Policy fixes to unleash clean energy, part 8

U.S. energy and environmental policy sucks. We burn too much fuel, we emit too much pollution and we do so under a set of rules that cause us to spend far too much on energy, even as we use it in volumes that poison our planet, our geopolitics and our economy. We deserve better.

That said, while it’s fairly easy to identify what ideal energy and environmental policy would look like if we had a clean sheet of paper, it’s harder – and ultimately, more important – to figure how to achieve those objectives within existing political constraints. 

That’s not to say we settle for half-measures.  After all, the political challenge to reform is dwarfed only by the consequences of inaction. Rather, we need to insist that our politically-constrained actions pass two key tests:

1. They have to matter. The fact that big reform is hard shouldn’t consign us to irrelevant actions. Getting a $100 million earmark in a $700 billion stimulus packages is the same as getting a millionaire to write you a check for $142, and warrants about as much joy. The U.S. spends $360 billion per year on electricity in the course of consuming some 3.5 million GWh and releasing over 40 percent of all U.S. CO2 emissions. By all means, let’s celebrate small victories, but not lose sight of the challenge we face.
2. They have to maximize the ratio of societal gain to political pain. Except in times of immediate, tangible crisis, the safest political action is always to do nothing – and even reform-minded politicians need to get re-elected. Politically viable, lasting reform has to give enough mid-term social gain to quickly offset the near-term political pain. 

Of bricks and dams

An old joke: How fast do you have to run to outrun a hungry bear? A: Faster than the other guy. Similarly, energy policy reform need not out-run the bear – it simply needs to advance far enough to let others finish the job. Our challenge is not to remove every regulatory brick that holds back clean energy progress, but rather to remove those few critical bricks so that the pent-up pressure behind the dam can wash out the remainder. So which bricks? Here are my three, in rank order:

1. Recast all emissions standards on an output-basis.
2. Institute a Clean Energy Standard Offer for federal electricity purchases
3. Create a regulatory modernization committee

None of these have obvious political opposition. None require picking a fight over states’ rights, opposing powerful vested interests nor are they dependent upon economic sacrifice. All could be just as easily justified on traditional Republican or Democratic principles. And most importantly, each would unleash a flood through the dam. 

Recast all emissions standards on an output basis

At the simplest level, an output-based standard is just algebra. Take an existing, parts-per-million standard, multiply it by a few factors relating to the stoichiometry of a combustion process and its fuel efficiency and you can get an environmentally-equivalent standard framed in pounds-per-unit of useful energy output (e.g., MWh of electricity, MMBtu of thermal energy, etc.)  The math guarantees that the standard places a standard for emissions at least as stringent as the existing regulations. But as the saying goes “what gets measured gets managed.” Having historically ignored the efficiency with which we convert fuel into useful energy, our environmental regulations have unwittingly placed environmental compliance in direct opposition with energy efficiency. I wrote here about the key details to get output-based standards right so won’t repeat them – but suffice it to say that the details are really important.

Understanding why this simple tweak would unleash a flood of clean energy investments requires first understanding how industrials invest capital. Businesses have fixed annual capital budgets. The simplistic view is that this capital is allocated purely in terms of risk/reward, with the most attractive projects getting funded first. The reality is more nuanced. Like Orwell’s pigs, some high-return capital projects are more equal than others. And some negative return projects are more equal than high return ones. This is because of the sequential prioritization of capital that businesses follow:

1. The first use of capital is on government-mandated projects. From environmental remediation to health & safety compliance, there are a host of projects that are built not because of their economic return, but because they are required. (And yes, one could argue that they have a high return since they allow you to keep operating. But by that logic, Catherine Martin had an economic interest to “rub the lotion on its skin”.)  
2. The second use of capital (to the extent that any remains) is to invest in core-business activities. Peter Drucker has taught a generation of managers to preferentially deploy scarce capital towards core activities. This is very sensible, and has led to the streamlining of American businesses; it explains why so many paper goods companies no longer to own forests and why your employer has (in all probability) long-since out-sourced its pension plan and cafeteria. However, it also means that lots of high-return projects don’t get built. A paper mill will invest in an upgrade to their paper machine that delivers a 16 percent rate of return before they’ll invest in an upgrade to their boiler that delivers a 20 percent rate of return – not because they see the latter as more risky, but because they want their managers to stay focused on making paper.
3. The third use of capital (again, to the extent any remains) is for non-core investments. Unless you’re in the energy business, all energy projects fall into this bucket.

In my experience, this means that any efficiency project with more than a 2 year simple payback (about a 45 percent rate of return) is unlikely to attract private capital. But an output-based standard would jump clean energy from the third to the first funding bucket. Better still, it moves it to the top of that funding bucket since industrials will – for the first time – have a way to profitably comply with environmental mandates. 

This is a brick that unleashes a flood. Change the algebra and you will see a huge boom in the demand for clean energy. Rather than prescribing specific pollution control devices (and hoping we prescribed the right ones), industrials would have the flexibility to choose the mix of cogen, solar, boiler controls upgrades, selective catalytic reduction and any of a host of other technologies to meet the mandated emissions level. This would also significantly expand the financial resources available to the clean tech community – lowering the investment returns required to get those technologies deployed will necessarily induce more risk-averse investors to enter the space. And perhaps most important from a political perspective, it would finally end the false debate between the economy and the environment, by giving businesses profitable ways to meet (no less stringent) environmental objectives.

