 This is Think Tech Hawaii, Community Matters here. Okay, we're back. We're live here on a human Wednesday afternoon with Energy in America. And we are joined, as we usually are, by Lou Pulirisi. He is the CEO of E-Pring, which is an energy policy think tank in Washington, D.C. And we are joined by him even in the week between Christmas and New Year's, a special time. Thank you for joining us, Lou. Can you hear me, Jay? Let's get started. Yes, I can. It's nice to see your smile and face. You look like you've been enjoying the week. I have, yeah. I've been overindulging probably. That's it. So when I asked you... It's the entire family here, so it's a big gets a lot of work. That's wonderful. It's all about family this time of year. In fact, I would say the country is all about family. Family is the best part of the United States. It may be the biggest part of the world. Exactly. So I asked you what we could talk about here in the call it the bridge week. The one notable thing that sort of occupies all the oxygen is the tax reform, I say reform, the tax reform bill that just passed and was signed. So the Republicans and Trump have had a success in that regard. And the question is what are the implications, both short term and long term? Because they may not... The implication short term may be that we all get a few bucks, you know, we leave taxes. The long term is what about the macroeconomics? Before we get started, I meant to point out to you that the week before last I was in Frankfurt, Germany, chairing a European LNG conference. And the dynamics on that, the ongoing struggle between the Eastern Europeans and the old traditional Europeans, particularly as it relates to Russia was very interesting. And as you know, the Russians have proposed to build with the Germans a pipeline directly from Russia to Germany to bring natural gas from Russia, bypassing the Ukraine. And this is an issue that's going to continue for the next few months throughout the next year. And it's a topic we probably should revisit at some point. Because one of the alternatives to this Russian gas is United States LNG. And this was a big feature at this event. And there was also a great deal of, I would say, concern among the Germans about the political developments in the U.S. I found that also very interesting. Well, they're probably also concerned about the political developments in Russia with respect to Ukraine. But let me ask you, what are the geopolitical considerations of bypassing Ukraine? Why would Russia want to do that? What does it mean for LNG? So I think that there was a debate whether this additional pipeline capacity is really needed or not. And I think the Russians and some of the Germans, the sponsors of the project, were arguing, yes, we need more capacity to bring additional gas from Russia because European production is declining. But I would say the Ukrainians argue, no, the Russians are doing this just to put the squeeze on Ukraine. That if they can bypass us, they know that they don't need us to transport their gas. And it will then give them a free hand for all kinds of nasty shenanigans. So I think that is an issue. And the U.S., by the way, today still supports maintaining the Ukrainian transit. And the U.S. is more or less opposed to Nord Stream. And within the context, I can say the Europeans should not have too high a reliance upon a single supplier. They don't try to single out the Russians. But anyway, I just wanted to get that started on the table. Yeah, sure. Well, I think that's a thread we should cover. But just to get the foundational points, if they build the pipeline in a way that avoids going through Ukraine, where do they build it north or south? They go over the sea. They go through the Baltic Ocean and the Baltic Sea. So they do it. And they need to get landing facilities like in Vilnius. The Swedes have said, no, you can't land the pipeline in Sweden. So they have to use an alternative route. And I think the Lithuanians have also told them they cannot land it in Lithuania. So then they are forced to move the gas entirely through an undersea route. Why would a country like Sweden or Lithuania say no? Are they opposed to the Russian end of it or the German end? They are opposed to the Russian. Basically, they don't trust. They don't want to be holding to the Russians on anything. They don't want a Russian pipeline on their territory. They want to have political and defense reasons. This is really interesting. It's the intersection between energy and geopolitics. Yes, it's a topic which we can in a few weeks. I'm going to have some visits with the State Department next week. And I'll be able to talk about it more extensively. Okay. We're ready to talk about the tax reform act now? Let's talk a little about the tax reform because I guess the Republicans said it was going to be the best thing since sliced bread and Nancy Pelosi said it was probably the end of the world as we know it. Okay, on again. And so I think it's important to sort of not get too excited about this stuff. When the government does something, it's really never really as big as you think. I agree with that. And I think the first thing to start with is if you look at the development of the United States economy after the financial collapse of 2008, whatever it was, and you look at that, we have a period of extremely low growth historically by most recoveries from a major recession or major event. Now, recoveries from financial crises usually do take longer. But one characteristic of the U.S. recovery wasn't that consumption spending, consumer spending was so low. It was actually pretty good. It was that the historic rate of direct business investment compared to previous recovery periods was substantially lower and stayed low throughout the period. And that this low rate of investment recovery was attributed to lots of things. One that just takes a long time to work out the, let's say, the adverse effects of a financial crisis as opposed to a traditional recession. Second, the number of projects that justified investment seemed to be limited. And some would argue that there were two features there. One was that the regulatory state had grown to such a point that it was very difficult to risk capital in a lot of areas. And the second point was that U.S. corporations, because they were paying this high tax rate versus what their competitors were paying in Europe, made them less competitive. And hence, you get these inversions where essentially a foreign company buys a U.S. company and moves the headquarters to Ireland or somewhere, right? And I think the third part is the U.S. had a unitized worldwide tax treatment. So you were taxed on worldwide funds. Everybody else in the world only is taxed on those revenues and profits they generate in their own country. And so, even President Obama had said, well, I think the rates do high, maybe we should go to 28%, right? And, of course, this whole political debate is caught up in a lot of other issues, some of them on the unpleasantness of the way American politics operates now. We talked about that a few weeks ago. And I think that a couple of issues to think about, before we get to the tax treatment of you and I, like working steps, the treatment of the corporations is quite an interesting and important breakthrough. And I think in the end, people are going to embrace this. One is, we're moving away from a unified tax treatment to a territorial one. That means that you're only going to be taxed on the revenue that you make in the U.S., that when you repatriate revenue back to the U.S., you will not pay a higher tax rate than generally, than in most states of the world. And so, you now have incentive to bring it back here. Combined with the lower tax rate, the thinking goes, behind with the lower tax rate, and the fact that you have this massive or important regulatory reform effort, we should get more direct investment in the United States than we would without the tax. So that is basically what was driving the economic theory of the economic practicalities behind the tax reform. It is extremely useful tax, a beneficial tax for major integrated oil companies headquartered in the U.S. and is likely to completely stop the inversion process. So you will see companies like ExxonMobil, Chevron, the Shale producers. I think they all believe that this is a huge benefit to the domestic oil and gas industry. Well, how would that work then? That would make it cheaper for them. They would have to pay a lower tax rate. And they would be able to, there are other aspects of the project. The direct expensing of investment, particularly in the early years. You don't have to amortize investment over a longer period of time. But a lot of features of it should induce a higher rate of direct investment in the U.S. And one of the problems we've had is that our growth rate in the country, now I don't know what it is for the state of Hawaii, but for the United States as a whole, we've stayed around what we call the terrible twos, right? And many economists have argued, okay, well, we're 2% because population is getting older and people are retiring, they're sitting on the rear-ends, they really don't want to do any work. And I think there's a debate about that. There's a lot of people who are not in the workforce, who could come out of the so-called U4 category. People who are not looking for work anymore. If the wage rates rise, they'll come out. So this tax program will be a success if several things happen. If we have a higher rate of economic growth. And if we just go from 1.9 to 2.5%, that is huge. Second, if we start to see rising wage rates, these are all the things to look. So my view is the tax package that's really important was the way we treated the corporation. And I also think- That's where the big money is. That's where the money is. But remember, corporate income taxes only generate today, even before the tax, about 10% of the revenues to the federal budget. So they have a- You and I are the ones that fund the federal budget. Yes, but that's troubling in the sense that, you know, you can say it's a- It has been a high rate. And it'll be substantially lower. But the fact is the multinationals have a lot of tax breaks, you know, that are not directly related to the rate. Deductions and amortizations and the like, credits, whatnot. I agree. And one of the problems- So they don't pay that much anyway. One of the problems with a very high tax rate, our corporate tax rate was one of the highest in the world, is the corporations go to Congress and say, hey, you're killing me with this tax rate. I need a special deduction if I invest in high tech this. Or if I buy a super duper windfall. Or if I- And the Congress, oh, I agree with you. It's bad. You're from my state. I'm going to try to get you a break. And then those breaks start to pile up through the whole system. And so people argue, look, the effective rate is really not 35%. It's something else. But that's not the point. It's something else because Congress passed all these special favors, which are distorting decisions in the marketplace. Well, are those special favors going away, Lou? Are those special favors going away now? Yes, they are going away. Many of them are going away. Some remained in the bill like the final bill left the wind and solar credits, which people don't understand, untouched. But they still phase out in four years. Well, I want to take a look and synergize all of that right after this break, Lou. Sure. I'd like to ask you specifically how are renewables going to do? You know, because there's a lot of policy around that right after this break. We'll be right back with Lou. This is Think Tech Hawaii, raising public awareness. Good afternoon. My name is Howard Wig. I am the proud host of Code Green, a program on Think Tech Hawaii. We show at 3 o'clock in the afternoon every other Monday. My guests are specialists from here and the mainland on energy efficiency, which