A Set Price For Production

A feed-in tariff sets a flat rate that a utility must pay someone who generates renewable electricity. Feed-in tariffs allow small producers of renewable energy a certain return on investment without the volatility of wholesale and retail market pricing.

Germany is well known as an early mover in the creation of feed-in tariffs. Germany’s tariff is widely believed to be the reason that they are now the world leader in solar powered energy production. In February of 2008,The State of California approved a feed-in tariff applicable for up to 480 megawatts of renewable energy created by small producers.

On June 11, 2008 Rep. Jay Inslee announced that he would be introducing a bill that would establish a federal feed-in tariff in the United States.

Feed-in tariff legislation is not a slam dunk by any stretch of the imagination. Because the rates paid under these tariffs are set higher than standard energy prices, they are effectively subsidized by the utilities who purchase the power. Those utilities may pass the extra costs related to the tariff on to their customers.

Balancing Production And Use

Net metering rules allow small producers of renewable energy to offset their use of energy with production from their renewable generators. Under these rules production of energy effectively rolls back the meter so that the producer is ultimately charged (or paid) for the net of their production and use. This type of pricing scheme is especially effective for small energy producers who consume more power than they generate.

The EIA reports that over 34,000 customers in the U.S. utilized net metering programs in 2006 with the vast majority (about 75%) of these customers located in California. The number of customers accessing net metering programs represents about 1% of all the customers in the United States. Net metering rules are implemented at the state level vary widely from state to state.

While net metering seems to be a very beneficial aspect of a retail electric market there are some potential drawbacks to these schemes. According to the EERE, “Net metering has the potential to be a bad deal for utilities. If market penetration of solar and other renewable energy-powered buildings becomes substantial, utilities are likely to become concerned with revenue losses.”

Common Technology Issues

The electric meter is the common technology element that is important to both of these programs. In order for these programs to work effectively a customer must have a meter that can either register produced power or effectively spin backwards in order to provide the net of consumption and production. In some cases the meter must register supply and demand time-stamped at different times of day. I plan to explore advanced metering technology and its effect on clean energy in future posts.

Purpose

The purpose of the Act is stated within as follows:

(1) to establish the core of a Federal program that will reduce United States greenhouse gas emissions substantially enough between 2007 and 2050 to avert the catastrophic impacts of global climate change; and

(2) to accomplish that purpose while preserving robust growth in the United States economy, creating new jobs, and avoiding the imposition of hardship on United States citizens.

In short, the bill aims to reduce harmful emissions between 2012 and 2050 without destroying the U.S. economy.

Method

The purpose will be achieved by creating caps on emissions from certain ‘covered’ facilities. For the most part the caps will apply to any coal, natural gas or oil fired power plant. The caps will also apply to companies that operate large vehicle fleets.

The caps will be acknowledged via emissions allowances that will be doled out to a variety of parties. Companies that own ‘covered’ facilities will have the right to emit greenhouse gases up to the limit of their allowances. If a company exceeds their limit they can buy allowances from other parties or pay heavy penalties for exceeding the cap.

Emissions allowances are tradeable and bankable. Allowance holders can sell them to just about anyone they like. Allowance holders can also bank unused allowances for use in future years.

Companies who emit greenhouse gases will initially be allocated enough allowances to cover their emissions but as years go by they will be issued fewer allowances.

Affected Parties

Companies that own fossil fuel powered electric generation facilities will be subject to caps and thus receive allowances. The vehicle fleet clause will likely affect companies like UPS, Federal Express and large over the road trucking companies as well.

Because emissions allowances are tradeable, it is likely that emissions traders will buy and sell allowances as well. These traders will likely consist of established commodity trading houses as well as emissions trading start-ups that arise as a result of this legislation.

State governments, Electric and Natural Gas load serving entities (LSEs) will receive allowances as well. These parties are directed to sell the allowances and use the money for a variety of purposes. The most popular revenue spending requirements are aimed at mitigating impacts on low-income energy consumers and promoting energy efficiency.

New Government Entities

This bill creates the Climate Change Credit Corporation. The CCCC will administer the cap-and-trade program. They will be responsible for doling out emissions allowances and allocating revenue to a wide variety to companies and programs.

The Carbon Market Efficiency Board is also established. The CMEB will be responsible for assessing the economic impact of the program as well as maintaining the market for emissions allowances.

New Government Programs

The Federal Greenhouse Gas Registry will be created to track emissions of greenhouse gases. Entities that emit greenhouse gases will be required to submit data to this registry. The Domestic Offset Program will be responsible chiefly for distributing allowances to companies that produce verifiable, permanent reductions in greenhouse gas emissions. This will allow organizations to meet some of their emissions requirements by purchasing offset allowances which they can then submit to meet cap requirements. The Deficit Reduction Fund will be created to bank allowances that are not otherwise allocated. This fund increases yearly as fewer allowances are distributed.

