Undoing the Wasteful Incentives of the Energy World, Giving Innovators a Shot: A Talk With State Energy Secretary Ian Bowles

11/24/09Follow @wroush

In a state that prides itself on leadership in tomorrow’s energy technologies, Ian Bowles is the point man. He’s Secretary of Massachusetts’ Executive Office of Energy and Environmental Affairs, a new position created under Gov. Deval Patrick to oversee a hodgepodge of state agencies controlling everything from utility regulation to agriculture to the state’s parks and conservation lands. He’s a seemingly ubiquitous presence at energy-related events and forums around the state, frequently speaking on regulatory reform, energy efficiency, and programs to expand the use of wind and solar power. Those are issues close to the hearts of our readers in the cleantech sector—so when Bowles invited me to his office for an interview earlier this month, I jumped at the chance.

Bowles has a long history in politics and environmentalism. The Harvard grad started out as a legislative aide on Capitol Hill, and ran (unsuccessfully) for the Democratic nomination in Massachusetts’ 10th Congressional District in 1996. During the final three years of the Clinton Administration, he was senior director of environmental affairs for the National Security Council, and went on to direct policy research at Conservation International, a non-profit dedicated to biodiversity protection. His last gig before becoming Massachusetts’ top energy and environmental official was as president and CEO of MassINC, a Boston-based think tank dedicated to advancing middle-class prosperity and civic life, and publisher of CommonWealth, MassINC’s house magazine.

Most of my questions for Bowles focused on a different kind of environment—the environment for clean-energy entrepreneurs in Massachusetts. While there’s obviously plenty of energy innovation in the Bay State, it’s not necessarily the easiest place to translate that innovation into real change, given the mish-mash of regulatory and legal hurdles facing startups with dreams of building pilot facilities. As Bowles himself pointed out during our interview, for example, three of the largest wind-farm facilities proposed for the state have all been snarled in litigation for years.

So I wanted to know what the Patrick Administration and the state legislature have been doing to try to smooth the way for innovators. (Quite a bit, actually, beginning with basic changes in utility regulations affecting the way the state’s electric and gas companies earn revenue and the incentives they have to invest in new technologies.) I also asked him about the heat the administration has been taking lately over perceptions that the state is losing solar manufacturing jobs to China and biofuels and battery manufacturing jobs to facilities in Michigan.

Speaking of batteries, my laptop battery died moments before my interview with Bowles ended, so I wasn’t able to record his response to my last question, which was about why budding energy entrepreneurs should consider building their companies in Massachusetts. But his answer was a distillation of the themes that ran through the interview: No matter what its downsides (e.g. litigiousness, zoning restrictions, foot-dragging utilities) the Boston area still has one of the world’s highest concentrations of great universities, especially MIT, churning out talented and ambitious young engineers; venture investors who understand the energy and cleantech industries; an innovation-friendly governor and state bureaucracy; and generally progressive regulatory policies when it comes to building markets for alternative energy sources.

Here’s an edited version of the parts of the interview that I was able to capture.

Xconomy: At a high level, how would you describe the biggest changes that you’ve been trying to push through in the way the energy business works in the state?

Ian Bowles: One of the big differences between energy and IT or life sciences is that energy is such a heavily regulated part of our economy. Much of the regulation is at the state level. Federal regulation is pretty limited, but you have 50 state public utility commissions and departments of environmental protection. What we’ve been trying to do is clear away some of the barriers and make the entire system work better, with the goals of bringing new clean energy technologies to market, creating bigger markets for existing technologies, reducing greenhouse gas emissions, and cutting energy costs. All of those agendas merge quite well. A terrific example is district heating, which has about 25 percent penetration in European cities but less than 1 percent here. The barriers to things like that, as well as solar and wind, have typically been utility rate structures that encourage utilities to sell as much power as they can.

The Public Utility Commission issued a landmark decoupling ruling over a year ago, in the summer of 2008, and now you’re seeing utilities coming in for decoupling rate cases. The first of those rate cases was issued on November 1, for Bay State Gas. The second, for National Grid, is in front of the DPU [the Department of Public Utilities] right now, for a decision at the end of the month. Those cases are bringing about a fundamental shift in the model of utility regulation. The utilities have an incentive to maximize their power sales in order to make revenues. It’s as if Comcast were charging you for how many minutes of CNN you watched, rather than for simply bringing the cable to your house.

