How Would We Provide Enough Energy For 11 Billion People?

• Reconciling energy and environmental concerns was challenging enough when global population seemed headed for a plateau around 9 billion.
• A new forecast of up to 12 billion people by 2100 raises large questions about the capacity of current energy technologies to meet future global needs.

The combination of forecasted global economic weakness and growing non-OPEC production continues to weigh on oil prices.  Brent crude has fallen below $90 per barrel, and the US benchmark has been flirting with $80. But just when the rapid growth of energy supplies has undermined the mood of energy scarcity that prevailed for the last four decades, a group of demographers has thrown us a curve ball, though admittedly a very long one. 

In the 1970s many people were concerned about a "population explosion." Dystopian fiction--already a well-established sub-genre--featured visions of a grossly overcrowded future earth, along the lines of "Soylent Green." However, something happened on the way to such nightmares: birth rates in developed countries as well as large developing ones like China slowed in tandem with rising incomes. Instead of a world of 12 billion by 2100 or sooner, long-term population estimates in the last decade, including from the United Nations, began to focus on an eventual plateau around 9 billion.

Now it appears those lower forecasts might have been too optimistic, particularly with regard to birth rates in sub-Saharan Africa. The analysis in a paper published in Science last month suggests that growth will continue beyond the end of the current century. The authors expect global population in 2100 to reach 9.6 to 12.3 billion. That could have significant implications for energy demand and climate change, among other environmental and development issues, while in turn being influenced by them.  Nick Butler, who writes on energy for the Financial Times, looked at this from the perspective of oil and other energy sources and concluded, "None of the current technologies...offer an adequate answer."

I would take Mr. Butler's observation a step farther.  It's extremely challenging to say anything confidently concerning how much energy the world of 2100 might need, or where it will come from. Forecasts are rarely accurate beyond a few years, and even scenario methods struggle to cope with the unknown-unknowns involved in such time frames.

Recall that in 1928--as far removed from today as 2100-- world oil production was less than 5 million barrels per day, and the first chain reaction making nuclear power possible was still 14 years in the future. Natural gas was mainly viewed as a low-value byproduct of oil production, while wind power was considered quaint. And with a global population of just over 2 billion at the time, meeting the energy needs of today's 7 billion might have seemed even more daunting than supplying 11 or 12 billion does to us.

It's also worth keeping in mind that more than three-fourths of today's oil is consumed by countries with just 60% of the world's population.  The curve drops off steeply from there, leaving roughly 2 billion without modern energy services. So the energy implications of an extra two billion people by the turn of the century depend heavily on whether their energy demand looks more like today's top 4 billion or bottom 2 billion energy consumers. The recent "Africa Energy Outlook" from  the International Energy Agency (IEA) examined how energy supply on that continent might develop, along with the necessity of shifting investment from exports to domestic consumption to bridge that gap.

For that matter, even if an expansion of global fossil fuel production on the scale required to meet the needs of billions of additional consumers were possible, due to the technology that is currently unlocking oil and gas from source rock rather than conventional reservoirs--a.k.a. the shale revolution--it would bypass any notions of a "carbon budget" that might constrain the projected global temperature increase to a manageable level. It's a reasonable bet that however many people are alive in 2100, they will use less fossil fuels per capita than we do.

Consider what some of today's mainstream forecasts indicate about the future energy mix. The main "New Policies" scenario of the IEA's 2013 World Energy Outlook sees renewable energy growing from 11% to 18% of total primary energy by 2035, while its more aggressive "450" scenario has these sources supplying 26%, with commensurate reductions in fossil fuels. Shell's current long-range scenarios envision divergent futures in which fossil fuels still supply 50-60% of nearly doubled energy demand by 2060, but shrink to around 20% or less by 2100.

One big trend that could help facilitate that kind of change is electrification, which will increasingly displace liquid fuels from illumination, cooking, and even transportation. That's important because while we have few practical large-scale alternatives to petroleum for liquid fuels, we have many ways to generate electricity and could accommodate more, including the long-awaited arrival of practical nuclear fusion--perhaps along the lines announced by Lockheed Martin earlier this month--or some other, currently unanticipated energy source. Eight decades would be more than sufficient for an entirely new generating technology to become significant. 

Reconciling the energy needs of a large, growing population with preventing dangerous global warming--referred to by some as the "energy dilemma"--thus appears to require a sustained, protracted transformation of the entire energy economy. That shouldn't be a surprising insight. The bigger question is whether such a transformation can be achieved through the gradual evolution of the energy technologies available today, or whether it will require revolutionary developments. That remains a matter of considerable debate in energy circles. 

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

Is the Wind Energy Tax Credit About to Expire for Good?

• The expiration of the federal subsidy for wind power on 12/31/13 provides an opportunity to replace it with a smaller benefit, more focused on innovation.
• Comprehensive tax reform is the best way to approach this, including making tax incentives for energy consistent across the board.

With the end of the year fast approaching, the US wind power industry faces yet another scheduled expiration of federal tax credits for new wind turbines. The wind Production Tax Credit, or PTC, was due to expire at the end of 2012 but was extended for an additional year as part of last December’s “fiscal cliff” deal. With the PTC and other energy-related “tax expenditures” subject to Congressional negotiations on tax reform, it was looking like this might truly be its last hurrah in its current form, until Senator Baucus, Chairman of the Senate Finance Committee, released his draft proposal yesterday. Unfortunately, from what I have seen so far it falls short of sunsetting this overly generous subsidy and replacing it with a new policy emphasizing innovation.

