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Energy Business
Michael Cashin
Michael Cashin
 · Posted in Energy Business

Policy Formation Stage Insights from Energy System Transformation, Climate Change and Sustainability Policy Stakeholder Discussions

Regulatory and legislative initiatives typically seek public input from impacted stakeholders and interested parties regarding provisions in policies and rules intended to address issues of concern.  Such stakeholder input can be required by regulations and subject to legal stipulations. Voluntary stakeholder discussions may also be hosted independently during the policy “formation stage”, that stage where policy concepts can easily be kept or discarded as they are vetted for their technical viability and adverse stakeholder impacts, before problematic provisions are drafted into proposed policy and rules.   Such policy formation discussions might address emerging issues of concern including curtailment of environmental emissions, public health impacts, climate change, sustainability, energy system reliability, energy project cost effectiveness, equity, energy poverty and environmental justice. This article identifies a few of the precursor, formation stage issues that may result in consumer resistance and concerns by the regulated community.  These issues can provide some insights about ongoing challenges and opportunities being encountered as ongoing policy initiatives progress from conception to implementation.  An article published in Energy Central in a March 2021 Special Issue provides some background reference context for examples presented in this article (https://energycentral.com/c/cp/balancing-renewable-energy-and-decarbonization-policy-measures-during-energy EC March 2021). 

 Twelve Examples of Formation Stage Development Issues

  1. Time horizon and emission scenario assumptions applied for cost benefit analysis.  The contribution to the greenhouse effect from today’s greenhouse gas emissions extends for years, unique for the type of emission, before natural mechanisms mitigate their effect.  Current emissions targeted for reduction are pooled with the emissions from all parties across the globe as IPCC modelers project how those emissions might be characterized over the next century.  Various scenarios for future emissions within different nations by “third parties” over the next century, present a broad range of prospective climate change mitigation benefits from a ton of carbon dioxide equivalent emission reduction delivered today.  Policy makers typically apply 100 year time horizon, global climate change damage cost estimates considering “business as usual” emission projections from all nations to help cost justify near term climate mitigation cost outlays by an individual party today  (Reference Figure 4 from, EC March 2021).  Since business as usual does not weigh in benefits from greenhouse gas emission reduction policies that might be implemented over the next century (Representative Concentration Pathways or RCPs), climate damage cost estimates can be multiples higher than a scenario that portrays outcomes when parties act to mitigate greenhouse gas emissions to achieve emission reduction targets.  Policy makers considering cost effectiveness have the latitude to “dial in” whatever damage cost estimate is intrinsic to the 100 year aggregate of climate mitigation actions chosen to characterize future climate. 

This is similar to applying accounting standards for “first in last out” cost impact analysis overlaid upon figurative future emissions by third parties, creating significant financial equity issues between individuals and nations choosing to act to mitigate climate change.  Emission reduction benefits considering “first in first out” analysis might assign value by weighing an emission reduction today with today’s climate change mitigation benefits. Recognizing uncertainties in future greenhouse gas mitigation policy might seek to “split the difference” by considering the average estimated benefit over a time horizon that aligns with the duration of the climate mitigation strategy.  Formation stage discussions suggested that, absent universal mandates for climate mitigation, a default to business as usual climate projections can be warranted, even though it is known that significant mitigation actions are underway and that nations have accepted “aspirational targets” to reduce greenhouse gas emissions.  Aspirational targets presume timely delivery of enabling new technology readiness, achievement of cost economies of scale, affordability and consumer acceptance, making aspirational targets vulnerable to slippage in achieving announced goals.

Mitigation measures typically include facilities with useful economic life that may be expected to be depleted or obsolete near term, e.g. within twenty years.  Near term utilization of equipment and business operations that emit greenhouse gases may be structured with a tax life or cost recovery life of five to thirty years while their business operations are influenced by risk of market obsolescence in response to changing consumer trends and demand.  In practice, assignment of business as usual analysis with a 100 year time horizon during cost analysis leaves the facility considering mitigation measures facing artificially augmented cost benefits with delivered benefits to climate that may be indiscernible.  Such actions may be found to adversely yield business competitiveness to favor third parties who chose not to act to mitigate emissions.    

