TODAY’S STUDY: THE ENERGY VIEW FROM THE OLD SCHOOL

America’s Energy Resurgence: Sustaining Success, Confronting Challenges; A Report from the Bipartisan Policy Center’s Strategic Energy Policy Initiative

February 2013 (Bipartisan Policy Center)

Executive Summary

As the United States struggles to emerge from a historic recession, energy has emerged as both a bright spot and a source of ongoing challenges for the nation’s long-term prosperity and security. On the one hand, when adjusted for economic growth and inflation, the United States has cut its energy needs by more than 50 percent since 1973, and the trend shows no signs of slowing. Treating this 40-year reduction as the equivalent of new energy supply, the resulting resource is significantly larger than the expansion of output from all other energy resources combined over the same period. In addition, there have been major positive developments on the supply side: Domestic oil, natural gas, and renewable energy production are up, while energy imports are down; new energy development is driving a jobs boom in many parts of the country; and lower energy costs are helping the U.S. manufacturing sector recover.

The combination of these trends means that the nation is arguably more energy secure than it has been in more than a generation. But the news is not all good: Affordable energy is still a challenge for many households and businesses; the oil and gas boom comes with environmental challenges; the electric grid faces hurdles in upgrading infrastructure and integrating new renewable sources; public research and development (R&D) in energy is insufficient to maintain an international competitive edge; and the issues of climate change, global energy market volatility, and competition for energy resources by countries with growing economies remain.

The Strategic Energy Policy Initiative, a project of the Bipartisan Policy Center (BPC) and led by a diverse 20-member Energy Board, was launched in 2011 to build the bipartisan consensus needed to tackle these challenges in the years ahead. Americans are fortunate: The nation has enormous energy strengths, greatly exceeding those of most industrialized nations. Building on these strengths to deliver affordable, secure, and reliable energy in an environmentally responsible manner is the overarching goal of the recommendations outlined in this report. Specifically, we, the Energy Board, believe U.S. energy policy should be designed to advance four core objectives:

(1) pursue a diverse portfolio of energy resources;

(2) improve the energy productivity of the U.S. economy;

(3) accelerate innovation and technology improvements across the energy sector;

(4) improve energy policy governance and accountability.

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It is important to emphasize at the outset that the actions we propose in each of these areas should be viewed as a package—no single Energy Board member necessarily agrees with each individual recommendation in isolation.

Taken together, however, we believe this set of recommendations provides the blueprint for a balanced and effective plan for enhancing the nation’s prosperity, energy security, and sustainable environmental quality in the 21st century.

A critical energy and environmental policy issue is whether the United States should adopt a comprehensive climate change policy to reduce greenhouse gas emissions.

We agree that climate change is a significant issue and addressing it can and should be a matter of bipartisan consensus. It is our view that government policy development and prudent business planning should incorporate cost-effective greenhouse gas emissions reductions, and support market-based efforts to accelerate the integration of low-carbon energy technologies. We call on Congress and the Administration to find a way forward together on responsible and efficient policies to reduce greenhouse gas emissions and to work with other governments in seeking a global approach that both promotes the most cost-effective emissions reductions and addresses the competitiveness issues associated with carbon policy. We look forward to assisting the effort.

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America’s New Energy Landscape

The United States has long benefited from a diversity of energy resources, including a rich endowment not only of conventional fuels, such as oil, natural gas, and coal, but an abundance of renewable energy from water, wind, solar, and geothermal sources. Equally important, the U.S. has an abundance of the innovative capacity, entrepreneurial energy, and technological know-how needed to continuously improve the energy productivity of the economy. Indeed, over the last four decades, energy savings achieved through improvements in energy productivity have exceeded the contribution from all new supply resources in meeting America’s growing energy needs. These improvements have also helped to reduce the domestic economy’s sensitivity to abrupt energy price increases, particularly oil price shocks. Our report highlights the importance of treating demand and supply-side resources on an equal footing, from the standpoint of assembling a resource portfolio that can meet the nation’s future energy needs as cost-effectively and as environmentally responsibly as possible.

On the supply side, meanwhile, dramatic developments in the last decade have already produced a major positive shift in the nation’s energy position and prospects.

