When the Edison Electric Institute (EEI) and Electric Power Supply Association (EPSA) both announced new climate-change policy principles in early 2007, they signaled the U.S. power industry was going through a dramatic climate shift of its own.
Rather than emphasizing voluntary efforts to reduce emissions of greenhouse gases (GHG), as past policies did, the new climate policies focus on regulatory actions that encourage technology R&D and reward companies for investing in those new technologies.
These new policies demonstrate that U.S. power companies expect carbon constraints to become mandatory in the foreseeable future, probably before the end of the decade. And rather than fighting a losing battle against a rising policy current, they are trying to direct that current in ways their stakeholders can accept—and even support.
This change in thinking also confirms what analysts and consultants have been saying—that carbon constraints can represent a major business opportunity for the electric-power industry, as efficiency and conservation become core value propositions for companies that traditionally have been rewarded for building capacity and selling volume.
“If we get the right regulatory treatment, energy efficiency is the lowest-risk strategy we could follow,” says Michael Chesser, chairman and CEO of Great Plains Energy, parent company for Kansas City Power & Light (KCPL). “As it gets put into rate base, it will provide a steady stream of earnings and will improve our image and our relationship with the customer.”
However, not all companies agree on the “right treatment.” Integrated utilities that rely heavily on coal will face different challenges from those of retail transmission and distribution (T&D) companies. Independent generators will face different risks from those of IOUs and public-power utilities.
Nevertheless, despite a diverse set of ownership structures and business interests, the electric power industry will be expected to achieve at least one-third of America’s required GHG reductions in the coming decades.
“To me this is the definitive business issue of our generation—and in fact a series of generations,” says David Crane, CEO of power generator NRG Energy in Princeton, N.J. “Nothing like this has come along since the paradigm shift in workplace safety at the beginning of the 1900s. The importance of GHG regulation should not be underestimated.”
Not all executives at U.S. power companies agree about the predictions of climate scientists, or about the chance of reversing global warming by reducing GHG emissions. But most of them do agree, at least in principle, that only mandatory constraints will spur the investments and behavioral changes necessary to dramatically cut GHG emissions.
“National GHG regulations will bring certainty the industry currently lacks,” says David Saggau, CEO of Great River Energy, a G&T cooperative based in Elk River, Minn. “It gets difficult to do resource modeling for assets that will last 50 years when you don’t know what GHG regulation will look like. A national carbon tax or cap-and-trade program will give us real numbers we can plug into our assessments, and it will drive the development of technologies we can use to solve this problem.”
As always, however, the devil is in the details. And for every proposed scheme of GHG regulation, power company CEOs worry about a host of details.
For example, various utilities and power generators argue about how emissions credits should be allocated under a federal cap-and-trade program like the existing Clean Air Act program for SO2. Companies that have been investing to reduce their GHG emissions want to ensure they get credit for those efforts. But those that recently have built or acquired coal-fired power plants don’t want to be penalized for investments prudently made within the existing regulatory and cost-recovery framework.
More broadly, power companies fear legislators will target them as the biggest, most obvious source of GHG emissions—with disproportionate effects on electricity prices.
“We Americans consume a lot of energy, and it’s not fair to put the crosshairs on utilities,” Saggau says. “This is not an industry-specific problem. It’s much broader and we have to look at it in its totality, across all industries.”
At stake are hard assets and revenue streams worth trillions of dollars, which no one will surrender lightly.
To protect those assets, power-company CEOs have thrown down the gauntlet, promising a mortal fight against policies that threaten their companies. At the same time, however, they are challenging regulators, shareholders, and their own employees to realize a new regulatory model in which the market will reward climate-friendly investments.
“We have a perfect storm of fuel prices, environmental concerns, and technology solutions to create a real opportunity for efficiency,” Chesser says. “Utilities are the only companies that can make this happen on a broad scale, because of our financial capabilities and our credibility with customers. And the only way we will do it on a broad scale is if we can be made whole in terms of earnings.”
