Savannah Duby

Chelsea Pestana
12 May 2011
Foundations of Policy Analysis
Grinnell College
The Problem
 The current energy grid is inefficient,
insecure and unreliable, and market
incentives are insufficient for utilities or
private actors to drive innovation for
upgrading the grid.
Current Grid
 Three large grid systems
 Interlinked transmission
and distribution lines
 Nation’s energy
regulated by Federal
Energy Regulatory
Commission (FERC)
Inefficient
 Huge demand at certain time of day =
 “peak load”
 Cushion demand with reserve energy
 Immediate demand and supply not known
 Renewable energies not easily integrated
Insecure
 Cyber attacks
 Natural Hazards
 Foreign natural gas dependency
Unreliable
 Outages
 $150 billion annually
 Uncommitted backup energy sources
 Increasing energy demand
 17.7% increase in ten years
Solution: Smart Grid
 What we could be exploiting…
 Efficiency
 Security
 Reliability
 Change initiated by contracts between utilities and
energy entrepreneurs
The Market Failures
 Rate-based system
 Utilities unmotivated to look for alternatives
 Asymmetrical information
 Consumer lacks real-time pricing and market influence
 Immediate costs with delayed benefits
 Consumer energy costs
 Utilities transition investments
 Current utility financing programs
Actors
 Official actors
 Congress
 President
 Bureaucrats
 Department of Energy (DOE)
 Treasury
 Federal Energy Regulatory Commission
(FERC)
Actors
 Unofficial Actors
 Utilities
 Entrepreneurs
 Interest groups
 Think Tanks
 Consumers
 Society
Lack of innovation
1995 1996
Electricity 0.2% 0.3%
Industry
Business 10.1% 10.2%
Services
Drugs & 10.1% 10.5%
Medicines
Table 1: Percentage of sales revenue directed
toward R&D. National Science Foundation.1
Figure 1: Declining energy R&D investment by public and private sectors – Since 1980,
energy R&D as a percentage of total US R&D investment has fallen from ten percent to
two percent. (source)2
Figure 2: Federal outlays for Energy compared to those for Education, Training,
Employment and Social Services

Source: PolicyAgendas.org
Status Quo
 Renewable Energy and Electric Power Transmission
Loan Guarantee Program
 American Recovery and Reinvestment Act (ARRA, the
Stimulus Bill) Section 406
 Leverages federal dollars by guaranteeing the debt
(loans) of private companies rather than investing
directly through grants or tax subsidies
 Original appropriation of $6 billion enables the program
to guarantee $40 - $120 billion worth of loans3
 Fund has subsequently been raided, lowering funds down to
$2.5 billion (losing $35 billion worth of leverage)4
 Deadline: September 30, 2011
Status Quo
 ARRA Section 1603 Treasury cash grant program
 Allows renewable energy projects to receive 30% of
qualified costs as a cash grant, rather than receiving a tax
credit
 As of April 6, 2011 5
 7,957 projects funded
 $6.9 billion in federal funding as part of $23.2 billion in total
private and federal investment
 Deadline: December 31, 2011
Status Quo
 Intellectual Property Rights
 Eased licensure process for patent applications – DOE
provision of an online, streamlined template option
 Total upfront cost of licensing DOE patents to $1,000 for
a portfolio of up to 3 patents (savings: $10,000 - $50,000)
 Easier access to use of national laboratories – companies
need only make an advance payment covering first 60
days of research work rather than 90 days6
 Deadline: December 15, 2011
Status Quo
• The American Recovery and Reinvestment Act (ARRA)
of 2009 allocated $4.5 billion for Electric Grid
Modernization 7
• $3.5 billion for Smart Grid Investment Program
• 570 applications from utilities requesting $14.6 billion –
only 100 applications approved under the $3.4 billion cap
8

• Deadline: Passed
So if all these great programs
have been put in place, what’s
the policy problem?
All these programs will expire by the end of 2011.
America needs to continue providing a sound economic
foundation for the nation’s energy infrastructure if the
benefits of a smart grid are to be realized.
Our Policy Proposal
 Extend the aforementioned finance programs
 Long-term rather than temporary
 Expand the scope of these programs
 Loan Guarantee Program  Restore the full $6 billion
 1603 Treasury cash grants  apply to smart grid technology;
end ban against tax-exempt parties
 Funding: surcharge, excise taxes on imports
 Establish a Revolving Loan Fund for smart grid
projects
Figure 3: Flow diagram of the process of a revolving loan fund (RLF).9

