A big week for energy and the environment – Energy Institute blog


Incentives matter! Let’s get them straight.

It’s a big week for the energy and environmental policy of the world’s fifth largest economy and the republic of which it is a part – for distinct but not completely independent reasons. Let’s take a look at what’s going on in DC. The Biden administration has been committed to cleaning up America’s electricity sector throughout its campaign and its first year in office. It is definitely in my mind the right thing to do. It is also a difficult and expensive thing to do – both from an engineering point of view and even more from a political economy point of view. It’s the equivalent of trying to teach your fat, content, but flatulent dog who is addicted to generic wet dog food to switch to a low-methane vegan diet. Ultimately, the puppy will get better and your house will smell better. Getting there will require setting up the right incentives for your highly intelligent dog.

Now replace the dog in this story with power generators and the dog owner with the federal government that represents us all. A significant portion of the proposed decarbonization will come from the recently published Clean Electricity Performance program. The full text is here. And I’m freaking out. And not in a good way. Jim bushnell reported some questions a few weeks ago and the published text of the regulation makes it clear that most of them were not answered in the bill. Smart energy economists like Steve Cicala, Ryan Kellogg and Rob Williams less than 45 minutes after its publication, managed to highlight some major incentive issues in the proposed legislation.

And just to be clear from the start, the problem we see is not that the CEPP is not the cherished carbon tax of economists. The problem is, CEPP is a well-intentioned, but nonetheless playable mess that probably allows companies to dirty taxpayers without creating clean energy.

The main problem is that one part of the program gives while another part takes money from electricity providers asymmetrically. I’m not a lawyer, but this is how I read it. For every megawatt hour of clean electricity I produce above a threshold over a previous year, I get $ 150. If I don’t, I pay $ 40 per megawatt hour. It’s like giving my kid $ 1 if he eats a carrot on top of his healthy dinner and charging him 50 cents if he doesn’t eat his healthy dinner but eats the attic instead. Why is this problematic?

As #econtwitter points out, the problem is that we don’t live in a static world, time flies like a banana and you have to choose what you do each year. First of all, if I wasn’t a Kale smoothie drinker holier than you Berkeley hippie, but a profit-maximizing utility, I would do nada zip zilch the first year and pay my fine of $ 40 per megawatt hour missed. A year later, I would lean on my leather chair and buy as many clean energy certificates as possible, then use the #cashmoney reward of $ 150 for every megawatt hour to pay my one-year fines. previous and pocket the difference. And then repeat. I think the draft text makes this kind of ‘cycling’ difficult every year, but I don’t think it kills cycling every 3+ years. It could potentially cost a lot of money without creating a lot of additional renewable energy for every dollar spent.

The second problem pointed out by Steve Cicala and Ryan Kellogg is also smart. Imagine Noah owns a coal-fired power plant. His friend Sam owns a Nuke. Period to period, Noah and Sam take turns over who is claiming the nuclear weapon’s carbon-free energy and – due to the difference between the penalty and the reward – they are essentially printing money! Without adding a single iota of extra clean energy.

The third problem with the current text will save lawyers even more money than they need. If you are an existing utility you can theoretically reincarnate as a new supplier and the clean energy reduction targets you are subject to are lower than if you stayed the same. PG & E1, PG & E2, PG & E3, yeah you know me.

What I’m saying here, from a luxurious point of view of my soapbox, can anyone call on people who love clean energy, who understand electricity markets and how the players operate in them, based on the incentives they face? In 2001, we had a massive and extremely costly electricity crisis in California. It could have been avoided if regulators had listened to the smart people who saw this coming.

So now we see something happening on the road again. The list of Ghostbusters that someone should call to prevent the clean electricity revolution from becoming massively more expensive than it should be is long and certainly does not include me. But I have a rolodex full of numbers that I would gladly share with any staff, member or committee chair interested in resolving these issues. And my friends will show some help.

Finally speaking of California. We continue to innovate and regulate in this great state of ours. And despite people screaming how expensive gasoline is right now, it’s a steal compared to what its optimal price should be. The progress we have made in environmental regulations in our sunny and dry state has resulted in massive improvements in air quality and we are looking for ways to meet the growing demand for energy with less carbon year after year. in year. For 20 years, governors of both parties have been strong supporters of continuing and innovating on this legacy of improving environmental quality in often profitable ways. Our ideas have been copied and pasted into laws around the world.

This Tuesday will be the culmination of another effort to halt progress in this dimension, which will have cost taxpayers $ 270 million. If Governor Newsom’s recall is successful, we will likely end up with a governor who speaks out against climate change alarmism rather than advocating for the fight against climate change. I won’t tell anyone who to vote for, but if you care about environmental progress (and a variety of other really important issues) you should line up on Tuesday and vote (or just cast the ballot you have. received the mail, in this haven of peace for the voters). Don’t stay home. There is too much at stake!

Stay up to date with Energy Institute blogs, research and events on Twitter @energyathaas.

Suggested citation: Auffhammer, Maximilian. “A great week for energy and the environment” Institute of Energy Blog, UC Berkeley, September 13, 2021, https://energyathaas.wordpress.com/2021/09/13/a-big-week-for-energy-and-the-environment/

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