Energy & Environment

Give Clean Energy a Hand Up, Not a Handout

Wind turbines at the Ocotillo Wind Energy Facility in California, May 29, 2020. (Bing Guan/Reuters)
We should be incentivizing clean energy, not subsidizing it.

In debating President Biden’s trillion-dollar proposals to spend on clean energy, many take for granted that the only way to support the environment is through subsidies. But it doesn’t have to be this way.

Rather than spend money blindly on projects designed more to grab headlines than to garner reasonable support, policy-makers should pursue market-based policies that tackle specific challenges facing our clean-energy transition.

Instead of relying on market-distorting subsidies, clean-energy supporters can take advantage of several financial tools to give clean energy a hand up, rather than a handout.

Among the biggest obstacles to cleaning up our current energy sources are decades-old coal plants. Many of these plants (one in five of those in the Midwest) use an electricity-market loophole to sell power above market value, with their customers paying the difference to keep them afloat. By running expensive coal plants uneconomically, utilities deny customers cheaper, cleaner electricity from existing clean-power plants. Nationwide, this costs customers an extra billion dollars each year.

It seems obvious that the companies running these plants should give up on coal and switch to something cheaper and cleaner, but replacing coal plants with better alternatives isn’t simple. Coal-plant operators loaded with billions in debt don’t have the capital to spend on cleaner options, and customers can’t just go without power.

Companies need a way to pay back investors while keeping up with changing markets and changing times.

Enter securitization. Through securitization, a utility could sell bonds covering the remaining debt on their coal plants. Customers would pay for the interest on that bond, but at a lower rate than if they had just continued paying the utility. This cash infusion would allow utilities to make a fresh set of investments in clean energy, cut customers’ bills, and pay off expensive, outdated coal plants. Currently, only a handful of states allow securitization, while some are actively using it to transition from coal to clean-power plants. More states should follow suit and adopt this practice.

Another way to accelerate the construction of clean-power plants is to allow utilities to charge for construction work in progress (CWIP). Allowing CWIP charging would mean utilities could charge ratepayers for the building of new plants before they’re operational. This would help speed up construction time and lower overall costs by reducing the amount of money utilities need to borrow — and, by the same token, the amount of money that customers would be on the hook to pay back.

While most states allow CWIP charging, the practice is not tailored to support the newest advances in nuclear and renewable technology. For instance, the cutting edge of nuclear-power technology is small modular reactors (SMRs). SMRs are cheaper, safer, and, at one-sixth the size of traditional nuclear plants, more operationally flexible. They can be built in places where large nuclear plants make little sense, and as you can simply add more of them to keep up with population and economic growth.

With recent nuclear projects in South Carolina and Georgia running billions over budget and years behind schedule, it would be a safer bet for customers to support the future of nuclear energy, rather than the past.

Another way to promote clean energy without distorting the market is through clean asset bonds. These would provide tax-exempt financing for projects that promise to reduce emissions, whether wind and solar plants or carbon capture and storage devices. Over time, the total amount of each project these tax-exempt bonds could finance would scale down — say, by 20 percent each year. These bonds would make it easier to raise the capital necessary for environmentally sound, economically beneficial projects, and the step-down mechanism would ensure that they’re simply the spark to get the engine going, not the fuel that keeps it running.

Another option is a technology-neutral energy-innovation tax credit. This credit would apply to new technology, such as battery storage, and upgrades to old technology, such as carbon scrubbers for fossil-fuel plants. And it would scale down as clean-electricity production ramps up. To ensure that the credit truly focuses on innovation, technologies receiving the credit wouldn’t be allowed to double-dip and receive other energy-related tax credits. And, importantly, the credit would apply to the value of electricity when it is sold. In other words, it would not reward unneeded power straining the rest of the electric system. These provisions would provide a tax credit that encourages innovation without fostering dependency.

Securitization, CWIP charging, clean-asset bonds, and energy-innovation credits: Combined, these policies offer a suite of free-market options for supporting clean energy. We should be incentivizing clean energy, not subsidizing it. It’s time to replace the status quo with policies that offer utility companies a hand up, not a handout.


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