The Future of Energy Policy in 2017


The economics worldview grounded in supply and demand for shale development is tempered by the salient question: Can we keep the current global financial system operating as we reach limits that are economic, geopolitical and price-driven in nature? This is a central question that the Trump Administration will face come January 20, 2017.

Also on the table:

  • Can the price of oil and other commodities be kept high enough?
  • Can the price of renewables provided by solar and wind trend low enough to replace or supplement the fossil fuel status quo?
  • Can we still keep the return on investment high enough to attract capital?
  • Can workers earn adequate wages to support higher energy prices and still buy necessary goods?
  • Will rising interest rates constrain debt access?
  • How will increasing inflation impact purchasing power and reconstruction of economic demand?

Often critical linkages are missed. Unless markets and companies remove barriers and offer near-term substitutes that replace energy products that are cheaper than currently available—without requiring a huge transition in machinery or infrastructure—the country is at risk for deep financial problems. Unbridled markets without socioeconomic balance or conscious and sustainable capitalism creatively destroy jobs via such innovations, increase debt burdens, and stretch the consumer’s ability to pay. This may also be part of the U.S. economic inequality and productivity decline in the past decade.

Global affluence seems to slow growth in OECD countries. Demographics and regulation fuel a lack of productivity (and increase costs) as more complexity with costs are shifted to the citizenry. Workers have less time to be productive in their jobs as shown since 2000. Monopoly and oligarchy concentrations in many U.S. industries foster suboptimal outcomes and inefficient rent transfers. These are reflected in predatory consumer pricing and price responses that exacerbate inflation and stranglehold economic principles.

Affluence can only be maintained with cheap energy—and it will likely not be from oil due to escalating production costs. And it will likely not be from coal because of environmental costs and other externalities. Nuclear is vulnerable to cost overruns of monumental risk and cost exposure. But time has shown that a strategy of cheap energy is short lived, and not based on values that endure.

Energy affluence can only be achieved with permanent value by efficiency, waste heat recovery, combined heat and power, demand-side management, building design efficiency, and/or increased supply diversity with renewables coexisting with nuclear. The role of natural gas will be to shape demand with an immediate supply of fuel for electricity. Government policy in the long-term is better served to cover the initial cost hurdles to facilitate the required energy transition.

Technology including energy storage, materials science, electrochemistry and IT solutions will optimize the end game and make a difference.

New business models and access to capital will be required to support this transition. This can only occur with regulatory reform and modernization that fuels market access to innovation and creative solutions that advance markets beyond the limits of the entrenched status quo.

The business opportunity is too great to not foster an all-of-the-above portfolio energy strategy that promotes innovation, technology, efficiency, and the value-added information delivered by it. These energy products and services have national value and export value that are not limited to the fuels themselves.

Otherwise, we will be stuck with 19th-century fuels, used in 20th-century infrastructure, wondering why we cannot compete and meet the escalating global challenges of the 21st century.

CE3 Blog by Michael J. Zimmer, Executive in Residence, Ohio University Russ College of Engineering and Voinovich School of Leadership and Public Affairs. Edited by Elissa E. Welch, CE3 Project Manager, Ohio University. January 2017.

The Clean Power Plan’s Legal Path



The Clean Power Plan (CPP) issued by the U.S. EPA in August 2015 represents a hallmark in regulatory and judicial actions.  However, on February 9, 2016, the U.S. Supreme Court stayed implementation of the CPP by a 5-4 vote pending judicial review at the lower court level.  This decision in no way reflects a decision on EPA’s rule itself.  Rather, the Supreme Court ruling—made before the death of Associate Justice Antonin Scalia—has simply delayed implementation of the EPA rule pending review at the U.S. Court of Appeals for the District of Columbia (DC Circuit).  The DC Circuit is scheduled to hear the case on June 2, 2016 with a decision to be rendered later in the year.  The DC Circuit is likely to be favorably disposed to EPA’s plan as our analysis below shows.  Their ultimate ruling is critical because if the Supreme Court is later deadlocked at 4-4 on an appeal of the DC Circuit’s ruling, then the DC Circuit decision will stand (although it could be reviewed again later once a full complement of nine justices is empaneled).

The CPP issued by EPA is based on Section 111 of the Clean Air Act (CAA) authorizing performance standards for both new and existing sources.  The plan seeks to reduce power plant emissions through state compliance plans (SCPs) to be implemented by 2022.  More detail on the CPP can be found here:  However, despite flexible compliance mechanisms, 27 states and other manufacturing groups filed to appeal the CPP rule.