X: So decoupling takes away the incentive to simply sell more power—but explain how that helps advance clean energy.

IB: For one thing, utilities won’t have the incentive to come up with bureaucratic reasons not to let you install solar, or fuel cells, or wind. Any time you put solar on your roof, the utility makes less money. So the history of enterprises trying to install distributed power has been one of utilities telling them “No, it’s too complicated, or too hard to interconnect, or we’re going to charge you this high stand-by rate just in case the thing breaks.” That may or may not have actually been true.

A century’s worth of utility regulation has been based around centralized power systems and delivery. Tomorrow’s world is going to look a lot more decentralized—-people are using a lot less energy and generating more of it at their homes, whether it’s geothermal or solar or what have you. Utility rate redesign won’t in itself deliver a final product, but it will remove some of the perverse incentives in the system.

Investing in energy efficiency is another big part of what we’ve been doing. We have a $1.6 billion plan for the electric and gas utilities over three years to invest in energy efficiency. Last year, the American Council for an Energy-Efficient Economy ranked Massachusetts No. 7 in the nation, and this year we are No. 2. Our message to our friends in California is to enjoy their last year as number 1. We are spending three times more, per capita, than they are going to do. That will produce about $6 billion in savings for ratepayers. In the old world, if you ever got an energy audit of your home, you would get a document at the end that said “Here are some things you might or might not want to do.” In the new program, there will be very sophisticated energy audits that engage with the consumer; we are projecting a 15 to 40 percent energy reduction in participants’ homes which is a very big change.

X: That $1.6 billion is not coming out of the state treasury, right?

IB: No, it’s from three sources. Eighty percent of the Regional Greenhouse Gas Initiative auction proceeds are going to the utility-run energy efficiency programs. About $300 million of it is private capital. And the third source is a charge on ratepayers.

X: On the topic of deregulation, do you think Massachusetts is sufficiently hospitable to innovators who want to pilot new energy technologies? One local company that I won’t name here told me a story about how it took them almost a year to get permission from the local utility to connect a prototype generator to their own building.

IB: Every time I hear a story like that, I say “Call me or call Phil Giudice [commissioner of the Massachusetts Department of Energy Resources] and let’s try to get it fixed.” When people come to us with problems like that, we’ll typically call the utility and help get it solved, or we’ll put them in touch with the consumer affairs division at the Public Utility Commission and ask them to look into it, and in more cases than not, we can solve the problem. But all of that goes back to my point about the rate structure. The utilities have historically not wanted to see installation of these distributed power sources because they simply lose revenue. That’s why the new rate design is so important—to make them essentially disinterested in that question, so that their job is reliability and quality of service. That said, there are cases where—given the design of urban networks—connecting certain types of power devices can produce voltage problems. But wind power is a great example where this is a very difficult state to build in, period. All three major wind farms in Massachusetts are tied up in court right now. David Abel, in the Boston Globe last week, wrote a story about pending legislation that would dramatically streamline the process for siting and approval of wind power in Massachusetts. That is very much needed to make it easier to build things here.

X: On top of the resistance from utilities, you’ve got a patchwork of local regulations, a very strong tradition of home rule, and, as you were just indicating, a lot of legal strategies available to NIMBY groups. I’ve heard many entrepreneurs complain that when it comes to actually building clean energy facilities, this is not an innovation-friendly state.

IB: We do have a new building code in Massachusetts that is much more energy-efficient than the old building code—so we’ve been picking away at some of those problems. We’ve also been working with the MWRA [the Massachusetts Water Resources Authority] and Mass Development [the state's finance authority] on finding places that are “plug-and-play”—meaning a place where you’ve already looked at the interconnection issues, the real estate transactions are minimal, and you have the capacity to run with whatever you’re doing without a lot of complexity. There’s one in New Bedford where a number of clean energy companies have been working, and there is increasing interest in a number of municipalities and regions to come up with ideas like that. The Charlestown wind turbine blade testing facility, which is breaking ground next month, is going to be a place where we’re going to test other new wind technologies. And part of the mandate for the Massachusetts Clean Energy Center, where I chair the board, is building regional innovation areas where people can find plug-and-play spaces for their technologies.

