In the 2011 State of the Union address, President Obama urged lawmakers to establish a clean energy standard (CES) with a goal of 80 percent of the nation’s electricity to come from “clean” sources by 2035. The President emphasized that a CES would recognize electricity from not only renewable energy sources but also nuclear, coal with carbon capture and storage technology and natural gas. Calling the clean energy push “our generation’s Sputnik moment,” the President’s speech framed a clean energy standard in the larger context of improving the United States’ competitiveness in the global economy.

With this announcement, it’s fair to say we’ve officially shifted the federal political climate change discussion from cap and trade to the creation of a clean energy standard. Putting aside a comparison of the two approaches, here are a few things to know and watch for in the upcoming debate on a clean energy standard.

How a CES Would Work

In general, under a national CES, electricity supply companies would have to produce a certain percentage of their electricity from clean energy sources, purchase a like amount of credits, or a combination of both. Certified clean energy generators would earn credits for every unit of electricity they produce and could sell these along with their electricity to supply companies. The electricity supply companies would then submit the credits to a regulatory body to demonstrate compliance. Essentially, a CES is a form of “command and control” permitting on the electricity sector and would work much the same as if each electricity generating unit’s permit had an additional condition inserted to provide a certain portion of its electricity from clean (as defined in the proposal, see below) energy sources. But to the energy consumer, the CES proposal would look like a tax, in that the unit’s cost of energy would increase some finite amount, reflecting that cost to comply with the CES.

How is CES Different from RES?

A CES would require electric utilities to generate a portion of power from sources that emit less carbon dioxide such as solar and wind power. But the CES is broader - and presumably more palatable - than the Renewable Energy Standard (RES) legislation that failed to pass the Congress last year. As the President proposed last week, a CES would include nuclear, coal with carbon capture and storage, and natural gas, as well as typical renewable energy sources such as solar, wind, bioenergy, geothermal and hydroelectric power.

Core Principles of the Administration’s CES Proposal Includes Carbon Capture and Storage

It is important to note that a CES – due to its broad inclusion of many non-renewable, traditional energy sources such as natural gas - is, as portfolio standards go, generally viewed as a victory for business. The distinction between “clean energy” and “renewable energy” as described above has been supported by Republican administrations (see G8 Summit Declaration, paragraphs 59-64 (June 7, 2007), where the United States supported a definition of “clean energy” defined to include clean coal and nuclear as well as renewable sources) and a CES is by no means a new concept. How, exactly, the details of this Administration’s definition of the term differs from previous proposals remains to be seen.

Under the Administration’s broad CES proposal, one of its five core principles emphasized that full clean energy credits would be issued for electricity generated from renewable and nuclear power with partial credits given for coal using carbon capture and storage and “efficient” natural gas. It’s worth noting that one of the core principles also specifically proposed the promotion of new and emerging clean energy technologies, and, under this principle, the Administration singled out the promotion of coal with carbon capture and storage technology. Political Wrangling over a CES

A diverse portfolio of fuels under a CES may attract some legislators while pushing some lawmakers away from certain fuels. For example, some commentators have observed that if natural gas is included in a CES that could result in electric utilities using less coal. And coal has strong backing in the U.S. Congress. There’s also likely to be debate on whether a CES bill should block the U.S. Environmental Protection Agency (EPA) from regulating the largest emitters of greenhouse gases. In other words, will the prospect of suspending EPA’s greenhouse gas regulations in exchange for a clean energy standard be used as a negotiating tool? Further, some legislators will have issues over enacting a government mandate that forces electric utilities to derive a certain percentage of their electricity from specific fuel sources.

Some CES Design Elements to Consider

In addition to discussing the portfolio of clean (or cleaner) energy sources, the discussion of a CES would also likely include issues such as determining partial credits for carbon capture and storage and natural gas, cost caps, cost recovery by utilities, the status of state renewable portfolio standards, state implementation issues, CES program coverage, and penalties for non-compliance.

Determining Partial Credits for Carbon Capture and Storage and Natural Gas

  • How would a CES calculate partial energy credits for coal with carbon capture and storage and for “efficient” natural gas?

Cost Caps on Utilities

  • Would a CES include a cap on the cost of the program or include some form of escape clause where the regulatory entity could exempt utilities from meeting its requirements? The possible inclusion of a cost cap arises from the difficulties in estimating in advance the actual cost of the program.

Cost Recovery by Utilities

  • Would electric utilities be allowed to recover the cost of penalties associated with non-compliance through a ratepayer surcharge?

Status of State RPS Programs

  • What would happen to the varying Renewable Portfolio Standards (RPS) currently in place in about 30 states? Would state RPS credits be eligible for a federal CES? Would a federal CES preempt these state standards? Alternatively, would a national CES establish a floor for using clean energy that states could exceed with their own standards?

Implementing a CES on the State Level

  • When it comes to the generation of clean energy, every state has a different starting point. Would a CES allow for differentiated clean energy targets among the states? How would it account for regional diversity in eligible clean energy resources?

CES Program Coverage

  • Would a CES carveout small utilities? Under some state RPS programs, small public utilities are exempt from the RPS target, have a lower target, or are required to develop their own targets.

Penalties for Non-Compliance

  • In order to motivate compliance, would a CES have enforceable standards with penalties for utilities that fail to reach the specified targets?

Banking

  • Would the CES standard allow for unlimited banking of credits, to encourage early investment?

Next Steps

These are just some of the issues to look for as the discussion of a CES ramps up. It’s early in the process but the Administration’s overriding interest in promoting economic growth, creating jobs, competing globally on green technology and investing in the country’s infrastructure is likely to spark significant interest in a national clean energy standard – and debate on Capitol Hill. Stay tuned.