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Thursday, September 17, 2020

Resource-based view

From Wikipedia, the free encyclopedia

The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

Barney's 1991 article "Firm Resources and Sustained Competitive Advantage" is widely cited as a pivotal work in the emergence of the resource-based view. However, some scholars argue that there was evidence for a fragmentary resource-based theory from the 1930s. RBV proposes that firms are heterogeneous because they possess heterogeneous resources, meaning firms can have different strategies because they have different resource mixes.

The RBV focuses managerial attention on the firm's internal resources in an effort to identify those assets, capabilities and competencies with the potential to deliver superior competitive advantages.

Origins and background

During the 1990s, the resource-based view (also known as the resource-advantage theory) of the firm became the dominant paradigm in strategic planning. RBV can be seen as a reaction against the positioning school and its somewhat prescriptive approach which focused managerial attention on external considerations, notably industry structure. The so-called positioning school had dominated the discipline throughout the 1980s. In contrast, the resource-based view argued that sustainable competitive advantage derives from developing superior capabilities and resources. Jay Barney's 1991 article, "Firm Resources and Sustained Competitive Advantage," is seen as pivotal in the emergence of the resource-based view.

A number of scholars point out that a fragmentary resource-based perspective was evident from the 1930s, noting that Barney was heavily influenced by Wernerfelt's earlier work which introduced the idea of resource position barriers being roughly analogous to entry barriers in the positioning school. Other scholars suggest that the resource-based view represents a new paradigm, albeit with roots in "Ricardian and Penrosian economic theories according to which firms can earn sustainable supranormal returns if, and only if, they have superior resources and those resources are protected by some form of isolating mechanism precluding their diffusion throughout the industry." While its exact influence is debated, Edith Penrose's 1959 book The Theory of the Growth of the Firm is held by two scholars of strategy to state many concepts that would later influence the modern, resource-based theory of the firm.

The RBV is an interdisciplinary approach that represents a substantial shift in thinking. The resource-based view is interdisciplinary in that it was developed within the disciplines of economics, ethics, law, management, marketing, supply chain management and general business.

RBV focuses attention on an organisation's internal resources as a means of organising processes and obtaining a competitive advantage. Barney stated that for resources to hold potential as sources of sustainable competitive advantage, they should be valuable, rare, imperfectly imitable and not substitutable (now generally known as VRIN criteria). The resource-based view suggests that organisations must develop unique, firm-specific core competencies that will allow them to outperform competitors by doing things differently.

Although the literature presents many different ideas around the concept of the resource-advantage perspective, at its heart, the common theme is that the firm's resources are financial, legal, human, organisational, informational and relational; resources are heterogeneous and imperfectly mobile and that management's key task is to understand and organise resources for sustainable competitive advantage. Key theorists who have contributed to the development of a coherent body of literature include Jay B. Barney, George S. Day, Gary Hamel, Shelby D. Hunt, G. Hooley and C.K. Prahalad.

Concept

Achieving a sustainable competitive advantage lies at the heart of much of the literature in strategic management and strategic marketing J and Smithee, A. "Strategic Marketing and the Resource Based View of the Firm," Journal of the Academy of Marketing Science R The resource-based view offers strategists a means of evaluating potential factors that can be deployed to confer a competitive edge. A key insight arising from the resource-based view is that not all resources are of equal importance, nor do they possess the potential to become a source of sustainable competitive advantage. The sustainability of any competitive advantage depends on the extent to which resources can be imitated or substituted. Barney and others point out that understanding the causal relationship between the sources of advantage and successful strategies can be very difficult in practice. Thus, a great deal of managerial effort must be invested in identifying, understanding and classifying core competencies. In addition, management must invest in organisational learning to develop, nurture and maintain key resources and competencies.

In the resource-based view, strategists select the strategy or competitive position that best exploits the internal resources and capabilities relative to external opportunities. Given that strategic resources represent a complex network of inter-related assets and capabilities, organisations can adopt many possible competitive positions. Although scholars debate the precise categories of competitive positions that are used, there is general agreement, within the literature, that the resource-based view is much more flexible than Porter's prescriptive approach to strategy formulation.

The key managerial tasks are:

  1. Identify the firm's potential key resources.
  2. Evaluate whether these resources fulfill the following criteria (also known as VRIN criteria:
    • Valuable - they enable a firm to implement strategies that improve its efficiency and effectiveness.
    • Rare - not available to other competitors.
    • Imperfectly imitable - not easily implemented by others.
    • Non-substitutable - not able to be replaced by some other non-rare resource.
  3. Develop, nurture and protect resources that pass these evaluations.

Definitions

Given the centrality of resources in terms of conferring competitive advantage, the management and marketing literature carefully defines and classifies resources and capabilities.

Resources

Barney defines firm resources as: "all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness" 

Capabilities

Capabilities are "a special type of resource, specifically an organizationally embedded non-transferable firm-specific resource whose purpose is to improve the productivity of the other resources possessed by the firm." 