In its 20-year history, minus a few year-long expirations in the past, the PTC has promoted tremendous growth in the US wind industry, from under 2,000 MW of installed wind capacity in 1992 to over 60,000 MW as of today. For most of its tenure, the PTC did exactly what it was intended to do: reward developers for generating increasing amounts of renewable electricity for the grid at a rate tied to inflation.

However, unlike the federal investment tax credit for solar power and some other renewables, the amount of the subsidy didn’t automatically decrease as the technology improved, with wind turbines growing steadily larger, more efficient, and cheaper to build. Instead, the PTC’s subsidy for wind power increased from 1.5 ¢ per kilowatt-hour (kWh) to its present level of around 2.3 ¢. That figure equates to up to $39 per oil-equivalent barrel, depending on which conversion from kWh to BTUs you choose.

It's also roughly one-third of today’s average US retail electricity price for industrial customers and exceeds most estimates of typical operating and maintenance costs for wind power. The latter point has serious implications for the impact of wind farms on other generators in a regional power grid.

If wind turbine installations continued at their remarkably depressed rate of just 64 MW in the first three quarters of this year, the cost of extending the current PTC for another four years and beyond, as Senator Baucus seems to be proposing, would be negligible. However, it’s evident from industry data that a major reason installations are so low in 2013 is that the uncertainty over last year’s scheduled expiration caused developers to accelerate projects into the record-setting fourth quarter of 2012. The American Wind Energy Association cites over 2,300 MW of new wind capacity under construction as of the end of September, while installations over the last three years averaged just under 8,400 MW annually.

At that rate, a one-year extension of the current PTC would add around $5 billion annually to the federal budget over the succeeding 10 years that each year's new wind farms would receive benefits. Congress’s Joint Committee on Taxation apparently came up with a slightly higher estimate of $6.1 billion for a one-year extension.

Before reflexively supporting or opposing another status quo PTC extension, we should ask what we’d be getting for that $5 or $6 billion a year. One of the commonest rationales I encounter justifying the continuation of the current PTC is that conventional energy still receives billions of dollars in subsidies each year. Without getting bogged down in arguments over the definition of a subsidy, or the real and imagined externalities associated with using fossil fuels, it is certainly true that the US oil and gas industry benefits from deductions and tax credits in the federal tax code to the tune of around $4.3 billion per year, based on figures in the latest White House budget.

If we compare these benefits on the basis of the energy production they yield, the PTC starts to look pretty expensive. For example, wind capacity additions in 2012 of over 13,100 MW increased wind generation by 20 billion kWh over the previous year. That’s the energy equivalent of about 140 billion cubic feet of natural gas in power generation, or 66,000 barrels per day of oil. (Although less than 1% of US oil consumption is used to generate electricity, oil is still an easily visualized common denominator.)

By comparison, US oil production expanded by 837,000 bbl/day, while natural gas production grew by the equivalent of another 606,000 bbl/day. So on this somewhat apples-to-oranges basis, oil and gas added more than 20 times as much new energy output to the US economy as wind power did, for roughly the same cost to the federal government.

Now, it’s true that domestic oil and gas both had banner years in 2012, in terms of growth, reversing longer-term decline trends in earlier years, but US wind had its biggest year ever last year. Another factor making this comparison more reasonable than it might otherwise seem is that these are all essentially mature technologies. Wind turbines are still improving, but these improvements are mainly incremental at this point. Nor do they or the billions in annual subsidies for wind address the single biggest obstacle to the wider adoption of wind energy, arising from its fundamental intermittency and disjunction with typical daily and seasonal electricity demand cycles.

When the PTC was first implemented in 1992, by its very existence it fostered innovation in a technology that was still in its infancy as a commercial means of generating meaningful quantities of electricity. That’s no longer the case. I’ve seen various ideas for reforming the PTC to make it more innovation-focused, but while these might be preferable to the status quo, they strike me as overly narrow. We don’t just need wind innovation, but energy innovation, and in fact innovation across the whole US economy if we want to remain globally competitive, and if we want to make more than incremental reductions in our greenhouse gas emissions.

It’s ironic in that context that the federal 20% research and development tax credit is also due to expire at the end of the year. If it came down to a choice between extending the R&D tax credit and extending the PTC, I’d hope that even the wind industry would opt for the R&D credit. That’s not entirely a false choice, considering the scale of ongoing federal deficits and debt, and the need for the government to borrow around 20% of what it spends.

Now is the ideal time to rethink the Production Tax Credit. Its expiration now wouldn’t be as abrupt as was foreseen at the end of 2011 or 2012, because last year’s extension redefined how projects qualify for the PTC. Any wind project that has either started significant work or spent 5% of its budget by year-end could still qualify for the current PTC in 2014. I have seen analysis suggesting a project begun now might even qualify after 2015, as long as work on it had been continuous.

That sets up a smoother transition, while Congress and the wind industry reevaluate what role, if any, specific wind-energy subsidies have in a national energy economy that looks very different than the one in which the PTC was first conceived in the 1990s. Making tax incentives more uniform across competing energy technologies, as Chairman Baucus's draft would do, is a good start, but instead of locking in a perpetual subsidy for current wind power technology at 50 times the rate of today's disputed oil & gas tax incentives, Congress should focus on making the tax incentives for all energy production consistent across the board, at levels that taxpayers can afford no matter how much these energy sources grow in the future.

