Turning obstacles into strategies
By Donald Gilligan
This article represents Donald’s personal opinion on these issues, not the position of NAESCO.
The Inflation Reduction Act (IRA) has appropriated tens of billions of dollars for energy efficiency, renewable energy, and grid flexibility (demand response) programs, a substantial portion of which can potentially be used in ESCO projects. These programs are rolling out slowly, because the administering agencies, the Department of Energy (DOE) and the Environmental Protection Agency (EPA) are very short-staffed.
At the recent Energy Policy Conference of the National Association of State Energy Officials (NASEO), one speaker after another emphasized the importance of several major issues that often seem to be obstacles to the ESCOs’ day-to-day work of developing and implementing projects. But it is important for ESCOs to understand that these issues are not secondary but front and center to the politicians that drove the IRA to passage. So ESCOs must understand the political dynamics if they want to get the maximum short-term value from the IRA and set the foundation for a sustainable clean energy economy.
Goals of the Biden Administration
ESCOs should understand that the IRA tax incentives and grants are designed to do much more than provide subsidies to clean energy projects. They are also designed to use these subsidies to catalyze fundamental changes in the US economy. Many people dismiss President Biden’s talk about rebuilding the US economy “from the bottom up and the middle out” as political rhetoric, but the slogan represents a real vision, based on the “Golden Age” from the end of World War II to the depth of the Vietnam War. The expansion of union jobs grew a blue-collar middle class and US politics was much less fractured. California, New York, Ohio, Texas, and Florida were all “purple” states. President Reagan and House Speaker O’Neill would regularly have a friendly drink together in the White House.
The speakers at the NASEO conference from DOE and EPA kept coming back to a few key “bottom up and middle out” policies which the Biden Administration thinks may help re-create this Golden Age:
- Building a diverse and inclusive workforce that can deliver the technologies and projects that will drive the growth of the American economy in the 21st century.
- Focusing the benefits on neglected EJ40 communities.
- Remediating the economic hardship that the shift in the US energy economy is imposing on some communities.
- Revitalizing American industries that are critical to the energy economy of the 21st century.
- Lifting the country out of the BANANA (Build Absolutely Nothing Anywhere Near Anyone) siting and permitting quagmire that makes it virtually impossible to site new energy facilities, from solar farms to carbon capture and storage facilities.
These policies are more than just talking points; they are elements of a strategy to build a majority political constituency that will support a sustainable “clean energy economy.” If this strategy is not successful, the clean energy economy may well go the way of the 1960s Great Society.
When evaluating this threat, it is useful to bear in mind that politicians don’t look at the world the way businesspeople do. Where we see policy as facilitation of profitable businesses opportunities based on economics — saving money, reducing emissions, and creating jobs — politicians see building blocks to get to a majority that can change the direction of the country and/or get them re-elected. The disconnect is that we often see these political building blocks as obstacles that get in the way of business through programs like the IRA. But the Biden Administration and the (very fragile) Congressional majority that passed it sees the IRA incentives as a set of tools to remake the US economy, just as the Reagan administration and the 1980s Congress saw large tax cuts for companies and wealthy individuals as the way to pull the US economy out of stagflation.
To help understand the difference between the political and business viewpoints, it is useful to ask ourselves why it has it been so difficult to build convincing public support for the ESCO business proposition that we think is a no-brainer – re-purposing money current wasted on unnecessary energy usage and the maintenance of decrepit equipment to pay for desperately needed capital improvements in public facilities.
Unfortunately, our no-brainer is missing a lot of the political building blocks we need.
- We don’t have the wholehearted support of organized labor, which doesn’t see the momentum behind distributed EE and RE as the rising tide that can deliver millions of new jobs to the construction trades. They see EE and RE as a threat to union jobs in utilities, as demonstrated by 2022 threatening legislation in California and Hawaii.
- We don’t have mass movement public support in poor communities for programs that will reduce their energy burden and make their homes, businesses, and public facilities more comfortable and productive, even though a large percentage of ESCO K-12 projects, for example, are implemented in these communities.
- We don’t have support in communities that could see the new energy economy as a remedy to the economic devastation they experience when the coal mines and power plants close.
- We don’t have much support from companies and workers that should be seeing boom times ahead because they will be making all the equipment we will need.
- We have ambivalent support from environmental organizations, some of whom are talking about “leapfrogging” straight to electrification because the economy-wide deployment of EE is too difficult.
- We see only spotty support from utilities for new microgrids, grid-response, and demand management programs that use the advanced metering infrastructure paid for by ratepayer surcharges and that represent a huge new business opportunity for them and for ESCOs.
So let’s look at how three elements of the Biden policy that are embodied in the IRA programs are designed to provide incentives for ESCOs to understand and support the necessary political building blocks.
From a policy standpoint, the Biden Administration recognizes that as we revitalize the energy economy, it is profoundly unfair to simply walk away from the “Energy Communities” that have suffered significant environmental degradation and whose economies have been dependent on the coal mines, coal-fired power plants, oil-fired power plants, and other facilities that our economy has relied on for the last century. So the IRA allows for a 10% bonus ITC credit to new facilities located in these Energy Communities. From a political standpoint, a critical building block was the vote of West Virginia Senator Joe Manchin, without which the IRA would not have passed.
So maybe the ESCO industry can make a special effort to take advantage of the bonus credit and develop projects in one of the hundreds of Energy Communities across the country (see: Energy Communities Map – Sneak Peek | SEIA)
There is a widespread recognition that today we don’t have the workforce we need to sustain our current economy, never mind build the new energy economy, which must:
- Retrofit 100 million homes to make them more efficient and more comfortable, and retrofit 6 million commercial, government, and institutional buildings to make them more efficient and productive work environments. And significantly reduce the aggregate cost of new energy supply, from whatever source.
- Build and operate a new generation of energy supply, transmission, and distribution facilities to replace the current aging, often obsolete, and uneconomic energy supply infrastructure. Whether you think the future is electrifying buildings, transportation and industry with renewables, or relying on more fossil fuels, we need more mines, wells, pipelines, transmission lines, and as much as two to three times the amount of electric generation we now have.
- Domestically mine and process the raw materials and domestically manufacture as much of the needed equipment as possible.
Even a cursory reading of the economics headlines indicates that there are nowhere near enough people in the current workforce to do this work, which ESCOs experience as a shortage of skilled subcontractors, exacerbated by the retirement of a generation of workers in the utility industry and the skilled construction trades. The average energy worker is seven years older than the average worker across all industries in the United States, and more than 500,000 workers are expected to retire in the next 5 to 10 years. The National Renewal Energy Laboratory (NREL) recently published a report saying that we need between 600,000 and 1.1 million new workers before 2030 for just four technologies: wind, solar, storage and efficiency.
You don’t have to accept the arguments that women and minority workers have been discriminated against and deserve fairness and equal opportunity going forward to accept the fact is that we need all the skilled workers we can get, as fast as we can get them. And we need the new workers to commit to careers in the field, not temporary employment, because the retrofitting and new construction will take decades. So the IRA is investing tens of millions of dollars into training programs for residential retrofit workers (a good entry point for unskilled people to enter the energy workforce). And the IRA is providing potentially tens of billions of dollars in the 30% bonus ITC tax credits for companies that implement labor standards (apprenticeship programs and prevailing wage standards) to assure that ESCOs and their subcontractors can attract and retain a long-term workforce.
So maybe the ESCO industry should, rather than seek waivers and other workarounds for labor standards, modify our businesses models to use the 30% additional tax credits to proactively work with the construction trades unions to get their wholehearted support for our projects.
The IRA will attempt to direct 40% of program grants to Environmental Justice communities, which have borne the brunt of pollution generated by our industrial economy for the last century and a half, a policy known as “EJ40.” These grants will be reinforced by provisions in the IRA that allow for a 10% bonus ITC tax credit for facilities located in Low Income communities and up to a 20% bonus ITC tax credit for certain low-income residential building projects or certain low income economic benefit projects.
Why this focus?
First, it’s no surprise that most of these EJ40 communities are poor, populated by minorities, and have a much greater than average energy burden (percentage of household income spent on energy) than average (see: EJScreen: Environmental Justice Screening and Mapping Tool | US EPA). The policy principle is to invest funding where it will arguably have the greatest effects on people’s lives and contribute to transforming unproductive disadvantaged communities into thriving, healthy neighborhoods that are productive parts of the US economy.
Second, from a political standpoint, it is perhaps useful to think of EJ40 as a Democratic wedge issue that can develop a key political building block. Republican have been very successful for the last twenty years using cultural wedge issues to win elections by identifying politically disaffected people and motivating them to become voters and political activists. Democrats can theoretically do the same by delivering tangible benefits (jobs, lower energy costs, retrofitted homes and buildings) to disadvantaged communities, motivating their politically disaffected residents to vote and support the clean energy economy.
So maybe the ESCO industry should try to become an essential part of delivering the benefits to EJ40 communities. Focus on implementing performance contracting projects for public and institutional facilities, even it means establishing special business units that can afford to implement smaller projects because they don’t carry the same overhead burden as the normal target projects. Make a special effort to hire local contractors even if they need a more On the Job Training (OJT) approach to management and modified that facilitate their participation in ESCO projects.
Donald Gilligan has worked in the energy efficiency industry since 1975 as a consultant, entrepreneur, and state government official. Donald has authored and co-authored a number of reports on energy efficiency and the growth of the ESCO industry, which have been published by NAESCO and the Lawrence Berkeley National Laboratory. He is currently the President of the National Association of Energy Service Companies (NAESCO) an organization of about 135 companies that delivers about $8 billion of energy efficiency and renewable projects annually. He is responsible for coordinating the organization’s state advocacy activities and promoting energy efficiency and distributed generation in state legislative, regulatory, and policy forums. He also serves on the Board of the Efficiency Valuation Organization (EVO), as the Board Treasurer of the Emerald Cities Collaborative, and the Board Chair of PACENation and is a graduate of Harvard University.