Public Policy and the Energy Transition: Howard Learner in Conversation

Howard Learner:

With policy, you're dealing with an evolutionary process. Nobody thinks you're going to get it all perfect and all right at the beginning. We're dealing with an existential climate crisis, and that means we need to get moving on policy, get moving on technological innovation, and most of it hopefully will do a pretty good job and will do right. The costs of inaction are extraordinarily high when it comes to climate change, so waiting forever to get the perfect policy in place is far outweighed by the cost of doing nothing or inaction on climate change.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Aaron Engen:

Good day and welcome to another episode of Sustainability Leaders. My name is Aaron Engen and I co-head the Energy Transition Group at BMO Capital Markets. Today we're in Phoenix, Arizona, where we are wrapping up our inaugural transition Think Summit of leaders and stakeholders who are all involved in the energy transition of the economy. With me today is Howard Learner, Executive Director Environmental Law and Policy Center, which has made a name for itself combining public interest litigation with strategic policy advocacy, science and economic analysis. Today we're going to speak about the role of public policy in the energy transition. Welcome to the BMO Sustainability Leaders Podcast, Howard, and thank you for joining us.

Howard Learner:

Good to join you this morning, Aaron, and let's talk.

Aaron Engen:

Sure. Maybe best place to start here this morning, Howard, is to have you give our listeners who are not familiar with your work. Maybe you can start by telling us what the Environmental Law and Policy Center does, what role it plays in advancing energy transition.

Howard Learner:

Aaron, you gave a nice description before but we're based in the Midwest, headquartered in Chicago and the Midwest is the center for the United States of the energy transition problems and opportunities. Still the largest concentration of old coal fired power plants. Wind power is booming, solar is about ready to come. Lots of old buildings in the major cities like Chicago, Milwaukee, Detroit, and Cleveland that are energy inefficient, that can be made much more energy efficient. And you know the politics of the United States, generally speaking, the two coasts are relatively green. The South and the Rockies are relatively brown.There are all sorts of exceptions to that but the Midwest is a swing area when it comes to both energy and environmental policy, both on the ground in terms of physicality, the wind power, the issues with being the center of the nation's transportation system. It's also the pivotal delegation in Congress when it comes to some of those key votes. So we work in the Midwest, we work in Washington dc, we have a staff of attorneys, MBAs, public policy people, data scientists, and we work on eco-business innovation and hard hitting effective public interest advocacy. We combine the two together

Aaron Engen:

When you form the policy center, and as I think about energy transition today in the context of, and I think you've heard me say before, that big transitions in the economy historically have largely been driven by macro changes in technology. Think of the agricultural revolution, the industrial revolution, and think of the tech revolution and this revolution to the economy. That's how I think energy transition really driven by public policy. Technology plays a critical role in what we're doing, but who could have thought back when you started this organization that you'd be in the midst of where we stand today at the crossroads of changing an economy, changing the way we produce and consume energy and policies right at the heart of it all?

Howard Learner:

We really did look ahead and we saw this coming and I'll tell you why. Look what happened in telecommunications. If you go back 20 years or so, practically, everybody in the states had a landline phone at home and we began to have that innovative technology called a dial in modem where you'd plug it into the wall, it would make that sound, and you could try to have some communication that was faster than landline. Of course, that changed very rapidly, blackberries and cell phones and smartphone, and if today I said to you, "I got a great deal on a 2G smartphone," you'd look at me like I was crazy. The fact is, what we've seen in wireless technology, it's completely transform telecommunications, the way we live, the way we work, the way we play. Everybody practically has a smartphone of one type or another. Very few people have landlines.

So look at what that was 20, 25 years ago. And what we saw happening with energy was the beginning of that. Wind power was beginning to accelerate, and that's where technology innovation and policy go hand in hand. At the time, 20 years ago, there was maybe 500 megawatts of wind power in the Midwest. There's now 35,000 megawatts. Some of that's driven by much bigger machines that are much more technologically sophisticated. The production tax credit, a key policy driver helped move it forward, as did the state renewable energy standards.

When it comes to solar, which is now rapidly accelerating, the technological improvements in solar panel efficiencies have gone way up, which brings the cost down and the federal policy as well as some state regulatory policies provide a lot of support as well. So you're seeing technological innovation, public policy go hand in hand to drive that energy transition, which is really coming on the heels about 20 years later of the revolution in telecommunications and the way we do digital photography, for crying out loud.

