Economics Senior Seminar with Dr. Michael Cook

Economics of Energy Policy in the United StatesJames Milam

15Spring

1

I. Introduction

The Energy Information Administration (EIA) estimated that energy expenditures made

up approximately 8.3% of the United States’ Gross Domestic Product (GDP) in 2010. (Energy

Information Administration (AEO2014)) This amounts to about 1.5 trillion dollars annually.

According to the International Energy Agency (IEA), energy consumption in the United States

has increased over the past 18 years (from 1990-2008) by 20%. (Energy Information

Administration (AEO2014)) This number accounts for population growth of 22% and a decrease

in energy per capita of 2% over the same time period as above. This trend, recorded by the IEA,

suggests that the increase in the United States’ population due to migration will outweigh current

conservation and renewable technology initiatives that are being implemented. America’s per

capita energy use is four times the annual per capita energy use average for the world (87,216

kWh in the U.S. compared to 21,283 kWh for the world).

The demand for energy in the United States is constantly fluctuating, due to population

growth, energy conservation policies, technological innovation, changes in income, lifestyle

changes, and changes in citizens’ tastes and preferences. A lot of outside variables can affect a

person’s energy use and conservation habits. Sometimes energy use can be related to age due to

increased awareness of environmental issues like greenhouse gas emissions (GHGs). Another

outside factor that could affect energy use is rural-urban migration. Some trends predict more

densely populated urban areas over the next few decades. This suggests more utilization of

public transportation and other conservation efforts. The leading resources used in power

generation and consumption referenced above are coal, natural gas, and crude oil. (Energy

Information Administration (AEO2014)) Therefore as developing nations like China, India, and

places in the Middle East develop and demand more energy; the finite amount of world resources

2

will become scarcer prompting the need to incentivize investments in renewable energy

generation, power conservation, and efficiency in order to meet a growing world demand. The

paper will predict the future demand for energy in the United States by discussing changes in

income, future prices of related substitute and compliment goods, and variations in tastes and

preferences.

Meeting the current demand for energy depends on a supply with an uncertain future. The

uncertain future is a result of an aging electrical grid and exhaustion of nonrenewable natural

resources. The electrical grid will require a lot of construction and maintenance costs in order to

maintain effective operation over the next twenty-five years. Even though new techniques for oil

and natural gas extraction like hydraulic fracturing have given the United States access to new

fossil fuel reserves, the fact is that the United States is burning these fuels at a rate that is

impossible to sustain without critically depleting complimentary resource inputs used to generate

electricity. This paper will examine the current supply of energy and predict the future supply of

energy by examining the amount of input resources available, the current and future states of

energy production technology, and the volume of producers in the market.

Once this paper examines the depleting supply of and the changing demand for energy in

the coming decades, it will make predictions about the future price of energy and the

corresponding effects on the United States economy. In addition to effects of future prices, the

paper will discuss alternative methods of energy generation like renewables. Current renewable

technologies are seemingly good solutions to the potential problems outlined above. However,

renewable technologies are limited by inefficiencies, high costs relative to traditional forms of

energy generation, and geographical location. This paper will examine some alternative

electricity generation options for potential investors, by looking into projected revenues and

3

potential costs associated with investing in large-scale renewable energy generation projects. In

addition to renewable energy generation, this problem is also being solved by cutting the energy

use per capita in the U.S. Therefore insight on profitability, costs, and benefits of compliment

and substitute goods for improved energy efficiency and conservation efforts will also be

discussed as a viable option.

Next, the paper will discuss current tax modifications and subsidies available that are

already encouraging the use of substitute forms of energy generation and more efficient

complimentary goods. Electrical generation is typically not bounded by government jurisdiction.

Local, State, and Federal governments all produce environmental mandates that impact

electricity generation, transportation, and residential energy consumption making policies very

complicated. Deadweight losses and externalities of past and existing policies will be

investigated in order to gauge the value of a new policy for the energy industry to encourage

development of the energy generation industry. This paper will map the present and future

demand for and supply of energy to predict future prices. It will also examine current tax and

subsidy incentive policies to recommend constructive new policies for government

implementation to correct and foster healthy expansion of the United States energy industry. The

new policies will not only include renewable energy generation as a substitute good, but also

innovative ways of implementing more energy efficient manufactured goods as complimentary

contributions to better conservation practices.

II. Demand for Energy

Changing and Increasing Energy Demands:

Over the past century average energy consumption in the United States has changed as

we have discovered substitute input sources for energy generation and as compliment goods

4

using generated electricity have changed. The EIA has tracked energy consumption and

separated trends by energy generation method or fossil fuel type. This can explain some

fundamental energy habits of U.S. citizens.

For example, starting in 1875 coal was the king energy provider, driving the

transportation and industry sectors. It was not until after World War II, that consumption of coal

generated energy, fell below two new substitutes: petroleum and natural gas generated

electricity. Rising labor costs and

new costly safety standards for

coal recovery weakened

production. This fact paired with a

discovered abundance of oil and

natural gas led to lower power

prices, making the substitute goods

more cost effective and therefore

the new energy generation input of choice. Particularly in the

transportation sector, petroleum and natural gas served as a

much cheaper substitute for coal steam engines. Due to the high probability of profitability,

petroleum and natural gas consumption skyrocketed. This new substitute energy generation input

caused railroads to justify and absorb the capital costs associated with transitioning to diesel

locomotives, and incentivized companies to use trucking fleets to transport goods. These types of

changes required capital investments from both private investors and even the federal

government. The justifications for these changes were new safety standards from the

Figure 1: EIA, February 9, 2011.

5

government, higher labor costs, and lower cost and better performance from substitute goods.

Even so, coal is still a main player for utility type power generation today.

The input goods demanded used in energy generation are heavily affected by pricing,

costs of labor, and environmental externalities. Just before 2008, the price of crude oil peaked

and new environmental concerns surrounding greenhouse gas emissions intensified. New

concerns about environmental externalities going unaccounted for instigated new conservation

laws, like efficiency of newly manufactured cars, and the “Energy Independence and Security

Act of 2007.” This act called for a reduction in energy intensity among government agencies by

3% each year (base year 2003) or 30% by 2015. (EPA.gov) Conservation efforts are playing a

larger role in the United States than ever before. Certain private companies are unionizing to

support high-performance or high efficiency commercial buildings and many other initiatives.

Current Market Trends

According to the Annual Energy Outlook of 2014, the average energy demanded per

capita is set to decrease over the next 25 years. This decrease is justified in part, “by gains in

appliance efficiency, a shift in

production from cooler to warmer

regions, and an increase in vehicle

efficiency standards, combined with

modest growth in travel per licensed

driver.” (AEO 2014)

Appliance efficiency will increase

over time as consumers demand

complimentary goods that consume

6

less power. This shift in tastes and preferences among consumers is largely due to generational

changes. Studies show that younger generations, on average make decisions based on a healthier

environment, more than older generations. Social scientists expect this trend to continue into the

next 25 years, incentivizing the manufacturing of more energy efficient compliments to

electricity. Another factor driving the demand for higher efficiency is increased electricity costs.

The average cost for a kWh of electricity is 10.14 cents in the United States. This price of power

is expected to grow in the coming decades, once again giving consumers more reason to use less

power and demand more energy efficient products.

Projected Future Demand for Energy in the United States:

The graph to the right is provided by

the EIA through the 2014 AEO. It shows

that energy use increases by about 15

quadrillion btus over the next quarter

century. This is a 0.4% annual growth. The

largest increase in energy demanded is

projected to be in the industrial sector,

which accounts for 7.8 out of 15 quadrillion

btu increase in the model. This increase is made possible thanks to an increased use of natural

gas, a cheaper substitute input for energy generation, and rising transportation costs

(complimentary good).

Commercial energy use accounts for about one-fifth of the projected increase in demand

for energy. Even though the EPA is and will continue to pass clean energy mandates and

electrical companies will increase energy efficiency standards, it will not be enough to halt the

7

increasing quantity of energy demanded. This sector will still see an increase of 3.3 quadrillion

btu’s by the year 2040. In order to reach this conclusion, the model factors in a 1.0% annual

growth in commercial floor space within the United States economy. It also takes into account a

0.4% annual decrease in commercial energy intensity (Energy use per square foot), due to

increased production of energy efficient complimentary appliances through 2040. By subtracting

0.4% from 1.0% the model predicts that energy demanded will increase by 0.6% annually.

Finally the residential and transportation energy demanded remains the same. This is

because immigration and population growth will cancel out the fall in energy demanded due to

more efficient appliances and reduced energy use for space heating in homes and apartment

complexes. Also, conservation mandates like more fuel-efficient cars and the more frequent use

of public transportation will be cancelled out. The increase in number of licensed drivers and

amount of overall people in the United States will reduce the results of the initiatives above to

just a 1 quadrillion btu decrease over a 25 year span.

