Jump Start the Smart Grid, Accelerate the Nation

Savannah Duby, Chelsea Pestana

19 May 2011 PST220: Foundations of Policy Analysis Grinnell College

Introduction In 2009, American consumers consumed about 3,741 billion kilowatt-hours (kWh) (EIA) of electricity. Every light switch and appliance that drew a current depended on the utilities in charge of generating, transmitting, and distributing that power. Additionally, state and national regulatory standards are responsible for assuring quality service. The relative involvement of utilities and government, at the state and national level, has changed over time in response to shifting perspectives on electricity as a good and to increasing demand for energy. The North American Electric Reliability Corporation (NERC) has been involved in monitoring the reliability of electricity on a national level since 1968, but it has not been until 2007 that the federal government has had the authority to regulate generation, transmission and distribution of energy on a national scale. In this new appropriation of power, the U.S. Federal Energy Regulatory Commission (FERC) granted NERC the legal authority to enforce reliability standards with all users, owners and operators of the bulk power system in the United States and made compliance with those standards mandatory and enforceable. Throughout the last decade, policy makers have scrutinized the existing grid system, as alternative energy supply options have exposed some of its weaknesses. 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.

Problem Background The inefficiency of the current grid primarily stems from ignorance in supply and demand that hurts both consumers and producers of energy. It costs producers more to provide energy

during “peak load” when demand is highest because they have to invest in reserve energy sources. Consumers, even if they are knowledgeable about daily fluctuations in price, cannot choose to use energy that would bring them a better price, since they are charged a flat rate for use. The second inefficiency is in the current system’s dependency on carbon-emitting fuels, including 23.3% on natural gas and 44.5% on coal generation in 2009 (EIA, 2009). Although during that year renewable sources (excluding hydroelectric) accounted for 3.6%, natural gas is still the fastest growing energy generation sector (EIA 2009). The environmental externalities of impaired air quality and contribution to global warming could be mitigated if the grid were more receptive to integration of renewable energies. The grid system is also insecure and unreliable. It is still vulnerable to cyber attacks, a concern brought to congress’s attention in 2008 with a hearing reviewing the weakness of the electric power infrastructure, and then again as recently as 1 February 2011 with a joint initiative spearheaded by the Office of Electricity Delivery and Energy Reliability, NERC, and the National Institute of Standards and Technology (NIST). In addition to this threat, international instability in countries that provide our petroleum can threaten both the oil supply and price, fluctuations which are felt by both utilities and consumers. Although petroleum currently accounts for roughly only one percent of electricity generation within the United States (EIA 2009), it is the fuel of choice par excellence of the nation's transportation sector. Dependence on a volatile foreign petroleum market places the U.S. electricity generation and delivery infrastructure at risk by endangering the transportation system necessary for delivery of other fuels to power plants. Power outages in the U.S. currently range between a low of

92 minutes to a high of 214 minutes, numbers that are astonishingly high in comparison with those of other developed nations, such as Japan, which averages only four minutes of total interrupted service each year (Patterson, 2010). These power outages have been estimated to run an annual cost of $150 billion for Americans (DOE, 2008). The reliability of the grid will become more of a public concern as utilities feel the pressure of energy demand increasing by about 17.7% in the next ten years (NERC). With every year, the current system appears less sustainable. The federal government has come to recognize inefficiencies in the grid and has begun to incentivize utilities to develop a more interconnected, flexible, communicative grid. One model the government has deemed a feasible solution to the electricity grid woes of the new millennium is a “smart grid.” In brief, the smart grid may be described as “an automated electricity system that improves the reliability, security and efficiency of electric power. It more easily connects with new energy sources, such as wind and solar, and is designed to charge electric vehicles and control home appliances via [sic] 'smart' devices” (Patterson, 2010). This would involve creating a more nationally interconnected network with fluid interstate transmission of energy, as well as incorporating technologies designed to provide better information about real-time supply and demand. The physical network, enabling integration of a variety of energy sources, would improve reliability and security. If one particular kind of energy production were to fail, the system would have others to fall back on. Additionally, alternative energy sources could reduce dependency on international fuel sources, thus insulating the system from fluctuations in fuel pricing overseas. These alternative energy sources also offer greater efficiency through potential carbon emission reduction, both by bringing more renewable energy online. The Electric Power Research Institute (EPRI)