Aaron Engen:

When you think of public policy in the role of energy transition, how important is it to you at the end of the day?

Howard Learner:

Well, it's vitally important. It's what we do well. We are not a research lab. We're very familiar with what's going on with technological innovation. We stay on top of it. We work very closely with some people who that's what they do. But at the Environmental Law and Policy Center, that's not our core expertise. We're really good at policy and law and science. So we're looking at how do you take the technology that's coming and how do you get the right policies in place to really drive to a much cleaner energy economy? That's what we do well.

Aaron Engen:

And when I think about that, Howard, in the context of elected officials, bureaucrats, trying to make decisions about what the right form of policy is, how does government get that right? What do they need to be doing to implement good policy? And if they get it wrong, what do they need to do to be able to and have what tools they need to be able to unwind that and push the reset or restart?

Howard Learner:

First of all, with policy you're dealing with an evolutionary process. Nobody thinks you're going to get it all perfect and all right at the beginning. If you did that, you'd never do anything. Don't let you know. Perfection, get in the way of the good. And that's what legislators do. They can amend things. Public utility regulatory commissions try to get it right. You try to do the best job you can. You find out that some things worked well, other things perhaps not, and then you move to improve them.

We're dealing with an existential climate crisis, and that means we need to get moving on policy, get moving on technological innovation, and most of it hopefully will do a pretty good job and we'll do right, but if we get some things wrong, there's compared to what? The costs of inaction are extraordinarily high when it comes to climate change. So waiting forever to get the perfect policy in place is far outweighed by the cost of doing nothing or inaction on climate change. So you drive policy, and that's really at frankly four different levels. First is the federal and state administrations. There's a lot that can be done by the executive branches in the state. Secondly, by Congress and the state legislatures.

Third are the regulatory backwaters, and Aaron, you and I know about the Federal Energy Regulatory Commission, the regional transmission organizations like MISO and PJM, and then the regulatory backwaters, like the Illinois Commerce Commission, the Michigan Public Service Commission that most of the public doesn't know what the heck MISO or PJM the fuck is. And then finally the courts which make major decisions. So you're working on all those forms and different interests of course have different policies they're trying to move forward. But the key is you can't always get it right and perfect at the beginning, and if you let perfection be the enemy of the good, there's some real costs on the other side of that.

Aaron Engen:

And I appreciate your comment as well, Howard, about the various levels in the policy making environment. There's many of them, and it's not just three or four levels, It's also three or four levels across many different jurisdictions.

Howard Learner:

That's correct.

Aaron Engen:

In the US for example, 50 states of federal government, there's also regulators in our regional basis, depending what if you're talking about a transmission, like how do you coordinate all those policies because at some point you have to believe that the policy in one jurisdiction heading one direction and in a different jurisdiction in another direction. How do you orchestrate this big group of cats all going in the right direction?

Howard Learner:

The answer is less than perfectly. Think about the Canadian example where not all the provinces do things the same way to say the least. US Supreme Court Justice Brandeis once said, "The United States has 50 laboratories of democracy." There's certainly trends among the state public utility commissions. Many of them go in the same direction but not all of them. And even in the Midwest, they get together, they talk together. But I can give you plenty of examples of Illinois did this, but Iowa did this and Michigan did that, and Wisconsin did something different.

One of the things we do at the environmental of Law and Policy centers, what we call innovate and replicate. So if we work, for example, before the Michigan Public Service Commission to get a very good decision involving regulatory treatment of solar installations, large utility scale projects, we then try to replicate that in some of the other states. It's the right thing to do. It's effectively, and of course the Illinois Commerce Commission is interested to hear what happened in Michigan more so than they are what happened in Washington State or Idaho. But they don't feel bound by it, but it gives you a leg up, if you will. So there's a degree to which they come together, but they really are doing their own things and the state laws are different as well.

Aaron Engen:

So here we are, October of 2022. I think it's fair to say it's impossible to have a conversation about public policy without talking about the Inflation Reduction Act. So I'm keen to hear your thoughts on the IRA and where you think it might be going too far, where it may not be going far enough.

Howard Learner:

The IRA is a hugely important and necessary step forward. It's going to jumpstart technologies in all sorts of ways. It creates stability when it comes to the investment tax credit for solar energy, which needs that stability to really move forward in the United States. It does the same thing with regard to the production tax credit for wind power. It provides some incentives to get energy storage moving, and as we all understand, solar-plus-storage storage combined really changes the market enormously. You're creating at least a 12 hour, if not a 24/7 power source. So that's fundamental. That's really important.