Competitive advantage

Barney defined a competitive advantage as "when [a firm] is able to implement a value creating strategy not simultaneously being implemented by any current or potential competitors."

Classification of resources and capabilities

Firm-based resources may be tangible or intangible.

Tangible resources include: physical assets such as financial resources and human resources including real estate, raw materials machinery, plant, inventory, brands, patents and trademarks and cash.
Intangible resources may be embedded in organisational routines or practices such as an organization's reputation, culture, knowledge or know-how, accumulated experience, relationships with customers, suppliers or other key stakeholders.

They are particularly valuable in resource-based view because they give companies advantages in using resources. For example, patents make it impossible for other firms to use their resources in the same way and brand might be the only thing differentiating the product from the competitor’s.


Resources and capabilities may also be intraorganizational or interorganizational:

While RBV scholars have traditionally focused on intraorganizational resources and capabilities, recent research points to the importance of interorganizational routines. Routines between organizations and the ability to manage interorganizational relationships can improve performance. Such collaboration capabilities are, in particular, supported by contract design capabilities. An efficient use of contracts in the management of interorganizational relationships can facilitate the transfer of information, enhance organizational learning, and help develop relational capital.


The resources are divided into two critical assumptions:

Heterogeneous: It is the assumption that each company has different skills, capabilities, structure, resources and that makes each company different. Due to the different forms of employment and amount of resources, organizations can design different strategies that promote competitiveness in the market.
Immobile: It is the assumption that is based on the resources that an organization owns are not mobile, in other words, at least in short terms, cannot be transferred from one company to another. Companies can hardly obtain the immobile resources of their competitors since those resources have an important value for companies.

RBV and strategy formulation

Firms in possession of a resource, or mix of resources that are rare among competitors, are said to have a comparative advantage. This comparative advantage enables firms to produce marketing offerings that are either (a) perceived as having superior value or (b) can be produced at lower costs. Therefore, a comparative advantage in resources can lead to a competitive advantage in market position.

In the resource-based view, strategists select the strategy or competitive position that best exploits the internal resources and capabilities relative to external opportunities. Given that strategic resources represent a complex network of inter-related assets and capabilities, organisations can adopt many possible competitive positions. Although scholars debate the precise categories of competitive positions that are used, there is general agreement, within the literature, that the resource-based view is much more flexible than Porter's prescriptive approach to strategy formulation. Hooley et al. suggest the following classification of competitive positions:

  • Price positioning
  • Quality positioning
  • Innovation positioning
  • Service positioning
  • Benefit positioning
  • Tailored positioning (one-to-one marketing)

Criticisms

A number of criticisms of RBV have been widely cited, and are as follows:

  • The RBV is tautological
  • Different resource configurations can generate the same value for firms and thus would not be competitive advantage
  • The role of product markets is underdeveloped in the argument 
  • The theory has limited prescriptive implications.

Other criticisms include:

  • The failure to consider factors surrounding resources; that is, an assumption that they simply exist, rather than a critical investigation of how key capabilities are acquired or developed.
  • It is perhaps difficult (if not impossible) to find a resource which satisfies all of Barney's VRIN criteria.
  • An assumption that a firm can be profitable in a highly competitive market as long as it can exploit advantageous resources does not always hold true. It ignores external factors concerning the industry as a whole; Porter’s Industry Structure Analysis ought also be considered.

Energy crisis

From Wikipedia, the free encyclopedia

An energy crisis is any significant bottleneck in the supply of energy resources to an economy. In literature, it often refers to one of the energy sources used at a certain time and place, in particular those that supply national electricity grids or those used as fuel in Industrial development and population growth have led to a surge in the global demand for energy in recent years. In the 2000s, this new demand — together with Middle East tension, the falling value of the U.S. dollar, dwindling oil reserves, concerns over peak oil, and oil price speculation — triggered the 2000s energy crisis, which saw the price of oil reach an all-time high of $147.30 a barrel in 2008.

Causes

The gasoline shortages of World War II brought about the resurgence of horse-and-wagon delivery.

Most energy crisis have been caused by localized shortages, wars and market manipulation. Some have argued that government actions like tax hikes, nationalisation of energy companies, and regulation of the energy sector, shift supply and demand of energy away from its economic equilibrium. However, the recent historical energy crisis listed below were not caused by such factors. Market failure is possible when monopoly manipulation of markets occurs. A crisis can develop due to industrial actions like union organized strikes and government embargoes. The cause may be over-consumption, aging infrastructure, choke point disruption or bottlenecks at oil refineries and port facilities that restrict fuel supply. An emergency may emerge during very cold winters due to increased consumption of energy.

Large fluctuations and manipulations in future derivatives can have a substantial impact on price. Large investment banks control 80% of oil derivatives as of May 2012, compared to 30% only a decade ago. This increase contributed to an improvement of global energy output from 117 687 TWh in 2000 to 143 851TWh in 2008. Limitations on free trade for derivatives could reverse this trend of growth in energy production. Kuwaiti Oil Minister Hani Hussein stated that "Under the supply and demand theory, oil prices today are not justified," in an interview with Upstream.

