April 20, 2021 – Capstone believes nuclear power producers would be an underappreciated beneficiary of President Biden’s proposed Energy Efficiency and Clean Electricity Standard (EECES)—a crucial part of the administration’s infrastructure plan, designed to achieve 100% clean energy by 2035. This note explores how the EECES could be structured and how the debate is likely to evolve on Capitol Hill. Key design features, biggest winners, and compliance mechanisms are explored below.
The EECES is the chief mechanism in President Biden’s American Jobs Plan (AJP) infrastructure outline that would create national standards that would set requirements for utilities for the use of renewable energy. The structure of the EECES varies from other traditional market-based emissions control programs such as cap-and-trade and closely resembles state Renewable Portfolio Standards (RPS).
A National EECES Would be Structured Like a Renewable Portfolio Standard.
A national EECES is designed to mirror successful state RPS programs. RPS requires electric utilities and retail electric providers to supply a specific percentage of electricity sales with eligible sources of renewable energy, using instruments known as renewable energy credits (RECs). RECs are tradable and created by various eligible generation sources, most often solar and wind generation. A REC is generated by a renewable source and given a discrete tracking and vintage number. RECs are tracked and either can be sold bundled with the power generated or decoupled from the electricity sales.
Compliance obligations for RPS programs typically fall to the electricity supplier level or the load distribution center (LDC). The LDC must demonstrate that it holds a REC for the required percentage of renewable energy specified by the RPS. We would anticipate a national EECES to be similarly structured with compliance at the LDC level, but rather than RECs, a specified number of fuel neutral clean energy credits (CECs) would be required. For example, if a state RPS is 50% renewables in a given year, and an LDC sells 100 MWhr of power to the community that year, the LDC would need to hold RECs totaling 50MWhr.
How a CES works
According to early legislative proposals, the EECES would be fuel-neutral, rather than having various tiers for different renewable resources such as solar and offshore wind, though some variegation is possible. As described in the AJP, all zero-emitting resources, including nuclear and hydropower, would be eligible to earn a full certified CEC for every MWhr of energy produced. In most CES proposals, fossil generation sources could earn partial CEC credits if their emission rate is below the emission rate defined as “clean” in the legislation.
For example, in the CLEAN Future Act, “clean” energy would be defined initially as sources 0.82 metric tons per megawatt-hour (mt/MWhr)—the rate of an ultra-supercritical coal-fired generator—and would decline to be defined as sources emitting 0.4 mt/MWh or less, the approximate emissions rate for efficient natural gas generators. These technologies can attract bipartisan support by including both carrots (CECs) and sticks (the required percentage of CEC that needs to be achieved).
Generators emitting at an equivalent or higher rate than the “clean” baseline plant would not receive any CEC credits, and thus would be disadvantaged. In sum, zero-emission generators would earn credits for each MWhr of energy produced, partial credit could be earned by generators operating under the clean energy defined baseline. Given its name, it is safe to assume that efforts like energy efficiency that reduce the need for electrical output also would be eligible to earn credits. In that way technologies such as direct air capture also could generate CECs.
Key Design Challenges
Interface between federal and state REC/CES requirements is a key design issue. Many states have complex RPS approaches with differentiated tiers for different renewables and some restrictions on in-state solar generation. Merging these decades-old, state-designed programs with a national hierarchy will pose some challenges to synchronize. That said, states may impose more stringent requirements than federal regulations. A federal program will likely be designed to complement rather than interfere with state programs. But some issues, including how banked RECs participate, are bound to create some debate, even among EECES supporters.
Making Fission Fashionable Again
As outlined in the AJP, a truly fuel neutral EECES would provide tailwinds for all zero-generating resources, particularly for the 55 existing nuclear power plants (and 94 nuclear reactors). Nuclear plants tend to be very large, averaging about 1,200 MW in nameplate capacity with an average national capacity factor of 93.4% running 24 hours a day, every day unless the unit is taken offline for refueling and maintenance about every 18–24 months. Under an EECES, nuclear output could translate into the creation of 809 million MWh (20% of U.S. energy output) of tradable CECs annually from the existing nuclear fleet, creating an additional revenue stream.
