With apologies for the dueling clichés in today's title, that image conveys the conflicting messages I received from a pair of events on the topic of energy efficiency this week. Yesterday I watched a panel discussion on energy efficiency finance, part of the valuable First Wednesday series of seminars from Resources for the Future in D.C. Yet as I listened to the discussion of creative mechanisms for overcoming the numerous financial and behavioral obstacles impeding the widespread adoption of efficiency technologies, I couldn't help framing it in the context of Tuesday's blogger call on "efficiency rebound", also known as the Jevons Paradox, hosted by the Breakthrough Institute. This latter, offsetting effect has been controversial in the US but is apparently more widely accepted in EU policy circles.
Energy efficiency is probably the energy topic to which I've devoted the least space in this blog in the last seven years. That hasn't been a deliberate slight, though perhaps it reflects the bulk of my personal experience on the supply side of energy. It's also a tricky subject because it's a moving target. We often hear efficiency described as the low-hanging fruit in discussions of energy security or emissions reductions, but that usually ignores the fact that the truly low-hanging fruit in efficiency was mainly captured during the energy crises of the 1970s and early 1980s, and in subsequent price spikes in electricity and natural gas. That doesn't mean there isn't still ample scope for further improvement, but it does leave those efforts subject to the long list of barriers described in yesterday's presentations. They include lack of funding, low awareness, landlord/tenant issues, and lack of expertise.
One of the other obstacles that intrigued me was the mismatch between the scale of most efficiency projects, even in the commercial sector, and the much larger scale of investor interest in financing efficiency, as described by the panelist from Citibank. He suggested the answer lies in aggregation, in which the financing of numerous smaller projects would be bundled and sold off in tranches to investors. If that sounds familiar, it should, because it reflects a similar approach to securitization to the one that contributed to the recent housing bubble. However, I would stress that efficiency instruments need not be inherently very risky, as long as they are assembled with due concern for the creditworthiness of the project owners, and without heroic assumptions about the risk-abating portfolio effect of aggregation. Another element that could assist this process is the sort of project performance guarantees described by the panelist from Johnson Controls. In any case there is no shortage of federal, state and local programs focused on energy efficiency financing, including the controversial Property Assessed Clean Energy (PACE) mechanism.
I hope you get the sense from this brief summary that implementing energy efficiency on a large scale is quite difficult enough in its own right, even when those investing in such improvements can safely assume that they will enjoy 100% of the promised cost savings when the projects are completed. The research on rebound by a team commissioned by the EU's Directorate General for the Environment highlighted a number of mechanisms by which efficiency gains may lead to additional energy consumption, either by the individual or organization implementing it or within the larger economy. In some cases this could even lead to post-efficiency consumption exceeding the pre-efficiency level, a condition referred to as "backfire." The potential for these offsetting effects not only makes efficiency a tougher sell on a project basis, but it also undermines the efficacy of macro-scale efficiency measures in mitigating climate change or reducing energy imports. This view is consistent with the findings concerning rebound assembled by the Breakthrough Institute.
The logic of rebound begins simply and locally, before becoming complex and widespread. When you invest in efficiency, your energy bill goes down, leaving you more money to spend on either more of the services that consume energy (e.g., transportation, lighting, heat or air conditioning) or on other goods or services, after accounting for the cost of the upgrade or the cost of financing it. Now think about what happens in the economy: the demand for energy has dropped by a little bit, as has the money spent on it. You'd expect energy prices to fall and the freed up money not spent on energy to result in consumption or investment somewhere else. But those goods and services likely consume energy, too, along with the embedded energy in the efficiency technology, the installation of which started this cascade. And as overall energy productivity goes up, economic growth should also increase, resulting in additional energy use. The EU report found evidence of rebound in the range of 10-30%, including 26% for the UK efficiency investments that were studied. For example, the UK government apparently assumes that 15% of the benefit of home insulation will be lost to rebound.
Some of these mechanisms are more intuitive than others, and I am still thinking through what I heard, particularly in terms of why much of the rebound effect wouldn't be offset by market feedback mechanisms or by the reaction of company management to disappointing post-expenditure reviews on efficiency projects. When I raised these points during the call, Dr. Maxwell, the co-leader of the EU study team, assured me that my concerns weren't supported by the empirical research they examined.
If this rebound effect is as prevalent as the evidence seems to indicate, then the implications aren't very positive. Although individuals and companies implementing efficiency measures are likely to get most of the value they expect, even if it's in some form other than direct savings on their energy bills (e.g., more mobility, more comfort, higher output) society likely wouldn't see the expected energy and emissions savings at the level of the entire economy. That requires increasing efforts on efficiency even further--against all the barriers discussed above--or expending more effort on the supply side of energy, through promotion of higher energy production and more investment in renewables. In other words, those low-hanging efficiency gains that have defied so many efforts to implement look even harder to achieve in practice and somewhat less valuable.
I'm not sure to what extent I buy into all this, yet. Direct rebound due to less expensive energy services for the individual or firm seems fairly straightforward, but the wider ripple effects involve positive and negative feedback loops requiring complex modeling to assess--with all the uncertainties to which such models are subject. Nor does it require the existence of a large rebound effect to appreciate just how difficult it will be to move the needle on total energy consumption and emissions very far by means of efficiency measures that must ultimately be implemented by individual companies and consumers that already face a large array of competing priorities. I intend to look into this further and report later on any insights that turn up.
Thursday, October 06, 2011
Tuesday, October 04, 2011
The Energy Glass Is More Than Half Full
A recent comment from a frequent reader got me thinking about the good news that has accumulated on the energy front, even as the rest of the economy has bogged down in pessimism. There's actually quite a lot of it, though perhaps it has been easy to miss, because most of these developments look like bad news from someone's perspective, as organizations and social-media-empowered individuals seek to outdo each other in the hunt for negative ramifications and unintended consequences. Recognizing the positive aspects of such nuggets as shale gas and its recent extension into shale oil, along with factors like the plummeting price of solar panels that contributed to the Solyndra debacle, requires stepping back to view them through the lens of the big energy problems that have plagued us for decades.
As recently as a few years ago, it was widely assumed that the US was running short of both oil and natural gas. Domestic oil production was declining steadily, as it had been since the mid-1980s, even as US oil consumption kept rising. The result was a wedge of oil and petroleum product imports that seemed likely to widen indefinitely. Moreover, US natural gas production appeared destined for the same outcome, as non-associated gas fields in the shallow waters of the Gulf of Mexico declined faster than expected, and diminishing oil production slowed associated gas output. The combination of these trends made energy security a priority concern again, after more than a decade of complacency.
The turnaround in these trends has been nothing short of astonishing. Last week the Houston Chronicle published an article with the headline, "N. American oil output could top 40-year old peak", accompanied by a graph showing a clear inflection point in 2008--not by coincidence about five years after oil prices began their climb from the $20s to a peak just shy of $150 per barrel. Motivation plus investment equals production, after an inherent time lag. But what's really changed is that those investments weren't just going into more of the same onshore conventional oil fields that had been declining; they were going into deepwater drilling, oil sands extraction, and lately into the application of shale gas drilling techniques to similar deposits of shale oil that weren't in anyone's reserves just a few years ago, because no one knew how to tap them effectively and economically.
The latter provides a fascinating example of innovation, today's hot buzzword. Drillers have been hydraulically fracturing oil wells since the late 1940s--about a million of them--and horizontal drilling has been around for more than a decade, too. Combining these techniques, along with modern seismic visualization, has unlocked what looks like a century's worth of natural gas supplies. But if this weren't enough of a game-changer, setting up gas-fired power plants as both a replacement for coal and as the on-demand backup for intermittent renewables like wind and solar, some smart folks realized that the same combination of techniques could produce oil from other shale deposits. Suddenly fields like North Dakota's Williston Basin (the Bakken formation) and the Eagle Ford shale in Texas are counted among the largest oil fields in the country, with billions of barrels of potential reserves and production in the hundreds of thousands of barrels per day.
When we look at these successes and recognize that some of the most prospective US oil resources remain locked away behind actual and virtual drilling bans, the mantra that we can't drill our way to energy independence at least merits a serious reassessment. But what's even better about these recent energy revolutions is that they aren't occurring in a 1970s' context in which all this extra oil and natural gas would merely be burned in gas-guzzling cars and inefficient power plants. Instead, they coincide with impressive advances in fuel efficiency, in which muscle cars like the Camaro and Mustang can get at least 30 miles per gallon on the highway, while true economy cars get over 50 mpg today. Meanwhile, we've squeezed almost all the petroleum out of the utility sector, with just 0.9% of US power generation last year coming from oil-based fuels, while nearly 54% came from lower-emission sources such as gas, nuclear and renewables. These trends are moving in the right direction, too.
Renewables have come a long way, since solar cells were niche or novelty items and the economics of wind power only appealed to wealthy taxpayers seeking write-offs against marginal tax rates of up to 70%. Notwithstanding the struggles of individual firms like Solyndra and Evergreen Solar, global photovoltaic (PV) generating capacity grew by 74% last year to 40,000 MW, roughly where wind power was in 2003, if you ignore how much of the former has been installed in places with miserably poor solar resources. Wind power is still cheaper than solar power, but solar looks much more useful in the long run, because its output is more predictable and better aligned with demand. Both remain more expensive than conventional energy sources, though the gap is narrowing, especially for solar, and without cheap and abundant natural gas from shale resources it might not exist at all in some markets. Together with a resurgent geothermal energy sector, these renewables could soon survive with little or no subsidies by concentrating on regions with the best combinations of resources and transmission-accessible markets. (Germany would have installed its last solar panel in that scenario.) That wasn't an option just a decade ago.
The greatest contribution the energy sector can make is providing affordable and reliable inputs for the rest of the economy. Building on the developments above it should be possible to craft cost-effective energy policies to improve US energy security significantly and greatly reduce the leverage of the sources of our imported oil, including OPEC as a whole. At the same time we could move the electricity sector, which never really had an energy security problem but remains the largest source of US greenhouse gas emissions, towards much lower emissions without breaking the bank. Those outcomes seem attainable, if we can moderate our impulses to treat energy policy as a piggy bank for patronage or a laboratory for industrial policy. In that respect, energy just might be the most solvable of all our big problems.
As recently as a few years ago, it was widely assumed that the US was running short of both oil and natural gas. Domestic oil production was declining steadily, as it had been since the mid-1980s, even as US oil consumption kept rising. The result was a wedge of oil and petroleum product imports that seemed likely to widen indefinitely. Moreover, US natural gas production appeared destined for the same outcome, as non-associated gas fields in the shallow waters of the Gulf of Mexico declined faster than expected, and diminishing oil production slowed associated gas output. The combination of these trends made energy security a priority concern again, after more than a decade of complacency.
The turnaround in these trends has been nothing short of astonishing. Last week the Houston Chronicle published an article with the headline, "N. American oil output could top 40-year old peak", accompanied by a graph showing a clear inflection point in 2008--not by coincidence about five years after oil prices began their climb from the $20s to a peak just shy of $150 per barrel. Motivation plus investment equals production, after an inherent time lag. But what's really changed is that those investments weren't just going into more of the same onshore conventional oil fields that had been declining; they were going into deepwater drilling, oil sands extraction, and lately into the application of shale gas drilling techniques to similar deposits of shale oil that weren't in anyone's reserves just a few years ago, because no one knew how to tap them effectively and economically.
The latter provides a fascinating example of innovation, today's hot buzzword. Drillers have been hydraulically fracturing oil wells since the late 1940s--about a million of them--and horizontal drilling has been around for more than a decade, too. Combining these techniques, along with modern seismic visualization, has unlocked what looks like a century's worth of natural gas supplies. But if this weren't enough of a game-changer, setting up gas-fired power plants as both a replacement for coal and as the on-demand backup for intermittent renewables like wind and solar, some smart folks realized that the same combination of techniques could produce oil from other shale deposits. Suddenly fields like North Dakota's Williston Basin (the Bakken formation) and the Eagle Ford shale in Texas are counted among the largest oil fields in the country, with billions of barrels of potential reserves and production in the hundreds of thousands of barrels per day.
When we look at these successes and recognize that some of the most prospective US oil resources remain locked away behind actual and virtual drilling bans, the mantra that we can't drill our way to energy independence at least merits a serious reassessment. But what's even better about these recent energy revolutions is that they aren't occurring in a 1970s' context in which all this extra oil and natural gas would merely be burned in gas-guzzling cars and inefficient power plants. Instead, they coincide with impressive advances in fuel efficiency, in which muscle cars like the Camaro and Mustang can get at least 30 miles per gallon on the highway, while true economy cars get over 50 mpg today. Meanwhile, we've squeezed almost all the petroleum out of the utility sector, with just 0.9% of US power generation last year coming from oil-based fuels, while nearly 54% came from lower-emission sources such as gas, nuclear and renewables. These trends are moving in the right direction, too.
