Clean Energy Standard: Summary and Analysis of S. 2146
Released: 2012-05-09T00:00:00

Introduction

Policymakers have several options when considering legislation that would result in reducing carbon dioxide (CO 2 ) emissions from the U.S. electricity sector. Some policy options might include a carbon tax or a carbon cap-and-trade approach. A federal clean energy standard (CES), such as that proposed in the Clean Energy Standard Act of 2012 ( S. 2146 ), is an alternative approach that requires certain utility companies to provide a prescribed amount of electricity from qualified clean energy sources based on a percentage of each utility company's annual electricity sales to consumers. Several CES policies have been proposed in the past, although none have become law.

According to the Energy Information Administration (EIA), the electric power sector represents approximately 41% of U.S. energy-related CO 2 emissions. The remaining 59% of CO 2 emissions are from the transportation (33%) and buildings/infrastructure (26%) sectors. Unlike previous carbon reduction policy proposals, S. 2146 is focused only on CO 2 emission reductions in the U.S. electric power sector.

The concept of a U.S. clean energy standard was proposed by President Barack Obama in his 2011 State of the Union address, and the White House subsequently published a proposed framework for a federal CES. In March of 2011, the Senate Energy and Natural Resources Committee (SENR) released a Clean Energy Standard white paper that solicited feedback on several CES policy design questions. On March 1, 2012, the Clean Energy Standard Act of 2012 ( S. 2146 ) was introduced in the Senate. This report provides a summary and analysis of the CES proposed in S. 2146 .

S. 2146 proposes to amend Title VI of the Public Utility Regulatory Policies Act (PURPA) of 1978 (16 U.S.C. 2601 et seq.) by adding a new section, Section 610, titled "Federal Clean Energy Standard." According to the proposed bill, the stated purpose of the Federal Clean Energy Standard is:

to create a market-oriented standard for electric energy generation that stimulates clean energy innovation and promotes a diverse set of low- and zero-carbon generation solutions in the United States at the lowest incremental cost to electric consumers.

Policy Design Elements

The Clean Energy Standard Act of 2012 includes a number of design elements that define the CES structure, methods of compliance, and other aspects. This report describes the proposed policy, based on the following general questions: (1) Who is required to comply? (2) What are the compliance requirements? (3) What types of electricity generation would qualify for the CES? and (4) What mechanisms are available as a means of CES compliance? Additional design elements are also briefly discussed.

Entities Required to Comply

Some utility companies that sell electricity to consumers in U.S. states, except Alaska and Hawaii, plus the District of Columbia and Puerto Rico, would be required to obtain a certain percentage of electricity sales from qualified clean energy generators. Whether or not a utility company is required to comply with the CES depends on the total amount of its annual electricity sales to consumers, in megawatthours (MWh). Beginning in 2015, S. 2146 requires utilities that sold 2 million MWh or more the previous calendar year to comply with the CES. The annual sales threshold for utility compliance declines by 100,000 MWh each year from 2015 to 2025, after which the level remains constant at 1 million MWh of annual electricity sales.

This electricity sales threshold exempts the majority of utility companies from having to comply with the CES. According to EIA data, there are more than 3,500 utility companies operating in the contiguous 48 United States. Preliminary analysis based on 2010 electric utility sales data indicates that just over 300 utility companies would be required to comply with the CES starting in 2015 (see Figure 1 ). However, these 300 utility companies required to comply with the CES would represent approximately 81% of total national electricity sales.

As the threshold sales level decreases from year 2015 to 2025, the number of utility companies required to comply gradually increases to nearly 500 in 2025 (see Figure 2 ), at which time approximately 87% of national electricity sales would be subject to CES requirements.

Clean Energy Compliance Requirements

Starting in 2015, S. 2146 would require non-exempt utilities, as described above, to obtain a percentage of their total electricity sales to consumers—less applicable deductions of certain hydropower and nuclear power electricity—from qualified clean energy generators. (Definitions for qualified clean energy are discussed and provided in the next section.) Clean energy includes electricity generated from facilities using renewables, nuclear, natural gas, and other specific energy sources, that were placed in service after 1991, plus other technologies described in the next section of this report.

The standard requires a minimum of 24% clean energy by 2015. The percentage requirement increases an additional 3% each year until 2035, when 84% of electricity sold from non-exempt utilities must be sourced from clean energy generators (see Figure 3 ). Non-exempt utility companies can deduct their hydropower and nuclear power electricity generation, as long as the electricity is generated from facilities placed in service before 1992, from their applicable sales base. This deduction could potentially make it easier for certain utilities (especially those with large amounts of hydropower and nuclear power in their portfolio) to comply with the standard as a result of decreasing the total amount of qualified clean energy needed to meet annual CES compliance requirements (see example in Table 1 ).

