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Green America: Renewable Standards, Tax Credits, and What’s Next

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Green America: Renewable Standards, Tax Credits, and What’s Next

In the first part of this series, S&P Global Ratings discussed the development of the green bond market in the U.S., some of the hurdles, how it differs from the European and Asian markets, and the opportunities that await investors as the American grid continues to transform. But underpinning the whole discussion is the torrent of renewable energy that continues to enter the U.S. market. Here, we’ll take the conversation beyond labelled green bonds to discuss several other factors influencing the growth of renewable energy in the U.S., including renewable portfolio standards, which mandate that power generators use renewable energy sources; production tax credits, which can help finance renewable projects; and feed-in tariffs, which can potentially heighten the demand for renewable energy.

  • Renewable portfolio standards, which have contributed significantly to the growth in green bonds, are mandates by 32 states and territories—but not the federal government—for utilities to sell some electricity generated by renewable power.
  • Federal production tax credits (PTC) in the U.S. have helped the level of wind power-generated electricity to quadruple between 2007 and 2014, although the future of PTC beyond 2020 is uncertain.
  • Feed-in-tariffs (FIT), which guarantee the price utilities pay renewable energy providers, have yet to gain as strong a foothold in the U.S. as they have in parts of Europe.
  • Although Washington is sending mixed messages on renewables, states are likely to continue encouraging their use, especially as the price of renewable power decreases.

Renewable Standards: The Forms They Take

Renewable portfolio standards (RPS) are legally binding policies that require retailers of eletric utilities to deliver a specified amount of electricity from renewable sources. Iowa established the first RPS in 1983, followed by Nevada and Massachussets in 1997 (see chart 1). Today, 29 states, three territories, and the District of Columbia have instituted RPS. In addition, eight states and one territory have instituted renewable energy goals, which provide nonlegally binding targets for renewable electricity generation. Absent a Clean Power Plan or similar carbon mandate, it’s not clear that this tally will be pressured to grow in the near term. But even as the Clean Power Plan has come under siege during the Trump Administration, states having renewable standards have expanded them, sometimes with more ambitious goals and more specific carve-outs for new asset classes.

The design of RPS differs by state. Most standards incorporate one or more of the following aspects:

Overall goal
Most often, states set a percentage of kilowatt hours of electric sales that must be generated from renewable sources. Some states diverge from this model, mandating instead that renewable energy sources satisfy a portion of energy capacity or peak demand, for example.