The Clean Electricity Payment Plan: How Exactly Is This Supposed to Work?
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.
Moving Forward
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/
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Excellent analysis. My question is how this can affect Public Utility Districts and other non-profits such as some Rural Utilities? Since we don’t pay taxes, how does this work in a system based on the tax code?
“Rates (more importantly, bills) will probably increase a bit in the short term, then be lower because the additional clean energy will push down prices.”
Nowhere in the world has additional renewable energy pushed down consumer prices – ever. Despite the abundance of hype telling us it has: “Why did renewables become so cheap so fast?”, “Renewable Energy Prices Hit Record Lows”, “Solar and Wind Cheapest Sources of Power in Most of the World”, “Renewable Energy is Startlingly Cheap”, etc. ad nauseum, it is all accompanied by some version of the following disclaimer:
“Reflects wholesale electricity prices. Note that these are distinct from the prices consumers actually pay, which includes taxes, fees, payments to support the grid that delivers the electricity, and so on.”
Integrating intermittent solar and wind energy to the grid is an enormous headache. To be comparable with conventional sources, one must include the price of gas generation for backup power (when the sun isn’t shining or the wind isn’t blowing); when they are available, one must include the price of natural gas “peaker” plant generation to smooth their variable output, and provide ancillary services such as voltage and frequency stabilization. They require the most lucrative energy subsidies in history, per unit of energy generated.
“It’s entirely possible for wholesale electricity prices to drop even as consumers end up paying more. That said, large changes in the wholesale price should ultimately be passed on to consumers to one degree or another.”
A tiresome refrain repeated for the last five decades: “Just a little more time”, “just a little more money”…bleh. No more time to waste trying to build a reliable electrical grid using unreliable sources of energy.
Let’s identify the real culprit of rising electricity prices for the last five decades — nuclear power plant cost overruns. End of story.
And unnecessary transmission construction, rewarded by premium FERC-regulated return for zero risk
“And unnecessary transmission construction, rewarded by premium FERC-regulated return for zero risk.”
You mean the two ultra-efficient 500V DC lines that connect Diablo Canyon to California’s Path 15 electricity backbone? Other than the Pacific DC Intertie, those two “unnecessary” lines have transmitted more carbon-free energy, more efficiently, than any other two transmission paths in the state.
If they’re so unnecessary, maybe you can explain why Trident Winds plans to hijack those lines to do exactly the same thing, but with intermittent, unpredictable electricity from their Morro Bay Wind Project?
“End of story”…that’s a laugh. If only QEDs were that easy to come by (look it up).
James, the most direct (and equitable) route to an effective Clean Energy Payment Plan would be offering a federal Zero-Emission Credit (ZEC) to every zero-carbon source of energy. Make it proportional to EPA’s Social Cost of Carbon. Start off low (like a carbon tax), then gradually increase it. Allow states to supplement it through ratepayer increases, to mesh with local priorities.
Unlike penalizing carbon emitters with a carbon tax, ZECs reward the do-gooders – those generating electricity with no carbon emissions.
The first order of business, however, should be eliminating the scam of tradeable RECs. That there is any justification for separating the “environmental attributes” from wind and solar energy, then selling them to fossil fuel IPPs to launder their dirty energy, is a joke (or it should be, although otherwise-respectable economists seem to take them seriously). No matter how quickly they are “retired”, RECs double-count those attributes – and are thus exactly half as effective as proponents make them out to be.
To those wind and solar producers who kick and scream at the idea they might have to compete with nuclear energy on a level playing field, I say: “boo freakin’ hoo.” Penalizing nuclear plants just because they don’t meet someone’s arbitrary definition of “renewable” (it means nothing to a physicist) amounts to a handout to intermittent, variable sources of energy, with real consequences for grid reliability. Or did our governor just order five new gas plants be rushed into service because the CAISO grid was plenty-reliable enough?
ZECs would work just like RECs. The point of having tradable credits is that rather than assigning a value of zero to excess generation above the RPS, RECs allow the generators when they actually produce power to transfer that credit to other LSEs. It’s been well established in the environmental economic literature that these types of tradable credits encourage environmental compliance more broadly than simple standards that don’t allow trading.
