House of Representatives

Commonwealth of Pennsylvania

Majority Policy Committee Hearing

Alternative Fuels and New Energy Technologies

March 1, 2007

Testimony of Brent Alderfer

Executive Vice President

Iberdrola Renewable Energies USA

I would like to thank Chairman Eachus and the members of the Committee for holding this very timely hearing. I would also like to recognize the leadership of Governor Rendell and Secretaries McGinty and Yablonsky for proposing the Energy Independence Strategy. They should be commended for the thoughtful and comprehensive approach they have proposed for securing Pennsylvania’s energy future.

Iberdrola Renewable Energies USA is the U.S. based subsidiary of Iberdrola, based in Madrid, Spain, the largest owner of renewable energy projects in the world. Previously, I was president of Community Energy, a leader in wind energy development and marketing based in Wayne. Community Energy developed the first utility scale wind projects in Pennsylvania, including the Somerset wind farm in western Pennsylvania and Bear Creek and Locust Ridge in the northeast. Iberdrola Renewable Energies USA acquired Community Energy in 2006 and promptly set-up its North American headquarters in Wayne. We have recently moved down the road to Radnor. Developing additional renewable energy projects in Pennsylvania is a focus of Iberdrola USA, which chose Pennsylvania as its North American headquarters, in part, due to its progressive energy policies.

Prior speakers have done a remarkable job in providing the Committee with a comprehensive examination of energy policy and the role of renewable electricity, renewable fuels and energy efficiency and demand response in solving today’s energy policy challenges. The scope of my comments is a bit narrower, focusing on policies that can continue to promote renewable electricity deployment in Pennsylvania, and specifically Governor Rendell’s Energy Independence Strategy.

The United States generally and Pennsylvania specifically face a number of important challenges in the energy sector. The demand for electricity continues to increase annually, with new records for peak winter and summer demand being set in the past year. Additionally, as the world becomes more carbon constrained, new technologies will be necessary to meet citizens’ demands for reliable, affordable, carbon-free electricity.

States that have the most progressive policies to promote new energy technologies will be at the forefront of investment and economic development opportunities in the energy field. The recent purchase of TXU, a major owner of coal and natural gas fired power plants in Texas, predicated on an agreement with the Environmental Defense Fund and the National Resources Defense Council to ultimately limit their emissions of carbon dioxide to 1990 levels and double their commitment to wind energy to 1500 MW is just one example of how the energy generation industry is responding to demands for cleaner power. An examination of energy projects actually getting built in Pennsylvania and the broader PJM grid is another. The only new utility scale-projects built in Pennsylvania since 2004 have been wind projects. Renewables will play an every increasing role in meeting our growing demands for electricity simply because other sources, such as coal and nuclear, will be difficult to site, making it all the more important that the policy environment for renewables be as favorable as possible.

The challenge before us is to identify policies that will continue to promote Pennsylvania’s leadership in alternative energy. We have seen how the demand for new technology can create entirely new business models and economic opportunities when tipping points are reached: bio-technology for example is an area in which Pennsylvania excels, a field that blossomed due to massive technological changes in the last two decades. The energy policies presented today should be designed to create a "tipping point" for Pennsylvania in which renewables become the fuel of choice for new energy projects and, as a national and world leader, ensures that Pennsylvania enjoys the corresponding job and economic development benefits.

Governor Rendell’s Energy Independence Strategy provides many key policy ingredients to move Pennsylvania towards the tipping point. Currently, Iberdrola USA’s specific interest is wind energy, but we will pursue other feasible renewable electricity projects, with a specific eye towards solar. Iberdrola USA endorses the electricity provisions of Governor Rendell’s strategy in their entirety, but my remarks will highlight some of the key provisions in the Strategy that are especially necessary to ensure the long-term growth of Pennsylvania’s wind energy market, as well as highlighting some additional policy recommendations for the Committee’s consideration.

Long-term contracts: It is critical that electric distribution companies – Pennsylvania’s old legacy utilities – are able to engage in long-term contracts with renewable energy developers. Long-term contracts are essential for securing project financing. Additionally, project financing is not only easier to acquire, but also comes with lower interest rates, when long-term agreements for power supply are signed by a credit-worthy counterparty such as a legacy utility, thereby lowering the total cost of the project and making the energy they produce cheaper.

A failure to provide long-term contracting options will lead to fewer renewable energy projects being developed in Pennsylvania and higher costs for those that are. The long-term contracting provisions of the Energy Independence Strategy must be adopted to ensure that the promise of economic development from renewables and the Alternative Energy Portfolio Standard is realized.

