Remarks at the 2008 Deloitte Energy Conference

Assistant Secretary Alexander Karsner's remarks to the 2008 Deloitte Energy Conference in Washington, D.C.

May 19, 2008

Thanks so much for being here. We have an indispensable role in assuring that the train reaches its destination. That we get the rocks off the rails and we allow our efforts and aspirations to meet and realize maximum velocity. That's what we're about at EERE—looking at things with a renewed sense of urgency given what our great challenges are.

The top line theme is if you don't do efficiency, all of the other things you will talk about over the course of this conference will matter a lot less. I manage a portfolio of technologies at the DOE—it's everything that's not fossil or nuclear. That's a lot in between. Cross-cutting the entire portfolio is efficiency.

Why do I say we have to prioritize efficiency, that it must be first among equals in all of our planning? Because the investments we are making in technologies today, many of which are already ripening, many of which need to be transformational to manifest their merits, can't be fully realized until we understand the merits of lifecycle investing. Efficiency is based on that—understanding the total cost of ownership, understanding not just what it means to transform the capital stock and transform our infrastructure, but how that infrastructure operates over its lifetime.

So the great issues that we discuss in the halls of Congress, and that you will discuss over the next couple of days—our security, our economy, our carbon footprint—all of them matter not on the first day of a financial closing of a new facility, a new power plant, a new home, a new ribbon cutting—all of them matter for the entire lifecycle. Understanding the time value of transactions is the key to understanding how we prioritize, how we quantify, and how we capitalize on efficiency as a national resource. I would argue we do not get to a point of manifesting our aspirations for sustainability until we understand how we can implement policies for profitability—that is profiting from the outcomes we seek, which is avoiding emissions, sequestering emissions or reducing emissions. The most powerful tool we have to do that today is our nation's efficiency efforts, if we can begin to get all of our jurisdictions nationally to row in the same direction, at the same pace, to a common destination. And we're a long way from that. I'm going to address how we're working at the Department of Energy toward that destination through four different means.

On efficiency, we have an obligation to rely on our national laboratories for the development of sound science and technology for end-use applications, for the widgets and devices that will transform our energy future. So I'm going to talk to you about technology development. I'm also going to address our role in setting appliance standards and advocating for model building codes. Third, we have voluntary market and deployment methods, and I'm going to tell you what we've done to seize opportunities out of the jaws of despair in many cases, such as in New Orleans or Greensburg, Kansas. And lastly, the thing that we disproportionately talk about the most but invest so little has been technology advancement and outreach. It's really communication, about looking at your kids and my kids watching Nickelodeon and Disney Channel and trying to come up with a useful message they won't forget.

Efficiency itself has to be broken out into at least three key areas. If you split power generation for a moment and just talk about the carbon footprint and the built environment, buildings take up the largest piece. Almost 40% of all emissions can be accounted for by buildings. And more than emissions is the buildings fundamentally are around the longest. We don't even know how old—we've got buildings on the east coast that are more than 200 years old. So when we build, we need to be thinking about 100 years. At least 30 years, that's the way that we think about financed mortgages, but we don't today. And that's a critical piece.

And the next biggest piece is industry, not just in terms of their efficiency, but what does it mean to our national competitiveness and to our productivity? What does it mean to the balance of other fuels in the portfolio and principally here, I'm talking about alleviating price pressure on natural gas which is so dear to most of our initial outputs and productions and in fact runs all through our economy.

I spend a lot of my time during the day trying to explain to people actually how fractional and minor the percentage of ethanol is as a contribution to elevating food prices. It's very difficult to walk them through how natural gas affects fertilizer and how efficiency affects natural gas or how efficiency affects aluminum production and what it means when these things go offshore and what it means to re-import them and the world has increasing scarcity amongst commodities. So balancing out our industrial portfolio.

And then of course, vehicles. This administration was the first ever to succeed in modernizing and elevating CAFE vehicular efficiency standards. That's critically important. That's not just a blip in the night. But in reality if you look at the more than 6 gigatons that were mandated as CO2 reductions at savings for the Energy Independence and Security Act of 2007, almost 75% of all CO2 savings come from efficiency mechanisms in that legislation.

People will wake up one day without incandescent lighting or with incandescent lighting that's highly efficient, for example, and say, when and how did that happen? It's almost miraculous that we were able to bring George Bush and Nancy Pelosi and Harry Reid together within the course of a year, one year from the time the President called the 20-in-10 plan, the 20% reduction in our gasoline dependency within a decade. People don't realize, all of the efficiency measures and modernizations that went on with that legislation that we are busy implementing now in the Department of Energy. It will ultimately play a part in our portfolio, whether we are talking about our national productivity, or whether we are talking about what our future prospective climate change emissions reductions policies will in fact be.

