By Kevin Steinberger, Natural Resources Defense Council
In its Clean Power Plan, the Environmental Protection Agency proposed a new initiative called the Clean Energy Incentive Program (CEIP), intended to support early investments in renewables and energy efficiency in low-income communities. Back in January, NRDC provided comments to the EPA on its initial proposal. The EPA received and has been reviewing comments on its original proposal from a wide range of stakeholders, and has issued more details on the design of the program, and is asking for another round of input. NRDC is offering some additional recommendations to improve the CEIP, which I’ll describe in more detail below. Let’s start with a quick review of the basics:
What is the Clean Energy Incentive Program, and how does it work?
The Clean Energy Incentive Program (CEIP) is designed to encourage the development of renewable energy – specifically, wind, solar, hydro, and geothermal – and clean energy projects in low income communities – energy efficiency and solar projects. The EPA included this program in the Clean Power Plan (CPP) in order to provide credit to utilities, renewable energy developers, and energy efficiency providers for investments made prior to the start of the Clean Power Plan compliance period. The program is also designed to help remove market barriers that would prevent or delay the development of clean energy in the years before the Clean Power Plan officially begins. Early investments in clean energy have multiple benefits and can help states make progress towards the CPP goals by ensuring continued momentum in the shift to a lower-carbon electricity sector.
Under the CEIP, eligible renewable energy projects receive credits or allowances for each megawatt-hour of electricity generated in 2020 and 2021, during the two years prior to the Clean Power Plan. Eligible low-income energy efficiency and solar projects receive double credit, to provide a stronger incentive for such projects. For each allowance granted, half of the allowance is provided by the state, and half of the allowance is provided by the EPA.
What has changed since the EPA finalized the Clean Power Plan last August?
Last December, Congress finally made the smart move of passing multi-year extensions of the renewable energy tax credits and creating a predictable glide path for the wind and solar industries. The tax credit extensions are an important policy development and are expected to result in significant renewable energy growth in the period leading up to the Clean Power Plan. Additionally, natural gas prices have remained low, and many analyses are revising their price forecasts downwards. An updated analysis of the Clean Power Plan by M.J. Bradley and Associates that takes into account these factors demonstrates that meeting the CPP targets will be even easier than originally expected, which in turn means that allowance prices will also be significantly lower than the EPA and others first projected. Without changes to the design of the CEIP, the decline in allowance prices will weaken the incentives provided to developers.
What are NRDC’s policy proposals for strengthening the incentives for CEIP-eligible projects?
NRDC is recommending that the EPA consider ways in which the CEIP incentives might be strengthened for projects that would result in additional savings or generation. This can be done by altering the incentives such that they are not as directly tied to allowance prices:
Allow states to increase the ratio of their allowances or ERCs, relative to the EPA’s match. The EPA could allow states to increase their portion of the awards to projects. Under this approach, the EPA’s matching allowance award would remain constant (so as not to erode the emissions outcome), but the state could increase the number of allowances such that a low-income efficiency project gets, for example, 4 emission rate credits (ERCs) per MWh – 1 from the EPA and 3 from the state.
Allow states to pool and auction CEIP allowances to provide an incentive pool and early price discovery; take steps to ensure emission reductions are achieved. The EPA could also allow a state to auction its total CEIP allowances to raise revenues, which would then be awarded on a competitive basis to CEIP-eligible projects through either direct grants or a green bank that provides incentives and low-cost financing. This would change the nature of the CEIP, from a program that provides small per-project incentives after a project is already operating to a program that provides larger per-project incentives upfront, providing certainty for project developers, and larger incentives that are more likely to induce additional projects. The early auctions would also create the opportunity for price discovery. However, if the EPA provides states this option, it would need to ensure that emissions reductions were achieved in the same quantities as would be expected if the CEIP had been implemented as currently designed. The EPA could provide its matching allowances to the state’s budget after determining the amount of generation and/or savings achieved by the projects awarded.
What are NRDC’s concerns and recommendations regarding projects that would have been built anyways?
Under the CEIP, for every two allowances a renewable energy project receives (or credits in a rate-based program), one of the allowances comes from the state, and the other one comes from the EPA. The EPA, by awarding a project an allowance (which represents a permit to emit one ton of carbon dioxide), is effectively loaning the state an extra ton of emissions during the 2022-2030 compliance period. And like a loan from a bank, it should come with an assurance that it will be paid back. The project will “pay back” the allowance if it achieves additional emissions reductions – reductions that would not have occurred if it had not gotten the CEIP awards.
For example, if an eligible wind project is projected to reduce 1 million tons of CO2 between 2020 and 2021, then it receives 500,000 allowances from the state’s budget, and 500,000 additional allowances from the EPA. In the first few years of the Clean Power Plan (2022-2024), more allowances are available for fossil plants to purchase from the wind developer, leading to 500,000 additional tons of CO2 pollution. If the wind project would not have been built in the absence of the CEIP, then the net result of the CEIP is 500,000 tons of carbon pollution reductions: 1 million tons of CO2 reduced prior to 2022, and 500,000 tons of additional CO2 emitted after 2022. But the converse is also true – if a project would have been built in the absence of the CEIP but is still credited, then the net impact is higher CO2 emissions.
The figure above illustrates why we think it’s critical that the EPA take steps to ensure that it is only granting awards to projects that would not have been built in the absence of the CEIP.
The EPA should restrict the CEIP eligibility of renewable energy projects that receive the federal tax credits (not including low income community projects). NRDC supports restricting CEIP eligibility to projects that do not receive the full value of the Production Tax Credit (PTC) or Investment Tax Credit (ITC). Providing allowances to projects that would have been developed absent the CEIP would undermine the environmental objectives of the CPP more broadly, and, by adding more allowances to state budgets, decrease allowance prices and further weaken the incentives available to additional projects. However, NRDC does not recommend restricting the CEIP eligibility of low-income solar projects, as these projects face additional hurdles (e.g. access to credit and financing) that limit their deployment.
What are the next steps?
We’re looking forward to working with other stakeholders as we refine our comments before providing them to the EPA in November. My colleagues Dylan Sullivan and Khalil Shahyd are also providing recommendations that focus on the details of the incentives and eligibility requirements for low-income efficiency projects.