Heightened focus on decarbonization likely post COVID-19 crisis

This article first appeared in Utility Dive

The idea that taxpayers are more willing to pay for improved environmental, health and safety outcomes during favorable economic conditions is a common political axiom. Conversely, during challenging times, the mantra is typically to relieve short-term fiscal burdens to accelerate economic recovery.

Some may be tempted to apply this logic to clean energy subsidies amidst the current COVID-19 crisis. As "shelter-in-place" driven unemployment soars and the value of retirement savings portfolios plummets, there may be calls to hit pause on the pursuit of aggressive energy sector decarbonization and clean energy development to avoid raising electricity rates.

However, applying this line of thinking universally to policy decisions across the United States is likely misguided.

Yes, it is highly probable that COVID-19 will create near-term obstacles to clean energy development and procurement. Supply chain disruption, difficulty accessing credit and capital, and utilities, regulators and state legislatures focused on mission-critical operations are only a sample of the challenges ahead.

However, once states transition from virus containment mode to recovery mode, decarbonization can actually be a driver of economic recovery, as opposed to a hindrance.

In particular, states that already feature (or are actively considering) strong energy decarbonization targets — for example those in the Northeast, Mid-Atlantic and West Coast, but also states like Colorado, Illinois and New Mexico — may accelerate their clean energy transition as a form of economic stimulus to help their regional economies rebound.

Clean energy has previously played a significant role in economic recoveries

There is precedent of heightened focus on clean energy in the post economic collapse.

In the aftermath of the late 2000s Great Recession, 12 states enacted or expanded their Renewable Portfolio Standards (RPS) from 2008 through 2010 to help spur job creation as well as reduce the emissions profile of electricity. While we expect future state clean energy focus to take a more economy wide lens with direct infrastructure investment and procurement, the Great Recession example is illustrative of the momentum behind such an approach.

Beyond RPS expansion, clean energy stimulus in the wake of the late 2000s financial crisis took many forms. Subsidies, loan guarantees and cash grants (in lieu of tax credits which can be challenging to monetize during economic downturns) all played a role.

One of the most successful examples of this type of stimulus was the Section 1603 "Cash Grant" program of the American Recovery and Reinvestment Tax Act.

Section 1603 was signed into law in 2009 and administered by the Department of Treasury, which allowed clean energy projects to receive a direct payment in lieu of federal tax incentives like the Investment Tax Credit (ITC) and Production Tax Credit for (PTC) for solar and wind. Approximately 21 GW of wind and 9.5 GW of solar projects benefited from this funding.

Similarly, the Department of Energy's Loan Guarantee Program played a pivotal role in both providing economic stimulus through job creation and allowing nascent and largely "unbankable" clean energy projects to obtain financing. The combination of these programs accelerated the adoption and cost decline curves for relatively immature technologies like solar by funding projects which proved out their viability and ultimately attracted private capital to the sector.

It is reasonable to assume that nascent technologies like energy storage (which are on the fringe of bankability) and electrification of transport infrastructure (which is on the cusp of material growth but available infrastructure, and now possibly sustained low oil prices, are inhibitors) could benefit while concurrently stimulating the economy and progressing on the clean energy transformation glide path.

Notably missing from the post-Great Recession era was meaningful enacted federal carbon legislation. That is not for a lack of trying.

The American Clean Energy Security Act of 2009 — or Waxman-Markey — proposed to create a national cap and trade program for carbon emissions. While there are numerous explanations for that bill's ultimate demise — such as President Obama had the ability to address one but not both administration priorities of health care reform or climate change — direct investment in infrastructure through programs such as RPS, cash grants and loans were ultimately more politically palatable than a federal carbon cap and trade program.

Investments aimed towards achieving decarbonization targets and standards to take center stage

As we move forward to remobilize our economy, we expect to see similar calls for direct investment in energy infrastructure — particularly transmission, distribution, energy storage, distributed energy resources, electric vehicle infrastructure and new build renewable generation — that are needed to achieve rapid renewable development and enhance progress toward economy-wide electrification.

Clean energy stimulus may cover areas like transportation and building electrification to help encourage deeper emission reductions beyond the traditional direct electric sector focus.

However, unlike the previous clean energy stimulus, it is likely that support for clean energy may also come in the form of command and control procurement and development driven by economy-wide decarbonization targets and standards. These broad targets and standards will likely be accompanied by subsets of technology- and sector-specific targets to support certain nascent or struggling sectors.

These may include targets for more established forms of renewable generation, but also nuclear and offshore wind generation, transmission solutions for accessing zero-carbon generation, and energy storage. However, targets and associated command-and-control procurement and development programs also have the potential effect of further re-regulating otherwise competitive energy markets.

Perceived lack of COVID-19 preparedness at the federal level to continue to shift public sentiment towards stronger state level environmental policies

Over the last three years, states have begun enacting separate and more stringent clean energy or zero-carbon electricity targets that function similarly to RPS programs but make eligible a wider range of resources, often including nuclear and large hydropower. Most of these policies were enacted in 2019 following a change in party control of several state governments from the 2018 midterm elections.

Hawaii, California, New Mexico, Washington, Maine and New York each have 100% zero-carbon electricity targets, with several other states potentially joining the list in the 2020 legislative session. A primary driver of these aggressive state level policies is the perception of limited carbon leadership at the federal level.

This trend is likely to continue in the wake of COVID-19.

Even if there is limited carbon action at the federal level, the majority of voters in the states that have adopted higher clean energy standards may be further inclined to believe that the spread of COVID-19 and its related consequences could have been contained by enhanced preparedness of the federal government. Furthermore, they may be inclined to believe that a lack of federal preparedness was tied to the prioritization of short-term economic growth over health and safety by the current executive branch.

Right or wrong, this public perception that the federal government's priorities contributed to the spread of COVID-19 may continue to shift public sentiment even further toward stronger environmental policies in certain states.

It is important to acknowledge that prior to COVID-19, economic development and job creation have served among the impetuses for more recent, broader and more aggressive state actions to decarbonize energy. In its most extreme form, the grassroots Green New Deal proposed by progressive-leaning Democrats not only calls for a rapid shift to renewable energy, but also the training and mobilization of a massive unionized workforce to execute this transition.

While not fully reflective of the Green Deal in its most extreme form, the six states that have enacted 100% clean electricity targets were certainly influenced by these principles, and it is telling that many laws strengthening clean energy targets have had strong support from local labor unions.

Clean energy poised to drive economic growth (again)

While we are in the midst of an unprecedented transformation in our lives — and the economy for which sustained impacts remain highly uncertain — the standard caution against paying more to decarbonize during economic hardship may not hold. Rather, there is an opportunity for states to use clean energy policy, including electrification of the heating and transport industries, as a form of economic stimulus and to show leadership in the face of societal challenges that threaten the health, safety and quality of life of current and future generations.

While the short term is rife with uncertainty, policymakers can actually accelerate the push towards a clean energy infrastructure as a driver of economic stimulus while also addressing environmental, health and safety challenges.

Geoff Burmeister, David Cherney, Matt Mooren and Zach Pollock are energy and utilities experts at PA Consulting