by Leslie Wells, Consultant for Natural Resources

This Advisor briefly describes our current national energy policy (or lack thereof) and presents some options that are being espoused to promote a more managed approach to energy production and consumption.

Introduction

In the past, energy use in the United States was guided by the assumption that an increase in energy supply would support unlimited economic growth, especially because energy sources were inexpensive and relatively abundant. In 1990 the United States consumed 81 quadrillion British thermal units (Btus) of energy, an 85 percent increase over 1960. Accounting for the increase in population size during the same period, energy consumption per person has increased 35 percent since 1960.

This unchecked consumption of energy is no longer considered sustainable. Due to increased worldwide population growth and industrialization, demands for energy have accelerated. The extraction of energy resources is becoming more expensive as we dig deeper and travel farther for supplies, and the environmental and social costs of resource extraction, energy production, and protection of energy sources are escalating. In addition, the United States currently uses twice as much energy as its trading peers (Japan and Germany) per dollar of gross national product (GNP), making us less competitive in the global marketplace.

Increasingly, both the public and private sectors are recognizing the benefits of conserving energy and the need to use energy efficiently. In Michigan a relative risk analysis project was conducted for Governor Engler (using funding from the U.S. Environmental Protection Agency [EPA]) the goal of which was to identify and rank environmental issues affecting Michigan according to the risk they posed to people and the environment. Twenty-four issues were identified by committees composed of citizens, scientists, and agency representatives. “Energy production and consumption: practices and consequences” was one of six top-ranked issues.

National Energy Crisis

The oil crisis of the 1970s was a blunt reminder of U.S. dependence on foreign energy supplies and the consequent potential threat to the U.S. standard of living and national security. It placed energy briefly at the forefront of policy making, and resulted in adoption of a two-pronged energy policy. One component supported the production of domestic energy supplies; large federal subsidies for nuclear and fossil fuels were allocated with little emphasis on cost competitiveness. The other component promoted energy efficiency and the use of renewable energy sources, programs that were less noticed although they were cost-effective and successful in lowering the demand for energy.

Unfortunately, as the energy crisis lessened, vehicle efficiency standards were rolled back, home appliance standards were relaxed, and public education programs promoting energy savings faded. Federally funded research and development on energy efficiency and the development of renewable energy sources such as solar and wind power were substantially reduced, although subsidies for nonrenewable resources such as coal and petroleum were maintained.

The Energy Policy Act of 1992 was adopted by the Bush administration following the Gulf war. Heralded as a positive step forward by some, critics say the act tries to decrease dependence on foreign supplies of energy by further subsidizing noncompetitive domestic sources as well as encouraging a more rapid depletion of U.S. resources by supporting energy development at artificially low prices. Critics say energy efficiency provisions included in the act are piecemeal and reiterate many current practices, such as mandated appliance and manufactured housing efficiency standards and promotion of integrated resource planning (discussed below).

In 1993 the topic of energy policy was again broached. As part of the national budget plan President Clinton proposed an energy tax to generate revenue. The tax was different from traditional taxes on income and savings because it taxed different fuels based on how much heat energy, measured in Btus, they could produce. By increasing the cost of energy, the tax would have promoted efficiency as well as discouraged carbon dioxide emissions generated by the combustion of fuel, much as taxation does in Europe, where consumers are taxed the equivalent of several dollars per gallon of gasoline. The proposal was soundly defeated in Congress and replaced with a gasoline tax of 4.3 cents per gallon of gasoline sold, a significant retreat from the comprehensiveness of the original proposal.

Energy Efficiency

Amory Lovins, founder of the Rocky Mountain Institute and a renowned energy specialist who consults for governments overseas and corporations such as General Motors, has written hundreds of commentaries on the efficient and cost-effective use of energy over the last several decades. He recently toured Michigan, speaking about energy efficiency to a variety of audiences.

In 1976 Lovins wrote a controversial article in Foreign Affairs that projected that U.S. GNP would grow while energy use remained stable; before the early 1970s, increases in GNP were matched with increases in energy consumption. His projections proved correct: By 1989 energy consumption levels remained relatively stable while GNP increased 40 percent.

Lovins and a colleague, Joseph Romm, wrote another article in Foreign Affairs (winter 1992) that provided a blueprint of energy-efficiency policies and actions that can revitalize the U.S. economy and reduce environmental degradation. While many of the ideas are not new, they have been largely overlooked in the past and are worth reexamining.

Transportation

Transportation uses two-thirds of the oil consumed in the United States and has an enormous effect on total energy use. Lovins is working with General Motors to design an “ultralight” car made partially of carbon fiber that could revolutionize the auto industry. Potential modifications include better aerodynamics, ultralight materials, and new motor and energy storage technologies. The car has the potential to get 120 to 300 miles per gallon using present technologies.

To promote this technology, an unprecedented agreement was reached in 1993 between the White House and the U.S. auto industry to develop research goals for exploring new automobile technologies. The agreement attempts to change the relationship between government and industry from regulation-based to research-oriented.

“Feebates”

During the transition to energy-efficient vehicles consumers would either pay a fee or receive a rebate, depending on the fuel-efficiency of the car s/he purchased. The fees would pay for the rebates until the transition was complete and the program was no longer needed. A less comprehensive program is currently in place. The EPA has identified 39 models of cars that will be subject to a “gas guzzler” tax upon purchase in 1995.

Technology Improvements

Technological improvements in electric appliances can be significant energy savers. For example, four-fifths of all energy used for lighting could be saved by using existing new technologies, according to the Department of Energy and the EPA. The Clinton administration has recently proposed boosting support for the federal “green lights” program, which supplies financial assistance to businesses to promote installation of more efficient lighting systems. Many Michigan firms are participating in the program, but overall a very small percentage of state firms participate.

