Constitutional Hurdles to Renewable Energy

18 February 2009 Publication

Energy Law360

Law360, New York (February 18, 2009) -- Over the past several decades, renewable energy has garnered significant support.

Increasing concerns about global climate change and greenhouse gas emissions have resulted in consideration of new, carbon-friendly sources of energy.

Limited fuel supplies and rising gas prices spur on the search for alternative, renewable and eco-friendly forms of energy.

For the United States, continued reliance on volatile and potentially hostile regions for oil and LNG supplies threatens national security.

Whether for environmental, economic or national security reasons, more and more people are clamoring for renewable energy. Despite the strong support for renewable energy, however, it still provides only a small fraction of the overall generation mix.

A significant part of this failure to achieve widespread adoption stems from the historically high costs of renewable energy generation.

According to the Energy Information Administration (EIA), in 2007 approximately 7 percent of the nation’s energy was derived from renewable energy sources, with hydroelectric and biomass contributing almost 90 percent of that figure.

Currently, the EIA projects that renewable-generated electricity will only account for 12.5 percent of total U.S. electricity generation by 2030.

Even with strong environmental and national security benefits for renewable energy, adoption has been slow. The primary practical hurdle for renewable energy generation is the cost.

Many renewable facilities rely on wind or solar power, which lack consistency as generation sources: the wind may blow for a period of time and then stop; similarly, the sun only shines during the day, and poor weather can impact performance. Neither of these sources provides stable, reliable power.

The inability to operate at consistent, sustainable levels reduces the practicality of considering wind and solar as reliable baseload capacity resources and requires utilities to maintain expensive baseline units and peaker facilities to bridge reliability gaps.

Although some scholars have proposed utilizing batteries to level power peaks and valleys, adequate battery technology does not currently exist at cost-competitive levels, further exacerbating the problem.

Recognizing the economic hurdles to widespread renewable energy adoption, states have worked to find ways to offset some of the increased costs. These include, inter alia, renewable portfolio standards (RPS), expedited siting review, and direct and tax subsidies.

Taken as a whole, these programs permit states to provide economic incentives for renewable energy development, which in turn makes renewable energy generation facilities more cost-competitive with their traditional, fossil fuel fired counterparts.

Yet states must remain wary: a growing number of scholars have pointed out that the Constitution may hinder the implementation of these programs. In particular, one constitutional doctrine, the Dormant Commerce Clause, inhibits states’ ability to discriminate against out-of-state interests to favor in-state companies.

The Commerce Clause gives Congress the power to regulate commerce “among the several states.” This power over interstate commerce has been interpreted to extend to more than the positive law enacted by Congress and to prevent states from promulgating laws that place an undue burden on interstate commerce. Scholars refer to this aspect as the Dormant, or negative, Commerce Clause.

After many years of court interpretation and clarification, the Dormant Commerce Clause today broadly regulates two major categories of activity. First, under the test laid out in Philadelphia v. New Jersey,1 discriminatory statutes invoking economic protectionism are subject to strict scrutiny and are essentially per se invalid.

Second, under Pike v. Bruce Church,2 the Dormant Commerce Clause evaluates statutes where the state operates for a legitimate local public interest with only limited effects on interstate commerce. In these situations, courts determine the validity of the statute by weighing the burden on interstate commerce against the state interest furthered by the statute.

The Dormant Commerce Clause affects several of the state mechanisms for offsetting the expense of renewable energy generation. For example, many states have enacted RPS requirements to level the playing field and encourage renewable energy generation.

While RPS requirements are generally facially valid, they must also avoid discrimination against out-of-state renewable energy facilities based on location. It is now generally accepted that the location of the renewable energy generation facility must be irrelevant to the RPS requirement for the state, or the RPS violates the Dormant Commerce Clause.3

Reviews by state public utility commissions typically examine the in-state benefits of proposed generation facilities. With a utility proposing a new plant to serve its own projected load, out-of-state issues may not arise.

But if an independent power producer requires state commission approval for a generating facility, Dormant Commerce Clause issues can come into play. The state commission must avoid provisions that secure energy distribution priority to the home state.

Some states have tried to use direct or tax subsidies to encourage renewable generation. Since West Lynn Creamery Inc. v. Healy,4 however, a nondiscriminatory tax on an activity combined with a state subsidy no longer passes constitutional muster under the Dormant Commerce Clause.

States that intend to subsidize renewable energy generation directly must ensure that their programs do not fall within the ambit of West Lynn Creamery; the discriminatory effect of such in-state incentives could render the entire program unconstitutional.

But states do have options to encourage renewable energy generation. For example, states can make aggressive use of generation location-neutral RPS requirements. Additionally, states can utilize fast-tracked permitting with only a limited focus on in-state benefits.

Moreover, there has been significant talk surrounding the Obama administration’s potential for introducing a national RPS. A federal RPS or other renewable energy-specific grant can encourage renewable energy generation without running afoul of the constitutional hurdles imposed by the Dormant Commerce Clause, as all interstate commerce would be treated equally.

But unless such legislation explicitly “occupies the field” and preempts and invalidates state programs, Dormant Commerce Clause issues will remain for state policymakers.

States may have very good reasons for wanting to encourage renewable energy generation. The Dormant Commerce Clause, however, limits states’ options. States must continue to be vigilant to ensure that their efforts to encourage renewable energy do not result in protectionist violations of the Dormant Commerce Clause.

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1 437 U.S. 617 (1978).

2 397 U.S. 137 (1970).

3 For example, in an analogous case under the Dormant Commerce Clause, New England Power Co. v. New Hampshire, 455 U.S. 331 (1982), the New Hampshire Public Utilities Commission withdrew a hydroelectric power company’s permission to export power and instead ordered the power company to sell that power first to in-state consumers. The Supreme Court held that the Dormant Commerce Clause prevented New Hampshire from restricting interstate transmission of power generated within the state; the state requirements must be location-neutral to comply with the Dormant Commerce Clause.

4 512 U.S. 186 (1994).

Reprinted with permission from Portfolio Media, Inc.

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