Does Paying Utility For Clean Energy Work

When complex regulations run across power markets, be sure to read the fine impress.

The next large push in climate policy in the United states appears to exist coalescing effectually a make clean electricity payment program (CEPP), a clean electricity standard that is not-really-a-regulatory-standard and therefore qualifies for inclusion in a pecker that tin pass via reconciliation. The CEPP has gotten a lot of contempo coverage, merely these incorporate only sketchy high-level details and platitudes like "the biggest thing since the lights went on." There is also this widely circulated ii-folio summary of at least one version of the concept . All of these leave out some of import implementation aspects, then I'g going to apply this blog post to ask "how is this supposed to work, exactly?" and speculate on some answers.

First, what nosotros know so far is that the policy is adapted from a clean free energy standard (CES) that, if implemented as a regulatory standard – like the Federal renewable fuel standard (RFS), or electricity renewable portfolio standards (RPS) – would have required something similar 80% of electricity to come from "clean" (zero-carbon) sources past 2030. Since we've done a Federal Renewable Fuels Standard ( not without hiccups ), it's kind of easy to meet how such a thing would have worked for a hypothetical CES. Notwithstanding, regulatory standards are designed to re-classify coin within an industry and be more-or-less budget neutral. Reporting , and Twitter , suggest such an approach would non be eligible to be included in a bill that qualifies for the reconciliation process, and would therefore accept required 60 votes in the Senate.

Enter the CEPP, designed to mirror the general approach of a CES, just with a much more tax-and-spendy flavor, thereby making it eligible to laissez passer with just 50 Senate votes (I'm not a parliamentarian, don't enquire me the details). Frankly I'g still getting my head around the new politics of this. For decades, industry standards were a preferred tool because they did not have a taxation-and-spendy experience, and drawing the coin to pay for clean energy out of say, electricity rates or gasoline prices, was less politically fraught (and at times more economically efficient) than paying with taxes or debt. I gauge this strategic pivot is one more than fun legacy of the filibuster.

images-14 Anyway, like a CES, a CEPP would require individual electricity load-serving entities (LSEs) buy an e'er-increasing amount of energy from zero-carbon sources. Those that autumn short of the target would pay a tax. Those who exceed the targets would earn a subsidy. Taxes and subsidies would presumably be per MWh that the LSE is short of, or in excess of, its target increase. My understanding is that these targets would be based on twelvemonth-over-year changes in renewable free energy purchases, rather than on levels. Then only the MWh increases over the previous year's clean MWh, and in backlog of the required increases, would earn the subsidy. Simple, right ?!?

I have questions:

How exactly is the authorities going to measure a "purchase" of clean electricity?

The FAQ describes compliance via "building and owning an asset, purchasing clean energy via a long-term contract or PPA, or purchasing clean electricity in spot markets ." The reason I put these words in bold italics is that there is non currently a spot market for clean electricity, only for electricity . Markets run past Independent System Operators, with i exception, practise not track the environmental attributes of the MWh they manage and more importantly do not rail who buys which MWh. And so, if you lot need 100 MWh from PJM today, and PJM is treatment 900 MWh of coal and 100 MWh of current of air in your expanse, there is no mechanism today for you to get the 100 MWh of wind instead of some mix. The ane exception is California's mechanism for tracking cap-and-merchandise compliance of imported electricity and boy is that a headache . Of further concern is the fact that there is a spectrum of commercial arrangements between "long-term contract" and ISO spot markets. All this leads me to wonder …

Will compliance be facilitated by some kind of tradable certificate?

The measurement headaches described above are greatly mitigated if qualifying MWh are assigned a certificate like to the Renewable Identification Numbers (RIN) used for the renewable fuel standard. The idea is that each "clean" MWh creates an associated zilch-carbon electricity certificate (I'm going to telephone call information technology a ZEC). The ZECs could be bundled with the electricity or, like the Renewable Electricity Certificates used today in RPS programs, could be unbundled and traded to entities that need more renewable credits for compliance. My sense is that any kind of standard where compliance is placed on LSEs would have to have a tradeable certificate mechanism to make information technology manageable. Even if the government doesn't create such certificates, the marketplace volition detect creative means to (on-paper) trade zero-carbon energy in ways that recreates the effects of credit trading. Meliorate to proceed visibility over the whole thing by just making them officially part of the program. Yet, fifty-fifty if there are ZEC's…

Would tradable certificates be issued for all clean MWh or just new clean MWh?

While the regulation is focused on subsidizing only new MWh, I don't think a certificate that credits just new MWh would be workable, or necessary. First of all, what makes a MWh new? What if some of my old solar panels "intermission" and new ones appear? JimBo Generation has closed its doors, but Bushnell Make clean Power has opened for business organization but side by side door! My colleague Chris Knittel has pointed out the parallels to attempts in the 1980's to pay more than for "new" natural gas than for "old" natural gas . This led to all sorts of distortions similar early on endmost of old wells and drilling new wells right adjacent to them. Most importantly, certificates for just new MWh would do nothing to keep existing plants open up. Since existing clean MWh are just as important for the environment as new ones, this leads to the next question…

Is this system supposed to exist better for existing clean free energy sources, specially nuclear energy, than the current system of renewable product revenue enhancement credits and portfolio standards?