Renewable Energy Sources

Increased use of renewable energy sources can supplement larger supplies. Lovins states that “five U.S. national laboratories recently concluded that increasing research and development by $160 million a year for 20 years could by 2030 enable these renewable energy sources to provide cost-effectively about half the total energy and all the electricity used in the United States in 1989.”

Comparing the cost of currently used energy sources illustrates the potential competitiveness of renewable energy sources. The estimated cost for nuclear power is 9.9 cents per kilowatt hour (not including the cost for federal subsidies, decommissioning, and environmental cleanup), twice as high as current wind power bids and ten times more expensive than investments in energy efficiency, according to Lovins.

Process Efficiency

There is a great need for process efficiency—creating products that use fewer inputs and recycle or reuse production outputs. Lovins cites the case of the 3M Company, which since 1973 saved $482 million by eliminating more than 500,000 tons of waste and pollutants and an additional $650 million by conserving energy.

According to Lovins, despite improvements, the amount of waste generated per dollar of goods is five times greater in the United States than in Japan, and more than twice that produced by Germany. Lovins proposes using Technology Extension Centers to educate small businesses on new technologies that will reduce production waste, much like the Agricultural Extension Service does in agriculture today. Both the University of Michigan and Michigan State University are initiating technology outreach centers of this kind.

Summary

Each of these options to elevate the productivity of energy and increase the use of renewable energy sources have positive economic and environmental effects. Capital saved by using less energy can be used for research and development to make businesses more competitive. Environmental costs caused by the current use of energy can be reduced significantly by using fewer combustion-oriented energy sources. The quandary of radioactive waste disposal would be significantly reduced by eliminating the need for additional nuclear power.

Other Approaches

Integrated Resource Planning

Each state has a Public Service Commission (PSC) or Public Utility Commission that is responsible for regulating public services such as electricity suppliers as well as telecommunication companies and motor carriers. PSCs or comparable governmental bodies around the world are gravitating toward energy efficiency by requiring electric utilities to use integrated resource planning (IRP) when preparing their management plans

IRP attempts to balance future energy supply and demand by considering a range of options to increase cost-effectiveness by using energy conservation and efficiency programs, variable rate structures (providing benefits for using electricity in off-peak hours), and purchasing power from other utilities and private sector producers.

In April 1989 the Michigan PSC encouraged utilities to prepare IRPs. Since 1989 Detroit Edison has submitted and updated its IRP three times; Consumers Power has done so twice.

An exceptional example of an utility using IRP is Pacific Gas & Electric (PG&E), the largest investor-owned utility in the nation, located in northern California. PG&E recently decided never to build another conventional power plant to create additional energy supplies. It plans to get additional power supplies from improved customer efficiency and privately owned renewable sources. PG&E believes this plan will cost less and serve customers better than building more power plants. PG&E can keep 15 percent of customers’ cost savings, providing an additional incentive to maintain efficiency programs.

Environmental Costs

Another newly emerging component of electricity planning is the recognition of the costs borne by society due to the pollution created by energy use and production, such as air emissions containing sulfur dioxide, nitrogen dioxide, and mercury. More and more PSCs are proposing that these environmental costs be included in IRPs by adding them to energy production costs, enabling the real cost of combustion resources to be compared to the real cost of noncombustion resources.

According to a study conducted in 1990, 29 PSCs in the United States have adopted, or are considering adopting, rules mandating internalization of environmental effects resulting from energy production. Efforts to identify costs for pollutants are quite complex, and states are using or proposing a variety of methods. Quantitative methods are used to try to assign dollar values for each pound of a pollutant emitted. Qualitative methods include multiattribute scoring processes that quantify the effects of each resource type in comparison with alternatives, taking into account economic, environmental, and operational variables.

The Michigan PSC has encouraged utilities to incorporate environmental costs into the IRP process but has found that to require utilities to include these costs, it needs legal authority from the state legislature.

Green Pricing

Another new program a utility can adopt is “green pricing,” whereby the utility offers its consumers the opportunity to buy electricity generated from a renewable source at a higher price. This gives consumers a choice, and the utilities have an incentive to offer the program. As more consumers choose renewable sources, the price should drop.

In 1994 Traverse City Light and Power, in northern Michigan, offered its customers the choice of receiving energy produced by a wind generator at a higher price. The interest has been substantial; more than 200 customers enrolled in the program, the maximum they can supply at this point, and about 50 more are on a waiting list. The wind generator should be operating in June 1995.

Transmission Access and Retail Wheeling

Attempts are being made to encourage competition for electricity power supplies. Currently, large utilities own the electricity transmission systems, and nonutility power sellers have limited access to them. On the national level there is a recent surge of interest in increasing the access of nonutility producers to transmission systems to enhance competition for traditional power producers. The Federal Energy Regulatory Commission is required to establish rates charged to system users to allow utilities to recover the costs of constructing and maintaining the system.

Retail wheeling takes increased transmission access a step further by allowing nonutility producers to use utility transmission systems to sell to third parties. In Michigan the PSC has required that when the large utilities need a new source of energy, they must solicit bids from alternative suppliers in addition to submitting a competitive bid themselves. A small percentage of the new energy supply must also come from a wheeling arrangement.

Conclusion

Demands for energy are increasing worldwide, U.S. competitiveness with trade partners is being threatened, and environmental degradation due to traditional means of production can no longer be ignored. Improved technologies and policies are continuously being developed, and many of the programs discussed above are being evaluated, and a few adopted, across the country. It is time, however, for comprehensive energy policies to be developed on the national and state levels to take advantage of the wide variety of innovative alternatives being proposed to better manage and meet current energy needs without sacrificing economic development.

Copyright © 1994

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