Renewables have come a long way, since solar cells were niche or novelty items and the economics of wind power only appealed to wealthy taxpayers seeking write-offs against marginal tax rates of up to 70%. Notwithstanding the struggles of individual firms like Solyndra and Evergreen Solar, global photovoltaic (PV) generating capacity grew by 74% last year to 40,000 MW, roughly where wind power was in 2003, if you ignore how much of the former has been installed in places with miserably poor solar resources. Wind power is still cheaper than solar power, but solar looks much more useful in the long run, because its output is more predictable and better aligned with demand. Both remain more expensive than conventional energy sources, though the gap is narrowing, especially for solar, and without cheap and abundant natural gas from shale resources it might not exist at all in some markets. Together with a resurgent geothermal energy sector, these renewables could soon survive with little or no subsidies by concentrating on regions with the best combinations of resources and transmission-accessible markets. (Germany would have installed its last solar panel in that scenario.) That wasn't an option just a decade ago.
The greatest contribution the energy sector can make is providing affordable and reliable inputs for the rest of the economy. Building on the developments above it should be possible to craft cost-effective energy policies to improve US energy security significantly and greatly reduce the leverage of the sources of our imported oil, including OPEC as a whole. At the same time we could move the electricity sector, which never really had an energy security problem but remains the largest source of US greenhouse gas emissions, towards much lower emissions without breaking the bank. Those outcomes seem attainable, if we can moderate our impulses to treat energy policy as a piggy bank for patronage or a laboratory for industrial policy. In that respect, energy just might be the most solvable of all our big problems.
Wednesday, September 28, 2011
The East Coast Refinery Gap
I see that ConocoPhillips has announced it will idle its 185,000 barrel-per-day Philadelphia area refinery, as a prelude to selling it or closing it permanently. Combined with the recent announcement that Sunoco would exit the refining business and sell or close its two refineries in Philadelphia, this amounts to just under half of the operating refining capacity on the US east coast, and that's counting PBF Energy's Delaware refinery, which is apparently in the process of starting up again after having been sold last year by Valero. If none of these three facilities finds a buyer, the resulting closures would leave a large gap in the east coast petroleum product market that must be filled either by shipping more products via pipeline from the Gulf Coast, to the extent capacity permits, or by means of increased imports from Europe and Canada. East coast gasoline and diesel prices could be higher for years to come.
The story in Reuters gives a good overview of the circumstances leading to Conoco's decision, and you've read about most of these factors in previous postings here. Topping the list is the persistent divergence of crude oil prices between the US mid-continent and the global oil market, due to a bottleneck at Cushing, OK resulting from several factors. Last week the gross margin ("3:2:1 crack") for importing crude priced at the level of UK Brent and turning it into gasoline and diesel or heating oil for the northeast market stood at a breakeven, and it's only a few dollars a barrel in the black today, after yesterday's market recovery. That's not much of an inducement to hang onto massively complex, capital-intensive facilities and to continue investing in them to keep them in compliance with ever more stringent regulations. Sometimes it just makes more sense to take a write-down and sell to someone else, who then starts with a lower capital base and has a better chance of making a return--not unlike the restaurant business. The problem in this environment is that it's not obvious who would step into the shoes of Sunoco and Conoco in Philadelphia. A few years ago buying refineries from integrated companies that wanted to redeploy their capital was a thriving game, with lots of players. Not so much, now.
Conoco's timing on this move is interesting, too. If it were only a question of margins, I'd think they'd wait to see how much profitability improved after Sunoco's plants shut down. Instead, it appears they are focused on a bigger picture. Even if they don't find a buyer, closing a marginal or money-losing facility will improve their overall refinery portfolio as they prepare to spin off the refining and marketing business, while allowing them to use the capital expenditures they won't have to put into the Trainer refinery for more lucrative opportunities like shale gas, which the company has been touting in a series of ads. That probably makes sense for the company's shareholders, though it won't do much for consumers in my neck of the woods, especially if the company's larger New Jersey refinery meets the same fate.
Oil refining has always been a tough business, with its occasional good years normally more than offset by years or decades in the doldrums. But the combination of reduced demand from the recession-weakened economy and the increased supply of biofuel--mainly corn ethanol, so far--has increased the pressure. When I ponder all this it makes me wonder why so many startups are so eager to get into the fuels manufacturing business, even if it will be based on biomass rather than oil, when they will ultimately be exposed to similar market forces.
The story in Reuters gives a good overview of the circumstances leading to Conoco's decision, and you've read about most of these factors in previous postings here. Topping the list is the persistent divergence of crude oil prices between the US mid-continent and the global oil market, due to a bottleneck at Cushing, OK resulting from several factors. Last week the gross margin ("3:2:1 crack") for importing crude priced at the level of UK Brent and turning it into gasoline and diesel or heating oil for the northeast market stood at a breakeven, and it's only a few dollars a barrel in the black today, after yesterday's market recovery. That's not much of an inducement to hang onto massively complex, capital-intensive facilities and to continue investing in them to keep them in compliance with ever more stringent regulations. Sometimes it just makes more sense to take a write-down and sell to someone else, who then starts with a lower capital base and has a better chance of making a return--not unlike the restaurant business. The problem in this environment is that it's not obvious who would step into the shoes of Sunoco and Conoco in Philadelphia. A few years ago buying refineries from integrated companies that wanted to redeploy their capital was a thriving game, with lots of players. Not so much, now.
Conoco's timing on this move is interesting, too. If it were only a question of margins, I'd think they'd wait to see how much profitability improved after Sunoco's plants shut down. Instead, it appears they are focused on a bigger picture. Even if they don't find a buyer, closing a marginal or money-losing facility will improve their overall refinery portfolio as they prepare to spin off the refining and marketing business, while allowing them to use the capital expenditures they won't have to put into the Trainer refinery for more lucrative opportunities like shale gas, which the company has been touting in a series of ads. That probably makes sense for the company's shareholders, though it won't do much for consumers in my neck of the woods, especially if the company's larger New Jersey refinery meets the same fate.
Oil refining has always been a tough business, with its occasional good years normally more than offset by years or decades in the doldrums. But the combination of reduced demand from the recession-weakened economy and the increased supply of biofuel--mainly corn ethanol, so far--has increased the pressure. When I ponder all this it makes me wonder why so many startups are so eager to get into the fuels manufacturing business, even if it will be based on biomass rather than oil, when they will ultimately be exposed to similar market forces.
Monday, September 26, 2011
Drawing Conclusions from Solyndra
When the energy portions of the 2009 stimulus were announced I remarked to a colleague that I wouldn't be surprised if its billions in incentives led to a future scandal or two. In fact, I was thinking more along the lines of fraudulent diversions from the Treasury's renewable energy grant program, which has handed out $8.7 billion since its inception. That program had its own day in the spotlight when it turned out that a significant portion of the initial disbursements were going either to non-US companies or to pay for equipment made outside the US, undermining its green jobs rationale. However, I wouldn't have guessed that the biggest scandal would erupt from the ostensibly lower-risk loan guarantee program of the Department of Energy. The prospect that a tussle over a small cut to that program, for which eligibility is due to end in a few days, nearly set up another government shutdown crisis seems even stranger.
Whatever happens to the loan guarantee program, the decision to lend over $500 million to Solyndra looks bad, and not just in retrospect, with the firm in bankruptcy. The market environment that Solyndra was betting on was already shifting in late 2008--months before its loan was approved. The global bottleneck in the supply of polysilicon, the key raw material for the crystalline silicon photovoltaic modules with which Solyndra's unique CIGS modules competed, was easing as new polysilicon capacity was coming on line, more was under construction, and polysilicon prices were falling. Someone at the DOE should accept responsibility--and the consequences--for ignoring or missing that signal and concluding that it was a good time for Solyndra to double its capacity and fixed costs.
As tempting as it might be to dwell on Solyndra's failure, that should not be our primary concern right now. If laws are found to have been broken or influence improperly used, there will be ample time to address that. Nor should we dwell on the fate of the other projects for which $10 billion in loans or loan guarantees have already been concluded. Many of those projects involve generating renewable power and selling it under long-term agreements that will ensure a profit, with little additional risk. Instead, oversight should focus urgently on those projects that are still under consideration or have received only conditional approvals to date.
One of the applications that apparently got caught in the fallout from Solyndra was a project of Solar City Corp. to install up to 371 MW of rooftop solar panels at military facilities across the US. Solar City was seeking a partial (presumably 80%) guarantee of up to $344 million in loans to carry out these projects. This is precisely the sort of initiative necessary to deliver on the military's goals to increase its use of renewable energy. I heard a lot more about that at an Air Force energy briefing at the Pentagon earlier this month and will write about that session when I receive the responses to the follow-up questions I sent in.
The military faces two major obstacles in achieving its energy objectives, and projects like Solar City's would help overcome both. First, energy generation assets are expensive and would compete with military hardware procurement and other budget priorities. Having someone else make those investments and charge the services for power that they'd otherwise have to buy from a utility is as useful for the military as it is for homeowners who can't afford the up-front costs of rooftop solar. The other aspect with which the project helps is that the economics of rooftop solar still depend on federal and state incentives that the Department of Defense can't access directly. In this case, Solar City would buy and install the hardware and collects the tax credits and other incentives that allow them to charge the military a competitive price for power. With time running out on its application, the company has apparently decided to pursue a scaled-down version of the project with only commercial financing.
As for any remaining applications, if the DOE can't convince itself that they are sound before the clock runs out at the end of the month, then it must either turn them down or ask the Congress for more time. Whatever call the DOE makes it had better be prepared for the scrutiny and second-guessing they are bound to receive. The Solyndra debacle has arguably done as much harm to US renewable energy policy as the Enron scandal did to energy trading. Another Solyndra might just put an end to the whole proposition of financing green energy with public funds in the US.
Note: Posting updated to reflect the current status of Solar City's project.
Whatever happens to the loan guarantee program, the decision to lend over $500 million to Solyndra looks bad, and not just in retrospect, with the firm in bankruptcy. The market environment that Solyndra was betting on was already shifting in late 2008--months before its loan was approved. The global bottleneck in the supply of polysilicon, the key raw material for the crystalline silicon photovoltaic modules with which Solyndra's unique CIGS modules competed, was easing as new polysilicon capacity was coming on line, more was under construction, and polysilicon prices were falling. Someone at the DOE should accept responsibility--and the consequences--for ignoring or missing that signal and concluding that it was a good time for Solyndra to double its capacity and fixed costs.
As tempting as it might be to dwell on Solyndra's failure, that should not be our primary concern right now. If laws are found to have been broken or influence improperly used, there will be ample time to address that. Nor should we dwell on the fate of the other projects for which $10 billion in loans or loan guarantees have already been concluded. Many of those projects involve generating renewable power and selling it under long-term agreements that will ensure a profit, with little additional risk. Instead, oversight should focus urgently on those projects that are still under consideration or have received only conditional approvals to date.
One of the applications that apparently got caught in the fallout from Solyndra was a project of Solar City Corp. to install up to 371 MW of rooftop solar panels at military facilities across the US. Solar City was seeking a partial (presumably 80%) guarantee of up to $344 million in loans to carry out these projects. This is precisely the sort of initiative necessary to deliver on the military's goals to increase its use of renewable energy. I heard a lot more about that at an Air Force energy briefing at the Pentagon earlier this month and will write about that session when I receive the responses to the follow-up questions I sent in.
The military faces two major obstacles in achieving its energy objectives, and projects like Solar City's would help overcome both. First, energy generation assets are expensive and would compete with military hardware procurement and other budget priorities. Having someone else make those investments and charge the services for power that they'd otherwise have to buy from a utility is as useful for the military as it is for homeowners who can't afford the up-front costs of rooftop solar. The other aspect with which the project helps is that the economics of rooftop solar still depend on federal and state incentives that the Department of Defense can't access directly. In this case, Solar City would buy and install the hardware and collects the tax credits and other incentives that allow them to charge the military a competitive price for power. With time running out on its application, the company has apparently decided to pursue a scaled-down version of the project with only commercial financing.