One of the concerns with the existing hodge-podge of country-level RPS'south and Federal renewable revenue enhancement credits is that the subsidies depress wholesale power prices and somewhat perversely (depending on your betoken of view) push existing zero-carbon sources, peculiarly nuclear plants, into early retirement .

A system that assigns ZECs for all qualifying MWh would place a value on the connected production from existing plants, thereby offsetting (for clean generation) any concurrent revenues lost from declines in wholesale power prices. The CEPP would crave that every LSE increase their percentage of clean energy every year. That means ownership new clean energy AND continuing to buy the "old" clean energy. For instance, each LSE would be required to bear witness an increasing corporeality of ZECs each year (according to their target increases). This ways they would demand to both buy ZECs from existing sources and stimulate the cosmos of new ones. What they are willing to pay for these ZECs will depend on…

Will the tax/subsidy schedule be flat or "progressive"?

The FAQ says that taxes would be paid by LSE'south "that fall far short of the annual threshold." This implies that a tax would not exist paid by those that miss the threshold past just a little. Hither'due south the problem though. If visitor A was merely a little beneath its threshold and visitor B were only a little above its threshold, visitor A would sell its clean energy to company B. Company A would not pay a tax, because it is however "shut" to its target while visitor B would collect some extra subsidy greenbacks. The discontinuity in the tax schedule, combined with the incommunicable-to-prevent trading of clean energy, would encourage trading that arbitrages the kinks in the tax schedule. In all likelihood this arbitrage trading would reduce taxes collected and drive upwards subsidy amounts, without creating more than clean MWh . All this leads to the big film question…

How would this organisation affect wholesale and retail electricity prices?

This is a good topic for a full-diddled research paper, but hither is a first guess. My sense is, if questions i-v are resolved sensibly, this would work like an intensity standard, such equally Renewables Portfolio Standards that are used in many states, just with the value of a clean MWh fix by the tax lawmaking rather than by a market for clean MWh. Even though it is subsidized, electricity prices would still be affected. Intensity standards "dilute" the touch on of carbon pricing on retail prices (relative to say, a carbon price on all dirty MWh), but there is notwithstanding an bear upon.

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If the ZECs are tradable, and are generated by both new and incumbent sources, there would exist a unmarried market clearing cost for ZECs. Both pre-existing and new make clean MWh would earn that credit value from the market and LSEs would accept to buy them for compliance. But LSEs would earn the subsidy only for the ZECs above their required increase in clean free energy (If they don't buy as many ZECs every bit the previous year, they pay a tax). So the money for the remainder of the ZECs, the ones that are not subsidized, would have to come from LSEs. This might raise LSE average costs, even when the cost of the marginal clean MWh is subsidized. All this new energy might also lower wholesale "generic" power prices, at least during high wind/solar hours . So the combined cost of energy plus ZECs may or may not increment. I would call back that these impacts would non be felt uniformly beyond utilities.

I take seen claims that this system would not enhance anyone's electricity prices, just given the complex interactions of these incentives with power market place prices, and the disparate positions of unlike parties in the market, this is not obvious to me. For one, the bear upon on the marginal electricity cost will differ from the impact on average generation costs, and whenever that happens, impacts on regulated utilities will differ from those operating in markets .

Moving Forward

This practice illustrates the complexities and potential for perhaps unforeseen indirect market place impacts from such a arrangement. In one case more than details sally, I hope that some careful market analysis volition be applied so that the full market impacts can exist considered and looked at aslope the impacts of alternative approaches. It may turn out that a much simpler approach– due east.thousand., expansion of the existing production tax credit framework– could achieve many of the same goals. Taxation credits don't guarantee a quantity target like a strict standard would, but remember the CEPP isn't really a standard either. That'southward how we got to this signal.

I'm too contractually obligated equally an ecology economist to point out that a carbon revenue enhancement on the emissions of power plants could provide every bit strong or stronger incentives for clean energy, would exist more than straightforward, more than efficient, and would produce the revenues that could be applied toward many of the other goals of the budget bill. It also obviously fits the type of policy that tin pass through reconciliation. If we can't go this obvious road though, let's make sure the road we do take gets us where we think it should.

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Suggested citation: Bushnell, James. "The Make clean Electricity Payment Plan: How Exactly Is This Supposed to Work?" Free energy Plant Blog, UC Berkeley, Baronial 23, 2022, https://energyathaas.wordpress.com/2021/08/23/the-clean-electricity-payment-program-how-exactly-is-this-supposed-to-work/