Energy Reconciliation Proves Irreconcilable
Electricity always moves at the speed of light, while congressional clean energy rhetoric and results have moved light years apart. Public spending no longer dictates the pace of the clean transition, but archaic regulation does. Spending, however, is the only tool available to congressional Democrats in the reconciliation package, who aim to pass massive energy subsidies in a sweeping bill this month. But subsidizing mature technologies will yield little climate benefit and impose high costs, whereas regulatory reforms, research and development (R&D) support and efficient emissions pricing would spur innovation, deep emissions cuts and economic growth.
The bill’s Clean Electricity Performance Program (CEPP) has been portrayed as transformative for clean energy. However, this contradicts the practitioner view that appreciates the role of institutions and incentives that determine clean energy deployment. In effect, the CEPP would be a massive public-to-private wealth transfer that risks fatally undermining the market forces that hold the key to an affordable and reliable clean transition.
Fortunately, scrupulous actors remain unsold. Democratic Sen. Joe Manchin recently threw cold water on the plan, noting that paying utilities in this manner “makes no sense at all.” He is correct. An excellent one line summary comes from Max Auffhammer, a professor of sustainable development at the University of California, Berkeley, who noted that the problem isn’t intentions but that the CEPP is a “gameable jumble that likely lets companies bilk taxpayers without creating clean energy.”
It’s hard to be confident in a process that has been mired in opacity since the beginning. Only at the end of last week did details emerge, forcing stakeholders to digest mammoth and detailed spending provisions within days. To help stakeholders and Congress absorb the reconciliation package expeditiously, they should be clear on what’s at stake, and what isn’t, for clean energy and the climate.
What’s Not at Stake in this Package
- A clean energy standard (CES). Despite a CES serving as initial inspiration, this package no longer resembles thoughtful CES concepts, let alone more efficient concepts like emissions pricing. Instead, it has morphed into a staggering subsidy machine at $150 per megawatt-hour (MWh). For comparison, today’s renewable power purchase agreements (PPAs) are roughly $30/MWh. Further, current language may obliterate voluntary renewable PPA markets, which fairly allocate resources based on what customers are willing to pay for clean energy and are a big reason why costs have fallen and product innovation advanced in recent years. For these reasons, among others, some CES proponents now privately disagree with the CEPP but fear opposing the package publicly. Distinguishing CES from the CEPP could change some minds. In an intriguing twist, Hill meeting readouts suggest moderate progressives uneasy with the CEPP are encouraging a renewed dialogue on carbon pricing instead. That would be a welcome development and find far more takers given the shift in corporate attitudes.
- Reducing core impediments to the clean transition. There’s two main obstacles in the clean grid transition: 1) outmoded regulation that holds back the next decade of private investment; and 2) uneconomic “clean firm” technology that’s necessary for the final chapter of decarbonization. Moderate emissions pricing would likely have a peripheral but productive effect on the electricity industry, whereas it would be a core driver in harder to abate industries. Addressing the core impediments to a cleaner grid means prioritizing R&D programs for “clean firm” technologies and regulatory reform that unleashes private capital so clean markets can flourish. For example, the American Council of Renewable Energy released a report last week that makes a convincing case for reforming outdated rules for generator interconnection that result in overcharging renewables. Instead, the congressional package would channel public dollars into mature, economical technologies without remedying the flawed mechanisms inhibiting them from getting to market.
What’s at Stake in this Package
- Damaged prospects for durable, effective and efficient climate policy. The reconciliation package is a profound deviation from regular congressional order. Legitimizing this opens the door to all policy, including energy and climate, becoming more partisan. For example, Republicans could simply use the same tool to flip the script when they regain control. This is eerily familiar to the lesson of the Trump administration’s coal bailout flirtation with abusing the Defense Production Act, where administration insiders warned that legitimizing the tool would enable a Democratic successor to use the same tool to declare a grid emergency of a different variety to subsidize coal’s competition. This see-saw must stop. As my colleague Philip Rossetti writes, we need to drive bipartisan consensus to achieve durable domestic policy and for the United States to be taken seriously in international climate negotiations.
