Download ABA EEMF Committee – DISCUSSION DRAFT April 25, 2011 April

April 25, 2011
[LETTERHEAD]
To: Members of the _______ and ________ Committees
Re: Senate Clean Energy Standard White Paper
Interactive CES Policy Debate:
Designing a Federal Clean Energy Standard: What
Should a CES Include? How Should It Operate?
Aggregated Comments and Analysis from Members of the ABA SEER Energy and
Environmental Markets & Finance Committee and the Renewable, Alternative, and
Distributed Energy Resources Committee
The Energy and Environmental Markets & Finance Committee (EEMF) and the
Renewable, Alternative, and Distributed Energy Resources Committee (RADER), both
committees from the American Bar Association’s (ABA) Section of Environment,
Energy, and Resources (SEER), seek your comments and input.
The two Committees are assembling a comprehensive analysis of key issues and
considerations federal policymakers should consider as they develop legislative proposals
for a federal Clean Energy Standard (CES).
As many of you are aware, earlier this Spring the U.S. Senate Energy and Natural
Resources Committee (ENR) released a white paper seeking comment from interested
parties on the design elements and parameters of a federal CES. 1 The following employs
a number of the same questions posed by the Senate ENR, with the intent to develop an
interactive debate among our members over CES best practices and suggested guidelines
going-forward.
I.
INTRODUCTION
As stated in the White Paper, earlier this year President Obama proposed the
rough outlines for a federal CES that would require 80% of the nation’s total electricity
come from qualifying clean energy technologies by 2035. The Senate ENR Committee
1
A copy of the ENR white paper can be found at:
http://energy.senate.gov/public/index.cfm?FuseAction=IssueItems.View&IssueItem_ID=7b61e406-3e174927-b3f4-d909394d46de (hereinafter “White Paper”).
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
stated it wanted to ask threshold questions on the general CES policy goals and whether a
CES “would be the most effective vehicle” to achieve them. For example, the White
Paper states the following:


II.
“Is the goal to reduce greenhouse gas emissions, lower electricity costs,
spur utilization of particular assets, diversify supply, or some combination
thereof?”
“Depending on the goals, is a CES the right policy for the nation at this
time? If so, is 80 percent by 2035 the right target? If not, should
alternatives to reach similar goals be considered?”
POLICY OVERVIEW/GOALS
A CES, in simplest terms, can be understood as a renewable electricity portfolio
standard (“RPS”) with additional “clean” energy types included, where regulated utilities
are obligated to generate or purchase a set percentage of their load-serving needs from all
such qualifying resources. But a CES can also be much more than that a portfolio
mandate. Policy goals and objectives of a CES can be as broad or as narrow as
policymakers determine to be in the public interest.
Nevertheless, the over-arching goal of any CES is to establish an energy legal and
regulatory framework for promoting clean energy deployment, one that appreciates the
need to overcome existing market pricing yet also provides least-cost solutions. A CES
can (1) act as the centerpiece for a long-term federal clean energy policy, (2) provide
market and energy price signals to help spur investment in next-generation energy and
efficiency technologies, and (3) begin to set the country on a path toward addressing
some risks associated with climate change. A CES mandates production or procurement
of cleaner electricity. It helps reduce utility-sector GHG emissions and spurs advanced
energy manufacturing and domestic job creation – things that will not occur but for (a) a
drastic shift in energy prices or (b) a mandated preference for qualifying types of clean
energy.
The devil is in the details, though. The challenges to designing a successful CES
are the policy inputs and variables. How the 80% is conceived, and how compliance is
measured, could have disproportionate impacts on the efficiency of the program. A CES
that gives to too much weight to natural gas as a compliance resource, for example, could
drown out other technologies.
III.
ISSUES TO CONSIDER
Beginning with this Section, please add to or comment on the following issues
and postulates bracketed below. Comments can be inserted into this document or
delivered separately.
2
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
1.
[A CES should not be viewed as an alternative to a market-based GHG cap-andtrade program, even though a CES would provide a measure of GHG reductions over
time. The difference is the policy objective and the metric. A utility-only cap-and-trade
program literally caps emissions. The market transition to cleaner energy technologies
resulting from the cap is an indirect by-product to compliance. The GHG reductions
achieved are secondary to the relative portfolio increase in cleaner energy sources.]
2.
[A CES and its attendant federal clean energy credit market could provide
investment certainty for utilities, project developers and technology manufacturers.]
