A front-page article in today's Washington Post reported on the trend of energy-related investments in the US by European companies. This is another aspect of the competing energy revolutions I mentioned a few weeks ago, in my comments on President Obama's State of the Union speech. Germany's 2000 Renewable Energy Law introduced feed-in tariffs for wind and solar power that have made that country a global leader in green energy implementation, yet it has also become increasingly apparent that this carefully planned transformation paid insufficient attention to the cost of the new energy sources it was embedding at the heart of the German economy. The Post describes how leading German firms are looking across the Atlantic to invest where energy is cheaper, thanks to the unplanned, largely unanticipated extraction of hydrocarbons from shale.
The Ludwigshafen, Germany dateline of the article caught my eye immediately. Having just returned from a family trip to California with a packet of letters I wrote to my parents during a temporary work assignment in Germany in the early 1980s, I had only yesterday re-read the account of my visit to BASF's sprawling petrochemicals complex there. I recall being greatly impressed by the site, which dwarfed the Los Angeles refinery at which I worked at the time. The BASF facility was part of the post-war boom--the Wirtschaftswunder--that made Germany the economic and industrial center of Europe, where it remains today two decades after reunification and a decade after relinquishing its cherished Deutchmark for the Euro. Now the company apparently wonders whether Ludwigshafen can remain competitive in a global market dominated by US shale gas.
The divergence of energy prices that worries German industrialists is the result of conscious choices made by that country's government and a set of developments that occurred here largely out of sight of the US government, while its attention was focused elsewhere. In the same decade in which production from shale gas deposits in Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas--output that now sets the price of both gas and electricity in much of the US--was gathering momentum, the German government was negotiating for more imported natural gas from Russia, via a pipeline built by a company led by a former German Chancellor. It also set up a mechanism for consumers of electricity to fund the payment of up to $0.70 per kilowatt-hour that was necessary to support the initial solar power installations in one of the world's least sunny countries.
German solar tariffs have declined significantly since then, thanks in part to ruinous competition with China-based solar manufacturers. However, in the aftermath of the nuclear accident at Fukushima, the German government agreed to retire the country's nuclear power plants, which supplied 22% of its electricity in 2010. New solar might soon be cheaper than new nuclear capacity, but there aren't many energy sources cheaper than an existing, fully-depreciated nuclear reactor, even after allowing for waste disposal and site cleanup. As a consequence of these policies, German managers such as those at BASF face natural gas prices that are a multiple of those here, along with the prospect of steadily rising electricity rates. The option to offshore production must seem as obvious for them as it did for US companies in 2005, when US natural gas prices reached $10 per million BTUs.
Of course this comparison is just a snapshot in time; the competition between these two energy revolutions will likely ebb and flow for years. However, the current energy divergence between Germany and the US should remind us that the cost of energy remains a very important economic parameter, even in highly developed countries. Measures that inevitably raise it are very likely to bring adverse consequences, no matter how well-intended or carefully justified they might seem. That's worth considering here, as well, when Congress debates new energy taxes and the administration proposes new rules that could raise energy costs or constrain output.
Showing posts with label energy policy. Show all posts
Showing posts with label energy policy. Show all posts
Tuesday, April 02, 2013
Wednesday, January 25, 2012
State of the Union: "All-Out, All-of-the-Above Energy"
Anyone expecting the announcement of big new energy initiatives in this year's State of the Union address was disappointed last night. What was new, however, was a welcome shift in the President's emphasis on conventional energy--the fuels he referred to as "yesterday's energy" in last year's speech. Never mind that the resurgent oil production for which Mr. Obama took credit is demonstrably the result of events and policies that preceded his inauguration, or that his administration has pursued policies that have held back faster development. If his remarks signal a return to federal energy policy that expends more than 10% of its effort on the sources that account for more than 80% of the energy we use, we should applaud him. The other new ingredient last night was an effort to ground the rationale for greater support for renewable energy in the argument that it took federally sponsored R&D to make the shale gas revolution possible--R&D that ironically wouldn't have occurred under the research priorities this President has set for the Department of Energy. I hope President Obama is serious about an "all-out, all-of-the-above strategy" for energy, because that's precisely what we need.
The best way to put that in perspective is with the figures in the 2012 Early Release of the Annual Energy Outlook from the Energy Information Agency of the DOE. It was released just in time for the President's speech, and there are few coincidences in today's Washington. The reference case of their forecast for 2035 shows the US consuming 10% more energy within 24 years--an improvement from the 16% predicted in last year's Outlook. It also shows the contribution of renewable energy in the mix increasing from 6.7% today to 8.3%, including mature hydropower. So even after two more decades of strong emphasis on clean energy, oil, gas and coal would continue to provide 80% of our energy. It's clear that there's a disconnect between the lofty rhetoric of last night's speech and the analysis of the government's energy experts. I'll leave it to you to assess whether the discrepancy is due to unrealistic expectations, inadequately ambitious forecasting, or some combination of the two.
A couple of other points from the State of the Union are worth noting. The President called for Congress to "Pass clean energy tax credits," presumably a reference to the Production Tax Credit (PTC) for wind and other renewables that expires at the end of this year. Yet he didn't devote a word to whether the PTC should be restructured and gradually phased out in light of the steadily narrowing competitive gap between renewable and conventional power, let alone the kind of major tax reform he alluded to later in the speech. Mr. Obama also called for a Clean Energy Standard in lieu of a comprehensive climate bill. This is small beer when most of the states with attractive renewable energy resources already have fairly aggressive state-level Renewable Portfolio Standards. Meanwhile, the development of 3 million homes' worth of clean energy sources on public lands that he is directing his administration to allow equates to less than 1% of US electricity demand--helpful, though hardly transformational.
With little likelihood of a divided Congress enacting much that is new on energy this year, the President's remarks last night are mainly interesting for what they suggest about the energy platform on which he will run for reelection this fall. In terms of clean energy, that seems to mean more of the same from 2008 and the last three years, but with much less emphasis on climate change than we heard in his last campaign. The new element is his pivot to embrace rising oil production and the possibilities created by shale gas, even as he cautiously distances himself from the technologies (hydraulic fracturing and horizontal drilling) that make these two trends possible. Although this might appeal to independent voters, it's also vulnerable to deflation by fact-checking and stands in tension with his rejection--for now--of the Keystone XL pipeline. And if tensions in the Persian Gulf or some other oil hot spot were to increase, so would the scrutiny applied to the administration's energy policies. I'll take a much closer look at those policies when the campaign heats up.
The best way to put that in perspective is with the figures in the 2012 Early Release of the Annual Energy Outlook from the Energy Information Agency of the DOE. It was released just in time for the President's speech, and there are few coincidences in today's Washington. The reference case of their forecast for 2035 shows the US consuming 10% more energy within 24 years--an improvement from the 16% predicted in last year's Outlook. It also shows the contribution of renewable energy in the mix increasing from 6.7% today to 8.3%, including mature hydropower. So even after two more decades of strong emphasis on clean energy, oil, gas and coal would continue to provide 80% of our energy. It's clear that there's a disconnect between the lofty rhetoric of last night's speech and the analysis of the government's energy experts. I'll leave it to you to assess whether the discrepancy is due to unrealistic expectations, inadequately ambitious forecasting, or some combination of the two.
A couple of other points from the State of the Union are worth noting. The President called for Congress to "Pass clean energy tax credits," presumably a reference to the Production Tax Credit (PTC) for wind and other renewables that expires at the end of this year. Yet he didn't devote a word to whether the PTC should be restructured and gradually phased out in light of the steadily narrowing competitive gap between renewable and conventional power, let alone the kind of major tax reform he alluded to later in the speech. Mr. Obama also called for a Clean Energy Standard in lieu of a comprehensive climate bill. This is small beer when most of the states with attractive renewable energy resources already have fairly aggressive state-level Renewable Portfolio Standards. Meanwhile, the development of 3 million homes' worth of clean energy sources on public lands that he is directing his administration to allow equates to less than 1% of US electricity demand--helpful, though hardly transformational.
With little likelihood of a divided Congress enacting much that is new on energy this year, the President's remarks last night are mainly interesting for what they suggest about the energy platform on which he will run for reelection this fall. In terms of clean energy, that seems to mean more of the same from 2008 and the last three years, but with much less emphasis on climate change than we heard in his last campaign. The new element is his pivot to embrace rising oil production and the possibilities created by shale gas, even as he cautiously distances himself from the technologies (hydraulic fracturing and horizontal drilling) that make these two trends possible. Although this might appeal to independent voters, it's also vulnerable to deflation by fact-checking and stands in tension with his rejection--for now--of the Keystone XL pipeline. And if tensions in the Persian Gulf or some other oil hot spot were to increase, so would the scrutiny applied to the administration's energy policies. I'll take a much closer look at those policies when the campaign heats up.
Wednesday, January 04, 2012
"Energy Reality"
Earlier today I attended a luncheon and press conference rolling out the annual "State of American Energy" report from the American Petroleum Institute. API's President and CEO, Jack Gerard, also used the occasion to launch a new "Vote 4 Energy" campaign, which he described as a non-partisan effort intended to start a conversation about energy during a key election year. He also touched on a number of issues that are very familiar to readers of this blog, including the Keystone XL Pipeline decision, the need for greater access to US energy resources, along with energy security and jobs. A phrase that Mr. Gerard used in his remarks, and that recurred several times during the press conference, was "energy reality." This struck me as an apt encapsulation for the energy policies that should be addressed by President Obama and whomever his Republican challenger turns out to be, from the shrinking pool of candidates.
I was pleased to hear Mr. Gerard cite the need for a full range of energy solutions, with renewables, nuclear energy and energy efficiency prominently mentioned along with the expected references to oil and gas. That is precisely the energy reality we should be pursuing: tapping the hydrocarbon riches with which the US is endowed, in order to reduce our dependence on unstable foreign suppliers, even as we ramp up the wind, solar, biofuel and other renewable energy sources that must take over the energy burden in the long run, and with all of it used more efficiently than today. Yet energy reality should also take account of the tremendous disparities of scale that still exist between conventional energy and renewables, and that are likely to persist for some time. After a decade of rapid growth, wind power accounted for less than 3% of the electricity generated here last year, and solar for much, much less than that--with neither displacing any meaningful amount of imported oil, since less than 1% of our electricity is generated from oil.