ZECs in New York State, New Jersey, and Illinois don’t represent units of energy at all, but emissions that were prevented. Each credit corresponds to 1 tonne of prevented CO2 emissions (“prevented CO2 emissions” are calculated based on an average of the IOU’s remaining generation portfolio – as if the solar farm / wind farm / nuclear plant didn’t exist). It allows IOUs to bill ratepayers for an amount corresponding to:
Prevented Emissions (MT) x (EPA’s Social Cost of Carbon ($/MT)
It’s a reward, the cost of which is equitably spread among all customers (not coincidentally, like the penalty of climate change is also spread among them).
Yet solar and wind developers hate ZECs. They go into attack mode whenever a state announces a new ZEC, calling it a “nuclear bailout”, when it’s nothing of the sort. ZECs simply put all clean generation sources on a level playing field, and that’s the last playing field on which intermittent sources of clean energy want to play.
Contrast with RECs: a solar farm generates 10MWh of clean electricity, then transfers its attributes (sells a corresponding certificate) to a gas plant. Are the emissions from that gas plant magically scrubbed from the air just because its owner bought a piece of paper from a solar farm, or because the California Energy Commission has re-labeled his dirty energy “null” energy? Are there any solar farms that have taken responsibility for emitting even 1MWh of carbon they get in the trade?
Of course not. The entire REC scam was invented as a way, through creative bookkeeping, to discount the intermittency of solar and wind energy – to say, “my solar farm generated too much clean energy at the wrong time. Let’s pretend you generated it instead of me, and your emissions were, like, never emitted…’kay?”
Any way you slice it, RECs double-count clean energy from wind and solar farms. Without this double-counting legerdemain, CCAs wouldn’t exist. It’s just not that profitable to sell a product that only exists when the sun is shining. Is it?
Carl,
The IOUs in NY, NJ and IL do not own any significant amount of generation. Some of their affiliates do, but the energy and money flow through the ISOs, I think your commentary on the operation of ZECs is muddled.
Which state sets the ZEC price at the SCC × avoided emissions?
You also don’t understand the operation of RECs. Most customers in restructured states purchase from an LSE a bundle of generic energy and capacity, RECs, and other services. No one says “my NGCC is clean” because they relabel the RECs as part of the CC output.
Other than outright fraud (which is illegal under state and federal law), there is no double-counting in the typical REC transaction. It is only when some jurisdiction or utility is allowed to call REC-stripped power “clean” or “renewable” that double-counting can arise. The jurisdictions that require RECs are not fooled, but some consumers in other places may be.
And your ZECs would have the same problem. A nuclear plant sells its ZECs to LSE X, and its output to LSE Y, and both tell customers they are getting 0-carbon energy.
Other than outright fraud (which is illegal under state and federal law), there is no double-counting in the typical REC transaction.”
You’re missing the point, Paul. If a solar farm sells a REC to a gas plant and doesn’t assume the “dirty energy attributes” of the gas plant’s generation, no one is taking responsibility for them. You can’t just make emissions disappear from the air with a piece of paper, just because your state, or SEIA, says so.
Do the math:
1 MWh dirty energy generated at a gas plant -> 898 lbs CO2 (EPA average)
1 MWh clean energy generated at a solar farm -> 0 lbs CO2
Both sources together produce 2 MWh of energy, with a total CO2 footprint of 898 lbs CO2.
At best, both sources could take half-credit and say, “Our farm/plant only generates 449 lbs of CO2/megawatthour.” But to my knowledge, no solar farm that sells RECs is taking credit (or responsibility, same thing) for generating carbon emissions. They’re selling their energy as 100% clean, and it isn’t. By any standard, that’s fraud.
The only similarity between RECs and ZECs is their names rhyme. Zero-emission credits aren’t tradeable – they’re monetary credits added to the purchase price of energy from a nuclear or renewable source, collected by the utility from ratepayers. They reward all zero-carbon sources with the same marginal credit based on the EPA’s Social Cost of Carbon. What could be more fair?
So after Ohio’s REC only increased renewables market penetration by a whopping 3% over the course of 13 years – an abysmal failure – it was repealed and replaced with a ZEC in 2019. Though House Bill 6 (HB 6) credited all zero-carbon sources (even undiscovered future ones) with the same rate of payment, renewables developers, anti-nuclear activists, and natural gas interests fought it tooth and nail, calling it a “nuclear bailout”. Why? They knew the intermittent, meager generation of Ohio solar and wind couldn’t possibly compete with the state’s reliable nuclear plants. They foresaw their sweet REC handout coming to an end.
