The Plug

My physician friends often complain that they can never escape the demands of their profession. No matter where they gowhether its on vacation or to their kids soccer gamepeople inevitably come up seeking advice on their bad backs or their parents Alzheimers.

These days, I understand their complaint a little better. For the past two decades, Ive run a private equity firm in Washington, D.C., that invests in clean energy. My counsel has rarely been sought at local cocktail parties (and thats been fine by me). But that changed when the price of oil skyrocketed. Now it seems as if everyone I meet, from taxi drivers to U.S. senators, wants to discuss energy policy with me.

Well, the good news is that voters and politicians are finally awake to the energy problem. Its especially encouraging that the debate is focusing on the most dangerous part of the energy supply chain: foreign oil. This is a case where the conventional wisdom is true. Our addiction to imported crude threatens our national security by making us reliant on Middle East oil dictators and assorted autocrats around the world. It is also ruinously expensive to maintain, costing nearly a trillion dollars a year at current prices. This seriously exacerbates our trade deficit, nearly four-fifths of which can be linked to oil imports. Finally, our use of oil is environmentally destructive. The oil we put in our cars is responsible for more than a third of Americas greenhouse gas emissions. This prevents us from properly tackling the biggest environmental challenge facing the country and the planet: climate change.

So an important message to politicians is that oil has three huge strikes against it: its a security threat, an economic threat, and an environmental threat. This is far worse than the cumulative rap on any other major source of energy. For example, Al Gore is right that coal is bad for global warming, but from a national security or balance-of-payments perspective coal stands up well. And while politicians like to pretend that oil can be distinguished from foreign oil, in practice dependence on one kind of oil means dependence on the other. We can drill all we want to here in the United States, but well only ever meet a fraction of our demand, since we use a quarter of the worlds oil production but possessat bestonly 3 percent of the total reserves.

The bad news is that none of the current energy plans being debated in Washington or presented by the presidential campaigns adds up to sound long-term policy for dealing with the energy challenges facing the U.S. Most of the supposed grand solutions turn out to be half-baked schemes that pander to voters and vested interests. John McCain argues for more drilling in America. Barack Obama favors more subsidies for ethanol. Oilman T. Boone Pickens advocates retooling cars to run on compressed natural gas. These and many other big energy plans have at least one thing in common: they involve a multiyear, massive-spending, government initiative that will set America on the path toward displacing foreign oil with some kind of domestically produced liquid fuel. That may seem like a sensible idea, but in fact it merely postpones, and therefore makes more costly and wrenching, the energy transition that Iand many other industry leaders I talk withbelieve will save America.

In the film The Graduate, Walter Brooks famously gives Dustin Hoffman a one-word piece of career advice: Plastics. At the risk of sounding similarly glib, let me nevertheless suggest a one-word answer to our multifaceted energy problems: electrification. The basic idea is very simple. Over the next few decades, government policies should advance the aim of replacing oil and most other liquid fuels with electricity. It should also ensure that the way we generate electricity gets steadily greener and more efficient. Since about three-quarters of our oil goes into our cars, this means favoring policies that will encourage phasing out the internal combustion engine in favor of the electric enginea direction in which many automakers are already headed. Electrification as a rallying cry for American energy policy isnt perfect, but in my view its the best and perhaps only way to get us to a clean and secure energy future.

If you live in a typical home, your domestic life is already centrally dependent on one source of energyelectricity. You have a number of electrical appliances you simply plug into wall outlets. You can move these machines from room to room, house to house, or city to city. All over the nation, electrical outlets work the same way. But imagine for a second that each of your appliances instead relied on a distinct source of energy. Suppose you had to load your computer with coal, your television with kerosene, and your vacuum cleaner with natural gas. That sounds like utter mayhem, since we take the standardization of power sources for granted. And yet, not long ago, people purchased kerosene for their lamps, coal for their stoves, and oats for their horses. The movement toward making machines reliant on electrical power has always gone hand-in-hand with progress.

But we dont think of our cars this way. Of course, for the past hundred years, in a world where petroleum has been abundant and cheap, the fact that the transportation sector hasnt made the electricity transition hasnt seemed problematic. The energy and transportation industries have done what they could to keep our cars frozen around oil technology. Its no wonder that government policies have been aimed primarily at making internal combustion engines more efficient and eco-friendly rather than at changing something more fundamental. Youd hardly guess that electric motors are far more efficient users of energy than internal combustion engines.

