Energy Markets

June 11, 2018 1 Comment

California’s Bold Solar Energy Vision

By Joseph Nyangon
How California’s New Rooftop Solar Mandate Will Build Additional Value for Its Customers

*Luminalt solar installers Pam Quan (L) and Walter Morales (R) install solar panels on the roof of a home on May 9, 2018, in San Francisco. (Credit: Justin Sullivan / Getty Images).*

The boldest new plan yet to increase electricity generation from noncarbon-producing sources has been announced by California. Highly regarded as a trendsetter and vanguard of progressive energy policies, California became the first state to require solar power installed on all new homes. The requirement makes rooftop solar a mainstream energy source in the state’s residential market. Adopted by the California Energy Commission (CEC) as an update to the state’s 2019 Title 24, Part 6, Building Energy Efficiency Standards [1], the solar mandate obligates new homes built after Jan. 1, 2020 to include photovoltaic (PV) systems.

These standards represent a groundbreaking development for clean energy. Single-family homes and multifamily units that are under three stories will be required to install solar panels. The biggest impact may prove to be the incentive for energy storage and the expected uptake in energy efficiency upgrades which could significantly cut energy consumption in new homes.

But not everyone is celebrating. Critics warn that the requirement could drive up home prices overall, further exacerbating already high housing costs in the state. For instance, in a letter to CEC, Professor Severin Borenstein of the Haas School of Business at UC Berkeley warned that such a plan would be an “expensive way to expand renewables” to achieve clean energy goals [2]. But in its order, CEC argued that the new rooftop solar mandate would save homebuilders and residents money in the long-term and cut energy-related greenhouse-gas emissions in residential buildings.

Few solar firms, homebuilders, efficiency experts and local governments fully understand the significance of the mandate. Buildings-to-grid integration experts speak of “turning residential solar into an appliance,”—the merging of rooftop solar, home energy management, energy storage, and data analytics into the next generation of high performance buildings that is expected to usher in a new era of sustainable development.

How could this new solar mandate help improve grid management so that these ‘new power plants’—clusters of buildings integrated to the grid—can respond quicker to load signals like water heating or home entertainment and thereby contribute to better system reliability? Of course, there are a lot for stakeholders to grapple with between now and 2020 as they come up with compliance solutions to address these opportunities. But this gap, especially, poses a significant challenge in how the new California’s Title 24 codes will affect the clean energy industry.

On the delivery side, First Solar Inc.—a U.S. panel manufacturer—and Sunrun—the largest U.S. residential-solar installer—could be major beneficiaries of the new building codes considering their established market positions in the state. The U.S. Energy Information Administration’s Annual Energy Outlook 2018 puts the mid-point estimate of installed solar capacity required to meet the state’s ambitious ‘50% by 2030’ renewable portfolio standard (RPS) target at around 32 GW (Figure 1). California currently has an installed solar capacity of 18.6 GW, indicating that it has only until the beginning of the next decade to find technical, business, and policy solutions to realize a 50% increase in installed PV capacity. Considering that the core elements of the requirements are now technically locked in, greater cooperation with solar industry players is needed for the success of this bold energy vision.

Figure 1: AEO 2018 estimate of renewable energy generating capacity and emissions in California (2016-2050)

Here are suggestions of what needs to be done to succeed. Provision of today’s electricity services is fundamentally dependent on its transmission, distribution, and storage (TD&S) systems; these functions include business activities that support construction, operation, maintenance and in this case, overhaul California’s electricity infrastructure. According to the 2018 U.S. Energy and Employment Report (USEER), national employment in TD&S including retail service was approximately 2.35 million in 2017, with nearly 7% growth expected in 2018, mostly in manufacturing, construction, installation/repair, and operation of TD&S facilities [3]. Using these national figures as rough benchmarks for job generation, the new solar building mandate represents a major growth opportunity for the solar industry. However, there are transmission implementation challenges that could occur in the future. Orders 890 and 1000 by the Federal Energy Regulatory Commission (FERC) require transmission providers to treat demand resources comparably with transmission and generation solutions during transmission planning. Which means that a clarification is required of whether onsite generation under Title 24 would count toward compliance with FERC’s orders.

With proper distribution and transmission planning coupled with the fact that new homes will have better efficiency overall, California could reap significant benefits from the solar mandate and pioneer in mainstreaming non-wire alternative business models associated with solar distributed generation systems. Deferring and reducing costs to capacity upgrades for distribution and transmission under a distributed utility regime, is one example. For this reason, California regulators would need to anticipate and address compliance issues that could result during the implementation period, such as concerns regarding flexibility measures, the estimated number of homes that would comply with the codes, and year-on-year market bottlenecks that may occur without rapid change in business models. Further greater stakeholder engagement and partnerships with the building industry, universities and research organizations will be needed to track progress on single–family and multi-family solar development.