Increased Demand Incentivizes New Energy Generation Capabilities:

With an increased energy demand of 0.6% annually amounting to an increase of over 15

quadrillion btu’s of power, new carbon emission reduction standards, and a decreasing supply of

crude oil and other liquid supplies, the United States is being forced to find new ways to generate

electricity and power its economy. Some of these new methods are renewable and clean energy

technologies. This includes upgrading traditional coal and natural gas powered EGUs to more

efficient, modern, and reduced pollution systems. The type of upgrades needed to improve an

aging electrical grid will be very costly and could serve as a crossroads for substitute inputs for

energy generation to gain momentum and be economically feasible for investors. Installing new

EGUs that utilize renewable energy from the environment like solar, wind, hydroelectric, and

8

geothermal could be a good substitute for traditional EGUs. Furthermore, these new methods

will be costly and require collaboration between the government and private sector as the United

States transitions its energy sector to meet the growing demand for energy. In addition to the

increased demand for energy in the United States, developing nations will begin to require more

inputs for energy generation as they transition to more industrialized economies in the next 25

years. This will put even more strain on the world supply of energy. For example: Canada

provides a lot of energy generation inputs to the United States. However, as third-world countries

start to demand more energy there will be more competitors in the market for energy inputs. It is

very possible that this type of strain could bid up the price for the United States and thus be

transferred to the consumer. Therefore it is imperative to investigate the current supply of energy

and predict the future supply of energy by examining the amount of input resources available, the

current and future states of energy production technology, and the volume of producers in the

energy sector in the United States.

III. Supply of Energy Inputs

Current State of America’s Electrical Infrastructure:

The two decades leading up to World War I served as time of rapid growth in the

electrification of America. This electrification movement was largely a result of industrial

revolution and the need for electricity to speed up manufacturing and increase productivity, in

part for military purposes. During the early twentieth century “Government bodies influenced the

provision of electrical service by giving utility companies monopoly privileges and rights to lay

poles and wires along streets; patent protections encouraged inventors to improve electrical

equipment; and many municipalities operated their own generating stations.” (Jones 202-203)

World War I and energy shortages in 1917 and 1918 sparked reservations about decentralized

9

decision-making regarding the nation’s electrical grid. So the progressive era sparked centralized

planning between the State and America’s utility providers, which is a continued practice today.

Since most citizens in America only have one company to choose from as an energy provider,

state and local governments regulate the rates in which the utility companies can charge based on

energy consumption of the consumer. Therefore energy costs are expected to stay relatively

stable. This means that compensation paid to the utility companies is just enough to make repairs

during a disaster and cover operating costs. The consumers’ payments, in general, are not enough

to pay for modernization of and necessary upgrades to the grid infrastructure. This continual

cycle has led to a grid system that is stretched more and more as population grows through

migration and overall energy demands increase annually. The current state of energy production

technology directly correlates with the supply of energy and the amount of power the United

States is capable of supplying to run the economy. The aging electrical grid is a present concern

that must be corrected before it becomes a major problem in the future. If the grid is not

upgraded to sustain expansion in energy generation capacity, then it will halt expansion of the

supply of energy necessary to meet increasing demands. This reduced growth in supply will

directly affect the cost of energy causing it to skyrocket. Consumers would demand more energy

then the grid could safely supply without causing extended blackouts and brown outs. Extended

black outs could cost the US economy Billions of dollars in productivity and therefore losses in

output.

Part of this problem revolves around the idea that the price of energy for consumers is

generally sticky upward. So as the price of inputs like natural gas and coal remain high, there is

not enough excess revenue from consumer bill payments to make the necessary upgrades to

increase the safety and expand the capacity of the grid system. However, in recent years

10

developments in extraction technologies have led to unexpected booms in input resources. This

boom has provided some temporary relief in the supply constraints.

Developing Third World Countries:

Another up and coming challenge for the supply of energy inputs is the development of

economies in third world countries. Energy is a foundational part of economic development and

its use directly correlates with improving lifespans of citizens living in poverty. Energy provides

services for cooking, space heating/cooling, lighting, healthcare, transportation and many other

basic services essential for development. Increased energy use also encourages a transition from

primarily subsistence agriculture to commercial agriculture and even can be credited with driving

industrialization. As these services are driven by the supply of energy inputs rather than ancient

techniques powered by the strength of humans, life expectancy will increase and poverty will

begin to fall. According to the Food and Agriculture Organization of the United Nations (FOA),

it is critical to realize that people demand the services in which energy provides not necessarily

the raw inputs. “Environmental degradation, poor healthcare, inadequate water supplies and

female and child hardship are often related to low energy consumption.” (Food and Argiculture

Organization of the United Nations)

As third world countries begin to demand more energy, it will increase the demand for

generation input resources. When this happens the net exporting countries will be forced to

increase output of generation inputs like fossil fuels. Even as output is increased there will still

be pressure placed on the supply to meet the growing demand for energy which will drive up the

price of generation inputs. As the price goes up, innovation and technological breakthroughs will

create more efficient solutions, as well as, more cost effective alternative forms of energy

generation.

11

Developing nations have an opportunity to expand their energy use much more

responsibly than countries like the United States and Canada that have already developed. There

is no data that suggests that the supply curve for energy inputs is vertical. In theory, there is

probably a set number of input resources for energy generation in the world. However,

economically it is assumed that human innovation and technology advancements will create new

ways to produce the same product that traditional energy generation input resources do.

Therefore the slope of the supply curve for energy is upward sloping and a bit steeper than other

less complex markets, but there is always room for expansion of supply to meet growing

demands that would be brought on by the development of third world nations’ economies.

Natural Gas Boom:

For example, recent innovation in natural gas recovery like hydraulic fracturing, has

given the United States access to new supplies of natural gas, crude oil, and petroleum. This new

technique has increased recovery so much that in 2012, the United States became a net exporter

of natural gas. Because natural gas is used in the transportation and electricity generation sectors

of the energy industry and demand has been met by this increase in compliment goods available,

the average energy prices in the United States have remained fairly steady in the past few years.

The EIA records that natural gas is responsible for 27% of the United States’ quantity of power

supply.

Even though natural gas is seeing a boom in production, government legislation at the

federal and state level as well as EPA regulations look to slow production and recovery efforts of

natural gas due to environmental concerns. Some studies have raised concerns of methane

leaking into water supplies. Already, legislation in 19 states is calling for transparency on

chemicals used in the recovery processes. In addition, these legislations are placing limitations

12

on hydraulic fracturing techniques as a whole. Pennsylvania and New York prohibit the use of

ground water during hydraulic fracturing methods, and also prohibit extraction of natural gas

within 2,500 feet of any ground water source or table. Some state governments are even

capitalizing on this new found natural gas supply by placing a severance tax of five percent on

gross value extracted of natural gas. A severance tax is compensatory tax, charged when non-

renewable resources are extracted from public land. (Milam 7) Another type of tax being

utilized, called an impact fee, forces the recovering firm to pay a lump sum of money over time

to the state to cover environmental impacts associated with extraction procedures. (Milam 7)

Even though there is a natural gas boom due to new recovery techniques, more research about

the effects of the procedures will likely spark more regulations from both local and state

governments making natural gas generated power more costly. As of May 2012, 119 Bills in 19

states have been introduced to address hydraulic fracturing in some way. (Milam 7) With this

volume of pending legislation and mandates pending against extraction innovation, the increased

supply of compliment resource inputs may be limited.

Cutting Greenhouse Gas Emissions:

In addition to regulations on Natural gas, the EPA proposed a “Clean Power Plan,” on

June 2, 2014 urging states to propose a plan to cut carbon emissions by 30% in each states’

fossil-fueled Electric Generating Units (EGUs) by 2030. This plan is backed by studies that

show this type of carbon emission reduction would allow for compensation of climate and health

externalities valued between $48 and $82 billion. This plan is based on the idea that coal and

natural gas would remain the leading complement goods to energy generation in America

through 2030. These types of externality compensation mandates increase the cost of

compliment input goods for traditional energy generation methods. These increased costs put

13

more pressure on private energy generation units to keep consumer bills low, yet still maintain

functional infrastructure. This pressure will incentivize investors and consumers to examine

other substitute methods of energy production like renewable technologies. This fact serves as

one of the main contributing factors leading to a 1.6% annual increase in energy generated by

renewables as a substitute to traditional generation techniques.

