 This is Stink Tech, Hawaii. Community matters here. Okay, the magic word is Lou Puderisi. There he is. Hi, Lou. Energy in America. Lou is the CEO of E-Princk, which is an energy policy research organization in Washington, D.C., and we caught him in Washington. You know, there's lots of times when we can't find him because he's globetrotting. That's part of his job, but today he's in Washington. Welcome to the show yet again, Lou. I'm happy to be here, Jay. So we were talking today about two very interesting developments that you identified. One, let's talk about them both so we know what we're going to do. One is the reduction of the CAFE standards, and the other is the decline of the cost of renewable energy. Both significant sea changes and initiatives, if you want to call them that, in the American energy scene. So let's talk about the first one first, CAFE standards. How important are they? Do we care? Do we get excited about them? Well, some people care a lot about them and what we think about CAFE in a notional way is a lot different than what it looks like when we dig into it. And the reason why this is topical today is that this week the Trump administration said that they have officially said after an extensive review that the CAFE standards set in motion during the Obama administration, which were heavily back loaded, that means most of the big lifting between now and 2025 is going to take place between 2022 and 2025. And basically what the administration said is, look, those standards are too onerous. They're going to raise the cost of vehicles too much and that we should halt the standard at 2022 levels where it would be at 2022 and just fix it at that level for now. Now under the Clean Air Act, the state of California is saying you can't do that and not only can you not do that for us, I have 17 other, the District Colombian, 17 other states that agree with me and so we are going to fight this standard. So we have the potential of a bifurcated standard in the U.S. One for everybody else except California and its 17 states. By the way, the state of Hawaii is not a member of that coalition. It's so interesting because one of the guys running what for Congress is Doug Shin. And Doug was the attorney general who went after Trump on the immigration issue and got a lot of support from other states when it was party to a bunch of lawsuits about that. Right, right. It was a national figure. But we didn't do it on the CAFE standards. That's very interesting. We've softened it. Because you're not a member of the coalition and there are some reasons why you might not want to do it on the CAFE standard. Now basically I think the administration is going to challenge the state waiver exemption, not on the basis of local air pollution or on the basis of the right of California to meet greenhouse gas emissions, but they're going to challenge it through the National Highway Transportation Administration legislation, which sets safety standards. And basically the administration is going to show that the current CAFE standards, if they continue, will create a higher level of fatalities. And we do have data that shows that. Cars are getting safer of course, but small cars, when they bump into big cars, usually they lose. I always wonder about these things. It's like the tariffs. The president gets up and says, OK, I'm going to do this. But wait a minute. You have a whole apparatus of many departments. You have all these regulatory organizations. You can't wake up in the morning and make pronouncements like that. And yet that happens over and over again. It's happening here. Yes, he does do that. But there's a classic quote by John Kennedy when he was asked to do something by a woman, had to do something with women's involvement in the workforce. And he said, look, I have to check with the government. I'm not sure I can do that. Trump doesn't like to check with the government. He doesn't like to check with the government. He wakes up in the morning and does it. So let's go to the first slide. We have a lot to cover tonight, this afternoon in Hawaii. And you can see this first slide. And it's a very interesting slide. OK. And the title of this slide should be existing consumers of hybrids and EDs are not re-enlisting in the green way. And what does data show, if you look at it, I'll peek it out here. You can see that the data show 2015 and 2016, what percentage, right, of people, of consumers that own a hybrid or electric vehicle, when they turn in their old hybrid or electric vehicle, decide to buy another one. And you can see that from 2015 to 2016, the hybrids and the EVs actually declined. This data is from Edmunds. And actually, another thing is there's something called attribution association, which people don't like to talk a lot about. But they found out that almost every family that owns an EV also owns a very large SUV. You mean a gas guzzling very large SUV. They like them because basically they have to compensate for the fact that they have an electric car. So I think that if you look at this, there's a corollary to this underway now too. And if we go to the next slide, I think this is kind of where Trump is coming politically, right? The next slide shows how CAFE shrinks the low-cost automobile market. In fact, I don't know if anybody was paying attention, but this year Ford announced it would no longer make either the Ford Fusion or the Ford Focus. Now, if you look at this data here, it shows you that the projection, and this is from the US Energy Information Agency, it's not from us, and you can see here that the percentage of vehicles that will be sold in the lowest category, that is 10 to 25,000, you know, like working men like you and I, the kind of car we need to buy, right? That that is shrinking. And it is shrinking