Today, even when we speak of moving beyond oil, the conversation turns to other liquid fuelssuch as ethanol or natural gas. This is a bit like reacting to a paraffin shortage by switching over to kerosene, even though each day is bringing breakthroughs on the incandescent lightbulb. The new national commitment to produce thirty-six billion gallons of biofuels in America by 2022, as mandated by the Energy Independence and Security Act of 2007, is less about stimulating the transportation technologies of the future than about protecting the interests of those who wish to perpetuate the past. The plan put forward by T. Boone Pickens to remove natural gas from the production of electricity and use it to fuel automobiles would just swap our dependence on oil for dependence on another fossil fuel. This would force us to spend billions of dollars building out new gas infrastructure, and it would inevitably drive up the price and require us to import more liquefied natural gas. Wed also risk depriving our electrical grid of one of its most precious resourcesbecause natural gas is the primary source of peak load power production available to the system. So its a lot more sensible to preserve natural gas as a source for electricity and heat in our homes and to use electricity for vehicles instead.

Because our national policy has been biased toward liquid fuel for so many years, its easy to forget how liberating a bias toward electricity would be. Electrons, which travel through power lines, are far easier to transport than are dangerous, corrosive liquids, which require trucks or pipelines. (Incidentally, existing pipelines could not accommodate ethanol, which would corrode them.) Since electricity can be generated from many homegrown sourcescoal, natural gas, wind power, solar energy, hydropower, nuclear power, fuel cells, and, eventually, perhaps fusion and other sourcesits tremendously flexible. This makes things easier for policymakers, too. Most important of all is that it helps us to phase out one of the major sources of energyand headachesin our economy today: oil.

To see how a smarter use of electricity in our cars, starting in urban areas, might work, take a look at London, where drivers are purchasing electric cars in order to avoid a fifteen-dollar-a-day congestion fee required of ordinary motorists. Many drivers in the city now own two cars: an electric one for day-to-day local use, and a traditional oil-burning one for long-distance driving. They use the EV for the ordinary short trips in town and take the big car out for the weekend trip up the motorway. Other European cities are following the London example.

I recently started driving an electric car made by a firm that my company invests in. I thought Id keep driving my gas-powered hybrid Toyota Camry about half the time, but in reality Ive been using it only about a fifth of the time. My electric car has taken over. It uses lead acid batteries and has a range that is short by American standardsforty to fifty miles per chargebut I use it whenever Im traveling inside the Beltway (as long as Im not transporting my sons cross-country team). Fueling it is easy: I plug the car into my 110-volt home outlet in my garage at night or the 220-volt charging bay in our company parking garage. The cost is about two cents per milecompared to my hybrid Camry, which at thirty-five miles a gallon still costs me about ten cents a mile. Everywhere I drive, people stop to ask me about it, excited by the idea that they, too, could have an electric car choice in the not-too-distant future.

Electric cars are also getting better and better. Hundreds of millions of dollars of new investments from the private sector are streaming into the electric car sector, leading to improved battery technologies, drivetrains, controllers, and advanced energy management systems. I have no doubt that within a few years EVs will be the major growth segment of the automotive industry. With even a gentle push from Washington, electric vehiclesstarting with small, city-oriented cars, delivery vans, and cabs in the next several yearscould expand into the mainstream transportation sector of the United States and grow to 25 percent or more of all vehicles by 2020.

To start with, our focus should be on cities. Put incentives in place so that cities make the transportation infrastructure friendly to electrificationlike installing power lines for trolleys and electric buses or adding charging stations to public parking garages. Make electric cars available to commuter rail passengers so that people can drive the two or three miles back and forth from their house to the station. Even modest steps like these would go a very long way toward making the urban transportation system in America predominantly electric in a few short years.

I should add that the use of electricity as the primary energy source in transportation is hardly new. Urban light rail and bus systems in most major cities of Europe and Japan have long been electrified. Russia completed the fully electrified Trans-Siberian Railroad a few years ago. If we wanted to make it happen, American freight and passenger railroads could run all-electric with as little as a decade of additional investment. The problem has been will, not way.

Now, I dont mean to suggest electrification is perfect or easy. We currently rely on an aging, outmoded electrical grid that is stretched to the limit, and our utility companies are part of a Byzantine patchwork of regulated monopolies that have few incentives to innovate or modernize. So the physical infrastructure for electrification is not yet in place. Moreover, the greater our dependence on the electrical system, the greater the effect of disruptions to it will be. Severe weather and natural disasters, terrorist attacks, or even just small technical perturbations can ripple into major outages. Experts estimate that 60 percent of our current equipment on the electrical transmission grid is so antiquated that it needs to be replaced in the coming decade.