The domestic supply outlook for oil and natural gas, in particular, has vastly improved thanks to advances in drilling technology that have made it possible to develop previously inaccessible onshore and offshore resources, including large oil and gas shale plays. Significant progress has also occurred in the renewable energy industry, which responded to state and federal policies by growing at a rapid rate—installed wind energy capacity alone increased 16-fold over the last decade—while driving down cost and improving performance.

Developing America’s abundant indigenous energy resources provides multiple benefits: It spurs local and regional economic activity and job creation; generates revenues for federal, state, and local government; opens the door to potential export opportunities while simultaneously allowing the United States to reduce energy imports; increases the amount of global oil and gas supply from stable sources; and spurs technological innovation that benefits long-term U.S. competitiveness.

Our recommendations focus on expanding access to, and promoting investments in, America’s diverse domestic energy supply resources in environmentally responsible ways, improving the energy productivity of the economy, accelerating energy technology innovation, and overhauling federal energy tax expenditures.

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Pursue a Diverse Portfolio of Energy Resources

Maintaining a diverse portfolio of energy resources requires an energy system that relies on a varied mix of fuels and technologies from diverse geographic areas, as well as continued progress in energy efficiency improvements. A diverse system is inherently more robust and resilient than one heavily dependent on a limited number of resources. Such a system helps insulate the U.S. economy from the supply shocks and price volatility that can affect the market for a particular energy resource. Our recommendations below are organized by major energy resources.

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Oil and Natural Gas

To expand the production of domestic oil and natural gas resources in a manner that protects the environment and addresses the interests of all stakeholders, we recommend the following:

• Congress should expand access to oil and gas exploration and production in the Eastern Gulf of Mexico, and the Department of the Interior should accelerate the timetable for leasing areas off the coasts of the Mid- and South Atlantic states—provided that the areas involved have been reviewed and approved based on a rigorous coastal and marine spatial planning process. Stakeholders should work together to identify substantial new acreage in the Eastern Gulf that could be opened to exploration and production in concert with other, ongoing activities, and request that Congress remove the moratorium in these areas; in both the Eastern Gulf and the Atlantic region, we recommend an open, collaborative and science-based planning approach, and we recommend that in conjunction with such planning processes, the Department of the Interior consider reopening its current five-year plan to include at least one lease sale in the Atlantic.

• Working with all stakeholders, Congress and the Department of the Interior should improve permitting and leasing for onshore oil and gas production on federal and tribal lands by (1) assuring adequate resources; (2) providing consistent requirements; (3) creating a new commission to identify options for regulatory reforms; (4) creating more litigation transparency; and (5) improving the collection and dissemination of statistics for energy projects on federal lands.

• Federal and state regulators should implement the environmental performance recommendations for shale resource development recently issued by the Natural Gas Subcommittee of the Secretary of Energy Advisory Board and the National Petroleum Council…

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Coal

As America’s most abundant fossil fuel resource, coal has played a large role in the nation’s energy portfolio for well over a century.

Coal is expected to maintain a significant role in providing reliable and affordable power to serve the U.S. market, but the industry faces clear challenges in the decades ahead, including low natural gas prices, which are already prompting a shift to gas in the dispatch of existing generators and in building new capacity; new environmental regulations; and the prospect of longer-term carbon constraints.10 Our recommendation aims to accelerate progress on innovations that allow for cost-effective capture, utilization, and storage of carbon:

• The Department of Energy should continue public-private efforts to develop and demonstrate cost-effective, commercial-scale technologies for carbon capture, utilization, and storage and should begin developing a comprehensive, integrated legal and regulatory framework to govern long-term carbon storage…

Energy Exports

Increases in domestic energy production coupled with reductions in demand will result in decreased dependence on net imports of energy. With certain fuels, the changing dynamics of increasing production and decreasing consumption can result in a new opportunity for net exports. Although the United States already exports many domestically produced fuels to some extent, the rapidly changing dynamics for some fuels have raised controversy over the potential for increasing energy exports. While controversy has surrounded other exports, primarily those with potential national security implications, the policy solution rarely has been to abandon completely the nation’s traditional commitment to free trade, as reflected in our recommendation on energy exports:

• Restricting international trade in fossil fuels is not an effective policy to reduce global greenhouse gas emissions or to advance domestic economic interests, and we recommend against any such restrictions…