The existing nuclear fleet, particularly plants in wholesale power markets, have been closing or threatening to close absent state aid as they have become uncompetitive against the ultra-low gas prices fueling low natural gas power prices. According to the Nuclear Energy Institute (NEI), 55% of carbon-free electricity in the US comes from nuclear power. Thus, it would seem logical that policymakers angling to achieve deep decarbonization are looking to bolster these plants. Yet nuclear power has been ignored or shunned by some progressive policymakers who favor a renewables-only approach such as the Green New Deal.
States including Connecticut, Illinois, New Jersey, New York, and Ohio, have taken action to support their nuclear plants. Yet some of these state policies, namely those in Illinois and Ohio, have been ensnared in scandal after bribery schemes with state lawmakers were revealed, underscoring the need for a stable, federal policy approach. The scandal in Ohio led to a legislative withdraw of the nuclear subsidies destined for Energy Harbor Corp.’s (ENGH) two plants in Ohio. An EECES would provide revenue for nuclear plant owners, including Exelon Corp. (EXC), which is in the process of separating its utility business from its generation, Energy Harbor, PSE&G (PEG), as well as Southern Company (SO), Dominion Energy Inc. (D), Duke Energy Corp. (DUK), and NextEra Energy Inc. (NEE). For example, in 2020, Exelon’s nuclear fleet produced about 150 million MWh of electricity, at an average capacity factor of 95.4%. How this volume of output could translate into revenue under an EECES will depend on the CEC price, which is likely to fluctuate. REC prices range widely, between $1 MWh to more than $100 MWh. As program details emerge, we will gain visibility into the range of potential clean energy credits.
A CES also would provide support for new nuclear plants, namely Georgia’s Vogtle Generating Plant owned by Southern Company but also including the next generation of nuclear power plants, known as small modular reactors (SMRs), such as NuScale (which received approval from the Nuclear Regulatory Commission) Holtec International’s SMR 160, and TerraPower. However, commercialization of those technologies is still several years away. The CEC support would be in addition to a new nuclear production tax credit (PTC) of 1.8 cents per kilowatt-hour over eight years, which was extended in the 2018 Bipartisan Budget Act.
The AJP also includes a possible PTC for hydrogen, which could work well with nuclear power plants that produce significant amounts of electricity overnight when power demand is low, often for low and occasionally negative prices. Thus, nuclear plants are well-suited to produce hydrogen, which also could provide a meaningful revenue stream if the PTC is well-priced and there are sufficient offtakers.
Process Moving Forward with the EECES
We note that the details of the AJP emerge piecemeal through Congress rather than in one a large bill comprised of the mosaic of policy proposals highlighted in President Biden’s infrastructure plan. Several pieces of legislation that map to some form of the policies proposed in the AJP (see Exhibit 1). We fully expect an EECES to be fleshed out with more details through the congressional hearing process and not necessarily through additional detail released by the White House, though more granularity is possible. To wit, Exhibit 1 includes the CLEAN Future Act, proposed by Representative Frank Pallone (D-NJ), featuring a CES to achieve 100% clean electricity by 2035.
We also expect another CES proposal to emerge from the House Energy and Commerce from Representatives Kurt Schrader (D-OR) and David McKinley (R-WV), we believe that proposal will be a catalyst for bipartisan work on a CES given that Representative McKinley represents West Virginia, a state replete with both coal and natural gas resources. To contextualize, West Virginia was the second-largest coal-producing state, and 91% of its net electricity generation came from coal-fired boilers in 2019, according to the US Energy Information Administration (EIA). Thus, a CES crafted by Representative McKinley could likely to supported by other coal-state Republicans, including Senator Joe Manchin (R-WV), whom we have given the moniker of Climate Gatekeeper.
Inclusion as a part of a broader infrastructure package passed using reconciliation is one pathway that is commonly discussed for an EECES becoming a reality. While the feasibility of this pathway is still a subject of debate in policy circles, we would note that it likely faces significant procedural hurdles. The principal obstacle EECES inclusion faces in a reconciliation bill is the Byrd Rule, which prevents provisions that do not produce a change in outlays or revenues or if changes in outlays or revenues were incidental to the nonbudgetary component of the measure, among other things. In short, the Byrd Rule makes it very difficult for regulatory items such as an EECES to be implemented using reconciliation. While many moderate Democrats support an EECES, they may not be comfortable with bending the Byrd Rule to implement one with reconciliation.
Exhibit 1: Key Legislative Proposals Mapping into Biden’s AJP