To better understand how the industry’s leaders are facing the greenhouse gauntlet, Fortnightly’s 2007 “CEO Forum” focuses on GHG constraints and their effect on companies’ strategic outlook. Interviews with CEOs at a diverse group of power companies—Duke Energy, FPL Group, Great Plains Energy/KCPL, Exelon, Great River Energy, National Grid, and NRG Energy—revealed many differences in viewpoint, but at least two common threads. Namely, power-industry CEOs are optimistic about the long-term opportunities climate change presents. And they also are determined to make sure any GHG-reduction mandates are affordable, effective, and fair to their stakeholders.
Fortnightly: What does climate change mean to your company? How will it affect your shareholders, customers, and employees?
John Rowe, Exelon: Simply put, we think the climate issue is real, and solving it will require action over several decades. The sooner you start action, the better. You need to start modestly but precisely, and ratchet constraints up so people build the costs into their investment decisions.
Because we are mostly a nuclear company, with a small amount of coal in the East and some gas around the country, we will be relatively minimally penalized by carbon legislation. That’s the result of a structural decision. It wasn’t an accident. The value of our fleet will continue to increase with carbon regulation.
On the other hand, in terms of growing our business, we are situated like every other company.
On the margin we could build coal, gas, or nuclear capacity. We’d be very unlikely to build coal that didn’t have carbon capture associated with it, because it doesn’t make sense in this environment. Personally, I think new nuclear will prove cheaper than carbon capture. But whether it is new nuclear or coal with carbon capture, the cost of the next generation of power capacity, including wind and other renewables, will be significantly higher than the prices prevailing in most parts of the country. That is an economic challenge for all of us.
I’d like to say it’s good news because the value of our power plants goes up, but this will be a source of stress for our customers as we go forward. Carbon regulation isn’t necessarily a windfall for nuclear because there are costs in the markets and regulatory structures affecting their value. And gas is no longer the free lunch it once seemed to be.
We’ve been working on allocation systems, looking for ways to make sure customers are fairly treated. Some of our customers have carried extra costs for a long time by being nuclear dependent, and customers who had low costs from coal historically will have to pay a little more to bear this cost going forward. The whole issue of the allocation system will be very complicated.
Michael Chesser, Great Plains Energy: As a coal-based utility we potentially will be impacted by GHG regulations more than the average utility in the United States. Prices will go up, but there also will be some positive consequences for our stakeholders. I believe the focus on GHG will allow us to pursue strategies that will add value for our customers, continue predictable growth in shareholder value, and provide our employees with an even more stimulating work environment as we apply new ideas and techniques.
We are in a growing service area. We will have to add capacity between now and 2015, and we have some older coal-fired plants that will be affected. As we look to our options, we have opportunities for wind-power development in Kansas and Missouri, but we also have significant potential for energy efficiency improvements and conservation.
The economics of conservation are compelling. By upgrading a typical building with high-efficiency lighting, windows, and HVAC, we can reduce energy consumption by about 30 percent, and we can do it for substantially less per megawatt-hour than it would cost us to build a new base-load plant. The customer value proposition is compelling too, because the building owner gets new equipment with less maintenance headaches, better comfort and better lighting. This is a real opportunity for utilities to add value for their customers.
A financial regulatory structure is necessary to incent us to do that, but with the proper regulatory structure, we could handle our entire native-load growth from 2010 through 2015 with energy efficiency. It’s not just something on the margin. It’s a real resource.
We can’t do it through 2050; the low-hanging fruit will be picked by 2020. But we look at it as a bridge to get us to the point where carbon capture and storage is commercially available, and nuclear plants are being built.
In the process of doing that, we’ll be adding real value for our customers and a stimulating environment for our employees. We’re not talking about the old utility system, but the system of the future, with more two-way communications and dispatchable load. In this way, GHG regulation could be the impetus for us to do some things that are in the long-term best interests of the company.
Steve Holliday, National Grid: What GHG regulation has meant in the past and will mean in the future is a quite broad canvas.
