Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

"Balancing Energy And Environment" was the topic at Governor's Environment Conference last October  Posted: December 9, 2009

“Finding A Balance Between Our Energy Choices And Environmental Protection”
A Panel Discussion Presented To the 33rd Annual
Governor’s Conference On The Environment
Tom FitzGerald, Director
Kentucky Resources Council
Lexington, Kentucky
October 1, 2009

Thank you for the opportunity to be a part of this panel.

We need to put to rest the myth that we can “balance” environment and economy. We cannot sustain an economy unless we live within our ecological means.

The idea of “balancing” energy and the environment stems from a powerful though entirely groundless belief that economic progress can only come at the cost of environmental degradation. That myth has led us, as a commonwealth, to embrace and indeed codify into law the principle of doing the absolute minimum requires of us. That policy is embodied into many of environmental programs, and it is at the root of much of our current crisis.

This is a time of great crisis and great opportunity. We have reached an important point in Kentucky’s energy and utility policies, standing with one foot in the past where adding value for the coal industry was the preeminent political concern, and the other at the threshold of a carbon-constrained future in which a dramatic shift in how we produce and consume energy is needed to avoid catastrophic social, environmental, and economic consequences.

There is general consensus 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 scientific 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 even more dramatic costs on our communities and our economy and narrow our options to mitigate, rather than adapt to, climate change.

We in Kentucky are “ground zero” for climate change. As a state that both produces a significant amount of coal and which is 98% dependent on coal and other fossil fuels for electricity, and as the 44th poorest state in the Nation, the implications for Kentucky of the coming national carbon mandate, such as that proposed in the Waxman-Markey bill are significant. Kentucky ratepayers will see potentially significant increases in electric rates as utilities seek to recover costs associated with reduction in carbon emissions or internalization of carbon costs. 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. We are about to reap the bitter harvest of having made energy choices that pushed ecological costs off budget and built a staggering ecological debt that now demands to be paid.

What tools do we need to aid that transition to a sustainable energy future?

First, we need more honesty and transparency regarding the costs of our energy choices. Honesty in how we measure the value and costs of our energy choices and transparency in how we account for those costs. We must reevaluate our production and wasteful utilization of energy and invest in energy strategies and choices less damaging to the land, air and water of our Commonwealth, and more capable of sustaining an economy and quality of life over the long term.

Second, we need to incorporate life-cycle assessment of the direct and indirect economic, health and ecological costs of our energy choices.

Third, we need to change utility rate design, integrated resource planning and our certificate of public convenience and necessity processes to send the right regulatory and price signals to the utilities – signals that reward efficiency on both sides of the meter over most costly capacity addition.

Within the narrow bandwidth that has been defined as “low-cost, high reliability,” the PSC has performed well the function assigned it by the General Assembly.

Yet it is increasingly apparent that the manner in which we have defined “cost” and accounted for, or failed to account for, elements of that cost has had dramatically negative consequences, and the bill is coming due for the failure to have fully costed our energy choices. The formula favors the cheapest purchased fuel, which is typically coal, not the energy source that is most ecologically sound, nor even coal that is mined by the most responsible and least-impact methods. Changes in the rate-setting formula for electric and gas utilities that more fully cost and account for environmental and social costs, will help to end the artificial subsidies that skew the market by allowing those costs to be excluded from consideration and make fuel choices that cost the environment and public dearly, seem inexpensive in comparison to cleaner energy sources.

All energy choices have a footprint and need to be viewed comprehensively on a life-cycle basis, considering such issues as the potential conflicts between food and fuel, and energy production and other land uses. In order to bring honesty to energy choices, our utility policies must include health, environmental and social costs from consideration in pricing energy. We need to provide additional meaning and depth to resource planning, in order to more fully value efficiency and pollution in our choices for energy.

Historically, environmental costs have been considered externalities. These historic “externalities” have a nasty way of eventually becoming internalized in ways that are less efficient and more costly to the ratepayers, as add-on adjustments for particulates, mercury, SO2, and now CO2. Utility resource planning processes that fully cost the fuel choices and energy approach in life-cycle terms will more honestly value fuel diversity, congestion relief, reliability enhancement, environmental and cost-savings benefits that clean energy and energy efficiency provide.

Fourth, we need to dispel the myth that “opportunities for renewable energy in Kentucky are limited.” In fact, there is a significant potential for greater deployment of renewables, including some 880 MW of hydropower potential on existing locks and dams on the Ohio and Kentucky Rivers and major lakes in the state, and a largely untapped opportunity for solar and distributed generation in the residential, commercial, institutional and industrial sectors the Commonwealth. Kentucky’s solar resources exceed those of Germany, who has made solar energy a cornerstone of their energy policy. Wind power capacity expanded by 45% in 2007 alone, with 5,244 MW installed nationwide. DOE reported that an ambitious program of investment in wind could provide 20% of the nation’s electricity by 2030. Kentucky should be investing in renewables – in production, in the manufacture of components, and in the training of researchers, scientists and engineers to help advance the technological improvements needed to more efficiently harvest renewable energy.

The time has come to make our top energy priorities a real and sustained investment in energy efficiency and in diversification of our energy portfolio to include greater use of renewables. Investment in efficiencies in transmission, generation and consumption of power, and research and deployment of more efficient transportation systems that make us less rather than more reliant on fossil fuels is the prudent path, and indeed, the only path in the near term.

