The Biden administration infrastructure plan is an ambitious, and is badly needed for the country. The US infrastructure ranks 13th in the world according to WEF, which is appalling. The broad allocations under the plan are:
- Electricity vehicles – $174B
- Utilities – $266B – of which $100B is for the power grid improvement
- Climate technology – $35B under job creation and research
- Clean Energy – $46B under manufacturing
The electric transition till date has much been a story about the renewables – wind and solar; and lately of course, a bit about electric vehicles and batteries. And why not, given the phenomenal growth and advancement of these technologies over the last decade, and emergence of companies like Tesla. So it is quite natural to stick to the policies that worked and continue on the same path for the foreseeable future. This means keep supporting solar and wind as we march toward a net zero target over the next 30 years or so. But is this the right thing to do at this stage?
I am afraid the answer is no. There are two claims that I wish to make:
1. Solar and wind are ripe to play in the markets: For the last decade, the PTCs, ITCs, RPS standards, accelerated tax depreciation etc., have contributed enormously to innovation and growth in renewables. It is about time that government let the markets workout the economics and let the private sector drive innovation based on competitive forces. In fact, continuing government support can create more harm than good. This may not be blatantly obvious if we look only at the technical innovation of the physical assets, in materials advancement or in scale economics. But, if we start looking at the second order effects of the financial structuring of renewable projects and it link back to the power industry it becomes a bit clearer. Take the case of tax equity financing. This has created innovative hedging structures such as, contract for difference that hedge away variable prices for fixed prices. While it keeps cost of capital low and offers assurance to investors for bankability of the projects, it also creates all sorts of distortions in system balancing. The fallout of growing covariance risks (e.g., when penetration goes up, loss of widespread generation due to a weather event increases prices) and consequent use of balance of hedge contracts masks variable or spot prices, which are supposed to be the signal for capacity and resource adequacy and needs. This issue came home to roost in Texas (ERCOT) this February when the synthetic PPAs did not reveal transparently that there might be a capacity problem, which took many bankers by surprise. Not that this was the only cause for the Texas disaster, but there is no denial that such structures and incentives perpetrate a behavior that resorts to rapid deal making over thorough due diligence of risks that might be several orders away. Given that the wind and solar economics are promising, even without subsidies, government can and should deploy funds elsewhere in other emerging technologies. As Bill Gates has written in his book, that the technology that can take us to a clean economy (which he calls the greatest challenge before humanity) is not there and we need innovation. Simply put, wind and solar alone will not be enough, so we need other technologies where government can help.
2. Let’s not forget nuclear, particularly the SMRs. Government should fund nuclear energy, especially Small Modular Reactors (SMRs), a technology that is missing from popular discourse. During the stimulus bill a decade ago, DOE assisted two technologies – a B&W-Bechtel JV (Generation mPower) and another belonging to Fluor (NuScale then). Only the NuScale technology marched ahead, with deployment far below its potential. Nuclear is not only a different clean technology that does not suffer from the same covariance risks discussed above, but also has a strategic, and hence a public good component. Conversely, with China building several nuclear plants, we have already given up on comparative advantage in civilian nuclear capability. SMRs can revive that. Additionally, clean as they are, wind and solar call for major projects in new T&D infrastructure, resiliency in supply chains, and viability of sustainable metals and minerals extraction. Nuclear provides insulation against underemployment and smaller geographical footprint with higher paying jobs and higher energy density per square footage. Furthermore, with possible reuse of existing T&D infrastructure, it cuts down all the hassles of securing new right of way and transmission corridors. We need to do more for nuclear along with solar and wind.
The energy transition presents a different challenge compared to 2010. Using the same playbook will not be wise. We are way past the point of experimenting and pussy-footing on energy transition, and policy needs to get us to a war-footing. The challenge now is one of commercial and practical feasibility across the value chain. There are big challenges to wrestle with:
- a) new technologies to address the transition of dirtiest industries, like cement and steel, aluminum and eventually airlines and shipping.
- b) the upstream/downstream supply chains of clean resources that rely heavily on carbon intensive practices.
- c) securing minerals and materials that will create strategic advantages, which manifest as geopolitical issues, international trade, and job creation implications.
If we believe wind and solar alone are not going to get us there, government policy needs to target the next frontier. Despite the unbridled hope and fanatic zeal for wind and solar, policy must look beyond and take a realistic view of decent clean energy jobs and domestic economic revitalization. It has to tackle serious questions on costs, economic dislocations, underemployment. Charging forward without addressing or sidestepping these matters will result in a grievance snowballing into full frontal opposition to the energy transition itself. There is no denying that where the government decides to spend its money will be crucially important. Getting it wrong will have serious consequences. If we have a remote chance of an energy transition, this is the least the government can do.
© 2021 by Greenelectrons Consulting, LLC.