As for any remaining applications, if the DOE can't convince itself that they are sound before the clock runs out at the end of the month, then it must either turn them down or ask the Congress for more time. Whatever call the DOE makes it had better be prepared for the scrutiny and second-guessing they are bound to receive. The Solyndra debacle has arguably done as much harm to US renewable energy policy as the Enron scandal did to energy trading. Another Solyndra might just put an end to the whole proposition of financing green energy with public funds in the US.
Note: Posting updated to reflect the current status of Solar City's project.
Thursday, September 22, 2011
Breaking Oil's Monopoly on Transportation
I've been thinking about an op-ed in Tuesday's New York Times written by a former National Security Advisor and a former CIA chief. They propose breaking oil's monopoly on transportation fuels by introducing more fuel competition at the point of use. This isn't a new idea, nor is their preferred tactic of requiring all vehicles sold in the US to be flexible fuel vehicles (FFVs) capable of running on a variety of fuels. I looked at this in April, following another op-ed by Mr. Woolsey, and several times previously in conjunction with the Open Fuel Standards Act, a piece of unpassed--so far as I know--federal legislation designed to put such competition into effect. The idea is as interesting as it has always been, though several trends pose new challenges for its ultimate success.
The op-ed was apparently timed to mark the introduction of a new group called the United States Energy Security Council, the membership of which constitutes a who's who of national security and energy leaders. The Council's issue statement is worth a read and stands apart from some other similarly-well-intended efforts for its clear recognition that our energy security problem with oil has nearly nothing to do with electricity, and thus won't lend itself to leverage from renewable electricity sources until large numbers of electric vehicles are on the road. That could take decades, as I've noted elsewhere. However, I wish the group had spent more time pondering the source of oil's natural monopoly in transportation energy, because I think it might have given them pause concerning methanol, one of the competing fuels they're trying to promote.
The sources of that natural monopoly--the reasons oil continues to dominate the transportation energy market 93 years after the introduction of the Model T Ford--owe little to the market power of OPEC, and much to the energy density and convenience of storage, transportation and distribution of petroleum products. Making fuels like E85 ethanol and methanol as readily available as gasoline, and making cars as compatible with them as they are with unleaded gasoline, won't affect the miles per gallon and range advantage that gasoline enjoys. That advantage is especially evident relative to methanol, which packs just under half the BTUs per gallon in gasoline.
Even though the abundance of shale gas could conceivably alter the economics of fuel methanol enough to put it into serious competition with gasoline, it would face an even more serious marketing challenge than E85, with its smaller but still significant range and mpg penalties, and its miles-per-dollar penalty that could expand significantly when the ethanol blenders credit expires at the end of the year--or sooner. Without substantial engine modifications to take advantage of methanol's other properties--modifications that wouldn't be compatible with fuel flexibility, as I understand it--both mpg and range would reflect a similar ratio as energy content. And unless methanol (with all appropriate federal, state and local motor fuel taxes applied) could be delivered to your corner gas station at less than half the cost of gasoline, then not only would its range be inferior, but also the miles delivered per dollar spent. Consumers tend to notice such things after a while. And that is aside from my long-standing concerns about the mass-market use of methanol.
The group's focus on alcohol-based fuels also goes against another recent trend in the biofuels industry towards what are called drop-in fuels: fuels that despite their non-petroleum origins are 100% compatible with engines designed to run on petroleum products. Despite all the hype about cellulosic ethanol, it is looking increasingly likely that the main fuels we will get from non-food biomass could closely resemble today's gasoline, diesel and jet fuel. And drop-in fuels don't require vehicles to be modified as FFVs.
When viewed from a technical perspective, I don't find the Council's arguments for mandating FFVs especially persuasive. However, I think there's a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car's owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn't even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it's worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.
The op-ed was apparently timed to mark the introduction of a new group called the United States Energy Security Council, the membership of which constitutes a who's who of national security and energy leaders. The Council's issue statement is worth a read and stands apart from some other similarly-well-intended efforts for its clear recognition that our energy security problem with oil has nearly nothing to do with electricity, and thus won't lend itself to leverage from renewable electricity sources until large numbers of electric vehicles are on the road. That could take decades, as I've noted elsewhere. However, I wish the group had spent more time pondering the source of oil's natural monopoly in transportation energy, because I think it might have given them pause concerning methanol, one of the competing fuels they're trying to promote.
The sources of that natural monopoly--the reasons oil continues to dominate the transportation energy market 93 years after the introduction of the Model T Ford--owe little to the market power of OPEC, and much to the energy density and convenience of storage, transportation and distribution of petroleum products. Making fuels like E85 ethanol and methanol as readily available as gasoline, and making cars as compatible with them as they are with unleaded gasoline, won't affect the miles per gallon and range advantage that gasoline enjoys. That advantage is especially evident relative to methanol, which packs just under half the BTUs per gallon in gasoline.
Even though the abundance of shale gas could conceivably alter the economics of fuel methanol enough to put it into serious competition with gasoline, it would face an even more serious marketing challenge than E85, with its smaller but still significant range and mpg penalties, and its miles-per-dollar penalty that could expand significantly when the ethanol blenders credit expires at the end of the year--or sooner. Without substantial engine modifications to take advantage of methanol's other properties--modifications that wouldn't be compatible with fuel flexibility, as I understand it--both mpg and range would reflect a similar ratio as energy content. And unless methanol (with all appropriate federal, state and local motor fuel taxes applied) could be delivered to your corner gas station at less than half the cost of gasoline, then not only would its range be inferior, but also the miles delivered per dollar spent. Consumers tend to notice such things after a while. And that is aside from my long-standing concerns about the mass-market use of methanol.
The group's focus on alcohol-based fuels also goes against another recent trend in the biofuels industry towards what are called drop-in fuels: fuels that despite their non-petroleum origins are 100% compatible with engines designed to run on petroleum products. Despite all the hype about cellulosic ethanol, it is looking increasingly likely that the main fuels we will get from non-food biomass could closely resemble today's gasoline, diesel and jet fuel. And drop-in fuels don't require vehicles to be modified as FFVs.
When viewed from a technical perspective, I don't find the Council's arguments for mandating FFVs especially persuasive. However, I think there's a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car's owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn't even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it's worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.
Tuesday, September 20, 2011
Secretary Chu Advised on "Prudent Development" of Oil and Gas
A news item concerning last week's release of the National Petroleum Council's "Prudent Development" report referred to a recommendation supporting a national tax on carbon. That caught my attention. Given the NPC's makeup, a consensus on such a controversial issue would be surprising. The actual text of the report proved somewhat less dramatic on the climate policy front, but no less worthwhile for its comprehensive assessment of the abundance of North American hydrocarbon resources, as well as the development approach "necessary for public trust, protection of health, safety and the environment, and access to resources." The report doesn't just focus on macro concerns about climate change and other environmental issues, but also on timely details such as the methane emissions, water and land-use impacts involved in shale gas production and other resource development.
For those not familiar with the NPC, the organization is charged with advising the Secretary of Energy on matters relating to oil and gas, though in practice it looks at a much broader array of energy issues. In 2007 I helped with the renewable energy analysis in the group's previous study, entitled "Hard Truths." The current study is one of two requested of the NPC by Secretary Chu; the other will look at future transportation fuels and is due out in the first half of next year. What makes these reports unusual is that they incorporate the views of academics, government officials, non-governmental organizations, and the legal and financial sectors, along with those of the energy industry. In the current study, just under half the participants represented oil and gas companies, while the Emissions and Carbon Regulation Subgroup included members from the National Resources Defense Council and US EPA, and the Environment and Regulatory Subgroup was chaired by someone from the Environmental Defense Fund. I think we'd all benefit from more such "strange bedfellows" collaborations.
The report's specific recommendation on carbon pricing as a mechanism for addressing greenhouse gas emissions appears in the Executive Summary and originates in an entire chapter on "Carbon and Other Emissions in the End-Use Sectors." Although it's much more generic than the Fuelfix article indicated, it's still noteworthy. It deals with the need to internalize emissions costs into fuel and technology choices, with a carbon tax mentioned as just one option among a range of measures for establishing an explicit or implicit price on carbon. It states,
"As Congress, the Administration, and relevant agencies consider energy policies, they should recognize that the most effective and efficient method to further reduce GHG emissions would be a mechanism for putting a price on carbon emissions that is national, economy-wide, market-based, visible, predictable, transparent, applicable to all sources of emissions, and part of an effective global framework."
It goes on to address non-market mechanisms such as performance standards and clean energy standards, and how a policy on carbon should be phased in. While individual oil and gas companies have supported cap and trade or a carbon tax either individually or within multi-industry groups, I can't recall such a broad cross-section of this industry going along with the idea of carbon pricing, even in this non-specific manner.
The timing of this is interesting. It's hard to envision a comprehensive climate bill passing the Congress between now and the November 2012 election, or even being introduced on anything other than a symbolic basis. The pork-laden monstrosity of the Waxman-Markey bill succeeded only in making cap and trade toxic, and I can't imagine a worse environment for introducing any kind of new tax--a price on carbon is clearly a tax--even if the concept behind cap and trade has a solid bipartisan pedigree. Short of the miraculous materialization of a carbon tax as a compromise revenue solution from the deficit-fighting Supercommittee, carbon pricing in the US looks dead until 2013 and possibly well beyond. I'm also starting to see more comments along the lines of this one from the blog of the Information Technology and Innovation Foundation suggesting that policies promoting innovation might be a lot more important in addressing climate change than any level of carbon pricing that could realistically be implemented here.
So whether you regard this recommendation by the NPC as an attempt to restart a stalled debate on carbon pricing, or merely a tardy entry in a formerly crowded field, I think it also signals that the energy industry isn't oblivious to the fact that its emissions--including the lion's share associated with end-user consumption of their products--must eventually be dealt with. Chances are, that will await a return to economic health and stability, when US consumers, voters and taxpayers might be expected to prove more willing to incur the sacrifices this will entail. The report also includes a good perspective on the considerable North American resource upside that could be unleashed with different policies than the ones now in place, and that might just hasten the arrival of more favorable economic conditions for carbon policy.
For those not familiar with the NPC, the organization is charged with advising the Secretary of Energy on matters relating to oil and gas, though in practice it looks at a much broader array of energy issues. In 2007 I helped with the renewable energy analysis in the group's previous study, entitled "Hard Truths." The current study is one of two requested of the NPC by Secretary Chu; the other will look at future transportation fuels and is due out in the first half of next year. What makes these reports unusual is that they incorporate the views of academics, government officials, non-governmental organizations, and the legal and financial sectors, along with those of the energy industry. In the current study, just under half the participants represented oil and gas companies, while the Emissions and Carbon Regulation Subgroup included members from the National Resources Defense Council and US EPA, and the Environment and Regulatory Subgroup was chaired by someone from the Environmental Defense Fund. I think we'd all benefit from more such "strange bedfellows" collaborations.
The report's specific recommendation on carbon pricing as a mechanism for addressing greenhouse gas emissions appears in the Executive Summary and originates in an entire chapter on "Carbon and Other Emissions in the End-Use Sectors." Although it's much more generic than the Fuelfix article indicated, it's still noteworthy. It deals with the need to internalize emissions costs into fuel and technology choices, with a carbon tax mentioned as just one option among a range of measures for establishing an explicit or implicit price on carbon. It states,
"As Congress, the Administration, and relevant agencies consider energy policies, they should recognize that the most effective and efficient method to further reduce GHG emissions would be a mechanism for putting a price on carbon emissions that is national, economy-wide, market-based, visible, predictable, transparent, applicable to all sources of emissions, and part of an effective global framework."
It goes on to address non-market mechanisms such as performance standards and clean energy standards, and how a policy on carbon should be phased in. While individual oil and gas companies have supported cap and trade or a carbon tax either individually or within multi-industry groups, I can't recall such a broad cross-section of this industry going along with the idea of carbon pricing, even in this non-specific manner.
The timing of this is interesting. It's hard to envision a comprehensive climate bill passing the Congress between now and the November 2012 election, or even being introduced on anything other than a symbolic basis. The pork-laden monstrosity of the Waxman-Markey bill succeeded only in making cap and trade toxic, and I can't imagine a worse environment for introducing any kind of new tax--a price on carbon is clearly a tax--even if the concept behind cap and trade has a solid bipartisan pedigree. Short of the miraculous materialization of a carbon tax as a compromise revenue solution from the deficit-fighting Supercommittee, carbon pricing in the US looks dead until 2013 and possibly well beyond. I'm also starting to see more comments along the lines of this one from the blog of the Information Technology and Innovation Foundation suggesting that policies promoting innovation might be a lot more important in addressing climate change than any level of carbon pricing that could realistically be implemented here.