The Program For Tribal Communities will deliver assistance to tribal communities affected by climate change. The Climate Change Worker Training Program will be established to create jobs in fields related to renewable energy. A Science Advisory Board will be established.

The International Climate Change Adaptation and National Security Program will be established. This program will be responsible for the submission of annual reports to the President and other government agencies

A number of funds are created by this bill including: The Energy Assistance Fund, The Climate Change Worker Training Fund,The Adaptation Fund, The Climate Change and National Security Fund, The Bureau of Land Management Emergency Firefighting Fund, The Forest Service Emergency Firefighting Fund, The Climate Security Act Management Fund and The Energy Independence Acceleration Fund.

How It All Works

Creation of emissions allowances effectively puts a price on greenhouse gas emissions. Emitters will then have to pay for their emissions starting with nothing at first and then more in the future as they are allocated fewer and fewer allowances. As such, emitting greenhouse gases will get more and more expensive. This will create incentives for emitters to invest in low carbon and carbon free technologies that will ultimately help in reducing all greenhouse gas emissions in the United States.

Meanwhile the federal government will be collecting revenues via the auctioning of allocated allowances and the sale of allowances that the government allocates to themselves. The resulting revenue is used to monetize the programs, funds and agencies mentioned in the paragraph above. Ostensibly these programs, funds and agencies will serve to accelerate the development of low-carbon and carbon free technologies as well as mitigating the impact of these changes on low-income consumers of energy.

The Projected Effects

The Energy Information Administration has written an extensive impact assessment of S.3036 which I recently reviewed. The short answers are these. The emission of GHG will be significantly reduced during the time period of this bill. Most of this reduction will be due to changes in the electric power sector. It is likely that Natural Gas will become an increasingly dominant fuel source for electric generation. Coal consumption is greatly reduced. Energy prices and this energy bills for consumers will be greatly increased. The impact of increased energy prices will affect the overall economy by reducing purchasing power and lowering demand for goods and services. Industrial activity is significantly effected by the changes. Significant revenue (between $300 and $800 Billion) is generated by Federal and State Governments auction and sale of emissions allowances.

The actual effects of S.3036 depend on a lot of factors. The ability of the U.S. to develop and deploy nuclear and carbon capture and sequestration (CCS) technologies is a very important one. If the U.S. is not able to develop these technologies then the increased reliance on natural gas will be pronounced. This would likely lead to significantly higher natural gas prices which would cause a greater negative impact on the overall economy.

The Road Ahead

This is a wide ranging and controversial piece of legislation. S.3036 essentially changes the landscape with respect to the economics of energy production and consumption for the next forty years. The Act also greatly increases the size and funding of the U.S. government as a result of the agencies, programs and funds contained in the Act.

Some will see this as an onerous increase in the power and responsibility of the government. While others will view S.3036 as landmark legislation that will change the planet for the better. Some see S.3036 as a vehicle for massive wealth redistribution. While others will call it a necessary sacrifice during a time of dire need for reductions in emissions. As such, expect intense debate and discussion that will likely end up passing the issue to the next Presidential administration.

It is also worth noting that the Warner-Lieberman legislation is not the only game in town. Recently Representative Edward Markey from Massachusetts announced a bill with stricter emissions requirements than S.3036. Perhaps the two pieces of legislation will give rise to a third bill that blends provisions included in each of them.

At some point as I grew up I came to realize that some problems could not be defined so simply. Problems were rarely about a bad person causing harm and a good person saving the day. I found that the most difficult problems are far more complex than that. They require not one side versus another but a variety of sides with varying interests and intentions. Everyone needs to pool their resources and give a little in order for things to work out.

This is how I feel about the many passionate debates around clean energy. Getting to a clean energy future requires hard work from all stakeholders. It can’t be about us vs. them. It needs to be about us working together. Alas, some of our leaders don’t see it that way.

Yesterday the U.S. House of Representatives passed a bill that would extend the Renewable Energy Tax Credit. This is a credit currently in effect but set to expire at the end of 2008. The credit allows owners of clean energy projects to take credit against their taxes based on the amount of energy actually generated by the projects. I believe the credit stands at $.19 per kilowatt hour. It’s a nice payday for profitable clean energy producers and a needed incentive at this point in the game. This incentive, for better or for worse, spurs investment in wind, solar and other renewable technologies.

The passing of the bill to extend these credits would normally call for a cheer or two from me but there is something else. Built into this bill is a provision that removes certain tax incentives meant to keep U.S. oil companies competitive in the world markets. Some don’t like these subsidies but they were voted for by Reps from both sides of the legislative aisle for a reason. In any case, the issue of these subsidies does not have to be tied to the production tax credit (PTC) issue. Unfortunately the two issues are tied together.

