Understanding Clean Electricity Standards

Most people see climate policies as coming in three main flavors:

• Investments and spending, like a tax credit for installing solar panels or direct funding of research and development
• Standards and regulations, like requiring a certain level of energy efficiency in appliances, or fuel economy standards for vehicles
• Carbon pricing, which discourages greenhouse gas emissions by imposing a fee on them.

Sometimes these flavors can be swirled together. Pricing is, in some ways, a form of regulation. Some regulations have an accompanying fine or penalty that makes them a little like pricing. Some prices also include spending or rebates that act as incentives. In all cases, the goal is to encourage or require the things you want more of and to discourage or forbid the things you want less of.

A closer look at Clean Electricity Standards

Clean Electricity Standards are similar to Renewable Portfolio Standards.  They’ve been around in various forms for a few decades, with existing policies in many states. Basically, they require that a certain percentage of electricity sold by utilities come from clean energy sources by a certain date. Sounds simple, but like many policies, there are a lot of details to consider, and those details make a big difference.

What counts as clean energy?

A big question is: what is considered “clean energy” under a CES? Is it limited to renewables like solar and wind, or does it include big hydroelectric power, nuclear, biomass, or fossil fuel-based power with carbon capture? Are there partial credits for cleaner (but not clean) energy, which would incentivize natural gas over coal? In some cases, CES policies have had specific requirements for a percentage of solar or wind, or even requirements for certain types of systems, like rooftop solar.

What does a Clean Electricity Standard cover?

Another question is how broadly the policy applies. In some cases, only investor-owned utilities are covered, with no requirements for municipal utilities and rural electric co-ops. In other cases, the requirements are waived for small-scale providers.

How does a Clean Electricity Standard actually work?

CES policies generally have some sort of credit trading system. For instance, If two utilities are both required to sell 50% clean energy and one has produced 60% clean energy and another 40%, the latter could buy credits from the former and be in compliance with the law. This effectively ends up much like cap-and-trade systems, with further complexities around who can trade with whom, how long you can bank credits, etc. 

In some systems, there’s also an alternative compliance option (an “Alternative Compliance Payment” or ACP) that allows for purchasing clean energy credits from the government. ACPs effectively set a maximum price for such credits on any trading market. In the end, such a system can end up quite similar to a carbon pricing system.

These details can get pretty arcane, but they do matter. Partial credits for natural gas could mean coal is phased out sooner but might lock in more gas-powered infrastructure. How methane leakage and other upstream emissions are factored into the “cleanness” of natural gas can also affect its usage. Either of these details may affect nuclear plants’ viability. Interim targets can be as important as the final targets that get more media attention—100% clean electricity by 2035, for example.

How does an Alternative Compliance Payment (ACP) compare to a carbon price?

• A CES sets a clean energy requirement for each year, which means that some amount of “dirty” energy is allowed each year. So, if the requirement in 2030 were to be 80% clean electricity, utilities could sell up to 20% of their electricity from sources that are dirty. If a utility only sold 75% clean energy and 25% dirty energy, they would need to buy additional clean energy credits from another utility or pay an ACP for the 5% of energy that was above the 20% limit. With a carbon fee they would be paying the fee on emissions from the full 25% of dirty energy. So, with a carbon price there’s always an economic incentive to transition all of your energy to clean energy. With a CES, there’s less incentive for a utility to produce clean energy beyond any given year’s target, though if clean energy credits are tradeable that could provide some incentive (but since credit prices would fluctuate, their value would be less predictable than with a carbon fee).
• An ACP is generally set per megawatt-hour of electricity. For coal-fired power, a $50/MWh ACP is roughly equivalent to a $50/ton carbon price, but for natural gas, $50/MWh is equivalent to a $121/ton carbon price.  In some CES, the credits factor in the emissions intensity so natural gas is given a partial credit, which helps incentivize efficiency and would drive coal out of the market sooner, but may lock in natural gas infrastructure and perpetuate its use longer. A carbon fee is generally set per ton of emissions that the fuel will produce when burned, so none of these adjustments are necessary.
  • 1 MWh of gas generation averages 0.412 tons of CO2. (Does not include upstream emissions, such as methane leakage.) $50/0.412 = $121
  • 1MWh of coal generation averages 1.01 tons of CO2. (Does not include upstream emissions, such as methane from coal mines.)
  • U.S. average for all fossil fuel electricity is 0.646 tons/MWh.

