Navigant Research Blog

Clean Power Plan Ruling Presents Opportunities and Issues for States

— August 3, 2015

After a year in review, and following approximately 4 million comments and appeals by state public utilities commissions (PUCs), legislators, and special interest groups, the Obama Administration and the U.S. Environmental Protection Agency (EPA) have released a final ruling on the Clean Power Plan.

The Proposed Rule was released last June.  It included interim (2020) and long-term (2030) regulations that will be imposed state by state to decrease CO2 emissions from generation facilities.  It also requires gradual decommissioning of high-emissions facilities, increased support for low-emissions natural gas and renewable generation, and improvements in demand-side management and energy efficiency.  Speculations and protest across stakeholder groups has been colossal.

According to a paper sponsored by the Brookings Institute, the majority of comments to the plan centered upon several major issues: fairness, reliability impacts, attainability of goals, and its legal basis—many reaching past state boundaries and party lines.  Fairness concerns, held by 23 states, are largely based upon the 2012 baseline level of emissions. Many states had been proactive in the decade prior, already attacking the low-hanging fruit and therefore were being forced to implement improvements with higher marginal costs than those states that had not yet proactively addressed emissions. Reliability impacts, which differ from state to state, caution the over-dependence upon less reliable sources of power, in particular renewables.

Perhaps the most contentious pushback centered upon the attainability and legality of the program. According to the Brookings report, 36 states commented on attainability, predominantly criticizing the timeline as too short. Some states have even argued that the goals altogether are unattainable. Wyoming, for example, has an economy that is reliant upon coal production and coal-based generation. Wyoming Public Service Commission Commissioner Alan Minier, as well as other agencies in that state, has been outspoken in stating feasibility concerns surrounding the decommissioning of coal-fired plants as much as 30 years before scheduled retirement.  Similarly, although Wyoming has abundant wind resources, most of this power is exported and Wyoming would be unable to receive renewable energy credits under the plan.

The cherry on top is concerns on legality of the Clean Power Plan, particularly how it interprets the Clean Air Act (its legal basis), and that favoring gas-fired generation will encroach upon the Federal Energy Regulatory Commission’s least-cost principles in the dispatch of power. Experts have appropriately forecasted large sums in legal and lobbyist fees.

Issues and Opportunities

It’s clear that a number of issues exist within the Clean Power Plan’s approach to reducing CO2 emissions in the United States, and these do need to be addressed in order to realistically comply.  But there are also many opportunities.  In terms of creating pathways to alternative production and more efficient distribution of electricity, there has been more innovation in the energy in the past 5 years than in the previous 50. The introduction of the smart grid has invited the possibility of real-time, grid-wide networking and monitoring, enabling the use of renewable resources with very large to very small generating capacities, while ensuring reliability across the grid.

Many question the worth of derailing support for innovation in order to contest the rule. By supporting more engagement between utilities and building and industrial facility owners, city planners, and even individual homeowners to implement energy efficiency programs and integrate distributed generation, states can employ more creative and innovative approaches to compliance with the Clean Power Plan.  The possibilities are endless in terms of inviting an array of new stakeholders and developing new revenue-generating systems that can help states achieve their state goal. The question is whether the state will lend itself to innovation or litigation.

 

July Proved a Pivotal Month for Renewable Power

— August 3, 2015

The news stream started early on July 3, when the German government published a white paper presenting its proposal for power market reform known as Strommarkt 2.0, or Electricity Market 2.0. The proposed reform is focused around three ideas: the energy supply must be reliable, it must be environmentally friendly, and it must be cost-effective—even with a growing share of wind and solar power.

To achieve these focus points, the white paper proposed 20 pillars to support the new market. The most important are that the price is set by a free market, there is constant monitoring of the security of supply, a capacity reserve (but not a capacity market) will be introduced, and the power market will evolve to be balanced.

While the proposal does not affect renewables directly (Germany has been actively tweaking its incentives in the last 2 years to reduce impact on electricity bills), it does introduce the flexibility necessary to allow further growth of renewables in the country, which is a must if the country wants to meet its 80% renewables target in 2015.

