Clean Energy Standard: Design Elements, State Baseline Compliance and Policy Considerations
Released: 2011-03-25T00:00:00

Background and Introduction

In 2009, approximately 4 trillion kilowatt hours of electricity were generated by the U.S. power sector. By 2035 electricity generation is expected to rise to more than 5 trillion kilowatt hours, a roughly 25% increase from 2009 levels. The fuel mix for U.S. electricity generation includes four primary categories: (1) coal, (2) natural gas, (3) renewables, and (4) nuclear. As illustrated in Figure 1 , coal is the largest electricity generation fuel source for both actual (2009) and projected (2035) generation. However, EIA projects that natural gas and renewables are the only fuel sources that would experience growth, in terms of percentage of the electricity generation mix, over the projection period.

During his January 25, 2011 State of the Union speech, President Obama proposed a Clean Energy Standard (CES) policy framework that would result in 80% of U.S. electricity generation coming from "clean energy" sources by 2035. "Clean energy," as described by President Obama, would include renewables, nuclear power, and partial credits for clean coal and efficient natural gas.

While there is no official definition, a federal Clean Energy Standard might be defined as a requirement to generate a percentage of electricity from certain energy sources. It is a policy designed to encourage U.S. electricity generation from "clean" or "cleaner" energy sources within a certain time period. Many CES proposals require individual utility companies to comply with a federal CES, although some utilities may be exempt from CES requirements based on their total amount of annual electricity sales. Generally, utilities can comply with CES requirements through a combination of (1) electricity generation from qualified clean energy sources, (2) purchasing clean energy credits, and (3) making alternative compliance payments (ACPs). Each of these will be discussed below.

Previous CES proposals have addressed multiple policy design parameters, including (1) technologies that qualify, (2) base quantities of electricity, (3) goals and requirements, (4) alternative compliance payments. Understanding the implications and inter-relationships of these parameters is an important element of CES policy design and will assist Congress with considering if overall objectives such as increasing clean energy generation, minimizing rate payer impacts, and job creation are likely to be achieved.

This report evaluates design elements of previous CES proposals, summarizes the Administration's CES policy framework, provides state-level baseline CES compliance analysis, and presents several policy options that Congress might consider as part of a CES debate.

Summary and Design Elements of Previous Clean Energy Standard Proposals

During the 111 th Congress several Clean/Renewable Energy Standard policies were proposed, although none became law. In order to provide background on previously proposed CES legislation, four proposals were analyzed and compared against multiple design parameters (See Table 1 ).

A more detailed analysis of these proposals is presented in a side-by-side comparison matrix that can be found in Appendix A . All proposals were compared in order to assess areas of commonality and divergence. While not an all-inclusive or exhaustive list, following is a brief overview and discussion of the design elements considered for this analysis.

Base Quantity of Electricity

The base quantity of electricity is a critical Clean Energy Standard design element as it establishes the amount of electricity, typically measured in kilowatt-hours, that applies to CES goals and requirements. Proposals analyzed have base quantity definitions that range from 100% of utility power sales to sales less the amount of power generated by hydro-electricity and municipal solid waste (MSW) incineration. A hypothetical example of how different utilities might derive their respective CES base quantities in the latter case is provided in Table 2 .

Target/Goal

Clean Energy Standard targets and goals set the percentage of electricity that must be generated from clean energy sources by a certain date. The percentage articulated in a CES proposal is applied to the base quantity of electricity to calculate the number of kilowatt-hours that must be generated from clean energy sources in order to achieve compliance by a certain date. Examples of CES targets/goals include (1) 50% of base quantity by 2050, (2) 15% of base quantity by 2039, and (3) 15% of base quantity by 2020.

Qualifying Energy Sources

Defining and determining which energy sources will qualify under a CES proposal could be a design element worthy of consideration. A clear definition of qualifying sources is important as it allows a utility company to determine which electricity generation options are available for compliance. Each of the four proposals analyzed in this paper include typical renewable energy as qualified sources. All four proposals also include coal-mine methane and landfill gas as qualifying sources. Differences among the proposals, generally, are associated with the inclusion and definition of qualified hydropower and incremental geothermal as well as the inclusion/definition of waste-to-energy, qualified nuclear, advanced coal/fossil with carbon capture and storage, and re-powering/co-firing biomass at existing coal generation facilities.

Energy Efficiency/Savings Credits

Energy efficiency/savings typically refers to reductions in electricity consumption at end-use consumer facilities that are served by an electric utility company as well as reductions in distribution system losses. Some proposals also include output from combined heat and power systems as energy efficiency/savings. In order to qualify for energy efficiency/savings credits, utility companies may have to institute programs that result in consumer demand reductions. One example of such a program might be subsidies for high efficiency air conditioning systems. All four proposals analyzed allow for energy efficiency/savings credits, although some proposals place limits on how much energy efficiency/savings credits can be used to comply with a broader Clean Energy Standard. For example, one proposal allows utility companies to use energy efficiency credits to satisfy up to 25% of the CES target. Therefore, 75% of a utility company's CES target must be met by generating electricity from qualified sources, purchasing CES credits, or making alternative compliance payments. One challenge associated with energy efficiency/savings credits might be determining a baseline for calculating energy efficiency and therefore the number of credits that result from various energy efficiency programs.

Alternative Compliance Payments

Alternative compliance payments (ACPs) can be paid by utility companies in lieu of generating qualified clean energy or purchasing clean energy credits. Typically expressed in cents per kilowatt-hour, ACPs provide utility companies with some degree of flexibility associated with meeting the targets/goals of a Clean Energy Standard. From a policy perspective, determining the value of ACPs can be somewhat complicated. Setting the ACP too low could potentially result in minimal development of "clean" electricity generation because some companies might choose to pay the ACP instead of generating or purchasing qualified clean energy. At the same time rate payer costs may increase as utility companies seek to recover their compliance costs. However, setting the ACP value too high might result in relatively large electricity rate increases in areas/regions that lack clean energy resources. Nevertheless, ACPs are basically a cost containment mechanism that effectively place a cap on the value of clean energy credits. Determining the value of ACPs will likely involve comparing the cost of generation from all qualified sources to the lowest generation cost from any fuel (e.g., coal, natural gas, nuclear, renewable) source. Some proposals suggest that funds generated through receipt of ACPs will be used to provide grants in support of new "clean energy" electricity generation projects.

Credit Trading

Under most of the four Clean Energy Standard proposals, utilities would be awarded credits for each kilowatt-hour of electricity generated from qualified clean energy sources. Utility companies can submit clean energy credits as a means of compliance with annual CES requirements. If a utility has more CES credits than are required for a given year, the utility may either "bank" the excess clean energy credits for a certain period of time or the utility can trade the excess credits, in exchange for cash, to other utilities. For those proposals that allow energy efficiency to count towards CES compliance, energy efficiency credits are typically handled in a similar manner. Details regarding the mechanics of how CES credit trading may work are not clearly defined in the four proposals analyzed and responsibility for establishing trading programs is delegated to the Secretary of Energy.

Multiple Credits

Three of the four CES proposals analyzed include provisions for double and triple credits. Multiple credits could be an approach that further incentivizes certain types of clean energy projects or the development of projects in certain locations. Some examples of projects that might receive multiple credits include (1) projects on Indian lands, (2) on-site electricity generation, (3) first five advanced coal facilities that sequester 1 million tons per year of carbon dioxide (CO 2 ), among others.

Credits for Demonstration Projects

Some CES proposals include provisions that allow demonstration projects to receive clean energy credits. For example, S. 20 would provide clean energy credits for advanced coal demonstration projects, based on the amount of CO 2 that is captured and sequestered. Providing credits for demonstration projects might be viewed as an incentive to develop, deploy, and commercialize emerging clean technologies.

Civil Penalties

Most CES proposals include a civil penalty for utilities that fail to comply with CES requirements. Civil penalties are typically computed by multiplying the annual kilowatt-hour target shortfall times a multiple of the alternative compliance payment (e.g., 200% of the ACP—inflation adjusted).

