Understanding Obama's Energy Policy: Definitions for the Armchair Economist

by Tonya Bodell, CRA International Inc

The new administration is pursuing transformation of America’s century-old electricity industry. As with any reform, however, disagreement often boils down to definition. The following lexicon summarizes selected energy economic concepts embedded in the stimulus package and energy plans.

Clean Coal

Clean coal is a term that undergoes transformation each time a by-product of coal-fired generation becomes undesirable. Before World War II, clean coal was a marketing term for smokeless coal preferred for cooking and heating. During the 1960s through the 1990s, clean-coal technology reduced SO2 and NOXsub> from the emissions of coal-fired power plants. Most recently, the term refers to reducing carbon emissions from coal-fired power production through carbon capture and storage. Although electricity production from such a plant could be economic under certain carbon policies, there is not yet a full-scale operating prototype that captures, transports, stores and monitors carbon emissions.

Decoupled Rates

Decoupling rates refers to delinking a utility’s profits from its energy sales to eliminate the utility’s disincentive to promote demand response (DR) and behind-the-meter generation. Currently, most electricity rate designs in the U.S. include recovery of fixed costs through a kilowatt-hour charge, tying revenues to the amount of electricity customers consume. To motivate utilities to consider all options, including DR programs and new generation sources, advocates for decoupled rates argue that the sales-revenue link in current rate design must be broken. Opponents argue that decoupling rates pay a utility for power it does not deliver, removing an important market test for utility investment in the wires business.

Demand Response

Demand response covers many ways consumers can modify electricity usage:

 

  • Conservation, or load curtailment, is a decrease in electricity consumption by foregoing services that would require such electricity over all timeframes.
  • Energy efficiency (EE) is the decreased use of electricity for the same level of service in the same time period, achieved by replacing or updating buildings or existing equipment with new technology.
  • Load shifting is a change in the timing of the use of services that require electricity, shifting demand from one time period to another.

 

Assuming energy prices reflect the true cost to produce power, economists argue that the right way to elicit the right response is to send the right price signal at the right time to the right place.

Renewable Portfolio Standards

To promote green technologies, government policies have mandated that a percentage of power come from specified types of generation. Twenty-nine states have a renewable portfolio standard (RPS) mandating that a set percentage of electric power procured by load-serving entities come from renewable resources. The definition of renewable resources varies by state but can include wind, hydroelectric, solar, geothermal, tidal, biomass and other nonfossil-fuel power. States such as Massachusetts also have passed alternative energy portfolio standards that set targets for technologies such as carbon capture and sequestration, energy storage and EE. Federal legislation may contemplate an energy portfolio standard that would encompass a yet-to-be-defined set of technologies.

Green Collar Jobs

Green collar jobs are employment opportunities created by deployment of cleaner technologies, renewable resources and greater efficiency. Advocates promote investment in clean technology and renewable resources, touting the benefits of increased green collar jobs and a growing green economy. The question is whether the multiplier effect of the investment offsets the deadweight loss of the tax required to fund that investment.

Smart Grid

Smart grid refers to information technology and advanced hardware that allow for more efficient operations of transmission and distribution systems, as well as more effective control by consumers over consumption. Effective implementation of such technology generally requires broader access to information and the means by which system operators and consumers can respond to this information in accordance with appropriate incentives.

The recent stimulus package includes significant support for renewable energy, clean-coal technology and transmission. Details will be implemented in upcoming regulations and energy policy bills.

Although final features of President Barack Obama’s energy policy are uncertain, ongoing debate over definitions will remain a critical part.

Author

Tanya Bodell is vice president of CRA International Inc. E-mail her at  Tanya.bodell@fticonsulting.com

“It is commonplace that economists spend a discouraging proportion of their working time in controversy over definition.”
Richard M. Davis (1952)

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