estimates that a national smart grid could reduce annual greenhouse gas emissions by 60-211 million metric tons of CO2 by 2030. Accompanying the physical grid would be technologies that give the smart grid its intelligence. Programs, such as Advanced Metering Infrastructure (AMI), will enable communication between energy suppliers and consumers, as well as improvements in repair response time after outages. The responsiveness of the system could save as much as $49 billion in outage costs per year (Massoud, 2011). The smart grid offers improvements to a suite of problems existing in the electricity sector.

Market Failures The financial environment for spurring smart grid innovation and growth currently suffers from the following market failures: the current business model adopted by utilities and government regulators guaranteeing a rate of return based on kWhs sold, the system of rate-setting, and the natural advantages held by monopolistic companies in a sector where sizable initial capital costs serve as barriers to entry. The current rate-based system of pricing has guaranteed a certain rate of return for utilities, which in turn disincentivizes investment in new technologies and innovative business models. Instead, this guaranteed rate of return has lead to a tendency for utilities to favor traditional baseload power from coal and nuclear plants, rather than renewable energy sources, programs promoting energy efficiency, and demand response programs to more effectively balance energy production with energy needs. The necessity of large amounts of starting capital creates high barriers to entry that give existing energy producers and distributors a strong advantage as natural monopolies largely immune to the effects of competition. Without competition, the electricity

industry is bereft of the primary driving force behind continued innovation. Table 1 and Figure 1 both illustrate the dwindling interest in energy infrastructure innovation. 1995 Electricity Industry Business Services Drugs & Medicines 0.2% 10.1% 10.1% 1996 0.3% 10.2% 10.5%

Table 1: Percentage of sales revenue directed toward R&D. Moynihan.

Figure 1: Declining energy R&D investment by public and private sectors – Since 1980, energy R&D as a percentage of total U.S. R&D investment has fallen from ten percent to two percent.

Figure 2: Comparison of federal outlays for Energy and Education, Training, Employment and Social Services; Source: PolicyAgendas.org Beginning in the 1960s, we see a steady widening of the gap between public investment in the energy sector (as represented by government outlays) and the budget for Education, Training, Employment and Social Services, even though the nation depends heavily upon a stable and secure energy supply industry in order to function. The abrupt spikes in the energy budget reflect international affairs of the time, most notably the formation of OPEC in the 1970s and the ensuing squeeze put upon U.S. access to oil supplies. This historical moment demonstrates the need for greater U.S. energy independence, which will be further strengthened by upgrading the current energy transmission grid to a smart grid capable of handling new energy needs securely and efficiently.

Current Programs The government, recognizing that there is room for improvement, has begun a series of attempts to incentivize revision of the traditional energy system. American federal energy policy framework currently relies on two primary programs for transitioning the U.S. energy grid to the smart grid model: The Renewable Energy and Electric Power Transmission Loan Guarantee Program and the Smart Grid Investment Grant Program (hereafter referred to as the Loan Guarantee Program and SGIG, respectively). Two subsidiary programs, the ARRA Section 1603 Treasury cash grant program for renewable energy generation, and the DOE’s recent alterations to the licensure process for patent applications, provide additional support for developing the infrastructure changes necessary for America’s energy future. The Loan Guarantee Program was originally established under the Energy Policy Act of 2005, and then substantially modified for the better under Section 406 of the ARRA legislation of 2009. Its creation allowed for the leverage of federal dollars by guaranteeing the loans of private companies working within the burgeoning smart grid technology sector. This Loan Guarantee Program is analogous to the federal government’s guarantee of college student loans. The Loan Guarantee Program has a deadline set for 30 September 2011. By providing a level of financial security for these companies with promises of repayment to the lending institutions, the U.S. federal government injects greater stability into the market for smart grid technologies. Between the program’s inception in 2005 and its alteration in 2009, “only three Department of Energy project solicitations have been issued and not a single renewable energy project has received a loan guarantee” (Bastier, et al, 2009). This program failure has been attributed to the original program’s

