Why regulation protects utilities from politicians

‘All politics is local,’ is the commonly held phrase. This same phrase can be easily applied to energy. ‘All energy is local.’ The evolution of the energy sector is from the bottom up, from the gasification of street lamps to universal electricity service, the electricity and gas sectors are rooted in community and politics. This relationship is essential to understand in the deployment of low carbon technologies and energy efficiency measures.

To steal a headlining grabbing quote, “Prostitution, horse racing, gambling and electricity are irresistible to politicians, says John Rowe, the CEO of the Chicago-based utility Exelon. The interview in the Wall Street Journal with this practical executive provides an important perspective of how the utility industry balances the constant political demands with the understanding that regulations are the industry’s best friend. Not that regulation just protects the industry from the worse excesses that itself engages in, but also from political meddling that interferes and disrupts the long-term planning horizons necessary in the industry.

 

An effective regulatory environment that accounts for the environmental impact of the utility industry can play an important role in shaping the long term investment strategy of companies.

“What we are trying to do,” Mr. Rowe argues, “partly out of self-interest and partly to avoid sticking our customers with things that are really expensive, is to push for some sort of orderly environmental framework on the markets.” 

An orderly regulatory framework can provide the structure to advance technology (see his quotes against nuclear and carbon capture and storage) to invest in the most economically efficient plants and, presumably, overall technology (grid, smart meters, etc.) that will reduce carbon emissions while meeting the needs of consumers at the least possible costs. Regulations and market efficiency do not have to be separate.

The comparison in how the markets are handled by governments in the US and EU are stark. I won’t go into great detail to highlight their differences, the overall approach, whether federal or multilateral EU-style, does need to be uniform in pushing towards a common direction of low carbon and prompting the investment in new technologies. The EU is better organized in this respect while the US is having to relying on local and state governments to force and incentives the utility sector to change. This is not the most efficient approach when you consider the large multi-state scale of the utility industry and the significant infrastructure investments that need to occur. While small can work, large is can make a significant impact.

I’ve emphasized here the role that regulation, rather than politics, can play to induce change and investments. The politics, as Mr. Rowe points out is intertwined in the types of investments and the types of regulations. While job creation and pandering to votes is the politician’s main job, so should be the longer term vision of an efficient energy system that uses not the most politically favored ‘green’ energy, but technology that costs less and pollutes less. Less is more in the low carbon energy sector.

Energy is as irresistible to politicians as gambling and horse racing

 

Russia and the EU: Playing Russian energy roulette in Europe

From the movie Casablanca:

Rick’s Cafe – when Captain Renault decides to shut down the establishment.

Rick: How can you close me up? On what grounds?

Captain Renault: I’m shocked, shocked to find that gambling is going on in here.

[A casino worker gives Renault a wad of money.]

Casino Worker: Your winnings, sir.

Captain Renault: [Quietly] Oh, thank you very much. [Loudly] Everybody out at once.

http://youtu.be/kvE-KVCbvow

Thus the anti-monopoly raids on Gazprom offices across the European Union in September 2011 appear to have set off a rocky period between Captain Renault and Rick Russia and the EU. [See my interview in the Prague Post on this issue]

The response by Russia is President Medvedev was to ask Gazprom and the Energy Ministry how to operate under the EU’s 2009 Third Energy Package. The stipulations in the Package requires, “Companies to sell or spin off their transmission businesses, require them to hand grid management over to an independent operator or oblige them to make the unit more independent through internal action.” There are two things that are odd about this. First, it is now 2011, the package was passed over 2 years ago. Did Medvedev just get to the memo from 2009 ? (and I thought I was behind on my emails) Second, there really is no need to worry about this requirement. The Germans in negotiating the package, managed to water down the unbundling requirement thus protecting their companies, and Gazprom at the same time. Some would say these were not unconnected.

‘Independence’ is a loose term. Making a company’s transmission unit “more independent through internal action,” places little demand to have a fully functioning business that makes independent decisions on network operations. The purpose of having an independent transmission company is to prompt competition by having multiple companies buying and selling gas through a network that does not discriminate between suppliers and buyers.

However, for Gazprom there is little to worry about. Even if Gazprom spins off its transmission business in the EU there is no way to ensure it is independent. If Hungary could never find out who owned RosGas that purchased Emfesz, or Surgutneftegaz that bought the MOL shares, then the continued obscure structure of Russian companies – or appointed board members that stick to the wishes of Gazprom, will result in limited independent action by a gas transmission company from Russia. Even in the US, this type of requirement is hard to police.

The true reason for the sudden rocky period, may be the additional pressure that is building on Russia for the proposed requirement that the EU Commission know the conditions for existing and new bilateratel gas agreements  between a Member State and a third country. This will see the EU insert itself into the contract negotiations between Gazprom/Russia and Member States.

If there is one thing Rick doesn’t want, it is for Captain Renault climbing into bed with him and his past lover, Yvonne.