Another key step is to improve the revenue model for all generation technologies to reconcile with long-term contracts. In recent years, as solar power grew in the Western Electricity Coordinating Council region, and particularly in California, future prices of solar electricity became uncertain. Today’s electricity prices are set based on the variable cost of the marginal technology. Because technologies like rooftop solar, once built have near-zero marginal costs, this could put downward pressure on long-term electricity prices. Good news for customers and the economy! But payment for TD&S may be of risk. States have been solving this problem by implementing long-term fixed pricing systems, either through power purchase agreements (PPA) or capacity mechanisms, which carry the full-price risk of the technology. California (and New York) has proposed new revenue models that balance the pace of improvement in technology cost and revenue returns. Still, adjustments in the revenue model may be necessary in the future.

The logic behind California’s solar mandate is to reposition the market so that the bulk of generation will increasingly come from customer-sited equipment. This is significant: rooftop solar is one of the most effective customer-sited solutions for accelerating a decentralized grid and greening our electricity supply. Apart from the anticipated long-term cost-reductions to the grid, we can infer that CEC may have been guided by the growing market potential of rooftop solar when crafting the new building code energy-efficiency standards. As to the question of economic viability of the standards to the grid, detailed study is needed to take into account direct and indirect impacts.

Recently, there has been mention of the mounting problem widely known as the “duck curve”—that is, the sun shines only during the day which means that the solar energy cannot meet the system’s demands when the sun goes down or cloud cover disrupts solar energy system output. This phenomenon can force utilities to ramp up non-solar generation, thereby undermining some of the benefits of a low-carbon strategy. This concern raises a question: What happens to the value of solar energy produced as new additional capacity grows? Over-generation? Because retail competition is still limited in volume to support the anticipated market growth under the new standards, the value of the additional solar generation could decline. Furthermore, the grid would need to be prepared to anticipate and handle any over-generation. CEC is aware of the duck curve problem and included a compliance credit for energy storage in the Title 24 codes to address the issue. But this may not be enough. Options for maximizing on-site solar use should be sought as capacity grows. In addition, while greater electrification of buildings is noteworthy for the utility business model, without offering incentives to residential solar producers, for instance, in the form of affordable construction materials that socializes costs over all ratepayers and introduces new products and services that guarantee long-term profitability, the latest round of CEC building codes could raise significant grid management issues and market uncertainties thus exacerbating the duck curve problem. In brief, the role of utilities in interconnecting these ‘power plants’ and managing any over-generation issues will become more critical.

Growth from the new solar mandate and steps taken to incentivize storage and energy efficiency upgrades may not produce profits for utilities in the short term. But adoption of the Title 24 codes offers utilities opportunities for greater electrification and enables them to search for cost-effective pathways to reduce carbon emissions. In a study of grid decarbonization strategies in California, Southern California Edison (SCE) found that a clean power and electrification path can provide an affordable and feasible approach to achieving the state’s climate and air quality goals [4]. While the cost of managing the grid is an important consideration for utilities like SCE, approval of the new solar mandate is an important reminder of the changing utility industry. Power companies are developing new ways to extract value from emerging distributed solar technologies and expand customer choices. The success of the Title 24 codes will depend to a significant degree on supportive regulation. With billions of investments required for grid modernization to address the aging infrastructure issues, finding a sustainable operating model that enables utilities to recuperate costs through rates is fundamental. This is a long-term proposition and power companies should treat it as such.

Despite the challenges discussed above, California’s new Title 24 mandate represents the boldest and most inspiring building energy efficiency standards by any state to date. No doubt the questions surrounding future electricity rates, grid management issues, retail competition, investments in TD&S, design of long-term contracting via PPA mechanisms, and the impact on housing prices require significant attention. But this solar mandate can be an unprecedented energy-problem solving strategy that turns every home into a power plant as solar becomes more mainstream.

Additional Resources
[1] Rulemaking on 2019 Building Energy Efficiency Standards: https://energy.ca.gov/title24/2019standards/rulemaking/
[2] Email response by Severin Borenstein regarding new building energy efficiency standards rulemaking to mandate rooftop solar on all new residential buildings: https://faculty.haas.berkeley.edu/borenste/cecweisenmiller180509.pdf
[3] The 2018 U.S. Energy and Employment Report was prepared by the Energy Futures Initiative (EFI) and the National Association of State Energy Officials (NASEO): https://static1.squarespace.com/static/5a98cf80ec4eb7c5cd928c61/t/5afb0ce4575d1f3cdf9ebe36/1526402279839/2018+U.S.+Energy+and+Employment+Report.pdf
[4] The Clean Power and Electrification Pathway: An exploration of SCE’s proposal to help realize California’s environmental goals: https://www.edison.com/content/dam/eix/documents/our-perspective/g17-pathway-to-2030-white-paper.pdf

July 8, 2016 1 Comment

The Scale of the Energy Access Gap

By Benjamin M. Attia
Access to electricity is a key catalyst correlated with economic development.