Pipeline failures and other accidents may cause minor interruptions to energy supplies. A crisis could possibly emerge after infrastructure damage from severe weather. Attacks by terrorists or militia on important infrastructure are a possible problem for energy consumers, with a successful strike on a Middle East facility potentially causing global shortages. Political events, for example, when governments change due to regime change, monarchy collapse, military occupation, and coup may disrupt oil and gas production and create shortages. Fuel shortage can also be due to the excess and useless use of the fuels.

Historical crises

  • 2000s energy crisis - Since 2003, a rise in prices caused by continued global increases in petroleum demand coupled with production stagnation, the falling value of the U.S. dollar, and a myriad of other secondary causes.
  • 2008 Central Asia energy crisis, caused by abnormally cold temperatures and low water levels in an area dependent on hydroelectric power. At the same time the South African President was appeasing fears of a prolonged electricity crisis in South Africa."Mbeki in pledge on energy crisis". Financial Times. Retrieved 2008-02-10.
  • In February 2008 the President of Pakistan announced plans to tackle energy shortages that were reaching crisis stage, despite having significant hydrocarbon reserves,. In April 2010, the Pakistani government announced the Pakistan national energy policy, which extended the official weekend and banned neon lights in response to a growing electricity shortage.
  • South African electrical crisis. The South African crisis led to large price rises for platinum in February 2008 and reduced gold production.
  • China experienced severe energy shortages towards the end of 2005 and again in early 2008. During the latter crisis they suffered severe damage to power networks along with diesel and coal shortages. Supplies of electricity in Guangdong province, the manufacturing hub of China, are predicted to fall short by an estimated 10 GW [DJS-Hour?]. In 2011 China was forecast to have a second quarter electrical power deficit of 44.85 - 49.85 GW.
  • Nepal experienced a major energy crisis in 2015 when India imposed an economic blockade on Nepal. Nepal faced shortages of various kinds of petroleum products and food materials which severely affected Nepal's economy.
  • The Gaza electricity crisis is a result of the tensions between Hamas, who rules the Gaza Strip, and the Palestinian Authority/Fatah, who rules the West Bank over custom tax revenue, funding of the Gaza Strip, and political authority. Residents receive electricity for a few hours a day on a rolling blackout schedule.
  • 2019 California energy crisis

Emerging oil shortage

“Peak oil” is the period when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. It relates to a long-term decline in the available supply of petroleum. This, combined with increasing demand, significantly increases the worldwide prices of petroleum derived products. Most significant is the availability and price of liquid fuel for transportation.

The US Department of Energy in the Hirsch report indicates that “The problems associated with world oil production peaking will not be temporary, and past 'energy crisis' experience will provide relatively little guidance.”

Mitigation efforts

To avoid the serious social and economic implications a global decline in oil production could entail, the 2005 Hirsch report emphasized the need to find alternatives, at least ten to twenty years before the peak, and to phase out the use of petroleum over that time. Such mitigation could include energy conservation, fuel substitution, and the use of unconventional oil. Because mitigation can reduce the use of traditional petroleum sources, it can also affect the timing of peak oil and the shape of the Hubbert curve.

Energy policy may be reformed leading to greater energy intensity, for example in Iran with the 2007 Gas Rationing Plan in Iran, Canada and the National Energy Program and in the USA with the Energy Independence and Security Act of 2007 also called the Clean Energy Act of 2007. Another mitigation measure is the setup of a cache of secure fuel reserves like the United States Strategic Petroleum Reserve, in case of national emergency. Chinese energy policy includes specific targets within their 5-year plans.

Andrew McKillop has been a proponent of a contract and converge model or capping scheme, to mitigate both emissions of greenhouse gases and a peak oil crisis. The imposition of a carbon tax would have mitigating effects on an oil crisis. The Oil Depletion Protocol has been developed by Richard Heinberg to implement a powerdown during a peak oil crisis. While many sustainable development and energy policy organisations have advocated reforms to energy development from the 1970s, some cater to a specific crisis in energy supply including Energy-Quest and the International Association for Energy Economics. The Oil Depletion Analysis Centre and the Association for the Study of Peak Oil and Gas examine the timing and likely effects of peak oil.

Ecologist William Rees believes that

To avoid a serious energy crisis in coming decades, citizens in the industrial countries should actually be urging their governments to come to international agreement on a persistent, orderly, predictable, and steepening series of oil and natural gas price hikes over the next two decades.

Due to a lack of political viability on the issue, government mandated fuel prices hikes are unlikely and the unresolved dilemma of fossil fuel dependence is becoming a wicked problem. A global soft energy path seems improbable, due to the rebound effect. Conclusions that the world is heading towards an unprecedented large and potentially devastating global energy crisis due to a decline in the availability of cheap oil lead to calls for a decreasing dependency on fossil fuel.

