Tesla Power & Light?

Two events make for an interesting convergence of interests for the electric power and transportation sectors.  I’m not sure if this is a bullet train or a train wreck ahead but it could be transformational either way.  These events are the Tesla Motors IPO and the word leaking out of Washington that the broad cap and trade legislation stalled in Congress may be ‘downsized’ to apply only to the electric power industry.  Even that retrenchment has opponents with the Wall Street Journal suggesting that a face-saving way out of the Waxman-Markey, Kerry-Lieberman mess might be to declare a national RPS target victory and go home.

Why Tesla is a big deal

Tesla’s electric car has captured the imagination of the country.  Perhaps the Chevy Volt will steal the Tesla lightning and be cheaper—but it will still be a Chevy.  The ‘event’ was the IPO for Tesla Motors—the first American carmaker to go public since 1956.   Part of the magic of Tesla is the transformational nature of the product and its ‘mid-life crisis’ styling sure to appeal to every guy with $100k to burn on a state of the art ‘babe magnet’ to relive his Mustang or Camaro bad boys days of 40 years earlier.  After all, we baby boomers knew how to party!

Tesla lets us relive our youth and wrap ourselves in the environment-friendly persona of today.  Even Toyota sees its promise and is pumping millions into the venture—just keep them away from the accelerator pedals will ya?

Starting an all electric car business is a bold move but the perfect play for a nation in search of a solution to its oil addiction and an administration desperate for a victory on emissions reduction. With more than 260 million registered vehicles in the United States there is a lot of room for market share growth. Transport consumed about 28 percent of all energy consumed in the U.S. with 95% of it petroleum products including gasoline.  Electricity and natural gas combined accounted for less than 3 percent.

If Tesla and Chevy Volt and other electric cars to follow can change that market share curve there is the potential for both a big payday for Tesla and a big payoff for America in reduced oil consumption.

What does Tesla mean for the power Sector?

While the resistance to cap and trade legislation has been widespread across the economy, one group has flirted with jumping on the Waxman-Markey, Kerry Lieberman bandwagon.  Ironically that group is composed of some of the largest electric power utilities some of whom burn large amounts of coal to fire their power plants.

Why would they do this?

One school of thought is these ‘certainty hawks’ believe that getting into the debate and being involved in shaping the final bill gives them more influence than just saying no and being on the outside.  They also hope to negotiate a price for their surrender to Congressional aspirations for a greenhouse gas emissions reduction post COP15 compromise.  Their price is Federal tax and regulatory support before it’s too late.

I think the truth is that these electric power titans see the end of America’s manufacturing and industrial base hitting their bottom lines with nothing to replace it except fuel demand for power generation.  The power industry can not survive on the slow growth of residential consumption even when supplemented with commercial demand mostly from lighting and HVAC.

Where will growth come from in the power industry to keep shareholders happy?  The electric car and capturing the power demand from the electrification of transport for growth to replace industrial demand gone offshore.

But beyond rolling over for new caps on emissions these power industry titans offer this seductive prospect for the Administration and Congress.  They offer the ability to make the oil reduction for transport possible.  In short, they offer a grand bargain.  The power industry will take on the burden of converting the transport sector from oil to electric power and the reduction of greenhouse gas emissions that go with it.  But the price Congress must pay is to give the power industry the authority, the tax support and the regulatory clearance to do the job.

That thrill running up your leg, as Sean Hannity might say, is the environmental community telling Obama and Congress to do it—or else.  After years of work to get to cap and trade, watching Kyoto slip away, then the breathtaking promise of Obama fizzle into a COP15 meltdown, the environmental community needs some change they can continue to believe in.  And Al Gore is not helping right now any more.

So the forces of nature and politics are converging on a last ditch effort to salvage the environmental and energy agency and pass a bill that declares victory or at least avoids disaster.  For many no bill is still better than any bill even a watered down one.  If the Republicans and the senators from states that depend upon oil, gas and coal stick together they likely have the votes to keep any legislation from passing.  But will they?

Remember the old joke about the fine line between seduction and prostitution where the punch line tells us that once you cross that line the only thing left to decide is the price.  As the last best hope for passing an energy bill to save the Democrat base approaches, the price is going up—way up.  And we all know that Congress will spend our last dollar to get what it wants this badly.

So what could be part of this grand bargain American clean energy bill? Setting a cap on greenhouse gas emissions?  The question is where do you set the cap?  Adopt a National RPS Goal?  What goal–10%, 20%, 33% and by when?  Set national energy efficiency standards?  How high?  How soon?  What about state efficiency standards?  These are the ‘easy’ choices that would find wide favor and do little harm if cast as goals to strive for instead of edicts to be enforced.  This is the politically face saving equivalent of no bill for the Democrats, but it is not sufficient to achieve any of their goals and will outrage their base.

All the other possible seductions to the clean energy bill are very difficult and still get 60 votes:

  • Raise gasoline taxes? How much?  At the national level or state by state?
  • Adopt a carbon tax? How much and how widely applied across the economy?
  • Build National Interest Electric Transmission Corridors? Big fight with states on this.
  • Endorse major expansion of nuclear power? Big fight with environment groups on this one.
  • Fund clean coal technology transformation? How much?  How soon?  Will it work?
  • Feed-in-Tariffs for renewable energy supply? Big subsidies and uneven state by state.
  • Boost domestic oil & gas production? Not likely if goal is electric transport
  • Expand R&D on clean energy technology? Showbiz but no fast or certain payoff.

Do you see the problem?  Getting to a grand bargain that is sufficiently seductive to get the interests of the parties aligned makes it difficult to get 60 votes by those who are not yet seduced sufficiently.  The bigger the grand bargain the more expensive it is and the more difficult the challenge of getting 60 votes.

If Obama and Congressional Democrats are serious about such a clean energy economy, there are some things they could add to the grand bargain that might make it worth doing including:

  • No capital gains taxes or carried interest taxes on clean energy or clean transport investment for the life of projects coming online in next 10 years. This would unleash a wave of capital investment that would almost certainly accelerate job creation and achievement of the clean energy policy goals.
  • Clean energy development is declared to be a high priority national environmental goal and must be considered in every EIS under NEPA, ESA and other environmental laws with a duty to balance the national interests to include clean energy development and emissions reduction along with other environmental issues.
  • Congressional mandate to FERC to site, authorize and regulate backbone interstate transmission corridors. This preemption of the state by state control of transmission is necessary to scale the cleantech business for energy efficiency, demand response, renewable energy access and smart grid.
  • Federal Agencies must develop clean energy potential on Federal lands. Congress should give FERC the authority to approve proposals or order competitive auctions by Federal agencies to achieve a policy goal that each agency must have an energy efficiency and demand response plan and must enable clean energy production equivalent to at least its own total net energy use.  FERC would review and approve the compliance plans of each Federal agency and could order modifications.

As the end of the Congressional session approaches my hunch is only the easy things are possible.  They won’t do anyone a lot of good, but they won’t do anyone a lot of harm either.  Congress will declare victory and go try to save its behind from angry voters.  But clean energy transformation is a goal worth pursuing.