Archive for April, 2014

Interest Groups: Alternative Energy

Posted: April 26, 2014 in Energy

So how does the power of alternative energy compare to that of the oil and gas industry that we looked at last week? Intuition would probably hold a couple of things: 1) the ability to have impact (give $) is significantly less than the oil and gas and 2) that democrats receive more of the money than do the republicans. In general these things do hold true, but are not completely accurate. 

In the past 20 or so years, the alternative energy industry has given 4.6 million dollars to candidates or parties, which was drastically less than that of the oil and gas industry. Important to specify, there is a difference between just donating money to a candidate or a party and lobbying for production or services, as I do not think I made that clear in my last post. Alternative energy has increased significantly the amount of money spent on lobbying in the past several years, and the strong focus on lobbying for government policy is a significant portion of that. By the way, yes this is the post that was interrupted by my Heavyweights connection. 

The total amount of lobbying spending for this industry has amounted to just under 22 million dollars, with 139 clients and 334 lobbyists withing this industry. Again, this pales in comparison to the oil and gas industry, but is what we expected to see. What I find most interesting about this is how the composition of donations has shifted politically. As mentioned earlier, one intuition would be that democrats would get a significantly greater amount of the money due to the wider support they give to alternative energy in DC. While it has been the case that typically they receive a majority of the funding, it does not always hold true and even when it does there is not a drastic domination in most cases. In fact, there are been periods when republicans received the majority of the money. Now I am not exactly sure the reason, but I am going to say that I think the bio-fuels play a large part. Republicans often have support of farming and look to tend to middle america’s farmers and subsidies for bio-fuels and ethanol would certainly be something to benefit some of those folks. This seems to be supported by the fact that Poet LLC is the largest contributor of this funding, and they focus on bio-fuels and about 61% of their funding goes to republicans.

There has been some flip-flopping from election to election in which party gets the majority of the money, and I think that would tend to be due, at least in part, to the current situation in policy. Sometimes we see republicans take initiative on alternative energy subsidies, and other times it is democrats. This industry is smart enough to understand that they do not need to focus on only one party, and that continuous “help” from government is needed to assure adequate development of the market. Again, it is similar to the boys at fat camp that are looking for any avenue to get that dance. Follow me on Twitter @devinxcombs and stay tuned for further posts.

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So I began writing a post on the alternative energy interest group power, and in the middle of writing it, I got an epiphany. So I will post the interest group one another time, and instead wanted to share the following. It is a lighter post than typical, but I think it has some interesting parallels to the energy regulatory markets. Even if you don’t find it interesting to make a connection, you should at least enjoy the process of trying to do so.

Recall the movie Heavyweights, with Ben Stiller and the fat camp for young boys? One scene in the movie is where a dance is held at the fat camp, where “Tony” (Ben Stiller) invites a camp of girls to attend. These girls are not the fat camp kind of girls, and would traditionally not have anything to do with the fat boys at a typical school dance. However, since the fat kids were the only boys, those boys had the ability to dance with these girls, something that would have most likely never happened in the traditional setting. Of course the movie has it play out that both the fat kids and the popular girls had a lot of fun and it went well.

How about we take a leap and try to make a connection to energy. I know, this is a bit of a stretch but stay with me through the end before you judge. The popular girls are those that provide the large scale energy, so it would be those that are impacted by government policy. These entities would typically not choose to utilize alternative energy sources, for all the reasons we have discussed before. Of course, this means the fat boys are the alternative energy sources. The dance itself, being that the only two groups there are the popular girls and the fat boys, is the regulation. This regulation mandated that one of two things happens: either you don’t dance (utilize energy) or you dance with a new kind of partner (incorporate alternative energy).

While the fat boys at the camp were first apprehensive to the idea of the dance, due to embarrassment, they were also very excited about the opportunity to get to dance with these girls. The alternative energy industry is similar to this, as they want to have more of these “dances” where regulation requires more of the popular girls to dance with the fat boys. I want to mention, this does not fit perfectly because in the movie “Tony” wanted the boys to get embarrassed and was not happy that it worked out well and they had a blast. I do not think government regulation is trying to make the alternative industry fall on its face with these regulations, but give me a break, I am connecting Heavyweights to energy markets and regulation. In the end, this regulation made for a great way to connect these two groups and it worked out for both parties. I hope that we will see this play out similar in the energy markets, where policy helps to unite these two parties and find a great relationship that works well for both parties and therefore society.

