The Waxman-Markey sponsored American Climate and Energy Act of 2009 (ACES) bill cleared its first hurdle on Thursday May 21st with the approval of the House Energy and Commerce Committee on a more-or-less party-line vote of 33-25. While the panel’s actions increase the likelihood of Congress addressing broad legislation on energy and climate this year, the road to ratification looks challenging with the bill still needing to pass through both the House and Senate for assessment.

The Bill and RES

At the heart of the 932-page bill is an attempt to combine the twin puzzles of energy and climate into one piece of legislation. It includes three major components: global warming policy (a cap and trade program to cut US emissions to 17 percent below 2005 levels by 2020 and 83 percent under 2005 levels by 2050), much-needed improvements to the U.S’ antiquated transmission system, and a national requirement for utilities to produce a certain percentage of their power from renewables (Renewable Portfolio Standard). The latter issue is addressed in the Section of the Bill entitled Combined Efficiency and Renewable Electricity Standard (CERES).

The CERES would require utilities that sell more than 4 million megawatt hours of electricity to consumers per year, for purposes other than resale, to meet a minimum percentage of their load with renewable resources (wind, solar, geothermal and other low-carbon sources) and electricity savings. The bill sets the CERES at 6%, beginning in 2012, ramping up to 20% by 2020. This may seem impressive, yet the bill’s glossy appearance hides several crucial compromises that will have a detrimental effect on its effectiveness. As a diluted version of the original Renewable Energy Standards (RES) proposition it has been met with disappointment for a number of reasons.

First, Waxman, Markey, and even Obama himself had announced their desire for the RES to be set at 25% renewables by 2025 (see our article February 4th article entitled ‘The Future for a Federal RPS’). Instead of a target of 25% the ACES bill proposes 20%.

Second, instead of this 20% being met purely by the development of renewables, the CERES aspect of the bill permits 5% from “energy efficiency measures”. Worse still, a further loophole in the law (in a concession to ‘low-wind’ states) would allow a governor to reduce his state’s renewable requirement to just 12%, providing the other 8% can be provided by “energy efficiency measures”. It is worth noting that further unsuccessful proposed amendments, included an offer by Republicans, supported by conservative Democrats, to include the use of clean coal, nuclear and biomass within the RPS.

Third, by promoting a general CERES without a carve-out for a single renewable technology Congress risks discriminating against certain technologies, such as solar, that while currently less cost competitive than others (wind), bring a number of additional benefits not factored into the market price. As a result, lawmakers too often focus on the direct input costs, and not the indirect output benefits. For solar these benefits include that solar installed on rooftops and within the grid does not require additional investment in transmission and distribution systems, during the day it replaces higher cost electricity production, and furthermore it complements night-time wind generation. By ignoring these, the Federal RES structure could lead to a 35% increase in solar compared to a 678% increase in wind (according to the Department of Energy’s analysis of the RES).

Fourth, the bill includes a credit multiplier that provides three Federal renewable electricity credits for each megawatt hour of renewable electricity generated by a distributed renewable generation facility. With an Alternative Compliance Payment (the fine utilities must pay for each MWh of power under the CERES not produced from renewables) of only $25, this results in a net cost of just $75. Given past experience at the state level (Arizona and New Mexico), this multiplier will not stimulate much investment in distributed solar (non-utility scale solar) as there would still be too little incentive to invest in this early-market, higher-cost energy option. Without the aforementioned direct carve-out it will take much longer to realize the economies of scale cost reductions projected for this valuable and highly beneficial energy resource. Furthermore, while credit multipliers ensure that one megawatt counts as three (seemingly stimulating investment), they actually may reduce the total amount of renewable energy in the mix by diluting the goal, and in doing so undermine the very policy objective they seek to achieve.

Despite its flaws, the bill represents a major step towards stimulating the essential transformation in the way the U.S. consumes and produces energy. Failure to reach agreement would not only hamper attempts to reduce the U.S’ dependence on imported and price-volatile fossil fuels, improve energy efficiency, and generate more green energy on U.S. soil, but would also severely compromise the chances of success at the Copenhagen Climate Conference in December. The impact of U.S. intransigence on this issue has been clear for all to see over the past decade. As the legislation winds its way through Congress, we should expect debate on the CERES to be one of the main sticking points. While the RES bill has been diluted and no carve out initiated, the CERES represents an important step forward in stimulating the transformation required in the market for energy in the U.S.