So whether you regard this recommendation by the NPC as an attempt to restart a stalled debate on carbon pricing, or merely a tardy entry in a formerly crowded field, I think it also signals that the energy industry isn't oblivious to the fact that its emissions--including the lion's share associated with end-user consumption of their products--must eventually be dealt with. Chances are, that will await a return to economic health and stability, when US consumers, voters and taxpayers might be expected to prove more willing to incur the sacrifices this will entail. The report also includes a good perspective on the considerable North American resource upside that could be unleashed with different policies than the ones now in place, and that might just hasten the arrival of more favorable economic conditions for carbon policy.
Thursday, September 15, 2011
Renewable Energy Faces the European Debt Crisis
With all the bad economic news and political turbulence in the US, it's been easy to lose track of the sovereign debt crisis in Europe, which appears to be spreading from smaller, peripheral countries like Greece to affect the banking systems of core European Union members like Italy and France. To read Paul Krugman's column in last Sunday's New York Times, Europe could be on the verge of another financial crisis on the scale of the one triggered by the collapse of Lehman Brothers in 2008. Aside from the global economic consequences of such an event, it would send ripples throughout the energy sector, affecting both conventional and renewable energy markets and participants. While such an outcome is far from certain, it's a worrying scenario to contemplate.
The 2008 financial crisis is a good place to begin looking for the implications of a potential 2011 credit crunch in Europe. Start with oil, which in the fall of 2008 slid from around $100 per barrel to below $40 by mid-December of that year. Of course oil prices had already retreated from a high of $145 that summer, as the weakening US economy and collapsing housing market slowed US demand for oil. Yet it's worth noting that despite their generally more efficient use of energy and higher consumer energy prices, the countries of Europe together import slightly more crude oil and petroleum products than the US does. And as I've noted before, the economies of the EU's Euro area have been partially sheltered from high oil prices by the strength of the Euro relative to the US dollar, in which most oil transactions are settled. Even without a full-blown financial crisis, a sharp drop in the Euro/dollar exchange rate resulting from sovereign debt worries would create a regional energy price spike that could further hamper the EU's growth and reduce its energy demand. OPEC appears to be preparing to trim output for just such an eventuality.
Next consider what happened to renewables, such as wind and solar power. Lending to renewable energy projects in the US dried up in late 2008, as credit became harder to obtain in general, and participants in "tax equity swaps" retreated. Without the generous renewable energy supports in the 2009 stimulus, wind turbine installations might have ground to a halt, and the expansion of solar manufacturing that has recently hit a rocky patch might never have occurred. European projects and suppliers weren't affected to the same degree, thanks to a combination of higher direct subsidies for renewables and robust lending from EU agencies such as the European Bank for Reconstruction and Development.
Those protections look less dependable in a new crisis. European governments have been busily cutting renewable energy subsidies, and growth is already slowing, squeezing local firms like Germany's Q-Cells between a weaker domestic market and low-cost import competition from China and elsewhere. It's anyone's guess whether commercial lending to the renewable energy sector and loans from groups like the EBRD could be sustained in another financial crisis focused on the Eurozone.
A sudden contraction in European funding for renewable energy projects would be felt around the world. Suppliers in the US and Asia have relied on European sales of wind turbines, solar panels and components for much of their planned growth, and the further decline in equipment prices that would follow a big demand drop would leave all but the best-capitalized, lowest-cost competitors scrambling. And even as renewable energy growth has shifted in recent years toward developing countries and away from North America and Europe, Europe has remained the most important market for many of these technologies--particularly for solar PV and offshore wind power--just as Europe has retained the strongest focus globally on reducing the greenhouse gas emissions implicated in climate change. Every aspect of the global energy business has a big stake in the success of Europe's leaders in navigating through the current crisis, but none more than the renewable energy sector.
The 2008 financial crisis is a good place to begin looking for the implications of a potential 2011 credit crunch in Europe. Start with oil, which in the fall of 2008 slid from around $100 per barrel to below $40 by mid-December of that year. Of course oil prices had already retreated from a high of $145 that summer, as the weakening US economy and collapsing housing market slowed US demand for oil. Yet it's worth noting that despite their generally more efficient use of energy and higher consumer energy prices, the countries of Europe together import slightly more crude oil and petroleum products than the US does. And as I've noted before, the economies of the EU's Euro area have been partially sheltered from high oil prices by the strength of the Euro relative to the US dollar, in which most oil transactions are settled. Even without a full-blown financial crisis, a sharp drop in the Euro/dollar exchange rate resulting from sovereign debt worries would create a regional energy price spike that could further hamper the EU's growth and reduce its energy demand. OPEC appears to be preparing to trim output for just such an eventuality.
Next consider what happened to renewables, such as wind and solar power. Lending to renewable energy projects in the US dried up in late 2008, as credit became harder to obtain in general, and participants in "tax equity swaps" retreated. Without the generous renewable energy supports in the 2009 stimulus, wind turbine installations might have ground to a halt, and the expansion of solar manufacturing that has recently hit a rocky patch might never have occurred. European projects and suppliers weren't affected to the same degree, thanks to a combination of higher direct subsidies for renewables and robust lending from EU agencies such as the European Bank for Reconstruction and Development.
Those protections look less dependable in a new crisis. European governments have been busily cutting renewable energy subsidies, and growth is already slowing, squeezing local firms like Germany's Q-Cells between a weaker domestic market and low-cost import competition from China and elsewhere. It's anyone's guess whether commercial lending to the renewable energy sector and loans from groups like the EBRD could be sustained in another financial crisis focused on the Eurozone.
A sudden contraction in European funding for renewable energy projects would be felt around the world. Suppliers in the US and Asia have relied on European sales of wind turbines, solar panels and components for much of their planned growth, and the further decline in equipment prices that would follow a big demand drop would leave all but the best-capitalized, lowest-cost competitors scrambling. And even as renewable energy growth has shifted in recent years toward developing countries and away from North America and Europe, Europe has remained the most important market for many of these technologies--particularly for solar PV and offshore wind power--just as Europe has retained the strongest focus globally on reducing the greenhouse gas emissions implicated in climate change. Every aspect of the global energy business has a big stake in the success of Europe's leaders in navigating through the current crisis, but none more than the renewable energy sector.
Tuesday, September 13, 2011
The American Jobs Act's Poison Pill(s)
I had a completely different topic in mind for today's posting, but I'll have to come back to the energy implications of a potential European financial crisis later. Since President Obama's jobs speech to Congress last week I have been awaiting the text of the actual proposed bill, rather than the summaries I'd been seeing. It finally came out at the end of the day yesterday. I feel obliged to point out a few provisions that haven't been widely advertised, either in the original speech or on the fact sheet that the White House published. These include several measures related to alternative energy, such as the inclusion of some project categories within the purview of the proposed National Infrastructure Bank, or the funding for putting solar panels on abandoned and foreclosed buildings as part of their rehabilitation. However, I'm not sure how much any of this matters, because the bill sent to the Congress also includes a slate of provisions that were certain to be regarded as a "poison pill"--sections that would preclude passing it on the all-or-nothing basis that the President seemed to be pushing for last Thursday. Energy features prominently in these poison pill measures.
I can't do justice to a 155-page legislative draft in the few hours I've had to review it. I'll restrict my comments today to the "offset" provisions that escaped being mentioned in the administration's fact sheet and reserve comment on the other aspects of the bill for a later date, if necessary. It seems clear from reading Sections 431-442 that the architects of this bill view the US domestic oil and gas industry as a declining cash cow, rather than as the source of new jobs and growth that I described in last Thursday's posting. Those sections set out to repeal every single oil and gas industry tax benefit of which I was aware, and a couple I hadn't even heard of. Included are the Section 199 manufacturing tax credit enjoyed by every other manufacturing company in America, along with portions of the tax code designed to prevent US companies from being subject to double taxation on their global income, protections that I believe their non-US competitors enjoy automatically under the territorial tax systems in use in most developed countries. In a different context I wouldn't have found any of this surprising, but rather a measure of consistency, since the administration has pursued the termination of these benefits in every budget proposal since 2009 and in a number of bills introduced by its allies in Congress.
The surprise comes from their inclusion in a bill intended to provide immediate relief for the large number of Americans still out of work, and possibly to avert a double-dip recession--a bill described as consisting mainly of provisions that have been backed by both parties at various times. However, the legislative history and likely fate of the poison pill provisions is abundantly clear: they have failed every time they were proposed, including in the previous Congress in which the President's party held overwhelming majorities in both houses. Along with the other "offset" provisions, such as those limiting itemized deductions for taxpayers making more than $200-250,000 per year, or going after the tax treatment of hedge fund income and corporate jets, it's hard to see their inclusion in the American Jobs Act as anything other than politically motivated. This morning's headlines reflect the entirely predictable reaction to them.
It's not that these measures aren't a legitimate subject for debate and action. However, that debate is part and parcel of the growing bipartisan consensus on the need for comprehensive reform of our convoluted tax code, in which the majority of current deductions and exemptions, including those for energy, would be sacrificed in exchange for the lower tax rates necessary to make all US businesses--not just a chosen few--more globally competitive. Squandering that opportunity to pay for a short-term boost to the economy would, among other outcomes, leave the US energy sector less competitive and the nation worse off in the long run. Meanwhile, when the Congress rejects these poison pills and proceeds to cherry-pick among the bill's headline measures, it might also adopt the American Jobs Act's final provision, which dumps the problem of paying for it in the laps of the Supercommittee appointed to find the remainder of the deficit reductions agreed in the Budget Control Act of 2011--already a pretty tall order.
If there was ever a chance for a "clean" jobs bill to pass intact, the pursuit in this venue of the administration's long-standing agendas with the oil and gas industry, hedge fund managers, and corporate jet owners erases it. Whatever the outcome of the negotiations with and within the Congress over this bill, you can count on hearing a lot more about these issues between now and next November.
I can't do justice to a 155-page legislative draft in the few hours I've had to review it. I'll restrict my comments today to the "offset" provisions that escaped being mentioned in the administration's fact sheet and reserve comment on the other aspects of the bill for a later date, if necessary. It seems clear from reading Sections 431-442 that the architects of this bill view the US domestic oil and gas industry as a declining cash cow, rather than as the source of new jobs and growth that I described in last Thursday's posting. Those sections set out to repeal every single oil and gas industry tax benefit of which I was aware, and a couple I hadn't even heard of. Included are the Section 199 manufacturing tax credit enjoyed by every other manufacturing company in America, along with portions of the tax code designed to prevent US companies from being subject to double taxation on their global income, protections that I believe their non-US competitors enjoy automatically under the territorial tax systems in use in most developed countries. In a different context I wouldn't have found any of this surprising, but rather a measure of consistency, since the administration has pursued the termination of these benefits in every budget proposal since 2009 and in a number of bills introduced by its allies in Congress.
The surprise comes from their inclusion in a bill intended to provide immediate relief for the large number of Americans still out of work, and possibly to avert a double-dip recession--a bill described as consisting mainly of provisions that have been backed by both parties at various times. However, the legislative history and likely fate of the poison pill provisions is abundantly clear: they have failed every time they were proposed, including in the previous Congress in which the President's party held overwhelming majorities in both houses. Along with the other "offset" provisions, such as those limiting itemized deductions for taxpayers making more than $200-250,000 per year, or going after the tax treatment of hedge fund income and corporate jets, it's hard to see their inclusion in the American Jobs Act as anything other than politically motivated. This morning's headlines reflect the entirely predictable reaction to them.
It's not that these measures aren't a legitimate subject for debate and action. However, that debate is part and parcel of the growing bipartisan consensus on the need for comprehensive reform of our convoluted tax code, in which the majority of current deductions and exemptions, including those for energy, would be sacrificed in exchange for the lower tax rates necessary to make all US businesses--not just a chosen few--more globally competitive. Squandering that opportunity to pay for a short-term boost to the economy would, among other outcomes, leave the US energy sector less competitive and the nation worse off in the long run. Meanwhile, when the Congress rejects these poison pills and proceeds to cherry-pick among the bill's headline measures, it might also adopt the American Jobs Act's final provision, which dumps the problem of paying for it in the laps of the Supercommittee appointed to find the remainder of the deficit reductions agreed in the Budget Control Act of 2011--already a pretty tall order.
