And the differences could undermine the program.

[Today’s blog is a joint effort of Severin Borenstein, James Bushnell, Steve Cicala and Ryan Kellogg]

The Clean Electricity Performance Program (CEPP) is the most important aspect of the energy and climate provisions in the reconciliation bill still under development. Previously, we and others have raised questions and concerns about how CEAR exactly works. Since more details emerged about a month ago, we’ve spent a lot of time studying the implications of those details.

On several occasions, CEPP has been described as a “budget-based clean electricity standard (CES)In effect, a national version of a Renewable Energy Portfolio (RPS) standard that would also credit other forms of low-carbon power generation. These types of policies – sometimes referred to as intensity standards (like an RPS or a low-carbon fuel standard) – have been the subject of criticism from some environmental economists, many of whom argue in favor. the superiority of carbon pricing.

This historic debate – pitting proponents of intensity standards against those calling for a carbon tax – has often been described as one of the pragmatists striving for a decent, if not fully effective, policy versus the purists. for which only carbon pricing would do the trick. This historic debate has had the unfortunate effect of making it easier to dismiss concerns about CEPP with “these economists are back, trashing everything that is not carbon pricing.”

But this framing is wrong. CEPP, as currently configured, is not an ESC that has been modified so that it can go through the budget reconciliation process. CEPP creates a series of incentives for Load Service Entities (LSEs) that are quite separate from those of a CES. These differences in incentives open up a variety of channels for gambling and unintended consequences that could lead to significant public spending without inducing the large-scale substitution of a new clean energy supply for fossil fuel production.

CEPP’s initial incentives make it different

The key distinction begins with the scale and timing of clean energy incentives. As part of a “normal” intensity standard (like an RPS), an LSE – a utility or other retail supplier – is awarded annually for purchasing clean energy. For example, currently a Renewable Energy Credit (REC) can sell for around $ 10 per MWh, and any renewable electricity source, new or old, can earn that value for every MWh it produces from it. ‘a renewable source. CEPP, however, does not provide subsidies for the purchase of all clean energy production, but rather makes a Once giant subsidy of $ 150 per MWh for “newly purchased” clean energy. That is, the year an LSE increases its purchased clean electricity to at least its target level, it gets $ 150 per newly purchased clean MWh. But then, he receives no further compensation for this clean energy in the years to come. LSEs that do not meet their clean energy growth target are penalized $ 40 per MWh for any shortfall.

CEPP’s intention to provide large one-time grants for “new” clean energy makes it, in some ways, more like an upfront Clean Energy Investment Tax Credit (CTI) than an initial clean energy investment tax credit (CTI). CES (setting aside the distinction that ITCs generally reward clean energy capacity rather than the energy itself). We were told that the decision to go with the large initial grant was motivated by the concern that if CEPP had been structured as a standard CES, the sources posted towards the end of the 10-year program would only gain. ‘a year or two of grants. But unlike an ITC which is paid directly to developers of new energy supplies, CEPP grants are payable. at LSE for newly acquired clean energy.

This large one-time grant to LSEs, along with a sequence of associated design elements, creates perverse incentives that will result in less new clean energy at a higher cost.

For example, while $ 150 / MWh was an acceptable subsidy level, it was deemed to be too severe a penalty. Thus, failure of an LSE to meet CEPP’s clean energy growth targets would be penalized at just $ 40 / MWh. The asymmetry between the $ 150 grant and the $ 40 penalty has previously been identified as creating an incentive to gamble via exchanges of clean energies between “short” and “long” LSEs, especially in the later years of the program. These types of exchanges would allow “long” LSEs to earn grants to source clean energy from other “short” non-compliant LSEs, rather than actually building new clean energy. This problem would be significantly compounded if the penalties were removed completely – a potential change to the CEAR now in discussion.

Incentives to deliberately waste energy

However, there is another fundamental problem with the current design that has received less attention. The subsidy amount of $ 150 / MWh is so much higher than the current additional cost of clean energy – a gap that will widen over the next decade as renewables become even cheaper – that it creates an incentive to increase the use of energy in order to increase the MWh obtained. subsidized.

