Introduction: The Clean, Renewable and Efficient Energy Act

In October 2008, Michigan Gov. Jennifer Granholm signed into law Public Act 295, known as the Clean, Renewable and Efficient Energy Act.[1] The law instituted the state’s “renewable energy standard.”[2]

This standard requires that the “renewable energy resources” specified in the bill generate 10 percent of the annual retail electricity sales made by investor-owned electric utilities, alternative suppliers, electric cooperatives and municipal electric utilities by the year 2015 and thereafter.[3] Under the law, renewable energy resources are “ultimately derived from solar power, water power, or wind power” and include biomass energy, geothermal energy and energy from landfill gas produced by municipal solid waste.[4] The act stipulates that a renewable energy resource “does not include petroleum, nuclear, natural gas, or coal”; nor does it include a new hydroelectric facility or a “hydroelectric pumped storage facility.”[5]

The act also requires that before 2015, Michigan’s power suppliers steadily increase the percentage of electricity sold[*] from new renewable energy resources. The RES mandates that in 2012, providers supply enough electricity generated by renewable energy to cover 20 percent of the gap between 10 percent full compliance and baseline electricity production from renewable energy resources in the year prior to passage of the act. In 2013, 33 percent of the gap must be filled. In 2014, 50 percent of the gap between the baseline and full compliance must be covered, with full compliance required in 2015.[6] The 10 percent standard would have to be maintained in subsequent years.[7]

The act also contains a cost cap meant to limit the impact on retail customers of implementing the renewable energy standard. This means that electricity providers are not required to comply if, as determined by the Michigan Public Service Commission, the cost to end-users has any of the following effects per month: The RES increases the average electricity bill by $3 for a residential customer meter; by $16.58 per commercial secondary customer meter; or by $187.50 per commercial primary or industrial customer meter.[8]

While the cost cap could prove effective in preventing large price increases, we set it aside in our calculations in order to determine the economic impact if the RES standard is met in full. We will discuss this assumption and its relationship to our findings below, but we would note that the cost caps do not apply to consumers’ overall electrical bills; rather, they “apply only to the incremental costs of compliance [with the RES] and do not apply to costs approved for recovery by the commission other than as provided in this act.”[9] In other words, a consumer’s bill can rise by more than the cap as long as the amount considered attributable to the RES is less than the cap. In addition, if the Michigan Public Service Commission does enforce the cost caps, the cost of the policy would be reduced, but the direction of the standard’s effect would not change. The policy’s net costs would not become net benefits or vice versa.

The law assigns bonus credits for specific types of electricity generation.[†] Solar power generation effectively counts for three total megawatt-hours of production toward the RES: one for the actual production, and two bonus credits.[10] In addition, renewable generation that takes place utilizing equipment manufactured in Michigan receives an additional 0.1 MWh, or 10 percent of one credit, for the first three years of production. Similarly, if in-state workers are used to build the facility, then an additional 0.1 MWh, or 10 percent of one credit, for the first three years of production is awarded.[11] Despite the bonus credits, the U.S. Energy Information Administration’s projections — which account for Michigan’s RES — estimate that solar power will not deliver any significant electricity production in Michigan between now and 2035.[12]

Still, these large government subsidies may lead to the installation of solar energy, even in Michigan, where Detroit experiences approximately 20 percent clear days, 30 percent partly cloudy and 50 percent cloudy days.[13] To take this possibility into account, we assumed that Michigan installs solar capacity equal to the projected national level of solar capacity. Each MWh produced would in effect count as three MWh under the RES, reducing the total amount of renewable energy required. This solar power scenario falls under our “high-cost case” below. In the early years of the RES, the relatively immature solar power market increases the net cost of the RES by displacing other renewables, such as biomass and wood waste, that are more affordable. As time passes, the cost of solar power would decline relative to other renewables.

Another component of the act — the banking of unused Renewable Energy Credits — could help defray costs.[14] By producing more green energy than required by the act, energy suppliers could bank credits to use for RES compliance in the future. However, the EIA projections made prior to the law show a baseline scenario in which renewable electricity generations will fall below RES minimums. Therefore, it is unlikely that producers will supply excess renewable energy to trigger banking. Producers will use all renewable energy production to fulfill the requirement that same year, and not bank any for future compliance. For this reason, we assume that banking will have no effect on overall price of renewable energy production.

Finally, the RES contains a costing provision that applies to two specific electricity companies. In addition to the percentage-based mandates discussed above, Public Act 295 institutes a separate renewable energy “capacity” requirement. This capacity standard requires that the companies install 500 megawatts of renewable energy capacity by the end of 2015 (with an interim mandate of 200 MW by the end of 2013) if they have between 1 million and 2 million retail customers as of Jan. 1, 2008. Similarly, utility companies with two million or more customers as of Jan. 1, 2008, must have 600 MW of renewable capacity by the end of 2015 and 300 MW by the end of 2013.[15]

Consumers Energy is the only utility that qualifies under the first case, while DTE Energy is the only utility that qualifies under the second. It is difficult to determine the exact cost effect of this section of the law, but a few details are obvious. First, both of these companies will need to build capacity, buy contracted capacity or buy RECs to cover their RES requirements. The first two would count toward the capacity requirement, while the third would not. So it appears that the capacity requirement was put in place to require these two larger companies not to fulfill their RES requirement via RECs only. Why part of the law would seemingly encourage the use of RECs while another section does not is not understood. We believe that this section of the law is adequately accounted for in our range of estimates.[‡]

[*] The mandates in the Clean, Renewable, and Efficient Energy Act are sometimes based on energy sales and sometimes on energy production. Compare, for instance, MCL § 460.1027(3), where computations involve generation and production, and MCL § 460.1027(4)(b), where computations involve the amount of electricity sold. As noted in the main text, the act contains a requirement for renewable energy capacity as well.

[†] MCL § 460.1039(2). These bonus credits are technically referred to as “Michigan incentive renewable energy credits.”

[‡] Based on our projections, the RECs will have little effect on prices and therefore will not affect our range of estimates.