Alternative Energy and New Technology Policy Committee Hearing

Good Afternoon. Thank you for the opportunity to address the Alternative Energy and New Technology Policy Committee.

My name is Tom Tuffey. I am the Director of PennFuture’s Center for Energy, Enterprise, and the Environment, in West Chester, Pennsylvania. PennFuture is an environmental advocacy organization with offices in Harrisburg, Philadelphia, West Chester, and Pittsburgh. We have a deep understanding of the energy markets and strong involvement in public policy advocacy for a clean energy future.

Our Energy Center makes its contribution as a bridge between the private enterprise markets and the formation of public policy. Our essential operating premise is that the private sector is the surest path to energy market transformation, and that the emerging enterprises must have good supporting public policy, including an initial period of public finance assistance.

I have spent the majority of my career in the private sector, with the last six years in advocacy work, four of those managing the Sustainable Energy Fund in the PPL territory, and the last two plus years with PennFuture in a state wide role. I also served on the Executive Committee of the Clean Energy States Alliance, that trade group for the public clean energy funds in the various states, totaling some $4 Billion. I currently serve as the Chair of the Economic Development and Finance Committee of the Governor’s Agricultural Renewable Energy Council.

In the prior thirty years I was the Executive Vice President of a 3000 person engineering company, in venture capital, a management consultant, and in publishing. I have been CEO, Board member, member of the senior management team, or financier to over two dozen early stage environmental or energy companies, with my full share of successes and failures.

Therefore, I like to think that I know something about emerging markets and the challenges of early stage companies. For the last six years, I have concentrated solely on the emerging Pennsylvania clean energy markets. My comments here will focus more on market stage and competition, and how to capture the economic opportunities of this sea change in energy markets. I do not mean to shortchange the abundant benefits to environment or the consumer from the provision of affordable and abundant clean energy. I simply think our perspective, a view from the lens of private enterprise lens, will be of more value to you.

I will also comment on the Governor’s Energy Independence Strategy, that I find timely and very much based on an enterprise approach to the market, versus command and control, or a classic cost write down system of incentives.

To this day, I can’t quite shake thirty years in private enterprise. Hence, I continue to approach the alternative energy policy and finance arena with the perspective of an entrepreneur.

A key advantage in business is the ability to see markets forming, to move into position, to develop capacity, and to execute well. I have learned that the same is true for public policy.

I believe we in Pennsylvania are at a unique time and space. We are at, most likely beyond, the tipping point for the transition of the energy markets to cleaner, more secure, and ultimately more affordable technologies and sources. Our Commonwealth can play an important role and create an entirely new, highly sustainable, technology employment sector.

The markets are forming and we have some good early positions. We also have challenges and we have competition from neighboring, peer states. We need to further advance supportive policies and develop capacity.

We also need to fight the status quo, the vested position to do nothing.

There is always of measure of opportunity, but legacy positions and complacency get in the way. I like pain. I learned long ago that pain more than opportunity motivates corporations to change and excel. In the early 80s, I had the distinct displeasure of conducting three waves of layoffs. Our legacy markets were collapsing. It was extreme pain, but it gave rise to a laser like focus on new markets. We subsequently enjoyed a decade of 40% annual growth and in 1986 took the company public as the sixth most successful IPO of that year. I see that same potential now.

Energy Markets in transition

Well, how does my pain analogy relate to our energy markets? What is our pain?

We too have legacy markets; they are in various stages of trouble, and causing pain. We are a huge electric power generation state. That is the good part. The bad part is the technologies are two generations old coal and nuclear plants. While we see technology advances in essentially all aspects of our life, we remain trapped in legacy systems and their associated costs and pain.

1] Environmental pain. Our grandfathered coal plants are cheap to operate but do a poor job of converting energy to electric power compared to modern technology. But, they do a good job of emitting pollutants and carbon. Acid rain associated with them erodes our buildings, impedes our forest products industry, and impacts waterways. I am privileged to have a second home on a lake in the Adirondacks in up state NY. I am not happy to have to acknowledge dozens of completely dead lakes due to acid rain from Pennsylvania and Ohio coal fired power plants.

2] Health effects. Pennsylvania Physicians for Social Responsibility attribute 30,000 asthma attacks per year to small particles emitted from our coal fired generators.

3] Global Warming. Whether you react to loss of polar bear habitat, species destruction, or that your shore property storm insurance tripled, climate threat is a substantive source of pain. Our position is quite vulnerable. We are a huge generator of power. Although some 40% is from nuclear sources, the carbon from our coal fired boilers emits more climate changing carbon than that from power generation in NY, NJ, Conn, Mass, RI, Vermont, New Hampshire and Maine combined. Yet, their consumers are paying close to 50% more for their power. Not a stable geopolitical situation.

