Clean energy bill in Washington: a magnifying glass

The trend of states targeting 100% clean electricity has become viral.

Last month, New Mexico was aiming for 100% cleanliness by 2045. The Maryland legislature recently passed a bill to renew 50% of its resources by 2030 and to to determine the viability of 100% by 2040. The Illinois could soon reach the goal of 100%. Of course, California and Hawaii have already, not to mention more than 100 American cities (most recently Chicago).

It's a lot to follow. It is therefore understandable that the clean energy bill, which is about to be passed in Washington (SB 5116), has not been widely covered, has lobbied the governor and Washington Governor Jay Inslee. But it is the best of the group. And I do not say that just because I live here.

This is not just a clean energy bill. It also contains a series of thoughtful, and in some cases truly revolutionary, structural changes in the way public services do business.

That's right, I'm talking about reform of the business model. Sexy stuff!

But for some reason, as far as I know, nothing in the stories about this bill speaks as much as that aspect. So unless you're a political obsession in Washington State, you hear it here first.

It's a very very cool bill, with a lot of juicy details. Let's start with what's in the name first: clean energy.

A progressive approach to decarbonization

The bill defines three objectives for the state's public services, with increasing rigor over time.

By 2025, they must completely get rid of coal energy (it currently provides about 14% of the state electricity, most of which is imported).

EIA

By the year 2030, they must be 100% carbon neutral. Eighty percent of their energy must come from "producing uninterrupted electricity and electricity from renewable resources". (This language is significant: it leaves room for nuclear power, natural gas with CCS, or other non-renewable, non-carbon-producing sources. clean energy bill, not a renewable energy bill.)

The remaining 20% ​​of the bond can be filled in three ways:

• Renewable Energy Credits (REBs), that is, coupons certifying that someone else has produced clean energy
• An administrative penalty based on the remaining tonnes not covered (equivalent to a carbon tax of $ 100 per tonne)
• Energy Transformation Projects (FTEs)

The third is interesting. FTEs are "projects that provide energy-related goods and services other than electricity generation that result in reduced fossil fuel consumption and GHG emissions, while providing benefits to customers of their energy consumption." 'a public service'. They include the electric car. infrastructure, weatherization or renewable natural gas (GNR – natural gas from, for example, landfills or agricultural waste).

These are things that utilities can do to reduce the fossil fuel consumption of their customers, but they traditionally had no way of getting paid for these fuels, so they lacked motivation. Now, if they partially decarbonise and find the last 20% difficult or expensive, they can meet their obligations towards FTEs. It is a clever way to encourage such projects.

Over time, the required level of self-generated clean electricity steadily increases until 2045, when all utilities must generate 100% clean energy.

Shutterstock

What about costs? Of course, the utilities were worried about it. To appease their concerns, a cost cap is included in the bill, but it is smartly crafted. This is not an absolute ceiling, a cost level at which utilities can cease their efforts, but a rolling ceiling: Costs directly attributable to the clean energy requirement – ie incremental compliance costs – can not exceed 2% of electricity revenues in the previous year.

In practice, this means that the ceiling could slow respect for the program, possibly postponing it beyond the deadline, but it will never stop conformity. Each year, new resources will be released and dedicated to compliance. the complete decarbonization will arrive finally, happen that will be able.

As it turns out, in-depth analyzes by advocates and public services themselves show that costs may be lower than the ceiling during the lifetime of the bill, but that ceiling is nevertheless crucial to obtaining the bill. political membership.

So: a set of huge requirements for utilities that will culminate, by 2045, with a carbon – free electricity system in Washington. Pretty cool.

But that's only half the content of the bill. The other half concerns electricity utilities and their relations with customers and regulators. It's a bit of a winner, but just as important as the target itself – with as much potential for influencing policy design in other states.

Washington's energy bill includes some of the sexiest utility business model reforms of 2019

As long-time readers know, I'm a bit obsessed with the role that utilities play in the transition to clean energy. More specifically, I am obsessed with the regulatory regime in which they operate, which in fact prevents them from adhering to many trends (energy efficiency, distributed energy) that would otherwise benefit their customers and the climate. (See here and here for a more complete introduction to these questions.)

It's a long and complicated story, but to sum up, there are two fundamental problems with the way that utilities monopolized in old schools, like those that Washington still has, are regulated.

Shutterstock

First, the only way to make money for shareholders is to earn a guaranteed return on investments in investment projects – "steel in the ground". This is not surprising, it gives them a lot of incentive to invest in investment projects. If customers use less energy, or generate and share more of their own energy from distributed renewables, the need for new power infrastructure and the benefits of utilities are diminishing. Good for guests and the climate, bad for public services.

Secondly, the "regulatory compact" – the obligations contracted by utilities in return for the granting of monopolies – only requires that they produce reliable energy, available to each customer, at the lowest possible cost. These are their only statutory obligations; it is forbidden for them to take equity or carbon into account when making decisions.

The Washington bill perfectly addresses these two thorny issues.

