Pitting Wind and Solar Against Nuclear Power

• With US electricity demand stalled, expanding wind and solar power is increasing the economic pressure on equally low-emission nuclear power.
• New state incentives for nuclear plants are facing resistance from the beneficiaries of renewable energy subsidies, as both battle for market share.

It's an old adage that a growth market has room for all participants, including new entrants. The US electricity market is now experiencing the converse of this, with increasing competition for static demand leading to headlines like the one I saw earlier this week: "Lifeline for Nuclear Plants Is Threatening Wind and Solar Power."

The idea behind that headline is ironic, considering that for more than a decade renewables have depended on government mandates and incentives to drive their impressive expansion. Along with recently cheap natural gas, they have made conditions increasingly difficult for established generating technologies like coal and nuclear power. In the case of coal, that was an entirely foreseeable and even intentional outcome, but for nuclear power it has come as a mostly unintended consequence.

Much as the slowdown in gasoline demand brought on by the recession created a crisis for biofuel quotas, stagnant electricity demand has hastened and  intensified the inevitable fight for market share and the resulting shakeout in generating capacity. US electricity consumption has been essentially flat since the financial crisis of 2008-9, thanks to a weak economy and aggressive investment in energy efficiency. More generation serving the same demand means lower prices for all producers, and fewer annual hours of operation for the least competitive of them.

At the same time abundant, low-priced natural gas from soaring shale production has made gas-fired turbines both a direct competitor in the 24/7 "baseload" segment that coal and nuclear power formerly dominated, and the go-to backup source for integrating more renewables onto the grid.

The US is essentially swimming in energy, at least when it comes to resources that can be turned into electricity. The only rationale left for the substantial subsidies that wind and power still receive--over $3 billion budgeted for wind alone in 2017--is environmental: mainly concerns about climate change and the emissions of CO2 and other greenhouse gases linked to it.

That's the same reason why some states have become alarmed enough by the recent wave of nuclear power plant retirements to consider providing some form of financial support for existing facilities. Nuclear power isn't just the third-largest source of electricity in the US; it is by far our largest producer of zero-emission power: 3.5 times the output of wind in 2016 and 22 times solar. A large drop in nuclear power is simply not compatible with the desire to continue cutting US emissions. Environmental groups like EDF are reaching similar conclusions.

Nuclear's scale is even more of a factor when it comes to considering what could replace it. For example, it takes the output of about 2,000 wind turbines of 2 megawatts (MW) each--roughly half of the 8,203 MW of new US wind installations last year--to equal the annual energy production of a single typical nuclear reactor. An infographic I saw on Twitter makes that easier to visualize:

I can appreciate why utilities and others that are investing heavily in wind and solar power might be convinced that providing incentives to keep nuclear power plants from retiring prematurely is "the wrong policy." After all, we have collectively pushed them to invest in these specific technologies, because it has been easier to reach a consensus at the federal and state levels to provide incentives for renewables, rather than for all low-emission energy.

As long as we are promoting renewables in this way, though, we should recognize that nuclear power is no less worthy. The biggest benefit of renewables is their low emissions (including non-greenhouse air pollutants,) an attribute shared with nuclear power. Yet because of their much lower energy densities, requiring much bigger footprints for the same output, and their lower reliability, incorporating a lot more renewables into the energy mix requires additional investments in electricity grid modernization and energy storage, along with new tools like "demand response." Nuclear power is compact, available about 90% of the time, and it works just fine with the existing grid.

By experience and philosophy, I'm a big fan of markets, so I would normally be more sympathetic to the view expressed by the American Petroleum Institute that states shouldn't tip the scales in favor of nuclear power over gas and other alternatives. However, we don't have anything resembling a level playing field for electricity generation, even in states with deregulated electricity markets. The existing federal incentives for wind and solar power, together with state Renewable Portfolio Standards, are already tipping the scales strongly in their favor. These subsidies will remain in place until at least 2022, consistent with the most recent extension by Congress. Why do renewables merit such subsidies more than nuclear power?

