Another firm that received a loan guarantee from the Department of Energy has just filed for bankruptcy. Beacon Power had drawn down $39.1 million of the $43 million authorized by the DOE for the construction of its 20 MW energy storage facility in Stephenstown, NY, but was still operating at a loss and unable to find additional backing. As was the case for Solyndra, the DOE's "loan guarantee" actually took the form of a direct loan from the Federal Financing Bank, an arm of the US Treasury, rather than from a commercial bank or other private-sector lender. If two data points can indicate a pattern, the one here reflects poorly on venture capital decisions made solely by government officials lacking any stake in the eventual outcome of the investment. Real venture capitalists make bad bets, too, but with an entirely different degree of accountability.
The Beacon failure is especially disheartening, because it involves the application of energy storage to grid services, which many believe is crucial for integrating large increments of intermittent renewable energy--mainly wind and solar power--into our electricity supply. In particular, Beacon's use of flywheels, rapidly rotating disks capable of storing and releasing large amounts of energy quickly, looked like a promising alternative to chemical batteries. I've long been intrigued by this technology, which is also being applied to race cars. Beacon's problems appear to be both technical and financial, with two of the company's flywheels having failed catastrophically since startup due to manufacturing defects, and the business model generating insufficient revenue to support the company's obligations.
Unlike Solyndra, the DOE's investment in Beacon Power might not turn out to be a complete loss, though I don't share the confidence of the DOE's spokesman that the "valuable collateral asset" will enable the government to recover the entire sum it lent Beacon. With an operating facility and ongoing revenues, it's possible that the firm's liabilities could be reorganized in such a way than it could emerge from bankruptcy as a viable entity. However, if its reported second-quarter revenue of $525,000 is indicative, it's very hard to see that either the business or the underlying assets could be worth more than a fraction of the $39 million federal loan liability, let alone their $72 million book value. "Haircuts" seem to be in vogue, and I'm guessing that Uncle Sam will take one on Beacon, in order to realize any value at all from the deal.
I'm relieved that the administration has finally ordered an independent review of the entire loan guarantee program, though it's a little late for that to accomplish much more at this stage than bringing additional problems to light. The main 1705 loan guarantee program is out of money and unlikely to receive further appropriations, at least until after the 2012 election. Meanwhile, another energy-related stimulus beneficiary, advanced-battery maker Ener1, was just de-listed from NASDAQ last Friday. The best coda on this whole situation may come from the blog of VC David Gold, who wrote yesterday that the administration's cleantech stimulus is turning out to be "Bad Policy, Bad Politics, and Bad for Cleantech." I'll bet there are many executives at cleantech firms who now wish they had never heard of Treasury grants and DOE loan guarantees.
Tuesday, November 01, 2011
Friday, October 28, 2011
Repaying Greece's Debts with Tomorrow's Sunlight
Some days the economic news seems to emanate from the Twilight Zone. When the official summit document from Wednesday's meeting of EU leaders seeking to avert another financial crisis includes a reference to repaying a portion of Greek debt with the output of a huge PV array that might not be completed for several decades, if it is built at all, I don't know how else to describe it. And that's before considering the perplexing economics behind the Helios scheme, which apparently entails Germany or other EU members investing or lending--after lenders have just agreed to take a 50% haircut on previous Greek debt--up to €20 billion to build a 10 GW PV installation in Greece to generate power that would be sent to central Europe via transmission lines that don't all exist yet. Either I'm missing a key element of the plan, or the EU ministers didn't quite grasp the details involved.
Let's start by stipulating that the idea of generating solar power in a sunny location like Greece and sending it to darker northern countries like Germany probably makes a lot more sense than investing billions of Euros installing additional solar in the latter, where it will be lucky to produce annual output equal to an average of 10% of its nameplate capacity, compared to 25% or more in an ideal location. That's the same logic behind the much larger and better-known Desertec plan, which would accomplish much the same goal from installations in North Africa and the Middle East, if it ever gets built. The problem in the case of Helios, as the Greek project is called, isn't the basic engineering concept but the financial one necessary for it to function in the manner suggested in the EU document.
In order for Helios to generate significant value to offset part of Greece's borrowings from the European Financial Stability Facility (EFSF) and other EU institutions, it would follow that Greece should actually own either the Helios installation or the rights to most of the power it would generate. Yet it's also clear that Helios could only be built with massive non-Greek investment of either equity or debt. If equity, then wouldn't the foreign investors own most of Helios and its output, leaving Greece little from which to repay its debts? And if debt, wouldn't that mean Greece was repaying one debt with the proceeds of another, rendering this scheme just a circuitous form of rollover?
Perhaps the Greek government assumes it will end up with a large carried interest in the project merely from contributing the land upon which it would sit, and for streamlining the permitting process for building it. But what proportion of most PV projects is attributable to land, especially in competing, high-sun regions such as those involved in Desertec? I'd think it was pretty low compared to the value of all the solar and electrical hardware, which Greece can't afford to buy on its own. And once we determine how much of the project Greece would actually own, then we would need to calculate the revenue out of which debt repayment could be remitted. If they're counting on power prices close to today's German feed-in tariffs, which were just slashed again, I think they're going to be very disappointed at the end of the day. My guess is the power would be worth no more than around 10 €-cents per kWh at the source, to allow it to compete in the German wholesale market after accounting for transmission costs. At that rate a 100% share of twenty years of 10 GW of PV under Greece's average temperature-adjusted insolation might generate an undiscounted €25 billion, but that's before repaying the project's up-front investment and all other expenses.