A different version of this posting was previously published on Energy Trends Insider.

Five Myths About the "Carbon Asset Bubble"

• The idea that efforts to mitigate climate change expose fossil fuel assets to the risk of a bubble-like collapse has attracted some high-profile supporters.
• However, the notion of a "carbon bubble" depends on questionable assumptions concerning our current knowledge of climate change, the rate of adoption of renewable energy technology, and how such assets are valued.

In their recent Wall St. Journal op-ed, Al Gore and one of his business partners characterized the current market for investments in oil, gas and coal as an asset bubble. They also offered investors some advice for quantifying and managing the risks associated with such a bubble. This is a timely topic, because I have been seeing references to this concept with increasing frequency in venues such as the Financial Times, as well as in the growing literature around sustainability investing.

Although bubbles are best seen in retrospect, investors should always be alert to the potential, particularly after our experience just a few years ago. In this case, however, I see good reasons to believe that the case for a “carbon asset bubble” has been overstated and applied too broadly. The following five myths represent particular vulnerabilities for this notion:

1. The Quantity of Carbon That Can Be Burned Is Known Precisely
Mr. Gore is careful to differentiate uncertainties from risks, which he distinguishes for their amenability to quantification. For quantifying the climate risk to carbon-heavy assets, he refers to the widely cited 2°C threshold for irreversible damage from climate change, and to the resulting “carbon budget” determined by the International Energy Agency (IEA). As Mr. Gore interprets it, “at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2° of warming.” That would have serious consequences for investors in oil, gas and coal.

The IEA’s calculation of a carbon budget depends on a factor called “climate sensitivity.” This figure estimates the total temperature change resulting from a doubling of atmospheric CO2 concentrations. The discussion of climate sensitivity in the recently released Fifth Assessment Review of the Intergovernmental Panel on Climate Change (IPCC) sheds more light on this parameter, which turns out not to be known with certainty. Their Summary for Policymakers includes an expanded range of climate sensitivity estimates, compared to the IPCC’s 2007 assessment, of 1.5°-4.5°C with a likelihood defined as 66-100% probability. It also states, “No best estimate for equilibrium climate sensitivity can now be given because of a lack of agreement on values across assessed lines of evidence and studies.”

The draft technical report that forms the basis for the Summary for Policy Makers provides more detail on this. It further assesses a probability of 1% or less that the climate sensitivity could be less than 1°C. That shouldn’t be surprising, since temperatures have already apparently risen by 0.8°C above pre-industrial levels. At the same time, the report indicates that recent observations of the climate — as distinct from the output of complex climate models — are consistent with “the lower part of the likely range.”

In other words, while continued increases in atmospheric CO2 resulting from increasing emissions are widely expected to result in warmer temperatures in the future, the extent of the warming from a given increase in CO2 can’t be determined precisely before the fact. For now, at least, the CO2 level necessary to reach a 2°C increase would be consistent with calculated carbon budgets both larger and smaller than the IEA’s estimate. That means that the basis of Mr. Gore’s suggested “material-risk factor” — as distinct from an uncertainty — is itself uncertain.

2. The Transition to Low-Carbon Energy Is Occurring Fast Enough to Threaten Today’s Investments in Fossil Fuels
There is no doubt that renewable energy sources such as wind and solar power are growing at impressive rates. From 2010 though 2012 global solar installations grew by an average of 58% per year, while wind installations increased by 20% per year. Yet it’s also true that they make up a small fraction of today’s energy production, and that the risks for investors of extrapolating high growth rates indefinitely proved to be very significant in the past.

For further clarity on this, consider the IEA’s latest World Energy Outlook, the agency’s analysis of global energy trends, which was just released on November 12. The IEA projects global energy consumption to grow by 33% from 2011 to 2035 in its primary scenario, which reflects expanded environmental policies and incentives over those now in place. In that scenario, the global market share of fossil fuels is expected to fall from 82% to 76%, but with total fossil fuel consumption still growing by 24% over the period. Only in their “450″ scenario, based on similar assumptions to its carbon budget, would fossil fuel consumption fall by 2035, and then only by 11%.

Moreover, in its April 2013 report on “Tracking Clean Energy Progress,” the IEA warned, “The drive to clean up the world’s energy system has stalled.” This concern was based on their observation that from 1990 to 2010 the average carbon dioxide emitted to provide a given unit of energy in the global economy had “barely moved.” That’s hardly a finding to be celebrated, but it serves as an important reminder that while some renewable energy sources are growing rapidly, fossil fuel consumption is also growing, especially in the developing world — and from a much larger base.

The transition to lower-carbon energy sources is inevitable. However, it will take longer than many suppose, and it cannot be accomplished effectively with the technologies available today. That’s a view shared by observers with better environmental credentials than mine.

3. All Fossil Fuels Are Equally Vulnerable to a Bubble
As Mr. Gore correctly notes, “Not all carbon-intensive assets are created equal.” Unfortunately, that’s a distinction that some other supporters of the carbon asset bubble meme don’t seem to make, particularly with regard to oil and natural gas. The vulnerability of an investment in fossil fuel reserves or hardware to competition from renewable energy and decarbonization doesn’t just depend on the carbon intensity of the fuel type — its emissions per equivalent barrel or BTU — but also on its functions and unique attributes.

