Making a Rapid Stop
The climate change debate has shifted to the United States Senate, where most discussions are based on an unstated assumption: that reform will be slow, requiring decades to make any serious reduction in greenhouse-gas pollution.
The legislation approved by the House of Representatives, in fact, envisions a time frame of more than a decade to achieve just a 17% reduction in our country’s greenhouse-gas emissions — far below what climate scientists say is necessary. The fact that we have not yet enacted this legislation results directly from concerns that even this modest target is too ambitious.
Meanwhile, the surest way to be dismissed as a naïve idealist is to claim that faster change is possible. Claim that renewable energy can quickly displace coal (as Al Gore, T. Boone Pickens and others have done) and you will be immediately dismissed by energy industry insiders who assure you that the capital, commercial and long planning/construction horizons innate to their industry make such rates of change impossible. Those claims are hard to rebut. The industry has historically been pretty slow to change, and the investments really are massive.
Those claims, however, are also completely false. Recent history is rife with examples of rapid change in the power sector. Intriguingly, those historic shifts — even when not environmentally motivated — led to a cheaper and cleaner energy infrastructure. To claim that such change is not possible in the future is to ignore history’s lessons.
That’s not to say that Al Gore, T. Boone Pickens and their ilk are right today; those who predict technology-specific paths have been consistently wrong in the past, and will undoubtedly be consistently wrong in the future. That said, it is quite clear from this recent history that modest regulatory reform can facilitate rapid, cheap transformations, in spite of vested-interest claims to the contrary.
Recent history
Let’s start with the most widely observed changes that came about in response to the oil embargoes of the 1970s when governments launched a series of programs to spur conservation and efficiency. The results still startle. The U.S. increased its economic production by 27 percent yet cut its oil use by 17 percent. Our nation’s reliance on imported oil fell by half in just over five years (see Figure 1).
In hindsight, it’s fairly easy to understand what happened. We shifted to smaller cars, stopped using oil as a fuel for power generation and “got religion” on energy efficiency with respect to federal regulations and programs (e.g., Energy Star, CAFE, PURPA, etc.) But these results were hardly pre-ordained, and certainly weren’t predicted to be economically-beneficial over the long term by anyone “in the know.” Quite the contrary: President Carter’s “malaise” speech gave voice to a belief that remains as widespread today as it was in 1979 – that our standard of living depends upon unsustainable energy use. Although conventional wisdom holds that we can reduce our energy footprint only if we were willing to accept a lower standard of living as well, it is hard to argue that my 27 mpg Acura with GPS, power-everything and ultra-low emissions represents a Luddite victory over a 1970s-vintage Dodge Dart!
Now fast forward to the early 1990s. Deregulation was the rage, having led to modernization of the airlines, telecoms and natural gas industries. In 1992, we saw the first cracks in the monopoly-regulation of the electric sector with that year’s Energy Policy Act (EPACT). Prior to 1992, only a limited number of players — mostly regulated electric utilities that enjoyed guaranteed profits — had the right to sell electricity. Entrepreneurs with innovative, efficient ways of generating power were legally shut out beyond a smattering of small “qualifying” technologies that were allowed under the 1978 Public Utility Regulatory Policies Act.
The Energy Policy Act reformed this closed system by creating wholesale power markets on which anyone could participate. Initially, nothing happened, as the old regulated utilities were able to limit access to these markets via their ownership of the transmission system. FERC in 1998 addressed the barriers with Order 888 that mandated non-discriminatory access to the transmission grid. The results were immediate, and staggering (see Figure 2).
Within ten years, unregulated entrepreneurs built nearly 200 gigawatts of power capacity, twice that available from all the nation’s nuclear reactors. It took us nearly a century to build the first 800 GW of our electric grid, but just a decade to increase it to 1000 GW. Moreover, these reforms came about without any meaningful public investment; these plants were built in large part with private money that — for the first time in the history of our electric grid — had an unregulated profit incentive and no protection from failure.
And fail they did. This build out of gas assets, coupled with the related run up in natural gas prices led to the bankruptcies of many in the new “merchant power” space. Like the predictions of doom-and-gloom that predated our oil-embargo reforms, the predictions of cheap-power-for all were not quite what the future delivered. But since we didn’t build any other generation during the same period, it is no exaggeration to say that in many parts of the country, if your lights are on today, you owe it to the 1992 EPACT.