Exemptions

In some cases, CES proposals may exempt certain utility companies from compliance. Two of the four proposals analyzed exempt utilities that sell less than 4 million megawatt -hours of electricity in the preceding year. All utility companies in Hawaii are also exempt.

Loans to Support Compliance

Some CES proposals empower the Secretary of Energy to make loans to support the development of qualified clean energy projects. The purpose of the loans is to assist with CES compliance and reduce cost impacts to utilities and retail consumers.

President Obama's Clean Energy Standard Proposal

On January 25, 2011, during the State of the Union address, President Obama announced a clean energy goal for the country: "By 2035, 80% of America's electricity will come from clean energy sources." On February 3, 2011, the White House released a document titled "President Obama's Plan to Win the Future by Producing More Electricity Through Clean Energy," which summarizes the goals of the President's plan. Primary objectives of the Administration's plan include:

Double the share of clean electricity in 25 years Draw on a wide range of clean energy sources Deploy capital investment to sustain and create jobs Drive innovation in clean energy technologies Complement the clean energy research and development agenda

Furthermore, President Obama's plan described five core principles for the Clean Energy Standard proposal. These principles are summarized in the following text box.

As discussed and presented in the following sections, baseline compliance with President Obama's CES proposal differs among the states and several policy considerations may warrant further evaluation as the CES policy debate evolves.

Baseline State Compliance Assessment (President Obama's CES Proposal)

President Obama's Clean Energy Standard proposal states that 40% of electricity currently generated nationwide comes from "clean energy" sources. However, each state and each utility required to comply with a federal Clean Energy Standard has a unique electricity generation mix. The following figure shows how each state would currently comply with the CES proposal based on existing electricity generation from qualified "clean energy" sources. Data sources and the calculation methodology used to generate Figure 2 and Figure 3 are described in Appendix B .

As indicated in Figure 2 , some states may be better positioned than others to comply with a Clean Energy Standard, with some states already exceeding the 80% goal for 2035 and other states generating a relatively small percentage of electricity from qualified clean energy sources. Previously proposed CES legislation has typically applied to electric utilities and has been based on the amount of electricity sold to consumers.

The same data used to create Figure 2 were used to create the map shown in Figure 3 . This map illustrates potential regional differences associated with CES compliance, based on existing electricity generation sources. This map does not provide utility-level percentages, which could be the basis for CES implementation.

Limits of Analysis

Information provided in this report does not provide specifics at the utility level and does not represent the total amount of electricity sales to consumers. Such level of analysis is beyond the scope of this report. Nevertheless, the information presented here does illustrate generation profile differences among the U.S. states and may be useful as a baseline assessment of state and regional differences associated with CES legislation.

Policy Considerations

In evaluating possible Clean Energy Standard legislation, policy considerations might include the following.

Should the Policy Provide Credit to Existing and/or Incremental "Clean Energy" Generation?

President Obama's CES proposal states that 40% of U.S. electricity is generated from "clean energy" sources. However, as illustrated in Figure 2 and Figure 3 , each state has a different generation mix that results in a wide range of initial baseline compliance levels. Allowing existing "clean energy" generation to count toward the standard would enable each state to receive credit for its respective "clean energy" capacity. However, allowing existing generation to count toward a CES puts some states in a better position when compared to other states, as indicated in Figure 3 . Under this scenario, and depending on specifics of the proposed legislation, some states may experience some degree of wealth transfer as a result of purchasing CES credits from states with an excess of qualified "clean energy" electricity generation. Alternatively, Congress might decide to only allow incremental generation capacity added after the policy is enacted to count towards CES compliance. If such a policy were adopted, Congress may choose to structure the CES in a different manner than that proposed by President Obama. For instance, President Obama's 80% of total electricity generation by 2035 would be much more difficult to achieve if existing qualified generation sources are not eligible.

What Should Be the Value of Alternative Compliance Payments?