Let's keep the EU out of our relationship

Effective Institutions? Assessing low carbon EU institutions

It almost feels like a big PR launch. But the timing has been coincidental. After a few years of working on how low carbon technology and governance are connected a few things have come together. The journal Energy Policy has accepted my article for publication and I just presented the results at a big gathering in Brussels. Specifically: EU-US Summit on Science, Technology and Sustainable Economic Growth, Brussels, Belgium, September 29, 2011. The presentation is below and the full article can be downloaded here and the abstract that describes what I have done is below.

 

[slideshare id=9704644&doc=institutionsmatterv1-111015001832-phpapp01]

 

Abstract

This paper examines three different governance approaches the European Union (EU) and Member States (MS) are relying on to reach a low carbon economy by 2050. Current governance literature explains the operational methods of the EU’s new governance approach to reduce carbon emissions. However, the literature neglects to account for the perceived risks that inhibit the roll-out of new low carbon technology. This article, through a novel approach, uses a grounded theoretical framework to reframe traditional risk literature and provides a connection to governance literature in order to assess the ability of EU governance mechanisms to reduce carbon emissions. The empirical research is based on responses from European energy stakeholders who participated in a Delphi method discussion and in semi-structured interviews; these identified three essential requirements for carbon emissions to be reduced to near zero by 2050: 1) an integrated European energy network, 2) carbon pricing, and 3) demand reduction. These features correspond to institutionalized responses by the EU and MS: the Agency for the Cooperation of Energy Regulators (ACER); European Union Emission Trading Scheme (EU ETS) and energy efficiency directives and policies integrated into existing MS institutions. The theoretical and empirical findings suggest that governance by facilitation (energy efficiency) fails to induce significant investment and new policy approaches and cannot be relied on to achieve requisite reductions in demand. Governance by negotiation (ACER) and governance by hierarchy (EU ETS) do reduce risks and may encourage the necessary technological uptake. The term ‘risk governance’ is used to explain the important role governance plays in reducing risks and advancing new technology and thereby lowering carbon emissions in the energy sector.

Making institutions that serve our children

The matter that institutions are made of is routines, rules and structure. This can both prompt and inhibit innovation. New institutions are conceived in a time and place to meet pressing needs. Overtime, the rules and structures that were put in place age, however as both external and internal factors change (i.e. personnel, technologies and political-social circumstances) institutions can become restrictive unable to meet new demands and address opportunities.

Institutions are essential for change, but they can hold back ideas and technologies, leading to institutional and technological lock-in..

 

The examination I have done on the topic of risk governance applies to broad based institutions. My recent keynote speech at the EU-US Summit on Science, Technology and Sustainable Economic Growth, addressed the need to “break rulez” to prompt a more rapid uptake in new low/zero carbon technologies.  The presentation was a challenge for me, because I had both the opportunity to show my well constructed research to a wide audience but I also wanted to convey a sense of urgency – radical urgency. And convey it with emphasis that stays within an academic discourse (thus keeping people just on the edge of falling asleep).

The reason for my emphasis on ‘urgency,’ or ‘the pace of change’ as I framed it, is essential if we are to achieve an almost zero carbon energy system by 2050. Therefore it becomes almost impossible to speak of reaching these goals without discussing how to revitalize, restructure and revamp institutional processes in an urgent manner. Rulez need to be broken.

During the day long program, the urgency of the need to develop and deploy zero carbon processes and technologies was stated well by Nick Gotts, of the James Hutton Institute, when he rebuked another speaker that said we need to gradually roll out  new technology. Nick said we can’t wait another generation or two to begin rolling out new technologies, the significant consequences of failing to act now, will only be felt after 2050. Patrick Criqui, director at the Centre National de la Recherche Scientifique (CNRS), later finished this thought by stating that we are working for the babies of today. And he is absolutely right.

My two year-old son was sick last weekend and had a high fever.  Whenever there is a fever in the house, my wife and I go through the same discussion. She takes the temperature, looks at the thermometer and then says, “Oh – its 39 degrees.”  And then I ask “what’s that in Fahrenheit? Is it high?” –  I only know what ‘normal’ and ‘high’ are in Fahrenheit. So I feel the child’s forehead. Then I know how hot the fever is. But really, at the end of the day, does it matter if the fever is 38 or 40? You have to take action to reduce the fever. Even with his high fever, my son kept telling me, “let’s go dad, let’s go outside.” He’s picked up my restlessness.

Inaction only perpetuates the current condition. My effort to break institutional lock-in and ensure the wide deployment of new technologies is based on this restlessness. At least, when my son is older, he can understand why I was always pushing for all of us to get going. It doesn’t matter what the temperature will be in 2050. It will be hot, and the environment and us will suffer, thus action must be taken now. The current pace of change is not enough to stop the fever. The rulez institutions hold onto, like mementos from their own childhoods, need to be broken. It is the children of today that the institutions need to serve.

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The question becomes can you carry the inspiration for fighting institutions from your youth to middle age and beyond? Can the energy of the mosh pits of the 1990’s be transformed to fight climate change? Do we become lazy and content like the baby boomers and fail to make change like they said they would in the 1960’s and 1970’s. Can we afford to fail the next generation?