Richard Kauffman talks New Market-Based Energy System at New York Energy Week

Last week, the 2^ndNew York Energy Week (NYEW) concluded. At its closing ceremony, the esteemed Richard Kauffman, Chairman of Energy and Finance for New York State, Office of the Governor of New York, offered his thinking on a new energy system. There is no better person to explain the thinking behind the policy than Mr. Kauffman who leads New York State’s plan â€" NY Green Bank â€" to scale up clean energy and make its energy system more reliable and resilient while at the same time cost effective. To properly appreciate his following reflections on a new energy system it is important to know that he worked in energy and finance at some of the highest levels of both the private (Goldman Sachs; Morgan Stanley) and public sector (Senior Advisor to Secretary Steven Chu at the Department of Energy).

Mr. Kauffman is clearly an advocate for market-based solutions: “The problem is not innovation, it’s markets. Governments have a preference for mandates and grants. The problem is that [these instruments] are not used to develop markets but [instead governments] think they are the markets.” He added that the “Valley of Death” funding gap could be solved through market development; in particular, the use of capital markets. Note here, that many early stage technologies are confronted with this funding gap on their path to successful commercialization. In order to master this serious threat, third-party funding is needed.

“Valley of Death”

 Source: Osawa and Miyazaki (2006) via Forbes 

Moreover, “[we] need markets to drive innovation based on technology,” Mr. Kauffman postulated. In this context, he addressed the fundamental tension â€" at the heart of the new energy system â€" between central power station generation and distributed solutions. The latter creates those ancillary services critical for the resilience of the system and the customer. In the end, this is where the ‘value-added’ for customers lies; namely, according to Mr. Kauffman for home health care or home entertainment. So, instead of asking how other sectors are driving ‘energy’, the right question to ask is what a new energy system can provide to those sectors as ‘value’.

Above all, to make this work, distributed energy solutions are needed and they need to be integrated into the centralized system. At this point, we have come full circle as Mr. Kauffman explains: “Government needs to be close to where the market already is. [Then], to get the price signals right, free data [streams] need to be created in order to open up information for the market.”

As a result, the right price signals will provide the right ‘value’ for e.g. electric vehicles (EVs), which can be perceived as instruments to improve the resilience of the grid in an urban setting. In this regard, Mr. Kauffman made an interesting and crucial point as for energy customers’ driving motivation â€" e.g. climate change considerations â€" for the adoption of this new energy system: “Adopting the new energy system for the wrong reasons â€" [i.e. for convenience and not necessarily for saving the planet] â€" may happen to yield the right outcome.” This last statement is quite reminiscent of Adam Smith’s ‘invisible hand’.

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Roman Kilisek

Roman Kilisek is a Global Energy & Natural Resources Analyst and a contributor at Breaking Energy. His writing and research focuses on global energy policy, energy infrastructure and trade, commodities, mining, global political risk and macroeconomics. He likes to draw on scenario development and analysis. He has a Master of Arts degree in international relations and diplomacy from Seton Hall ...

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