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Obama’s Energy Plan and Your Energy Bill

Electricity prices will increase, but your bill could actually come down.
February 1, 2011

A national energy plan proposed last week by President Obama could have a paradoxical impact on the nation’s energy bills. It is likely to raise electricity prices by forcing utilities to use certain sources of energy, but it could lower energy bills by offering people incentives to reduce the amount of electricity they consume.

According to an outline supplied by the White House, the energy plan would include a clean energy standards that would require that the United States get 80 percent of its energy from “clean” sources by 2035.  These would include renewable sources such as wind and solar, nuclear and natural-gas plants, and coal plants that capture and store the carbon dioxide they produce. Currently about 40 percent of U.S. electricity comes from such sources.

The standard is an alternative to the climate and energy legislation that passed the House in 2009 but failed to pass the Senate last year. That legislation included a cap-and-trade system, limiting the total carbon-dioxide emissions from most sources but leaving it up to emitters whether to achieve the goal by switching to cleaner energy, promoting energy efficiency, or buying emissions credits from others.

In general, economists prefer cap-and-trade to clean-energy standards because it gives emitters more options for reducing their emissions, allowing them to choose the methods with the lowest costs. However, some economists say that in theory it’s possible to design a clean-energy standard so that it approaches the flexibility of a cap-and-trade system. “To the extent that the mandate says ‘I don’t care how you get there,’ then they come pretty close,” says Wallace Tyner, professor of agricultural economics at Purdue University.

Indeed, according to a White House fact sheet, a goal of the new standard is “to give utilities the flexibility to generate clean energy wherever it makes the most sense.” Therefore, the fact sheet says, “all clean sources—including renewables, nuclear power, efficient natural gas, and coal with carbon capture and sequestration—would count toward the goal.”

But even as the bill is being written in Washington, special interests are likely to intervene. “You can make it look exactly like cap-and-trade. The problem is that’s extremely unlikely to happen,” says Severin Borenstein, a professor in the Economic Analysis and Policy Group at the University of California, Berkeley. “It usually ends up getting highly politicized, so that every renewable-energy source says we need our special share of the pie,” he says. This forces utilities to use certain forms of clean energy regardless of price.

Even if the system implemented is as flexible as possible, it is likely to increase electricity prices by forcing utilities away from one of the least expensive sources of electricity—conventional coal. But the increase might not be much more than it would have been without a policy, says Kevin Leahy, managing director of climate policy at Duke Energy, a major utility. Utilities are already shifting away from coal to natural gas, largely because of existing pollution controls, he says. “If you include natural gas in this policy, then you’re just going to see the world do what was going to do anyway, which is use natural gas,” Leahy says. But, he adds that “a lot would depend on the details.” For example, the White House has suggested that utilities using natural gas may receive only partial credit toward the clean-energy goal. So they may need to draw on sources of power such as solar or nuclear to a greater extent than they would have without a clean-energy standard, driving up electricity prices.

To offset the likely increases in electricity prices, the Obama plan includes energy-efficiency incentives. There are already many ways that people can affordably cut electricity consumption—such as buying more efficient lightbulbs and appliances, and installing better insulation. But, Wallace Tyner says, the evidence suggests that most consumers won’t make these investments, even if they pay for themselves in just a few months. “If they have to pay a little more, even if they get it back very quickly, they don’t do it,” he says. But in the past, energy-efficiency standards, tax credits, and other incentives—much like the ones Obama has proposed—have led consumers to adopt efficiency measures. If these measures save enough energy, he says, “you could end up with bills that are lower.”

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