Energy reality came up again in the context of a question about the EPA's Renewable Fuel Standard, which was recently finalized for 2012 to require the use of 8.65 million gallons of cellulosic biofuel--a reduction of 98% from the 500 million gallons previously specified for this year in the RFS enacted by the Congress in 2007. Biofuel from corn, soy and animal fat has expanded to contribute nearly 10% of the US gasoline supply and a smaller fraction of diesel fuel. However, a law requiring the use of advanced fuels that don't yet exist in commercial quantities--and may not for many years--and forcing refiners to purchase credits in place of these non-existent gallons is certainly out of touch with objective energy reality and ultimately constitutes another tax on consumers.
I would argue that the decision that the President now has less than 60 days to make on whether to allow the Keystone XL Pipeline to go ahead also hinges on his understanding of energy reality. He must choose between the urgent concerns of employment and energy security articulated repeatedly in Mr. Gerard's answers to numerous questions on the subject, and an objective assessment of the environmental impact it might cause. Stripping away the various red herrings that sprang up in the course of the debates and protests over the pipeline, the latter boils down to the incremental greenhouse gas emissions from the extra oil sands production that the pipeline would facilitate, compared to the emissions from the conventional crude we would otherwise have to import from the Middle East or elsewhere. I've seen some wild exaggerations about that, including the doozy I ran across over the holidays from former Vice President Gore, to the effect that a Toyota Prius running on fuel refined from oil sands crude would have emissions equivalent to a Hummer. (When you do the math, it actually works out to the equivalent of a Ford Fusion hybrid.) In fact, the incremental emissions at stake in the Keystone decision amount to around 0.3% of total 2009 US emissions. That's the basis of the trade-off Mr. Obama must make, and no matter which side he chooses he will infuriate those supporting the other side.
As the 2012 presidential election approaches, I expect to find many opportunities for comparing campaign rhetoric to this kind of energy reality barometer. Elections tend to focus on the differences between candidates, and I have little doubt that the differences on energy will be significant. However, when the dust settles on November 7th it will be high time to start work on a new bi-partisan consensus on energy policy that might actually survive the next change in administrations, unlike the disruptive pattern we've been in for the last five cycles or so. Not reality? Perhaps, but certainly worth aspiring to. Happy New Year!
I was pleased to hear Mr. Gerard cite the need for a full range of energy solutions, with renewables, nuclear energy and energy efficiency prominently mentioned along with the expected references to oil and gas. That is precisely the energy reality we should be pursuing: tapping the hydrocarbon riches with which the US is endowed, in order to reduce our dependence on unstable foreign suppliers, even as we ramp up the wind, solar, biofuel and other renewable energy sources that must take over the energy burden in the long run, and with all of it used more efficiently than today. Yet energy reality should also take account of the tremendous disparities of scale that still exist between conventional energy and renewables, and that are likely to persist for some time. After a decade of rapid growth, wind power accounted for less than 3% of the electricity generated here last year, and solar for much, much less than that--with neither displacing any meaningful amount of imported oil, since less than 1% of our electricity is generated from oil.
Energy reality came up again in the context of a question about the EPA's Renewable Fuel Standard, which was recently finalized for 2012 to require the use of 8.65 million gallons of cellulosic biofuel--a reduction of 98% from the 500 million gallons previously specified for this year in the RFS enacted by the Congress in 2007. Biofuel from corn, soy and animal fat has expanded to contribute nearly 10% of the US gasoline supply and a smaller fraction of diesel fuel. However, a law requiring the use of advanced fuels that don't yet exist in commercial quantities--and may not for many years--and forcing refiners to purchase credits in place of these non-existent gallons is certainly out of touch with objective energy reality and ultimately constitutes another tax on consumers.
I would argue that the decision that the President now has less than 60 days to make on whether to allow the Keystone XL Pipeline to go ahead also hinges on his understanding of energy reality. He must choose between the urgent concerns of employment and energy security articulated repeatedly in Mr. Gerard's answers to numerous questions on the subject, and an objective assessment of the environmental impact it might cause. Stripping away the various red herrings that sprang up in the course of the debates and protests over the pipeline, the latter boils down to the incremental greenhouse gas emissions from the extra oil sands production that the pipeline would facilitate, compared to the emissions from the conventional crude we would otherwise have to import from the Middle East or elsewhere. I've seen some wild exaggerations about that, including the doozy I ran across over the holidays from former Vice President Gore, to the effect that a Toyota Prius running on fuel refined from oil sands crude would have emissions equivalent to a Hummer. (When you do the math, it actually works out to the equivalent of a Ford Fusion hybrid.) In fact, the incremental emissions at stake in the Keystone decision amount to around 0.3% of total 2009 US emissions. That's the basis of the trade-off Mr. Obama must make, and no matter which side he chooses he will infuriate those supporting the other side.
As the 2012 presidential election approaches, I expect to find many opportunities for comparing campaign rhetoric to this kind of energy reality barometer. Elections tend to focus on the differences between candidates, and I have little doubt that the differences on energy will be significant. However, when the dust settles on November 7th it will be high time to start work on a new bi-partisan consensus on energy policy that might actually survive the next change in administrations, unlike the disruptive pattern we've been in for the last five cycles or so. Not reality? Perhaps, but certainly worth aspiring to. Happy New Year!
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 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, January 05, 2011
The Results of Energy Policy
The combination of an energy event yesterday in Washington, DC that I was unable to attend and a comment I received on Monday's posting got me thinking about energy policy in the context of the new year and the start of the new Congressional session today. National energy policy has been debated throughout my adult life, whether the policy of the time was clearly articulated and effectively executed or not. The most important question is not what the policy says, but what it does and whether that aligns with what the nation really needs its energy industry to deliver. In my view our current energy policy is on the wrong track, and the new Congress and the spirit of bi-partisan cooperation that emerged in the recent lame duck session provide an excellent opportunity to revise it along more effective lines.
I would summarize our current energy policy as being focused on promoting greater efficiency and the development and deployment of new energy technologies, in order to reduce our dependence on imported energy from unstable or unreliable sources, and to reduce our emissions of greenhouse gases, more than 80% of which are associated with our production and consumption of energy. That sounds fine, but in practice the effect of that policy appears to be replacing low-cost energy with higher-cost energy, while attempting to maximize the employment associated with producing clean energy, rather than minimizing its cost.
What are the results so far? Well, the significant reduction in US oil imports that we've experienced recently is attributable mainly to the weak economy and high unemployment, rather than to improvements in vehicle fuel economy or domestic biofuel production. And the reduction of greenhouse gas emissions that has occurred in the last several years has mainly resulted not from policy-related measures to expand wind power or replace incandescent lights with compact fluorescents, but from two events with little connection to energy policy: the recession--particularly the slowdown in US manufacturing--and the unexpected growth of natural gas production from shale resources. That might not be a fair gauge of what current policies could achieve in the future, but it's clear that an energy policy that depended on economic weakness for its success would be contrary to our national interest.
For decades the de facto energy policy of the US promoted cheap and abundant energy to sustain economic growth. We live in more complex times, but focusing most of our current energy efforts on solutions that are still small-scale and high-cost seems unlikely to do much for the economic recovery. If we were really serious about fueling the recovery, we'd be at least as interested in promoting abundant, low-cost energy at a scale suitable for the needs of a $14 trillion economy, and for which employment gains in the energy industry didn't come at the expense of productivity. A study on the trade-offs between resource access and new taxes on the oil & gas industry that was prepared in conjunction with the release yesterday of API's "State of American Energy" report provides a case in point.
An international energy consultancy analyzed the potential production and employment gains associated with expanded access to the domestic resources that are currently off limits in places like the eastern Gulf of Mexico, the Atlantic and Pacific coasts, and the Arctic National Wildlife Refuge. They also looked at the federal revenue and employment impact of higher taxes on the US oil & gas industry, along the lines of a series of proposals from the administration and Congress in the last two years. They found that access to off-limits oil and gas could yield up to an extra 2.8 million barrels per day of oil and gas liquids and 6.6 billion cubic feet per day of gas by 2025, with direct and indirect gains in employment of more than 500,000 workers. By contrast, increasing taxes on the industry would not only reduce production and employment, as domestic opportunities become less attractive than those elsewhere, but also reduce total federal revenues from taxes, royalties and leasing, following a brief uptick in the initial period after their introduction. Although I'm not sanguine about the chances for increasing access when the administration has just reversed its earlier expansion, that would at least be more consistent with an effective energy policy than raising taxes on the production of energy.
We have a long, bi-partisan tradition of well-intended but ineffective energy policy, and the current policy continues that trend, even if its shortcomings differ significantly from those of past policies. The good news is that we have many more options and choices than we did when the US energy policy debate began in earnest in the 1970s. What we need now is a policy that recognizes that most of these sources, old and new, are important for our present and future energy security, but that what we chiefly require is abundant low-cost energy to fuel an economic revival strong enough to help shrink our enormous federal, state and local fiscal deficits and resulting massive debts, which also have solid bi-partisan pedigrees. It should also put us on a path to lower emissions from whatever sources can deliver them on a meaningful scale and at a cost that we can afford.
I would summarize our current energy policy as being focused on promoting greater efficiency and the development and deployment of new energy technologies, in order to reduce our dependence on imported energy from unstable or unreliable sources, and to reduce our emissions of greenhouse gases, more than 80% of which are associated with our production and consumption of energy. That sounds fine, but in practice the effect of that policy appears to be replacing low-cost energy with higher-cost energy, while attempting to maximize the employment associated with producing clean energy, rather than minimizing its cost.
What are the results so far? Well, the significant reduction in US oil imports that we've experienced recently is attributable mainly to the weak economy and high unemployment, rather than to improvements in vehicle fuel economy or domestic biofuel production. And the reduction of greenhouse gas emissions that has occurred in the last several years has mainly resulted not from policy-related measures to expand wind power or replace incandescent lights with compact fluorescents, but from two events with little connection to energy policy: the recession--particularly the slowdown in US manufacturing--and the unexpected growth of natural gas production from shale resources. That might not be a fair gauge of what current policies could achieve in the future, but it's clear that an energy policy that depended on economic weakness for its success would be contrary to our national interest.