It is an opportunity for our business, without any question. But we absolutely have to turn this industry on its head so we are motivated and incentivized for helping society conserve more energy and consume less. This is quite an unusual paradigm; most businesses make money by selling more of a product, and we have people thinking about a rate design that earns money and increases profitability by reducing sales volume.
We need to take a leading role and we are doing so progressively on both sides of the Atlantic, in helping regulators and consumers think through the process of moving from a world that is greedy about consuming energy to one that is careful about it. But people have to allow companies to earn money by reducing energy demand. When you start to apply that, you will motivate companies to work on the technology, and you’ll get the second- and third-generation technologies developed.
Nobody wants to waste energy, but the challenge is marrying together energy efficiency and reliability. In the UK we are replacing old infrastructure, and there are parallels in certain areas of the United States. We all want reliable energy supplies but we also need to replace infrastructure for future requirements, not past requirements. We are looking at smart metering, with trials to begin shortly in the United States.
David Crane, NRG Energy: If we do things correctly, this is a big growth opportunity for the power industry. Certain people are racing to build power plants and get grandfathered under a carbon regime. I don’t think that’s going to happen. I don’t want to get paid for putting carbon into the atmosphere, but I’d be happy to get paid for taking it out.
It should put us in a net-positive situation. We are trying to invest in technology and carbon remediation generally. We not only will use this technology at our plants, but we also will participate in commercializing the technology itself. The person who comes up with the right widget will do very well in the free market. GHG regulation is an opportunity for entrepreneurs.
James Rogers, Duke Energy: We make money by investing in our business, and a carbon-constrained world translates into huge investment opportunities. We have to upgrade our grid, to go from analog to digital, and to change out meters and transformers. We will have to totally modernize our fleet; nuclear and advanced coal will replace old coal. And if we do it right, we can have higher customer satisfaction, because there is value in helping customers control their bills.
We are on the road to a carbon-constrained world. To be prepared rather than debilitated in that world, we need to modify the DNA of our company, so we are taking into account the reality of carbon constraints in every decision we make. Our planning scenarios need to include carbon prices.
Lew Hay, FPL Group: We consider the threat of major, long-term environmental and economic damage from climate change to be real. Although many uncertainties remain, there is sufficient evidence today to warrant taking action.
We have been taking steps to reduce our GHG emissions rates and we will continue to do so. For decades, we have been executing a clean-energy strategy. As a result, more than 75 percent of FPL Group’s 128 million MWh of electricity is generated by clean fuels. This has allowed FPL Group to have one of the lowest CO2 emissions rates of all generators in the United States, a particularly remarkable achievement considering the significant growth experienced by Florida Power & Light and FPL Energy.
David Saggau, Great River Energy: We were one of the first utilities to start [to inventory] our GHG emissions in 1995. In 2006 we established a very lofty goal of reducing our GHG emissions to 2000 levels by the year 2020.
GHG regulation will drive conservation, which is important to Great River Energy. Like any other resource, conservation gets weighed against other resources. If generation is cheaper, we build generation. When we have some real numbers to plug into our assessment of what future generation costs are going to be, we will be able to cost-justify more conservation efforts going forward.
In a sense it is easier for public-power companies to address this issue, because we look at pure cost, and don’t worry about cost recovery. From a pure cost standpoint, if conservation is cheaper, that’s the way we will go. For IOUs, their shareholders can get penalized for conserving. The IOUs will have to fight that battle to figure out how to be incented to do the right thing—and certainly not get penalized.
Fortnightly: What are your company’s biggest risks and uncertainties associated with climate change?
Hay, FPL: Clearly, there will be a cost to taking action. It is critical that the right policies be put in place that will be effective in reducing emissions without imposing unacceptable costs or needlessly shocking the global economy to address this long-term issue. Bad policy can be just as damaging as no policy at all.
Some of the proposals now pending before the Congress—those that would require that every company simply reduce their historical level of emissions, without regard for their efficiency record or their growth rate—would be quite penal to a company like ours. Instead of rewarding or recognizing our achievements, these bills would force us into an untenable position.