Substituting Renewable Energy Generation in the United States:

Energy generated by renewable technologies like solar, wind, hydroelectric, wood, and

geothermal are set to grow by 1.6% annually through the year 2040 in the U.S. This number does

not include residential or commercial photovoltaic systems, which would be installed and tied

into the grid. This growth in substitute renewable generation is predicted to amount to about ten

quadrillion Btu’s annually or ten percent of the projected energy demanded for the United States

in 2040. This growth will also contribute to a decrease in the growth rate of carbon emission

externalities over the next 25 years. The AEO for 2014 shows that carbon emissions caused by

the transportation, electric power generation, and residential sector are projected to decrease.

However, the industrial sector will see an increase in carbon emissions. Overall, carbon

emissions from energy consumption are projected to stay the same due to the replacement of

using coal to using more clean and sustainable EGUs like natural gas and renewables. These

emission projections are very dependent on assumptions associated with economic growth. If the

U.S. economic growth rate increases, then the emission volume projections could increase.The

optimistic projections are a product of new investments in cleaner substitute energy generation

techniques. Even though these substitute goods and inputs are gaining momentum in the

consumer markets and with investors, it is not realistic to assume that renewables will eventually

14

totally replace tradition forms of energy generation. The use of renewables relies heavily on

geographical capability, distribution and storage capabilities, and cost effectiveness.

Renewable Technologies Leading the Change:

The specific substitute energy generation methods that are leading this transition are wind

and solar driven power generation. As can be seen in this table from the 2014 AEO, solar and

wind power surpass hydroelectric power generation around the year 2015. One of the largest

solar thermal plants in the world can produce about 364 Megawatts of consumable energy. These

types of power plants along with commercial and residential use of solar panels make solar

power a key player in America’s renewable energy powered future.

The other key substitute is wind

power. These types of power plants use

natural winds to power many turbines,

which then generate electricity. In Germany

about 40% of their generated electricity

comes from wind power. That is compared

to only about 6% for the U.S. That number

is likely to increase over the next 25 years

according to the chart above. This is due to

the fact that wind power reached grid parity

in the mid 2000s. This means that the cost of wind power in appropriate regions now matches

traditional forms of energy generation.

There are two other main forms of renewable energy generation that are definitely worth

mentioning. One is geothermal power. Using steam from the ground and then pumping heated

15

water (steam) directly into turbines is how geothermal power plants produce electricity. This

steam underground comes from geysers or reservoirs that hold hot water. The second form of

renewable energy generation is hydroelectric power generation. This is produced by the

gravitational pull of flowing or falling water. Power is usually generated along rivers through the

use of dams. The water flows through a dam spinning a turbine connected to electric generator.

Hydroelectric power is already being used in the United States in most of the areas it is available.

It provides a relatively cheap form of renewable power at only 3-5 cents per kilowatt-hour

produced. Conventional hydropower generation is expected to stay constant throughout the next

25 years, mostly due to the fact that most of the major regions that are capable of producing

hydroelectric have already been built and developed leaving minimal opportunity for expansion..

Even so renewables like wind and solar energy generation provide a promising solution for

increasing the supply of energy generation capability for America’s energy sector to meet

increasing demands.

Utility-Scale Renewable Power Generation:

One of the main ways to increase the use of substitute goods like renewables to increase

overall supply of energy is to begin using renewable input sources to generate grid scale

electricity. However, substitute renewable technology is still lacking some important capabilities

that traditional energy generation provides. Reliability is always a reservation that most investors

voice when talking about renewables on a utility scale. After all, the wind does not always blow

and the sun does not always shine (nighttime and cloudy days). This concern often reduces the

incentives for investors to invest in renewables and even worries consumers about the reliability

of their electricity. However, all of the renewable technologies have ways of silencing concerns

of reliability. The question is, at what cost?

16

For solar generated power, like in solar panel farms or solar thermal power plants,

efficiency is a big question. The sun, at its peak, produces about 1 kilowatt per square meter at

the earth’s surface uniformly. However, solar panels are, on average, only about 22% efficient

when fully exposed to direct sunlight (no cloud cover, and angled correctly). Some higher end

solar panels can be as efficient as 40%. Even so, to produce renewable electricity on the utility

scale, would take a lot of solar panels.

In addition to lower efficiency, electricity must be produced during nighttime hours

when the sun is not shining. Therefore it is necessary to store excess energy generated by the sun

to allow for a certain number of days of autonomy. In solar panel systems, this requires the use

of some type of energy storage, usually batteries. Since the sun does not always shine at the same

intensity, due to cloud cover and dusk and dawn hours where sun is indirectly producing

irradiance, a charge controller is necessary to regulate the amount of current going into a battery.

For example, if a battery is fully charged and the solar panel continues to produce electricity, this

device will prevent overcharging and battery malfunction. The mandatory use of energy storage

and charge controllers significantly raises the price of photovoltaic systems. Even so, this added

costs allows energy from the sun to be used in the evening and on rainy days, which significantly

increases reliability for panel photovoltaic systems. For solar thermal plants, energy is stored

through thermal liquids, which are highly efficient in heat trapping. This method of storage

allows energy to be dispatched during times of little to no sunlight again increasing the reliability

of solar generated power as an alternative renewable energy option for investors in the United

States. However, the necessary technology to meet today’s standards of electrical reliability

drastically increases the Leveled Cost of Energy, which will be discussed later on in the paper

when comparing cost effectiveness of substitute methods of energy generation. For wind the idea

17

of reliability is very similar to solar-generated power. Just as the sun does not always shine, the

wind does not always blow. Therefore it is imperative that wind turbines store excess energy

during peak wind gusts to be used when there is no wind. Even as this fixes reliability questions,

it increases the cost of wind-generated power, making it a tough sell to investors.

The next obstacle facing utility scale renewable power generation is energy distribution

and geographical capabilities. In general, private utility companies realize that it is most cost

effective to produce the power as close as possible to its consumers. This means that renewable

energy generation is most cost effective when it can be produced on a utility scale fairly close to

its consumers. However, to build a wind farm in the middle of the city would decrease its

efficiency or increase installation costs so much that it would almost not be effective due to wind

drag from tall buildings and other wind disturbances. Wind and solar farms are most efficient in

remote locations, but the expenses required for moving the electricity from these remote

locations to the city drastically increases the LCOE for substitute renewable generation

techniques. These energy distribution constraints limit the renewable energy capabilities of

certain geographical locations in the United States. In addition to broad geographical location,

solar and wind require a specific type of environment. Solar farms, for example, require

locations that are clear of tall structures that would shade panels and also a large plot of land in a

fairly dry climate that receives a large number of peak sun hours each day. This type of area has

a very high opportunity cost associated with it. Land is not something that can be produced and

is often used for agricultural and development purposes. A plot of land described above could be

used for a shopping center or industrial park, which would contribute to domestic economic

development.

18

Part of geographical capabilities, include climate patterns throughout various regions of

the United States. For example in some locations like Washington State, with a very wet climate,

solar panels would not be a reliable form of energy generation, as cloud cover would greatly

decrease solar thermal and panel efficiency. Even though energy storage is increasing the

reliability of renewable technologies, there are some locations in which renewable energy

generation is just not a logical investment without further technological developments. Just as

solar power is not practical is some regions, wind power also faces this challenge. In temperate

climates like middle and east Tennessee, wind intensity is simply not strong enough nor

consistent enough to generate an appropriate amount of electricity for utility scale production.

These questions of resource availability and the high costs associated with large-scale renewable

investments strongly deter large-scale investments in and expansion of renewable energy

generation on the utility scale.

IV. Future Price of Energy

Cost Effectiveness:

In order for America to increase renewable energy generation by the projected amounts

some power plants will need to be retired or replaced with these new technologies. A plant

owner makes the decision to retire a plant whenever the projected costs of running the plant and

the necessary repairs and upgrades exceed the projected revenue over the reasonable future of the

plant. (Energy Information Administration (AEO2014)) Some of these costs for plant owners can

be large capital repair projects to the grid infrastructure. Other costs could be large-scale

installation of Flue Gas Desulfurization Systems (FGD) or scrubbers for cleaner coal generated

power. (Energy Information Administration (AEO2014)) Other factors that could raise operating

costs would be an increase in fuel costs. If the cost of fuel increases, then the plant must find a

19

way to generate electricity more efficiently or risk raising the costs of energy to consumers. With

these new costs coming into play for utilities, it is imperative that revenues rise in order to

compensate for these new regulatory costs and aging infrastructural repairs and upgrades.

