3 Decentralizing Trends: Empowering State Capitals, Consumers and the Capital Markets

Even as uncertainties loom, the outlook for clean energy technologies and business models is bright. We can pin this optimism in the concrete: Three decentralizing trends are empowering state capitals, consumers, and the capital markets to lead the way on climate action — and, in turn, those trends are favorably transforming the opportunity landscape for clean energy technologies and business models.

The trends respond to changes in politics, technology, and the availability of data and modeling for decision making. And while no trend or change appeared overnight, each is sticky — and each will shape the coming year in significant ways for those with interest in, or adjacent, to climate or clean energy law, technology, or markets.

The federal government’s retreat on climate policy has invigorated state government leadership.

Across the U.S., governors are now pushing for a new physics of climate policy: What happens in Washington — should stay in Washington. So far, they are succeeding.

Over the past year, that has meant state capitals bringing litigation against federal government rollbacks of climate policy. Those efforts are working, and, over the next year, they will continue to either shrink or stall the impact of the new direction in Washington, D.C.

But state government leadership did not just play defense in 2017. The push forward is likely to continue next year as well. Specifically, more states are considering economy-wide approaches to carbon regulation, such as cap and trade. And states with programs already in place are stepping up ambition. The focus on reducing pollution is broadening in scope: For example, states are looking at supply chains, rather than just sources and end-products. This broader scope means more opportunity for innovation — for sustainable solutions including clean energy technologies and business models.

The electricity sector’s center of gravity has not finished shifting — from central station to communities, corporates, and consumers.

Innovation in hardware, software, and business models keeps placing power in the hands of end users. For 2018, that means the electricity sector will remain in a state of flux. The win will go to the proactive.

No one knows exactly where the sector is headed, but it is moving and past is prologue. Rooftop solar was an early disrupter in the power-plant centric electricity sector. We know from that experience: Panels on roofs were just the tip of the iceberg. The rapid uptake of that technology empowered consumers to self-generate electricity and redefined their relationship to utilities and the grid. The decentralized decisions cascaded through the system and rewired the economics of electric power.

In the coming year, new technologies will build on that disruption. Distributed energy resources like advanced storage and microgrids — as well as growingly intelligent power use that enable new levels of energy efficiency — will continue to propel the shift to communities, corporates, and consumers.

Together, these changes challenge existing regulatory frameworks and raise new or different questions around risks like cybersecurity. But these changes also signal new opportunity for sustainable solutions including clean energy technologies and business models.

Capital markets have moved off the sidelines on climate.

Climate risk — part of measuring and managing of material environmental, social, and governance (ESG) risk more broadly — is becoming a more integrated and important consideration for investors.

In part, the increasing attention around climate and ESG risk is a product of better understanding. Predictive analyses based on growingly sophisticated and specific models are allowing investors to translate a megatrend into portfolio-level decision making. In part, the increasing attention is being spurred by leading business and economic policy voices who are convinced that not paying attention to these risks comes at society’s own peril. For them, ignoring these risks is about more than losing out on basis points — it could deliver break-the-bank impacts.

At some level, this transformation puts climate policy in the hands of millions of investors — rather than a few handfuls of elected officials, central planners, or sustainability officers. What mainstream investors, led in part by millennials, believe about climate could move billions toward climate solutions and away from climate aggravators. Smart money is betting that is the direction the capital is moving in the coming year and beyond.

Decentralization can be destabilizing.

In the case of these trends — which are empowering state capitals, consumers, and the capital markets to lead the way on climate action — it definitely is: The status quo way in which we power our economy continues to be destabilized, as a broader set of empowered actors usher in a new equilibrium.

To be sure, currents running counter to these three decentralizing trends exist. Washington could create roadblocks for renewables through decisions on matters like trade. Central-station generators could slow distributed energy resources by lobbying for unhelpful rate structures. Capital markets transformation could be limited by data constraints (and pressure from incumbent industries). But these three trends will not be easily turned away. They will persist. They will shape 2018. And, for clean energy technologies and business models, that is good news.

Lead image credit: CC0 Creative Commons | Pixabay

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Ali A. Zaidi is Of Counsel at Morrison & Foerster LLP. His law practice is focused on helping clients navigate complex issues related to climate, energy, and environmental law, especially at the intersection of policy, technology, and markets. Before private practice, Mr. Zaidi served the Obama Administration for eight years as an advisor on economic and environmental policy, most recently as the White House Office of Management and Budget Associate Director for Natural Resources, Energy, and Science and before that as the White House Domestic Policy Council Deputy Director for Energy Policy. In addition to his work at Morrison & Foerster LLP, Mr. Zaidi serves as Precourt Energy Scholar at Stanford University and non-resident Fellow at Columbia University.

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