Any utility customer who installs (or engages a third-party to install) an eligible generator on their premises must continue to buy 100 percent of their power from the utility. This is designed to separate the societal benefit of clean power from the financial solvency of the local utility. It's a neat trick that recognizes that the financial settlement of a power contract does not have to have any direct relationship on where current from the generator flows.

When you say "must continue to buy 100 percent of their power", do you mean "100% of their power requirements over and above what they generate on-site"?  Or do you mean that they have to pay the utility for all the power they use, regardless of how much of it they generate on site?  If the latter interpretation, that sounds alot like a departing load fee.

Or is your model this: The customer-generator builds a plant, which sells power to the grid at the pre-agreed rate (per the 15 year contract), while the customer buys all their power through the utility meter.  In other words, the generation and the use of power are separated; i.e. this is not net metering.  After thinking about it, this seems like the most likely interpretation, but hopefully you can confirm or clarify this for me.

The part outside of bold should not be conflated within what is in bold. I've posted int he past on Sulphur trading in the U.S. vs. Sulphur regulation in Germany.  Regulation worked a whole lot faster. So you don't have to be receptive. I guess it is a matter of whether you care if your postion is reality based. If realism is unimportant to you, than by all means be closed to the idea that regulation and public works may provide faster results.

Let's say that you are the big local industrial on a local utility load.  To pick numbers, let's say the utility has a 50 MW load, of which you represent 25 MW.  Then let's assume that you have waste heat and/or a perfectly balanced cogen potential to generate 100% of your load, all of which is at vastly higher efficiency than the grid.

From society's perspective, the choice is a no-brainer.  Install the generation and reap the benefits.  But from the utility's perspective, the choice isn't so obvious.  50% of their capital assets (generation, wires, etc.) has been deployed to serve your load.  While one might quibble that they shouldn't be compensated for building generation & distribution that you could more cost-effectively build on your own, that doesn't alter the reality that if you build the optimal on-site generation, their revenues fall by 50% but their debt-service is unchanged.  Ergo, they've got a hard time keeping rates unchanged for the rest of the customers who don't have such options.

Now look what the CESOP does.  The utility was strapped for power anyway, so the rule simply stipulates that they buy their marginal power from you instead of from a 20% more expensive central power plant.  Whether they use this to serve load growth, the other 50% or simply "flip it" to someone else is immaterial - but in any event, they have to buy the power.

But in exchange, they still serve 100% of the industrial load.  So they still get all the $ they were anticipating to recover their capital, but as a bonus find themselves owning power that they can dispose of however they wish, at a price that is cheaper than anything they could otherwise build on their own.

The key to keep them whole is that 100% of all the power you generate gets sold to the utility, so 100% of the revenues they were anticipating still get earned.  But in the meantime, we've brought cheaper, lower-carbon power on-line in a manner that lowered the rates for all customers.  The intellectual insight here is that you can completely separate the financial transaction for the power sale from the physical transaction of where the current goes, such that the industrial still gets the benefits of the power, but the utility doesn't get hit with a financial hammer as a result.

Make sense?

One could quibble with 50% fossil reduction, I suppose, but recognize that hitting 66% annualized fossil efficiency (2x the grid average) is really freakin' hard with cogen.   You need a steady thermal load pretty much all year long to make this work.  Is it possible?  Absolutely.  But you rule out an awful lot of projects that are better than the grid by far, but not quite up to this standard.  In other words, the bar is high, and sufficiently high that you can't game it.

(I would say, per my Truman line above, that the political challenge of this will be getting all the traditional cogen folks to buy in.  A group with which I have much simpatico, I might add, but one which will really struggle to hit the 66% threshold.)  

But if you hold out for 100%, I'd argue that you're making the perfect the enemy of the good, to the detriment of the overall concept.  That said, I think it's quite reasonable to devise a formula whereby the total payment is indexed to the % above the average fossil efficiency.  (For example, if 2X gets 80% of the avoided cost, maybe 100% improvements get 90% of avoided cost, with a linear connection in between.)  