Revenues are generated from energy sales, which are governed by the local commercial,

industrial, and residential demand for energy. Even so, private utilities cannot simply increase

the price of electricity per kilowatt-hour for the average consumer. Government regulations,

competition markets, and regional expectations govern the price of power for consumers. This is

very important for the protection of the American people against financial exploitation. Without

government pricing regulations, people would have to pay what their location specific utility

ordered them to pay, without any option of getting their power from a different company. This is

because in the history of the United States, energy infrastructure grants were given to specific

companies during construction of the gird so that there would not be a mess of electrical lines

around the United States due to five different firms competing for consumer business. At the

time, this regulation simply made sense. However, it caused the heavy need for government

interventions through federal organization like the Federal Energy Regulatory Commission

(FERC) to avoid market monopolies. “The FERC regulates interstate transmission of electricity,

natural gas, and oil.” (Federal Energy Regulatory Commission) Ultimately, this organization is

responsible for regulating sales of energy across state lines. It also monitors and investigates

energy markets and enforces safety codes and standards. Even though FERC regulates sales of

fuels to power EGUs, it does not regulate retail and natural gas sales to local consumers. (Federal

Energy Regulatory Commission) The FERC also does not claim any liability for “reliability

problems related to failures of local distribution facilities.” (Federal Energy Regulatory

Commission)

20

Instead, the above responsibilities are placed into the hands of State Public Utility

Commissions. For application purposes let us examine the state of Missouri Public Service

Commission (PSC). The PSC is the state government agency that regulates companies like

Kansas City Power and Light in order to provide reliable, safe, and adequate utility services at

reasonable rates. It is important to note than when the commission is setting the rates for energy,

they must balance public interests, as well as company stakeholders. Rates are usually set to give

each utility company an “Opportunity, but not a guarantee, to earn a reasonable return on its

investment after recovering its prudently incurred expenses.” (Missouri Public Service

Commission) It is also important to realize that this state commission does not regulate

municipal utility companies and their rates. This responsibility falls to local city and county

governments in Missouri.

The point of this information above is to reinforce the idea that utility companies cannot

finance upgrades for existing power plants or new construction for renewable energies solely by

raising the rates of power on the consumer. It was also meant to illustrate the stakeholders and

complexity involved with the transition to renewable technology and also the addition of new

energy generation capacity throughout the United States through 2040. Without government

assistance to these utility companies, renewables will have a very tough time growing at their

projected rates necessary to meet increasing energy demands. Recent trends in the power

industry have led to an increase in operating costs of coal plants and a decrease in revenues from

bill payments by the consumer.

Reasons Behind Declining Revenues:

In 2008 natural gas prices began to fall due to an increased supply. Because natural gas

serves as a marginal fuel for EGUs, it caused the price of power to fall. This fact also “improved

21

the competitiveness of Natural Gas Combined Cycle (NGCC) power plants relative to coal fired

plants.” (Energy Information Administration (AEO2014)) Also, the price of coal delivered for

electricity generating purposes rose from 2007 to 2011 by 4% each year. (Energy Information

Administration (AEO2014)) Therefore the natural gas power plant has become a more profitable

substitute to the coal-fired plant causing a loss in revenue to the private coal plant owner.

Also beginning in 2009 the Recovery and Reinvestment Act along with many other

pieces of state legislation started to incentivize more energy efficient appliances. The Act also

provided subsidies and tax cuts to individuals willing to invest in individual residential solar and

wind power generation techniques. During these projects, the renewable energy generation

products are wired into the main electrical grid to be used as a backup source for power. The

electrical grid serves as a battery in residential and commercial photovoltaic systems. During

some parts of the year a private customer may even provide power to the utility company during

a billing cycle. This means a consumer could actually become a producer and require

compensation from a private utility company. An outside company that has no responsibility of

compensating the electrical utility company for this loss of revenue usually does these types of

projects. These types of individual investments by citizens have slowed the growth of electricity

demand and drastically decreased revenues for private utilities in places like California, where

solar is becoming very prevalent. Because of these projects, “fewer high-cost marginal

generators need dispatching,” to compensate for peak load hours. This equipment has not

produced the revenue that it was intended to produce at the time of the investment. Ultimately,

power plants that have made this type of investment and have not used it at the volume originally

projected are losing money with no way to rebound from their loss.

Measuring Cost Effectiveness:

22

The levelized cost for energy generating technologies (LCOE) is a measure of the overall

market competitiveness of new technologies like renewables. It takes into account the fuel costs,

capital costs, operation and maintenance costs, finance costs, and assumed utilization for each

plant type. The LCOE places a kilowatt-hour cost on building and operating an EGU over its

assumed life cycle. (Energy Information Administration (LCOE)) The LCOE allows solar and

wind power, which have very low operating and maintenance costs, but high capital costs for

initial installation to be compared to traditional EGUs like coal which has higher operating costs,

but relatively lower capital costs for installation. The LCOE is definitely affected by local and

state tax incentives or subsidies, which have varied a lot over the past ten years. In addition, the

LCOE can change based on higher fuel prices and technological innovations.

LCOE values for the table below show national averages. The LCOEs can change based

on the specifications and existing environment of a local area. Private plant investors base their

decisions off of the projected utilization rate of the proposed power plant, which depends on

varying factors like localized energy demanded and geographical resource availability.

“The existing resource mix in a region can directly impact the economic viability of a new investment through its effect on the economics surrounding the displacement of existing resources. For example, a wind resource that would primarily displace existing natural gas generation will usually have a different economic value than one that would displace existing coal generation.”

(Energy Information Administration (LCOE))

This quote from the report by the EIA is directly referring to the opportunity cost of new

renewable energy locations. As discussed above wind and solar farms require a lot of land,

which may normally be used to contribute to a local economy in the form of farmland or

shopping centers. Therefore the LCOE is not uniform in all areas of the United States and varies

between regions.

23

Another factor to consider when comparing LCOEs of varying EGUs is the capacity

factor, which is a plant’s

ability to vary output in

order to follow demand.

This value can vary based on

existing capacity mix and

load characteristics in a

particular region. A power

plant must always balance

its output with its load.

Lights are not always on and industrial factories are not always running at full speed therefore

the load varies. Power plants with dispatchable technologies are ones that can adapt to these load

variations and are therefore understood to be more valuable. Alternative types of EGUs are ones

with non-dispatchable technologies, which would tie the operation of the facility to the

availability of the energy generating resource being used. According to the Electric Power

Research Institute, all base load energy generation technologies are assumed to have between an

80%-90% capacity factor. This means that the power plants can dispatch extra power during

peak load hours when it is necessary. The graph above shows the LCOE in dollars per Megawatt

hour compared the cost of CO2 in dollars per metric ton for dispatchable technologies. This

graph is a projection of the estimated capital costs for tradition EGUs as the price of CO2 rises.

Notice that Pulverized Coal (PC), Integrated Coal-Gasification Combined Cycle (IGCC) and

Natural Gas Combined Cycle (NGCC) are all projected to increase as the price of fuels and

24

operation rise. These price increases can be in the form of carbon emission taxes or simple price

increases from transportation cost increases and other variables.

Renewables are

considered to be non-

dispatchable because their

factors depend on the

resource availability within

their corresponding regions.

The LCOEs for renewables

do not include costs

associated with adding addition reserve capacity or balancing technologies needed to balance

power output with the load demanded at any given time. (Niemeyer) However a chart displaying

the LCOEs for non-dispatchable renewable technologies without additional reserve capacity is

included below. Notice that in the graph to the left the LCOE for renewables remains unchanging

as the cost of fuels and CO2 emissions increase. However, due to their non-dispatchable nature

their value still remains significantly lower than existing electricity generation techniques.

Because of all the variables included in LCOEs it is not recommended to directly

compare LCOEs of dispatchable technologies directly to LCOEs of non-dispatchable

technologies as a way of measuring economic competitiveness. Instead, it would be more

accurate to include the avoided cost associated with taking on a new EGU project.

25

The avoided cost measures the cost of producing the same electricity that would be

replaced by a new energy generation project with the existing infrastructure. This idea can be

related to economic concepts like opportunity cost examination to provide an economic value

assessment of a proposed project. This avoided cost is summed up over a plant’s expected life

and then converted to a stream of annual payments. The avoided cost is then divided by the

average annual output of the existing EGU. This ratio is called the levelized avoided cost of

energy (LACE). The significance of the LACE and the LCOE is that they can be compared in

order to determine whether a project’s value exceeds its cost. (Energy Information

Administration (LCOE))

For example: A coal plant

may need a lot of

upgrades and

improvements in order to

meet new carbon

emission requirements put

into place by the U.S.

government. In this case

an assessment would be

done in order to

determine the cost of

these upgrades in relation

to the projected life span

of the coal plant. If the LACE were greater than the LCOE of a totally new EGU project, then

26

the retirement of the coal plant and replacing it with a renewable energy generation plant would

be a good net economic value to the private investor.