credit subsidy fee charged to the borrower for the guarantee, a fee which has since been eliminated. Loan guarantee programs have the advantage of leveraging federal funds without relying on direct investment. This leverage structure enables the government to guarantee between $40 billion and $120 billion in loans using only $6 billion in original funds (Caperton, 2011). Unfortunately, since the Loan Guarantee Program’s 2009 modification, the original $6 billion fund has been raided repeatedly, first for an extension in July 2009 of the “Cash for Clunkers” program, and then again to help pay for the federal medical assistance (FMAP) legislation of August 2010, for a total reduction of $3.5 billion. This cutback is estimated to cost $35 billion in possible loans, a roughly 30% minimum downgrade of the program’s original effectiveness. The 2009 ARRA legislation also allocated $4.5 billion for “electric grid modernization,” with $3.5 billion of those funds reserved for the Smart Grid Investment Grant Program (SGIG). The SGIG program has been authorized to provide grants of up to 50% of qualifying smart grid investments (DOE, 2009). Direct cash grants have been proven to have a large, immediate impact on promoting industry growth (Bipartisan Policy Center, 2011) in comparison with the delayed effects of tax credit programs. Although the Bipartisan Policy Center’s study was strictly concerned with the renewable energy generation industry, the principle applies equally well to the smart grid technology sector. The increased effectiveness of cash grants over tax credits may be ascribed to the difficulty of finding initial funding capital from private sources who are often wary of the possibility of reimbursement under the highly unstable tax credit system, as well as the reliance on tax equity providers1 for project financing, a


The online journal EcoSeed best clarifies tax equity providers with the following description: “Tax equity providers are large tax-paying financial entities that can use the tax incentives to offset future tax liabilities. These clean energy developers then participate in a partnership structure that “flips” ownership of the project from the tax equity investor to

dependence which hinders project flexibility as well as limits the scope of possible projects. Taxbased incentives limit the industry’s capital financing access to a small group of corporate investors, whose numbers have further dwindled as a result of the credit crunch of the recent economic downturn. Table 2 illustrates the reduction in this investor market. Sasha Mackler, energy research director at the Bipartisan Policy Center, has stated that “one dollar in cash has nearly double the value of a dollar in tax credits to a project developer” (Valdez, 2011). At the program’s commencement, 570 applications from utilities were received, requesting a total of $14.6 billion, nearly six times the program’s 100-project capacity as defined by its $3.5 billion cap. The huge disparity between the number of applications and the number of approvals indicates that the SGIG program has a large amount of untapped potential for spurring growth within the smart grid sector. Other government policies with significant though as yet unexplored implications for accelerating smart grid technology innovation and growth are the ARRA 1603 Treasury cash grant program (“1603 cash grant”) and recent changes to the DOE’s licensure process for patent applications. The 1603 cash grant, allows renewable energy projects to receive 30% of qualified costs as a cash grant directly from the Treasury rather than as a tax credit. The program benefits from all of the advantages already outlined for cash grants compared to tax-based incentives. The 1603 cash grant has been heralded as “the star of ARRA,” (Umanoff, 2011) with 7,597 projects funded as of 6 April 2011, using $6.9 billion in federal funding as part of a total of $23.2 billion in private and federal investment. The program was originally set to expire on 30 September 2010, though it has been extended to 31 December 2011 as part of the Tax Relief, Unemployment Reauthorization, and
the developer-owner once the tax benefits are realized. However, the transfer of the clean energy project would only take place after the project developers pay a premium to the tax equity providers.” (28 March 2011)

