To state the obvious, productive capital formation and maintenance are critical to achieving lower inflation over the long-term. The long-term goal of energy policy should encompass more than just security and decarbonization: the goal should be to ensure energy capacity abundance and stable energy cost. By building out a diversified and resilient energy generation infrastructure which is not vulnerable to the disruption of specific sources, policymakers can act today to rein in the volatility of energy prices in the future.
While gasoline prices are front-page news, skyrocketing natural gas prices are forcing American consumers to pay record utility bills.
While the US has sufficient natural gas supplies to meet domestic demand, a growing capacity to export US natural gas is pulling up the prices US consumers pay for energy services. The traded commodity price for natural gas feeds into the prices Americans pay for utility gas service and electricity, the key components of US Energy Services CPI.
Following a major outage at the Freeport liquefied natural gas (LNG) export terminal – through which 17% of US exports pass on their way abroad – US natural gas prices fell while European prices surged.
While this situation might provide some temporary relief to American consumers, it is hardly sustainable or desirable. The moment this facility comes back online, Asian and European buyers stand ready to pay a premium for these exports, leading to higher utility bills for Americans in the process.
Resolving this dynamic requires more productive investment, not less. We need to expand and maintain key electricity-generation assets. We need more diversity of power generation, not less. The Reconciliation Bill is a model for promoting both energy investment and diversification. The scale of investment and the diversity of energy sources supported by this bill represent an approach exactly at odds with European energy policies, which were insufficiently diversified. Its largest economies were left completely exposed to energy-driven inflation, even before the Russian invasion. Provisions in the bill not only support wind and solar capacity - which can be stood up relatively quickly - but also much-needed support for nuclear and geothermal power generation, batteries, and other forms of energy storage that will only grow in value over the coming years.
Legacy energy sources like oil, natural gas and coal are responsible – directly or indirectly – for rising costs faced by businesses and households alike. In recent months, many US households have suddenly discovered that their monthly utility and gasoline bills are tightly coupled to supply movements in far-flung markets. Worse, virtually every business in the country requires energy, and some of our most high-tech businesses rely on low and stable energy costs. Increases in the price of energy are often passed on to consumers as rising prices exactly when they are likely to inflict the largest harm on our standard of living. Today, new investment is catalyzed and funded through sudden and haphazard price signals that directly undercut the standard of living of hard-working Americans. By providing a valuable and stable source of support to private sector investment efforts, targeted fiscal policy mitigates the reliance on such volatile price signals and ensures economic stability for families and businesses alike.
Put simply, the clean energy investments supported by certain provisions will lower inflation. Bill text includes tax credits for old and new forms of lower-carbon energy generation. New technologies developed by the advanced manufacturing credits will help provide new transmission and storage solutions, while new implementations of older technologies will provide new sources of baseload power generation. As the Texas grid has shown, through its reliance on solar in recent weeks, diversification of electricity generation is key to building resilience and reliability.
The tax credits listed work even better in concert than any of them do independently. Nuclear power has a critical role to play in decoupling baseload electricity production from carbon emissions, while batteries and new transmission infrastructure will help convert intermittent wind and solar assets into much-needed peaking capacity. Each of these technologies are substantially less reliant on the continuous purchase of fuels for electricity generation. While this makes these technologies expensive up front, the cost of operation will be insulated from economic and geopolitical volatility. The time is now to invest in the future of the American energy grid.
These reconciliation proposals will help prevent inflation that otherwise seems destined to materialize in the future.