Given current technology, it’s not possible for us to be much cleaner. Combine that with Florida’s tremendous growth rate, and it would be impossible for us to simply cut our emissions by a specified percentage. In real terms, because FPL has already reduced total CO2 emissions significantly over recent years, millions of Floridians will, in a very perverse twist, have to pay twice if FPL is required to buy credits from other less forward-looking companies.
As a result, we have to be diligent about the details of any proposed federal or state policies. We have to work to educate the policy- and decision makers. We have to ensure everyone understands that by investing in clean and efficient technologies, our customers have already paid for our low rate of emissions.
Rowe, Exelon: There are key questions about how we will operate in a lower-carbon, less energy-dependent fashion. I think the two key technologies will be nuclear and coal with carbon capture. I think natural gas will be a significant bridging technology, with a significant niche opportunity for windpower. But I don’t see renewables filling a large part of the hole unless prices are allowed to rise very high indeed.
Put in naked terms, we can have a more energy-independent, less carbon-intense economy with electric prices in the next decade between 15 and 20 cents per kilowatt-hour. If we make believe you don’t need nuclear and coal to do that, we will have higher electricity prices, and that will be bad for the economy.
Carbon capture and nuclear-waste management are key questions that can be answered, but not for free. There is little doubt in my mind a nuclear expansion would be the cheapest solution, but you don’t build new nuclear plants for 4 to 6 cents a kWh. I don’t have a good number, but I think 9 cents is a better number.
Utilities, regulators, customers and the markets have to come to terms with that, and they aren’t ready to do that yet.
Chesser, Great Plains Energy: I’m most concerned that any approach to GHG regulation should be a prospective charge rather than a retrospective charge. The worst thing would be to put in a carbon assessment that would shift the economic balance between cities in the East, Midwest, and West Coast.
At KCP&L, we get about 70 percent of our power from coal and 30 percent from nuclear. People in Chicago get maybe only 20 percent of their power from coal. I don’t think nuclear investment decisions were made for environmental reasons. We and other utilities made those investments because they were in the best interests of investors at the time. For a nuclear utility’s customers to see a comparative benefit in energy prices as a result of GHG regulation would be a real problem.
We have worked hard in the Kansas City region to grow our community. There are certain benefits we have that other cities don’t, and vice versa. If you take away affordable energy it really undercuts the development and growth of our community.
If you do it on a prospective basis, however, you take today’s carbon footprint and reward or punish companies on a going-forward basis, depending on the choices they make. I think that’s a lot more fair and won’t upset the economic balance.
Saggau, Great River Energy: The devil is in the details. GHG regulation must be fair to utilities, reasonably flexible, and phased in over a reasonable period of time. It must include full credit for voluntary reductions that are taking place now.
One of the big fears for us is that by being progressive and responsible on this issue, we could end up being penalized for being early adopters if it takes too long to implement mandatory standards.
The way it worked for SO2 was each company started from a baseline amount of carbon, and had to improve upon it. As we develop technologies and invest in infrastructure to reduce our carbon footprint, it could have the effect of lowering our baseline when national cap-and-trade policies are enacted.
There’s a bit of a feeling that no good deed will go unpunished. Yet we feel it’s important to go forward and do it in any event.
Holliday, National Grid: It’s a massive challenge, make no bones about it. The things we need to do require some pretty major adaptations in the way we run our operations. There are risks associated with that. And ultimately the biggest risks are actually the consequences of climate change itself, and how it will affect our operations and our markets.
In a word, though, the immediate risks are political. The biggest risk today is getting people to have the courage to tackle this issue.
Addressing these issues and changing the way you provide an essential service to society will take some brave people who want to make big changes. Climate-change adaptation is not free, but most people want their bills to go down. That is a dilemma we have to grapple with.
Crane, NRG: The main secondary effect we are concerned about is a carbon regime that becomes too punitive, too quickly. If that happens there will be a flight from coal plants into gas-fired generation, causing sharp upward pressure on natural gas prices.