There is largely today a sufficiency of efficiency technology. Our dilemmas are largely man-made impediments. They are not waiting for a transformation of hydrogen infrastructure, by way of example. They're waiting for a transformation of intelligent policy that allows consistent and continuous deployment of available technologies. The technologies themselves are continuing to evolve at a rate that surpasses their market deployment rate.

And so we've got to say, how do we catch up? How do we make ourselves a state-of-the-art nation if state-of-the-art technologies exist all around us, and whether that is integrating smart metering into our grid, whether it's understanding real-time pricing, whether that is the availability of solid state lighting. The compact fluorescents have been all the rage, and we do a lot to promote them. I'll speak about that in a moment. But it's taken more than a century to get past the Edisonian incandescent with compact fluorescents. It should take less than a decade to move beyond compact fluorescents with solid state lighting that for the first time this year became ENERGY STAR® qualified.

We have to do it all with a sense of urgency. And that's really the top line message I want to implant with you if I do anything today. Because you will hear continuously from the candidates involved—you're going to hear it in the presidential election, you're going to hear it continuously on Capitol Hill. You'll hear the same record as you begin the CO2 debate, the climate change debate on Capitol Hill shortly. It's the economy, it's the environment and we're doing all these things, very high level stuff. No one is talking about time. If you don't get to the time value of the transactions, if you don't get to the time value metrics by which we can flip capital stock, that's really what we're talking about. A major flip in the devices and the things that we own and the things that take us to work and the places that we live. We're going to have to talk about more than carbon pricing alone. We're going to have to talk about the mechanisms that allow us to scale, the mechanisms that allow us to fund, and we're going to have to talk far more intelligently about it than the superficial level that we're talking about it today. But if only we could reduce the pricing. If that's the exclusive thing that happens, everything else will fall into place.

We can't afford the disappointment of failing to realize that there needs to be a great deal more coordination amongst the jurisdictions of the states. There has to be a discussion in the 21st century about how you posture our institutions if you want disruptive outcomes and manage transition to the aspirations that we talk about at every high level. We're going to need new forms, new paradigms of disruptive institutional and organizational approaches here in Washington and we're going to need disruptive policy that enables those that deliver energy.

Those are the things that we are currently lacking in our national discussion. You've heard those things over and over and over and whether you hear them from Hewlett or Pew or the IPCC Report, or one that I like to lean on in my office, the report by the National Petroleum Council, called "The Hard Truths." You hear the same thing over and over. We will not exclusively be able to drill ourselves out of this, but that doesn't mean we can't drill and avail ourselves of domestic resources. We will not be able exclusively to be able to conserve our way out of this. But that doesn't mean we shouldn't be having maximum efficiency. And as "The Hard Truths" report pointed out, bottom line for us is, we're going to need it all.

More than 50% energy growth, those are the things you'll talk about in the next two days. In the next 25 years, demand is likely to continuously outstrip supply. We are not facing a temporary spike, but rather a permanent ramp escalating on the back of global demand, in China, in India, in Brazil, in South Africa, major emerging economies that aren't likely to abate their appetite for being part of the modern world, nor should we discourage that. Nor should we discourage the development opportunities around the world. But we can, as we've done with telecom and other means, do these things more intelligently by providing models here at home and being the world's leading competitor as we do these things.

You know, a recent report indicated that just existing technologies with an internal rate of return of 10% or more can reduce global energy demand by 50%. We're in the process of validating that at the Department of Energy, but what that really means is, this isn't just low-hanging fruit. This is fruit that has fallen and is gathering around our knees. But just as in any orchard, if you don't go out and plant the fruit it's going to rot in the field. And you're going to wait for something else. And it's the same here. We have got to assure the mechanisms of profitability for collecting that resource, for quantifying it, for monetizing it, for capitalizing on it, for producing new forms of innovation and capture the value of efficiency as a quantifiable resource for all the things that we want to achieve.

The technology and the economics and the opportunity are all on our side. But time isn't. And it's very difficult to explain in a town where very few people understand the concept of new present value, of internal rate of return, of return on equity, and whose very thesis of budgetary investing is based on incrementalism. How do you break that mold? How do you get the government to understand we're not dealing with an annual budgeting exercise for my office that is transformative, but rather unleashing the balance sheet of the United States of America with a user-friendly window with a nexus to the private sector that says: I can fund things long-term. I can make durable, intelligent policy that is predictable. I should have policy that is technology-neutral and, as the president called for, is carbon saving. That's really the key formula we need. We need durability and longevity in our policy. We need to give the private sector the tools to affect the change that we see.

Short-term, incremental, erratically-applied tax credits are not a formula that will work in this country, to think on 10- and 20- and 30- and 100-year horizons that are necessary and commensurate with the great challenges that we have to face. So we're going to have to leave the tools of the past behind just as we have to leave behind the ideas that our energy resources are inexhaustible and without impact.

