Washington’s clean energy bill: a closer look
The trend of states targeting 100 percent clean electricity has gone viral.
Last month, New Mexico targeted 100 percent clean by 2045. The Maryland legislature recently passed a bill targeting 50 percent renewable by 2030 and looking into the viability of 100 percent by 2040. Illinois might pass a 100 percent target soon. Of course California and Hawaii already have, to say nothing of more than 100 US cities (most recently Chicago).
It’s a lot to track. So it’s understandable that there hasn’t been much coverage of the 100 percent clean energy bill that is on the verge of passing in Washington (SB 5116), the one Washington governor and presidential candidate Jay Inslee has been pushing. But it is the best of the bunch. And I’m not just saying that because I live here.
It is not just a clean energy bill. It also contains a raft of thoughtful, in some cases genuinely groundbreaking, structural changes to the way the state’s utilities do business.
That’s right, I’m taking utility business model reform. Sexy stuff!
But for some reason, as far as I can tell, none of the stories about this bill so much as mention that side of it. So unless you’re a Washington state political obsessive, you’re hearing it here first.
This is a very, very cool bill, with lots of juicy details. Let’s start with what’s in the name first: clean energy.
A step-down approach to decarbonizing
The bill sets three targets for the state’s utilities, ramping up in stringency over time.
By 2025, they must completely get rid of coal power (it currently supplies about 14 percent of state electricity, most of it imported).
By 2030, they must be 100 percent carbon-neutral. Eighty percent of their power must come from “nonemitting electric generation and electricity from renewable resources.” (This language is significant: It leaves room for nuclear, natural gas with CCS, or other nonrenewable, non-carbon-emitting sources. In other words, this is a clean energy bill, not a renewable energy bill.)
The other 20 percent of the obligation can be satisfied in one of three ways:
- Renewable energy credits (RECs), i.e., vouchers certifying that someone else generated clean energy
- An administrative penalty based on tons remaining uncovered (which effectively amounts to a $100 per ton carbon tax)
- Energy Transformation Projects (ETPs)
The third is interesting. ETPs are “projects that provide energy-related goods and services other than electricity generation and result in a reduction of fossil fuel consumption and a reduction of GHG emissions, while providing benefits to the customers of a utility.” They include such things as electric car infrastructure, weatherization, or renewable natural gas (RNG — natural gas drawn from, for example, landfill or agricultural waste) projects.
These are things utilities can do to reduce their customers’ consumption of fossil fuels, but they haven’t traditionally had any way to get paid for them, so they lacked incentive. Now, if they partially decarbonize and are finding the last 20 percent difficult or expensive, they can meet their obligations with ETPs. It’s a clever way to incentivize such projects.
Over time, the required level of self-generated clean electricity rises steadily, until 2045, when all utilities must be self-generating 100 percent clean energy.
What about costs? Of course utilities were worried about that. To soothe their concerns, a cost cap is included in the bill, but it is cleverly designed. It is not an absolute cap, a level of costs at which utilities can cease their efforts, but a rolling cap: costs directly attributable to the clean energy requirement — that is, the incremental costs of compliance — cannot exceed 2 percent of the previous year’s electricity revenue.
What this means in practice is that the cap might slow compliance with the program, potentially pushing it past the deadline, but it will never stop compliance. Each year there will be new resources freed up to devote to compliance; full decarbonization will happen eventually, come what may.
As it happens, extensive analyses from advocates and the utilities themselves show that costs are likely to come in under the cap over the life of the bill, but the cap was nonetheless crucial for getting political buy-in.
So: a ratcheting set of requirements for utilities that will result, by 2045, in a carbon-free electricity system in Washington. Pretty cool.
But that’s only half the stuff in the bill. The other half has to do with power utilities and their relationships to customer and regulators. It’s a bit wonkier, but just as significant as the target itself — with just as much potential to influence policy design in other states.
Washington’s energy bill includes some of the sexiest utility business model reforms of 2019
As longtime readers know, I am somewhat obsessed with the role that utilities play in the clean energy transition. More specifically, I’m obsessed with the regulatory regime under which they operate, which effectively prohibits them from embracing many trends (energy efficiency, distributed energy) that otherwise would benefit their customers and the climate. (See here and here for a fuller introduction to these issues.)
It is a long and complicated story, but to boil it down, there are two basic problems with the way old-school regulated-monopoly utilities, the kind that Washington still has, are regulated.
First, the only way they make money for shareholders is through guaranteed return on investments in capital projects — “steel in the ground.” Not surprisingly, that gives them considerable incentive to invest in capital projects. If customers use less energy, or generate and share more of their own energy from distributed renewables, it reduces the need for new electricity infrastructure, and thus utility profits. Good for customers and the climate, bad for utilities.
Second, the “regulatory compact” — the obligations utilities take on in exchange for being granted monopolies — requires only that they produce reliable power, available to every customer, as the lowest possible cost. These are their sole statutory obligations; they are effectively prohibited from considering equity or carbon in their decision-making.
Washington’s bill neatly solves both of these thorny issues.
