Wishful thinking: If we only had a stable energy policy

I often hear the comment — “If we only had an energy policy” — but what does that really mean? In this column I will provide three examples — originating with both Democrats and Republicans and impacting both renewable energy and fossil fuels — of how constantly shifting legislation makes it very difficult to plan and execute energy projects.

Imagine that you were considering buying a home. However, let’s say your income is inclined to wild swings and the mortgage interest deduction is only approved on a year by year basis. Perhaps it is allowed to expire on occasion. In a situation like this, you would be wise to be very conservative with your purchase, or to even forego the purchase altogether.

This is analogous to the way energy companies plan and execute projects. Decisions hinge on the economics of the project. These projects are large capital expenditures and they only pay out over many years. Thus, when considering the economics of a project, it is important to have a stable environment around regulations and tax policies. Failure on these two items makes for dysfunctional energy policy.

Below are three recent examples of an unstable environment that can result in projects that will be either delayed or cancelled because  of the uncertainty this causes for project economics.

Case 1: The Production Tax Credit (PTC)

The Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by renewable energy resources such as wind, biomass, geothermal, landfill gas, and hydropower. Solar power is eligible for various subsidies, but is not currently eligible for the PTC.

The PTC was originally established by the Energy Policy Act of 1992 to incentivize renewable energy technologies for power production. Since it was first established, the credit has lapsed on several occasions only to be later extended — generally in periods of only one or two years at a time.

Congress is once again debating an extension of the PTC, set to expire again at the end of 2012. The constant political posturing over the PTC creates uncertainty for renewable energy developers. If we as a nation believe that we should encourage production of renewable electricity (and I do believe we should), these extensions of one or two years at a time are not helpful.

On the other hand, there are technologies that may never be competitive and that will need subsidies forever to survive, and that is not a prescription for success either. So a reasonable compromise — in my view — is to extend the PTC for a long period of time but reduce it over time. The current credit is 2.2 cents/kilowatt-hour for power derived from wind and geothermal, as well as for some biomass power plants. The credit is 1.1 cents/kilowatt-hour for some of the other options like power from municipal solid waste.

One might envision a 10-year extension in which the credits drop by 10% each year. Through a combination of economies of scale and improving technology, the economics should improve over time. If they do not, then opponents of these subsidies will have some assurance that we will not subsidize uneconomical options forever.

Case 2: End Polluter Welfare Act

Senator Bernie Sanders, an Independent from Vermont, has cointroduced legislation with Minnesota Democratic Congressman Keith Ellison called the End Polluter Welfare Act. The legislation is aimed at domestic U.S. oil companies, and with a title like that is there any wonder why our level of discourse on energy is so dysfunctional?

Senator Sanders does have an agenda, but it isn’t based on being informed on energy matters. He has made highly inflammatory comments on the Senate floor about ExxonMobil which PolitiFact.com deemed “false” after fact-checking his statements. He promoted misinformation on the Senate floor, and that misinformation has been repeated endlessly. So with this kind of misinformation running rampant (and it certainly isn’t just him) among our elected officials, it should be no surprise that we get ignorance-based legislation.

Senator Sanders lists the “welfare” he proposes to eliminate on his website. I would be willing to make a bet that Senator Sanders knows neither the purpose of the tax incentives he proposes to eliminate, nor the projected impact from doing so. I am not going to go through them here; you can refer to some of my previous columns.

The biggest problem with the legislation is that it is not conducive to U.S. energy security. It is legislation that is politically driven, and if oil prices decline it is a prescription for a rapid decline in domestic drilling. In other words, it isn’t sensible long-term energy policy.

There are ways to capture more revenue from oil companies when oil prices are rising, and I will detail that in a future column. My proposal would actually capture more revenue than Senator Sanders’ proposal in an environment of rising oil prices, but would not have the same chilling impact if prices fall.

Case 3: Navy Purchases of Biofuels Curtailed

One of the top priorities of Navy Secretary Ray Mabus has been to aggressively pursue biofuels for Navy ships and planes. The Navy’s goals are summarized in a 2010 interview that I conducted with Tom Hicks, who is the Deputy Assistant Secretary to the Navy (Energy). In part, Mr. Hicks said:

“So what we are saying is that by 2012, to test the fleet and do the local ops that I mentioned with the Great Green Fleet, we need 8,000 barrels of biofuel. To deploy that in 2016, we need 80,000 barrels. Those are certainly quantities that – we have talked to industry – and they will have no problem with delivering. By 2020, we go from 8,000 to 80,000 to 8 million barrels, is what our need is to meet that goal of 50% alternative fuel. So if we were to sit passively back and not send out the demand signal, perhaps we would have a different outcome. We choose a leadership position, and part of that position is sending out a strong demand signal to the market, that if you can deliver this; if you establish this; if you can meet it at a competitive cost long-term, then this is something we are going to commit to.”

In support of these objectives the Navy has made major purchase over the past few years of biofuels made from various feedstocks, including algae and camelina. However, the prices paid were well above the price of petroleum-derived fuel, and last week the House Armed Services Committee voted to put a stop to the practice — once more marking an abrupt change in energy policy.

Again, whether you agree or disagree with the Navy’s commitment to purchase biofuel, here is another example of changing legislation that can totally stunt the development of advanced biofuels. If you are an opponent, you may think this is a fine idea, but there has to be a better way.

The biggest problem with the Navy case is that the amounts paid for the fuel were 4 or 10 or even 100 times more than the price paid for petroleum-derived fuel. Further, the prices paid were not transparent. The fuel contracts frequently contained money for research which made it difficult to determine exactly how much was paid for the fuel. I think it was fairly obvious that this sort of practice would eventually be stopped, but as in the case of the PTC it would have probably been politically feasible to provide long-term incentives that phase out over a period of 10 years or so.

Conclusions

Excerpting from my book:

“A sound energy policy should take into account the supply side, the demand side, and the possibility that projections will be wrong on one or both counts. Energy policy decisions must also factor in the impact on current and future generations, and they should be capable of weathering changing political climates.”

In order to develop long-term alternatives to oil (or as in the previous example, to develop our domestic oil), it is important that the rules don’t change every 2 to 4 years. Energy projects span much longer than election cycles, and if energy policy can’t withstand changing political climates the result is paralysis.

I believe the best possibility of passing energy legislation that is stable for energy producers, yet palatable to both major political parties is to build in mechanisms that either phase out subsidies over time, or that automatically change tax incentives based on the price of oil. However, even then there is nothing to prevent the next election from ushering in new leaders who will completely overturn existing energy policies.

Thus, the real reason we have dysfunctional energy policies is that we elect dysfunctional leaders. We just have to figure out ways of working around them.