The fines in the proposed Railbelt Renewable Portfolio Standard are so small as to be nearly irrelevant

Even if utilities build no new renewables, the fines will barely impact rates. However the PR impact of paying fines may motivate utilities where voluntary goals have failed.

In 2022, Governor Dunleavy introduced a bill mandating a Renewable Portfolio standard for the Railbelt. Last year, Senator Tobin introduced a similar bill, which is still in the legislature.  

Chugach Electric’s board just passed a resolution in support of an RPS, right after Golden Valley Electric published a statement opposing it. Homer Electric and Matanuska Electric have not put forth public statements on the bill, but Homer Electric recently repealed their voluntary renewable energy goal, and Matanuska Electric has never had a meaningful renewable energy or emissions goal.

SB 101 proposes a standard of 25% renewables by 2027, 55% by 2035, and 80% by 2040, with fines of $20 per MWh (2 cents per KWh) if the targets aren’t met.

Golden Valley’s statement specifically calls out the penalties as one of their objections. Last year’s bill hasn’t gotten much discussion yet, but utilities’ comments on Dunleavy’s version also revolved heavily around the potential rate impacts of the penalties. It’s true that penalties would be paid by co-op members — there’s no one else to pay them. It’s also true that the penalties proposed are a miniscule fraction of the total utility costs.

Even if utilities make no attempt whatsoever to meet the standards, the penalties increase total costs by less than 1% until 2036, and less than 5% at their maximum.

This makes sense if you think about it for a minute. Fines are 2 cents per Kwh, and in early years, would only be leveled on 10% of Railbelt electricity. Two tenths of a cent per Kwh is well within the range of quarter-to-quarter fluctuations in the cost-of-power-adjustment that most customers don’t notice.

And in the future, while 2 cent per KWh fines are fixed in law, inflation continues to apply to everything else, rendering the fines a much smaller percentage of the total. As the targets increase, those fines go up, but add less than 5% at their maximum in 2040. In its current form the bill forgives the first year of non-compliance, reducing the impact of fines even further.

In this analysis, I used a 2% escalation for general costs, a 3% escalation for fuel costs, and flat energy consumption. The Cook Inlet natural gas crisis means that fuel costs in this no-new-renewables case will likely increase a lot more than that — pushing total costs higher, and making the fines appear even more irrelevant. Additionally, a power purchase agreement signed and approved within a given year can count as part of a utility’s total even if the actual energy doesn’t come until two years later, giving plenty of wiggle room for the earliest 2027 deadline.

Utilities will save costs by pursuing renewables rather than relying on expensive imported gas. But if they choose not to, they can afford the fines. If they do try to transition, and miss a few deadlines along the way, the fines are even smaller. 

There’s also a debate about over whether or not fines can be paid from member rates. This graph assumes they can be, comparing the fines to total revenue. If the fines have to be paid out of margins, that blue area gets a whole lot smaller. To cover a fine with margins, a utility would likely take the money from past members rather than current ones -- deciding not to pay back capital credits to past members. Ultimately it is members’ money either way, so I think it’s better to include it in rates. Current members have the ability to complain to the RCA or vote out their utility boards if they don’t like what’s happening, which past members can’t do. Also, since the penalties are small, ratepayer ire at having any penalties at all included in their bill is probably more of an incentive to meet the goals than the fines alone could be.

You can have a renewable energy goal without penalties, of course. We’ve had one since 2010, which says Alaska will reach 50% renewable energy by next year. In the 14 years since the goal was passed, the Railbelt has added around 2% wind energy, and less than 0.5% solar, to reach a total of around 15% renewable energy (the state total is higher, around 1/3, largely due to hydropower in Southeast which existed long before the goal was passed). 

That’s where a penalty-free goal will get you.

We shouldn’t need penalties to incentivize renewable development. Economic incentives point that direction already. But that should make us even less scared of the penalties in an RPS.