As a continuation of the on-going discussion regarding the negative impact on the nation if the Obama administration adopts the Gang 31’s proposals, I will now address how adoption of their proposals will operate as a de facto moratorium on major construction and infrastructure projects. This is the third (See November 17 and 19 blogs below) of the four concerns which our nation will encounter should greenhouse gases be regulated simultaneously with both climate change legislation and climate regulations under the CAA.

A Decades-Long Moratorium on Major Construction and Infrastructure Projects

Once CO2 becomes “subject to regulation” under the CAA, the regulatory cascade is immediate. Under the CAA, should CO2 be deemed regulated under the Act—even if the regulation is for vehicles or fuels and is specifically not directed at stationary sources—no new or existing “major” stationary source of CO2 can be built or modified (if the modification increases net emissions) without first obtaining a PSD permit. “Major sources” are defined as either a source in one of 28 listed categories (mostly industrial manufacturers and energy producers) that emits at least 100 tons per year (tpy) of an air pollutant, or any other source with the potential to emit 250 tpy of an air pollutant.

PSD for greenhouse gases will result in a complete moratorium on construction in the United States. According to a report released by the U.S. Chamber entitled “A Regulatory Burden: The Compliance Dimension of Regulating CO2 as a Pollutant,” over 1.2 million buildings in the United States will be exposed to PSD for CO2. Many of these are previously-unregulated establishments, such as:
a. 260,000 office buildings;
b. 150,000 warehouses;
c. 92,000 health care facilities;
d. 71,000 hotels and motels;
e. 51,000 food service facilities;
f. 37,000 churches and other places of worship; and
g. 17,000 farms.

As previously mentioned, these 1.2 million newly-regulated establishments will now be forced to devote a significant amount of their resources to navigating the PSD maze before commencing construction projects. According to documents released by EPA less than one month following issuance of the ANPR, an average PSD permit costs $125,120 and imposes a burden of 866 hours on the applicant. If only 40,000 of the 1.2 million buildings exposed to PSD for greenhouse gases opt for new construction or modifications in a given year, PSD compliance alone would cost over $5 billion and would require the devotion of 17,320 full-time employees! Additionally, the PSD application requires a determination of best available control technologies (BACT), performed on a case-by-case basis, with considerable cost and burden placed on the applicant.

The increased number of PSD permits triggered by regulation of greenhouse gases will also cripple the state agencies forced to issue them. EPA estimates that state or local agencies tasked with processing PSD permit applications will spend 301 hours and $23,280 processing each permit. Overall, state agencies spend $6.5 million to process the 282 PSD permits currently issued. If this number were to balloon to even 40,000 permits—a completely reasonable number, given that 1.2 million entities will be exposed—the PSD program will cost state and local agencies $931.2 million, and would require 6,020 full-time employees to implement. In 2008, Congress appropriated less than one-quarter of the projected administrative costs —only $227.5 million—for state, local and tribal assistance grants for air quality management. In fact, EPA spent only $971.7 million total on clean air and global climate programs in 2008. Issuance of 40,000 PSD permits for greenhouse gases would, in and of itself, match or exceed EPA’s budget for its entire clean air program!

Note that the entire PSD process takes, on average, six to twelve months. In some instances, it can take years. Businesses forced to comply with PSD will be barred from construction for potentially long periods of time, immediately placing our economy at risk. If the PSD burden is too great, many businesses will simply not undertake new construction projects or modifications.

This is just not the type of program we need as we try to rebuild our economy. Moreover, these regulations will stop the very infrastructure improvements we are trying to undertake to improve our economy.

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The economy will, of necessity, be the first priority for the new Administration. Anything other than addressing the crisis in the global financial markets will have to take a back seat in the near term.

That doesn’t mean, though, that progress should come to a halt. There are many ways in which government can work on climate change legislation in phases, fitting pieces of the puzzle into an overall plan to re-grow the economy and create new jobs.

It’s likely the Congress and the Administration will tackle certain sectors of the economy first under a cap-and-trade system. The transportation sector is not likely to be among the first, as there are already mechanisms in place to control greenhouse gas emissions from vehicles through Corporate Average Fuel Economy (CAFE) regulations.

But, without customers coming into dealerships and purchasing vehicles, auto companies are unlikely to have the revenue to fund the research and development necessary to meet even the requirements already on the books. Thus, improving the overall economy will go a long way toward keeping industry on track to meet near-term standards.

The most important thing federal, state and local government can do now is work together to devise a single national approach to address reduction of greenhouse gases. Automakers and other businesses need the certainty of knowing what the standards will require before they can move forward.

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The climate crisis is a multi-generational challenge that will significantly outlast the current credit crunch. And unlike the financial crisis, it is not reversible. When the glaciers that supply drinking water to billions melt and go away—they’re gone for good. No bailout, no matter how large, can turn back climate change’s most severe impacts.

While some see the financial crisis as cause for pulling back on climate change, investors see opportunity. As others have commented on this page, a green stimulus is exactly what our economy needs right now. Upgrading our aging power grid to bring more renewable energy on line, making our buildings more energy efficient, expanding public transportation systems—these are the types of investments that can boost our flagging economy while providing millions of new well-paying jobs.

Many investors are bullish about the long-term prospects for the clean technology industry because of climate concerns and volatile fossil fuel prices. They know that the scale of what’s required to avert climate disaster means that the clean tech boom will be infinitely larger than the Internet boom.