3.
[A goal of a CES is not to lower electricity costs. The goal is to slowly lower
overall macroeconomic costs (including environmental externalities) associated with
continued dependency on fossil fuel generation assets]
4.
[Cost-containment of a mandate relates to incentives and scope. Price signals and
long-term clean energy credit contracts can greenlight projects. Including a measured
amount of energy efficiency as qualifying will reduce load and costs.]
5.
[The devil is truly in the details for any CES. How the 80% is conceived, and
how compliance is measured, could have disproportionate impacts on the efficiency of
the program. A CES that gives to too much weight to natural gas as a compliance
resource could drown out other technologies, for example.]
6.
[Alternative and additive policies should be considered and implemented
regardless of what a final CES target becomes (if anything). Such policies include:






A federal GHG cap-and-trade program or equivalent carbon pricing
mechanism.
Complimentary feed-in tariff programs.
Demand response and energy efficiency incentives.
Innovative and/or expanded environmental finance mechanisms (e.g.
green bonds, loans and guarantees).
Reorientation and redistribution of massive energy tax expenditures away
from fossil fuels and toward clean energy development and deployment.
Wholesale and retail energy ratemaking incentives for accelerated clean
energy deployment (including transmission).]
7.
[Project shutdowns of existing, aging fossil fuel fleets will need to be replaced.
Additional capacity may also be required. If the goal is a big-tent CES, the least-cost
solution will be lowest cost qualifying resources that supply high volumes of energy.
This in turn means considering the opportunity costs of one technology over others, and
how policies and market design features can maximize option availability.]
8.
[Natural gas is the economic and environmental “bridge fuel” to more advanced
energy technologies. The greater nameplate capacity and energy production of natural
3
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
gas, combined with cheaper feedstock prices, means natural gas will comprise a much
larger share of the overall generation mix in 2035 regardless of any additional incentives.
In sum, natural gas does not need a CES to achieve these targets. Worse, a CES that
counts or allocates clean energy credits to existing natural gas plants, and does not
appropriately cap the amount of new natural gas that can be used for compliance, runs the
risk of turning the entire program into a direct subsidy of natural gas at the expense of
other options.]
IV.
KEY ELEMENTS FOR CLEAN ENERGY STANDARD PROPOSALS
The Senate ENR White Paper sets out the following series of statements,
questions and sub-questions (excerpts below copied directly from the White Paper)
seeking comment on the fundamental elements and design variables of a CES. Please
add your responses or comments to each question as appropriate. Separate submissions
are acceptable if you run out of space.
1. What should be the threshold for inclusion in the new program?
In the RES contained in S. 1462 last Congress, utilities selling four million
megawatt hours or more of retail electric power in a calendar year would have been
subject to the mandate. Additionally, the State of Hawaii was specifically excluded from
the program’s requirements.
Questions:
A.
Should there be a threshold for inclusion or should all electric utilities be
subject to the standards set by a CES?
Relevant Considerations:
[Should there be a presumptive emissions threshold for eligibility?]
[Should the threshold for inclusion be statutory or established pursuant to
administrative procedures?]
[Are there issues raised for demand response rules and implementation?]
[How would a threshold affect reliability and transmission planning?]
B.
Should any states or portions of states be specifically excluded from the
new program’s requirements?
Relevant Considerations:
[Should FERC/DOE have implementing regulatory authority to provide waivers
for national security or hardships?]
[What should be considered for reliability, critical infrastructure, and end-use load
management for requirements?]
4
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
C.
How should a federal mandate interact with the 30 existing state
renewable electricity standards?
Relevant Considerations:
[Would a federal mandate establish minimum performance standards that states
can meet or exceed, provided there is a fungible clean energy credit market?]
[Should a federal market be fungible in total, or is there room to have varying
regional standards but a federal clean energy credit market?]
[How should existing RECs and obligations be provided and complied with if
there is dual compliance obligations? Is there a risk of double subsidy?]
2. What resources should qualify as “clean energy”?
The definition of what qualifies as “clean energy” will be crucial in determining
the overall mix of technologies deployed to comply with a CES.
A.
On what basis should qualifying “clean energy” resources be defined?
Should the definition of “clean energy” account only for the greenhouse
gas emissions of electric generation, or should other environmental issues
be accounted for (e.g. particulate matter from biomass combustion, spent
fuel from nuclear power, or land use changes for solar panels or wind,
etc.).
