The Fight Between Low-Carb and High-Carb Utilities

As the Senate slouches towards debating a climate bill, there's a mano-a-mano scrap among utilities over distribution of carbon emissions allowances. Enviros ought to pay attention because the outcome of the battle could determine whether low-carbon or high-carbon energy sources get the upper hand under whatever climate bill staggers out of Congress.

It's a battle between low-carb utilities and high-carb utilities. The low-carbs complain that the high-carbs want "cash for clunkers" to keep their dirty old coal plants operating. The high-carbs say the low-carbs are trying to game the allowances market to enrich themselves.

Here's the lowdown behind the fightin' words: The American Clean Energy and Security (ACES) legislation that the House passed June 26 hands over 30 percent of emissions allowances to electric utilities between 2012 and 2026, when auctioning would start to phase in. The bill contains a 50-50 formula determining how allowances would be handed over to utilities. Half the allowances would be distributed on the basis of kilowatt-hour sales. The other half would be tied to utilities' past carbon emissions. The 50-50 arrangement was the deal that Henry Waxman negotiated with the Edison Electric Institute - the big tuna of utility lobbyists on the Hill.

Low-carb utilities with lots of nuclear, natural gas, hydro, and other renewables in their portfolios like the deal. High-carb utilities that rely heavily on coal don't. Here's why: The low-carbs would get all the allowances they need to comply with the ACES caps. They argue that low-carbon resources cost more, so it's only fair to tie half the allowances to retail sales, reflecting their investment in the cleaner power resources. The 50-50 formula also works to the advantage of low-carb utilities selling power into the wholesale market in competition with high-carb utilities.

The high-carbs say ACES wouldn't give them all the allowances they need to comply with the caps. They would have to buy more on the allowances market, driving up their costs. They call that a wealth transfer that would shift money from customers in Midwestern states that depend heavily on coal to those in coastal states that don't. The 50-50 deal would create "dramatic winners and losers," MidAmerican Energy Holdings' president told the Senate Environment and Public Works Committee last month.

Coal utilities are trying to take the 50-50 deal apart in the Senate, where coal-dependent states have more relative political sway than they do in the House. The coal utilities want the allocation formula changed so that most, if not all of the allowances are handed over on the basis of emissions.

The low-carb utilities are pushing back hard. The CEOs of Exelon (big nuclear portfolio), FPL (big gas portfolio), and a few others published a hard-hitting op-ed in the Energy Daily last week arguing against tinkering with the 50-50 deal. More allowances given on the basis of emissions would be "the ultimate 'cash for clunkers' program for dirty power plants" that would let the clunkers "stay on the road," the CEOs wrote, using language you would more likely hear from a Greenpeace activist than a utility boss.

Here's why the fight matters. The 50-50 deal is flawed - it would be better either to tax carbon directly or auction off all emissions allowances - but it's better than handing over all the allowances through a formula biased towards emissions. The more free allowances given to coal, the weaker the price signal needed to steer the energy market away from conventional coal-fired power generation.