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Renewable Electricity Production

Wind, solar, biomass, and other non-hydroelectric renewable energy technologies have made remarkable gains in a few short years, roughly doubling their contribution to the nation’s overall electricity supply portfolio—from 2.5 percent of generation to nearly 5 percent of generation—between 2007 and 2011.14 This expansion has been possible as a result of falling production costs and supportive state and federal policies—notably he federal production tax credit and state renewable portfolio standards, which typically require utilities to include a minimum percentage of renewable energy in their supply portfolio.15 Currently, 29 states and the District of Columbia have renewable or alternative energy portfolio standards, and many states as well as the federal government provide tax incentives for renewable energy development.16 Nonetheless, technological, financing, and siting challenges remain. Our recommendations for expanding renewable electricity production focus on three areas (recommendations concerning the renewable energy production tax credit are covered in a later section, as part of a broader discussion of financial incentives in the energy arena):

• The Department of the Interior and other federal agencies should continue to fully fund and implement reforms initiated over the past few years for approving renewable energy projects on federal lands as expeditiously as possible.

• The Department of Defense should continue efforts and initiatives to achieve greater energy efficiency and harness renewable and alternative energy investments in direct support of its national security mission.

• Electric-sector regulators and stakeholders should identify and implement strategies to modernize the grid and enable investment in necessary transmission and non-wires solutions in order to more efficiently integrate renewables into the electric power system…

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Energy-Sector Workforce Needs

All key energy sectors and their stakeholders, including the oil and gas industry, the electric power sector, and the renewable energy and energy efficiency industries, require a highly skilled, well-trained workforce to deliver clean, reliable, and affordable energy to the U.S. economy. Many sectors will face significant workforce challenges due to a rapidly aging employee pool and high future demand for qualified workers. Congress, the executive branch, and stakeholders in industry and academia should cooperate to ensure that these workforce challenges are met and that the proper institutions and systems are put in place to achieve them. We support several specific actions to help prepare for future workforce needs in the U.S. energy sector.

• Congress should direct the Department of Energy and the Department of Labor to work with states to evaluate training needs and facilitate multi-stakeholder energysector training programs.

• Congress should appropriate funds and direct the Department of Energy, the Department of Labor, and the Department of Education to improve existing systems for collecting, managing, and disseminating workforce and educational data.

• Congress should appropriate funds and direct the Department of Labor to identify training standards and best practices for energy-sector jobs.

• Congress should provide support for individuals who seek relevant technical training and experience.

• Congress should reauthorize the America COMPETES Act…

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Nuclear

Nuclear power has been part of the U.S. electricity mix since the 1960s and today supplies nearly one-fifth of the nation’s overall electricity needs.23 But the nation’s fleet of 104 operating reactors is aging and only two new reactors are currently under construction. The question for policy makers, the utility industry, and other stakeholders now is whether the long-term benefits of retaining nuclear energy as a viable, non-carbon component of a diversified energy supply portfolio justify the investments needed to continue to move the technology forward while also addressing long-standing challenges related to waste management, financing, safety regulation, national security, and nonproliferation.

• Broadly speaking, we endorse the key strategic goals set out in the Bipartisan Policy Center’s 2012 report, Maintaining U.S. Leadership in Global Nuclear Energy, and in the report of the Blue Ribbon Commission on America’s Nuclear Future to guide policy makers on this issue…

• The industry and the U.S. Nuclear Regulatory Commission should continue efforts to strengthen nuclear plant safety and security, and provide the industry with regulatory certainty and uniform standards, particularly in light of lessons learned from Fukushima.

• The administration and Congress should act quickly to implement the recommendations of the Blue Ribbon Commission on America’s Nuclear Future (see text box on page 53) and adopt an effective, long-term strategy for managing and disposing of the nation’s spent nuclear fuel and high-level radioactive waste. As a first step, S. 3469, introduced in the 112th Congress by then Senator Jeff Bingaman (D-NM), should be reintroduced and passed.