Funding: Unlike fossil fuels, electricity produced from renewables has no fuel costs. Renewables, therefore, provide a hedge against electricity produced by volatile fossil fuels such as natural gas and oil, which regularly set Pennsylvania wholesale electricity prices. Up-front capital costs are the primary costs associated with renewable energy (which is why low-cost financing for projects as stated above is so important). Public funding, such as that proposed by the Energy Independence Strategy, helps to lower project costs by reducing the amount of financing necessary for the project. Lower financing costs mean lower overall electricity prices for consumers and a maximization of the hedge renewables provide against volatile fuel prices.

Voluntary Market Protection: The very first utility scale wind energy projects in Pennsylvania came about because of voluntary purchases from entities interested in supporting renewable energy. Parties, such as the Pennsylvania State University, the University of Pennsylvania, over forty other Pennsylvania colleges and universities and the Commonwealth of Pennsylvania voluntarily purchased credits from the first Pennsylvania wind projects to make them a reality. Prior to the Alternative Energy Portfolio Standards Act the only way that a renewable energy project could be built in Pennsylvania was for parties wishing to purchase renewable energy to buy renewable energy credits from those projects. Renewable energy credits, or RECs, as they are often referred to, represent the delta between the average cost of energy and the additional premium cost of renewables.

The Alternative Energy Portfolio Standards Act creates a mandatory, regulatory market for RECs in Pennsylvania that will ramp up over time in which utilities can recover any additional cost for acquiring renewables, if there are any, directly from rate-payers. The thriving voluntary market demand that currently exists in the near term provides the essential near term boost to get projects underway now. This part of a growing national voluntary market driven by climate change awareness will remain an essential element in financing renewable energy projects. To protect voluntary market purchasers and to encourage the continued growth of the voluntary market it is imperative that voluntary REC purchases are allowed to contribute to new wind generation along side of the ramp up in AEPS’s mandatory obligations. We strongly support the provisions of the Governor’s proposal which offers these protections to the voluntary market.

Looking forward there are a number of critical issues that remain. We commend to the Committee the following considerations:

Siting: Pennsylvania needs clear, consistent, statewide rules for siting renewable energy projects. Renewable energy developers are vying for a limited amount of investment capital. That capital will go to where risks of regulatory uncertainty are smallest. The "Model Ordinance for Wind Energy Facilities," which was developed collaboratively with the state government, the wind industry, environmental groups and the associations representing local government offers an excellent template for developing comprehensive statewide siting rules.

Use of State Lands: Pennsylvania’s state lands have been used for decades for oil and gas extraction. We believe that renewable energy projects, including wind, can be responsibly sited on state lands. We would be pleased to work with this Committee and the appropriate government agencies to develop draft proposals for the appropriate siting of renewable energy projects on state lands.

Alternative Energy Portfolio Standard: Act 213 of 2004, the Alternative Energy Portfolio Standards Act, was groundbreaking and moved Pennsylvania into a national leadership position for requiring renewable energy. However, many other states have followed Pennsylvania’s lead and adopted even more aggressive renewable energy requirements. There are now 21 states and the District of Columbia with renewable portfolio standards. Only two states, Massachusetts and Maryland have smaller renewable energy requirements than Pennsylvania. The Commonwealth has a wealth of renewable resources and in light of Governor Rendell’s pending climate proposal we believe it is time for the Pennsylvania General Assembly to consider raising the AEPS’s requirements for Tier I -- essentially the renewable energy tier.

Carbon allocations: While we do not yet know the details of Governor Rendell’s climate initiative, we strongly encourage a "set-aside" of carbon credits for renewables. The Committee should also investigate the possibility of creating set-asides for NOx, SOx, and mercury credits associated with Pennsylvania’s clean air programs. Specific allocations for renewables ensure that promised emissions reductions actually occur.

We commend Governor Rendell for his leadership and foresight in proposing the Energy Independence Strategy. The electricity provisions taken in their entirety will benefit consumers, provide more affordable and reliable electricity service and bring jobs and economic development to Pennsylvania. Our comments today reflect those provisions and recommendations we believe are most critical for ensuring the success of renewable electricity projects in the Commonwealth.

I would like to again that Chairman Eachus and the members of the Committee for their dedication to these very important issues. Ibedrola Renewable Energies USA is a proud Pennsylvania corporate citizen and we look forward to working with this Committee and the General Assembly to build a clean and bright energy future for all Pennsylvanians.