The best example of this might be a recent transaction involving the sale of a leading coal company’s mines. What’s behind this wasn’t just new EPA regulations making it much harder to build new coal-fired power plants in the US, but some fundamental, structural challenges facing coal. Power generation now accounts for 93% of US coal consumption, as non-power commercial and industrial demand has declined. This leaves coal producers increasingly reliant on a utility market that has many other--and cleaner--options for generating electricity. That’s particularly true as the production of natural gas, with lower lifecycle greenhouse gas emissions per Megawatt-hour of generation, ramps up, both domestically and globally. Coal accounts for about half of the global fossil fuel reserves that Mr. Gore and others presume to be caught up in an asset bubble.

Compare that to oil, which at 29% of global fossil fuel reserves, adjusted for energy content, still has no full-scale, mass-market alternative in its primary market of transportation energy. Despite a decade-long expansion, biofuels account for just over 3% of US liquid fuels consumption, on an energy-equivalent basis. They’re also encountering significant logistical challenges and concerns about the degree to which their production competes with food. This has contributed to efforts in the EU to limit the share of crop-based biofuels to around 6% of transportation energy. Biofuels have additional potential to displace petroleum use, particularly as technologies for converting cellulosic biomass become commercial, but barring a prompt technology breakthrough they appear incapable of substituting for more than a fraction of global oil demand in the next two decades.

Electric vehicles offer more oil-substitution potential in the long run, though they are growing from an even smaller base than wind and solar energy. Their growth will also impose new burdens on the power grid and expand the challenge of displacing the highest-emitting electricity generation with low-carbon sources.

Meanwhile, natural gas, at 20% of global fossil fuel reserves, offers the largest-scale, economic-without-subsidies substitute for either coal or oil. In any case, it has the lowest priority for substitution by renewables on an emissions basis, and so should be least susceptible to a notional carbon bubble.

4. A Large Change in Future Fossil Fuel Demand Would Have a Large Impact on Share Prices
Although Mr. Gore’s article includes a good deal of investor-savvy terminology, it is entirely lacking in two of the most important factors in the valuation of any company engaged in discovering and producing hydrocarbons: discounted cash flow (DCF) and production decline rates. Unlike tech companies such as Facebook or even Tesla, the primary investor value proposition for which depends on rapid growth and far-future profitability, most oil and gas companies are typically valued based on risked DCF models in which near-term production and profits count much more than distant ones.

At a conservative discount rate of 5%, the unrisked cash flow from ten years hence counts only 61% as much as next year’s, while cash flow 20 years hence counts only 38% as much. Announced changes in near-term cash flow due to unexpected fluctuations in production or margins would normally be expected to have a much bigger impact on share prices than an uncertain change in demand a decade or more in the future.

This is compounded by the decline curves typical of many large hydrocarbon projects. If the first 3-5 years of a project account for more than half its undiscounted cash flows, it won’t be very sensitive to long-term uncertainties, nor would a company made up of the aggregation of many projects with this characteristic. This is even truer of shale gas and tight oil projects, which yield faster returns and decline more rapidly.

I can’t speak for Wall Street's oil and gas analysts, but I’d be surprised based on past experience in the industry if the risk of a 10% or greater drop in global demand for oil or gas in the 2030s would have much of an effect on their price targets for companies — certainly not enough to qualify as a bubble.

5. Fossil Fuel Share Prices Don’t Already Account for Climate Risks
The assertion of a carbon bubble in fossil fuel assets ultimately depends on investor ignorance of climate-response risks, presumably because companies haven’t quantified those risks for them. To the extent the latter condition is true, it represents an opportunity for companies seeking to capitalize on the boom in sustainability-based investing.

However, you needn’t be an adherent of the Efficient Markets Hypothesis for which Eugene Fama was named as a recipient of this year’s Nobel Prize in Economics to realize that thanks to the Internet, average investors have access to most of the same information on this subject as Mr. Gore and his partners. Institutional investors, who make up the bulk of the shareholding for at least the larger energy firms, and the analysts who follow these companies have the resources to access even more information.

Nor is the idea of a carbon bubble exactly new. Mr. Gore didn't create it, and I’ve been following it for a couple of years, as it took over from waning interest in Peak Oil. It’s not an obscure risk, either, in the sense that sub-prime mortgages and credit default swaps were in the lead-up to the failure of Lehman Brothers in 2008. It’s becoming more mainstream every day, although the burden of proof that this risk is mispriced rests with those advocating this view.

Before concluding, a word of disclosure is in order. As you may gather from my bio, I spent many years working with and around fossil fuels, though my ongoing involvement in energy is much broader than that. As a result of that experience, my portfolio includes investments in companies with significant fossil fuel holdings. I strive for objectivity, but I can’t claim to be disinterested. However, neither can Mr. Gore. As a major investor in renewable energy and other technologies through the firm cited in the article and other roles, he has as much at stake in promoting the idea of a carbon bubble — and on a very different scale — as I might have in dispelling it.

The carbon bubble is an interesting hypothesis, even if I don’t yet find the arguments made in support of it convincing. Despite that, I see nothing wrong with investors wanting to track their carbon exposure, consider shadow carbon prices, or ensure they are properly diversified. However, the biggest risk I see that might eventually warrant considering divestment of fossil-fuel-related assets isn’t based on the merits of this analysis, but on the possibility of creating a self-fulfilling prophesy by means of drumming up social pressure on institutional investors. You might very well think that applies to this Wall St. Journal op-ed. I couldn’t possibly comment.