Job Creation Act of 2010. Currently the program cannot be applied to tax-exempt entities, such as many institutions of higher learning, municipal utilities and electric cooperatives. Yet the 1603 cash grant program only applies to renewable energy generation projects, thus cutting out the other smart grid projects which are also concerned with energy transmission and distribution. The 1603 cash grant program provides valuable insight into the possibilities of an extended, uncapped cash grant program. Table 2: Tax Tax Equity Investors Motivated in 2007 Investor Market • JP Morgan Sources: U.S. • Union Bank of California Partnership for • Wells Fargo Renewable • New York Life Energy Finance (PREF) • Bank of America *Departed tax • GE Capital equity base • Morgan Stanley during 2008• HSH Nordbank‡ 2009 due to • Key insufficient • Northern Trust‡ taxable income or • John Hancock* bankruptcy • Prudential* †Permanent • NorthWestern Mutual* departure • Citi* ‡These firms • ABN Amro*† only participate • Fortis*† in small-scale • Lehman Brothers*† solar financings • Wachovia*† • AIG*† • Merill Lynch*† Renewables Tax Equity Market $6.1 billion $3.4 billion $1.2 billion Tax Equity Investors in 2008 • JP Morgan • Union Bank of California • Wells Fargo • New York Life • GE Capital • Sempra Energy • Morgan Stanley • Bank of America‡ • U.S. Bank‡ • HSH Nordbank‡ • Key‡ • Northern Trust‡ • Sun Trust‡ Tax Equity Investors in 2009 • JP Morgan • Union Bank of California • Bank of America • GE Capital • Credit Suisse • Morgan Stanley • Citi • Wells Fargo‡ • U.S. Bank‡ • Key‡ • Northern Trust‡

The final major financial element of federal U.S. smart grid policy is the latest collection of adjustments to the DOE’s process for private companies to license DOE patents. Beginning 2 May 2011 and ending 15 December 2011, the “America’s Next Top Energy Innovator Challenge” will reduce the total upfront cost of licensure to a $1,000 fee, a savings of between $10,000 and $50,000 on average for companies. Furthermore, the licensure process itself will be simplified, with a standardized set of terms for start-ups, thus enabling the DOE to process more licenses in a shorter time period while also curtailing costs for companies lacking the resources or expertise to negotiate individual licensing agreements per the older licensing framework. Accompanying these changes is a new regulation regarding company access to national laboratories, stating that companies need only make an advance payment covering the first 60 days of research work rather than the first 90 days.

The Proposal In response to the inadequate funding programs thus far, we propose to restructure and refund current smart-grid research and development grant programs. By incentivizing utilities to invest in innovative energy technology, the U.S. may achieve greater integration of increased efficiency, security and reliability into the electricity system. To address the current market failures preventing utilities from investing in smart grid technological innovation and commercialization as a step toward the deployment and installation of smart grid products, we propose the following steps be taken: • • Extend the Loan Guarantee Program and SGIG program Restore the full $6 billion of the Loan Guarantee Program

Expand the scope of the 1603 cash grant program to apply to smart grid technology and end the ban against project ownership by tax-exempt entities

• •

Establish a Revolving Loan Fund (RLF) for smart grid projects Appoint a Portfolio & Oversight Commission

The extension of the Loan Guarantee and SGIG programs combined with the establishment of a national smart grid RLF will signal a paradigm shift that emphasizes long-term rather than short-term planning. The installation of smart grid infrastructure technologies is a continual process, with most estimates of the implementation timeline extending to at least 2030, as with the Electric Power Research Institute’s (EPRI) preliminary estimate of the cost-benefit analysis of a fully functioning smart grid (EPRI, 2011). A transition to a long-term financing plan will assure utilities of the benefits and financial security of switching to a smart grid model. The restoration of the full $6 billion for the Loan Guarantee Program will increase the program’s effectiveness to the projected $120 billion worth of leverage of private funding for smart grid projects. Expanding the 1603 cash grant program to apply to smart grid technology will provide additional avenues for smart grid technology and manufacturing companies to receive appropriate funding for RD&D projects. Ending the ban against project ownership by tax-exempt entities will permit experienced power players, such as municipal utilities and electric cooperatives, to increase “knowledge capital” by injecting a higher degree of knowledge of the industry into the system, thereby promoting smoother application of technological innovation to the transition process. This regulatory change would also encourage utilities to enter the renewable energy industry, thus functioning as an indirect incentive for utilities to invest in smart grid technologies which would

