By Chris Bzdok, Troposphere Legal
This fall the Michigan Legislature passed a suite of clean energy bills that the Governor recently signed into law. The new laws are intended to transform electric generation in the state over the next 17 years. The most prominent of these laws, Public Act 235 of 2023, requires regulated electric utilities to achieve generating portfolios of 60% renewable resources by 2035 and 100% clean energy resources by 2040.
PA 235 amends the Clean and Renewable Energy and Energy Waste Reduction Act. There are two main components of the new legislation: (1) a higher renewable energy standard, and (2) a new clean energy standard. There are also important new provisions related to energy storage and distributed generation.
This article focuses on the new renewable energy standards for regulated, investor-owned electric utilities. Future articles will cover the new clean energy standards, distributed generation, and requirements for municipally owned electric utilities and electric cooperatives.
Ramping up renewable energy
Currently, electric utilities must meet a renewable energy standard (similar to an RPS) equal to 15% of their total generation. That 15% standard will remain in place through 2029. Then, PA 235 will require electric providers to achieve higher renewable energy standards of 50% by 2030 and 60% by 2035. Sales of electricity to customers participating in an electric provider’s voluntary green pricing program and outflow from distributed generation customers will be subtracted from the provider’s total number of megawatt hours first, before making these percentage calculations.
Utilities will meet the new renewable energy standards by procuring a portfolio of renewable energy credits (RECs) that correspond to electricity generated using renewable energy systems. Providers who have achieved annual incremental energy savings of greater than 2% under an energy waste reduction plan may substitute energy waste reduction credits for up to 10% of their required RECs, subject to MPSC approval.
What kinds of energy count as renewable?
A renewable energy system is a facility or system that generates electricity or steam using renewable energy resources. The new law modifies the set of renewable energy resources that utilities can use to meet these requirements. Renewable energy resources still include wind, solar, and geothermal, of course. They also include certain kinds of hydropower, biomass, landfill gas, and methane digesters that meet specific requirements. Gasification facilities, new incinerators, and facilities that co-fire biomass with tires or tire-derived fuel are excluded.
To provide RECs that count toward the renewable energy standard, renewable energy systems must either be located in Michigan or the provider must include the capacity from the renewable energy system toward meeting its resource adequacy obligations to the regional transmission organization that operates the grid in which the utility provides service. (There is an exception for municipals and co-ops.)
Extending the compliance deadline
The new law allows an electric provider to petition the MPSC for an extension of a REC portfolio deadline of up to two years, on a showing of good cause. “Good cause” means any of the following:
- Despite all commercially reasonable efforts, compliance is not practically feasible for reasons such as zoning, siting, permitting, supply chains, transmission interconnection, labor shortages, delays in project deliverability from developers, or unanticipated load growth. Issuing a request for proposals to purchase renewable energy and not receiving a commercially viable offer would create a rebuttable presumption that compliance with the deadline is not practically feasible.
- Compliance would be excessively costly to customers despite commercially reasonable efforts by the electric provider to contain costs.
- Compliance would result in a deficiency in meeting resource adequacy requirements in the electric provider’s service territory.
- Compliance would result in a local grid reliability issue. “Grid reliability” means the ability of the bulk power system, as defined by the regional transmission organization, to withstand sudden, unexpected disturbances, such as short circuits or unanticipated loss of system elements because of natural causes.
The legislation is silent regarding whether a petition to extend a compliance deadline would be subject to a contested case. This author believes the MPSC would have discretion to open a contested case on any such petition under existing standards for making that determination, and that the MPSC should do so given the stakes involved in such a decision.
Renewable Energy Plans
To meet the new renewable energy standards, the legislation will require each provider to submit amended renewable energy plans (REPs). Providers are required to file amended REPs within one year after the bill’s effective date (or by approximately February 2025), and then every two years after the MPSC approves their amended REP. The Commission will decide the amended REPs as contested cases. The deadline for deciding the first set of amended REPs will be 300 days and the deadline for subsequent amended REPs will be 180 days.
For rate-regulated electric utilities, the MPSC will review the amended REP and its projected costs and approve the plan and the costs, in whole or in part, if it finds that the plan and the costs, in whole or in part, to be reasonable and prudent. In making that determination, the Commission is required to consider whether projected costs in prior REPs were exceeded.
Recovering costs of renewable energy from customers
The legislation authorizes utilities to use bill surcharges to recover the “incremental cost of compliance” with the new renewable energy standards. The incremental cost of compliance is net revenue needed to comply with the new standards. It is calculated as the amount by which the total costs of meeting the new standards exceeds the transfer price, which is a proxy for the cost of supplying power with conventional generation.
In a change from the 2008 law, the surcharges under the new legislation will be volumetric – a per kWh charge for energy that the customer uses, rather than a monthly per-meter charge. The surcharges will be designed using the same cost allocation methodology approved for the utility’s other production costs in its most recent general rate case. Utilities will also have the option to include all or a portion of the incremental cost of compliance in base rates.
The new law allows utilities to recover their authorized rate of return on equity, or ROE, for costs approved under the act. The authorized ROE for the costs of any renewable energy system approved prior to passage of the new legislation will remain fixed at the rate of return and debt-to-equity ratio that was in effect when the electric provider’s amended renewable energy plan that first included the renewable energy system was approved by the MPSC.
The new law also entitles utilities to recover a “financial compensation mechanism” – essentially an incentive – on all contracts they enter into with unaffiliated entities for renewable energy resources, energy storage systems, or clean energy systems. The new law makes the incentive richer than before, requiring it to be calculated as the product of contract payments each year multiplied by the electric provider’s approved pre-tax weighted average cost of permanent capital.
Reconciliation proceedings
The new law also restricts the amount of time that a rate-regulated utility can carry a balance of under-recovered or over-recovered funds to 12 months. It requires utilities that have recorded a regulatory asset or regulatory liability to use those balances to adjust the surcharge for the following calendar year in their annual renewable energy reconciliation proceeding. The MPSC is required to decide renewable energy reconciliation cases within 270 days of when they are filed.