Federal

Introduction

This paper describes an illustrative framework for a federal clean energy standard (CES) for the electricity sector. A CES is a type of electricity portfolio standard. Electricity portfolio standards are flexible, market-based policies that typically set requirements for the percentage of electricity that must be supplied from qualified energy resources—requiring, for example, that by 2025, 25 percent of electricity sales must be met with electricity generated from renewable sources (e.g., wind, solar, geothermal). Thirty-one states and the District of Columbia have already enacted some type of electricity portfolio standard, and members of Congress have several times proposed federal electricity portfolio standards.[1] For background information on the concept of a CES, see "Clean Energy Standards: State and Federal Policy Options and Implications."[2]

A CES Framework

The CES framework described in this paper is intended to illustrate how policymakers could balance the various objectives and interests associated with a federal CES, whether in the way described in this paper or in any number of other ways.

An Illustrative CES Framework

Table 1 below presents the key CES policy design questions and considerations that policymakers face in choosing relevant CES policy parameters, as well as an illustrative framework that addresses these design choices, and the rationales that explain the approach illustrated. The various policy design choices in the illustrative CES framework should be considered together as a whole, as they are interrelated.

In addition to the CES policy outlined in Table 1 below, Discussion of Select Issues Related to the CES Framework describes some key CES design issues as well as policies that can complement a federal CES to more effectively drive clean energy technology innovation and deployment.

Note that certain numeric values are bracketed. These bracketed values are suggestions and can be refined based on additional analysis or deliberation. In addition, for the "Eligible Clean Energy Resources" policy design parameter, the proposal includes two alternatives.

Table 1 : Illustrative Federal CES Framework

Discussion of Select Issues Related to the CES Framework

Certain CES policy design issues related to the CES framework above warrant particular mention, and these are explored in more detail in this section. Note that the issues below highlight the need for more sophisticated modeling analyses of potential CES policies to inform policymakers and other stakeholders about the implications of and trade-offs among various CES design options as they develop the details of a CES policy.[8]

Quantifying Base Quantity

The assumption underpinning the framework described in this paper is that, if a CES sets uniform percentage requirements for all electric utilities, policymakers should provide CECs only to qualified clean energy generation while excluding non-incremental nuclear and hydropower generation from the base quantity of electricity sales. This approach can minimize the risk of windfall profits, though for some technologies, it may risk encouraging the reduction of generation from existing clean energy facilities.

Natural Gas

Highly efficient natural gas combined cycle (NGCC) power plants emit much lower levels of air pollutants (including CO2, the primary GHG) compared both to the average existing coal-fired power plant and even compared to new coal-fired power plants with modern pollution controls.[9] Moreover, developments over the past few years related to shale gas have led to the realization that the United States has a much larger supply of affordable domestic natural gas than previously thought.[10] As a result of these and other factors, natural gas is, absent new policies, projected by the U.S. Energy Information Administration (EIA) to dominate new electricity generating capacity additions in coming decades.[11]

While natural gas is a highly competitive choice for new electricity generating capacity required to meet electricity demand growth, there remains a significant opportunity to displace existing older, less efficient, and more highly polluting coal-fired generation with incremental natural gas-fired generation—a displacement unlikely to be fully realized under "business as usual" but one that a CES can facilitate by providing at least some credit to incremental natural gas-fired electricity generation. Incremental natural gas-fired generation could come from both new capacity additions and greater utilization of existing NGCC power plants.

In providing an incentive under a CES for displacing existing coal-fired generation with incremental natural gas-fired generation, policymakers may want to avoid an outcome in which a CES provides an incentive for natural gas at the expense of other lower-emitting energy technologies—e.g., renewables, nuclear power, and fossil fuel use coupled with CCS. Whether providing partial credit under a CES for incremental natural gas-fired generation leads to this outcome likely depends on the CES program's targets and the value of any alternative compliance payment (ACP). For example, providing credit for incremental natural gas-fired generation under a CES that has very modest targets and a low ACP value is more likely to create an incentive for natural gas-fired electricity generation at the expense of lower-emitting technologies.

Both "Eligible Clean Energy Resources" policy design parameter options in the CES framework would tie incentives for natural gas under a CES to the displacement of existing traditional coal-fired electricity generation. This approach, however, could benefit from additional analysis and deliberation – particularly regarding how best to implement it.

Other issues related to crediting natural gas under a CES are how the treatment of natural gas may affect CES cost impacts differently across utilities, states, and regions and how policymakers can provide incentives for new NGCC plants without creating competition between new and existing NGCC units.[12]

Equitable Impacts

Since electricity prices already vary dramatically across utilities, states, and regions, electricity price impacts under a CES can vary across utilities, states, and regions. This variation results from factors such as the different levels of existing clean power generation, differences in renewable resource endowments, differences in wholesale power markets, and different retail electricity market structures (i.e., competitive vs. traditionally regulated). These factors and CES policy design choices can interact in complex and nuanced ways, so the best way to gauge the likely electricity price impacts of particular CES policy formulations is through sophisticated power sector modeling.