Bill Gates is one of the $100 million in investors for algae-based fuel technology company Sapphire Energy. Warren Buffet, too, is seeing long-term value in General Electric by investing $3 billion in the world's leading manufacturer of wind turbines, energy-efficient hybrid locomotive engines and other eco-friendly products. The bottom line is that these investors are not philanthropists; they recognize these as money-making opportunities in the long term.

Mark Fulton, global chief of climate change investment research at Deutsche Asset Management, said it best last month: "The current crisis is making the necessity of tackling climate change an opportunity to stimulate growth through investment opportunities. Encouraging investment in renewable energy is a key focus.”

Clean energy is also an excellent hedge against long-term downside risk. Despite extreme turbulence in the short-term, carbon emission limits, public sentiment and climate change itself represent significant financial risk to every company's bottom line.

And that risk extends to our economy as a whole. European and Asian companies are on the cutting edge of developing new wind and solar technologies. The U.S. is falling behind these countries when we should be leading. Clean tech investment globally reached $148 billion last year and that figure will grow exponentially over the next decade. The U.S. should be a major player in this fast growing sector, not a bystander.

Investors are ready to invest in a “New Green Deal,” but they need clear and long-term policy signals. National climate legislation that cuts greenhouse gas emissions will provide a stable investment climate that will allow them to scale up the financial flows to clean technologies.

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It is striking that none of those whose replies you've summarized has mentioned the Keynesian connection between a recession and deficit spending. We may have 1933 here, and a search for labor-intensive challenges in areas where federal government leadership is appropriate. Two important examples come to mind: 1) The incorporation of energy efficiency deep into the public buildings sector via disciplined (i.e., monitored) building-by-building retrofits of shell, lighting, and electric use and 2) the overhaul of our electricity grid, a challenge analogous to our national highway system in scale and embedding "smart" controls.

Thus, there are some energy projects that the economic crisis may generate, rather than "stall."

With respect to natural gas utilities, we believe that—yes—the cost of capital will undoubtedly increase in the current economic climate, but we do not foresee any trouble raising capital, albeit at slightly higher rates, for any necessary expansion or maintenance projects our members need to undertake. For one thing, our industry has always adhered to solid fundamentals and, historically, good business practices. Our members are regulated utilities with public utility commissions that understand our need to expand our delivery system to connect to new customers. Our core business is transparent and natural gas utilities have tangible assets, including more than 2 million miles of pipe in the ground that connects them to the 70 million customers they currently serve. What is more, a large number of our member utilities have been serving their customers for 50 years or more. They are fixtures in the communities in which they operate.

In fact, given that the cause of the nation’s current economic difficulties are, in large part, due to overly risky business practices, the basic, easy-to-understand business model of a regulated utility may be a welcome “safe harbor” for investors. As a CEO of one of our member companies once put it, “For years our industry was seen as boring. These days, boring is exciting.”

It is critically important, however, that Congress extend the current 15-percent maximum tax rate on dividend income beyond its expiration date of December 31, 2010. This lower dividend tax rate, which first went into effect in May of 2003, has made dividend-paying companies such as natural gas utilities more attractive to investors and has enabled them to raise capital for maintenance and growth.

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As all the posters here agree, the current squeeze on financing will hit the energy sector particularly hard. But in the midst of all the grim forecasts, many analysts are citing investment in renewables as the biggest opportunity to turn the ship around.

Right now, fossil fuels are really feeling the chill in financing. In the past few months, oil and gas companies have seen their financing rates rise between 2 and 5 percent points and their stocks plummet 60 to 70 percent. This means we will likely see more price volatility, since the pipeline for new projects is drying up.

Coal is also struggling. As early as last spring, the industry was having a hard time getting financing thanks to construction cost risk and the growing concerns on Wall Street about carbon risk. Not only is capital even harder to come by today, but coal will have a hard time justifying enough load growth to compensate for higher borrowing costs.

The future is brighter for renewables. Yes, some companies have seen their financing drop off, but analysts remain confident that solar will be the most interesting market to watch in the coming years. The key here is sound policy. The Senate just extended the renewable energy production tax credit, giving the industry a much needed boost, and more than 30 states have renewable energy portfolio standards.

But a national commitment to addressing climate change would make this market really explode. Today, Deutsche Bank’s Asset Management Division released a report detailing the opportunities for investing in climate change mitigation. It concludes that in this economic downturn, green energy investments offer governments a prime opportunity to stimulate growth.

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Yes, the current economic downturn might make it more difficult to find private financing for new energy sources, but there is much that the public sector can do to pick up the slack. Next year the new administration and Congress can do much to jumpstart a “Green Deal” that would help pull the country out of our economic mess by investing in clean energy and expanding the national grid, which would generate hundreds of thousands of new green-collar jobs and reduce global warming pollution at the same time.

The first step for Congress would be to pass a strong federal climate bill that would raise the money to finance new energy sources through a cap-and-trade system. Federal lawmakers would be following the example set just last month by six of the 10 Regional Greenhouse Gas Initiative states in the Northeast. They raised nearly $39 million in the first U.S. auction of permits to emit carbon dioxide under a regional cap-and-trade regime. If the price of the first auction holds, the auctions would yield more than $500 million for investment in energy efficiency initiatives and renewable energy development per year. That number pales in comparison to what a national economywide cap-and-trade program could raise.