For decades the de facto energy policy of the US promoted cheap and abundant energy to sustain economic growth. We live in more complex times, but focusing most of our current energy efforts on solutions that are still small-scale and high-cost seems unlikely to do much for the economic recovery. If we were really serious about fueling the recovery, we'd be at least as interested in promoting abundant, low-cost energy at a scale suitable for the needs of a $14 trillion economy, and for which employment gains in the energy industry didn't come at the expense of productivity. A study on the trade-offs between resource access and new taxes on the oil & gas industry that was prepared in conjunction with the release yesterday of API's "State of American Energy" report provides a case in point.
An international energy consultancy analyzed the potential production and employment gains associated with expanded access to the domestic resources that are currently off limits in places like the eastern Gulf of Mexico, the Atlantic and Pacific coasts, and the Arctic National Wildlife Refuge. They also looked at the federal revenue and employment impact of higher taxes on the US oil & gas industry, along the lines of a series of proposals from the administration and Congress in the last two years. They found that access to off-limits oil and gas could yield up to an extra 2.8 million barrels per day of oil and gas liquids and 6.6 billion cubic feet per day of gas by 2025, with direct and indirect gains in employment of more than 500,000 workers. By contrast, increasing taxes on the industry would not only reduce production and employment, as domestic opportunities become less attractive than those elsewhere, but also reduce total federal revenues from taxes, royalties and leasing, following a brief uptick in the initial period after their introduction. Although I'm not sanguine about the chances for increasing access when the administration has just reversed its earlier expansion, that would at least be more consistent with an effective energy policy than raising taxes on the production of energy.
We have a long, bi-partisan tradition of well-intended but ineffective energy policy, and the current policy continues that trend, even if its shortcomings differ significantly from those of past policies. The good news is that we have many more options and choices than we did when the US energy policy debate began in earnest in the 1970s. What we need now is a policy that recognizes that most of these sources, old and new, are important for our present and future energy security, but that what we chiefly require is abundant low-cost energy to fuel an economic revival strong enough to help shrink our enormous federal, state and local fiscal deficits and resulting massive debts, which also have solid bi-partisan pedigrees. It should also put us on a path to lower emissions from whatever sources can deliver them on a meaningful scale and at a cost that we can afford.
Wednesday, November 03, 2010
Interpreting the Election Results
The results of yesterday's election will be interpreted and spun in many ways in the days and weeks ahead. Republicans gained control of the House of Representatives and several key governorships but fell short of capturing control of the Senate. In the process they picked up enough seats--along with at least one like-minded Democratic Senator-elect--to put cap & trade or a national carbon tax out of reach for at least the next two years. Meanwhile, voters resoundingly defeated a ballot initiative in California that would have forestalled implementation of the state's tough greenhouse gas policies. But even if comprehensive federal energy legislation is off the table, divided government doesn't rule out the possibility of a national renewable energy standard or other energy measures, provided they don't involve significant additional expenditures.
On the surface, the election outcome appears to set up a return to the pre-2009 situation, when California and other states were pushing aggressively for action on climate change while the federal government remained deadlocked on the issue. Too much has changed since then for that picture to be accurate. In the absence of Congressional action on greenhouse gas emissions the EPA is forging ahead with its own regulations under the Clean Air Act, and that could provide an early test of the willingness of the new Congress to try to modify the administration's regulatory approach. Meanwhile, although the proposition that would have suspended California's A.B. 32 climate rules was swamped after being portrayed--unfairly, in my view--as mainly benefiting out-of-state oil companies at the expense of the state's new Cleantech industry, California voters passed another initiative, Proposition 26, that will make it harder to impose a variety of new fees on businesses and consumers, including fees related to the environment. Further complicating the outlook, the results of several key governor's races, including in New Mexico and possibly Oregon, could limit the number of other states that might "opt in" to A.B. 32, as well as raising the possibility of more defections from the Western Climate Initiative.
Although as I noted on Monday our fundamental energy situation is largely pre-determined for at least the next few years, last night's results could affect energy policy in a number of other ways, aside from climate change. One example is the President's desire to eliminate subsidies for conventional energy, as part of an initiative of the G-20 group of nations. The main subsidies targeted by this international effort are those that increase demand by limiting the price of fossil fuels for consumers, particularly in developing countries, yet President Obama has linked this to his goal of eliminating a variety of tax breaks benefiting domestic energy production, including the Section 199 tax deduction that all US manufacturers enjoy. Unless this measure is somehow passed in the lame duck session when Congress returns from its election break, it looks dead on arrival come January. From an energy security perspective we should be glad of that.
The change in control of the House also puts the extension of the expiring ethanol blending credit in doubt, along with the prospect of extending eligibility for Treasury renewable energy stimulus grants beyond the end of this year. Even though the latter appears deficit-neutral, and might thus attract bi-partisan support, it accelerates benefits that project developers would otherwise have to wait until their next tax filing to receive, and it probably lets some marginal projects that might not otherwise find private funding escape winnowing. If the lame duck doesn't pass this, the odds of the 112th Congress extending it or anything else connected to the stimulus look poor.
Ultimately the likelihood of meaningful energy legislation of any kind will hinge on the willingness of the President and the new Congress to meet somewhere in the middle to get things done. Otherwise, the scope is limited to a few lowest-common-denominator efforts, which might include a modest national renewable electricity standard, with everything else effectively blocked by the other chamber of Congress or the President's veto pen. I don't expect to lack for topics on which to blog in the next two years.
On the surface, the election outcome appears to set up a return to the pre-2009 situation, when California and other states were pushing aggressively for action on climate change while the federal government remained deadlocked on the issue. Too much has changed since then for that picture to be accurate. In the absence of Congressional action on greenhouse gas emissions the EPA is forging ahead with its own regulations under the Clean Air Act, and that could provide an early test of the willingness of the new Congress to try to modify the administration's regulatory approach. Meanwhile, although the proposition that would have suspended California's A.B. 32 climate rules was swamped after being portrayed--unfairly, in my view--as mainly benefiting out-of-state oil companies at the expense of the state's new Cleantech industry, California voters passed another initiative, Proposition 26, that will make it harder to impose a variety of new fees on businesses and consumers, including fees related to the environment. Further complicating the outlook, the results of several key governor's races, including in New Mexico and possibly Oregon, could limit the number of other states that might "opt in" to A.B. 32, as well as raising the possibility of more defections from the Western Climate Initiative.
Although as I noted on Monday our fundamental energy situation is largely pre-determined for at least the next few years, last night's results could affect energy policy in a number of other ways, aside from climate change. One example is the President's desire to eliminate subsidies for conventional energy, as part of an initiative of the G-20 group of nations. The main subsidies targeted by this international effort are those that increase demand by limiting the price of fossil fuels for consumers, particularly in developing countries, yet President Obama has linked this to his goal of eliminating a variety of tax breaks benefiting domestic energy production, including the Section 199 tax deduction that all US manufacturers enjoy. Unless this measure is somehow passed in the lame duck session when Congress returns from its election break, it looks dead on arrival come January. From an energy security perspective we should be glad of that.
The change in control of the House also puts the extension of the expiring ethanol blending credit in doubt, along with the prospect of extending eligibility for Treasury renewable energy stimulus grants beyond the end of this year. Even though the latter appears deficit-neutral, and might thus attract bi-partisan support, it accelerates benefits that project developers would otherwise have to wait until their next tax filing to receive, and it probably lets some marginal projects that might not otherwise find private funding escape winnowing. If the lame duck doesn't pass this, the odds of the 112th Congress extending it or anything else connected to the stimulus look poor.
Ultimately the likelihood of meaningful energy legislation of any kind will hinge on the willingness of the President and the new Congress to meet somewhere in the middle to get things done. Otherwise, the scope is limited to a few lowest-common-denominator efforts, which might include a modest national renewable electricity standard, with everything else effectively blocked by the other chamber of Congress or the President's veto pen. I don't expect to lack for topics on which to blog in the next two years.
Monday, August 30, 2010
Germany's Nuclear Bridge
Since I've been taking potshots at German energy policy recently, I was pleased to see that it appears the country's government is nearing a reasonable compromise concerning nuclear power, which accounts for 22% of the electricity generated in Germany. The Financial Times reported yesterday that the CDU/FDP coalition is likely to propose extending the life of the country's reactors by 12-15 years, in order to give renewable energy sources more time to ramp up. Yet while the extension makes enormous sense from the perspective of emissions and energy security, I'm puzzled by the plan's implicit assumption that nuclear power is valuable only as a bridge to more renewable energy, rather than as a key part of any future, low-emission energy mix.
In 2007 Germany's 17 reactors generated 140 billion kWh of electricity. By comparison, all renewable sources amounted to just over 100 billion kWh, with only 3 billion of that coming from the country's highly-subsidized solar photovoltaic (PV) installations. All of these reactors will reach the limits of the their currently-allowed 30-year service lifetimes by 2020, when they are required by existing law to be shut down, and all have provisional shutdown dates within the next few years. The problem is that the incremental growth in renewable electricity required to replace all of these plants does not seem feasible within that timeframe, despite its impressive expansion so far.
Replacing just the net output of those reactors would require total renewable generation to expand by roughly 150%, though much of that expansion would by necessity depend on a much smaller fraction of the renewable power base. Wind currently supplies 6.5% of generation and continues to grow steadily. PV capacity has more than doubled since 2007, from 4,000 MW to 9,800 MW last year, though that still results in a contribution of only around 1% of generation, partly due to scale and partly to Germany's low solar insolation. Wind and solar output would have to quadruple to fill the kWhs supplied by nuclear power, plus their current part of the mix. This challenge is compounded by the problems of intermittency and low output vs. nameplate capacity of both of these sources. In 2007 the calculated capacity factor for Germany's wind turbines was just 21%, while PV was under 10%. So not only would these sources have to expand by a multiple of the capacity lost from idled nuclear reactors, but much of the incremental output would have to be stored, in order to time-shift it to match demand--combined with time-shifting demand to match the variable and cyclical output from these sources. Power from other renewable sources such as biomass, waste and hydro is much more compatible with normal demand patterns, but more difficult to expand quickly and overcome resource limitations.
