July 2005

Secure Clean Giant

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2005/08/01)
 

The Energy Act, in all of its confusion, glory and bounty of benefits, is rolling towards what, at this moment, appears likely to be passage. Soon thereafter, as the night the day, will be a deluge of analysis. Were the right resources benefited? Were the right stimuli applied to consumer market behavior? Were the environmental consequences sufficiently taken into account? How in charge will FERC be now? But the most important question will be: Will “merchant power” as we have come to know it, still be standing? Will there be channels for vigorous competition in the power industry?

What is needed for analysis is a different perspective: not that of interconnecting generators but an integrated approach to the multiple requirements of individual energy-consuming users, which takes environmental and resource stability into account. “Merchants” who can provide this may outsail the traditional energy galleons which are clearly reemerging. Since national security is presumably the ultimate driver of the Energy Act (not simply the cornucopia of benefits to certain suppliers, as non-faith-based cynics have suggested), and since we live in the new age of anxiety, it is only appropriate to examine how our military is approaching the question. Next to China, it may be probably the biggest energy consumer in our world (80 Trillion Btus; $800 MM per annum). What it wants is a good indication of what a merchant should sell, since “the customer is always right.”

With this in mind, it is useful to analyze what the newly released “Army Energy Strategy for Installations” (the “Strategy”, sir) has concluded it should want. While somewhat optimistically surmising that technology will conquer the surging energy demands of a global industrial nation, its reluctant conclusion is that energy prices will increase. The first radical conclusion – by conventional electric utility industry standards – is that cost and population pressures point in the direction of more compact installations with higher energy density and less expensive distribution. The strategy’s conclusion, in turn, is that this implies not only to an imperative for efficiency, but also a conclusion which in an earlier age might have been found only in a Whole Earth Catalog.

Integration of energy and environmental sustainability, it deduces is critical to the success of the Strategy. “Sustainability connects our activities today to those of tomorrow with sound business, energy and environmental practices. We will invest in sustainable and energy efficient facilities” the Strategy assures us.

Its specifics come in five key principles, from which are extracted below not the policy poetry, but some of the acknowledged hardware implications:

Installations will make extensive use of electric energy monitoring and control equipment to validate performance of energy systems to focus corrective action accordingly;

Needed are:

- Continued reduction of the use of electricity from non-renewable fuel;

- Regionalizing purchasing and entering into long-term contracts to achieve price stability;

- Shift and reduce electrical loads during peak hours to reduce total energy acquisition costs;

Sustainable Development and Design (SDD) standards (green buildings to you civilians) should be incorporated into all installation planning and construction renovation projects.

The Army, more than its civilian counterparts, also seems to be very sensitive to security issues affecting energy supply. It turns out that “sudden impacts to the global market can adversely affect the ability to meet mission requirements and sustain our quality of life.” The Strategy’s suggested response – expand the diversity and availability of our energy supply, improve the reliability of security to our power systems, and increase efficiencies in building facilities. Along related lines, it turns out according to the Strategy that it would be desirable for installations to have the ability to counter potential disruption threats, including failure of deteriorated and overburdened infrastructure (like transmission). The use of distributed generation at mission critical facilities, and partnering with utility and community suppliers, are recommended approaches. Recognition of the relationship of energy production and water availability and conservation also will receive specific attention.

Well, you may say, that is very well for the clean green giant, that insecure Schreck, but what does it have to do with merchant power — swashbuckling exploiter of the free market seas. Fount of trading innovation and last bastion from market power.

My thought: everything! The days of rampant IPP deregulation are over. The days of offering integrated energy-environment solutions for facilities are upon us. The Strategy is, at least conceptually in the vanguard, of the new mentality. It is one central station utilities are not yet set up to serve well, and whose regulatory framework is not designed to save it.

So just as small mammals are reputed to have scurried among the dinosaur eggs, so too the new merchants must find their niches for survival in a world soon to be, without PUHCA or PURPA. Each merchant developer, an army of one, defining customer needs and working toward aggregation and creation of mass markets. Where the merchant sail: follow the buoys set by the secure clean green giant.
 

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.