If you have never seen the movie, please stop everything are go find a way to watch it, as it is an all-time great. But at least go watch this scene and while you enjoy the entertainment, just think about how you would connect different characters in the scene to potential participants to our energy regulatory markets. There is plenty of room for our own interpretation and I have some of my own that I think are fitting, so watch and share your connections with me in the comment section.

The Diffusion of Innovation theory is one that looks to explore the why and the when that a population adopts some form of innovation. It is essentially looking at understanding the function of how change is created, specifically in the context of social change. Everett Rogers, an expert on this theory, asserts that a significant portion of the probability of successful adoption of an innovation relies on 5 key elements. In this post, I want to briefly discuss these 5 elements and how we can relate them to altering the global energy market. I want to say, that this is a longer post than normal but it needed a little lengthy to cover the necessary information but I think you will find it interesting and worth the few extra words.

Element 1: Relative advantage. This is the perceived notion of how the innovation compares to the status quo, where the perception is determined by the groups of users that the innovation impacts. Obviously, the greater the perception of advantage, the more likely to see adoption. In energy, we can look at this in two broad ways which can be either the individual or the society as a whole. I will speak to the society as a whole for our purposes, as I think it is more appropriate. Because the perception of the relative advantage can be due to a number of variables, there is potential for large variations in this. Subgroups of the society will differ according to what they value the most. For some, costs are the most important where for others it may be the issue of climate change and environmental concerns that are the dominant variable. This is very easy to identify in the micro-aspects of society, and also evident at the national level with the introduction of government policy that encourages cleaner energy sources, even when it is more expensive. However, I contend (and I would not think it is a radical thought) that cost of these cleaner energies has played a significant role as a barrier to larger scale incorporation. The trade-off between cost and environment (i.e “guns or butter” idea) is strongly related, and we see that as governments have more concern for climate they are willing to spend more on clean energy, where the opposite situation also exists.

Element 2: Compatibility with existing values and practices. This is the idea that the innovation needs to be consistent with the existing values and needs associated with the society. I don’t need to touch on this much, as I think that for our purposes the existing values and needs of energy are easily identifiable. I think that renewable energy does have some problems here in that the acceptance of some of these sources as efficient supplies is not absolute across society.

Element 3: Simplicity and ease of use. How easy is it to transition to the innovation? It is difficult for energy. From development of economies to scale to the development of the necessary infrastructure, renewable energy has a long way to go before absolute adoption. Even in terms of policy, how easy is it for investment of renewable energy projects and how easy it is to get the incentives? Especially for energy, I think this is a very important barrier that we have to meet in order to provide the adoption at a large scale. Between this and the costs, I think this may be the more significant because even those that value climate more than costs, can be barred from utilizing RE when the ease of use is absent.

Element 4: Trialability. How permanent is this or can we just experiment? Again this can be difficult due to the nature of long term projects, which would mean long term experiments. If we change our energy infrastructure, only to find out that RE is not an effective large scale source, then there will be a problem. Finding ways to alleviate this concern is important so that there can be a kind of contingency plan for the potential that it does not provide the required level of reliance. I think this is where the intermittency problem sits.

Element 5: Observable results. How easy is it to see the impacts? For governments, it can be difficult because economic payoffs may not be seen for years, and that is a difficult political issue. For the climate, we can see emissions reduce, but how quickly can we see the improvements in climate change and dangers of pollution?

In another post I will address how to reach the different types of people within this theory and how energy can be applied to the various groups. I ask that you think about these elements and comment your ideas for how we can address them as I believe this can be a significant way to find solutions.

Interest Groups: Oil and Gas

Posted: April 17, 2014 in Uncategorized

Just how much power do interest groups have on policy? The first step of this is understanding how interest groups get involved and whom they get involved with. I want to just look at the amount of money interest groups spend and who gets the money. Let us start with oil and gas industry.