Most Germans are intensely practical. That German practicality is in my genes and upbringing, part of which was spent in Germany. I speak the language and know the people fairly well, yet it remains a mystery to me that Germans would choose to pit these two complementary categories of electricity generation against each other, rather than aligning them cooperatively to replace high-carbon coal and natural gas that is largely imported from Russia--hardly the world's most reliable supplier. The answer appears to reside in coalition politics (in both major groupings) and green ideology, the price of which seems likely to rise sharply. German households already pay more than twice as much for electricity as US households, while German industry pays about 250% what its US counterparts pay, and I can only guess at the comparison to Chinese energy costs. Taking large, fully-depreciated baseload power sources out of the national mix will only amplify those disparities. I'd be very surprised if Germany didn't choose a course that hews back towards practicality in the long run.
In 2007 Germany's 17 reactors generated 140 billion kWh of electricity. By comparison, all renewable sources amounted to just over 100 billion kWh, with only 3 billion of that coming from the country's highly-subsidized solar photovoltaic (PV) installations. All of these reactors will reach the limits of the their currently-allowed 30-year service lifetimes by 2020, when they are required by existing law to be shut down, and all have provisional shutdown dates within the next few years. The problem is that the incremental growth in renewable electricity required to replace all of these plants does not seem feasible within that timeframe, despite its impressive expansion so far.
Replacing just the net output of those reactors would require total renewable generation to expand by roughly 150%, though much of that expansion would by necessity depend on a much smaller fraction of the renewable power base. Wind currently supplies 6.5% of generation and continues to grow steadily. PV capacity has more than doubled since 2007, from 4,000 MW to 9,800 MW last year, though that still results in a contribution of only around 1% of generation, partly due to scale and partly to Germany's low solar insolation. Wind and solar output would have to quadruple to fill the kWhs supplied by nuclear power, plus their current part of the mix. This challenge is compounded by the problems of intermittency and low output vs. nameplate capacity of both of these sources. In 2007 the calculated capacity factor for Germany's wind turbines was just 21%, while PV was under 10%. So not only would these sources have to expand by a multiple of the capacity lost from idled nuclear reactors, but much of the incremental output would have to be stored, in order to time-shift it to match demand--combined with time-shifting demand to match the variable and cyclical output from these sources. Power from other renewable sources such as biomass, waste and hydro is much more compatible with normal demand patterns, but more difficult to expand quickly and overcome resource limitations.
Most Germans are intensely practical. That German practicality is in my genes and upbringing, part of which was spent in Germany. I speak the language and know the people fairly well, yet it remains a mystery to me that Germans would choose to pit these two complementary categories of electricity generation against each other, rather than aligning them cooperatively to replace high-carbon coal and natural gas that is largely imported from Russia--hardly the world's most reliable supplier. The answer appears to reside in coalition politics (in both major groupings) and green ideology, the price of which seems likely to rise sharply. German households already pay more than twice as much for electricity as US households, while German industry pays about 250% what its US counterparts pay, and I can only guess at the comparison to Chinese energy costs. Taking large, fully-depreciated baseload power sources out of the national mix will only amplify those disparities. I'd be very surprised if Germany didn't choose a course that hews back towards practicality in the long run.
Thursday, August 12, 2010
By Executive Order
I recently ran across a mention in the New York Times of a new study suggesting a variety of energy and climate measures the administration could undertake on their own, without requiring new legislation passed by Congress. I've been thinking about this during some long stretches of driving this week. At first glance, the group's ideas merit consideration, and they might indeed be sufficient to meet the near-term emissions reduction goals the US endorsed at last year's Copenhagen climate conference. However, as tempting as such an approach might be in a year of legislative gridlock on energy, its pitfalls probably outweigh its benefits.
I haven't had time to scrutinize the report of the Presidential Climate Action Project item by item, since I'm on vacation. It caught my eye mainly because of the involvement of former Senator and presidential candidate Gary Hart. So my reactions don't really constitute analysis, but are more along the line of ruminations on a first impression that I might examine in more depth later.
At the very least, the idea that the administration could take major steps--beyond what it has already done--to reduce emissions and shift our economy away from its reliance on fossil fuels represents a potentially significant new scenario for the energy/climate environment, particularly if the mid-term elections reduce or eliminate the current Democratic majority in both houses of Congress. It could provide a new policy twist that many of the companies and organizations that have invested so much time in working with Congress on these matters haven't incorporated in their planning.
The problem with such an approach arises from the same source as its appeal: the lack of a sufficient bi-partisan consensus in Congress to enact these changes legislatively. Without a consensus spanning both parties and all factions, any action the President takes on his own could be reversed within a few years. We're not going to lick climate change or our energy problems in the span of any one administration; these problems look much more like the Cold War and require a similarly enduring bi-partisan coalition to deal with them. Major energy policy swings every 4 or 8 years would make this approach much more costly and much less effective, because of the planning and investment horizons involved. The evidence of that is already on display, as this administration reverses many of the energy policies of its predecessors.
Such an outcome is even likelier if these policies become overly identified with a president whose popularity has been waning and who is by no means assured of a second term, barring an unexpectedly robust revival of the US economy. Congress might be even less popular at the moment, but it remains the venue in which a long-term, bi-partisan energy and climate strategy must be hammered out. If a comprehensive energy bill with limits on carbon isn't possible today, important elements of a least common denominator approach to energy security and lower emissions could likely still be enacted. That could include more effort on energy efficiency and a low-carbon electricity standard encompassing both nuclear power and with the currently favored list of renewables. Future administrations and congresses could build on these steps later. A modest compromise along these lines wouldn't please everyone, but it seems preferable to an approach that depends on one party controlling the White House in perpetuity.
I haven't had time to scrutinize the report of the Presidential Climate Action Project item by item, since I'm on vacation. It caught my eye mainly because of the involvement of former Senator and presidential candidate Gary Hart. So my reactions don't really constitute analysis, but are more along the line of ruminations on a first impression that I might examine in more depth later.
At the very least, the idea that the administration could take major steps--beyond what it has already done--to reduce emissions and shift our economy away from its reliance on fossil fuels represents a potentially significant new scenario for the energy/climate environment, particularly if the mid-term elections reduce or eliminate the current Democratic majority in both houses of Congress. It could provide a new policy twist that many of the companies and organizations that have invested so much time in working with Congress on these matters haven't incorporated in their planning.
The problem with such an approach arises from the same source as its appeal: the lack of a sufficient bi-partisan consensus in Congress to enact these changes legislatively. Without a consensus spanning both parties and all factions, any action the President takes on his own could be reversed within a few years. We're not going to lick climate change or our energy problems in the span of any one administration; these problems look much more like the Cold War and require a similarly enduring bi-partisan coalition to deal with them. Major energy policy swings every 4 or 8 years would make this approach much more costly and much less effective, because of the planning and investment horizons involved. The evidence of that is already on display, as this administration reverses many of the energy policies of its predecessors.
Such an outcome is even likelier if these policies become overly identified with a president whose popularity has been waning and who is by no means assured of a second term, barring an unexpectedly robust revival of the US economy. Congress might be even less popular at the moment, but it remains the venue in which a long-term, bi-partisan energy and climate strategy must be hammered out. If a comprehensive energy bill with limits on carbon isn't possible today, important elements of a least common denominator approach to energy security and lower emissions could likely still be enacted. That could include more effort on energy efficiency and a low-carbon electricity standard encompassing both nuclear power and with the currently favored list of renewables. Future administrations and congresses could build on these steps later. A modest compromise along these lines wouldn't please everyone, but it seems preferable to an approach that depends on one party controlling the White House in perpetuity.
Thursday, July 08, 2010
Rejecting Reactive Energy Policy
I see that BP now thinks it might be able to cap its leaking Macondo well this month, rather than sometime in August, barring a major hurricane or other disruption. That can't come a moment too soon, and not just for the obvious reasons. Every day that the well continues to spew oil into the Gulf of Mexico contributes to the mounting appearance of panic among policy makers, who have allowed--willingly or otherwise--the oil leak to hijack our progress towards a sensible energy policy that addresses both energy security and greenhouse gas emissions, based on a rational assessment of the tools available now and the timing of future options. The sooner the oil spill is off the front page, the sooner work can resume on that effort.
One of my old commodity-trading mentors liked to remind his more junior colleagues to "sell the news and buy the facts." By this he meant that those who get carried away by the emotion of current events are liable to be whipsawed when reason returns with a little time and perspective. More than a few members of Congress and the administration could benefit from that insight right now, as the understandable reaction to the oil spill whips up exaggerated rhetoric concerning our addiction to oil and the prospect of ending it sometime soon. Funny that we don't hear much about Europe's addiction to oil, which at least in terms of its relative reliance on oil imports looks even more serious than ours, despite astronomical motor fuel taxes and an emphasis on biodiesel that nearly matches our focus on ethanol. Since Europeans have consistently focused on this problem for years, perhaps it's just not as easy to solve as some Representatives and pundits imagine. If that's true, does it make sense to divert our focus away from a comprehensive approach to both emissions and broadly-defined energy security, in order to zero in on the most daunting element of both concerns?
First consider the oil-security portion of the problem, which in many ways was clearer in 2008, when oil prices zoomed past $100/bbl and headed for $150, until both they and the economy broke later that year. Americans got the message that conservation and efficiency were the top priorities for dealing with the cost of our oil addiction. The oil spill doesn't alter that. Although prices have come down considerably since mid-2008, they remain well above the pre-2004 level of $20-30/bbl or so, when gasoline was consistently under $1.75/gallon. As a result of those pressures, motorists cut back on their driving, and the Congress enacted--and this administration implemented--the most significant increase in Corporate Average Fuel Economy requirements in a generation, taking the new-car average CAFE standard to 34 mpg by 2016, including both passenger cars and light trucks/SUVs. Based on forecasts by the Energy Information Agency of the DOE, these rules, along with prudent conservation, should reduce US gasoline consumption by 2.6 million barrels per day by 2030, compared to pre-CAFE forecasts. And although I've disagreed with some of the specifics of these regulations, particularly for failing to correct outdated assumptions and allowing carmakers to double-count the benefit of electric vehicles, these new standards will eventually transform the US vehicle fleet and the energy it consumes.