because of CAFE. And most people don't understand why it does because of CAFE, but it has to do the way CAFE is implemented. And the way it's implemented is on this footprint basis has a very, a lot of complex kind of features to it, which makes it inefficient for the automobile manufacturers to sell low-margin products, right? Because the CAFE burden on that product is too high. Ah, interesting. You can't make any money on it. Well, working stiffs like you and me are less likely going forward to buy this major price car. We're not going to have access to so many models, so we're going to have to buy a more expensive car. Wow. And part of this, a lot of this is tied to CAFE. So you can see, this appeals to kind of Trump's kind of sense that the working class, you know, the working man is the one getting stiffed here on this thing. I'm not judging. I'm not saying it's good or bad. Okay, please. No hate mail. It's a working man who's going to be affected by this when you reduce the CAFE. And so I think that this has become a very big test issue. It's also going to be very important in the Senate elections coming, particularly the Senate, but also the House elections coming up in 2018. So the two points here is that they had back loaded the CAFE standards. And that was going to really ramp up costs, because even though Obama signed up for it, he postponed all the heavy lifting to 2022 after he was on office. Of course. Remember, they gave somebody a Nobel Prize for figuring out that politicians vote their self-interest. Oh, my God. I hope they didn't pay too much money for that. But you know, one thing you said about, you know, so some of these factors, some of the charts, some of the numbers you're talking about may have been influences on Trump, you know, to take this initiative. At the staff level, I doubt Trump left it at any chance. Okay, well, as a general policy matter, though, what self-interest, you know, what political vectors, what lobby or organizations are causing him to do this? Okay, so first, I think he is not necessarily supporting the auto manufacturers, because the auto manufacturers don't want a bifurcated standard. What they really wanted was some kind of, you know, technology exemption, some ways where they could wiggle out of the more rigorous standards to 2025, but not appear to be wiggling out of them, right? So they would have enough exemption and they could kind of keep a single standard. They could kind of maybe keep California in the game, right? But Trump said, no, it's a bad, bad standard. And so we're going to take California to court and we're not going to let them set a single standard. But the autos are not interested in that because they can be tied up in court for years and they got to make decisions soon about 2025. So, yeah, you got any predictions? I know it's early, Lou, but you got any predictions about how that court battle is going to, what are the chances there? Actually, I think they have the administration has a very strong case if they go after it under the law that enables the National Highway Transportation Administration to set the miles per gallon, because they are going to make the claim that we need, that we should have a national safety standard, that that has been authorized as a federal responsibility in that legislation and California cannot abrogate it. That doesn't mean California can have a program of subsidized electric cars and it can't do other kinds of things to deal with local air pollution or even greenhouse gas emissions, but I do believe they're going to win. The question is how long will it take? You got more slides? I got another slide. We're going to talk about Jevin's paradox, right? At dinner, my wife and I speak of little else. Yes, exactly. Now, this date is kind of old, but it's long term, 1983 to 2007. And one of the things that people, and this guy Jevin, who was around like 150 years ago, explained that when you think about energy efficiency, and you have to be careful, because if you make, if energy efficiency makes the energy cheaper, do you know what people do? They use more of it. I hope he didn't pay too much for that study. This is 150 years ago. So if you look at this data here, you can see that even though, by the way, gasoline demand in the U.S. is going to decline or stay flat for the next 20, 30 years. We know that data, but what this is a kind of paradox, is the purpose of the cafe standards was to lower gasoline consumption. There is something called a rebound effect. Some people might call it a green specter effect. But you can see this in the data. Even though we impose higher miles per gallon standards on the consumers of automobiles, all they did was drive more. So when we made gasoline, when we made the car, of course gasoline prices go up and down, that has an effect. But when we made the cars more fuel efficient, they just used more gasoline. So once again, if you think you really don't like people to use gasoline, you should probably put a tax or something. But the miles per gallon is a very inefficient way to do it. And I think, you know, Trump sees this more in a political sense. When the election starts, he has a lot of midworse Western manufacturing states, and he's going to be tweeting Nancy Pelosi and Chuck Schumer want to tell you what kind of car to drive. I'm absolutely sure. I'm not making this up, but I'm predicting that that will be the first tweet of the night of the election. We'll be watching for that and so much more. Anyway, so let's take a short break, Lou. Take a quick break and we'll come back and, you know, we'll finish up anything else on CAFE standards. But then I'd like to talk about the decline of renewable energy in general and see where that takes us. That's Lou Poulirisi. He's the CEO of EPRINC, an energy