Congress should prioritize advancing competition, not subsidizing monopoly utilities
A CEPP could somewhat mimic a CES, but is expected to focus more on the payment structure. It should be noted that no legislative language has been made publicly available. Most of what we know about both proposals come from advocates, policy papers and interviews. Nevertheless, what each aims to accomplish remains the same—provide direct taxpayer funding to build more renewable and clean energy generation in a way that will survive a parliamentarian review so it can be included in a reconciliation package.
Investing in clean energy and renewable energy projects should be a priority, but we need to select policy tools appropriate to the circumstances. Technology costs and demand, which a CEPP is arguably meant to address, are not what is blocking clean energy investment. For example, Lawrence Berkeley Lab (LBL) recently released a report on trends on land-based wind development; amongst its findings is that in 2020 $25 billion was invested in wind adding 16.8 gigawatts (GW) of capacity. Key regulatory reforms that could unlock trillions of dollars in private investment in clean energy, such as interconnection and transmission reform, all sit outside of what can be accomplished under reconciliation. According to the LBL report, at least 209 GW of wind is sitting in interconnection queues across the country, with prices around $20/megawatt hours (mwh) for power purchase agreements. As such, there is plenty of demand for renewables, and their costs continue to decline. Instead, the main impediment to cost-effective renewables and clean energy resources is regulatory; notably, monopoly business models, something that the CEPP intends to exacerbate.
Electric utilities are heavily regulated by either state regulatory commissions or local boards who review utility plans, costs and rates. Most of the country does not have an option of electricity provider—there is one monopoly who owns the generation, transmission and distribution of that service. Monopoly utilities have a century-long history of spending excessively on capital projects and socializing risk on captive ratepayers. This is poised to worsen, as monopoly utilities recently pivoted to own and operate renewables projects that require more capital management acumen than conventional generation. They are pursuing pathways to insulate themselves from competition, which will inherently make the clean transition more expensive and risky with regressive impacts on customers. Policies that entrench monopolies further therefore run counter to any notion of a just and equitable energy transition.
The absence of competition is already driving monopoly utilities to prefer large, expensive investments and shut out cost-effective, consumer-preferred alternatives. In competitive areas, consumers are benefiting from declining costs for renewables and demand-side technologies. The competitive movement had its roots in the passage of the Public Utilities Regulatory Policy Act (PURPA) in 1979, which utilities resisted from the onset. Utilities have continued to fight subsequent state and federal policies that would enable customer choice and competition. Indeed, as noted by Third Way, a CEPP “provides incentives for every utility to build more clean electricity.” So, while clean energy—including distributed energy resources—is increasingly the cheapest form of new generation, a CEPP would incentivize utilities to build resources that are already the most cost-effective means of meeting demand. Instead, a CEPP is the latest avenue for incumbent utilities to cement themselves at the expense of captive ratepayers, box out competition and be able to reject any requirement for fiscal accountability. Ultimately, the costs of this approach will fall on either captive ratepayers or the general public through more taxes.
The CEPP (and CES), as described by advocates, would give taxpayer money directly to these monopoly utilities even as they resist customer adoption of these same resources and erect barriers to entry for competitive clean energy suppliers. This utility-focused approach also ignores the significant work done over the past 15 years across the country by the states to transition our electricity system. Indeed, to say that nothing has been done on the policy side to address climate change and enable a clean energy transition over the past decade willfully ignores the mountain of work done by the states. That work contributed to the declining costs of wind, solar and storage nationwide.
As these costs continue to decline, the solution isn’t to give handouts to utilities to build resources that are already cost-effective. The challenge is for Congress to figure out ways to let the market work better without giving electric monopolies an opportunity to shut out competition. Climate advocates should beware that a CEPP that funnels money directly to monopoly utilities will crowd out opportunities for third party developers, customer choice and distributed energy resources. For example, if monopolies receive this funding and build out renewable energy resources, then utilities may very well be in a position where they can argue additional rooftop solar is unneeded and that there is no need for all resource procurements. This would cast a significant pall around innovation and market growth opportunities for clean energy resources, slow down cost declines as competition dries up, and ultimately delay the transition to a cleaner energy mix both in the United States and abroad.
As another example, a recent Brattle Group study found that in North Carolina, Duke Energy could achieve 70 percent reduction in its greenhouse gas emissions by 2030, and save $590 million by retiring its coal and gas fleet and replacing it with renewables and storage, noting that new renewables and storage are cheaper compared to operating coal and gas plants currently. Again, the issue isn’t how to bring down costs of renewables, it’s that utilities have a regulatory and business interest to not bring on new renewable resources, even though they are cheaper than existing fossil resources. It then remains to be seen what the utilities would use the money given to them by Congress to actually do.
CEPP advocates have suggested that these types of details be left to implementation, yet the question remains just who will be responsible? The U.S. Department of Energy (DOE) is not a regulatory body—while they provide funding for research and development, grants for new technologies, and provide assistance to states on these issues, giving DOE authority to review utility costs is not within their authority. Another option may be the Federal Energy Regulatory Commission (FERC). FERC does regulate electric utilities, but its authority is limited to the bulk power system and wholesale markets. That generally stops at the 100 kilovolt (kV) system. The investment in new resources might fit within their existing authority, however, costs for such investments are usually recovered through retail rates, since generation is constructed to serve retail customers.
The review and setting of retail rates has historically belonged to the states. Again, absent additional legislation expanding FERC authority, the most capable entity to implement such a program would be the states, in particular the state public utility commissions. Developing such a process where taxpayer funds would be given to electric utilities but overseen by state commissions would be a complicated dance.
A variety of alternatives, even inefficient ones like tax credits for mature technologies, would likely yield better results. As recently suggested by James Bushnell, extension of the existing Investment Tax Credit and Production Tax Credit programs may reach many of the same goals, but more simply and with less risks of expanding utility monopolies, and at lower cost. Any additional funding should be results-oriented, resource-agnostic and prioritize early-stage technology to reduce crowding out private capital.
Taking action to lower the costs of climate change mitigation should be prioritized to propel deep global emissions cuts. This means instilling economic discipline and innovation through competitive means and consumer choice, not putting monopoly utilities at even greater advantage. Solutions that efficiently and equitably meet this challenge should be the first priority, not finding the easiest and simplest way to send billions of taxpayer dollars to a group that has done as much as possible to fend against this future. Care should be taken to ensure that any effort to fit a boatload of policy solutions into an economic reconciliation package does not create further complications in the market and does not give one player additional market power over others.
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