Sustainable Investing

January 15, 2016 Leave a Comment

Post-Paris Agreement: FREE’S Focus on Subnational Climate Action

By Job Taminiau and Joseph Nyangon
Accelerating climate action and finance at subnational level based on the Paris Agreement.

The 21st Conference of the Parties to the U.N. Framework Convention on Climate Change, or COP 21 (also known as the Paris climate summit) closed in Le Bourget, France after two weeks of intense negotiations, with negotiators agreeing on a landmark “Paris Agreement.” The conference took place from November 30 – December 12, 2015 and was attended by a delegation from the Foundation for Renewable Energy and Environment (FREE). The FREE delegation included Dr. John Byrne, Chairman and President, and Dr. Job Taminiau, Research Principal of FREE. This blog post briefly discusses the outcome document of the negotiations and highlights the experience of attending COP-21.

FREE’s Participation in the COP process
The FREE delegation participated in official side events, interviews, discussions, and meetings throughout the second week of the negotiations. Overall, the FREE delegation was very impressed by the ‘can do’ attitude of, particularly, the subnational actors that were present at the COP. In fact, these subnational actors, on more than one occasion, highlighted their willingness to not only follow-up on negotiators’ progress to seal a deal but to champion and “ratchet-up” local climate action as a viable pathway for future climate change mitigation and adaptation.

FREE co-sponsored and co-organized two side events at the conference. In a side event on the potential contribution of cities to address climate change, co-sponsored and co-organized by FREE in collaboration with the Center for Energy and Environmental Policy (CEEP, University of Delaware) and the Climate Alliance of European Cities with Indigenous Rainforest Peoples (or simply “Climate Alliance”), the Global Covenant of Mayors, and others, Dr. Taminiau offered a perspective on subnational climate change innovation, leadership, and governance by drawing from examples of ‘solar city’ strategies. Such a project could offer a substantial improvement in a city’s energy profile: for example, a high density, vertical city like Seoul could supply 66% of daylight electricity needs for the year and 35% of all-hours annual electricity needs from the use of 30% of the rooftop real estate available in the city. The Europe-based Climate Alliance was a very suitable partner for this message: the organization works with more than 1,700 cities and municipalities spread across 26 European countries to reduce their greenhouse gas emissions.

L-R: Dr. Taminiau and Dr. Byrne at the Paris climate change conference

Flanked by among others, Camille Gira of Luxembourg European Union Council Presidency; Magda Aelvoet, Minister of State, President, Federal Council for Sustainable Development, Belgium; Tine Heyse, Deputy Mayor of Ghent, Belgium; Josefa Errazuriz, Mayor of Providencia, Chile; Julie Laernoes, Vice-President of Nantes Metropole, France; Marie-Christine Marghem, Belgian Federal Minister of Energy, Environment and Sustainable Development; and Ellý Katrin Gudmundsdottir, Chief Executive Officer and Deputy Mayor of Reykjavik, Iceland, Dr. Taminiau argued that cities are well positioned to help bend the carbon curve. “Cities could be the power plant of the future,” he added.

The second side event organized by the Climate Change Center Korea was titled “Preparing Action Plans for a Post-2020 Climate Change Regime in Asia.” Former prime ministers and senior government officers from Asia were among the participants in this well-attended event, highlighting the need for a new finance, markets and policy regime as well as stronger cooperation and partnerships in Asia to combat climate change. Dr. Duck-Soo Han, Chairman of the Board of Directors of the Climate Change Center and Former Prime Minister of Republic of Korea called for enhanced financial and technological resources in Asia to combat climate change. Professor Haibin Zhang of Peking University and a Member of the Global Advisory Board of the Center for Climate and Sustainable Development Law and Policy (CSDLAP) offered a Chinese perspective on climate policy governance. Dr. Oliver Lah of Wuppertal Institute for Climate (Germany) examined EU-Asia climate partnerships. And Richie Ahuja, Regional Director for Asia of the Environmental Defense Fund (EDF) summarized work in Asian region on clean energy and clean cooking systems as low-carbon solutions.

Dr. Byrne presenting findings from a study on the financeability of large urban solar plants in Amsterdam, London, Munich, New York, Seoul, and Tokyo. Photo by IISD/ENB

Dr. Byrne presented findings from a six-city study on the financeability of large urban solar plants. He described results from Amsterdam, London, Munich, New York, Seoul, and Tokyo, noting financing and policy needs on the cost of installations in these cities to enable infrastructure-scale investment. Particularly, New York City, London, Munich, and Amsterdam could be successful in implementing a solar city strategy without many changes to existing policy structures. Seoul and Tokyo, meanwhile, require more modification to existing conditions in order to produce a viable project that could attract financial resources from investors. For instance, FREE’s researchers find that such infrastructure-scale solar development is financeable in 13 years for Seoul, 10 years for New York City, and 11-12 years for London, Munich and Amsterdam (Figure 1).

