Data suggest that the electric power sector’s long march toward decarbonization was already well underway before the EPA’s Clean Power Plan (CPP) rulemaking, let alone the final rule’s compliance period, which doesn’t begin until 2022. If so, then the emissions reduction obligations imposed by the CPP might be characterized as consistent with the dramatic changes already underway within the power sector as much as they are a driver of those changes. This is an encouraging characterization, because it suggests that compliance with the CPP is likely to be accomplished without departing greatly from the utility resource planning and state policy pathways already in motion.

Some are concerned, however, that the CPP could temporarily slow the adoption of cleaner, more renewable energy sources and more efficient end use of energy. The CPP prudently provides states and sources with an unusually long window to prepare for and achieve compliance with its emission limits. But in doing so, it may have created an inadvertent gulf for the development of renewable energy projects and implementation of energy efficiency efforts until that window opens. Specifically, it is not clear that early energy efficiency and renewable energy actions—those undertaken before 2022—will count toward a state’s compliance with the CPP.

The CPP does allow renewable energy generated after 2022 by projects constructed between 2012 and 2022 to count toward state compliance. And many energy efficiency measures implemented during the 2013–2021 period are apt to be still providing some energy savings and emissions reduction benefits in 2022 and beyond, which could contribute to compliance. But the fact remains, developers now face a tricky question: Should they delay projects until after the CPP compliance window begins in 2022? In other words, has the CPP created a “chilling effect” on efficiency and renewables development during the 2016–2021 timeframe?

The EPA provides one avenue for states to bridge this gulf—the Clean Energy Incentive Program (CEIP). The CEIP encourages new renewables to come online in 2020–2021 by offering one allowance or emission rate credit (ERC) for each MWh generated during these two years, one half coming from the state and one half from the EPA.

The CEIP provides an even greater incentive for energy efficiency—two ERCs per MWh saved, one from the EPA matched by one from the state—but it is limited to projects carried out in low-income communities. In addition, the state must institute rigorous evaluation, measurement, and verification (EM&V) for any energy efficiency efforts it hopes to count, consistent with the protocols the EPA requires for quantifying ERCs, even if the state has chosen a mass-based approach to compliance. The challenge is this: Instituting and operating the administrative frameworks necessary to secure credit for CEIP efforts over the program’s short two-year life could impose a greater burden than the perceived benefits of participating in the program.

Fortunately, the CPP gives states broad discretion over how they formulate their compliance plans. Some states are using this discretion to explore ways they may be able to recognize early efficiency and renewables actions under the CPP, thereby closing the gulf. Specifically, at least one state, Michigan, is considering the creation of an “early action credit pool” in the context of a possible mass-based compliance plan. A similar credit pool might be possible under a rate-based approach as well, denominated in ERCs rather than allowances.

Allowances to create the early action credit pool could come from reserving a fraction of a state’s CO2 emissions budget for the first year of the CPP compliance period. Early action allowances from the pool would be distributed in 2022, one for each short ton of CO2 reduced or avoided by qualifying efficiency and renewable energy actions during 2016–2021. Tons of CO2 reduced or avoided would be calculated by multiplying the MWh that a specific energy efficiency measure avoided or that a renewable energy project generated in a given year by a standard CO2-per-MWh rate, determined by the state. Effectively, early actors could get a jump-start on compliance because they would be earning credit toward compliance with the state’s plan once it goes into effect. This jump-start could be as large or small as a state desires within the limits of its allowance budget.

The idea of an early action credit pool raises a number of questions, of course, including:

  • How big should the pool be?
  • Who is eligible to apply for credits from the pool—utilities, industrial facilities, small businesses, residential customers, or all of the above?
  • Should the pool be split into separate efficiency and renewables sub-pools, and if so, in what shares?
  • What if the pool is over-subscribed, with more qualifying tons reduced than allowances in the pool?
  • What if it is under-subscribed, and unused allowances remain in the pool?

Further contemplation yields additional refinement possibilities:

  • Could the pool be made larger, for example, by spreading the allowances it requires over the full 2022-2030 compliance period rather than taking them all out of the first-year 2022 budget?
  • Might the state want to encourage efficiency and renewables development throughout the CPP compliance period by maintaining the pool beyond 2022?

This may sound like a long, complex list, but most states already have stakeholder processes underway that could readily address these and other issues.

These and many other questions remain to be addressed if state early action credit pools move forward. But their creation would certainly help close the 2016–2021 gulf under the CPP, and warm any chilling effect it may have on energy efficiency and renewable energy development. Recognizing early efficiency and renewables action during the pre-compliance period is likely to help states benefit from lower compliance costs and lower energy bills once the CPP is in effect.

The financial value of CPP allowances to developers is unlikely to be “make-or-break” for project finance; it will certainly pale in comparison to Congress’s recent extension of the production tax credit for wind and investment tax credit for solar PV. But it could nevertheless be a welcome addition. Project finance hinges on certainty, cost, and policy, and a state’s decision to recognize early efficiency and renewables action under the CPP conveys a positive message on all three fronts.