Relevant Considerations:
[Should policymakers consider defining “clean energy” as inclusively as possible
(while remaining true to the concept of increasing the competitiveness of clean
energy technologies that are currently disadvantaged by the absence of carbon
pricing)]
To what extent should energy security/independence considerations enter the
analysis?
[Are there particular technologies that should not be considered? Thermal or
waste heat?].
[What are the implications of trying to integrate a conversionary metric for MWh
and CO2e? Should the CO2e metric be included at all?]
[Is there an administrative inefficiency and over-reach by including other criteria
pollutants? Would including them cause regulatory jurisdiction or compliance
problems with the Clean Air Act? FERC or EPA (or both)?]
B.
Should qualifying clean energy resources be expressly listed or based on a
general emissions threshold? If it is determined that a list of clean energy
resources is preferable, what is the optimal definition for “clean energy”
that will deploy a diverse set of clean generation technologies at least
5
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
cost? Should there be an avenue to qualify additional clean energy
resources in the future, based on technological advancements?
Relevant Considerations:



Is a pre-determined list of resources, rather than a threshold based on
emissions avoidance/reduction, preferable?
Should the definition allow regulated entities to pursue “least-cost”
compliance options for new generation or power purchase?
Should the designated CES program administrator have discretion to add
resources to the list during the life of the program?
[What should the compliance metric be? If CO2e is to be included, does that
cause administrative and jurisdiction battles? The compliance metric for CES
program could be based on the energy produced by qualifying resources (e.g.
kilowatts or megawatts). A regulated utility will be required to submit/retire a
number of CLECs equal to its annual obligation. ]
[Alternately, will a simple predetermined list that can be expanded work better?]
[What if everything and anything could be certified provided it isn’t conventional
coal?]
[Does the compliance metric affect the clean energy credit market? Does it make
it easier or harder to include emission offset credits and energy efficiency as part
of the CES?]
C.
What is the role for energy efficiency in the standard? If energy efficiency
qualifies, should it be limited to the supply side, the demand side, or both?
How should measurement and verification issues be handled?
Relevant Considerations:
[What are the major drawbacks of including efficiency? Certification and
oversight?]
[Does inclusion prevent the goals of a CES to promote energy generation
changes?]
[What are the metrics for calculating energy efficiency?]
[What entities along the supply chain should have original right, title and interest
to energy efficiency credits?]
D.
Should retrofits or retirements of traditional fossil-fuel plants be included
in the standard?
Relevant Considerations:
[Is there is a reasonable role that retrofits and replacements could play in a CES
program? As was integrated into two previously proposed CES programs by
6
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Senators Lugar and Graham, respectively, retrofit efficiencies and/or retirements
could provide some measure of non-CLEC compliance “credit” to regulated
utilities.]
3. How should the crediting system and timetables be designed?
The design of the crediting system and the timing and stringency of the targets
will necessarily impact the mix of technologies deployed as well as the ultimate costs
imposed on end-use customers.
Questions:
A.
Should the standard’s requirements be keyed to the year 2035 or some
other timeframe? requirements?
Relevant Considerations:
[Should the year chosen for program compliance be far enough in the future to
provide long-term price signals to all applicable market participants, and short
enough to spur innovation? Is there a goldilocks CES? What does it look like?]
B.
What are the tradeoffs between crediting all existing clean technologies
versus only allowing new and incremental upgrades to qualify for credits?
Is one methodology preferable to the other?
Relevant Considerations:
[The trade-offs are political and economic. A crediting regime that allocates to
existing resources increases credit volume, reduces overall compliance and
commodity costs, and facilitates the achievement of higher percentages of cleaner
energy deployment.]
[If existing natural gas sources are credited, even partially, the marketplace may
not receive the price signals necessary to make renewable energy or distributed
energy the least-cost solution. The high volume of gas credits literally drowns out
the competition for a number of physical and economic factors.]
Conversely, only crediting “new” energy sources could reduce market liquidity,
which in turn increases compliance costs. On the positive side, it allows the
CLECs to function as a true financial subsidy rather than like a proxy allowance
system. Compliance can be met by generating energy, buying clean energy, or
buying CLECs or other equivalent commodities.]
C.
Should partial credits be given for certain technologies, like efficient
natural gas and clean coal, as the President has proposed? If partial credits
are used, on what basis should the percentage of credit be awarded?
Should this be made modifiable over the life of the program?