First, on revenue, it grants the state’s Utilities And Transportation Commission (UTC) the authority to shift utilities from a return-on-capital model to a performance-based model. Rather than profit (and returns to shareholders) coming purely from investments in capital projects, utilities’ returns would be determined based on their performance against metrics determined by the UTC, things like carbon reduction or equity. This will align utility incentives with the state’s larger energy goals.
Second, it adds several new considerations to the regulatory compact:
1. The social cost of carbon.
The “social cost of carbon” (SCC) refers to the rough estimate by economists of the total damages, economic, environmental, and otherwise, imposed by a ton of carbon emissions. Washington’s bill requires that utilities begin taking the SCC into account in all their decisions.
Specifically, the bill requires utilities to adopt the federal government’s current SCC, as established in Executive Order 12866 — roughly $68 per ton, rising to $116 per ton by 2050 — at a discount rate of 2.5 percent. (See here for an explainer on discount rates and their role in climate policy; suffice to say, 2.5 percent is pretty low, which means it puts a lot of weight on future damages, i.e., The Children.)
The SCC is a technical (and controversial) number, but the exact level is less important than the net effect of this change, which is to define carbon reduction as in the public interest and a core part of the regulatory compact. Washington utilities will be required by law to take carbon into account.
An interesting side note here: Remember that the cost cap applies only to incremental costs related to meeting the carbon-free energy standard. The costs incurred by incorporating the SCC into utility decision-making do not count among those incremental costs. They are part of the new baseline, the new normal.
2. Public interest and equity.
The bill adds several new considerations regarding equity to the regulatory compact, including equitable distribution of benefits, reduction of burdens to vulnerable communities (the bill also requires a Cumulative Impact Analysis to identify such communities), short-term and long-term public health and environmental benefits, and energy resilience and security.
Suffice it to say, this will yield decisions more complex than those based purely on low cost. It will force utilities, for the first time, to consider the differential impacts of their decisions on different parts of their rate base. They cannot, for instance, meet energy efficiency or EV charging mandates simply by installing equipment where wealthy people can afford it. They must ensure that benefits are equitably distributed.
3. Energy assistance.
The bill requires that all utilities in the state make funds available for “energy assistance” to low-income households, which includes not only bill reductions but weatherization, energy efficiency, and “direct customer ownership in distributed energy resources.”
And utilities don’t just have to establish these programs; they have to take them seriously, tracking data and performance and reporting to the UTC every two years. The goal is to reach 60 percent of eligible customers by 2030 and 90 percent by 2050.
Some utilities already have programs like this, but not all, and a statewide requirement like this is novel, as far as I know. Typically, the only way low-income customers can access some of these services is through federal programs. This creates an avenue for them to get in-state money, and without requiring any taxpayer money.
How Washington plans to get the unions on board
One barrier to climate action at the state level has always been building and construction unions worried about the loss of fossil-fuel jobs. They are jealously protective of those jobs and unconvinced by the promise of jobs in renewables. Washington’s bill brought them on board with a neat bit of policy.
The bill establishes state tax incentives for clean energy projects. But — in a first for the state — the incentives are contingent upon certain job-quality criteria. The tiers are as follows:
- 50 percent tax exemption for projects that make a good-faith effort at “procurement from and contracts with women, minority, or veteran-owned businesses; procurement from and contracts with entities that have a history of complying with federal and state wage and hour laws and regulations; apprenticeship utilization; and preferred entry for workers living in the area where the project is being constructed.”
- 75 percent tax exemption for projects that meet the above criteria and also “compensate workers at prevailing wage rates determined by local collective bargaining.”
- 100 percent tax exemption for projects “developed under a community workforce agreement or project labor agreement,” as certified by the Department of Labor and industries.
These standards were hashed out between renewable energy developers and the building and construction unions. The result is that the former have committed to high-quality job standards and the latter have dropped their longstanding opposition to climate policy.
Washington has accomplished something unique
The bill still has to be reconciled in the Senate and signed by the governor, but both are expected to happen soon. When they do, Washington will have accomplished something special, even amid the flurry of climate action at the state and local level.
The problem with many state legislative targets and mandates on clean energy, energy efficiency, and distributed energy is that they tack against the basic incentives created for utilities by the regulatory model under which they operate. Utilities comply with mandates, but they don’t like it much, and they rarely feel inspired to go further than forced. And they use their power in state legislatures to oppose new mandates, because mandates directly impact their bottom line.
Washington took on both sides of the problem. It set ambitious targets, but it also made fundamental changes to the utility regulatory model, aligning utility incentives with the targets. State power utilities must now, by law, consider carbon and equity in all their decisions and investments. And they can make higher returns for shareholders by performing well against carbon and equity metrics.
Similarly, the bill brought unions on board by structuring policy so that they benefit from more clean energy. They get access to more high-quality jobs the more clean energy gets built.
That’s the magic sauce, what Washington’s bill does better than any other state clean energy bill I’ve seen: It aligns the interests of utilities, energy developers, and unions behind the project of equitable decarbonization. They all benefit from it. That makes them allies in the fight, rather than at loggerheads, as they have so often been in the past.
This kind of reform ought to be a key piece of climate progress in every state. And it’s a hell of a feather in the cap of Gov. Jay Inslee, who’s running for president on climate change. He can now truthfully say that his state is a model of cutting-edge climate policy.