Figure 1. Solar city implementation options for the six municipalities under a 12-year financing maturity. [1]

The Paris Agreement: A New Direction for Climate Change Governance?
Forged by nearly 200 countries to ramp-up climate mitigation and adaptation measures to reel in planet-warming carbon emissions, the Paris Agreement marks a historic shift in climate diplomacy. Indeed, the agreement has been hailed as a monumental step in the climate change negotiation process: “For the first time, every country in the world has pledged to curb emissions, strengthen resilience and join in common cause to take common climate action,” said UN Secretary General Ban Ki-moon during the conference’s closing session. “This is a resounding success for multilateralism,” he declared. Key elements of the new agreement include:

A goal to hold the increase in global average temperature to “well below 2°C and endeavour to reach 1.5°C” relative to pre-industrial temperatures;
Successive nationally determined contributions outlining Parties’ commitments to reduce climate change emissions, to be updated every five years. Each round of commitments needs to represent a progression from previous commitments; and
A regular process of review of the implementation of the Paris Agreement. This “global stocktake” which informs collective efforts on mitigation, adaptation and support on technology development and transfer for developing country parties will take place in 2023 and every five years thereafter.

Six years after the 2009 diplomatic disaster of Copenhagen, the path to Paris had been well-prepared. The COP talks in Copenhagen, in no small part, collapsed due to the continued focus on a top-down, legally binding agreement with strong emission reduction commitments for which, ultimately, willingness to sign on by nation-states was low. The Copenhagen Accord (2009) and subsequent Cancun Agreements (2010) formulated a new approach revolving around a new way of target-setting of more bottom-up, self-determined, national targets. This ‘pledge-and-review’ approach yielded approval from a much larger set of nation-states, including the United States and China. A “fresh” architecture for climate action was set out to be the goal in the follow-up Durban Platform for Enhanced Action (2011).[2] The bilateral talks and agreements between China, the U.S., and India can also be seen as critical preparatory work that allowed for the outcome in Paris. For example, U.S. President Barack Obama and his Chinese counterpart President Xi Jinping met in September 2015 in Washington D.C. announcing new and strengthened bilateral and multilateral climate cooperation, including the establishment of a national cap-and-trade program in China by 2017, providing momentum for success in Paris.

The Paris Agreement marks a break from the past, representing an unprecedented inflection point in the global response to climate change. Over twenty years of negotiations have brought the international community to a point where self-determination, rather than top-down treaty pursuits, has become the new approach moving forward. In this, there appear to be at least two main elements that will shape climate change governance for the years to come.

First, the agreement provides a process for governments to ratchet-up efforts to limit global temperature rise and, for the first time, includes commitments from all key Parties to the convention. The agreement puts emphasis on registering commitments at global, national, provincial/state, local, and corporate scales, and tracks national performance over time. Every five years, beginning in 2020, each country will be required to communicate a new nationally determined contribution for reducing emissions. Potentially, this implies that the Paris Agreement could be the main platform within which climate change action at the global level is articulated for years, only to be routinely updated rather than fully redrafted.

Second, as the focus shifts to implementation, the success of the agreement lies in the Convention’s ability to engage the private sector, financial institutions, cities, and transnational and subnational authorities. Indeed, as Christiana Figueres highlighted during the 2016 Investor Summit on Climate Risk, the Paris Agreement was “clearly the easiest of the components”. [3] Noting the Paris Agreement as the “starting line”, Christiana Figueres continued that the real challenge is to take all the “fantastic intentions” and move them to actual implementation. Similarly, Secretary General Ban Ki-Moon emphasized the gravity of the challenge that lies ahead: “We have an agreement. It is a good agreement. You should all be proud. Now we must stay united – and bring the same spirit to the crucial test of implementation. That work starts tomorrow”.[4]

L-R: Laurence Tubiana, COP 21 Presidency; UNFCCC Executive Secretary Christiana Figueres; UN Secretary-General Ban Ki-moon; COP 21/CMP 11 President Laurent Fabius, Foreign Minister, France; and President François Hollande, France, celebrating the conclusion of the event. Photo by IISD/ENB

The Bottom Line: Paris Agreement Implementation Requires Subnational Creativity, Innovation, and Leadership
The FREE delegation proposed ‘polycentric’ strategies to COP-21 as a viable way forward for the international community. The proposal is based on ideas and models developed and implemented by FREE, such as the promising contribution of the Pennsylvania Sustainable Energy Finance Program (PennSEF), the innovative character of the Sustainable Energy Utility (SEU) model, or the transformative potential of ‘solar cities’. The proposal titled “A Polycentric Response to the Climate Change Challenge Relying on Creativity, Innovation, and Leadership” highlights the critical importance of subnational actors, particularly cities and other municipal agents. [5] Relying on a wide and diverse landscape of actors to address climate change, the proposed focus on ‘polycentric’ strategies could capture and scale-up the innovation, leadership, and creativity taking place.