A different version of this posting was previously published on Energy Trends Insider.

Those Other Energy Subsidies

Energy subsidies have become a hot-button issue for both renewable and conventional energy, with each side claiming the other receives more than it should. This issue is on the agenda for the meeting of the G-20 group of nations in Seoul, because they committed to the phase-out of subsidies for fossil energy at last year's Pittsburgh summit and will report on progress at this week's session. This coincides with the release of a new forecast from the International Energy Agency highlighting the urgency of phasing out these subsidies for the sake of reducing greenhouse gas emissions. It's worth noting that unlike US incentives for energy production that have attracted so much flak here, the bulk of the subsidies the G-20 and IEA want to eliminate are for the consumption of fossil fuels; most of them are provided in the developing world, often by governments that can ill afford them. Putting an end to these practices is a worthy goal, and not just because of climate change.

In addition to promoting stronger government support for renewable energy, the IEA report highlighted $312 billion in counterproductive subsidies for fossil energy last year--the figure was much higher in 2008--compared with $57 billion for all renewables, including biofuels. The subsidies in question are mainly in the form of price controls and market manipulation by governments in developing countries, including both large net energy producers and large net consumers. These governments effectively pay consumers to use more energy by keeping prices lower than free market levels. This is clearly counterproductive with regard to combating climate change, because it leads to higher emissions, but I'd like to focus on another drawback, in terms of how it affects global energy markets. Its effects haven't been as obvious recently, with demand down and spare production capacity ample for the moment, but it contributed significantly to the extreme oil prices we saw in 2007 and especially 2008.

Whether as simple as fuel price caps set by government fiat or as complex as the Philippines' former Oil Price Stabilization Fund that I used to monitor regularly in the 1990s--it acted as a sort of central bank for energy prices, until it ran out of money--these mechanisms insulate consumers from the global price of energy, usually oil. The benefits on which these measures are justified even make a certain amount of sense, in terms of protecting consumers from the effects of market volatility and promoting prosperity. If all they did was to smooth out market fluctuations while still reflecting average market values over time, those benefits might outweigh the damage these policies do to both national treasuries and to the capacity of oil prices to match supply and demand. In practice, these efforts often become politicized and end up entrenching below-market prices for their most vocal constituencies. Unfortunately, this not only boosts consumption but it also muffles or blocks price signals when global demand approaches the limits of supply, as we saw a couple of years ago.

The consequences of this are both local and global. Locally, either oil companies or oil price funds require ever greater cash infusions from governments, as global prices go up but consumers miss receiving the message to conserve. This decoupling, compounded over large segments of global demand, amplifies global price increases and focuses the necessary demand response on those countries without such mechanisms, like the US. This helps explain why oil prices skyrocketed to $145/bbl from the $70s just a year earlier, because that's what it took to force demand in non-subsidized countries down by enough to adjust for the global tightness of supply. In other words, oil consumption subsidies intended to stabilize local markets are paradoxically destabilizing for global oil markets.

It's important to draw a distinction between consumption subsidies like these and the fossil fuel subsidies that have come in for significant criticism in the US, which are focused not on consumption but on production. In fact, if their critics' claims about the unresponsiveness of global oil prices to incremental US production were right, then they would have zero impact in promoting consumption, which is the issue of concern to the G-20 and IEA. I don't believe either side of that thesis is correct. Supporting US domestic production inherently helps stabilize global oil prices by reducing US oil imports, but it likely does increase consumption modestly by nudging prices a bit lower than they'd be otherwise. That gives rise to an awkward trade-off, pitting increased energy security against slightly higher emissions, contrary to the rhetoric of some "energy hawks" who suggest that these two issues are always aligned.

In any case, as long as the G-20's efforts are focused on phasing out subsidies intended to hold down fossil fuel prices, they are on the right track, though consumers in developing countries will be in for a nasty shock when their governments follow through with this initiative. At the same time, the alternative to incentives for energy production is not their unilateral elimination, but the rationalization of tax and regulatory structures so that producers in one country aren't at a disadvantage compared to producers in another country, or to other industries in their own country. Sorting that out would require an entirely different and much more complex effort, and not just by the G-20's membership.

Perfect Energy

The recent start-up of the latest large-scale nuclear fusion experiment, the National Ignition Facility at the Lawrence Livermore National Laboratory, was greeted with the customary mix of fanfare and skepticism that has accompanied the quest for practical fusion power for as long as I have followed it, starting as a seriously nerdy child. MIT's Technology Review does a good job of describing the new facility, which will use high-powered lasers to attempt to create useful amounts of nuclear energy. But rather than focusing on the stupendous potential of fusion energy and whether this device might finally be the one to deliver on it, I'm more interested in what our dogged pursuit of this technology through decades of frustratingly slow progress says about our collective view of our current energy sources. How much of the search for fusion springs from its inherent value, and how much from our dissatisfaction with every other long-term energy option we possess?

The answer may lie in the generally-assumed characteristics of a successful commercial nuclear fusion reactor technology, providing cheap, reliable and concentrated energy from a fuel that is as ubiquitous as it is limitless, using a process that creates large amounts of power but essentially no harmful waste. Is that a realistic expectation, or merely the aggregated antonyms of the shortcomings of every existing energy source? Consider the alternatives:

• Fossil fuels are finite, and their production and use release a variety of unwanted byproducts, including greenhouse gases implicated in climate change. Their reserves are also unevenly distributed, giving rise to worrying levels of rent-seeking, resource nationalism, and geopolitical instability and insecurity.
  