The International Energy Agency (IEA) recently estimated that over 1.5 billion people do not have access to affordable electricity, representing one quarter of the world’s population [1]. In the absence of aggressive new policies and significant financing, it is estimated that that number will drop to only 1.3 billion by 2030 [1]. The United Nations’ (UN) Sustainable Energy for All (SE4ALL) initiative, which is working toward a goal of global universal energy access by 2030, estimates that approximately 600 million of these unelectrified people live in Sub-Saharan Africa [2]. This number is expected to rise to approximately 645 million by 2030 under a business-as-usual scenario due to expected explosive population growth [2, 3]. This widening gap of energy access is a complex and multidimensional problem and represents an important hindrance to economic development and social change in the developing world.

Historically, the access gap since the initial commercialization of electricity has “consistently been between 1 and 2 billion people… as grid expansion has roughly paced global population” growth [4]. This suggests that the access gap is a reflection of a persistent lack of equity in distribution. In fact, in 1983, Krugmann and Goldemberg famously estimated that at 1983 global consumption levels, the “energy cost of satisfying the basic human needs” of every person on the planet was well within the available supply of energy resources [5, p. 60].

Today, the consumption and distribution inequalities are even more pronounced. In 2011, the average American consumed 13,240 kilowatt hours (kWh) per person per year, while the average Ethiopian consumed only 56 kWh [6]. Further, across all of Sub-Saharan Africa, annual per capita kWh use is one-sixth the load requirements of a relatively efficient American refrigerator [7]. Globally, the poorest three-quarters of the world’s population comprise less than ten percent of total energy consumption [8, p. 5].

The inequities that underline energy poverty and energy access are also fundamentally connected to climate change. Looking ahead, the world’s demand for electricity is estimated to increase by more than 70% by 2040, and the World Bank and IEA estimate that a doubling in installed energy capacity will be necessary to meet the anticipated growing demands of emerging markets [9], [10]. Despite the accelerating paradigm shift to low-carbon and renewable energy generation technologies, there is a paradoxical irony to the link between development and climate change which has left the poorest countries with the lowest contributions to greenhouse gas (GHG) emissions as the most vulnerable and most susceptible to the effects of climate change [11, p. 591, 12]. As markets evolve to value avoided GHG emissions [13, p. 215], reconciling the joint–and possibly conflicting– goals of development through universal energy access and combating climate change will accelerate, but at present, the inequity in energy access is only further exacerbated by the parallel inequities with respect to climate change adaptation measures.

Many scholars agree that access to electricity in itself is not fully sufficient to bring about the required economic and social development to break the cycle of poverty [14, p. 1058, 15, p. 2194]. It has also been widely settled that access to electricity is a key catalyst correlated with economic development and that a lack of electricity access is a key bottleneck to growth [16], see [17] for comprehensive rebuttal]. However, approaches for tackling the problems associated with energy poverty are often difficult to scale up because of the difficulties associated with navigating this uneven technical, sociocultural, agricultural, and institutional landscape, and, as will be demonstrated below, the multidimensionality of energy access inhibits scalability of any one catch-all solution.

The IEA estimates that 30% of those without access to electricity would best be served by grid extension, 52.5% would be best served by micro-grids, and 17.5% would best be served by stand-alone energy systems [3, p. 14]. There is a clear need for investment in rural electrification initiatives at all three levels and a clear gap in understanding routes and sinks for effective impact investing [3, p. 14]. National grid extension programs and firms selling small energy systems are generally much better funded than the community-scale solution of micro-grids, despite their significant potential market share and niche ability to provide scale benefits, rapid deployment, flexibility of business models, and energy storage, security, and reliability [3, p. 15]. The micro-grid space is rife with opportunity to build markets, innovate new business models, develop new financing mechanisms, and provide the sustainable development benefits of renewable electrification and increased economic potential.

As one development professional put it, “If rural [people] have power in their lives, they will have more power over their lives” [16]. Access to electricity is not the answer to the greater global problems of poverty and inequity, but can be a good place to start.

