We need sound energy policy

Chris Barry, MBA student, Fuqua School of Business, Duke Universityby Chris Barry, MBA ’17

This article was written in response to a seminar given by Jim Rogers, Former CEO and Chairman of Duke Energy, at Duke University in an EDGE Seminar on Sept. 7, 2016 at Duke University’s Fuqua School of Business. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.

 

The energy industry is at a critical moment in time. As we deepen our understanding of the environmental impact of the energy we use to fuel the quality of life we have come to expect, we realize that our current means of powering our prosperity are no longer sustainable. The U.S. needs sound energy policy to be an example to the rest of the world, as it was in the establishment of the electricity industry a century ago, for how to deal with the modern challenges we face with energy.

Nearly 40% of CO2 emissions in the U.S. originate from our predominantly fossil-fuel-powered electricity industry. If we are to continue to power a prosperous and healthy future we have to act quickly to revamp a century-old industry that moves with the agility of an oil tanker. This dramatic shift to incorporate unique forms of distributed generation, integrate new technologies that will further connect our devices and appliances in an intelligent way, and reinvest in decades old infrastructure that was optimized under a completely different paradigm will require vast sums of investment.

Our challenges are further exacerbated by the fact that 1.2 billion (with a “B”) people around the world do not yet have access to electricity. That’s nearly 20% of the global population. Another 1.2 billion do not have power that can be relied upon. These global citizens have as much right as Americans to strive for the same higher quality of living that is fueled by access to affordable electricity. So, we’re tasked with steering a slow-turning ship and we’ll need tremendous capital to do it. In order for the business world to respond, we will need clarity in energy policy. The U.S. should take a leadership role in deigning the policy, technology, and business solutions to drive this new energy system.

The sentiment that echoes through energy industry conferences and across the pages in investor reports is that some form of carbon tax and regulation is inevitable. Plans are already underway to comply with the Clean Power Plan, which sits in legal limbo. However, what is stifling investment and further innovation is the uncertainty about the scope and timing of these impending regulations. Moreover, the piecemeal nature of energy policy across the country keeps many technologies and business solutions from reaching efficient scales of economy.

Fortunately, we have been down similar roads before. In the very beginning of the power industry, in the late 19th and early 20th centuries, there was avid competition from numerous electric companies to supply power to wealthy and densely populated centers, like New York. We quickly learned that the tangled mass of wires and poles from several, dominate vertically integrated utility companies was a tremendously inefficient distribution of resources that did not provide equitable access to electricity. Congress then passed the Public Utility Holding Company Act of 1935 (PUHCA), which, in essence, permitted regional electric utility monopolies to form in return for the guarantee that all customers in that service territory would receive access to power. The monopolistic protection incentivized investor-owned, rural cooperative, and municipal utilities to make the large capital investment needed to extend transmission and distribution lines, knowing that they would have time to make a steady return. The act was in place for seven decades and allowed for the vast proliferation of the electric grid across the country.

Similarly, when the country was facing energy shortage in the late ’60s and early ’70s, reform of the sector was needed again. In targeted response to the energy crisis of 1973, Congress passed the Public Utility Regulatory Policies Act (PURPA) that encouraged the creation of markets for non-utility power producers, the use of cogeneration, the promotion of renewable forms of power, and the conservation of electric energy and natural gas. It was the beginning of the deregulation of the energy industry and spurred new creative entrants.

Over the last two decades, other piecemeal efforts have been made to help promote clean forms of energy that address growing environmental concerns. The production tax credit, the investment tax credit, and state-based renewable energy portfolio standards have all attempted to give clean forms of power like wind, solar and biomass a leg up in the market. Recently, the value of these programs has begun to show some signs of success as renewables have a fast-growing, though miniscule, fraction of U.S. electric supply and their costs are falling precipitously.

However, the country is in need of clear leadership and market guidance from Congress. These cobbled solutions have suffered from fits and starts of delayed extensions, and the complicated effort of working with numerous sets of rules in different markets across the country, limiting efficient investment. Despite the depressing state of American politics in 2016, there is hope to be found in the examples of compromise and rational policy-making from our representatives of the past.

I am of the opinion that a majority of the issues we face from a malfunctioning and intransigent Congress stem from the grotesque gerrymandering of the last decade. In 2012 Democrats received 1.4 million more votes than Republicans and yet the GOP claimed 54% of seats. With districts neatly drawn along party lines, it is increasingly easy to predict election outcomes. The upshot is that elections are now won in the primaries, pushing the parties farther from consensus and compromise. Many challenges to these practices are proving successful, and the ship will eventually right itself, but given the long time horizons and the massive scale of investment needed, we might be moving too slow.

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