Waxman-Markey Zeroes Renewable Energy Standard, Drops Efficiency Sharply

This blog was written by John D. Wilson, former Deputy Director for Regulatory Policy at the Southern Alliance for Clean Energy.

Guest Blog | June 4, 2009 | Climate Change, Energy Efficiency, Energy Policy

Our organization and other advocates are becoming increasingly concerned about the House Waxman-Markey energy and climate bill and its companion in the Senate for a host of reasons. Among the most dramatic changes made by the House Committee on Energy and Commerce is the “Combined Efficiency and Renewable Energy Standard,” or “CERES” as people are starting to call it.

It is clear that President Obama’s campaign pledge to “create millions of new green jobs” by ensuring that 25 percent of our electricity comes from renewable sources by 2025 is not being realized in this legislation. Our analysis suggests that this bill would not help America make any progress towards that goal, at least through 2020. Furthermore, this bill falls far short of President Obama’s pledge “to reduce electricity demand 15 percent from projected levels by 2020.”

Let’s be clear, in addition to creating a healthier economy and global environment, these provisions are essential to the long-term jobs strategy that we desperately need. Prior to combining energy efficiency and renewable energy, the Waxman-Markey bill promised 297,000 new renewable energy jobs by 2025 and 222,000 new energy efficiency jobs by 2020. With more than half a million jobs at stake, the CERES compromise barely opens the hiring office. The lower energy efficiency targets may be strong enough to create 60,000 jobs. And with the renewable electricity standard almost completely gutted, it looks like all the new renewable energy jobs will be in the credit trading business.

One of the unfortunate conclusions that I draw from analysis of the CERES is that in an effort to add “flexibility” by coupling the renewable energy and energy efficiency portions of the bill, the potential impact of the bill has been diluted to the point where it would actually be better to have just a standalone energy efficiency standard than the CERES. If that were to happen, the bill would at least represent a more sure-footed path towards achieving the green jobs goal for energy efficiency.

The CERES would result in no new renewable energy development according to our analysis, which considers three basic components. First, the utility qualification threshold and various factors that diminish the effective requirements of the CERES. Second, the existing state renewable electricity standards (state RES) and existing generation. Third, the interaction with the opportunity to use energy efficiency to partially comply with the CERES.

In 2020,  about 8% renewable energy will be generated simply from compliance with existing state standards and continued operation of existing renewable energy facilities. This 8% floor is derived from data assembled by Union of Concerned Scientists, Lawrence Berkeley National Laboratory (pdf), and Energy Information Administration.  Although the CERES is set at 12-15% for qualified utilities, after taking into consideration the qualification threshold and several other factors, the CERES would at most require an 1.4% increase in renewable energy above the 8% floor. However, additional exemptions that cannot be quantified (for reasons discussed below) are very likely to reduce the impact of CERES to effectively zero.

The renewable energy component of CERES does have an impact: There will be an financial transfer from utilities in states without a state RES to those states that require renewable energy, as illustrated on the map. Some energy model studies and opponents of a national RES were arguing that this financial transfer would occur because of cost advantages that western renewable energy resources have over eastern resources (a perspective that may rely on flawed assumptions). I want to be very clear that this analysis does not (need to) engage those issues – states that export renewable energy credits (RECs) will do so because their state RES is higher than the federal RES. There will be a sufficient quantity of federal RECs driven by compliance with state RES deadlines will saturate the market and drive prices down to near zero.

However, a conclusion that I do not accept is that the CERES could actually depress renewable energy development below business-as-usual. This claim is based on various comparisons of the Energy Information Administration’s business-as-usual forecast with the CERES requirements (taken at face value, without applying the adjustments we have applied based on the latest bill language). Using these comparisons as a starting point, blog posts have implied the low standard would mean that even the business-as-usual forecast wouldn’t be attained. If business-as-usual has more renewable energy than the standard, it will render the standard effectively meaningless but it won’t be restrictive in any way. While the numerical comparison is based on facts, the logic really drives towards the point I made above: federal REC prices will be near zero with such a low CERES. If there’s a silver lining to near-zero federal REC prices, its that the hyperbolic claims about “wealth transfer” will get a reality check.

The CERES would mandate more energy efficiency, as much as 4-8% in 16 states and the District of Columbia. A similar number of states already have a state energy efficiency resource standard (EERS), but 17 states would remain without a substantial energy efficiency mandate. Across the Southeast, and in a few other states, the CERES mandate would lift the energy efficiency programs from insignificant levels to mid-level efforts.

The original stand-alone national EERS would have required cumulative energy savings of 15% from qualified utilities, taking into consideration building codes, etc. Because building codes accounted for about 4% of the 15%, allowing utilities to meet either 5 or 8% of the CERES standard with energy efficiency represents a reduction in the EERS of at least 3 to 6% on paper. But the same qualification threshold and other factors that diminish the renewable energy impact of the CERES also diminish the energy efficiency impact.

