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A partial solution to rural Alaska energy challenges

  • Author: Brian Hirsch
  • Updated: June 29, 2016
  • Published October 24, 2015

Alaska legislators have begun a special session to consider the state's economic future peering through a proposed 48-inch diameter gas line. By all accounts, this is a complicated, high-stakes megaproject with an uncertain outcome. Policies and decisions by these legislators and Gov. Bill Walker -- along with global markets and actions by the major producers and TransCanada -- will determine the fate of the project, with Alaska's fiscal reality hanging in the balance.

By comparison, the energy issues in rural Alaska simply seem painful and intractable. We have all heard of the high costs and tortuous journeys of delivering diesel fuel to the Bush, and the no-win choice some encounter between heating a poorly insulated home or feeding a family.

To the credit of previous Alaska Legislatures, some of our state's past wealth was channeled into an endowment fund to ease the grinding energy poverty that comes from generating electricity with expensive diesel fuel. Earnings distributed from this endowment constitute the Power Cost Equalization program.

The PCE program received its name not only because energy prices were high in rural Alaska and the state's citizens and lawmakers agreed rural electrification was worth the investment, but also in recognition of the public investment and subsidies that were required in urban Alaska to make electricity affordable in Anchorage and other locations. This includes state funding for Bradley Lake hydro, long-distance power lines between Homer and Anchorage and Fairbanks, and tax credits for Cook Inlet gas development. In other words, PCE is not just a rural handout, but rather an ongoing arrangement aimed at keeping both rural and urban energy prices manageable.

Although there is a complicated formula to determine the exact amount PCE provides, the bottom line is that money is sent to eligible rural utilities based primarily on the amount of diesel fuel used to generate electricity for residents and "community facilities." Importantly, schools, businesses, and state- and federal-owned buildings do not receive PCE. Also importantly, if a village utility installs a wind turbine or becomes more efficient and reduces diesel fuel use for electricity, the utility receives less PCE subsidy and residential rates generally do not change. In other words, PCE reduces the incentive to save fuel.

As legislators look for budget savings, it should be emphasized that PCE revenue is essential to maintain quality of life in rural Alaska, and cutting PCE should NOT be on the table. However, the program was designed when diesel fuel prices were much lower and renewable energy and energy efficiency were not technically or economically viable options for reducing energy costs and private developers were not interested in rural Alaska.

Things have now changed.

Diesel fuel is much more expensive while renewable energy and energy efficiency options are mature enough to provide meaningful savings and attract private investment. And of course, state funding for everything from education to affordable and clean energy is now under budget scrutiny.

In a recent statewide meeting I attended on barriers and opportunities for renewable energy development in rural Alaska, PCE was widely identified as a barrier, despite original legislative intent that PCE promote affordable energy.

As state funding for energy programs such as the Renewable Energy Fund decline, many observers have identified opportunities to leverage PCE to encourage private investment in renewable energy and energy efficiency. Most of the suggestions revolve around decoupling PCE payments from diesel fuel consumption and instead simply using PCE as a guaranteed revenue stream for all electricity production in a village -- not just diesel-based. What this would mean pragmatically is that if renewable energy and/or energy efficiency projects in a community reduce diesel fuel consumption, the community would not receive less PCE payment. In fact, the more fuel and money the community were to save, the more PCE they could "pocket," thus PCE would provide incentive for more fuel savings and economic development.

From a clean energy private developer's perspective, this policy shift would result in viewing PCE as a guaranteed revenue stream to reduce investment risk instead of the current view of PCE being an obstacle to diesel reduction. To be sure, this would not simply be a direct transfer of funds to the private sector, but rather an incentive to the utility and community to become more fuel efficient, transparent and attractive to investors.

Of course, there are details to work out and oversight would be required to ensure the guaranteed revenue stream was put toward its intended use. Fortunately, the state agencies currently administering PCE -- the Alaska Energy Authority and the Regulatory Commission of Alaska -- have done an excellent job to date and would be well-positioned to manage a reconstituted PCE.

As state revenues decline, creative policy options that leverage public-private partnerships to reduce costs, reward efficiency, and expand investment in Alaska will be necessary to support the unique cultures, environments, and local economies that define our state. Alaska's legislators have an opportunity to transform PCE into such an incentive program by carefully rewriting the funding distribution formula while maintaining the original intent of encouraging affordable energy in rural Alaska.

Dr. Brian Hirsch, president of Deerstone Consulting LLC, has been working in rural Alaska and other remote locations on renewable energy and community development solutions for over 25 years. He has led or facilitated energy efficiency, solar photovoltaic, biomass, wind and hydrokinetic turbine installation projects as a private developer and, from 2009 to mid-2015, as the Alaska Senior Project Leader for the National Renewable Energy Laboratory, part of the U.S. Department of Energy.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.

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