by Josh T. Smith, Research Manager
Posted February 21, 2019 In Scholar Commentary

This article was originally posted on the Medium publication The Benchmark

Much has already been made of the Green New Deal (GND), and it has become the focal point for discussions about the federal government’s role in addressing climate change. It lays out an ambitious list of 10-year goals, including net-zero greenhouse gas emissions, infrastructure investments and improvements, and upgrading all existing buildings in the United States.

While we should certainly be having a conversation about climate change, environmental policies and the future of energy, we have to be honest with ourselves about the reasons why we are where we find ourselves today. A major piece of the conversation that is currently missing from today’s debate is the role both state and federal regulations play in disincentivizing green tech investments. Current regulations on electricity markets deter investment in innovative solutions and slow individual and business responses to climate change. The willingness to propose such ambitious approaches like the GND should also extend to a rethinking of the current rules. The future requires a regulatory system that is flexible enough to allow new ideas and new approaches to emerge.

When the rules governing utilities have allowed more experimentation, we’ve seen consistently greater levels of innovation. Consumers have more options, and that includes greener ones. Any environmental proposal that ignores the underlying incentives created by current regulations will likely create increase costs without any corresponding benefits.

Consider the recent kerfuffle between Sen. Ed Markey and Rep. Alexandria Ocasio-Cortez over whether the GND was partial toward specific technological approaches. Sen. Markey’s office argued that the resolution is silent on any technology, leaving the door open to carbon capture technologies and nuclear in the GND. As Markey clarified, the focus of the GND is on any energy technologies “that can move us to a solution.” Yet the frequently asked questions document released by Ocasio-Cortez’s office to NPR asks and answers the questions differently:

Is nuclear a part of this?
A Green New Deal is a massive investment in renewable energy production and would not include creating new nuclear plants…

It also includes:

Are you for [Carbon Capture, Utilization, and Storage] CCUS?
We believe the right way to capture carbon is to plant trees and restore our natural ecosystems. CCUS technology to date has not proven effective.

This kind of debate on whether or not nuclear is the “right” green technology is playing out across the country. Pennsylvania is currently debating whether or not to include nuclear in its renewable portfolio standard. These standards, set in 29 states, require a certain amount of electricity to come from qualifying sources. The discussions playing out in Pennsylvania, as well as in DC over the GND reveal an important part of environmental regulations: technology lock-out.

Because an RPS is a design standard, it can create lock-in for specific technologies which may lock-out future innovation from occurring. Nuclear is the obvious example, in which it is specifically locked-out, but hydroelectric plants often face indirect lock-out as well.

By locking out certain technologies, these rules create a technology bias. Rather than focus on performance, and allowing the market to achieve them, these rules outline a specific set of technologies. In fact, both state-level clean energy mandates like RPS and federal clean energy efforts like the GND are likely to be more expensive and less effective than technology-neutral policies, as our research on RPS shows.

There’s a lot of research showing similar results. Three energy researchers, Jesse Jenkins, Max Luke, and Samuel Thernstrom, reviewed 40 studies of the kind of decarbonization called for by Ocasio-Cortez and Markey. Writing about their findings in Joule, they conclude:

Eschewing the development of firm low-carbon technologies because they face challenges today would amount to betting the planet on the assumption that all of the conditions needed for an affordable wind and solar-centered path to decarbonize electricity will fall into place… Obstacles remain along any path to zero-carbon electricity, and the true probabilities of success are unknowable. It is therefore vitally important that decision makers identify and pursue prudent strategies to improve the odds of feasible and cost-effective decarbonization.

So it’s important that environmental policies, like the GND, remain silent on specific technologies to promote innovation and avoid locking in bad bets and locking out better ones. Given uncertainties about which technologies will succeed and which will only appear promising, it’s vital that policymakers leave room for the unexpected to avoid making a mess of things.

It won’t be enough to reform state renewable energy mandates or technology mandates in federal regulation. Instead, a wholesale rethinking of the utility-model may be necessary. Old modes of thinking about electricity markets are simply out of date.

Historically, the utility model is a one-way system. Power plants existed outside of cities run solely by producers and power is piped in along transmission lines to consumers. Utilities made investments and, together with public utility commissions, set electricity rates to recoup those investments plus a little bit extra to earn money to invest in further expansion.