  1. Engaging “all of the above” energy policies.  Energy system transformation supported by an “all of the above” energy resource policy overlaps with but is not the same as “all of the above” policies structured to achieve environmental emission reduction aspirational targets such as net zero greenhouse gas emissions by 2050 (e.g. a 25 year outlook). Costly and often “aspirational” additional energy system components are needed to meet net zero climate targets while preserving energy system infrastructure reliability and supporting economic growth.  Targets such as net zero by 2050 are aspirational and may be achievable by entities whose individual business situation may be supportive, but the aggregate achievement of net zero targets is constrained by the absence of enabling technology and cost effectiveness concerns, especially for parties vulnerable to energy poverty, disruptive unemployment consequences and national competiveness and security concerns.

Energy system transformation that includes “all of the above” policies enables the full range of energy resources to be optimized for cost effectiveness and service to meet consumer and societal needs for energy that supports standard of living and economic growth in addition to addressing environmental concerns.  While the relationship between energy use and economic growth has been moderated due to development of new technologies, conservation and efficiency improvements, affordable access to energy remains a critical component for aiding economic development for the estimated 1 billion people who have little to no access to electricity or the three billion people who need to alleviate energy poverty to improve their standard of living.

(Reference EIA electricity vs. GDP growth https://www.eia.gov/todayinenergy/detail.php?id=33812  )  

  1. Game changing technology development.  Technology such as deployment of cell phone tower communication has been viewed as game changing in that it enabled millions of people to have phone communication and internet service without the buildout of “land lines” with an extensive system of wires.  Similarly, the ability to feed billions more people from the same agricultural region has been enabled by development of modern irrigation, fertilizing and pesticide treatment practices.  Energy system transformational technologies are under deployment and development that can make moot, much of the projected emission reduction benefits from costly retooling of existing industry and consumer goods before depletion of their economic life.  For example, small modular nuclear energy is commercially ready and innovative technologies like nuclear fusion would certainly be transformational for supporting large scale greenhouse gas emission reductions while reliably supporting increasing electricity demand. While the current buildout of renewable energy resources is competing against zero emissions technology alternatives like nuclear energy to displace fossil fuel based energy production, application of a robust “all of the above” energy strategy that includes use of “bridging” fossil fuels during the transition period supports societal needs for reliable and affordable energy while new technology is developed and deployed. 
  2. EV Charging Infrastructure Costs applied to CO2 emission reduction benefits.  Electric vehicle charging infrastructure needed to support urban transportation needs carries fixed costs that translate to consumer outlays of hundreds of dollars per ton of CO2 equivalent emission reductions.  Additionally, consumer needs for transportation “off the grid” and for support of recreational access or reliable transportation during seasonably cold weather leaves shortfalls in what electric vehicles can deliver vs. current Internal Combustion Engine (ICE) infrastructure.  For example, providing for Level 2 EV charging equipment at home allows the homeowner to fully recharge their EV overnight so it can be ready for transportation service the next day, drawing from 18 to 80 amps of electricity while charging, depending on selected recharging time (two to ten hours).  Estimates are situational, but average homeowner transportation related greenhouse gas emissions might be reduced by 4 tons CO2e annually compared to operation of an ICE vehicle.  Transportation electric vehicle emission reduction benefits are less when considering how benefits from renewable fuel standard mandates may be assigned to parties delivering qualifying fuels for credit.   The cost to the homeowner for a Level 2 charging station may run $2000 to $5000 or more. 

Similarly, many neighborhood electric distribution system transformers that typically serve four to six households are service limited and will need to be upgraded to support robust Level 2 charging (Reference T&D World https://www.tdworld.com/electrification/article/21278952/right-sizing-residential-transformers-for-evs#:~:text=Assuming%20that%2030%20million%20of,a%2030%25%20EV%20adoption%20rate.).  100% EV conversion supported by Level 2 home charging may require upgrading of over 7 million electric distribution transformers at an estimated cost that can exceed $17,000 plus installation per transformer. (Cost reference: https://www.sce.com/sites/default/files/inline-files/Attachment_A-Unit%20Cost%20Guide%202021_Final.pdf ).