Other ideas concentrate on design and development of improved, energy-efficient urban infrastructure in developing nations. Government funding for alternative energy is more likely to increase during an energy crisis, so too are incentives for oil exploration. For example, funding for research into inertial confinement fusion technology increased during the 1970s.

Kirk Sorensen and others have suggested that additional nuclear power plants, particularly liquid fluoride thorium reactors have the energy density to mitigate global warming and replace the energy from peak oil, peak coal and peak gas. The reactors produce electricity and heat so much of the transportation infrastructure should move over to electric vehicles. However, the high process heat of the molten salt reactors could be used to make liquid fuels from any carbon source.

2010s oil glut

Rather counterintuitively, the world economy has had to deal with the unforeseen consequences of the 2015-2016 oil glut also known as 2010s oil glut, a major energy crisis that took many experts by surprise. This oversupply crisis started with a considerable time-lag, more than six years after the beginning of the Great Recession: "the price of oil [had] stabilized at a relatively high level (around $100 a barrel) unlike all previous recessionary cycles since 1980 (start of First Persian Gulf War). But nothing guarantee[d] such price levels in perpetuity".

Social and economic effects

The macroeconomic implications of a supply shock-induced energy crisis are large, because energy is the resource used to exploit all other resources. Oil price shocks can affect the rest of the economy through delayed business investment, sectoral shifts in the labor market, or monetary policy responses. When energy markets fail, an energy shortage develops. Electricity consumers may experience intentionally engineered rolling blackouts during periods of insufficient supply or unexpected power outages, regardless of the cause.

Industrialized nations are dependent on oil, and efforts to restrict the supply of oil would have an adverse effect on the economies of oil producers. For the consumer, the price of natural gas, gasoline (petrol) and diesel for cars and other vehicles rises. An early response from stakeholders is the call for reports, investigations and commissions into the price of fuels. There are also movements towards the development of more sustainable urban infrastructure.

In 2006, survey respondents in the United States were willing to pay more for a plug-in hybrid car
 
Global New Investments in Renewable Energy

In the market, new technology and energy efficiency measures become desirable for consumers seeking to decrease transport costs. January 30, 2008 Planet Ark. Examples include:

Other responses include the development of unconventional oil sources such as synthetic fuel from places like the Athabasca Oil Sands, more renewable energy commercialization and use of alternative propulsion. There may be a Relocation trend towards local foods and possibly microgeneration, solar thermal collectors and other green energy sources.

Tourism trends and gas-guzzler ownership varies with fuel costs. Energy shortages can influence public opinion on subjects from nuclear power plants to electric blankets. Building construction techniques—improved insulation, reflective roofs, thermally efficient windows, etc.—change to reduce heating costs.

Crisis management

An electricity shortage is felt most acutely in heating, cooking, and water supply. Therefore, a sustained energy crisis may become a humanitarian crisis.

If an energy shortage is prolonged a crisis management phase is enforced by authorities. Energy audits may be conducted to monitor usage. Various curfews with the intention of increasing energy conservation may be initiated to reduce consumption. For example, to conserve power during the Central Asia energy crisis, authorities in Tajikistan ordered bars and cafes to operate by candlelight."Crisis Looms as Bitter Cold, Blackouts Hit Tajikistan". NPR. Retrieved 2008-02-10.

In the worst kind of energy crisis energy rationing and fuel rationing may be incurred. Panic buying may beset outlets as awareness of shortages spread. Facilities close down to save on heating oil; and factories cut production and lay off workers. The risk of stagflation increases.

2007 Russia–Belarus energy dispute

Druzhba pipeline goes from Russia through Belarus to other European countries

The Russia–Belarus energy dispute began when Russian state-owned gas supplier Gazprom demanded an increase in gas prices paid by Belarus, a country which has been closely allied with Moscow and forms a loose union state with Russia. It escalated on 8 January 2007, when the Russian state-owned pipeline company Transneft stopped pumping oil into the Druzhba pipeline which runs through Belarus because Belarus was siphoning the oil off the pipe without mutual agreement. On 10 January, Transneft resumed oil exports through the pipeline after Belarus ended the tariff that sparked the shutdown, despite differing messages from the parties on the state of negotiations.

The Druzhba pipeline, the world's longest, supplies around 20% of Germany's oil. It also supplies oil to Poland, Ukraine, Slovakia, the Czech Republic, and Hungary.

Background

Oil pipelines in Europe and Northwestern Asia.