Cap-and-trade revenue should only be invested in safe, secure energy sources that do not emit global warming pollution. We have a long ways to go before coal and nuclear power could meet those requirements. It makes sense to fund some full-scale demonstration projects to determine whether carbon emissions from coal-fired power plants can be safely and cost-effectively captured and stored. Nuclear power is saddled with serious safety, security and long-term waste disposal problems that the industry and federal government must adequately address before any new plants are built. Meanwhile, the projected cost for a new reactor has jumped to over $6 billion – more than double industry predictions from a few years ago.

We are making progress in bringing more renewable energy to market, but we still have a long way to go, as only three percent of our electricity currently comes from wind, solar, geothermal, and bioenergy. But the renewables industry has been one of the bright spots in the economy recently. By the end of this year, more wind power will have been installed in the United States over the past two years than the previous 20 years. During this time, companies will have invested an estimated $25 billion in the U.S. to install enough wind turbines to generate 13,000 megawatts (MW), the equivalent of about 10 average size coal plants. Over the same period, more than 27 wind turbine and component manufacturing plants have opened for business. The U.S. solar industry also is booming, with global annual growth rates of more than 50 percent over the past few years.

But just as it took the federal government to land a man on the moon and build a national highway system, shifting to a clean energy economy will require federal leadership.

Besides establishing a national cap-and-trade system, Congress needs to enact a national renewable electricity standard requiring utilities to supply a specific percentage of their electricity from renewable sources by a specific year. This would encourage additional private investment, increase U.S. manufacturing capacity, and save ratepayers money.

According to a Union of Concerned Scientists analysis, if Congress required 20 percent of the nation’s electricity to come from renewable sources by 2020, it would create 185,000 new jobs; spur $66.7 billion in private capital investment; provide $25.6 billion to farmers, ranchers and rural landowners who produce biomass energy and site wind turbines on their land; and generate $2 billion in new local tax revenues by 2020. Increasing our reliance on renewable power also would cut consumer electric and natural gas bills $10.5 billion in 2020, and by $31.8 billion in 2030.

Boosting our reliance on renewable energy to 20 percent of our power also would dramatically cut global warming emissions – the equivalent of taking some 36 million cars off the road.

The next Congress and the incoming administration need to understand that the fate of the planet and the fate of the global economy are intertwined. We can revitalize the economy and combat global warming at the same time.

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First, anyone who really claims to know that this market is going to do to ANYTHING is either going to be very rich or look very foolish -- and I'm pretty sure I'm not going to get rich, so we really don't know. The decline in the price of oil will reduce pressure for alternatives, and may lead to a corresponding weakness in gas prices, which will cause some utility demand that would otherwise have been met with coal or renewables to be met with gas. But the biggest hit will be on projects with three qualities: high capital costs, long lead times, and great oil price sensitivity.

That means first and foremost nuclear and coal-to-liquids --- a proposed plant in West Virginia went down this week. Least impacted should be wind and photovoltaics, because while they have high capital costs they have relatively short lead times and are not tied directly to the market price of oil. They also benefit from state RPS standards and the likelihood of a federal standard next year.

Concentrated solar and geothermal are probably in the middle -- longer lead times and high capital costs, but not as long as nuclear or as linked to the price of oil as coal to liquids.

But as private capital remains in short supply, probably for a fair while, and public capital flows to make up the difference, public policy and public priorites will make a HUGE difference -- so ask me after November 4 and I'll have a better idea.

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America must dig its way out of our economic and ecological mess by using a green shovel. We should use this recovery period as a time to rebuild our economy around a carbon-free domestic energy supply.

I am reminded of Warren Buffett’s admonition to value investors, “Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community.

The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

This is a good time to reverse the nation's economic downturn by encouraging private investments in all forms of carbon-free energy including but not limited to efficiency, wind, geothermal, solar, tidal, and ocean current/wave projects.
This is no time for investors to retreat in fear. Instead, it is a time for counter-intuitive investors like T. Boone Pickens to invest in new energy pathways that will stimulate the economy, reduce our balance of payments, and protect the planet’s climate. The so-called green energy sector needs to expand dramatically to lead America away from foreign oil dependency and dirty, high carbon fuels and toward a more sustainable economy.

As Pickens has been suggesting, to stimulate the new energy economy America should foster a rapid deployment of new energy sources such as wind and solar by investing in a high-voltage, high efficiency electric grid that links new energy sources to centers of demand. Funding assistance and tax breaks must be created in the early days of the next Congress to accelerate the transition to greater efficiency in our homes and commercial spaces. Also needed, Congress should give assistance to low and moderate-income homeowners and small business owners to help reduce their energy costs by dramatically improving efficiency.

At the same time, an ambitious carbon cap must be put in place to lock in an escalating price on carbon pollution to offset these important upfront investments. Carbon revenues should also be committed to fund much-needed adaptation projects to address impacts in a warming world.

In order to advance a rational pathway forward, policy makers in Washington must first level the playing field by ending unnecessary subsidies that for decades have favored fossil fuels industries that have dominated K Street and give start-up, clean-energy companies incentives, subsidies and technical assistance needed to jump start rapid deployment of clean energy technologies.