The final example comes from New England’s forward capacity market (FCM). Now entering its third year of operation, the FCM was the first to formally allow those who reduce demand for power to be financially incentivized through the same mechanisms that have historically been used to encourage construction of new units of generation supply. Such a program had been in effect previously for big utilities, but New England structured the program to ensure that smaller players were finally allowed to get in the game.
Just two years in, this forward capacity market brought forth nearly 3,000 megawatts of energy savings, the equivalent output of three nuclear reactors — and more than 10% of the peak demand ever recorded on the New England system. That’s a massive increase in overall grid reliability that didn’t require the construction a single central power plant, or the financial backstop of a single ratepayer dollar.
Taking stock
Although the three examples exhibit significant differences, a few noteworthy constants deserve note, if only because they fly in the face of all of our conventional wisdom:
- Our energy economy can change much faster than we think. Reducing CO2 emissions by 17% in 10 years sounds like a big lift in a vacuum. But compared to the 27%/5 year reduction in oil imports, 20%/10 year increase in US generation capacity and 10%/3 year deployment of demand side resources in New England, that goal looks not only attainable, but ambition-deprived.
- Saving fuel saves money. Obvious as this sounds, it is ignored every time we assume that our standard of living is dependent on access to fossil fuel. It depends only on our access to useful energy (or, as Amory Lovins puts it, “cold beers and hot showers”). Getting more useful energy out of less fuel leaves more money in our pocket and grows our economy.
- Transformative change in the energy sector not only does not need to be accompanied by economic dislocation, but often leads to a net increase in our overall standard of living. From national security to grid reliability to the ratepayer-borne costs of capacity resources, the benefits of the change are often under-appreciated in future forecasts, just as the costs of those changes are overstated.
- Finally, none of these changes required a totally new regulatory system. Our political system too often assumes that major change is impossible without massive regulatory reform, agency creation and top-down wealth redistribution. The reality tells a quite different story: targeted regulatory reform, if focused at critical barriers, is sufficient to unleash massive change in energy markets.
A sleepy industry
Electricity generation has been a slow-moving business, largely because it arguably is the most regulated and protected-from-competition segment of the U.S. economy. From municipal light boards to state regulatory commissions to the Federal Energy Regulatory Commission, layers upon layers of regulatory bodies historically have protected power-company monopolies. With guaranteed profits and no incentives to innovative, these utilities have not improved their efficiency in more than 50 years, since Dwight Eisenhower occupied the White House. Today’s average power plant continues to require three units of fuel to generate one unit of electricity, for a dismal efficiency rate of 33 percent. Few other industries can claim such a dreary record — and few regulators accept their own culpability in this record (or demand the reforms necessary to fix it.)
But this sleepiness is precisely why the industry is capable of such rapid change. A trickle of water downstream of a dam gives no insight into the potential flows that could result from the removal of a few carefully considered bricks. Comparably, the regulatory barriers to efficient capital allocation have dammed up a century of cheaper, cleaner, more efficient technologies and business models. The slow pace of historic change tells us nothing useful about how quickly change could come from slight regulatory reform – as the examples above make clear.
Climate change opportunities
Yet our climate debate remains mired in the swamp of diminished expectations. Policymakers seem to think they have to treat energy companies with kid gloves — as if demanding big changes will somehow be too much for them to bear, resulting in a devastating blow to our economy. But this view simply doesn’t square with history. With even minor reforms, enormous changes can occur.
The climate debate tends to be framed by armies of lobbyists who support specific technologies — coal, nuclear, renewable, carbon sequestration — and argue about which of these approaches should be near-term winners and losers of government largess. Yet more dramatic change is clearly possible. History suggests that the pace of greenhouse-gas reductions can be vastly quicker and cheaper than we anticipate. Why couldn’t we replace 2% percent of today’s fleet with cleaner technologies each year, as we already shown possible after the 1992 EPACT? Why couldn’t we move even faster and replace 5% per year as New England has demonstrated? Might it be possible to move faster still?
History provides us optimistic answers to these questions, and suggests that our optimism is much more likely to be limited by our ambition than any capital, technical, thermodynamic or commercial constraint. Tackling climate change and changing the electricity system can be easier, cheaper, and faster than we think. Once we start.
Sean Casten is president and CEO of Recycled Energy Development (www.recycled-energy.com).