There is a looming renewable energy crisis, but it’s probably not the one you think. While national headlines over the past few months have focused on controversial federal loan guarantees, or the approaching expiration of key tax credits, the threat to renewable energy is much deeper than just these two areas.
Through Renewable Portfolio Standards (RPS), 29 states and the District of Columbia require electric utilities that supply power to their residents to obtain a specified percentage of their electricity from renewable energy sources by a specified date. For the last decade, RPS has been a resounding bipartisan success story, popular in both “red” and “blue” states alike. Today, they are the linchpin of our country’s investment in renewables, setting the requirement that a host of other public subsidies, including tax credits, are intended to support.
A recent analysis by Booz Allen Hamilton has shown that RPS will drive over $400 billion in investment in renewable energy by the time they are fully implemented. For perspective, that’s more investment than was generated by building the interstate highway system from 1956 to 1992 (adjusted for today’s dollars).
But RPS and the investment in renewables they generate face a perfect storm across multiple fronts: the emergence of inexpensive and plentiful natural gas, foreign dominance of wind and solar manufacturing, rising pressures on state budgets, and cost reductions in electricity distribution stemming from grid investments.
Without action, the future of our investment in renewable energy is very much in doubt.
The Perfect Storm
Circumstances have changed dramatically since the first RPS were established. Just a few years ago, it seemed that the price of electricity generated from traditional sources (coal, nuclear) was headed considerably upward, and renewable power would soon be competitive on price without the need for long-term subsidy. But things have changed quickly since then, with the emergence of very cheap natural gas, flattening demand for electricity, and increased operating efficiencies from utility grid investments – including federal assistance for smart grids. Add it all up and it means that despite the cost improvements we’ve seen in renewable energy, electricity prices may stabilize at levels that renewables can’t compete with for the predictable future.
An even bigger threat may be the emergence of low-cost foreign manufacturing of wind and solar technology and its effect on U.S. jobs. In the area of solar photovoltaics, for example, China’s swift rise to global production dominance over the past three years has sparked allegations of price manipulation and dumping in the U.S. Even with tariffs, U.S. companies will have a hard time competing on price. With respect to wind technology, some foreign manufacturers have established U.S-based manufacturing facilities, but most have not.
If the $400 billion infrastructure investment driven by RPS is seen as having created a captive market for foreign manufacturing of renewable technology, it undermines a major policy objective of the standards – high-quality domestic job creation. And if that investment is being made by American electricity consumers in the form of both higher rates and higher taxes to fund public subsidies, the support system for renewable energy could find itself just one exposé away from unraveling. For a glimpse of this future, take a look at Europe where, despite a much more enduring commitment to the renewables industry, they’ve already started to scale back their commitments in the face of government fiscal pressures and eroding market share for renewable manufacturing. It’s not a stretch to imagine that happening here, especially considering the budget situation in many states.
Safeguarding US Renewable Energy Development
Now is the time for action. By acting on five key goals, we can safeguard our investment in renewable energy and increase its overall benefits to the US taxpayers who’ve made that investment. Here’s how.
1) Bring certainty to the issue of tax incentives for renewable energy. Lower the level of the incentives if needed, but extend the length of their effectiveness with an established end-date, so developers know when incentives will expire for good and can plan accordingly.
2) Accelerate the efforts of the Department of Defense (DoD) to develop secure microgrids at key military bases, powered by renewable sources. Although renewable energy may not be commercially price-competitive yet, it offers military bases the key advantage of providing power even in the event of an extended outage. The DoD should be willing to pay a reasonable “security premium”, and has the ability (through the Defense Production Act) to support domestic production of critical microgrid technology.
3) Increase the federal Department of Energy’s role, in addition to technology investments, to help reduce “soft” costs for renewable development. For example, create a national database of interconnection agreements and a model approach for streamlining interconnection applications. Or develop methods to determine the value of technologies that support renewable integration (such as energy storage).
4) Strengthen the role of energy efficiency in RPS to drive more domestic jobs. Some, but not all, states allow for energy efficiency gains to be counted toward their renewable goals and several have specific required “carve-outs” for efficiency. A greater role for energy efficiency would drive building and technology improvements that would come from predominantly domestic jobs.
5) Increase the financial return to utilities for operating fossil-powered plants that are essential to the integration of renewable resources. In particular, natural gas plants can be ideal complements for intermittent renewable sources, but operating them in this “load-following” way increases maintenance costs considerably over their lifetimes.
Gary Rahl, Senior Vice President, Booz Allen Hamilton, leads Booz Allen’s energy business. For both public sector and commercial clients, Mr. Rahl has led and participated in the design and implementation of energy technology development programs, enterprise-wide energy strategies, and environmental management systems; and helped clients implement environmental regulation and develop enterprise information management systems.
Ralph Braccio, Senior Associate, Booz Allen Hamilton, leads a practice within Booz Allen’s Energy Team that focuses on the commercialization and deployment of clean energy technology.