Democrats Eye Penalties for Utilities That Miss Climate Targets

(Bloomberg) -- Senate Democrats are proposing to penalize utilities that don’t meet clean-energy targets, while rewarding those that do, as part of a mandate for carbon-free power they are preparing to move through their $3.5 trillion tax-and-spending package.

The plan, known as a clean energy standard, would mandate 80% carbon-free electricity by 2030 and require sweeping changes in the nation’s power sector. The directive would help fulfill one of President Joe Biden’s signature climate goals -- decarbonizing the electric grid by 2035 -- and help satisfy his Paris Agreement pledge to halve the nation’s greenhouse gas emissions by the end of the decade.

Senate Majority Leader Chuck Schumer and other Democrats announced the mandate would be included in their $3.5 trillion budget blueprint Wednesday.

Specific details still must be fleshed out by individual committees, but the overall framework would impose annual clean-energy targets on electric utilities and a system of incentives and penalties for the companies based on their success in meeting them, said Sam Ricketts, co-founder of the environmental group Evergreen Action. Ricketts said he was briefed on the standard by staffers for Schumer and Senator Tina Smith, a Minnesota Democrat who has championed the measure.

“This is critical policy to decarbonizing the power sector and is the linchpin for our economy-wide clean energy transformation,” Ricketts said in an interview. “We’re incredibly thrilled it is part of the Senate Democrats’ budget resolution.”

Details of the plan, such as how to treat nuclear or natural gas plants, are still being developed and are subject to change as the measure winds through Congress. There is no guarantee that Democrats -- who narrowly control Congress -- will muster the requisite votes to approve the overall bill, which also includes changes to Medicare and immigration policy and is being wedged through Congress using an arcane process known as budget reconciliation.

That process allows some tax-and-spending measures to advance on a simple majority vote, without the risk of being thwarted by a Republican filibuster. But so-called Byrd Rule prohibitions bar the budget reconciliation process from being used to advance policy measures with only incidental budgetary impacts.

That’s forced congressional Democrats to steer clear of a more straightforward clean energy standard and renewable power mandate, like those adopted by more than two dozen states. Instead, they have coalesced behind an incentive-based mandate backed by Evergreen Action and Data for Progress that they believe will fit into Congress’ narrow procedural requirements.

Under that approach, individual utilities would be required to meet a growing percentage of their annual electricity demand with emission-free power. Those falling short would be hit with penalties, while utilities that meet or exceed their targets would be rewarded with grants, a Senate Democratic aide said.

“This clean energy standard is about investing in clean energy -- it is a budget-based plan so it clearly fits in a budget bill,” Smith told reporters, adding she had been working closely with the White House on the plan.

A spokesman for Schumer didn’t immediately respond to a request for comment.

Grants could soften the blow for utilities that spent money retrofitting coal plants to meet federal environmental regulations and haven’t yet recouped the cost. Utilities could use grants to help lower customer bills, close recently retrofitted coal plants and bring on new generation sources, said Leah Stokes, a University of California, Santa Barbara professor who outlined possible approaches.

It’s a way of “making those utilities whole,” while not “jacking up customer bills,” Stokes said during an April Columbia University Center on Global Energy Policy discussion. “If you put a significant carrot in front of utilities, they will want to do these things in their own interests.”

Some utilities and energy analysts have questioned whether the U.S. can decarbonize the electric sector by 2035 -- given the scale of technological gains, grid improvements and investments that would be needed to make the transformation. Duke Energy Corp. Chief Financial Officer Steve Young last year called the 2035 target “challenging.”

Electric utilities have warned that rapid changes in the nation’s power mix could put reliability at risk and emphasize the importance of natural gas-fired power plants to meeting demand amid natural fluctuations in wind and solar power generation.

“At minimum, a CES or any other policy tool has to create space in the near term for natural gas generation to continue to play a critical role in integrating more renewable generation,” said Emily Fisher, general counsel with the Edison Electric Institute that represents investor-owned utilities. “Electric companies and their customers cannot be penalized for keeping the system reliable as we work to achieve our clean energy goals.”

The group said it supports “a well-designed clean energy standard that covers all clean energy resources, including existing nuclear and hydropower generation” while also supporting the retirement of coal-fired power plants and recognizing the role of natural gas.

A clean electricity standard could remove one barrier, by spurring state utility regulators to sign off on the investments needed to meet the federal mandates.

“Overall it is very positive for utilities,”said Andy DeVries, a utility analyst for CreditSights Inc. “If the federal government mandates it, that essentially forces state regulators to approve these record capital expenditure budgets and that leads to strong earnings growth.”

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