OurBlook interview with Paul O'Rourke, managing director of LECG.
Editor's Note: It's hard to think of too many people more qualified to discuss this topic than Mr. O'Rourke, head of the energy sector of global consulting firm LECG. He has more than 30 years' experience in energy consulting and general management ... we're most pleased to present his views.
 What do you see as the strong points of the American Clean Energy and Security Act? And what do you see as the weak points?
PO: The American Clean Energy and Security Act (ACESA) is an ambitious undertaking, one that includes both positive and negative elements.
ACESA provides an integrated solution to a long-standing energy problem in the United States. In fact, if implemented, it will be the most comprehensive energy plan ever enacted in this country’s history. In particular, it: (a) sets specific limits on greenhouse gas emissions which are long overdue; (b) allows for the use of offsets to ease the burden of penalty payments for noncompliance with GHG reduction targets; and (c) encourages the increased use of renewable generation and conservation through much-needed subsidies.
Another key strength is that it sets clear targets and institutes some elements that will bring things together at the national level, and it will build upon important initiatives already underway at the state and regional levels. This would be a big improvement over the uncertainty of state and regional programs that drive our renewable energy policy now. This national structure includes important government oversight activities that will help the legislation’s goals be realized. Of course, this also has drawbacks because it adds government bureaucracy and additional cost. If the legislation is enacted in its current form, it will require a complicated and potentially cumbersome infrastructure to track compliance of mandated programs, and to verify and validate claims related to offsets and reductions in GHG emissions. On the other hand, it should also foster a renaissance of financial products that will enable both polluters and consumers to hedge some of the financial and operating risks that will inevitably arise from the investments that will need to be made in new technology.
That said, let’s take a look at a few of the negative aspects. If enacted in its current form, the bill would require a massive investment in new technologies. We are talking trillions of dollars at a time when our nation’s financial system is stretched to its limit and government spending is focused on propping up banks and the auto industry. Implementing the bill will put a huge burden on an already overstressed capital structure, and it will add huge costs to already over-burdened household budgets, as the costs of reducing CO2 emissions and subsidizing renewable energy get passed through to consumers
Since the costs of ACESA will be immediate, but the benefits will not be realized for generations ... if at all ... we need to be asking ourselves whether this is the appropriate time for such far-reaching legislation that will radically change the energy landscape. Consumers will pay in many ways ... directly through increased electricity and gasoline prices and indirectly through new standards that require purchasing more efficient energy using equipment. In addition, American workers will pay through reductions in total labor earnings and employment, since the job creation aspects of the bill will not be sufficient to offset economy-wide job and income losses. Proponents of ACESA have missed the fundamental economic premise ... “That it is impossible to bring about a net increase in labor earnings through measures that impose a net cost on the economy” ... particularly in the short term. It is dangerous for the U.S. to embark on such far-reaching changes without a clear understanding of how we are going to pay for everything in the bill.
In fact, the United States is probably the costliest place to be implementing all the measures outlined in the bill. For example, it requires as much as 250,000 megawatts of new renewable capacity to be built ... 25 percent of total U.S. capacity today. Current estimates put the cost for this at $700-900 billion, plus we’d need to upgrade the transmission grid which would cost another $100 billion (some estimates range as high as $300 billion for other investments that will be required as a result of the legislation). That is a hefty price tag for just one part of the energy package.
Another negative is the time frame for implementing the measures called for in the bill. We are playing catch-up by trying to squeeze these ambitious renewable energy goals into a 10-year window ... all at too high a price. The accelerated and subsidized investment in renewable technology will force the U.S. to “throw away” otherwise economically viable fossil-fueled electric generating plants before the end of their useful lives. Meanwhile, over that same 10-year period, China and India will build more new coal-fired electricity generating capacity than we currently have in the U.S. ... virtually guaranteeing large increases in world CO2 emissions.
You have worked with both traditional energy in coal, oil and natural gas as well as with renewable sources. Will any forms of renewable energy ever be able to stand on their own feet economically or will they always require a subsidy from the government?
PO: I have been involved with renewable energy sources for more than 30 years ... and philosophically, I am a big supporter of renewables and conservation efforts. As with many things in life, sometimes you need to take a view based upon what your gut tells you is intuitively correct ... and renewables are a prime example for me. Of course, it all comes down to cost, and renewables traditionally have not been cost-effective.
The legislation in its current form extends the production tax credit for wind and provides for renewable energy credits ... subsidy for all renewable technologies. Without these, the economics of renewable investment would not make sense. In fact, earlier this year we saw a big drop in orders for new wind machines when the IRS raised some concerns about the treatment and allocation of tax benefits between equity investors in wind development projects. Historically, these subsidies have been short-term with an uncertain tenure, and the new legislation removes that uncertainty. These subsidies represent the extra cost that the U.S. economy will be paying to substitute renewable energy for fossil energy.
Several factors come into play when looking at the economics of renewable technologies. One important factor is that some geographic areas are more suitable for certain types of renewable energy generation ... wind farms in coastal areas (Texas and California) and in the Plains States, and solar power in the Southwest, for instance. In the Southeast, utilities have already begun blending biomass into their coal feedstocks to reduce their GHG emissions.
The price of natural gas and oil will continue to be a major determinant in whether renewable sources will ever be able to exist without subsidies. As long as natural gas prices and coal prices remain relatively low, renewable energy will not be able to compete with traditional energy on an economic level. Given the current fragility of our economy, the question that we need to ask ourselves is, “Has the time come to adopt a more European view of pricing fossil energy to encourage more investment in renewable energy technologies?”
You have worked in Europe, the Middle East and Asia Pacific, in addition to North America. Are there any countries you have experienced that do a better job than the U.S. in traditional and alternative energy?
PO: There are other countries that do a better job than the U.S. in terms of renewable energy. Most have also embraced renewables earlier than the U.S. One example is Germany and its promotion of wind energy to replace coal plants. France’s embrace of nuclear power ... while technically not renewable, yet non-emitting ... is another example of a country that long ago adopted a clean and efficient energy source.
Yet, this question brings up the fundamental issue that I raised earlier. Does it make sense for the U.S. to implement an energy program with huge costs to address a problem that we are playing a declining role in? When you compare our contribution to greenhouse gases to those of the rapidly expanding economies of India and China, you see that our emissions, while still significant, will be overshadowed by those in these emerging markets.
China and India are building coal-fired generators to meet their energy needs, yet we want to implement a plan to replace our coal plants with renewable energy generators. Why not put our investment dollars to work building renewable energy plants in China and India, as well as other developing countries?
While this solution would be fraught with its own issues, it would provide a less expensive alternative and hence a quicker payback in terms of reducing CO2 emissions globally.
In summary, the total costs associated with the American Clean Energy and Security Act represent the largest capital investment undertaking in U.S. history and the program would be pervasive ... impacting all segments of our society.
After the bill is debated in the Senate and presumably passed, it will have to be reconciled with the House version. In the end, we are likely to see a much different version with different requirements in the ultimate legislative conference version. However, the American Clean Energy and Security Act provides a useful basis for debating all the issues it encompasses, which brings us closer to a more efficient and environmentally friendly energy plan in the U.S.
Since 1985, Mr. O’Rourke has managed energy practices at: Booz Allen & Hamilton (1977–1987); CRA International (1988–1992 and 2000–2006); Putnam, Hayes & Bartlett (1993-2000); Concentric Energy Advisors (2007–2008); and LECG (2008 to present). He has a BS degree from Stanford and an MBA from the Wharton School at the University of Pennsylvania.
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