We’ve got very strong environmental laws, but they shouldn’t be used for NIMBY purposes. They should be used for the betterment of environmental quality. The wind siting reform bill gets right at this point. It will consolidate the town approval process and limit judicial appeals. If a town wants to proceed [with a project], opponents are not going to be able to tie it up in court for half a decade.

X: You mentioned the Massachusetts Clean Energy Center. That’s the energy sectors’ equivalent of the Massachusetts Life Sciences Center. But when the life sciences center was authorized, it got a billion dollars in funding over 10 years, whereas far less funding was attached to the clean energy center. So how does the center go about doing its job?

IB: It will have a $20 million trust, plus $25 million a year that the Renewable Energy Trust currently gets. I think that’s the right level of funding. What we have available in the energy area that is not available in some of the other areas, like life sciences, is the regulatory component. In the case of solar, we set out to get 22 megawatts of solar installed in the Commonwealth through the solar rebate program funds from the Renewable Energy Trust, and in the course of the two years of the program, 29 megawatts ended up getting built. And now we are transitioning to a solar credit program where there is a mandate on the electric utilities to buy a certain amount of power from solar sources. That’s a case where a regulatory mandate will look like a subsidy to the solar installers, but it doesn’t require grant funds. The Governor has now set a goal of 250 megawatts of solar by 2017. Our expectation is that by the end of next year we’ll be at 54 megawatts, partly because we’ve got overwhelming demand for solar, and partly because we’ve quadrupled the number of solar installers in the state in the last two years, and new federal incentives have come along. That’s all an example of the usefulness of utility regulation. We can help create markets that wouldn’t be possible in less regulated industries.

Biofuels is another case. We are the only state with a tax incentive for cellulosic ethanol—the state has waived the state gas tax, which is 21 cents per gallon, on cellulosic ethanol fuel. It’s quite significant, if you are an advanced biofuels maker, to have that kind of cost advantage coming into the market.

X: But to cite an argument often used by free-market conservatives, isn’t it important that these energy technologies eventually become competitive on their own, without government subsidies or regulatory mandates?

IB: I see them as durable, long-term policies that are more stable than any grant program would be. Essentially, we are baking into our economy the idea that by 2020, 30 percent of our electrical demand will be met through efficiency investments. Today it’s 8 percent, so we are going to triple that. That is a permanent change in the market. If I’m an energy efficiency vendor or technologist, i know that the demand is going to be there. With solar, I think we are within a couple of years of not needing subsidies, because the prices are coming down dramatically. That’s part of what Evergreen Solar is feeling, but for the consumer, it is very good news that panel prices have come down by 30 to 40 percent. I think that having mechanisms like requirements to the utilities that they buy solar power are a very strong bridge to the point where they are not going to need any subsidy at all.

X: A question about Evergreen Solar, since you brought it up. Last month the Boston Globe ran a piece questioning the wisdom of the $72 million in grants and tax incentives that the state extended to Evergreen, given that their revenue shortfalls are now forcing them to shift some solar panel manufacturing to China. In a lot of cases, grants and incentives do amount to a bet on an innovative new technology—and new technologies are, by definition, risky, meaning not all the bets are going to pay off. Nobody could have predicted what would happen to market prices for solar panels. So how did you feel about the criticism over Evergreen?

IB: A couple of days after that story, the Globe editorial page came out with a full-throated endorsement of what we’ve done. What the reader would miss from the original story is that Evergreen originally promised to maintain staffing of 350 jobs in Massachusetts. Currently they are at 925—225 temporary and 700 permanent—which is almost three times what they committed to the state. That’s a pretty good dividend. While they are going to trim back the panel assembly part of their local operation, the company has made it clear that they expect to maintain staffing at a level beyond what their original commitment was. Another thing that didn’t come through in the story is that when you look at the $72 million in incentives, and you really peel back the onion, the direct grants were $20 million, and included in that was $7.5 million from Citizens Bank for a loan that Evergreen didn’t take. The Renewable Energy Trust made a $2 million investment in Evergreen that yielded $8.3 million in proceeds—so the net grant investment was about $13.6 million, with several hundred jobs created.