 Create a national Revolving Loan Fund program for

smart grid projects
Revolving Loan Fund Program
 Reduce direct federal financing 10
 Initial capital often already provided through ARRA –
State Energy Program (SEP) & Energy Efficiency and
Conservation Block Grant Program (EECBG) funds
 DOE: Office of Energy Efficiency & Renewable Energy
already familiar with setting up RLF programs
(Guidelines11)
Portfolio & Oversight Commission
 Establishes portfolio standards
 Energy project proposal
 Entrepreneurial connections
 Financial situation
 Rationale
 Implementation
 Top-down
 Bottom-up
 Incorporate learning and feedback
Controlling Bureaucrat Discretion
 Ownership over policy
 Principal-agent problems
 Shirking (street-level bureaucrats)
 Report to the Commission
 Required number of random evaluations on projects
 Moral Hazard (Commission members)
 Limit interest group connections
 Implement a conflict of interest policy modeled on that of the
North American Electric Reliability Corporation (NERC)12
Alternative Approaches
 “Consumers are the barrier”
 Centrality of “the interest of the consumer” to impact nature
of utilities’ operation models
 Overwhelmed by information required to operate customer-
end smart grid technologies (e.g., smart meters)
 “Initiatives should be led by the states”
 Better positioned to design project standards
 Rebuttal
 Consumers want smart grid technologies
 Energy grid crosses state lines, outside the jurisdiction of any
single state
 Benefit Matrix
Renewable Flexibility of Cost Deployment
Energy Response Effectiveness Efficiency

Our Policy
– Focus on
Utilities,
Supply Side
Alternative A
– Focus on
Consumers,
Demand Side
Alternative B
– Initiatives
led by the
states
End notes
1 Moynihan, Michael. Electricity 2.0: Unlocking the Power of the Open Energy
Network (OEN). Rep. NDN and the New policy Institute, 4. Feb. 2010. Web.
http://ndn.org/sites/default/files/paper/Electricity2_0.pdf.
2 Kammen, Daniel M., Gregory F. Nemet. “The Incredible Shrinking Energy R&D
Budget.” The Access Almanac. Vol. 30, Spring 2007. Web.
http://www.uctc.net/access/30/Access%2030%20-%2006%20-
%20Almanac%20-%20R+D%20Budget.pdf .
3 Caperton, Richard W. “Congress, DOE’s loan guarantee program, and America’s
Clean Energy Future.” ClimateProgress.org. 4 March 2011. Web.
http://climateprogress.org/2011/03/04/congress-doe-loan-guarantee-program-
clean-energy/.
4 Caldwell, Jake, Richard W. Caperton. “End the Raids on Clean Energy Funding:
Congress Shortchanges a Key Component of Our Clean Energy Future.”
AmericanProgress.org. 11 August 2010. Web.
http://www.americanprogress.org/issues/2010/08/clean_energy_raids.html.
End notes
5 Overview and Status Update of the §1603 Program. U.S. Treasury. 6 April 2011.
Web. http://www.treasury.gov/initiatives/recovery/Documents/2011-04-
06%20-%20S1603%20Overview.pdf.
6 “Department of Energy Launches ‘America’s Next Top Energy Innovator.’” U.S.
Department of Energy, Office of Energy Efficiency and Renewable Energy. 29
March 2011. Web.
http://apps1.eere.energy.gov/news/progress_alerts.cfm/pa_id=508.
7 “Breakdown of Funding.” U.S. Department of Energy. Web.
http://www.energy.gov/recovery/breakdown.htm.
8 Sulavik, Christopher. “Cleantech revolution: Building smart infrastructures.”
Price Waterhouse Coopers US Thought Leadership Institute. December 2009.
Web. http://www.pwc.com/en_US/us/technology/assets/pwc-cleantech-
revolution.pdf.
9 Otto, Garth. “State Energy Revolving Loan Funds – Overview and Trends.”
National Association of State Energy (NASEO). 3 August 2010. Web.
http://www.naseo.org/resources/selfs/State_Energy_RLF_Report.pdf.
End notes
10 Ibid.
11 “Revolving Loan Funds and the State Energy Program.” US Department of
Energy, Office of Energy Efficiency and Renewable Energy. 6 July 2009. Web.
http://www1.eere.energy.gov/wip/pdfs/sep_rlf.pdf.
12 “Appendix A – Corporate Policies: Conflict of Interest and Business Ethics
Policy for Trustees, Officers, and Employees.” North American Electric
Reliability Corporation. 30 July 2008. Web.
http://www.nerc.com/files/Conflict-of-Interest-and-Business-Ethics-7-08.pdf.
Picture sources
 http://www.earthzine.org/wp-content/uploads/2010/04/transformers.jpg
 http://gigaom2.files.wordpress.com/2011/03/cloud_powerlines_streetlamps.jpg
 http://www.telegrid.com/SmartGrid.JPG
 https://www.cee.siemens.com/web/il/en/corporate/home/Siemens_Israel/Energysector/PowerDistribution/EnergyAu
tomation/PublishingImages/Smart%20Grid.JPG
 http://www.guardian.com/stellentdev/groups/guardiandotcom/documents/native/gi_010643.jpg