If you’ve seen solar panels on a neighbor’s roof or read about microgrids, however, you’ve seen the need for a way to rethink this system. For one, because those rooftop solar installations aren’t investments by the utility, they see them as lost revenue and lost returns as the utility can’t earn a return on those investments and solar customers are buying less electricity from the utility. Second, the electrical grid gets inputs from your neighbor’s rooftop solar panels as well as from the power plants outside of the city. Rooftop solar owners are one form of distributed energy technology revolutionizing what goes on behind the scenes when you flip on a light.

The revolution will also create growing pains. Many of those pains boil down to the regulatory process that creates the electricity rates you pay each month. Rate design — the sausage-making process for electricity rates — is a messy area. But a fundamental issue is that it lacks flexibility. For example, R Street’s Travis Kavulla testified on electricity ratemaking to the U.S. Senate Committee on Energy and Natural Resources. As Kavulla — a former ratemaker himself — points out, it’s a tough job. After assessing the likely costs of building power plants, ratemakers sign twenty-year contracts with energy producers. Kavulla freely admits that these “projections were almost always wrong.” Why? Because it’s difficult to guess what the price of energy will be next week, let alone next year or in twenty.

But these best-we-can-do-but-still-unreliable calculations cause multiple problems that Kavulla details in his testimony and research on electricity market regulations. If the calculations are too low or too high, then they received too few or too many bids for power. But that’s not the problem necessarily. The problem is that, because of current federal regulations, public utilities have to take power regardless of its cost-competitiveness.

The most discussed example of this is Colorado’s 2017 tangle with those federal regulations. The state’s utility invited competitive bids for power production. Many of the bids came from renewable energy companies promising cheap energy. In fact, commentators called them “unprecedented”. Yet it’s not all good news. The Public Utilities Regulatory Policy Act of 1978 (PURPA) got in the way of wind and solar in 2017. PURPA requires that the state must purchase power that is cheaper than what it can produce itself.

As Kavulla notes, one of the companies that was not selected by Colorado’s state utility because other bidders would have been cheaper, claimed the right to sell the power it could produce and that Colorado must pay it at a higher rate. They claimed this right under PURPA arguing that Colorado’s utility had already established an agreement with them and must take their generation even if others are cheaper. That higher rate was one set by Colorado’s ratemakers in 2016. Notably, it’s much higher than the offers from other providers. Kavulla concludes:

And because the utility does not actually require that amount of energy to serve its customers, accepting the jilted bidder’s PURPA claims would mean either canceling projects that were low-cost bidders or buying more energy than customers actually need.

In short, that unreliable forecasting might actually deter cheap, renewable energy contracts in Colorado, and across the country. That means where energy could be getting cheaper and cleaner, it’s being stymied by outdated regulations like PURPA.

Luckily, there are ongoing reform efforts for PURPA’s rules. As those efforts move forward, they provide a picture of what could be. Texas, for example, has a competitive retail electricity market across most of the state. Unlike consumers in other areas, Texas’s electricity customers have multiple options for electricity providers. The Texas Public Utility Commission (PUC) maintains a website called Power to Choose. Customers enter their zip code and can view the options available to them.

For example, 78336 belongs to an area in Corpus Christi, one of Texas’s largest cities. Entering that zip code into Power to Choose shows 138 plans and a prompt to narrow the search based on three questions recommended by the PUC. Not only do customers in Corpus Christi have about 137 more options than customers outside of Texas, but they can select a variety of options to narrow their search based on their preferences. They can get a time-of-use plan so that they can save money by shifting when they do their laundry or use other energy-intensive appliances.

One of the most interesting examples is the option to sort by renewable energy percentage. Consumers in other states sometimes have options like this, called green power options, but they often come by mandate. Texas’s market shows an appetite for green power purely from consumers instead of direct design standards.

Other states considering reforming their electricity markets should learn from Texas’s experience. Many already are. As Terence Donnelly, the president of the Illinois-based utility ComEd, stated at a utility conference event earlier this year, “We Are Not in the Utility Business Anymore.” Instead, Donnelly sees a path of change as consumers demand more than just that the lights come on whenever they want them to, but that the energy behind them be clean and affordable.

Yet, these efforts are still frustrated by a focus on design instead of performance standards. The Green New Deal is just one example, but state-level efforts to enforce clean energy mandates are another.

For decades, we’ve heard promises that clean energy would be cost-competitive with fossil fuels in “just a few years”. Now it’s time to test that promise in the market. Colorado’s experience shows promise, but we need a continued focus on removing regulatory roadblocks between renewable energy companies and the market.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.