We are sending about $500 to $700 billion out of this country each and every year to buy oil. America has experienced unprecedented and sustained trade deficits as our assets flow to other countries particularly to the Middle East for oil. With each tank of gas, the trade deficit further impoverishes the American economy and depletes the average homeowner. Millions of Americans households are now in debt, many deeply so with large credit card balances, auto loans and record mortgage debts. We also know that Americans are earning smaller average incomes in 2005 than they did in 2000. Real income (after inflation) has actually contracted for the vast majority from 2000 to 2007. Yet every time we pull up to the pump, buy groceries or purchase other consumer goods, we are spending more and more on climate-warming-energy and sending our future to other oil producing nations.

Investments in domestically produced, carbon dioxide-free energy and the efficiency-sector create new pathways that eliminate pollution and international dependency while stimulating high-quality green collar jobs for millions of Americans.

It may be a long time before we fully understand the root causes of the economic melt down that began on Wall Street, and spread like a fast moving flu that rapidly became pandemic. Recent disruptions in the U.S. and world markets were no doubt brought on by a series of bad policies and a complete lack of governmental oversight here in the US. Washington ignored obvious warning signs. The most obvious were the widespread and irrational speculation by financial institutions on real estate, excesses in leveraged investments, corporate greed, and the phenomenal individual debt in America. In the end, the shuffling of bundles of uncollectible paper looked like a scheme that Charles Ponzi would have invented.

Let us learn an important lesson here. The government has an important role in overseeing financial markets and it has an equally important role in shaping and enforcing rational and sustainable national energy policies. In both spheres, doing nothing does not work. You can bet on that.

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Current financial constraints are clearly reducing investment in all sectors including energy infrastructure. And even though there may be a number of conventional coal plants under construction, there are little if any private investment dollars flowing into the development of either coal facilities with carbon sequestration or new nuclear power plants. But there is unlikely to be funding available in the foreseeable future for theses technologies regardless of the condition of the economy given the costs and risks associated such ideas unless there are substantial federal subsidies and some certainty regarding carbon regulation. With respect to nuclear power plant investments one CEO of a large electric utility seeking to construct new nuclear facilities recently stated…“I can not find anyone in their right mind that will give me a fixed price contract to build a new nuclear plant that I can afford.” On the clean coal side the International Energy Agency recently released a report that concluded “…investment in [carbon capture and storage (CCS)] will only occur if there are suitable financial incentives and/or regulatory mandates,” adding that “market mechanisms alone will not be sufficient”.

But all is not bleak for energy infrastructure expansion. Solar and wind projects are currently being financed and built as are other types of distributed renewable generation. True, financing even in the renewable sector seems to be slowing. But as indicated by other comments wind projects pose less risk than large central station plants and are often supported by contracts under state renewable portfolio standards. Significant numbers of transmission projects are also under construction and financing appears to be available to expand and upgrade the grid. The Federal Energy Regulatory Commission is seeing robust interest in new transmission projects primarily to support extensive wind development. Returns in such projects appear compensatory and risks are relatively low. So even though financing may rank as a barrier to transmission project development and construction, developers have not yet elevated it to the top of the list.

With that background the premise of the question that the nation will need 30% more energy by 2030 should be examined. A number of comments indicate that significant energy will be required in the future. That may be true. But even accepting that assumption few comments suggest improvements in energy productivity will play a significant role in offsetting that energy growth. Google has recently release a national energy plan that, in part, proposes to improve energy productivity by 30% by 2030.* Offsetting the EIA projected 30% increase in energy use by increasing energy productivity by 30% would mean that energy usage would be held flat over the next 22 years. Energy productivity improving technologies- energy efficiency, demand response, combined heat and power systems and waste heat recovery technologies- are generally the cheapest, fastest, and most cost effective strategies to implement. Thus, one of the major prongs of Google’s proposed clean energy path- balancing new demand by improving energy productivity- may be the most feasible and profitable first response for the nation to implement. This appears to be particularly true given recent advancements in LED technology that will have significant implications for improving energy productivity in everything from digital televisions and computers to lighting. In addition, the nation’s organized wholesale electric markets are seeing an array of new companies assist in delivering rapidly expanding customer demand response, both lowering customer participant bills and at the same time lowering energy costs in those markets for all consumers. Further, significant efforts are underway to improve productivity on the grid side of the meter through the installation of advanced transmission sensing technologies, energy storage systems including flywheels, batteries, and plug-in hybrid electric vehicles, and the implementation of grid optimization algorithms to improve grid operation. The rapid advancement of all of these technologies lends credence to a projection of improving energy productivity by 30% by 2030. The Google plan is well documented and supported by substantial research. It deserves serious consideration.

See

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This financial meltdown is going to make it more difficult for SOME firms (private equity/highly leveraged) to build SOME energy projects(marginal/high risk/most capital intensive), but firms with good balance sheets will be able to benefit from declining material costs and less competition for good opportunities. Look for more consolidation along the lines of Exelon's proposal to buy NRG.

While the roil of financial markets will make capital necessary for major energy projects more expensive, another major factor is the load reduction that can result from a recession. This can, as one commentator notes, buy some time for technology development but will create a large conflict with renewable portfolio mandates adopted in many states. To build renewables to serve a growing load is one thing - to build expensive renewables where there isn't load growth to partially absorb the cost is another. Capital intensive renewables will be disproportionately impacted by higher financing costs and their economics will be adversed, particularly if natural gas costs stay low (relative, that is).

