Let me begin by thanking Senator Stivers for his leadership role in the Senate on these energy issues. We are well-served by his thoughtful approach to these issues.
My perspective on energy policy issues is framed by the fact that I represent those who are most likely to feel the brunt of energy policy decisions that don’t fully account for the “footprint” – the impact of extraction, beneficiation, and utilization of energy sources and disposal of resulting wastes and management of emissions or discharges.
Earlier this year, I testified before the House A &R Committee concerning House Majority Floor Leader Adkins House Committee Substitute to House Bill 5. At my request, the House Committee Substitute significantly increased the availability of incentives for renewable energy and lowered the thresholds for eligibility for those incentives over what had been in the initial bill. The opportunity to secure the incentives for expanded deployment of renewables provided in the committee substitute was an investment on behalf of our environment and on behalf of Kentucky’s electric power ratepayers. Smaller, distributed generation of renewables offer an important opportunity for Kentucky’s utilities to defer new substantial capital investments in base load and peaking plants by utilizing available smaller renewable capacity to address peak demands, thus postponing the need for new capital investment while the nation determines the approach to addressing carbon dioxide (CO2).
In my comments, I made two other points.
First, I noted KRC’s concerns about the environmental impacts of coal-to-liquid processes, while acknowledging that attracting to Kentucky more of the research and development (R&D) that is ongoing in this area would be advisable. KRC stressed that the full life cycle costs of all of our energy choices needed to be analyzed and accounted for in our policy and investment decisions.
The second point was that there were significant uncertainties in what form the inevitable carbon mandate will take, and in looking at any energy path, the ability to capture and sequester carbon dioxide and to minimize other pollutants over the life cycle of a fuel will drive our energy choices.
In the intervening months, there has been continued movement and growing consensus towards a national policy response to climate change and specifically, towards a mandatory program of controls on emissions of greenhouse gases from fossil fuel utilization. As a result, and as I indicated to the House A&R Committee last Thursday, KRC believes that state coal-related initiatives such as those in HB 5 and SB 1 should be targeted at addressing research and development in carbon capture and sequestration rather than simply underwriting new syngas or coal-to-liquids plants that do neither.
Just as the overwhelming weight of the scientific community acknowledges that climate change is occurring and that the increase in concentration of carbon and other greenhouse gases is responsible for that trend, there is growing consensus in the business community and government on the need to reduce greenhouse gases in order to minimize the coming consequences of warming that will follow emissions already released into our atmosphere.
I would like to acknowledge with appreciation that Ford Motor Company, an important part of the economic landscape of this Commonwealth, last week joined with the Chrysler Group in joining the United States Climate Action Partnership, which is a group businesses and six of the nation’s leading environmental organizations that have issued a collective call for the federal government to swiftly enact legislation that includes mandatory significant reductions of greenhouse gas emissions from all sectors through a mandatory market-based cap-and-trade system. Members include Duke Energy, GM, GE, Ford, Alcoa and Alcan, and many others.
There is general agreement within the scientific community, that emissions of greenhouse gases should be reduced by 60-80% by mid-century to minimize irreversible effects of climate change. There is also general consensus that we have a relatively brief period in which to restructure the manner in which we produce and consume energy, before the exigencies of climate change will impose dramatic costs on our communities and our economy and narrow our options to mitigate, rather than adapt, to climate change. In the CAP “Call to Action,” the CAP noted that
"each year we delay action to control emissions increases the risk of unavoidable consequences that could necessitate even steeper reductions in the future, at potentially greater economic cost and social disruption. Action sooner rather than later preserves valuable response options, narrows the uncertainties associated with changes to the climate, and should lower the costs of mitigation and adaptation."
The CAP has proposed a U.S. policy framework that includes
"mandatory approaches to reduce greenhouse gas emissions from the major emitting sectors including emissions from large stationary sources, transportation, and energy use in commercial and residential buildings that could be phased in over time, with attention to near-, mid- and long-term time horizons;
flexible approaches to establish a price signal for carbon that may vary by economic sector and could include, depending on the sector: market-based incentives; performance standards; cap-and-trade; tax reform; incentives for technology research, development, and deployment; or other appropriate policy tools; and
approaches that create incentives and encourage actions by other countries, including large emitting economies in the developing world, to implement GHG emission reduction strategies."
I would encourage you each to read the “Call for Action” which is available on-line at www.us-cap.org, and also read the “Summary for Policymakers” of the first three Assessment Reports of the Intergovernmental Panel On Climate Change.
What are the implications for Kentucky?
