Congressional Democrats have proposed a Clean Energy Performance Program (CEPP) as a key part of the climate change mitigation measures in their budget reconciliation bill. In principle, the program as designed would encourage the accelerated deployment of low-carbon electricity generation. Less discussed has been the potential for the CEPP to prevent existing low-carbon facilities, like the nation’s nuclear power plants, from closing prematurely.
Policymakers in California remain committed to shuttering Diablo Canyon, the last operating nuclear power plant in the state. Those policymakers should consider that, in addition to the $3.9 billion it will cost to decommission the plant and more than $400 million in the form of increased electricity rates to replace jobs and support the nearby community, closing Diablo Canyon this decade will cost between $500 million and $1.5 billion in CEPP penalties and foregone federal payments.
The CEPP mechanism is complex, but essentially awards utilities with a payment of $150 per MWh for an increase in year-over-year clean energy generation of over 1.5 percentage points if the total increase year-over-year exceeds 4 percentage points. For example, if a utility had 20% of the electricity generation from clean sources in 2022, and increased that to 24% in 2023, they would be eligible for a payment of $150 per MWh for 2.5% (4% minus 1.5%) of their total generation. If they instead increased the clean generation fraction from 20% to 26%, they would be eligible for payments for 4.5% (6% minus 1.5%).
These $150 per MWh payments are given each year based on year-over-year changes in generation. Effectively this means that each addition of clean generation gets a one-time payment, assuming that the utility exceeds the minimum 4 percentage point increase in the year in which it is installed.
In addition, the CEPP includes a penalty for utilities that fail to achieve a 4 percentage point increase in clean generation. Specifically, utilities suffer a $40 per MWh penalty for the difference between their year-over-year increase in clean generation and the 4 percentage points target. For example, if a utility only had a 2 percentage point year-over-year increase in clean generation — say, from 20% to 22% — they would have to pay a $40 per MWh penalty on 2% (e.g. the 4 percentage point target minus the 2 percentage points actually achieved) of their total generation. If the clean generation declined year over year — say, from 20% to 17% — the utility would have to pay a penalty on missing the 4 percentage point goal plus the additional 3 percentage point decline (e.g. a $40 per MWh fine on 7% of their total annual generation in this case).
There is an exception in the bill for utilities that exceed 85% clean generation; in those cases, utilities are exempt from penalties for missing the target 4 percentage point increase as long as their clean energy generation does not decline year-over-year. In cases where their clean generation declines, they would be charged a penalty equal to the decline. For example, if a utility went from 90% to 88% clean generation, they would be charged a $40 per MWh penalty on 2% of their total generation.
However, as it is currently written this provision may punish utilities that rely heavily on hydroelectric power, as natural variations in rainfall could result in penalties (but no subsidies) at high levels of clean generation. One option under discussion would be to simply remove all penalties as long as clean generation remains above 85%. Unfortunately, this could result in perverse outcomes where utilities could significantly reduce clean energy generation — from 100% to 85% — with no penalties. An alternative could be to use a multi-year average to smooth out year-to-year variations, but this would come at the expense of further increasing the complexity of the system.
Finally, to avoid manipulation of the system, the 2019 to 2020 period is used as a baseline in the CEPP. No incentives can be awarded for year-over-year increases in clean generation if it remains below baseline levels. This prevents utilities from removing existing clean generation and then being rewarded with incentives for filling the gap back in — provided that removal would bring them below the baseline.
Pacific Gas and Electric (PG&E) is in a somewhat unusual position as it already has quite high levels of clean generation. In 2020 PG&E’s retail sales were 89% clean generation – as shown in the table below. Their actual generated and purchased electricity – including sales of power to other utilities – was approximately 71% clean generation — 34% from the Diablo Canyon nuclear plant, 29% from non-hydro renewables, and 8% from large hydro plants.
This means that the ability of PG&E to benefit from the CEPP clean energy incentives is rather limited; two years of meeting the 4 percentage point year-over-year growth threshold would result in the utility maxing out at close to 100% clean energy. At the same time, however, the utility is exempt from penalties for failing to achieve 4 percentage points growth as long as the clean generation does not decline year-over-year.
Unfortunately, PG&E is planning to decommission the Diablo Canyon nuclear generating plant that is responsible for approximately half of their current clean energy generation in 2024 and 2025 (with one of the two generating units retiring in each year). This will very likely result in PG&E paying a penalty under the CEPP, though the magnitude of this penalty depends on the extent to which Diablo’s generation can be replaced by other clean generation in the year it retires.
This is an important restriction: the ultimate replacement of Diablo’s generation with other clean energy sources will not result in any incentives — and will not reduce the penalty — unless it happens in the same year that Diablo is retired. Because Diablo’s generation is baked into PG&E’s baseline, they will have to pay a penalty for any decline in clean energy percentage in the year in which each generating unit is retired, but are not eligible for any future clean generation incentives as they fill in the gap left by the nuclear plant’s closure. Fully replacing Diablo’s generation with other clean generation in the year it is retired is a much more difficult task than replacing the lost clean generation over a longer period of time. Based on the CPUC proposed preferred system plan, the clean firm generation and long-term storage intended to replace Diablo won’t be online until 2028 or later.
If Diablo’s two units are retired in 2024 and 2025 and its generation is replaced entirely by natural gas, PG&E’s clean generation would decline from 89% in 2023 to 67.2% in 2024 and 46% in 2025. This would result in penalties of approximately $600 million across the two years over which Diablo is retired, and total penalties of $1 billion by 2030, as continued penalties of missing the 4% growth target are imposed until PG&E brings clean energy generation back up to its baseline levels.
If PG&E replaces the clean energy output of Diablo by adding 7 percentage points of clean energy each year (e.g. one-sixth of Diablo’s total output) it would reduce the total penalty to $700 million, while adding 11 percentage points (e.g. one quarter) each year would reduce the total penalty to $500 million. The fact that clean energy has to be added in the same year that Diablo is replaced to avoid incurring large fines makes the decision to close the reactor particularly costly under the CEPP framework even if PG&E pursues accelerated adoption of clean energy replacements.
Closing Diablo puts PG&E at risk of missing out on an additional ~$500 million in incentives they could receive by going from 89% clean energy to 100% clean energy under the CEPP, if PG&E is unable to both fill in the gap left by closing Diablo and get all the way back up to 100% before the program ends in 2031. If we use the actual current procurement of 71% clean energy — which accounts for PG&E gas generation sold to CAISO — the incentives at risk could be as large as ~$1.5 billion.
If the final language in CEPP is amended to remove penalties for year-over-year declines in clean generation as long as utilities remain above 85%, this could potentially reduce the penalty for Diablo’s closure — provided that PG&E increases its clean generation to closer to 100% prior to closure. However, this would create the perverse incentive of allowing utilities to reduce their clean generation by up to 15% with no penalties. While a modification of the CEPP language to avoid unduly penalizing utilities for year-to-year variation in hydro generation is a good idea, we should avoid doing so in a way that reduces the penalty for eliminating large amounts of existing clean energy.