• Historically, the United States has been a leader in nuclear technology research and commercialization. To extend this tradition and assure further innovation, the United States must continue to support research and development efforts within the nuclear industry, the national labs, and U.S. universities. Specifically, the Board recommends focusing future federal research, development, and deployment efforts on two core areas: reactor safety and small-scale reactors that may be better suited to the diversity of electricity markets and to the regulatory structures that currently exist in the United States. These small-scale reactors potentially could serve installations, complexes, campuses, and other institutional aggregations on a cost-effective basis…

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Alternative Transportation Fuels

Oil plays a critical role in the U.S. energy portfolio and in the broader economy, and it has been at the center of America’s energy security concerns for nearly a half-century. A large share of global oil supplies comes from regions or countries that are either unstable and/or conflict-prone. The U.S. transportation sector remains overwhelmingly dependent on oil, which leaves American consumers and businesses exposed to the fluctuations of the world oil market.25 This exposure exists even with expanded U.S. domestic oil production. In this context, the development of alternative transportation fuels has long been seen as a complement to fuel efficiency as well as a way to improve U.S. energy security and reduce pollution…

Given the potentially large energy security and environmental benefits that could be achieved by increasing fuel diversity in the transportation sector, we recommend continued federal support for R&D to improve fuel and vehicle technology and to address related infrastructure needs. Specifically we recommend the federal government focus its resources in four areas:

• The federal government, by itself or in combination with industry, should pursue sustained investment in research and development for transportation fuels, vehicles, and infrastructure to advance more efficient and cleaner energy consumption in the transportation sector.

• Local, state, and federal governments should continue and expand efforts to encourage early infrastructure investments for those alternative fuel–vehicle systems that offer a path to long-term viability, considering their lifecycle costs and long-term benefits.

• While we have diverse views regarding the Renewable Fuels Standard provisions for conventional renewable fuels, we uniformly believe the nation should continue to develop advanced renewable fuels, and we support the role that the Renewable Fuels Standard can play in promoting these fuels.

• We support longer-term Department of Defense procurement contracts, consistent with the fulfillment of its national security mission, for advanced biofuels and urge the Congress to authorize extended procurement contracts.

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Improve the Energy Productivity of the Economy

Electric Power Sector

Electric utilities play a unique role in improving energy productivity, because they can help drive energy efficiency on both sides of the electric meter. On the customer’s side of the meter, utilities are well-situated to spur the implementation of cost-effective energy efficiency measures across a variety of economic sectors, given their access to customers and consumption data, their technical expertise, and their access to capital. On the utility side of the meter, opportunities exist to improve efficiency in the production, transmission, and distribution of electricity. To capture these opportunities, we support several policies that can spur cost-effective actions. States and local utility boards should:

• Establish utility ratemaking policies that reward investments in cost-effective customer energy efficiency as a distributed resource and remove disincentives to these investments.

• Encourage all cost-effective energy efficiency through Energy Efficiency Resource Standards, incentive programs, and/or resource procurement planning and measure the effectiveness of these policies.

• Encourage the adoption of dynamic retail pricing of electricity and continue to evaluate the use of this option in the residential sector.

In addition, to enhance energy productivity:

• Congress and the U.S. Environmental Protection Agency should design environmental programs that encourage efficiency improvements (e.g., output-based emissions standards that account for both electricity and steam output).

• Congress, the Federal Energy Regulatory Commission, other relevant federal agencies, state public utility commissions, and local utility boards should encourage investment in new, more efficient transmission and distribution infrastructure.

Residential and Commercial Sectors

Residential and commercial buildings account for more than 40 percent of total U.S. energy consumption; despite large productivity gains over the last four decades, both sectors offer significant opportunities for further efficiency improvements.31 Residential energy consumption, for example, is lower today than it was in 1980 on a perhousehold basis, even though the average house size has increased and most households have many more electronic devices than they did a generation ago. Meanwhile, energy consumption per unit of commercial floor space has also declined by roughly 20 percent over the same time period…

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State legislatures should:

• Adopt the latest energy codes and upgrade continually state building standards for new buildings and major renovations, based on life-cycle cost effectiveness. State public utility commissions and local utility boards should:

• Promote demand-side efficiency with improved customer information (e.g., smart meters, dynamic pricing) and other innovative uses of customer information (e.g., comparing energy usage among peers).

• Support state agencies and contractors that administer building codes and standards through encouragement of partnerships with utilities.