Table 1 provides an illustrative example of how the pre-1992 nuclear and hyropower deduction might affect the amount of qualified clean energy needed by three hypothetical utility companies in order to comply with the CES. In this example, three hypothetical utility companies with different generation fuel mixes, but the same amount of total electricity sales (2 million MWh annually), are compared. As Table 1 indicates, CES compliance requirements for different utilities can vary depending on the fuel sources used for generation. While the total retail sales for each utility might be the same, adjusting the applicable sales base by deducting nuclear and hydro electricity from facilities placed in service before 1992 results in varying amounts of qualified clean energy needed for compliance.

Qualified Electricity Generation

In order to comply with proposed CES requirements, electric utilities that sell electricity to consumers would need to generate or purchase electricity that is qualified as "clean energy." S. 2146 provides a four-part definition of the term "clean energy."

1. Electricity generation from facilities placed in service after 1991 that use the following energy sources: renewable energy, renewable biomass, natural gas, hydropower, nuclear power, or waste-to-energy. 2. Electricity generation from facilities placed in service after the date of enactment that use either combined heat and power or non-biomass energy sources that emit less than 0.82 metric tons of CO 2 per MWh. Additional information about qualified CHP is discussed below in the section titled " Combined Heat and Power ." 3. Electricity generation that results from efficiency or capacity additions made after 1991 to nuclear or hydropower facilities that were originally placed in service before 1992. 4. Electricity generation from facilities that capture and store CO 2 regardless of each facility's placed-in-service date.

Regarding item 1 above, according to EIA, approximately 1.1 million megawatts (MW) of electricity generation capacity exists in the lower 48 United States. Roughly 400,000 MW of electric power capacity was installed during the years 1992 to 2010. Approximately 93% (nuclear, natural gas, and renewables) of this electric power capacity would qualify under the "clean energy" definition (see Figure 4 ). Most of this qualified "clean energy" capacity is natural gas facilities—although natural gas generation is only eligible for partial CES credits based on the amount of CO 2 emissions per MWh of electricity produced. This qualified clean energy generating capacity is distributed throughout the United States. Figure 5 shows the amount of qualified clean energy capacity located in each state.

Clean Energy Standard Compliance

Utility companies required to comply with the CES have two compliance options: (1) submit clean energy credits to the Secretary of Energy, and/or (2) make alternative compliance payments to the Secretary of Energy.

Clean Energy Credits

Clean Energy Credits would be issued by the Secretary of Energy to qualified electricity generation facilities owned by an electric utility. Generally, clean energy credits are issued based on the CO 2 emission intensity, as determined by the Secretary of Energy, of qualified electricity generation compared to the CO 2 emission intensity of a pulverized coal plant—which is estimated to be approximately 0.82 metric tons of CO 2 per MWh. Whether or not this CO 2 intensity metric is on a gross or net basis is not specified in the bill. Additional discussion about gross vs. net emission intensity is discussed in the section below titled " Potential Areas for Further Clarification ."

The formula used to calculate the per-MWh CES credit amount for qualified electricity generators is as follows:

CES Credit MWh = 1 – [(Metric Tons of CO 2 per MWh qualified generator )/0.82]

For example, a qualified clean energy generator that uses a renewable energy source with a CO 2 emission intensity of 0 would receive 1 CES credit per MWh of electricity generation. However, a qualified generator that uses a fossil energy source with a CO 2 emission intensity of 0.41 would receive a partial, in this case 0.5, credit for each MWh of electricity generated.

Once CES credits are issued, they can be (1) used to comply with annual CES requirements, (2) sold to other entities, or (3) held in reserve (also known as 'banking') and used for compliance in future years (i.e., CES credits do not expire). For qualified clean energy sold under contract—in effect on the date of enactment of the proposed bill—into the wholesale market, CES credits for the electricity generated would be issued to the purchaser of the electricity; unless the contractual terms for wholesale electricity transactions include other conditions regarding title to CES credits.

The Secretary of Energy is required to establish a Federal Clean Energy Trading Program to facilitate, document, and track CES compliance. The Secretary of Energy also has the option of delegating the market function of CES credit trading to qualified entities.