There are opportunities for the Commonwealth both to mitigate the impact of the carbon mandate, and to retool our economy for a carbon-constrained world. The most important area in which state investment can help hedge against the near-term impacts of a mandatory carbon reduction program is energy efficiency. According to several studies, investment in many cost-effective technologies can reduce consumption by 25-30% over the next 20-25 years. 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 and to buy important time as the framework of the carbon mandate is constructed and as technological improvements in the capture, conversion, and management of various fuels are refined.

And there are abundant opportunities to mine out inefficiencies on both sides of the meter. According to the Energy Information Administration, 67% of the 41.8 quadrillion Btus of energy consumed for electricity are lost – 3% in line losses, the remainder in waste heat.

There is a tremendous untapped potential in all sectors for greater efficiency. And there has never been a better time to combine a workforce in need of meaningful employment opportunities, a housing construction sector facing significant hurdles to new construction, an economy reeling from energy volatility, and an atmosphere desperately in need of a reduction in carbon loading, into a comprehensive program to retrofit housing stock across the commonwealth for efficiency and clean energy. Patterned after the Clean Energy Corps proposal developed by the Clean Energy Corps Working Group, the General Assembly and Beshear Administration should develop as a key component of the Kentucky Energy Strategy, a program that would leverage state financing, university support, and job creation and training programs and attract private investment to spur a statewide effort to retrofit existing housing stock for efficiency and renewables.

We spend millions each year to fund emergency heating programs, and countless hundreds of thousands of volunteer hours doing stopgap weatherization for many of the over 465,000 rental occupied housing units in this state. Low-income households spend about 8% of their income on electricity, and very low-income households (at 50% or below the poverty level) spend up to 23%. In contrast, the average household spends 2% of their income. Yet there is no real incentive for landlords to make those homes energy efficient, nor for the renters to invest in making a home they don’t own more efficient since they may not be there long enough to recoup that investment, nor have access to capital to make an investment.

We should join with many of our sister states in adopting a Renewable and Energy Efficiency Portfolio Standard to spur market demand that will encourage private investment in distributed generation.

We should codify the principle that all cost-effective Demand Side Management measures should be employed prior to approval of any new generating capacity.

In House Bill 1, the General Assembly sent a clear message – until a utility has demonstrated that all cost-effective DSM strategies have been deployed, including investment in energy efficiency, no new capacity should be approved. It is time to codify that principle into the Public Service Commission’s statutory mandate, and to make demand management the first step, so that ratepayers are not asked to shoulder the burden of new capacity until efficiency measures have been fully deployed. Energy efficiency investment, coupled with deployment of renewables, will buy critical time and allow avoidance of risky investments in new coal-fired base load or expensive natural gas-fired supply before the carbon targets and timeframes are adopted and strategies developed to manage the carbon.

In House Bill 2, the General Assembly asked the administration to produce recommendations on a renewable portfolio standard (RPS). It is time for the Beshear Administration to lead in helping spur investment in renewables and efficiency by creating market demand for renewable-generated power. Adopting a mandatory requirement in Kentucky for a state RPS will make us less dependent on coal and other fossil fuels, with a negligible impact on utility rates. Renewables Portfolio Standards in the United States: A Status Report with Data Through 2007, April 2008. A Renewable Portfolio Standard will help to create a stable demand to attract capital for expansion of renewable energy, and diversifying supply sources through investment in renewables will help blunt the impact of the coming carbon mandate on low and fixed-income consumers; failing to do so will create a far greater burden.

Stable and sufficient funding for means-tested energy efficiency programs through adoption of a public benefits fund is essential to any real investment in such programs. A one mill (1/10th of one cent) per kilowatt hour dedicated to low-income efficiency efforts and housing retrofits would generate a significant fund, at a nominal cost of around $1 per year per customer, saving that customer far more in avoided “poverty costs” and in avoided power generation costs.

The crisis in the automotive sector and request for a public bail-out, as well as the near bankruptcy of the federal highway fund, similarly provide a great opportunity to leverage that federal support to demand a transformation in the auto industry and the highway system to a model of sustainable transportation, with fuel efficient hybrid and electric fleets, community-oriented transit, road and rail transportation.

As we transition away from reliance on fossil-fueled power, there will be a continued need for use of coal as a bridge fuel. But it is important that we understand that so-called “clean coal” isn’t. The new generation of coal-fired power plants that are in planning and under construction are not the solution, nor is gasification or liquefaction of coal, since the sequestration of carbon is an as-yet unresolved problem with any conversion technology for coal. While the new generation of plants may be more efficient that the old, it is important that we look towards more sustainable approaches to power generation and consumption. Margaret Mead was right – “It may be necessary temporarily to accept a lesser evil, but one must never label a necessary evil as good.”

Finally, more accurate data concerning the extent of recoverable coal reserves needs to be developed for each coal field in the nation. The recent National Academy of Sciences report on coal research needs highlighted the shallow dataset underlying the oft-repeated assumption of 200 to 250 years of recoverable reserve base. Before we embark on a course that imposes on Kentucky's ratepayers the staggering costs of underwriting a fleet of new coal-fired electricity generation capacity, prudence dictates that we assess whether the resource base exists to support that capital investment in plants whose useful life may extend as far as 60 years in the future or more.

Kentucky's challenge is how to prepare for the inevitable transition from an economy that has been powered by extractive industries and low-cost electricity, to an economy that can better sustain and meet the needs of all of our state's residents, and remain competitive in a regional and global economy while more fully accounting for the ecological costs of resource extraction, energy generation, and industrial production.

Thank you for this opportunity.

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