The CES framework in Table 1 is intended to provide for equitable electricity price impacts across utilities, states, and regions. Stakeholders, however, may reasonably have different points of view regarding what constitutes "equitable price impacts." For example, some might argue that roughly equal percentage changes in electricity rates across utilities, states, and regions are fair while others might support price changes of similar absolute magnitude (e.g., in cents per kilowatt-hour). Additionally, some might argue that it is only fair for utilities, states, and regions that currently have higher than average electricity prices because of a greater current reliance on cleaner energy sources to see smaller price increases under a national CES than utilities, states, and regions that enjoy lower than average electricity prices in part due to less investment in clean power generation.

Cost Containment

In designing a CES, policymakers will likely seek to balance the benefits associated with increasing clean power generation against the costs (e.g., electricity rate impacts) associated with transitioning to an electricity generation mix that relies more heavily on clean energy sources. In recent congressional electricity portfolio standards, one of the key provisions for cost containment has been the alternative compliance payment (ACP).[13]

A few points regarding the inclusion of and value chosen for an ACP warrant mention. First, congressional electricity portfolio standard proposals in the 111th Congress have included relatively low ACP values that remained constant in real terms (i.e., they increased only to keep pace with inflation).[14] However, putting the power sector on a clean energy trajectory that diverges more and more over time from "business as usual" is likely to require an ACP that may start off at a relatively low level but that increases in real terms over time.
Second, while an ACP acts as a price ceiling for the price of tradable clean energy credits, the relationship between credit prices and electricity rate impacts under a CES is not as straightforward as one might imagine. As such, policymakers should think carefully about what ACP value is truly appropriate for balancing benefits and costs under a CES.

Third, if policymakers want to use a CES to focus specifically on spurring the deployment of less commercially mature, very low-emitting technologies, policymakers might consider a CES formulation that has a high ACP value but a lower percentage target coupled with a narrower definition of clean energy. This formulation might satisfy the desire for cost containment while still providing a substantial financial incentive for less commercially mature clean energy technologies.

Complementary Policies

A policy—like a CES—that lowers the cost of clean electricity technologies relative to competing technologies can be the federal government's central, overarching policy for spurring widespread deployment of clean electricity technologies. However, combining a CES with technology-specific complementary policies like those summarized in Table 2 can help deploy clean energy technology more cost-effectively and advance a broader portfolio of clean energy technologies by addressing market failures, and market and institutional barriers that a CES alone cannot address.[15]

Table 2 includes examples of existing policies and programs that could complement a CES. Policymakers could continue these policies and programs, expand them, or create new similar ones to complement a federal CES.

Table 2 : Clean Power Complementary Policies

Given the limited options with a CES policy for addressing costs borne by particular households and businesses of concern to policymakers (e.g., low-income households and energy-intensive, trade-exposed [EITE] industries), policymakers might seek to ameliorate any negative cost impacts felt by such households and businesses via complementary policies outside of the CES. Tax credits to defray the cost of energy efficiency investments by EITE industries and additional funding for the Low Income Home Energy Assistance Program (LIHEAP), are examples of such complementary policies.

EndNotes

[1] "Renewable & Alternative Energy Portfolio Standards," Center for Climate and Energy Solutions, last modified August 25, 2011.

[2] Regulatory Assistance Project and the Center for Climate and Energy Solutions. Clean Energy Standards: State and Federal Policy Options and Implications, September 2011, Appendix A.3.

[3] Here, as in congressional electricity portfolio standard proposals, the definition of "electricity utility" refers to any person, state agency, or federal agency, which sells electric energy (Public Utility Regulatory Policies Act of 1978, 16 U.S.C § 2602(4)).

[4] Clean Energy Standards: State and Federal Policy Options and Implications, Section 8.5. This section discusses the point of regulation.

[5] Ibid, Appendix A.3.

[6] American Clean Energy Leadership Act of 2009, S. 1462, 111th Congress, Sec. 132 (2009). Renewable energy is defined to mean electric energy generated at a facility (including distributed generation facility) from: solar, wind,  geothermal and incremental geothermal, qualified incremental hydropower, marine and hydrokinetic renewable energy, ocean (including tidal, wave, current, and thermal), biomass (as defined by the Energy Policy Act of 2005, 42 U.S.C. § 15852(b)), landfill gas; and coal-mined methane, or qualified waste-to-energy sources or other innovative sources as determined through rulemaking.

[7] In most states with RPS programs, utilities are required to provide their customers a certain percentage of electricity from renewable sources. New York's RPS program uses a central procurement model, with New York State Energy Research and Development Authority (NYSERDA) as central procurement administrator. Under this model, utilities do not procure renewable electricity directly, but rather NYSERDA pays a production incentive to renewable electricity generators. In exchange for receiving the production incentive, the renewable generator transfers to NYSERDA all rights and/or claims to the RPS attributes associated with each MWh of renewable electricity generated, and guarantees delivery of the associated electricity to the customer.

