A Renewable Portfolio Standard (RPS) is a regulatory policy requiring electric utilities and other retail electric providers to supply a specified minimum percentage (or absolute amount) of customer demand with eligible sources of renewable electricity.
State or national authorities can set these standards. Many states have adopted RPS requirements due to their efficient, cost-effective, market-based approach to achieving renewable electricity policy objectives. The key features of a Renewable Portfolio Standard include:
- Mandated Renewable Energy Targets: A RPS sets specific and often increasing targets for the portion of electricity that must be generated from renewable sources. These targets, set with future benchmarks, creates a compliance timeline and encourages a gradual shift toward renewable energy.
- Compliance Requirements for Utilities: Utilities typically have mandates to procure or generate a certain percentage of their electricity from renewable sources. This compels them to diversify their energy portfolios and increase investments in renewable energy projects to meet the set targets.
- Renewable Energy Certificates (RECs): A common feature of these policies is a REC trading system that reduces the cost to comply with the standard. A utility with excess renewable generation can trade or sell RECs to suppliers struggling to meet RPS requirements. Some states make a certain number of credits available for sale. Typically, only one entity - the generator or REC holder - can claim the renewable attribute of RPS-eligible environmental attributes. In addition, many RPS programs have escape clauses if renewable generation exceeds a specified cost threshold.
- Penalties for Non-Compliance: If utilities fail to meet the required renewable energy generation benchmarks, they might face penalties or fines. These penalties incentivize compliance with the set standards.
These policies aim to foster the development of renewable energy sources, reduce greenhouse gas emissions, and promote energy independence. They create a market demand for renewable energy, which, in turn, encourages investment in renewable energy technologies and projects. As a result, RPS policies drive renewable energy sector growth, offering a predictable market for renewable energy generation.