The EIA’s table above shows comparisons of LACEs and LCOEs for a variety of

different energy generating techniques used in the United States. The numbers account for

inflation by including the amount of 2012 U.S. dollars it would cost to produce one Megawatt-

hour of power. Most homes use about 1200 kilowatt-hours of power per month in order to run

effectively. There are 1,000 kilowatts in one megawatt. The average four person home uses

about 1400 kilowatts of power each month. This should illustrate a rough idea of the meaning of

the numbers above. The graph is separated into dispatchable and non-dispatchable technologies.

It also records numbers for power plants set to begin generation in 2019 and also projected

numbers for future plant projects that would be set to go online in the year 2040. Basically, if the

number under the “average difference” column is a positive number, then it is profitable for U.S.

investors to pursue those types of energy generation unit projects. Currently in the United States

the closest cost effective renewable resource generation projects to pursue are on-land wind and

solar photovoltaic systems. However, even though those are the closest comparable technologies,

according to this table, investors would overall be forced to take a loss. Another important thing

to deduce is that these averages are more negative (less profitable) due to the fact energy storage

and control technologies for renewables to be fully functional are not even included in these

numbers. The 2019 numbers suggest that investing in combined cycle natural gas, which would

burn cleaner and reduce carbon emissions, would be a significantly better investment (negative

3.4 is greater than negative 24.5). Especially considering the dispatchable capabilities of fossil

fuel energy generation already included in the numbers for CCNG, due to its dispatchable

capability. Also included in the table are projections to 2040. The averages for the future take

27

into account higher fuel costs, higher energy demand, and some expected technological

innovation. In the next twenty-five years wind, in particular, is projected to over take

conventional coal and be more cost effective. (-10 for coal compared to -2.3 for wind) The cost

of new solar projects, and hydroelectric power also fall through the year 2040 and at least

become more cost competitive with traditional forms of energy generation. The findings from

the table above along with the understanding of LCOE and LACE have shown that renewable

energy generation is not cost competitive enough to completely replace traditional EGUs. In fact

without major technological advancement in energy storage and other related goods, increases in

government spending and taxes incentivizing new developments, renewables will have a hard

time increasing by 2% nationally through 2040.

Financing Renewable Energy Development Projects:

Even though projections by the EIA state that production capacity of renewables is set to

increase ten quadrillion btu’s in the U.S. by 2040, it will not come without major challenges for

policymakers and investors in the energy sector responsible for powering the U.S. economy.

Renewables pose threats to grid reliability, increase energy distribution and storage costs, have

geographically limited capabilities, and struggle to compete with the low costs of traditional

power. The Recovery Act put into action in 2008 by the United States government invested

money in renewable manufacturing and provided tax cuts and subsidies to companies and

individuals also willing to invest in renewable technologies. This has arguably been the main

engine driving the expansion of sustainable energy technologies. The wind power industry has

seen little to no growth since 2012 when most of the tax cuts and subsidies expired.

With all of the unanswered questions and risks involved with investing in renewable

electricity generation, it is fair to ask the simple question: Where will the money come from?

28

The interesting thing about the electrical grid in the United States is that it is a complicated

interconnected system of power lines, which span all throughout the country and are not bounded

by state, county, or city lines. Therefore it is not only the federal government and its affiliated

organizations, it is also state, county, and city governments that are involved in the decision

making process about sustainable energy development projects. This fact means that the energy

sector and private investors have a variety of different government tax revenue accounts to pull

from. Since electricity is a public good much like water distribution, investors can leverage

governments to invest in maintenance and development projects. For example, if a city wants to

expand by building a system of apartments, then the apartments must be equipped with

electricity. If the private utility cannot undertake the increased load without a renewable energy

generation project, then the opportunity cost of not having the extra tax revenue brought in from

population growth becomes an incentive for a local government to step in and assist or subsidize

development projects for the corresponding company.

The fact still remains that the consumer must absorb some of the costs of renewable

energy projects. The typical US consumer will likely feel the effects of rising fuel prices and

increased load capability projects in the future, without any type of price hikes due to

renewables. As the United States population increases due to migration, along with the demand

for energy, consumers will start to exercise more conservation minded practices. This is one way

that consumers will absorb the cost. As more conservative energy practices come about new

markets will see increased demand for more efficient complimentary goods like light bulbs,

appliances, modes of transportation, and much more. This is one reason why major companies

like General Electric, Google, and Amazon are investing in large-scale research and development

projects for the type of goods referenced above. Investors see the value in the development of

29

goods with much lower power requirements. The effects of more efficient power consumption

are accounted for in the EIA’s annual energy outlook for 2014. It cites that individuals and

commercial businesses will use less energy per capita.

Another way they will be forced to absorb the cost, is monetarily. One of the main things

that can be used to incentivize consumers to lower energy use is to attack their pocketbooks.

Private utility companies seeing falling energy revenues will have no other choice, but to do just

that, in order to stay in business. Since these price increases will be necessary for companies to

maintain a reliable power grid, the FERC and the Missouri PSC will have no other choice, but to

grant an increase in the price of power to consumers. The inevitable increase in the cost of

energy and the question of how to pay for it is driving alternative EGU project talks. These talks

are providing a deeper sense of urgency than ever before to innovative and drive down the costs

of energy storage and controllers to make sustainable energy development more cost

competitive, reliable, and reasonable for all of the stakeholders involved with financing new

EGU projects through 2040 for the United States. The shift to renewable EGUs in the United

States will be responsibly facilitated by United States government regulations, mandates, and

new energy policy. The construction of these new policies will determine the economic impact

and the costs and benefits to the American people.

Possible Government Incentives and Subsidies to Jumpstart Development

There have already been numerous regulations and policies that have been put into place

on a small-scale to try and experiment with and expand renewable energy generation projects

across the United States. Recently, the U.S. environmental protection agency submitted

regulations on carbon emissions for new and existing power generation that will increase costs of

conventional power generation. “At the same time new and existing environmental concerns like

30

ground water contamination through new hydraulic fracturing techniques, greenhouse gas

emissions, and destruction of vegetation and top soil are raising questions of acquisition methods

for coal and natural gas prompting new legislation.” (Milam 17) In addition to regulatory laws,

the United States federal government provided $38 Billion in subsidies for renewable energy

projects in 2012 compared to just $30 billion in 2013 according to the EIA. These subsidies were

in the form of direct expenditures to producers or consumers, tax expenditures, research and

development, federal electricity programs supporting federal and rural utilities, and loans and

loan guarantees. All of these programs were meant to drive the development and implementation

of renewable technologies throughout the U.S. In fact, these subsidies are the main reason that

renewable energy generation has expanded over the last decade. Some of these subsidies have

either recently ended or are set to conclude in the near future. Therefore it is imperative to

determine if other mandates, taxes, and subsidies may be justified.

Currently, the United States government subsidizes renewable energy generation on an

individual level by providing tax benefits. “Renewable energy generation earns tax credits of 1.5

cents per kWh, adjusts for inflation.” (U.S. Environmental Protection Agency) This subsidy

applies to biomass EGUs and wind energy sources. The total estimated cost of this subsidy is

about $970 million annually to the U.S. government, beginning in 1995. The U.S. also provides a

conservation subsidy paid by utility companies to the consumers. The subsidies are then

deducted from each private utility’s income tax. The annual cost to the government from this

subsidy is approximately $100 million annually. Subsidies have also been provided to users of

alternative fueled vehicles, which cost the U.S. about $1 billion.

In addition to renewable and pollution subsidies and tax exemptions, there are also tax

benefits for pollution control. Many states offer subsidy assistance for installing pollution

31

controlling equipment. (U.S. Environmental Protection Agency). The tax breaks usually are

applied in the form of sales tax or property tax relief. In the state of Texas, an amendment was

approved by voters to exempt property used for pollution control to prevent the property taxes of

industrial businesses from rising due to new environmental mandates. The majority of these

exemptions were filed on equipment that was supposed to comply with clean air act. However, in

some subtle ways the tax exemption backfired costing the state of Texas $26.6 million in tax

revenue. This shortfall had massive implications eventually leading to cutting education budgets

and other important state funded services. This is an example of why the debate on the

jurisdiction of the electric grid and private utilities means so much. It is the constant question of

whether the local government should bare the burden or should the responsibility of transitioning

the energy sector to more renewable EGUs fall into the hands of the federal government. After

all, pollution, especially in the air, can blow across state and county lines. Therefore pollution, as

well as, carbon emission control becomes a federal issue. The most recent EPA mandate is a

regulation requiring states to make their own policy for reducing carbon emissions in the next

fifteen years. It provides a guide and requirements, but leaves it up to the states to write up their

own set of regulations to regulate the EGUs and other energy industry companies.