promote the use of renewable energy sources and assisting both the renewable energy industry and initiatives within the smart grid sector. Establishing a revolving loan fund (RLF) for smart grid projects will reduce direct the amount of necessary direct federal financing while ensuring a steady stream of public investment capital. Rather than constantly needing to approve outlays for federal financing programs in yearly budgets, such financing would come from a one-time financial appropriation. RLFs function operated based on the principle of constant fund recycling and reinvestment. The process begins with a conventional loan situation, with a minimal interest charge used to cover operating costs. Once the loan is repaid, the money is then immediately reinvested in another project. Readers may find it helpful to draw an analogy between our proposed smart grid RLF and the activities of the non-profit organization Kiva Microfunds. Figure 4 illustrates the RLF process. The DOE already has familiarity with setting up RLF programs, and indeed the Department has guidelines for states to create RLFs using ARRA funds as a means of extending their impact. An RLF at the national level will ensure that companies whose projects would cross state borders will not be overlooked by state RLFs with specific geographic and jurisdictional limitations. In order to fund any additional costs incurred by the initial establishment and maintenance of these programs, we propose two cost allocation measures. First, we advocate the elimination of certain tax breaks for oil companies. These tax breaks, specifically the tertiary injectants deductions, percentage depletion allowance, passive investments allowing oil and gas properties to become tax shelters, and the foreign tax credit, all of which would create a $18.75 billion in total additional revenue for the federal government (Gandhi, 2010). Ending these artificial economic structural

supports for the oil industry will induce a shift in the U.S. away from dependence on a volatile foreign energy market while simultaneously buttressing the growing American renewable energy and energy efficiency markets vital to the implementation of the smart grid. We also recognize the potential necessity of an additional surcharge levied on the raet at which electricity consumers are charged for their consumption. This additional surcharge would only apply in some cases – for instance, consumers who use below a defined level of electricity in a month, or those who live below a specified income level, would be exempt. In this way, we hope to limit the instrument's regressive nature as well as putting in place a pilot program for incentivizing energy conservation at the consumer level.

Figure 4: Flow diagram of the process of a revolving loan fund (RLF).

Oversight Commission Although making more money available to more utilities will increase funding for research, development, and deployment of smart grid innovations, this does not necessarily guarantee the successful fulfillment of the policy goals of energy reliability, security and efficiency. An Oversight Commission, housed within the Department of Energy to expedite intra-governmental communication, will provide assurance that the money invested by the government will be used constructively. The Commission will set standards for utility grant requests and monitor the progress of the project. The Commission will ensure that only deserving grant proposals will be funded by requiring that utilities submit a portfolio that details the short and long-term project proposal, references for existing and potential energy entrepreneur connections, the financial situation of the utilities and their entrepreneurs, and finally a rationale for why they have confidence that their use of funds will be constructive. Setting specific requirements for the portfolio will facilitate the grant award process for bureaucrats and will ensure utilities identify necessary steps toward successful smart grid development, as traditional utilities may learn from the examples of others already transitioning to the smart grid model. These requirements must also retain a degree of flexibility in light of the variety of energy needs and challenges facing each region of the United States. For instance, projects which target innovation regarding the installation and connection of renewable portfolio standards (RPS) according to the specific profile of potential renewable energy supply of different regions. Utilities in the Southwest would most likely prefer a project proposal with a strong emphasis on photovoltaic

solar arrays, whereas utilities located along the coasts might prefer ocean wave energy, or utilities in the Northern Midwest may favor projects comprised largely of wind power. The Commission will also monitor the progress of the utility’s proposed project, mainly through frequent and random inspections. Such oversight would ensure projects remain on track, that funds are used appropriately, and that a high level of detail si documented on the progress of the project, so as to provide data for future evaluations of projects and feedback on best practices as well as practices to avoid. By personally connecting the utilities with the Commission review board, project monitors will provide a useful source of information necessary for policy learning. Yet the actions of this bureaucrat and others within the Commission will need to be regulated in order to avoid such problems as moral hazard and shirking. Although the use of discretion may empower the monitoring agents and give them a sense of engagement with and ownership over the policy implementation process such that they would be less likely to fall prey to moral hazard, the question of shirking still remains. To combat this possible principal-agent problem, the Commission will establish a minimum number of inspections to be completed for each approved project and to be reported to the Commission. This minimum will ensure that agents will conduct a comprehensive review of the projects while still maintaining the element of surprise not permitted within a rigid, scheduled system of administering project reviews. To mitigate the risk of moral hazard on the part of Commission members, a conflict of interest policy will be adopted, modeled on that of NERC (NERC, 2008). The potential for principal-agent problems will also be considered during the selection of members to serve on the Commission. Individuals may not have specific ties to any

