The Conflict at the Heart of U.S. Energy Policy: Domestic Extraction vs. Cheap Energy

Imagine you're out to dinner with your spouse. When the waiter comes, she says, "I'm trying to decide between the house salad and the deep-fried twinkie. Which would you recommend?" You might think many things, but "she sure knows what she wants" is not one of them.

Now shift to Washington D.C., where we are simultaneously discussing how much we should subsidize domestic fuel production and whether or not we can afford to enact (or even maintain) incentives for clean technologies to wean us off fossil fuel dependence. The stakes are higher than the silly dinner example, but the conclusion is the same.

What do we want from our energy policy? Specifically, would we prefer to accelerate the rate of extraction of (raw) domestic energy resources or to maximize supply of useful energy to consumers at the lowest possible price?

We have it within our power to do one of those well, but we cannot do both. Yet that's exactly what our energy policy is trying to do.

This conflict is particularly prevalent in countries that have extensive natural resources and an energy-intensive economy. With only the former (see: Algeria, and increasingly Russia), it is in the national self-interest to enhance the economics of resource extraction. With only the latter (see: Japan), it is in the national self-interest to embrace efficiency and conservation. In those countries with both, energy policy tends to be self-conflicting.

Interestingly, we are in the midst of a transition from a net energy exporter to a net energy importer, suggesting that we should be transitioning away from our conflicted policies of yore. But the conflict at the heart of our policy has proven hard to kill.

Take oil: we haven't been a net oil exporter since the 1970s, and yet we remain unable to shift to an oil policy predicated on conservation. President Obama's recent plan to reduce demand for foreign oil manages to enshrine the conflict in just one word. (Imagine how different -- and more politically difficult -- an energy policy would look that had the exact same objective but deleted the word "foreign".)

This conflict leads to a lot of strange behavior and inefficient deployment of resources. Cost-plus utility rates have given the U.S. electric sector an economic disincentive to conserve. The historic inefficiency of the U.S. power sector is the result. Yet those same utilities are often forced to oversee efficiency programs (e.g., facilitating installation of efficient appliances) and/or meet renewable energy mandates in the name of cost and pollution reduction. These programs give them a political incentive to green-up their operations.

Given that conflict, the only actions that would satisfy utility shareholders and regulators alike would be a technology that reduces CO2 and is really expensive. That explains why we keep talking about coal with CCS. It's as bland as the house salad but as fattening as the deep-fried twinkie; we won't stop talking about it until we've figured out what we want.

Our clean energy policies are no more coherent. Encouraging power from wind because "we're the Saudi Arabia of wind" makes no more sense than passing immigration reform because we're the Saudi Arabia of undocumented Mexicans -- but somehow, that actually counts as a serious policy argument. No one should care if we are leaving untapped wind blowing across the plains; we should care only if our energy supplies are unreliable or too expensive. Yet even our clean energy incentives focus overwhelmingly on maximizing the use of specific resources.

To see the problems this raises, suppose that you are a cleantech investor considering two competing investments. Both require no combustion of fossil fuels and both displace processes that would otherwise consume equivalent amounts of fossil fuels. Both have equivalent environmental, energy security, economic, and national security benefits. An energy policy based on maximizing the reliability of our energy system at the minimum total cost would incentivize both equally. Ours doesn't:

1. Suppose that both systems are biomass plants but one generates heat and power while the other only generates power. With the noteworthy exception of North Carolina's thermal REC program, incentives are applied solely to power generation. The more fuel-efficient CHP plant receives less incentive per unit of social benefit than the power-only facility.


2. Suppose that one project is a wind farm and the other is a solar PV array. Solar incentives dwarf wind incentives, because our clean energy policies are essentially Marxist ("to each according to his needs"). That's not unique to clean energy -- the (much larger) incentives paid to dirty energy sources are doled out according to lobbying budget as well -- but it skews cleantech investment dollars away from the most economic investments.


3. Suppose one project is a new biomass plant and the other is a boost to the fuel efficiency of an existing biomass-fueled industrial facility. Both deliver equivalent social benefits; only the second has the added benefit of reducing the rate of biomass consumption. Yet only the first would typically qualify for renewable incentives, given their resource bias.

The result of all this? Massive confusion in the business and regulatory realm. Who knows how much in legal bills as developers and regulators try to figure out whether a given project comports with conflicting regulatory mandates. And, even as the global cleantech industry grows, capital deployed largely outside the U.S.

Much political discussion is focused on whether or not to increase cleantech subsidies, but that misses the point. The problem is not whether to incentivize clean energy but how. Do we want to accelerate rates of resource consumption or do we want to increase America's access to cost-effective, reliable energy? Until we answer that question, we're pondering twinkies and salads.