But keep in mind that this is not meant to be a GHG policy as much as an energy policy that is internally consistent with GHG objectives.  Let's set a GHG target because that's an important goal, but let's then also set a price on GHG emissions that can be additive or subtractive to the revenue earned under this program.  (For example, while a coal CHP plant could hit this goal just as readily as a gas plant with careful thermal matching, that doesn't mean that the gas plant wouldn't be eligible for additional revenues as well due to it's lower GHG signature.)

In fairness, the trouble with any analysis of past regulation is that it is monumentally difficult to back-figure how the world would have responded if we changed one variable and held all else constant.  The experiment has no controls.  What I know from experience is that markets innovate and craft all sorts of clever ideas (provided appropriate gov't oversight) and top-down regulations constrain solutions.  Maybe you draw a different conclusion from the data, but it's not because we have different goals, nor because we have differential levels of reality-acceptance!

1. I think your conditions of 80% of the cost of the central option and half the ton as the grid are too rigid conditions. How would the commission decide between a CHP facility that is half as efficient as the grid that costs 79% of the central option and a wind facility that has zero emissions and costs 81%? Under your rules, the CHP plant would be chosen, while the wind facility probably meets the policy goals better. Its not initially obvious how to design a scale that maximizes reductions and minimizes costs, but I'm sure it exists.

2. This sounds like a good near term policy to the impending increases in energy prices as new expensive capacity will soon need to be built, while also reducing GHS's. But it won't get us all the way to our goal until we think about replacing old inefficient generators. Under a system that puts a price on carbon (tax, cap, OBS), what type of generator would be the first to close? From your previous article, it is based on a mix of fixed and variable costs. Any price on carbon (tax, cap or OBS) would add significantly to the variable costs of coal and a lesser amount to the variable cost of natural gas. So which would be priced out of the market under carbon pricing: inefficient coal whose capital costs are paid, newer more efficient coal whose capital costs are not amortized (do these even exist?), and newer natural gas? Or is there no straight answer to this question? The reason I ask this question is to get buy in from the electric industry for future policies, we might have to make the utilities whole. I'm wondering which type of utility would be the biggest loser under carbon pricing.

At core though, the purpose of the CESOP is to get more, lower-cost sources of power deployed than will be deployed under our current regulatory regime, and to unleash the capital and entrepreneurial power of our economy in the electric sector without first having to unbundle 100 years of regulation and jurisprudence.)

As to who would be the first to shut down, per my prior post, the plants all run so long as they are recovering their variable cost.  At current gas prices, I don't see any GHG pricing regime that would shift existing coal onto the margin relative to natural gas.  But it would affect the decision to build new plants.  You raise a very good question about shutting down old plants though, and one that will get you kicked out of many an electric policy meeting for daring to suggest that an asset, once built ought ever be retired before it has been fully amortized twice over.  Indeed, I know of no other industries where 50-year old assets are not only still running, but are actually competitive (without major modification - there are old steel mills running, but they are almost totally rebuilt from their initial designs).  The reason is a regulatory model that massively protects those old assets from competition, and a full overhaul of the system to inject competition would immediately mothball many of those plants.  (If all we did was remove the grandfather rights of the Clean Air Act, such that all plants had to operate under the same emissions regime, regardless of when they were built, we'd shut down lots of those old dogs.)  But I know of no way to make that reform in a way that won't trigger massive political opposition.  Not to say we shouldn't do it of course, but we need a politically elegant way to do so, or else it's just a lot of yelling with no result.  Ideas welcome.

Re: your first comment, I agree.  I threw this out as a possibility, but the more I think about it, the more I think a single 80% value and 2x efficiency test is simple and sufficient.  The complexity of a sliding scale gains little, but adds massive complexity.

From all this we may conclude that the current regulatory structure in Wisconsin seeks to provide the lowest-cost electricity to the rate payers.  Waste one third of the heat generated by dumping it into the natural environment?  Doesn't matter.  

I admit I'm struggling to understand parts of your re-regulation proposal.  Thinking about our local situation one day, I searched online for "electric utility heat exchanger" and found you.  Could a company like RED build a closed loop heat exchanger near our IOU's site to use the waste heat to generate electricity under your proposal and be profitable?  