• Wind power is intermittent, unpredictable and unsightly, requiring extensive adaptation of the power grid, ample fossil-fueled back-up, expensive energy storage or all of these to contribute reliably on a large scale.
  
• Solar power is more predictable than wind but still expensive, inefficient and cyclical, delivering less than a quarter of a day's peak output even in optimum locations. It takes well over 3,000 MW of solar installations to generate the same amount of energy as one 1,000 MW coal-fired power plant.
  
• Geothermal power is reliable and relatively cheap. However, the "hydrothermal" reservoirs--natural deposits of steam and very hot water--that it taps are unevenly distributed and often far from markets. Enhanced, or "dry rock" geothermal offers greater promise and flexibility, though it is still in its infancy and might also cause earthquakes.
  
• Ocean power taps waves, tides or temperature gradients, offering enormous potential while sharing many of the drawbacks of wind, solar and geothermal. It is also decades behind them in development.
  
• Biofuels' necessary shift away from unsustainable food-based feedstocks depends on unproven or expensive technology. Truly large-scale biofuel production entails harvesting and hauling vast quantities of bulky materials with low energy densities, raising serious questions about whether it can ever create a sufficient energy surplus for the rest of the economy. This limitation also applies to electricity generated from biomass.
  
• Perhaps fusion's first cousin, fission, comes closest to its ideal, providing large amounts of cheap kWhs on demand, around the clock and with very low emissions. Unfortunately, it's hobbled by the high construction cost of new reactors and concerns about safety, security, proliferation, and waste. Some of these are legitimate while others seem overblown, but the technology is no one's free lunch.

Don't get me wrong; I have always loved big science, and nothing would please me more than if the NIF performed exactly as advertised and heralded the dawn of a new era of energy abundance. However, given the long history of drawbacks and unintended consequences from all other energy sources, it seems unrealistic to suppose that any new source, including fusion, is capable of living up to all of its pre-deployment expectations. Fusion is perfect on paper, but then so is my favorite long-term energy option, space-based solar power--until the public becomes anxious about beaming megawatts of power to earth from space, or rogue nations develop anti-satellite capabilities that could hold our orbital energy supplies hostage.

I don't know what form fusion's unexpected drawbacks will take, should the NIF testing pave the way for commercial fusion power plants a decade or two from now. I do know we need a serious debate about the sorts of trade-offs we're willing to accept from any energy source we promote as part of the solution to our dual challenges of climate change and energy insecurity. At a minimum, we must move beyond the mindset in which no current technology can compete with the presumed perfection of those that are still on the drawing board or have yet to be deployed on a scale at which their flaws might become apparent. Our future energy diet will most probably be a messy mix of "all of the above", just as our current one is. Perfect energy remains an April Fool's story.

Building the Low-Emissions Future

Last week The Economist published a detailed assessment of the state of play for capturing and storing the carbon dioxide emitted by power plants and factories. Although it skirted the assertion of many environmentalists that "clean coal" is inherently an oxymoron, the article's tone was generally skeptical concerning the cost and ultimate efficacy of the technology. Coincidentally, Greenpeace released a study featuring an ultra-low-carbon scenario created in conjunction with the European Renewable Energy Council. It proposes that by 2050 the US could shed all coal-fired power generation, as well as all nuclear power and most natural gas-fired power, along with nearly 80% of the petroleum used in transportation--all replaced by renewable electricity and biofuels. If the Economist regards carbon capture and sequestration (CCS) as "expensive and unproven", I can only imagine the terms it might use to describe the extraordinary transformation required to achieve the outcome Greenpeace envisions. The necessity of reducing greenhouse gas emissions dramatically by mid-century and the serious obstacles to replacing our entire energy economy with renewable energy sources in that time frame reinforce the importance of continuing to pursue CCS, in spite of its uncertainties.

I've been following CCS for a long time, and I've written about it many times on this blog. Without diminishing the technical challenges involved, I see them as being manageable with existing and foreseeable engineering know-how, without a scientific breakthrough. I attribute the prolonged absence of a large-scale demonstration of fully-integrated CCS on energy sources more carbon-intensive than natural gas to the mismatch between its costs and current monetary benefits. Whether the cost proves to be closer to the low or high end of the range of estimates included in the article, from roughly $40-115 per ton of captured CO2, it's hard to imagine a utility or oil company taking on the investment and operating expenses involved without the incentive of a transparent and fairly predictable price on carbon emissions. Whatever the cost of CCS might be, it can't be considered in a vacuum, and that is the biggest shortcoming of the Economist's otherwise thorough analysis.

As the US Congress prepares to embark on its latest effort to enact a greenhouse gas cap and trade bill, it's important to think about where its enormous pool of emissions savings will be found, and at what cost. CCS is only one option among many. Happily, a fair amount of work has been done in this regard, including a study by McKinsey & Co. for the Conference Board a little more than a year ago. A key chart from their report portrays a potential medium-term supply curve for emissions reductions. It indicates that while there might be a number of ways to cut CO2 at low or even negative cost--changes that would pay for themselves--achieving deeper cuts would require the contribution of costlier solutions, including CCS.