First, in terms of revenues, it gives the state's Transportation and Utilities Commission (UTC) the power to shift public services from a return-on-capital model to a performance-based model. . Rather than profits (and profits for shareholders) derived solely from investments in investment projects, the performance of utilities would be determined by their performance relative to measures determined by UTC, such as reduction of carbon emissions or equity. This will align incentives on public services with the wider energy goals of the state.

Second, he adds several new considerations to the regulatory compact:

1. The social cost of carbon.

The "social cost of carbon" (CCS) refers to the rough estimate by economists of the total damage, economic, environmental and other, imposed by a ton of carbon emissions. The Washington bill requires that public services begin to consider CSC in all their decisions.

In particular, the bill requires utilities to adopt the current CSC, as defined in National Policy 12866 – approximately $ 68 per tonne, which is expected to be $ 116 per tonne by 2050 – with a discount rate of 2.5%. (See here for an explanation of discount rates and their role in climate policy, suffice to say that 2.5% is quite low, which means that it weighs heavily on future damage, such as children.)

CSC is a technical (and controversial) number, but the exact level is less important than the net effect of this change, which is to define carbon reduction as the public interest and an essential part of the regulatory compact. The law will require Washington utilities to consider carbon.

Here's an interesting note: remember that cost caps only apply to the incremental costs of meeting the carbon-free energy standard. The costs of integrating CCS into the decision-making process of utilities are not among these incremental costs. They are part of the new baseline, the new normal.

Shutterstock

2. Public interest and fairness.

The bill adds several new equity considerations to the regulatory pact, including the equitable distribution of benefits, reducing burdens for vulnerable communities (the bill also requires cumulative impact analysis to identify these communities). , short and long-term public health and public health. environmental benefits, resilience and energy security.

In other words, this will give more complex decisions than those based solely on low costs. This will force utilities, for the first time, to consider the differential impacts of their decisions on different parts of their rate base. They can not, for example, meet the obligations of energy efficiency or recharging electric vehicles by simply installing equipment where rich people can afford it. They must ensure that benefits are distributed equitably.

3. Energy assistance.

The bill requires all state utilities to provide funds for "energy assistance" to low-income households, which includes not only reducing the bill, but also resistance to weather, energy efficiency and "direct ownership of the customer in distributed energy resources".

And public services should not just establish these programs; they must take them seriously, tracking data and performance, and reporting to UTC every two years. The goal is to reach 60% of eligible customers by 2030 and 90% by 2050.

Some utilities already have programs like this one, but not all, and a state-wide requirement like this is new, to my knowledge. Typically, federal programs are the only way for low-income clients to access some of these services. This gives them the opportunity to obtain money from the state without the need of taxpayers' money.

How Washington plans to involve unions

One of the obstacles to climate action at the state level has always been construction and construction unions worried about the loss of jobs related to fossil fuels. They jealously protect these jobs and are not convinced by the promise of jobs in renewable energy. The Washington bill led them to adopt a well-defined policy.

The bill establishes tax incentives for clean energy projects. But – in a first for the State – the incentives depend on certain criteria of quality of the jobs. The levels are as follows:

• 50 percent tax exemption for projects that make a bona fide effort to "contract with women's, minority, or veteran-owned businesses; procurement and contracting with entities complying with federal and state pay and hour laws and regulations; use of learning; and a privileged entry for workers residing in the area where the project is being built. "
• 75 percent tax exemption for projects meeting the above criteria and "compensate workers at prevailing wage rates determined by local collective bargaining".
• 100 per cent tax exemption for projects "developed under a community or project contract" as certified by the Ministry of Labor and Industries.

These standards were shared between renewable energy developers and building and construction unions. The result is that the former are committed to high quality labor standards and the latter have abandoned their longstanding opposition to climate policy.

Shutterstock

Washington has accomplished something unique

The bill still needs to be reconciled in the Senate and signed by the governor, but both should come to fruition soon. When they do, Washington will have done something special, even in the wake of climate action at the state and local levels.

The problem with many of the legislative objectives and mandates of States in the areas of clean energy, energy efficiency and distributed energy is that they address the basic incentives created for utilities by the regulatory model under which they operate. Public services respect mandates, but they do not like it too much and rarely feel inspired to go beyond duress. And they use their power in state legislatures to oppose new mandates because they have a direct impact on their outcomes.

Washington has taken both sides of the problem. It set ambitious goals, but it also made fundamental changes to the utility regulatory model, aligning utility incentives with goals. The law now requires utilities to consider carbon and equity in all their decisions and investments. And they can generate higher returns for shareholders by achieving good results relative to the carbon and equity indicators.

Similarly, the bill rallied unions by structuring their policies so that they benefit from cleaner energy. They have access to a greater number of high quality jobs and to building clean energy.

This is the magic sauce, what the Washington bill does better than any other clean energy bill presented by a state I've seen: it aligns the interests of public utilities, energy developers and unions on the fair decarbonisation project. They all benefit. This makes them allies in the fight, rather than as opponents, as they have so often been in the past.

This type of reform should be a key element of climate change in each state. And it's a great feat of Governor Jay Inslee, who is running for president on climate change. He can now honestly say that his state is a model of advanced climate policy.