We Need a New New Deal

Infrastructure as a means to economic recovery

The original New Deal spanning 1933–1939 was designed to help pull the United States out of an economic depression but it had the added benefit of laying down a foundation of infrastructure that enabled the greatest economic and productivity boom the country has ever seen. The strong government-backed build-out of the electric grid, transportation system, telecommunications network, and accompanying R&D laid the seeds for the private sector to harvest for the rest of the century. The Green New Deal proposed in early 2019 began to form a vision for what an analogous New Deal could look like for this century. While it was received with a mix of praise and criticism (both deserved), its biggest flaw was perhaps that it came about one year too early.

Today, the dramatic impact of COVID-19 on the global economy is quickly thrusting us into another depression of similar magnitude. Yet even before this exogenous threat emerged, the global economic system was in need of a new foundation upon which to build. 12 years of global economic growth augmented by low interest rates, surplus government spending, and deregulation left many of our remaining institutions exhausted and flimsy. Corporations and government have been caught in a self-reinforcing incentive loop that has sacrificed activities for long term growth (R&D, startups, education, healthcare, and infrastructure) for short term headlines (stock buybacks, tax cuts, and reinvestment in antiquated fossil fuel technology). During this rapid growth, we knew we needed to invest in infrastructure and rebuild the energy system underlying our society, but we had a hard time focusing on the foundation while the market reached new heights.

We borrowed from our children’s futures to artificially inflate our existing wealth and ultimately have nothing to show for it.

The forces of nature can rewrite valuations in days (a lesson we hopefully take with us as we begin recovering from this depression). Our economic house has started to collapse and the pandemic is forcing us to pause while we consider our paths forward. We can provide stimulus across the board and continue with the status quo or we can take this as an opportunity to build a new, more sustainable foundation upon which to rebuild our economy. With a 21st century New Deal, we can build the infrastructure for an energy system that is less volatile, less susceptible to foreign cartels, reliably low cost, and less prone to creating future exogenous threats to our society.

Electric Infrastructure

One of the most efficient and effective tools we have for government directed economic stimulus at scale also happens to be the most efficient and effective tool for resiliency and decarbonization at scale: the electric grid, or to be more specific: the regulated electric utility. Regulated utilities enable state and federal governments to deploy large amounts of capital on vast arrays of infrastructure at a very low cost by socializing it over a long period of time. They also come with little risk of bankruptcy, excessive profit (usually held by regulators to between 7–11%), or disproportionate executive payouts, and they employ a large number of people directly and through suppliers (significant perks in today’s financially and politically volatile circumstances). Utilities are essentially banks dedicated exclusively to their local infrastructure with greater local government oversight. When the United States needed to massively scale-up production during WWII, the government relied on cost-plus contracting to overcome the risk and uncertainty that would otherwise paralyze private capital (giving companies like GM a 7% guaranteed profit in addition to covering all costs incurred). We will need a similar “war-time” effort to revitalize our economy and rebuild our infrastructure; utilities are already setup for the job.

Another reason to focus on utilities is that the vast majority of decarbonization is going to come from direct electrification of our economy. A big reason for this is that high voltage is a very low cost means of moving energy to where it is needed.

While policymakers have debated for years about the technological readiness of many clean energy technologies (biofuels, CCUS, nuclear), the reality is that many electric technologies have been ready for larger scale deployment for decades, idling on small occasional token pilots and DOE funding:

• high speed electric trains
• advanced transmission and distribution
• energy efficient appliances and lighting
• heat pumps

Many more have been brought to the forefront in recent years by the hard work of the nation’s clean tech innovation community:

• energy storage
• electric vehicles
• low cost wind and solar
• smart home and connected community technologies
• electrified industrial processes (steel, hydrogen, indoor agriculture, etc.)

Many of these technologies exist at the very periphery of the grid, “behind the meter”, the “grid edge”. A place in which regulated utilities have historically been constrained by regulators from investing (lest their monopoly status scare away the potential for a competitive market). A modern New Deal would need to enable utilities to deploy capital to the most efficient combination of traditional and behind-the-meter infrastructure. However, doing so cannot be done haphazardly. Efficiently transitioning to a more electrified and decarbonized economy without causing unacceptable increases in electricity rates requires a more granular degree of data literacy than utilities and regulators are accustomed. Determining the most efficient combination of all this new technology is a highly localized problem. Solar panels and heat pumps might make sense for one building while a new transformer and distribution line is the only option for its neighbor. A new data-driven digital rate case process is needed to allocate capital to the most efficient combination of infrastructure for each locality (see The Digital Rate Case).