It's also worth noting that the current cost per ton of CO2 reductions from some of our current climate change strategies exceeds most estimates for CCS. In my recent posting on the application of energy storage to solar power, I calculated an effective cost of power for a couple of utility-scale solar projects in Florida at around $0.25/kWh. That's a premium of at least $0.20/kWh compared to a coal-fired power plant (without sequestration.) Based on typical emissions of 2.1 lb. of CO2 per kWh generated from coal, that implies an abatement cost of $190/ton of avoided CO2. In the likelier event that the power backed out by solar was generated from natural gas, the effective abatement cost could be even higher, because of the smaller emissions savings involved, despite the higher cost of gas-fired power compared to coal.

That comparison doesn't imply that solar power will always be a high-cost source of emissions reductions, or that CCS represents some kind of silver bullet for climate change. At the same time, coal now accounts for 23% of US primary energy consumption, 49% of our electricity generation, and nearly two-thirds of our baseload-capable generation. The difficulty of replacing baseload power with cyclical or intermittent sources makes me very skeptical of any low-emissions scenario that ignores CCS or assumes we can jettison coal entirely, not to mention forgoing nuclear power, the second-largest baseload power source in the US and by far our largest source of low-CO2 power. My specific comments on the Greenpeace scenario are posted elsewhere. At a minimum, any claims that it proves we can achieve the administration's 2050 emissions goals with only "green" energy options and efficiency gains are unwarranted. As useful as they are, scenarios can only point the way to possible futures. They can't provide firm proof of anything.

That leaves us with the hard work of cobbling together a broad set of climate solutions, in response to a price signal on emissions. In my assessment, that mix is very likely to include awkward elements such as CCS, along with deeply unglamorous things like improved farming and ranching practices. Contrary to the conclusions of the editorial accompanying the article on CCS, the technology is worth pursuing for reasons that have nothing to do with "placating the coal lobby." Nor does the cost of proving its feasibility look so high as to "deprive potentially cheaper methods of cutting emissions of cash and attention," particularly when the administration expects to carve out $120 billion for energy R&D from the proceeds of cap & trade over the next ten years. And even if it did, it's one of the few options that could be applied to reduce directly the emissions from the fossil fuels that still account for 85% of the energy we consume. That could make the difference between a manageable transition to a low-emissions world and an upheaval as bad as the current financial crisis.

The End of the World As We Know It?

The opinion section of the Sunday New York Times made for sobering reading this weekend. While the Times has hardly been a bastion of economic optimism of late, three op-eds stood out for their shared sense that we might be on the brink of truly wrenching change. Tom Friedman invoked an enviro-economic tipping point, citing one expert's prognosis of a "Great Disruption;" a best-selling author saw the risk of "economic cataclysm" in the bursting of Eastern Europe's foreign debt bubble; and another found parallels to the Austria-Hungary of 1913, one year before the war that ended at least three empires and mortally wounded a couple of others. But while the systemic unraveling of the past six months or so makes such possibilities likelier than they would have been just a few years ago, the odds still favor a much less drastic result than revolution or apocalypse. The enormous recent increase in the range of uncertainties we face lends added credibility to the direst scenarios. However, it's important to realize that these predictions are not certainties, unless our responses make them so. That applies to energy, as well.

When I think about the possible paths of energy supply and demand over the next few years, they depend much less on specific energy or environmental trends than on the future state of the economy. Forecasting oil prices has become meaningless without a clear view of growth, particularly in the US and China. Demand may have rebounded recently in the US, but the combination of a crippling financial crisis with a deep cyclical downturn has Americans questioning the future in ways that I haven't seen in decades, other than the immediate aftermath of 9/11. The tangible effects of what noted historian Niall Ferguson has dubbed the "Great Recession" serve to reinforce the hangover of millennial angst from the turn of the century, which manifested in the more extreme views of Y2K and more recently Peak Oil. Layer in the propensity of my own Baby Boom generation to see itself at the epicenter of great events, and the stage is set for receptiveness to the view that we stand on the brink of unprecedented, permanently life-altering change.

When I was involved in my first scenario planning project at Texaco, we came up with three remarkably insightful views of the future of the energy industry, at least two of which have remained relevant far longer than any of us could have guessed. They received wide distribution throughout the company and had the general support of many in upper management. However, that project also came up with the seeds of another scenario, a much darker view involving the rejection of globalization and a growing wave of anti-Americanism around the world. Although in some respects it was no less prescient--or challenging--than the other three scenarios, it went nowhere, because the context for exploring it didn't exist in 1997. The external consultants who guided us through the process advised us not to pursue it, or risk destroying the credibility of the entire effort. That was good advice, even in retrospect, and it served as a useful lesson about the way that assessments of the future interact with our views of the present and our experience of the past. They must also be grounded in reality.

That's certainly true for energy, today. However much we might consider our energy future to be in flux, our views of it must take into account the embedded dominance of fossil fuels in our energy systems. Given the scale of these systems, that dominance will still exist next year and the following year, no matter what policies are enacted in the US or elsewhere. This might all seem to be up for grabs, but that's really only true in the long term. I've believed for a long time that we are on the threshold of a revolution in the ways that we produce and use energy, and it has arguably already begun. But no matter what happens in the economy, short of a massive global collapse, this revolution cannot be completed overnight. It will take decades, and that is equally true of our response to man-made climate change, which took a century to create.

