Op-Ed: Addressing the Challenges of Transitioning NJ to a New Energy Future

Frank A. Felder | January 27, 2020 | Opinion
With state’s Energy Master Plan to be announced today, we need to take a step back to ensure that decisions are well-informed and based on evidence
Frank A. Felder

As the state puts its finishing touches on its Energy Master Plan, it is worth taking a step back and discussing several challenges.

The premise of this Op-Ed is that the transition to a clean energy future is worthwhile. In addition to the moral imperative, the full range of health, environmental and economic benefits exceeds the costs. The corollary is that unless the transition is accomplished in a cost-effective, equitable and transparent manner, it risks being derailed by opponents who will inevitably make claims about rising energy costs, poor performance of policies and programs, and inadequate and one-sided analyses.

First, the transition to a clean energy future will be expensive and regressive. Replacing fossil fuels with clean energy requires a dramatic change in the economy. Every sector of New Jersey’s economy depends extensively on fossil fuels for heating, transportation, and electricity. Regardless of how the state pursues a clean energy economy, direct energy costs will rise even with declining costs of clean energy. These additional costs will be paid for by residents either directly or indirectly from the increase in costs passed along to them by businesses, nonprofit organizations, and local and state governments.  In effect, these costs put a price on greenhouse gas; that is, they are a “carbon tax.”

As a share of the state’s gross product, these costs will be a small percentage due to the arithmetic of dividing a large number by a very large number. As a percentage of the energy budget of residents, however, (and a larger percentage of the budgets of lower-income residents), it will be a substantial increase.  In fact, the New Jersey Clean Energy Act of 2018 mandates caps on rate increases due to this very concern.

Second, the net employment benefits will be small, perhaps even negative. So far, the case for the transition to a clean energy economy has relied heavily, but not exclusively, on the claims that investments in solar and offshore wind will increase employment. Those claims, however, do not net out the reduction in jobs due to increased energy costs. It is analogous to only counting the points scored by your team and ignoring the ones scored by the opponents.

Creating high-skill jobs at expense of low-skill jobs?

Without conducting a full and comprehensive economic analysis (which can be done using the same methodologies used to estimate the benefits of clean energy investments), the state may be implementing policies that create high-skill jobs at the expense of low-skill ones, further exacerbating economic inequities and compounding the regressive impact of higher energy costs. A full accounting will identify such problems and enable New Jersey to mitigate them.

Third, even if New Jersey reduces all greenhouse gases to zero tomorrow, it will still experience the negative effects of global climate change and the associated costs. It is an inconvenient fact of the inconvenient truth of climate change that New Jersey’s emissions are a fraction of a percent (about 0.2%) of global emissions. As the costs of climate change continue to affect New Jersey at an increasing rate, mitigation policies will have to compete with adaptation policies for limited resources. The cost of climate change adaptation, just like the mitigation costs of transitioning to a clean energy future, will fall on New Jersey residents. Now is the time for public officials and advocates to be forthright regarding the future so that the public do not turn on clean energy policies because they were misinformed about their effect on reducing climate change’s impact on the state.

Fourth, effective energy efficiency policies will help reduce the rate impacts of the transition (and, of course, improve environmental outcomes) but are not a panacea. Energy efficiency advocates make strong claims about the enormous amount of cost-effective energy efficiency measures that could be adopted but are not for a host of noneconomic reasons. The notion is that energy efficiency can result in savings in energy bills that then can be invested in other clean energy programs.

This sanguine view is reflected in the New Jersey Clean Energy Act of 2018, which requires energy utilities to achieve a 2% and 0.75% per year reduction in electricity and natural gas usage respectively. Actual U.S. past performance is nowhere near these goals. From 2014 to 2018, only 14 times out of 250 (50 states times 5 years) did states achieve a 2% annual electricity reduction and only 43 times out of 245 (Hawaii does not materially consume natural gas) did states achieve a 0.75% annual natural gas reduction. New Jersey’s best year for electricity savings was 2014 with an annual decrease of 0.68%; in 2018 the savings were 0.35%. For natural gas, the best year was 2018 at 0.33%.

Furthermore, peer-reviewed research conducted by some of the nation’s leading energy efficiency researchers questions the underlying claims of energy efficiency proponents, which suggests that the figures quoted in the above paragraph may overstate savings (although many others dispute these findings). Optimism is fine, but it does not necessarily result in an effective energy efficiency program (or for that matter a winning state university football team). Objective, independent and timely reviews of energy efficiency programs are needed to obtain meaningful results.

The silver lining in higher rates

There is a silver lining in the clean related electricity and natural gas rate increases: Higher rates will reduce energy demand. A rough rule of thumb is that a 1% increase in energy rates results in a 0.5 to 1% reduction in long-term reduction in energy usage. It may be the case that New Jersey’s best energy efficiency program will be rate increases.

Fifth, industry capture of the political and regulatory process is a real concern. New Jersey is not the only state susceptible to subterfuge (there is always Illinois), but it seems to have its fair share. Both fending off industry capture and improving government performance should be front and center in any progressive agenda. The state’s approach of funding specific clean energy industries and companies — as opposed to implementing an economy-wide price on greenhouse gas emissions and rebating the proceeds in a progressive manner to residents — may exacerbate this problem as illustrated by recent statements that the state will not let the solar industry fail.

So how should clean energy policymakers and advocates respond to the above challenges?

For a start, the state should conduct a complete, and the word complete cannot be emphasized enough, energy rate impact of its Energy Master Plan (EMP) that includes all of the additional costs (e.g., transmission, tax incentives, state expenditures, etc.) that the plan imposes.

The state also should perform a comprehensive economic impact analysis of the EMP that determines the reduction in employment and gross state product due to higher energy costs.

The state’s clean energy analyses should undergo an independent and objective peer review process.

It’s like asking students to grade own exams

The state also should benchmark its EMP against viable alternatives such as an economy-wide price on greenhouse gases or replacing offshore wind with land-based wind imported from other states. It may be the case that these alternative approaches achieve the same environmental results with lower rate increases, more jobs, and higher gross state product. Without conducting such comparisons, the state may be implementing policies that are unnecessarily inefficient, regressive, and inequitable.

In addition, the state should establish an objective and independent body to measure and assess the state’s performance in implementing its clean energy policies. The funding for this body should be for multiple years so that the state cannot revoke funding and should include sufficient budget and staff so that this body can properly conduct its efforts. Asking the state to evaluate its own efforts is similar to asking students to grade their own exams or utilities to set their own rates.

Moreover, the state needs to complete analyses prior to making decisions. Currently, policy goals mysteriously appear, are mandated, and then the state commissions studies to arrive at seemingly predetermined results. This approach is not likely to result in cost-effective or equitable clean energy policies. It also risks public ridicule when it is discovered that decisions were rationalized after the fact.

A clean energy future is doable and desirable but only if New Jersey makes well-informed, evidence-based decisions. Adopting the above recommendations will go a long way in helping New Jersey to transition successfully to a clean energy economy.