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Is N.C.’s costly renewable energy mandate also unconstitutional?

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North Carolina’s renewable energy portfolio standards (RPS) survived an attempt to cap and end the mandate last year as crony politics won out over protection of poor ratepayers.

Even if the attempt had succeeded, however, it would have kept in place a provision that allows utilities to satisfy up to 25 percent of the renewable energy mandate by purchasing renewable energy certificates (RECs) from out-of-state facilities. This allowance acts as a cap, however, owing to the state’s geography and limited resources, as noted in my report last year on the state’s costly RPS mandate:

In 2011, for example, fully 25 percent of the RECs that Duke and Progress Energy retired to achieve compliance were out-of-state RECs. The out-of-state facilities include, for example, numerous wind farms in Texas and solar facilities in California. Purchasing those RECs essentially subsidizes electricity for out-of-state consumers at an additional cost to North Carolina ratepayers, without them receiving any of the electricity they supposedly bought.

There is another problem with this scheme beyond making ratepayers here subsidize others’ electricity there. The provision could be unconstitutional.

This problem was made evident in a landmark ruling last summer in the 7th U.S. Circuit Court of Appeals. At issue was the state of Michigan’s RPS mandate requiring 10 percent of electricity to be derived from in-state renewable energy sources by 2015. The court ruled that the mandate violated the Commerce Clause.

Writing for a three-judge panel, Judge Richard Posner noted that because the RPS mandate forbids the state from crediting wind power from other states, it therefore "trips over an insurmountable constitutional objection. Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy."

North Carolina’s RPS mandate, while not an outright block on crediting out-of-state renewable energy, has a similar effect, however. The law allows for a utility to meet its RPS requirement by generating electricity through renewable energy sources, reducing energy use through energy-efficiency measures (this could satisfy only 25 percent of the mandate now; by 2021, 40 percent), and/or purchasing RECs. The law limits how many RECs could be purchased from out-of-state renewable energy facilities, and that is where it may run afoul of the constitution.

As stated in the law, "Certificates derived from out-of-state new renewable energy facilities shall not be used to meet more than twenty-five percent (25%) of the requirements of this section." It would seem that North Carolina may be discriminating against out-of-state facilities by preventing them from competing for the remaining 75 percent of REC purchases.

Annual compliance data from the North Carolina Renewable Energy Tracking System strongly suggests that this cap is indeed discriminating against out-of-state facilities. Utilities are using RECs purchased from out-of-state to satisfy the full 25 percent of the requirements; in other words, they are using out-of-state RECs until state law forbids them from using any more.

In 2012 (the most recent year listed), Duke retired 1,669,977 RECs, of which 419,630 (25.1 percent) were out-of-state RECs. Progress Energy retired 1,120,600 RECs, of which 280,150 (25.0 percent) were out-of-state RECs.

The potential unconstitutionality of this scheme only makes a bad idea worse. Already North Carolina ratepayers are basically forced to subsidize electricity for out-of-state consumers at an additional cost to themselves, without receiving any of the electricity they supposedly bought.

It is ironic and shameful that the same year that North Carolina lawmakers voted to impose this system on captive ratepayers, the North Carolina Utilities Commission had signed on to a letter with eight other Southeastern U.S. states’ utilities commissions urging Congress to reject a federal renewable energy portfolio standard. The letter noted the limited availability of abundant renewable energy resources in the Southeast, including North Carolina, and warned that the federal RPS mandate would make their ratepayers buy federal RECs, raising their rates for nothing.

"Because of the limited availability and cost-effectiveness of traditional renewable energy resources, we are deeply concerned that our utilities will be forced to buy renewable energy credits from the federal government," the letter stated. "Correspondingly, our retail electricity consumers will end up paying higher electricity prices, with nothing to show for it."

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Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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