Subsidizing the Energy Transition: Cost of Internalizing the Externality
Subsidies play a crucial role in governing the transition to low-carbon energy sources, impacting pricing structures for customers and suppliers. Explore the history of federal support for the electricity transition and the ambitious decarbonization targets set for the Northeast by 2050. Delve into the evolving status of gas in electricity generation and its implications for the energy landscape.
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Subsidizing the Energy Transition: Cost of Internalizing the Externality NECPUC 76th Symposium: Plenary Session May 20, 2024
Subsidies Govern the GHG transition Subsidies keep prices for customers below market levels or for suppliers above market levels, or reduce costs for customers and suppliers Subsidies assume form o Federal Tax Credits (ITC, PTC, tax shield) o State sponsored procurements (wind,solar,storage,wire) o Mandates (RPS) o Regulations (Permitting exemptions) Subsidies are baked into the topology of the transition LEVITAN & ASSOCIATES | 2
History of Federal Support for Electricity Transition Price-Anderson Act Established accident liability limits for the nuclear industry FERC Order 636 Securitizing stranded cost liabilities Clean Energy Transition Decarbonization goals, new technologies, Climate funding through IRA ($369 billion), IIJA ($62 billion) Late 1990s- 2010s 1978 Last 10 years 1957 1992 Public Utility Regulatory Policies Act (PURPA) Standard Market Design Natural Gas Policy Act Deregulation of wellhead price controls NRC, The Price-Anderson Act: 2021 Report to Congress, page xvii, https://www.nrc.gov/docs/ML2133/ML21335A064.pdf DOE, The Infrastructure Investment and Jobs Act: https://www.energy.gov/sites/default/files/2022-09/FECM%20Infrastructure%20Factsheet-revised%209-27-22.pdf IRS, Fact Sheet, https://home.treasury.gov/system/files/136/FactSheet-Implementing-IRA-Climate-CleanEnergy-TaxIncentives.pdf. LEVITAN & ASSOCIATES | 3
Northeast 2050 Decarbonization Targets Aggressive emissions reduction targets through 2050 o 5 of 6 NE states have legislative mandates NH* 80% by 2050 VT 80-95% by 2050 State policies drive ISO-NE's resource mix ME 80% by 2050 Uncertainty factors re pace of change NY Net Zero by 2050 MA Net Zero by 2050 Net Zero by 2050 80% Reduction by 2050 RI 80% by 2050 Aspirational CT 80% by 2050 NCEC, Northeast Climate Goals Drive Opportunity for Clean Energy Deployment, June 2021, https://www.necec.org/blog-details/northeast-climate-goals-drive-opportunity-for-clean-energy-deployment LEVITAN & ASSOCIATES | 4
Status of Gas for Generation Share of electric demand served by gas-fired generation has increased o Rapid anticipated marginalization of gas fleet o Ascension of Variable Energy Resources through 2040 Sources of Grid Electricity in New England (Annual Net Energy for Load) 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2000 2005 2010 2015 2020 2025 2030 2035 2040 Oil Coal Hydro Renewables Net Imports Nuclear Natural Gas ISO-NE, New England s Changing Resource Mix and Planning for the Future Grid, August 21, 2023, https://www.iso-ne.com/static-assets/documents/2023/08/8-21-neppa-keynote-gvw-isone.pdf LEVITAN & ASSOCIATES | 5
Electricity Demand Heating electrification will cause ISO-NE to shift from Summer to Winter-peaking 2005-22: Declining demand due to efficiency improvements 2023+: Nationwide trends reflected in New England (Electrification, data centers, EV) ISO-NE, 2023 Final Draft Energy and Seasonal Peak Forecasts, APRIL 14, 2023, page 17. https://www.iso-ne.com/static-assets/documents/2023/04/lf2023_finaldraft.pdf ISO-NE, The Changing System Over the Next Ten Years and Beyond, APRIL 26, 2023, page 13. https://www.iso-ne.com/static-assets/documents/2023/05/ebc_presentation_final.pdf LEVITAN & ASSOCIATES | 6