References
[1] “World Energy Outlook 2014,” Paris, France, 2014.
[2] SE4ALL, “Energy for all: Financing Access for the poor,” in Energy for All Conference, 2011.
[3] M. Franz, N. Peterschmidt, M. Rohrer, and B. Kondev, “Mini-grid Policy Toolkit: Policy and Business Frameworks for Successful Mini-grid Roll-outs,” EUEI Partnership Dialogue Facility, Escheborn, 2014.
[4] P. Alstone, D. Gershenson, and D. M. Kammen, “Decentralized energy systems for clean electricity access,” Nat. Clim. Chang., vol. 5, no. 4, pp. 305–314, 2015.
[5] H. Krugmann and J. Goldemberg, “The energy cost of satisfying basic human needs,” Technol. Forecast. Soc. Change, vol. 24, no. 1, pp. 45–60, 1983.
[6] C. Kenny, “If Everyone Gets Electricity, Can the Planet Survive?,” The Atlantic, 2015.
[7] “Power Africa Annual Report,” 2014.
[8] J. Tomei and D. Gent, “Equity and the energy trilemma Delivering sustainable energy access in low-income communities,” International Institute for Environment & Development, London, United Kingdom, 2015.
[9] “World Energy Outlook 2015 Factsheet,” Paris, France, 2015.
[10] R. K. Akikur, R. Saidur, H. W. Ping, and K. R. Ullah, “Comparative study of stand-alone and hybrid solar energy systems suitable for off-grid rural electrification: A review,” Renew. Sustain. Energy Rev., vol. 27, pp. 738–752, 2013.
[11] A. Yadoo and H. Cruickshank, “The role for low carbon electrification technologies in poverty reduction and climate change strategies: A focus on renewable energy mini-grids with case studies in Nepal, Peru and Kenya,” Energy Policy, vol. 42, pp. 591–602, 2012.
[12] J. Byrne, Y.-D. Wang, H. Lee, and J. Kim, “An equity and sustainability-based policy response to global climate change,” Energy Policy, vol. 24, no. 4, pp. 335–343, 1998.
[13] U. Deichmann, C. Meisner, S. Murray, and D. Wheeler, “The economics of renewable energy expansion in rural Sub-Saharan Africa,” Energy Policy, vol. 39, no. 1, pp. 215–227, 2011.
[14 A. Bhide and C. R. Monroy, “Energy poverty: A special focus on energy poverty in India and renewable energy technologies,” Renew. Sustain. Energy Rev., vol. 15, no. 2, pp. 1057–1066, 2011.
[15] B. Mainali and S. Silveira, “Financing off-grid rural electrification: Country case Nepal,” Energy, vol. 36, no. 4, pp. 2194–2201, 2011.
[16] D. Mans, “Back to the Future: Africa’s Mobile Revolution Should Inspire Rural Energy Solutions,” Huffington Post, 20-May-2014.
[17] L. A. Odarno, “Negotiating the Labrynth of Modernity’s Promise: A Paradigm Analysis of Energy Poverty in Peri-Urban Kumasi, Ghana,” University of Delaware, 2014.

December 23, 2015 Leave a Comment

China’s Cap-and-Trade Decisions

By Joseph Nyangon
How China Can Shape the Future of Carbon Markets.

About 75% of current electricity supply in China comes from thermal power generation, mostly coal-fired power plants. In the above February 17, 2015 photo, a man cycles past cooling towers of coal-fired power plants in Fuxin, a prefecture-level city in northwestern Liaoning province, China (AP Photo/Greg Baker).

In the lead-up to the 2015 Paris climate change conference, policymakers stressed the need for creation of integrated carbon markets and called for linking new climate financing mechanisms with the United Nations-organized Green Climate Fund (GCF) based in South Korea. Both the U.S. and China have committed to accelerating the transition to low-carbon development internationally. Through a $3 billion per year pledge to GCF by the U.S. and a new $3.1 billion climate finance guarantee by China to support other developing countries to combat climate change, the two countries have committed to enhance multilateral climate cooperation. [1]

Carbon markets have emerged as part of the solution to the problem of climate change. Examples of these markets include the EU Emissions Trading System (EU ETS), the Regional Greenhouse Gas Initiative (RGGI) in the U.S., and the Western Climate Initiative (a joint program of California and two Canadian provinces – British Colombia and Quebec). New cap-and-trade schemes for 2016 have been announced by South Korea, Switzerland, Kazakhstan, and China (which will test models with seven ETS pilots).

While carbon markets are being used more frequently as a policy option, the question remains if such markets will actually reduce emissions and make development more sustainable. A common worry is how cap-and-trade decisions would be balanced with those stemming from often regulated markets governing carbon-intensive sectors, especially energy commodity markets, which have a clear growth orientation.

On his historic state visit to the U.S. in September 2015, Chinese President Xi Jinping announced new and strengthened climate actions, including the establishment of a national cap-and-trade program for carbon dioxide (CO₂) emissions by 2017. [1] The declaration made in Washington D.C. in a joint meeting with President Barack Obama builds on the historic November 2014 U.S.-China joint announcement on climate change, enhances bilateral and multilateral climate cooperation and together, provided momentum for securing the Paris Agreement—a historic climate change policy architecture to cut greenhouse gas (GHG) emissions and ramp-up mitigation and adaptation worldwide. This is truly a bright spot for cap-and-trade systems, especially considering the potential implications for China’s price-controlled energy sector. The nation accounts for nearly 30% of global GHG emissions, placing it as the world’s biggest emitting nation, followed by the United States.