For a long time, the gas price for most of the former USSR republics was significantly lower than for the Western European countries. In 2006 Belarus paid only $46 per 1000 m³, a fraction compared to $290 per 1000 m³ paid by Germany. The annual Russian subsidies to the Belarusian economy were around $4 billion, as Russian president Vladimir Putin said on 9 January 2007. In 2006 Russia announced a higher price for 2007. After Alexander Lukashenko, President of Belarus, rejected this price change, and without a new treaty, Gazprom threatened to cut gas supplies to Belarus from 10:00 MSK on 1 January 2007. Both sides finally agreed on the following terms:

  • Russian gas to be sold to Belarus for $100 per 1000 m³ (compared to Gazprom's original request of $200 per 1000 m³)
  • Belarus to sell Gazprom 50% of its national gas supplier Beltransgaz for the maximal price of $2.5 billion 
  • Gas prices for Belarus to gradually rise to the European market price by 2011
  • Belarus's transit fees for Russian gas to increase by around 70% 

Another part of the energy dispute is the dispute over oil. In 1995, Russia and Belarus agreed that Russia would not impose any customs on oil exported to Belarus. In exchange, the revenues from this oil processed in Belarus would be shared by 15% for Belarus and 85% for Russia. In 2001, Belarus unilaterally canceled this agreement while Russia continued its duty-free exports. Lukashenko's state kept all the revenues, and many Russian oil companies moved their processing capacities to Belarus. On this arrangement, Russia also lost billions of dollars annually. Belarus imposed a tariff of US$45 per ton of oil flowing through the Druzhba pipeline, prompting Russia to claim that the move was illegal and to threaten retaliation, since it contradicts bilateral trade agreements and worldwide practice. Only imported or exported goods are being tariffed while transit goods are not objects of tariffing. Russia rejected paying the newly imposed Belarusian tariffs.

In compensation, Belarus began siphoning off oil from the pipeline. According to Semyon Vainshtok, the head of Russia's pipeline monopoly Transneft, Belarus had siphoned off 79,900 metric tons of oil since 6 January. Vainshtok said this was illegal and the move was made "without warning anyone." In response, Russia stopped oil transport on 8 January.

A Belarusian team led by Vice-Premier Andrei Kobyakov flew to Moscow on 9 January to pursue a solution but initially reported that they had not been able to start negotiations.

On 10 January, the Belarusian government lifted the tariff, and Russia agreed to start negotiations. The oil flow was resumed at 05:30 GMT on 11 January. In the wake of the dispute, Gazprom acquired 50% stake in the Belarusian gas pipeline operator Beltransgaz for 2.5 Billion USD.

August 2007 developments

Following the alleged violation of previous agreements and the failure of negotiations, on 1 August 2007 Gazprom announced that it would cut gas supplies to Belarus by 45% from 3 August over a $456 million debt. Talks are continuing and Belarus has asked for more time to pay. Although the revived dispute is not expected to hit supplies to Europe, the European Commission is said to view the situation 'very seriously'. Following overnight negotiations in Moscow, on 3 August, $190 million of the debt was repaid, and Belarus was given a further week to pay the remainder or face a 30% cut in supplies.

As of 8 August Belarus has fully paid its $460 million debt for Russian natural gas supplies, ending a dispute between the country and Gazprom [RTS: GAZP].

Related disputes

The situation is reminiscent of other recent price tensions between Russia, one of the world's energy superpowers, and other states since the start of 2005. These have resulted in increases in the prices paid for gas by Moldova (now paying US$170 per 1,000 cubic meter), Georgia (US$235 per 1,000 cubic meter) and Ukraine (following the 2006 Russia-Ukraine gas dispute, which also resulted in a 4-day cut to European gas supplies).| with Azerbaijan having recently stopped oil exports to Russia.

On 29 July 2006 Russia shut down oil export to Mažeikių oil refinery in Lithuania after an oil spill on the Druzhba pipeline system occurred in Russia’s Bryansk oblast, near the point where a line to Belarus and Lithuania branches off the main export pipeline. Transneft said it would need one year and nine months to repair the damaged section. Although Russia cited technical reasons for stopping oil deliveries to Lithuania, Lithuania claims that the oil supply was stopped because Lithuania sold the Mažeikių refinery to Polish company PKN Orlen.

Impact

All IEA member countries who are net oil importers have legal obligation to hold emergency oil reserves, which is equivalent to at least 90 days of net oil imports of the previous year. Furthermore, under the EU regulations there is obligation to hold reserves equivalent to 90 days of consumption, so unlike the gas dispute with Ukraine in 2006, consumers were not affected. Poland had an 80-day oil reserve. The Czech Republic reported drawing oil from its 100-day reserves. Had the dispute prolonged, it is likely that alternative supplies would have been secured. International oil prices were not significantly affected.

The involved countries have, however, expressed concerns about the reliability of the Russia-Belarus oil pipeline and Belarus as an oil middleman supplier.

The events have also provoked renewed discussion on the government policy of phasing out nuclear power in Germany.

Reaction

The European Union has demanded an "urgent and detailed" explanation, according to a spokesman for Energy Commissioner Andris Piebalgs.

Piotr Naimski, Poland's deputy economics minister who is responsible for energy security, stated "This shows once again that arguments among various countries of the former Soviet Union between suppliers and transit countries mean that these deliveries are unreliable from our perspective."

German Economy Minister Michael Glos stated that the dispute showed that "one-side dependencies must not be allowed to develop."