Wind and solar power are key parts of the emerging low-emission energy mix, and we will want more as their costs continue to fall, but not at the expense of much larger low-emission energy sources that are already in place. Less nuclear power doesn't just mean more renewables. It also means more gas or coal-fired power. That's the experience of Germany's "Energiewende", or energy transition.

As long as that is the case, and without corresponding incentives for equally low-emission nuclear plants, as well as for fossil-fuel plants that capture and sequester their CO2, we will end up with an energy mix in the next few years that is less diverse, less reliable, and emits more CO2 than necessary. I wouldn't consider that progress.

Unlocking the UK's Shale Gas Potential

• Following estimates of substantial shale gas resources underlying parts of Britain, the UK government is proposing incentives for companies and local communities to encourage its timely development.
• Even if it ultimately proved less transformative than in the US, shale gas could balance the UK's future energy mix, while setting an example that other shale-rich EU countries could follow. 

Shale gas development has been slow out of the starting blocks in Europe, for reasons that have been widely discussed.  These include differences in mineral rights ownership, smaller onshore oil and gas service sectors, and significantly fewer onshore wells drilled in the past, compared to the US.  Local opposition to hydraulic fracturing also plays a role in some countries. Last month the UK government announced new proposals intended to address some of these challenges and make shale gas more attractive to produce there. The Prime Minister underlined these proposals in an op-ed in Sunday's Telegraph.

The UK's natural gas market has been experiencing problems similar to those the US encountered in the last decade, prior to wide-scale development of shale gas resources.  Natural gas production from the offshore fields of the UK sector of the North Sea, which provided an energy surplus until about ten years ago, has declined rapidly. As a result, the Interconnector UK, a bi-directional gas pipeline linking Britain to continental Europe, has recently operated mainly in import mode. UK natural gas prices have been correspondingly high and volatile, spiking briefly to around $17 per million BTUs this March. Prices in excess of $10/MMBTU are typical.

Against this background, the UK government is understandably interested in pursuing the exploration of the country's potentially enormous shale gas deposits.  In June the British Geological Survey released its detailed estimate for the Bowland shale in the north of England.  With a range of 822-2,281 trillion cubic feet (TCF) of gas-in-place, and a "central estimate" of 1,329 TCF, this looks like a significant resource. Even at the low end of the BGS assessment, and using a conservative figure of 15% recovery based on relevant US shale gas recovery rates, the Bowland could provide 120 TCF or more of technically recoverable gas, the equivalent of over 40 years of current UK consumption.

Two aspects of the government's proposals caught my attention.  First, the Chancellor of the Exchequer indicated his plan to make development attractive for producers with a new tax structure that he intends to be "the most generous for shale in the world." Earnings from shale would be taxed at 30%, compared to 62% for other hydrocarbon projects.  With only a few companies currently exploring for shale, that should attract additional drillers, along with the service companies that perform many of the key activities at the well site. 

I was more intrigued by the proposal--apparently originating with industry--to provide local communities with a benefit of at least £100,000 per well-site that is hydraulically fractured, or "fracked", plus a small share of gas revenue. In a country where the government owns the sub-surface property rights, this could be a crucial step in gaining local support for projects that, in addition to significant economic activity and eventually local employment, will also result in unavoidable increases in noise, traffic and other intrusions in daily life during the weeks or months in which each site is being prepared, drilled, completed and brought on-line, and for the longer periods that crews would be operating in the area.

We've certainly seen the importance of local benefits in promoting receptiveness towards gas drilling in the US, where most shale development has occurred on private land, and where royalties from production provide property owners with regular payments ranging from helpful to lifestyle-altering, depending on production rates and the ownership interests. Sharing financial benefits from shale production at the community level, rather than with individuals, might even galvanize broader-based support than in some parts of the US. Much will depend on whether British communities consider the offered compensation sufficiently generous.