Prior legal challenges to block EPA from finalizing CPP rules had failed up until the Supreme Court stay in February.  Generally, CPP opponents claim EPA is overstepping its authority under Section 111(d) of CAA, and since EPA’s plan extends deeply into unchartered legal territory, the Supreme Court decided to stay further actions.  While EPA cannot compel the states to take additional action on the CPP right now, it can still advance understanding of emissions trading and benefits of greenhouse gas (GHG) regulation.  Almost 20 states are still moving forward with development of their SCPs.

Legal Issues

When the Clean Air Act was enacted and later amended in 1990, there were two different versions of Section 111(d) in the final statue from the House and Senate.  These differences were never reconciled in Conference Committee before being signed by the President.  Indeed, EPA chose to follow the Senate version of this section in the CPP because it prohibits the agency from writing a second rule controlling a pollutant that is already regulated.  Since GHGs are not regulated from power plants elsewhere in Section 112, the EPA would be free to regulate them under Section 111. In fact, EPA believes it is simply upholding current law following its 2009 Endangerment Finding that GHGs (including CO2) meet the necessary guidelines to be regulated under the existing Clean Air Act, and thus the CPP is not intended to foster conflict but merely adhere to existing law.

The CPP’s definition of the “best system of emission reduction” is also being challenged. EPA believes this system can be applied to entire power sector on a statewide basis.  In contrast, opponents believe the system is limited to individual emitting sources, since all emission sources within a state are not equally integrated into the power sector.  CPP proponents favor EPA’s expertise and flexibility in determining the scope of the rule.

Additionally, federalism is being advanced as an issue by some states that do not wish to implement a national policy that runs counter to state authority.  This same issue has arisen related to water and healthcare with the states as well.

Timing is also a challenge. While the DC Circuit plans to rule on this case later in 2016, because of the annual rotation of law clerks in the DC Circuit every August, appellate justices could lose research continuity and support soon after the hearing thereby impeding progress.  Separately, if the Supreme Court elects to hear an appeal of the DC Circuit decision in early 2017, a final decision is likely not until 2018 from the Supreme Court on the merits of the case.  Regardless, the final outcome could hinge on the 2016 elections, as the party that wins the White House will likely appoint the next justice to the Supreme Court (replacing Justice Scalia).

Precedent and Conclusion

History shows a judicial deference to EPA decisions.  The authors reviewed all judicial rulings at the DC Circuit since President Obama took office (2009-present) in cases where EPA was the Appellee and an Appellant was challenging an EPA policy (or ruling) previously upheld at a lower court.  Out of the 289 cases reviewed, EPA’s record at the DC Circuit was 239 wins, 30 losses, and 20 mixed results.  Only slightly more than 10 percent of the time did EPA lose outright on cases decided before the DC Circuit, evidence of deference to EPA at the Appellate Court level.  Recall the DC Circuit’s ruling might prove to be pivotal because lower court rulings stand when the Supreme Court has a tied vote (e.g. 4-4).

The international Paris Agreement in December 2015 adds broader interest and pressures for GHG regulations.  The Paris commitments may need additional policies in the U.S. beyond the CPP and tax incentives to succeed—an opportunity for tools under existing law to be used for the first time to reduce emissions.  For example, Section 115 of the Clean Air Act could support GHG action beyond the power sector in the U.S. by offering broad country reciprocity over any air pollutant anticipated to harm or threaten public health or welfare in a foreign country.  The U.S. already treats GHG emissions as pollutants and the United Nations Framework Convention on Climate Change offers the U.S. the reciprocity required to pursue Section 115.

The CPP is a part of an ongoing public debate in the U.S. regarding energy and environmental policy.  Pivotal to that public debate will be the judicial rulings on the CPP likely to arrive in early 2017 by the DC Circuit.  With the prospect of Congressional action on climate policy unlikely, all eyes are on the courts to decide if the first, nationwide policy limiting GHG emissions in the U.S. will take effect or not.

Addendum: On May 16, the DC Circuit announced that oral arguments will be delayed until September 27, 2016.  Furthermore, the case will be heard en banc by the full panel of DC Circuit judges, rather than the usual, smaller three-judge panel.  Experts believe that the en banc review at this step of the judicial review will expedite final resolution of the legal issues surrounding the Clean Power Plan.

CE3 Blog by Daniel H. Karney, Department of Economics and Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3. May 2016.


What is at Stake? Assessing the Real Impact of the Clean Power Plan


On February 9th, 2016, the U.S. Supreme Court issued a stay on the implementation of the U.S. EPA’s Clean Power Plan (CPP).  Hearings on the case will be held during the summer with a potential decision likely by end of the year.  Future blog entries will discuss the political and legal aspects of the case.  The purpose here is to discuss the impact of the CPP nationwide if it were ultimately implemented.