Following a meeting with European Commission President José Manuel Barroso in Berlin, German Chancellor Angela Merkel condemned the action, stating "It is not acceptable when there are no consultations about such actions". Commenting on the importance of trust in energy security, she said "That always destroys trust and no trusting, undisturbed cooperation can be built on that." Merkel continued by saying "We will certainly say to our Russian partners but also to Belarus that such consultations are the minimum when there are problems, and I think that that must become normality, as it would be within the European Union." Barroso said that "while there is no immediate risk to supplies, it is not acceptable" for such actions to be undertaken without prior consultation.

Energy Policy Act of 2005

From Wikipedia, the free encyclopedia
George W. Bush signing the Energy Policy Act of 2005, which was designed to promote US nuclear reactor construction, through incentives and subsidies, including cost-overrun support up to a total of $2 billion for six new nuclear plants.

The Energy Policy Act of 2005 (Pub.L. 109–58) is a federal law signed by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico. The act, described by proponents as an attempt to combat growing energy problems, changed US energy policy by providing tax incentives and loan guarantees for energy production of various types. The law also exempted hydraulic fracturing fluids from regulation under several environmental laws, and it repealed the Public Utility Holding Company Act of 1935, effective February 2006.

Provisions

General provisions

  • The law exempted fluids used in the natural gas extraction process of hydraulic fracturing (fracking) from protections under the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and CERCLA ("Superfund").
  • Under an amendment in the American Recovery and Reinvestment Act of 2009, Section 406, the Energy Policy Act of 2005 authorizes loan guarantees for innovative technologies that avoid greenhouse gases, which might include advanced nuclear reactor designs, such as pebble bed modular reactors (PBMRs) as well as carbon capture and storage and renewable energy;
  • the Act increases the amount of biofuel (usually ethanol) that must be mixed with gasoline sold in the United States to 4 billion US gallons (15,000,000 m3) by 2006, 6.1 billion US gallons (23,000,000 m3) by 2009 and 7.5 billion US gallons (28,000,000 m3) by 2012; two years later, the Energy Independence and Security Act of 2007 extended the target to 36 billion US gallons (140,000,000 m3) by 2022.
  • it seeks to increase coal as an energy source while also reducing air pollution, through authorizing $200 million annually for clean coal initiatives, repealing the current 160-acre (0.65 km2) cap on coal leases, allowing the advanced payment of royalties from coal mines and requiring an assessment of coal resources on federal lands that are not national parks;
  • it authorizes tax credits for wind and other alternative energy producers;
  • it adds ocean energy sources, including wave and tidal power for the first time as separately identified, renewable technologies;
  • it authorizes $50 million annually over the life of the law for biomass grants;
  • it includes provisions aimed at making geothermal energy more competitive with fossil fuels in generating electricity;
  • it requires the Department of Energy to:
  • it authorizes the Department of the Interior to grant leases for activity that involves the production, transportation or transmission of energy on the Outer Continental Shelf lands from sources other than gas and oil (Section 388);
  • it requires all public electric utilities to offer net metering on request to their customers;
  • it prohibits the manufacture and importation of mercury-vapor lamp ballasts after January 1, 2008;
  • it provides tax breaks for those making energy conservation improvements to their homes;
  • it provides incentives to companies to drill for oil in the Gulf of Mexico;
  • it exempts oil and gas producers from certain requirements of the Safe Drinking Water Act;
  • it extends the daylight saving time by four to five weeks, depending upon the year (see below);
  • it requires that no drilling for gas or oil may be done in or underneath the Great Lakes;
  • it requires that the Federal Fleet vehicles capable of operating on alternative fuels be operated on these fuels exclusively (Section 701);
  • it sets federal reliability standards regulating the electrical grid (done in response to the 2003 North America blackout);
  • it includes nuclear-specific provisions;
    • it extends the Price-Anderson Nuclear Industries Indemnity Act through 2025;
    • it authorizes cost-overrun support of up to $2 billion total for up to six new nuclear power plants;
    • it authorizes production tax credit of up to $125 million total a year, estimated at 1.8 US¢/kWh during the first eight years of operation for the first 6.000 MW of capacity, consistent with renewables;
    • it authorizes loan guarantees of up to 80% of project cost to be repaid within 30 years or 90% of the project's life;
    • it authorizes $2.95 billion for R&D and the building of an advanced hydrogen cogeneration reactor at Idaho National Laboratory;
    • it authorizes 'standby support' for new reactor delays that offset the financial impact of delays beyond the industry's control for the first six reactors, including 100% coverage of the first two plants with up to $500 million each and 50% of the cost of delays for plants three through six with up to $350 million each for;
    • it allows nuclear plant employees and certain contractors to carry firearms;
    • it prohibits the sale, export or transfer of nuclear materials and "sensitive nuclear technology" to any state sponsor of terrorist activities;
    • it updates tax treatment of decommissioning funds;
  • it directs the Secretary of the Interior to complete a programmatic environmental impact statement for a commercial leasing program for oil shale and tar sands resources on public lands with an emphasis on the most geologically prospective lands within each of the states of Colorado, Utah, and Wyoming.

