How Policy Impacts a Clean Energy Transition in the U.S.
In the United States, successfully transitioning to a clean energy future is not without its challenges. It is dependent on interworking regulations and policies at every level, from federal and state governments to ISOs and RTOs. In November 2019, the U.S. government began to formally withdraw from the Paris Climate Agreement (the only participant nation to do so), a process that will be complete by the end of 2020. Without a federal mandate to reduce greenhouse gas emissions, and decreased federal incentives for solar and wind projects, states become responsible for setting their own clean energy and emissions reduction policies.
Standards Across the United States
Twenty-nine states currently have some form of renewable portfolio standard (RPS). While many states, such as New York and California have set increased requirements over time, some states are rolling back standards.
In New York, renewable energy targets have increased since the passage of the Climate Leadership Community Protection Act (CLCPA) in 2019, which mandates that 70% of the state’s energy needs are met by renewable resources by 2030 and 100% emissions-free resources by 2040. Additionally, the CLCPA sets specific targets for offshore wind, solar, and energy storage. California has an RPS requiring 60% clean energy by 2030 and 100% clean energy by 2045.
West Virginia and Ohio have taken a different approach. In 2015, West Virginia became the first state to repeal its RPS (which technically could have been met through fossil fuel technologies). In 2019, Ohio’s legislature passed a bill that will eliminate the state’s 12.5% RPS by 2027 while simultaneously imposing monthly charges on utility customer bills to support struggling nuclear and coal power plants.
How Regulations and Policies Could Slow the Clean Energy Transition
Leaving the Paris Agreement
When the withdrawal process is complete later this year, the U.S. will be the only nation to have left the Paris Agreement. Analysis by Climate Action Tracker, an independent research group, showed that the global pledged reductions were not significant enough to avoid more than 2 degrees Fahrenheit warming. This will now be made more challenging as the U.S., which had pledged to reduce emissions by around 25% by 2025 (compared to 2005 levels), leaves. This was the first step in a series of energy and environmental policy rollbacks by the current administration, a number of which make it easier for facilities to avoid emissions regulations.
ISO Capacity Market Design
Recent FERC orders in NYISO and PJM that hinder the participation of storage and renewables in capacity markets suggest that there is still work to be done in determining how to appropriately value these resources. As they currently stand, the NYISO and PJM capacity markets both, albeit through slightly different mechanisms, essentially require state-subsidized new resources to bid into their respective capacity markets at higher prices than can clear, while fossil fuel plants’ bids will clear and replace renewable resources that may have otherwise cleared.
The importance of appropriate valuation and market design is highlighted by states like New Jersey and Illinois considering alternatives to the PJM capacity market over concern that its Minimum Offer Price Rule will keep states from meeting clean energy goals. New Jersey targets 100% carbon-free energy by 2050, and pending legislation in Illinois targets 100% renewable energy by 2050. A redesign of certain elements of capacity markets may need to take place for ISOs’ markets and states’ policies to work in tandem and help facilitate a clean energy transition at the lowest cost to consumers.
Phasedown of the ITC and PTC
In December 2019, the federal government made changes to the Production Tax Credit (PTC) and Investment Tax Credit (ITC) used by wind and solar project developers. The PTC, most commonly used for wind projects, was set to completely expire at the start of 2020 after being phased down from 2016-2019. It was given a one-year extension through 2020 at a slighter higher rate than it was set to expire (60%). The ITC, most frequently used for solar projects, was not given the extension the solar community was hoping for and is set to phase down to 10% by 2022. While the economics of renewable projects are becoming increasingly competitive, these tax credits have been a boon to the growth of solar and wind industries in lieu of an official national strategy for a clean energy transition.
While a lack of federal policy may not keep states from reaching their own renewable energy targets one way or another, it does keep the country from the large-scale clean energy transition that will be required to reduce emissions and help the rest of the world limit global warming to the 2 degrees Fahrenheit target.
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