Here’s how it would work: let’s say the current cost of clean energy is $ 70 / MWh, and a subsidy-eligible LSE has 100 MWh of customer consumption (load) per year for which it currently does not purchase any. clean energy. The LSE could buy 100 MWh of clean energy at a cost of $ 70 / MWh, and since it would buy the electricity “for the first time”, it would be paid $ 150 / MWh for every 100 MWh in the first year and would bring in $ 80 / MWh, for a total of $ 8,000 during this first year. The LSE would now be 100% clean! Under the rules of the program, once he increases his percentage of clean energy, he has an incentive to keep that percentage high, otherwise he pays penalties. So I hope he will want to continue buying clean energy after this first year to avoid these penalties. So far, so good!

But why stop at 100 MWh? What if the LSE sets up a bitcoin operation (or other new load) that uses an additional 100 MWh, increasing its total load to 200 MWh? He could now source 200 MWh of clean energy, again making an additional $ 80 / MWh from the subsidy minus cost difference, and cash in $ 16,000. The LSE is always 100% clean! In fact, it’s a bit clean at 200%, even though half the electricity is wasted. And this problem would be much bigger on a large scale than $ 16,000: the annual industrial load alone in the United States is around 1,000,000,000 MWh, not 100 MWh.

Now here is how the LSE could energize the strategy. After the first year, when the subsidies cease, it could sell the additional 100 MWh of clean energy to another LSE who would also buy it “for the first time”. And it would send the bitcoin operation with clean energy, bringing its load back to its normal 100 MWh. Then the second LSE performs the same operation for a year before sending the package to another LSE. So instead of paying the $ 150 / MWh once for a new clean energy source, the program ends up paying it over and over again. All for the energy that was created and then wasted to collect grants.

This kind of behavior is surely not what the architects of CEPP had in mind, but it is a behavior that CEPP uses for LSEs or even for large industrial customers. In fact, Bitcoin start-ups are already in partnership with LSEs (including in zones with regulated tariffs) Where buy coal power plants to power their operations and arbitrate wholesale electricity prices.

Economists generally complain that clean energy standards pay people to buy Following clean energy, when what we really want is for them to buy less dirty energy. Most of the time, this distortion is small enough that it does not create great inefficiencies. But by increasing the “buy clean” incentive for so-called new clean energy purchases, CEPP takes an arguably modest incentive problem and turns it into a very big problem.

Building a better CEPP

The solution isn’t necessarily to dismiss the whole idea and say carbon tax or collapse, especially given all the work that has gone into building coalitions that support this type of agenda. There is a simple change that turns CEPP into what it has already been publicly described as, a real clean energy standard based on budget. Pay a lower incentive, but apply it to every clean MWh every year. Instead of having a “one-time” subsidy of $ 150 / MWh and an “annually” penalty of $ 40 / MWh, there could be, for example, a subsidy of $ 15 / MWh and a penalty of $ 15 / MWh earned or paid on each MWh target each year. If some LSEs insist that the penalty is too severe, then rather than reducing the penalty and creating clear playing opportunities, adjust the goal so that LSEs are less likely to be penalized and more likely to be penalized. win subsidies, while giving them a strong incentive to increase their share of clean energy.

There are many ways to access the lower carbon power system which is imperative. And a well-designed CEPP could certainly be one of them. A group of experts recently argued that CEPP’s goal of increasing clean energy by 4% per year would be achievable. However, an assessment of the technical feasibility of 4% growth is not an analysis of CEPP or its likely outcomes. The latter requires examining how businesses will most profitably respond to the incentives of the program. It is, after all, the profit motive that makes subsidies and penalties powerful tools for developing clean energy production. Unfortunately, the current CEPP has significant design flaws that could greatly hamper its effectiveness in getting us where we need to go. Now is the time to make sure the program’s incentives match its goals.