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The Art of the Plausible

Prospects for clean energy legislation in 2011.

Fortnightly Magazine - April 2011

of a market-oriented approach, because it typically provides a suite of compliance choices, and lets the market pick among them. It also typically provides a trading scheme that allows purchase and sale of clean energy credits (CLEC) for compliance. Thus, regulated entities have discretion within the larger mandate to choose their own methods of compliance. These flexibilities both mitigate command-and-control inefficiencies, and indirectly subsidize the mandated technologies by requiring their use. A CES also typically contains a price ceiling in the form of an alternative compliance payment (ACP), to provide a degree of cost certainty and ratepayer protection. The ACP thereby sets the price by which regulated entities can buy their way out of physical compliance.

CES issues generally break down into six major categories: 1) time frames and percentage of clean power requirements; 2) what energy sources or other actions qualify; 3) preferences or disincentives for particular sources, if any; 4) CLEC trading regime design and structure; 5) how energy efficiency is treated— e.g., the same as any other qualifying technology, or separately with, for example, a nested obligation and a different trading regime; and 6) ACP pricing and revenue use.

In terms of time frames and percentages, a CES will mandate that a certain percentage of power from each covered entity (measured in kilowatt- or megawatt-hours) be generated from specified clean sources. The specified percentage of clean power required increases over time.

When evaluating the overall goals and timing of a CES, it’s important to make practical apples-to-apples comparisons. For example, while the president has called for an 80 percent standard by 2035, he includes natural gas, nuclear and CCS as eligible. About 47 percent of current generation is from nuclear, natural gas and renewables, so Obama’s clean energy requirement would require an additional 33 percent of power generation to come from “new” clean energy by 2035. This proposal is therefore relatively different from Graham’s 2010 proposal of 35 percent of new clean energy by 2035 and Lugar’s 2010 proposal for 30 percent of new clean energy by 2035, where neither of those proposals included gas. 10

Importantly, however, while the Lugar and Graham CES proposals were based on a certain percentage of new, qualifying energy resources measured from the initial compliance year of the legislation, President Obama’s 80 percent by 2035 suggests that his metric won’t be “new” qualifying clean energy sources, but rather “total” qualifying sources. Under this metric, while the country in aggregate might be at 47 percent of clean energy in the starting year of the legislation, individual utilities won’t be, with some having much larger current clean energy fleets than others. To normalize this situation, and place individual utilities in compliance in the starting year, huge amounts of clean energy credits might need to be bought and sold across the country in a truing-up exercise—which arguably would be pointless and costly; pointless because it wouldn’t change the actual generation mix; costly because it would impose high up-front compliance costs on some regions of the country, and provide a windfall of credit dollars to others. Therefore,