Not so long ago the prospects for projects like Helios were mainly determined by the interaction of oil prices and climate policy, with strong global economic growth essentially a given. That proposition has recently been inverted, with oil prices, climate policy and energy development all being driven or constrained largely by economic factors. In this context Helios looks potentially useful as a development project that could provide some construction jobs and eventually generate some corporate tax revenue for Greece on the profits from exporting green electricity to the project's effective owners in central Europe. That could give the Greek economy a bit of a boost. However, the line in the EU communique in which , "Greece commits future cash flows from project Helios...to further reduce indebtedness of the Hellenic Republic by up to €15 billion with the aim of restoring the lending capacity of the EFSF," seems to reflect the same sort of thinking that brought Greece to its current situation.
Let's start by stipulating that the idea of generating solar power in a sunny location like Greece and sending it to darker northern countries like Germany probably makes a lot more sense than investing billions of Euros installing additional solar in the latter, where it will be lucky to produce annual output equal to an average of 10% of its nameplate capacity, compared to 25% or more in an ideal location. That's the same logic behind the much larger and better-known Desertec plan, which would accomplish much the same goal from installations in North Africa and the Middle East, if it ever gets built. The problem in the case of Helios, as the Greek project is called, isn't the basic engineering concept but the financial one necessary for it to function in the manner suggested in the EU document.
In order for Helios to generate significant value to offset part of Greece's borrowings from the European Financial Stability Facility (EFSF) and other EU institutions, it would follow that Greece should actually own either the Helios installation or the rights to most of the power it would generate. Yet it's also clear that Helios could only be built with massive non-Greek investment of either equity or debt. If equity, then wouldn't the foreign investors own most of Helios and its output, leaving Greece little from which to repay its debts? And if debt, wouldn't that mean Greece was repaying one debt with the proceeds of another, rendering this scheme just a circuitous form of rollover?
Perhaps the Greek government assumes it will end up with a large carried interest in the project merely from contributing the land upon which it would sit, and for streamlining the permitting process for building it. But what proportion of most PV projects is attributable to land, especially in competing, high-sun regions such as those involved in Desertec? I'd think it was pretty low compared to the value of all the solar and electrical hardware, which Greece can't afford to buy on its own. And once we determine how much of the project Greece would actually own, then we would need to calculate the revenue out of which debt repayment could be remitted. If they're counting on power prices close to today's German feed-in tariffs, which were just slashed again, I think they're going to be very disappointed at the end of the day. My guess is the power would be worth no more than around 10 €-cents per kWh at the source, to allow it to compete in the German wholesale market after accounting for transmission costs. At that rate a 100% share of twenty years of 10 GW of PV under Greece's average temperature-adjusted insolation might generate an undiscounted €25 billion, but that's before repaying the project's up-front investment and all other expenses.
Not so long ago the prospects for projects like Helios were mainly determined by the interaction of oil prices and climate policy, with strong global economic growth essentially a given. That proposition has recently been inverted, with oil prices, climate policy and energy development all being driven or constrained largely by economic factors. In this context Helios looks potentially useful as a development project that could provide some construction jobs and eventually generate some corporate tax revenue for Greece on the profits from exporting green electricity to the project's effective owners in central Europe. That could give the Greek economy a bit of a boost. However, the line in the EU communique in which , "Greece commits future cash flows from project Helios...to further reduce indebtedness of the Hellenic Republic by up to €15 billion with the aim of restoring the lending capacity of the EFSF," seems to reflect the same sort of thinking that brought Greece to its current situation.
Tuesday, October 25, 2011
Key Renewable Energy Subsidies About to Expire
The US renewable energy industry faces a greatly altered incentive environment next year, as eligibility for two of its largest current subsidies comes to an end at the close of 2011. The corn ethanol sector will likely see the complete withdrawal of the blenders' credit that has fueled its growth for more than 30 years, while new projects generating electricity from renewable energy sources must shortly attract investment without the Treasury grants that provided up-front cash in place of federal investment tax credits against taxable income--a commodity sometimes in even shorter supply among recipients than the energy they seek to generate. With these expirations taking place against the backdrop of a US presidential election campaign and record levels of deficit and federal debt, the prospects for another round of one-year subsidy extensions look slim. Yet renewable energy development in the US won't grind to a halt without them, because these two programs represent merely the most generous layer of the complex web supporting renewables.
Consider the venerable ethanol tax credit, which was made mostly redundant by the passage of the Energy Independence and Security Act of 2007, with its Renewable Fuels Standard mandating the use of increasing quantities of ethanol in gasoline. In fact, ethanol producers were never more than indirect beneficiaries of the $0.45 per gallon credit, which was paid to refiners and other gasoline blenders in order to help create a market for ethanol. Mission accomplished. Moreover, with US gasoline sales having stalled at a level that can barely absorb all the ethanol that existing US ethanol plants can produce, unless gasoline blends containing more than 10% ethanol become popular, there is simply no need for corn ethanol output to expand further. In fact, the market will be more than sufficiently challenged providing outlets for the limited quantities of cellulosic and other advanced ethanol likely to be produced in the next few years. As I've noted previously, forward-looking members of the industry are now seeking help in expanding the market for high-ethanol blends, rather than perpetuating an outdated support for existing sales.