The EPA’s website says the CPP is “a historic and important step in reducing carbon pollution from power plants that takes real action [emphasis added] on climate change.”[1]  The key step in determining the veracity of this claim is figuring out what “real action” means.  Appealing to the logic of the scientific method is the best way to generate fact-based conclusions.

Scientists like experiments, and scientific progress often comes from experimental results.  For instance, start with two petri dishes: one labeled “control” and the other labeled “treatment”.  Add bacteria to the treatment dish and watch the bacteria colony grow, while the control dish remains dormant.  This simple experiment demonstrates the basic logic of the scientific method; keeping all else equal, observe the effect of changing one variable between the control and treatment scenarios.  The same logic can be applied to determining the CPP’s real effect.

To start, EPA summarizes the CPP’s impact as follows: “When the Clean Power Plan is fully in place in 2030, carbon pollution from the power sector will be 32 percent below 2005 levels, securing progress and making sure it continues.”[2]  The problem with this characterization is that it only presents the “treatment” scenario; that is, EPA states what would happen with CPP implementation.  Indeed, the logic of the scientific method requires us to look at the difference between the treatment (“with CPP”) and control (“without CPP”) scenarios when determining the impact.  Therefore, what would be the emission levels in the “control” scenario without CPP implementation?

Fortunately, EPA conducted a Regulatory Impact Analysis (RIA) that provides the information necessary to implement our “scientific method”-based analysis.[3]  Below is Table ES-4 from the RIA that provides CO2 emission projections for a base case without CPP implementation and two policies cases under CPP implementation.  The two policy cases are labeled “rate-based” and “mass-based”, respectively, but for this analysis the distinction is not important.  Consider the base case the “control” scenario and the policy cases the “treatment” scenario.

CPP Table ES-4

The Table ES-4 reports projections emission projections out to 2030 for the base case (or business as usual) and policy cases.  By 2030, the policy cases both achieve a 32 percent reduction from the 2005, just as EPA claims (see the last column of the table).  However, the base case without CPP implementation projects an emissions reduction of 17 percent by 2030 relative to the 2005 baseline.  This is mainly due to the falling price of natural gas generation relative to coal generation, where the former is significantly less carbon intensive than the latter.  But, importantly, this change in the generation mix is independent of CPP implementation and thus included in the control scenario (i.e., base case).  Therefore, the difference between the control and treatment scenarios is only 15 percent, not 32 percent!  That is, implementing the CPP, all else equal, leads to a 15 percent difference between in the emission level from existing power plants by 2030.[4]

As litigation surrounding the CPP proceeds during the summer, it is important to remember what is really at stake: 15 percent.  While that 15 percent reduction in U.S. power plant emissions might seem small, it actually represents over 400 million short tons of CO2 reductions, which is equivalent to all 2011 carbon emissions from Spain.[5]

CE3 Blog by Daniel H. Karney, Department of Economics, Ohio University.

[4] This analysis relies on the results from EPA’s model of the U.S. electric power sector given a set of assumptions.  Different assumptions – for instance, a higher economic growth rate – change the model results.  Furthermore, a different model with a different model structure might yield different results and therefore different conclusions.

Sustainability Emerges as Central to Global Corporate and Social Innovation


Proactive global companies are moving the concept of sustainability beyond an intangible vision and aspirational goals in support of concrete actions, visible metrics and public reporting and disclosure. These companies value innovation, conscious capitalism, and a new model for business that is more accountable to a global citizenry than to crony capitalism or PAC activism. They also realize they must offer a responsibility-based “service” to others for their products and services to differentiate themselves and compete successfully in a dysfunctional society with consumer options too numerous to count. Economic performance still must be achieved, but more C-suite executives are balancing their bottom line with a more sophisticated complexity grounded in scientific, systems-based thinking.

Companies and global enterprises cannot succeed nor profit in a society that is failing with little regard for the integrity of workers, consumers, natural resource use or environmental resilience. Ignoring the trend towards sustainability principles will leave the laggards at a perilous high risk of failure because of exposure to the creative destruction of capitalism in normal business cycles.  Here are the top ten reasons not to ignore this trend:

