Electric industry restructuring is progressing at a rapid pace. Across the country, states are moving ahead to encourage retail competition. Two states have allowed retail wheeling experiments (Michigan and New Hampshire), utilities are proposing them, and over 20 states are studying the issue. Back in Washington, Congress is examining legislation to amend the Public Utility Holding Company Act (PUHCA). A few blocks away, the Federal Energy Regulatory Commission (FERC) is implementing the Energy Policy Act of 1992 in its Mega-NOPR (Notice of Proposed Rulemaking) on electric restructuring. Some also question the need for the Public Utility Regulatory Policies Act (PURPA).
In preparing for change, many companies will follow the traditional model of cost cutting. They will reduce staff and attempt to sell uneconomic assets. Unfortunately, they may also feel pressured to reduce investments with long-term payoffs, such as leading-edge efficiency techniques and renewable energy technologies. Without these, the nation could have trouble achieving important federal policy objectives.
Few experts doubt that wholesale competition has arrived in several regions of the country. Some believe retail competition is around the corner. In a market driven solely by economics, that could mean the lowest price always wins. In many cases, then, investments in renewables or energy efficiency would not be selected to meet energy-service requirements for consumers. Such beneficial investments could dry up without regulatory policies that consider the social benefits offered by these technologies. However, these new models will evolve slowly, while the new price-conscious market is taking off rapidly.
Many will argue that the market should prevail. However, there are other federal interests that must be met besides the lowest price. So, what is the role of energy efficiency and renewable energy in the coming restructuring? Where does the federal interest lie?
"Green" Investment Lies in Jeopardy
During the past two and a half years, the Department of Energy (DOE) has been a leading supporter and partner with utilities in energy efficiency investments. We didn't do it just to feel good.
The electric power sector produces approximately 35 percent of the nation's emissions of carbon dioxide (CO2) caused by human activity. (The manufacturing and transportation sectors are responsible for the remaining 65 percent.) To the industry's great credit, utilities responsible for approximately 50 percent of the CO2 emissions from this sector have signed agreements with DOE ("climate challenge accords") to voluntarily reduce greenhouse gas emissions. Energy efficiency and demand-side management (DSM) measures will account for a significant percentage of these reductions.
Some believe that global warming is not a real threat. But the climate challenge accords also benefit our nation's health and environment, bringing us closer to achieving the goals of the Clean Air Act (CAA). DOE estimates that voluntary climate initiatives can provide nearly 5 percent of the CAA's sulfur dioxide reduction goal. These programs should also reduce nitrogen oxide emissions by 7 to 14 percent of targeted CAA reductions. Energy efficiency plays a major role in these reductions.
Restructuring is a matter of concern because the reductions due to investments in energy-efficiency technologies are voluntary, not mandated, and are made only because the economics make sense. Changes in industry structure, which could transform the electric power industry to a commodity market, will affect utility investment. If an investment adversely affects utility competitiveness because it is geared toward longer-term challenges, the investment may not take place. Without such investment, climate change goals may fall by the wayside.
Many observers question the economic viability of some of the policies designed to encourage energy efficiency. DOE is not advocating a cookie-cutter approach to force efficiency in the new market. We believe new models must be developed to ensure that energy efficiency remains a priority for the utility industry during the transition to more competitive markets.
Renewables Serve Our Long-term Interests
The enactment of PURPA in 1978 encouraged development of renewable energy. Since then, approximately 12,000 megawatts of nonhydroelectric renewables have been brought on line. Several states, particularly California, have encouraged the development and deployment of renewable resources. Some have experimented with different mechanisms to push renewables into the marketplace. Over time, advances in research and development have driven down the costs of various renewable technologies, allowing them to compete with more conventional power generation (see chart). At the same time, renewable capacity has continued to grow. By 2005, renewable capacity in the United States is projected to increase to 260 megawatts (Mw) (photovoltaics); 12,500 Mw (biomass/municipal solid waste); 3,440 Mw (geothermal); and 4,180 Mw (wind).
The federal government supports the continued deployment of renewable resources primarily for economic, export, environmental, and energy-diversity purposes.
I have had the good fortune to accompany Energy Secretary Hazel O'Leary on several presidential missions on trade and sustainable energy development to India, China, Pakistan, and South Africa. The Secretary witnessed the signing of energy deals valued at $19.2 billion (em a full 15 percent ($2.7 billion) involving renewables.
For every $1 billion in exports, 20,000 jobs are created. In India alone, Prime Minister Rao has committed to install 2,000 Mw of renewable energy by 2000. China prominently featured renewable energy in its Agenda 21 (em a plan developed to achieve the objectives established by the Rio treaty. These two nations alone will account for 35 percent of incremental electricity demand between 1993 and 2010, requiring $450 billion in capital. Thus, the potential market for renewables is great. And because research and development has driven down their cost, renewable technologies will have an opportunity to compete against conventional technologies in inter-national markets.
Renewable resources deployed in India, China, or any of the developing countries also offer global environmental benefits. Non-emitting technology produces no CO2 or criteria air pollutants. Deployment of renewable technologies also provides local benefits. Since renewables do not emit any pollutants, meeting incremental electric capacity requirements with such technologies will help keep the local environment clean. It is essential that U.S. firms compete in these markets.
From the standpoint of energy diversity, the development of innovative technologies expands the nation's flexibility to respond to changes in energy markets. As we have learned many times, our nation is better off when we have more options to respond to changes in energy markets.
Renewables have flourished due to PURPA. However, many utilities have complained that they are being forced to purchase power at rates above avoided cost. In response to recent petitions by two California utilities, the FERC reiterated that states cannot require utilities to buy power from PURPA qualifying facilities at prices above avoided cost. Concern that utilities are being required to pay above-market prices for power from renewable energy and cogeneration facilities has led some members of Congress to propose repeal of the so-called mandatory purchase provisions of PURPA. Repeal would have adverse impacts on the continued deployment of renewable resources; DOE does not support it.
The solutions to these problems will be intricate and complex. Yet the process is not. Solutions will only be derived when all interested parties recognize that their concerns are part of the greater public interest. t
Richard Rosenzweig is chief of staff to U.S. Energy Secretary Hazel R. O'Leary. His work deals with electric policy, global climate change, the international power market, energy security, nuclear waste, national security, and environmental cleanup. Prior to his appointment, Rosenzweig was executive vice president of The Madison Group, a Washington public affairs firm specializing in energy and environmental policy. He was also director of The Keystone Energy Futures Project, which developed far-reaching options to restructure the electric power industry.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.