[8] "Clean Energy Standards," Center for Climate and Energy Solutions, last accessed September 19, 2011. Existing CES modeling results from such groups as the Bipartisan Policy Center and Resources for the Future are accessible on this webpage.

[9] Clean Energy Standards: State and Federal Policy Options and Implications, Appendix A.3.

[10] "What is shale gas and why is it important?," United States Energy Information Administration's (EIA), Energy in Brief, last modified August 4, 2011.

[11] "Annual Energy Outlook 2011," United States Energy Information Administration (EIA), last modified April 26, 2011. In its AEO2011 Reference Case, EIA projects that natural gas will account for 60 percent of capacity additions for 2009-2035.

[12] Meghan McGuinness, The Administration's Clean Energy Standard Proposal: An Initial Analysis, Bipartisan Policy Center Staff Paper (Washington, DC: Bipartisan Policy Center, 2011). Such competition between new and existing NGCC units has little to no benefit in terms of increasing clean energy generation, but as the Bipartisan Policy Center's recent CES modeling suggests, it is a possible outcome if a CES policy is not carefully crafted to avoid it.

[13] Electric utilities demonstrate compliance with CES requirements by submitting clean energy credits equivalent to the required level of clean energy generation. An ACP provision under a CES allows an electric utility to make payments to the CES program administrator of a specified value in lieu of submitting tradable credits. An ACP acts as a cap on the cost of compliance with a CES. Electric utilities will increase the amount of clean energy that they deliver in keeping with the CES requirement until the incremental cost of such energy exceeds the ACP value. Policymakers may set a fixed ACP, one that increases at the rate of inflation, or one that increase in real terms over time as the CES targets become more ambitious.

[14] Clean Energy Standards: State and Federal Policy Options and Implications, Table 3 in Appendix A.3

[15] Ibid, Appendix A.2. This appendix section provides a broad overview of many of these challenges.

What is the regional haze program?

The Clean Air Act sets a national goal of reducing pollution that causes lowered visibility in national parks. Sec. 169 of the Act requires the Environmental Protection Agency (EPA) and land management Federal agencies to monitor air pollution-affected visibility in 156 national parks, wilderness areas, and wildlife refuges, known as “class I areas.” These class I areas are affected by a variety of pollution sources, including natural sources like dust and wildfire smoke and manmade sources like motor vehicles, power plants, refineries, and manufacturing facilities. Pollution, especially particulate matter can be transported over a wide geographic area, affecting class I areas far from the source, even in nearby states. Haze develops when light bounces off this pollution, degrading air quality in national parks and obstructing views.

As part of the regional haze program, every state must submit a plan to reduce haze to EPA in coordination with the National Park Service, U.S. Fish and Wildlife Service, and U.S. Forest Service. These plans are submitted individually, though usually coordinated by regional, multi-state efforts. The long-term goal is to achieve natural visibility levels in class I areas by 2064.

Who are the covered entities?

These plans require emission sources to add control technologies, including retrofitting certain large facilities that have been operating since 1962 with the Best Available Retrofit Technology. If the plans fail to adequately clean the air quality in national parks, EPA may reject them and implement a federal haze plan.

What is the status of regulation?

The regional haze program was first mandated in the 1977 amendments to the Clean Air Act. The initial program required air quality monitoring in class I areas. Regulations implementing the program were promulgated in 1980, and monitoring began in 1988.

In the 1990 amendments to the Act, additional requirements were added to the program to reduce haze and increase visibility, leading to significant new regulations in 1999 that required the creation of state implementation plans. These plans were to have been filed by 2007; however, filing was delayed as states waited for finalization of the air transport rule. The air transport rule (the Clean Air Interstate Rule and its replacement Cross-State Air Pollution Rule) added more stringent requirements on many of the same pollutants effected by the regional haze program, therefore states waited to consider the implications of that rule before adjusting their regional haze plans. Currently, only California and Delaware have EPA-approved plans in place, while 45 other states and territories have submitted a plan and are awaiting EPA action.

A 2011 lawsuit challenged the delay and asked EPA to begin accepting or rejecting the state plans. In November 2011, EPA reached a settlement agreement with plaintiffs and agreed to finalize acceptance of 37 state plans or implementation of a federal plan by November 2012. The result was a proposed rule released on December 23, 2011 that allows Eastern U.S. states covered by the Cross-State Air Pollution Rule to comply with regional haze requirements by implementing that rule, while consideration continues of Western U.S. state plans.

Also in November, HR 3379, the Regional Haze Federalism Act, was introduced. This legislation would eliminate the role of EPA in accepting or rejecting state regional haze plans or the institution of federal implementation plans, leaving planning implementation entirely to the states.

Read more from EPA on regional haze.