UK shale development still faces significant above- and below-ground uncertainties that only time and drilling can resolve.  Nor is it clear whether development of the Bowland shale would have as large an impact on the UK gas market as shale gas has had here.  Skeptics can be found among opposition politicians and respected energy analysts, though I must say their arguments about high costs and low production rates sound very similar to those that I heard in energy conferences in the US not many years ago.  Signposts to watch include the number of drilling companies moving into the north of England and emulation of the UK government's pro-development policies by other countries.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

The Unlevel Playing Field for Energy

An editorial in last weekend's Wall St. Journal led me to a recent analysis by the US Energy Information Agency (EIA) summarizing the costs of the federal government's various "subsidies" for energy from different sources.  This is both useful and timely, since discussions of specific subsidies such as the expiring wind production tax credit inevitably lead to questions about how incentives for renewable energy compare to those for oil, gas, nuclear, and other more traditional sources.  As the Journal noted, the EIA stopped short of comparing these incentives on the basis of the relative productivity of different energy sources, but even without that it's still apparent that the category of new renewable electricity--excluding hydropower--received 21% of the federal energy benefits for 2010, while accounting for less than 3% of domestic energy production that year, when oil and gas, which provided 49% of US energy production, received less than 8% of these benefits.  Whether on an absolute or relative basis, renewables receive much more generous federal support than oil and gas.

Before digging further into the EIA's analysis, I should point out an important distinction between the federal expenses and incentives covered in the report and the externalities that are frequently conflated with them.  It is certainly true that many of these energy technologies involve significant impacts that aren't reflected in their market prices, and that the production and especially the consumption of fossil fuels create serious environmental and security externalities. However, to whatever extent federal subsidies address externalities they do so indirectly, at best, and in many cases inefficiently.  The focus of this posting, just like the EIA report's, is on the federal government's cash outlays and "tax expenditures"--deductions, credits, etc.--that have a direct bearing on the federal deficit and debt burden that are the subject of intense debate in this election cycle.

The tables in the report's executive summary reveal several key facts.  Between 2007 and 2010 federal energy subsidies in constant dollars more than doubled to $37.2 B, with most of the increase going to renewables and energy efficiency, except for a sizable bump in low-income energy assistance payments.   $14.8 B of the increase originated with the 2009 stimulus bill, none of which was directed at oil and gas, but which appropriated nearly $8 B to conservation and efficiency.  Overall, renewables received $14.7 B, split 55/45 between electricity and biofuels, while nuclear received $2.5 B and oil and gas $2.8 B.  The latter figure is lower than you'll see elsewhere, because among other incentives that the EIA chose to exclude from its analysis was the Section 199 deduction for manufacturers, which is budgeted at around $1 B/yr for oil and gas firms.  The logic behind that exclusion seems sound, because US manufacturers of biofuels, wind turbines, solar panels and other renewable energy equipment qualify for the same tax credit, and at a higher rate than oil companies.

I was also struck by the fact that oil and gas received just $70 million out of the more than $4 B spent on R&D. If there's one category in which federal expenditures on renewables should be expected to dwarf those for conventional energy, this is it, and they did so by a factor of more than 20 times.  (Coal R&D received more than $0.6 B, presumably for clean coal technologies.)

It's also the case that while the growth of renewable energy output from 2000-10 was dramatic, the relatively smaller net changes in oil and gas output in that period masked the substantial replacement of depleting resources that would have otherwise resulted in a large drop in output, especially for natural gas.  This is precisely the aspect of the mature oil and gas industry at which these federal incentives are aimed, to enable US projects to compete with the international opportunities to which many of these companies have access.