The other moving piece, though, that can offset higher financing costs to some extent is the significant price reductions we are now seeing in critical commodities for infrastructure construction - steel, aluminum, copper, cement and gasoline/diesel. Increases in these costs drove the cost of new power plant construction up double or more in last 3-5 years. That trend is reversing with global demand declines and recessionary pressures.

Financing baseload power plants such as new coal and nuclear power plants is an enormous challenge. This was true before today’s credit crisis. It was true a year ago, when the subprime crisis hit. It was true in 2005, when the Energy Policy Act was enacted. The industry couldn't finance the first wave of new reactors – then or now -- even if the financial markets were completely stable in the absence of credit support from the federal government, in the form of loan guarantees. With a workable loan guarantee program, these plants can be financed regardless of conditions in the credit markets because the financing is secured by the full faith and credit of the United States government.

New nuclear projects have long development times – eight to nine years – and the next nuclear projects are still in the early stages of development. So the industry is at least three years away from closing on construction financing for a new nuclear plant. For that reason alone, today's conditions in the financial markets largely are irrelevant to the issue of new nuclear plant financing. If we're still facing today's credit conditions three years from now, we'll have far worse problems than financing new nuclear plants.

All new baseload power plants are expensive – $3-4 billion for 600-megawatt-scale coal-fired power plants and $6-8 billion for average 1,400 megawatt new nuclear plants. The U.S. electric power sector consists of relatively small companies that do not have the size or financial strength to finance power projects of this scale on their own, in the numbers required to meet U.S. baseload electricity needs and reduce carbon emissions. These projects require financing support – government backing, not government dollars – in the form of loan guarantees from the federal government or assurance of investment recovery from state governments, or both.

The loan guarantee program authorized by Congress in 2005 is a step in the right direction, but Congress unilaterally imposed a loan guarantee cap that would guarantee loans for only three or four new nuclear plants. The current Administration has agreed with the cap. As currently capped, the loan guarantee program does not represent a sufficient response to the urgent need to meet the challenge of building carbon-free nuclear plants in the numbers needed over the next 10 years.

The new administration and Congress must reconsider that cap in light of the $1.5-trillion financing challenge that confronts the electric utility sector as a whole. Congress needs to lift the artificially imposed volume caps for loan guarantees. Our energy security and environment depend on it.

On a separate path, we should also consider creation of a Clean Energy Development Bank, a government corporation equipped with loan guarantee authority commensurate with the size of these new clean energy projects and with the scale of the capital investment facing the electric sector. This new institution, as proposed by Senators Landrieu and Domenici and others, would be modeled on the Export-Import Bank (which has $100 billion in loan guarantee authority) and the Overseas Private Investment Corporation, and could ensure that capital flows to critical infrastructure deployment in the electric sector.

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There is an opportunity that the current problems may provide. As others have noted, electricity demand is likely to soften in the near term. This buys us time to develop technologies, polices and incentives to be more efficient, and create an electric power system with a much smaller carbon footprint. If we get a period of declining demand, we should put in place mechanisms to keep the demand off. Just like if we go on a diet and lose weight – we need a program to keep our weight down. The capital exists inside and outside the electric power sector to make investments in energy efficiency and we should create the appropriate environment now to deploy this capital. When the economy grows again we should try to make sure that electricity doesn’t follow suit.

Perhaps states or utilities should compete to be the “Biggest Loser”, but instead of weight we could compete for largest reductions in electricity use. The federal government could set up a contest to reward efficiency improvements.

Looking further into the future, perhaps we need a dialogue on whether the federal government should be engaged in the development of energy codes for homes and other buildings. California has had energy building codes for 25 years and because of that our homes and commercial office buildings are among the most energy efficient in the country. California has had the greatest improvement in energy efficiency over the last quarter century and as another author noted, California’s energy efficiency improvements have helped the CA economy grow. While a number of states have some type of energy building code, none are as extensive as California’s. If every state were as efficient as California in energy use, energy demand in buildings could be reduced at least 1% per year beyond reductions that would happen anyway. (State-Level Changes in Energy Intensity and Their National Implications, Bernstein et.al., RAND 2003).

Investments in energy efficiency can provide a hedge against future price increases, and provides an opportunity to reduce pollution, and improve productivity. We should take this opportunity to keep the ‘weight off.’

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In the short term, yes, the economic downturn will probably dampen private investment somewhat. The liquidity crisis means that only rock solid projects get funded. Falling fossil fuel prices means many types of capital intensive projects, and specifically projects that are only viable in a high fossil fuel environment, will be difficult to finance without subsidies. Some companies, whose business model only worked if fossil fuel prices remained high, will hit a brick wall. In general, the downturn will weed out some of those projects which probably don’t have as solid a foundation and strategy.

According to the US Department of Energy, buildings account for 40% of all energy used in the US, and 71% of electricity demand. New (more energy efficient) building construction may be slowed by the credit crisis. Energy efficient upgrades of current building stock, that are not already underway, are likely to slow for the same reason.

Investment in renewable energy is a high priority for the nation and for America’s steel industry. As an energy-intensive industry, our member companies are committed to investing in advanced technologies to achieve ever greater energy efficiency. We’ve reduced our energy consumption 29% since 1990 on a voluntary basis, so we are committed to this cause.

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A corollary to this question is whether the economic crisis will change the calculus of what kinds of energy projects receive financing, and whether that could significantly change the energy mix. Renewable energy projects, as well as capture and storage projects for coal-fired power generation, face a unique set of circumstances and challenges.

