The Agenda

Jigar Shah on the Barriers to Energy Innovation

Bloomberg Businessweek published a brief symposium on the energy future, and I was particularly impressed by the remarks of Jigar Shah, CEO of the Carbon War Room and a well-regarded solar power entrepreneur. He begins by making an important distinction:

The word energy is very confusing. Energy includes both transportation fuel—which I think people are very concerned about—and coal, solar, wind, and other things that produce electricity. People confuse the two, and while we have fast-rising prices of electricity—5 percent rate increases per year since 2000—the fourfold increase in oil prices since 1999 is a much bigger problem in terms of economics than our electricity problem.

And later on, he stressed the importance of competition in achieving various energy-related goals. Note his disagreement with Carol Browner, who served as President Obama’s chief adviser on climate and energy policy:

Browner: Some of these changes will require congressional action, because what we need to do is give the private sector the certainty and the predictability so that they’ll make the large-scale investments in these changes. They don’t want to start making investments where they think I’m going to build something but I’m not able to sell it. 

Shah: Just to be slightly argumentative, I think we were in exactly the same place for both electricity and transportation in the 1970s. For electricity, we opened up that market. I started one of the largest solar companies in the U.S. We had that opportunity because we had net metering, we had streamlined interconnection standards, we had all sorts of ways for us to connect to the grid and actually provide [a new service to] customers who were dissatisfied with the services they were already being provided. Today if you own a gas station, you’re most likely under a franchise agreement with a large oil company that doesn’t allow you to add an alternative fuel station without their permission.

Shah isn’t advocating deregulation per se. Rather, he is calling for an approach to regulation that emphasizes openness to alternatives. It’s not obvious that this is the right approach, but it does represent a difference in emphasis from Browner.

Shah also bristled at conservation as a solution, which will warm at least some conservative hearts:

Shapard: If we could reduce electricity consumption by 10 percent, you’d save $25 billion a year in energy costs, you’d reduce CO₂ by about what you get in 10 percent electric vehicle penetration. The problem is people don’t know how to do it. Think about the way you buy electricity today. It’s like going to the grocery store, throwing groceries in your bag, walking out the front door, and once a month the grocer sends you a bill for $800. You didn’t break down eggs from milk from bacon. That’s the way you get electricity, just a big lump bill. If we can give you real-time feedback, studies have shown you’ll use less, you’ll use it smarter. 

Shah: I love Opower, but ultimately energy efficiency through individual action is just people spending money out of their own pocket. [It] hasn’t worked for 35 years. I really don’t believe it.

Opower, in case you’re wondering, is a new customer engagement platform for the utility industry that offers detailed information on electricity expenditures. 

And in what I found to be the most striking exchange, consider the gap between Browner and Shah on the virtues of regulation:

When we talk about the automotive industry, is the change going to come out of Detroit?

Browner: It’s going to come through the regulators. What regulations do is they create market opportunities for the capital investments, because they create predictability and certainty. When the President said all cars are going to be 35 miles per gallon for the average fleet by 2017, the automotive industry knew what kind of investments they needed to make. 

Shah: Here’s one thing that we don’t have in transportation, which I think is critical: There is almost no way in hell that you’re going to get an entrepreneur into transportation. There’s at least 15 different engine technologies that have been invented since the 1960s, but only someone with 50 full-time regulatory affairs people can actually get through the National Transportation Safety Board, through all the EPA regulations, and all of the other things to actually bring a new car to market. Like the group that won the X Prize, right? That’s an actual gasoline-powered vehicle that goes 120 miles to the gallon, and it’s an extraordinary engineering feat. I guarantee you that thing is never going to come to market.

Shah is referring to the very impressive Edison2. Browner places heavy emphasis on the role of regulators in providing a set of common standards. In contrast, Shah observes that the regulation is proving an insuperable obstacle to breakthrough innovation in engine technology.

My personal bias is that we should be willing to risk a few more exploding vehicles if doing so means more cars that get 120 miles to the gallon. I realize that this sounds very glib, but I say it in recognition of the invisible harms caused by restraining the innovative process. The danger, of course, is that we will manage potential harms through litigation rather than regulation, which might prove even more problematic. Joshua Schwartzstein and Andrei Shleifer have written on this subject, e.g., in “Litigation and Regulation” and “An Activity-Generating Theory of Regulation,” the abstract of which reads as follows:

When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to innovation are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are, and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare. 

We clearly need to create a regulatory regime that is somehow less burdensome and less demanding, thus reducing the cost of complying with safety regulations. We also need a pony. But I suspect that we won’t get either any time soon. 

Another advantage of allowing spectacularly dangerous vehicles on our highways: the meek might choose to telecommute or use public transportation, thus reducing congestion for those willing to brave a slightly elevated chance of death by flaming DeLorean.