The authors of the report suggested caution in comparing the allocations of incentives to the energy produced by each technology, because some of these incentives were paid for projects still under construction and in some cases represented the front-loading of what would otherwise have been a 10-year stream of tax credits.  Fair enough.  Yet even with the conservative assumption that the entire $4.9 B of non-R&D subsidies for wind power in 2010 came in the form of cash grants in lieu of the 30% investment tax credit for new wind turbines that would produce for 20 years at a 30% capacity factor, that still equates to a subsidy of more than 16% of the average present wholesale value of all the electricity those turbines will produce, using prevailing industrial sector electricity prices as a proxy for wholesale prices.  By comparison, the $2.7 B of oil and gas tax incentives for 2010 represented just 1% of the wholesale value of US production of these fuels, before refining.

A serious debate about the appropriate level of US energy subsidies should begin with the facts, rather than with misperceptions. It should also focus first on the goals of such incentives, before jumping to the details of this tax credit vs. that one.  What do we want these measures to achieve?  If it's simply the promotion of energy production, then the current incentive system looks too heavily skewed in favor of renewables.  If it's jobs, then we should be realistic about how many can be added by such a capital-intensive sector.  If it's the promotion of both energy security and innovation, then at least parts of the current system look directionally right, though I'd argue that we'd benefit from spending more on renewable energy R&D and less on the deployment of mature-but-expensive technologies like wind.  However, if emissions and climate change are our primary concerns, then these incentives are not a terribly effective way to address them.  My own expectation is that regardless of whether the wind tax credit is extended for another year, most of the tax incentives that the EIA assessed here will eventually be swept away by tax reform focused on reducing corporate tax rates to improve US competitiveness, while eliminating loopholes to make the changes revenue-neutral.

The Market for US Cleantech Is Out There

One of many press releases I received this week highlighted the new Clean Energy Export Principles developed by a "multi-industry coalition, which was coordinated by the National Foreign Trade Council, and U.S. government representatives." They recommend a significantly expanded and technology-neutral effort by the US government to promote exports of clean energy gear, including equipment for the smart grid, energy efficiency and energy storage. They also suggest the need to reduce trade barriers affecting such exports globally, not just to help US industry but to increase the effectiveness of efforts to mitigate climate change. I can only hope that the administration embraces these recommendations as enthusiastically as it has other aspects of its green agenda, because these principles are aimed squarely at the biggest opportunities for clean energy technology and emissions reduction, outside our borders.

It doesn't really matter whether these principles reflect the sensible recognition of trends in the global energy marketplace, or merely make a virtue of necessity at a time when government support for domestic clean energy deployment is approaching its statutory and practical limits. However the current debt ceiling crisis is resolved, the capacity for the federal government to continue providing generous incentives for cleantech deployment, either through the Treasury renewable energy cash grants that have totaled nearly $8 billion to date, or the Department of Energy Loan Guarantee program that has backed or directly funded more than $40 billion in loans for clean energy projects is likely to be far more constrained in the future.

Nor is this simply a question of money. The whole notion that we are in some kind of renewable energy deployment race with China or any other country ignores the big differences in our respective levels of economic development. If there were such a race we would be bound to lose, and not because we don't have the right policies or strict enough regulations, but because US electricity demand is growing slowly and is backed by both ample generating capacity and ample supplies of relatively cheap and low-emitting fuel. Meanwhile both electricity demand and capacity in the developing world are growing rapidly, and the indigenous generation fuel in good supply is mainly coal. That, together with the disparities in economic growth coming out of the global recession, is the underlying reason why investment in renewable energy in the developing world apparently surged past that in the developed world last year.

With cleantech supply chains already substantially globalized, the leaders in this industry must be global in scope and focus. US manufacturers of cleantech equipment shouldn't ignore the US market, but they must be realistic about it. Even with growing opportunities in the smart grid and solar power, the US will account for only a small fraction of the global market for such goods and services, as growth shifts away from the mature markets of Europe and North America. The market share that counts, for competitive strength and economies of scale, is global market share. And global sales will provide the volumes needed to drive down costs for both exports and domestic installations. There's a huge, growing market for cleantech, and it is mainly out there.