While homeowners might consider installing technology to manage and coordinate their household electric load demand to suppress their demand for electricity sufficiently to avoid costly upgrades of typical 100 amp or 200 amp service, this smart house technology upgrade may still cost the homeowner thousands, which is additional to any cost premiums incurred to purchase an electric vehicle, less electricity fuel cost savings.  Consumers that use on street parking are at risk of being denied reliable access to EV charging as needed to support transportation needs.  Mandates that seek to curtail or ban sale of ICE vehicles by 2030 leave the consumer with significant new costs if they choose to operate an EV while the consumer may still need an ICE vehicle to maintain quality of life supported by unconstrained transportation.  Ultimately, technology forcing of EV deployment can cost consumers hundreds of dollars per ton of CO2 equivalent emissions avoided while risking significant adverse impacts on recreation and businesses that depend on customers driving to remote locations.  

  1. Research, Development and Deployment of new equipment needed to support net zero emission aspirational targets would recognize the need for government funding support until the technology successfully achieves commercial scale deployment.  Government programs that offer rebates or tax incentives to parties purchasing zero emission technology are not covering the cost premiums compared to purchase of existing technology, with the expectation that the technology will become commercially viable and profitable in the marketplace. The US Department of Energy defines three “Valleys of Death”, for technology development, commercialization and profitability during which the supportive role of government involvement steps back to yield the commercialization lead to industry, investors and banks.     

Reference:  https://www.energy.gov/eere/buildings/technology-market

Measures that provide incentives for consumer and industry purchases like the Inflation Reduction Act should be accountable for demonstrating cost effective use of government funds to help assure value for both consumers and tax payers is being delivered.  

  1. Consumer demand for electricity from the electric grid requires reliable 24/7 service at capacities covering the increasing needs for electricity as energy systems targeted for net zero emissions goals proceed to more electrification.  However, intermittent energy resources like solar and wind generation are subject to limitations by what nature provides for sunshine and wind resource, which obviates the need for deployment of non-intermittent resources that can immediately dispatch energy to make up for nature’s shortfalls.  Costly calls for modernization of the electric grid are augmented by measures such as battery backup and load shedding technology in addition to measures needed to serve underlying increases in electricity demand. 

Electricity system reliability can be illustrated as being supported by a three-legged stool.  Reliable energy, environmental responsibility and economic electric service are supported by delivery of:

  • CO2 and other emissions share of targeted reductions

  • Customer electricity affordability and competitiveness and

  • 24/7 electricity services on demand. 

Reference “Electricity System Reliability Issues During Energy System Transformation” Natural Gas Electricity December 2017, Exhibit 1 (https://onlinelibrary.wiley.com/doi/epdf/10.1002/gas.22020 )

  1. Businesses targeted to implement net zero technology deployment are not equally yoked for resultant economic burden on their profitability.  Financing costs vary between investor owned utilities and electric cooperatives that can receive government supported financing.  Entities need “tax appetite” in order to utilize incentives such as tax credits.  Energy intensive and trade exposed industry such as the steel and wood products industry that is servicing the cost for deployment of net zero or other emission reduction technology can be subject to significant product cost increases that suppress profitability and place industry at risk of closure, with ensuing loss of jobs and benefits to local communities.  Such concerns are even more pronounced when competing industry is allowed to import products from sources that have not equitably reconciled their environmental emissions, as might be quantified under Scope 3 emissions reporting. Tariffs designed to level the playing field for equitable business conditions are at risk of lagging in timeliness to bring relief to parties that are leading with their emission reductions. 
  2. “Consumer resistance” can become a catch all policy failure excuse when aspirational environmental targets involve the forcing of consumers to accept shortfalls in operational performance of products and services needed to support household and societal needs.  Cold climate regions have existing infrastructure for serving energy needs utilizing fossil fuels such as fuel oil, gasoline and reliability fossil based electricity generation such as natural gas and coal.  Technology readiness falls short of meeting consumer needs in some regions and when technology is available, high cost and reliability vulnerabilities would, of course, be expected to exhibit consumer resistance. 
  3. Energy poverty is a significant concern globally where over a billion people have no electricity service and about half the world’s population lacks access to affordable energy that can moderate the heating and cooling hardships exhibited by global climate change.  As noted in Item 2, economic growth is linked to growth in energy use and associated emissions from fossil fuels.  Policies that target net zero greenhouse gas emissions while suppressing affordable access to fossil fuels can lead to increased mortality and economic hardship during the energy system transformation, which are among the outcomes that sound climate policy seeks to rectify.

