States May Benefit from Appointing Energy Czars

In early 2013, Governor Andrew Cuomo pushed New York state to the cutting edge of state energy regulatory policy by appointing Richard Kauffman as Chair of Energy and Finance. As the nation’s first state energy czar, Kauffman has pushed New York to increase support for renewable energy and to reform regulation of utilities and the electric grid.

New York City
A bus travels through Chinatown in New York City. (Credit: Flickr)

Several other states may now consider creating similar positions in their own governments. There are good arguments both for and against doing so.

Supporters of the idea believe the energy czar model can resolve fragmented state regulatory regimes and attract greater amounts of private capital to renewable-energy projects.

Despite these benefits, there are also concerns that creating energy czar positions in other states might be difficult politically and take attention away from more promising policy proposals. Ultimately, more energy czar positions may be inevitable; states may benefit by appointing them sooner rather than later.     

Regulatory Fragmentation

Regulatory fragmentation regarding renewable energy is a problem that many states face.

Because renewable energy is a relatively recent development, most state governments are not optimally designed to support it.

As a result, different elements of renewable-energy projects are often regulated by different agencies that do not always coordinate with one another, even when they share broad policy goals.

When developers or investors look to begin new projects, they often find a regulatory structure that sends conflicting signals. For states with ambitious renewable-energy goals, this disjointed structure can hinder progress.

Andrea Colnes, executive director of the Vermont Energy Action Network, an organization of business, government and nonprofit leaders committed to transforming Vermont’s energy system, said her own state is an example of this wider national problem.

Vermont has ambitious renewable-energy goals, as it hopes to derive 90 percent of its energy needs from renewable sources by 2050. Despite its ambition and commitment to renewable energy, its regulatory structure sometimes stands in the way of progress. The process of selecting sites for renewable-energy projects illustrates this tendency.

When developers look to build new projects, the Vermont Department of Public Service pushes to approve new sites. While these sites benefit the environment in the long run by helping mitigate climate change, they require construction in the short term that can disrupt natural ecosystems.

The Vermont Agency of Natural Resources, which is responsible for preserving the state’s environment and wildlife, must then reconcile its short- and long-term goals while also managing the tension between itself and the Vermont Department of Public Service. These two agencies, that share common objectives and long-term priorities, find themselves in conflicts that stymie progress by creating uncertainty for investors, developers and consumers.

Regulatory fragmentation like Vermont’s is a problem that many states face. Often, the federal Environmental Protection Agency, state transportation agency, state energy agency, and public utility commission each manage independent pieces of what should be integrated policy strategies. 

New York has resolved many of these conflicts by appointing Kauffman to oversee several agencies. He oversees the State of New York Department of Public Service, New York Power Authority, Long Island Power Authority, and New York State Energy Research and Development Authority. Putting relevant portions of different agencies under the authority of one policymaker has allowed New York to create a more coherent regulatory environment that is more attractive for new projects.

Increased Financing for Renewable Projects

The second area where energy czars could have a significant impact is renewable-energy finance. Colnes estimates that most states will require more than $30 billion to meet renewable-energy goals. This number far exceeds any economic development initiative that most states have undertaken in the past. It also dwarfs existing government financing even in states led by officials who support renewable-energy investment.

Since states cannot adequately fund renewable-energy projects with tax dollars, the challenge becomes mobilizing private capital. Energy czars can play a significant role in helping to address these financing gaps, as most states currently have no institutional processes in place for doing so.

Currently, states that appropriate money for renewable-energy projects tend to do so in a piecemeal and uncoordinated way. This approach limits the effectiveness of the government spending and keeps states stuck in a grant-based model.

Appointing a senior policymaker to coordinate all state resources for renewable-energy finance with private investors can make a huge difference in attracting funding for clean-energy projects. New York Green Bank, one of Kauffman’s signature initiatives, has demonstrated the effectiveness of this approach.

By using limited state resources to demonstrate the positive returns associated with clean-energy investments, the bank has attracted significant private capital. In October, the green bank used $49 million in government loans to attract an additional $178 million in private capital for clean-energy and energy-efficiency investments.

The size of this investment is still relatively small. But it proves that public funding, when deployed in the right way, can pave the way for private capital and create a virtuous cycle for renewable-energy finance.  

The Political Challenge

If energy czars can resolve regulatory fragmentation and attract private capital to renewable-energy investments, why might states opt out of appointing them?

The answer to this question is primarily political.

First, appointing an energy czar requires an extremely committed governor. The decision costs time, money, and political capital. The governor has to defend the decision to appoint an energy czar rather than appointing a czar focused on a number of other deserving issues such as poverty or education.

In most states, renewable energy is not the most politically pressing issue, and governors might prefer to focus on issues that more clearly benefit their electoral futures.

Second, appointing an energy czar would create tension and potential infighting among existing government officials. Many agencies would invariably feel threatened or undercut, so the administrations would have to work extremely hard to manage these tensions while reorganizing the regulatory structures. This process would be arduous and time-intensive. 

It is possible that states could avoid these political and procedural challenges by instead pursuing renewable-energy solutions that force the market, rather than administration officials, to resolve these issues. Such a solution would most likely be legislative. 

Carbon Prices

The most talked about legislative solutions to the challenges facing renewable energy are laws that put a price on carbon emissions.  

Some trailblazing state legislators, such as Massachusetts Senator Michael Barrett (D-Lexington), have proposed legislation to do exactly that. Barrett believes that attaching even a marginal cost to carbon emissions would correct the underlying market failure that has created large gaps in clean-energy finance and left regulators struggling to support renewable-energy projects. Such legislation could be an effective alternative to appointing an energy czar.

Senator Barrett’s Communications Director, Brendan Berger, said that the underlying problems an energy czar would work to address might be solved through such legislation. “The price we pay for fossil fuels does not reflect their downstream consequences – most notably health effects and their impact on climate change. We do, however, get stuck with the bill later when we pay for rising health care costs and for adaptation infrastructure like seawalls. A price on carbon would incorporate these downstream impacts.”

Such carbon pricing could incentivize new clean-energy investment, and force the market to resolve some of the conflicts with which regulators have struggled. This option is attractive, as it would force the market, rather than policymakers, to drive change.

In the past, putting a price on carbon has appeared politically unfeasible, but Berger said he believes the tide may be turning. “Senator Barrett’s bill has made very good progress in a few short years. The bill has garnered support from 46 co-sponsors, well over 20 percent of the state legislature.”

Legislation of this kind may also become more politically palatable than an energy czar might be, because it can be designed in a way that does not increase overall government tax receipts. While the appointment of an energy czar might look like a dramatic and symbolic expansion of government, Berger said that Barrett’s bill is not a tax. “It is revenue-neutral and does not expand the size of government.”

Berger sees a national price on carbon as inevitable, and believes that once a single state takes action, the others will follow more quickly than expected. If a price on carbon emissions may be a reality in the medium term, it is possible that energy czars might become less necessary.

A Middle Ground

In reality, the view that energy czars and legislative solutions are competing solutions to the same problem is shortsighted. Many states may well need both solutions going forward.

Building more and more innovation on top of a fundamentally outdated system is no recipe for success. With renewable energy, innovation and change in the coming years is inevitable. When that change comes, states will be better off if they have already invested in a more streamlined and coordinated regulatory structure. Energy czars can be integral to that process. They may well be worth the political pain governors might face by appointing them.

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