(The following article introduces and summarizes conclusions and recommendations contained in a June, 2015 Electricity Journal article, co-authored by Gerry Braun and Stan Hazelroth and entitled Energy Infrastructure Finance: Local Dollars for Local Energy. This synopsis omits text, tables and charts of the full article that provide an overview of electricity infrastructure investment, power sector finance, on-going power sector transformation and emerging trends in local power production and finance. Click here for a pdf of the full article.)
Introduction
In California[1] and the US, mature, centralized energy grid infrastructure exists. So, does centralized, carbon intensive electricity supply infrastructure. Transitioning to clean, climate friendly and smarter electricity systems means bringing innovative, capital intensive, and increasingly decentralized power sector infrastructure on stream. National, state and local policy should recognize and address the implications for finance, particularly the need for investments that capture and optimize local economic benefits.
In this regard, we see an urgent need for policy research that informs movement toward a new balance of planning and investment between centralized (Washington, state capitols and Wall Street) and local. Lacking local empowerment, we see decentralization occurring anyway as a natural evolution, with trial and error adding cost and extending time frames.
Conclusions
Pent up local energy supply investment will drive lagging local energy infrastructure investment. The finance innovations under-girding local supply investment have already been transformative. Navigating the transition to increasingly decentralized energy supplies and infrastructure presents multiple obstacles to both mature and experienced public power entities and their investor-owned counterparts. Newly created entities will enjoy the relative freedom to adapt. Obviously it is in the broader shared public interest to maximize effectiveness of both emerging and established market participants.
Increasing public ownership of energy infrastructure may be a necessary condition for adequate investment and innovation. Transformative changes in energy supply and delivery technology and markets may compel changes in energy infrastructure finance. The balance may have to shift toward public ownership of distribution infrastructure if innovation and investment continue to lag.
The pace of investment in local energy delivery infrastructure must increase. It currently lags the pace of cost saving distributed generation investment in some communities and regions, where it is already a bottleneck.
Promising to fill the gap, a decentralized energy (DE) revolution is underway. DE saves money by relying on new technologies characterized by predictable economic performance, rapid maturation, and decoupling from the price of carbon. We anticipate an energy services finance paradigm shift driven by the economics of transformative technologies, in particular the opportunities for cost savings through less restricted local power flows and use of clean and efficient on site generation. The DE revolution will create new revenue streams and drive a shift in the balance and sources of public and private capital for electricity infrastructure. We believe a mix of public and private sector investment in energy infrastructure can continue to offer opportunities for economic optimization, but we also believe the best source of private sector investment in local supply infrastructure will be local energy consumers, and local businesses.
DE adoption can be impeded in the US; long term, it cannot be stopped. Comparably sized competitive industries (IT, auto, and solar) are already financing/selling decentralized electricity products, using finance innovations to break through utility industry resistance.
Engaging in energy planning and investment responsive to local needs and opportunities can empower local communities. With electricity generators increasingly localized and with distribution systems needing to accommodate bi-directional energy flows, the economic model that regards them as undifferentiated elements of a larger energy supply pool do not remain valid for pricing or capital allocation purposes.
Change is a given; whether it is orderly or chaotic is a choice. In the past electricity distribution costs and investments were roughly indexed to numbers of meters. In the future “virtual” NEM electricity exchange arrangements will stimulate distributed generation infrastructure investment.
New local energy agencies are the leading edge of a new energy infrastructure paradigm. In the future, capital needed to maximize productivity of energy assets will be best allocated by local investors rather than Wall Street.
There are mutual benefits of regional standardization and local flexibility. Newly created public entities must focus on the new functions and opportunities that motivated their creation, while established entities consider how best to incorporate and manage innovation
Policy Research Recommendations
Energy policy research tends to address small incremental shifts in business as usual at the national and regional levels and almost completely neglects the policy integration needed between regional utilities and regulatory bodies and local jurisdictions. This unbalanced emphasis results in need for the following:
- Policy support to stabilize/reduce finance costs for decentralized electricity supply;
- Better understanding of the extent to which local energy resources and dollars can be put to work to the economic benefit of local communities;
- More imaginative consideration of the strategic role of incumbent local public power utilities in financing decentralized energy supply and delivery infrastructure;
- Determination of the need and role for new locally accountable agencies capable of mediating between regional and local grids to manage local two way flows;
- Policies that encourage local investment in micro-grids and virtual power plants;
- Policies that enable re-financing of centralized merchant renewable electricity generators by host communities after tax incentives have been captured by local investors;
- Determination of how to remove barriers between rural communities that are able to develop local renewable electricity supply resources and urban communities needing the resulting electricity;
- Consideration of whether existing and proposed Federal renewable electricity incentives result in a capital efficient balance between centralized and decentralized assets;
- Determination of best practices for local level policy development in support of local renewable energy resource development and more pervasive local energy infrastructure planning and integration with other municipal services;
- Review of local energy supply and infrastructure costs attributable to taxes, finance and related trade-offs leading to an efficient mix of ownership by: 1) large corporate monopolies that pay taxes, 2) people, local businesses and banks that pay taxes, 3) local agencies that are not taxed but can use their revenues to secure financing for creation/maintenance of local infrastructure, and 4) national, state and local green banks.
These are not academic questions. They have implications for infrastructure modernization. They also have implications for the speed and scale of our response and adaptation to climate change. Under-investment by investor owned utilities in power sector infrastructure modernization, particularly at the city and county level, may be budget driven rather than revenue driven. Can it be mitigated by increasing levels of lower cost public investment in distributed generation and local electricity distribution assets?
[1] Our primary reference is California where renewable resources, electricity sector policies, and other change drivers favor decentralized energy especially when compared to most other states.