But these challenges present the opportunity to modernize the entire electrical grid. New Smart Grid technologies will allow households and utilities to measure real-time electricity use and control electrical devices in our homes remotely. Advanced IT systems and physical monitoring will better safeguard the grid from natural disruptions or deliberate attacks.

By gradually eliminating petroleum fuels in transportation, we can also begin to tackle the other major threat posed by use of fossil fuels: global climate change. Targets can be set for steadily reducing the carbon footprint of the national electricity generation and transmission system. Of course, adding more wind farms, solar electric panels, and geothermal generation systems will help make the electricity system more carbon-neutral. But equally important will be the technological progress on the dirty side of the business: the use of coal and nuclear power. Currently, more than 50 percent of American electricity comes from coal-fired power plants (which emit conventional pollutants and greenhouse gases), and 20 percent comes from nuclear power (which still has serious radioactive-waste problems).

Regrettably, coal cannot be eliminated as a fuel for electricity generation too rapidly, because it still supplies too large a share of our generating capacity. (Politicians know that the public wont tolerate brownouts of the sort California experienced in 2001, much less blackouts.) In fact, we will have to maximize energy production from non-oil-based sources if were to be successful at making up for what we lose by cutting out oil. But by imposing carbon taxes, cap-and-trade programs, and other regulatory mechanisms, we can force power companies either to clean up their coal emissionsthrough carbon sequestration or other technologiesor, over time, to replace their coal-fired facilities altogether with plants that run on cleaner alternative fuels.

Theres one more advantage to electrification: Washington can keep misbehaving. Electricity is a political winner. It spares government from having to play God in the marketplace by declaring today which technologies will prevail in the marketplace tomorrow. It also allows for many forms of generation, so nearly every energy lobby apart from big oil would embrace a move to greater electrification and scramble to get a cut of potential windfalls. Automakers know that the electric car is the way forward, so few would be likely to lobby against incentives geared toward its developmentespecially if Washington threw some pork in Detroits direction. And electrification doesnt require serious sacrifice from the public. Being flexible, a policy bias for electrification also would allow politicians to keep wasting public funds on local pet programswhich they will do unless thwarted by the veto pen. If, say, Senator John Thune of South Dakota wants to throw money at converting ethanol to electricity, a plan like this wouldnt stop him. You pick your battles.

As luck would have it, then, electrification is politically attractive for the same reason its smart as policy: its flexible. Policymakers dont need to settle on some specific resource or favorite fuel in order to make electrification work. They can allow the free market, conditioned by the regulatory process, to determine the mix of generation sources many decades into the future.

Theres one more essential reason for Washington to get behind the electrification wave: the survival of the American car industry depends on it. American car companies know how to build electric vehicles. But they are still behaving as if flex-fuel vehicles are the dominant technology of the future. If this continues, Japanese and European carmakers, who see flex fuels as a dead-end technology, will leave us far behind. Recently, one Japanese car official told me that he considered hybrids a cul de sac, a diversion from the path to the true electric car world of the future. Even plug-in hybrids are getting to be yesterdays news. The Big Three American automakers are asking for $25 billion in new government loan subsidies to retool their factories to make the competitive car of the future. If they stick with flex-fuel or internal combustion engines, they will be out of business in a decadeor back with their hand out. (The Pickens plan, which would require Detroit to retool its cars to run on compressed natural gas, would lead to the same problem.)

Let me say one last thing: simple or short-term policy answers to the nations current energy problems dont exist. I was a freshman in college in 1973 when President Richard Nixon boldly laid down the following challenge to Congress: Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of the decade we will have developed the potential to meet our own energy needs without depending on any foreign energy source. Needless to say, this didnt happen. The problem for the past thirty-five years has been that petroleum prices have been low, even if artificially so, and energy policy has failed to account for long-term trends. We must have a forty-year plan, not a gimmicky Manhattan Projectstyle plan.

No matter how we proceed as a nation in energy use, one thing is certain: the era of cheap, abundant petroleumthe cornerstone of the twentieth-century American way of lifeis over. Prices may fall again somewhat, but they will never be what they once were. This is a critical moment, and well need a strategy to guide us through what will be a rough transition. As we attempt to curb our addiction to oil, electricity is there for us, and its the best asset we have in meeting what, in the coming decades, will be the most urgent challenge facing our country.

Jeffrey Leonard is CEO of the Global Environment Fund, a private equity firm founded in 1990. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.

This site and all contents within are Copyright 1969-2011 Washington Monthly
Editorial offices: 1200 18th Street NW, Suite 330, Washington, DC 20036

Jeffrey Leonard

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.