particular energy companies or manufacturers. That is, no board member could recently (within the past two years) have been employed with any company in which it could be said they have a conflict of interest. Another tool would be to require board members to give an extended advance notice of leave, such as six months, to avoid a “revolving door” situation, in which board members enact policies favorable to a specific entity and then immediately leave in order to work for that same entity. With a longer period of time between when a board member can give notice of leave and when he or she can actually end duties with the board, the risk of industry capture may be lowered. When deciding which project proposals should receive grants, the commissioners will also have to consider diversity among the projects. This will prevent bureaucrats from either intentionally favoring a certain energy domain or from disproportionately awarding finds to more utilities that are more well established. It is necessary to be flexible and optimistic in some innovative proposals in order to preserve the diversity of the smart grid that contributes to its reliability, security, and efficiency.

Perspectives of Policy Stakeholders This policy will be reviewed by the U.S. congress, as transmission and distribution lines are already across state boundaries and goals of the policy include creation of a national scale energy market. Congress’s support of the policy depends on how the representatives perceive it will be received by the target population (utilities), its feasibility of implementation, and the benefits. The president has veto power over the policy, but support from President Obama is likely in light of his

highlighting the smart grid as an issue for consideration on the agenda and has generally been in favor of research and development. Other official actors which may directly influence the passage of legislation for our proposal are those which have a role in regulating the energy industry and providing funding for the research and development in the energy sector. The DOE and FERC are both involved in reviewing energy generation, transmission, and distribution and may prefer a policy which preserves their authority. The U.S. Treasury is already funding some grant programs for renewable energy generation and could be receptive to reworking their investment to a program that may have greater payoffs. These groups will likely express their judgment about the feasibility of policy implementation. Utilities, the target population, will likely influence the passage of legislation as unofficial actors, since they have the greatest immediate stake in the policy. Utilities will have to weigh the benefit of immediate funds with the costs of initiating a smart grid system trajectory, just as they do when approaching the existing grant programs. Our policy, which will make grant programs a more lasting option, may incite disapproval of state governments, unofficial actors which are still highly influential in localized electricity markets (Moynihan, 2010). This policy would include a shift in power from states to utilities, since providing more long-term grant programs will give utilities more autonomy in their generation, transmission, and distribution. In opening up the market, energy entrepreneurs will become unofficial actors that will bring strong support for the policy. This group, along with energy think tanks, has already been highly visible and proactive in their support of funding for smart grid innovations (SmartGridNews.com,

2009; ClimateProtect.org, 2011). Though the policy requests some upfront increased funding from the government, adoption of a smart grid would also help relieve outage burdens on the national budget. Congress will also consider the response of consumer-voters. As the program involves some up-front transition costs to individual consumers and long-term benefits through strategic energy management, Congress will not likely approve such legislation based solely on benefits to consumers. The impact on society as a whole will need to be considered, including dispersed benefits such as improved reliability and security. A more persuasive benefit would likely be the short-term increase in employment. According to the American Solar Energy Society (ASES) and Management Information Services, Inc. (MISI), “aggressive development of the renewable energy and energy efficiency industries could generate up to $4.5 trillion in revenue and create 40 million jobs by the year 2030” (Bezdek, 2007).