If there was ever a chance for a "clean" jobs bill to pass intact, the pursuit in this venue of the administration's long-standing agendas with the oil and gas industry, hedge fund managers, and corporate jet owners erases it. Whatever the outcome of the negotiations with and within the Congress over this bill, you can count on hearing a lot more about these issues between now and next November.
Thursday, September 08, 2011
Turning to Energy for Jobs
Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.
In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.
The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.
What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.
Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.
That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.
However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.
Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.
In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.
The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.
What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.
Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.
That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.
However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.
Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.
Friday, September 02, 2011
Will Solar Bankruptcies Be Different From Ethanol's?
The solar equipment business appears to be undergoing a shakeout, as three US solar firms have declared bankruptcy in the last few weeks. The most prominent of these was Solyndra, which was notable for its receipt of a $535 million federal loan guarantee. Joining Solyndra in bankruptcy filings were Massachusetts-based Evergreen Solar, which had been ailing for more than a year, and former Intel spin-off SpectraWatt. These failures raise many questions, but one that I haven't seen discussed much is whether these companies' assets will merely be absorbed into other, more successful solar firms, or effectively sold for scrap. I suspect the outcome will be quite different from that of the ethanol bankruptcies that followed the financial crisis.
Observers of these firms might be tempted to look to the ethanol industry for a model of how their bankruptcies could turn out. After all, ethanol represents another green industry--or at least one with green aspirations--the growth of which has also been entirely predicated on government subsidies and mandates. And in a pattern similar to the current situation in the global solar industry, US ethanol producers had invested aggressively in capacity expansion ahead of actual demand and were faced with high costs that couldn't be recovered in the marketplace, particularly when growth slowed and the price of their product fell during the aftermath of the financial crisis. The shakeout that ensued saw a number of ethanol producers, including one the largest, VeraSun, enter bankruptcy with the intention of reorganizing, though most ended up in liquidation. With the exception of a few small facilities, the vast majority of the ethanol plants that were idled by these business failures were acquired and restarted by larger, better-capitalized entities such as refiner Valero. The buyers paid $0.30-.50 on the dollar for the assets, and most now have profitable ethanol businesses, after the legacy cost overhang was removed.
Unlike ethanol, however, the output of solar manufacturing is anything but a commodity. Solar cells, modules and panels are differentiated products and still quite costly, compared to conventional energy sources. Solyndra's cylindrical modules were very different from FirstSolar's thin film modules and SunPower's crystalline silicon modules. It's much harder to envision the assets of Solyndra, Evergreen and other failing solar manufacturers being snapped up by more successful competitors, for several reasons. First, technology differences likely make the idled facilities of little use in the manufacturing processes of the survivors. The location of the capacity is also an issue, because the winning solar suppliers have mainly adopted a strategy of shifting manufacturing to Asia, where costs are lower and supply chains possibly better integrated. So I doubt there's a Valero waiting to put these plants and their employees back to work quickly, nor do current economic conditions give much hope of these facilities being quickly repurposed for some other product. I would like to be proved wrong about that.
Because of the low likelihood of recovering more than a tiny fraction of its investment in these companies, it's crucial that the Department of Energy and its Congressional overseers immediately assess the lessons from Solyndra and ensure that the DOE's Loan Program Office doesn't sow the seeds of further expensive failures in its rush to issue additional loan guarantees before the appropriations for them expire at the end of the month. And just to clear up some confusion in the terminology, although the government's role in Solyndra is usually described as a loan guarantee, suggesting some future, contingent loss if Solyndra doesn't make good on its debts, the actual lender in this case was the US Treasury's Federal Financing Bank. There is nothing contingent about the losses that taxpayers face in this bankruptcy. Those losses will be even harder to stomach if the firm's nearly new factory and production lines aren't put to some good use.
Observers of these firms might be tempted to look to the ethanol industry for a model of how their bankruptcies could turn out. After all, ethanol represents another green industry--or at least one with green aspirations--the growth of which has also been entirely predicated on government subsidies and mandates. And in a pattern similar to the current situation in the global solar industry, US ethanol producers had invested aggressively in capacity expansion ahead of actual demand and were faced with high costs that couldn't be recovered in the marketplace, particularly when growth slowed and the price of their product fell during the aftermath of the financial crisis. The shakeout that ensued saw a number of ethanol producers, including one the largest, VeraSun, enter bankruptcy with the intention of reorganizing, though most ended up in liquidation. With the exception of a few small facilities, the vast majority of the ethanol plants that were idled by these business failures were acquired and restarted by larger, better-capitalized entities such as refiner Valero. The buyers paid $0.30-.50 on the dollar for the assets, and most now have profitable ethanol businesses, after the legacy cost overhang was removed.
Unlike ethanol, however, the output of solar manufacturing is anything but a commodity. Solar cells, modules and panels are differentiated products and still quite costly, compared to conventional energy sources. Solyndra's cylindrical modules were very different from FirstSolar's thin film modules and SunPower's crystalline silicon modules. It's much harder to envision the assets of Solyndra, Evergreen and other failing solar manufacturers being snapped up by more successful competitors, for several reasons. First, technology differences likely make the idled facilities of little use in the manufacturing processes of the survivors. The location of the capacity is also an issue, because the winning solar suppliers have mainly adopted a strategy of shifting manufacturing to Asia, where costs are lower and supply chains possibly better integrated. So I doubt there's a Valero waiting to put these plants and their employees back to work quickly, nor do current economic conditions give much hope of these facilities being quickly repurposed for some other product. I would like to be proved wrong about that.
Because of the low likelihood of recovering more than a tiny fraction of its investment in these companies, it's crucial that the Department of Energy and its Congressional overseers immediately assess the lessons from Solyndra and ensure that the DOE's Loan Program Office doesn't sow the seeds of further expensive failures in its rush to issue additional loan guarantees before the appropriations for them expire at the end of the month. And just to clear up some confusion in the terminology, although the government's role in Solyndra is usually described as a loan guarantee, suggesting some future, contingent loss if Solyndra doesn't make good on its debts, the actual lender in this case was the US Treasury's Federal Financing Bank. There is nothing contingent about the losses that taxpayers face in this bankruptcy. Those losses will be even harder to stomach if the firm's nearly new factory and production lines aren't put to some good use.
Tuesday, August 30, 2011
Three Studies Confirm Shale Gas Is Not Worse Than Coal
For most of this year the enormous potential of shale gas has been clouded by controversy over its alleged climate impact. This began with the draft and later the leaked pre-publication version of a paper from a Cornell professor suggesting that the greenhouse gas emissions from gas were no better than those from coal and might even be worse. When I examined Dr. Howarth's analysis in two postings last December and this April I found that his methodology and assumptions were sufficiently flawed to undermine his conclusions. However, I also recognized the informal nature of my assessment and suggested the need for further scrutiny of this issue by organizations with more resources. That has now taken place, though I claim no credit for it. Within the last month three separate teams have issued reports bearing on this question, and not one of them validates Dr. Howarth's findings against shale gas.
The first of these studies comes from IHS Cambridge Energy Research Associates, addressing not just Dr. Howarth's paper, but also the EPA's estimates of methane leakage that were a key input for its calculations of greenhouse gas emissions from shale gas. Although a skeptic might find reasons to dismiss a study from a consultancy with a large energy industry clientele, the other two studies have connections to groups with unimpeachable environmental/sustainability credentials. One is a collaboration between Worldwatch Institute and Deutsche Bank, while the other paper, published in Environmental Research Letters, is from a team at Carnegie Mellon University with financial support from the Sierra Club. I encourage you to read them, but here are the highlights:
The Carnegie Mellon team focused on shale gas from the vast Marcellus formation underlying several eastern states. (See Friday's posting for some perspective of the scale of this resource.) They found that while the current techniques for developing and completing a Marcellus shale gas well do result in higher methane emissions than from conventional gas wells, the extra methane only increases lifecycle emissions from well to burner tip by 3% on average. This is the case because, "The life cycle emissions are dominated by combustion that accounts for 74% of the total emissions." As a result, when burned in a combined cycle power plant to generate electricity, shale gas results in emissions per kilowatt-hour (kWh) that are 20-50% lower than those from coal, depending on equipment and sources. This is the crucial comparison that Howarth's paper gave short shrift. They also compared shale gas emissions to those from LNG, which we'd now be importing in large quantities had shale gas development not ramped up as it did a few years ago. The Mellon team found shale gas and LNG roughly comparable, with both emitting around a quarter less CO2 equivalent per BTU than diesel fuel. That suggests that shale gas isn't just a lower-emitting fuel for power generation, but also for transportation. Finally, they looked at the possibility of shale gas wells being fractured multiple times, rather than just once during their production life, and found that it would take more than 25 fracturing events to negate gas's advantage over coal.
The Worldwatch/Deutsche Bank study considered both top-down and bottom-up views of shale gas emissions, including that of Howarth. They looked at the average US natural gas supply including current proportions of shale gas and found that the emissions from gas-fired power plants beat coal-fired plants by an average of 47%, even with the EPA's higher figures for methane venting during gas production. They also found that among bottom-up assessments of shale gas emissions, including the one from Carnegie Mellon and another from the DOE's National Energy Technology Laboratory, Howarth's results appear to be an outlier, and that shale gas is materially lower than coal in lifecycle emissions for power generation. And while their analysis was performed using the standard 100-year global warming potential for methane of 25 times CO2, they considered sensitivities ranging up to a GWP of 105:1, at which extreme gas still performed better than coal.
It's probably too much to hope that these independent studies will alleviate all of the concerns that have been raised about the greenhouse gas emissions from shale gas, which will only improve as technology and standards progress. (The studies also highlighted both the need and potential to reduce methane emissions from shale gas development, in order to minimize the extra greenhouse gas contribution, irrespective of any comparison to other fuels.) I also get that with the current mood in much of this country, claims for the game-changing energy potential of shale gas must sound too good to be true, without some fatal flaw. Yet everything I see indicates that the problems associated with shale gas development are all manageable, and that while it isn't a panacea, it does represent an extraordinary opportunity for the US from an economic, energy security and environmental perspective. It's time to recognize this as the tremendous gift that it is.
The first of these studies comes from IHS Cambridge Energy Research Associates, addressing not just Dr. Howarth's paper, but also the EPA's estimates of methane leakage that were a key input for its calculations of greenhouse gas emissions from shale gas. Although a skeptic might find reasons to dismiss a study from a consultancy with a large energy industry clientele, the other two studies have connections to groups with unimpeachable environmental/sustainability credentials. One is a collaboration between Worldwatch Institute and Deutsche Bank, while the other paper, published in Environmental Research Letters, is from a team at Carnegie Mellon University with financial support from the Sierra Club. I encourage you to read them, but here are the highlights:
The Carnegie Mellon team focused on shale gas from the vast Marcellus formation underlying several eastern states. (See Friday's posting for some perspective of the scale of this resource.) They found that while the current techniques for developing and completing a Marcellus shale gas well do result in higher methane emissions than from conventional gas wells, the extra methane only increases lifecycle emissions from well to burner tip by 3% on average. This is the case because, "The life cycle emissions are dominated by combustion that accounts for 74% of the total emissions." As a result, when burned in a combined cycle power plant to generate electricity, shale gas results in emissions per kilowatt-hour (kWh) that are 20-50% lower than those from coal, depending on equipment and sources. This is the crucial comparison that Howarth's paper gave short shrift. They also compared shale gas emissions to those from LNG, which we'd now be importing in large quantities had shale gas development not ramped up as it did a few years ago. The Mellon team found shale gas and LNG roughly comparable, with both emitting around a quarter less CO2 equivalent per BTU than diesel fuel. That suggests that shale gas isn't just a lower-emitting fuel for power generation, but also for transportation. Finally, they looked at the possibility of shale gas wells being fractured multiple times, rather than just once during their production life, and found that it would take more than 25 fracturing events to negate gas's advantage over coal.
The Worldwatch/Deutsche Bank study considered both top-down and bottom-up views of shale gas emissions, including that of Howarth. They looked at the average US natural gas supply including current proportions of shale gas and found that the emissions from gas-fired power plants beat coal-fired plants by an average of 47%, even with the EPA's higher figures for methane venting during gas production. They also found that among bottom-up assessments of shale gas emissions, including the one from Carnegie Mellon and another from the DOE's National Energy Technology Laboratory, Howarth's results appear to be an outlier, and that shale gas is materially lower than coal in lifecycle emissions for power generation. And while their analysis was performed using the standard 100-year global warming potential for methane of 25 times CO2, they considered sensitivities ranging up to a GWP of 105:1, at which extreme gas still performed better than coal.