7
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Relevant Considerations:
[Not all energy sources are created equally (energy, economic, environmental),
and such disparities find their way in energy prices]
[If partial credits are used, should the basis be proximate to a projected amount of
natural gas that would maximize renewable energy and distributed energy
alternatives?]
[Should economic analysis be conducted comparing the price signal impacts of
partial crediting versus a hard cap on natural gas eligibility? The high-volume,
low cost energy delivery aspects of natural gas vis-à-vis other ‘clean’ options
need to be addressed carefully to avoid negating the market incentive to use
anything but gas to comply. Should the CO2e efficiency of natural gas and a cap
on MWh eligibility be considered?]
D.
Is there a deployment path that will optimize the trade-off between the
overall cost of the program and the overall amount of clean energy
deployed?
Relevant Considerations:
[Is there an issue here and state regulatory commissions, if given implementing
authority over a CES for utilities within its state jurisdiction, will go for the lower
hanging fruit first (e.g. efficiency), then for high-return, low cost capacity (e.g.
natural gas, advanced solar) based on cost of deployment?]
[Should itemized, per-technology portfolio requirements be established for
capital-intensive technologies (e.g. solar, nuclear, CCS)?]
[If set-asides help promote these technologies, should separate ACPs be set-out as
well?]
[Is there a cost-containment mechanism available that optimizes the deployment
path in a least-cost fashion? For example, set-asides as discussed for capital
intensive technologies, with varying ACPs, with payments going into a dedicated
federal trust? And that federal trust could finance additional clean energy projects
based on reverse auction?]
E.
What would be the effect of including tiers for particular classes of
technology, or for technologies with different levels of economic risk, and
what would be a viable way of including such tiers?
Relevant Considerations:
[Will classifications be prejudicial if certain technologies are prioritized for noneconomic or environmental purposes? For example, if natural gas is a lower tier
technology eligible to receive only 1/3 of a clean energy credit per MWh, will it
be de-emphasized relative to renewable energy deployment options?]
8
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
[Does tiered classification provide market clarity on value in terms of clean
energy credits?]
[Is the goal of tiered classification to establish the desired deployment path? Or is
it to promote subsidization of capital-intensive technologies (i.e. nuclear and
CCS)?]
[If tiered classes are established, should the portfolio requirements break down by
class (e.g. 30% from Class I, 50% from Class II, 20% from Class III)? And
should ACP requirements be based on the tier requirement?]
F.
Should the same credit be available to meet both the federal mandate and
an existing state standard or should a credit only be utilized once?
Relevant Considerations:
[Can a federally created credit be used to meet a state requirement? What laws
would need to be changed to allow for this harmonization?]
G.
Should there be a banking and/or borrowing system available for credits
and, if so, for how long?
Relevant Considerations:
[Should the benefits of banking be balanced against the impact on market value in
early years?]
4. How will a CES affect the deployment of specific technologies?
The value and expected future value of clean energy credits created by a CES will
be the primary driver of clean energy deployment. Each technology faces different
economic and financing issues.
Relevant Considerations:
[How should policymakers compare the varying capital cost differences between
technologies that also has varying energy production and consumption
differences? Should carve-outs to promote expensive technologies be considered
(e.g. solar carve-out)? Should CCS and nuclear have subcategory mandates and
credit kickers?]
[Does this assume that the CES will include suitable provisions for certification,
registration and trading?]
Questions:
A.
How valuable would clean energy credits have to be in order to facilitate
the deployment of individual qualified technologies?
9
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Relevant Considerations:
[The value could depend on the technology in question. The value of CLECs for
nuclear energy would need to be quite high to facilitate deployment and overcome
incremental capital costs. The same may be true on a different level for solar
energy.]
B.
How might a CES alter the current dispatch order of existing generation
(such as natural gas-fired power plants), which has been driven by
minimization of consumer costs, historically?
Relevant Considerations:
[The dispatch order could change based on baseload price in deregulated markets
and economic dispatch in regulated vertical markets. The price of a particular
technology will be different on many factors, including efficiencies brought by
innovations spurred by a CES.]
[Are there constitutional issues involved with navigating this issue? Does a CES
conflict with state regulators authority over cost-based ratemaking?]
5. How should Alternative Compliance Payments, regional costs, and
consumer protections be addressed?
In considering a CES, it is important to consider the additional costs that may
accompany such a policy and how those costs may vary by region. Some regions of the
country contain more abundant energy resources than others, and utilities within those
regions may be utilizing vastly different fuel mixes.