The situation for renewable electricity sources like wind, solar and geothermal energy is more complicated. The expiring Treasury grants were introduced as part of the 2009 stimulus to stand in for the "tax equity swap" market, a category of financial transactions that froze up during the financial crisis. These swaps provided a private-sector cash-flow bridge between project expenditures and tax credits that only paid off after start-up as income was earned or energy produced. That was particularly helpful for smaller, less profitable developers, but it also provided an additional check on marginal projects. Even after credit markets eased, most developers understandably preferred the cash grants, which reduced their financing costs and avoided the fees that bankers charged on tax equity deals. However, that preference doesn't justify continuing the cash grant program--particularly for the large, profitable corporations that increasing dominate this space. The industry should focus more effort on fostering the revival of a liquid and competitive tax equity market and less on lobbying for an extension of a temporary stimulus measure.
Either way, the tax credits behind these grants and swaps won't last forever. Under current law, the principal federal tax credit for wind will be in place only through 2012, for biomass and geothermal through 2013, and for solar through 2016. Instead of a scenario of perpetual last-minute extensions such as we've seen in the past, the industry and its investors should be thinking about a scenario in which all these tax credits end, either as part of comprehensive tax reform that eliminates most such "tax expenditures"--including the ones for the oil and gas industry that have become so contentious in the last few years--or a transition to providing renewables with similar sorts of incentives as oil and gas, which essentially amount to forms of accelerated depreciation and modest tax breaks for manufacturing in the US, rather than in other countries.
It's also important to realize that even without these tax credits and in the absence of comprehensive federal energy legislation that looks unlikely any time soon, the industry would still retain numerous state-level benefits, starting with the renewable portfolio standards (RPS) for electricity currently in place in 29 states and the District of Columbia, a tally that encompasses most of the states with the best wind and solar resources. These RPS's are similar to the Renewable Fuel Standard for biofuels in requiring utilities to include increasing proportions of renewable energy in their supply portfolios, whether owned or purchased. Such standards, including California's aggressive RPS targeting 33% renewable electricity by 2020, stand outside the polarizing political debate over taxation and government expenditures. They function as an implicit tax on ratepayers, rather than taxpayers, because they show up within customers' utility bills rather than on their 1040 forms. That distinction could be particularly important if the congressional supercommittee fails to reach a consensus, and the default spending cuts built into the Budget Control Act that resolved this summer's debt ceiling crisis kick in.
So while it might appear that the US renewable energy industry is about it be cut loose from the key incentives that enabled it to grow to its present dimensions, it will continue to benefit from supports not enjoyed by other industrial sectors. Even when the current tax credits expire, renewables will have a mandated market providing a floor beneath them. Ethanol output won't revert to 2005 levels, nor will renewables vanish from the landscape, even if their growth slows a bit while the rest of the economy struggles to emerge from the aftermath of the Great Recession and financial crisis, and to avoid a double-dip. Meanwhile, global overcapacity in wind turbine and solar module manufacturing will keep their prices trending lower--and installations stronger--pending industry consolidations that will position both for healthier, more sustainable growth in the long run. All of this falls well short of the level of help for the industry that most renewable energy supporters would like to see, but it's far more than the level playing field (ignoring externalities) that would see cheap and abundant natural gas sweep away all competition for new power generation.
Consider the venerable ethanol tax credit, which was made mostly redundant by the passage of the Energy Independence and Security Act of 2007, with its Renewable Fuels Standard mandating the use of increasing quantities of ethanol in gasoline. In fact, ethanol producers were never more than indirect beneficiaries of the $0.45 per gallon credit, which was paid to refiners and other gasoline blenders in order to help create a market for ethanol. Mission accomplished. Moreover, with US gasoline sales having stalled at a level that can barely absorb all the ethanol that existing US ethanol plants can produce, unless gasoline blends containing more than 10% ethanol become popular, there is simply no need for corn ethanol output to expand further. In fact, the market will be more than sufficiently challenged providing outlets for the limited quantities of cellulosic and other advanced ethanol likely to be produced in the next few years. As I've noted previously, forward-looking members of the industry are now seeking help in expanding the market for high-ethanol blends, rather than perpetuating an outdated support for existing sales.
The situation for renewable electricity sources like wind, solar and geothermal energy is more complicated. The expiring Treasury grants were introduced as part of the 2009 stimulus to stand in for the "tax equity swap" market, a category of financial transactions that froze up during the financial crisis. These swaps provided a private-sector cash-flow bridge between project expenditures and tax credits that only paid off after start-up as income was earned or energy produced. That was particularly helpful for smaller, less profitable developers, but it also provided an additional check on marginal projects. Even after credit markets eased, most developers understandably preferred the cash grants, which reduced their financing costs and avoided the fees that bankers charged on tax equity deals. However, that preference doesn't justify continuing the cash grant program--particularly for the large, profitable corporations that increasing dominate this space. The industry should focus more effort on fostering the revival of a liquid and competitive tax equity market and less on lobbying for an extension of a temporary stimulus measure.
