How should we promote energy efficiency?

Portland Press Herald

A new report shows how vital it could be to the future of Maine's economy.

CHARLES LAWTON

May 4, 2008

The Muskie School at USM and the Margaret Chase Smith Center at the University of Maine recently released a joint report on the gains Maine could enjoy from greater energy efficiency -- "Energy Efficiency, Business Competitiveness and Untapped Economic Potential in Maine," prepared for the Governor's Energy Summit, April 3, 2008.

The report's most striking finding is not that we can gain from increasing energy efficiency (that applies to everyone, after all), but rather that ours is such an energy-intensive economy. Maine ranks 24th among the 50 states plus Washington, D.C., in terms of energy used per dollar of Gross State Product and 20th in terms of energy used per resident.

Upon reflection, the reasons are obvious. Our colder-than-average climate means that it takes more energy to heat and light our buildings. Our relatively sparse population, virtual absence of public transportation and sprawling land use pattern mean that we have to drive for everything we do -- to get to work, to school, to shop, to visit, to recreate. Finally, the continued importance of paper manufacturing in our industrial sector means that it takes more power to run our machinery.

The results of these fundamental facts about our economy are equally obvious. Relative energy costs represent, by far, our most significant economic cost disadvantage, far outpacing differences in the costs of labor, office or industrial space and taxes. Our relative costs for labor, space and taxes are at or slightly above national averages, but our relative energy costs are 90 percent above the national average.

Clearly, given these differentials, the benefits of increasing energy efficiency are enormous. Citing a variety of studies from other states, the Muskie/Margaret Chase Smith study suggests that Maine's commercial and industrial sectors could, by adopting known but not cutting edge energy efficiencies, reduce their petroleum and electricity use by between 20 and 25 percent. Having invested in these efficiencies, Maine's businesses could increase their relative competitive position and, according to the report, increase total state employment by more than 1,500 jobs, total state production by nearly $170 million and total state income by nearly $100 million by 2020.

So why are we waiting? Why aren't boilers being replaced and buildings insulated and burners retrofitted and newer electric motors being installed?

The report cites several reasons. We have a mishmash of building standards. It's not clear legally what can and can't be done. We have a mishmash of information. Many possible efficiencies are touted, but which are reliable? There is no standard source of readily accessible energy-efficiency information for businesses considering these investments. We have a mishmash of motivations. Often those who must make the energy-efficiency investment (a landlord, for example) don't gain the benefits (a tenant who pays the utility bill, for example), so the traditional economic arrangements of the system discourage investment.

And finally -- and most importantly -- we have tremendous uncertainty about pricing. Businesses who sank millions into wood-fired and hydro-powered electricity plants in the 1970s and '80s only to see themselves undercut by steeply falling oil prices are certain to be hesitant before thinking seriously about today's "alternative" energy ideas. In those days, we had only OPEC to worry about. Today, Russia, Iran, Venezuela and Nigeria have joined the Middle Eastern emirates as petro-states whose production motivations can never be predicted with any certainty.

In addition, today we can no longer separate energy policy from monetary policy. The Federal Reserve's current efforts to forestall a U.S. recession are driving energy prices far higher than can be explained by purely production demands. What will happen to energy prices if the Fed starts raising interest rates?

It is this uncertainty about the course of future energy prices more than anything else that holds back investment in efficiency. Thus, if the state really wants to encourage such investment, it should address this uncertainty directly. Borrow a page from the financial engineers and say to the business considering an energy investment: "Instead of giving you a subsidized loan or a tax credit to help pay for your investment today, I'll indemnify you for the difference between the future energy costs you're projecting today (that show a positive payback) and those that actually occur." If energy prices remain high, the state pays nothing. If prices spike sometime during the payback period, the state offsets the difference. But in either case, the investment gets made today, Maine's energy use drops and its economy gains.

Seems like a risk worth taking.