4] Energy costs. As a result of electric utility restructuring, our generation rates have been capped since 1996. These caps will come off at the end of this decade. Our electric energy costs have a bargain when compared to cost escalation in almost any other consumer staple. Although we are not anticipating rate shock, we will see long term cost escalation due to fuel price increase. Hence our desire to diversify the generation mix and conserve energy.

5] Energy Security. All energy sources are interrelated, but think Iraq and the close to 1 billion gallons of petroleum we import to Pennsylvania annually from the Persian Gulf. That says it all. I believe we are already seeing energy security emerging as a dominant campaign theme for the 2008 elections. Again, energy at the tipping point.

You will surely have some constituents that will deny or marginalize one or more of these sources of pain, but it sure is hard to ignore them all, especially those about to hit their pocketbooks.

Modern society is built on energy usage, wise or wasteful, good or bad. As Thomas Friedman says "The World is Flat", in our case meaning that all forms of energy interrelate. The pain/opportunity ratio is now at the tipping point where the fossil fuel legacy markets, whether based on coal or oil, must transition to cleaner technologies and other energy sources.

This transition has begun on a global scale; it will take decades, and will be measured in percent of GNP financial terms. There will be winners and losers. For those who will recognize it and position accordingly, the potential for economic gain is immense.

My Clean Energy Market Model is a very sophisticated three legged milking stool. It’s pretty simple.

The first leg is renewable energy. Renewable energy, like wind and solar energy, has no fuel component, hence no pollution, and no escalating fuel cost. Constant cost clean power for the life of the project.

The second leg is energy conservation and efficiency. Energy not generated is the cleanest by far. The "low hanging fruit" efficiency projects cost about 3 to 4 cents per kilowatt hour versus the 5.6 cents of new generation. In a few years, I believe we can meet the Commonwealth load growth, about 1.5% per year, through energy conservation and efficiency, a huge gain for not only consumer pocketbooks but for reducing carbon and global warming gases, and the environment. This opportunity begs for a whole range of technology products and new energy service businesses.

The third and last leg is load shifting from times of peak demand to off peak, a new market also referred to as demand side management (DSM). In Pennsylvania we peak in the winter cold and the summer heat. At summer peak, the 100 most costly hours of generation can be twenty times more expensive. That cost is passed on to the consumer as a time smoothed charge to the annual bill that can be 20% of that bill. Shifting load not only saves consumers cost, it relieves pressure on the grid, improves system reliability and avoids blackouts. Just small shifts are very effective. A 1% reduction in peak load can reduce the cost of peak power by 10%.

This will also be a good framework to view the Governor’s Energy Independence Strategy from, but let’s first see how it relates to our markets and their potential.

Let’s take renewable energy as the example, principally wind and solar energy.

Both are fuel-less, hence, no pollution, no carbon, no fuel based price escalation. Pretty good stuff. Six and seven years ago, I doubted the potential for wind energy in Pennsylvania. Conventional wisdom said that the best wind resources were in the west. What I learned was that our resource was ok, but our markets were good. Demand trumped supply and a market was born that is now becoming the East coast center for a $100 Billion wind energy market.

Cost for wind energy is currently close to conventional power, about 6 cents per kilowatt hour at wholesale, under long term agreements, versus 5.6 cents for conventional power. In the future, it is reasonable to expect it will be less than conventional power, but remember that wind is intermittent, and we cannot store large amounts of power. We will still need base load generation from conventional power sources, but we can incorporate a significant amount of wind power into our Pennsylvania supply.

How much? At the moment we have about 46,000 MW of conventional power generation capacity in Pennsylvania. Generally speaking, that is close to 50% coal, 40% nuclear, a few percent hydro-power or landfill gas, and 10% of capacity uses expensive natural gas for peak power. Wind is very new entrant with only about 185 MW installed capacity, 0.4% of the installed base. Solar has only 1 MW capacity, enough to supply the equivalent of only 180 homes. We have a reasonable wind resource, an excellent grid in PJM, and good markets. We could have up to 8 to 10,000 MW of wind energy installed in Pennsylvania, supplying not only Pennsylvania but neighboring states. This represents up to $20 Billion in new capital investment in the Commonwealth.

What is our progress? In the East, the wind resources are found in Pennsylvania, West Virginia and New York. The other states have minor potential. So far, we have won the battle to attract both manufacturing jobs, Gamesa with its four plants and 1000 jobs, and development leadership, Iberdrola, the Spanish company with the Number One position in global wind energy, now with North American headquarters in Wayne. Our current pipeline of potential projects, as measured by registering for systems safety and capacity analysis at PJM, is 4000 MW plus.

