In June 2014, the EPA released its proposed carbon emissions rules to reduce carbon dioxide emissions from existing fossil fuel power plants. This so-called ‘Clean Power Plan’ proposed a regulatory framework that mandates US power plants reduce GHG emissions 30 per cent by 2030 relative to their 2005 baseline. Taking center stage in this proposal are individual states, which are given the flexibility to determine their preferred way of complying with the new regulatory requirements – i.e. meeting the set carbon emission targets. The states are required to submit a plan by 2016 that reduces GHG emissions by 30 per cent in 2030. In this respect, the Clean Power Plan also lays out “Building Blocks for the Best System of Emission Reduction” that individual states can use to cut down on carbon pollution.

Now, a new report by The Analysis Group recently released at the National Association of Regulatory Utility Commissioners (NARUC) conference in Dallas, Texas shows that states seem to already possess the tools needed to cut down on carbon emissions, boost the economy and protect consumers financially. The report titled “EPA’s Clean Power Plan: States’ Tools for Reducing Costs and Increasing Benefits to Consumers” studied 25 states already cutting carbon pollution and found that “the impacts on electricity rates from well-designed CO2-pollution control programs will be modest in the near term, and can be accompanied by long-term benefits in the form of lower electricity bills and positive economic value to state and regional economies.”

The reasons for this conclusion are varied. Foremost, given the flexibility granted to states under the proposed ‘Clean Power Plan’, states will have the flexibility – as intended – to “prepare and implement State Plans that fit their circumstances, minimize costs of compliance, and provide benefits to customers.” Note, states differ in many ways ranging from their “electric systems, their regulatory culture, [to] their electric industry structure.” The report cites the following two examples:

1. “States with vertically integrated utilities have mechanisms (…) for identifying least-cost compliance strategies. States have considerable experience and strong practical background in evaluating portfolios of supply and demand resources with costs and reliability in focus, and in encouraging long-term investments that minimize costs and maximize electricity consumer benefits.”

2. “States with restructured electric industries can choose from a variety of market-based mechanisms that dovetail well with competitive retail and wholesale electric industry structures.”

Moreover, especially the implementation of market-based programs within individual states creates the opportunity for states to join forces and devise “workable multi-state programs to control CO2 emissions from existing power plants, in ways that fully preserve the rights of states in program design and administration,” the report stresses. Even though the EPA has explicitly not required states to develop their plans together, in light of commonly shared  – i.e. across state boundaries – power generation assets as well as resources and global lessons learned with respect to devising a viable carbon pricing mechanism, this ‘multi-state’ possibility appears practical.

This report is especially noteworthy as it looks at how regulatory compliance costs translate into impacts on consumers’ electricity bills. “States have many decades of experience with electricity rate design, program benefit and cost allocation, and compliance program planning and implementation that will help guide an equitable distribution of program costs and benefits, while protecting lower-income customers,” the authors suggest and point to existing carbon-control programs already in operation in some states across the US in order “to illustrate how program design and state ratemaking policies can influence the distribution of cost and benefit outcomes to consumers.”

Prima facie, great news for US electricity customers: “States have the means to help ensure that compliance costs are as low as possible – and to provide benefits to local economies.” However, there is a very important caveat, as the authors of the report explain:

“In many parts of the U.S., there is not a straight line connecting the costs incurred by the owners of the power plants directly affected by EPA’s Clean Power Plan, and the costs, benefits and state/regional economic impacts experienced by electricity consumers and other players in the electric industry. In fact, the relationship between power plant owners’ compliance costs and consumers’ prices will vary significantly, depending upon many factors (such as whether the local electric utility owns any power plants, or what things a state includes in its State Plan). [Additionally], it is also important to keep in mind that the impact of the Clean Power Plan on electricity prices – through increased costs at some power plants – is incomplete in the sense that it examines and over-emphasizes only one part of the electricity cost structure [- costs relating to electricity supply].”

Consequently, in order to keep the impacts on consumers’ electricity bills relatively contained, a plethora of other pricing variables need to be in the states’ toolbox such as effective energy efficiency strategies, demand response programs flanked by the integration of residential as well as utility-scale renewable projects in order to reduce overall demand for electricity and, as outlined by the report, “in turn lower average cost of electricity supply.” The following graphic shows a typical electricity cost structure comprising the three cost elements involved:

Source: EIA; via The Analysis Group