Making these changes to the utility business model means we need new partnerships between utilities, startups, regulators, and even customers themselves. Utilities are good at deploying capital and operating infrastructure, they are rarely good at innovating quickly. Startups have historically struggled in the energy sector due to the long and difficult process of engaging utilities and regulators in pilots of their new technology. The average time between an innovation’s conception and its commercial implementation needs to be shortened. Doing so would incentivize greater investment in energy innovation and transition the energy system more expeditiously. Utilities and regulators must provide specific mechanisms to engage in pilots with startups within 3 months (as opposed to the typical 12+ month utility budgeting cycle). A good example of this is the Energy Efficiency R&D budget created by the Illinois Commerce Commission and ComEd under the Future Energy Jobs Act. Piloting programs need not be large, but they must be rapid, transparent, and representative of larger-scale value. National energy innovation funding programs such as ARPA-e could more formally partner with regulated utilities and state regulators to create these representative environments for pilots. The federal government’s typical reluctance to “pick winners” by partnering with specific utilities should not apply in the case of state-granted monopolies. Utilities aren’t going anywhere; innovators simply need to design their business models to integrate with them. Finally, we need new means of engaging energy customers; we need to change people’s relationship with energy and its providers. For nearly a century, low cost energy in the United States and top-down business models have made most Americans completely disconnected from their energy providers. Energy companies (incumbents and startups) must endeavor to find ways to change this relationship. Whether through value added services, data platforms, virtual markets, or some other unexplored idea, we need energy customers to start participating in the planning of energy infrastructure. Longer term, we will need to establish new incentive structures, not just with a carbon price, but across the ecosystem: utility revenues models will need to change, electricity tariffs will need to change, wholesale market rules will need to change. Rather than waiting for big bureaucratic policies to shift on their own, we must design these new partnerships to catalyze and inform the policy changes. These new types of partnerships present durable and long term path towards economic activity that builds wealth for all stakeholders: shareholders, customers, employees, and society at large.

Chemical Fuel Infrastructure

Direct electrification via the grid or batteries are not a panacea for everything. Many processes in the economy need some sort of chemical fuel and they generally fall into 2 buckets:

1. chemical industries that require clean chemical feedstocks (e.g. ammonia, steel, plastics, etc.)
2. end uses that need to inventory energy (aircraft, heavy-duty vehicles, off-grid vehicles)

Additionally, the impact of forest fires, pandemic, and other climate change related shocks are underlining the need for resilient infrastructure. Relying exclusively on an electric grid and relatively short duration energy storage in the form of batteries is not sufficient. We have grown accustomed to having two additional energy distribution systems in addition to the electric grid: natural gas pipelines and liquid fuel. Clean chemical fuels are an unignorable necessity. We already have a robust system for distributing and transporting chemical fuels, but it will need some major upstream investments:

• Large-scale hydrogen electrolysis
• Renewable natural gas
• Some level of Carbon Capture, Use, and Sequestration

Most clean chemical fuel technologies simply are not economical without some sort of price on carbon or equivalent subsidy. However, there are many opportunities to leverage existing market features (and a bit of government support) to pilot some of this infrastructure at scale. This will require cross-industry partnerships between large incumbents and potentially a few startups to inject an enabling technology. Power plant owners, chemical refineries, and steel mills will need to look at hybrid approaches to designing plants as well as sharing revenue and risk.

Recognizing the Inevitable

An economy is only as stable as the infrastructure it is built on. We need to focus on building a new set of corporate institutions that are 1) less speculative 2) less susceptible to foreign intervention 3) provide secure employment for a large number of people 4) deploy a more sustainable set of infrastructure that has multiplying effects long term. The original new deal built our grid, setting a social baseline that every American could rely on and a scaffolding that regulated utilities and private sector capital have since filled in. The New New Deal must again provide a scaffolding for a new set of infrastructure that local utilities and private sector capital can expand upon. The financial markets are good at repeating things that have been done; they are not good at taking first of a kind risks on long-lived infrastructure. Government was always going to be needed to lead the charge on infrastructure investment and decarbonization with or without a depression, and a depression needs a massive government led stimulus program with or without the need for new infrastructure (we just happen to be lucky enough to be faced with both at the same time). This is a no regrets strategy towards economic recovery and it has the added benefit of mitigating the frequency and impact of future black swan events like COVID 19. The economic stasis and uncertainty we currently face gives us no choice but to think long term. Let us take this opportunity to reflect on how we started this century and redirect ourselves towards where we want to end it.

Jake Jurewicz offers professional consulting at 1st Principles Consulting, LLC.