FREE has well-established experience with sustainable energy financing programs and, through research such as on solar cities, is actively developing options for transformative change. The SEU model, for instance, has been implemented in the U.S. state of Delaware (with a second bond issuance planned for the near-term) and in Washington, DC and is being actively explored in India and Korea. The U.S. White House in an announcement made by President Obama recognized the SEU model for its promise of transformative change and capability to lower energy use and carbon emissions while improving state economic development. Other programs, like PennSEF and planned future projects, combine innovations in finance, policy and market approaches and are needed to mobilize necessary levels of climate finance and fulfilment of existing commitments of the Paris Agreement.

Concerns linger as to, for instance, the observation that much more needs to be done than is currently pledged by the nation-states in order to meet the two degree target (the so-called ‘ambition gap’). The bottom line of the Paris Agreement therefore is that implementation will require the mobilization of state and non-state actors to perform substantial technical, methodological, and policy efforts to support the accord when it enters into force. A critical factor in this is the leveraging of financial resources to drive transformative change. FREE plans to assist state and non-state actors in developing these capacities. Recombination and careful consideration of the policy-market-finance interaction is at the foundation of FREE’s project portfolio and can deliver a critical contribution towards the implementation of the Paris Agreement.

Notes
[1] Byrne, J., Taminiau, J., Kim, K.N., Seo J., and Lee, J. (2015). “A solar city strategy applied to six municipalities: integrating market, finance, and policy factors for infrastructure-scale photovoltaic development in Amsterdam, London, Munich, New York, Seoul, and Tokyo.” Wiley Interdisciplinary Reviews: Energy and Environment.
[2] As mentioned on the UNFCCC website: https://unfccc.int/key_steps/durban_outcomes/items/6825.php
[3] As discussed at the 2016 Investor Summit on Climate Risk. The Summit seeks to sustain the momentum from Paris and was organized by Ceres, the United Nations Foundation, and the United Nations Office for Partnerships.
[4] https://www.un.org/apps/news/infocus/sgspeeches/statments_full.asp?statID=2875#.Vqe9cSo4HIV
[5] This position paper was authored by Dr. Job Taminiau and Dr. John Byrne in their respective capacity at the Center for Energy & Environmental Policy (CEEP, University of Delaware).

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 6, 2015 Leave a Comment

The Green Cred of Bike Sharing Programs

A.L. Smith

The announcement that Philadelphia will be rolling out its new bicycle sharing program this spring gives me a minute to reflect on the pros and cons of this new type of transportation infrastructure. First off, a bit about the program.

The program will be implemented in two phases. The first is this spring and will consist of 60 docking stations and 600 bikes. Riders can either get a membership or pay per use at the fully-automated station when they return the bike. The stations will be located in the heavier trafficked part of the city and the second phase is planned no earlier than 2017 and will involve 650 more bike and docking station placement in parts of the city that lack other transportation options [1]. As far as cons go, I cannot think of many.

Though the cost for the first phase is over 14 million, planners anticipate being able to recoup that in the first two years [1]. I thought safety might be an issue since there are going to be more bicycles on city streets, but the study by Fuller, et al (2013), found that in the Montreal bike share program there were no greater numbers of accidents or near misses [2] and that city has over 4,400 bikes in its system [3]. I did find one definite con: people using a bike share were much more likely to ride without a helmet. In a study of the DC and Boston programs cited in Fishman, et al (2013), 80% of bike share riders were un-helmeted [4]. This fact could be a little worrying, but if there are no fewer accidents …Then again, it only takes one to put someone in a comma. Maybe those running a bike share program could find a way to include helmets with the rental.

The pros of a bike share program on first thought appear to be numerous. Biking promotes a healthy lifestyle, bike shares offer transportation alternatives and greater convenience, the programs reveal that a city is trying to accommodate all of its citizens and that it is thinking green. This last one is important to me – the only form of transportation more environmentally friendly is walking. Well, that is at least what I initially thought. It turns out that it not clearly the case.