It also provides a lot of funding for what I'll call R&D technologies at this point. There's a tremendous amount of funding for carbon capture and sequestration, and let's face it, carbon capture and sequestration ought to be explored. It ought to be piloted, it ought to be demonstrated, but the jury's still out. The Kemper Project in Texas was a disaster or in the rest of the south was a disaster. It hasn't worked well so far. The costs aren't economically competitive at all. What this does is it provides a lot of money for what could probably be a dozen, maybe more projects.

And then what we really need to do is kick the tires, figure out does it work, how expensive it is compared to what and does it make good economic sense? Likewise, there's a tremendous amount of support for small modular or nuclear plants. There isn't yet a small modular or nuclear plant that's in commercial operation. It's a new experimental technology. I'm a pro-technology environmentalist.

Aaron Engen:

Which has always struck me interesting when people say SMR brand new technology, we're getting there. When I think of SMRs, it's hard for me to not to think about US military in particular. Now I understand it's a little bit different but fundamentally, the concept of small scale nuclear operating in small environments and doing so very safely is definitely not new to this world.

Howard Learner:

It's not new to this world. It's been used in submarines and so forth, which is what I think you're referring to. There's a difference between that and a 200 megawatt small module or nuclear reactor that is somewhere near a community where if something goes haywire, there's some really catastrophic consequences. And also what the cost of that smaller nuclear reactor powering a submarine gets buried away somewhere in the Department of Defense budget for sure. When you're talking about a 200 megawatt small modular nuclear reactor, let's see what it really costs.

The American experience with nuclear has not exactly been robust when it comes to economics. The big new wave of nuclear generation that was touted as being the next great thing, it was going to be less expensive, more efficient is the Vogtle Plant in Georgia. I think the costs now are somewhere along the lines of 35 to 38 billion. It's viewed as being an economic fiasco. Corporate executives have lost their jobs. Regulators are under a lot of fire. The cost escalated and spiraled and I'm not throwing stones at anybody but let's face it, that is not economic on a compared to what basis.

So let's see what happens with small modular reactors. Treat it as an R&D project, get some pilots, get some demonstrations out there, kick the tires, find out what it really costs. That's the purpose of the subsidies that are in the IRA. But before we start throwing billions and billions of more dollars at it, let's see how it really works and let's see what it really costs because there's then a compared to what issue. Can you take half the amount of money, put it into energy efficiency, put it into storage, put it into solar, put it into pump storage, and come out with something that gives you just as many megawatts, but does it in a way that's much less expensive. The jury's out. Let's look at the real numbers.

Aaron Engen:

Where does the IRA fall short in your mind, or doesn't?

Howard Learner:

Everybody has their wishlist of what they wanted the IRA to include and there are a lot more things and more money for this and more for that and so forth. The fact of the matter is Congress got it done in the Senate by a vote of 50 plus one. There's that political reality there. The IRA is carrots, it's money, it's incentives. What goes together with that in combination are regulatory policies, and the two of them, regulations and incentives, carrots and sticks really work together to get things done.

So if for example, the IRA is helping to provide carrots to support more solar and wind and for example, small modular nuclear reactors, but you have a lot of old highly polluting coal plants still running, then we're chasing our tail when it comes to net zero. So that's where the regulatory system is so important in terms of reducing pollution from the current coal plants and from some natural gas plants and so forth. While at the same time we have the carrots going for the cleaner technologies.

Aaron Engen:

And from a policy stability perspective, which industry and investors have been very focused on, I want to go back to your point about 50 plus one. That isn't to say that the 50 minus one or diametrically opposed to the principles of the IRA in its entirety, there may have issues with it, but that isn't to say that suddenly in a changed administration that the IRA is going to get wiped out.

Howard Learner:

No, and I don't think it will be, and here's why. When you look at, for example, the incentives for wind power, it's not like you have 50 Democrats who support it and 50 Republicans who oppose it. Senator Charles Grassley of Iowa believes him. He calls himself the father of the production tax credit for wind power. Senator John Thune the number two Republican in the Senate has been a strong supporter of the production tax credit. These are states in which wind power is a big piece of the energy economy and they are going to be supporting the production tax credit to continue. Energy policy in the United States is regional as much as it is national or state by state. And you have a number of states including South Dakota and Iowa, Texas, California, Illinois, New York that are leading wind power states where those states tend to work together. The two states that are leading hydropower are main Senator Collins, a republican, Washington, Senator Cantwell, a Democrat along with the other two senators.

