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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