Tax reductions by subject area

Change to daylight saving time

The law amended the Uniform Time Act of 1966 by changing the start and end dates of daylight saving time, beginning in 2007. Clocks were set ahead one hour on the second Sunday of March (March 11, 2007) instead of on the first Sunday of April (April 1, 2007). Clocks were set back one hour on the first Sunday in November (November 4, 2007), rather than on the last Sunday of October (October 28, 2007). This had the net effect of slightly lengthening the duration of daylight saving time.

Lobbyists for this provision included the Sporting Goods Manufacturers Association, the National Association of Convenience Stores, and the National Retinitis Pigmentosa Foundation Fighting Blindness.

Lobbyists against this provision included the U.S. Conference of Catholic Bishops, the United Synagogue of Conservative Judaism, the National Parent-Teacher Association, the Calendaring and Scheduling Consortium, the Edison Electric Institute, and the Air Transport Association. This section of the act is controversial; some have questioned whether daylight saving results in net energy savings.

Commercial building deduction

The Act created the Energy Efficient Commercial Buildings Tax Deduction, a special financial incentive designed to reduce the initial cost of investing in energy-efficient building systems via an accelerated tax deduction under section §179D of the Internal Revenue Code (IRC) Many building owners are unaware that the [Policy Act of 2005] includes a tax deduction (§179D) for investments in "energy efficient commercial building property" designed to significantly reduce the heating, cooling, water heating and interior lighting cost of new or existing commercial buildings placed into service between January 1, 2006 and December 31, 2013. §179D includes full and partial tax deductions for investments in energy efficient commercial building that are designed to increase the efficiency of energy-consuming functions. Up to $.60 for lighting, $.60 for HVAC and $.60 for building envelope, creating a potential deduction of $1.80 per sq/ft. Interior lighting may also be improved using the Interim Lighting Rule, which provides a simplified process to earn the Deduction, capped at $0.30-$0.60/square foot. Improvements are compared to a baseline of ASHRAE 2001 standards.

To obtain these benefits the facilities/energy division of a business, its tax department, and a firm specializing in EPAct 179D deductions needed to cooperate. IRS mandated software had to be used and an independent 3rd party had to certify the qualification. For municipal buildings, benefits were passed through to the primary designers/architects in an attempt to encourage innovative municipal design.

The Commercial Buildings Tax Deduction expiration date had been extended twice, last by the Energy Improvement and Extension Act of 2008. With this extension, the CBTD could be claimed for qualifying projects completed before January 1, 2014.

Energy management

The commercial building tax deductions could be used to improve the payback period of a prospective energy improvement investment. The deductions could be combined by participating in demand response programs where building owners agree to curtail usage at peak times for a premium. The most common qualifying projects were in the area of lighting.

Energy savings

Summary of Energy Savings Percentages Provided by IRS Guidance

Percentages permitted under Notice 2006-52 (Effective for property placed in service January 1, 2006 – December 31, 2008)

  • Interior Lighting Systems 16⅔%,
  • Heating, Cooling, Ventilation, and Hot Water Systems 16⅔%,
  • Building Envelope 16⅔%.

Percentages permitted under Notice 2008-40 (Effective for property placed in service January 1, 2006 – December 31, 2013)

  • Interior Lighting Systems 20%,
  • Heating, Cooling, Ventilation, and Hot Water Systems 20%,
  • Building Envelope 10%.

Percentages permitted under Notice 2012-22

  • Interior Lighting Systems 25%,
  • Heating, Cooling, Ventilation, and Hot Water Systems 15%,
  • Building Envelope 10%.

Effective date of Notice 2012-22 – December 31, 2013; if §179D is extended beyond December 31, 2013, is also effective (except as otherwise provided in an amendment of §179D or the guidance thereunder) during the period of the extension.

Cost estimate

The Congressional Budget Office (CBO) review of the conference version of the bill estimated the Act would increase direct spending by $2.2 billion over the 2006-2010 period, and by $1.6 billion over the 2006-2015 period. The CBO did not attempt to estimate additional effects on discretionary spending. The CBO and the Joint Committee on Taxation estimated that the legislation would reduce revenues by $7.9 billion over the 2005-2010 period and by $12.3 billion over the 2005-2015 period.

Support

The collective reduction in national consumption of energy (gas and electricity) is significant for home heating. The Act provided gible financial incentives (tax credits) for average homeowners to make environmentally positive changes to their homes. It made improvements to home energy use more affordable for walls, doors, windows, roofs, water heaters, etc. Consumer spending, and hence the national economy, was abetted. Industry grew for manufacture of these environmentally positive improvements. These positive improvements have been near and long-term in effect.

The collective reduction in national consumption of oil is significant for automotive vehicles. The Act provided tangible financial incentives (tax credits) for operators of hybrid vehicles. It helped fuel competition among auto makers to meet rising demands for fuel-efficient vehicles. Consumer spending, and hence the national economy, was abetted. Dependence on imported oil was reduced. The national trade deficit was improved. Industry grew for manufacture of these environmentally positive improvements. These positive improvements have been near and long-term in effect.

