02/19/2013 03:43 pm ET

A High-Energy State of the Union

The President's speech last week contained more discussion of climate and energy than any State of the Union (SOTU) speech in recent memory -- perhaps ever. Beyond making a strong case for taking action to combat the effects of climate change, in the SOTU speech and Plan for a Strong Middle Class & a Strong America the President:

  • Directed his cabinet "to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy."
  • Called on Congress to make the PTC permanent and refundable as part of tax reform with the goal of doubling renewable power generation (again) by 2020.
  • Called for an "Energy Efficiency Race to the Top" and to "cut in half the energy wasted...over the next twenty years."
  • Proposed an Energy Security Trust funded from gas and oil royalties to "support research into a range of cost-effective technologies" aimed at "one achievable goal: shifting our cars and trucks off oil."

Additionally, and though it was not as clearly set out, the President alluded to the need to improve the electric power infrastructure, making it smarter and more cyber-secure. He also made clear that increased natural gas production, with strong environmental protections, was very much a part of his energy vision.

While there is much to analyze and applaud in this visionary, ambitious agenda, I will focus on its big-picture implications for the U.S. power industry, assuming it largely comes to pass. In this respect the President's SOTU platform is quite comprehensive in scope and leverages all of the main drivers transforming the power industry, as I explain in Smart Power: the need to decarbonize generation, the flattening of industry sales growth, the declining costs of renewable and distributed power, the electrification of transport and the growth of the Smart Grid. Together these forces are steadily transforming the power industry; the President's proposals are well-targeted precisely because they accelerate trends already in motion.

In their latest pre-SOTU analysis, my Brattle colleagues estimated that about 60 GW of coal-fired capacity would retire by 2020 under predicted EPA rules. If the President is serious about maximizing his executive authority, it is likely that this figure will increase. A brand new WRI report projects that the difference between carbon reductions from "lackluster" versus "go-getter" federal rules would amount to 30 percent of 2035 emissions. The WRI report includes much more than power plants; only about a quarter of their reductions are from existing coal plants.

This leaves the power industry with a lot of uncertainty surrounding the power generation rules of the road. Since uncertainty is costly, it would be far preferable for industry planners and investors to get a clear climate policy path from Congress rather than to rely on hard-fought, long-gestation EPA rules. Without Congressional action, the industry can expect continued plant-specific battles at the federal, state, and local levels for many existing plants. Undoubtedly many of these will end in additional early retirements, likely without leading to either sufficiently rapid decarbonization nor a particularly positive investment climate. I hope Congress is listening to this.

The goal of doubling non-hydro renewable power again by 2020 (i.e. from around 4 percent to 8 percent, based on the latest 2011 numbers from the 2013 Annual Energy Outlook is highly laudable but a little less disruptive than it sounds. Under existing state RPS laws, renewable generation will be required to increase by something approaching 100 percent. Moreover, these RPS-driven figures don't count all rooftop solar or community renewable projects, which are already on a positive upward trend. Non-utility PV solar installations alone are projected to grow between 20-30 percent a year through 2016, nearly as fast as utility-scale solar.

The President's energy efficiency agenda appears to be an adoption of the Alliance to Save Energy's Energy 2030 Plan. The ASE plan, developed by a bipartisan commission, is sophisticated and comprehensive, but much of it will require concerted Congressional and administration efforts. For example, the plan calls for better labeling of building energy use, incorporating these ratings into appraisals and loans. This is a great idea, but it will take a strong effort to get it well-established in the real estate sector.

From the standpoint of the power industry, an ambitious boost to energy productivity will only accelerate the falloff in grid-based electric sales growth. Under pre-SOTU policies, EIA predicted only 0.7 percent annual sales growth through 2030. With stronger climate, renewables and energy efficiency policies, this number is sure to decline significantly through a variety of mechanisms. Indeed, under the ASE's Energy 2030 Plan, U.S. total energy use drops to 1990 levels by 2030. All the more need to consider new utility business models.

Finally, the President called for an Energy Security Trust to help speed the transportation sector's evolution away from petroleum transport. Assuming Congress will create the Trust, the three obvious areas for Trust investment are (1) fuel, vehicle and system R&D, (2) fueling infrastructure co-funding and (3) fleet conversion and other vehicle turnover incentives. This will undoubtedly speed the penetration of electric (as well as compressed natural gas and biofuel) vehicles, boosting power sales a bit, creating more storage options on the grid and increasing the need to retool the distribution system.

All in all, it is a significant accelerant on the already-smoldering fires of industry change. Congressional action is still needed right away to reduce uncertainty and improve our chances of meeting climate targets, but the platform cannot be faulted for an absence of vision, ambition or -- yes -- energy.

The views expressed in this article are strictly those of the author and do not reflect the views of The Brattle Group or its clients.