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House Reconciliation Provisions Target Eliminating Natural Gas Power Generation

Details have emerged on the Democrat $3.5 trillion "human infrastructure and climate change" tax and spending package. We're focused on the energy-related parts of the proposal coming from the House Energy and Commerce Committee. Language was released yesterday which the Committee will be considering this week.

Bottom line: a major provision of the bill is aimed directly at eliminating natural gas and coal fired electricity generation unless the generator is equipped with carbon capture, but with perverse incentives to discourage that from happening.

The mechanism is called the "Clean Electricity Performance Program" which amounts to a byzantine and unprecedented system of money grants paid to, and financial penalties assessed on power producers, based on their year-over-year increase in production of "clean electricity".

"Clean electricity" is defined as generation that emits no more than .1 metric tons of CO2 equivalent per megawatt hour generated. Since the average natural gas plant emits about .4 metric tons/mWh, for its output to qualify as "clean electricity", 75% of its CO2 emissions would have to be removed.

The formula would grant the power producer $150 for each megawatt hour of increased "clean electricity" generated, but only if the increase is at least 4% above the previous year's production. The grant applies to the amount of "clean electricity" produced that is above a 1.5% increase threshold. There is no upward limit on the amount of such electricity eligible, or the dollar amount of award.

The bad news is a penalty that applies if the producer does not increase its clean electricity output by at least 4% from the previous year. If they fail to reach that 4% level, they would be required to pay the Department of Energy $40 per megawatt hour of "shortfall" from a 4% increase. So if you are a power producer that generates only from natural gas, 4% of your megawatt hours of output would be subject to the penalty.

As an example of what that would mean in the real world, we calculate that if you are a 400-megawatt capacity gas-only power producer with average output at 75% of capacity, and you do not add at least 4% "clean electricity" to your output during the year, you owe the Department of Energy $4.2 million in penalties for that year.

On the other hand, if you are a 400-megawatt solar farm and your average output is 25% of your capacity, and if you add 20% solar output over the previous year, the Energy Department pays you about $26 million for the year.

This is clearly an attempt to force utilities to limit or eliminate additions to gas and coal-fired generating capacity in favor adding solar or wind generation; or alternatively equipping gas-fired capacity with carbon capture. That would force the gas-fired producer to decide whether to invest in retrofitting existing capacity with carbon capture or invest that money into new renewable generation.

We can't predict at this point whether this system will survive the contentious reconciliation negotiations, and we have not seen a "score" on what it might cost the government. But if proponents can come up with a model where the penalties on the gas generators subsidize awards to the "clean electricity" generators, the number theoretically could be manipulated to net-out to zero.

We'll circulate this analysis widely on Capitol Hill and will watch the process closely. As it moves forward, we anticipate asking you to engage with your Senators and House members at key points in the process.

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