(Reference Our World in Data https://ourworldindata.org/grapher/per-capita-ghg-emissions?tab=chart&country=CHN~BRA~IND~OWID_WRL~USA~OWID_EU27~RUS ).

(Reference https://ourworldindata.org/grapher/access-to-electricity-vs-gdp-per-capita) 

  1. Energy system transformation in the United States is already exhibiting significant energy cost increases to consumers.  Electricity cost increases of over 20% occurred over the last three years and are projected to continue to increase as energy transformation components are deployed, influenced by fuel cost variability such as natural gas and costs for deployment of new equipment.   Developed countries including the United States also have parties who suffer from energy poverty, where programs to moderate energy expenses do not keep pace with the rising cost of living.  Recent increases in electricity costs (over 20% in three years) are placing a burden on both low and moderate income consumers. Some regions are subject to electricity pricing that is as much as four times the national average. 

     (Reference: https://www.statista.com/statistics/201714/growth-in-us-residential-electricity-prices-since-2000/ )
  2. Credit for early action, baseline year reassignment and cross sectoral trading have combined with initial emission inventory development to create situations where the technical correctness of declared emission reductions can be compromised.  Some policy initiatives have allowed parties to declare reductions in emissions based on historic emission factors that would no longer be applicable as such programs proceed to completion.  For example, early Scope 2 emission estimates allowed for electricity emissions to be declared at baseline year values throughout the program, just as emissions might proceed to zero as energy transition policies are implemented.  Allowing “over crediting” to encourage program participation ultimately results in compromised credit valuation.   Similarly, allowing credit for not taking measures that would result in land use change that increases emissions becomes “where and when” situational and may serve to provide credit for actions that ultimately resulted in no emission reductions.  Cross sectoral trading can allow market distorting price signals to be applied into the marketplace that is disruptive to economic food production or business operation viability.  For example, a renewable energy production credit for electricity of $30 per megawatt hour might avoid emissions of 30 tons CO2 from coal based generation, 12 tons CO2 from natural gas based generation and no CO2 reduction benefit from hydroelectric generation or nuclear generation displacement.  Yet, applying that $30 per ton CO2 cost signal into the wood products industry harvesting might increase their cost of feedstock fiber resources by more than 30%.  
  3. “All in costs” associated with the calculation of the levelized cost of energy (LCOE) production can provide distortions in energy market pricing until all components needed to provide reliable electricity to customers are included.  The reference from Our World of Data presents how the LCOE has changed for new power plants over a decade (2009 to 2019).  Yet the cost of capacity needed to support electric system reliability on a 24/7 basis and capacity accreditation from weather affected renewable resources like wind and solar can be significant.  Fossil fuel resources, nuclear and hydroelectric power can provide spinning reserves within their operating range while intermittent wind and solar resources require operation of reliability resources to support their delivery of renewable energy to the electric grid.  A July 2024 PJM capacity auction cleared pricing reflecting a nine fold increase in one year.  Intermittent renewable energy generation influence on capacity market pricing is not reflected in LCOE analysis, leaving the reconciling of capacity needs and related costs to support electric system integrity to parties involved with the transmission and distribution of electricity to customers. 

    Reference Power Magazine:  https://www.powermag.com/pjm-capacity-auction-prices-surge-over-nine-fold-signal-urgent-need-for-new-power-generation/ ) 

The impacts of unreconciled policy formation issues such as those noted above can be exhibited in multiple ways, including unnecessarily high program costs, impacted stakeholder legal challenges, slippage in targeted delivery dates, emission reduction program credibility challenges, missed performance targets and equity and business competitiveness shortfalls.

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