Clean Energy Transition in NE 120,000 2000 2022 2040 100,000 Generation (GWh) 80,000 60,000 40,000 20,000 0 Nuclear Oil Coal Natural Gas Hydro Imports Renewables ISO New England s Role in the Clean Energy Transition, March 30, 2023. Page 7 https://www.iso-ne.com/static-assets/documents/2023/03/clg_mtg_ethier_iso_energy_transition_ppt_mar_30_2023_final.pdf LEVITAN & ASSOCIATES | 7
Recently Announced OSW Clearing Prices New Jersey's 3rd solicitation, January 2024: o Leading Light Wind: 2,400 MW o Attentive Energy : 1,342 MW o Levelized OREC Purchase Prices: $139/MWh (LLW); $165/MWh (Attentive) New York's 4th solicitation, February 2024: o Empire Wind: 810 MW o Sunrise Wind: 924 MW o Weighted average all-in : $150/MWh NJBPU Board Orders, https://www.nj.gov/bpu/pdf/boardorders/2024/20240124/8A%20ORDER%20Solicitation%203%20Invenergy.pdf, https://www.nj.gov/bpu/pdf/boardorders/2024/20240124/8A%20ORDER%20Solicitation%203%20Attentive.pdf NYSERDA Announcement, https://www.nyserda.ny.gov/About/Newsroom/2024-Announcements/2024_02_29-Governor-Hochul-Announces-Two-Offshore-Wind-Project_Awards LEVITAN & ASSOCIATES | 8
Ratepayer Subsidy from Offshore Wind $5,000 Annual Net Ratepayer Subsidy (Miilions of Nominal Dollars) $4,000 $3,000 $2,000 $1,000 $0 ($1,000) ($2,000) ($3,000) 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 Project 1 PPA Payments Project 4 PPA Payments Less Delivered Energy Value Project 2 PPA Payments Project 5 PPA Payments Less Delivered REC Value Project 3 PPA Payments Project 6 PPA Payments Net Ratepayer Subsidy LEVITAN & ASSOCIATES | 9
Annual Subsidy Allocated to Participating State Retail Load 2.00 1.80 1.60 Average Ratepayer Subsidy (cents per kWh) 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2030 2044 2053 2025 2026 2027 2028 2029 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2045 2046 2047 2048 2049 2050 2051 2052 2054 2055 2056 2057 LEVITAN & ASSOCIATES | 10
Key Takeaways Material subsidies are an integral part of the energy transition and cannot be avoided Both Federal and state subsidies are required to effectuate the transition in New England State procurement goals necessitate long term ratepayer support for OSW, utility scale solar, batteries,HVDC transmission Subsidies will pancake over time in response to heavy VER penetration Laudable climate goals require financial and ratepayer innovations LEVITAN & ASSOCIATES | 11
Financial Challenges Who pays, what are they paying for, when do they pay? Are business-as-usual ratemaking practices realistic to support the transition? o Issuance of medium term or long-dated state general obligations to securitize all or a part of the GHG transition o Progressive income tax reform to yield discretionary funds to mute the onus on overburdened communities o Rate design at the electric and gas distribution company level based on needs test Is it worth a penny or two per kWh to help save the mother ship? LEVITAN & ASSOCIATES | 12
Key Assumptions for Offshore Wind Subsidy PPA Term- 20 years Inflation Rate 2.50% Nominal Discount Rate 4.00% (Social discount rate) Present Value Year - 2029 Market Value of PPA Products o Wholesale energy o Tier 1 RECs OSW Project Assumptions o Project o First Year o Capacity (MW) o LCOE (Nom $/MWh) o Annual Capacity Factor $40.00 / MWh (Level nominal $) $40.00 / MWh (Level nominal $) 1 2025 800 $150 47% 2 2030 1,200 $150 47% 3 2032 1,200 $150 47% 4 2034 1,200 $150 47% 5 2036 1,200 $150 47% 6 2038 1,200 $150 47% This is a speaker note not tobe included in the deck for presentation LEVITAN & ASSOCIATES | 13