There’s a large fleet of marginal coal plants that already are struggling with adding back-end controls for SOx and NOx. If you hit those up front, they will be pushed out of the market before the market is able to replace them.
Global warming signals a true paradigm shift. If we put our minds to it, the industry and regulators working together can significantly change the way we produce energy by 2015 to 2020.
Rogers, Duke: Our challenge is to make this transition and minimize the cost impact on our customers. That’s why getting the allowance system right and having a long enough transition period is critical.
We are asking the question, can we significantly de-carbonize our power supply? This leads to many other questions: How long will it take, what will it cost, and how will it affect rates, reliability and customer satisfaction? What will the investor community think as we move toward a de-carbonized power supply?
The biggest question is, What is the tech roadmap that allows us to do it? We are the third-largest consumer of coal in the United States. Clearly on our small coal units, almost 4,000 MW that we are not significantly retrofitting for SOx, NOx or mercury control, will be retired over time. On the other hand, we spent $3.5 billion on scrubbers at other plants, and those units will be candidates for carbon capture and storage. That technology isn’t with us today, and won’t be commercially available for probably 15 years.
Then we turn to our nuclear fleet. We are the fourth-largest operator of nuclear units, with seven reactors. They have been re-licensed for a further 20 years. We are on the road to building a new plant in Cherokee County. We will file for a construction and operating license and a South Carolina certificate of convenience and necessity in the fourth quarter of 2007. There’s more work to do on standardization of the technology, but these processes will put us on track.
Longer term, in 2033 the licenses on our existing units will begin to expire, and if we are planning to de-carbonize our fleet, we need to answer the question of whether to re-license these plants for a second time. And that brings up the question of whether we will build more nuclear units beyond Cherokee County. Our judgment is we must do so to meet growing demand, with a load growth through 2030 of 35 to 45 percent.
These are long-term questions, but the thing that is critical to work on today is to start conserving energy, and moving forward with a new regulatory model.
Fortnightly: Assuming federal GHG regulation is coming, what approach do you think would be most effective and workable?
Rogers, Duke: We actively support the regulation of carbon as a policy position, and we are very active in Washington to shape legislation that makes sense. We support a mandatory, economy-wide cap-and-trade regime, where the government sets the cap and the market goes to work to find the cheapest way to comply. Also, because we are dependent on coal, we believe we need the type of allowance methodology we had for the 1990 Clean Air Act amendments, with allowances phased out over time.
We’re also moving in each state to put in regulatory models that incent us to improve energy efficiency.
Rowe, Exelon: The most effective way of dealing with an all-pervasive challenge like carbon is with a carbon tax. That is not popular politically, so the National Commission on Energy Policy (NCEP) proposed a cap-and-trade approach with a safety valve. I am convinced there should be some sort of safety valve because I don’t think the economy can tolerate the shock of imposing a cap on it and letting the price be what it will be.
In April the NCEP increased its recommended safety-valve price from $7 a ton of CO2 to $10 a ton, and changed the rate of escalation to 5 percent a year in real terms, rather than 5 percent in nominal terms. I voted for both changes.
The first question is when will Congress act? Second, how sharply and sternly will it act? Third, how are permits under cap-and-trade going to be allocated? This will be a huge source of conflict among utilities based on their traditional power source.
If the permits are all to be sold, that’s the economically efficient option, but it might be too hard on customers of coal-burning companies. If the permits are to be given away for free, that’s not fair for other customers. The NCEP suggested half of the credits should be free as a transition mechanism, and that’s not a bad place to start.
Hay, FPL: To be effective, a GHG reduction program should be mandatory and economy wide, and should require reductions from all sectors. It should recognize, reward and encourage technological innovation, just as it should acknowledge and reward early action. Our efforts thus far, for example, have had an obvious environmental benefit, but there’s a cost associated and, as such, recognition is deserved.