China’s market-based carbon pricing system will be the world’s largest, and will apply initially to power generation, iron and steel industries, chemical firms, building materials, cement and paper-making industries, and non-ferrous metals manufacturing. The electricity sector is particularly important because China’s energy-related CO₂emissions are expected to grow until 2030. [2] For this reason, the discussion here focuses on the energy sector and how China can balance its domestic commitments in the electricity industry and the proposed nationwide ETS market to advance emissions trading as the most efficient policy instrument to address GHG emissions, in lieu of command-and-control or carbon taxes measures. While important details remain to be worked out, including the level of the cap, accreditation and verification systems, allocation of allowances, registry and market oversight, and regulations on the use of carbon offsets, the key takeaway is that China has signalled its commitment to achieving its post-2020 intention to move toward a low-carbon and climate resilient economy.

Here are six critical ways China can shape the future of carbon governance through reforms of its energy sector and a balanced ETS market development:

1. Develop a priority dispatch policy for renewable energy generation
This tool would enable China to prioritize power generation from renewable sources in its power sector. It would also establish distribution and dispatching guidelines to accept electricity from the most efficient and lowest-polluting fossil fuel power generators first. China has committed to implementing a clean electricity dispatch system. The 2005 landmark Renewable Energy Law includes a provision for a priority “green dispatch” system in the power sector but its actual implementation has been difficult because of the current structure of the power system. This is particularly critical for China because even though it now leads in global wind and solar energy manufacturing, 75% of its current electricity supply comes from thermal power generation, mostly coal-fired power plants.

2. Ensure state-owned and private energy companies have equal rights and liabilities in the ETS
Most state-owned Chinese companies enjoy monopoly positions due to the current political system and state capitalism policy, which give them a dominant position in the energy and power sector. Success of a nationwide cap-and-trade policy will depend upon rules in which state-owned and private energy firms have equal responsibility to avoid carbon emissions. Such a responsibility would obviate fears that the state industry sector would have undue control of the energy market and the potential to manipulate electricity prices.

3. Ensure transparency in allocation of allowances and trading rules
For the success of a nationwide carbon market, China must encourage full participation of companies, especially energy and power firms, by addressing current concerns that ETS will increase their production costs or reduce profits. The experience of the EU ETS demonstrates that cap-and-trade as a policy instrument can fail if there is insufficient political will to limit the number of available allowances to energy-intensive production sectors.

4. Establish independent carbon market monitoring systems
The central government selected the National Development and Reform Commission (NDRC) and the Provincial Development and Reform Commissions (PDRCs) as the lead authorities responsible for managing its ETS pilots. Because energy and power sectors are controlled by the National Energy Administration (NEA), [3] a department affiliated with NDRC, establishing an independent carbon market monitoring body could help to promote the development of the ETS in China and diminish potential institutional imprinting challenges from the old system.

5. Increase the share of non-fossil energy sources and establish a carbon intensity cap
Economic restructuring to promote low-carbon development, promoting technology advancement and improving energy efficiency are essential strategies for mitigating GHG emissions. These strategies as well as implementing measurable targets for CO₂ intensity would help China to explicitly address climate protection concerns (e.g., increasing the share of non-fossil energy composition in the mix of primary energy sources, and creating carbon trading exchanges). In addition to improving energy efficiency and increasing renewable energy generation, establishing a carbon intensity cap would be an important step toward an eventual introduction of a nationwide ETS.

6. Establish inter-regional carbon trading
China’s twenty-three provinces differ with respect to economic strength, industrial composition and related energy demands, making implementation of a national carbon trading a daunting challenge. The initial pilot ETSs (begun in 2013) did not allow inter-regional carbon trading. At the national level, this would be critical to carbon governance in China and should be developed via a bottom-up approach to achieve numerous mandatory intensity and efficiency targets.

China has a unique opportunity to shape the future of carbon markets. Its pilot carbon trading experience, industrial structure, economic development and capacity to link its national ETS with other schemes give the country a distinguished advantage. A future well-linked Chinese national ETS with other schemes internationally will require harmonisation of rules, reliable emissions accounting, mutual acceptance of the scheme caps, and enforcement of trading regulations in all participating jurisdictions. Although China’s pilot ETSs are at a very early stage and assessing them in terms of impact on emissions reduction and regional integration of carbon markets would be immature, certain problems are apparent when one examines the potential of the carbon market. These issues concern transparency in allocation of allowances and the effectiveness of legal enforcement, lack of unified ETS framework at the inter-regional level, and incentive-inducing policy tools.

Final Remarks
China’s pledge to create the world’s largest market-based carbon pricing system is an exciting step and demonstration of its commitment to achieve a unified ETS market and to pursue a low carbon economy. Can China innovate on both economic and environmental fronts, bringing these key factors together to boost the next phase of climate-resiliency? Any change in the Chinese energy sector will surely have a global impact, and striking the right balance to realize just and sustainable solutions to the problems of climate change will place the country in a strong carbon leadership position.

