Phase II of Renewable Energy in America

National Policy Conference

November 28-29

Cannon Caucus Room, Washington, DC

American Council On Renewable Energy (ACORE)

It’s quite a difficult act to follow out from- from Andy’s energetic tour de force, but I shall try.  In particular-- not only because I was excited he plugged my book, which was very nice of him-- but because I think he had some of the key themes.  We really are at an energy crossroads and the 10 to 15 years that he talked about are really what we have to make the decisions that will shape the 21st century when it comes to energy, environment and crafting the global economy; the legacy we’re going to leave for our children and grandchildren.  We know that energy infrastructure can be very long-lived and if we make the wrong choices building more and more filthy pulverized coal plants for example, we are likely to leave a legacy that lasts 50, 60 years and the carbon emitted from those plants stays in the atmosphere a century or longer, so the choices we make here in America, in China, in India, in South Africa, the developing giants, the public policy choices that are made here in the chambers of the people will have extraordinary consequences, and the role that you play as innovators, as folks who are pushing for this change will make an extraordinary impact.  That’s why I’m excited to be here and I want to argue to you in my comments to you today that the clean energy revolution is already well under way.  Now, before I do and look to the future with that clean energy revolution, I thought I would take a step back and look to the past.  Six decades ago Mahatma Gandhi asked a question that’s salient to our conversation today.  That was a moment when India was a recently independent country, the rising Asian giant.  Britain of course had been the great colonial power of the previous few hundred years.  He asked, “How many planets-- How many planets will it take if India follows the same reckless path of industrialism that Britain has taken that has already consumed over half the world’s resources?  How many planets?”  If we were to transpose that question to the great concerns of today we might say, “How many planets will it take if China industrializes, urbanizes, motorizes along the same path that America has taken?”  If every Chinese jumps into an SUV, gas guzzler of the sort that many Americans like, or if China follows the path of carbon intensive path that America has blazed a trail on, what will be the consequences for geopolitics, for the price of energy, for the environmental impacts, for the human health consequences, for the world?  There’s no great secret.  Just open the newspaper any given day.  You’ll see these concerns splashed on the front pages.  I argue that the needlessly inefficient and dirty ways that we use energy today are fundamentally unsustainable.  In fact, the reason we need to pursue this energy crossroads with much more vigor, the energy system that has taken us through the 20th century has three pillars of instability.  The first, which doesn’t get a lot of attention that I know many of you are working on is the link between energy and poverty.  1.6 billion on earth perhaps have no access to modern energy at all; no clean fuels, no electricity, and in many of these places people in this room I’m delighted to know are working on bringing distributed clean, renewable resources in a more economical fashion than the grid that will never reach them.  That energy poverty problem is one of the pillars of instability and how the current energy paradigm, the centralized fossil paradigm, a <inaudible> approach that’s quite brittle and has let us down in many ways; one of the pillars of instability.  The second is the link between energy and geopolitics.  Now, the arrival of the Asian giants on the global oil markets is simply the most obvious manifestation of this; the rise of oil process to close to $100.  One of the main factors has been the extra consumption that’s been coming on the markets as China, through all of its history has been energy independent, but in the last 10 to 15 years of course has become such a large consumer of oil as it motorizes, that it’s become an important force on the world markets.  What are the consequences when two thirds of the world’s remaining barrels of conventional oil are in the hands of five countries in the Persian Gulf; Saudi Arabia with a 25 percent share and it’s four immediate neighbors with about 10 percent share each.  Every official forecast, including from the DOE argues that the OPEC share in particular, the Saudi and Middle East OPEC share, will increase dramatically in the next 10 to 20 years thereby increasing the risk of economic shock, geopolitical shock, or potential conflict over those barrels and the impact on foreign policy that this has need not be overstated that in this hall.  And the final pillar of instability is well known to everyone in this room; the link between energy and environment.  At the simple, basic human level local pollution, smog, local emissions are among the leading preventable causes of death on earth, and in the longer term of course the great challenge that we’re facing in the 21st century driven in large part by emissions of dirty energy, is climate change, and this is going to be one of the important drivers of change; trying to come to grips with, as Andy put it again, “climbing the mountain,” a difficult mountain nonetheless.  These are the drivers of change.  I don’t want you to think I’m a pessimist because I promised you a clean energy revolution.  I’ve outlined three very painful and difficult challenges.  I’m actually an optimist, and the reason is because having spent over a decade looking at this topic at The Economist writing about it, it has come to my-- I’ve come to the view that in fact there are three mega trends that underpin this clean energy revolution that I’m talking about.  First, the liberalization of energy markets worldwide.  What do I mean by that?  It’s not simply a free market guy from a free market magazine trumpeting the virtues of competition.  Now, of course obviously writing as I do for the Economist, I do think competition is better than the alternative, but that’s not why I make this case.  