North American cities are a bit like the little engine that could: what they lack in political power, they often make up in drive and vision.
Cities motivated to use energy more sustainably do not always have clear authority to take action because energy is typically controlled at a provincial or state level. But cities can and do get innovative.
One of these innovations is the focus of our new backgrounder, CLEAN Cities: A renewable financing option for supporting local renewable energy. It explains how cities can deploy the world’s most effective renewable energy policy and adhere to a lofty principle that marries sound economics and good environmental policy. All with something called “franchise fees”. Let me explain.
Energy users often don’t pay
When a power producer makes electricity from coal, the pollution harms both the environment and human health. This has real costs for our society. Ontario estimated that the health-related damages of coal could top $3 billion a year. A Harvard Medical School study found up to $345 billion in U.S.-wide costs. (media report here; original study behind a paywall here)
But consumers don’t see these real costs in the price they pay for electricity on their bills. If we did, coal power prices would go up so much (18 cents per kWh according to the Harvard study, compared to the 11 cents per kWh we pay for electricity here in Alberta) that we might stop thinking of coal as cheap and we might be smarter about our energy use. Instead, we all pay the costs as taxpayers, insurance holders, and workers. And Old King Coal keeps puffing along.
Cities have reason to be concerned about this. Many cities are starting to realize that the energy consumed within their borders not only represents a major cost, but also a large part of their environmental impact. For example, in a study for the City, Pembina found that 48 per cent of Calgary’s greenhouse gas emissions result from electricity consumption.
Cities can act. In a prior post, I described how Gainesville in Florida is an example of a city that has taken a leading step in acting locally. They are providing guaranteed rates, known as feed-in tariffs or CLEAN (Clean Local Energy Available Now) contracts, for electricity generated from solar photovoltaic (PV) systems. This is the world’s most effective way to encourage renewable energy development. And the icing on the cake: the user (electricity consumer), not the taxpayer, pays the true cost.
But Gainesville owns its electricity utility and can set electricity prices to recover the program costs. Many cities are not in the same boat. They could use tax revenues, and some do. But that puts the cost back on everybody, instead of the user who is creating the need in the first place. More importantly, it pits renewable energy against other pressing budget priorities, often creating limited program ambitions or unstable programs — or both.
The franchise fee innovation
Cities possess a really innovative solution: franchise fees (a.k.a. “local access fees”). Instead of leasing out space and levying taxes on each individual power pole or transformer station in the city, many cities charge annual fees to their energy distribution utilities. Often, cities can set the fee so that it is recovered at a set rate based on energy consumption.
These fees are a cost of doing business in cities. As they would from any business in town, cities collect these fees as part of their annual revenues. Cities often have the power to raise the fees marginally and can direct the additional income to fund important programs. What better purpose for this revenue than to fund energy projects to help meet energy needs locally and cleanly? By supporting renewable energy development, cities can reduce the impact their electricity demand has on the environment and meet some of the demand locally. It just makes sense to use local consumption to fund local solutions.
As long as there is also a net metering program in the province or state (all Canadian provinces and most U.S. states have some sort of net metering), cities can marshal their franchise fee powers to deploy effective renewable energy policies without diverting a single tax dollar. They simply set a franchise fee rate to collect sufficient revenue from energy use to fund a top-up to net metering prices that would be guaranteed over a long enough period to make investing in local renewable energy projects affordable. Since the fee is based on use, those who conserve energy and use it more efficiently will pay less.
The City of Edmonton has examined the idea through its Renewable Energy Task Force. With such a program, Edmonton can increase the amount of solar PV capacity in the city by as much as 100 times the existing capacity, directly creating dozens, even hundreds of new solar installation jobs each year.
By supporting local renewable energy, consumers would spend less on electricity imported from outside the city, keeping millions of dollars in the local economy. And the cost to the average residential household? Less than $1 per month, according to reports the Task Force has received.
Visionary cities wanted
If yours is a visionary city interested in growing the local opportunities of renewable energy development, this policy model is waiting for you. It is replicable across much of the continent. Take a look – see if your city can put franchise fees to work to become a regional renewable energy leader.
Ben Thibault was the director of the Pembina Institute's electricity program until 2016.