Notes
[1] White House Joint Presidential Statement: https://www.whitehouse.gov/the-press-office/2015/09/25/us-china-joint-presidential-statement-climate-change
[2] The Chinese ETS Pilots: An IETA Analysis: https://www.ieta.org/assets/China-WG/ieta%20china%20pilots%20analysis%20feb%2026.pdf
[3] Chinese Government Releases Major Policy Guidance on Renewable Integration and Related Issues: https://www.raponline.org/featured-work/chinese-government-releases-major-policy-guidance-on-renewable-integration-and-related

September 15, 2015 Leave a Comment

Why the U.S. Urgently Needs to Invest in a Modern Energy System

By Joseph Nyangon
Investment in ‘smart’ energy offers a viable and effective long-term solution that allows the energy industry to shift its supply sources, build new transmission and storage systems, and increase its energy efficiency goals.

QER Report cover — *The U.S. power grid is one of the most advanced energy systems globally, but its growth has been an evolving patchwork of disparate systems, functions, and components.*

In a speech commemorating the thirty-fifth anniversary of the International Energy Agency (IEA) in 2009, former U.S. secretary of state, Henry Kissinger recalled how the energy crisis of 1970s awakened the world “to a new challenge that would require both creative thinking and international cooperation.”[1] He explained that as “global demand continues to grow, investment cycles, technologies, and supporting infrastructure will be critical.” As a top U.S. diplomat in the 1970s, Kissinger is credited with promoting energy security as a third pillar of the international order through a trifecta of initiatives to bolster incentives to energy producers to increase their supplies, encourage rational and prudent consumption of existing supplies, and improve development of alternative energy sources. These efforts contributed to the establishment of the IEA in 1974 as a principal institutional mechanism for enhancing global energy cooperation among industrialized nations.

Forty years after the IEA’s founding, the relationship between energy and international cooperation endures, but changes in the energy landscape triggered by a revolution in how we produce, distribute, and consume various forms of energy is affecting the IEA’s fans. The agency interestingly examines the role of sustainable energy options and considers institutional change as often eclipsing conventional supply issues in shaping our energy future. For example, the challenges facing the electric power industry today include the need for diversification of generation, optimal deployment of expensive assets, carbon emissions reduction, and investment in decoupling strategies and demand response. Two key policy imperatives characterize these challenges, notably: the need to adopt policies that combat climate change, and the need for greater energy security due to concerns associated with supply-demand imbalances. Once again, we are at a moment of institutional and industry-wide transformation that calls for strategic investment and partnership to replace, protect, expand, and modernize our energy infrastructure. It is easy to slip into thinking of the nation’s energy landscape as a static challenge. It is not. The boundaries, business models, policies, strategies, and technical solutions have been a function of the incentives and objectives provided by policy.

The U.S. power grid is one of the most advanced energy systems globally, but its growth has been an evolving patchwork of disparate systems, functions, and components. Because of years of inadequate investment, the electric grid is now aging, outmoded, and unreliable to take full advantage of new domestic energy sources and emerging technologies and business models in the sector. In climate, energy, and economic terms, these issues are defined by whether the next wave of energy infrastructure will further the status quo of the path of least resistance and principally continue relying on conventional fossil energy sources or transition to efficient technologies and a clean energy future. In the first-ever Quadrennial Energy Review (QER) of the U.S. energy infrastructure released in April 2015, modernizing the nation’s energy infrastructure, to foster economic competitiveness, create a domestic clean energy economy, improve energy security, and promote environmental integrity, are identified as central policy concerns facing the country in a time of rapid change. President Obama ordered the review when he unveiled his Clean Power Plan in early January 2014.[2]

Here are six key policy recommendations of the QER report.

