Stimulus VAR Support

Energy has been identified as an important market in which to spend the American public’s money to update infrastructure, preserve jobs, and facilitate the change to a more “green” electricity industry. The dynamic duo of smart grid and renewables, slated to receive many billions of dollars, is a centerpiece of the Recovery and Reinvestment Act stimulus program. New wires will also be installed to conduct new, clean energy that is planned to supplant the use of greenhouse gas–emitting fuels while creating many “green jobs.” Complementing these new energy projects, energy efficiency savings are to be achieved through a diverse series of building and government grant programs.

If this huge investment in wires and renewables sounds too good to be true, it could be. Here’s the catch: The electricity business is so diverse and intertwined with state and local politics that the fed’s shock therapy may have no effect whatsoever.

All Politics Are Local

Electricity industry members are accustomed to tie-ups in interregional energy resource disputes and internecine squabbles. It is the dirty linen of the business, and every energy bill takes a run at resolving the problems. For example, the Energy Policy Act of 2005 established Corridors of National Interest that were designed to blast open transmission and distribution roadblocks between states. Four years later: nothing.

There are three major “matchup” factors that should be used to reposition the electricity industry to support our national economic recovery efforts:

• Match the stimulus funding availability with industry capital requirements.
• Match the grid investment and regulation needs with projected renewable power sources and locations.
• Match our national goals for energy growth with carbon controls and other environmental goals.

The renewable energy industry has grown up supported by tax credits and political leverage, with the former making possible the latter. Renewable energy development is certainly made easier if there are mandatory electricity purchase requirements as represented by a resource portfolio standard (RPS). The overriding problem facing the industry  now, however, is shrinkage in both the number of financial lenders and the number of investors willing to provide equity for tax credit–driven projects.

Whether or not easy money is available, project development of renewables or wires in remotely located areas remains a time-consuming process that may fall outside the stimulus’s purview. To be anticipated, for example, are resistance from affected landowners, quarrels over who should pay for the grid, timing delays in getting permits, and continued assertion of states’ rights versus the federal government’s assertion of national policy requirements.

The efficacy of the new stimulus provisions providing Treasury grant funding in lieu of tax credits could be revolutionary, but it is only a short-term solution. It is only stop gap relief for the disappearance of tax-oriented equity investmen. The Department of Energy funded a comprehensive study that was released mid-March that provides a good discussion of these options going forward. (See “PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States” [PDF].)

Borrow the Money

If tax credits don’t stimulate investment, what about loan guarantees? Loan guarantees, which are designed so that the government gets its money back at a future date, have proven to be a cumbersome tool for attracting bank lending, particularly when they have been focused on commercializable innovations. Such loan guarantees seem to work best for the economy when someone other than the Federal Financing Bank is making the loans. The procedures and efficiency of the new “short form” program, which the stimulus legislation gives the DOE to implement, remain to be worked out. The short-form program, too, is conceived, however, as a relatively short-term rather than a sustaining measure.

More fundamentally, loans—whether guaranteed or not—generally must proceed after pre-development and be based on firm power purchase markets. The former is time-consuming; the latter is frequently problematic, given uncertainties about power market prices (however much those future prices may be fueled by visions of cap-and-trade-driven price escalation).

Who still has the capital to construct new plants, has the need for new sources of electricity, and needs the renewable tax credits? Electric utilities. If electric utilities oppose a federal RPS, don’t leverage their capital to build new renewable and wires projects, and remain lukewarm to the president’s stated goals of moving to a more “green” electricity economy, then the future of the industry is in doubt.

I reach this conclusion because renewables’ success in many cases will be driven if there is a major expansion of the “smart grid,” to which so many dollars have been allocated. The smartest grid from a renewables standpoint would be one that reached to the far corner of renewables’ power sourcing and was also robust enough (for example, also providing reactive power or VARs) that it could deal with fluctuations in the availability of unstored solar/wind power. The smartest grid from a consumer standpoint, on the other hand, should be flexible enough to accommodate the possibility of widely varying use to conform not only to renewable power’s  variability but also to the requirements presented by the objective of energy efficiency. Certainly the renewable grid would be costly—as much as $100 billion, according to a recent study sponsored by several independent system operators.

More Rules to Come

Hovering over the grid and renewable investment issues is an environmental cloud: the uncertainty of how high power prices will be driven by cap-and-trade carbon regulation. Will they be so high that renewable technologies will become competitive in the immediate future? The answer is likely to be particularly important if tax incentives prove insufficient (as many believe they will be) for investors to counterbalance the lower cost of conventional technology choices. Renewables may become competitive in some cases only if the most stringent of caps (with resulting costs) is installed. Additionally, to the extent that renewables have been “pulled” into the market by RPSs and renewable energy credits are replaced by “unbundling” into carbon credits, this key regulatory incentive for renewables may be confused or even vitiated. Directly or indirectly, the interface of environmental regulation with utility reserve planning will be at the heart of the matter.

Of course, no one institution has the power to deal with all of the nonfinancial challenges that come with national grid planning or a switch to renewables that’s proposed in the stimulus package. Perhaps, however, it’s the institutions with the greatest investment in existing infrastructure that stand to have collateral costs from the new energy programs imposed on them, but which do not stand to directly benefit from a significant portion of the stimulus plan benefits: public utilities.

A little policy equivalent of VAR support at this time by the federal government is critical to our nation’s electrical infrastructure.

—Roger D. Feldman is cochair of the Clean and Renewable Energy Group at the law firm of Andrews Kurth LLP. He is also a director of the American Council on Renewable Energy (ACORE) and cochair of the ACORE Climate Change Committee.