Federalism and the rise of renewable energy: preserving state and local voices in the green energy revolution.

Author:Lyons, Daniel A.

The rise of renewable energy has disrupted the traditional regulatory structure governing electricity. Unlike traditional fossil fuel power plants, wind and solar facilities are geographically constrained: they exist where the wind blows and the sun shines. Large-scale renewable energy is more likely to flow interstate, from resource-rich prairie and Southwestern states to energy-hungry population centers elsewhere. The difficulties of coordinating interstate electricity policies have led some to call for greater preemption of the states' traditional duties as chief regulators of the electricity industry. But while preemption would eliminate some state-level roadblocks to interstate cooperation, it would sacrifice many of the benefits of local knowledge and experimentation in a diverse and innovative new marketplace.

This paper examines the benefits of a cooperative federalism approach to electricity regulation. The challenges facing renewable energy are regional in scope, and there is value in preserving state and local voices in policymaking decisions. It examines three aspects of the renewable energy debate--siting generation facilities, building transmission lines, and adopting demand-side renewable energy standards--and, for each, explores governance structures that would promote greater regional cooperation without sacrificing the benefits of decentralized government.

CONTENTS INTRODUCTION I. ELECTRICITY REGULATION AND THE RISE OF RENEWABLE GENERATION A. The Traditional Regulated Utility Model B. Federal Deregulation of the Generation Market and the Birth of Renewable Energy C. State Growth in Demand for Renewable Energy II. CHALLENGES TO RENEWABLE ENERGY DEVELOPMENT A. Local Opposition to Renewable Generation Facilities B. Transmission Challenges C. Grid Stability Challenges D. Demand Side Concerns III. FEDERAL PREEMPTION OF ELECTRICITY REGULATION AND ITS ALTERNATIVES A. Federal Governance Through Preemption B. The Matching Principle and Regional Governance C. Building Regional Governance Through Cooperative Federalism IV. OVERCOMING OBSTACLES TO RENEWABLE ENERGY THROUGH COOPERATIVE FEDERALISM A. Siting Renewable Generation Facilities B. Electricity Transmission 1. Grid Stability 2. Transmission Line Planning and Siting C. Renewable Portfolio Standards CONCLUSION INTRODUCTION

America is in the midst of a quiet electricity revolution. Spurred by federal policies promoting energy diversity (1) and state initiatives to decrease reliance on fossil fuels, (2) companies have begun investing significantly in renewable electricity generation. From 2000 to 2012, wind power capacity in the United States increased twenty-five fold to over 60,000 megawatts, (3) enough to power more than fourteen million homes. (4) Solar electricity capacity has quadrupled in the past four years alone, reaching the 10,000 megawatt milestone in 2013. (5) America currently generates approximately thirteen percent of its total electricity from renewable sources, (6) and the Department of Energy expects that share to grow. (7) It estimates that one-third of all new capacity built in the next quarter-century will be from renewable sources. (8)

Renewable energy differs from more traditional electricity sources in several important ways. Perhaps most obviously, renewable energy generates less carbon dioxide and air pollutants than traditional coal or natural gas-fired power plants, which makes it an attractive alternative for environmentalists. (9) And fuel costs are negligible: while traditional electricity often depends on fossil fuels whose prices vary in the market, wind and sunshine are free. But those fuel sources are intermittent. Renewable facilities produce energy only when the wind blows or the sun shines, which poses challenges for grid regulators. And significantly, renewable electricity must be generated where its fuel is found. Unlike fossil fuel or nuclear power plants, which can be located virtually anywhere in the country, wind turbines can only be built in windy locations and large-scale solar projects are most feasible in hot, arid environments. Renewable energy thus requires significant infrastructure investment to bring electricity from generators to consumers.