The fact that over the last 20 years we have moved, in fits and starts to be sure, with horrible blunders like the Californian experience to words, a model of energy that moves away from oligopolies and cartels to words where competitive markets away from a heavy hand of a single provider approach to more competitive markets.  The reason this matters is because it’s the essential enabler of innovation in an industry that has historically been the least innovative industry on earth.  That’s a big statement I made, so let me back it up with a statistic.  If you look at the US electricity industry, just to take one slice of the energy pie, it’s an enormous enterprise of course.  I mean, in revenue terms it’s bigger than cellular telephony and long distance telephony combined.  In terms of modern life, we couldn’t even have it without electricity.  The grid electrification, the National Academy of Engineering voted it as the leading accomplishment of the 20th century; more than television or space travel or the internet or anything else.  But, if you think about the electricity business in America, it reinvests less than one half of one percent of its revenues back into research and development.  That figure has been true for the last few decades; less than one half of one percent into R&D.  If you look at any vaguely innovative industry, whether it’s-- even automotive if you look at-- never mind pharmaceuticals or biotech or some of the high tech industries, you’ll see 5, 10, even 20 percent being rolled back from revenues into research and development, and that one half of one percent figure for the last three decades come from EPRY [ph?], not me or an outside consultant; it comes from the industry itself.  That explains why we’re stuck with a fleet of clunkers.  Thankfully, you know, 55 percent of our power comes from coal, the fleet that’s on average 30 years old, runs at pretty low efficiency.  We can do much better than this.  If you think about the digital revolution that has transformed so many sectors of the American economy, we’ve seen extraordinary changes, an incentive for innovators, the two guys in the garage that came up with Hewlett-Packard and helped bring about a digital revolution.  Where are they in clean energy?  They may be in this room.  Are they getting the rewards in the marketplace?  In the old way that we thought about regulating the industry and in the kinds of ways a business organized itself, whether it was, you know, big auto or big oil or the way that we regulated electricity, it didn’t reward innovation.  On the contrary, companies were rewarded to just keep <inaudible> over; put a bit more duct tape on the old coal plant and get waivers.  That’s the wrong way to think about it and I’m delighted to see that we’re finally getting to encourage innovators, entrepreneurs, venture capitalists coming into this clean tech space.  That’s a powerful mega train for the future.  The second has to do with a new kind of environmentalism, a much smarter approach to environmental thinking.  Back in the 70s we had of course the first modern way of environmentalism in the US, the Clean Air, Clean Water Act, and that era had its successes, to be sure.  The air is cleaner than it was back in 1970 or the water is cleaner than when the Cuyahoga River spontaneously burst into flames because of how filthy it was; the river in Cleveland, but that approach was essentially a very top down command of control approach and it had a very much “us versus them” mentality.  It was corporations versus the environment as the environmental movement and often a partisan approach-- And as one of the founders of NRDC put it to me, he said, “You know, the approach we took was mandate, regulate, litigate, because you can’t trust the bastards.”  Well, that might have worked when you’re trying to deal with the first 50 percent of a particular pollutant, but when you’re trying to get the last five percent at the margin it can be very expensive.  It calls for more sophisticated tools whether it’s in technology or whether it’s in the tools of economics like cost benefit analyses and in particular what we’re seeing across the world, in developing countries as well as in developed countries is a smarter approach to economics; instruments like whether it’s pollution taxes in Europe, whether it’s trading systems in America where we pioneered the acid rain training system, the S02 training system which is perhaps the most successful environmental initiative of the last 20 years and is being copied widely.  We’re seeing a much smarter, more sophisticated use of economics and the tools and seeing business as a potential part of the solution and understanding that markets can be a friend of the environment and of environmentalism.  I think it’s a powerful tool and I see this in Beijing and Bogotá as much as I see it in Boston or in Berkeley. This is a new way to think about the environment, both amongst policy makers as well as environmentalists, and that’s a big mega trend.  The final mega trend; we’re entering an area of technological innovation that we haven’t seen in energy since the golden age over 100 years ago with Tesla, Edison, Henry Ford, when these giants of another era helped shape the infrastructure, the business models, the technologies for cars, for energy, that have lasted a century.  We <inaudible> the industry settled into old ways of doing things.  Internal combustion engine and gasoline, symbiotic twins haven’t essentially changed in almost 100 years.  I’m a mechanical engineer from MIT and a lot of the things I studied my father, who himself is a mechanical engineer from India, he studied exactly the same things, and I’m wondering, “Nothing’s changed,” or very little has changed in terms of that aspect of technology.  Well, this is an era of disruptive innovation that we’re entering now; a new golden age of innovation that’s happening in part because of the market forces I’ve talked about, new ways of thinking, but as well of course we’re seeing extraordinary new technologies, we’re seeing a convergence of material science, lightweight composites, advanced software and hardware of course, the computing revolution; all the changes that have brought us to a 21st century economy in many aspects of American Life.  