The game plan: The mother of all energy bills

(hat tip to Joe Romm for the title)

The next big green priority after stimulus will be energy. It is possible that some of what I describe below will be broken out into separate bills — for instance, Markey and Platts in the House and Bingaman in the Senate have put forward freestanding Renewable Energy Standard bills. But partially because I think it will all be clumped together for political reasons, and partly for convenience, I’m going to treat it all together.

The goal is twofold:

1. Get a big win and build momentum. Unlike carbon restrictions, which sharply divide the public, investing in and otherwise supporting clean energy and efficiency is wildly popular. Many of the elements likely to be in this bill came within a hair of passing in the last session of Congress, but failed narrowly in the Senate, where Dems now have six more votes.
2. Juice the renewables and efficiency markets by creating long-term, predictable incentives that get investment flowing. Remember, there are two ways of accelerating the energy transition: raising the price of dirty energy, and lowering the price of clean energy. The latter is far more popular, and can help ease the passage and blunt the regressive effects of the former.

One high-level consideration here is that the bill will have to pay for itself under PAYGO rules. That means any money to renewables or efficiency will have to come out of some other pot. This was part of what made passing a bill in 2007 so difficult — Big Oil didn’t want to give up any of its tax breaks. And Big Oil hasn’t gone anywhere. Finding revenue will be a crucial piece of the puzzle, and in economic hard times it isn’t going to be easy.

What will be included in the energy bill? Start with the biggie:

Renewable Energy Standard (RES)

A national RES would mandate that some percentage of U.S. electricity come from renewable sources by some specified date. The big questions: what percentage, what sources, and what date?

For reasons Sean (among others) has described, both the politics and the economics around this policy are contentious. Southern states have opposed a federal RES because they think they’ll get screwed — the biggest wind and solar potential is in the west half of the country, so Southern legislators fear their states will be on the wrong end of a massive wealth transfer. (According to a recent report from ISLR, though, Southern states have all the renewables they need as long as biomass is included.) Some economists say an RES would lead to massive misallocation of capital by directing spending to the most expensive CO2 emission reduction options (wind, and particularly solar PV, are more expensive per ton of CO2 reduction than a range of efficiency options).

To some extent these problems can be meliorated by expanding the list of sources that qualify as “renewable,” including, for example, recycled energy and other kinds of efficiency, geothermal, maybe some co-fired biomass. Ultimately, though, an RES focuses on paths, not goals, so some inefficiency is inevitable.

One technical complication: some 23 states have passed state-level RESs. How will the federal RES affect them? Will it supersede them? Operate alongside them? What happens when their details diverge or conflict?

Another technical complication: how will an RES interact with carbon legislation? Will renewable projects earn both RES credits and carbon credits? Do carbon rules render an RES extraneous? The relationship between these policies will need to be thought through in advance.

Mostly, though, it’s about votes in the Senate. The 2007 energy bill containing a 15 percent-by-2020 RES got to 59 votes (thanks, Mary Landrieu!), but couldn’t get by a threatened Republican filibuster until the RES was stripped out. Given all the newly elected Democrats, it should be easy to push that above 60, so 15 percent by 2020 should be the baseline minimum. In his campaign, Obama proposed 10 percent by 2012 and 25 percent by 2025.

Other significant provisions likely to be considered/included in the energy bill:

• A Low-Carbon Fuel Standard requiring fuel suppliers to begin steadily reducing the carbon intensity of their fuel — Obama has proposed 5 percent in 5 years, 10 percent in ten years. This would effectively nationalize a similar program in California. The fossil fuel lobby hates this one too, as it would certainly rule out fuels based on liquid coal or tar sands oil. It would also (unfortunately or not, depending on your perspective) give a huge boost to biofuels.
• Efficiency standards have languished under Bush. It’s uncertain exactly what combination would make their way into a bill, but the broad goal would be to reduce electricity demand from DOE’s projections, through some combination of building and appliance standards.
• Energy efficiency block grants to cities give mayors freedom to fund programs suited to their local circumstances. Mayors argue that they are uniquely placed to put that money to work quickly.
• Building retrofits get some money in the stimulus bill (assuming it survives committee), but with any luck an energy bill would include a larger and much more ambitious program, something along the lines of what Alan Durning describes here, here, and here. The issue is not just money, though much of that is needed, but measures to shape markets, properly align incentives, and catalyze private investment.
• Renewable tax credits finally got extended in October’s bailout bill. However, while the investment tax credit (ITC) was extended eight years for solar, the production tax credit (PTC) was only extended one year for wind and two for solar, biomass, and hydropower. The longer those credits are extended, the more stable the investment climate is and the more money flows to renewables. Also, there’s talk of making the credits refundable in the stimulus bill (making them available even to companies that aren’t yet making profit and thus paying taxes); if that doesn’t happen, it might happen in the energy bill. It’s unclear how the tax credits would interact with a possible RES.
• Long overdue electricity grid improvements, including money for smart grid technology, money for long-distance transmission, and rules and policies to facilitate the deployment of both.
• Decoupling changes the perverse regulation of electrical utilities whereby they get paid more the more electricity their customers use (and the more GHGs they emit). Depending on the scheme, decoupling removes that incentive and — in so-called “decoupling plus” — creates an incentive to boost efficiency. Since utilities are regulated by states, decoupling is mostly a state matter, but the feds can tie requirements to federal money (just as they tie, say, speed limit requirements to federal highway money). Henry Waxman slipped decoupling into the stimulus bill, as a condition placed on the efficiency block grants. If it doesn’t survive in that bill it will likely make its way into in the energy bill.
• Vastly increased funding for energy R&D is long, long overdue. If legislators get ambitious, they could go further and create a series of regional research centers devoted to various specific areas, along the lines of what Brookings has recommended.
• Green job training programs are badly needed, since one of the biggest barriers to expanded clean industry is not a lack of capital or policy incentives, but human resources. This will mostly fall to cities, but the feds could offer block grants (and some shared standards/guidelines/metrics). Per Van Jones et al, it would be nice if some or all of this money was predicated on training low-income and other disadvantaged populations.
• Large and unfortunate tax credits and subsidies for “clean coal” and nuclear power are inevitable; they’re required to buy votes. The fight for greens will be to minimize them, and to insure that no money goes toward complete climate-screwing boondoggles like liquid coal and tar sands.

And finally, a moon-shot for many in the green world, though highly unlikely at the federal level:

• A feed-in tariff for wind and solar “microgeneration” by business owners, homeowners, and community groups. Such a measure would require utilities to purchase microgenerated power at guaranteed above-market rates, helping to overcome the price barrier for decentralized renewables. (The Wikipedia article is good; see also Paul Gipe.)

No doubt the final list will differ from this substantially; some of the above won’t make it, and I’ve probably left some things out. Point is, this will be a chance to get a lot of the energy cherries Dems have been pursuing for a long time, bundled together under the aegis of Obama’s promise to free us from foreign energy and spark a green economy.

Just like the 2007 energy bill, expect a bold, ambitious version from the House, a watered-down version from the Senate, and something in-between from the committee process. But with more Dem votes on all sides and Obama in the bully pulpit, this should be a big and relatively painless win.