A more efficient design of these two new plants could have incorporated a closed loop heat exchanger from the start (if I correctly understand your writing), although the cost to rate payers would have been higher due to the increased cost at the outset.  In our current regulatory scheme, even if that had been proposed (it was not, as far as I know), it would have been vetoed by the PSC as too costly, just like the coal gasification proposal.  But if the market could provide a way to do it, we could get to where we as a society want to go.  If there are any regulatory barriers to an independent company doing what the IOU could have done in the first place, those barriers should be eliminated.

The benefits to society would include that Lake Michigan water temperature would not rise artificially; we would burn significantly less coal to generate the same amount of electricity; the cost to rate payers might go down due to the efficiency increase; the IOU is not injured as their sunk costs and financial commitments would go forth on schedule.

We're looking for the best balance between regulation and market forces.  We don't want to de-regulate, we want to re-regulate or restructure.  I know what outcome I want:  to stop "smoking" -- stop dumping GHG into the environment.  I'm starting to be persuaded that we should not make laws that incentivize a particular technology.  If somebody could profitably generate electricity from the waste heat (or use the waste heat to economical advantage), then I would only wish for the law to stay out of the way to allow that capital investment -- as long as it doesn't veer off the path toward the smokeless atmosphere.

If I'm completely wrong-headed I apologize and I'll go back to reading silently.

To take an agricultural point of comparison, it's directly analagous to the separation of combined crop/livestock lots, where the waste of one was the fertilizer for the other but now both produce prodigious environmental externalities in the form of settling ponds and fertilizer run off.  The logic for building those is that if you only wanted to grow corn, the economic size is big.  But if your goal was to minimize inputs per $ of profit, you build smaller and size the two relative to one another.  

Taking this back to power and our big coal plant analogy, the big coal plants being built right now are like massive cattle feed lots.  They're more economic than small feedlots, but both of them are vastly more wasteful than the integrated farms of yore.  In power, this means that power plants need to be sized not to the power need, but to the local thermal need.  Thus, 10 50 MW combined-heat and power plants rather than 1 500 MW power-only facility.  (This same logic applies where there is not a local thermal source, but there is a supply of opportunity fuels like heat, landfill gas, etc.  Size to those fuel supplies rather than power demand for maximum economic return - which again means smaller facilities.)  The end result when you size this way is that you don't need the cooling tower at all, because your local thermal load is doing the cooling for you or, in the case of waste heat, you're throwing slightly less heat away than you were throwing away before, leading to a net reduction in heat rejection to the environment.  (Admittedly, you might shift from atmospheric heating to water heating, but it's still at a vastly smaller scale.)

The irony is that those smaller units can beat the stuffing out of the big plants because they are so much more economic - which is why the utilities have fought them so hard.  But they don't get built in our model.  The idea of the CESOP is to make sure that those smaller plants get built first, so that we don't then need to shut down the big and expensive (but grandfathered) ones that we're going to build if we stay on our present course.

The grid serves a purpose, guaranteeing stability of the supply across many sources. Perhaps it should be nationalized as much as our interstate highway system has been.  I realize this comes at a cost but there is a public benefit attached thereto which need not be tied to corporate profit-taking at all turns on the way to a renewable energy future.

I don't agree that the large investor owned power companies continue to need to sit in the catbird's seat indefinitely here, whether that means guarantees of profits or fiscal "wholeness".  The risks of distributed energy production will necessarily be taken on by other smaller players, who should also be justly rewarded for their investments in sustainable energy technologies and production.

I also disagree that the guarantee of grid operator "sales" (even when they did not produce the energy nor transport it, as condition #4 suggests may be the case) and profit needs to be included since we all know the many externalities of current unbalanced energy production on the environment and future life on the planet.   Nothing in this proposal seems to address the externalities, instead it seems to be all about price.   A carbon tax could be much more effective addressing the externalities than this command-subsidy setup which seems biased only in favor of continued energy production increases and not in favor or taking old outmoded dirty energy sources offline in time.

In short this seems an incremental approach not destined to succeed along the lines required (see challenge set forth by Mr. Gore last week).  We would continue to have those old dirty coal plants on line indefinitely this way too, wouldn't we.

Moving toward sustainability with hopefulness, one revolution at a time.