Either way, the tax credits behind these grants and swaps won't last forever. Under current law, the principal federal tax credit for wind will be in place only through 2012, for biomass and geothermal through 2013, and for solar through 2016. Instead of a scenario of perpetual last-minute extensions such as we've seen in the past, the industry and its investors should be thinking about a scenario in which all these tax credits end, either as part of comprehensive tax reform that eliminates most such "tax expenditures"--including the ones for the oil and gas industry that have become so contentious in the last few years--or a transition to providing renewables with similar sorts of incentives as oil and gas, which essentially amount to forms of accelerated depreciation and modest tax breaks for manufacturing in the US, rather than in other countries.
It's also important to realize that even without these tax credits and in the absence of comprehensive federal energy legislation that looks unlikely any time soon, the industry would still retain numerous state-level benefits, starting with the renewable portfolio standards (RPS) for electricity currently in place in 29 states and the District of Columbia, a tally that encompasses most of the states with the best wind and solar resources. These RPS's are similar to the Renewable Fuel Standard for biofuels in requiring utilities to include increasing proportions of renewable energy in their supply portfolios, whether owned or purchased. Such standards, including California's aggressive RPS targeting 33% renewable electricity by 2020, stand outside the polarizing political debate over taxation and government expenditures. They function as an implicit tax on ratepayers, rather than taxpayers, because they show up within customers' utility bills rather than on their 1040 forms. That distinction could be particularly important if the congressional supercommittee fails to reach a consensus, and the default spending cuts built into the Budget Control Act that resolved this summer's debt ceiling crisis kick in.
So while it might appear that the US renewable energy industry is about it be cut loose from the key incentives that enabled it to grow to its present dimensions, it will continue to benefit from supports not enjoyed by other industrial sectors. Even when the current tax credits expire, renewables will have a mandated market providing a floor beneath them. Ethanol output won't revert to 2005 levels, nor will renewables vanish from the landscape, even if their growth slows a bit while the rest of the economy struggles to emerge from the aftermath of the Great Recession and financial crisis, and to avoid a double-dip. Meanwhile, global overcapacity in wind turbine and solar module manufacturing will keep their prices trending lower--and installations stronger--pending industry consolidations that will position both for healthier, more sustainable growth in the long run. All of this falls well short of the level of help for the industry that most renewable energy supporters would like to see, but it's far more than the level playing field (ignoring externalities) that would see cheap and abundant natural gas sweep away all competition for new power generation.
Thursday, October 20, 2011
US Energy Poll Reveals Contradictions
Yesterday I received a press release announcing the results of a new poll on US consumer attitudes towards energy conducted by the McCombs School of Business at the University of Texas in Austin. I wasn't surprised to see that a plurality of the poll's respondents thinks the country is headed in the wrong direction on energy--triple the proportion that think we're on the right track--and many expect the situation to get worse in the next 25 years. That meshes with numerous readings on Americans' views of the overall economy. The poll also showed consumers broadly dissatisfied with the job that government and industry are doing in this regard, though the renewable energy sector, along with engineers, scientists and academia received somewhat better marks. At the same time, the results on several questions either contradict current consumer trends or reveal a poor understanding of energy market influences. Perhaps the most reassuring finding was that less than a quarter of consumers consider themselves knowledgeable on energy, while a large majority is interested in learning more.
The main question that grabbed my attention concerned consumers' "expectations for adopting new technology." 38% reported they were likely to use smart meter technology within the next five years, 30% said they were likely to own a hybrid car, and 21% were likely to install solar panels on their homes. On the face of it, these should be very encouraging results for the renewable energy and advanced vehicle sectors and those who invest in them. At the same time, it's hard to square these figures with the actual adoption rates for such technologies in the marketplace.
Consider hybrids, which have lost most of their novelty in the last decade, with cumulative US hybrid car sales standing at just over 2 million at this point. That's less than 1% of total US light-duty vehicles (cars, SUVs and light trucks), but it's still impressive, considering they started at essentially zero in the late 1990s. The problem is that even now, with practically every major carmaker offering at least one hybrid model, and several fielding an entire range of hybrids, 2011 sales have averaged just 2% of total US car sales of 9.5 million through September, based on figures compiled by hybridcars.com. Add plug-in electric cars like the Chevrolet Volt and Nissan Leaf and you get to 2.1%. Even before hybrid supplies were constrained in the aftermath of the earthquake in Japan, advanced vehicle sales never topped 3% in any month of this year.
The poll provides few insights into why the actual "take rate"would amount to less than a tenth of those with favorable attitudes towards buying a hybrid. However, it does suggest that the standard explanation that gas prices just aren't high enough yet is out of step with how consumers view those prices. Fully 95% of respondents described gas prices as either "very high" or "somewhat high", and 78% expected them to be somewhat or significantly higher in six months. One possible conclusion is that despite coming in compact, SUV, truck and luxury flavors, hybrid technology still doesn't deliver the value and/or performance most consumers are seeking, even if they're receptive to it in the abstract.