There is also something called supplemental environmental projects (SEPs) “these are

settlements negotiated by a law violator and the EPA where a private company agrees to do an

alternative environmental project in return for an agency agreement to lower the proposed

penalty” (Federal Energy Regulatory Commission) For example: a sand blasting company got a

fine of $50,000. Once the company agreed to hire an environmental auditor and launch a five-

year pollution reduction program the fine was reduced to just $14,000. However, it is interesting

that these steps may not have been profitable for the fined company because in the long run it is

32

possible that they could have paid more in wages to the new auditor and the strategic pollution

reduction plan. “These types of settlements cost the United States about $104 million in 1995.”

That number is expected to more than double in the next twenty years. SEPs are not as popular in

state governments because the revenue from the violations is usually a more significant portion

of the budget.

Most of the taxes and subsidies mentioned by the EPA are centered on private consumer

actions rather than encouraging a complete transition to renewables in our electric grid. There

has not yet been an incentive provided for grid scale transition to renewables. Mostly because the

technology needed to provide that kind of load capacity is financially out of reach at the moment,

especially considering the added cost of making a renewable EGU dispatchable. Therefore, it

should be proposed to provide a fifteen-year allowance to private investors who pay for

renewable energy generation power plants in the most geographically logical regions of the

United States. For example, a state that may be a good candidate to receive this funding would

be Kansas, strictly on the basis of developing the Midwest’s ability to generate wind energy.

This type of allowance would be a heavy cost to the United States, but it would provide the

support needed for investors while also protecting the price of energy for consumers.

Another subsidy recommendation would be to look at major cities in the United States

and focus on making those areas use sustainably generated electricity. Places like Chicago, the

windy city, could receive allowances from the federal government to make their power plants

more sustainable. Powering the whole city of Chicago with wind-generated power is a stretch at

this time in history. However, supplementing the traditional EGUs with renewable generation

techniques could relieve stress during afternoon peak load hours and also during extremely cold

33

winters to support space heating. Other applicable cities for this type of allowance subsidy might

be Las Vegas, Los Angeles or San Fransisco.

The question still remains about who should put forth the costs of these projects on a

large scale. If the US government gives huge subsidies to states in geographically suitable

locations, what about the other states who are not so lucky? How can the government justify

giving so much money to one state? Even if the federal government covered the cost of large-

scale renewable projects, a state could never repay the cost in a reasonable amount of time.

Therefore if the United States took on a project like this it would have to be for every state. It

would also have to be paid as an infrastructural investment that the federal government does not

hope to be compensated for. Basically at this point in time this type of investment by the United

States is premature in the most optimistic sense, and some would call it completely out of the

question. This is due to the relatively low cost of coal and also the dispatchable ability of it as

well. Coal generated electricity is not expected to increase leading up to 2040, but it is expected

to stay the same. This means that investors would much rather invest in clean coal technologies

at a much lower cost than to reinvent the wheel with a major renewable energy project. Another

fact making these policies seem unreachable is the recent decline in the price of natural gas.

Basically, major technological developments need to be made in the technologies surrounding

renewable generation to make it more usable. Energy storage techniques need to become

cheaper, more accessible, and more efficient in order to make grid-scale renewables a nationwide

reality.

Defining Stakeholders in Sustainable Development:

Ever since the 1980s “Sustainable Development” has been a hot topic that was originally coined

by United Nations committee. (Cook) To repair and improve America’s electrical infrastructure

34

in a sustainable manner, the stakeholders must meet the needs of the present population without

endangering the future generations. (Cook) Some of the most pivotal stakeholders in the energy

sector are the consumers. Consumers in the United States demand energy for economic

functionality, food and nutrition, healthcare, education, and many other reasons. These

consumers are concerned with not only the price they pay for electricity, but also the externalities

associated with power generation, especially when it directly affects air quality, the environment,

and their overall quality of life. Therefore another stakeholder in power generation changes in

America is the community. If communities become more involved in local decisions surrounding

energy policy, with more informed opinions on environmental impacts, then governments and

investors will be forced to spend a little bit extra to accommodate the tastes and preferences of

the consumer. The population controls another very key player and stakeholder in sustainable

energy development, the United States and local governments. If the general public starts to take

notice of electricity issues then so will politicians. Government not only plays an important role

in regulating the energy sector, but also helps to fund maintenance and expansion projects. So if

externalities like global warming and air pollution become enough of an issue then governments

will begin to increase subsidies for alternative energy generation, as well as invest heavily in

research and innovative initiatives to improve technologies for more efficient and cheaper power

generation. The final stakeholder in decisions about energy generation is the local utility

companies and investors. In order for investors to agree to more sustainable energy projects, then

they must become profitable. As it currently stands, costs of energy storage and controllers for

renewable energy generation make sustainable projects way too costly for private investors to

undertake. This is because the general population is not willing to pay a large amount more than

what they already pay. Therefore it is possible to consider the price for energy to be sticky

35

upward. This means that if the price of energy rises, then the demand for energy will fall and

thus less energy will be consumed. For the supplier, to raise the price of energy to the consumer

is not always an answer to deter much higher costs associated with renewable energy projects.

Furthermore, it is the constant struggle between stakeholders to improve the sustainability of

energy generation and remain cost effective, while collaborating with federal and local

governments. It is this challenge that slows renewable energy generation development projects

and hinders America’s inevitable transition.

Price of Energy

In the sections above, many different insights have been provided that are necessary to

consider when predicting the future price of energy. The price of energy is going to be

increasingly affected by infrastructure repairs and upgrades, the price of input resources, the

development of third world countries, and new regulations and mandates placed on

environmental externalities like pollution. Rising transportation costs, food production and

transportation costs, water distribution costs will all increase and affect the spending power of

households nationwide.

Not only will the direct power prices increase, traditional forms of generation have major

secondary costs. Whether it is pollution or global warming, the opportunity costs of continuing

traditional forms of energy generation, are projected to cost billions of dollars in relief aid to

state and federal governments over the next twenty-five years. In addition, health problems

linked to pollution will be responsible for lowered economic productivity from the labor force

and increased healthcare costs through the year 2040. These opportunity costs of doing nothing

incentivize the United States Government to increase regulations and subsidize more sustainable

development projects within the energy sector.

36

The formula is simple. Energy prices in the United States are going to drastically increase

in the next 25 years to cause a domino affect on the United States economy. It is uncertain how

much are prices going to increase. However, all graphs and projections show that the price of

inputs like oil and natural gas will drastically increase in the coming decades. This fact is

reinforced by net import/exports graphs for input resources in the United States. These graphs

show the United States decreasing imports of resources like crude oil, natural gas, and coal

through the year 2040.

These projections are not based on a decrease in energy demanded by the United States,

but rather a decrease in the use of input resources due to alternative generation methods, more

efficient energy practices, and cleaner forms of power. Ultimately the rising costs of electricity

will spark expansion of alternative methods. This expansion needs to be done responsibly and

accurately in order to facilitate a positive impact on the United States economy. In the next

section, the paper will make some policy recommendations for the United States government to

implement that will help to responsibly shift the electrical infrastructure to alternative cleaner

methods of energy generation over the next twenty-five years.

V. Policy Recommendations

Some of the policies, recommended below have already proven to be effective on a

small scale, and others are completely new ideas that may spark constructive reform to the

current energy industry. However, the entire structure of the overall structure and timeline

for this proposal is completely original. The policy proposed will have three major time

periods. The first two time blocks will be ten years each. And the third and final time period

will be five years. Altogether, this is a twenty-five year energy industry reformation plan.

A. Fundamental Groundwork Policies (2015-2025)

37

The policies outlined below are to be implemented within the first ten years in

order to assist in solving major problems within the energy industry that pose immediate

threats to the effective functioning of the United States economy. The policies will also lay a

ten-year foundation for more impactful projects and initiatives to be implemented later on

in the twenty-five year policy.

1. Collaborate all Renewable Technology Projects with Utilities: This first policy

would require all existing and new individual and commercial renewable generation

units to collaborate with and provide compensation to utilities in exchange for using

the grid as a backup source for power. Grid connected wind and solar systems are

already required to go-dark with the grid in case of blackouts, but they are not

required to pay for the services of grid connectivity except when backup power is

actually used. This mandate would also not require utilities to pay solar system

users if extra power was pumped back into the grid from their particular system.

The purpose of this is to allow the utility companies to have enough revenue to

make appropriate upgrades to infrastructure. Upgrades are necessary to ensure that

new individual and commercial solar and wind projects do not compromise the

reliability of the entire grid system. This regulation will also provide utility

companies with extra money to invest in more efficient generation methods and

materials, without passing more expenses onto the end use energy consumers.

