Mass-based versus rate-based

Complying with the Clean Power Plan will require addressing a number of highly technical issues. These decisions can make a difference for how utilities comply with the rule, who is regulated, how much pollution is reduced, how much the plan costs, and more. To dive into some of those key topics, read on!

Required plan decisions

The Clean Power Plan is about reaching carbon reduction targets. EPA gives the states two options for how to get to those targets: a rate-based approach or a mass-based approach. Complying with either method will require using more clean energy sources such as wind and solar power, and reducing energy demand through energy conservation.  Both choices require critical decisions to be made; these are laid out after the two approaches below.

Mass-based

A cap on the amount of CO2 allowed regardless of the amount of energy produced. This is basically the approach EPA has used to address other reduce environmental problems such as smog and acid rain.  

  1. Setting the target: In a mass-based plan, EPA estimated the increase in energy needed to power Minnesota’s homes and businesses over the next several years and set our cap so that we have room to grow, but not so much room that we don’t still need to reduce carbon emissions.
  2. Reducing demand: Electric utilities would comply with a mass cap by reducing carbon emissions from existing fossil fuel-fired power plants. They do this by making the plants cleaner and more efficient, and also by reducing the demand for energy from these plants – either by producing more energy from cleaner sources like wind and solar, or by reducing demand through energy efficiency, for example getting consumers to use less energy.
  3. Common method: The mass-based approach has been used for other EPA rules, so the MPCA and power utilities know how to do this.
  4. Less government: It’s easier to administer, as compliance can be determined simply by measuring emissions from the stacks of existing fossil fuel-fired plants.
  5. Emission cap: The mass-based approach provides greater certainty of the total carbon reductions from existing power plants.
  6. Economic growth: It could be overly restrictive if it turns out the EPA underestimated how much energy Minnesota will need as we grow in the coming years. This might make it difficult for utilities to both supply all the energy needed and comply with the emissions cap if existing fossil fuel-fired plants are run more than expected.  

Rate-based

A limit on the amount of CO2 allowed per unit of energy produced.  Note “rate” doesn’t refer to what consumers pay but to CO2 emissions allowed per unit of energy (megawatt hour, in this case).

  1. Setting the target: In a rate-based plan, the required ratio of carbon emitted to energy produced remains the same, regardless of how much energy is produced.  So if energy production increases, allowable pollution can also increase.
  2. Earning credits: Utilities comply with a rate-based standard by offsetting carbon pollution from existing plants with cleaner energy sources such as wind and solar.  Cleaner energy sources earn “credits” to balance the pollution produced by fossil fuel-powered plants.  Utilities can add “green” energy to offset their own emissions, or give or sell the credits to other companies.  Balancing emissions and credits brings the whole state system into compliance with the targets.  
  3. New method: This approach requires developing a system to track and issue credits that will be accountable to EPA.
  4. More government: It can add significant bureaucracy because utilities and regulators need to monitor both emissions and energy produced from affected power plants, as well as all other sources that earn credits.  Any source that produces cleaner energy that wishes to earn credits would be regulated under the Clean Power Plan; these sources have not traditionally been regulated by the MPCA.
  5. Variable emissions: Since this method does not set a cap on total carbon emissions, CO2 emissions could go up or down depending on rising or falling energy demand.
  6. Economic growth: A rate approach is intended to accommodate economic growth because utilities can develop more green energy to offset increases in carbon emissions at fossil-fuel plants.

Critical decisions based on choice of approach:  mass-based

Allowances

Allowances are the tool EPA uses to ensure that only a certain amount of “allowed” pollution occurs each year.  One allowance can be used to cover one ton of carbon pollution, up to the total cap on emissions.  For example if a plant is assigned 50 allowances and emits 50 tons of carbon, it is complying with its allowances.  Allowances also can be bought or sold in a trading market.  For example if the same plant with 50 allowances emits only 40 tons of carbon, it can sell some or all its allowances to other plants.  If it emitted more than 50 tons, it could buy allowances from other plants that have extra.  The goal of trading is to balance the system so that overall emissions are reduced.

If Minnesota develops a mass-based plan, we need to figure out how to distribute these allowances. How and to whom should we distribute them? Different allocation methods can support different goals.  Let us know what goals we should have as we consider how to allocate allowances by going to our “What can you do?” page.

