There is a strong societal interest in moving to renewable energy sources. And it is in the electric industry that the current deployment and growth of renewable energy is greatest. In the US, there are federal goals and incentives for promoting renewable energy in the electric industry. But as of summer 2015, there are no federal mandates or regulations requiring that renewable electricity generation reach a particular percentage of the nations total electricity generation. Many individual US states however, do have regulations that require utilities operating within the state to obtain a certain percentage of electricity production from renewable generators. These required percentages are referred to as renewable portfolio standards. And like other aspects of the electric business in the US, the percentages vary from state to state. For example, California has an aggressive renewable portfolio standard of 33% of generation from renewable sources by 2020, while North Carolina currently has a more moderate RPS of 12.5% by 2021. Note that meeting an RPS by a particular year means that the RPS in any year before the target year is likely less than and rising towards the target percentage. A utility meets its RPS requirement for the year by buying and then retiring Renewable Energy Credits, or RECs from qualified renewable energy generators, which generally must be located within the state. A REC is a credit with a unique id issued to the renewable energy generator, for every megawatt hour of electricity their unit puts on to the grid. The value of the REC can vary depending on the demand for them. Potential purchasers of RECs from renewable generators not only include utilities that must comply with their state's RPS. But also other organizations such as businesses or institutions, wishing to publicly claim that they are getting electricity from renewable energy sources. Like the utilities, these other purchasers must also retire their RECs in order to make such claims. Marketers, on the other hand can purchase the RECs, and then sell them on to buyers, helping to facilitate large REC sales. The RECs are an important financial incentive for promoting increased renewable generation, because the RECs provide an additional source of revenue on top of what a renewable generator receives for the electricity it produces. However, because the market value of RECs can vary. And because the capital costs of renewable generators, such as wind turbines and solar panels, are so high, RECs alone are often not enough to spur a significant investment in new renewable generation. A solution to the price volatility of RECs and the high up front costs of renewable generators has been to pay renewable energy generators a fixed premium for the electricity they generate. For example, utilities will establish power purchase agreements or PPAs, with large wind or solar farms. Under a PPA, the utility agrees to purchase all the electricity a renewable plant generates at a significant, above average wholesale price and will do this for one to two decades. In return, the utility not only gets the electricity produced by the renewable plant, but also all the RECs that the plant generates along with its electricity. Having a PPA helps a renewable plant owner obtain the financing they need to pay for the plant by showing banks or investors that the plant will have a long term guaranteed income stream. For smaller scale operations, states will offer to pay residential and small commercial owners a premium on each kilowatt hour of electricity they produce from solar panels or small wind turbines that they install on their property. In turn, the state or its designated agency receives the RECs produced by the generation. In states with strong RPSs and competitive electrical market structures, third party companies such as Solar City have emerged to facilitate residential and commercial solar development using what are called third party PPAs. In this particular type of PPA, the third party provider, for example, Solar City, agrees to install and maintain solar panels on an owner's building. And sell the owner electricity at a rate that is competitive with what they were paying their utility and which will be fixed for up to two decades. In return, the third party operator receives any state and federal incentives for installing and operating the solar panels, including all the RECs created along with the electricity generated by the panels. In essence then, the third party operator sells electricity and RECs to the utility at a high price. Buys electricity back from the utility at a lesser price. Sells this electricity to the building owner for an intermediate price. And pockets a profit on the difference between what the provider is selling and buying electricity for. The building owner, on the other hand, receives renewable energy generated on their property in an equal or lower price than they were paying their utility for electricity. And the owner does not have to put up any capital costs to pay for the solar panels installed on their home or building. Through these and other innovative business models and incentives, including the US federal government's investment credits, which also help defray the high upfront costs of qualifying renewable generators. Renewable electricity has been the fastest growing form of generation in the US over the past several years. In fact, the penetration of renewable electricity has become so large in some states, that it's starting to affect grid operations and reliability. Consider the case of California. At present, about 20% of the state's electricity comes from renewable generators, including geothermal, wind and particularly solar, which has been the fastest growing of the three. For all these generators, there is no fuel price. Fuel price for conventional power plants is the most significant variable cost to operate. Consequently, when California's renewable energy generators are arranged with all the other types of power plants in California along a dispatch curve that is based on fuel costs. It would appear that dispatching renewal plants will almost always be the least cost option for generation. However, renewable generation is not dispatchable. It's not dispatchable in the sense, that a system operator, such as the California ISO can not schedule wind and solar farms to optimally generate electricity to meet demand. This is because wind and solar are intermittent forms of renewable energy generations. They generate electricity when the wind blows and the sun shines respectively. Consequently, system operators treat intermittent generation as decreases in demand. And in California, the decreases in demand resulting from growing intermittent renewable generation, particularly solar energy, have been altering the daily load curve. This is because solar generation rises starting in the morning, peaks during the mid day hours, and ends by sunset. And when this mid day increase in generation is removed from the demand based load curve, the resulting load curve shifts from one that is rising during the mid day, to one that now has a mid day sag. Furthermore, this midday sag is increasing as more renewable generation is added to the grid. On the plus side, the increase in midday sag indicates that renewable energy generation in California is beginning to significantly displace fossil fuel power plants. On the minus side however, the increasing sag is creating a larger and steeper difference between the midday and early evening loads, that can only be met with more faster ramping dispatchable power plants. Which currently are fossil fuel plants, and specifically natural gas plants. In fact, new advanced natural gas combined cycle plants are being developed to address the increase variation in load created by increased renewable generation. But operators of such plants also face the prospect of generating and not selling less electricity as more demand is met by renewable generators. Consequently, further increases in the penetration of renewable energy may require paying conventional generators as much or more for how fast they can accommodate changes in demand, as well as for how much electricity they produce. Otherwise there may not be enough of a financial incentive for operators to invest in and deploy these needed new types of flexible power plants.
