The heat is on

By Natalie Brandweiner, Deputy Editor

These are interesting times for the energy sector. The heightened federal focus on reducing greenhouse gas emissions, combined with the current financial instability, is exerting enormous pressure on utility companies across the country. PSEG’s Ralph Izzo gives the low down on an industry in turmoil.

“50% of PSEG's energy comes from nuclear power”
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As a seasoned champion of renewable energy, PSEG Chairman and CEO Ralph Izzo agrees with President Obama about the need for aggressive emissions targets as part of a major effort to get energy on a more sustainable course, but he does have some reservations about the methods that may be used.

“President Obama has energized our nation,” he says. “I am incredibly excited about the opportunities that lie ahead. My only cautionary note is about the need to maintain fiscal discipline. There are constraints on how much debt the nation can accumulate since the federal deficit is already substantial and growing. My sense is that they will borrow the money from taxpayers to bring about such change, and they will use whatever mechanisms are available to them. These fall into the category of issuing debt from a nation that’s quite indebted already, and that’s the point I disagree with.”

Izzo is no newcomer to renewable energy.  His fascination with it began when he was studying at Columbia University. His university days coincided with the oil embargo of the 1970s, turmoil in the Middle East and America’s search for energy alternatives. “I became fascinated with renewable energy resources,” he says. “I realized energy security was an important social concern and a compelling scientific issue.”

Influenced by his graduate studies in fusion energy research, Izzo combines the two personalities of scientist and policy-maker. “My scientific background has helped me as a decision maker to evaluate complex, multifaceted issues with rigor and discipline. Having spent years in the laboratory, I have a huge amount of respect for people dealing with fundamental operating challenges, such as ensuring nuclear power plants run well and electric and gas delivery systems are as reliable as can be. These challenges feed into the technical engineering side of me.”

Cost
A big question on the nation’s energy agenda revolves around who should bear the costs of carbon-reduction efforts. “The way you get more of an equitable cost distribution is to focus on who is creating the problem to be corrected,” Izzo explains. “To the extent that carbon is a problem because some folks are driving vehicles that get low gas mileage or consuming electricity that is inexpensively being produced by coal, they should be bearing more of the near-term costs of having to solve these environmental challenges.”

Izzo strongly believes that investments in green energy can be good for business and help get the economy back on track. “The idea of jump-starting the economy through green investment makes enormous sense. It’s a worthwhile investment in basic infrastructure, and is a more effective utilization of our natural resources. The only question is how do you pay for it – we just need a slightly different approach.”

The current financial climate has pointed Izzo back in the direction of policy-making. “We are facing enormous challenges brought about by climate change, and now our policies are being drastically influenced by the economic challenges confronting us at the same time. The situation has led me to participate intensively in policy development and pursuing ways in which PSEG can help solve the problems that confront us in both the environmental and economic arenas,” he says.

Strategy
PSEG has a multi-pronged strategy for combating climate change. “From a technology point of view, climate change does not lend itself to one solution, as there are multiple fronts to be taken into account,” Izzo explains. “We are looking at everything from thin film photovoltaics to very standard and basic energy efficiency measures, such as weatherization, to light emitting diode systems.

“At the highest level our strategy has three parts, built respectively around energy efficiency, renewables, and new nuclear. On the energy efficiency front, we’re converting the vehicle fleet, changing lighting systems and heating, ventilation and air conditioning systems. In addition, we’ve sought and received regulatory approval for a $50 million program to help customers reduce their energy consumption.

“We’re hopeful this is just the beginning of a much larger program. We’re currently operating on a local level for improving home energy efficiency. In the renewables area, along with our offshore wind program, we have a $100 million solar loan program for our customers, which so far is approximately 40% subscribed. We are about to file for regulatory approval of an initiative involving solar farms that we would build on our own property and that would be owned by us, which is different than the loan program whereby we facilitate the construction of solar projects by customers.”

Izzo adds, “Our most risky proposition nowadays is offshore wind, as we attempt to follow the example of our European counterparts and do what has not been done in the United States. Since having won a request for proposals as the leading project to do so off the coast of New Jersey, we have a 350 megawatt project that we are in the early stages of developing, for which we are currently conducting the meteorological data acquisition.”

Reform
Balancing the desire to implement greener policies and the finances needed to do this is crucial to PSEG’s strategy. Izzo stresses the importance of regulatory reform to foster an environment conducive to investment: “Basically, we have been saying to our state regulators we can do a good job of accessing the capital markets if together we redesign the way in which we’re regulated. There needs to be less of a lag and greater predictability from the investor point of view as to what is and isn’t allowed and how we will get compensated for it.

“If we can reduce the perception on the part of the investor about the regulatory risk associated with utilities, then we have two benefits. The first is that the utility is freer to invest in the things it regularly wants to invest in, and we can therefore create the environmental benefits and the economic stimulus that we’re seeking. Second, we can do that at a lower cost of debt, which then gets passed on to benefit the customer. It makes regulations clearer and more predictable, and therefore minimizes regulatory risk. At the federal level, what we’re hoping to do is engage the new administration in a discussion of revenue: if money is to be made available, please condition it.”

As Izzo sees it, much will hinge on the states’ willingness to reform regulatory systems, push green policies in tandem with utilities, and as a result benefit from the resource allocation that the new administration in Washington is proposing. Coordination is important in his view, so that federal dollars can have the desired impact at the state level.