Then there's the even more dramatic disconnect on solar power. If 21% of single-family dwellings in the US were to install rooftop solar panels of 3 kW or more in the next five years, that would equate to at least 228 GW of solar power--about 90 times current US installed capacity--for average installations of 46 GW per year, or nearly three times the amount installed globally last year, mostly in Europe. As of the end of 2010, there were 153,000 grid-connected PV systems in the US, including commercial and utility installations. Even if all of them were on the rooftops of homes, that would still amount to just a 0.2% market penetration. Although PV prices are coming down rapidly and sales could approach 2 GW in 2011, this divergence between sentiment and sales suggests that a lot more Americans like the idea of rooftop solar than are actually willing to invest in buying (or leasing) it at this point.
Whatever the UT poll results indicate about the potential medium-term market share of new energy technologies, they provide a data point that Americans view energy as another important issue they believe government is getting wrong. They also highlight the need and opportunity for more education on how energy markets really work, with supply constraints and growing demand actually having a much bigger impact on energy prices than the limited pricing power most energy companies enjoy.
The main question that grabbed my attention concerned consumers' "expectations for adopting new technology." 38% reported they were likely to use smart meter technology within the next five years, 30% said they were likely to own a hybrid car, and 21% were likely to install solar panels on their homes. On the face of it, these should be very encouraging results for the renewable energy and advanced vehicle sectors and those who invest in them. At the same time, it's hard to square these figures with the actual adoption rates for such technologies in the marketplace.
Consider hybrids, which have lost most of their novelty in the last decade, with cumulative US hybrid car sales standing at just over 2 million at this point. That's less than 1% of total US light-duty vehicles (cars, SUVs and light trucks), but it's still impressive, considering they started at essentially zero in the late 1990s. The problem is that even now, with practically every major carmaker offering at least one hybrid model, and several fielding an entire range of hybrids, 2011 sales have averaged just 2% of total US car sales of 9.5 million through September, based on figures compiled by hybridcars.com. Add plug-in electric cars like the Chevrolet Volt and Nissan Leaf and you get to 2.1%. Even before hybrid supplies were constrained in the aftermath of the earthquake in Japan, advanced vehicle sales never topped 3% in any month of this year.
The poll provides few insights into why the actual "take rate"would amount to less than a tenth of those with favorable attitudes towards buying a hybrid. However, it does suggest that the standard explanation that gas prices just aren't high enough yet is out of step with how consumers view those prices. Fully 95% of respondents described gas prices as either "very high" or "somewhat high", and 78% expected them to be somewhat or significantly higher in six months. One possible conclusion is that despite coming in compact, SUV, truck and luxury flavors, hybrid technology still doesn't deliver the value and/or performance most consumers are seeking, even if they're receptive to it in the abstract.
Then there's the even more dramatic disconnect on solar power. If 21% of single-family dwellings in the US were to install rooftop solar panels of 3 kW or more in the next five years, that would equate to at least 228 GW of solar power--about 90 times current US installed capacity--for average installations of 46 GW per year, or nearly three times the amount installed globally last year, mostly in Europe. As of the end of 2010, there were 153,000 grid-connected PV systems in the US, including commercial and utility installations. Even if all of them were on the rooftops of homes, that would still amount to just a 0.2% market penetration. Although PV prices are coming down rapidly and sales could approach 2 GW in 2011, this divergence between sentiment and sales suggests that a lot more Americans like the idea of rooftop solar than are actually willing to invest in buying (or leasing) it at this point.
Whatever the UT poll results indicate about the potential medium-term market share of new energy technologies, they provide a data point that Americans view energy as another important issue they believe government is getting wrong. They also highlight the need and opportunity for more education on how energy markets really work, with supply constraints and growing demand actually having a much bigger impact on energy prices than the limited pricing power most energy companies enjoy.
Tuesday, October 18, 2011
Pipelines in the Spotlight
There aren't many parts of the energy value chain that normally receive less attention than pipelines. Energy production, whether from oil and gas fields, nuclear power plants, or rapidly growing renewable sources usually garners far more attention for the impressive technology and capital involved. By contrast pipelines are long-lived, relatively low-tech and low-return assets that often seem invisible to those outside the industry. Sunday's announcement of Kinder Morgan's bid for El Paso Corp., uniting two pipeline giants into a $94 billion enterprise, reminds us just how big this low-key infrastructure can be. This deal also signals important shifts underway within the fossil fuel industry. Just as the rise of wind and solar power requires an upgraded electricity grid, changes in the sources of our oil and gas have big implications for the networks required to bring these fuels to market.
As an article in today's Wall St. Journal states in its title, the Kinder Morgan-El Paso deal heralds the arrival of the Age of Shale. It simultaneously validates the potential of US shale gas resources and points to a new set of growth opportunities created by unconventional oil and gas resources that couldn't have been produced a decade ago, either economically or technically. This couldn't have come at a better time for the pipeline industry, when its bread-and-butter business of transporting refined products to distribution terminals is reaching a plateau, as developed-country markets exhibit Peak Demand and biofuels output grows. That's a big change from when I worked in the "mid-stream", which includes pipelines, distribution terminals and trading. Then, the challenge was keeping conventional crude pipelines full as domestic onshore oil fields depleted, while expanding capacity to transport gasoline, diesel and jet fuel to meet steadily rising demand. Today the advent of shale gas, shale oil and oil sands crude coincides with the development of a much more diverse energy market.