Congress and the Executive Branch should:

• Continue to assign high priority to timely issuance of and upgrades to all its statutorily authorized performancebased efficiency standards for appliances, lighting, and equipment.

• Continually upgrade federal model building standards based on life-cycle cost-effectiveness.

• Support the creation of university-based energy efficiency centers.

• Promote energy performance labeling in both new and existing buildings through voluntary programs and/or by utilizing labels as a compliance mechanism for incentive programs.

• Improve and harmonize federal energy efficiency programs, including the Department of Energy appliance standards, the Department of Energy and the Environmental Protection Agency’s ENERGY STAR program, and the Federal Trade Commission’s Energy Guide Program…

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Industrial Sector

…As the economy recovers and business investment rebounds, there will be an important window for promoting investments that offer long-term energy savings in the industrial sector. To some extent, the effectiveness of various policy interventions depends on the timing and the current business environment in which they are applied. Thus, it is beneficial to have an array of policy tools to choose from to match current conditions and industry needs. Our recommendations include a variety of policies and approaches aimed at overcoming barriers to cost-effective industrial efficiency improvements:

• Congress, state public utility commissions, and local utility boards should create incentives and remove disincentives for utility promotion of cost-effective industrial efficiency on-site.

• State public utility commissions and local utility boards should explore the feasibility of including combined heat and power and waste-energy-based generation in state energy efficiency resource standards.

• The Department of Energy should accelerate the development and adoption of cost-effective DOE efficiency standards and establish cost-effective industrial standards for certain types of products (e.g., pumps and other relatively homogenous mass-produced equipment).

• State public utility commissions and local utility boards should create incentives for utilities to implement submetering at industrial and commercial facilities.

• State public utility commissions and local utility boards should support electric utility investment in cost-effective industrial efficiency through grants, loans, training, funding for audits/retrofits, and other programs.

• The Department of Energy, together with state public utility commissions and local utility boards should support utility-industrial partnerships, including dedicated staff to establish energy management best practices and to promote greater deployment of cost-effective efficiency technologies that deliver benefits to utilities and industry.

Transportation Sector

…For decades, the most important policy-driven improvements in vehicle efficiency have been the federal corporate average fuel economy (CAFE) standard. First enacted by Congress in 1975, CAFE standards were substantially increased in 2007; under current law, the average fuel economy requirement for new light-duty vehicles will increase gradually to a target level equivalent to 54.5 miles per gallon by 2025.37 The new requirements will also encourage innovative natural gas vehicles, electric vehicles, plug-in hybrid electric vehicles, and fuel-cell vehicles. According to U.S. government estimates, the new standards will reduce oil consumption by an estimated 2.2 million barrels per day by 2025, which is more oil than the United States imports in net from any one member of the Organization of the Petroleum Exporting Countries (OPEC).38 To further reduce oil consumption and reduce the U.S. economy’s exposure to volatile world oil prices, however, these vehicle efficiency improvements will have to be paired with greater efforts to reduce vehicle miles traveled (VMT) and diversify transportation energy sources. To that end, and in conjunction with efforts to develop and commercialize alternative transportation fuels (discussed earlier):

• Congress, the U.S. Department of Transportation, states, and localities should encourage the adoption of costeffective policies aimed at reducing energy demand for transportation services and should make full use of existing authorities to ensure continuous improvement in fuel economy for new vehicles under, for example, the bipartisan 2007 Energy Independence and Security Act.

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Accelerating Energy Innovation

Technological innovation holds the key to meeting the energy challenges of the 21st century, therefore accelerating the pace of innovation—from early research and development through demonstration and commercialization—must be seen as a central goal of U.S. energy policy. Unfortunately, our nation starts from a position of deficit: measured against other sectors of the economy and other countries, several studies find that the United States is already experiencing a substantial shortfall in overall investments in energy innovation—both public and private—relative to the scale and importance of the national interests at stake.39 Addressing this shortfall is thus one of the most urgent tasks confronting policy makers today; given the current fiscal and economic climate, it is also one of the most difficult. Accordingly, our recommendations for accelerating energy innovation focus on ensuring that federal investments are not only as effective and efficient as possible, but also oriented to promoting private innovation.

