Renewable Energy Guidance Released

April 11, 2008

On February 6, 2008, the Department of Energy's (DOE's) Federal Energy Management Program (FEMP) released its Renewable Energy Requirement Guidance for the Energy Policy Act of 2005 (EPACT 2005) and Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management. The guidance outlines the requirements of EPACT 2005 and EO 13423 as they relate to renewable energy. It includes updated definitions of qualified renewable energy sources, information on how to deal with Renewable Energy Certificates (RECs), and the circumstances under which new and old sources can be counted towards requirements.

Section 1 explains the authority for the guidance and the renewable energy goal. It includes the mandate under EO 13423 that at least half of the requirement must be met with energy from renewable sources placed in service after January 1, 1999.

Section 2 defines the renewable energy technologies and products that agencies can use to meet the goals. It includes sections on biomass, waste to energy (including municipal solid waste and refuse-derived fuels), landfill gas, geothermal, solar, wind, incremental hydropower, hydrokinetic energy and RECs.

EPACT 2005's wording dictates that only electricity from renewable energy counts towards meeting the EPACT 2005 goal. However, in a change to the August draft guidance, non-electric sources of renewable energy may now be used to meet the EO 13423 requirement that 50 percent of required renewable energy must come from new sources installed after January 1, 1999. These projects may be reported as progress toward the Executive Order requirement.

Section 3 explains requirements for qualifying projects or purchases, including:

  • renewable energy must be consumed by a Federal agency;
  • double counting of renewable energy attributes is prohibited, thus requiring care when RECs or state renewable portfolio standards (RPSs) are involved;
  • key attributes and requirements that agencies must consider when using or trading RECs to meet the goal;
  • grandfathering provisions to help agencies transition to the new requirements;
  • bonuses that agencies can receive for consuming electricity from projects that produce renewable energy on Federal or Indian lands;
  • non-electric renewable energy is not eligible for the bonus; and
  • provisions encouraging long-term contracts (10 years or longer).

Section 4 explains how the credit that agencies currently receive toward their energy reduction goals for renewable energy purchases will gradually phase out. Finally, section 5 discusses reporting.

The treatment of RECs and the bonus for renewable energy produced on Federal or Indian land raise complex issues. Agencies will be pleased to know that RECs can still be used to meet the requirements of EPACT 2005 and EO 13423, provided their source energy meets the requirements of both (i.e., new and electrical where required). However, RECs may only be counted towards EPACT 2005 and EO 13423 requirements when no other party (including state renewable portfolio standards) " ...at the same time claims the renewable energy attributes from renewable energy generation." The guidance also precludes non-energy attributes such as emissions credits or carbon offsets from being separated from the REC and sold.

Many agencies are interested in selling or trading the RECs from on-site projects to help reduce renewable energy costs. Under the new guidance agencies can leverage RECs for financing so long as they retain a REC for each kiloWatt-hour (kWh) of renewable energy they use. This can be accomplished by arranging "swaps" of high-value RECs for lower value RECs. Agencies can use the difference between the high-value RECs and the lower-value RECs to help reduce the costs of their renewable energy. Section 3.2.2 explains REC swapping.

This swap provision is particularly important in the context of the new bonus created by EPACT 2005. Section 203(c) of that law allows Federal agencies to claim a bonus for new renewable energy produced on Federal or Indian lands and used at a Federal facility. This means that for every kWh of renewable electricity generated on-site, a Federal agency may claim two kWhs. To claim this bonus, agencies must retain RECs for the electricity generated on-site.

For example, assume an energy manager developed an opportunity to host a project that produces 1 million kWh of renewable energy a year on the agency's land, and the agency is able to use the electricity at its facility. The energy manager and his agency can claim 2 million kWh of renewable energy use toward their renewable energy goal because of the bonus, as long as they do not sell or trade the RECs from the project.

But what if RECs from the project were worth 2 cents/kWh and the agency needed help in financing the project? In that case the energy manager could work with the project developer to sell those RECs and reduce the cost of the project by $20,000 per year. However, unless the agency replaces those RECs, it cannot count either the 1 million kWh of generation or the 1 million kWh bonus towards its renewable energy goal.

Every energy manager wants his agency to meet the renewable energy goal, so let us assume he found another source of RECs that only cost 1 cent per kWh, the RECs come from facilities placed in service after January 1, 1999, and the agency bought 1 million of them per year. Although this REC purchase would cost $10,000 per year, the agency would still net $10,000 per year ahead from the cost reduction from the sale of RECs from its on-site project.

In this scenario, the agency could also claim both the generation from the project and the bonus, restoring the 2 million kWh it can claim toward meeting its renewable energy goal. This may sound complicated and work intensive for the energy manager, but in practice the swap of one REC for another does not have to be formally documented. As long as the agency reports having enough RECs from qualified new renewable energy sources to cover the output from on-site projects or projects on Indian land, it will automatically be given credit for any generation that qualifies for the bonus when it prepares its annual energy report to FEMP. More details on REC retention requirements and trading options can be found in sections 3.2.1 and 3.2.2. More details on bonuses for qualifying renewable energy can be found in section 3.4.

What is the difference between EPACT 2005 and EO 13423?

EPACT 2005 and Executive Order 13423 have the same total minimum renewable energy requirements; however, EO 13423 also has a minimum requirement for new (placed into service after January 1, 1999) renewable energy sources and allows new non-electrical (thermal) energy sources to be used to meet these minimum requirements for new sources (see table below for details).

Now let us consider the case of another agency that happens to have a lot of electricity from qualified renewable energy, but all of it is from projects placed in service before January 1, 1999. The agency only needs 1 million kWh to meet the renewable energy goal under EPACT 2005. However, because all this renewable energy comes from "old" sources the agency can only count it towards half (500,000 kWh) of the EO 13423 renewable energy requirements; the other half of the required renewable energy must come from new sources. Until the agency satisfies the EO 13423 requirement that half of their goal must come from sources placed in service after January 1, 1999, they cannot get credit for their total renewable electricity use.

Luckily the renewable energy generators happen to produce a large amount of waste heat that the agency can use if it upgrades them to combined heat and power (CHP). The CHP upgrade happens to be cost-effective, and it produces 1.706 billion Btu of thermal renewable energy per year, which is equivalent to half the agency's goal, 500,000 kWh (3412 Btu/kWh). Because the heat recovery system for the renewable energy generators was placed in service after January 1, 1999 it qualifies as a source of new renewable energy and satisfies the EO 13423 requirement. Now the agency can report that it has met the new requirement, report all of the renewable energy use from its older renewable electricity generators, and easily meet both EPACT 2005 and EO 13423's goals.

The guidance deals with many other thorny questions. Section 3.4.4 provides important information on when refurbished facilities can qualify for the bonus. Section 3.4.5 is important for biomass projects because it allows agencies to qualify for the bonus as long as the generating equipment is located on Federal or Indian land, even if the biomass fuel is imported from off site. You can find this information and more details and nuanced definitions of the terms relevant to EPACT 2005 and EO 13423's renewable energy sections in the guidance, which can be found online at: www.eere.energy.gov/femp/renewable_energy/renewable_fedrequire.html.