More News

A couple weeks later, on July 17, the European Union (EU) Commission proposed a new regulatory package that set the stepping stones of its EU strategy. While most of the proposal is geared toward empowering consumers so they can make better decisions affecting their energy consumption, it also advocates for a new single-market design at the European level. This design will add flexibility to the system to facilitate the expansion of renewables, promote cross-border competition, allow decentralized electricity generation (including for self-consumption), and support the emergence of innovative energy service companies.

And a few days later, on July 22, the U.K. Department of Energy and Climate Change (DECC) announced a revamp of its solar and biomass policy support, ending solar feed-in tariffs for projects under 5 MW (projects above 5 MW were not eligible). DECC also said that it will remove subsidies that had been guaranteed to new biomass conversions and co-firing projects, including existing plants that were intended to burn higher shares of biomass. Finally, DECC announced it would delay new Contract for Difference tenders indefinitely.

Meanwhile, France announced a significant shift in its energy policy. On July 23, the French National Assembly approved its energy transition law. In it, the country announced that it will reduce its reliance on nuclear energy to 50% of its generated power by 2025, from 75% today, capping its nuclear power installed capacity at 63.2 GW. The country also set the share of renewable energy at 32% of its demand. In addition, France introduced a long-term target for carbon tax. Currently standing at €14.50 ($15.90) per tonne, this tax will increase to €22 ($24) in 2016, then to €56 ($62) in 2020, rising to €100 ($110) in 2030.

Overall, with their new intents, the EU, Germany, and France seem settled in their way forward, while the United Kingdom’s energy  policy is consistent at being inconsistent. After all, this is the third time it has changed policies in about 5 years.

A couple weeks later, on July 17, the European Union (EU) Commission proposed a new regulatory package that set the stepping stones of its EU strategy. While most of the proposal is geared toward empowering consumers so they can make better decisions affecting their energy consumption, it also advocates for a new single-market design at the European level. This design will add flexibility to the system to facilitate the expansion of renewables, promote cross-border competition, allow decentralized electricity generation (including for self-consumption), and support the emergence of innovative energy service companies.

 

Momentum Builds for Reinstatement of Wind Tax Credits

— July 24, 2015

The legislative effort to renew the expired wind energy tax credits took a big step this week in Congress as supporters of wind energy secured a 2-year extension of the wind credits. The Senate Finance Committee voted 23 to 3 to extend roughly $95 billion in 52 tax breaks for various industries and interests, including wind.

The Production Tax Credit (PTC) provides $0.023/kWh in tax credits for a 10-year duration to wind plant owners. A 30% Investment Tax Credit (ITC) is also included as an alternative. Both are comparable in value, offsetting around 30% of the installed cost of a wind plant.

The package also includes a 2-year extension of the 50% bonus depreciation, which allows an owner in a new wind plant to deduct 50% of the tax basis in wind turbine capital costs and depreciate the other 50% over the normal depreciation period. The PTC/ITC extension also includes geothermal, biomass, landfill gas, and ocean energy projects. Notably, solar energy was excluded from the package, but intense lobbying is underway from that industry to get it included.

The tax credits for wind, which expired in 2014, must be renewed to prevent the U.S. wind market from collapsing, as it does from time to time when Congress fails to renew them. The wind industry is currently in a build cycle, with over 8,600 MW expected to be brought online this year of more than 13,600 MW under construction. This momentum, however, is riding on special start construction and other safe-harbor regulations provided by the Internal Revenue Service (IRS) that allows wind plants to qualify for the tax credits if construction is finished by the end of 2016.

The new 2-year extension would re-enact the PTC and ITC for a 2-year period through the end of 2016, and wind projects would have to begin construction during this 2-year window to be eligible. IRS guidance to the wind industry in recent years has allowed a 2-year window for wind plants to be built, and this is expected to be applied to this new extension. In practice, new wind plants that meet IRS guidelines for either starting construction or meeting other safe-harbor regulations will have 2 years to finalize construction. The ultimate result would be securing stable wind turbine installations in the United States from now through 2018.

