A Grand Compromise on Energy?

The idea of  a Congressional "grand compromise" on energy has been debated for years. A decade ago, such an agreement might have opened up access for drilling in the Arctic National Wildlife Refuge, in exchange for "cap and trade" or some other comprehensive national greenhouse gas emissions policy. By comparison, the deal apparently included in the 2016 spending and tax bill is small beer but still worthwhile: In exchange for lifting the outdated restrictions on exporting US crude oil, Congress will respectively revive and extend tax credits for wind and solar power.

Anticipation about the prospect of US oil exports seemed higher last year, when production was growing rapidly and threatening to outgrow the capacity of US oil refineries to handle the volumes of high-quality "tight oil" flowing from shale deposits. Just this week Michael Levi of the Council on Foreign Relations, citing a study by the Energy Information Administration, suggested that allowing such exports might now be nearly inconsequential in most respects.

Although little additional oil may flow in the short term, given the current global surplus, it's worth recalling that the gap between domestic and international oil prices hasn't always been as narrow as it is today. The discount for West Texas Intermediate relative to UK Brent crude has averaged around $4 per barrel this year, but within the last three years it has been as wide as $15-20. Oil traders will tell you that average differentials between markets are essentially irrelevant. What counts is the windows when those gaps widen, during which  a lot of cargoes can move in short periods.

No matter how much or little US oil is ultimately exported, and how much additional production the lifting of the export ban will actually stimulate, the bigger impact on the global oil market is likely to be psychological. Having to find new outlets for oil shipped from West Africa, for example, because US refiners are processing more US crude and importing less from elsewhere is one thing; having to compete directly with cargoes of US oil is going to be quite another. That's where US consumers will benefit in the long run, from lower global oil prices that translate into lower prices at the gas pump.

Finally, if OPEC can choose to cease acting like a cartel--at least for the moment--and treat crude oil as a normal market, then it's timely for the US to follow suit and end an oil export ban that originated in the same 1970s oil crisis that put OPEC on the map.

How about the other side of this deal? What do we get for retroactively reinstating the expired wind production tax credit (PTC), along with extending the 30% solar tax credit that would have expired at the end of next year?

We'll certainly get more wind farms, along with some stability for an industry that has been whipsawed by past expirations and last-minute extensions of a tax credit that has been a major driver of new installations throughout its 20+ year history. Wind energy accounted for 4.4% of US grid electricity in the 12 months through September, up from a little over 1% in 2008.

However, this tax credit isn't cheap . The 4,800 Megawatts of new wind turbines installed in 2014 will receive a total of nearly $2.5 billion in subsidies--equivalent to around $19 per barrel--during the 10 years in which they will be eligible for the PTC, and 2015's additions are on track to beat that. The PTC is also the policy that enables wind power producers in places like Texas to sell electricity at prices below zero--still pocketing the 2.3¢ per kilowatt-hour (kWh) tax credit--distorting wholesale electricity markets and capacity planning.

As for solar power, it's not obvious that the tax credit extension was necessary at all, in light of the rapid decline in the cost of solar photovoltaic energy (PV). In any case, because the tax credit for solar is calculated as a percentage of installed cost, rather than a fixed subsidy per kWh of output like for wind, the technology's progress has provided an inherent phaseout of the dollar benefit. Solar's rapid growth seems likely to continue, with or without the tax credit.

The big missed opportunity from a clean energy and climate perspective is that these tax credit extensions channel billions of dollars to technologies that, at least in the case of wind, are essentially mature and widely regarded as inadequate to support a large-scale, long-term transition to low-emission energy. I would have preferred to see these federal dollars targeted to help incubate new energy technologies, along the lines of the Breakthrough Energy Coalition announced by Bill Gates and other high-tech leaders at the Paris climate conference.

The current deal, embedded within a $1.6 trillion "omnibus" spending bill, must still pass the Congress and be signed by the President. It won't please everyone, but it is at least consistent with the "all of the above" approach that has been our de facto energy strategy, at least since 2012. It also serves as a reminder that despite the commitments at Paris to reduce emissions of CO2 and other greenhouse gases, renewable energy will of necessity coexist with oil and gas for many years to come.

Energy Storage and the Cost of Going Off-Grid

• New energy storage offerings from Tesla and other manufacturers are widely expected to enhance the attractiveness of rooftop solar power and other renewables.
• However, recent analysis from the Brattle Group shows that even with rapid cost reductions, grid-independence will remain beyond the reach of most consumers.

