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Fossil Fuel Politics: How the New Congress Might Change the Mix

How the New Congress Might Change the Mix
Fortnightly Magazine - February 15 2003

demand, plus at least a 12 percent reserve margin. Such long-term planning can potentially affect fuel and generating technology choices, as it may make generators more inclined to invest in projects involving greater capital costs and longer lead times in lieu of quickly deployed measures, such as gas-fired turbines.

At present, FERC is collecting public comment on the SMD NOPR. The resource adequacy proposal has been controversial due to concerns expressed by state regulators and elected officials that the proposal federalizes a function that historically has been performed by the states. Still, even if it is amended or is dropped from the final rule, the proposed resource adequacy requirement highlights the point that new approaches may be required to address resource planning in the context of restructured wholesale power markets that are regional in scope.

It also highlights the question of whether fuel and generating technology choice will be left completely to the market or whether regulators and policy-makers should intervene to influence such choices.

State Initiatives

In the absence of federal policies, individual states are now acting on a host of issues affecting fuel and technology choices for electric generation. Massachusetts and New Hampshire have legislated controls on greenhouse gases emitted from utilities. Several states, including Texas, have established renewable portfolio standards that require a certain percentage of total electricity generation produced from renewable energy sources. 25 North Carolina recently enacted the Clean Smokestacks Act, requiring utilities to achieve additional emissions reductions in return for a rate moratorium. 26 This could be the start of a trend leading to a disjointed set of state requirements affecting fuel and generating technology choices for the electric power industry and perhaps creating a greater imperative for federal action.

Federal policies affecting fuel choice for electric generation can include tax incentives, direct transfers, research and development, economic and environmental regulations, and transportation policy. Direct incentives in the form of tax expenditures and direct transfers are modest compared to both the overall size of energy markets and direct incentives for other segments of the economy. Still, targeted incentives can have a significant effect on the subject fuels and technologies.

While fuel-neutral on their face, economic and environmental regulations can have a significant effect on fuel choice. The Clean Air Act Amendments of 1990 resulted in fuel switching for existing coal-fired generators and added to the impetus for natural gas as the fuel of choice for new generators. Electric restructuring lowered barriers to market entry and placed an emphasis on cost recovery at market-clearing prices. This favored low-capital cost, short lead time technologies for new generation.

Comprehensive energy legislation is likely to be resurrected in the 108th Congress. Compared to the legislation considered in the 107th Congress, it is likely to include a greater emphasis on the increased production of energy from conventional fuel sources. Future environmental legislation has a much greater potential to affect profoundly the choice of fuel and technology for electric generation. This is especially true if such legislation includes a four-pollutant strategy (e.g., CO 2 is included among the targeted pollutants).

More immediately,