So it works in very funny ways and it's hard to pass legislation in the states. It's also hard to pass legislation to undo legislation. As we saw when Republicans took control of Congress, tried to undo Obamacare really for eight to 10 years and that didn't happen. The IRA has a lot that's good for a lot of different states and different interests. A Republican congress might tread it, tweak it, adjust it, improve it as they may put it around the edges and so forth. But keep in mind, President Biden is in place for the next two years. So I think the IRA really does have some stability.

Aaron Engen:

And I have to believe too that as time passes, and this is one of the things that for me makes sense with the IRA being passed when it has, there's a 48 month plus period of time where industry is putting capital to work. And indeed, it's not just this and Biden may be reelected, even if there's a change in administration, that capital is going to continue to be spent until somebody, if they choose to do so, try to shut down or make changes or amend the IRA to limit it's impact. But while that's going on, all this capital is being spent eventually capital and industry have to say, "Look folks, we've invested, fill in a blank, $2 trillion since this thing got started. You, whoever you are, whatever political stripe here, I'm not going to support you in changing that because you're stranding all this money that I've put to work in good faith."

Howard Learner:

I think you're exactly right. On the other hand, investors roll that into the risk. The fact of the matter is they're very few risk investments. Probably the best is a win power project that has a 20 year PPA, that's about as good as you get. That's a pretty safe investment. There's a little bit of risk but not much. But this is something investors deal with all the time. I think back to when the federal government to the United States cut the corporate tax rate from 48% to 34%, which the Chamber of Commerce, for example, had strongly supported. Well, there were a lot of real estate developers who had real estate syndication deals. The economics were all based on a 48% tax rate. They were really unhappy with that. Cutting the tax rate from 48 to 34% had some consequences for real estate syndication deals.

Fact of the matter is there's a tremendous amount of capital flowing right now to clean energy projects spurred by the IRA, but also spurred by the technological improvements and the fundamental economics of these projects. So there is some risk, for example, if the investment tax credit for solar that's in the 30% range were to be yanked out again, that would affect the economics of projects. But I think what you're going to see are financial institutions, developers, utilities, and others all saying to congress, "Wait a minute here, we have projects that are going forward in your states and in your districts. The public wants it. They're good for the energy system. We're doing this based on the legislation you passed." Not impossible that that gets changed, but that's hard to change.

Aaron Engen:

Yes. Now we talked a little bit about coordination of policies across the US. So let's talk about it on a global scale because obviously emissions, the impact is all, no matter where they come from, whether-

Howard Learner:

We're all in it together.

Aaron Engen:

We're all in it together. So what's the likelihood of being able to coordinate global policies in the first instance and in the second instance of ensuring compliance might not be the right word, but that countries and other policy makers follow through and execute on their promises?

Howard Learner:

Almost impossible, but let's face it, we're all in it together. Whether greenhouse gases come from a power plant in Indiana, India or Indonesia or Manitoba doesn't make a whit of difference in terms of the atmosphere. So we need to lead in North America, we need to lead in Northern Europe, but 75% of the emissions are coming from the rest of the world and the policy that works really well in the United States may not necessarily be the right policy for India, and we can't be that presumptuous. What the COP talks do are designed to get goals and enforceable standards for all the nations in the world and we got to do it that way, and technology transfer is key to that.

Aaron Engen:

Can we do and lead in North America and Europe on energy transition, decarbonization in such a way that we don't structurally disadvantage the North American European economies relative to the rest of the world?

Howard Learner:

Well, let's start with the IRA which we've been talking about. The Inflation Reduction Act was absolutely necessary in terms of the United States have global credibility and be able to say to the rest of the world, "We're stepping up in the United States. We're putting our taxpayers money where our mouths are. We're moving forward aggressively." I mean, absent that, absent the IRA passing, the United States would've been going to the global discussions and negotiations saying, "We're not doing our share but you need to do your share." That's not a very tenable position. So a hugely important part of the IRA was it gave the United States credibility in terms of global leadership and that can help move things.