Recent changes in the economy also make pipelines, which used to be considered dull, more interesting as an investment. With interest rates historically low and equity markets weak and volatile, the modest but stable returns that midstream oil and gas assets offer must seem a lot more attractive than they did prior to the financial crisis, particularly when managed in tax-efficient structures such as the master limited partnerships that Mr. Kinder helped pioneer. And those same low interest rates make the capital required for new private-sector infrastructure projects more affordable. Such projects also look doubly beneficial in the current environment of high unemployment, providing both large numbers of jobs in the short term, during construction, and ensuring the reliable energy supplies needed for sustainable job growth once the economy hits its stride again.
Of course pipelines aren't always dull, particularly when they are the focus of controversies such as the current one concerning the proposed Keystone XL Pipeline. But what many of that project's critics, including celebrities who appear to know less about such facilities than most of my readers, have missed is that despite rare, unfortunate accidents, pipelines remain the best and most efficient means of transporting large volumes of fuel over long distances. Unless you honestly think we can do without these fuels entirely--a scenario that I am convinced will not be realistic for at least another few decades--then it makes little sense to shun pipelines and thus proportionally increase the quantity of fuel that will be carried by truck, rail and ocean-going tankers, all of which are also subject to accidents. Like all infrastructure pipelines require proper maintenance, but they are not inherently risky.
No bet on the scale of the one Kinder Morgan is making can ever be a sure thing, and I can think of several things that might go wrong, topped by a double-dip global recession that lasted for years and sapped both energy demand and gas drilling economics. However, this deal taps into a number of converging trends supporting a US natural gas boom that is part and parcel of the potential global Golden Age of Gas that the International Energy Agency recently described. I wouldn't be surprised to see more transactions along these lines.
As an article in today's Wall St. Journal states in its title, the Kinder Morgan-El Paso deal heralds the arrival of the Age of Shale. It simultaneously validates the potential of US shale gas resources and points to a new set of growth opportunities created by unconventional oil and gas resources that couldn't have been produced a decade ago, either economically or technically. This couldn't have come at a better time for the pipeline industry, when its bread-and-butter business of transporting refined products to distribution terminals is reaching a plateau, as developed-country markets exhibit Peak Demand and biofuels output grows. That's a big change from when I worked in the "mid-stream", which includes pipelines, distribution terminals and trading. Then, the challenge was keeping conventional crude pipelines full as domestic onshore oil fields depleted, while expanding capacity to transport gasoline, diesel and jet fuel to meet steadily rising demand. Today the advent of shale gas, shale oil and oil sands crude coincides with the development of a much more diverse energy market.
Recent changes in the economy also make pipelines, which used to be considered dull, more interesting as an investment. With interest rates historically low and equity markets weak and volatile, the modest but stable returns that midstream oil and gas assets offer must seem a lot more attractive than they did prior to the financial crisis, particularly when managed in tax-efficient structures such as the master limited partnerships that Mr. Kinder helped pioneer. And those same low interest rates make the capital required for new private-sector infrastructure projects more affordable. Such projects also look doubly beneficial in the current environment of high unemployment, providing both large numbers of jobs in the short term, during construction, and ensuring the reliable energy supplies needed for sustainable job growth once the economy hits its stride again.
Of course pipelines aren't always dull, particularly when they are the focus of controversies such as the current one concerning the proposed Keystone XL Pipeline. But what many of that project's critics, including celebrities who appear to know less about such facilities than most of my readers, have missed is that despite rare, unfortunate accidents, pipelines remain the best and most efficient means of transporting large volumes of fuel over long distances. Unless you honestly think we can do without these fuels entirely--a scenario that I am convinced will not be realistic for at least another few decades--then it makes little sense to shun pipelines and thus proportionally increase the quantity of fuel that will be carried by truck, rail and ocean-going tankers, all of which are also subject to accidents. Like all infrastructure pipelines require proper maintenance, but they are not inherently risky.
No bet on the scale of the one Kinder Morgan is making can ever be a sure thing, and I can think of several things that might go wrong, topped by a double-dip global recession that lasted for years and sapped both energy demand and gas drilling economics. However, this deal taps into a number of converging trends supporting a US natural gas boom that is part and parcel of the potential global Golden Age of Gas that the International Energy Agency recently described. I wouldn't be surprised to see more transactions along these lines.
Friday, October 14, 2011
More Lessons from Solyndra
I'll bet that those working and investing in renewable energy are even more tired of the steady stream of headlines from the unraveling Solyndra mess than the rest of us are. Today's crop includes more evidence of the political linkages to the overall process for determining the company's suitability for federal backing and the revelation that an investor in Solyndra was advising the US Navy to sign a contract with them, even as the firm was on the verge of collapse. None of this has done either the industry or the administration any good, and there is much to be learned from this episode. That includes lessons concerning direct government support for the full-scale deployment of renewable energy and other technologies.
