Best Practices in the Deployment of Smart Grid Technologies

There may be tensions among the current administration’s goals, but nearly $100 billion in new spending on energy-related projects will have a huge impact.

October 2015 | by Robert Harris

President Obama has made no secret of his ambition to transform the energy base of the United States. The administration’s seriousness in pursuing its goals—boosting energy and economic security while mitigating the threat of global warming—became clear with the unveiling of the American Recovery and Reinvestment Act. The unprecedented speed and scale of the government’s commitment to technologies that use or generate energy efficiently, with minimal impact on the environment, will dislocate strategies and disrupt market shares in the energy sector for years to come. With the government assuming the role of primary banker and customer in many energy markets, executives must decide whether to rethink, and in some cases completely redraw, their capital plans.

As industry executives wrestle with these decisions, the government itself must come to terms with a series of competing objectives embedded in the stimulus. The ARRA, for example, has a bias toward job creation and “shovel readiness,” which could favor established over nascent renewable-energy players, potentially compromising the long-term goal of transforming the US energy base. The act also relies heavily on public–private coinvestment, which may be difficult to pull off given the growing concern among business leaders about entanglement with the public sector, not to mention the current state of credit markets. Finally, the ARRA emphasizes energy efficiency, a goal to be met primarily through the efforts of state and local governments that aren’t fully prepared to deploy the proposed funds.

Private-Sector Coinvestment

Nearly all of the federal funding initiatives require coinvestment by the private sector. The $6 billion Innovative Technology Loan Guarantee Program, for example, aims to support $60 billion in loans from private-sector banks for renewable-energy projects. Separately, recipients of grants for smart grids and the manufacture of batteries must finance, from their own coffers, an amount equal to what they receive from the government.

That approach encourages responsible project proposals and the sharing of risk with the private sector but may slow or perhaps limit the deployment of federal funds. For starters, developers may struggle to secure private-sector financing in currently weak credit markets. Furthermore, it’s not clear to what extent energy sector participants and investors will be willing to play ball with the administration. Companies incur transaction costs securing government money, and it remains to be seen how many of them will risk significant amounts of their own—often, in the millions of dollars—to craft solid proposals and have officials review their applications.

In addition, energy players have long struggled with the inconsistency and uncertainty of US policy, exemplified by the annual renewal of production tax credits for renewables (specifically, wind power) and policy flip-flops on nuclear power. Anxiety about the potential ramifications of coinvesting or otherwise partnering with the government compounds the problem; energy players are watching with interest the fate of automotive and financial-services companies as their ties with the government deepen.

Despite the administration’s clear policy direction, no short-term stimulus, nor even the longer-term energy policy bills now under development, will completely resolve the suspicions of private-sector investors. Yet competitive pressures could serve as an important motivator: the prospect that companies may secure government support could inspire their rivals to seek it as well. Because many executives feel they’ve been through similar situations in the past, large, mature companies who do not need the government’s money may prove to be the most reluctant of all to deepen ties with the federal government; this potential adverse selection bias adds another twist to the tension between the administration’s goals in near-term job creation and the longer-term acceleration of technology.

Policy makers and the public at large should be realistic about the ability of any short-term spending program, no matter how well conceived, to transform a large, complex sector in a fundamental way. Yet executives in the energy sector shouldn’t underestimate the impact that $97 billion, quickly deployed, will have on its future shape. Despite the tensions inherent in the stimulus package, technology learning curves will probably accelerate, innovative new players should gain a measure of strength, and successful programs sustained by future government support are likely to emerge. And of course, the stimulus may be only the first step. Additional energy and climate bills, along with the 2010 budget, could go further in recasting the sector’s economics.

The task before companies now is to develop careful, coherent plans for dealing with the government as a new shaping force in the energy sector. Two obvious steps are establishing or enhancing regulatory affairs efforts and hiring new salespeople in key places around the country. And while large international energy companies and regulated utilities are used to having governments play a significant role, it represents a novelty for many technology firms and emerging players. Their executives must decide where to put the federal, state, and local governments in their customer account lists and learn how to compete for and do business with these very different new customers.

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan