In energy, government can mean business.

Public policy is paramount in creating new markets and new business models within the energy sector, according to a former chief of the Federal Energy Regulatory Commission (FERC).

Suedeen Kelly told an elite gathering of energy industry executives, analysts, attorneys and academics at the Clean and Green Investment Forum in San Francisco that both sudden and incremental changes were often essential and inevitable in the energy industry.

“The energy industry is a creature of public policy; that’s why if we are to cross the chasm to mainstream we need to push public policy. Some change you know is coming but creates dramatic and immediate changes when it arrives – like having a first child.

“We use policy in America regularly to create mainstream markets for new tech that competitive markets won’t provide cheaply enough. In our clean and green energy world policy really matters, policy is paramount.”

Kelly, who served as the head of the US federal energy regulator from 2004 to 2009, said the energy industry was worth $6 trillion globally. But she compared change in the sector to the momentum a pole vaulter needs requires to clear the bar.

“Change can also come after long buildup of fits and starts to build momentum, like a pole vaulter,” she said. “Energy efficiency is an example of this.”

US electricity companies have struggled to embrace energy efficiency because of the high cost of upfront investments with long-term payback loops, she said. “Electric companies lose money through efficiency and have no incentive, in fact it’s a counter incentive.”

In later remarks, she said that the electricity industry would have to change dramatically if it intends to embrace energy efficiency through the adoption of new business models, such as demand response, or the creation of new markets like negawatt trading.

“The utility industry has grown up over the last 70 and 80 years and it has evolved a particular business model that worked well when America was growing and electricity demand was growing,” Kelly said. “It’s based on the fact that utilities make their profit by investing and by the return on investment.”

Decoupling of generators and service providers, of the kind seen in California, was helpful in the early stages. But only new policies and regulations could drive further incentives for the utility industry, she said.

“It’s a business model that’s based on building more and more generation because that’s where you make and put your money. You can ask utilities to invest in energy efficiency but realistically why would they do that and why would their shareholders allow them to do that? The business model came about as a result of the way we regulate them and set their rates is at odds with where we’re trying to go in so many areas.”

Momentum for change in the energy industry would driven by government mandates such as the Renewable Portfolio Standard, the creation of new markets such as California’s feed in tariff scheme (Reverse Auction Mechanism) and money from investors given incentives to act by government programs.

But Kelly, who now works for DC law firm Patton Boggs, warned that an assortment of federal tax credits to encourage investment in clean energy were “fragile” because they would expire.

The 1603 cash grants program, which offers 30% of the value of a project in lieu of tax credits for all renewable energy projects, will expire at the end of this year. Around $6.3 billion has so far been awarded by the federal government, which rises to a total of $21.6 billion including leveraged private investments for 9.7 gigawatts of installed capacity.

The federal business energy investment tax credit (ITC) is a 30% corporate tax credit for solar, small wind and fuel cell projects in service by 2016. But the renewable electricity production tax credit (PTC) for wind will sunset next year, and the PTC for energy from waste and tidal and wave energy ends in 2013.

New Federal Rules Prompt Change By Example

Given the atmosphere in Congress, extensions to these programs would be unlikely, Kelly said. But government policy such as the “sustainable acquisition” rule could help in other areas, she added.

The sustainable acquisition rule, introduced on May 31, requires the Department of Defense, the largest single consumer of electricity in the US, to foster markets for sustainable technologies, materials, products and services in procurements from its $671bn proposed budget.

But she said she still expected to see a clean energy bill before the next presidential election that would win bipartisan support.

“In his last State of the Union address, Barack Obama defined clean energy to include natural gas, clean coal and oil. It put all energy resources on the table and sets the stage for compromise in Congress so that every vested interest is on the table.”

“There is bipartisan support for the bill – but is there political will to make the last compromises necessary?” she said later. “The agenda of the new Republicans and the Tea Partiers is trying to get rid of the reforms that were made two years ago. That’s not going to work but how much time will it take them and do they have enough time to do something positive?”

The Crucial Act Of Lobbying

Lobbyists she said could play a crucial role in achieving bipartisan agreement on a clean energy standard, which would succeed in particular with Wall Street’s involvement, she said:

“Lobbying is enshrined in our constitution in our first amendment, freedom of speech and the ability to bring people together. When you’re trying to make national policy the only way Congressmen are going to be educated is by people explaining how important it is. It’s obviously not to buy their vote or to pressure them into voting but it is to explain to them the implications.”