Since its introduction in 2008, Ohio's alternative energy portfolio standard, or AEPS, has been repeatedly assailed, first frozen for two years in 2014, narrowly escaping a prolonged freeze in 2016 by the governor's veto then ultimately slashed in 2019. What remains of the original 2008 legislation is a renewable energy standard of 8.5% in 2026. With the current projects in development, very little additional capacity will be needed to meet that standard.
When Ohio first implemented the AEPS, it required utilities to generate and procure 25% of its electricity from in-state "advanced energy" or renewable sources by 2026, with no more than half coming from alternative energy sources. The renewables portion of the mandate therefore required 12.5% of generation to be from renewable sources in 2026, with 0.5% from solar resources. The same legislation also set in place an energy efficiency and peak demand reduction program, under which utilities were required to reduce energy expenditures by 22% in 2026 and reduce the peak demand by 1.0% in 2009 and 0.75% annually thereafter through 2018. Both programs were frozen for two years in 2014 by state Senate Bill 310, and the in-state advanced energy requirement was removed. House Bill 554 of 2016 would have continued the moratorium for an additional two years, but the bill was vetoed by then Gov. John Kasich. In June 2019, HB 6 passed, which, to offset subsidies for two nuclear plants and two coal plants owned by First Energy, lowered the renewable standard to 8.5% in 2026, eliminated the solar carve-out, and removed the energy efficiency and peak demand reduction standards.
To meet the renewable energy standard, resources must be included in the following technologies: wind, solar photovoltaics or solar thermal technologies, geothermal, biomass, landfill gas, biologically derived methane gas, certain nontreated waste biomass products, noncombustion solid waste, fuel cells that generate electricity, and certain hydroelectric facilities depending on environmental impacts but not generating capacity.
The annual compliance benchmarks can be met through either generation by these resources or the purchase of renewable energy credits, or utilities must make an alternative compliance payment, or ACP. The ACP for resources other than solar was initially set at $45/MWh and is adjusted annually by the Public Utilities Commission of Ohio, never to drop below the initial price. The solar ACP was initially set at $450/MWh in 2009, reduced to $400/MWh in 2010 and 2011, with a reduction of $50/MWh each year thereafter. The two-year hiatus paused the decrease at $300/MWh for 2015 and 2016, and the schedule resumed until the carve-out was removed, ending at $150/MWh in 2019.
Factors affecting pace of development
Ohio met its compliance in 2016 and 2017 with RECs, with the vast majority — 79.0% in 2016 and 76.4% in 2017 — as imports from out of state. The solar AEPS was met with 73.3% in-state RECs in 2016 and 69.0% in 2017. In 2018, 23.7% of the RECs came from in-state, and 59.7% of solar RECs were in-state. Of the out-of-state REC purchases, 25% came from Kentucky, mostly in the form of hydro, and 21% came from Indiana.
With the removal of the solar carve-out in the 2019 legislation, the solar projects currently in development in Ohio will be more than sufficient to meet the requirement for 2019, with no builds needed for compliance starting in 2020. The 795 MW of solar projects in development through 2020 may be affected by the elimination of the carve-out, with significantly less REC revenue to support their installation. An additional 600 MW of solar capacity is in development for 2021, but with the removal of the solar carve-out, S&P Global Market Intelligence is not including it in its forecast, with no new solar builds forecast beyond 2020.
Of the projected new renewable installations through 2030, 70% will be wind, raising the capacity from 990 MW in 2019 to 2,693 MW in 2030. The forecast wind capacity of 2,110 MW in 2021 comprises solely planned builds, putting Ohio well on track to meet its standard by 2026, with only 532 MW of additional capacity needed between 2022 and 2025.
Ohio is within the footprint of the PJM Interconnection regional transmission organization, facilitating clearing prices and generation for hundreds of generating units. This provides a high level of market access, allowing generators to interconnect to a centrally cleared market with discoverable revenue streams for wholesale electricity. Additionally, the ACP mechanism fosters an active market for REC trading, providing a further value stream for new projects and their counterparties.
The state currently trades an Ohio-located REC index that has recently traded between $5/MWh and $7/MWh. The in-state solar REC index traded around $5/MWh for much of 2017 and early 2018 before beginning a steady rise. In late 2018, the index jumped to over $10/MWh and continued to increase to roughly $30/MWh before the new legislation that removed the solar carve-out was passed, causing the solar REC price to plummet back below $10/MWh.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
To see wholesale price, supply and demand projections, see the S&P Global Market Intelligence Power Forecast.