Here’s a quote from House speaker Nancy Pelosi from the New York Times article, “The price at the pump increased 17 cents just in the past two weeks,” Ms. Pelosi, of California, continued. “Just yesterday oil prices reached another new record at $101 per barrel. This is at a time when oil companies are making record profits. Last year, ExxonMobil earned $40.6 billion in profits, the largest corporate profit in American history, and yet the administration refused to repeal billions of dollars in subsidies to big oil.”

This obsession with tying the fight against ‘big oil’ to renewable energy legislation is ridiculous. This isn’t an episode of Batman. Nancy Pelosi is not Adam West. The CEO of ExxonMobil is not Cesar Romero. If cracking the clean energy nut were as simple as knocking a big oil company out of existence maybe that would have happened by now. The situation is not that simple. In spite of what many legislators and citizens think, U.S. oil companies are not a roadblock standing in the way of a clean energy future. Oil companies are a big player in a much larger game. But there is plenty of innovation occurring and progress being made without seeking to punish big oil.

My perceptions are based on all the rhetoric we see coming out of Washington. I don’t see a lot of understanding with respect to the real problems that exist in the U.S. energy policy. I see a lot of finger pointing at supposed bad guys. This is an ultra simplistic approach to a complex problem. The whole scenario plays out like a bunch of angry, stubborn children saying, “I’ll show you!” We all get hurt though. It’s time to grow up and realize that these are two separate issues.

The anti-big oil provisions included in this latest bill are likely to derail the proposal in the Senate. That means more uncertainty and delays in clean energy investment. Perhaps our legislators in Washington should work to pass the extension that they know is so important to our clean energy future. And then once that’s done they can go back and fight it out about how to punish big oil for foisting a variety of ills on the populace.

1. Increasing the supply of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36 billion gallons of biofuel in 2022.
2. Reducing U.S. demand for oil by setting a national fuel economy standard of 35 miles per gallon by 2020 – which will increase fuel economy standards by 40 percent and save billions of gallons of fuel.

If you are in a corn producing state (or have invested in ethanol stocks) you’ll be happy to know that this law pretty much insures strong demand for domestic ethanol. The market agrees. Pacific Ethanol Corp., the largest ethanol producer and marketer on the West Coast, was up 18% today after having a very rough year. This law gives a very strong signal to ethanol producers as the clean energy fuel source of choice due to the lack of provisions for the extension of the wind and solar tax credit.

It also means that the average fuel economy of passengers cars will increase over the next decade due to the increased CAFE standards. So we’ll definitely be seeing more smaller vehicles and many more hybrid electric vehicles on the road. Strangely enough, rising oil prices have accelerated public demand for increased fuel efficiency. But now that this is a law expect auto companies to take more proactive steps to bring fuel efficient vehicles to market faster.

The net effect of all this should be a steady decrease in oil prices. As demand decreases the commodity becomes less valuable. But don’t expect drastic changes in oil or gasoline prices in the very near future. It’s going to take several years at a minimum to bring the right technologies online in large enough amounts to really force the worldwide petroleum markets to react to the changes.

On the positive side there are new federal mandates for auto efficiency. The new CAFE standards are likely to result in cleaner technologies for automobiles and increased investment into biofuels.

On the negative side there was no extension of the critical renewable electricity production tax credit which expires at the end of 2008. This tax credit provides a strong incentive for clean energy developers (including wind and solar) to launch successful projects. In order to benefit from the credit these projects must generate electricity and be profitable. The presence of such credits undoubtedly spurs investment into the clean energy space in the United States. The lack of certainty over the credit post-2008 may stymie investment.

The major issue related to the tax credits seems to be the omnipresent question of, “Who’s going to pay for it?” So in the interest of moving the bill forward these provisions were removed. This “watered down” version of the energy bill is likely to pass an upcoming House vote and be signed into law by President Bush. Unfortunately this law has a huge hole that needs to be addressed on the issue of what to do about electricity production tax credits.

There are two issues that are contentious in this legislation. Understanding what these issues are also requires an understanding of the acronyms you are likely to hear when these are referred to in the mass media. CAFE stands for Corporate Average Fuel Economy. Current standards require that U.S. automakers produce cars with an average fuel economy of 27.5 miles per gallon (MPG). The bill passed today requires that automobiles average 35 MPG by 2020. RPS is another term you are likely to hear a lot of in the coming months. RPS stands for renewable portfolio standard. An RPS is a requirement to generate a certain percentage of electricity from sources deemed ‘renewable’ by the governing authority.

Opposition to the new CAFE standards is coming from politicians who feel that the new standard is overly aggressive and will place an undue financial burden on auto makers who must redesign their vehicles in order to meet the new standards. The RPS issue is a bit more complicated. Many states are instituting their own RPS and a federal standard would take power away from state commissions who are investing quite a bit of effort into local standards. The other issue is that a ‘one size fits all approach’ to the RPS could penalize states that don’t have as much access to renewable sources of energy like wind and hydro.

You can find out more about CAFE standards by visiting the National Highway Traffic Safety Administration. You can find our more about state level RPS guidelines at the Renewable Energy Policy Project.