Federal Clean Energy Standard: Game-Changer or Game Over?

North American Clean Energy

March 2011

By Jennifer Owen and Craig Cornelius

Many renewable energy proponents feared that the November elections sounded the death knell for federal energy and climate legislation. Concerns over budget and health care dominate, with energy appearing as a footnote.  But in his State of the Union address, President Obama catapulted energy back to the forefront, issuing a bold call to generate 80% of U.S. electricity from clean sources by 2035.  While carbon policy remains highly controversial, bipartisan consensus around some form of a federal clean energy standard (CES) appears marginally more obtainable. 

That slowly evolving debate begs the question – so what? Will a federal mandate move markets?   Which State and regional power markets stand to be most influenced by the mandates?  Will some generation technologies see accelerated demand for deployment while others see markets shrink?  Must a mandate take a different form to leverage private investment and stimulate more business activity?

Prospects for a federal electricity mandate are somewhat better in the Senate than the House, although the path forward is murky in either case. Following the State of the Union, details on a CES from the White House have been limited. The President appears to favor the inclusion of nuclear, coal with carbon capture, and natural gas in a mandate, along with solar, wind and other renewables.  Whether some generation sources will be treated differently – a solar carve-out or a limit on natural gas, for example – is unclear.  The mix of resources, the overall target, and the timeframe for the mandate all create very different coalitions and will require difficult compromises to achieve consensus.

Historically, Senator Jeff Bingaman (D-NM), Chair of the Senate Energy and Natural Resources Committee, has preferred a renewable mandate. In the last Congress, Chairman Bingaman championed a 15% renewable electricity standard.  In recent weeks, Chairman Bingaman has expressed openness to working on a broader bill, consistent with the President’s proposal. 

On the Republican side, inclusion of nuclear, clean coal, and natural gas is essential. Senator Lisa Murkowski (R-AK), Ranking Member of the Senate Energy Committee, supported the 15% renewable mandate in the last Congress, but has indicated she prefers a CES going forward.

In the House, energy is taking a backseat to partisan wrangling over budget and health care.  Rep. Fred Upton (R-MI), Chairman of the powerful House Energy and Commerce Committee, has prioritized rolling back health care mandates and limiting the ability of the Environmental Protection Agency (EPA) to regulate carbon. In the last Congress, Chairman Upton voted for a 20% renewable electricity mandate that ultimately passed the House. Recently, Chairman Upton has suggested he may link support for a CES to some limitation on EPA regulatory authority.

Given the contentious debates in Congress over federal spending and deficits, action on a CES proposal is hardly imminent.  Opponents are seizing on the anti-government mood by tying a CES to cap-and-trade, suggesting that both are taxes that raise electricity prices and redistribute wealth regionally. 

The wild card catalyst may be gasoline prices.  High gasoline prices often drive broad energy debates in Congress, giving CES proponents a slender window of opportunity.  If Congressional leadership senses that the public wants bipartisanship, rather than steadfast opposition to the Administration’s proposals on health care and climate, then a CES may be the ripest ground for compromise.

Even if agreement on a CES were possible, the question remains: what impact might a federal mandate really have in the marketplace?

Nearly all of the non-hydro renewable generation that delivers into wholesale power markets in the U.S. today was constructed as a result of state-level renewable portfolio standards (RPS). Reductions in the cost of wind and solar photovoltaic (PV) power generation – coupled with the federal tax incentives – have made these mandates less costly to state ratepayers in recent years.  But with the exception of a limited number of projects that were built after natural gas prices spiked during 2007-2008, very little new renewable power generation has been built without mandates as a key financial driver.

Some solar PV power plants will be capable of delivering competitively-priced power at financial returns acceptable to private investors without depending on revenue from the sale of renewable energy certificates (RECs) to meet state RPS mandates.  But even those projects represent a small fraction of the wholesale solar PV generation that is built in California, Arizona, Nevada, and Colorado to satisfy RPS targets.

Similarly, nearly all new wind generation that will be constructed during the next 2-3 years will depend on REC sales to deliver the returns required for financing.  With off-peak wholesale power prices still down significantly from their 2008 highs, power markets will not allow for new wind projects to be profitable without the REC payments that RPS mandates facilitate.  For certain states, the existence of a mandate has clearly been essential to renewable deployment.

Whether a federal clean energy standard will change that dynamic is unclear.  The legislative proposals that were considered during the 111th Congress would likely not have influenced renewable deployment beyond “business-as-usual” trajectories predicted for 2012-2020 in most power markets, with the possible exception of accelerating biomass generation in the Southeast.  The proposals were in most cases less aggressive and comprehensive than those already enacted across the country.

The impact of a federal mandate that significantly surpasses state thresholds will depend on the details.  None of the major proposals from the 111th Congress included nuclear or natural gas generation; those provisions could shift the mix of new generation away from renewables in many states if federal eligibility supersedes state rules.  At the same time, the effect of distributed generation “multipliers” may result in partial displacement of wind and other wholesale power sources with rooftop solar PV generation.  The ability to trade RECs across states could motivate development of excess generation in certain states, particularly in the Midwest and Southwest.  Setting a stretch goal of 80% by 2035 is only part of the process, and the value of that target will be largely shaped by the finer details that are often overlooked in the broad debate. 

Jennifer Owen is an attorney at Van Ness Feldman PC in Washington, DC, where her practice focuses on energy matters, particularly those related to clean technologies, renewable fuels, and energy efficiency technologies.  Craig Cornelius is a Managing Director at Hudson Clean Energy Partners, a private equity firm that invests in companies that reduce the environmental impact of energy production and consumption. 

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