Last month's Annual Energy Conference of the US Energy Information Administration included speakers and panels on topics such as crude-by-rail, potential US oil exports, and the role of the Strategic Petroleum Reserve, all of which should be familiar to my readers here. However, the topic that really caught my interest this year was energy storage.

Storage has been in the news lately, particularly since the launch of Tesla's new home and commercial energy storage products. In fact, Tesla's Chief Technology Officer spoke on the first morning of the conference. Much of his talk (very large file) focused on Tesla's expectations for the cost of storage to decline sharply as electric vehicles (EVs) and non-vehicle battery applications grow. Whether battery costs can drop as quickly as those for solar photovoltaic (PV) cells or not, storage is likely to become a more important factor in energy markets in the years ahead.

One of the most interesting presentations I saw examined a provocative aspect of this question. Michael Kline of The Brattle Group, which consults extensively on electricity, took a detailed look at whether rooftop PV and home energy storage might become sufficiently attractive that a large number of consumers would employ the combination to enable them to disconnect from the power grid entirely.  That would be an extremely appealing idea for a lot of people. The author of a book I received from the publisher a few years ago referred to it as a movement.

Most people by now appear to understand that solar panels alone can't make a household independent of the grid. The daily and seasonal incidence of sunlight aligns imperfectly with the peaks and troughs of typical home electricity demand. This is why "net metering", under which PV owners sell excess power to their local utility--effectively using the grid as a free battery--has become contentious in some electricity markets.

In a true off-grid scenario, net metering would be unavailable. Onsite storage would thus be necessary to shift in time the kilowatt-hours of energy produced from a home PV array. However, a standalone PV + storage system must be sized to deliver enough instantaneous peak power to handle periodic high-load events like the startup of air conditioners and other devices. Another presenter on the same panel had a nifty chart demonstrating how wide those variations can be, with multiple spikes each day averaging above 12 kilowatts (kW)--several times the output of a typical rooftop PV array.

Brattle's off-grid model included PV and storage optimized to "meet load in every hour given a battery with 3 days of storage (at average load levels.)" Although that is still probably less than the peak load such a system would encounter, it is the equivalent of multiple Tesla "Powerwall" units and would only be practical with the kind of drastic cost reductions Mr. Kline assumed by 2025: PV at $1.50/W and storage at $100/kWh, installed. That equates to around a third of last year's average US residential PV installation and 1/7th the estimated installed cost of Tesla's offering on a retail basis.  

Mr. Kline framed this exercise as a "stress test", not just of the off-grid proposition but of the future of the electric power grid. If many millions of customers were to "cut the cord" for electricity as others have for wireline telephone service, even a "smart" power grid would become much less important and might shrink over time. That same logic should extend to the power generators supplying the grid. If most consumers went off-grid, the value of even the most flexible generation on the grid, which today is often provided by natural gas turbines, would fall, as would demand for the fuel on which they run.

In Brattle's assessment, despite the assumption of very cheap PV and storage, that prospect seems remote. For the three markets analyzed (California, Texas and Westchester County, NY) the levelized cost of energy (LCOE) for the off-grid configuration modeled was significantly more expensive than the EIA's projected cost of electricity in those markets in 2025. In fact, for consumers in California and Texas, as well as in all cases of the parallel commercial customer analysis Brattle performed, PV + storage would  be expected to cost a multiple of retail electricity prices.

As Mr. Kline explained, under more realistic assumptions the comparison was likely to be even worse for off-grid options. However, his conclusion that , "going off-grid...is unlikely to be the least expensive option for most consumers" does not mean that some consumers would not choose to do so, anyway. To them, a premium of 10-20 cents per kWh might seem like a small price to pay for personal energy independence. Yet at that price, it is hard to envision it would become a mass-market choice. 

Mr. Kline made a point of reminding his audience that Brattle's analysis did not mean that distributed energy  would  not be competitive in the future, or that it could not provide valuable services to customers and to the grid. Importantly, the figures he presented underlined the continued value of the power grid to customers, even in a future in which large quantities of PV and storage are deployed.  As he put it, "Distributed energy is a complement to the grid, not a substitute for it."