We support a market-based, economy-wide program that directly places a price on carbon emissions, and believe it will have the best prospect of achieving sensible environmental goals and maintaining economic growth. Imposing a price or fee on CO2 emissions that predictably, steadily and gradually escalates over time offers substantial practical advantages. It will support long-term capital deployment; avoid distortions in the economy; and be more efficient and fair to administer than a cap-and-trade program. It also will support increased R&D funding; provide transitional assistance to economically disadvantaged consumers; and preserve the competitive position of U.S.-based companies.
Instead of being based on a potentially misleading metric like historical emissions, the solutions should look at performance and efficiency. And, while it may be possible to develop a fair and effective cap-and-trade system that accomplishes this end, FPL recommends a more straightforward fee to be imposed equally on all carbon used as fuel anywhere in the nation. The price of all downstream goods would rise in proportion to the use of carbon-intensive fossil fuels in their manufacture and distribution.
It will be important, however, to avoid raising the cost of fossil fuel uses that don’t emit CO2, such as the capture and permanent storage of CO2, and the use of petrochemicals to make plastics. To that end, mechanisms such as credits, rebates or exemptions should be implemented for non-emitting uses, thus providing an incentive to incorporate new technologies for carbon capture or sequestration.
Saggau, Great River Energy: I think cap-and-trade works better because it allows the free market to value those credits and creates a marketplace for utilities that are progressing a bit faster to benefit economically compared to those that are moving slower. We have seen great success with the SO2 cap-and-trade program. It’s a method that is familiar to utilities and has proven itself workable. There’s no reason to re-invent the wheel.
Cap-and-trade has the same effect as a carbon tax. Both are designed to accomplish the same goal. The important thing is that we do something to provide certainty and incent R&D folks to address this problem.
Crane, NRG Energy: I don’t understand the thinking that favors a straight tax over cap-and-trade. Cap-and-trade has worked so well on SO2, why would you do something else? If you turn it into a straight tax, it will raise money but the market will just pass it through. In the U.K., everyone knew in 2003 what the carbon tax would be for 2005, and the forward market just went up by 5 pounds a MWh. That’s not the same level of motivation you get from a market system.
Notwithstanding the fact we didn’t sign the Kyoto accord, the United States is ahead of Europe in developing technology solutions. You have to wonder, with carbon being priced there for several years, why don’t we see the same level of innovation in Europe?
In a federal cap-and-trade system, where less than 100 percent of the credits are allocated, the auctioned credits are effectively a carbon tax anyway. We support that. It’s absolutely necessary, and the sooner it gets imposed, the sooner we will know what regime we are operating under, and the sooner we can make the investments we are contemplating.
The worst-case scenario would be a type of regulation that both hurts companies and is counterproductive in addressing climate change. For example, various states and regions are imposing their own carbon taxes as opposed to the federal government. If New York imposes a carbon tax, it will only change the merit order of plants in the market, so electricity will be imported from out-of-state plants that are even worse than the ones in New York. That would hurt companies and be counterproductive.
Fortnightly: To what degree should U.S. GHG policy depend on international cooperation—particularly from China and India? Arguably GHG constraints will make it even harder for U.S. businesses to compete internationally.
Crane, NRG Energy: I’m not hung up on whether it’s a global system as opposed to a national system, or a single sector as opposed to multi-sector. We don’t compete with imports from China. And domestically, if lawmakers choose to tax us first, it just means we’ll solve our problem before other sectors will.
Saggau, Great River Energy: We dismiss out of hand the argument that because it’s a global issue we shouldn’t do something nationally. We should be leaders on this issue. If we invest in new technologies to reduce our carbon footprint, those technologies will be used by other countries.
We don’t want to damage our nation’s competitive position with regulations that won’t solve the problem and only create a lot of costs. We have to do it in a rational way that keeps competitiveness in mind. But we can’t choose between clean power and cheap power. The public demands both. Our challenge is to figure out how to deliver both.
There’s no reason to wait for a global agreement before we do something. Other countries understand this issue and they haven’t ignored it. In time they will begin to address it as well. We need to demonstrate leadership, and if it drives innovation and conservation in this country, that can only help us.
