Kurdistan Attracts Billions for Oil Exploration

Investors are betting billions of dollars that oil will flow freely from wells being drilled in Kurdistan. The Financial Times reports that one small oil exploration company, Gulf Keystone Petroleum, already has a market capitalization of $1.9 billion, which would put it on the FTSE 250 index if it gets listed on the London Stock Exchange. Not bad for a company that has no proven reserves, has never earned any money for its investors, and has run operating losses every year of its existence.

Of course, Kurdistan is a pretty dangerous and unstable place. Just because you find oil today doesn't mean you will get to profit from it in the future.

So why does this company have a market capitalization of almost two billion dollars? Analysts say it is because investors are very confident that there are large oil reserves in the parts of Kurdistan where Gulf Keystone has been drilling. In fact, Gulf Keystone hit oil with its first well drilled in August 2009.

Ok. I can understand that line of thought. But this oil is in Kurdistan, a place that has been in almost continual violent conflict with Iraq since it was first recognized as an autonomous region in 1970. What about the very significant risks of violence, war, or even just political instability? How can a company afford all the security and insurance that must be necessary to cover those risks.

This is where we start to understand how the oil industry benefits from costs assumed by others. The ability to drill for oil in Kurdistan is a direct result of the hundreds of billions of dollars our governments have spent on the Iraq war and the ensuing seven years of efforts to stabilize that country. The door was opened, and it remains open, because of huge government investments and the personal sacrifices of hundreds of thousands of American, British, and other troops, including almost 5,000 Americans who lost their lives and more than 30,000 who were seriously wounded.

Next time we fill up our cars with relatively inexpensive gasoline, let's remember the hidden costs that are not reflected in the price. And let's also keep those costs in mind when we consider government investments in sustainable alternatives.

John Howley
Woodbridge, New Jersey
www.HowleyGreenEnergy.com

Greece Invests Bailout Billions In Greener Energy

Greece announced today that it will invest 12 billion euros ($15.6 billion) in environmental and energy projects over the next five years. This amounts to more than 10% of the 110 billion euro bailout fund it received from the EU and the IMF.

If successful, Greece will get 40% of its electricity from renewable sources within 10 years, compared to only 4% today.

Imagine what 40% renewable electricity could do for an economy and an environment. Yes, it requires a large investment up front, but within 10 years Greece could get a significant portion of its energy needs from sources such as wind and solar that have zero fuel costs. Talk about a competitive advantage. Businesses in other countries will be paying inflated prices per ton of coal or barrel of oil, while Greece will have zero fuel costs for a significant portion of its energy needs.

Considering all the ways IMF bailout funds have been used by countries in the past (where, exactly, did all that money go?), investing in infrastructure that will reduce energy costs and emissions over the long term has to be one of the better plans.

Greece hopes to leverage its investment by attracting an additional 32 billion euros of private sector funding for energy infrastructure projects such as natural gas pipelines and storage terminals. It also hopes to create almost 200,000 new jobs in the process.

This will be fascinating to watch. Getting 40% of electricity from renewable sources and creating jobs over 10 years is not a pipe dream. I wish Greece all the best on this venture….and hope they succeed as an example for the rest of us.

John Howley
Orlando, Florida
www.HowleyGreenEnergy.com

Wind Power Exceeds 10% of Electricity Generation in Four States

The US added 10 Gigawatts of new wind power generation in 2009. Texas led the way with 2,239 Megawatts but 27 other states also added to their wind generation capacity last year. Four US states now generate more than 10% of their electricity from wind power. Iowa gets 20% of its electricity from wind, followed by South Dakota (13%), North Dakota (12%) and Minnesota (11%).

“Wind power projects accounted for 39 percent of all new electric generating capacity added in the U.S. in 2009," noted Ryan Wiser, a scientist at Lawrence Berkeley National Laboratory, "and wind energy is now able to deliver 2.5 percent of the nation’s electricity supply.” Berkeley Labs and the US Department of Energy released a study last week with more details on the state of wind power in the US.

