Energy Tax Reform is in the Air

Senator Max Baucus (D-Mont), Chairman of the Senate Finance Committee proposed far-reaching energy tax reform. The principles  are solid, to quote:

“It is time to bring our energy tax policy into the 21st century,” Senator Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale.  We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”

Regrettably, as drafted, it is limited to electrical generation, and thereby it aggravates the problem of confusing incentives that get in the way of maximizing reductions in GHG-emissions. It effectively accomplishes the opposite of its stated goal mainly by locking out the thermal technologies that are so powerful on the demand side of the grid, and can hugely reduce electrical demand, and therefore reduce GHG-emissions.

In its present form it would leave out the huge potential shift in energy production from the supply side to the demand side of the grid, where thermal technologies have the greatest potential. In general, renewable energy generation facilitates a move towards more on-site generation, and thus alleviates the demand on the grid. I addressed this issue earlier in an open letter to President Obama proposing simplifications in energy tax and incentives, including eliminating incentives at the technology/component level, such as is now done with the Energy Star rating system.

We can only hope that the proposal be amended to include ALL ENERGY GENERATING technologies, as well as energy storage, and certain passive energy technologies, insulation, energy efficiency, etc. Careful drafting is in order as to what is in and what is out. At the extreme, some homes and buildings should arguably be scrapped altogether, if they are hopeless energy sinks. However, even if they were replaced with a net zero building, that should probably not be permitted as a tax write off in its entirety as intended in the proposal... or should it? (Think e.g. Zenesis House.)

Utility-scale Projects

For utility-scale projects that continue the old model of the grid, with centralized generation and mass distribution, electrical generation is the way to go, because electricity is easier to transport than process heat. Various technologies can come into play, and we have recently even seen solar thermal win some interesting applications, such as the Ivanpah project. For remote energy generation, the Baucus proposal levels the playing field in the only way that makes sense. But centralized energy generation is of decreasing importance, and the greater reductions in GHG-emissions can be achieved on the demand side of the grid, not on the supply side.

Building Retrofits Include Energy Generation

Building retrofits are different. They are on the demand side of the grid. According to DOE, buildings account for 39% of total energy consumption, and 72% of all electricity. If the incentives are leveled in the spirit of the Baucus Energy Tax Reform proposal but include ALL forms of energy generation as suggested above, HUGE changes are possible. Not only can more electricity be generated in buildings (solar, wind, hydro), but more electrical demand can be replaced with thermal technologies, such as geothermal and solar thermal, thereby reducing the need for remote production in the first place.

This shift is necessary both because of direct environmental reasons, such as GHG-reductions, but also because greater building resilience is becoming mandatory, and in many areas with weather related risks (such as the coastal zones), greater energy independence and micro-grids are becoming very necessary, and laws are already starting to encourage them. Here is where thermal technologies will shine, and need to be on a level playing field with the alternatives.

The Potential Impact of Thermal Technology on GHG-reduction

The advantage of thermal technology when it is implemented at the demand side of the grid is extensive:

• Greater efficiency, in some cases this is very obvious. For example, solar thermal directly converts the heat of the sun and uses it for heating and cooling, and it can even be used for on-site electrical generation.
• Ease of storage, whether it is geothermal or solar thermal, storing process heat is much easier. With geothermal heat, preheated hot water used for heating or cooling can be easily stored, With solar thermal you can store process heat in high heat tanks, and downstream you can store preheated hot water.
• Because there are no transportation losses, and heat can be easily stored for intra-day use on-site. Also, geothermal can easily provide the ability to store energy from wind or solar PV for intra-day use also, which typically provides superior returns compared to selling back to the grid at wholesale levels, and again water storage is more environmentally benign than batteries.

Energy Star Portfolio Manager to the Rescue

Help is on the way from your friendly EPA. The Energy Star Portfolio Manager program is designed exactly to model building performance and plan energy retrofits with an eye to GHG-reduction, in short, the tools for a comprehensive revision of the incentives for ALL forms of energy generation are already in place. The proposed revisions of the energy tax could and should rely on this type of modeling, and it would seem proper if the EPA set the standards. With this type of support in place a simple incentive structure for GHG-reductions is all we would need.

Conclusion: Include All Energy Generation

As drafted. the Baucus proposal for energy tax reform is a step in the right direction, but it would accomplish the opposite of its stated goal by leaving out thermal technologies, and the sector that is capable of such dramatic GHG-reductions: building retrofits with on-site energy generation. We can only hope that the same simplification of incentives should be extended to all forms of energy generation, active, and passive, instead of applying to electricity generation alone.