It's probably too much to hope that these independent studies will alleviate all of the concerns that have been raised about the greenhouse gas emissions from shale gas, which will only improve as technology and standards progress. (The studies also highlighted both the need and potential to reduce methane emissions from shale gas development, in order to minimize the extra greenhouse gas contribution, irrespective of any comparison to other fuels.) I also get that with the current mood in much of this country, claims for the game-changing energy potential of shale gas must sound too good to be true, without some fatal flaw. Yet everything I see indicates that the problems associated with shale gas development are all manageable, and that while it isn't a panacea, it does represent an extraordinary opportunity for the US from an economic, energy security and environmental perspective. It's time to recognize this as the tremendous gift that it is.
Friday, August 26, 2011
How Small Is That Revised Marcellus Estimate?
I see in The Hill that some critics of shale gas drilling are pointing to a revised estimate of the shale gas resources in the Marcellus formation as evidence that there's not enough gas to justify any risk from hydraulic fracturing. Earlier this week the US Geological Survey updated its previous estimate to 84 trillion cubic feet (TCF) of natural gas, a figure substantially less than the estimate of 410 TCF from the Department of Energy. Now, I'd have thought that even without doing the math on this, 84 TCF would still sound like a heck of a lot of gas, even if trillions have become the new billions in another context.
Perhaps cubic feet of gas don't convey quite the same degree of familiarity as barrels of oil, which most people can visualize, so it might be useful to think of this gas in its oil-equivalent terms. Using standard conversion factors, that 84 TCF in the Marcellus equates to roughly 14.5 billion barrels of oil. For comparison, that's half again as big as the original estimate of 9.6 billion barrels for the Prudhoe Bay field on the Alaskan North Slope. (FYI, Prudhoe Bay had produced a cumulative 11.5 billion barrels as of the end of 2007 and was still estimated to have a few billion barrels to go.) In that light, does anyone still want to argue that the Marcellus resource is inconsequential?
Perhaps cubic feet of gas don't convey quite the same degree of familiarity as barrels of oil, which most people can visualize, so it might be useful to think of this gas in its oil-equivalent terms. Using standard conversion factors, that 84 TCF in the Marcellus equates to roughly 14.5 billion barrels of oil. For comparison, that's half again as big as the original estimate of 9.6 billion barrels for the Prudhoe Bay field on the Alaskan North Slope. (FYI, Prudhoe Bay had produced a cumulative 11.5 billion barrels as of the end of 2007 and was still estimated to have a few billion barrels to go.) In that light, does anyone still want to argue that the Marcellus resource is inconsequential?
Thursday, August 25, 2011
Why Haven't Gas Prices Fallen More?
With the US economy stuck in the doldrums, weakening the demand for oil and its products, and with the fall of at least portions of Tripoli foreshadowing the eventual return of Libyan oil exports to the market, it must seem puzzling that US gasoline prices haven't dropped farther in the last few weeks. As of Monday, the national average price for unleaded regular stood at $3.58 per gallon, only 3% lower than a month ago, when crude oil was just shy of $100 per barrel, compared to around $84 today. On Monday's evening news, CBS ran a segment attempting to explain this apparent disconnect. Unfortunately, they over-simplified the main explanation with a graphic showing cheaper domestic crude oil mixing with higher-priced imported oil. The "A" answer to this question is simpler but not well-understood, even though its elements have been fairly widely reported: Americans are simply looking at the wrong crude oil price, out of long habit. When you compare current gasoline prices and more representative crude oil prices, there isn't much of a disconnect about which to grumble.
The source of this confusion is the price of West Texas Intermediate crude oil (WTI), which for three decades has been the most watched and widely traded oil price in the world, and the basis of what most people mean when they talk about the price of "oil." In fact, there are numerous distinct grades of oil, each with its own price reflecting quality, location and availability. However, until recently most of these prices were based on the price of WTI, plus or minus a relatively narrow band of premiums or discounts, so using WTI as a barometer of all oil prices didn't cause much confusion or inaccuracy. The emergence of a pronounced and lengthy supply bottleneck at the Cushing, OK delivery location for the WTI futures contract has exploded this convenient set of relationships and assumptions.
Because more oil has been going into tankage at Cushing than was leaving those tanks over the last year or so, the price of WTI--itself a category, rather than a single stream of oil--has become massively depressed relative other types of crude oil, not just imported oil but also oil in other locations in the US that aren't affected by the bottleneck. Consider some important examples. While oil produced in Kansas, New Mexico and Oklahoma is all cheaper due to the Cushing effect, Louisiana Light Sweet, which historically traded within a dollar of WTI, is now worth nearly $20/bbl more, putting it much closer to the price of UK Brent crude--the best current gauge of global oil prices--than to WTI. Meanwhile, Bloomberg reports Alaskan North Slope crude (ANS) for delivery on the West Coast at nearly $107/bbl, or $24 over WTI. That's surprising, considering that ANS is heavier and higher in sulfur than WTI, and thus requires more processing. Just as remarkably, California heavy crude at Midway-Sunset is quoted at more than $10/bbl above WTI, when based on history and quality I would expect to see a discount of at least that magnitude. In other words, for now at least, the price of WTI is simply no longer representative of the crude that many US refineries are processing, from either foreign or domestic sources.
When you compare the wholesale price of gasoline from US refineries near the East, West and Gulf coasts to the cost of their crude inputs at around $100 or more, the difference of $15-17/bbl isn't historically unusual. Meanwhile, refineries in the middle of the country have recently been experiencing much stronger margins. This disparity is evident in the second quarter earnings reported by various US refining companies. East coast refiner Sunoco, which hasn't benefited much from cheap WTI, reported a net loss for the quarter, while Valero, with a bigger and more geographically dispersed refining system that includes facilities processing large quantities of WTI-related crude, saw refining segment earnings increase by 39% compared to the second quarter of 2010. The Cushing effect was even more pronounced for the recently merged HollyFrontier Corp., which apparently runs little crude that isn't priced near WTI and saw second-quarter net income almost triple versus 2Q2010. Even after that extra profit margin, gas prices in Tulsa, OK are currently as low as $3.30/gal., or about 15 cents per gallon less than the national average after adjusting for differences in state gas taxes.
Gasoline prices are determined by more than just crude oil prices, though in the long run the two must move together, because the latter represents the largest component of the cost of the former. At least until the bottleneck in Cushing is resolved by new pipeline capacity to the Gulf Coast, one option for which was just canceled, we will need to look beyond our old reliable WTI price indicator in order to compare gasoline and crude prices on a representative basis. I've been paying a lot more attention to the Brent market, and the Wall St. Journal still publishes daily prices for Louisiana Light Sweet and ANS. When and if those indices drop significantly, then it will be time to start looking for a commensurate drop in retail gasoline prices at the pump.
The source of this confusion is the price of West Texas Intermediate crude oil (WTI), which for three decades has been the most watched and widely traded oil price in the world, and the basis of what most people mean when they talk about the price of "oil." In fact, there are numerous distinct grades of oil, each with its own price reflecting quality, location and availability. However, until recently most of these prices were based on the price of WTI, plus or minus a relatively narrow band of premiums or discounts, so using WTI as a barometer of all oil prices didn't cause much confusion or inaccuracy. The emergence of a pronounced and lengthy supply bottleneck at the Cushing, OK delivery location for the WTI futures contract has exploded this convenient set of relationships and assumptions.
Because more oil has been going into tankage at Cushing than was leaving those tanks over the last year or so, the price of WTI--itself a category, rather than a single stream of oil--has become massively depressed relative other types of crude oil, not just imported oil but also oil in other locations in the US that aren't affected by the bottleneck. Consider some important examples. While oil produced in Kansas, New Mexico and Oklahoma is all cheaper due to the Cushing effect, Louisiana Light Sweet, which historically traded within a dollar of WTI, is now worth nearly $20/bbl more, putting it much closer to the price of UK Brent crude--the best current gauge of global oil prices--than to WTI. Meanwhile, Bloomberg reports Alaskan North Slope crude (ANS) for delivery on the West Coast at nearly $107/bbl, or $24 over WTI. That's surprising, considering that ANS is heavier and higher in sulfur than WTI, and thus requires more processing. Just as remarkably, California heavy crude at Midway-Sunset is quoted at more than $10/bbl above WTI, when based on history and quality I would expect to see a discount of at least that magnitude. In other words, for now at least, the price of WTI is simply no longer representative of the crude that many US refineries are processing, from either foreign or domestic sources.
When you compare the wholesale price of gasoline from US refineries near the East, West and Gulf coasts to the cost of their crude inputs at around $100 or more, the difference of $15-17/bbl isn't historically unusual. Meanwhile, refineries in the middle of the country have recently been experiencing much stronger margins. This disparity is evident in the second quarter earnings reported by various US refining companies. East coast refiner Sunoco, which hasn't benefited much from cheap WTI, reported a net loss for the quarter, while Valero, with a bigger and more geographically dispersed refining system that includes facilities processing large quantities of WTI-related crude, saw refining segment earnings increase by 39% compared to the second quarter of 2010. The Cushing effect was even more pronounced for the recently merged HollyFrontier Corp., which apparently runs little crude that isn't priced near WTI and saw second-quarter net income almost triple versus 2Q2010. Even after that extra profit margin, gas prices in Tulsa, OK are currently as low as $3.30/gal., or about 15 cents per gallon less than the national average after adjusting for differences in state gas taxes.
Gasoline prices are determined by more than just crude oil prices, though in the long run the two must move together, because the latter represents the largest component of the cost of the former. At least until the bottleneck in Cushing is resolved by new pipeline capacity to the Gulf Coast, one option for which was just canceled, we will need to look beyond our old reliable WTI price indicator in order to compare gasoline and crude prices on a representative basis. I've been paying a lot more attention to the Brent market, and the Wall St. Journal still publishes daily prices for Louisiana Light Sweet and ANS. When and if those indices drop significantly, then it will be time to start looking for a commensurate drop in retail gasoline prices at the pump.
Monday, August 22, 2011
Oil Sands Anxiety Is Overblown
As I was catching up on a two-week backlog of news after my vacation, I ran across a New York Times editorial with the promising title of "Tar Sands and the Carbon Numbers." Thinking that perhaps the Times might have woken up to the necessity of comparing the lifecycle emissions from oil sands to those from other crude oils, I was disappointed to find its editors perpetuating the common misunderstanding concerning these emissions when viewed only from an oil-production perspective. That's a shame, because it results in the scape-goating of Canadian producers and pipeline companies while conveniently avoiding the soul-searching that ought to accompany a clear understanding that, whether we're talking about oil sands or conventional oil imported from any other source, the vast majority of the lifecycle emissions will occur here, when the products into which these oils will be refined are consumed. It is also condescending toward the sovereign responsibility of our NAFTA neighbor for managing their national emissions under the Kyoto Protocol, which they ratified but we didn't.
The pending State Department review of the proposed Keystone XL pipeline project linking Alberta's oil and oil-sands projects to Gulf Coast refineries has become a hot-button issue for US environmental groups. Producing oil from oil sands, which were more commonly called tar sands until that became a term of disparagement, certainly involves more environmental consequences than most--though not all--conventional crude oils. Since US groups haven't been very successful targeting the oil sands projects in Alberta, where they contribute significantly to Canada's oil output and overall economy, the export pipeline has become a target of convenience. From my perspective, the angst about pipeline safety and acidic bitumen is mainly a red herring; the oil industry routinely handles other crude oils of similar sulfur levels and acidity, usually by adjusting the metallurgy of the pipes and vessels involved. The real issue here is greenhouse gas emissions, which the Times and most other critics of oil sands narrowly compare to those from producing conventional oils.
The Environment Canada report cited by the Times indicates that oil sands production and upgrading result in emissions about 70% higher per barrel than for the production of Canada's average conventional oil. That's in the range of other estimates I've seen. However, what the Times fails to mention is that such "upstream" emissions only account for a fraction of the total lifecycle emissions attributable to any oil. By far the biggest portion--even for oil sands--comes from the combustion of petroleum products by end-users.
So if at least 70% of the emissions from oil sands crude occur in the US, rather than Canada, and if the lifecycle (well-to-wheels) emissions from oil sands only average around 15% higher than for the average US refinery's crude slate, while emitting little or no more than some commonly imported crude oils from other countries, are the XL pipeline's opponents exaggerating its impact? I believe they are, unless they're also willing to take on imports of consumer goods and other products from higher-emitting countries like China. That would be difficult to justify to the World Trade Organization, considering that the US doesn't have a statutory limit on its own greenhouse gas emissions. It might also put us in an awkward position with regard to our exports to countries that have adopted strict emissions reduction targets.