It’s worth a final note on the politics of output-based standards. In talking about this idea with Congress, we‘ve encountered one opposed constituency: U.S. coal miners. Not to output-based standards specifically, but to any policy that increases the efficiency with which the U.S. uses energy. That sounds like a big deal, but it’s really not. The entire U.S. coal-mining industry employs about 80,000 people, providing employment for about 0.06 percent of all U.S. non-farm employees. To put that in perspective, there are 280,000 people employed in “baking and tortilla manufacturing.” It’s a winnable fight.

Institute a Clean Energy Standard Offer for federal electricity purchases

Lisa Margonelli wrote recently in The Nation about the idea for a Clean Power Agency, tasked with buying clean power from high-efficiency and renewable generation plants to create a market pull for clean energy. I love the idea, but suggest a few tweaks to make it more politically saleable. 

The creation of any new federal agency is bound to face political challenge. However, two points are unassailable: (1) the federal government buys a lot of electricity and (2) the federal government stipulates how it buys a lot of things. This latter point is particularly relevant – from EEOC requirements to prevailing-wage construction principles, the government mandates that many of its purchasing decisions factor in broader societal considerations. Why not do the same with electricity?

To be sure, the federal government does have some limited guidelines for electricity purchases, most notably those associated with the 2005 EPACT. But this law leaves a lot to be desired. First, because it places paths ahead of goals (e.g., it stipulates that the government must buy power from certain technologies, rather than from any technology that meets certain standards of cleanliness.)  Second, because it includes those dangerous weasel words: “to the extent economically feasible and technically practicable.”  In other words, we’d like to buy clean energy, but not if it’s too expensive. (And even then, this requirement is only imposed on a tiny percent of total government electricity purchases.)

This sounds reasonable – except that we don’t tolerate it with respect to other government purchases. Should the government buy 3 percent of their office supplies from companies that don’t discriminate, but only if “economically practicable”?  Worse, “economically practicable” is in the eye of the beholder. Getting rid of child labor is economically impractical if you ignore the economics of the kid. So should the government define “economically practicable” without including all the externalities and cross-subsidies innate to dirty energy? The law doesn’t say.

Fortunately, laws can be changed. 

First, instead of mandating the purchase of power from specific technologies “if economically feasible,” mandate that the federal government preferentially buy from any source that meets a goal-driven standard of cleanliness under a Clean Energy Standard Offer.  For these purposes, define “clean” as anything that is at least twice as efficient as the U.S. power grid on a fossil energy in/delivered electricity out basis. Renewables count, but so does high-efficiency CHP. Second, eliminate questions of economic practicality entirely by setting a pricing heuristic such that the all-in, delivered costs of electricity (inclusive of all externalities) sets a bogey, and the Clean Energy Standard Offer price is set to 80 percent of that bogey. The price could be set by an independent panel each year and – with this formulation – is politically unassailable, since any power purchased under this program is saving the country money. Obama has said that he wants to eliminate fossil energy subsidies because they distort the market – this simply accelerates that elimination for federal purchases, turning brown energy’s weakness into green energy’s strength.  Finally, rather than only applying this requirement to a tiny percent of purchases, stipulate that the government buys up to the limits of their needs or the limits of supply at that price.

So what would this drive? First, the government consumes a lot of power. According to the Federal Energy Management Program, they buy about 55,000 GWh of electricity per year – roughly 1.5 percent of all U.S. electricity purchases or – seen from another lens – about 50 percent of all non-hydro renewable generation in the U.S. Shifting any significant fraction of those purchases to cleaner sources would represent an enormous growth engine. But perhaps most importantly, this would force a conversation about the true costs of energy. Like it or not, we are going to have to confront those Medicare entitlements one of these days, and it can’t hurt to get the public (and government) to better understand the linkage between clean energy and lower healthcare costs. Finally, it’s got a nice “what’s good for the goose is good for the gander” spin to it. If it’s good social policy to mandate that utilities preferentially buy from clean energy sources, doesn’t the same hold true for the government?

Create a regulatory modernization committee

This is arguably the least important change from a market-reformation perspective, but perhaps the most important politically. Changing environmental regulations and changing the way the government buys energy will have huge long-term impacts, but their results will only be visible as projects get designed, financed and built. At best, that’s a 2 year process. On the other hand, it’s really easy to identify dumb, antiquated laws that block efficiency, and many of them are politically painless to fix. 

It’s also got photo op written all over it. Remember when Clinton deputized Al Gore to “streamline government”? Cue the fileboxes of bad regulations, and the positive energy that always surrounds a good spring cleaning. Hell, even tea-partiers can cotton to this idea. 

This committee should ideally not limit their scope to the laws on the federal register; a host of more local regulations (building codes, fire-safety codes, etc.) also block the deployment of clean energy. Whether that means one really big committee or 51 small committees though is a matter of tactics. (After all, the committee that identifies the problematic laws is still going to depend on legislatures to enact change.) The important thing is the conversation. Re-align the public debate so that the body politic understands how many dumb laws block clean energy deployment and we can get past the idea that energy markets are perfectly allocating capital in response to nothing but the purest of economic signals. Shift the conversation from “can we afford to subsidize yet another technology?” to “why do we tolerate subsidies that block our forward progress?”

I’d argue that all three of these could be done – if not immediately – pretty quickly. None of these are so complex that they require months of hearings and debate (see: healthcare, CO2 regulation).  All are complementary with existing government programs. None have any strong constituency to oppose. But if implemented, they would unleash a flood of clean energy, finally starting to tear down the dam.