In 2020, the proposed CERES would drive a national reduction of 2.5% in electricity use (somewhat less, actually, due to the same unquantified exemptions mentioned above). In contrast, ACEEE data indicate that electricity use would be reduced by about 5% nationwide from the EERS obligations in 21 states. Even though the CERES would have an important impact, it is clear that a minority of states are still setting the pace on energy efficiency and that the CERES would be a least-common-denominator approach.

A glance at the state map indicates that the CERES would have highly irregular impacts from state to state. The renewable-energy oriented qualification and exclusion factors create large differences in the effective statewide standard. (Since utilities have the opportunity to meet energy efficiency targets anywhere in their state, this is the appropriate region of analysis.)

Alaska has no energy efficiency mandate because none of its utilities qualify to be regulated under the CERES. The CERES has little or no impact on North Carolina and several other states due to the combined effects of weak state RES and EERS requirements, existing renewable energy generation, qualification limits, and other factors.

This analysis probably overstates the impact of the CERES for several reasons. Although we’ve got a very good idea of which utilities qualify under the CERES, the base amount against which the 20% mandate is assessed is impossible to anticipate using available data sources. The base amount is reduced by three factors: existing hydroelectric generation, new nuclear generation, and new coal generation with carbon capture and storage (CCS). Another way of looking at it is that utilities get 20% credit towards the CERES for these energy resources.

We aren’t able to anticipate which utilities will have new nuclear or coal with CCS by 2020, so we don’t adjust for these base amount reductions. However, 35 GW of new nuclear or coal with CCS would be enough (if strategically located) to eliminate the 1.4% renewable energy requirement. That’s probably a stretch goal for 2020, but certainly some qualifying power plants will be complete by then.

Our data on existing hydroelectric generation are from the Energy Information Administration. We assume that all of this generation would be used by qualified utilities to reduce their base amount. Although a small amount of this generation probably cannot be effectively transferred from non-qualified utilities, the major problem with this assumption is that some of this generation is considered “new” and thus does not reduce the base amount. Instead, it may be used by the utility to meet its federal CERES obligation. This unknown amount of hydroelectric is effectively undercounted by 80% in our analysis. If just 10% of existing hydroelectric production is “new,” then that would reduce the 1.4% renewable energy requirement to 0.9%.

Another source of under counting the utilities’ existing resources to comply with the CERES is the distributed generation credit. Existing and early developers of distributed generation will receive triple credit for their projects. We assumed that solar energy projects specifically mandated in state EERS rules would receive this triple credit, but in reality there would be other qualifying energy projects. This would effectively increase the number of RECs generated as a result of compliance with state EERS deadlines. However, considering that distributed generation has been slow to take hold, this should be on the order of a 0.1-0.3% reduction.

Finally, we did not take into consideration banking (or retirement) of federal RECs. To the extent that early state RES deadlines create a surplus of federal RECs, federal RECs can be banked for three years, pushing out the date at which the CERES might actually require some renewable energy development. This could be in excess of 1% per year for several years until the backlog is cleared.

If these factors together aren’t enough to erase the 1.4% renewable energy requirement, then we just have to look at the growth rates from EIA that we used and wonder if they might be a little too optimistic. If actual energy demand in 2020 is 2% lower than the forecast we developed based on the Annual Energy Outlook, then the CERES mandate would be reduced by approximately 0.4% (depending on which states have the lower growth). And since we used 2020 forecast electricity sales as our baseline (rather than 2019), we’ve probably overestimated the impact of the AEO2009 forecast anyway.

Some questions:

Why pass a renewable electricity standard that doesn’t require any more renewable energy development than current laws?

If the CERES amounts to a modest energy efficiency standard, why do some utilities have lower (or higher) obligations based on how much hydroelectric, nuclear, solar, coal with CCS, or renewable energy they decide to use? Do customers of utilities with high levels of these generation resources benefit less from energy efficiency than those with low levels?

If the least cost path to reducing global warming pollution and achieving greater energy independence is to pass legislation with a cap on carbon dioxide, a renewable electricity standard, and a energy efficiency resource standard, why is Congress weakening this strategy by giving credits for high-cost solutions like nuclear power and coal plants with CCS?

SACE is continuing to evaluate its position on this legislation, but I’d like to make a personal suggestion. If the legislative intent is to have a bill that only compels utilities to invest in energy efficiency, why the head-fake on renewable energy? Just gut the renewable energy piece and clean up the energy efficiency requirement. Don’t exempt 50% of the Tennessee Valley Authority system (the largest retail electric sales system in the country.) Or maybe the renewable energy portion of the legislation could be restored to a meaningful level.

The American Clean Energy and Security Act has many good provisions. Although weakened, the cap-and-trade portion of the legislation has broad support by businesses, public interest groups and others who agree we must reduce global warming. Other titles of the act would establish regulations and programs that are long overdue. But the CERES is a flawed compromise that urgently requires review and repair.

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