Investments in wind power are creating good manufacturing jobs in the US. Seven of the top ten wind turbine manufacturers already have manufacturing facilities in the US. Two of the remaining 3 have announced plans to open manufacturing facilities here. And, of course, the actual installation and ongoing management of wind turbines create domestic jobs.

Wind power also creates competitive advantages for manufacturers by lowering electricity rates over the long term. While the up front investment is high (construction of wind farms costs about twice as much per MW as construction of coal-fired power plants), wind and other renewables are less expensive over the long term because they have zero ongoing fuel costs. This advantage will become even more pronounced if, as predicted by many economists, the costs of coal, petroleum and natural gas increase dramatically as the world economy comes out of the Great Recession.

Transmission remains a significant stumbling block. In Texas, 17% of existing wind generating capacity was not used last year because of inadequate transmission. Billions of dollars in investments in smart grid technologies will be required to pave the way for more wind and solar generation. (See DOE Says Grid Needs Upgrade to Handle Wind Power, Jan. 20, 2010).

The US accounted for 26% of all new wind generating capacity in the world last year. That put the US in second place after China, which accounted for 36% of all new wind generation capacity and is the world leader.

John Howley
Orlando, Florida

$550 Billion In Welfare Payments for Dirty Energy

Governments around the world spent $550 billion on energy subsidies last year, mostly to keep down the price of dirty energy from oil and coal. The Financial Times broke the story today based on an advance copy of an International Energy Agency study.

In fact, that number represents only half the story. The $550 billion in direct government welfare payments for the oil and coal industries does not include all of the indirect government subsidies that these industries receive. It does not include the cost of soldiers protecting oil fields in Iraq; or the cost of treating respiratory illnesses caused by particulate emissions; or the cost of free liability insurance for oil and coal companies (in the form of limitations on their liability for harm to third parties); or the cost to individuals who lose their livelihoods when oil gushes uncontrollably into the Gulf of Mexico or the Niger Delta.

But let's stick with the very tangible number of $550 billion in cold, hard cash for now. What would happen if we took that $550 billion away from oil and coal, and invested that cash in clean, sustainable energy technologies instead?

Just taking the welfare payments away from the oil and coal industries would have a tremendous impact on the level of investments in clean, sustainable energy technologies. Think about it for a moment. You are considering an investment in a new technology. But the existing technology that you want to compete against receives $550 billion in direct government welfare payments every year to keep its price artificially low. So your new technology will not only have to be better than the existing technology, it will also have to be a half trillion dollars less expensive. That is a high hurdle for anyone considering an investment in new technologies.

Take away that half trillion dollars in government welfare payments, and now you have a level playing field. That alone removes a hurdle and provides an incentive to investors in new technologies.

And if you actually shift that half trillion dollars from the oil and coal companies to investments in clean, sustainable energy technologies, you can start a green revolution.

As an added benefit, the clean, sustainable energy technologies will not require these subsidies forever. Give a man a welfare payment to buy oil today and he'll be back for another welfare payment tomorrow. But give him the same payment to buy solar panels, and he'll have energy for a lifetime.

John Howley
www.HowleyGreenEnergy.com
Orlando, Florida

The Blame Is On BP, But The Solutions Are All Ours

In 1969 a blowout off the coast of California caused an 800 square mile oil slick. We kept drilling.

In 1973 members of the Organization of Arab Petroleum Exporting Countries refused to sell us oil, causing an economic crisis. We invented the SUV and the McMansion to consume even more oil.

In 1989 the Exxon Valdez spilled 10.8 million gallons of crude oil along 1,300 miles of pristine coastline. We built more and larger supertankers.

In 2001 the son of a Saudi Arabian construction magnate orchestrated the worst terrorist attack ever on US soil. We went on to buy more oil than before, sending more of our money to Saudi Arabia and other oil-producing countries where, as Thomas Friedman notes, "it ends up with mullahs who build madrasas that preach intolerance."

In 2010 the BP blowout is destroying the ecosystems and the economy along our Gulf coast. We . . . .

Have we learned anything at all? Or will we increase our dependence on rapacious oil companies and despotic regimes once again?