Improve the capacity of states and localities to identify and respond to potential energy disruptions: The review identifies severe weather events as the major cause of electric grid disturbances. From 2003 to 2012, severe weather caused an estimated 679 widespread power outages in the U.S. costing the economy between $18 billion and $33 billion annually.[3] Low-probability/high-consequence events also caused various types of electric grid disturbances in energy transmission, storage, and distribution infrastructure, including natural gas transmission infrastructure systems such as pipeline and storage leading to safety concerns. These threats and vulnerabilities vary substantially by region with Gulf Coast region being more susceptible to hurricanes, thus requiring regional solutions. The report recommends investing in new technologies like smart meters and automated switching devices to ensure much quicker recovery times from disruptions. It also recommends establishing a multi-year program by the U.S. Department of Energy to support the updating and expansion of state energy assurance plans.
Increase investments in electric grid modernization through expansion of different business models, utility structures, and innovative technologies: The review identifies increased investments in flexible operations and resilience as a more effective and economical solution for serving customer needs by enabling smart growth, in both transmission and distribution systems. Investment in transmission has been on the rise since 2000s, and is expected to grow with improved system reliability and interconnection requirements of distributed generation sources. In 2013, the report explains that investor-owned utilities spent a record high of $16.9 billion on transmission, up from $5.8 billion in 2001.[4] The growing level of transmission investment is needed to replace the aging infrastructure, increase system reliability, and facilitate competitive wholesale power markets. The report recommends adopting new business models, utility structures, and institutions to shape the operation, management, and regulation of the grid as well as optimize and update the Strategic Petroleum Reserve to reflect modern oil markets.
Strengthen regional integration of the North American energy markets: Opportunities for increased integration of markets and policies exist in the North American neighbours: the U.S., Canada, and Mexico. To further energy, economic, and environmental goals, the report recommends developing a common energy market, shared environmental and security goals, and infrastructure that undergirds the three economies. For example, in 2013, energy trade between the U.S. and Canada was approximately $140 billion, while energy trade with Mexico exceeded $65 billion in 2012—a sign of the existing opportunities for integration.[5]
Update and improve quantification of methane emissions from natural gas systems: To enhance the ability of the nation to achieve the targeted environmental goals, the report calls for urgent need to address the direct environmental impacts and vulnerabilities of energy transmission, storage, and distribution infrastructure, more broadly, carbon sequestration infrastructure, long-distance transmission to enable distributed generation and utilization of renewable resources, and smart grid technologies to support energy efficiency. The QER recommends updating greenhouse gas inventory estimates of methane emissions from natural gas systems, increased funding to reduce diesel emissions under the Diesel Emissions Reduction Act, and enactment of the proposed Carbon Dioxide Investment and Sequestration Tax Credit, to support carbon capture technology and associated infrastructure.
Improve siting and permitting of energy infrastructure: The QER identifies involvement of multiple federal, state, local and tribal jurisdictions to add the time to siting, permitting, and review process of energy infrastructure projects due to overlapping and sometimes conflicting statutory responsibilities. To enhance credibility of the process, the QER recommends increased meaningful and robust public engagement with local stakeholders to speed up siting decisions, establishment of regional and state partnerships, and enactment and funding of relevant statutory authorities to improve coordination across agencies.
Strengthen shared transport infrastructures: The report calls for strengthening of waterborne, rail, and road transport to move energy commodities. It recommends establishing alternative funding mechanisms, public-private partnerships, and grants for shared energy transport systems.

The energy infrastructure challenges highlighted above can be addressed partly by investing in an assortment of technological innovations. This would repurpose energy sectors to trade energy efficiently in today’s extremely difficult managerial, regulatory, and financial environment. Investing in ‘smart’ energy offers a viable and effective long-term solution that allows the industry to shift its supply sources, build new transmission and storage systems, and increase its energy efficiency goals. Finally, these policy recommendations illustrate a key point: changes associated with modernizing our energy infrastructure and the attendant market solutions may change, interplant or even interfirm efficiency.

Notes
[1] Kissinger, H. (2009). The Future Role of the IEA: Speech for the 35th Anniversary of the International Energy Agency, October 2009. Available at: https://www.henryakissinger.com/speeches/101409.html. Accessed on September 15, 2015
[2] The White House (2014). “Obama Administration Launches Quadrennial Energy Review.” January 9, 2014. Available at: https://www.whitehouse.gov/the-press-office/2014/01/09/presidential-memorandum-establishing-quadrennial-energy-review. Accessed on September 15, 2015.
[3] QER (2015). Quadrennial Energy Review (QER) Report: Energy Transmission, Storage, and Distribution Infrastructure, April 2015. Available at: https://energy.gov/sites/prod/files/2015/04/f22/QER-ALL%20FINAL_0.pdf. Accessed on September 15, 2015, pp. S-10
[4] QER (2015), pp. 3-6
[5] QER (2015), pp. S-22

Photo: Cover of the Quadrennial Energy Review (QER)

April 4, 2015 Leave a Comment

Mobilizing Public and Private Capital for Clean Energy Financing

By Joseph Nyangon
Innovative financing, increased capital investment and technological improvement are catalyzing renewable energy growth.

A key driver of recent renewable energy gains is cost. As a mass market develops and the technology improves solar and wind power have become more competitive. Photo: Solar Panel Against Blue Sky, Deutsche Bank

The energy market in the United States is undergoing a dramatic transformation, driven by technological advancement, market dynamics, and better policies and laws—none of which was a decade ago. Venture capitalists made huge profits from the computing boom of the 1980s, the internet boom of the 1990s, and now think the next boom will happen on the back of energy. These past booms, however, were fed by cheap energy: coal was cheap; natural gas was low-priced; and apart from the events following the 1973 Arab oil embargo and the 1979 Iranian Revolution, oil was comparatively cheap. However, in the space of the past decade, all that has changed. New resource finds, primarily shale resources from states such as Texas, Oklahoma, North Dakota, and Pennsylvania, exert pressure on the prices of oil and gas. At the same time, there is a growing concern of negative externalities associated with these fossil fuels.

