Posts tagged “policy”
A couple of weeks ago I had the opportunity to tour the Liquefied Natural Gas (LNG) facility at Cove Point, Maryland. Owned by Dominion, the Cove Point facility is currently an LNG import and storage facility.
As readers will know, there has not been that much demand for LNG imports to the U.S. over the last few years – the shale gas revolution has turned the U.S. from an economy looking to import increasing quantities of costly gas to one where a surplus of low-cost gas is looking to global exports. As such, Dominion has applied for the permits to expand the facility for LNG export. It has received approval from the Department of Energy for exports, but it is awaiting state, local, and final FERC approval before construction can begin. They expect to break ground on the new facility in the spring of 2014, with completion sometime in 2017.
A Brief History
When Cove Point was first built in the late 1970s, there was demand for imported gas from the only major supplier of LNG, Algeria. The 1970s had seen shortages of gas around the country. As it came on line in 1978, Congress passed legislation to deregulate the gas industry. With deregulation, domestic production increased and demand for imported LNG fell and most imports ceased by 1980. In the early 2000s, there was pressure in natural gas markets again, and Cove Point was reactivated as an import terminal in 2003. In ‘04 and ’05, Cove Point hosted almost 80 ships per year bringing in LNG from producers around the world. At that time, U.S. demand looked set to grow inexorably, with domestic supplies unable to meet demand. So, in 2004, Dominion embarked on a large expansion of Cove Point’s capacity, more than doubling its storage capacity. Once completed in 2009, markets had again turned against LNG imports, as the shale revolution pushed down prices and pushed up production. 2011 was the last commercial import of LNG; now two or three ships per year service the facility in order to keep their lights on and fulfil their secondary mission of providing a peak demand service (providing gas to markets in times of high demand).
Supporters of coal have called the planned new rules from the EPA on CO2 emissions from coal-fired power generation a war on coal and have pledged to fight the rule-making process. It is true that there will almost certainly not be a new coal-fired electric generating station built in the U.S. for at least the next several years, but the hiatus won’t be caused by any specific rule. The real danger to the coal industry is uncertainty.
Investing in the electric business is about long stable returns. Electricity assets last a long time, are expensive to install, and are typically expected to provide long-term stable, if modest, returns. Since returns are spread over a long period and are stable, with limited upside (10x returns on energy infrastructure don’t exist) investors and lenders require a quantifiable and manageable amount of risk. Uncertainty in any form makes the quantification and valuation of risk in an electric generation investment much more difficult (or impossible) and severely limits investor interest.
An excellent illustration of the impact of uncertainty on electric generation investment is a recent history of the wind industry. Despite a pattern of consistent, and even retroactive extensions, the uncertainty created by the political fight over extending the Production Tax Credit for wind power has caused nearly complete cessation of new wind facilities being brought on line each time the credit wasn’t extended well in advance of expiration.
The impact of the PTC on the economic case for a wind project has been substantial and was (and still is for some projects) the difference between a profitable and an unprofitable project, so the uncertainty regarding the availability of the credit was a threshold requirement for an investor. An investor simply could not have certainty that it could earn the necessary return (or in most cases any return) without realizing value from the credit, so no investments were made. The result of this uncertainty in 1999, 2001 and 2003 is stark, as investment dropped precipitously from year to year, even though any project would have qualified for the credit because of retroactivity of the extensions.
The impacts of budget sequestration are slowly being unveiled to the general public. Furloughs at the Federal Aviation Authority (FAA) led to air traffic gridlock and angry travelers. Parks and national tourist sites are cutting back hours. And the Department of Defense (DOD) recently announced furloughs for 680,000 civilian employees. While these short-term impacts are painful, in particular to those losing work hours and income, sequestration is initiating cuts with negative, long-term impacts, which are not yet immediately apparent.
One area of specific concern is the potential $381 million in cuts to energy innovation investments at the DOD – a 25 percent cut compared to FY2012 levels. Since 2009, DOD has invested $5 billion in clean energy research, development, testing, demonstration, and procurement, representing almost 25 percent of U.S. clean energy funding in FY2012. DOD’s focus on clean energy innovation is important for three reasons:
- The DOD has been the source of some of the last century’s most important breakthrough technologies, including the Internet, GPS, and microchips and it could have a similar impact on clean energy technologies like batteries and smart grid;
- The DOD has developed its own cohesive innovation ecosystem that bridges its investments in research to its procurement budget and actual use of new technologies in the battlefield, which allows for accelerated pathways for technology development;
- The DOD budget is typically not politically controversial in comparison to other sources of energy innovation investment like the Department of Energy, assuring consistent funding over time rather than periods of boom and bust.