I think there's a challenge and an opportunity, and I'll focus on the opportunity first, and that's technology transfer. The fact of the matter is energy storage equipment, solar innovations and so forth that are happening in the United States. What's going on with EVs and batteries in the United States and Canada. This is all technology that can be transferred to a lot of countries in the world to help solve problems. If you've ever been in Bangkok for years, there were tuk-tuks. Tuk-tuks are essentially a lawn mower with a golf cart combined. Highly polluting, a principle means of transportation. Cleaning those up can make a big difference. We know the technology to do this. The United States can play a key role asking Canada in terms of both getting the technology over and helping subsidize and support it. And that doesn't hurt our economies in any way. It helps our economies because whether that pollution comes from Bangkok or somewhere in Canada or the United States doesn't matter in terms of the atmosphere.

Aaron Engen:

When I think of what we see going around and going on globally, do you see other jurisdictions and recognizing as big geopolitical differences between literally every country around the world. But are there any luminaries, leaders globally you can think of in other countries where you look at some of the policies that they've implemented that you think, "I like what they've done and maybe we ought consider doing something similar?"

Howard Learner:

If you look even at Northern Europe, the policies they're doing are so radically different and it also reflects that you have very different governments in place in the Northern European countries and you have, particularly in Denmark, Sweden, Norway, and such manage state economies. I mean, you can look at some examples for example, in Norway, how are they handling state oil and what's the transition with state oil, the nationalize if you will, oil company and how that might be used and some lessons on that? For example, how oil development ought to be done in the Bakken region of North Dakota?

But it's hard to just take a policy that's been adopted by Sweden and say, We're going to just take that lock, stop and barrel and apply it in Canada, apply it in the United States, let alone apply it in India. What we have to do is grow the cleaner technologies. In parts of the world that are highly polluting because they're using old technologies and that's an opportunity for transfer and economic development in which the United States and Canada's manufacturing sectors, I really do think benefit greatly. But I'm not so presumptuous to say, "Here's a policy we have in the United States," and I know enough about law in India or Thailand to say, "You could adopt that lock, stock and barrel." I think we need lots of different solutions that work in the places where they're applied. Recognizing, as I said, we're all in this together.

Aaron Engen:

So do you consider yourself a policy wonk?

Howard Learner:

I am a policy wonk.

Aaron Engen:

This has to be a great time to be a policy wonk when you consider all that's going on.

Howard Learner:

It is a great time in the energy sector to be a policy wonk. If you go back, for example, to the beginning of the Obama administration in the States 2009 and 2010, when the administration was focused on what became Obamacare, every healthcare policy wonk was coming out with their solutions and so forth. I mean, it was an amazing time if you were in the healthcare area. I don't know much about healthcare policy today. What an exciting time to be working on policy and technology and law in the energy and environmental sector.

Aaron Engen:

I doubt there's a time in history around energy policy transition where having policy expertise would have been more important than it is now.

Howard Learner:

I'd have to go back and I'm not so presumptuous to say no point in time, this is a fascinating and an interesting time. And for somebody who's spent his career working in the energy and environmental and civil rights area, I mean this is a time where it's all coming to play and what we're seeing is the pace of change is so rapid. As I analogized too before, look what happened if you were a telecommunications policy wonk. 25 years ago as wireless was coming in and the whole system was changing from landline to wireless to what I'll call dumb smartphones that could send emails but couldn't take photographs. And how rapidly that change has occurred and the policy decisions that were being made at the time of access and technology. This is a time where policy, law, economics, and technology is all converging and the best solutions are ones that really take all those into account in combination.

Aaron Engen:

Well listen, Howard, I have to thank you so much for taking time out to speak with me this morning for our Sustainability Leaders Podcast. Your insights, I'm sure will be appreciated by our listeners, and I'm going to put this down now as well. I think it'd be very interesting to get together in a year's time, particularly as we start to see the IRA roll out and do a bit of a post mortem or of course, very... I can't even say early days. This is just the first few days of the policy. It would be very interesting to have a conversation post midterms, post projects getting underway. What success have we seen and not seen under the new act?

Howard Learner:

Aaron, I'd be glad to do that. That will be fun. It will be interesting.

Aaron Engen:

Well, thanks very much for your time.

Howard Learner:

You're on.

Aaron Engen:

Bye-bye.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider and we'll greatly appreciate a rating and review in any feedback that you might have. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company industry strategy or security. This presentation may contain forward looking statements. Investors are caution not the place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results.