Hybrid vehicles are doing more to fulfill their technological promise. Wind-and-solar powered alternative no longer looks so costly by comparison to natural gas—whose low prices due to increased shale production have shaken up domestic and global energy markets recently. Coal remains relatively cheap, however, its extraction damages ecosystems by destroying ecological habitats. Additionally, combustion of fossil fuels pollutes the air by emitting harmful substances into the atmosphere, such as carbon dioxide, methane, and nitrous oxide that contribute to global warming.

Oil spills, such as the 2010 Deepwater Horizon spill in the Gulf of Mexico and leakages at exploration and extraction points destabilize marine ecosystems, killing aquatic life. Utility firms seeking to avoid political and capital costs of the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan and Mercury and Air Toxics Standard on existing plant performance have began to invest more in energy efficiency and low-carbon technologies that guarantee less harmful emissions. As a result, the industry is accelerating modernization of their generation fleet. These underlying factors, including innovative financing options, increased capital investment, and market incentives, have opened up a capacity gap from conventional plants and an opportunity especially for solar, wind, and other low-carbon technologies.

Innovative financing options: A key driver of recent renewable energy gains is cost. As a mass market develops and the technology improves solar and wind power have become more competitive. In California and New York, a surcharge paid by utility customers to help finance clean energy projects in the two states has generated substantial sums of money, which is being invested in energy efficiency and renewable projects. In Connecticut, the Clean Energy Finance and Investment Authority (CEFIA), a successor of Connecticut Clean Energy Fund (CCEF) has funded over $150 million of clean technology projects and awareness programs statewide.[1] As more states adopt these kinds of programs, they continue to subsidize investment in clean energy programs. Financing clean energy projects, nevertheless, continues to face stiff competition from non-renewable sources. The cost of fossil fuels is still relatively low, mostly because social costs and the price of ecological damage are not factored into existing market prices. Renewable energy development also continues to experience high transactions costs, such as in negotiating power-purchase agreements which can make them more risky to investors.

Capital costs: In the long run, however, real gross domestic product and carbon emissions are likely to be the primary drivers of clean energy consumption, because governments will try to prevent the price of energy from rising too fast or decreasing overly quickly as it can have negative effect on overall economic growth. Thus the price of fossil fuels could have only a small negative effect on the demand for clean energy. The main barrier to large-scale wind and solar projects is obvious—high upfront capital costs. Accordingly, some investors in certain parts of the country continue to demand high premium lending rates to offset the upfront capital risked up to fund clean energy projects than other conventional energy projects. At the same time, technology improvements, especially with regard to solar, and promising much lower future capital costs, which explains why solar energy is the fastest growing source of new energy simply in the U.S. and worldwide.²

Secondary effects: According to the Energy Information Administration (EIA) Short-Term Energy Outlook February 2015, utility-scale solar power generation in the U.S. will increase by more than 60% between 2014 and 2016, averaging almost 80 GWh per day in 2016.[2] Half of this new capacity will be built in California. The World Energy Outlook 2014 estimates a 37% increase in the share of renewables in power generation in most OECD countries by 2040.[3] However, growth in renewable energy generation in non-OECD countries, led by China, India, Latin America and Africa, will more than double, according to the report. A change in energy policy or regulations in these markets could have even wider secondary effects on energy supply: positive impacts on emission reductions, accelerated substitution effects, and improved cost-competitiveness of renewable energy.

Market incentives and carbon tax: In the absence of fossil-fuel subsidies, which in 2013 alone totaled $550 billion, renewable energy technologies would be competitive with fossil power plants.[4] The effect of fossil-fuel subsidies on renewable electricity generation is fourfold: they weaken the cost competitiveness of renewable energy; boost the incumbent advantage of fossil fuels; lower the costs of fossil-fuel-powered electricity generation; and make investment in fossil-fuel-based technologies favorable over renewable alternatives. For instance, a phase-out of coal subsidies could further limit new construction and use of least-efficient coal-fired plants, thus incentivizing investment in clean energy.

Finally, if new policy causes the marketplace to internalize the risks of climate change, there would be no need for renewable energy subsidies and mandates in order for these sources to reach market parity.

Notes
[1] Connecticut Clean Energy Finance and Investment Authority: https://www.ctcleanenergy.com/Default.aspx?tabid=62
[2] Energy Information Administration’s (EIA) Short-Term Energy Outlook February 2015: https://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
[3] World Energy Outlook (WEO) 2014: https://www.iea.org/publications/freepublications/publication/WEO_2014_ES_English_WEB.pdf
[4] Ibid, WEO, p.4

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