Rowe, Exelon: What China and India will do is a major uncertainty. Action by the United States won’t have any impact if the developing countries don’t do something too. But the United States must take a significant first step because we have been a major carbon producer for a long time and we are wealthy. The obligation is on us to move sharply sooner, but that doesn’t end the issue.
Chesser, Great Plains Energy: I feel strongly we should lead the way. We are fortunate enough to have the economy and society that can develop the technology and lead by example. At the same time we should use that momentum to do everything we can to influence China and India to install new technology as well. But it’s wrong for us to sit back and say, “If you guys do it, we’ll do it.” That would minimize the opportunities for us. We should lead the way, and try to influence them to follow that lead.
Hay, FPL: A revenue-neutral carbon fee will preserve the competitive position of U.S.-based companies that compete in markets that aren’t bearing an equivalent burden for CO2 reduction. A promising approach is to place an equivalent tariff on imports from countries lacking a carbon policy, and rebate the tariff on exports to such countries.
Fortnightly: What changes in regulation, policy or financing structures need to happen in order for GHG-reduction efforts to succeed?
Saggau, Great River Energy: What has to change is the way we talk about global warming and solutions to it. We have to look at this globally, across industry sectors.
If you focus on one sector, you will miss low-hanging fruit. For example, transportation and utilities working together would be a perfect collaboration. Plugging in cars at night can contribute to reducing GHG emissions and improving our energy independence, and it will increase the efficiency of the way this country does business.
We will fit the pieces together if different sectors of the economy work together to find solutions. A national cap-and-trade program that encompasses all industries will get you there. But the framework for the debate, and the clearinghouse for information and ideas, has to be formalized on a national level.
I’m fundamentally an optimist. I know the technology is out there, and if we can see our way through the initial upfront costs and hassles and false starts, this stuff will take off and we will create a more efficient economy. We’re in the early stages of this evolution, and we don’t give ourselves enough credit for what we’ve already accomplished. We need to acknowledge the leadership and great thinking that has happened. But we need more of it. We can’t let it stop.
Chesser, Great Plains Energy: A potential barrier for utility companies is that the traditional planning process doesn’t accommodate energy efficiency, dispatchable loads, integration of two-way communication, and marketing of conservation resources. These things have not been part of the mainstream utility, and it will take strong leadership and commitment from the top of the industry to make that transformation. That could be as much of a barrier as the regulatory structure.
Back in 2003, when we saw load growing and the need to build additional capacity, we decided to do things 180 degrees different from the typical approach. Normally a utility would decide how to address load growth and then go to the public utility commission. We decided to talk to the commission first, and develop a straw man, our comprehensive energy plan. It included not only building a coal-fired power plant but also installing emissions controls at existing units to make total output lower than it is today. Also it included building wind energy facilities and pilot projects for energy efficiency and demand-side management.
This plan attracted broad support from community groups and legislators, but not environmental groups like the Sierra Club. They were resisting our plans to build a coal plant.
We approached the Sierra Club and asked them if, instead of fighting with us on the coal plant, can we get on the same side of the table and promote regulation to drive energy efficiency and renewables? Can we work more collaboratively? We talked about it and found a way to make it work.
[Editor’s Note: In March, KCP&L and the Sierra Club reached an agreement under which KCP&L will offset all the GHG of its new coal-fired power plant—about 6 million tons of CO2 a year— with investments in energy efficiency, renewable energy and emissions controls at existing plants. In return, Sierra Club will support KCP&L’s efforts to secure favorable rate treatment for investments in efficiency and environmentally friendly technologies.]
None of what we’ve agreed to do will happen unless we get proper rate treatment. This is not a ruse. It is a genuine commitment to collaborate. We’ve been collaborating with community stakeholders all along, but this gets the last holdout working with us. There’s no question they can accomplish more in collaboration with us. This is a good time for industry and environmental groups to be working together.
