Scenario Three – Policy Themes

Beginning Years: 2013-2017/The Rise of Smart Energy

The global economy is slowly recovering from the recession (or even depression, some say) that began in 2008. Debt problems in the United States and Japan, a slowdown in China, and the ongoing Eurozone crisis remain unresolved and converge in these early years. There is no reason to hope for or expect a short-term turnaround as policy confusion and conflicts reign. Investors are risk averse and postpone new hires in the early years, and the recession settles deeper into the American psyche as about 15% of Americans live in sustained poverty by the mid-to-late years of this decade.

At the same time, Mother Nature seems as relentless as the economic downturn. What Hurricane Katrina started in 2005 and Hurricane Sandy repeated in 2012 gains momentum in 2013 and beyond, as North Americans struggle through ever more devastating hurricanes, floods, and droughts. Desperation turns to cries for action. Movements for the protection of the environment expand in strength and diversity, gradually forcing the federal government to accelerate investment in renewable and clean technologies. This provides policy support for increased R&D investment from government which in turn encourages private investment.

Investor-owned utility managers are nervous about their future opportunities—long-term demand growth and where and how to invest in new assets. Legislators and regulators encounter a related and substantial dilemma: how to progress toward a cleaner and more sustainable power system without concurrently overburdening consumers and industry. Potential harm to economic growth and job creation makes this challenge complex.

A smart choice for the entire nation is investment that focuses on renewables and carbon-free solutions. It stimulates economic development and addresses growing concerns about climate change and, relatedly, energy independence. Even in a depressed economy, investment and policy that leans toward renewable and carbon-free energy solutions seems prudent and hopeful.

Most politicians, be they federal, state, or municipal, seek out opportunities to publicize their support for policies that they believe their constituents view as beneficial to the public good. This is especially true when the proposed policy promises both well-paying jobs and viable business opportunities. Sometimes these policies, however well intentioned, don’t lead to the predicted outcomes despite significant upfront public expenditures. Over the long term, unintended consequences lead to budget and cost overruns that often alienate political constituencies and restrain further risky investments.

On the other hand, federal investment combined with private resources creates initiatives like the U.S. Department of Defense’s funding of the initial phases of the “networked computer” experiment in the 1960s. This effort eventually led to what the public would come to know as the Internet. There were comparable periods of slow economic growth in that period as well, though not enough to deter investment. This pattern reasserts itself in the energy sector during this period.

Politicians push public policies funding research and development that advance renewable energy solutions as well as catalyze both job creation and economic expansion. Energy saving thermostats, appliances, lighting, and “apps” that allow consumers to monitor their energy usage and savings with smart and portable devices gain a small, but significant, foothold. Utilities follow suit, aggressively marketing tools and upgrades that promise future savings or risk mitigation for ratepayers. Early adopters think it trendy to know their household’s “Energy Efficiency Scorecard.” Elsewhere in the energy sector, there are advances in small modular nuclear technology in regions where nuclear energy is politically acceptable.

High and fluctuating oil prices harm economic growth and, in turn, provide a powerful political impetus for new energy policies—even though the public appetite for change usually wanes somewhat during periods of economic recession. Companies with sufficient private funding take financial risks in the energy and clean technology sectors. More often than not, the capital markets and consumer uptake reward their boldness. Smart grid and energy service companies deliver tools to lower and manage costs, resulting in decreased energy bills.

Through strategic investments in smart grid technologies and in concert with the expanding wind and solar sectors, large investor-owned utilities and other players lay the foundation for the emergence of a more technologically advanced power sector. Large-scale generation generally focuses on replacing carbon-intensive resources with carbon-free and renewable energy. Consumers also demand flexibility in both rates and services from state PUCs and utilities in order to accommodate and drive cost-effective distributed renewable energy innovations.

During these years, natural gas availability rises and prices decline as the energy market experiences a flood of new supply driven by improved drilling and fracturing technology. Energy industry veterans joke about being “present at the creation” of the “Birth of Natural Gas.” Some industry players warn of an emerging pattern of boom-and-bust cycles, which will adversely affect investors. Companies in the power generation business, however, argue forcefully for new investment to keep the cost of power low in order to spur long-term economic growth (See Figure 4.1 below on the possible long term supply of natural gas in the U.S). There is serious talk of building out domestic infrastructure to export domestic gas to Asian markets. Rural areas within the WECC region experience load growth because ongoing gas exploration efforts are increasingly supplied by electricity from the grid.