2. Provide Major Government Aid to Incentivize the Transition of Aging Power

Plants to Renewable EGUs: This policy would allocate 1 trillion dollars of government

funds to current “at-risk” coal and natural gas power generation units. Each plant

receiving funds would be inspected and would pass necessary requirements to be deemed

38

eligible. One requirement is that the plant must be in immediate risk of failing. Another

requirement is that the plant must serve a certain number of United States citizens, with

projection of an increased demand in the area in which the plant serves. A third

requirement is that money must be used to cut the plants’ externalities, like greenhouse

gas emissions, by a significant amount based on the current clean technologies available.

The final requirement is that the new project must increase the efficiency of the power

plant by the maximum amount possible using existing technologies. This will make the

use of existing cleaner technologies a requirement before receiving the government

funds. This policy will reduce the amount of input resources needed to generate power,

while also providing a much cleaner environmentally friendly method of energy

generation. All of these will be achieved without passing the burden of payment to the

consumers of electricity.

These grants, totaling one trillion dollars will be financed over the next five years

so that the remaining five years can be used for the completion of projects. The money

will be given with the requirement of project completion in a timely manner. The ten-

year timeline for the first wave of policies allows more time for the federal government to

finance the projects described above. The policy will also improve the reliability of the

most at risk portions of the grid immediately while laying the foundation for cleaner and

more efficient energy generation in order to keep direct costs low

3. Property Tax Exemption:/Reduction: This policy would reduce property taxes for

those with individual or commercial, grid-tied, renewable energy generation units for the

next twenty-five years. This type of tax exemption would incentivize implementation of

pollution free power generation, as well as, slow the increase in the cost of energy due to

39

rising demand. The utility customers would still have to pay for the grid backup

capabilities, so it would keep some revenues going to the utilities while freeing up a lot of

electrical load stress on the grid infrastructure. The utility companies would see a fall in

residential and commercial energy demand, which would make way for the projected rise

in industrial demand for energy that is projected to occur through the year 2040.

4. Research and Development Grant: This policy is one of the most important ones to

occur in the first ten years. The federal government needs to allocate a huge amount of

money to finding more energy efficient methods of water distribution, commercial and

residential lighting, and general appliances that use motors. There should also be research

conducted specifically for further developing renewable energy generation methods. This

includes, but is not limited to solar, wind, charge controllers, batteries, and other methods

of energy storage. A portion of the money should be given to selected educational

institutions, and some more should be given to general innovation development labs and

companies. The institutions that receive grants shall provide formal updates and

presentations to congress every two years for any new breakthroughs found. The

organizations receiving grants will also be required to collaborate with each other on a

weekly basis both virtually and through telecommunication. This type of system of

checks and balances will ensure that research is not being duplicated and also ensure that

pivotal ground breaking information is not being withheld from other organizations. The

money will be used for wages for technical staff and any new machines or systems

needed to perform necessary research projects. This money will not be used for

researching alternative energy for transportation via automobile. The money flow will

end in 2025 at the end of the first ten-year implementation period of the policy.

40

5. Awareness Campaign: In the beginning of this twenty-five year policy, it is necessary

for the federal government to launch a marketing campaign communicating the need for

alternative forms of energy generation. One of the primary roles of government is to rally

and unite its culture to accept new change and embrace technological developments. It is

a fairly common for the general American population to be unaware of existing

technologies and alternatives that currently exist to increase energy efficiency and

generate cleaner power. Therefore this part of the policy will allocate several million

dollars to ad campaigns and other communication methods to help accelerate shifting

tastes and preferences beyond the average shift due to changing generations. This

campaign is one that will be heavily driven in the first five years of the plan, and then

incrementally slowed down until it is virtually completed by the end of the first ten-year

phase of this proposal.

By the end of this first ten-year phase, “at-risk” infrastructure will have been replaced, utility

companies will be better equipped with a steady revenue stream to handle upgrades for

increasing demands for energy, and research and development will help to aid progress in

advancing product efficiency and reducing carbon emissions. These types of policies are

designed to launch offensive initiatives that will jumpstart responsibly guided energy reform in

the United States.

B. Implementing Energy Reform in the United States (2025-2035)

The policies within the second phase will be implemented through the years 2025-2035.

The policies below are aimed to be a supplement to the policies implemented within the first ten

years of the energy reform policy. It is hopeful that these policies will lay groundwork for more

41

permanent energy reform that lasts far beyond the duration of this twenty-five year policy. The

finite changes should be expected to be more aggressive.

1. Encourage Urban Density: According to the U.S. Census Bureau, urban areas house

almost eighty one percent of the United States population and this number is expected to

grow at a rate that outpaces all other nations in the world in the coming decades. This

type of migration, allows us to allocate and use energy generation input goods much

more efficiently. People living closer together make it much easier to cut down on energy

use. Public services like transportation, water distribution and electricity become much

easier to provide at low costs to consumers. This comes from the idea that it takes less

energy per capita to provide electricity to an apartment complex, than it does to power

homes for each individual that could live in an apartment complex. If higher rates of

urban migration occur, companies will even be able to incorporate high-performance

buildings, which are low energy consuming, sustainable buildings with the highest level

of safety. Specifically I am proposing adding new incentives to those willing to migrate

to urban areas. Incentives will include compensation packages and possibly reduced

income taxes. For example, instead of a thirty-three percent tax rate, this number would

be thirty percent instead. By encouraging more dense populations, the demand for energy

would decrease due to more efficient methods and practices, which come from closer

living environments. Encouraging this type of migration would make new efficiency

technologies that exist now like Smart cities and Smart grid work much more effective

and would be able to contribute to a much more sustainable future. This policy would

also add value to the next policy that is going to be outlined below and implemented in

the second decade of the twenty-five year proposal.

42

2. Cyber-Security and Grid Infrastructure Investment: The next policy is the second

round of an intense electrical grid repair and upgrade project in the United States, which

will be necessary to provide the higher volume of energy demanded for the future. This

policy will allocate large amounts of government funds to any private utility that expects

an increase in energy demand for the jurisdiction in which they serve. For this policy the

utilities do not have to be deemed “at-risk,” they only need to be willing to collaborate

and adhere to the upgrade requirements. The upgrade requirements are:

The grid repairs must implement Smart grid technology, which allows power

load and output to be monitored and regulated in real time. The technology,

which exists today, also can pinpoint problems during a blackout and redirect

output in order to minimize people affected by a black out.

They also must include the installation of data centers and other infrastructure in

urban areas to allow for the development of smart cities. Smart cities use real

time data to monitor things like water distribution, trash removal, and load

demands in real time, which can allocate resources to extremely dense

populations in the most efficient way possible.

The upgrades must also implement necessary steps that will improve cyber-

security across the United States electrical infrastructure. Once datacenters and

smarter technologies are implemented, the grid will be more dependent on digital

connectivity. Therefore critical emergency command centers should be

connected to microgrids, which have the capability to island off of the grid and

run for several days off of energy storage, in times of blackouts. Places that

43

should have this capability would be hospitals, fire stations, police stations, and

military bases.

The power plants that serve urban areas will be given priority over other utilities in order

to compensate for the higher urban density encouragement policy above. Beyond these

requirements the grid infrastructural upgrades should be basic enough to keep costs low,

but effective enough for the United States to be free from this problem for another couple

of centuries. This funding will stop in 2035, but the projects will be given a five year

period after funding halts for project completion. All upgrade projects will be complete

by the end of the twenty-five year energy reformation.

3. Enhanced Modes of Transportation: With the more dense populations and

implementation of smart cities in urban areas, there will be a greater need for enhanced

public transportation methods. Also, electric cars with high power demands for

recharging are expected to become much more prevalent in the next twenty-five years.

The power for the batteries still comes from somewhere, usually the utility companies.

Electric cars are a partial solution, but they do not decrease energy demand enough to

completely eliminate the need for petroleum and oil. The increased demand for these

projects will be met with this policy, which aims to implement geographically specific,

highly efficient transportation lines. These new projects, like tunnel or elevated train

systems, electric buses, and others will be used to reduce the amount of petroleum and oil

that our nation currently requires for transporting goods and people. The policy also

applies to transportation of goods because a majority of energy use in transportation is for

commercial or industrial purposes. Focusing on public transportation would only partially

solve the problem. This policy will require local and state governments to collaborate and

44

come up with the best long-term solution to this problem. This policy will not provide an

extremely large amount of monetary compensation; rather it will require states to come

up with their own plans of action, by penalizing states, which do not comply. If a project

is much too large for a local government to finance, then there will be shortcuts and

special provisions for monetary compensation laid out within this part of the proposal.

This part of the proposal aims to combat the increased demand for energy generation

inputs by the industrial sector for transportation purposes within the next twenty-five

years.