During the past five years DOD has quickly ramped up its energy innovation investments to address strategic challenges impacting warfighters, such as protecting liquid fuel supply lines and addressing the geopolitical consequences of climate change. But budget sequestration threatens to slow, or even halt, these efforts.
The military has been a leader in the development of biofuels – for good reason. As I’ve written before, the military’s single-source dependence on petroleum for fuel is a strategic vulnerability. Oil has a monopoly on energy supply for 80% of our military’s energy needs, including virtually all of the non-nuclear transportation. To simply accept that oil is going to remain as the sole source of liquid fuel that the US military relies on for its transportation, operations, and training is to say that we should accept the long-term strategic risks of price volatility and dependence upon uncertain foreign countries.
We should remember that, even if the military uses oil solely from the United States and its allies, the price that the Defense Logistics Agency pays for oil is largely set by global market conditions – and saying that those are highly vulnerable to conflict and unrest in the Middle East is an understatement.
Last year, in an attempt to address this threat, the Department of Defense, the Department of Agriculture, and the Department of Energy were authorized under the Defense Production Act (DPA) to support the development of an alternative source of fuel. The funding agreed in a joint memorandum, and appropriated by Congress, each agency will invest $170 million over three years in helping to build a domestic biofuel industry (read more about the DoD’s biofuels policy here). This funding will be matched by investment from the private sector. Over the past several months, the agencies have been deliberating over which companies will partner with the government.
Bringing together climate policy and innovation to form a cohesive carbon tax proposal reframes U.S. climate advocates’ near-myopic focus on carbon pricing, mandates, and subsidies and expands the discussion on how we can use those tools to spur innovation, writes Matthew Stepp.
Joint Statement on ‘Dangers’ of Climate Change
A few weeks ago, Secretary of State John Kerry went to Beijing to meet with the leadership of the Chinese government. This meeting was mostly noted in the press as an effort to defuse tensions in the ongoing crisis over North Korea – and clearly that was important; there has been a notable ratcheting down of tensions since then.
However, over the long term, there was an agreement that came out of the meeting that could be much more important to the world’s future stability and security – a joint U.S. – China Statement on Climate Change. It was so overlooked in the press, that I missed it for the last two weeks. The statement indicated that the U.S. and China recognize the “dangers presented by climate change” and that a “more focused and urgent initiative” is needed.
This statement is invariably true – and these two countries are in a position to have an impact. Together, China and the United States are the largest emitters of greenhouse gases in the world, with 29% and 16% of global emissions, respectively. Like Willie Sutton and the Banks, if you want to affect greenhouse gas emissions, start where the emissions actually are.
Mutual Concern About Present Day Impacts
Importantly, the statement notes that the reasons for each country’s mutual concerns about climate change come from the impacts that are already being seen. The statement lists ocean acidification, Arctic sea ice loss, and the “striking incidence of extreme weather events” as reasons for concern about climate. Climate change has moved from being a hypothetical worry in world politics (this will harm us) to an actual threat (this is harming us).
This agreement is important because it will catalyze action by each country at the national level, it will open up areas of cooperation between the two, and it could act as a signal to international negotiations, leading to an ambitious UN agreement.
Formally, the agreement will create a new Climate Change Working Group in the annual U.S. – China Strategic and Economic Dialogue (S&ED). The S&ED was the brainchild of then-Secretary of the Treasury Hank Paulson, with the first one taking place in September, 2006. Over the last six years, the S&EDs have successfully brought together the highest levels of both governments to meet and discuss important areas of the bilateral relationship. Mostly, however, the discussions have focused on economic and trade issues.
Creating a Climate Change Working Group will ensure that the highest levels of government are forced to deal with the problems of climate change.
Forcing Entrenched Bureaucracies to Collaborate
One of the key reasons why this agreement is important is not even the potential areas of cooperation between the countries – it is the action it will generate within each country’s government. In the United States government (I can’t speak with any familiarity about the Chinese government), it will force entrenched bureaucracies to deal with one another on climate and environmental issues. There is often a tendency in government for issues to become ‘stovepiped’ – and on climate, which is pegged as an environmental issue, but is actually a cross-cutting issue of energy, trade, economics, national security, and more, the stovepipes have not worked.