Alternative Approaches Alternative approaches to addressing the current problem of the impending obsolescence of America’s electricity grid may include the opinion that “Consumers are the barrier to effective smart grid RD&D,” or that “Smart grid initiatives should be led by the states rather than the federal government.” The first alternative approach relies on assumptions of the centrality of the “consumer interest” to affect the nature of utilities’ operation models and on the notion that consumers are overwhelmed by the information increase inherent to the operation of customer-end smart grid technologies (e.g., smart meters) such that they are antagonistic toward the entire model. These

assumptions are faulty. Research conducted by Energy Insights in 2007 indicates that consumers are interested in opportunities afforded them by the smart grid, with 95% of Americans reporting interest in receiving information on their energy consumption and 69% saying that they would review “real-time” usage data if it were available (Oracle, 2009). Furthermore, this emphasis on the consumer is misguided in light of the fact that utilities lie at the heart of the process of implementing the smart grid, and they “are unique positioned to set the tone for deployments, which in turn will influence the total value realized as well as who captures it” (Booth et al, 2010). The second alternative approach implicitly emphasizes the need for flexibility in responding to the variegated needs and strengths of different utilities and regional electricity grids. This concern has been incorporated into our policy proposal for a national plan. Moreover, a state-centered plan for the smart grid overlooks the fact that the electricity grid crosses state borders, so that it extends beyond the jurisdiction of any single state. This demands inter-state interoperability standards which can be set only by a higher authority, such as the federal government. Additionally, the states lack the broader financial resources of the federal government, resources which are necessary to achieve the smart grid implementation given its high estimated cost (EPRI, 2011).

Policy Evaluation To evaluate our policy, we stress the importance of financial sustainability, deployment efficiency and cost effectiveness. We use the following definitions for these terms: • Financial sustainability: the notion that our proposed financial programs will endure beyond the yearly battles over the government budget so that an environment of

long-term stability may provide fertile ground for the growth of the smart grid industry. • Deployment efficiency: program efficacy of pairing the target populations of utilities and energy entrepreneurs with the funds necessary for the commencement and completion of projects contributing to innovation and commercialization of smart grid technologies and products. • Cost effectiveness: programs which produce optimum results for the expenditure.

We are prioritizing the goal of achieving energy efficiency with the smart grid in our policy proposal, given that other significant legislation has been proposed regarding achievement of the goals of security and reliability, namely with the recent Grid Reliability and Infrastructure Defense (GRID) Act, which passed a vote in the U.S. House of Representatives on 10 June 2010, but it was not included for consideration by the Senate (GovTrack.us). Despite its failure in the Senate, its success in the House indicates that GRID is a strong piece of legislation. Thus, we rest assured that the goals of energy security and reliability are being appropriately addressed by other actors within the U.S. government. The RLF component of our policy proposal has been designed specifically to address the interest in financial sustainability. Its structural requirement of financial reinvestment in new projects guarantees that the starting lump sum will provide for an ever-larger number of projects over the life of the program. The Loan Guarantee Program will adjoin an additional dimension of financial sustainability, given its high ratio of financial leverage between public funds and private investment capital.

The interest in deployment efficiency has been included in our program’s strong emphasis on cash grant programs rather than tax-based incentives. Cash grant programs have the benefit of providing immediate funds for project use, so that both a wider variety of projects may be undertaken (given the elimination of the need for a tax equity investor, entities that have become increasingly rare since 2007) and project start times may be moved up to earlier dates, since project owners and managers will already have cash in hand and will no longer need to spend time searching for more capital investors. Finally, our proposed Oversight Commission will ensure a high level of cost effectiveness. The processes of project analysis and review, both pre- and post-implementation, make certain that the funds for such RD&D proposals are deployed in a manner that minimizes waste and assures citizens that their tax dollars are doing the most good for America’s energy future.

Glossary of Acronyms
AMI: Advanced Metering Infrastructure ARRA: American Recovery and Reinvestment Act (2009) DOE: Department of Energy EISA: Energy Independence and Security Act (2007) EPRI: Electric Power Research Institute FERC: Federal Energy Regulatory Commission GRID Act: Grid Reliability and Infrastructure Defense Act (2010) NERC: North American Electric Reliability Corporation NIST: National Institute of Standards and Technology RD&D: Research, development and deployment RLF: Revolving Loan Fund RPS: Renewable Portfolio Standards SGIP: Smart Grid Investment Program

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