In a study on the cost effectiveness of 7 San Diego transportation policies intended to abate greenhouse gas (GHG) emissions, biking policies proved to have the highest cost per ton of GHG abated by far [5]. In a study by the Fishman team (2014) of bike share programs in DC, Melbourne, London, and Minnesota, they found that vehicle miles traveled actually increased because of the balancing that had to be done to keep bikes from accumulating beyond docking capacity in some locations while other docking locations emptied out completely. Trucks hauled trailers carrying bikes from one docking station to another. The biggest problem with this practice was in London where few people used cars in the city anyway and where many people used the bikes to travel from the outskirts to the city’s center. Even for other cities in the study, it was found that bikes did not replace car trips as much as replace public transportation ridership or walking [6].

Though the Fishman study (2014) brings out some interesting points, London was an outlier and the study only looked at these four cities. A study about the Denver bike share program showed that between 22% and 66% of trips with the share bikes replaced vehicle trips [7]. An interesting consideration that I did not see quantified in any of these studies was that the trips replaced were also the short ones that if a car was used would contribute greater GHG than average owing to the fact that cars burn gas inefficiently until they achieve operating temperature. Regardless, there are now at least 700 cities in the world that have a bike sharing program [6] and there is a whole lot more studying that can be done about these innovative transportation programs. For instance, do bike share programs increase the legitimacy of bicycle commuting and therefore encourage vehicle drivers to bike more even if they do not use the program? Does the presence of a highly visible bike share program increase the eco-consciousness of the public in other ways not related to transportation? There are a host of other questions that we could investigate and starting from the program’s inception in Philadelphia might be a good way to start.

Notes
[1] Brust, A. (April 25, 2014). Bike share not coming to Phila. till spring. Philadelphia Inquirer. Retrieved from: https://articles.philly.com/2014-04-25/news/49381541_1_bikes-and-stations-bike-share-system-bike-share.
[2] Fuller, D., Gauvin, L., Morency, P., Kestens, Y., & Drouin, L. (2013). The impact of implementing a public bicycle share program on the likelihood of collisions and near misses in Montreal, Canada. Preventive Medicine, 57(6), 920-924. doi:10.1016/j.ypmed.2013.05.028
[3] O’Brien, O., Cheshire, J., & Batty, M. (2014). Mining bicycle sharing data for generating insights into sustainable transport systems. Journal of Transport Geography, 34, 262-273. doi:10.1016/j.jtrangeo.2013.06.007
[4] Fishman, E., Washington, S., & Haworth, N. (2013). Bike share: A synthesis of the literature. Transport Reviews, 33(2), 148-165. doi:10.1080/01441647.2013.775612
[5] Silva-Send, N., Anders, S., & Narwold, A. (2013). Cost effectiveness comparison of certain transportation measures to mitigate greenhouse gas emissions in San Diego county, California. Energy Policy, 62, 1428-1433. doi:10.1016/j.enpol.2013.07.059
[6] Fishman, E., Washington, S., & Haworth, N. (2014). Bike share’s impact on car use: Evidence from the United States, Great Britain, and Australia. Transportation Research Part D-Transport and Environment, 31, 13-20. doi:10.1016/j.trd.2014.05.013
[7] Ramaswami, A., Bernard, M., Chavez, A., Hillman, T., Whitaker, M., Thomas, G., & Marshall, M. (2012). Quantifying carbon mitigation wedges in US cities: Near-term strategy analysis and critical review. Environmental Science & Technology, 46(7), 3629-3642. doi:10.1021/es203503a

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

February 17, 2015 Leave a Comment

Obama’s Budget Proposals for Clean Energy and Climate Investment

By Joseph Nyangon
Investment in R&D is crucial to achieving simultaneously the objectives of economic growth and sustainable development.

*A cross-country theme in the clean energy programs supported by the Obama budget proposal is the need for federal and private funding for research and development. Photo: Shutterstock*

President Obama has released a $4 trillion budget proposal for FY 2016. It contains a range of programs designed to encourage deployment of the next generation clean energy and energy efficiency technologies. Here are the top five things to know about the budget in terms of clean energy and environmental investments:

1. Clean Power State Incentive Fund
The U.S. President proposes a $4 billion incentive fund to encourage states to make faster and deeper cuts in carbon emissions from electricity, than would be required under the Clean Power Plan. The Environmental Protection Agency (EPA) is to administer the Clean Power State Incentive Fund, which would enable states to invest in activities that advance and complement the agency’s Clean Power Plan. The administration outlines several goals, including addressing impacts from environmental pollution in low-income communities to supporting businesses to catalyze investment in renewable energy, energy efficiency and combined heat and power. The budget also includes $239 million to support reductions in greenhouse gas emissions programs at the EPA. In particular, $25 million would be used to help states develop their Clean Power Plan strategies.