I work on energy policy for a national security think tank, so I am often asked to talk about energy security. Last week, I participated in a conference in which we were asked to comment on “U.S. Energy Security: How Do We Get There?” As I listened to the presenters at the conference, I realized that how you viewed the problem of ‘Energy Security’ depends on how you identify it. We all seem to have determined that energy security is a problem, but we each had different understandings of what the term ‘energy security’ actually means! Of course, that means there were very different prescriptions for how to ‘solve’ the problems of ‘energy security.’
In the absence of a definition, everyone defines energy security differently –both speakers and listeners. It is something like the late Margaret Thatcher said about the politics of consensus: “it is something in which no one believes and to which no one objects.” Along those lines, I believe that ‘energy security’ has devolved into simply a buzzword: a phrase that everyone favors, but defines differently. Pundits, politicians, lobbyists, industry, and campaigners from across the political spectrum cry ‘energy security’ because it polls better than their preferred policies. I have done it as well. Listeners, then, are misled because, really, who could actually be against ‘energy security?’ It is like being against mom, America, and apple pie.
President Obama released his long-awaited FY2014 budget request and while it’s unlikely the budget will be taken up by Congress in its entirety, it remains an important document. Namely, the proposal is significant because it steadfastly argues that America can continue to support next-generation industries like clean energy. In fact, the President’s proposal budgets for a number of high-profile, high-impact programs, including those aimed at growing the domestic clean energy manufacturing sector, reduce transportation fuel use, and calls on Congress to fund a new Energy Innovation Hub to transform the electricity grid.
Across the board, the FY2014 request boosts key energy innovation offices at DOE by about 15 percent compared to the FY2013 Continuing Resolution and seven percent higher than the President’s FY2013 request. The lion’s share of budget gains are aimed at the Office of Energy Efficiency and Renewable Energy (EERE), which would see a budget increase of 54 percent from FY2013 CR levels, and at the Advanced Research Projects Agency-Energy (ARPA-E), which would see a budget increase of 46 percent.
Expanding Research Capabilities in Advanced Energy Manufacturing
The largest budget increase target at EERE – 22 percent to be exact – is for the department’s Advanced Manufacturing Office, which invests in transformational research and development of integral clean energy manufacturing technologies and practices. This investment would support and complement EERE’s recently announced Clean Energy Manufacturing Initiative, which aims to aggressively increase the international competitiveness of emerging energy manufacturing. The program is designed to begin reversing a decade’s long decline in U.S. manufacturing – immediate goals include transferring new research, technologies, and industrial education and training to industry through a new research institute under the banner of the President’s National Network of Manufacturing Innovation as well as EERE’s Better Plants Challenge.
This is a guest post from my friends Katherine Hamilton, Jeff Cramer, and Patrick Von Bargen at 38 North Solutions (one of my best resources on energy policy developments in Washington). I get updates from them on emerging energy and related policy news, and I am excited to be able to share their follow up to the State of the Union here as I thought this was a great summary of the President’s energy focus.
Following up on the President’s largely unexpected statements on climate policy in his inaugural speech, the 2013 State of the Union highlighted accomplishments to date on clean energy deployment and GHG reductions, and outlined five focus areas for his second term climate and clean energy agenda. We have included our prognosis for each of these areas.
1) Challenging Congress to pass legislation addressing climate change through “market-based solutions,” referencing Republican John McCain’s past support for his own cap and trade bill, last introduced in 2007, and threatening executive action to regulate carbon through the Clean Air Act.
Prognosis: Dems in both Houses are expected to introduce climate legislation, perhaps as a Clean Energy Standard (CES) that the President has promoted in the past and that was introduced in Senate Energy and Natural Resources in the last Congress; perhaps through introduction of a carbon tax that has the dual purpose of raising revenues; perhaps through a smaller package of provisions like Master Limited Partnerships for renewables or innovation incentives for clean technology. EPA will also continue regulating greenhouse gas emissions through its Clean Air Act mandate.
What Can Obama Do?
The President has begun his second term in office by saying that he will act on climate change, stating in his inaugural address: “We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations.”
However, the question now becomes: what can President Obama do about climate change? He made action on climate change a central argument during his 2008 campaign and early in his first term, but failed in the effort to pass major emissions reduction legislation through Congress. While the stimulus had many important clean energy sections, it is unclear whether these will result in lasting changes in our economy.
Market-Based Actions Are Most Effective
Having tried and failed to pass major climate legislation through Congress in 2009 and 2010, and knowing that a polarized Congress is unlikely to address this again in the next few years, I believe that the Administration will move towards a two-pronged approach that uses regulation at home, but prioritizes action on climate as a tool of international relations.
(Read More: Why Climate Change is a Matter of National Security)