We can and should blame BP for their reckless disregard of the environment in the Gulf of Mexico, the Niger Delta, and other places around the world where they and the rest of their industry have destroyed entire ecosystems and communities.

But they will never give us the solutions. The solutions will depend entirely on our own choices.

Will we choose to continue wasting energy? Or will we require that all cars, trucks, and buildings reduce energy consumption by 20% or more?

Will we allow oil companies to sell products that pollute the air and water without including the cost of that pollution in the price of the product? Or will we level the playing field for clean and renewable alternatives by imposing the type of pollution tax (or cap and trade system) favored by well-known conservative and libertarian economists such as Nobel Laureate and Reagan advisor Milton Friedman?

In 2020 will our children thank us for making the right decisions today? Or will they suffer even worse catastrophes brought on by our selfish, thoughtless, and unnecessary addiction to oil?

The choice is ours.

John Howley
Orlando, Florida

The Power of Green Thinking (and Small Green Acts)

A friend invited me to join a Facebook group called the Carbon Conscious Consumer (C3) Campaign. The group has a simple agenda: To promote "6 easy steps that anyone can take to reduce our carbon emissions."

Many people scoff at such lists of "easy" ways to save the planet. Thomas Friedman, for example, worries in his book "Hot, Flat, and Crowded," that the "amount of time, energy, and verbiage being spent on making people 'aware' of the energy-climate problem, and asking people to make symbolic gestures to call attention to it, is out of proportion to the time, energy, and effort going into designing a systemic solution." He points out that the energy problems we face are huge -- if you convert global energy consumption into oil equivalents, we are consuming 420 million gallons per hour. We need game-changing technologies and policies, not just six easy ways to go Green.

I agree. So why did I join the C3 group and invite my friends to join too?

Because our daily thoughts and actions drive our national policies and investments.

Think about the 1980's and 90's. Does it surprise you that a nation of people who drove SUVs and built McMansions elected politicians in both parties who did not think about climate change or how our oil consumption was subsidizing despotic regimes? This is not an ideological issue. Very few people in either political party thought much about energy efficiency when buying cars and homes in the 80's and 90's. That thoughtlessness was an important driver of our national energy policies during those decades.

Since then, we have become more aware of energy and the environment as a result of a few extraordinary events. The terrorist attacks of September 11, 2001, and the realization that the terrorists came from countries subsidized by our oil purchases. The escalation of oil prices a couple of years ago. The current Great Recession. The debate over global warming.

Those of us who lived through gasoline and home heating fuel shortages during the oil embargo of the 1970's know too well how transitory these trends can be. How do we sustain our interest in sustainability?

By changing the way we act. People who act every day in small Green ways will enter the polling booths with a completely different mindset than people who drove their gas guzzling SUVs to the polls.

Besides, we must do something while we wait for the game-changing technologies. The six simple steps will have a meaningful impact.

Let's take just one of the six simple steps: Breaking the bottled water habit.

World consumption of bottled water has increased by 70% since 2001 to more than 200 Billion litres. Of that amount, Americans bought more than 33 Billion litres. That's a lot of plastic bottles that need to be manufactured, filled with water, shipped to warehouses and stores, cooled in stores or home refrigerators, and recycled or thrown into landfills where they will take up to 1,000 years to decompose. Each stage of this process uses much more energy than running tap water through a filter.

Will reducing or eliminating all this waste solve our energy and environmental challenges? No. But it's a start. And an American public that thinks about how much energy and other resources are consumed to produce a bottle of water is one that will think about energy and environmental issues when choosing its leaders.

That's why I joined the Carbon Conscious Consumer (C3) Campaign and am promoting the group to my friends. Because thinking and acting Green in our daily lives will make a difference today, and it is the only way we will build a public consensus to invest in the game-changing policies and technologies we need for the long term.

John Howley
Orlando, Florida

DOE Says Grid Needs Upgrade to Handle Wind Power

The U.S. Department of Energy's National Renewable Energy Laboratory today released a major study of the technical, operational, and economic issues facing the integration of large amounts of wind energy into the power system.