We also shouldn't allow our revulsion at the oil spill to blind us to the emissions implications of our energy choices. In 2008 oil accounted for over 37% of US primary energy consumption and 35% of our greenhouse gas emissions, while coal contributed 22.5% of primary energy but 30.5% of emissions, including a whopping 91% of the CO2 emissions from the electric power sector. That distinction is crucial, because while we still have limited and only partially-effective substitutes for oil in transportation, where most of it is used, we possess a wide array of options for reducing the emissions from electricity generation, which consumed just 1.3% of total US oil demand last year. Several of these are economically viable today, though most require some level of subsidies or incentives. Nuclear power and geothermal energy are effective low-emission alternatives for baseload generation, while natural gas and renewables are already making significant inroads into coal's market share of overall power demand. And if implemented on a large-scale, integrated basis, carbon capture and sequestration could enable coal to continue to compete in a low-carbon electricity marketplace.
None of this suggests a return to the pre-spill status quo. The impact of the spill on the oil industry and the regulations that govern it will be significant and long-lasting, as it should be. At the same time, it would be hard to assess all of the public evidence assembled so far and not conclude that the accident that destroyed the Deepwater Horizon rig and led to the uncontrolled leak of many thousands of barrels per day of oil into the Gulf was entirely preventable--not by a ban on drilling in deep water, but by prudent adherence to sound operating principles and practices and the consistent enforcement of regulations to ensure that adherence by even the least-cautious operators. Yet as necessary as creating a universal culture of safety and caution in offshore drilling is, we can't let this urgent task divert our attention from the important long-term drivers of US energy policy and the actions--many already underway--necessary to address them. Good energy policy can handle all of this, while overly-reactive policies focused on the Macondo spill and the political opportunity it presents risk misallocating our priorities and creating a legacy that would make our long-term energy situation even more challenging than it already is.
One of my old commodity-trading mentors liked to remind his more junior colleagues to "sell the news and buy the facts." By this he meant that those who get carried away by the emotion of current events are liable to be whipsawed when reason returns with a little time and perspective. More than a few members of Congress and the administration could benefit from that insight right now, as the understandable reaction to the oil spill whips up exaggerated rhetoric concerning our addiction to oil and the prospect of ending it sometime soon. Funny that we don't hear much about Europe's addiction to oil, which at least in terms of its relative reliance on oil imports looks even more serious than ours, despite astronomical motor fuel taxes and an emphasis on biodiesel that nearly matches our focus on ethanol. Since Europeans have consistently focused on this problem for years, perhaps it's just not as easy to solve as some Representatives and pundits imagine. If that's true, does it make sense to divert our focus away from a comprehensive approach to both emissions and broadly-defined energy security, in order to zero in on the most daunting element of both concerns?
First consider the oil-security portion of the problem, which in many ways was clearer in 2008, when oil prices zoomed past $100/bbl and headed for $150, until both they and the economy broke later that year. Americans got the message that conservation and efficiency were the top priorities for dealing with the cost of our oil addiction. The oil spill doesn't alter that. Although prices have come down considerably since mid-2008, they remain well above the pre-2004 level of $20-30/bbl or so, when gasoline was consistently under $1.75/gallon. As a result of those pressures, motorists cut back on their driving, and the Congress enacted--and this administration implemented--the most significant increase in Corporate Average Fuel Economy requirements in a generation, taking the new-car average CAFE standard to 34 mpg by 2016, including both passenger cars and light trucks/SUVs. Based on forecasts by the Energy Information Agency of the DOE, these rules, along with prudent conservation, should reduce US gasoline consumption by 2.6 million barrels per day by 2030, compared to pre-CAFE forecasts. And although I've disagreed with some of the specifics of these regulations, particularly for failing to correct outdated assumptions and allowing carmakers to double-count the benefit of electric vehicles, these new standards will eventually transform the US vehicle fleet and the energy it consumes.
We also shouldn't allow our revulsion at the oil spill to blind us to the emissions implications of our energy choices. In 2008 oil accounted for over 37% of US primary energy consumption and 35% of our greenhouse gas emissions, while coal contributed 22.5% of primary energy but 30.5% of emissions, including a whopping 91% of the CO2 emissions from the electric power sector. That distinction is crucial, because while we still have limited and only partially-effective substitutes for oil in transportation, where most of it is used, we possess a wide array of options for reducing the emissions from electricity generation, which consumed just 1.3% of total US oil demand last year. Several of these are economically viable today, though most require some level of subsidies or incentives. Nuclear power and geothermal energy are effective low-emission alternatives for baseload generation, while natural gas and renewables are already making significant inroads into coal's market share of overall power demand. And if implemented on a large-scale, integrated basis, carbon capture and sequestration could enable coal to continue to compete in a low-carbon electricity marketplace.
None of this suggests a return to the pre-spill status quo. The impact of the spill on the oil industry and the regulations that govern it will be significant and long-lasting, as it should be. At the same time, it would be hard to assess all of the public evidence assembled so far and not conclude that the accident that destroyed the Deepwater Horizon rig and led to the uncontrolled leak of many thousands of barrels per day of oil into the Gulf was entirely preventable--not by a ban on drilling in deep water, but by prudent adherence to sound operating principles and practices and the consistent enforcement of regulations to ensure that adherence by even the least-cautious operators. Yet as necessary as creating a universal culture of safety and caution in offshore drilling is, we can't let this urgent task divert our attention from the important long-term drivers of US energy policy and the actions--many already underway--necessary to address them. Good energy policy can handle all of this, while overly-reactive policies focused on the Macondo spill and the political opportunity it presents risk misallocating our priorities and creating a legacy that would make our long-term energy situation even more challenging than it already is.
Monday, June 28, 2010
The Energy Transition Is Already Underway
Lately I've been struck by the number of new groups and proposals calling for America to begin the transition to cleaner energy. We even heard this call from the Oval Office several weeks ago. Yet while there's clearly much more to be done to wean ourselves from our reliance on oil and other high-carbon fuels, I'm baffled by the suggestion that this process didn't actually begin long ago--not just in the last year and a half--with policies and R&D initiatives put in place by at least the previous two administrations. Perhaps it's fashionable to ignore our progress to date, because acknowledging it serves as a reminder that the process will require decades to complete, and that the end-point might not resemble the one we imagined when we began.
Let's start by recognizing that a massive energy transition is already well under way on many fronts, including the development of advanced biofuels, nearly-mature wind power, highly fuel-efficient vehicles, electric vehicles, solar power that's not just a science fair project, and a range of other technologies and policies for reducing oil consumption and greenhouse gas emissions. These didn't just appear spontaneously; most required literally decades of effort to get to this point. So if we're already headed down this path, rather than arguing about starting out should we rather be asking how much we can do now to accelerate this shift?
Take fuel economy, which seems simple, because we all understand miles per gallon, or think we do. But how many people realize that the incremental fuel savings from higher mpg shrink as mpg increases? The chart below shows the annual fuel consumption for a car driving 12,000 miles per year, about the national average, versus fuel economy in mpg. The improvement in Corporate Average Fuel Economy of new cars between 1978 and 2008, from about 20 mpg to 27 mpg, has already saved a very substantial 160 gal/yr per car, while the increase to 34 mpg by 2016, the new CAFE target, will save another 90 gal/yr. However, advancing from there to 44 mpg, roughly equivalent to the 2012 EU target of 130 grams of CO2 per kilometer, would save only an extra 80 gal/yr. That's no reason not to move ahead with more efficient cars, but we must recognize that we've already captured the steep part of a curve that is now flattening out, as the cost/benefit of each successively-harder increment diminishes, unless they burn no oil at all. That's where biofuels and EVs come in.
The Renewable Fuels Standard established by Congress in 2007 calls for a quantity of advanced and cellulosic biofuels by 2022 that exceeds what we currently get from corn ethanol. The problem is that at this point, after many years of hard work developing these technologies, there is not a single commercial-scale cellulosic biofuel facility design that has been built, tested and certified for profitable replication on the scale required, despite a special production tax credit of $1.01/gal. Nor do I conclude that's for lack of the government, private investors and big companies like ExxonMobil, Chevron, Shell, and BP throwing plenty of R&D dollars at the challenge. Within a few years we might be at the point at which billions of extra dollars for advanced biofuels would result in hundreds of such facilities actually being built, but then plenty of experts thought we would already be at that point by now, including the EPA, which had to ratchet back its cellulosic ethanol quota for this year from a level equal to the annual output of one corn ethanol plant to the quantity that a corn ethanol plant produces every three weeks or so.
The prospect for EVs looks more immediate--though still on a relatively small scale--with GM and Nissan launching flagship models later this year. However, as I noted in a recent webinar, every million EVs running entirely on electricity would save 31,000 barrels per day of gasoline, or about 0.3% of our current usage, and that's assuming they would replace cars getting today's average mpg, rather than Prius-type non-plug-in hybrids, as seems likelier to me. It's going to take a whale of a lot of EVs to make a real difference, and it's not yet obvious that offering more than the current $7,500 in consumer tax credits to buy them, or handing out more than the billions that have already been given to car companies--including some that have never built a mass-produced car--is going to put a lot more of these vehicles on the road in the next few years than would happen under existing policies that are still playing out.
Let's start by recognizing that a massive energy transition is already well under way on many fronts, including the development of advanced biofuels, nearly-mature wind power, highly fuel-efficient vehicles, electric vehicles, solar power that's not just a science fair project, and a range of other technologies and policies for reducing oil consumption and greenhouse gas emissions. These didn't just appear spontaneously; most required literally decades of effort to get to this point. So if we're already headed down this path, rather than arguing about starting out should we rather be asking how much we can do now to accelerate this shift?
Take fuel economy, which seems simple, because we all understand miles per gallon, or think we do. But how many people realize that the incremental fuel savings from higher mpg shrink as mpg increases? The chart below shows the annual fuel consumption for a car driving 12,000 miles per year, about the national average, versus fuel economy in mpg. The improvement in Corporate Average Fuel Economy of new cars between 1978 and 2008, from about 20 mpg to 27 mpg, has already saved a very substantial 160 gal/yr per car, while the increase to 34 mpg by 2016, the new CAFE target, will save another 90 gal/yr. However, advancing from there to 44 mpg, roughly equivalent to the 2012 EU target of 130 grams of CO2 per kilometer, would save only an extra 80 gal/yr. That's no reason not to move ahead with more efficient cars, but we must recognize that we've already captured the steep part of a curve that is now flattening out, as the cost/benefit of each successively-harder increment diminishes, unless they burn no oil at all. That's where biofuels and EVs come in.