By extension, flexible generating assets like fast-reacting gas turbines should also continue to provide significant value, especially during those seasons when daily solar input is low, and in locations where average sun exposure is generally much weaker than in the US Southwest and other prime solar resource regions.  As appealing as the idea might be to some, storage seems unlikely to make either the grid or any class of generating technologies obsolete for the foreseeable future. As Bill Gates recently observed, that has implications for the cost of a wholesale shift to current renewables and away from fossil fuels.

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

Eating the Seed Corn

Some days it's hard to find a salient topic on which to blog. Today I'm spoiled for choice but wish I weren't, at least in the case of one of the three I considered. The full implications of the Deepwater Horizon disaster won't be known until rescue efforts end, the well is brought under control, and the resulting oil spill contained. That doesn't prevent speculation and knee-jerk responses, but I'll reserve my analysis until the facts are clearer. Meanwhile, the EU has been forced to release yet another study finding that many biofuels could be worse for the environment than the petroleum products they are intended to replace. I'll say more about the issues that raises, soon. For today, I want to focus on the challenge that Bill Gates highlighted in an op-ed published in today's Washington Post, concerning the need for significantly more energy R&D spending by the US government.

Since recently turning his attention to energy, Bill Gates has made some astute observations about it, while falling into few of the traps that await those attempting to transfer their high-tech experience to this much larger, more basic industry. Past remarks suggest he grasps the scale of the problem. His recommendation for more innovation and explanation for why energy R&D has been underfunded by the public and private sectors are apt, though I'm less sure that the R&D investment rates of firms whose business is selling technology provide quite the right basis of comparison for an industry that produces vast quantities of interchangeable commodities. Nevertheless, he's right that discovering and developing revolutionary energy technologies is beyond the scope of most companies that operate on a scale to be able to afford the sums required. Most R&D by major oil & gas or power generation companies is devoted to improving what they're already doing, for good reasons. Things that don't deliver prompt results inflate costs without providing immediately-offsetting benefits, making companies pursuing such efforts less competitive in the market and often less attractive to investors.

Government doesn't have these constraints, and historically it has been a relatively uncontroversial role of government, even in the US, to devote significant resources to long-term projects. (The old Bell Labs looks like an exception, until you consider that most of its truly ground-breaking work in basic science was undertaken when its corporate parent functioned as a tightly-regulated monopoly--effectively an extension of government.) Mr. Gates suggests that spending less than $3 billion per year on clean energy research is inadequate, and I must agree. However, Gates stops short of explaining that the federal government already spends much more than that on clean energy, but that most of it is focused on the deployment of current technologies. As of its most recent update, the US Treasury had issued more than $3 billion in Renewable Energy Grants to wind, solar, biomass and geothermal project developers under the stimulus, and this is just a fraction of what the government is now spending on direct and indirect subsidies, tax incentives, loans and loan guarantees to support the deployment of corn ethanol and advanced biofuels; wind turbines, solar panels and the factories to make them; factories to build electric vehicles and the advanced batteries to power them; as well as new nuclear power plants, to name a few.

The innovation imperative articulated by Bill Gates thus stands in tension with a range of policies focused on overcoming the market barriers that current alternative energy technologies face. For some of these technologies, the case for providing temporary subsidies to enable them to become sufficiently established to benefit from economies of scale and experience-curve effects is solid. The same can be said for assisting a new generation of nuclear power plants that are so expensive that no company can risk its entire future to build the first one. This logic is much less compelling for conventional biofuels that are still not competitive without subsidies that are now in their fourth decade, or federal loans to finance EV factories for companies that have made just a handful of hand-built cars in their entire existence.

Without a major new funding source dedicated to long-term federal energy R&D, and in an era of increasingly-unsustainable budget deficits, the choice between energy R&D and the deployment of existing energy technologies becomes a zero-sum game. Eating the seed corn in this manner is indefensible, particularly when we realize that deploying today's technologies is very unlikely to yield a technology breakthrough of the kind that real energy transformation will ultimately require. While hardly simple or easy, the remedy is relatively obvious. If we agree that we need more federal research on new energy technologies that could supplant conventional energy sources on the basis of superior performance, and not just lower emissions, then we must wean current alternative energy technologies off massive subsidies as quickly as possible--in a few years at most, except for those that have been feeding at the federal trough for decades. Those should begin to be phased out at once. And if we agree that climate change is a serious risk that we must address urgently, then putting a price on the emissions contributing to it would ensure that the companies making and installing today's wind turbines, solar panels, and other technologies would have a decent chance of surviving the elimination of the direct subsidies upon which they depend, but that will eventually squeeze out R&D spending.