Energy Management / Energy Policy

How to navigate the choppy waters of energy policy today

Peter Garforth says focus on reliability and end-use efficiency in steering your organization through energy uncertainties.

By Peter Garforth

It would be a glaring understatement to say that there is uncertainty about strategic policy as it pertains to many energy-related topics. Debates over the speed and even the need to reduce and ultimately eliminate the use of fossil fuel continue to divide public opinion and policy direction. These are often accompanied by contentious discussion about the degree to which environmental rules should be relaxed, strengthened, or enforced.

This uncertainty is highly visible in the current U.S. political scene, with starkly different policy views among the administration, the political parties, and state and local governments. This is not a uniquely American debate.  Elsewhere, there may be less fundamental challenge over the need to cut fossil-fuel emissions, but the debate over the speed and direction of action is no less polarized.

This backdrop creates an interesting challenge for industry leaders in two ways. Energy policy could shift significantly and quickly; that could undermine long-term energy planning efforts. A lack of effective energy planning may also be a competitive risk.

Equally challenging for management is the policy debate itself. Industry has a major influence on how energy policy is shaped, and high-ranking officials will often be called upon to offer opinions and explain preferences. These management positions may prompt positive or negative customer reactions that affect an organization’s reputation and possibly its business performance.

Helping management navigate this landscape is a growing part of the industrial energy manager’s role. The challenge is to chart a rational energy path for a business in the midst of a debate that seems to offer only binary choices.

In proceeding, it’s first important to separate the sound from the noise and focus on fundamentals. All good energy management plans focus on maintaining reliability and end-use efficiencies, irrespective of where electricity or heat comes from.

Obviously, the economic value of end-use efficiency is driven by the price of power and fuels. This is where the policy uncertainty creeps in. Today’s low-priced power could become significantly more expensive if entities are forced to use particular fuels or sources. It also could become more expensive if present generating and distribution structures and regulations are maintained while competitive transformations elsewhere change the game. Passionate arguments can be made in support of reinforcing the status quo or transforming electricity supply and distribution networks.

Similarly, policies that favor specific thermal fuels can be major factors in future pricing. With respect to natural gas and coal and other fuels, these policies could include the degree to which exports are encouraged.

Either way, the operational and public positions of the industrial user are relatively simple. Operationally, industry will need to plan for the highest possible efficiency that will ensure competitiveness for a range of risks, commensurate with the policy uncertainty. The risks may include the need to close or relocate facilities if they become uncompetitive. Publicly, the message should be consistent with the operational planning.

A key dimension of energy cost is how easily regulations allow industry to install and operate on-site power generation. The regulations and ambiguity on this topic have been serious barriers to deployment of on-site power generation, and a policy stance for greater flexibility can easily be defended from any political or environmental perspective.

Arguably, the largest energy-related uncertainty pertains to managing a country’s or a region’s carbon footprint. The most aggressive national and regional policies will push energy users and suppliers to cut emissions by 60% or more, while the least aggressive will require no emissions reporting or reductions.

While not always easy to navigate from a messaging standpoint, a managerial focus on supporting policies that encourage operating flexibility, efficiency, and the lowest future cost risks will be consistent with competitive and clean operation of the business. The energy manager’s job is to deliver operational plans to manage market uncertainties and support management’s policy positions.