Alternative Compliance Payments

Another CES compliance option for non-exempt utilities is making alternative compliance payments (ACP) instead of generating or purchasing CES credits. The ACP design element essentially places a cap on the cost of CES compliance. S. 2146 sets the initial ACP level at three cents ($0.03) per kilowatthour in 2015. The ACP increases 5% per year—adjusted for inflation (see Figure 6 ). All ACP collections, and any civil penalty payments (discussed further below), would be used for a State Energy Efficiency Funding Program, which would distribute 75% of all collections to states for energy efficiency initiatives. Distribution amounts to each state are proportional to the percentage of collections received from each respective state.

Other Design Elements

In addition to the major policy design parameters in the bill, S. 2146 includes several other design elements. Some of these additional design elements are briefly discussed below.

Combined Heat and Power

Combined Heat and Power (CHP) systems may qualify for meeting CES compliance requirements. Unlike other qualified generators that only produce electricity for consumption, CHP systems produce both electricity and heat for beneficial use. Owners of CHP systems, typically industrial operations, generally consume a certain portion of the CHP energy (electricity and heat) for on-site facility and business operations. S. 2146 requires CHP systems to have an overall energy efficiency of more than 50%, produce at least 20% of useful energy in the form of electricity, and produce at least 20% of useful energy in the form of thermal energy.

The number of CES credits issued to CHP system owners is based on the amount of electricity generated by the CHP system, the relative CO 2 intensity of the electricity produced, the amount of electricity used for on-site operations, and the annual CES compliance requirement. Gross CES credits for CHP systems are calculated using the same CES credit formula discussed above; however, a certain portion of on-site electricity consumption—determined by the annual CES requirement—is deducted from the gross CES credit calculation. Additional CES credits may be issued to CHP system owners based on avoided greenhouse gas emissions that would result from eliminating the need for a dedicated on-site heat source.

Biomass

S. 2146 provides a specific definition for renewable biomass, which includes potential impacts associated with land use and management practices. The bill requires the Secretary of Energy to issue interim carbon intensity regulations for biomass and to commission a study by the National Academy of Sciences (NAS) to assess total lifecycle emissions from biomass-derived electricity. Based on the results of the NAS study, the Secretary of Energy is required to issue final carbon intensity regulations for qualified renewable biomass. A similar effort to quantify lifecycle emissions, including those from land use and management practices, for growing biofuel feedstock was led by the Environmental Protection Agency (EPA) in response to requirements in the Energy Independence and Security Act of 2007 (EISA, P.L. 110-140 ). Much debate and controversy in the biofuel community resulted from the life cycle analysis, with some groups arguing that emissions were understated and some groups taking the position that emissions were overstated.

Civil Penalties

Non-exempt utilities that do not meet annual CES requirements would be required to pay civil penalties equal to twice the value of adjusted alternative compliance payments (discussed above) for the deficit amount of electricity needed to comply with annual requirements.

Interaction with State Programs

As of April 2012, 29 states plus the District of Columbia and Puerto Rico had established binding renewable portfolio standard (RPS) policies. Generally, RPSs are policies designed to encourage development of renewable electricity projects by requiring a certain percentage of electricity be generated from renewable sources. Each state RPS usually has some degree of unique design with regards to the amount of renewable electricity required, dates for compliance, carve-outs for certain technologies, and other aspects. The impact of a federal CES on state-level RPS policies could be a concern to some policy makers. S. 2146 states that the CES does not affect the authority of states to enforce renewable energy laws or regulations. The bill also indicates that no state laws or regulations can relieve a utility company from its federal CES compliance obligations.

Other Energy Sources

Integrating energy efficiency and thermal energy sources into a federal CES is a topic of interest to many groups. Technologies that reduce the total amount of electrical load through either efficiency or heat sources could contribute toward CO 2 emission reductions in the electric power sector. However, calculating the amount and qualification of CES credits for such technologies can be challenging. S. 2146 requires a report that evaluates these technologies and provides legislative recommendations about how they might be integrated into the CES policy framework.

Natural Gas

The bill also requires a report on natural gas conservation, with the goal of quantifying natural gas losses during production and transportation and recommending programs and policies to promote natural gas conservation.

EIA Analysis of S. 2146

At the request of the Senate Committee on Energy and Natural Resources, EIA analyzed the potential impact of the Clean Energy Standard Act of 2012 on the U.S. electricity sector. Results from EIA's analysis indicate that the projected electricity generation fuel mix would change when compared to EIA's Annual Energy Outlook reference case projections (see Figure 7 ). Changes to the electric power fuel mix are projected to reduce electric sector CO 2 emissions in 2035 by 44% when compared to EIA's reference case scenario. As with any long-term forecast, models used to calculate such estimates are subject to certain economic, cost, technology, market, and other assumptions that can make the accuracy and reliability of long-range projections questionable. EIA's analysis compares two scenarios (Reference and S. 2146 ) with identical macro-level assumptions and adds policy parameters defined in the CES to the S. 2146 scenario. While this approach may not be able to accurately predict what will actually happen in 2035, it does provide some indication of potential changes to the electric power sector associated with the CES policy design. However, it is possible that changes to certain underlying assumptions could yield different results than those provided in the analysis of S. 2146 .