The Renewable Fuels Standard established by Congress in 2007 calls for a quantity of advanced and cellulosic biofuels by 2022 that exceeds what we currently get from corn ethanol. The problem is that at this point, after many years of hard work developing these technologies, there is not a single commercial-scale cellulosic biofuel facility design that has been built, tested and certified for profitable replication on the scale required, despite a special production tax credit of $1.01/gal. Nor do I conclude that's for lack of the government, private investors and big companies like ExxonMobil, Chevron, Shell, and BP throwing plenty of R&D dollars at the challenge. Within a few years we might be at the point at which billions of extra dollars for advanced biofuels would result in hundreds of such facilities actually being built, but then plenty of experts thought we would already be at that point by now, including the EPA, which had to ratchet back its cellulosic ethanol quota for this year from a level equal to the annual output of one corn ethanol plant to the quantity that a corn ethanol plant produces every three weeks or so.The prospect for EVs looks more immediate--though still on a relatively small scale--with GM and Nissan launching flagship models later this year. However, as I noted in a recent webinar, every million EVs running entirely on electricity would save 31,000 barrels per day of gasoline, or about 0.3% of our current usage, and that's assuming they would replace cars getting today's average mpg, rather than Prius-type non-plug-in hybrids, as seems likelier to me. It's going to take a whale of a lot of EVs to make a real difference, and it's not yet obvious that offering more than the current $7,500 in consumer tax credits to buy them, or handing out more than the billions that have already been given to car companies--including some that have never built a mass-produced car--is going to put a lot more of these vehicles on the road in the next few years than would happen under existing policies that are still playing out.
However attractive energy visions such as the President's might be, even to me, there are practical limits to additional activism at a point when so many wheels have already been set in motion. I do understand that the nation is riveted by the oil spill, and that transforming this interest into support for a broader energy agenda could be a once-in-a-generation opportunity. At the same time, I worry about an approach that relies on expanding already-unsustainable financial incentives for clean energy deployment at a time when the deficit has taken on the aspect of a black hole threatening to devour our future, energy and otherwise. To see the energy transition really take off, we must reach the point at which the alternatives are unambiguously better/faster/cheaper than oil, or can at least match its cost and convenience in its primary transportation energy uses, and are not merely better for the environment--as important as that is. We're not there yet, but we've clearly already begun the journey.
Energy Outlook will be on holiday the rest of this week and through the July 4th weekend.
Friday, November 20, 2009
Energy Principles
My critique of a proposal for expanded tax credits to promote the electrification of transportation prompted some interesting comments. It also got me thinking again about an underlying problem that leads to the kind of scramble for government favor and largess that is exemplified by such efforts and by the badly-flawed Waxman-Markey climate bill. We have seen endless debates on energy policy, energy strategy and energy tactics, but far too little on energy principles. It would save much time, effort and money if we had a guiding principle that eschewed favoritism toward any particular technology, in favor of technology-neutral regulations and federal investments in broadly-useful energy infrastructure. Even more importantly, we would benefit from a clear principle of focusing policy and incentives on our desired ultimate outcomes, such as reducing emissions or oil imports, rather than on individual pathways for achieving them.
Take the example of electric vehicles (EVs) and their infrastructure. The US government has no business promoting a single-focus solution like this. It does, however, have a vital interest in promoting much more energy-efficient cars, based on any technologies that achieve that result. If handing out consumer tax incentives for new cars is necessary to further that goal, they should be given on the basis of total energy consumption, using a comprehensive metric like the MPGe of the Automotive X-Prize, which counts all energy in all forms delivered to the car. The higher the MPGe, the bigger the incentive. That would make a lot more sense than doling out tax credits in proportion to the size of a car's battery. Along with the proposal by the EPA and Department of Transportation to let carmakers count EVs twice towards their new corporate fuel economy and tailpipe emissions targets, that would create a perverse incentive similar to the old "SUV Loophole", possibly setting the stage for a new generation of large, inefficient battery SUVs.
Shifting transportation energy from oil to electricity makes more sense if that electricity is used efficiently, particularly since low-emission sources still account for less than 1/3 of our electricity supply, and the wind power most often mentioned in connection with powering EVs accounts for just 1.6% of US generation this year. On that basis, investments in the smart grid and long-distance transmission lines would probably be as helpful in supporting future EV deployment as underwriting specific EV recharging infrastructure, while avoiding the risk of becoming orphaned if EVs don't catch on.
On the generation side, whether intentionally or not, the stimulus bill passed early this year helped put wind, solar, and other renewable energy sources on a more technology-neutral basis by making them all eligible for the same 30% federal tax credit previously available only to solar power. Yet this provision still contains at least one glaring omission, because it was established under a very specific definition of renewable energy, rather than encompassing all energy sources meeting criteria for very low emissions that would also include nuclear power. Putting nuclear and renewables on a common footing would go a long way toward ending protracted arguments about which technology receives more (undeserved) government support and which is most commercially competitive, and it would foster a future generating mix offering similar depth and flexibility to the one we have now, without undesirable greenhouse gases.
Ultimately, whether you like my choice of principles or prefer different ones, we need a common set of criteria for making the energy decisions we face, instead of treating each as an ad hoc opportunity for one option or technology and its backers to win at the expense of the others--and often at the expense of taxpayers. While we certainly need to get on with deploying lower-emission ways of producing and using energy, it is premature to bet the ranch on any one option. We should still be creating new options and pruning them along the way, based on principles aligned with the basic problems we are trying to solve. While that might sound idealistic to some, it strikes me as intensely practical and much more useful in the long run than the prevailing plague of energy "answer-itis", in which everyone wants to push a specific answer before we even agree on the right questions to ask.
Take the example of electric vehicles (EVs) and their infrastructure. The US government has no business promoting a single-focus solution like this. It does, however, have a vital interest in promoting much more energy-efficient cars, based on any technologies that achieve that result. If handing out consumer tax incentives for new cars is necessary to further that goal, they should be given on the basis of total energy consumption, using a comprehensive metric like the MPGe of the Automotive X-Prize, which counts all energy in all forms delivered to the car. The higher the MPGe, the bigger the incentive. That would make a lot more sense than doling out tax credits in proportion to the size of a car's battery. Along with the proposal by the EPA and Department of Transportation to let carmakers count EVs twice towards their new corporate fuel economy and tailpipe emissions targets, that would create a perverse incentive similar to the old "SUV Loophole", possibly setting the stage for a new generation of large, inefficient battery SUVs.
Shifting transportation energy from oil to electricity makes more sense if that electricity is used efficiently, particularly since low-emission sources still account for less than 1/3 of our electricity supply, and the wind power most often mentioned in connection with powering EVs accounts for just 1.6% of US generation this year. On that basis, investments in the smart grid and long-distance transmission lines would probably be as helpful in supporting future EV deployment as underwriting specific EV recharging infrastructure, while avoiding the risk of becoming orphaned if EVs don't catch on.
On the generation side, whether intentionally or not, the stimulus bill passed early this year helped put wind, solar, and other renewable energy sources on a more technology-neutral basis by making them all eligible for the same 30% federal tax credit previously available only to solar power. Yet this provision still contains at least one glaring omission, because it was established under a very specific definition of renewable energy, rather than encompassing all energy sources meeting criteria for very low emissions that would also include nuclear power. Putting nuclear and renewables on a common footing would go a long way toward ending protracted arguments about which technology receives more (undeserved) government support and which is most commercially competitive, and it would foster a future generating mix offering similar depth and flexibility to the one we have now, without undesirable greenhouse gases.
Ultimately, whether you like my choice of principles or prefer different ones, we need a common set of criteria for making the energy decisions we face, instead of treating each as an ad hoc opportunity for one option or technology and its backers to win at the expense of the others--and often at the expense of taxpayers. While we certainly need to get on with deploying lower-emission ways of producing and using energy, it is premature to bet the ranch on any one option. We should still be creating new options and pruning them along the way, based on principles aligned with the basic problems we are trying to solve. While that might sound idealistic to some, it strikes me as intensely practical and much more useful in the long run than the prevailing plague of energy "answer-itis", in which everyone wants to push a specific answer before we even agree on the right questions to ask.
Tuesday, October 27, 2009
Missing the Point on Energy and Jobs
Two emails I received yesterday delivered press releases from two organizations with very different agendas, both emphasizing the impact of energy on jobs. With US unemployment showing little response to the economic stimulus, the rebounding stock market, or the "green shoots" appearing in some sectors, it's understandable that companies, groups and even the government would want to play up the direct employment impact of key initiatives or policies. Yet when it comes to energy, I believe much of this effort misses the mark. Our employment goal for energy should not be to have as many people working in the energy sector as we can, but to have the most efficient and cost-effective energy sector possible, in order to promote job creation and retention in the rest of the economy, where the vast majority of jobs are found. Our decisions about energy policy should not depend on the creation of a few green jobs.
I'm hardly suggesting that energy jobs are insignificant or inconsequential. I've spent my entire career in energy, and I recommend it without hesitation as a field in which one's contributions can have a measurable impact on society, often with better remuneration than in many other pursuits. The Oil & Natural Gas Industry Labor-Management Committee isn't wrong to stand up for the millions of industry-related jobs at stake in the current Congressional debate on energy industry tax benefits, any more than Wind Capital Group is to highlight the 2,500 jobs associated with the supply-chain effects of their Lost Creek Wind Project. But as important as preserving or expanding energy-related jobs appears today, it is even more essential for the long-term interests of the country that we not obsess about this one aspect of energy, to the detriment of others that will affect overall US employment and international competitiveness long after the unemployment rate has returned to its normal range.
Putting this into perspective requires recalling that by its nature energy is a capital-intensive business, rather than a labor-intensive one. One way to gauge that is to look at the labor productivity of energy companies. The latest annual report of my former employer, Chevron, reveals that on average in 2008 its 61,675 employees each accounted for $4.3 million of revenue, resulting in nearly $700,000 of pre-tax net income (after covering their own salaries and all other expenses.) In the utility sector, the comparable figures for FPL Group were $1.1 million and $137,000, respectively. Even a small, rapidly-growing renewable technology firm such as First Solar enjoyed revenue and pre-tax profit per employee in 2008 of approximately $354,000 and $132,000, respectively. With its high labor productivity, the primary employment impact of energy occurs where it is consumed, not where it's produced, because energy is such a crucial input for so many sectors and the sine qua non of more than a few.