Renewable energy has seen robust expansion in the past several years. New wind and solar generation capacity in the U.S. have each increased over ten-fold in the last decade. This impressive growth is—by and large—not due to an increase in market demand for renewable energy. Instead, it is primarily driven by policy interventions, particularly the federal renewable energy production tax credit (PTC) investment tax credit (ITC), and state-level renewable portfolio standards. In a slowing economy where electricity demand may weaken, that may be encouraging news for renewable energy projects. So long as state and federal incentives continue, then renewable energy projects could enjoy a comparative advantage when competing for capital financing.

Perhaps as relevant, given our policy interests in shoring up national economic performance, studies have shown that green energy policies can offer significant gains. California’s energy-efficiency policies created nearly 1.5 million jobs over 30 years, while eliminating less than 25,000, and saved consumers $56 billion in energy expenditures. As long as a compelling link is made between jobs and energy, look for political support for renewable energy projects to continue.

That said, recent market behavior will no doubt diminish near term interest in new energy investments, including for renewable energy. The New York Times is already reporting weakening of capital financing for alternative energy projects as the pool of investment capital contracts. But unlike the mortgage industry, the majority of energy projects competing for capital are fundamentally sound. The real question is whether the investment retreat is a new long-term reality, or a short-term phenomenon that will dissipate once the market crisis has receded, and liquidity is restored.

During this period, the most vulnerable renewable energy and energy efficiency technologies are those in early stages of development that are not yet viable on a large scale. The problem for these technologies is what venture capitalists call the “Valley of Death;” that is, the period where early-stage technologies often fail because they lack the funding to go from laboratory to marketplace. In the near-term, if the investment pool dries up, it will likely be these early stage, yet promising technologies—such as enhanced geothermal, advanced solar thermal, or new innovative grid management technologies—that will suffer.

However, over the longer term, it is not plausible that energy demand will fall. Global electrification and development, particularly in India and China, will drive demand – and new expectations for environmental performance will simultaneously and increasingly require that the supply is green.

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As far as wind power is concerned, there is little doubt that the current financial crisis and economic downturn will have an impact in the short term, as it has on other energy technologies. However, industries that perform well through tight economic stretches tend to perform even better when recovery occurs, and wind’s strong fundamentals could position it to emerge as a key player in the new energy economy.

Wind developers rely in part on debt and equity financing for new projects, and the current financial crunch is having an impact on the availability of capital.

Wind developers also use the production tax credit as an incentive to attract financing, but the amount of available tax equity is shrinking due to the financial weaknesses of a number of banks and other investors. So the industry’s growth in 2009 will likely be affected.

Wind energy has experienced significant growth in the past five years, and remains among the most attractive energy investment options right now. In fact, wind provided 35% of all of the new installed capacity in 2007.

Although oil and natural gas prices have recently dropped, utilities and consumers have in the past have been hurt by dramatic increases in fuel costs, and continuing concerns over fossil price volatility will benefit wind due to its “no fuel cost” advantage. Wind also has a short construction cycle, giving it an edge over coal and nuclear power, which can tie up huge amounts of capital for five to ten years or more of construction.

In addition, wind power provides protection against environmental risk, including costs and liabilities from greenhouse gas and pollutant emissions. Because wind is non-polluting, using wind power instead of fossil fuels to generate electricity immediately reduces global warming, and continues to do so cost-effectively over the long term.

Wind also makes sense now because it produces jobs. In a sign of the industry’s ability to help stimulate economic growth and recovery, new manufacturing plants were recently announced in Indiana, Minnesota, Iowa and Little Rock. In all, the four plants will create an estimated 2,000 permanent jobs.

Because wind power is part of the solution to America’s most pressing problems—a slumping economy, the need for greater energy and national security, volatile fuel prices, greenhouse gas emissions, and heavy water use for electricity generation in a time of increasing drought--the wind power industry is thinking long-term.

To take full advantage of the industry’s role in stimulating job creation and economic development, and to support growth of domestic turbine and component manufacturing (a leading sources of new manufacturing jobs) we need stable, long-term policies, including a long-term extension of the wind production tax credit, a federal renewable electricity standard, investment in new transmission, and strong climate change legislation. These measures would ensure that wind power continues on its dynamic, upward trend and helps stimulate economic recovery.

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The recent credit problems resulting from the sub prime lending crisis may be amplifying an already difficult challenge facing deployment of advanced energy technologies for electricity generation. Such technologies as offshore wind, solar, enhanced geothermal, and carbon capture have run into significant roadblocks in getting deployment financing for some time now – even before lenders restricted credit. This has largely been because lenders are unfamiliar with these technologies and have trouble accounting for the risks of these emerging marketplaces. This, coupled with uncertainty about eventual pricing of carbon emissions, has led to a situation where promising technologies are not fulfilling their potential for contributing to our electricity supply. Although Congress partially helped the situation by recently extending the production tax credits for renewable electricity generation, I believe we'll need to do more if we want to see widespread deployment of these technologies. There are a number of proposals to provide increased financing support for initial deployment of these critical technologies, including a bill I introduced earlier this year. This issue will be one that we will be examining closely in the next Congress.