If we can get the regulatory compact right, investors will embrace that collaboration too. Already some investors are starting to take this up and are asking us what we are doing about energy efficiency and grid investments. They see potential earnings growth, whereas in the past they saw energy efficiency as just a loss. And ultimately they will see it as a lower-risk investment, because with the right regulatory compact I will have an easier time getting financing for an energy-efficiency strategy than for a nuclear power plant.
Holliday, National Grid: At the end of the day, Wall Street is interested in profitability, but it is also interested in responsibility. You have to be responsible in this business, investing in assets that have a 40- or 50-year lifespan. But the ability to finance those investments requires adequate returns, so we have to find a regulatory mechanism that works. That means companies in a monopoly position will earn returns commensurate with the risk they are taking, and can recover their cost of capital.
I can see a situation where National Grid becomes more of a total provider of energy services to our customers, a holistic manager of energy demand. We will get paid for investing in the right technology at the right time, and providing the right advice to help businesses and homeowners conserve energy, and for all the activity of getting a better handle on the overall supply-and-demand balance.
That has the potential to evolve into a new business model that is more than simply the wire and gas pipe into your home. We have the technology, expertise and professionalism to do it. We need to develop a trust with our customers and regulators that we are genuinely part of the solution, and we need the political desire to change the way we encourage conservation.
Competition can help eventually. As we are moving into people’s homes and helping them manage their energy use, there’s no reason we can’t have competitive businesses competing against us. But the business of conservation needs support to get it going before you can introduce the competitive element. From a standing start, this is something that companies that have the expertise should begin. Then you introduce competition, and let it occur naturally.
Crane, NRG Energy: At this time more than ever, we need the benefits of competition in terms of innovation and efficiency. Put this challenge into the competitive market, and see what ideas you get.
If you put it into the rate base, then utilities will figure out the most expensive way to do it. The public-relations budget of an independent power company pales in comparison to the budget of a utility, so the utility can give the appearance of being more civic minded and doing things out of the goodness of its heart.
But at the end of the day the free market will figure out the best technology to address global warming. You have to put a price on carbon, because no one will spend billions to take carbon out of the atmosphere unless someone puts a price on it.
Rowe, Exelon: We think if you give it a full chance to work, the competitive market will produce a cleaner generation base at a lower cost over time. If you set up a cap-and-trade system with a safety valve and you enforce it rigorously, the competitive market will respond with the most efficient solutions. But if you want to build nuclear plants fast, and build coal plants with carbon capture and sequestration, you can do that in a fully regulated, IRP regime. But you have to understand you are betting the customer’s money to subsidize the solution. That’s not necessarily a bad thing; either system can work if it is consistently applied.
The magic word is “consistency.” If you are in Georgia and you want to make sure Southern Co. is regulated, you can do that effectively but you must be fair and consistent. If you are in a free-market structure, you have to make it work and don’t keep running back in hindsight. All these models can work but they have to be applied with consistency and fairness to the investor.
Rogers, Duke: I had the privilege of visiting a cathedral in Seville that took 104 years to build. The people who worked on the foundation never lived to see the stained glass windows, and the people who worked on the windows never lived to see the steeple. But they had a vision of what it would look like when it was finished.
We need that kind of vision. The thing that is missing in Washington and in board rooms at energy companies is they are not engaged in cathedral thinking, but reactive, short-term responsive thinking.
We swing between panic and complacency in this country. Energy prices go up, and we panic. Then they settle down and we settle into complacency. To address climate change and grow our economy in the future, we need a sustained effort. We need cathedral thinking—with a scope of decades, not the term of a Washington politician or a quarterly report.
I have faith in the future, and I’m optimistic that we will put solutions in place. But it will take two or three decades to solve this problem. We are in the most capital-intensive industry in the United States. Our capital commitments are large, and our business cycles are long. When you build a nuclear plant, it lasts 40 to 60 years.
The challenge we face in our industry is to educate Wall Street and regulators about why these are good decisions. It’s a tough challenge when investors are focused on quarterly or annual earnings, and regulators don’t want to make any decision that is politically unpopular. But we need to make long-term decisions. We need to use cathedral thinking.