These are very different days. Your challenges to discuss these things are going to be very different. I'd like to speak with a sense of urgency because I grew up with a dad who went far away for a deployment at the time of war. And there are lots of dads around the country coming back right now. My own view about this portfolio and our energy dilemmas is that even people who want to save the world from climate change this year, even people who want to make their factories more productive somewhere in mainstream America, have a mission that is convergent with our military and it's inseparable. Our energy security fundamentally relies on the way we will manage our energy resources over the next century and we have to posture ourselves for that and I hope that that is the theme of your talks and pervades all the discussions that are here to follow.

Demand-side management and real product pricing are going to be the key. How do you enable consumers to make the right decisions on the real cost of what any given resource is? Not an arbitrary level separating out wholesale, but right now to their retail decisions that they make in their homes. There's not a day that goes by in my job that I don't thank God that we never created the Department of the Internet here in Washington. We've got to let the American people make real choices and we can do that with the efficiency technologies available today to allow utilities to deliver to them not only more efficient energy services, but value added efficiency. Proliferation of solar can be thought of as a generation sources that saves the world rooftop by rooftop but as a demand side management tool that complements the building envelope and solid state lighting and high value insulation.

Other countries do codes and standards differently. And it's time that we begin to think about that. It's only in the last 30 months that for the first time, the United States of America had codes and standards delivered on time, which originated 30 years ago. For 30 years, we haven't delivered a single appliance standard, or model building code, on time. Think about what that's meant. The rule set constantly delayed, dragged into court, but we've done it on the rails for the very first time. But the process is too cumbersome. The process doesn't account for a world that's flat. For a Chinese factory somewhere in Yunnan Province that turns out washers and dryers for Europe at a higher rate of efficiency and sends the same model to the United States at a lower rate of efficiency. Thirty year-old EPCA legislation has got to entertain serious reform so that we can overcome systemic failure.

And there are models out there. The Australians look to the best available technology and say that's what our citizens deserve, let's devise a standard around that. The Japanese have something called the Top Runner program, which is very prestigious. It basically says if you innovate a device and if we accept it as the Top Runner, you get the Nobel Prize for Japanese efficiency for an appliance or a widget for your home, and everybody else has to meet that standard within a specific period of time.

Now that's very innovative, but it's not exactly alien to us. This is where we go beyond codes and standards here in this country. We have something called the ENERGY STAR program. That's voluntary market deployment. ENERGY STAR does the same thing. Takes the top 10%, top 25%, and continuously moves it as technology develops. So a dynamic model, rather than a static one, is precisely what we need now. But even in a static model, even with building codes and standards, which used to move incrementally, about ½ or 2 or 3% every two or three years based on a consensus. We have proposed a 30% lead to catch this country up in standards with where we are in technology. There's no reason that my children or yours should be dealing with substandard technology on a global basis. Those aren't the troops we want to tinker with, nor do we want only the affluent in society to wear the best available technology as a luxury, green good sold through a luxury, green niche. These things need to be ubiquitous and codes and standards is the rule set that moves us forward and defines a marketplace so that we can sell into it much, much more predictably.

On the voluntary side, these are what I call the photo-op programs. The ribbon-cutting programs. And it's always been schoolhouse by schoolhouse, Secretary by Secretary, if you want. And we try to do it differently. We try to say, where can we do a program that has a model impact, that has a demonstration of technology, and that is replicable and commercial.

So when we started the EnergySmart schools program, we basically went to New Orleans and said, how do you fix it? How do you take the 75 schools in New Orleans where the state now has complete control and come up with an efficiency assessment method and an efficiency deployment method and use private capital and then demonstrate that around the country. And more successfully, when we got there first, in a place like Greensburg, Kansas, and we were able to work with FEMA and the Department of Agriculture and the Department of Rural Development, we've got the whole town to buy into the idea of 100% green. To understand what the future would look like if every building in town was LEED Certified. Even the John Deere mower, even the school, even the city hall, even the church, and so if anything, a place where there was damage and make it a beacon of hope, a place you can visit.

That's why we focus on civic infrastructure and the community buildings and the school buildings and the places where people gather to understand that this isn't a simple luxury green niche, a green badge of courage, this is where our society needs to go. These are the things that we can obtain today if we plan and execute correctly.

On the industrial side, it's been no different. We just completed our 500th assessment in a program called Save Energy Now. People said well that's corporate welfare. Why would you go to Dupont and Caterpillar for a mom-and-pop aluminum smelter somewhere and give them a free energy assessment and the tools, why would you work with the Green Grid and the Data Centers and focus on companies like Hewlett-Packard and IBM, and others. Well the answer is real simple: Executives have an obligation, a fiduciary obligation, and that's to maximize their profitability for shareholders. And not every decision they've gone and made about available room on their balance sheets is going to prioritize turnover of the capital stock in a given year. And so it is in the interest of this nation to work together with those who use and deploy energy most to show them in absolute, crystal clear terms what the value and the quantifiable resource is. It's about avoiding loss by a failure to invest. And the amount of the millions of metric tons that we are saving through these types of voluntary programs, the amount of dollars we are saving, the amount of competitiveness and productivity we are enhancing, is immeasurable.