As discussed earlier, alternative compliance payments (ACPs) provide utility companies with some degree of flexibility associated with CES compliance. In essence, ACPs act as a cost ceiling for complying with a Clean Energy Standard. Setting the value of ACPs can be complicated by factors such as the cost of electricity generation, transmission availability, regional "clean energy" resources, and finance costs for advanced technology. As a result, setting a single ACP that encourages "clean energy" electricity generation for the entire country can be difficult and challenging. An ACP set too low may simply raise rate payer electricity costs and encourage minimum amount of "clean energy" generation. In contrast, an ACP set too high may not be acceptable for states that are not endowed with "clean energy" resources. Evaluating the levelized cost of electricity (LCOE) of qualified "clean energy" generation options may be a way to begin estimating an ACP. However, since each region's "clean energy" resource base varies (solar in the southwest versus the northeast) and each technology may have different financial requirements due to real or perceived levels of technology risk, an LCOE-based analysis of ACP levels may, at best, only produce a reasonable range for the ACP. Setting a single, absolute ACP value that will be perceived as fair and equitable for all regions, and for all technologies, may be a challenging endeavor.

Should Utility Companies of a Certain Size Be Exempt?

Three of the four legislative proposals analyzed for this paper exempt certain utilities from complying with the respectively proposed Clean/Renewable Energy Standard. Two proposals exempt utilities that sell less than 4 million megawatt hours and one proposal exempts utilities that sell less than 1 million megawatt hours. If Congress were to choose to exempt certain utilities from compliance with the proposed standard, an analysis of how much electricity generation is represented by exempt utilities as a percentage of total U.S. electricity generation may be useful. CRS analyzed EIA data to estimate two items: (1) the number of utility companies that would be required to comply with a CES, and (2) the amount of electricity sales represented by non-exempt utility companies. The analysis assumed that utility companies selling less than 4 million megawatt-hours per year are exempt. Results from this analysis are provided in Figure 4 .

According to the analysis summary in Figure 4 , 149 of more than 3,000 utility companies would have to comply with the CES based on the assumed exemption criteria. These 149 utility companies represent 77% of annual U.S. electricity sales. Including an exemption as part of a CES policy may prompt consideration how to effectively achieve a CES target given that a portion of U.S. electricity might be exempted from compliance. Based on the above analysis, non-exempt utilities could be required to generate more (greater than 80% by 2035 for example) electricity from "clean energy" sources in order to meet an 80%-by-2035 goal, assuming that was a goal established through legislation.

How Should Interim CES Targets/Goals Be Structured?

All four proposals from the 111 th Congress include interim targets for CES implementation. These interim milestones serve as a means to phase in "clean energy" over a period of time. Figure 5 illustrates three possible phase-in approaches.

First, the linear approach, which might consist of annual increases, may be advantageous to renewable energy and natural gas generation since development timelines for these sources are relatively short. However, nuclear and "clean coal" may be at a disadvantage under this scenario due to long development timelines (nuclear) and technology maturity/commercialization ("clean coal"). Second, the back-end loaded approach, where targets are low in the beginning years of a policy and then increase steeply in later years, may be beneficial for nuclear and "clean-coal" generation as it allows more time for development and commercialization. However, under this scenario if beginning year targets are too low some may argue that this approach does not result in demand large enough to incentivize investment in new renewable and natural gas projects. Finally, the stepped approach might include targets and goals that increase every three to five years (example: 45% by 2015, 50% by 2020, etc.). This approach offers an alternative phase-in option but may result in flurried periods of project development followed by periods of stagnant, or non-existent, market growth. Manufacturing and job sustainability may be challenged under a stepped scenario.

Should Preference Be Given to Renewable Energy Generation?

President Obama's proposal allows a number of "clean energy" generation sources to qualify for CES compliance. This approach provides utility companies with some degree of flexibility when choosing among "clean energy" generation alternatives and it allows nuclear, coal generation with carbon capture and storage, and natural gas to compete directly with renewable (wind, solar, geothermal, etc.) generation.