Since 1990, the oil and gas industry has donated 238.7 million dollars to political figures, with 75% of those funds going to republicans. Just from that first figure, I think we can gain a decent idea of why republicans cater toward oil more than other forms of energy. I do not want to assert that it is the only reason, because renewables have not yet proven their large scale competitiveness to oil and gas. However, I do think that had we been for consistent in our development of renewable energy, that we would have a more advanced market than we do today. Quick rant; I do not believe that America, the land of innovation, would not be capable of answering to the question of finding solutions had we provided the necessary resources over the past decades. Out of these contributions, who was the largest contributor in the 2013-2014 period? Koch Industries.  The Koch brothers are oil billionaires, that are very active in many aspects of politics, and are associated with many think tanks and organizations, i.e funding. Now I want to state now, that I am not inferring a value judgement and I think that Koch Industries provides value to the world and many of the organizations they are associated with also provide significant value. I just want us to be aware of how the political process looks. Now interesting to also point out, is that the even President Obama received more than $800,000 dollars from Koch Industries during his initial campaign for president. So either way, it is safe to say the “money talks” in Washington, and that is bipartisan.

What about lobbying for this industry? Well the total amount during 2013 was $144,682,462, with the top three contributors being Exxon, Chevron, and Koch, with more than 35 million between them. Who are the top recipients of the money? John Cornyn, Senator from Texas (R) was the top recipient. What may be a surprise is the 3rd leading recipient is a Democrat, Mary Landrieu. In total, Republicans received 87% of the funding with the Democrats getting the other 13%. But interesting enough, there are more Democrats that receive funding from this industry that Republicans in the Senate, but the Republicans get almost double the amount of funds on average.

I say again, do not just go to thinking negatively of this. Wait until we look at the role of the alternative energy and their partisan funding. Also, remember that oil and gas and companies like Koch have been responsible for significant amounts of growth and economic development that has been available because of affordable energy that comes from oil and gas sources. So come back to check out how the alternative energy industry compares to this.

 

We often hear about how certain renewable energy sources are intermittent. But that is not the only indeterminacy they should be associated with. Government spends on energy, we know that. But in terms of cleaner and renewable energy, there has also been intermittent approach to it. Typically, government spends on renewables when things go bad in the traditional fuel market place. However, then when those traditional sources become widely available, government spending on renewables decreases. This is why it is so damaging to have such a partisan political process, especially with regard to energy. An example of this was Jimmy Carter to Ronald Reagan. Carter had set goals for advanced use of solar in the U.S. and provided spending and support for the growth of renewable energy markets. However, when Reagan came into office, this idea changed. The growth of these renewables were associated with Carter and so not a very attractive commitment. Additionally, the case for self-production of fossil fuels were advocated and in conjunction with the falling prices of fossil fuels, renewables lost the support and the development.

Renewable and clean energy growth needs to be associated with both parties for real change to occur. We have to be able to have consistent policy on the importance of growing alternatives power supplies to allow for these markets to develop. This is not going to be profitable right away. We are going to have to spend money to do this, and where the spending comes from depends on what we choose to use as policy. In another post I will explore some of these policies, but for now I will refrain.

The figure shows how in more than thirty years, the commitment to renewable energy is lacking. Had we taken a dedicated approach to this back then, it is very possible we would be in a much better situation today. Not to mention the way the world would be changed. Our R&D would have resulted in innovations that applied to rest of the world as well as us. Emissions and environmental damage would be seriously reduced.

This is a rather important thing to understand because renewables need to acquire economies of scale to become a viable solution. Start-and-Stop policy makes it difficult to get actual development that persists long-term, which is needed to drive the development of the market. When we look at regions where policy has been relatively stable for long periods of time, such as Germany, the renewable market does much better and experiences significant growth. I would hope that we can find a stable approach to development of these markets and urge everyone to remove this important issue from our partisan political nature. Both parties need to accept the importance of this and commit to the development of the market. So move beyond the partisan fog, for this issue at least, and then analyze what you think government should do with regard for spending.

Development of clean energy markets is vital to the ability of wide-scale adaptation in the global economy. As I have said before, the most sure-fire way to do this is through the power of business innovation, Schumpeter’s “creative destruction” if you will. In this post I want to explore how government can play a significant role in this process.

Government is not the everywhere and always “bad guy” nor the epitome of how to fix problems. However, I do believe that in terms of development of clean energy, the governments can be a significant impact for good. At least that is my view at the moment. With that said, government should not be a dominant player is this game, but rather the facilitator or incentives. We have discussed before the power of price and how there is currently a disconnect between price of energy supply and the incentive to invest in renewables. Government has, all throughout the world, taken this issue upon themselves to provide incentives via energy policy. There are a wide variation of policies, some better than others, and as with most policy options there are multiple ways to look at it.