The NAS has just released a report entitled Coal: Research and Development To Support National Energy Policy, which has a number of findings that are important to your work.
Most significantly, the NAS made these observations:
"The context for any assessment of future coal production is inextricably linked with the development of a national carbon emissions policy. Potential constraints on greenhouse gases (especially CO2) emissions, and the technical and economic feasibility of CO2 control measures, are the dominant issues affecting the outlook of the future of coal use over the next 25 years and beyond. The difficulty of predicting prices and availability of alternative energy sources for electric power generation provides additional uncertainty.
If coal is to continue as a primary component of the nation’s future energy supply in a carbon-constrained world, large-scale demonstration of carbon management technologies – especially carbon capture and sequestration (CCS) are needed to prove the commercial readiness of technologies to significantly reduce CO2 emissions from coal-based power plants and other energy conversion processes. In addition, detailed assessments are needed to identify potential geological formations in the United States that are capable of sequestering large quantities of CO2, to quantify their storage capacities, to assess migration and leakage rates; and to understand the economic, legal and environmental impacts of both near-term and long-term timescales."
Members of the Committee, I believe that we would do well to read the signs and to heed the observations of the MIT Study on the Future of Coal and the NAS Report. We should not invest public monies in supporting deployment of fossil fuel-based gasification or coal-to-liquid fuel technologies unless carbon emissions are addressed by the companies in order to move us towards the reductions needed to mitigate climate change.
Investment in R&D for large-scale demonstration of carbon capture and sequestration (CCS) as part of a larger, balanced portfolio of investments in renewable energy and energy efficiency, is a more prudent course than underwriting the commercial deployment of the current CTL technology that provides neither efficiency nor a carbon solution. Some refined variant of coal-to liquids may be part of the energy future, but only if the process can be made more efficient and carbon capture and disposition can be achieved.
The last issue I want to touch on before specifically identifying the suggestions that KRC has regarding SB 1 is the issue that concerns me most, both because of the people I represent and because it is the least talked about issue. Nationally, coal provides around 49% of the nation’s electricity. In Kentucky, coal provides 97 and 98% of the LGE and KU profile and somewhere around 90% overall. What has historically been our strength is becoming, in a carbon-constrained future, our vulnerability. The inevitable mandatory program for emissions reductions will hit hard on Kentucky’s ratepayers because we are so unprepared. Our regulated coal-fired power plants will be obligated to internalize carbon costs, either by retrofitting the existing fleet to capture and sequester carbon, by purchasing carbon credits, or by deploying new base-load plants that offer more efficiency or more effective carbon capture. The sticker shock, and the potential adverse effects on the most vulnerable ratepayers and on our economy, if we fail to plan now and to invest now in a strategy to reduce carbon emissions from the combustion of coal for electricity, will be staggering.
The most important area in which state investment could help hedge against the impacts of a mandatory carbon reduction program is energy efficiency. Investment in improving efficiency of conversion and use of energy offers a way to “mine” inefficiencies in the way that power is generated and consumed. Kentucky’s electricity is relatively low-cost, but our bills certainly are not, because we consume power inefficiently. In 2005, there were 20 states with lower monthly residential electricity bills than Kentucky’s. In that year, Kentucky’s residential ratepayers consumed more electricity than our counterparts in 43 other states; our businesses, more than 19 other states and our industries, more than counterparts in 47 other states. Efficiency improvements are a key to creating a sustainable Kentucky economy, and generate good jobs, increase disposable income, keep money circulating in the state, and make our industries and products more cost-competitive in the world market. Reducing waste, upgrading building codes, creating incentives for energy efficient home construction and renovation, enhancing demand management programs to encourage utilities to invest in more efficient use of power by customers, and increasing weatherization programs, particularly for rental housing – all of these are bricks on the path to real energy independence and should be prominent parts of any energy bill.
The House Committee Substitute to HB 5 was a start, and many of those efficiency inducements and targets are in this bill. But we should take this opportunity to significantly improve on both bills both with respect to energy efficiency, and with respect to creating incentives and lowering barriers to investment in renewables and for diversification of state electric power provider portfolios.
The other issue is where can we best place our investment dollars to advance technologies that better account for carbon in production of fuels and power. I encourage you to listen to the testimony of Mr. Bartis of the Rand Corporation, and I have provided a copy of his U.S. Senate testimony for your review.
He identified three economic uncertainties that will impede CTL development:
Uncertainty about the costs and performance of CTL plants
Uncertainty about the future course of world oil prices
Uncertainty about whether and how greenhouse gas emissions might be controlled in the US
We can’t do anything about one of these – we can about the other two.