Cell phones to internet to peer to peer networking to distributing computing, but they’re beginning to come to energy too; the smart grid, smart metering, intelligent distributed power.  Clean energy is coming to the fore as a lot of these technologies converge.  Ultimately I argue in my new book that we will see, as cars get smarter and electrify which is what’s beginning to happen in dramatic fashion, we see vehicle to grid coming along, we will see a convergence of these two great industries that is automobiles and electricity over time, and those coal plants that people think of as enormous assets, could very easily become stranded the way that a lot of fixed assets in the telephony business became stranded, or servers.  Cisco showed in one example after another from Silicon Valley or Africa where villages have leapfrogged ahead to cell phones without even needing to wait for land lines.  It’s that kind of disruptive innovation that’s coming from those of you in this room, from Bangalore, from Shanghai.  We’re seeing it around the world from Brazil with it’s work on renewable fuels for transport.  We’re seeing an era or open global innovation.  One of the fundamental paradigm shifts in terms of thinking about how change happens.  You’re living in this era; clean energy is right at the forefront.  So, will this happen magically because of these mega trends?  It won’t be quite so easy.  I want to leave you with one idea in terms of what further needs to happen.  These are powerful trends.  The change is coming, but I do think fundamentally there’s still work to be done on public policy.  The solutions will come from the marketplace, from innovators, from the bottom up as they have always done, but there is work to be done here and this is a policy conference.  I want to emphasize that we need to level the energy playing field.  Fossil fuels get a free ride in the marketplace and until we pay honest prices for energy, clean energy will face a difficult fight.  Now, what do I mean by this?  We need to have a dramatic re-think on eliminating subsidies.  This is how this game works.  You all know how this works.  The low energy playing field is tilted in a couple of ways.  Dirty energy, be that oil or coal or other fossil based energies get extraordinary amounts of distortions in the tax code subsidies and other benefits that the incumbents can enjoy.  Equally on the other hand the escape, the kind of externalities taxation-- and I was delighted that Andy mentioned externalities-- burning dirty fuels harms the health of our children’s life.  It contributes to environmental harm like global warming, and of course at least part of the cost of keeping troops overseas in the Middle East must be attributed to our addiction to oil as President Bush himself has coined that phrase.  Now, if you take this in the round, there’s a strong case for imposing a carbon price.  Now there’s a discussion going on about cap and trade.  I personally advocate a revenue neutral carbon tax where every penny is returned to every household as a refund, so that nobody can say this makes American poor, but until we level the playing field through some difficult choices like this, that is honest pricing; subsidy reform on one hand as well as externalities taxes, I don’t think clean energy will be able to compete effectively in a manner that overturns the current paradigm.  You’ll be nibbling around the edges.  The way that Andy said, “Don’t marginalize this,”-- But why is it a marginal game?  Because when you get into something like the energy bill of 2005 and we looked-- The best analysis that I’ve seen of this showed tens of billions of dollars were given away in effect by that legislation.  John McCain called it the “Leave no lobbyist behind bill.”  We remember that, right?  I know many of you were following that very closely and involved with that.  Well, those folks that I talked to in the renewable lobby, energy efficiency, clean energy, clean tech space were lobbying for tax credits, production credits, to get a piece of the pie, right?  That’s the game in Washington.  Here’s the problem.  You got some of that, you got some of those crumbs off the table, but that’s what they are.  They’re crumbs off the table.  When you looked at the roughly 80 billion dollars or so that was given away of taxpayer money under that very backward looking bill, the lion’s share did not go to you.  It went to oil and gas, it went to nuclear, just like it always does.  The first six nuclear power plants to be built are going to get billions of dollars in taxpayer subsidy which is an absolute disgrace in my view, that a well capitalized, mature industry should get a penny of support. So what happened?  The folks, the good hearted, earnest folks who lobbied to get some subsidies for their particular pet projects in clean energy ended up acting as a fig leaf for the shameful giveaway to the established powers.  That’s what happens when you enter the pork barrel race; the big pigs get a bigger share of what’s in the trough.  That’s why I argue you have to do the harder thing.  Don’t argue for subsidies; argue for a level playing field, for an end to subsidies but also coupled with proper carbon pricing, some sort of externalities approach.  I can live with a cap and trade if it isn’t a giveaway, if it’s properly auctioned.  A better way of course, most economists would agree, would be a carbon tax that’s revenue neutral, give back refund checks, make it politically popular.  In closing, I’ve given some bitter medicine.  You can also tell I’m not running for any office; I’m arguing for taxes, right?  But nevertheless, I think if we do that, if we level the energy playing field, this clean energy revolution will take off and we can finally answer Mahatma Gandhi on his great question.  How many planets?  We have only one planet.  We have to find a way to reconcile the legitimate aspirations for economic growth and poverty alleviation in developing countries, but the equally legitimate aspirations to preserve the planet for our grandchildren that many of us in the developed world feel and of course to boost clean energy.  How do we reconcile that?  The only way to do that is if we tap the one natural resource that we still have in infinite quantity and that’s human ingenuity.  Thanks very much.