  1. Companies with sustainable business models have lower costs of capital, better capital expenditure levels in their industry peer groups, and enjoy quality training for their workforce, better management, succession strategies and industry respect.
  2. Commitments to sustainability and their implementation appeal to millennial human capital with relevant skill sets encouraging this market transformation and values-based capitalism. Companies in heavy metals, minerals extraction, utilities and energy-intensive manufacturing are realizing that with senior staff retirements they face a “brain drain” and human capital shortfall.
  3. Sustainability-minded companies enjoy wider networks of stakeholder support and respect—especially from millennials—which are reinforced and validated through social media efforts, thereby providing communications, marketing, sales and public affairs benefits on proactive and defensive corporate issues. A company must always manage with trust as we saw recently with Volkswagen’s emissions scandal.
  4. A company’s leadership on sustainability thrives through its supply chain by fostering quality communications, productivity, modernization and execution support for sustainable results through thoughtful partnering and not rote supplier mandates.
  5. Sustainability becomes the centerpiece of innovation, encouraging improvements in the R&D process and methods, and quality and productivity metrics, throughout the company’s supply chain. Improvements to existing products, methods or processes already in the mix are more likely to appear than just sole reliance on new products.
  6. Resource, materials, energy and water impacts are accounted for, with decreases in waste materials and negative community and ecosystem impacts. Stakeholders’ concerns are better managed and enhanced corporate-community partnering can be sustained with improved risk management and more economical results.
  7. Financial and non-financial compliance and goal-oriented outcomes are fostered with increased levels of cross-team respect, allowing teaming and innovative solutions to be undertaken with less confrontation or adversarial hurdles within companies, and across stakeholders and their external markets.
  8. Product development, design and process improvements occur that are focused on durability, efficiency, minimal waste creation and maximum resource recovery and reuse. Life-cycle cost analyses for products improve, contributing to positive company and socioeconomic outcomes beginning at product inception instead of at product disposal.
  9. Product branding, loyalty and cost benefits accrue to support better teaming with customers and the media for future market share retention and growth. Sales and marketing initiatives can become more effective and productive—the gains of which can be reinvested into customer service, O&M support, social media, revenue sourcing and feedback for new product development.
  10. Improved performance within peer industry groups of sustainable companies promotes better economic outcomes for products and motivation for senior management to achieve performance incentives that benefit the customers served. As noted above, companies who differentiate themselves on sustainability principles are also able to attract relevant millennial talent that is drawn to a comprehensive value stream that is not merely financial, but reflective of wider values, integrity and character.

Historical growth with its cyclical patterns and consequences has fostered a false sense of consumer capitalism security, marked with concentrations of capital and power. Yet status quo capitalism without sustainability-focused improvements does not support the global capacity to bear a doubling of the Western-lifestyle expectant population in 15 years as related propaganda might purport. At this current resource consumption trajectory, what level of growth can really be achieved? Capital availability, mergers and acquisitions and technological innovation create complexity in this growth thesis. These growth tensions were already appearing in global markets as of 2014 and are spreading.

New Metrics

Leaders as diverse as product designers GE, Eaton Industries, Apple and Ford Motor Co. to leaders in cities, counties and local governments are demonstrating how to create a new structural framework for growth that is sustainable. In places across the U.S. from Seattle to New York and Austin, Texas to Arlington County, Virginia, locally-led initiatives center on buildings, “Smart Cities” growth, efficiencies in energy, water, solid wastes, transport, and more.

These trends may focus less on economic growth measured by GDP, and more on human health, well-being and quality of life outcomes. Broader views and definitions of capital will arise, with new sources and metrics of value. The current monetary system and model for capital delivery must improve and extend the reach of public funding with more public-private partnering and matching funding to decrease a reliance on grants. Sustainability measures advance collaboration which is in turn replacing mindless competition. The subsequent financial overhaul of businesses and industries will likely be less Darwinian and more strategically service-oriented. In the short term, bubble speculation must be terminated in deference to investments that create a lasting multiplier benefit to stakeholders. Accountability, responsibility, long-term durability, innovation and stewardship are the real values created by corporate sustainability.

A greater incorporation of system-focused management principles will create a closed loop system where traditional law of commons thinking erodes in favor of longitudinal externality accounting. Shared ownership models like those already seen in hotels, ride sharing and health care will further expand with a heightened focus on product resilience and durability in new ownership and delivery models. The entrepreneurial, startup companies entering the market with this new business model are likely to model sustainable practices as well because of their relatively high investment in capital equipment (compared with mature companies) and because of their unique managerial incentives.

The past decade has set the table and transformed companies, industries and global markets. The process has been marked with confusion, setbacks, and achievements by corporate shareholders, NGOs and stakeholder leadership. Consequently, the Congressional Budget Office now forecasts a reduction in U.S. economic growth by 1% to 2025, compared with the 1980-2007 period. The results of structural, corporate dysfunction are validated by senior executive, boards, market, and customer action and impact growth priorities, competitiveness, and income equality in U.S. society. The trends can no longer be ignored because of the governance, market and financial operating risks that are created.  Moreover, Pope Francis has encouraged renewed moral and ethical dimensions to business practices and societal growth decisions which would apply equally to sovereign governments, companies and NGOs together.

