Management Views: Phil Sharp

Few policymakers have been around at the crux of energy discussions in the U.S. over the years more than Phil Sharp. An academic with a doctorate in political science who taught at Ball State University, Sharp was elected to Congress 1974 as a Democrat from Indiana. He became a crucial member of the all-important House Energy and Commerce Committee, and an expert on energy issues as chairman of the energy and power subcommittee. He was a key player in major energy and environmental legislation, including the 1990 Clean Air Act Amendments. Sharp left Congress in 1996 and headed the Institute of Politics at Harvard’s Kennedy School of Government until 2005, when he took charge of Resources for the Future. He recently talked with MANAGING POWER about his insights into energy policy and politics.

The Meaning of Energy Policy

“There is a myth about what we mean by energy policy in general discussion. Some people talk as if the government should be smart enough and have enough control to set the pattern for the country going forward. That’s a totalitarian concept that none of us really subscribe to.

“The reality is that government policies do matter and they can shape industry and the way it responds. But ours is a political system of dispersed political power. There is no central control. In the electricity industry policy is dispersed. State governments are as important as the federal government. In my experience in Congress, it was often easier to get agreement between government and industry than it was to get agreement between the federal government and state governments over jurisdictions.

“A most important factor is the economy, and that’s not under government control. In the U.S., the government is not the main supplier of capital. Government can make it easier to raise private capital or harder. In some cases government at the state and federal level is subsidizing capital. But what we really want out of energy policy is that most decisions are made from the private sector.

The Government’s Energy Record

“Government has a mixed record. Even if the government were able to come to a unified position, would it be the right position? Government can get it wrong, so when it comes to energy policy, let’s be careful of what we ask for.

“Shale gas illustrates how so many things in the past decade have been unexpected. While industry has to plan ahead, we have seen that it is very hard to get it right, and we simply have to understand we function in a very dynamic environment. The marketplace is dynamic, the technology is in flux, the regulatory challenges are changing. It puts a real premium on people who can think strategically and manage opportunistically.

The Electricity Demand Puzzle

“One of the big questions for electricity is where demand is headed. In the 1970s, we were looking at annual demand growth of 7%. But then that dropped radically. We are now facing a demand curve for many major utility systems that sees not much growth at all. Over the last five years, EIA has kept revising its demand growth projections downward, not up.

“We know some of the reasons for that, but not all, and it is hard to determine just what is significant. Economic growth is important, but will increased growth bring demand back? Or have we reached a point where economic efficiency is taking off faster than anticipated? End-use efficiencies are clearly making an impact.

The Revolutionary Role of Natural Gas

“The biggest game changer is gas supply and pricing. We now have a resource base that, 10 years ago, we did not think we could get. Most of the oil and gas industry didn’t plan for it; the utilities didn’t plan for it. But the fact is that the resource and the production means that prices are likely to remain lower. The question is whether price will be volatile, although it is clear that higher prices will yield greater production.

“Who would have believed that we would be closing down what appears to be a perfectly good nuclear plant—Kewaunee—purely on economic grounds. It looked like a great investment, worth investing in it to improve its capacity, now we are going to shut it down because it can’t compete with gas-fired power. Gas has also reshaped the coal market. Who would have said we would have virtually stopped building new coal plants? Part of that is environmental concerns, but a lot is economics.

“Another factor ahead is the introduction of renewables, particularly solar. It’s notable how much the cost of solar photovoltaics has dropped and how aggressively it is entering the marketplace, given state and federal policies and the ability to lease, rather than own, the equipment.

“The intermittency issue is now economic. It’s now a question of how other customers are subsidizing solar customers. It’s not only how to manage intermittency as a technical problem for the utility, but how to manage the economics. We may see a shift in the balance of how generators are paid for capacity versus how they are paid for the commodity.”

—Kennedy Maize, executive editor of MANAGING POWER conducted and edited this interview.