Some may advocate a preference for renewable energy in the form of a specific percentage of generation dedicated to renewable energy or through a multi-tiered CES credit approach that provides more credit value for electricity generated from renewable sources. Others may argue that a CES should include a broad array of qualified electricity generation sources and state/regional markets should determine the generation mix selected for CES compliance.

Which Generation Sources Qualify As "Clean Energy"?

Qualified "clean energy" sources described in President Obama's CES proposal include (1) renewable electricity, (2) nuclear power, and (3) partial credits for clean coal and efficient natural gas. The proposal indicates that "clean coal" refers to coal-based electricity generation that includes carbon capture and sequestration and "efficient natural gas" refers to natural gas combined cycle (NGCC) electricity generation. Based on the choices of qualified sources, it appears that a "clean energy" objective is to encourage the development of low-carbon power sources. If this is the case, some may argue that supercritical and ultra-supercritical pulverized coal generation should qualify for partial credits since the carbon dioxide emissions profile is less than conventional subcritical pulverized coal generation. Sorting out qualified "clean energy" sources and determining the amount of whole and partial credits awarded for various electricity generation types could warrant further analysis in consideration of a federal Clean Energy Standard.

Other Policy Considerations

Other policy considerations may acquire increased levels of importance warranting further analysis and evaluation. Such issues include:

1. Transmission requirements and how to allocate associated costs? 2. Which federal agency should have responsibility for implementing and managing a federal CES? 3. What should be the guidelines for credit trading under a CES policy? 4. How might a federal CES affect other economic sectors, such as coal and coal electricity generation? 5. How should energy efficiency be treated under a federal CES? 6. How might a CES align and interact with renewable portfolio standards currently established in 29 states, DC, and Puerto Rico?

Senate Energy and Natural Resources: Clean Energy Standard White Paper

On March 21, 2011, the Senate Energy and Natural Resources committee released a Clean Energy Standard white paper. This white paper solicits feedback on 6 broad policy design questions along with 36 clarifying questions. The six broad design questions listed in the white paper are (1) What should be the threshold for inclusion in the new program? (2) What resources should qualify as "clean energy"? (3) How should the crediting system and timetables be designed? (4) How will a CES affect deployment of specific technologies? (5) How should Alternative Compliance Payments, regional costs, and consumer protections be addressed? (6) How would a CES interact with other policies?

Appendix A. Comparative Analysis of Selected Clean Energy Standards Proposed During the 111 th Congress

Appendix B. State-Level Baseline Compliance Calculation Methodology

Data Sources

Two EIA data sources were used to perform the baseline CES compliance assessment:

1. Electric Power Annual 2009—Data Tables: 1990-2009 Net Generation by State by Type of Producer by Energy Source (EPA 2009). 2. 2009: EIA-923 January-December Final, Nonutility Energy Balance and Annual Environmental Information Data (EIA-923).

Methodology

Calculating the generation mix for each state started with data from EPA 2009, which provides information regarding state-by-state electricity generation. A pivot table was created to organize electricity generation data by state and by fuel source. However, the EPA 2009 data do not provide the detail necessary to distinguish between natural gas combined cycle (NGCC) generation and other natural gas generation technologies. As a result, EIA-923 data were used to extract NGCC generation figures. With electricity generation from NGCC power plants now available, the pivot table from the EPA 2009 was modified to include NGCC generation and "Other Natural Gas" generation.

To be consistent with President Obama's Clean Energy Standard proposal, electricity generation sources were categorized as either "Clean Energy Generation" or "Other Generation."

Energy sources categorized as "Clean Energy Generation" include:

Geothermal Hydroelectric Conventional Natural Gas Combined Cycle (50% of generation) Nuclear Biomass Pumped Storage Solar Thermal and Photovoltaic Wind Wood and Wood-derived fuels

Energy sources categorized as "Other Generation" include:

Coal Natural Gas Combined Cycle (50% of generation) Natural Gas Other Other Gases Petroleum Other

In order to calculate the percent of generation from sources that qualify as "clean energy," the sum of "Clean Energy Generation" was divided by the total amount of generation. The same calculation was performed for "Other Generation." The pivot tables allowed this calculation to be done for the entire country as well as for each state.