Thinking Long with Durability in Mind

Until recently, markets generally were built on voluntary outcomes for capital investment, loans, product selection, and consumer choice. Yet markets are human enterprises formed by business, political and cultural choices. A corporate failure to address more sustainable outcomes in the upcoming decade could place at risk whether 50-70% of current companies listed in the Dow Jones will survive or not in the listing index over the next decade. For these companies to survive, they must ensure they are participating and contributing to thriving societies and global markets, and not just to their boards and shareholders. The affected communities, skilled employees and stakeholders already realize that their public success and well-being are on the line.

This awareness on both sides will be the center of a new value proposition that offers genuine value that is affordable and sustainable for people, communities, businesses and societies. That new value cannot be measured solely by GDP. Government spending must generate better returns beyond entitlements spending focused on physical and social infrastructure, R&D, innovation, entrepreneurial startups and healthcare and defense efficiencies through informed information technology. Technology solutions focused on processes, without asking why and what for, are only half truths. Companies must focus on doing no harm as they pursue their strategic business objectives; their raison d’etre will be held accountable, feet to the fire, through social media and global communications in our on-demand world. Case in point again, Volkswagen. That leadership will come from the engineering, communications, scientific and IT systems and functions with less reliance on the corporate, legal and financial functionaries of the past.

The evolution has begun, but at what pace, which industries and for how long? Who will lead and how? How should progress and outcomes be measured? And is there a moral and ethical obligation to do no harm as we consider our collective future imperatives? You, the leaders of tomorrow, will be answering those difficult questions to advance the transformation towards a sustainable future marked by success and measured to foster new and wider outcomes than mere profit ahead.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3; Originally published Feb. 2015, Revised Feb. 2016.


The Prospect for Alternative Energy in a Fossil-Fueled World


In the month of July 2014 (an “average” month with peak summer electricity demand), the U.S. Energy Information Administration (EIA) estimated that the U.S. used 6.65 quadrillion BTUs of fossil fuel-generated energy (i.e., coal, gas and petroleum), 0.75 quads of nuclear, and 0.81 quads of renewables (i.e., photovoltaics, wind, geothermal, biomass and hydropower). That’s a total of 8.2 quads. That means 9.1% of the total energy consumption that month was from renewables and 80.5% was from fossil fuels. Compare this to five years ago: in July 2009, 8.3% of total energy consumption was from renewables and 81.9% was from fossil fuels.

Continued phasing-in of renewables is required as part of an overall supply mix. In spite of the fact that over the past several years, the cost of renewables has been declining faster than other fuel sources, renewables will not likely surpass fossil fuel resources until post-2050. A more plausible supply strategy goal is to strive for increases of 10% more renewables each decade coupled with the increased use of demand-side management, transmission & distribution (T&D) investment, energy efficiency and waste heat recovery. The challenges are numerous, but the rewards will be long-lasting. Here’s why.

  • We have the technology to increase renewables, but it won’t be easy, quick or cheap. An inordinate focus on supply ignores the necessary infrastructure investment required to support renewables within the current investment framework for fossil fuel development.
  • Renewables cannot replace fossil fuels in the near term because the cost of capital, rate shocks and costs to end users. Energy investment will continue to compete with similar investments in new technology, water infrastructure, urban growth in our cities, housing stock upgrades, railroads, highways and tunnels and bridges. But renewables cannot be ignored or postponed because of their lower operating costs, efficiencies, reduced emissions and sustainability benefits.
  • Increasing renewables capacity will require huge amounts of capital outlay and technical expertise which could consequently boost business development, workforce training and infrastructure upgrades. These investments will create a 21st-century power grid that is distributed, diverse and more resistant to the effects of a changing climate and/or security attacks.
  • The status quo, consisting of resource extraction, fuels, transportation infrastructure, generation, T&D, manufacturing, etc., has taken countless investment dollars and more than a century to build. It will not be radically altered but will be modernized for the future with competitive manufacturing, global trade and tax reform pressures incentivizing more accelerated decisions than regulatory fiats or mandates.
  • The sheer magnitude of energy required to be generated on a 24/7/365 basis is impossible to recreate using existing technology, land transfers, materials (i.e., rare-earth minerals) and infrastructure. New technologies such as those being developed by our colleagues at Ohio University related to algae- based fuels, waste-to-energy and electrochemical technologies are the way of the future. Bringing them to market on a commercial scale is the next order of business.
  • The intermittency, lack of storage, and relatively high up-front costs of renewables make them less attractive for energy-intensive and trade-exposed (i.e., “EITE” and internationally competitive) industries such as steel, aluminum, paper and cement. These challenges will need to be addressed with reliable solutions so that these industries—the building blocks for infrastructure, manufacturing and product development necessary for competition in future global markets—can continue to grow.
  • The resurgence of oil and gas has led to a quiet revival of manufacturing, supply and logistics, and associated industries in and around the Ohio River Valley that has become a major driver in the post-recession economic recovery. North Dakota led the nation in job retention and growth over the last five years due solely to the growth in the unconventional oil and gas from the Bakken shale play.
  • The shale resources appear driven for global export value rather than indigenous national use. Similar development and trade incentives for clean technology and renewables for export value are equally important for advancing U.S. manufacturing and export product goals.
  • Experience in coal emissions controls has shown that the costs of mitigation are so high using existing technology, that it is not currently economically feasible. If mitigation follows a scheduled phase-in over a reasonable time frame and is coupled with significant legislative action (e.g., cap and trade, carbon tax, etc.), the adoption of low-carbon strategies such as renewables, nuclear, and carbon sequestration can be incentivized.
  • Electric generation technology, policy and market factors have reduced the cost to install renewables to the point that they are at parity with the cost of installing electricity from fossil fuel sources in many applications such as rural/remote areas, military installations and microgrids. Over the next five years, grid parity will escalate and could be accelerated by a market clearing price for carbon, a fuller inclusion of the negative externalities of fossil fuels, and the game-changing issue of electricity storage.