Start with the ethics issues. No one should be surprised that investors in Solyndra were lobbying the DOE and White House in support of the company's application for a federal loan guarantee. That was hardly unique to Solyndra or renewable energy. And I'm perfectly willing to accept, unless proven otherwise, that both the DOE advisor whose wife works for a law firm representing Solyndra, and the venture capitalist who apparently advised the Navy to buy Solyndra's technology in his capacity with the Pentagon's Defense Venture Catalyst Initiative, thought they had done everything necessary to resolve any potential conflicts of interest in this matter. Yet in both cases it seems clear that even if nothing improper was done, the appearance of impropriety is very hard to dispel after what seemed like a routine transaction turns into a front-page scandal.
Whenever I see this sort of thing I can't help recalling the early training I received as a petroleum products trader for Texaco, which took anti-trust compliance very seriously. The lawyer who advised our Supply & Distribution department on such matters always reminded us to think about how our dealings with other companies might look if we had to explain them from the witness stand in a court of law. He invariably advised going beyond mere compliance; his mantra was, "Avoid the appearance of evil." That's a lesson that it seems many of the officials involved in the Solyndra debacle either forgot or never received, even if they believed they were in full compliance with existing ethics policies.
When you step back from such details it becomes apparent that these are precisely the sorts of conflicts that result, when the government involves itself so deeply in transactions of a magnitude that would normally be handled in the commercial sector--which even when it makes mistakes does so with shareholder dollars, rather than tax dollars. And make no mistake, if Solyndra had gone broke after receiving $500,000 from Uncle Sam, rather than $535 million, none of these other issues would matter or have seen the light of day.
It's perfectly appropriate--even necessary--for the government to make modest-sized bets on new technology in key areas, particularly when they require greater patience than most corporations are capable of. And it's to be expected that many or even most such bets will turn out to be dead ends, as Solyndra did. The problem is that while a few million dollars will buy a lot of renewable energy R&D, they will buy only a negligible amount of deployment. While the government can afford to make numerous small bets that don't turn out well but advance our knowledge in the process, it can only afford to make a small number of bets on the scale of the Solyndra loan. That ought to be especially true when the deficit and debt loom as large as they do, unless you're a firm believer in the "broken windows" theory of stimulus, or Lord Keynes's suggestion that the government could productively bury bottles of money and let people dig them up.
The easy question is whether the Department of Energy should have backed Solyndra. I have concluded the answer is no, and not just based on after-the-fact information. The much harder question is whether the US government should be in the business of providing this level of support for large-scale manufacturing or deployment, rather than just R&D. And even if it should, can it develop the necessary expertise and processes, not only to make such decisions at least as well as its commercial counterparts would, but also to insulate the decision-makers from the political influence that such high stakes are bound to attract. Answering that depends on a lot more than just one's political or economic philosophy.
Start with the ethics issues. No one should be surprised that investors in Solyndra were lobbying the DOE and White House in support of the company's application for a federal loan guarantee. That was hardly unique to Solyndra or renewable energy. And I'm perfectly willing to accept, unless proven otherwise, that both the DOE advisor whose wife works for a law firm representing Solyndra, and the venture capitalist who apparently advised the Navy to buy Solyndra's technology in his capacity with the Pentagon's Defense Venture Catalyst Initiative, thought they had done everything necessary to resolve any potential conflicts of interest in this matter. Yet in both cases it seems clear that even if nothing improper was done, the appearance of impropriety is very hard to dispel after what seemed like a routine transaction turns into a front-page scandal.
Whenever I see this sort of thing I can't help recalling the early training I received as a petroleum products trader for Texaco, which took anti-trust compliance very seriously. The lawyer who advised our Supply & Distribution department on such matters always reminded us to think about how our dealings with other companies might look if we had to explain them from the witness stand in a court of law. He invariably advised going beyond mere compliance; his mantra was, "Avoid the appearance of evil." That's a lesson that it seems many of the officials involved in the Solyndra debacle either forgot or never received, even if they believed they were in full compliance with existing ethics policies.
When you step back from such details it becomes apparent that these are precisely the sorts of conflicts that result, when the government involves itself so deeply in transactions of a magnitude that would normally be handled in the commercial sector--which even when it makes mistakes does so with shareholder dollars, rather than tax dollars. And make no mistake, if Solyndra had gone broke after receiving $500,000 from Uncle Sam, rather than $535 million, none of these other issues would matter or have seen the light of day.
It's perfectly appropriate--even necessary--for the government to make modest-sized bets on new technology in key areas, particularly when they require greater patience than most corporations are capable of. And it's to be expected that many or even most such bets will turn out to be dead ends, as Solyndra did. The problem is that while a few million dollars will buy a lot of renewable energy R&D, they will buy only a negligible amount of deployment. While the government can afford to make numerous small bets that don't turn out well but advance our knowledge in the process, it can only afford to make a small number of bets on the scale of the Solyndra loan. That ought to be especially true when the deficit and debt loom as large as they do, unless you're a firm believer in the "broken windows" theory of stimulus, or Lord Keynes's suggestion that the government could productively bury bottles of money and let people dig them up.
The easy question is whether the Department of Energy should have backed Solyndra. I have concluded the answer is no, and not just based on after-the-fact information. The much harder question is whether the US government should be in the business of providing this level of support for large-scale manufacturing or deployment, rather than just R&D. And even if it should, can it develop the necessary expertise and processes, not only to make such decisions at least as well as its commercial counterparts would, but also to insulate the decision-makers from the political influence that such high stakes are bound to attract. Answering that depends on a lot more than just one's political or economic philosophy.