Meanwhile we shouldn't forget that under UN agreements it is Canada that bears responsibility for the extra emissions that oil sands generate in Alberta. The Environment Canada report indicates that oil sands are likely to contribute 11.7% of Canada's GHG emissions by 2020, up from 6.7% in 2005, when Canada's share of global GHG emissions stood at less than 2%. The expected increase in oil sands output would account for essentially all of the projected 7% rise in Canada's emissions over that interval, an amount equivalent to 0.1% of current global emissions. The means by which Canada could address those incremental emissions include improved technology, offsetting cuts in other sectors, emissions trading and offsets purchased from other countries, or the Canadian government could simply choose to restrict oil sands output. Whatever path they choose, we have plenty of our own emissions to consider without going into a tizzy over a Canadian sector that currently emits roughly as much as US livestock waste management.
Trying to control the emissions from oil sands by blocking this pipeline is a perfect illustration of the difficulty of attempting to tackle a complex global environmental problem by focusing on isolated measures that only bear indirectly on the outcomes that matter. The weakness of the Times' argument is reflected in the following sentence, referring to Canada's policies: "The United States can't do much about that, but it can stop the Keystone XL pipeline." The implication seems to be that we would be better off if Canada exported its oil sands to developing Asia, their next best market, relieving us of any associated guilt, even if it made no actual difference in global emissions. I hope that when the State Department decides this matter, it gives appropriate weight to the fact that, other than fuel economy improvements in the US car fleet, our energy ties with Canada represent the single most effective energy security measure undertaken by this country since the oil crises of the 1970s.
The pending State Department review of the proposed Keystone XL pipeline project linking Alberta's oil and oil-sands projects to Gulf Coast refineries has become a hot-button issue for US environmental groups. Producing oil from oil sands, which were more commonly called tar sands until that became a term of disparagement, certainly involves more environmental consequences than most--though not all--conventional crude oils. Since US groups haven't been very successful targeting the oil sands projects in Alberta, where they contribute significantly to Canada's oil output and overall economy, the export pipeline has become a target of convenience. From my perspective, the angst about pipeline safety and acidic bitumen is mainly a red herring; the oil industry routinely handles other crude oils of similar sulfur levels and acidity, usually by adjusting the metallurgy of the pipes and vessels involved. The real issue here is greenhouse gas emissions, which the Times and most other critics of oil sands narrowly compare to those from producing conventional oils.
The Environment Canada report cited by the Times indicates that oil sands production and upgrading result in emissions about 70% higher per barrel than for the production of Canada's average conventional oil. That's in the range of other estimates I've seen. However, what the Times fails to mention is that such "upstream" emissions only account for a fraction of the total lifecycle emissions attributable to any oil. By far the biggest portion--even for oil sands--comes from the combustion of petroleum products by end-users.
So if at least 70% of the emissions from oil sands crude occur in the US, rather than Canada, and if the lifecycle (well-to-wheels) emissions from oil sands only average around 15% higher than for the average US refinery's crude slate, while emitting little or no more than some commonly imported crude oils from other countries, are the XL pipeline's opponents exaggerating its impact? I believe they are, unless they're also willing to take on imports of consumer goods and other products from higher-emitting countries like China. That would be difficult to justify to the World Trade Organization, considering that the US doesn't have a statutory limit on its own greenhouse gas emissions. It might also put us in an awkward position with regard to our exports to countries that have adopted strict emissions reduction targets.
Meanwhile we shouldn't forget that under UN agreements it is Canada that bears responsibility for the extra emissions that oil sands generate in Alberta. The Environment Canada report indicates that oil sands are likely to contribute 11.7% of Canada's GHG emissions by 2020, up from 6.7% in 2005, when Canada's share of global GHG emissions stood at less than 2%. The expected increase in oil sands output would account for essentially all of the projected 7% rise in Canada's emissions over that interval, an amount equivalent to 0.1% of current global emissions. The means by which Canada could address those incremental emissions include improved technology, offsetting cuts in other sectors, emissions trading and offsets purchased from other countries, or the Canadian government could simply choose to restrict oil sands output. Whatever path they choose, we have plenty of our own emissions to consider without going into a tizzy over a Canadian sector that currently emits roughly as much as US livestock waste management.
Trying to control the emissions from oil sands by blocking this pipeline is a perfect illustration of the difficulty of attempting to tackle a complex global environmental problem by focusing on isolated measures that only bear indirectly on the outcomes that matter. The weakness of the Times' argument is reflected in the following sentence, referring to Canada's policies: "The United States can't do much about that, but it can stop the Keystone XL pipeline." The implication seems to be that we would be better off if Canada exported its oil sands to developing Asia, their next best market, relieving us of any associated guilt, even if it made no actual difference in global emissions. I hope that when the State Department decides this matter, it gives appropriate weight to the fact that, other than fuel economy improvements in the US car fleet, our energy ties with Canada represent the single most effective energy security measure undertaken by this country since the oil crises of the 1970s.
Thursday, August 04, 2011
US Renewables Need A Fallback Plan
When I described some of the energy implications of the debt limit crisis last month, the most serious ones were associated with a default by the US government in the event the debt ceiling wasn't extended. That risk has been resolved, for now. But that doesn't mean that everything looks rosy, especially for renewables. Renewable energy technologies and projects are far more dependent on government assistance and policies than conventional energy. The fate of a wide range of federal energy incentives looks highly uncertain, and the impact of that uncertainty is matched by doubts about the health of the US economy and its growth prospects. With the pace of growth already slowing in some renewable energy sectors, any manufacturers or project developers that aren't thinking seriously about how they would manage without federal incentives could be setting themselves up to become roadkill.
Understanding why requires taking a closer look at the debt ceiling bill that Congress passed in the context of the federal budget baseline--never mind that the US Congress has not enacted a budget in more than two years. In April the Congressional Budget Office (CBO) published its assessment of what the economy would look like under the budget submitted by President Obama in February, as well as under the laws already on the books. The latter comprises the "March CBO Baseline" that was mentioned frequently during the debt limit talks and that formed the basis for comparing different proposals. (See Table 1-5 of the CBO report.) Without factoring in this week's debt limit agreement, the CBO projected a cumulative deficit for fiscal years 2012-21 of $6.7 trillion. That figure is important for several reasons.
First, it serves as a reminder that even after the $917 billion of cuts agreed up front and the $1.2-1.5 trillion of future cuts to be determined later this year, the US debt would still grow by more than $4 trillion over the next decade, mainly through increases in mandatory, or non-discretionary spending--entitlements and other untouchables. That won't change even under the deal done by the Senate and House this week; all of its pre-programmed cuts are to discretionary spending, the category into which most federal spending on renewable energy would fall.
But even that $4 trillion figure looks optimistic. As I understand it the CBO baseline assumes that next January 1 all of the Bush-era tax cuts will expire on schedule, resulting in substantial increases in taxes on both ordinary income and dividend income. And that's not just for those earning more than $200,000 per year, or whatever the threshold of "wealthy" is determined to be; it's for everyone. Nor would the Alternative Minimum Tax, which has been biting a growing number of middle class families every year, be indexed as proposed. It also assumes that the Social Security payroll tax will revert to its normal level of 6.2%, up from this year's 4.2%. Barring a dramatic improvement in the economy between now and the end of the year, it seems unlikely that all of those tax increases will be allowed to take effect. That means that the government's revenue through 2021 is likely to be significantly lower than the CBO forecast, because both growth and tax rates are likely to be lower. That translates into bigger deficits and more pressure for deficit reduction.
So the environment for continued support for renewables will be one in which the government's projected deficits continue as far as the eye can see, even after painful cuts, while its ability to continue borrowing on that scale looks suspect. With the main focus of budget cuts falling on the category that includes cash support for renewables, how likely is it that the Congress would extend the Treasury renewable energy cash grant program when it expires on December 31, 2011, or add new appropriations for the Department of Energy's Loan Guarantee Program? And if the Congressional super-committee's proposals include tax reform that would eliminate many "tax expenditures"--tax credits and deductions--then a host of programs such as the solar investment tax credit, the wind, biomass and geothermal energy production tax credit, various biofuel tax credits, and the electric vehicle purchase tax credit, could end up on the cutting block. In the coming scramble to avoid the budget knife, renewables will be competing with better-established programs with broader and more influential constituencies.
It has always been a risky proposition to build companies and industries, the economics of which depended on substantial government subsidies. Some folks could be on the verge of finding out just how risky. If we go down that path, it will probably also result in awkward questions being asked about some of the decisions made by the stewards of these government programs. They should be; I've never understood what kind of due diligence could have resulted in hundreds of millions of dollars in grants or "loans" going to to clean energy and automotive startups with minimal track records, when private investors weren't willing to bet on those risks at that scale. From a national energy policy and strategy perspective, our focus should not be on saving individual companies--no TARP for renewables, I suspect--but on preserving key capabilities essential to ensuring a long-term competitive US position in the global clean energy market.
What would that entail? First, as government funding for renewables becomes constrained it should be focused on R&D at the expense of deployment. Not only would the available money go much farther, but it would also create more options for the future. The next step should be to ensure that whatever the government does spend on deployment should go to projects that are close to being viable without help, or in the case of the military that enhance combat capabilities. That means, for example, focusing solar development assistance on sunny places like the southwest--preferably in proximity to existing transmission infrastructure--and putting an end to paying people to install utility and rooftop solar in places that receive less than about 5 "peak sun hours" (kWh/m2) per day, on average. Again, the money would go farther, and we'd be shoring up nearly viable operations, instead of trying to command the tide not to overwhelm the marginal ones. And finally, as I suggested last week, a greater emphasis on exports to developing country markets, where energy demand is growing at impressive rates and where renewables are becoming increasingly popular, would increase export earnings and employment while participating in volume-related unit cost reductions. And looking beyond renewable energy, the US government has a bird's nest on the ground in the form of the potential lease bid and royalty income from the substantial oil and gas resources that have been placed off limits for various reasons. Tapping those looks like a much smarter source of revenue--not to mention job creation--than selling off the Strategic Petroleum Reserve bit by bit.
If that sounds like a recipe for putting the US cleantech industry on life support after years of robust government-supported growth, then that's consistent with the severity of the fallback plan that could become necessary. The need for this would depend on the priorities set by the special Congressional deficit reduction committee established by the debt ceiling bill, and by the Congress as a whole, along with the subsequent efforts that will be necessary to prevent our long-term debt from growing beyond our ability to service it. Nor would it be quite the starvation diet it might appear, as long as states kept their renewable portfolio standards in place. This isn't a scenario the cleantech industry would willingly choose, but it's one that it can't ignore.
Understanding why requires taking a closer look at the debt ceiling bill that Congress passed in the context of the federal budget baseline--never mind that the US Congress has not enacted a budget in more than two years. In April the Congressional Budget Office (CBO) published its assessment of what the economy would look like under the budget submitted by President Obama in February, as well as under the laws already on the books. The latter comprises the "March CBO Baseline" that was mentioned frequently during the debt limit talks and that formed the basis for comparing different proposals. (See Table 1-5 of the CBO report.) Without factoring in this week's debt limit agreement, the CBO projected a cumulative deficit for fiscal years 2012-21 of $6.7 trillion. That figure is important for several reasons.
First, it serves as a reminder that even after the $917 billion of cuts agreed up front and the $1.2-1.5 trillion of future cuts to be determined later this year, the US debt would still grow by more than $4 trillion over the next decade, mainly through increases in mandatory, or non-discretionary spending--entitlements and other untouchables. That won't change even under the deal done by the Senate and House this week; all of its pre-programmed cuts are to discretionary spending, the category into which most federal spending on renewable energy would fall.
But even that $4 trillion figure looks optimistic. As I understand it the CBO baseline assumes that next January 1 all of the Bush-era tax cuts will expire on schedule, resulting in substantial increases in taxes on both ordinary income and dividend income. And that's not just for those earning more than $200,000 per year, or whatever the threshold of "wealthy" is determined to be; it's for everyone. Nor would the Alternative Minimum Tax, which has been biting a growing number of middle class families every year, be indexed as proposed. It also assumes that the Social Security payroll tax will revert to its normal level of 6.2%, up from this year's 4.2%. Barring a dramatic improvement in the economy between now and the end of the year, it seems unlikely that all of those tax increases will be allowed to take effect. That means that the government's revenue through 2021 is likely to be significantly lower than the CBO forecast, because both growth and tax rates are likely to be lower. That translates into bigger deficits and more pressure for deficit reduction.