4. More Research and Development: This part of the policy is a continuation of the

research endeavors that will be taken on in the first ten years of this proposal. This

second wave of research grants will be much smaller overall. More money will be

distributed to only those institutions that made major breakthroughs in energy

innovations within the first ten years of the reform policy. According to a recent report by

NASA, “For every one dollar invested in research over the past forty years, we have seen

a five dollar return on investment.” (Lyttle) Research is a vital part of innovation and

therefore our country’s economic development. This reform policy is working under the

assumption that humanity has not yet found the solution to solving energy constraints.

This money will be a yearly stipend through the year 2040 that will continue to assist and

incentivize new innovations and developments in more efficient complimentary goods as

well as cleaner substitute methods of energy generation.

5. Workforce Development: The final policy in the second decade of the reform

initiative is to implement and launch workforce development for low and middle class

workers. The fact is that government spending on this scale in is an expansionary fiscal

45

policy, which will indirectly increase employment. This increase in employment will

need to be met with a workforce development policy, which will encompass, government

launched, vocational training programs. These types of programs will equip the

workforce with the skills that they need to take on new jobs created from energy

infrastructure upgrade and repair projects. The policy will collaborate with leading

institutions of higher education to create certified and sponsored programs to effectively

train new workers. This increase in employment in the largest sector of the United States

economy will cause an increase in household income and therefore consumption and

saving will increase. As consumption increases, demand for all goods will also increase.

This process will continue causing a secondary domino effect. Employment and output

will increase. This policy is more of a foundational policy that will equip the upgrade

projects with the skill level and manpower required to complete the jobs well by the year

2040.

The above policies from the second decade of energy reform are meant to provide major

upgrades and repairs to the energy infrastructure in the United States. These upgrades are set to

strengthen America’s power supply to provide for today’s energy demands with the intention to

provide for the future demand for energy for decades to come. This section outlined above is the

central part of the policy and the most drastic changes will be felt by the United States economy

during this ten-year period.

C. Solidifying A Sustainable Future (2035-2040)

The policies within the final five years of the energy reform are designed to foster

longevity and sustainability of the United States energy sector of the economy. The policies are

46

designed to protect completed initiatives, set the stage for further improvements to be made by

the private sector, and to expand responsible energy generation practices around the globe.

1. Expansion of Renewable Energy Generation: This policy is to implement

renewable energy generation technologies on a utility scale. As previously shown above,

wind and solar energy generation are projected to be cost competitive with traditional

EGUs for investors to implement on the grid scale. Therefore this policy is to provide

around 1 trillion dollars to install large-scale renewable energy generation plants like

solar thermal plants or industrial sized wind farms. The money will be allocated to the

sites that prove to have the highest expectation of rising energy demand in the coming

decade. In addition, these plants will be required to be located at a location that is

geographically plausible. This is a policy that is meant to accelerate the implementation

of research developments that may come from the additional funding provided in the first

twenty years of the energy reform policy. It is the expectation that the help provided by

the extra government funds will accelerate innovation in renewable technologies and

make them more efficient and therefore cost effective. This is one of the last domestic

policies included within the twenty-five year energy reform plan.

2. Incentivize and Assist Responsible Development of Third World Countries:

Cleaning up environmental pollution and other externalities from large-scale energy

generation is not just a problem facing the United States, rather it is much more of a

global issue. After all, carbon emissions do not only pollute a specific country’s

atmosphere. Pollution is a global externality. Therefore this policy is to incentivize

responsible development of energy industries abroad. Some incentives could be to reduce

trade barriers or to provide extra foreign aid to third world countries. In order to receive

47

these incentives a third world country must implement their own policies for responsible

expansion of energy production. The expansion must be centered upon expanding access

to power services to the poor or impoverished.

In addition this policy will provide some direct assistance to developing nations

throughout their healthy expansion. The United States should provide committees that

survey countries and evaluate necessary changes specific to each country’s needs. Then

this policy will allow the United States to provide expertise and assistance with the most

costly and technical portions of infrastructural development. This policy is meant to

expand new technologies throughout the globe to increase the use of more efficient

complimentary goods and substitute methods of energy generation like renewables. By

expanding the outreach of the proposal to the rest of the world, its impact significantly

increases.

3. Evaluate, Analyze, and Share Policy Results: The final policy of the proposed

energy reform is to evaluate the results and impacts of the policies written above. For this

policy, time and government resources should be devoted to following up with utilities

and local governments to survey the end results of the grant money allocated throughout

the United States. New transportation upgrades should be documented, energy

infrastructural upgrade projects should be surveyed, and the strength of the overall grid

should be tested. In addition, the Energy Information Administration should conduct a

Annual Energy Outlook with fresh projections about the projected demand for energy in

the coming centuries after 2040.

48

This type of information should then be transferred into marketable materials and

then shared with the general population, to show solidify societies passion for a cleaner

and more sustainable energy future.

The final five years of energy reform will solidify upgrades and set the stage for even better

improvements to the Energy Sector in the United States. It will also expand the impact of the

reform to have a more global reach. This will allow for new energy developments to be

implemented constructively and responsibly for a cleaner environment everywhere and not just

the United States.

Together all of these policies to be implemented in the next twenty-five years will work to

reduce the rate at which the demand for energy increases, increase the end use supply of power

from input resources, reduce the rate in which the price of power increases, and finally

strengthen the electrical grid and solidify a more definite future for the United States energy

industry.

IV. Conclusion

In the next twenty-five years, America’s demand for energy is expected to see a net increase,

while energy use per capita is expected to fall. This means that use of more efficient

complimentary goods is not decreasing the demand for energy enough to offset the increase we

will most likely see due to overall economic growth and expansion of energy demanded from the

industrial sector. A startling thing about this increase in demand is the aging electrical

infrastructure’s inability to handle increased power demands. In the first twenty years of the

policy recommendations, the allocation of a large amount of government resources will repair,

upgrade, and expand the electrical grid infrastructure. This will accommodate rising demands,

49

make necessary repairs, and upgrade existing technologies without putting more burden on the

power consumers and without compromising the integrity of our energy industry.

Another problem facing the energy sector in the coming decades is a constraint on the supply

of input resources like coal and natural gas. As more of the supply is used to meet rising

demands, prices are expected to increase. The policies laid out above provide grants to research

and develop more efficient complimentary goods, and also to encourage innovation in renewable

technologies and energy storage. The hope is that these policies will increase the fall in energy

use per capita over the next twenty-five years to offset the rising net demand for energy.

Some other policies from above are made with the intention of reducing the demand for

energy to increase urban migration and improving transportation of people and goods. These

policies will look to make end use services that energy provides more efficient and productive.

The implementation of smart cities will allow the same amount of energy that at one time could

only serve ten people, the chance to serve hundreds of people.

This entire paper has shown that replacing all energy consumed in the United States with

clean renewable energy is simply not a plausible answer to solving the energy industry’s

problem. This type of solution is not cost effective nor does America have the infrastructure

needed to support such a drastic alteration. The real answer to the rising cost of energy is to

decrease the demand for energy, and to increase the marginal productivity of generation input

resources. By implementing the policies outlined above, the immediate problems of America’s

energy industry will be corrected and the policies will also foster a healthy expansion of the

United States energy industry.

50

Works Cited

Cook, Dr. Michael. "Sustainable Development." William Jewell College, n.d.

Energy Information Administration (AEO2014). "Annual Energy Outlook 2014." Government Agency Report. Department of Energy, 2014.

Energy Information Administration (LCOE). "Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014." Government Report. n.d.

Energy Information Administration. Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013. Government Agency Report. Washington, D.C.: Department of Energy , 2015.

Environmental Protection Agency. "Clean Air Act." Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units. The Daily Journal of the United States Government. Washington: Federal Register , 18 June 2014.

Federal Energy Regulatory Commission. "What FERC Does." 2014.

Food and Argiculture Organization of the United Nations. "Energy in the World Economy." n.d.

"History of energy consumption in the United States, 1775–2009." Online Government Report. Washington: U.S. Department of Energy, 19 March 2015.

"History of Energy Use in the United States." Historical Perspectives of Energy Consumption. 18 March 2015.

Jones, Christopher F. Routes of Power: Energy and Modern America. Cambridge: Harvard University Press, 2014.

Lyttle, David. "Is Space Our Destiny?" Astronomy (1991): 6.

Missouri Public Service Commission. A Snapshot of What We Do. 2011. 21 March 2015

Niemeyer, Victor. "LCOEs and Renewables." Electric Power Research Institute, 2013.

The White House. "The Recovery and Reinvestment Act." Promoting Clean, Renewable Energy: Investments in Wind and Solar. Washington, 18 March 2015.

U.S. Environmental Protection Agency. Renewable Energy and Conservation. 1 April 2014. National Center for Environmental Economics. 31 March 2015

51