Thursday, July 3, 2014

In Search of an Effective Energy Policy

As per the second round of Kyoto Protocol on climate change the countries of the world have decided to reduce the Co2 by 18 %.  President Obama is now must be congratulated for his recent commitment which was announced on 2nd June 2014. President Obama announced the USA’s national goal of a 30% reduction of CO2 emissions from electrical generation utilities by 2030.  The recent announcement of Mr. Obama has created a new debate in the world regarding effective energy policy. As per the current scenario of state by state approach to regulation in the energy sector has been a patch work quilt of minor success with little innovation. Every potential country now needs an effective national energy policy that could drive and reward innovation in particular states. For example, a national policy that encourages energy efficiency in our buildings through innovative and simple tax law changes could provide enormous returns of reducing energy costs as a percentage of GNP. Any country cannot move forward as a country without leadership in its own state. The recent announcement by the Obama Administration of the proposed federal Clean Power Plan is a step in the right direction.

The strained relationships between advocates of renewable energy, energy efficiency and the utilities need to be repaired. Creative thinking to find “win-win” strategies would help. Examples include allowing utilities to obtain a rate of return on investing in customer renewable energy and energy efficiency projects. It is pertinent to mention the statement made by a famous English energy economist, Mr. Fritz Schumacher in 1964 about the importance of developing sound energy policy: “There is no substitute for energy. The whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not ‘just another commodity,' but the precondition of all commodities, a basic factor equally with air, water and earth.

In the 1980's, the Alaskan pipeline opened up 2.1 million gallons per day of petroleum and served to blunt the national security concerns presented by reductions in oil imports caused by the Iran/Iraq war. The approval of the Keystone pipeline is critical to secure sources of petroleum from a friendly neighbor to the north; thereby substantially reducing the national security threat presented by USA’s reliance on oil in the in the politically unstable Middle East. Given the fact that a significant share of the world's GNP is now generated in developing economies and significant sources of oil are located in politically unstable areas, the globalization of energy is the new strategic threat for the 21st century.

The failure of our political leaders to develop a sound energy policy is troubling given these disturbing world-wide energy trends.  Installing renewable energy projects is quite complex and intimidating for interested parties. It would be useful if standard programs could be arranged that take advantage of economies of scale for installation in neighborhoods. An example is the Solar Group Buy Program offered by the City of Milwaukee. This state should award a tax credit in the amount of the avoided tax in tipping fees for landfills if waste material is used to generate electricity in Wisconsin. Waste to energy projects using digester and pyrolysis technologies that convert waste to energy should be accorded tax credits in the amount of the tax assessed against land filling material if this waste material, used in these energy projects would otherwise be land filled.

 In a way similar to how the oil depletion allowance stimulates oil production through a reduced tax, a Waste Depletion Allowance would stimulate energy projection using waste as a source for energy production. Clean Power Plan involves trading in carbon offsets to meet carbon caps. Market-based principles for encouraging pollution reduction in clean energy production have been successful. If a company can make money by reducing its pollution more than is required by law, the more efficient pollution reducer should be able to trade the increase reduction to another emitter who will pay for it as an offset against its emission requirements. The VOC trading program for ozone nonattainment and SO2 reductions in the electrical generation segments are good examples of successful, market-based programs that work.

 More regulatory innovation should take place to encourage market-based trading solutions of this type which would encourage the development of clean energy sources. The proposed strategy for trading carbon offsets in the Clean Power Plan is a step in the right direction. In his seminal book on energy titled "The Prize," Daniel Yergin highlights the following current trends which, without an effective energy policy to contain them, will result in turmoil in the energy markets: the developing world surge in demand, the ‘internationalization' of energy companies, climate change and energy insecurity.

In the face of these trends, our political leaders must act now to develop a sound energy policy. The development of that policy is critically important not only for our economic, but also for our political security. It is much less expensive to encourage efficiency than to build new supply capacity. Programs should be designed to incentivize the utilities to promote energy efficiency rather than just returns on capital intensive base load projects. The regulators need to find a system in the rate based approach to utility regulation to incentivize investor owned utilities to invest in research and development. Unlike other industries, the “cost plus” model for rate regulation does not provide an incentive to innovate. The boiler and turbine technology used for base load generation has been around for almost a century.

 Innovation in the green technology and utility sector could be a “game-changer” for promoting clean tech in the industry. The Clean Power Plan's proposed requirements for a 30% reduction in carbon emissions may also drive much-needed technology innovation in the industry.  Now the leaders are required to plan a proper strategy and to achieve the much coveted goal of 30 % Co2 reduction from the emission. Only a policy on paper will be useless unless we have a commitment to achieve the target by an effective policy & execution of relevant regulations.

Source: by Art Harrington

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