Coal, nuclear, and non-hydro renewable energy sources would experience the most significant changes. In 2035, electricity generated from coal would decrease by 54%, nuclear power would increase by 62%, and non-hydro renewables would increase by 34% relative to reference case projections. Growth in non-hydro renewable sources of electricity is dominated by wind and wood/biomass; however, solar electricity is essentially the same as in EIA's reference case projections (see Figure 8 ).

Natural gas generation is also expected to experience a relatively modest increase of 8% over 2035 reference case projections including natural gas-fired CHP generation, which would increase by 21% in 2035. EIA's analysis also indicates that S. 2146 results in essentially no carbon capture and sequestration (CCS) projects as a means of CES compliance.

With regard to the potential impact on electricity prices, EIA projects that average U.S. electricity prices would increase, compared to EIA reference case projections, by approximately 4% in 2025 and 18% in 2035. EIA also notes that the provision in S. 2146 to exempt certain utility companies from CES compliance requirements could create some degree of regional price disparity between exempt and non-exempt utilities. Using one estimation approach, EIA indicates that by 2030 electricity prices from non-exempt utilities could be 3% to 30% higher than exempt utilities. Finally, EIA's analysis estimates that the use of alternative compliance payments as a means of CES compliance is minimal throughout the projection period.

Potential Areas for Further Clarification

S. 2146 includes a number of policy design elements that are integrated to create a structure for the Clean Energy Standard policy. The proposed CES raises some areas that Congress may decide to further clarify during future deliberations about the proposed bill.

Is the carbon intensity metric (0.82 metric tons per MWh) on a gross or net basis?

S. 2146 specifies a carbon intensity metric of 0.82 metric tons per MWh as the basis for calculating partial CES credits for fossil energy generators. However, the bill does not specify if this metric is on a gross or net basis. Table 2 compares the CO 2 emission intensity of subcritical and supercritical pulverized coal plants under certain operating conditions. Whether or not carbon intensity is on a gross or net basis could determine if certain plants qualify for partial CES credits and this determination could also affect the magnitude of partial credits issued to qualified natural gas generators.

How do utilities that operate in multiple states calculate their aggregate retail sales for determining if they are required to comply with the CES?

The clean energy requirement in S. 2146 indicates that non-exempt electric utilities that sell electricity to consumers "in a State," are required to comply with annual CES requirements. S. 2146 also indicates that the calculation of total electricity sold by a utility, for determining whether or not a utility is exempt from the CES requirement, should include electricity sold by all affiliates and associated companies. Utility companies that operate in multiple states may question whether they should aggregate company, affiliate, and associated company sales within each state or aggregate electricity sales from electric power operations in all states when calculating their total sales to determine if they are required to comply with the CES.

Policy Question: How to Define Clean Energy?

Should Congress choose to continue evaluating the possible implementation of a Clean Energy Standard for the U.S. electric power sector, future debate about the proposed policy may include various topics associated with defining "clean energy." S. 2146 defines clean energy based on carbon dioxide emissions at the point when electricity is generated. However, S. 2146 generally does not take into account potential emissions, waste, or other environmental impacts that might occur throughout the entire lifecycle of electricity generation from various energy sources. Some may argue that the entire lifecycle (energy extraction, transportation, land use, etc.) should be considered when defining clean energy, while others may argue that a CES focused on reducing electric power CO 2 emissions is a sound approach to reducing greenhouse gas emissions.

Every energy source for electricity generation has benefits and drawbacks. Nuclear power can provide carbon-free, reliable, and baseload electricity, yet there are concerns with disposal of spent fuel and weapons proliferation. Natural gas generation emits roughly half the amount of CO 2 , compared to coal, per MWh of electricity generated; however, there are environmental concerns with natural gas extraction. Hydropower could be considered a carbon-free and renewable source of electricity, but there are fish, wildlife, and water quality concerns associated with hydropower development. Non-hydro renewable electricity, with possibly the exception of biomass, is generally considered to be the cleanest source of power generation; however, there are concerns with endangered species, animal habitat, land use, and other issues associated with renewable electricity development.