So the environment for continued support for renewables will be one in which the government's projected deficits continue as far as the eye can see, even after painful cuts, while its ability to continue borrowing on that scale looks suspect. With the main focus of budget cuts falling on the category that includes cash support for renewables, how likely is it that the Congress would extend the Treasury renewable energy cash grant program when it expires on December 31, 2011, or add new appropriations for the Department of Energy's Loan Guarantee Program? And if the Congressional super-committee's proposals include tax reform that would eliminate many "tax expenditures"--tax credits and deductions--then a host of programs such as the solar investment tax credit, the wind, biomass and geothermal energy production tax credit, various biofuel tax credits, and the electric vehicle purchase tax credit, could end up on the cutting block. In the coming scramble to avoid the budget knife, renewables will be competing with better-established programs with broader and more influential constituencies.
It has always been a risky proposition to build companies and industries, the economics of which depended on substantial government subsidies. Some folks could be on the verge of finding out just how risky. If we go down that path, it will probably also result in awkward questions being asked about some of the decisions made by the stewards of these government programs. They should be; I've never understood what kind of due diligence could have resulted in hundreds of millions of dollars in grants or "loans" going to to clean energy and automotive startups with minimal track records, when private investors weren't willing to bet on those risks at that scale. From a national energy policy and strategy perspective, our focus should not be on saving individual companies--no TARP for renewables, I suspect--but on preserving key capabilities essential to ensuring a long-term competitive US position in the global clean energy market.
What would that entail? First, as government funding for renewables becomes constrained it should be focused on R&D at the expense of deployment. Not only would the available money go much farther, but it would also create more options for the future. The next step should be to ensure that whatever the government does spend on deployment should go to projects that are close to being viable without help, or in the case of the military that enhance combat capabilities. That means, for example, focusing solar development assistance on sunny places like the southwest--preferably in proximity to existing transmission infrastructure--and putting an end to paying people to install utility and rooftop solar in places that receive less than about 5 "peak sun hours" (kWh/m2) per day, on average. Again, the money would go farther, and we'd be shoring up nearly viable operations, instead of trying to command the tide not to overwhelm the marginal ones. And finally, as I suggested last week, a greater emphasis on exports to developing country markets, where energy demand is growing at impressive rates and where renewables are becoming increasingly popular, would increase export earnings and employment while participating in volume-related unit cost reductions. And looking beyond renewable energy, the US government has a bird's nest on the ground in the form of the potential lease bid and royalty income from the substantial oil and gas resources that have been placed off limits for various reasons. Tapping those looks like a much smarter source of revenue--not to mention job creation--than selling off the Strategic Petroleum Reserve bit by bit.
If that sounds like a recipe for putting the US cleantech industry on life support after years of robust government-supported growth, then that's consistent with the severity of the fallback plan that could become necessary. The need for this would depend on the priorities set by the special Congressional deficit reduction committee established by the debt ceiling bill, and by the Congress as a whole, along with the subsequent efforts that will be necessary to prevent our long-term debt from growing beyond our ability to service it. Nor would it be quite the starvation diet it might appear, as long as states kept their renewable portfolio standards in place. This isn't a scenario the cleantech industry would willingly choose, but it's one that it can't ignore.
Tuesday, August 02, 2011
The Next Big CAFE Loophole
The great pitfall of government policies, no matter how well-intended they might be, is their inevitable unintended consequences. When those are truly surprising, it's hard to attach much blame to the legislators or regulators involved. However, that degree of indulgence shouldn't apply when the unintended consequences are as obvious as the ones inherent in the new fuel economy regulations that were announced with such fanfare last week. After all, an earlier generation of CAFE standards gave rise to what might just be the classic unintended consequence of recent times: the "SUV loophole" that fed a 20-plus-year SUV fad and dug the nation's oil consumption hole much deeper than it needed to be, affecting oil prices, trade deficits and energy security. Now regulators are proposing the creation of a similar loophole for electric vehicles.
I'm not surprised that the coverage I have read on the latest CAFE debate didn't remind the public of the ongoing consequences of treating pick-up trucks and delivery vehicles differently than passenger cars when the first CAFE standards were established in the 1970s. (That loophole was mostly closed just a few years ago.) Who could have guessed that a provision intended to help small businesses would blow up, because an entire generation embraced deluxe versions of such vehicles as their primary transportation--by the tens of millions--undermining the purpose of the CAFE standards to reduce gasoline demand? When I looked at this several years ago, I estimated that SUVs had increased US gasoline consumption by over 400,000 barrels per day, or roughly 5% of total demand, equivalent to the energy contribution of around 10 billion gallons per year of ethanol.
In this case the problem starts with the evolution of Corporate Average Fuel Economy standards from a tool intended solely to improve US energy security by reducing the consumption of petroleum products in transportation, to one encompassing the greenhouse gas emissions implicated in climate change. Although there are important overlaps between these two goals--keeping a chorus of pundits employed touting them--they are not identical in operation or effect. Consider the specifics of the new CAFE proposal.
The "supplemental notice of intent" from the National Highway Traffic Safety Agency (NHTSA) of the Department of Energy, the body that along with the EPA designs and enforces the CAFE standard, spells out the special treatment accorded EVs in the rules that will be forthcoming. It states that EPA intends to give manufacturers multiple credit for each EV, plug-in hybrid (PHEV) and fuel cell vehicle they sell, starting at a multiplier of 2.0 for EVs and fuel cells and declining to 1.5 by 2021, as if these cars somehow canceled the emissions of more than one vehicle. They also intend to treat EVs and the electric portion of PHEVs as having zero emissions, regardless of how the power they use is generated. So in order to meet the tough greenhouse gas standards that accompany the 54.5 mpg CAFE standard, carmakers will have every incentive to produce as many EVs they can. Unfortunately, it's not obvious that this will reduce emissions in the real world, except in the rare instances when EVs recharge exclusively from renewable or nuclear power, which provide only 30% of our electricity mix today, up from 28% in 2005.
One needn't assume that EVs might be recharged using only coal-fired power to see that they aren't always a big improvement, emissions-wise, over non-plug-in Prius-type hybrids or clean diesels. Using the average US grid CO2 emissions of around 1.3 lb/kWh, a Nissan Leaf getting 3 miles per kWh is responsible for the emission of roughly 200 grams of CO2 per mile traveled. By comparison, a 2011 Prius with its 50 mpg EPA average emits around 196 g/mi. A more rigorous comparison would require a full well-to-wheels lifecycle assessment, but that is precisely what the new CAFE rules eschew in the interest of leaning on the scales to help today's preferred vehicle technology.
Subject to further refinement, this back-of-the-envelope analysis suggests that skewing the new CAFE regulations in favor of EVs isn't going to do much to reduce greenhouse gas emissions. Its main advantage is in reducing oil consumption, since less than 1% of our electricity is generated from oil. But if we only cared about oil and not emissions, producing gasoline from domestic coal--in the same manner as a sizeable fraction of South Africa's fuel supply--would be equally effective at backing out oil imports. Meanwhile, a gallon of gasoline saved by an advanced internal combustion engine with stop-start technology and other low-cost efficiency features would be worth exactly as much as a gallon saved by an EV, while costing dramatically less. That's especially true when you factor in the $7,500/car EV tax credit, which I can't help thinking will be a prime target when the joint Congressional committee on deficit reduction established by the debt limit bill passed by the House of Representatives last night and by the Senate just a few minutes ago sets up shop this fall.
The unintended consequence that is easily envisioned from this special treatment of EVs is a massive over-investment in a particular and still very expensive vehicle technology, at the expense of other, less costly and more cost-effective technologies. I certainly accept that EVs represent a major long-term trend in cars, but I don't believe that their development requires fiddling with the CAFE rules in this way. Nor is it obvious that US manufacturers enjoy any particular competitive advantage in producing EVs, which depend on ingredients such as rare earths for which we are even more import-dependent than for oil. If saving oil and emissions is what we really care about, then we are entitled to expect that new fuel economy regulations would focus squarely on those outcomes, without being diverted by the industrial policy fad of the moment. Perhaps this will be one of the topics taken up by the House Oversight and Government Reform Committee of the Congress as it investigates the new CAFE rules.
I'm not surprised that the coverage I have read on the latest CAFE debate didn't remind the public of the ongoing consequences of treating pick-up trucks and delivery vehicles differently than passenger cars when the first CAFE standards were established in the 1970s. (That loophole was mostly closed just a few years ago.) Who could have guessed that a provision intended to help small businesses would blow up, because an entire generation embraced deluxe versions of such vehicles as their primary transportation--by the tens of millions--undermining the purpose of the CAFE standards to reduce gasoline demand? When I looked at this several years ago, I estimated that SUVs had increased US gasoline consumption by over 400,000 barrels per day, or roughly 5% of total demand, equivalent to the energy contribution of around 10 billion gallons per year of ethanol.
In this case the problem starts with the evolution of Corporate Average Fuel Economy standards from a tool intended solely to improve US energy security by reducing the consumption of petroleum products in transportation, to one encompassing the greenhouse gas emissions implicated in climate change. Although there are important overlaps between these two goals--keeping a chorus of pundits employed touting them--they are not identical in operation or effect. Consider the specifics of the new CAFE proposal.
The "supplemental notice of intent" from the National Highway Traffic Safety Agency (NHTSA) of the Department of Energy, the body that along with the EPA designs and enforces the CAFE standard, spells out the special treatment accorded EVs in the rules that will be forthcoming. It states that EPA intends to give manufacturers multiple credit for each EV, plug-in hybrid (PHEV) and fuel cell vehicle they sell, starting at a multiplier of 2.0 for EVs and fuel cells and declining to 1.5 by 2021, as if these cars somehow canceled the emissions of more than one vehicle. They also intend to treat EVs and the electric portion of PHEVs as having zero emissions, regardless of how the power they use is generated. So in order to meet the tough greenhouse gas standards that accompany the 54.5 mpg CAFE standard, carmakers will have every incentive to produce as many EVs they can. Unfortunately, it's not obvious that this will reduce emissions in the real world, except in the rare instances when EVs recharge exclusively from renewable or nuclear power, which provide only 30% of our electricity mix today, up from 28% in 2005.
One needn't assume that EVs might be recharged using only coal-fired power to see that they aren't always a big improvement, emissions-wise, over non-plug-in Prius-type hybrids or clean diesels. Using the average US grid CO2 emissions of around 1.3 lb/kWh, a Nissan Leaf getting 3 miles per kWh is responsible for the emission of roughly 200 grams of CO2 per mile traveled. By comparison, a 2011 Prius with its 50 mpg EPA average emits around 196 g/mi. A more rigorous comparison would require a full well-to-wheels lifecycle assessment, but that is precisely what the new CAFE rules eschew in the interest of leaning on the scales to help today's preferred vehicle technology.
Subject to further refinement, this back-of-the-envelope analysis suggests that skewing the new CAFE regulations in favor of EVs isn't going to do much to reduce greenhouse gas emissions. Its main advantage is in reducing oil consumption, since less than 1% of our electricity is generated from oil. But if we only cared about oil and not emissions, producing gasoline from domestic coal--in the same manner as a sizeable fraction of South Africa's fuel supply--would be equally effective at backing out oil imports. Meanwhile, a gallon of gasoline saved by an advanced internal combustion engine with stop-start technology and other low-cost efficiency features would be worth exactly as much as a gallon saved by an EV, while costing dramatically less. That's especially true when you factor in the $7,500/car EV tax credit, which I can't help thinking will be a prime target when the joint Congressional committee on deficit reduction established by the debt limit bill passed by the House of Representatives last night and by the Senate just a few minutes ago sets up shop this fall.
The unintended consequence that is easily envisioned from this special treatment of EVs is a massive over-investment in a particular and still very expensive vehicle technology, at the expense of other, less costly and more cost-effective technologies. I certainly accept that EVs represent a major long-term trend in cars, but I don't believe that their development requires fiddling with the CAFE rules in this way. Nor is it obvious that US manufacturers enjoy any particular competitive advantage in producing EVs, which depend on ingredients such as rare earths for which we are even more import-dependent than for oil. If saving oil and emissions is what we really care about, then we are entitled to expect that new fuel economy regulations would focus squarely on those outcomes, without being diverted by the industrial policy fad of the moment. Perhaps this will be one of the topics taken up by the House Oversight and Government Reform Committee of the Congress as it investigates the new CAFE rules.
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