Talking points

• A CES affects only the electricity sector, which currently produces about 27% of U.S. emissions. By contrast, a carbon fee and dividend is economy-wide and would typically cover more than 80% of U.S. emissions.
• Carbon fee and dividend would reduce U.S. emissions 30% in 5 years. A 2035 CES target of 100% clean energy (as in HR1512) would move us from 36% clean electricity in 2020 to 49% clean electricity by the interim year of 2025--an increase in clean electricity of 13%. If you do the math, you can see that’s only a 3.5% drop in total US emissions in those 5 years (0.13*0.27 = 0.035). A CFD would reduce total U.S. emissions 8 times as fast over that same 5 years.
• Models show that a carbon fee and dividend policy like the Energy Innovation and Carbon Dividend Act would lead to 76% clean electricity by 2030. That’s in line with some of the more aggressive national CES proposals (HR1512 aims for 80% clean electricity by 2030). 
• A CES has the potential to increase the cost of electricity right at the time when we need to be aggressively electrifying transport and buildings. Increased electricity costs could slow that electrification. Unlike a CES, a carbon fee and dividend would also put a price on natural gas, diesel fuel, jet fuel, and gasoline. The result is that electricity, being easier to decarbonize, would become the cheaper option for transportation, in buildings, and in industry under a carbon fee. 
• A CES tends to have complex rules that require an extensive bureaucracy to administer. The regulated entities may be able to manipulate the system in ways that reduce its effectiveness. A carbon tax is much simpler to set up and administer, with far fewer entities to regulate, less potential for behind-the-scenes political manipulation, and far fewer details to factor in.
• A CES is a regulation on utilities. CFD puts a price on the fuel. Under a CES, sellers of coal and natural gas would look for and develop other markets where their products would be burned, whereas under CFD fossil fuels would be priced regardless of use. 
• Proponents of a CES assume 100% compliance, but there’s no guarantee that utility companies will comply. They might choose to pay the ACP (especially if the price is set too low, which industry will certainly lobby for as they have done in cap-and-trade systems), or continue to lobby regulators or Congress, or otherwise fight (in court, for example) to weaken compliance requirements. In this effort, complexity is their ally. They’re less likely to be able to weaken a simple carbon fee, especially if there’s an associated dividend.
• A CES wouldn’t have a significant source of revenue to use for a dividend. There could be some revenue from alternative compliance payments, but not nearly the amount that would be realized under a fee on all fossil fuels.

What are the concerns raised by proponents of CES and potential responses?

• A CES is more politically viable.
  • All significant climate policy is challenging to pass. If indeed a CES is easier to pass, it is because it affects only 27% of emissions, is not as fast at driving reductions, and obscures the true cost to retail consumers. When you total the effort to also pass other policies, it’s unclear as to which will be easier to accomplish. There is also the danger that passing a weak policy may make it more difficult to go further because some politicians might want to declare victory with only a partial solution and consider the climate problem solved.
• Carbon pricing is too slow.
  • The Energy Innovation Act will reduce emissions 8 times as fast as a CES in the first 5 years. (See above for details)
  • A good carbon fee will be fast and effective. As soon as a carbon fee with a clear schedule is announced, businesses will immediately start planning to minimize their use of fossil energy in order to preserve their profits.
• A carbon price will not get you to zero electricity emissions.
  • The Energy Innovation Act will reduce emissions 8 times as fast as a CES in the first 5 years and reach 76% clean electricity by 2030. (See above for details)
  • A CES may also not get you to 100% clean energy, if it allows for an Alternative Compliance Payment. In both cases, if the cost to remove the last bit of emissions from the electricity sector is higher than the carbon price or ACP, it may not happen without further policy. 
• A carbon price would not address environmental justice concerns.
  • Both a carbon price and a CES would significantly lower pollution levels from power plants, but only a carbon price will reduce pollution from every source that burns fossil fuels, from the largest to the smallest. Neither a carbon price nor a CES can guarantee complete elimination of pollution in any specific location without strong enforcement of Clean Air Act regulations. But, unlike a CES, a carbon price would reduce emissions from other sources besides electricity generation, such as cars, trucks, buses, refineries, manufacturing, etc. A CES cannot affect emissions from these industries, by design.
• A CES could allow for more regional equity. (Example: A CES could be designed where different utilities or grid regions moved at different paces toward clean energy and where trading was limited to within a region. )
  • It’s true that a national carbon price would have more impact on states that are more heavily invested in fossil fuels compared to those that have already decarbonized (or had natural access to hydro, etc.). However, if such regional equity issues are of high concern, Congress could address them with additional funding to consumers or utilities in regions needing extra support in the clean energy transition.  

Additional questions

• Could you have both a CES and a carbon fee and dividend?
  • Yes. They would be somewhat redundant in that both are likely to affect the same emissions. If the carbon fee is high enough, it’s likely to be the primary driver of the transition to clean energy, such that utilities are easily in compliance with the CES. If the fee is low, then the CES may be the main motivating factor. They could interact positively: for instance, a modest carbon fee might drive coal out of the energy mix more quickly than a CES, and then the CES would reduce the incentives to invest in new natural gas power. Or a higher carbon fee could be coupled with a late-stage CES to get at the last 10% of emissions from the electricity sector.
• How would national and state CES or carbon pricing policies interact?
  • If the national policy is more stringent, then entities would generally comply easily with their state policies. But states could have more stringent policies driving reductions in emissions faster than the national standard. The logic above for how a CES and CFD would interact would apply if policies were mixed at the state and federal levels as well.

Resources: https://fas.org/sgp/crs/misc/R46691.pdf

Examples of Clean Electricity Standards in Congress

117th Congress

116th Congress

Background & Intro
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• Tony Sirna

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Background & Intro
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• Tony Sirna

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