Wednesday, October 12, 2011
Is Mount Everest the Best Place for Solar Power?
A new study on the impact of regional temperature differences on solar generating potential arrives at some surprising conclusions about the world's best locations for solar power. While the US desert southwest still ranks high, as you'd expect, it turns out that some of the best sites may be in places most of us would never suspect, including the Himalayas and Antarctica. That's because the crystalline silicon-based photovoltaic (PV) cells that dominate the market today are sensitive to ambient temperature and perform best at low temperatures, such as those found in the polar regions and high altitudes. These results could have interesting implications for future energy supply and greenhouse gas emissions in India and China, and for regional cooperation in what has historically been a tense neighborhood.
The paper by researchers from Japan's National Institute for Advanced Industrial Science and Technology was published in Environmental Science & Technology. Their approach involved superimposing mapped global average temperatures onto the map of average solar radiation, or "insolation", that has been the standard guide for assessing solar power potential. This produces some interesting shifts in the world's best solar locations, particularly by reducing the PV potential of the tropics and increasing that of colder regions. (Note that this comparison isn't applicable to solar thermal installations.) High-altitude locations look especially attractive for PV for two reasons: Not only are they colder, with average temperatures falling by 4-10ºC for each kilometer of altitude (12-28ºF/mile), but they also receive more sunlight, due to the thinner atmosphere at these heights.
The resulting differences in output are significant. The same PV module that generates 600-800 kWh/year per Watt of nameplate capacity in the UK or Germany and 1,400-1,600 kWh/W in Arizona would top 2,000 kWh/W in the Himalayas and parts of the Andes, as well as near the South Pole. The authors recognize that the latter might not be very useful without low-cost, high-volume energy storage, perhaps in the form of hydrogen, due to extended periods of darkness in the antipodal winter. I would note that the enormous distances to the nearest market might also be overcome by borrowing some ideas from the plans for space solar power (SSP). Either way, it doesn't take high storage or logistical costs to render large-scale Antarctican PV impractical, and the installation, maintenance and transmission challenges in the Andes and Himalayas aren't trivial, either. Whether the paper's conclusions turn out to be more than just scientifically interesting will depend on the detailed economics of the projects necessary to implement them.
The economics of PV entail a lot more than just the solar generating potential in a given location. Proximity to markets, or at least access to transmission, is a big factor, as is price, including both the market price for power and any relevant government or utility incentives or carbon pricing. However, it's also true that it takes either very high local prices or very high subsidies, such as Germany's solar Feed-in Tariffs, to make PV competitive in regions with low temperature-adjusted solar output. Such subsidies are a rich-country game on any scale large enough to matter, and even European countries are finding it hard to sustain these added costs as their economies teeter on the brink of another financial crisis and recession. The advantages to developing countries like China and India of pursuing high-altitude solar--even if it requires long transmission lines--could be compelling in the long run.
The paper by researchers from Japan's National Institute for Advanced Industrial Science and Technology was published in Environmental Science & Technology. Their approach involved superimposing mapped global average temperatures onto the map of average solar radiation, or "insolation", that has been the standard guide for assessing solar power potential. This produces some interesting shifts in the world's best solar locations, particularly by reducing the PV potential of the tropics and increasing that of colder regions. (Note that this comparison isn't applicable to solar thermal installations.) High-altitude locations look especially attractive for PV for two reasons: Not only are they colder, with average temperatures falling by 4-10ºC for each kilometer of altitude (12-28ºF/mile), but they also receive more sunlight, due to the thinner atmosphere at these heights.
The resulting differences in output are significant. The same PV module that generates 600-800 kWh/year per Watt of nameplate capacity in the UK or Germany and 1,400-1,600 kWh/W in Arizona would top 2,000 kWh/W in the Himalayas and parts of the Andes, as well as near the South Pole. The authors recognize that the latter might not be very useful without low-cost, high-volume energy storage, perhaps in the form of hydrogen, due to extended periods of darkness in the antipodal winter. I would note that the enormous distances to the nearest market might also be overcome by borrowing some ideas from the plans for space solar power (SSP). Either way, it doesn't take high storage or logistical costs to render large-scale Antarctican PV impractical, and the installation, maintenance and transmission challenges in the Andes and Himalayas aren't trivial, either. Whether the paper's conclusions turn out to be more than just scientifically interesting will depend on the detailed economics of the projects necessary to implement them.
The economics of PV entail a lot more than just the solar generating potential in a given location. Proximity to markets, or at least access to transmission, is a big factor, as is price, including both the market price for power and any relevant government or utility incentives or carbon pricing. However, it's also true that it takes either very high local prices or very high subsidies, such as Germany's solar Feed-in Tariffs, to make PV competitive in regions with low temperature-adjusted solar output. Such subsidies are a rich-country game on any scale large enough to matter, and even European countries are finding it hard to sustain these added costs as their economies teeter on the brink of another financial crisis and recession. The advantages to developing countries like China and India of pursuing high-altitude solar--even if it requires long transmission lines--could be compelling in the long run.
Thursday, October 06, 2011
Energy Efficiency: An Uphill Battle on A Slippery Slope
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.
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.
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.
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