Whenever I watch the news or read the latest statistics about the economy, I worry about what next year might look like. The uncertainties are huge and daunting. But I also know that while the chances of a Great Depression-style collapse or a radical socio-enviro-political transformation have risen, the economic future is likelier to resemble the last few decades, minus the unsustainable levels of personal and institutional debt. In the same way, the energy transformation is likely to play out as a set of big, gradual shifts: away from coal and other carbon-intensive fuels and toward renewable energy and nuclear power, and away from liquid transportation fuels and towards the eventual electrification of most ground vehicles. These transitions will take time, and that means that, whatever their price, a decade from now there will still be electricity and natural gas for the appliances and devices you buy today, and there will still be fuel for the car you buy today. That's one set of uncertainties over which we shouldn't lose sleep.

Malthus and Renewable Energy

The Limits to Growth are back, yet another 1970s concept making a comeback. A front-page article in today's Wall Street Journal highlights these new Malthusian fears, based on recent signals that seem worryingly similar to those that made such predictions so troubling a generation ago. Why should they be any more valid now than they were the last time that phrase was commonplace? Another energy crisis has combined with broader commodity price inflation--both related to the improving standard of living of a growing fraction of the earth's population--and it is overlaid with the ultimate reflection of the scale of humanity's impact on the planet: climate change. Surprisingly, though, the article hardly mentions a development with the potential to finesse all these predictions, the large-scale exploitation of renewable energy.

The evidence that we are straining against serious limits is mounting. Is there anyone left who hasn't heard about China's impact on the global markets for oil, coal, steel, copper, and concrete? Add the simultaneous shift of hundreds of millions of consumers to diets richer in animal protein, along with the rapid growth of grain- and oilseed-based biofuels, and agriculture and water supplies look as stressed as industrial commodities. As skeptical as I was about the assumptions behind the 1970s' version of the Limits to Growth, the current situation gives me pause. We face some very ugly competition for all of the necessities of modern life, unless we find a solution that breaks the logic of scarcity without making our other problems worse.

Energy is the key to this, and although fossil fuels are likely to remain important for years to come, we simply don't have enough of any of them to make a material dent in the problems associated with extending real prosperity beyond about a billion Europeans, Americans and lucky Asians to encompass another couple of billion, at least, in the developing world, while lifting the remainder up to acceptable levels. Food-based renewable fuels don't answer; they are a stop-gap at best, buying time for the efficient conversion of non-food biomass to mature. However, even that won't be sufficient, as the world's population grows towards 9 billion by mid-century. After we double the efficiency with which we use energy, and then double it again, only wind, solar, ocean and geothermal power, augmented by nuclear energy, can close this kind of gap, by sidestepping the constraints on what we can dig or drill out of the earth.

Getting there is the problem, of course. It can't happen instantly, and our standard approach of throwing subsidies at all manner of renewables, without regard to their efficiency, energy-return-on-energy-invested, or other measures of long-term viability seems likelier to impede the process than to hasten it. The current debate about taxing the fossil fuel industry in order to fund subsidies for renewable energy would be enhanced by a frank discussion about phasing out all such subsidies, for all forms of energy, creating a bias for efficiency and scale that is lacking today. Higher prices for conventional energy won't sort that out, as anyone who expected $100 oil to make renewable energy cost-competitive has learned. Renewables will only refute the concerns of the Malthusians when they can deliver as much energy as we currently get from coal or natural gas, without being propped up by governments that have other urgent uses for those funds. Achieving that will require an entirely new approach to energy policy, relying a lot more on technology-blind targets and milestones and a lot less on kitchen sinks full of pet projects and programs.

The Energy Diet

An article I read over the long weekend got me thinking about how we talk about energy supply and demand, particularly when we're looking at alternatives to current sources and usage patterns. In an editorial in the July issue of Chemical Engineering Progress, the journal of the American Institute of Chemical Engineers, the editor referred to efforts to "find the right 'energy diet'." I'm sure I've seen that phrase a million times before, but for some reason this time it struck me as particularly apt for addressing the energy and environmental problems we face today.

Generally, I've tried to frame competing energy alternatives in terms of how they might fit into our future energy mix. That often prompts questions about which current component of the mix would give up market share to the newcomer, as oil effectively yielded to nuclear power in the 1970s and 80s. But as accurate as it is, the terminology of "energy mix" lacks something in the context of our concerns about climate change and energy security. In particular, it is neutral about the size of the total energy pie, when its size ought to be as much of an issue as its makeup. "Energy diet" connotes something quite different: not only the notion of balance among the various components, but the idea that there might be an optimal quantity of energy for an entity of a given size.

If we talked more about a national or global energy diet, it would be harder to dodge the need for conservation and efficiency, to address the large quantities of energy we now waste. It could also remind us that not all calories--BTUs or kW-hours--are equal, in a world that is increasingly worried about greenhouse gas emissions. High-carbon energy sources such as coal might come to be seen as analogous to cholesterol-promoting foods or trans-fats. Renewables such as wind, solar and biofuels then start to look like fruits and vegetables: healthy components of a balanced diet, but not enough to live on, by themselves.

I don't want to belabor this point, except to say that the way we frame these issues is important. Terminology matters, whether it's the aide of a Congressional leader referring to coal power plants "destroying the air", or proposals to subsidize renewable energy sources by penalizing fossil fuels in the name of "energy independence." All-or-nothing tactics seem unlikely to deliver an energy mix that promotes economic growth while minimizing greenhouse and other emissions. Debating the national energy diet--how much of which kinds of energy we should consume--just might.