2. Permanent extension of renewable energy investment tax credits
The renewable energy Production Tax Credit (PTC) has been an important lifeline for the wind industry in the United States. It expired at the end of 2013 and Congress agreed to a one-year extension, which expired in 2014. Tom Kiernan, CEO of the American Wind Energy Association (AWEA), has called on Congress to extend the PTC, noting that “Investing in wind power makes sense and that the Production Tax Credit is the right policy to continue growing this abundant, homegrown resource.”[1] The FY 2016 budget proposal concurs, proposing a long-term and stable clean energy policy based on a permanent extension of solar and wind investment tax incentives, and reforming the incentives to make them simpler and more efficient. A separate incentive scheme for solar, the Investment Tax Credit (ITC), which authorized a 30% tax credit through 2016 before falling to 10% thereafter is set to expire at the end of 2018. The administration has proposed a permanent extension.

3. Increased investment in clean energy technologies and R&D
The administration has proposed an investment of $7.4 billion in pollution-cutting technologies—an increase of nearly 7% [2] from the $6.5 billion allocation in the FY 2015[3], for clean energy programs and sustainable technologies. These investments in solar, wind, low-carbon fossil fuels, and energy-efficiency initiatives primarily cover programs at the departments of Energy, Defense, Agriculture, and the National Science Foundation. Examples of the programs outlined in the budget include investment in electric vehicles to enhance their affordability and convenience; improvement in building efficiency programs; climate proofing electric power grid such as storm hardening, flood-proofing, installing higher temperature-rated transformers and replacing underground transformers with saltwater submersible types; carbon capture and storage; and investment in research and development (R&D) to measure and mitigate fugitive methane emissions from natural gas systems.

4. Advancing international climate negotiations efforts and investing in the Green Climate Fund
The budget also provides $1.29 billion to advance the goals of the Global Climate Change Initiative and the President’s Climate Action Plan (which supports bilateral and multilateral engagement with major and emerging economies). This includes $500 million for U.S. contributions to the U.N.’s Green Climate Fund (GCF) to help catalyze additional private sector support for international climate action, and $230 million for the Climate Investment Fund. So far, the GCF has received pledges totaling $10.2 billion from countries such as Japan, South Korea, Norway, Mexico, Sweden, United Kingdom, Indonesia, Mongolia, and more.[4]

5. Energy and climate resilience
The budget contains a panoply of provisions designed to help vulnerable parts of the country enhance their energy and climate resilience and preparedness, including increased investments in community and ecosystem resilience, and better understanding of the projected impacts of climate change. For example, allocation of $400 million for National Flood Insurance Program Risk Mapping efforts, an increase of $184 million over FY 2015 funding levels. Additional funding has been proposed to tackle coastal resilience, wildfires and drought resilience. These include: $50 million towards the NOAA Regional Coastal Resilience Grants, $89 million to promote water conservation efforts, and $200 million to FEMA primarily for mitigation planning and facilities hardening, an increase of $175 million over current funding levels.

A cross-country theme in the clean energy programs supported by the Obama budget proposal is the need for federal and private funding for R&D. The United States enjoyed remarkable success recently because of pharmaceutical and biomedical research (even if proponents of the free-market often less understand it). From securitizing energy efficiency retrofits to unlocking capital in private equity and pension funds to harnessing green bonds, investment in R&D to fund projects targeting climate resilience and low-carbon technologies is crucial to achieving simultaneously the objectives of economic growth and sustainable development. It is why analyzing the trend in federal budgetary allocation for clean energy investment is vital for understanding signals of long-term economic transformation. In every dimension of clean energy economic growth there is a critical technological need, which must be underpinned by increasing capital flow in basic scientific research.

Notes
[1] The state of the wind industry is strong: https://thehill.com/blogs/congress-blog/energy-environment/230248-the-state-of-the-wind-industry-is-strong
[2] Obama 2016 budget urges states to cut emissions faster: https://www.reuters.com/article/2015/02/02/us-usa-budget-energy-idUSKBN0L60AF20150202
[3] Budget of the United States Government, Fiscal Year 2015: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/budget.pdf
[4] Green Climate Fund Initial Resource Mobilisation: https://news.gcfund.org/wp-content/uploads/2015/02/pledges_GCF_dec14.pdf

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