X: What about criticism that Massachusetts hasn’t been doing enough to make sure that local companies like A123Systems or Boston-Power build their manufacturing facilities here? Michigan is luring A123 away with some big tax incentives of their own, and Boston-Power failed to get the federal funding they said they needed to build a factory here.

IB: The coverage about companies going to Michigan is also a little bit unfair. Governor Patrick visited A123 and met with the employees to congratulate them on their tremendous IPO, and to thank them for their investment in the state. For us to see another couple hundred jobs created here by A123 is really great news. If I were developing a battery for an American automobile manufacturer, I might put my plant in Michigan too—it’s not a crazy thought. If you go down the list of companies expanding in Massachusetts, Konarka just bought the old Polaroid facility in New Bedford, and Lilliputian has been expanding here. What’s different under Governor Patrick is that he’s realigning the whole regulatory system to help create markets and give competitive advantage at the end stage to help companies expand in Massachusetts. Those things are different from any previous governor, and they’re paying real dividends.

X: How well do you think Massachusetts agencies and private companies have been doing in getting their share of federal dollars under the American Recovery and Reinvestment Act?

IB: The world is divided between the formula grants and the competitive grants. On the formula grants, we had a huge amount of input into the development of the stimulus package when it was coming along, and we were strong advocates for the $55 million that’s coming to the state through the state energy program. There, we’ll do very well. We’ve been very creative in utilizing the funds that are available on a formula basis. On the competitive side, we have had a few notable successes and a few notable cases where we didn’t get what we wanted. The $25 million that’s coming for the wind turbine blade testing facility was a huge win for the state. That will be a real anchor for the wind industry. And the ARPA-E awards are another great example. Massachusetts organizations did overwhelmingly, disproportionately better than anyone else. The major smart grid proposals, we didn’t get. We have a smart grid pilot project and we thought we were very well positioned but ultimately we didn’t get one of the big utility-based grants. A lot of them went to the Midwest, to the public municipal utilities. And the battery grants—that’s another case where those seem to have gone primarily to Michigan, Indiana, and Illinois, which has some logic to it. So I’d say we’ve done very well in a few areas and have clearly missed some major opportunities, but not for lack of trying.

X: I wanted to ask you about the way the state government interfaces with the entrepreneurial community here in Massachusetts. You’ve got some very active groups around Boston like the New England Clean Energy Council that work on policy initiatives and professional development for energy entrepreneurs. Have they made your work easier?

IB: I’m very impressed with the growth of the Clean Energy Council. I was one of the speakers, along with [Congressman] Ed Markey, at their recent green tie gala at the Kennedy Library. Last year’s event at the Museum of Science was half the size of this crowd, and there was a very strong turnout from the industry. So you have to hand to Nick [d'Arbeloff] and Hemant [Taneja] and others—they have really started to build something here. Very often, emerging technology clusters are late to the process of engaging with the media and government regulators, and the Council has shown a lot of foresight in saying “Let’s get organized, and let’s have an impact.” They worked closely with us on the development of the Clean Energy Center, where Hemant serves on the board. Nick and Peter Rothstein have done a lot of work on the development of the innovation clusters language in the Waxman-Markey energy bill. They are very good partners for us. They are giving a voice to the industry in the media and in government circles and we welcome that.

X: Turning back to the Regional Greenhouse Gas Initiative auctions that you mentioned earlier—those got started last year, with a company that I’ve covered, World Energy in Worcester, handling the technology part of the auction. How do you feel the carbon allowance auctions are working, and do you think RGGI is providing a good model for a national cap-and-trade system regulating carbon emissions?

IB: The 100 percent auction model has worked fantastically well. It has shown the world that an auction-based approach is sound in terms of revealing price and predictability. It’s elegant in terms of how it works, and it creates funds that are repurposed back for more energy efficiency. It should be a model for a national system. The congressional deliberations have had more of a deal-making flavor. Most of the national legislation shows a glide path, starting out with a lot of grandfathering, which is probably a political necessity. But in many ways it just prolongs the period of transition. If you believe in markets, the [Regional Greenhouse Gas Initiative] system has been a real success.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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