means you do more and less electricity, and you're generally safer and more comfortable while you're keeping dollars in your pocket. Okay, we're back at a given Wednesday here in Hawai'ine, with Lou Pulirisi. He's in Washington, D.C. He's the CEO of EPRINC, which is an energy policy research think tank. And we're having a discussion about the tax reform bill and how it affects not only the multinationals but the energy companies, not only the fossil fuel companies but the renewable companies. So that's my question for you now, Lou. How is it going to affect the development of renewable energy in this country? So the existing tax credits for both solar and wind and the federal payment for electric cars were restored during the conference debate when the two houses met, and now are part of the law. So there was no change to the way we were treating a wind which includes a production tax credit. In other words, when you bid into the grid with your wind, you still get somewhere between 1.8 and 2.0 megawatt hour. I'm not sure exactly the number. You continue to get the solar credits, and the direct payment for buying an electric car from the federal side stays into the bill. Does that expire at any point, or is that just ongoing? Yes, it has already. Because both the solar and wind guys have gone to the Congress so many times, the Congress said, look, the deal they put together, okay, this is it. This is the last time we're going to get these freebies from the government. So over time, these credits are going to phase out completely, and I believe by 2020 to 2022, they completely disappear. But for now, we still have them. Still, there's been no change in the treatment of it. And what about the electric car credit? The electric car, the federal electric car credit remains part of U.S. law. And how long will that last? That lasts until any manufacturer produces over 200,000 units. Once a manufacturer exceeds 200,000 units of an electric vehicle, that manufacturer loses the credit. Ah, interesting. So there's sort of a negative incentive there. Well, if you get up to 200,000, how long do you want the government to pay these guys? You don't have to ask yourself. They're not paying any road taxes. That's economies of scale. They're figuring that it must be cheaper to make 200,000 of them. Once you have a share of the market, the government pulls the plug. So what does this mean? I mean, if you extend all of that out into the future, I guess it's only a couple of years, but if you extend that out into the future, what's going to happen to renewable energy differently than what's been happening now? So I think the basic question is, we still have debate taking place in the Federal Energy Regulatory Commission on so-called appropriate treatment of reliable power. Now, reliable power would be, in Secretary Perry's view, nuclear or coal. But the question is, how reliable are resilience? Resilient really is coal if you get a snowstorm and the coal is frozen or if there's a big flood and it's all wet. So the FERC is working through this issue, which is part of a broader problem. They're going to have a technical conference and a proposed rulemaking. And for this issue, the real issue is, what is the true cost of bringing wind and solar and renewables to the grid? We don't really know yet what that cost is. Now, to the extent that these regional transmission organizations, these organizations which regulate the grid and many power plants in a large region, to the extent they say, okay, you need to bid in next year, whatever, a certain amount of megawatts to be available to our grid. You need to put a price and we're going to put you in the queue, right? And I think that when people were bidding, when wind and solar were bidding, intermittent power, utilities didn't have what was hard to do it, right? So what they're saying now is, look, when you bid, you have to bid firm power. So if you're a wind generator, you know your wind doesn't burn all the time, it doesn't blow all the time. You have to then say, okay, I'm going to bid firm power, but then I have to get a contract with a gas producer or a coal producer or a nuclear producer. And so I'm going to bundle my bid because when I send firm power to the grid, I have to show the regional transmission organization, yes, I can guarantee you that in August next year when you ask for so much, I will deliver power to the grid. So sort of supplemental source. Yeah, but you're responsible as the wind producer for making sure your bid is firm and then you wrap that up and put a number into it. I still think there's a debate, a big debate that's going to play out in the next couple of years, which is, well, what is the system risk or the system cost from intermittent and unpredictable sources of renewable power? So-called variable renewable energy. And that is what you're going to see play out over the next year, how to deal with that. And I do think one of the issues a lot of utilities are struggling with is what are consumers willing to pay in order to keep the probability of dropping load very, very low? All right. I know what my neighbor's willing to pay because he bought a $25,000 generator and stuck it in his backyard. So he's willing to pay a lot, right? Well, what about storage? I mean, we have an issue here in Hawaii, not resolved, maybe to get resolved this year as to whether we will allow local tax credit for storage, for batteries, because that's all the rage and I'm sure it is on the mainland too. If you want to have a flat curve, so to speak, if you want to have it dispatchable at all times, storage really helps on generation through renewables. So what about the federal government? What kind of credits are available now and does this bill change the arrangement for credits for storage for batteries? So I do not believe the Department of Energy has a big research program on storage. So there's a big effort on storage and there's continue to be spending money on it. I don't think there's any