Fossil fuels enjoy 400-500% more national benefits and incentives than renewables—better balance in this mix is required moving forward. This necessary balance is already recognized by our military, intelligence and international energy agencies. Cities and countries where 70% plus of future global populations will reside also endorse a more balanced approach. Recognition is similarly advancing in global financial communities as investments in non-fossil projects are advancing rapidly. Aside from supply, the focus on network modernization, efficiency, materials science, and energy storage will impact the timing and depth of a global market acceptance of non-fossil alternatives.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University with Scott Miller, Director, CE3; Edited by Elissa E. Welch, Project Manager, CE3

Carbon Pricing and Better Market Signals Will Help U.S.


Rather than perpetuate the current uncertainties from the European Union and stalled domestic legislative/regulatory efforts to revitalize the failing Kyoto Protocol platform, we might need a clean slate in the U.S. to make progress towards the upcoming international greenhouse gas (GHG) negotiations in Paris in 2015. Prudent future planning for large energy users must incorporate a price assumption for CO2 emissions to evaluate resource investment decisions for electric generation assets with longer useful lives.

A fresh start
A better domestic regulatory approach might let markets discover prices for carbon and sustainability efforts which could elicit bipartisan support. For example, even a seemingly straightforward cap-and-trade system requires extensive government involvement and impacts price discovery by the setting of mandates, price collars, allocations of allowances and other similar provisions. This impedes the market’s organic pricing process—arguably the best way to address carbon and solve regional energy challenges worldwide. Countries could establish their own targets consistent with international norms and seek to achieve regional or hemispheric goals. Or, an even better approach might be built around a strategy devised by independent power producers for the management of a subset of options, such as mercury emissions and combined power and heat (CHP) projects. This approach would incentivize the right economic conduct in a free marketplace promoting accurate price discovery. To be most impactful, regulatory efforts should be structured on a hemispheric basis for the next decade (2020-30) and rolled up globally thereafter, encouraging regional partnerships for progress in the interim.

Under a fresh start where domestic regulations promote a free market approach, we could provide every stationary source and mobile source of GHG emissions an allowance of carbon per megawatt hour (MWh) or mileage per tank of fuel, or delivered power, heat or cooling content, no matter what the technology, fuel, age of plant, location or past carbon emissions levels. Exceptions could be provided for small commercial and industrial users to protect small business. Using various modeling techniques based on U.S. Energy Information Administration (EIA) data to verify total carbon emissions per unit, the U.S. could implement a strategy that sets a declining schedule for allowances over the next 10-20 years. The U.S. Department of Energy with EIA assistance could annually update the table of carbon values to correct for actual consumption levels of heat, fuel and electricity in the U.S. Rising heat or electricity usage would not increase the cap on carbon emissions. The market would decide thereafter how to limit and implement effective carbon management in the economy to meet national goals.

How it would work
Parity is key. A new biomass plant would get the same carbon allowance as a new or existing coal plant. The same for a wind installation or a new gas-fired plant. The market would determine the price valuation for the carbon allowances. Any improvements in efficiency boosting the miles per gallon or the MWh from a specific volume of fuel would increase available allowances for trading purposes. Additional efficiency improvements would be funded by selling extra carbon allowances on the open market. In this scenario, owners of the older, less-efficient plants using coal or oil face the true market-based costs of their carbon management strategy as determined by the market each year. Historical least-cost dispatch becomes “least-emissions dispatch” because the external costs of the environmental and emissions dumped into our ecosystems are now assessed. For these outdated plants, their choice becomes clearer—use clean coal technologies, use a different fuel, upgrade and increase efficiency, retrofit, alter the mode of operations from base-load operations, purchase carbon allowances, or close the facility. This decision would not be able to be postponed for old, stale plants until 2030; action would start in the marketplace a year after enactment of the new regulations. This will then launch a march to competitiveness, jobs recovery, efficiencies and energy infrastructure modernization. Expect changes to occur even in states using 19th-century fuels in facilities built in the 20th century, without the infrastructure necessary to compete and solve 21st-century challenges and problems. A united, national energy policy could emerge based on this fundamental policy reform grounded in sound economics and proper reflection of fossil fuel costs to our socioeconomic system.