Though renewable energy will not displace fossil fuels as American's primary electricity source anytime soon, its growth threatens the stability of the traditional regulatory model governing electricity. Like many New Deal-era administrative statutes, the Federal Power Act divided regulatory authority neatly between the federal government, which regulates interstate electricity sales, and state regulators, which regulate intrastate activity. (10) Historically this division favored state regulators, as electricity was primarily an intrastate industry: vertically integrated utilities built power plants near population centers then constructed transmission lines to carry electricity to the local community and distribution networks to deliver power to consumers. (11) Most utilities operated within a state-granted intrastate service area and were overseen primarily by state public utility commissions. (12)

But the deregulation of electricity generation, and the rise of renewable energy in particular, have threatened the states' primacy. Improvements in transmission technology and federal policies promoting independent (non-utility-owned) power production have created a competitive wholesale power market allowing for more interstate electricity sales. (13) In the renewable power sector, a significant portion of electricity is likely to flow interstate. Renewable energy potential is highest in the Midwest and southwestern states, where wind and sunshine are abundant. But it is likely to be consumed by load centers several hundred miles away. (14) The existing transmission network is insufficient to transport large quantities of renewable electricity to load centers, or to manage the variability created by intermittent renewable generation. And many states eager to promote "clean energy" will lack the ability to do so without cooperation from neighbors whose geography is more amenable to renewable generation.

With some states poised to become net exporters of renewable energy, and others net importers, some policymakers have questioned whether states should continue to serve as chief regulators of the electricity industry. Since 1978, Congress and the Federal Energy Regulatory Commission (FERC) have taken numerous steps to increase federal regulation of the electricity market, some of which have proven more successful than others. Citing the interstate nature of renewable energy markets, the national benefits of reduced fossil fuel consumption, and state and local barriers that inhibit renewables growth, more voices are calling for the federal government to displace the states and assume the primary role over the electricity industry.

But these calls for federal preemption overlook the ongoing interests of state and local governments in shaping the renewable energy sector. Many key policy questions facing the renewable power sector--where to build new renewable generation facilities, how to modify and extend the transmission network, and how to calibrate the appropriate fuel mix between renewable power and more traditional electricity sources--are regional in scope. While there is unquestionably a federal interest in preventing parochial state interests from jeopardizing broader regional benefits, there is a concomitant state interest in leveraging local knowledge and identifying instances where regional diversity makes a uniform federal policy inappropriate or inefficient. Especially in an industry as dynamic as electricity generation, it is important to preserve space for experimentation and innovation that could be crowded out by broad federal mandates.

This paper explores the ongoing role that state and local officials should play in the renewable energy sector. The dual federalism approach embodied by the Federal Power Act offers a false dichotomy between state and federal regulation. Cooperative federalism provides the potential for greater dialogue between state and local officials, and allows for more regional experimentation within broad federal confines. Cooperative federalism has been instrumental in helping policymakers manage transitions in many other regulated industries, and those insights can help inform regulation of the increasingly dynamic and complex electricity industry. While a complete overview of the electricity industry is beyond the scope of this article, the discussion focuses on three key policy issues implicated by renewable energy: siting renewable generation facilities, managing and expanding the transmission grid, and determining appropriate renewables demand. For each issue, the article applies federalism principles to identify the key interests involved and explores structures that would promote regional cooperation where necessary without sacrificing the benefits of decentralized government.


    1. The Traditional Regulated Utility Model

      Analysts typically separate the American electricity industry into four segments: fuel, power generation, transmission, and distribution. (15) Within the generation segment, most of America's power plants run on fossil fuels. Two-thirds of all electricity generated in the United States in 2012 came from either coal or natural gas-fired power plants. (16) Nuclear power accounted for another nineteen percent, while renewable energy made up twelve percent of America's electricity in 2012 and has gained share slightly in 2013. (17) Once the electricity is generated, it travels over high-voltage transmission lines to a utility substation, where transformers convert the power to low-voltage electricity and distribution lines deliver it to customers. (18)

      Traditionally, state public utility commissions have regulated the vast majority...

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