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Legislation Seeks A Green Payoff To Offshore Drilling

Legislation proposed by a GOP congressman could pour billions into renewable energy over the next decade, letting green energy producers themselves bid on what gets funded.

off shore oil rig
off shore oil rig

Rep. Devin Nunes’ (R-Calif.) who introduced the bill, in late July, wants to use a reverse auction process to allocate future federal oil royalties to the best renewable energy projects and technologies, with the lowest-price-per-megawatt, (MW), bid winning funding.

“It’s clear and transparent; the people with the best technology will get the help,” Nunes says of the bill, dubbed “A Roadmap for America’s Energy Future,”

Depending on how much territory is eventually opened up to drilling, research firms estimate the royalties could be worth $10 billion to $50 billion a year.

Nunes says the plan could “potentially provide hundreds of billions in financing” for renewable energy over the next several decades.

Renewable energy advocates are cautiously optimistic, partly because the proposal comes from the Republican camp..

“This proposal is a positive step forward,” says Jesse Jenkins, director of energy and climate policy at progressive think tank The Breakthrough Institute. “It’s a sign that smart investments to boost U.S. clean energy production [and] spur innovation to reduce the price of emerging clean energy technologies are points that can enjoy bipartisan consensus.”

The proposed auctions would work alongside the existing grab-bag of subsidies for renewable energy, but clean energy developers and technology firms bidding in the auction would be barred from using those programs.

With bidders’ sizes likely to run the gamut, from start-up firms with new technologies to established utilities likePG&E and NextEra Energy Nunes would divide the auction into three sizes--less than 3MW in generation, 3-10MW, and over 10MW.

"“Regardless of what you believe about the urgency or importance of climate change, we can agree that making more clean, American energy, making it more affordable, and making it right here in the USA are all in the national interest." -The Breakthrough Institute, Jesse Jenkins

He says the concept should incentivize newer technologies that could dramatically reduce energy costs over time, while keeping developers of utility-scale power plants that use cheaper sources of green energy, like wind, from scooping up the entire auction.

Despite the potential gold rush for renewable energy the fund could inspire, analysts say in the wake of the BP oil spill in the Gulf of Mexico some in Washington may balk at Nunes’ plan because it only applies to new royalties,

That means expanded offshore drilling, including opening up the contentious Arctic National Wildlife refuge, as well as oil shale deposits.

Jenkins, for instance, says a $5/barrel fee on oil that's currently produced domestically could raise $40 billion a year, amounting to an increase of 12-15 cents per gallon at the pump – while safeguarding American waters from new drilling.

“That's small change,” he says. “And it’s within the regular ‘noise’ of fluctuating gas prices.”

There is also the issue of timing. The American Petroleum Institute estimates new offshore fields would yield oil in 10-15 years if work began today. That's a long time for renewable energy proponents to wait for financing.

Nunes has a solution to that.

With the royalties system in place currently, he says “bonus” fees would be paid up front for some new drilling, kick-starting the fund within two years.

While this proposal is unique, the use of auctions to spur energy and environmental improvements isn’t new.

Similar auctions already harness market forces to reduce greenhouse gases and increase energy efficiency efforts.

The Carbon Challenge: A CNBC Special Report
The Carbon Challenge: A CNBC Special Report

"A reverse auction is the most efficient way to award this financing," says Domaleski. “It is also the fairest, and it can be designed to level the playing field, " says Richard Domaleski, CEO of World Energy , which builds and manages energy- and carbon-related auction platforms.

He adds that reverse auctions allow the organizers to set values on key parameters—project size, jobs created, geographic location, or whatever may be important—and then tailor bidding to that.

The auction process would also be cheaper, he says, with auction fees typically around 2 percent of the awarded amount, versus the 7 percent of or more in managing manage applications for tax credits and other traditional subsidies.

Despite interest in similar auctions in the past from Democrats, Nunes’ co-sponsors are all Republicans, including Rep. John Shimkus (R-IL), Rep. Mike Simpson (R-ID), Rep. Rob Bishop (R-UT) and noted deficit hawk Rep. Paul Ryan (R-WI).

Nunes admits his bill is unlikely to attract a Democratic sponsor before the election, never mind get anywhere in the dying days of this Congress. However, a previous incarnation of his reverse auction concept in 2004 attracted the support of ten 10 Democrats, so he hopes to see some of them back on board after the midterm.

Bipartisanship support is crucial, says Jenkins..

“Regardless of what you believe about the urgency or importance of climate change, we can agree that making more clean, American energy, making it more affordable, and making it right here in the USA are all in the national interest,” says Jenkins.