“If I’m giving grant money, which is generated by the taxpayer, at least I’m giving it to states that have investment dollars being deployed because they have modified their regulatory systems so that the customer, the generator of this carbon, has got more at stake. That’s the two-fold approach we’re taking. The first is direct regulatory change at the state level, and the second is linking the federal resources that we believe will be allocated to those states that are showing some initiative in this area.”

Caution
President Obama has welcomed the return of nuclear energy as part of his green agenda, and yet questions remain. As the US utility sector prepares for the next stage of nuclear’s renaissance, PSEG is cautiously waiting for the specifics of Obama’s policies before moving ahead with new nuclear development. 

“50% of the energy PSEG produces currently comes from nuclear, so it’s very important for us,” says Izzo. “I would like more clarity from the incoming policy-makers as to what their outlook for nuclear will be. Specifically, the energy secretary designate has expressed doubts about developing the high level waste repository at Yucca Mountain in Nevada. President Obama himself voted against funding for Yucca Mountain when he was a senator. If we don’t have a high level repository, I’m not sure it’s a good idea to go ahead and aggressively expand nuclear energy.

“On the positive side, I’ve heard the new President say that we need to invest in technology that will allow us to safely recycle, reprocess and reduce the amount of nuclear waste we produce, and therefore we can then think of ways to entomb it at a much more diminished level, both in volume and in terms of activity levels. That’s a very worthwhile strategy to pursue, but we need to learn more about what that means for those of us who have an interest in investing in the next generation of plants. For this reason, PSEG has taken a more cautious approach than others to new nuclear power. We are not part of the first wave of developers.

“We are planning to prepare and file an early site permit in 2010, meaning that we would be asking the Nuclear Regulatory Commission whether or not they agree with us that we have room at our existing site for an additional unit. This probably wouldn’t be ruled on for at least two to three years, so we are a little behind other companies in terms of their commitment of major capital dollars,” says Izzo.

The turbulent economic climate has also influenced PSEG’s careful approach to a possible nuclear expansion. “Given the way energy prices are moving, whether for natural gas, electricity or coal, you would have to have a very different view of what’s going to happen to those prices in the near-term to be willing to build a nuclear plant right now.”

Workforce
Izzo believes the US energy sector is on the threshold of a historic transformation, reducing dependence on fossil fuels and developing more green energy – and green jobs. “If we invest in green technology we can provide not only economic stimulus in the short term by creating jobs, but we are doing something that will serve us well over the long term, namely a more efficient use of our natural resources. If you’re going to borrow from future generations to solve the short-term problems that you’re having today – a significant downturn in the economy – you have a moral obligation to return something to those future generations,” explains Izzo.

He remains concerned about a potential shortage of qualified new people entering the industry, even though a growing number of employees nearing retirement have decided to extend their careers.  “The phenomenon that existed a decade ago, and which persisted until a few years ago, of people taking an earlier retirement than had been traditional and leaving the workforce in their mid to late 50s, as opposed to their early to mid 60s, seems to have diminished. The devastation that has taken effect in terms of people’s retirement assets, whether that’s housing stock or equities, has pushed people to rethink their retirement plans. So we’re seeing quite a diminution in announced retirements among our workforce.

“Moreover, many young people who in past years were often enticed by the latest craze – the Internet bubble of the 1990s and the financial markets spiral of the 2000s – have tended to provide a backlash to such a trend,” adds Izzo. Despite the current economic climate, PSEG has not had any employee layoffs up to this point; in fact, it has continued to recruit newly qualified people into its operations. “Suddenly we have become a far more attractive employer than we were just six to 12 months ago. We have fewer people wanting to leave, and more people wanting to enter. Now the challenge for us is making sure the skill sets match. We’re working with county colleges, two-year colleges, four-year colleges, trade schools, to ensure that people are prepared to continue entering our workforce,” says Izzo.

Forward thinking
In 2008, PSEG was included in the Carbon Disclosure Leadership Index, which recognizes companies with leading approaches to climate change disclosure and governance practices. PSEG was also added to the Dow Jones Sustainability Index – one of only ten electric companies in North America to be included. The index evaluates performance to help individuals understand how responsible a company is to society and the environment.

The future for PSEG will be shaped by the unfolding energy transformation necessitated by climate change. “We are eager to be part of a future where we electrify transportation and remove the carbon from electricity generation. We have ongoing relationships with solar panel manufacturers, wind turbine manufacturers, the automobile industry and the R&D community. We are not taking equity positions in those firms but see ourselves as a solution provider, not as a manufacturer or an R&D house.

“Right now we’re trying to ensure that the regulatory rules are written in a way allowing our participation so we can be an effective vehicle for the deployment of capital. PSEG wants to bring about those two descriptors: the electrification of transportation and the decarbonization of electricity. We’ve had some effect locally, and have begun to scratch the surface of this on a national level through actively participating in some tax changes. We want to change the way in which utilities can participate in renewables, in ways they were unable to participate only as recently as two months ago, and we’ll strive to ensure this is achieved.”

PSEG’s eagerness to be a leader in the energy transformation is apparent in its commitment to greener policies, and with Izzo’s personal mission to further develop renewable energy resources, there is much hope for a greener future as 2009 unfolds.

Ralph Izzo is Chairman, President and Chief Executive Officer of Public Service Enterprise Group Incorporated (PSEG). His public policy experience includes service as an American Physical Society Congressional Science Fellow, in the office of former U.S. Senator Bill Bradley. Izzo began his career as a research scientist at the Princeton Plasma Physics Laboratory, performing numerical simulations of fusion energy experiments. He holds a PhD in Applied Physics from Columbia University and has published or presented more than 35 papers on magnetohydrodynamic modeling.