We have a great start to become the East coast center for the wind industry. We have achieved our position through team work and aggressive advocacy. Our competition is NY and they have significantly more financial strength. NYSERDA (NY State Energy Research and Development Authority) has some $130 annual clean energy incentive money to our $10-15 Million. We have maneuvered well, but could be out gunned.

Wind energy is our best beachhead and a great economic opportunity. We need to assure its growth.

Our Alternative Energy Portfolio Standard has a Tier I requirement for 8% renewable energy. Compared to peer states, like New York, that is quite low. It should be increased. As we address global warming, building a low carbon future, it is a safe bet that we will want more fuel less renewable energy and more energy efficiency. Virtually every state that has developed a low carbon strategy has incorporated more renewable energy and energy efficiency in its top three strategies.

We should also appropriately develop our state lands wind resources. We have over 4 million acres of public land; more than 60% of it has commercial grade wind potential. 1500 MW of wind development on state lands would generate $200 Million in lease income over the life of project, yet occupy only 0.1% of public lands, and avoid about 3 million tons per year of carbon causing green house gases, about 1% of the total Commonwealth carbon emissions from all sources, a meaningful amount.

A Target Rich Environment

Although wind energy is clearly one of the best emerging technology opportunities, it is hardly the only one.

Solar energy holds great promise as a new market sector. Whereas the wind energy main act is happening now, solar is a 5-10 year story, but with the opening chapter now. Its costs are currently high, but in steady decline. Whereas wind places power on the grid, solar places power at the consumer site, ultimately satisfying demand without line losses or grid issues. It has high reliability and premium power attributes. Our Alternative Energy Portfolio Standard recognizes this cost curve and ramps up slowly to provide the time necessary for technology development.

By the year 2020, our law requires 850 MW of installed solar generating capacity, a $7 Billion in capital investment at current cost. This is the potential that attracted the German solar leader Conergy to locate its NA headquarters in Pennsylvania and announce a $100 Million development appetite.

We do have competition. The established global markets for solar energy are Germany, Japan, California, and New Jersey. Why NJ? $150 Million in clean energy incentive funds are available. Since they don’t have a good wind resource, solar is an attractive growth area. We need to fight for our share.

Due to our historically low electric energy costs, we have not done much for energy conservation and efficiency or demand side management. We are in the bottom cohort of state programs. Utilities don’t naturally encourage conservation because it cannibalizes their revenues, reducing recovery for both variable fuel costs but also fixed wires costs. As generation caps are lifted, many technologies and business models will emerge.

Let’s shift to petroleum fossil fuels and the markets for biofuels.

This is yet another area in which demand trumps supply.

I think we have a very significant biodiesel opportunity. Some two dozen early starts is pretty good confirmation.

Interestingly, when we talk of biofuels on a national scale, the market is focused on ethanol. But, in Pennsylvania, we consume 10% of all the home heating fuel in the US and we also have a demand for 1 billion gallons of diesel fuel originating in our extensive highway system. These are our very good demand markets for Biofuels. We may be a net importer of corn, for ethanol production, but we are an exporter of soybeans and we have plenty of animal fats that can be converted to biodiesel. I think we have a terrific contrarian’s play in biodiesel, which happens to lend itself more to entrepreneurs than the large scale corn based ethanol plants.

Historically, 25% of all the ethanol transportation fuel consumed in the country is in the East coast urban corridor within a few hours of our markets. We can participate in the corn ethanol market, but don’t expect to displace the mid West Corn Belt. They will continue to dominant until cellulosic ethanol becomes commercially viable.

Cellulosic ethanol is that made from the fibrous parts of plants, corn stalks versus kernels, or the small diameter wood cuttings that are left over from forest harvest. In this case, we have not only demand but vast forest resources. This technology is being revolutionized through the use of bio-engineered enzymes.

I have been projecting six to seven years before we would see a commercial scale plant in Pennsylvania. My market timing may well be wrong. This past Friday, I received a call from one of the two market leaders, interested in developing a 25 million gallon wood chip plant in the Commonwealth. Time will tell.

PennFuture commissioned an Economic Impact Analysis to determine the effect of the PennSecurity Fuels Initiative. The results may be read on our web site at www.pennfuture.org/docs/EconomicImpactofPSFI.pdf We predict 25,000 new jobs.

Again, we are in a target rich environment. But, we need good policy and we need the ammunition to compete with neighboring states.

Secretary McGinty has reviewed the Governor’s plan with you. You may also find details on the subject web site at www.state.pa.us/papower/cwp/view.asp?Q=459791&A=11 or at www.pennfuture.org/UserFiles/PDFs/vol9no01_020107.pdf

I will simply cover some of the highlights from our enterprise development perspective.

Of course, there is much more that we could discuss. But, enough for now.

Thank you for the opportunity to present our comments. PennFuture is committed to the Governor’s Energy Independence Strategy. We stand ready to assist you.