It's also important to develop financial mechanisms for promoting energy efficiency improvements in both the residential and the commercial sectors. Increased efficiency is likely to be the most immediate and cost-effective measure we can take to improve our energy security. We need to think of energy savings on a par with new generation.

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Let’s be honest: energy projects are not being built in the numbers needed to supply electricity or refine petroleum as a direct result of environmental lawsuits and the Not In My Back Yard mentality. Years before the general public focused on the financial crisis activists were filing lawsuits and challenging administrative actions to stop the construction of energy projects. No new refineries or nuclear facilities have been built in over 30 years.

Those who oppose the construction of new energy projects would like to attribute that fact to an economic downturn, so that they do not have to take responsibility for their actions. However, the fact is that for the last several years literally every proposed energy project has been subject to litigation or a regulatory challenge.

Yes, the United States needs 30% more electricity in the next 30 years but the rest of the world - especially the developing world - will need 80% more energy in the next 30 years and the U.S. will have to compete for that energy. The U.S. will also need related infrastructure such as transmission lines to bring the power from rural areas to the cities. Activists are also challenging every transmission project.

The laundry list of challenges to energy facilities is long. On the transmission front there is the New York Regional Interconnect Project site, AP Trail, Devers-Palo Verde Transmission Line Project. On solar we have challenges to the Sunrise Power Project. Wind is a long list: Nantucket, MA, Long Island, NY, Maine, Cooke County, TX, Hays, KS and pending lawsuits against state or local wind farm approvals in Padre Island, TX, Greenbrier, WVA and a wind turbine project in Vermont. Biomass is a shorter list but there is fierce opposition to the biomass power project in Henniker, NH. Let’s not forget opposition to LNG facilities in Baltimore, MD, Long Island, NY, NJ, Los Angeles and Falls River, MA. The nuclear project at Indian Point, NY is also being challenged.
This is on top of years of attacks and challenges to Yucca Mountain and the nation’s effort to store nuclear waste.

So far I have not even mentioned the fact that almost every permit for a coal fired plant has been the subject of one or more legal challenges and many in multiple courts. Moreover, almost every lease sale or proposed oil and gas lease in the Chukchi and Beaufort Seas and on other federal lands has been subject to legal challenges.

All of these projects had financing and all have been challenged; some have moved forward but many were delayed and more than a few just stopped.

So let’s all stop trying to assign blame to the economic crisis and start trying to figure out how we will supply the U.S. with the energy and transmission lines it needs to be competitive in the world. One way to do both is to start drilling in the Outer Continental Shelf. The Mineral Management Service estimated that the OCS may contain up to 85 billion barrels of oil. At the same royalty rate as paid for Alaskan oil, $18.36 per barrel, the U.S. would receive $1.56 trillion dollars in royalty payments over the life of the project. We need these payments to help address our present financial crisis but we also need the energy to meet our economic security needs.

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Let’s look first at what we know. Right now, there are 29 coal-based generating units that are under actual construction: They are not just on the “drawing board.” That’s close to $30 billion of investment that will result in nearly 17,000 megawatts of electricity. We expect those projects will be completed.

If we look to the past, the U.S. has had nine economic recessions (according to CNBC) since 1950. Over that stretch of time, there have been some minor year-over-year decreases in U.S. coal production—none lasting more than a year—but the Energy Information Administration (EIA) points out that production increases have outnumbered decreases by almost two to one. As a result, the U.S. currently uses more than twice as much coal as it did in 1950—90 percent of it going to generate domestic electricity. So, what history tells us is that even as the economy has experienced ups and downs, our need for coal—and by extension, electricity—has continued to grow pretty dramatically.

But what do we know about the future? Clearly, there is a lot of sorting out going on throughout our economy, and energy projects are likely no exception. As a result, the larger the capital footprint the slower the walk to the finish line—regardless of the energy source.

Demand for electricity is not, however, just a function of more gadgets and bigger houses. It’s also a function of population growth. And this country’s population is expected to increase by 44 percent by 2050. That’s among the highest rates of population growth in the developed world. All of those new people will need electricity—even if they don’t have a computer in every room.

While our current economic slowdown may help us avoid some of the disruptions in energy supply that were projected for this summer, economic recovery can be facilitated if we have an energy supply system that is ready to meet increased demand of a newly invigorated economy. We shouldn’t be lulled to sleep. Our energy supply needs, which have already been put off too long, are still daunting.

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Electric power has been a capital-intensive industry since Thomas Edison's time. One of the innovations of the early years of the 20th century that aided access to capital was the establishment of exclusive service territories within which electric utilities would have a monopoly. That decreased risks for investors, and the long-term capital needs of an expanding industry were met.

Roughly half the USA still operates in that fashion, including some of our fastest-growing regions. Risks for investors in utilities whose public utility commissions guarantee a rate-of-return on investment should be low, so they should be preferred investments even in turbulent times.

In other areas where competitive markets exist, excellent companies that operate assets efficiently and can demonstrate a good track record should also be good investments.

Of course, "should" does not necessarily mean "will". However, electric power cannot be imported in quantity, and demand is strong. For 35 years, demand has been growing linearly, at a rate that will mean it is 40% higher in 20 or 25 years than it is today.

Make no mistake: rising demand and capital restrictions along with reluctance to allow new generation to be built put us in a precarious position. We need both demand-side programs and new generators if we are to avoid rolling blackouts in a few years. There will be some consequences of the current situation. I'll cover a few that my fellow contributors have not touched on.