policy research organization in Washington. We'll be right back in one minute. Search diveheart.org and share our mission with others. And in the process, help people of all abilities imagine the possibilities in their lives. Hi, I'm Bill Sharp, host of Asian Review here on Think Tech Hawaii. Join me every Monday afternoon from 5 to 5.30 Hawaii Standard Time for an insightful discussion of Contemporary Asian Affairs. There's so much to discuss and the guests that we have are very, very well informed. Just think, we have the upcoming negotiation between President Trump and Kim Jong-un. The possibility of CGMP and the leader of China remaining in power forever. We'll see you then. Yes, we're back. Lou Poulirisi. He's the CEO of EPRINC, energy policy research organization in Washington. We're talking about two really interesting events that are taking place in energy. One we talked about in the first part of the show and that's the administration's move to freeze, I guess freeze and not increase the CAFE standards on gas efficiency. And the second one we're going to talk about now is the de facto. This is not political, this is market, am I right? It's market, de facto reduction, decline of the cost of renewables in the marketplace. And how did that happen? What does it mean? Well, I think it was a thing I wanted to do. We talked a lot about it and I think the, you know, if you take a big picture, I would say biofuels have largely been a disappointment, but actually solar and wind have performed probably above what people thought they could do, right? So I'd say those two, and we have deployed a lot of wind power, a lot of solar power. But one of the things when we've talked about this before, inexpensive, I mean inexhaustible does not necessarily mean inexpensive. Okay, so we sort of chatted about that. And I think one of the things that, you know, even you sent me some data earlier last week showing that if we look at a range of different things we buy every day, actually the real price, you know, just for inflation, for electricity has declined. But my response to that is it should have declined a lot more because renewables are cheap, natural gas is cheap, the main fuel systems that generate power have gotten really low, low cost, even with the loss of coal-fired power plants. But so let's take a look at the next slide. And this shows you the, I believe this slide shows you Major Utility Distribution System Investment by NERC, right? This is not the right slide, this is calf-based. Major Utility Distribution System Investment, okay. So I think it's important for all your listeners to understand, this is actually a big problem in Hawaii, that you can have low power at the generation plant. But some of these systems, the two things going on, the renewables do require much larger investments in the grid, and those investments aren't cheap. And in fact, if you look at these different regions of the US here, the western, the midwest, this is between 1996 and 2016, you can see that in these main districts, the northeast particularly, Florida, not so bad, some of the other districts, but the western electricity, that investments in the grid have really taken off. And some of this stuff is wires, poles, and if you let this stuff go, you can see what happened in Puerto Rico. Puerto Rico wasn't just hurt by the hurricane. It was hurt because it did not make enough investment in the grid. And the utility sector is going to have to spend a lot more money. And let's go to the next slide. I'll show you what you think is happening to capital investment. And this is just through 2017. You can see here the annual electric distribution system costs for major utilities, right, has since 1997 risen from $33, $34 billion to $51 billion. Well, who's going to pay for that? Your electricity power consumer is going to pay for that. Now this isn't limited to renewable energy. This is the grid in general. No, it's not. It's hard to divide the two out yet. There's some work underway. We're trying to do a little bit of work on this. But some of this is because the system is allowed to what you might call normal physical depreciation. You have to get back in there and keep this stuff up. And some of this is, however, the increased cost of building a power system that can use renewables efficiently. So, I mean, the big thing here is as we cost out renewables, we have to find a way to make sure the public and everyone understands, look. Yeah, it looks like a good deal at the generating source, right? But if it's variable renewable energy, if it's intermittent, you're also going to have to have backup systems. And you're going to have to move the grid to where the natural efficiencies of renewable power exist. You can't put a wind farm anywhere. What I hear you saying, Lou, is that in the old model, we just generated the energy at a central point and distributed out like spokes on a wheel. That was actually adjusted for relative times and whatnot. But that was actually cheaper than what comes down the pike when you're doing renewable because you have to have, as you said, backup systems. You have to have all kinds of sophisticated interconnection. That costs more money, right? It does. So renewables are cheaper at the power center, right? They can be. It depends on how much backup power that you need. And I can show you some people have some disagreements on that. But it is clearly not cheaper to distribute because it's not located where the existing facilities are or it's not located in a naturally efficient distribution center. They should conceive this in Hawaii all the time. They need to move more power. And you have a small population like Hawaii that's expensive. So people need to sort of think about how to move it along so that the consumers don't get