Viewpoint -- What to Expect from Obama's Coming Energy Initiatives

The U.S. will see higher prices in electricity and fossil fuels as producers struggle to adjust to new laws and standards.

On January 20, a new era in U.S. energy policy will begin. President-elect Obama promises a profound shift in emphasis, and involvement, in the energy industry by the federal government. With it will come changes in regulations, tax laws and spending initiatives that will impact virtually every industry in America.

Barack Obama's energy policy is based on his belief that that United States must become more energy efficient, more environmentally responsible, and less reliant on foreign oil. While other presidents have had similar goals, Obama has made it clear that energy reform will be a centerpiece of his administration. In fact, it seems likely that the new president's economic stimulus package -- expected to be enacted within hours of his swearing in -- will incorporate important components of his energy plan, including improvements in the nation's electrical infrastructure and the creation of jobs in alternative energy segments.

Undoubtedly, President Obama will exercise his regulatory and legislative influence extensively to change America's energy footing. This will, we believe, result in higher prices in electricity and fossil fuels as producers struggle to adjust to new laws and standards.

A prime example of the coming monetary impact of regulations on the energy industry is the administration's planned cap-and-trade program to reduce greenhouse gas emissions. The program, if enacted, will require utilities that emit higher levels of greenhouse gas to purchase credits at auction from those that beat their emissions targets.

Currently, the United States is one of the world's lowest-cost producers of electricity. In 2007, the average price of electricity to industrial end-users in the U.S. was 6.4 cent per kilowatt-hour -- lower than Japan, Mexico, the United Kingdom, Germany, Brazil or Italy. The implementation of cap-and-trade will likely result in electricity rate increases in the U.S. of 30% to as much as 100% over the next four to five years effectively wiping out the competitive advantage of relatively low energy prices in the U.S.

Whether or not Washington agrees to bail out Detroit's Big 3 automakers, the new White House is also expected to insist on a number of changes to decrease gasoline consumption and promote alternative fuel development and use. President-elect Obama intends to impose a 4% increase in CAFE (Corporate Average Fuel Economy) standards each year, and work to mandate that all new vehicles coming from Detroit have FFV (Flexible Fuel Vehicle) capability; that is, the ability to run on biofuels, within four years.

The new administration intends to set a goal of one million plug-in hybrid electric vehicles on American roads by 2015, and establish a National Low Carbon Fuel Standard (LFCS) to further increase the development of low-carbon, non-petroleum fuels.

Based in part on the revenue generated by the cap-and-trade program, the new administration's plan includes investing up to $150 billion over 10 years in low emissions coal plants, biofuels and fuel infrastructure, and a new digital-based electricity grid. A new Renewable Portfolio Standard (RPS) will require that 10 percent of the nation's electricity consumption come from alternative energy including wind, solar and geothermal by 2012, and 25% by 2025.

Finally, natural gas is seen as a critical component of the Obama energy framework. Under the new plan, natural gas will fuel hybrid electric vehicles, and increasingly replace coal as a low-carbon alternative at power plants.

Clearly Barack Obama has an ambitious energy agenda-yet it remains to be seen how much of that agenda will actually be enacted. The current economic crisis will occupy the first months of his administration, although legislation for alternative fuel research and development will probably come quickly. Pursuit of the cap-and-trade program and federal renewable portfolio standard will likely follow, as soon as economic conditions permit.

Whatever the outcome over the next 12 to 24 months, history has shown time and again that increased regulation results in higher prices, fewer choices, less efficiency, and reduced competitiveness.

Andrew (Drew) Fellon is chief executive officer of Fellon-McCord & Associates, an energy consulting and management company based in Louisville, Kentucky www.fellonmccord.com

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