As for education, there are rings and rings of new programs I could talk about, but with limits for time, I'm going to ask you to indulge me to let me focus on a few other things. Because I missed this conference last year because I had a baby last year and she's one year old, and so I think a lot about my girls and I think about how do we get to them, how do we stimulate their thinking, and believe it or not, when you talk about systemic problems, it took me 14 months to convince the Office of General Counsel that the Walt Disney Corporation had a unique skill set to offer that would qualify them, that would qualify me to have a relationship with them beyond the contractor that we had been using on GSA schedule inside the Beltway. The Walt Disney Corporation could in fact work together with the Federal government for communication and outreach because of their unique and indispensable skill.

And so we piggybacked on the movie Ratatouille and we worked together with Wal-Mart, and though my first year we set the record for the compact fluorescents with a 10% jump in sales, last year we set the record again and we doubled the nation's sales, simply by working and leveraging and using targeted demographics in a range of 8-12 years old. You'll see more of that through the Ad Council and working with Tinkerbell to work on a multi-generational theme so that the Department of Energy can begin doing what we've long done to fight forest fires, to fight smoking in a multi-generational way. I don't even know what that Indian said in the commercial where he had the tear. All I know is that we didn't throw things out of the car anymore because it was built into our ethos and it changed the way we think.

And that's what we have to do about energy so that our consumer market is ready, as our policy makers and regulators begin to put in place the right mechanisms to enable profitability. None of it will get done without understanding lifecycle cost. Because it doesn't really matter whether you're financing a new business, a new high-efficiency aluminum smelter, some new nano-manufacturing, a super boiler, it doesn't matter whether it's a more highly efficient car, it doesn't matter whether it's even a compact fluorescent bulb, you have to say to yourself, what's the net present value of a light bulb? Ultimately, we're talking about the time value of money and opportunity costs of failing to implement efficiency now. We have to basically understand that the concept in the simplest way that emissions reductions avoided are emissions reductions denied. That energy savings avoided is energy savings denied. The competitiveness delay is competitiveness loss. And so in real time, I hope that throughout your discussions, when you're talking about coal-fired boilers, and how to make them 7% more efficient, and what that means to the environment, our competitiveness when you're talking about the deployment at scale of clean energy technology, I hope that every discussion you have in the next 48 hours, you're also talking about efficiency.

There is a mechanism that is quite elegant that is enclosed in the Energy Policy Act, Title 17, that my office administers, and it's what we call the Loan Guarantee Program. And I call your attention to it because there is an elegance to the Loan Guarantee Program that says that a government in all of its wisdom has failed to prescribe everything that is precisely needed to change the world in the Energy Policy Act, let this provision avoid, sequester or reduce emissions. If you have a manufacturing facility, if you have a stand-alone project, if you have integrated efficiency applications that can avail themselves of the balance sheet of the Federal government, not only is this authorized in statute for loan guarantees up to 80% of that project or that facility's cost, $42.5 billion has been appropriated for the next 24 months alone. By contrast, the whole Department of Energy budget, nuclear, stewardship, cleanup, everything—$25 billion. $42 billion waiting for the private sector to put forward innovative and imaginative paradigms for new facilities at the capital stock turnover that I've been talking about in a timeframe at a rate that is consequential. And we are hoping very much to see integrated efficiency applications as part of that.

I want to conclude by saying the obvious. We can't be the more competitive nation that we aspire to be without being more efficient. We can't be stronger, we can't be healthier, we can't be more safe, we can't be more secure, we can't be more productive, without being more efficient.

But there's good news in this story. There's good news if you look hard at what we are teaching our children without the federal government programming. This is part of our heritage—this is our birthright. This is who we are. The very same founding fathers that talked about pursuit of happiness talked about a penny saved is a penny earned. A kilowatt saved is a kilowatt earned. A BTU saved is a BTU earned. We didn't get to the West on the basis of excess. Our parents and grandparents didn't come to this country on the basis of waste. This is in our DNA as a nation and I have every confidence that the leaders in this room are going to have the type of conversations and stimulate folks on Capitol Hill to reduce it down from a superficial level and into the precision of policymaking that is necessary to coordinate the Federal jurisdiction with the state jurisdiction that empowers those that deliver energy with those that consume it so that intelligent policy can unleash a wave of technology deployment and practices that are ready, that are here today, and that ought to be transformative in making us the better nation we aspire to be.

Thank you all for having me.