When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.
I'm hardly suggesting that energy jobs are insignificant or inconsequential. I've spent my entire career in energy, and I recommend it without hesitation as a field in which one's contributions can have a measurable impact on society, often with better remuneration than in many other pursuits. The Oil & Natural Gas Industry Labor-Management Committee isn't wrong to stand up for the millions of industry-related jobs at stake in the current Congressional debate on energy industry tax benefits, any more than Wind Capital Group is to highlight the 2,500 jobs associated with the supply-chain effects of their Lost Creek Wind Project. But as important as preserving or expanding energy-related jobs appears today, it is even more essential for the long-term interests of the country that we not obsess about this one aspect of energy, to the detriment of others that will affect overall US employment and international competitiveness long after the unemployment rate has returned to its normal range.
Putting this into perspective requires recalling that by its nature energy is a capital-intensive business, rather than a labor-intensive one. One way to gauge that is to look at the labor productivity of energy companies. The latest annual report of my former employer, Chevron, reveals that on average in 2008 its 61,675 employees each accounted for $4.3 million of revenue, resulting in nearly $700,000 of pre-tax net income (after covering their own salaries and all other expenses.) In the utility sector, the comparable figures for FPL Group were $1.1 million and $137,000, respectively. Even a small, rapidly-growing renewable technology firm such as First Solar enjoyed revenue and pre-tax profit per employee in 2008 of approximately $354,000 and $132,000, respectively. With its high labor productivity, the primary employment impact of energy occurs where it is consumed, not where it's produced, because energy is such a crucial input for so many sectors and the sine qua non of more than a few.
When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.
Friday, June 19, 2009
Cash for Guzzlers Enacted
Yesterday the Senate passed this year's war funding bill, to which had been added the "cash for gas guzzlers" provisions that I described in early May. The bill should be signed by President Obama shortly and become law, just in time to help car dealers--including some who are losing their GM or Chrysler franchises--clear out the backlog of new cars that has accumulated during this protracted period of slow sales. The final version of this measure importantly requires that the "clunkers" traded in be scrapped, so that they don't end up consuming fuel and emitting pollutants somewhere else. While it is overly generous to new pickups and SUVs that would use only slightly less fuel than their predecessors, its minimum threshold of a 4 mpg improvement for passenger cars, or 10 mpg to qualify for the full $4,500 benefit, should still result in meaningful levels of avoided fuel consumption, while helping to compensate for the expiration of tax credits for many popular hybrid vehicles.
Every excursion I make into the details of energy-related legislation feels like a civics lesson. Cash-for-guzzlers took a lot of flak during its comparatively brief trip through the Congress, with the Wall St. Journal referring to it as "Cash from Lunkheads" and two prominent Senators penning an op-ed criticizing it roundly as "Handouts for Hummers". It probably couldn't have passed as a separate bill, and it just squeaked into the war funding bill in the Senate. It took a bit of scouting to track down its details, which appear as Title XIII of HR-2346, the "Supplemental Appropriations Act, 2009", carrying the vague description of "Consumer Assistance to Recycle and Save Program". While it clearly could have been better, from my perspective it's hardly the worst piece of energy legislation to come out of this Congress, considering that for the average motorist moving up from an 18 mpg car to one getting at least 28 mpg would save as much gas as a 50 mpg Prius consumes in total. Here are the basic rules, as I read them:
Every excursion I make into the details of energy-related legislation feels like a civics lesson. Cash-for-guzzlers took a lot of flak during its comparatively brief trip through the Congress, with the Wall St. Journal referring to it as "Cash from Lunkheads" and two prominent Senators penning an op-ed criticizing it roundly as "Handouts for Hummers". It probably couldn't have passed as a separate bill, and it just squeaked into the war funding bill in the Senate. It took a bit of scouting to track down its details, which appear as Title XIII of HR-2346, the "Supplemental Appropriations Act, 2009", carrying the vague description of "Consumer Assistance to Recycle and Save Program". While it clearly could have been better, from my perspective it's hardly the worst piece of energy legislation to come out of this Congress, considering that for the average motorist moving up from an 18 mpg car to one getting at least 28 mpg would save as much gas as a 50 mpg Prius consumes in total. Here are the basic rules, as I read them:
- The car traded in must be no more than 25 years old, in drivable condition and certified at 18 mpg or less in EPA "combined fuel economy". (15 mpg for a typical SUV/light truck.)
- It must have been insured and registered to the owner for at least one year prior to trade-in.
- It must be shredded or crushed, though not before the auto recycler sells off any desirable parts.
- The new vehicle must get at least 22 mpg (15 mpg SUV/light truck) and
- at least 4 mpg more than the trade-in (1 mpg SUV/light truck) to qualify for a $3,500 tax-free voucher, or
- at least 10 mpg more (2 mpg SUV/light truck) to qualify for the maximum $4,500 tax-free voucher.
- It can't cost over $45,000.
If you are in any doubt as to whether your present ride qualifies as a guzzler, the Detroit News has provided this handy search tool.
Whatever its merits as energy policy, in some respects the cash-for-guzzlers program looks like a clever insurance policy for the government's investment in GM and Chrysler, which will only achieve its intended goals if these companies can survive the recession and live on to produce the efficient cars the administration targeted with its new CAFE standard. That requires selling millions more of the current models, which only conform to the current, lower standard of 27.5 mpg for passenger cars and 23.1 mpg for SUVs and light trucks. And while the legislation doesn't require qualifying new cars to be American or even American-made--that would have run afoul of WTO rules--the Detroit 3 stand to benefit disproportionately, given the generous benefits for the large vehicles that dominate their current mix. The program only runs from July 1 through November 1, 2009 and is funded at $1 billion, enough for around 250,000 cars. If you intend to take advantage of it, I wouldn't wait too long.
Monday, January 19, 2009
Tempering Optimism with Patience
We've all heard the President-elect mention the need for patience in confronting our economic problems, echoed by countless commentators elaborating on the scale of the challenge involved. If I could offer him one piece of advice on Inauguration Day, it would be to ask the American public for the same degree of patience in transforming our energy economy. It took a century to evolve into its present shape, and its major hardware has lifetimes ranging from ten to sixty years. Despite the great progress and truly impressive growth of alternative energy over the last few years, displacing our reliance on conventional energy is not the task of a few months or years, no matter how much of the planned stimulus package is ultimately devoted to making a down payment on this transformation.
Along with that advice, I would point out two related facts to our new President. First, while doubling our renewable energy production in three years is an appropriately bold initial goal, it would be next to impossible if it included the hydropower dams that make up the largest current component of our renewable energy supplies. Wind and solar power have been growing at rates that should make it quite feasible to deliver a further doubling of their output in three years, if the new administration can find smart ways to restore the flow of financing that is so crucial for these projects. Yet wind, solar and geothermal power still accounted for less than 1.5% of the electricity generated in the US for the first nine months of 2008, while hydro provided 6.7%. Since I don't hear anyone calling for a slew of big, new hydroelectric dams--the trend seems rather in the opposite direction--we would need to double wind, solar and geothermal roughly five successive times to equal the 1.5 trillion kilowatt-hours of electricity generated from coal in the same period. Efficiency and conservation might conceivably reduce the required number of doublings to four; however, each doubling will get progressively harder, as wind and solar grow out of the niches within which their cyclical and intermittent output has been relatively manageable.
The other fact concerns oil and the fuels we derive from it. President Obama might consider asking Dr. Chu a few questions on the subject of why hydrocarbon fuels have been so successful for the last hundred years. The answers have at least as much to do with chemistry and physics as they do with economics and domestic and geopolitics. Each gallon of gasoline delivers 115,000 BTUs, the equivalent of 33.7 kWh. It takes 1.5 gallons of ethanol or roughly 740 pounds of lithium ion batteries to deliver the same amount of energy to a car. The only reason it is even possible to conceive of an electric vehicle with comparable range to a gasoline-powered car is that current internal combustion engines waste about 80% of the energy in gasoline, while electric motors are more than 90% efficient. Petroleum products constitute a remarkable energy source and storage system, albeit a finite one, and replacing both attributes of oil at once will be exceedingly difficult. If we weren't so concerned about the energy security and environmental consequences of their use, it would be hard to justify such an uphill battle at all.
Attaining our energy goals will require healthy doses of both optimism and patience: optimism to remind us that none of the obstacles along the way looks insurmountable in the long run, and patience because those obstacles will not be conquered in four years or likely even eight. I still subscribe to the old notion that "a goal without a plan is just a wish." We need tangible plans to manage the transition from the old energy to the new, and to manage our expectations along the way. That's the best recipe I can offer for avoiding disappointing voters and consumers, when the promised energy transformation isn't complete by the end of President Obama's first term in office.
Along with that advice, I would point out two related facts to our new President. First, while doubling our renewable energy production in three years is an appropriately bold initial goal, it would be next to impossible if it included the hydropower dams that make up the largest current component of our renewable energy supplies. Wind and solar power have been growing at rates that should make it quite feasible to deliver a further doubling of their output in three years, if the new administration can find smart ways to restore the flow of financing that is so crucial for these projects. Yet wind, solar and geothermal power still accounted for less than 1.5% of the electricity generated in the US for the first nine months of 2008, while hydro provided 6.7%. Since I don't hear anyone calling for a slew of big, new hydroelectric dams--the trend seems rather in the opposite direction--we would need to double wind, solar and geothermal roughly five successive times to equal the 1.5 trillion kilowatt-hours of electricity generated from coal in the same period. Efficiency and conservation might conceivably reduce the required number of doublings to four; however, each doubling will get progressively harder, as wind and solar grow out of the niches within which their cyclical and intermittent output has been relatively manageable.