The learning curve
All prior carbon pricing systems since the Kyoto Protocol have failed in their ostensible goal of environmental protection and carbon reductions. Our policymakers are ardently striving to find proper price discovery for the cost of removing carbon and other forms of degradation. But in all instances, the wealth transfer is generated to the older and worst carbon-polluting facilities, and older fossil allowances for convenience generate false cost savings. The best choices for the future are not made when allowances are provided by regulatory or government fiat based on continued levels of emissions. Right now allowances under trading schemes are provided for the favored; nothing of real economic or environment value is created, and minimal environmental benefits are achieved. The EU trading system has borne that lesson out, while newer U.S. trading models in California and New England seek to correct the issue.

Only 16% of allowances are directly transferred to end-use customers, others are only filtered through intermediaries or shareholders. This tends to transfer the economic rents to the utilities, as 40% of all world carbon suppliers consider those allowances as pass-through costs in their rates from customers, while retaining the rent values for their shareholders. In the U.S., many of these same utility power plants have already qualified for stranded cost recovery or the separate beneficial outcome of tax normalization. Market-based outcomes are foregone; and rent transfers have occurred with no improvement in the assets or infrastructure or competitive energy policies since 1978. The customer is not served: markets do not work properly and the customer effectively pays twice for the underlying generation assets and choices in carbon management made by the utility. Can the U.S. EPA achieve better objectives in rulemaking under its endangerment finding? We will soon find out in 2015.

A new path
Let’s not repeat the same errors from the EU carbon trading over the past decade. U.S. experiences with SOX, NOX, and mercury offer better guidance to build upon. We cannot afford to make this mistake in a global economy where developing country markets do not carry the burdens of such legacy decisions and ratemaking schemes. The accurate inclusion of costs for carbon are essential to strategic company planning, competitive products and market positions under a sound U.S. energy policy. U.S. products, strategies and solutions for carbon management will offer the innovation sought by companies and countries in the global marketplace for growth, innovation, and ideas to foster a better outcome for the capitalist business model.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3

How Now, CHP and DG?


A resurgence of interest is appearing in combined heat and power (CHP) and distributed generation (DG) options in many states, including specific interest from industry and the so-called “MUSH” markets (that is, municipalities, universities, schools and hospitals). Supportive state policies and incentives, technology support by vendors, ESCOs with low capital costs, and environmental incentives are combining to create a more conducive environment for CHP and DG projects. For example, the highly anticipated U.S. EPA rules regulating GHG emissions from existing facilities and supportive state policies will accelerate interest from and implementation by industrials, IT and MUSH market organizations.

CHP and DG projects, when coupled with intelligent energy efficiency from network and system optimization, offer substantial costs savings in industry and commercial uses. Commercial uses could dwarf potential in residential and industrial uses in some states. Smart dollars invested in O&M can finance the replacement of fans, motors, drivers, mechanical and heat needs to maximize CHP and DG efforts. Additionally, as the internet of things evolves, the electricity grid becomes more connected and more powerful with the addition of sensors and IT communications to supply sources. For example, cloud computing vs. server investment can reduce energy costs. Similarly, machine-to-machine (“M2M”) technologies that allow wired and wireless devices to communicate will drive smart manufacturing and innovative supply technologies. If done correctly, this shift will spur capital projects and investments, so long as projects produce quantifiable energy and cost savings over time, on a scale that allows financial pro formas to work and satisfy investors’ return expectations. The net result of these efforts is improved operations and analytical capability to monitor and sustain better system performance.

Common barriers to the implementation of CHP and DG projects have been:

  • Social & knowledge: equipment vs. software and IT involving a lack of technical assistance and better managing the equipment and IT interface;
  • Financial structuring, sources of capital & access: will come with better management, verification, data and protocols;
  • Structural: utilities, public service commissions with policies and regulations that are not modernized to reflect market and technology realities;
  • Traditional & outdated policies represent stale, non-consumer and non-market based thinking that stifle service and economic development;
  • Capital & banking sources with risk management profiles reflect a lack of energy lending experience; and
  • Cash flows that hamper internal hurdle rates of owners or fail to consider available incentives.