In the last year, the future of HB 6 has been clouded by scandal. For the first time, First Energy’s nuclear plants stood to gain from a zero-emission credit, but the company had resorted to illegal means to get the bill passed. It would truly be a shame if corruption led to the demise of the first zero-carbon subsidy that rewarded all sources equally. The end was a noble one; the means were not.
ZECs and RECs work the same way–they allow the GHG-free or renewable generator to sell their credit to a fossil-based generator (coal or fossil methane) who then can claim a credit against their GHG emissions. The units of measure are different–NY and NJ are in RGGI and Illinois has an average emission rate threshold, both of which focus on GHG emissions, while CA and others have RPS benchmarks. In either case, “the emissions from that gas plant magically scrubbed from the air just because its owner bought a piece of paper.”
(That the ZEC is measured against the average emissions is a mistake–it should be compared to marginal or incremental emissions.)
There is no double counting of RECs–once the renewable sells its RECs, it generation can no longer be counted directly toward meeting the RPS. Please describe in detail how you understand double counting can occur if the REC has been separated from the MWHs produced by the renewable.
“That the ZEC is measured against the average emissions is a mistake–it should be compared to marginal or incremental emissions.”
I agree, and they are. I was incorrect in an earlier post when I implied utilities were being compensated. The recipient of ZECs are the IPPs generating 100% carbon-free energy purchased by the utility.
Carl, RECs only double-count if the power is sold as renewable to some sucker, while the REC is sold elsewhere (to customers or LSEs, not to IPPs–IPPs don’t need RECs). That’s a false-advertising issue. Of course, some states (like Vermont) have gone along, at least for some purposes, with the fiction that their systems are mostly green, because they let the utilities count contracts or ownership of renewable energy as green, when the RECs have been sold elsewhere in New England. You don’t have that problem in the deregulated New England states.
An energy-only contract is not green, if the RECs have been sold.
There is already a spot market in RECs in the WECC, with the instruments registered in with WREGIS. It’s just not an spot auction market–it functions as a bulletin board or broker market akin to real estate. It appears to be pretty workable so far. The program should be extended to carbon credits too rather than trying to directly tie attributes to MWH.
Given that the current REC market isn’t an auction market, it doesn’t necessarily converge to a single price, although the range is fairly narrow.
Increase ZEC requirements may depress the auction portion of the wholesale market prices, but whether it depresses the full set of wholesale prices which include PPAs and CPCNs that enable the exercise of a real option to interconnect with the grid is directly dependent in the price of the renewables plus the externality value embedded in the standard. This will be giving conventional resources the market signal from the unpriced externality to retire prematurely or to be avoided as a new resource.
Note that in California, failure to the meet the RPS incurs a fine of $50/MWH paid by shareholders. (That’s a very (I would say overly) strong incentive not to fall short). It does act as a backstop tax and might qualify for the reconciliation requirements.
“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.”
Don’t the ISOs (at least ISO-NE, NYISO, and PJM) track environmental attributes of at least internal generation (imports are more complicated). Isn’t that necessary for the state RPSs, among other things?
My understanding is that state RPS compliance is tracked through a combination of PPA MWh output and RECs. Purchases out of ISO markets do not track delivery of renewable MWh to any specific customer.
See the ISO-NE GIS system: https://www1.nepoolgis.com/myModule/rpt/ssrs.asp?rn=112&r=%2FPROD%2FNEPOOLGIS%2FPublic%2FNEPOOL_System_Mix&apxReportTitle=NEPOOL%20System%20Mix for examples of what is tracked in New England. In fully restructured states (unlike CA), there aren’t a lot of PPAs to the LSEs. And RECs and ZECs are traceable back to the source; maybe they can be used for the CEPP in states that have them.
Will our electric bills increase, or decrease.
Will service remain reliable as it has been all our lives, or will there be frequent brownouts and blackouts, like in Cuba and NKorea?
Depends on the nature of the system; regulated or unregulated.
Rates (more importantly, bills) will probably increase a bit in the short term, then be lower because the additional clean energy will push down prices.
I assume that your claim that “our” electric service has been reliable is a joke, considering what happened in Texas this February, as well as in many summer and winter storms and general screw-up. The reference to Cuba and North Korea is almost assuredly humorous, since neither country has a clean energy system and both are under US sanctions.