The other fact concerns oil and the fuels we derive from it. President Obama might consider asking Dr. Chu a few questions on the subject of why hydrocarbon fuels have been so successful for the last hundred years. The answers have at least as much to do with chemistry and physics as they do with economics and domestic and geopolitics. Each gallon of gasoline delivers 115,000 BTUs, the equivalent of 33.7 kWh. It takes 1.5 gallons of ethanol or roughly 740 pounds of lithium ion batteries to deliver the same amount of energy to a car. The only reason it is even possible to conceive of an electric vehicle with comparable range to a gasoline-powered car is that current internal combustion engines waste about 80% of the energy in gasoline, while electric motors are more than 90% efficient. Petroleum products constitute a remarkable energy source and storage system, albeit a finite one, and replacing both attributes of oil at once will be exceedingly difficult. If we weren't so concerned about the energy security and environmental consequences of their use, it would be hard to justify such an uphill battle at all.
Attaining our energy goals will require healthy doses of both optimism and patience: optimism to remind us that none of the obstacles along the way looks insurmountable in the long run, and patience because those obstacles will not be conquered in four years or likely even eight. I still subscribe to the old notion that "a goal without a plan is just a wish." We need tangible plans to manage the transition from the old energy to the new, and to manage our expectations along the way. That's the best recipe I can offer for avoiding disappointing voters and consumers, when the promised energy transformation isn't complete by the end of President Obama's first term in office.
Friday, October 03, 2008
Tenth Time Lucky?
As the House of Representatives today takes up the financial rescue package passed Wednesday night by the US Senate, the renewable energy industry and its supporters now have two dogs in this fight. Restoration of the normal functioning of the country's credit markets--the main goal of this legislation--is as essential for the financing of renewable energy projects as it is for the rest of the economy. And if the House passes the same version of this package as the Senate, the renewable energy tax credits that are due to expire at the end of the year will finally be extended, by one year for wind and by eight for solar power.
It hasn't been easy to follow the legislative process involved in the creation of the "bailout" bills taken up by the House on Monday and the Senate on Wednesday. The bill passed by the Senate and referred back to the House, HR.1424, began life as the "Paul Wellstone Mental Health and Addiction Equity Act of 2007." The Senate then amended this dormant bill with the "Emergency Economic Stabilization" provisions--a modified version of the $700 billion rescue package plus a one-year boost in FDIC deposit insurance to $250,000--and the "tax extenders" package from S.3335, the "Jobs, Energy, Families and Disaster Relief Act of 2008" that I examined when the Senate considered it in August. That's where the wind and solar tax credits come in, along with the now-infamous "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children" measure to which I called bemused attention.
So here's the dilemma faced by the House: having heard from many of their constituents that Monday's defeat of the earlier rescue package was ill-considered, they can either put the bill exactly as passed by the Senate to a straight up-or-down vote, or they can amend it further to address the concerns of fiscally-conservative Democrats--the so-called Blue Dogs--and others to strip out some of the pork added by the Senate. In the former case, the bill would then be sent to the President for his signature and become law. However, if the House amends it prior to passage, then as I understand it, it must go to a House-Senate conference to resolve differences and then be re-voted by both houses. That entails further delays and possibly more market instability.
For the tenth time in a bit over a year, the renewable energy industry sees the possibility but not the certainty that the tax credits it regards as essential for continued growth will be extended. We should know the outcome later today. But whether this provision survives into the final economic stabilization package or not, this is no way to encourage a sector that both sides of the political divide agree is a key component of our energy security and climate change strategies. What is urgently needed is a predictable framework of incentives for energy technologies that are still at an early stage of their development and deployment, combined with a judiciously-planned phase-out, to ensure that we aren't simply creating industries that are addicted to subsidies, in the manner of the US corn ethanol industry. The energy provisions of the current bailout bill fall far short of that standard.
Update: The House passed the bill, without amendment, by a vote of 263-171.
It hasn't been easy to follow the legislative process involved in the creation of the "bailout" bills taken up by the House on Monday and the Senate on Wednesday. The bill passed by the Senate and referred back to the House, HR.1424, began life as the "Paul Wellstone Mental Health and Addiction Equity Act of 2007." The Senate then amended this dormant bill with the "Emergency Economic Stabilization" provisions--a modified version of the $700 billion rescue package plus a one-year boost in FDIC deposit insurance to $250,000--and the "tax extenders" package from S.3335, the "Jobs, Energy, Families and Disaster Relief Act of 2008" that I examined when the Senate considered it in August. That's where the wind and solar tax credits come in, along with the now-infamous "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children" measure to which I called bemused attention.
So here's the dilemma faced by the House: having heard from many of their constituents that Monday's defeat of the earlier rescue package was ill-considered, they can either put the bill exactly as passed by the Senate to a straight up-or-down vote, or they can amend it further to address the concerns of fiscally-conservative Democrats--the so-called Blue Dogs--and others to strip out some of the pork added by the Senate. In the former case, the bill would then be sent to the President for his signature and become law. However, if the House amends it prior to passage, then as I understand it, it must go to a House-Senate conference to resolve differences and then be re-voted by both houses. That entails further delays and possibly more market instability.
For the tenth time in a bit over a year, the renewable energy industry sees the possibility but not the certainty that the tax credits it regards as essential for continued growth will be extended. We should know the outcome later today. But whether this provision survives into the final economic stabilization package or not, this is no way to encourage a sector that both sides of the political divide agree is a key component of our energy security and climate change strategies. What is urgently needed is a predictable framework of incentives for energy technologies that are still at an early stage of their development and deployment, combined with a judiciously-planned phase-out, to ensure that we aren't simply creating industries that are addicted to subsidies, in the manner of the US corn ethanol industry. The energy provisions of the current bailout bill fall far short of that standard.
Update: The House passed the bill, without amendment, by a vote of 263-171.
Friday, September 19, 2008
Missing the Boat
When I consider what happened in the House of Representatives this week, passing a "drilling bill" that appears highly unlikely to stimulate more exploration and production--and might actually result in less--I look at two factors. Aside from the influence of those for whom the very idea of oil & gas drilling represents an affront to their sensibilities, I see a fundamental misunderstanding among many in Congress of the relative contribution of different energy sources and our structural requirements for them. More importantly, the nation still lacks a coherent energy strategy, which would serve as a guide to the tactics we should pursue. Absent such a plan, the result could hardly be anything but the grab-bag of discrete measures we observe.
Without the least bit of condescension, we should recognize that it isn't easy to compare different forms of energy, or to assess the remaining resource potential of the US. It takes a pretty solid background in science or engineering to be able to put barrels, BTUs, cubic feet, megawatts, and kilowatt-hours onto a consistent energy basis, and that still ignores the effective firewalls between the chemical-fuel economy and the electrical economy, with all their nuances. Few of our elected representatives have that background or experience, and as busy as they are with the numerous problems before them, there is a natural tendency to latch onto handy soundbites, such as the oft-repeated factoid that the US consumes 25% of the world's oil while possessing only 3% of global oil reserves. Unfortunately, this reasonably accurate comparison turns out to be entirely meaningless, because it ignores three much more relevant factors:
Without the least bit of condescension, we should recognize that it isn't easy to compare different forms of energy, or to assess the remaining resource potential of the US. It takes a pretty solid background in science or engineering to be able to put barrels, BTUs, cubic feet, megawatts, and kilowatt-hours onto a consistent energy basis, and that still ignores the effective firewalls between the chemical-fuel economy and the electrical economy, with all their nuances. Few of our elected representatives have that background or experience, and as busy as they are with the numerous problems before them, there is a natural tendency to latch onto handy soundbites, such as the oft-repeated factoid that the US consumes 25% of the world's oil while possessing only 3% of global oil reserves. Unfortunately, this reasonably accurate comparison turns out to be entirely meaningless, because it ignores three much more relevant factors:
- Even after steady declines over the last 20 years, the US still produced 10% of the world's petroleum output last year. (That includes natural gas liquids.)
- US proved reserves figures are not a reliable predictor of future production. This is amply demonstrated by the fact that in 1997 our proved oil reserves stood at 22.5 billion barrels, compared to 20.9 billion today. Yet in the interim, we have produced 20.4 billion barrels. Coincidentally, this is roughly the quantity of oil estimated to lie under the off-limits portions of the offshore.
- Many of the foreign reserves included in the denominator of that widely-quoted 3% figure would not withstand the same scrutiny to which US reserves figures are subjected. In particular, they include some notably suspicious "adjustments" to reserves in key OPEC countries during a period in which OPEC quotas were based in part on each member's relative share of reserves within that body.
In effect, then, our current strategy for future US oil production rests on the interpretation of a marginally-relevant, though satisfyingly-pithy statistic as a verdict of futility. The result is a "drilling bill" that would ensure that drilling can't contribute to reducing US oil imports, by opening up only a fraction of the off-limits portions of our Outer Continental Shelf--and only the most technically-challenging ones, at that--while imposing a permanent drilling ban on everything within 50 miles of the coast, aside from the heavily-explored Western and Central Gulf of Mexico. This is like putting half your net worth into a safe deposit box and then throwing the keys into the ocean.
For a hint of what a real energy strategy might look like, you have only to read yesterday's Washington Post op-ed by Henry Kissinger and Martin Feldstein. They suggest a coordinated response by the large oil-consuming countries to our own out-of-control demand growth and to OPEC's manipulation of the global oil market. Among other things, Drs. Feldstein and Kissinger recognize that opportunities to displace oil with other energy sources are greatest where oil is used to produce heat and electricity, rather than transportation energy and chemicals. While it's not quite an energy strategy in itself, their short essay could provide the guiding principles for an energy bill that would address the economic and geopolitical dimensions of this energy crisis, rather than merely creating the appearance of action prior to a critical election.
Wednesday, September 17, 2008
What Compromise?
I can't think of a single occasion on which I've reviewed the details of a piece of pending Congressional legislation when I haven't regretted the unintended civics lesson the experience provided. Poring over the text of the House Leadership's proposed "energy compromise" bill, HR.6899, the "Comprehensive American Energy Security and Consumer Protection Act" was no exception. Although the bill contains a version of the expected headline deal relating to offshore drilling and renewable energy credits, it also includes a hodgepodge of leftovers from the negotiations for last year's Energy Bill, along with some poison-pill measures such as the coerced, retro-active renegotiation of royalty relief on those late-1990s deepwater leases, plus an utterly half-baked idea to sell light crude oil out of the Strategic Petroleum Reserve and buy back heavier oil. Falling short of any dictionary definition of "compromise", this bill epitomizes my concerns about mixing energy policy with election-year politics.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
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