When complex regulations meet power markets, be sure to read the fine print.
The next big push in climate policy in the US appears to be coalescing around a clean electricity payment program (CEPP), a clean electricity standard that is not-really-a-regulatory-standard and therefore qualifies for inclusion in a bill that can pass via reconciliation. The CEPP has gotten a lot of recent coverage, but these contain only sketchy high-level details and platitudes like “the biggest thing since the lights went on.” There is also this widely circulated two-page summary of at least one version of the concept. All of these leave out some important implementation aspects, so I’m going to use this blog post to ask “how is this supposed to work, exactly?” and speculate on some answers.
First, what we know so far is that the policy is adapted from a clean 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 like 80% of electricity to come from “clean” (zero-carbon) sources by 2030. Since we’ve done a Federal Renewable Fuels Standard (not without hiccups), it’s kind of easy to see how such a thing would have worked for a hypothetical CES. However, regulatory standards are designed to re-allocate money within an industry and be more-or-less budget neutral. Reporting, and Twitter, suggest such an approach would not be eligible to be included in a bill that qualifies for the reconciliation process, and would therefore have required 60 votes in the Senate.
Enter the CEPP, designed to mirror the general approach of a CES, but with a much more tax-and-spendy flavor, thereby making it eligible to pass with only 50 Senate votes (I’m not a parliamentarian, don’t ask me the details). Frankly I’m still getting my head around the new politics of this. For decades, industry standards were a preferred tool because they did not have a tax-and-spendy feel, and drawing the money 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 guess this strategic pivot is one more fun legacy of the filibuster.
Anyway, like a CES, a CEPP would require individual electricity load-serving entities (LSEs) purchase an ever-increasing amount of energy from zero-carbon sources. Those that fall 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 year-over-year changes in renewable energy purchases, rather than on levels. So only the MWh increases over the previous year’s clean MWh, and in excess of the required increases, would earn the subsidy. Simple, right ?!?
I have questions:
- How exactly is the government 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 not currently a spot market for clean electricity, only for electricity. Markets run by Independent System Operators, with one exception, do not track the environmental attributes of the MWh they manage and more importantly do not track who buys which MWh. So, if you need 100 MWh from PJM today, and PJM is handling 900 MWh of coal and 100 MWh of wind in your area, there is no mechanism today for you to get the 100 MWh of wind instead of some mix. The one exception is California’s mechanism for tracking cap-and-trade 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 similar to the Renewable Identification Numbers (RIN) used for the renewable fuel standard. The idea is that each “clean” MWh creates an associated zero-carbon electricity certificate (I’m going to call it 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 it manageable. Even if the government doesn’t create such certificates, the market will find creative means to (on-paper) trade zero-carbon energy in ways that recreates the effects of credit trading. Better to keep visibility over the whole thing by just making them officially part of the program. However, even if there are ZEC’s…
- Would tradable certificates be issued for all clean MWh or only new clean MWh?
While the regulation is focused on subsidizing only new MWh, I don’t think a certificate that credits only new MWh would be workable, or necessary. First of all, what makes a MWh new? What if some of my old solar panels “break” and new ones appear? JimBo Generation has closed its doors, but Bushnell Clean Power has opened for business just next door! My colleague Chris Knittel has pointed out the parallels to attempts in the 1980’s to pay more for “new” natural gas than for “old” natural gas. This led to all sorts of distortions like early closing of old wells and drilling new wells right next to them. Most importantly, certificates for only new MWh would do nothing to keep existing plants open. 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 be better for existing clean energy sources, particularly nuclear energy, than the current system of renewable production tax credits and portfolio standards?
One of the concerns with the existing hodge-podge of state-level RPS’s and Federal renewable tax credits is that the subsidies depress wholesale power prices and somewhat perversely (depending on your point of view) push existing zero-carbon sources, particularly nuclear plants, into early retirement.
A system that assigns ZECs for all qualifying MWh would place a value on the continued production from existing plants, thereby offsetting (for clean generation) any concurrent revenues lost from declines in wholesale power prices. The CEPP would require that every LSE increase their percentage of clean energy every year. That means buying new clean energy AND continuing to buy the “old” clean energy. For example, each LSE would be required to show an increasing amount of ZECs each year (according to their target increases). This means they would need to both buy ZECs from existing sources and stimulate the creation 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’s “that fall far short of the annual threshold.” This implies that a tax would not be paid by those that miss the threshold by just a little. Here’s the problem though. If company A was just a little below its threshold and company B were just a little above its threshold, company A would sell its clean energy to company B. Company A would not pay a tax, because it is still “close” to its target while company B would collect some extra subsidy cash. The discontinuity in the tax schedule, combined with the impossible-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 up subsidy amounts, without creating more clean MWh. All this leads to the big picture question…
- How would this system affect wholesale and retail electricity prices?
This is a good topic for a full-blown research paper, but here is a first guess. My sense is, if questions 1-5 are resolved sensibly, this would work like an intensity standard, such as Renewables Portfolio Standards that are used in many states, but with the value of a clean MWh set by the tax code rather than by a market for clean MWh. Even though it is subsidized, electricity prices would still be affected. Intensity standards “dilute” the impact of carbon pricing on retail prices (relative to say, a carbon price on all dirty MWh), but there is still an impact.
If the ZECs are tradable, and are generated by both new and incumbent sources, there would be a single market clearing price for ZECs. Both pre-existing and new clean MWh would earn that credit value from the market and LSEs would have to buy them for compliance. But LSEs would earn the subsidy only for the ZECs above their required increase in clean energy (If they don’t buy as many ZECs as the previous year, they pay a tax). So the money for the rest 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 increase. I would think that these impacts would not be felt uniformly across utilities.
I have seen claims that this system would not raise anyone’s electricity prices, but given the complex interactions of these incentives with power market prices, and the disparate positions of different parties in the market, this is not obvious to me. For one, the impact on the marginal electricity price will differ from the impact on average generation costs, and whenever that happens, impacts on regulated utilities will differ from those operating in markets.
This exercise illustrates the complexities and potential for perhaps unforeseen indirect market impacts from such a system. Once more details emerge, I hope that some careful market analysis will be applied so that the full market impacts can be considered and looked at alongside the impacts of alternative approaches. It may turn out that a much simpler approach– e.g., expansion of the existing production tax credit framework– could achieve many of the same goals. Tax credits don’t guarantee a quantity target like a strict standard would, but remember the CEPP isn’t really a standard either. That’s how we got to this point.
I’m also contractually obligated as an environmental economist to point out that a carbon tax on the emissions of power plants could provide as strong or stronger incentives for clean energy, would be more straightforward, more 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 can pass through reconciliation. If we can’t go this obvious route though, let’s make sure the route we do take gets us where we think it should.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Bushnell, James. “The Clean Electricity Payment Plan: How Exactly Is This Supposed to Work?” Energy Institute Blog, UC Berkeley, August 23, 2021, https://energyathaas.wordpress.com/2021/08/23/the-clean-electricity-payment-plan-how-exactly-is-this-supposed-to-work/