The bottom line is: The existing grid serving most of the United States east of the Rockies would need a multi-billion dollar upgrade before it could handle even 20% wind-generated power.

The DOE's Eastern Wind Integration and Transmission Study (EWITS) evaluates the impacts of wind energy penetration into the power system through 2024. The study encompasses the majority of the utilities in the Eastern Interconnection, one of the two major alternating current (AC) power grids in North America. The Eastern Interconnection reaches from Central Canada eastward to the Atlantic coast (excluding Québec), South to Florida, and back West to the foot of the Rockies (excluding most of Texas).

About a year ago, a Joint Coordinated System Plan study group concluded that a 20-percent wind energy scenario would “require 15,000 miles of new extra-high voltage lines, at an estimated cost of $80 billion, in addition to $1.1 trillion in total generation capital costs by 2024.”

The new DOE study increases those numbers to 22,000 miles of new transmissions lines at a cost of $90 billion. But it argues that the $90 billion cost for transmission upgrades is only a small percentage of the total cost to build the wind generation capacity.

The new study also cautions that wind farms must be spread out geographically so they will not account for a large percentage of power generation at any given point in the grid. According to the new DOE study, "increasing the geographic diversity of wind power projects in a given operating pool generally makes the aggregated wind power output more predictable and less variable, while also reducing the variation in load and increasing the number of generation assets that can be committed and dispatched."

Other highlights from the new DOE study include:

• There are no fundamental technical barriers to the integration of 20% wind energy into the electrical system, but transmission planning and system operation policy and market development need to continue to evolve in order for these penetration levels to be achieved;

• Without transmission enhancements, substantial curtailment of wind generation would be required for all of the 20% wind penetration scenarios;

• Although the costs of aggressive expansion of the existing grid are significant, they make up a relatively small piece of the total annual power system costs in any of the scenarios studied;

• Wind generation displaces carbon-based fuels, directly reducing carbon dioxide emissions. Emissions continue to decline as more wind generation is added to the energy supply; and

• Reduced expenditures on fossil fuel costs more than pay for the increased costs of transmission in all wind scenarios.
  

For more information about incorporating increasing amounts of wind energy into the power system while maintaining reliable grid operations, see the DOE's Wind and Hydropower Technologies Program's Renewable Systems Interconnection web site.

John Howley
Orlando, Florida

Windmills on Office Buildings?

Solar panels on office buildings and homes have become almost commonplace. But windmills?

That is what SC Johnson is doing at its corporate headquarters in Racine, Wisconsin. The company has launched a wind energy pilot program with the installation of three new wind turbines. The objectives are to reduce greenhouse gas (GHG) emissions and raise awareness that renewable energy is not just for factories, but also office buildings in urban settings.

The three wind turbines are located on the roof of one of the seven buildings on SC Johnson's international headquarters campus, which has an approximate eight block radius and where more than 1,300 employees work. The wind turbines are expected to be fully functioning by the end of the month. Once fully operational, the turbines will be connected to the company's electrical distribution system. The output they generate will power a small portion of the company's campus.

Admittedly, this is a test project and it is difficult to project how many computers, machines and other basic office resources can be powered by renewable energy. "While we are not sure how much alternative energy these turbines will produce, we expect to have clear, consistent results within a year," said Johnson. "This pilot program will help provide useful information on ways we can develop more sustainable solutions for our campus."

The turbines are expected to be fully installed and connected in late January and will be monitored closely throughout the year. Depending on the impact of the turbine's energy output, it is possible the company will extend the project to additional local SC Johnson facilities.

This is not SC Johnson's first foray into sustainable energy. Its largest global factory, based in Racine, Wisconsin, is partially powered with cogeneration using methane gas from a local public landfill. The company's Bay City, Michigan plant is powered with wind energy, reducing the annual purchase of coal-fired electricity by nearly half. In Indonesia, waste palm shells are burned as a substitute for fuel, using 80 percent less diesel fuel, and in Mijdrecht, The Netherlands, the company's largest European manufacturing facility is operated by an 80 meter-tall wind turbine which is expected to eliminate 3,900 tons of carbon dioxide annually.