- Entrenching the problem actors of a just transition: incumbent utilities. Currently, the package would subsidize utilities and preclude third party competition. This could fatally undermine any hope of instilling competitive discipline on monopoly utilities; without this, there is no hope for a just transition as utilities continue to run up regressive electric rates and lobby for taxpayers assistance for uncompetitive projects. Competitive developers have driven renewables development to date, which has lowered costs, boosted innovation and put risk on investors. But monopoly utilities recently made their move to rate base the clean transition, which immediately sounded alarm bells among consumer groups. The early results confirm the adverse consequences of monopoly risk socialization, capital inefficiency and foul political play. As my colleague Chris Villarreal implores, Congress should be prioritizing advancing competition, not subsidizing state-sanctioned monopolies.
The irony that Congress is using a tool that does nothing to address the clean energy blockade is only eclipsed by the bizarre federal-state political economy. That is, the focus of the federal progressive package is to make renewables so cheap in red states that utilities and their regulators will have no choice but to gobble them up. Keep in mind, the combination of state renewable portfolio standards and market demand for clean energy in blue states already provides nearly all the propulsion for the transition already. The issue there is institutional reform to secure cost containment and reliability.
Most red states, on the other hand, are strangled by monopoly utilities seeking to overcapitalize investments and shut down consumer choice and third party competition. The most innovative clean energy companies—independent power producers (IPPs)—are nearly shut out of most of these states, while the corporate consumers that spend their own money on clean energy—in sharp contrast to utilities spending that of captive customers—want the freedom to self-provide and buy cheaper clean power on the market. The imperative in red states is to liberalize electricity markets, so it’s no surprise that some IPPs and corporate energy consumers are deeply concerned with recent Hill developments while utilities lobby to force taxpayers to finance their competitive moat.
If all else fails, a last-ditch effort may be crucial for damage control. Modest language adjustments in the bill may have profound consequences, because the effect of the package depends on subsidy design and implementation quality. If this package is locked in, Congress should consider the following changes:
- Issue a directive that funds disbursement contingent upon power that is competitively procured, owned and operated. At minimum, there is no excuse for not having all power generation procured competitively.
- Revise discriminatory language that limits eligibility of some business models and undermines voluntary clean energy markets. Options include having compliance overseen by an independent entity that administers a regional clean energy attribute market and having load serving entity compliance obligations managed at the corporate not individual company level.
- Given the aggressive timeline, any cursory quantitative analysis would be welcome. Manufacturers have already called for an economic and reliability examination of the CEPP before a vote. In their absence, expect large consumers to push hard for cost containment and reliability safety valve provisions. Although scoring from the Congressional Budget Office is not yet available, rough quantitative estimates of per unit emissions abatement costs would illuminate the ballpark of the bill’s benefits relative to costs.
- Eliminate or lower the fixed $150/MWh subsidy or, if the reconciliation procedure allows, tie the subsidy to verifiable performance or a competitive auction. With a fixed subsidy, it is very hard to limit subsidies to additional clean energy investment, which is why most of the current CEPP is likely to fund what the private sector already plans to do. It cannot be overstated how a fixed subsidy is fundamentally different than a CES. Under a CES, the price of clean credits would be based on supply and demand that minimizes gaming; if the requirement is close to what the private sector would already do (baseline) then subsidy prices will be minimal. Shifting the subsidy design to mimic a CES could have massive cost savings for taxpayers.
Thus far, the process has illuminated the gap between proper policy process and analysis and congressional drama. But climate change and economic prosperity are too serious for political theater. True clean energy leadership reduces emissions, improves governance and expands economic opportunity. This serves not only our self-interest but sets a template that is reproducible abroad. Accomplishing this requires improving the quality of our institutions and policies that the reconciliation package threatens.
The current CEPP would go down as an historic case of greenwashed corporate welfare negotiated in exclusive backroom deals. It will set an example of a wealthy country blunder that developing countries avoid and none of consumers, taxpayers nor climate stabilization can afford. If the CEPP passes in its current form, we will have to answer to our grandchildren why we left them with a mountain of debt and undermined the mechanisms that would deliver a just transition.
Let’s hope Congress pivots toward a results-over-posturing philosophy through bipartisan regular order that prioritizes regulatory reform, R&D support and efficient emissions pricing. But politics being what it is, at minimum Congress could follow the template above to reduce disruptions in competitive relationships dramatically, minimize taxpayer funding for what the private sector already plans to do and channel any public support to drive additional clean production or emissions mitigation in a cost-efficient manner.
Image credit: Pand P Studio