specific subsidy or tax credit for storage, however when you bid if you're a wind power generator and you've gotten married to a storage guy, and that's a cheaper route than getting an option contract with a gas generator, some oscillating generator, then you can bid that into the grid. There's a big penalty for bidding power into the grid and then not being there when it's a call to bond. It should be. It should be. You've got to comply. That would be interesting to see how the Hawaiians do with this. Well, yeah, I guess the question really is whether they're going to have any help from the federal government on it. But it doesn't sound like that. There might be some grant money at DOE for this. I wouldn't necessarily count it out. Well, let's go to that for a moment. The administration has not been friendly to the environment. We've seen that in many ways. I'd like your thoughts about whether it has been friendly to renewables, regardless of the law, because you can do so much on a regulatory basis. Sir, I would say the administration hasn't done any you could argue that the only major issue which is somewhat less favorable to renewables, but maybe even less favorable to gas has been the loan guarantee for the nuclear power plants in Georgia. They've put a big Department of Energy loan guarantee to make sure these few nuclear power plants are building and going forward. And they have engaged in withdrawal from the so-called clean power plan. The clean power plan is an extremely complicated program in which the states are still free to pursue their own renewable portfolio standards and other programs. So I think there's a my view as a person that cares about what things cost and efficiency. I'm not too concerned about getting rid of the clean power plan. I don't think it makes sense that the grid is unstable was struggling against natural gas. I do think we should put some brain power in making sure the grid is resilient and reliable that we don't want the wind and solar to propagate at a pace that the grid is unstable. I don't think we want that. I don't think even the environmentalists want that. Because if you start dropping load that's going to be a death nail to the renewables. They will not put off a losing electricity when they want to watch HBO. No one's doing that to keep that in mind. Well you know one other thing to cover before we run out of time is the whole thing about the effect of this on the initiative for LNG. You mentioned how important it is in Europe. We went to a conference in Japan a few weeks ago and discussed LNG from the U.S. into Asia. What does this legislation affect if at all? I think the two things is that the more favorable treatment direct investment particularly the expensive provisions and the territorial treatment and the lower tax rate is going to make it easier for LNG investment to take place in the U.S. It's going to make it more profitable. We are in the process now of a second of our sister think tank in Japan Institute of Energy Economics in Japan I'm going over there in February to work out the details to look at what needs to take place for capacity building in the Pacific for the Southeast Asia mostly but also we're going to do a deep dive on both India and China and I don't know if you've noticed in the last few months everyone thought we had too much LNG in the Pacific all of a sudden China and India started ramping up their LNG purchases and now LNG prices are rising very rapidly in the Pacific This is not a surprise is it? It's not a surprise because the pressure people think about greenhouse gas emissions but that's not what's driving this what's driving this is political concerns over local air pollution if you can't breathe the air in Beijing even if it's an autocratic society eventually you get nervous that the people will complain and they are complaining I have to add just a footnote to that is that we have our correspondent from Beijing tells us that this year for a lot of good technology that the Chinese have installed in Beijing the air is better so whatever they're doing they're actually addressing it I think it is getting better and more criteria but they have a long way to go One other thing is to assimilate all of this so we have potentially a better investment environment for LNG we have these opportunities east and west we have an initiative and a supply that really bespeaks a kind of LNG prosperity going forward but the question I put to you was where is the investment going to come from because now multinationals are more fluid perhaps especially if you buy into the notion that it's going to be one country at a time the U.S. is not going to tax income earned in other countries that's not yet but that may be coming so where is the investment going to come from to build out the LNG facilities to explore for it to connect it up to make it possible to export it hither and yonder I think there is historically the banks provided liquidity you know banks say we don't provide risk capital we provide liquidity you take the risk but I think now you're going to see new mechanisms to allow even the purchasers of LNG to participate directly in the long term play so that's something we could talk about sometime because as the LNG market begins to look more like the oil market with very short term trading and less concern about a long term contracts that you're going to need new ways to finance it and those ways are coming though they're coming historically the oil and gas companies they finance things directly out of retainers am I right to say that some of this investment capital will come from offshore that multinationals will be more fluid some will come from Australia some will come from Europe and possibly some will come from China if the US government allows them to do that so much to discuss I'm so looking forward to 2018 with you to find out on all these things in the meantime happy new year looking forward to our next rendezvous see you in two weeks see you in two weeks