Through these efforts, approximately 36 percent of SC Johnson's total electricity usage worldwide came from renewable energy. The company cut GHG emissions at its worldwide factories by 27 percent during the last eight years, including all its United States operations by 17 percent since 2005. These reductions -- achieved three full years ahead of the company's 2011 target -- are the equivalent of taking approximately 11,100 U.S. cars off the road for one year.

John Howley
Orlando, Florida

New Jersey Getting 12 More Megawatts of Grid-Connected Solar Power

New Jersey’s largest regulated gas and electric utility is adding 12 megawatts of grid-connected solar energy. PSE&G hopes to start construction at its sites in Edison, Hamilton, Linden and Trenton this spring, with projects completed this summer and fall.

The four ground-mounted solar farms will be among the largest to be developed in New Jersey, with the Hamilton project being the largest in the state and the project in Linden the second largest. All four sites will utilize crystalline solar panel technology and have monitoring and communications functionality.

Together, the four projects will add 48,000 solar panels on 38.2 acres of property. They will produce enough energy to power about 1,300 homes and eliminate some 6,700 tons of CO2 emissions, the equivalent of removing nearly 1,200 cars from the road for one year.

The State of New Jersey has become a leader in solar energy installations in the last few years, installing more than 100 MW of solar energy, making it second only to California in terms of the amount of solar capacity installed.

"We're moving ahead with clean energy projects that will put people to work, installing tens of thousands of solar panels that will help the environment and stimulate the economy," said Ralph LaRossa, president and COO of PSE&G.

The latest projects are part of PSE&G's Solar 4 All program, which was approved by state regulators in July. The program involves a total of $515 million investment in 80 megawatts of solar, creating green jobs and nearly doubling the size of New Jersey's installed solar capacity.

More Important Than Copenhagen

I told you so.

Four months ago, I predicted that, "Those looking for simple solutions to climate change will be very disappointed by the absence of firm emission reduction targets in Copenhagen later this year. . . . But at the same time, [the US and China] will pursue a second path of cooperation towards achievable solutions with or without an agreement on targets." See US and China Forge a New Path on Climate Change.

That is exactly what the US and China did in Copenhagen yesterday.

Why? Because nothing this important and this complicated ever gets resolved by a committee.

Consider for a moment the race to put a man on the moon. Thomas Friedman and others have said that this should be our model for the Green energy revolution.

I agree. But we did not get to the moon by holding international conventions and listening to dictators and despots like Iran's Ahmadinejad, Zimbabwe's Mugabe, and Venezuela's Chavez lecture us on the evil nature of our plans to be the first to put a man on the moon. Nor did we wait until we could reach the lowest common denominator consensus with Russia, China and 180 other nations on how and when to put a man on the moon.

If we had followed the path of seeking international consensus before we went to the moon, then we probably never would have achieved the goal.

So, now that we have gotten Copenhagen out of our system, let's get down to the serious work of pursuing the Green energy revolution the old fashioned way. With vigorous competition among nations to be the most energy efficient and energy independent economies in the world.

Walmart has given us a good first step. The company has sent out a Sustainability Index survey to 100,000 of its suppliers. The survey asks each supplier to provide information about their carbon footprint, energy and water usage, plans and goals to reduce their carbon footprint, energy consumption and water usage, and other factors that affect the sustainability of their operations. For now, Walmart will review this data internally. But it plans in later stages to release the data to consumers and possibly even disclose a ranking of individual products based on a Sustainability Index for the product and the company that manufactured it.

If you were a factory owner in China, what would provide a better incentive for you to reduce your carbon footprint and use of energy and water? (a) An international treaty that committed China to nation-wide carbon reduction targets over a 20 or 30 year period? Or (b) a Walmart Sustainability Index that made your products unsellable to the world's largest retailer unless you reduced your own company's carbon footprint and use of energy and water?

Forget Copenhagen. We need barriers to entry that will make it difficult for producers around the world to sell their products unless they are made using non-polluting energy sources and sustainable manufacturing practices.