• Congress should require a regular, rigorous retrospective review of the Department of Energy’s research, development, and demonstration energy portfolio conducted by an outside body (e.g., the National Academy of Sciences) that includes examining the effectiveness and management of the Department of Energy’s portfolio while also providing options to maximize the benefits from these federally funded programs.

• Congress should significantly increase federal investments in basic and applied energy R&D.

• Congress and federal agencies should, when appropriate, consider mechanisms to leverage public-sector resources to demonstrate and deploy energy technologies.

• Congress should reauthorize the America COMPETES Act, important provisions of which are set to expire at the end of FY2013.

• As a component of the government-wide Quadrennial Energy Review, the Department of Energy should undertake a regular review of its technology programs (a “Quadrennial Technology Review”) to rebalance its energy R&D portfolio and guide budget priorities in light of energy market conditions, technology advances, and emerging national priorities.

• The Department of Energy should reform elements of its institutional structure to prioritize energy innovation. While it may be too early to conduct a robust analysis of the relative effectiveness of ARPA-E (Advanced Research Projects Agency-energy) and other new energy programs and entities, we conclude that many of the organization and management characteristics they are piloting could serve as broad best practices for driving innovation across the department.

• The Department of Energy should take additional action to address intellectual property issues in its funding and collaboration processes.

• The section 1703 Department of Energy loan guarantee program should be maintained and reformed.

• The Department of Defense, in direct support of its national security missions, and other federal departments and agencies should strive for continued improvement in aligning their energy innovation activities with broader national energy goals.

• The Department of the Treasury, the Department of Energy, and Congress should assess the effectiveness of the tax code in spurring private-sector energy innovation.

Federal Interventions in Energy Markets

…we believe the long-term goal should be to phase out all energy-specific tax xpenditure subsidies. Where tax expenditures or similar mechanisms are the best or only available option to address market failures, they should be enacted for only so long as necessary to meet their intended goals with a clear sunset date. Finally, once enacted, these policies should be reviewed periodically and ended if not effective. While we recognize there are numerous debates regarding whether specific tax expenditures constitute a subsidy to a particular industry, these debates are beyond the scope of this report. Rather, we urge Congress to closely consider the full range of tax energy expenditures with the goal of ensuring that mature fuels and technologies compete with one another on a level playing field. Specifically, we recommend:

• As part of broad, comprehensive tax reform, Congress should review the full range of tax energy expenditures and develop a reasonable phase-out plan for those tax expenditures that constitute subsidies for mature fuels and technologies.

With respect to the renewable energy production tax credit in particular, we recommend:

• Congress should extend the renewable energy production tax credit, initially at its current level and develop a specific path to achieve a complete phase-out by the end of 2016.

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Conclusion: Continuing the Bipartisan Tradition in Energy Policy Today

The United States finds itself—thanks in part to technological progress and policy interventions of the last decade—in a stronger position to shape its own energy destiny and with a greater sense of energy security than it has enjoyed for some time. Arguably, the state of U.S. domestic energy sectors, energy productivity, and energy security is the best it has been in many decades. But the country also confronts an array of daunting energy challenges. Tackling these challenges in the midst of a slow economic recovery while addressing an unsustainable federal deficit creates difficult but necessary policy choices—choices that are unlikely to be resolved without the same willingness to work through differences, reconcile regional issues, and reach across political party lines that characterized earlier legislative successes.

Fortunately, Congress has a long history of taking bipartisan action to promote broadly held energy goals. For example, appliance standards were first authorized in 1975 by the Energy Policy and Conservation Act.46 They have since been codified and updated multiple times, each time with bipartisan support. The 2005 Energy Policy Act was passed by a Republican-controlled Congress, while the 2007 Energy Independence and Security Act was passed by a Democratic-controlled Congress; both pieces of legislation were signed by President George W. Bush. As recently as December 2012, Congress passed the American Energy Manufacturing Technical Corrections Act, an energy efficiency bill that amends specific appliance efficiency standards and bolsters industrial and federal government efficiency efforts, with overwhelming bipartisan support.

If the United States can draw on this bipartisan tradition to forge a long-term vision and strategic approach to wisely using its energy resources and technical advantages, we are confident that the goal of achieving a diversified and balanced energy portfolio—one that provides energy security, economic prosperity, and sustainable environmental quality—is well within reach.

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