The following different methods of distributing allowances can help achieve Minnesotans’ goals for our energy future:

  • Reduce compliance costs for affected utilities: Give allowances to utilities based proportionally on how many allowances they need to comply with their targets (utilities with higher emissions/generation from fossil fuel-fired plants would get a larger share of available allowances).  This method would reduce compliance costs for utilities, which could be passed on to consumers.
  • Reward early action: Give more  allowances to utilities that invested in energy efficiency and renewable energy  programs before they were required to by the Clean Power Plan
  • Use allowance “set-asides” to incentivize or support certain outcomes: Remove some allowances from the general pool and target them toward certain objectives, such as:  
  • Emphasize renewable energy development: Give allowances to developers of renewable energy who can then sell to fossil-fuel power plants.
  • Support certain industries: Give more allowances to utilities serving industries that use a lot of energy and would therefore be heavily impacted by rate increases.  This would allow those utilities to minimize potential rate increases for these businesses. We could also give allowances directly to the energy-intensive industries to sell back to utilities.
  • Support low-income consumers: Give more allowances to utilities that serve more low-income Minnesotans.  This would allow those utilities to minimize potential rate increases for Minnesotans who might have trouble paying for electricity. We could also give allowances to groups representing low-income Minnesotans to sell back to utilities.
  • Generate revenue: Auction allowances and use the revenue to support various state programs.  This could increase overall compliance costs, but revenue could be used to reduce electricity rates for people most impacted by increased costs or for other designated purposes. (Note: the MPCA currently lacks authority to implement an allowance auction and would need the state Legislature to pass a law allowing it to do so.)

Leakage

The Clean Power Plan addresses CO2 emissions from existing power plants. In order to assure EPA that a state won’t simply shift generation (and therefore, emissions) from existing fossil fuel-fired sources regulated by the Clean Power Plan to new  ones  that are not covered by the plan (this is termed “leakage” under the plan), we’ll need to submit a plan for EPA’s approval that does one of the following:

  1. Covers new sources: the Clean Power Plan is intended to regulate existing power plants.  New plants are already required to meet separate EPA standards. Covering new sources likely would increase costs, and could make compliance more difficult for utilities planning new natural gas plants; however, it provides great certainty of emissions reductions from the overall energy system.
  2. Adopts “fixes” prescribed by EPA: EPA suggests the use of two types of allowance set-asides: one to incentivize utilities to run their existing natural-gas plants more and one to increase use of clean energy sources. These set-asides would be pre-approved by EPA. Preliminary analysis suggests they may be less effective in a state like Minnesota, which already strong renewable-energy incentives and a well-regulated electric utility sector.   
  3. Adopts a state-specific set of fixes: Minnesota could suggest an alternative to EPA’s pre-approved fixes that use different types of allowance set-asides, or other requirements intended to ensure that emissions do not shift considerably to new (non-Clean Power Plan) sources. EPA must approve any such demonstration and so far has provided little information to help states develop such alternatives.
  4. Demonstrates to EPA that leakage strategies are unnecessary in Minnesota: We may be able to show that Minnesota’s current energy planning requirements and processes ensure that, even without a specific set of leakage strategies, emissions are unlikely to shift considerably to new fossil fuel-fired power plants. While this strategy provides the state with maximum flexibility to implement the Clean Power Plan in a manner that best suits Minnesota, EPA must approve any such demonstration and has provided little information to help states develop such a demonstration.

Critical decisions based on choice of approach:  rate-based

Credits

Credits are the method of tracking cleaner energy production in a rate-based plan.   EPA leaves it up to the states to determine what earns a credit. EPA has pre-approved wind, solar, nuclear, hydro, and geothermal power to earn credits.   For each additional resource that can earn credits, we would need a plan to evaluate, monitor, and verify that the facility is doing what it claims.  Sources we could choose to credit include:

  • Energy efficiency: Utilities develop programs that help consumers reduce their need for energy; for instance, programs to winterize houses or businesses.
  • Combined heat and power:  Companies install systems that produce energy and use the byproduct heat to heat their buildings or other business processes.
  • Biomass:  Facilities burn sustainably sourced wood or other organic material.
  • Waste-to-Energy: generating energy from the treatment of  solid wastes
  • Energy transmission improvements:  Utilities invest in improvements to reduce the energy lost as electricity moves through power lines from the facility to consumers.

Have an opinion on what should earn a credit in Minnesota?  Go to our “What can you do?” page  and submit a comment!

Clean Energy Incentive Program

Minnesota could choose to adopt EPA’s Clean Energy Incentive Program under either a mass or rate target.  This program is intended to promote energy efficiency programs in low-income communities and renewable energy projects.  EPA is still working on the details of this program.  We’ll fill you in once we know more.