slammed. Well, let me ask you about the technology. So on the one hand, you have all these young entrepreneurs and companies who have been for the past five years anyway, getting into renewable energy and grid modification. And they're inventing efficiencies. That's their job to invent efficiencies. At the same time, what they make and sell and the cost of swapping it out by the utility, that's more expensive. So you get a product that is trying to achieve efficiency, but which costs plenty money in order to find it and install it and so forth. So which one prevails? Well, you know, probably if you had... One of the problems is the renewables are heavily subsidized by the government, right? Wind power. You could argue that you need to... I don't want to talk about the merits here. I'm just saying it is heavily subsidized. So it got deployed at a very fast rate. The problem with deploying at a fast rate is a lot of the grid operators, people with distributed power, weren't really ready for it. And they hadn't really got their public utility commissions and their... You know, the regional system operators to keep up and talk about, okay, we need a rate-making case that talks about the grid. This is an integrated problem. It's not just a problem of approving a wind farm. We have to approve the wind farm and the distribution system. Now, I don't know what goes on in the state of Hawaii, but it'd be very interesting to see what does the utility commission do or the utility agency do when someone comes along with a new geothermal plant or a solar facility or a wind farm? How do they assess the cost of changes to the grid, particularly when the consumers are going to have to pay for it? We have an existing case right now we can talk a little bit about, some of the automobile... We'll go back to the cafe just for a second, but it's a similar kind of problem. A lot of the automobile manufacturers are saying, look, instead of cafe, why don't we just agree that we will only build high-compression engines? That's our global engine. We make it around the world. It won't cost a lot more. And the high-compression engine will give us 3% to 3.5% lift in natural efficiency. If that's what they drive in Europe and Europe, we can make big ones and small ones. But a high-compression engine will require only premium fuel. Well, that means lots of people have testified before Congress that they can transform the use of premium fuel in the U.S., which is only about 11% to 100% over the 12 to 15 years at very low cost. But that's only at the refinery gate. All the gas stations, if this premium fuel were going to be met with higher levels of ethanol, which is part of the bargain, that's going to require changing pumps and tanks at the retail level. Sometimes these investments are in the hundreds of thousands of dollars. So Congress is saying, oh, okay, wait a minute, let's find out. Congress will do all kinds of crazy things, but they hate to be blamed for raising gasoline prices. That's the one thing that will set their hair on fire, okay? People get very upset about that one issue. Yeah, yeah, yeah. So make the comparison now. So we have to have the infrastructure at the gas station, so infrastructure at the grid. Same thing, huh? Yeah, yeah, the same thing. So you have this infrastructure, and you need to do the full-value chain analysis and the full-value chain calculation. And believe me, I don't know in Hawaii, I presume if people see their, you know, they see their electric bills spiking, they're going to be like, well, what's going on here? You know, you gave us all this cheap solar power. It's free. How come my electric bills going up? And I know your electric bills have been going up. People really do not understand that putting a new system in costs plenty of money. Yeah, yeah. So what do we do, though? Recognizing that, recognizing, you know... Well, I just think, you know, we could use a lot more moderation in this country, which is we can move along the gradient. We don't have to move along the gradient so fast. We can get the kind of where we need to be, but we should do it in a way that keeps a political consensus that supports these improvements. And instead, people on both sides take these ridiculously extreme positions. And, you know, you get a lot of instability in the political process, which leads to a lot of interruption, instability in how we spend money. So it sounds like a timing issue. I mean, I'm just... All this stuff is a timing issue, right? Yeah, I'm throwing this out, but, you know, if you know you're going to put more renewables online, and you have to move very quickly in order to adapt the grid to the new supply of renewables, that's more expensive than if you adapt the grid at a more moderated rate. Is that what you're saying? Right, right. You can do it. If the grid needs modernization, you come in there, you integrate the renewables at the same time, and you require... You shouldn't require on all these issues with the regulator full-cost analysis, right? The regulator should know, because even the regulators, they don't like to do things when the consumers in their regulatory area find out their prices go up. People get pretty upset, and they take it out on them. So if you're evaluating a given project and you know you're going to need some kind of substation to deal with the renewables, some kind of new equipment, some kind of new distribution hub of some sort, then you want to crank that in to the analysis... That should all be, not the whole, all the second and third-order effects, things you have to do on the grid. All the second and third-order effects you have to do at the terminal, and at the gas station, at the pump, the special provisions to prevent this fueling, all these things should all be included. People