I concur with Mr. Bartis that the other area in which targeted state investment would be prudent is in CCS research. Just as the DOE budget for carbon sequestration is extremely underfunded, the budgets of both the Center for Applied Energy Research and the Kentucky Geological Survey are in need of substantial augmentation. We cannot (and should not) try to go toe-to-toe with Illinois in throwing money after coal gasification or CTL plants that do not promise carbon reduction. We can and should strategically invest in improving our Commonwealth’s capacity for research and demonstration on CCS, particularly on retrofitting existing power plants to scrub and manage carbon emissions. We don’t need to build a new CTL plant to do that – we have an entire fleet of pulverized coal power plants and new ones proposed to come on-line with whom the state universities, CAER and KGS could partner to test carbon capture and sequestration at a commercial scale.
Let me share with you also the recommendations of the MIT Study on the Future of Coal concerning state subsidies of coal gasification technology. The panel specifically discussed whether federal or state policy makers should provide incentives for projects to build IGCC without CO2 capture. The answer was that there is sufficient practical experience with IGCC without capture that further public investment was not justified or necessary. I have attached that excerpt to my comments for your convenience.
Against this backdrop, the specific recommendations that KRC has regarding SB 1 are:
1) Any state incentives for a coal to gas or coal to liquid plant should be contingent on inclusion of carbon capture and sequestration. Carbon capture and sequestration is not addressed in the bill as a criterion for state support of syngas or other fossil-fuel conversion technologies, and it should be.
I would caution also against placing much reliance on economic projections of the viability of a coal gasification or CTL plant that do not cost carbon reductions and management under various scenarios.
Mr. Chairman, I have provided for your review a chart showing the current bills before Congress on climate change. Not included in the chart is the newest bill, which was announced last week. Senators Lieberman and Warner will file a bill to replace the Lieberman – McCain bill, which had been seen as the leading climate change proposal in the Senate. The earlier bill called for 60% reduction in carbon emissions from the 2004 baseline, by 2050.
None of the federal bills would preempt or preclude the state from requiring carbon capture and sequestration as a criteria for state support of a coal to syngas or coal-to-liquid plant.
2) The amount of research funding proposed for the Kentucky Geological Survey needs to be expanded beyond the proposed $5 million in order to allow for more comprehensive investigation into carbon sequestration in shale and coal beds; and to the Center for Applied Energy Research for carbon capture, particularly from existing stationary sources;
3) The creation of a Kentucky Energy Development Authority that would approve eligible projects and proposed membership is of concern for several reasons. First, the membership is composed almost entirely (4 of 5) of appointees of the Governor, so that continuity and a certain insulation from political influence on the selection of projects is lacking. The second is that, with respect to at least two of the five appointees, those being the Economic Development Cabinet Secretary and the KEDFA Chair, the Secretary of the Economic Development Cabinet indicated in a letter to Governor Fletcher dated June 19, 2007 that neither the staff of the CED nor the KEDFA board “have the expertise needed for the analysis of these projects.” That being the case, perhaps a Board that would be staffed with entities possessing that expertise might assure better choices in funding projects.
4) As the Secretary of the Economic Development Cabinet noted in his letter in support of a special session to enact energy legislation, “there will need to be analysis of environmental impact, both general and resident-specific. The agency or body that considers these projects will need to have the expertise to balance potential state investment to potential benefit while including in that analysis any environmental risk. That expertise does not currently exist within CED. The current programs do not require environmental analysis as that had not previously been an issue so there is no clear statutory authorization to obtain the information required for that purpose.”
KRC concurs with this observation, and believes that any approval should be based on a review of such assessments – the bill as drafted does not require a feasibility study nor environmental impact analysis as a criteria for state support. A realistic business plan demonstrating economic viability under a range of assumptions concerning costs of production, of carbon capture and management, and of natural gas market conditions, is necessary to determine whether the project should be supported.
5) Finally, the incentives proposed are geared towards construction and operation of a facility, and do not allow the state to partner with or assist in the development of front-end engineering design – a step critical in determining accurately the costs of a project. Such engineering design should be eligible for state assistance if, and only where, carbon capture and management is an integral component of the design.
In closing, I would encourage this Committee to “refine” SB 1 by improving on the incentives for energy efficiency in all sectors, and creating incentives for research, development and demonstration in CCS and in fuels and power supplies that reduce carbon emissions and other greenhouse gases.