Wind power benefits from the production tax credit, that – at nearly 2 cents per kWh – represents a quarter to a third of its production cost. But it is a tax credit, so is useful only to companies that owe taxes. With reduced profits, owning wind may be attractive to fewer companies (large financial firms own a goodly number of wind farms).

Wind, solar, geothermal, and some other renewables are located in regions distant from population centers. The long transmission lines required to move this power to customers may face a harder time raising funds. But, some will win through based on state renewables portfolio standards. That may take time, and states may fail to meet their RPS mandates as a result. Massachusetts was already in that situation.

Programs that increase efficient use of electricity are likely to be quite attractive financially in the current climate. These still require investment – California spends $700 million a year – but are effective and generally can be implemented more quickly than building a new generator.

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In principle, there are four pathways through which the national (and for that matter, global) economic turmoil will affect investment in new sources of electricity generation.

First, in the short term, the tremendous market volatility experienced recently plus related constraints in the credit markets will increase the cost and hence reduce the rate of investment in new electricity-generation projects of all kinds, with the more risky investment projects more severely affected.

Second, when and if we find ourselves in a significant economic recession, there will be consequent reductions in demand for electricity (compared with business-as-usual), particularly by industrial and commercial consumers, but also by residences.

Third, and perhaps most important, the emerging economic climate will focus attention in Washington (and other national capitals) on rejuvenating the economy, thereby distracting attention from many other issues. Part of this will be less rapid and less intense attention by policy makers to global climate change. This is turn can have important implications both for short-term electricity dispatch decisions, as well as for the time path of investment in alternative sources of new electrical generating capacity.

Fourth and finally (at least off the top of my head), in addition to the distracted-attention pathway (#3 above), an economic recession will surely make elected officials in Washington and elsewhere less willing to put in place public policies that would increase costs to consumers, such as climate policies that would increase energy costs throughout the economy.

So, yes, the economic downturn -- if that's what we're experiencing -- will indeed have impacts on electricity generation and use.

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The meltdown in the financial markets and the economy may well dampen the utility sector’s plans to modernize its generation, transmission and distribution infrastructure and invest in renewables. For instance, a few utilities have hit the pause button on some of their largest projects, as well as their ongoing capital spending plans. That's understandable because next to government and finance, the utility sector is the third largest borrower in the U.S. and is very dependent on liquid credit markets that appear frozen today.

The key question is how long will this turmoil last? If the credit freeze and the recession are short, say three quarters or less, utilities will likely move forward with their near-term plans as well as with the almost $1 trillion in infrastructure investments planned over the next two decades.

The good news is we are already seeing some promising signs that the credit markets are beginning to thaw. On the other hand, if the access to capital at reasonable cost, coupled with problems in the economy persists for several years, the industry may face a whole set of other challenges.

In the short term, utilities are somewhat insulated from the recessionary malaise because the demand for energy won't precipitously fall. Secondly, with more than half the states having mandatory renewable energy portfolio standards, utilities will continue to make investments in renewable technologies and enter into contracts with suppliers of renewable energy. These investments and contracts could lead to significant growth in construction and manufacturing jobs in the renewable sector in 2009 and beyond.

Furthermore, power plants -- coal and natural gas -- being built in states with construction work in progress (CWIP) will continue to move forward. However, projects in states without CWIP mechanisms or in competitive markets could be at risk. Finally, plans for new nuclear plants are probably unaffected over the next 18 months because construction of these projects is yet to begin in the U.S.

The tax credit extensions for wind and solar in the federal rescue bill help the renewables industry, especially the elimination of the utility exemption for solar projects.

In a prolonged downturn, utility commissions will need to continue to support utility investments in renewables and projects to modernize their infrastructure, including the grid. Such regulatory support will help the cleantech sector attract new capital as the economy stabilizes.

In the cleantech space, high quality deals may well continue to attract financing during this time, but probably at a higher cost. GridPoint Inc., a startup that develops smart grid software recently secured $120 million in equity financing as late as Sept. 22, prompting the trade media to ask, “What credit crisis?” GridPoint is using the money to acquire other startups that make smart-grid software for recharging plug-in hybrids and other electric vehicles. We are working with GridPoint on our own smart grid efforts.

Utilities as well as cleantech companies may well develop relationships with sources of capital that they haven’t depended on in the past. Most importantly, utilities with better credit ratings may be in a stronger position to invest in clean technologies, especially if they incorporate them into their regulatory models. New partnerships between utilities and cleantech companies would provide better access to capital and create the economies of scale needed to bring renewables and smart grid technologies to market faster.

We need to see how investors and the market digest the steps taken by the Fed, Treasury and banks over the next few weeks. This, coupled with a better understanding of our economy’s trajectory will give us a clearer picture of the way forward.

We need to remember that cleantech isn’t just about solar and wind power. It’s also about upgrading our analog grid with digital intelligence to meet the demands of plug-in electric vehicles (PHEVs), rooftop solar panels and other technologies. This is especially critical now because PHEVs are coming on faster than many have projected.

In the meantime, we need to demonstrate to our investors that we have the discipline and the flexibility to weather future storms in the credit markets and the economy. At the same time, utilities with strong credit ratings and access to capital, and cleantech companies may find opportunities in this environment by working together. Such partnerships could transform our industry and create significant benefits for consumers, investors and our economy.

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