Criticism

  • The Washington Post contended that the spending bill was a broad collection of subsidies for United States energy companies; in particular, the nuclear and oil industries.
  • Speaking for the National Republicans for Environmental Protection Association, President Martha Marks said that the organization was disappointed in the law because it did not support conservation enough, and continued to subsidize the well-established oil and gas industries that didn't require subsidizing.
  • The law did not include provisions for drilling in the Arctic National Wildlife Refuge (ANWR); some Republicans claimed "access to the abundant oil reserves in ANWR would strengthen America's energy independence without harming the environment."
  • Senator Hillary Clinton criticized Senator Barack Obama's vote for the bill in the 2008 Democratic Primary.
  • The law exempted fluids used in the natural gas extraction process of hydraulic fracturing (fracking) from protections under the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and CERCLA. It created a loophole that exempts companies drilling for natural gas from disclosing the chemicals involved in fracking operations that would normally be required under federal clean water laws. This exclusion has been called the "Halliburton Loophole". Halliburton is the world's largest provider of hydraulic fracturing services. The measure was a response to a recommendation from the Energy Task Force, chaired by Vice President Dick Cheney in 2001. (Cheney had been Chairman and CEO of Halliburton from 1995 to 2000.)

Legislative history

The Act was voted on and passed twice by the United States Senate, once prior to conference committee, and once after. In both cases, there were numerous senators who voted against the bill. John McCain, the Republican Party nominee for President of the United States in the 2008 election voted against the bill. Democrat Barack Obama, President of the United States from January 2009 to January 2017, voted in favor of the bill.

Provisions in the original bill that were not in the act

To remove from 18 CFR Part 366.1 the definitions of "electric utility company" and exempt wholesale generator (EWG), that an EWG is not an electric utility company.

Preliminary Senate vote

June 28, 2005, 10:00 a.m. Yeas - 85, Nays - 12

Conference committee

The bill's conference committee included 14 Senators and 51 House members. The senators on the committee were: Republicans Domenici, Craig, Thomas, Alexander, Murkowski, Burr, Grassley and Democrats Bingaman, Akaka, Dorgan, Wyden, Johnson, and Baucus.

Final Senate vote

July 29, 2005, 12:50 p.m. Yeas - 74, Nays - 26

Legislative history

Energy Policy Act of 2005
Great Seal of the United States
Other short titles
  • Coal Leasing Amendments Act of 2005
  • Electricity Modernization Act of 2005
  • Energy Policy Tax Incentives Act of 2005
  • Energy Research, Development, Demonstration, and Commercial Application Act of 2005
  • Energy Tax Incentives Act of 2005
  • Federal Reformulated Fuels Act of 2005
  • Indian Tribal Energy Development and Self-Determination Act of 2005
  • EPAct 2005
  • John Rishel Geothermal Steam Act Amendments of 2005
  • National Geological and Geophysical Data Preservation Program Act of 2005
  • No Oil Producing and Exporting Cartels Act of 2005
  • NOPEC
  • Oil Shale, Tar Sands, and Other Strategic Unconventional Fuels Act of 2005
  • Price-Anderson Amendments Act of 2005
  • Public Utility Holding Company Act of 2005
  • SAFE Act
  • Set America Free Act of 2005
  • Spark M. Matsunaga Hydrogen Act of 2005
  • Underground Storage Tank Compliance Act
Long titleAn Act to ensure jobs for our future with secure, affordable, and reliable energy.
Enacted bythe 109th United States Congress
EffectiveAugust 8, 2005
Citations
Public law109-58
Statutes at Large119 Stat. 594
Codification
Acts amendedEnergy Policy Act of 1992
Public Utility Regulatory Policies Act (PURPA) of 1978
Acts repealedPublic Utility Holding Company Act of 1935
Titles amended16 U.S.C.: Conservation
42 U.S.C.: Public Health and Social Welfare
U.S.C. sections created42 U.S.C. ch. 149 § 15801 et seq.
U.S.C. sections amended16 U.S.C. ch. 46 § 2601 et seq.
42 U.S.C. ch. 134 § 13201 et seq.
Legislative history
Major amendments
American Recovery and Reinvestment Act of 2009
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Stage House of Representatives Senate
Initial Debate
Introduction April 18, 2005 June 11
Committed April 18 June 14
Committee Name(s) Energy and Commerce
Education and the Workforce
Financial Services
Agriculture
Resources
Science
Ways and Means
Transportation and Infrastructure

Committee Stage April 18 to 19
Committee Report April 19
Floor Debate April 19 to 21 June 14 to 23

Cloture invoked June 23

Passage April 21 June 28
Conference Stage
Conference Demanded/Accepted July 13 July 1
Conference Meetings July 14 to 24
Report Filed July 27
Final Passage
Final Debate July 28 July 28 to 29
Budget Act waived, July 29
Concurrence and Passage July 28 July 29
Presented to President August 4
Signed August 8

Lie point symmetry

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