A clean energy standard (CES) is a flexible approach to encouraging a cleaner technology mix for electricity production. The most recent federal CES proposal from Senator Bingaman would transform the way electricity is produced and result in substantial reductions in CO2 emissions with small national average electricity price effects through 2025. After 2025, electricity prices would increase substantially. The alternative compliance payment (ACP) for clean energy credit will be binding, and thus actual deployment of clean energy will fall short of the intended targets and cumulative emissions reductions by 2035 will be 12 percent smaller than they would be without an ACP. The small utility exemption from the CES requirements equates to roughly $29 billion in avoided electricity expenditures by the customers of exempted utilities in 2035 alone. Excluding power generated by existing nuclear and hydroelectric facilities from CES compliance responsibility raises electricity prices in competitive regions to the benefit of owners of existing nuclear and hydro capacity.
In the 2011 State of the Union address, President Obama discussed moving the country toward a goal of 80 percent clean electricity by 2035. One approach that has been proposed to meet this goal—as well as help reduce emissions from the electricity sector—is a clean energy standard (CES). A CES sets a minimum threshold on the share of generation that must come from clean sources, and that threshold grows over time.
Senator Bingaman (D-NM) proposed a CES policy this year in the Clean Energy Standard Act of 2012, or S. 2146. The bill sets the nominal clean electricity requirement at 24 percent in 2015, rising by 3 percent per year to 84 percent in 2035. In a new discussion paper, “Analysis of the Bingaman Clean Energy Standard Proposal,” RFF’s Anthony Paul, Karen Palmer, and Matt Woerman describe the design features of S. 2146, including how credits are allocated, how costs are managed, and which utilities are included. Their analysis uses RFF’s Haiku electricity market model to analyze the effects of the policy on generation, retail prices, and CO2 emissions from the electricity sector, as well as how the policy performs under different assumptions about natural gas prices and new environmental regulations.
Key findings include:
The proposed CES legislation would reduce CO2 emissions substantially.
- By 2035, the CES would achieve 11.4 billion tons of cumulative CO2 emissions reductions, and in 2035 alone, the CES would achieve 1.1 billion tons of reductions (or 41 percent of annual emissions projected in the baseline case).
The CES does not reach its 84 percent clean energy requirement by 2035. This is due to two features of the policy: the Alternative Compliance Payment (ACP), and the Small Utility Exemption (SUE).
- The ACP allows retail utilities the option of paying a price of $30 per megawatt hour (MWh) in 2015 (rising by 5 percent per year in real terms) in lieu of purchasing clean energy credits. Accordingly, the ACP imposes a ceiling on the price of credits—and the analysis by Paul, Palmer, and Woerman shows that this price ceiling is binding throughout the policy term. Without this cap on prices, elevated credit prices would lead to a greater fraction of generation from clean sources and more emissions reductions.
- The SUE exempts utilities with fewer than 2 million MWh in sales initially, and utilities with under 1 million MWh in sales ultimately, from having to comply with the standard. From 2025, the small utility exemption affects roughly 12.5 percent of the electricity sold in the contiguous United States. Those receiving the exemption would see a retail electricity price reduction in 2035 from $109 per MWh (if there were no exemption) to $52 per MWh, saving $29 billion in electricity expenditures in that year alone. Because of the ACP, the impact of SUE on emissions is small, but if there were no ACP, the impact would be larger.
The CES will have a modest effect on the national average retail electricity price for the first 10 years, followed by important increases after 2025.
- By 2035, the national average retail electricity price under the CES is higher than the baseline scenario by about 18 percent—but the ACP and SUE provisions of the bill both serve to dampen electricity price increases. If both provisions were struck from the policy, national average electricity prices would reach 42 percent above baseline by 2035.
Other key findings on regional price variations, revenue generation for municipalities, and more are available in the full discussion paper.