The best natural markets with incentives and market inducements based upon collective research and literature review include California, Massachusetts, Oregon, Utah, New York and Connecticut. States to watch as they design/improve incentives include Texas, Washington, Ohio, Michigan, Maryland, New Mexico, Minnesota: Pennsylvania, West Virginia, New Jersey and Illinois.

Current market forces, supportive regulatory and environmental policies, reliability and resilience concerns, and a wider array of fuel supply and technology improvements could represent the best market opportunity for CHP and DG in all sectors in more than 50 years. Here’s why:

  1. Capacity. A coalescence of available fuels, technology and the need for capacity has never been better for MUSH markets, industrials, IT and server loads, and municipal landfill and wastewater treatment facilities. The best regions include New England, the Mid Atlantic, California and Texas.
  2. Utility Business Model. The traditional business model of rate design for utilities is no longer serving its intended purpose, as customers demand better solutions, technology and services than the utility is willing or able to provide. When subject to rate design increases and regulatory attacks, continuing cost pass-throughs, riders and surcharges for declining service get expensive with diminished technology access and limited or no digitalization. The budget to support the old regulatory compact is dead as median income customers in the U.S. experience declining annual disposable income, and industrial and commercial margins are challenged.
  3. New Values for Performance. Power quality, reliability, volatility in price, and service responsibility for customer care and sustainable outcomes now exceed historical electricity market priorities. Industrials seek sustainability and a reduction in or removal of price volatility while seeking reliable and economical energy. Pricing values outweigh tax incentives and net metering reliance as customers realize the best rate to be paying is avoiding the costs of their own retail rate and the volatility, insecurity, and unreliability it poses.
  4. Variable Utility Market Response. The utility market response will vary based on fuel mix, individual utility priorities and recognition that the U.S. marketplace is more appropriately regarded as individual sub-markets with differences in the DOE regions. For example, because the natural gas market is volatile, seasonal in pricing, and considered a backup fuel strategy, it should be weighed as such to preserve the benefits of CHP and DG. For these and other reasons, in some regions utilities will be a friend of CHP and DG and others a foe, so that one blanket policy will not fit all and could be inappropriate.
  5. Financing. Financing models need to be revisited as U.S. banks are no longer lenders in the CHP and DG energy markets. Capital structuring, sourcing and third-party financing will need to evaluate and replace leasing and project finance models because of evolving accounting standards outcomes. The real game changer might be utilities with their cost of capital advantages fostering more joint ventures to develop these projects, and increased mandates on utility billing. New sources of loans are appearing from specialty funds, pension investment funds and high net worth family funding to replace the banks.
  6. Microgrids and T&D Costs. Microgrids, in conjunction with energy storage, energy efficiency and demand management co-strategies, will help accelerate CHP and DG implementation. More and more customers are seeking to avoid T&D costs—which will be rising faster than new generation costs this decade—and also avoid cost surcharges and line losses. To succeed, CHP and DG projects need to be fully integrated with load management efforts, conservation strategies and avoided water costs.
  7. EPA Regulations. Regulations for new SIP implementation for GHGs for existing facilities will accelerate the shift to CHP and DG, along with other requirements for mercury, boiler MACT, ozone, water and rules. (Interested in learning more? Check out CE3’s Energy Webinars Series archives.)
  8. Market Share. Based on our research and literature review, it is likely that 10 states will comprise over 60% of the U.S. market with an energy storage capacity whose share will grow to 25 states and reach to 80%. This would track the collective experience in the past with total energy, cogeneration, power marketing and renewables in the U.S. The whole country would likely not participate in the final market outcome.
  9. Need for Data. Case studies, data, and validation of project performance and operational efficacy will lower CHP and DG project costs—so will insurance and more robust markets for renewable energy credits (RECs) and emissions credits to offset project costs. Third-party financing sources and owners must share their case histories and provide operating data for insurance, financing, resilience, cyber security and weather performance values to be measured, verified and scored.
  10. Big Data Benefits. Big data and energy analytics will accelerate the desirability of CHP and DG alternatives to the customer, vendor, insurer, and technology solutions developer. Data also establishes the benefits of avoiding energy shifts to time-of-day pricing for each hourly or daily energy transaction, i.e. transactive energy with attendant volatility and lack of stability for planning.

Herein lies the best market opportunity in the U.S. in the past 50 years: Through the implementation of the above strategies, market volatility and uncertainty can be reduced or removed. The role of the traditional utility service can evolve to add value via the next-gen, market-ready solutions of CHP and DG, initiatives that differentiate price from value in a complex and changing market. Only then and through CHP and DG can we harmonize the dilemma of using 19th century fuels in a 20th century electric power infrastructure to support the sophisticated demands of a more modern utility service in the 21st century.

For more information about the state of CHP, check out our Energy Webinar from November 5, 2013, archived here:

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3