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To stimulate an increase in the use of renewable resources to generate electricity, several bills or amendments in Congress call for the establishment of a renewable portfolio standard (RPS) for all electricity retail suppliers. A typical RPS requires that a share of the power sold in the United States must come from qualifying renewable facilities. Companies who generate power from qualifying renewable facilities will be issued credits that they can hold for their own use or sell to others. To meet the RPS requirement, each individual electricity seller must hold credits - issued to their own qualifying renewable facilities or purchased from others - equal to the share required in each year. For example, a supplier with 100 billion kilowatt-hours of retail electricity sales in a year with a 5-percent RPS requirement would have to hold 5 billion kilowatt-hours of credits. In a competitive market, the price of renewable credits should rise to the level needed to stimulate power plant developers to bring on the amount of qualifying renewable capacity needed to meet the RPS requirement. Thus, the RPS provides a subsidy to renewables to make them competitive with other resource options. However, it allows the market to determine the most economical renewable options to develop to comply.

The RPS program analyzed in this report has the following characteristics:

• The program begins in 2004 with the required renewable share growing from 2.5 percent of retail electricity sales in 2008 through 2011, 5 percent in 2012 through 2015, 7.5 percent in 2016 through 2019, to 10 percent in 2020 through 2030. The requirement to hold renewable energy credits expires December 31, 2030.²
• Power sellers with retail sales of at least 4,000 gigawatt-hours per year (4 billion kilowatt-hours) are required to hold credits. Small utilities with retail sales below this level are exempt.
• Generation from renewable resources, including hydroelectric, is not included in the generation base from which the required amount of new renewables is calculated.
• The amount of qualifying renewable generation required each year is calculated by multiplying the generation base (total electricity retail sales minus renewable generation and small utility sales) by the required share.
• Qualifying renewable facilities include all new renewable generation facilities, including cofiring modifications to existing coal plants, that are placed in service on or after the enactment date of the legislation. Qualifying fuels include hydroelectric, geothermal, solar, wind, ocean, landfill gas, and certain biomass and municipal solid waste feedstocks. Renewable facilities in service prior to the enactment of the law do not receive RPS credits.
• The cost of the credit is capped at 1.5 cents per kilowatt-hour, in nominal dollars.
• The renewable production tax credit (PTC) is extended from the current expiration date of December 31, 2003 to December 31, 2006. Eligibility for the credit is also expanded to other renewable energy technologies such as geothermal, solar, and municipal sludge. New biomass cofiring at existing coal plants is eligible for PTC credits at a reduced rate (1.0 cents per kilowatt-hour) for a reduced period (5 years). Unlike the current PTC, which is indexed to inflation, the PTC analyzed in this paper remains constant in nominal dollars.

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