Questions:
A.
What are the anticipated effects on state and regional electricity prices of a
CES structured according to the President’s proposal? What are the
anticipated net economic effects by region?
Relevant Considerations:
[Does a response to these questions depend on the following: How the ACP is
calculated? Where ACP payments are made (e.g. federal versus state regulators)?
CES compliance and registration requirements? Regional differences?]
B.
Would other CES formulations or alternative policy proposals to meet a
comparable level of clean energy deployment have better regional or net
economic outcomes?
10
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Relevant Considerations:
[Highlight that a GHG cap-and-trade program, or a state or regional emissions
performance standard, that allows for state or regional differences, could have
better net outcomes?]
C.
How might various price levels for the ACP affect the deployment of
clean energy technologies?
Relevant Considerations:
[Will various ACP price levels modify the market discount for certain CLECs
from different technologies, which in turn may prioritize low-cost ACP
technologies on this issue, even though the technology may be cost prohibitive on
other deployment factors?]
[Should varying ACPs be set at the federal or state levels?]
[Do varying ACPs relate to the deployment path for capital-intensive
technologies? At the expense of low cost alternatives?]
D.
What options are available to mitigate regional disparities and contain
costs of the policy?
Relevant Considerations:
[Is it prudent to discuss regional crediting plans based on regional differences,
similar to how regional electricity markets are regulated?]
[Is it worth identifying the connections between state discretion and compliance
choices?]
[This goes to the questions raised above re allocation of authorities among Feds
and States and also begs the question, “what space will the Feds preemptively
occupy?]
[Do the regional disparities warrant a discussion about weighting utility obligation
and compliance costs based on existing portfolio?]
[Is a reverse auction concept worthwhile to bolt-on to a CES in states that are
clean energy deficient?]
E.
What are the possible uses for potential ACP revenues? Should such
revenues be used to support compliance with the standard’s requirements?
Should all or a portion of the collected ACP revenues go back to the state
from which they were collected? Should ACP revenues be used to
mitigate any increased electricity costs to the consumer that may be
associated with the CES?
11
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Relevant Considerations:
[Should all ACP revenues should go back to the state of its origin to be used for
energy price reduction and investment in infrastructure deployment (e.g.
transmission)?]
[Should ACP revenues be used to fund deficit reduction? A revolving fund for
the green bank?]
F.
Should cost containment measures and other consumer price protections
be included in a CES?
Relevant Considerations:
[Does this cause potential Fed/State conflict?]
[If cost containment is included, should it affect the credit prices? The ACP
payments? Or just the retail rate pass-through costs of compliance? In other
words, at what point in the supply chain of costs should containment be the goal?]
[Could additional cost containment include inclusion of emission reduction offset
credits as an alternate compliance options, energy efficiency? Banking and
borrowing is also useful to consider?]
G.
How much new transmission will be needed to meet a CES along the lines
of the President’s proposal and how should those transmission costs be
allocated?
H.
Are there any technological impediments to the addition of significantly
increased renewable electricity generation into the electrical grid?
[Utility and NERC research on frequency response issues tied to grid reliability
may have on inhibiting expansive use of intermittent resources?]
6. How would the CES interact with other policies?
The credit value generated by imposition of a CES may not, by itself, be enough
to address obstacles faced by particular clean energy technologies.
Questions:
A.
To what extent does a CES contribute to the overall climate change policy
of the United States, and would enactment of a CES warrant changes to
other, relevant statutes?
12
ABA EEMF Committee – DISCUSSION DRAFT
April 25, 2011
Relevant Considerations:
[Explain how a CES could affect PURPA, FPA, Energy policy Act of 2005, EISA
of 2007, Farm Bill, Clean Air Act.]
[On contribution to overall climate policies, a CES is a helpful ancillary policy
that is directed and energy portfolio.]
B.
Will the enactment of a CES be sufficient for each technology to
overcome its individual challenges?
Relevant Considerations:
[Overcoming the challenges is not the direct goal of a CES. The immediate goal
is to level an uneven playing field. All technologies are not created equal
economically or environmentally. The objective of a durable national clean
energy policy will be to attempt to balance policy priorities between ensuring
low-cost energy and ensuring clean energy production. Designing programs that
integrate externalities and result in total real costs of energy production are the
most obvious method of finding that balance. A CES is a way to do that, but
which costs more and does less from an environmental standpoint.]
************
13