should have a kind of full disclosure. Well, you know, you said before that in the case of renewables, the government is giving incentives for renewables. Absolutely. And so why not also give incentives for the grid modernization? Don't you think we need that too? I can't. How much money do you want to spend? My taxes are pretty high. Well, we spent $12 billion for the farmers who were affected by the tariffs the other day. The golden crutch they called it. So I understand this philosophy. It's called throw a dollar out the right window, throw a dollar out the left window. Fair is fair. Well, it's not a bottomless pit. And you know, there was a piece on the news about how, you know, by 2020 or so we're going to have a $1.5 trillion deficit. And it's pretty serious. So I absolutely agree with you. We can't just throw it out of both windows. So what's the solution? What's the solution? I mean, in general terms, to move. So basically, you know, I'm a believer in the solution in which we... I'm sorry about that. So I'm a believer in the solution in which we take full calculation and full accounting of the external... what we call the externalities. So if we're going to have a public policy program to do X or Y, it shouldn't be just... well, it sounded like a good idea at the time. Someone should or ought to be made to reveal, right? They should made to be revealed. Okay, what really are the public benefits from this? Not that it's just a good idea to do win because it's good for the earth or something. What specifically? Okay, you want this wind power? How much better is the environment going to be at the environment, at the margin? What are we really buying? Because in the end, you and I are going to have to take for it. And we should have an explicit accounting of what we're getting. And that's the problem. And that's why we have programs in California and different Hawaiians. Some are $1,800 a ton of carbon abated and some are $10 a ton. Well, that's kind of a crazy way to do business. Well, that actually takes me to a question I wanted to put to you before the program ended. And that is when you showed the chart earlier about investment from region to region, all the regions were different. They were all different. Some multiples different. And I say, you know, is there a benefit in trying to achieve standardization so that the country is treated on a uniform basis and you don't have differences like that? Yeah. So I think the differences in those regions are very complex. Some of them are losing population. Some are growing faster. Some have grids that have been neglected for longer periods of time before the time period. So we have to really sort of sort through that before we tag them with a different standard. I don't think that's there. Most of the places with the increase in grid costs are places with higher population growth but also places that have neglected the grid and at the same time are getting more requirements to install renewables. Now, Hawaii has the target aspirational goal which takes on more weight as we go forward of reaching 100% renewables by 2045. But other places don't have that. Other places don't have it and I'm not sure it can be applied everywhere but I wonder if you feel that there is a benefit in looking at this on a national level and trying to achieve those goals nationally rather than state by state because I think if there is no national consciousness on this one state in 2045 will have a very high percentage of renewables and another state which didn't invest very much will have a low. Is that in the national interest to have that kind of disparity? Well, of course the way the Constitution is written is to allow the states to be their own laboratories. So in a way there's this constant fight between the feds and the state's interest. So I guess it doesn't make sense in small, contiguous states in the Northeast. They probably should. And they do have a regional power system and a regional cooperative system but we do have big disparities in the price of electricity. It can be 7, 8 cents in Florida and 14, 15 cents a kilowatt hour in New York. And in Molokai 40 cents, you know. Or 50. Yeah, but Molokai, that's a very tough place to generate low-cost power, I presume. Well, I mean, to me, what would you leave with leave with the people on this loop? What would you leave with the people about this disconnect between the actual reduction but the net non-reduction or a reduction that's not enough? There's two parts of this equation. The fact that not everybody has a lot of money in this country and there's a political consequence to forgetting that there's lots of people that are just getting by and that you're imposing a regulatory program that in lots of cases, if you can't buy a cheap new car or your power costs go way up, well, you probably should be sensitive to that because you're going to have elections like the last one more often. So I actually think that, you know, this politicians do this at their peril and that, you know, we need to kind of be in tune with not just the benefits but the costs. That would be my modest advice to our political leadership and no one's listening to me so you don't have to worry. No, but increasingly, I think, as we discussed during the break, increasing the energy and politics, the politics of energy, it's... It's not going away. It's not going away. Well, thank you. Thank you. Lou Pulirisi, the CEO of E-PRINC and Energy Policy Research Organization of Washington, D.C. I hope we can catch you again in two weeks hence and I think you'll be in Washington is the question. I'm headed to Tokyo and Vienna but I think I'll still be here. You'll find you wherever you go, Lou. Exactly. That's what I'm worried about. Thanks so much. All right, Jake. Thank you. Bye.