Regulation in a Time of Looming Darkness
by Roger Feldman --
Andrews Kurth, LLP
Where are the regulators? While the American economy reels, its linkage to developments in the regulation of electricity is simply not a matter for public notice. Yes, oil is up and the dollar is down, but the lights still go on. Maybe an electric infrastructure is not geared for the necessary responses to the need for electric vehicles and the ongoing digital revolution demand for more and higher-powered data centers. But we tried deregulation: power prices rising as caps come off, the potential price impacts of renewables pass throughs are lurking; reserve margins are shrinking, and it’s more politically prudent to worry about noxious fuel fumes than attending to that knocking and wheezing sound in the American dynamo.
The Challenge for Renewables Regulation
What should regulators do? The challenge is to rethink regulatory policy to establish an appropriate place in the energy “pie” for the next types of renewable resources. The key to that rethinking needs to be not the introduction of a single abstract principle or to pit utility regulatory bromides against the “green hope” of renewables breakthrough. It is to focus on establishing the right scale for different types of renewables in our challenged US world. At what sizes and in what places should different types of renewables be fostered by regulation as a key response to our impending national dilemma?
Avoid Single Slogan Fixes
One touchstone of this search should be that there is no one right standard which can realistically be the basis for regulation:
- Not “sustainability” - the motto of the renewables movement. There are in fact many competing applications of the sustainability standard, including:
§ optimization of energy production not only to address load growth requirements but the requirements of a healthy economy;
§ optimization of the different components of our environment: air, water, land;
§ roll back of climate change due to GHG.
- Not the operation “financial markets”: exuberant market valuations of emerging companies, dour evaluations of project financial cash flows, return based evaluations of otherwise unproductive roll up efficiencies; these may lead or lag what are optimal future solutions to the application of renewables;
- Not the sometime-cousin of the financial standard -- “letting the market decide”-- which obscures or overlooks many types of direct or indirect subsidies to different energy resources influencing that decision, and which may, in the end, impede the implementation of desired policies (like reduction of dependence on foreign energy supply);
- Not the collective “wisdom” of government planners (whether legislative or executive branch) making bets which are likely to be politically informed or market under-informed;
- Not the wisdom of “social entrepreneurs” whose policy calculations are as accurate as the inputs to their programs and whose collective belief is the cumulative wisdom of multiple bets by multiple foundations showing a faith in the “invisible hand” which would make even Adam Smith raise an eyebrow;
- Not the marginal cost economic insight of the carbon “lenders” that, if carbon is priced correctly and the true cost of fuel externalists and energy efficiencies is clear, then renewables will be set free to function in the greatest national interest.
None of these is a clearcut standard. Are we left with regulation of the scale of renewables simply the residual byproduct of the general regulatory effort to establish equity among classes of customers, making least cost short and long run marginal cost calculations from the consumer perspective while taking into account of capital requirements of would-be suppliers offering competing technologies or using competing fuels.
The Heuristic Approach: The Envelopes of Regulation
Not necessarily, we are left with the pursuit of the beginning of wisdom of a “heuristic,” i.e., indicative approach, for establishing a pragmatic methodology for the regulation of renewables in the electric power sphere which reflects basic interlocking principals:
· Acknowledge that regulation is serving several different functions in addition to ratemaking and prevention of discrimination, for example, resource planning; stimulation of infrastructure development not otherwise incented by the system (e.g., transmission), system load shaping, externality identification and capture accounting.
· Define the appropriate relationship of economic regulation to the roles which different types of non-regulatory government financial incentives might play with respect to different renewable technologies at different levels of commercialization.
· Recognize that policy implementation of institutional change through regulation will only be as effective as it is smoothly interfaced with the on-going roles of the current on-going large scale infrastructure holders and central delivery institutions at the core of the operation of the American energy economy.
· Stop making policy for electricity renewables as though they were a single homogenous mass. While clean tech breakthroughs can -- and hopefully will -- scramble the picture, it is useful for policy purposes to categorize renewables by the role they play in the energy economy.
· Large scale, suitable for baseload, substantially commercial and reasonably foreseeable technology applications.
· Distributed generation: smaller scale, possibly required economic aggregation for commercial, frequently offering collateral environmental benefits.
· Emerging technologies -- with longer term breakthrough potential, whose future demonstration could fit new or existing technologies into one of the first two categories.
This type of sorting serves to focus attention on the need to define different envelopes of market regulatory incentives for each different category and with some view as to which players will most likely actually make use of them. Each type of resource (in the particular application in question) may benefit from different regulatory incentives. Too often, in the political desire to “do something that show progress,” the potential value of targeted “policy entrepreneurship” is overlooked.
Finally, particularly in the field of regulation, once refined envelope/technology targeting has taken place and the analytic results have been packaged into envelopes of potential targeted market regulatory incentives, the final step is to identify the governmental level at which these regulatory incentives are best applied, and what the appropriate interaction among governmental regulatory authorities should be with respect to these incentives. The possibility of following this approach is potentially facilitated by the fact that, at least in the past decade, rather than Federal cram-downs of policy through what have been treated as regional and state “delivery systems,” bottom-up innovation (and some collaboration) has been in play with respect to many electric power regulatory issues. Now there is more need for focus on the roles of the regulatory players seen from the perspective of purveyors of different renewables technologies.
To do this, some basic differentiation of envelope implementation responsibilities follow these guidelines:
(i) Federal. Provide declining economic safety net for different commercializable technologies; provide standardized metrics for calculation of the internalization of externalities in all energy regulation; provide for continuity in regulation incentives for an extended period, subject only to emergencies.
(ii) Regional (cf RTO). Define comprehensive, regionally appropriate resource plans, incorporating appropriate renewable technology-oriented incentive oriented measures; focus on regional provision of infrastructure to implement these plans (e.g., transmission); assure that any regional incentives to particular technologies are complementary to those provided at the Federal level.
(iii) State. Afford presumptive assumptions of validity to RTO recommendations regarding capacity and resource planning regarding renewables; focus on making local land and resource use regulation compatible with the overall policy objectives established at the Federal and regional levels.
To sum up: power regulation faces a time of looming darkness. Power regulation, particularly with respect to renewables, is of fundamental importance to national economic recovery, which is in a condition of limited confidence in the ability of our national system to effectively provide for our future national economic competitiveness. Bumper sticker policy slogan fixes harm the need for coherent action. A good way to light our energy efficient lightbulb in the darkness would be to focus on how regulation can best put the right size of renewables in the right places, so that the overall US energy economy is equal to the challenges it is now facing. In this way, regenerative energy policy can be regenerative economic policy as well, and all the talk about “green jobs” can have some greater substance.
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.