Promising but Uncertain

The path forward for these tax extenders to be signed into law is promising but uncertain. It is promising because the wind industry tax credits on their own could be a hard sell in today’s polarized Congress, but when rolled into a larger package that appeases broad industry interests, Congress is more likely to approve the package. Also, the well-known but not well publicized reality in the wind industry is that most U.S. wind plants are majority owned by so-called tax equity financial firms, usually large banks, all of whom have the large tax bills necessary to fully monetize the tax credits. These companies have enormous lobbying power that can help get their interests over the finishing line.

Passage by the full Senate is required, plus a reconciliation with a House version of the bill that has yet to emerge. Importantly, lawmakers are moving ahead with this extenders package now instead of the end of the year when a last minute rush can doom even the most straight-forward and uncontentious legislation. Allowing the extender effort to fall into next year would be even worse, as the effort would become entangled and politicized by the 2016 presidential and congressional elections. All eyes in the wind industry will be on this effort going forward.

 

States’ Roles in the Clean Power Plan

— June 25, 2015

Cross_Gatel_webThe U.S. Environmental Protection Agency (EPA) plans to finalize the Clean Power Plan (CPP) this summer. As part of the plan, states will have 1 to 3 years to submit State Implementation Plans (SIPs) to the EPA for review. Some states are already starting the planning process to develop an SIP, and most are beginning with stakeholder meetings that include utilities and other major players in their state. Other states are waiting to see the final regulation before they begin.

States face a complicated web of decisions when crafting SIPs. The figure below shows a simplified hierarchy of the paths that they may take. States are unlikely to go through the decision process in a linear fashion; instead, they will need to consider all options and narrow them down based on their existing policies, resources, and stakeholder goals, among other factors.

SIP Example Decision Process

 

CPP Decision Tree - Recreated

(Source: Navigant Consulting)

SIP or FIP?

The first decision a state needs to make is whether to submit an SIP. If a state does not submit an SIP, the EPA will impose a Federal Implementation Plan (FIP). The EPA has indicated that it may include insights on what an FIP will look like when it releases the final rule this summer. Some states have passed legislation limiting their state agencies from submitting an SIP without legislative approval, which could impede those states from submitting an SIP at all.

A decision that will need to be made early in the process is whether or not a state wants to work with other states to submit a regional plan. There have been proposals, for instance, from Duke Nicholas Institute, that individual plans could be crafted to be standalone and still allow trading of credits with other states, similar to the way that renewable energy credits (RECs) can be traded among states even though Renewable Portfolio Standard (RPS) policies were not coordinated prior to implementation. However, many states are already in discussions about coordination efforts—for example, 14 Midcontinent states submitted comments to the EPA on its proposal and held a stakeholder event on June 5.

If states do work together on regional implementation plans, under the proposed rule they would have an additional year before their plan is due to the EPA. This allows additional time to coordinate among the many players involved across all coordinating states, but narrows the amount of time between when the implementation plan is approved by the EPA and compliance begins—potentially as little as 1 year.

Targets and Policies

Another decision that states must weigh in on is whether or not to use the rate-based target laid out by the EPA or to convert it to a mass-based target. This decision is interrelated with the kind of policy regime a state chooses to include in its SIP. A rate-based target may be more appealing to states that impose individual unit obligations on fossil units in their state, as it eliminates the uncertainty surrounding future load growth. Conversely, a mass-based target may be easier to implement in the northeast, where a mass-based cap-and-trade system already exists.

States will also need to determine how to integrate existing renewable and energy efficiency policies into their SIPs and decide if new policies are needed. These include RPSs, energy efficiency standards, and updates to building codes and can be combined with cap-and-trade, as in California, or standalone.

There are many additional considerations for states to take into account as they craft implementation plans. For the best overall outcome, it is recommended that states start early, have meaningful stakeholder involvement throughout the process, and leverage modeling and analytical tools where possible.

 

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