy mix when the RPS was enacted.
Some states include specific goals for certain kinds of renewable generation, especially solar. When this kind of technology-specific goal is mandatory, it is called a “carve-out” or “set-aside,” and it comes with its own set of rules, which we’ll cover in another post.
One important term when it comes to eligibility is “distributed generation,” or “distributed energy resources,” which basically means small electrical generation systems spread around a utility service area. These resources include wind power turbines, solar panel systems, and small hydro generators, but can also come from non-renewable sources.
Distributed resources have certain benefits to the electrical grid, such as reducing the need for expensive transmission line upkeep and increasing reliability of the grid. Because these benefits go hand-in-hand with small renewables, specific goals for distributed generation are often included in RPS laws.
A major feature of RPS laws is the creation of incentives for renewable technologies. These incentives are basically subsidies, either from tax dollars within the state or from utility companies, which offer rebates to their customers as a way to encourage them to install solar panels or wind turbines and contribute to the overall RPS goal.
The most popular types of incentives are rebates, tax credits, and Renewable Energy Credits (RECs).
Rebates work just like a cash-back offer when you buy an efficient appliance—you get money back from the utility or the government when you buy a renewable system. But in the case of renewable systems, the amount of the rebate often goes to reducing the price you actually pay for the system, instead of coming back as a check after installation.
Tax credits, on the other hand, give renewable system owners cash back in the year after they install the panels. Offers vary widely by state, but generally allow for the owner to receive a credit equal to a certain percentage of the cost of their system. They often have caps on the amount an owner can receive, and also offer carryover of parts of the credit to the next year(s) if the owner can’t claim the whole amount in one year.
RECs are a bit more complicated. A renewable energy system earns its owner one REC for each megawatt-hour (MWh) of electricity it generates. The REC serves as “proof of generation,” which can then be sold to a utility company to help it meet its goals under the RPS.
Unlike a rebate or tax credit, a REC is a way for system owners to earn additional money as their system actually produces electricity. The price of RECs varies widely across the country, from almost nothing to hundreds of dollars, and depends of several factors we cover in a special article about RECs. This kind of market-based incentive can be offered for a limited time (e.g., the first 5 years of electricity production) or on an ongoing basis.
As we mentioned above, the cost of these subsidies is paid either with state funds (taxes) or by utility companies, which are often allowed to recoup the cost of the incentives through small fees on all of their customers.
Ways in which RPS laws vary
RPS laws can vary widely in a number of ways. States craft their RPS laws to meet their specific needs, including current energy mix, resource availability, and economic landscape. Like any big piece of legislation, lobbyists often have a say in the process, even recommending or writing specific clauses to be included.
The biggest variation between states can be seen in the renewable goal and timeframe for reaching it. For example, Michigan had a goal of 10% renewable energy by the end of 2015, while Hawaii has a goal of 100% renewable energy by 2045.
Another major way state RPS laws differ is how they apply their standards to different kinds of utility companies. Many states have lower standards for smaller Publicly Owned Municipal Utilities (POUs) and electric co-ops, and higher standards for large investor-owned utilities (IOUs).
For example, California‘s RPS calls for 50% of the electricity sold by each utility in the state to come from renewable sources by December 31st, 2030. The mandate is the same for both Investor-Owned Utilities (IOUs) and Publicly Owned Municipal Utilities (POUs).
All state RPS laws
As part of our annual State Solar Power Rankings Report, we give each state a grade for its RPS. The 2016 rankings are shown below, with Hawaii being the best and Wyoming bringing up the rear.
And below, we’ve included an alphabetical list of all the states with RPS laws, including those with voluntary goals instead of binding targets.
|District of Columbia||20.40%||2020|
|South Dakota||10% (voluntary)||2015|
|Virginia||15% of 2007 levels (voluntary)||2022|