For this post, I want to focus on the validity of accepting the role of government sponsored incentives. I have no doubt that if there was a significant change in the energy supply and prices skyrocketed for fossil fuels, that innovation would take place for renewables, at some point. I find myself believing that we should begin to develop these markets sooner rather than later, especially before we wait for the potentially damaging situation where these costs of fossil fuels do skyrocket.

Given that we are aware of the current failure of wide scale adoption of clean power in the United States, how can we use policy to promote development? I like to think of it as a portfolio that a government has which allows for a variety of tools that can be used to development the clean energy markets. There is no need to think that we should have just one policy, as that will limit the impact of total development. So which policies should be included? Well, there are a wide variety of policies that are proven to be effective, but I find myself in favor of Feed In Tariff policies more than any other. In a later post, I will discuss FIT policies in much more detail, but for now I want to focus on just the acceptance of government policy, and not the importance of consistency in policy.

Policy can help to overcome the difficulty in generating development because we subsidize for now, in an effort to promote long term efficiency. Policy that can prove that economies of scale can be achieved and wide scale implementation with minimal cost is something that we should be open to. Remember, we subsidize fossil fuels as well, so it is not a new idea to help make energy more affordable to the end user. When a lack of incentive is present in the market, for an issue that needs to be addressed, the government should be a player that helps to facilitate change. Policy is the tool that can do it, and choosing policy wisely is important. Regulatory restrictions are an option, but not one I would advocate. I want to advocate for tools that provide an incentive for investment into cleaner technologies, which can help to develop a market globally. As a nation, we spend an incredible amount of money on things that are not all that important, in my opinion anyway. Energy should be something we spend money on, and specifically the development of energy markets that will provide significant benefits for generations to come. To do this, we could benefit from attractive policy to induce investment.

 

 

 

Regulation is not a straight forward process. No matter how altruistic a policy may be, it is rarely ever clean of some level of corruption or rent-seeking behaviors, not mention unintended consequences. Governmental paternalism has potential for both good and bad outcomes and I want to share a story that can provide an example of how these things can take place, and that we should look past the surface of any policy. This story is not a “n=1” assertion that all regulation is bad, but should provoke a thought process that gets us to think a little deeper about issues.

The EPA wanted to reduce the sulfur emissions of coal plants, a very reasonable goal. Through amendments to the Clean Air Act, the chosen plan was to adopt a “scrubber technology” that was proven to reduce sulfur emissions. Yes, these scrubbers cost some money but the belief was that it helped to solve the externality problem of dirty coal. There was a difference between regional coal, as in general, western coal was clean and eastern coal was dirty. The amendment required that plants purchase the scrubbers to reduce the emissions of coal produced power.

The idea does not seem outrageous at all, right? The problem though was what happened, and was a response to the incentives of regional coal plants. For east and west regions, it was relatively straight forward. Western regions with the clean coal at a higher price, were better off purchasing the local product and having lower emissions. The Eastern coal was dirtier and cheaper and it was more advantageous to just purchase the scrubber and the still use the dirty coal. The key change was the Midwest. Due to the cost of the scrubbers, it was now more cost effective for Midwestern plants to purchase the dirty coal at a lower price rather than the clean coal. This meant that even with the scrubbers, there was more sulfur emissions because of the higher utilization of dirty coal. But this wasn’t supposed to be the case! The regulation did not change much of the operation on the western or eastern front because of logistics, but the Midwest now had real incentive to choose the dirty coal rather than the clean, and all due to the cost of the scrubber. With a goal of reducing emissions, the regulation actually resulted in some an increase in sulfur emissions.

Just for some further interesting information, this was largely due to the political problems of regulation. Eastern coal, the dirty coal, wanted to protect its interest and had a strong presence with legislators. They wanted this regulation and advocated the scrubber. You see, the regulation only allowed for this one scrubber technology to be used, not an open technology competition. This reduced efficiency and innovation of the market and gave way to the poor regulation. What was also interesting is the environmentalist also backed this regulation, but obviously for different reasons than the eastern coal. A fascinating look at this concept is called “Bootleggers and Baptists” theory by Bruce Yandle

Regulation is not a simple task that automatically leads to more efficient outcomes. Next time you hear about any regulation, just think about potential side-effects or spillovers and think about whether there is a bootlegger to the baptist of the issue.