QE2 Implications for Energy Strategy and Policy

There are several consequences from QE2 that can have material implications for the energy side of the economy:

1.       Higher inflation kills off new baseload power generation prospects from nuclear power and pushes even farther into the future the realistic prospects for clean coal technology.   The lead time, regulatory uncertainty and expected inflationary cost increases for equipment and delays chill prospects for baseload growth.  But if QE2 works to increase economic growth the consequence will be lower reserve margins and more pressure to build new power generation.

2.       Renewable energy is unlikely to fill that gap under any growth scenario because of its intermittent nature and the practical realities that we simply can’t get enough of it to market without high voltage transmission construction. It has always been faster, cheaper and easier to permit and build new power generation than to build new transmission.  So we will keep building new renewable energy project like crazy but even a return to the 1-2% annual load growth of pre-recession levels will swamp the renewable energy potential.

3.       Natural gas combined cycle power plants are the fuel and technology of choice in a QE2 scenario.  There is no technology risk with clean, fast to build and relatively cheaper gas fired power plants.  All that renewable energy will require gas backup anyway and we can build the gas plants we need before even the first major electric transmission line breaks dirt.

4.       Demand for power generation will drive up natural gas prices and supply.   But the astounding growth of domestic natural gas production from unconventional sources provides the double bonus of adequate supply growth from domestic sources thus reducing natural gas LNG imports.  North America will likely continue to be the dumping ground for excess LNG supplies assuring that storage is filled at very competitive prices and dampening dollar denominated energy price inflation.

What are the energy policy implications of Q2?

The US imports more than 12 million barrels of oil per day and higher inflation wreaks havoc on trade balances and energy prices which ripple through the economy spiking inflation.  Achieving a broad national consensus on energy policy that includes expanding domestic energy production, investing in fast tracking the best available technology, improving energy efficiency to improve energy productivity and reduce energy intensity and balancing our environmental goals with our strategic economic interests makes sense. The best policy defense against energy inflation is the following:

1.       Encourage domestic oil and gas production especially from unconventional sources needed to feed gas power plants with domestic oil supplies.  FERC should have the authority to manage and permit E&P activities in the national interest and keep the growth of domestic energy supply growing to fight inflation and facilitate growth.

2.       Higher energy efficiency standards improve energy productivity. Here the lesson from California’s higher energy efficiency standards set back when Jerry Brown was first Governor Moonbeam—they worked reducing energy intensity to 50% of national average. Expanding energy efficiency standards to rest of the country makes sense as a long term strategy.

3.       Energy R&D, Investment and Infrastructure Fast Tracking is needed to make use of the best available energy technology, improve America’s strategic competitiveness in the global economy, and unleash the innovation and growth potential of the clean energy economy.  This means giving FERC the authority to plan, regulate, permit and order actions to strategically manage for America’s future energy needs balanced against our broad national environmental and economic goals.  Specifically, Congress should give FERC the authority to do the following:

a.       FERC authority over Interstate Electric Transmission. FERC’s authority over electric transmission should be the same as its authority over wholesale interstate competitive power generation markets.  Today the State’s control transmission and the result is little new construction because of the tangle of permits, NIMBY issues and a lack of strategic national goals against which project objections are balanced.  We need to fix this.

b.      National Policy support for Nuclear Power.  Ending our national ambiguity and delay in supporting the development and construction of the next generation of nuclear power plants to replace our aging first generation fleet is a national priority.  Similarly, solving the nuclear waste storage debate by overturning the Yuccas Mountain closure decision makes sense.  Creating a market for the best new technology for nuclear power in the US by the world’s suppliers puts America back in the baseload game in a way that produces the most competitive result and lowest overall total cost.

c.       R&D Fast Track in Clean Coal Technology.  There is to alternative than for the Federal Government and the Coal and power industries to partner to advance clean coal technology through tax incentives and investments.  Coal is simply too important a strategic fuel to ignore when a breakthrough in clean coal technology could produce so many benefits over the long term. Such clean coal collaboration can be done on an international scale with many countries and players to mitigate the impact on the US and any other single investor.  Just do it.

d.      33% National Clean Energy Standard.  Expanding America’s use of clean energy is a national priority and Congress should adopt a balanced clean energy standard that including setting a substantial 33% share of the overall national portfolio mix from clean energy resources.  But clean energy definitions need to include more than wind, solar, geothermal, biomass and small scale hydro.  It also ought to include new nuclear, new hydro of all sizes, clean coal with carbon capture and sequestration, energy storage and microgrids and virtual power plants.  To make sure this is taken seriously the National Clean Energy Standard should be set at 33% from all sources by 2050.

Taken together these components of a national energy policy that realistically balances our national interest in economic growth, environmental quality, energy security and strategic competitiveness can take the sting out of QE2 in the near term and strategically position the US for long term advantage.