by Dan Watkiss
Is now the time to invest in big, capital-intensive energy projects—the Full Monty of baseload integrated coal gasification combined cycle with carbon recapture, a new fleet of nukes, and long-distance high-voltage transmission lines to connect hinterland generators with the densely populated coastal cities?
Every week it seems that some utility, developer or industry investor announces grand plans to chase one or another of these big projects. What is driving this capital sanguineness? Is it a sober assessment of supply and demand? Or is it instead a function of near-sighted energy and economic policies exacerbated by various economic subsidies and incentives that the Energy Policy Act of 2005 targets disproportionately toward big generation and big transmission solutions to the nation"s energy needs?
Questioning big capital-intensive projects today and getting comfortable with our answers before investing in them could prove critical to the industry"s future flexibility in pursuing a number of objectives, including energy security and a scaled-back carbon footprint for our power sector. The success of big power infrastructure investments depends critically on assumptions about not only supply and demand, but also future technological innovation, future environmental controls, and reliability demands that are increasingly influenced by post-9/11 security considerations. These assumptions are fraught with uncertainty.
Dr. Benjamin Sovacool, a professor at Virginia Polytechnic Institute and State University, in a June 2007 paper, "Coal and Nuclear Technologies: Creating a False Dichotomy for American Energy Policy in Policy Sciences," rigorously makes the case that three alternative energy technologies—energy efficiency, renewable energy systems and smallscale distributed generation—are superior to big generation and big transmission projects as measured by (1) technical feasibility, (2) cost, (3) negative externalities (primarily environmental), (4) generating and delivery reliability, and (5) security from accident or attack.
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In our post-industrial digital economy, electricity is essential to nearly everything a growing number of us do at work, home or play. According to the Energy Information Agency, demand is increasing and will continue to increase nationally at an average annual rate of 1.8 percent. New or replacement generation and transmission surely will be needed to keep apace. Decisions on what generation to build and where, however, need to be made against the looming large uncertainties of unproven technologies (such as carbon recapture and off-site storage of spent fuel rods) and heightened emissions controls, including legislated controls on carbon emissions. And in the case of investments in new transmission lines, the uncertainties are the grid" s future topography, what level of high-voltage "aluminum skies" society will tolerate, and the vulnerability of the grid to terrorist attacks and other failures. Until these uncertainties are considered and narrowed, if not resolved, capital investments today in big generation and big transmission solutions will be very risky, potentially locking in energy futures that may prove unwise.
That is why Dr. Sovacool"s findings should be a timely and welcome call to action for utilities, regulators, and Congressional appropriators of tax dollars to energy project developers. Smaller scale modular technologies can outperform big generation and transmission projects and at the same time preserve policy flexibility to pursue other energy futures.
Dr. Sovacool and others have recognized that these technologies cost less in the long-term, but often are not pursued because of high front-end costs to their localized beneficiaries. That is why programs that levelize the front-end costs over the life of investments in energy efficiency and renewable and distributed generation are critical to the acceptance and implementation of these technologies. For this reason, one would expect and hope that financing programs that have this levelizing effect would be central to federal and state energy policy, but lamentably, for the most part, this is not the case. Appropriations and ratepayer-generated funding for energy efficiency programs have been falling in recent years. And the lion’s share of grant money in recent energy bills has not gone to renewable and distributed generation. To the contrary, newly enacted federal authority to condemn transmission rights of way across public and private lands, together with regulatory policies that allow higher returns on investments in new transmission, have the effect of tying load centers to remote baseload generation and discouraging investment in more efficient (less losses) local and distributed generation.
While too many of our political energy avatars have yet to hear Dr. Sovacool’s thoughtful call to action, it appears to have resonated elsewhere. Dr. Sovacool’s home academy, Virginia Tech, recently announced that it will oversee a newly created $500 million fund for investing in efficiency upgrades to buildings in the metropolitan Washington, D.C., area. As with comparable programs in Cambridge, Mass., and the Clinton Climate Initiative led by the former president in a dozen cities around the world, the Virginia Tech program will work with an energy services provider to identify economical efficiency upgrades to buildings. The for-profit investor Hannon Armstrong will front the cost of the efficiency upgrades, and the building owner will repay Hannon Armstrong over time from the savings achieved, thereby levelizing the cost over all or some significant portion of the life of the technology.
One can only hope that future energy policies better promote and not impede innovative initiatives such as these in addition to or in lieu of the Full Monty.
Author
Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and mid-market companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. Contact Dan at Dan.Watkiss@bgllp.com.