We also need to alter the economics of energy at home. Yes, solar and wind are more expensive than most carbon-emitting alternatives right now. But only because those carbon-emitting alternatives do not pay the full cost of their pollution. If we make coal and oil companies include in their pricing the cost of eliminating their products' emissions (either with cap and trade or a carbon tax), then solar, wind and other non-emitting alternatives would seem very inexpensive by comparison.

Lastly, we need to use government funding and regulations to promote sustainable energy based on the long-term benefits -- just as we did when we used government funds to finance space exploration.

Imagine, for example, if all new construction and renovations in the US had to be "net zero" in terms of direct and indirect carbon emissions. By "net zero" I mean that the amount of energy used by a facility from non-carbon-emitting sources like solar and wind is equal to or exceeds the amount of energy from carbon-emitting sources. This could be accomplished by a combination of building codes requiring higher levels of efficiency in buildings (which many local governments are already imposing) and subsidies for investments in solar, wind and other non-carbon-emitting energy sources.

Yes, this would cost us in the short term. But think for a moment about the competitive advantage this would give us in the longer term. What if five or ten years from now our factories used highly efficient buildings that required less energy, and that energy was supplied by solar and wind plants that had ZERO fuel costs. Our factories would have a tremendous competitive advantage over factories in China and elsewhere that continued to use power generated by coal and petroleum fuels.

I hear all those out there who say that climate issues are different because they transcend borders. But space travel transcended borders too. And we did not succeed with space travel by waiting for everyone to agree. We went out and did it.

John Howley
Woodbridge, New Jersey

Lessons From the History and Economics of Oil

My first assignment as a young lawyer -- and my introduction to the history and economics of the oil industry -- was on a behemoth antitrust case against the major oil companies.  In re Petroleum Products Antitrust Litigation involved allegations that the major oil companies conspired to fix prices by "signaling" price changes to one another and by manipulating supplies and refinery operations during the 1970's.

In between days of reviewing thousands of documents, my fellow young lawyers and I had the pleasure of working with Daniel Yergin, who was retained as one of our expert witnesses and who had just written The Prize: The Epic Quest for Oil, Money and Power, for which he would win the Pulitzer Prize.  His book is a comprehensive and fascinating account of the history and economics of the oil industry.  It is still about the best book you can find on the subject, and anyone interested in any aspect of the green energy movement must read it.

Recently, I came across a short video of Daniel Yergin reflecting on lessons that can be learned from previous shifts in energy usage as we try to move towards a more sustainable energy future.  He describes the environmental concerns of the 1950's that forced a shift from coal to oil, followed by a shift back to coal as the principal fuel for electricity generation due to coal's cost advantages and emerging technologies that ameliorated some of the environmental harms.  He also talks about the sunk costs in our existing energy infrastructure and how that creates inertia and limits our willingness and ability to change.

Click here to view the video.  Short and to the point . . . . . and definitely worth watching.

Wind Energy and Political Grandstanding

Plans to build a $1.5 Billion wind energy project in Texas got some unwanted publicity this week when grandstanding politicians issued press releases and open letters urging the Department of Energy to reject any applications for clean energy tax credits “unless the project relies on US-built turbines and other components.”

Now, this project will create 300 construction jobs in the USA and 30 permanent maintenance jobs, also in the USA.  It will provide a clean, renewable source of electricity for Americans.  And it will reduce our dependence on foreign oil.  Just the type of thing that deserves tax credits.

But some politicians are dead set against allowing any tax credits for this project because the turbines will be made in China, thereby creating jobs in China as well.  Senator Schumer of New York objects, arguing that, "American taxpayer dollars should not be used to finance those Chinese jobs."

Let’s consider the implications of this political posturing.

First, the US just convinced China to repeal a law that required 70% of technology used in Chinese wind projects to be made in China.  Now I agree that if China were keeping us out of its markets, then fairness, good trade policy and practical diplomacy might dictate that we keep them out of our markets until they agreed to free and open trade policies.  But having convinced them to eliminate their local content rules, it is hypocritical for us to use local content rules to keep them out of our markets.

Second, if we prohibit foreign turbine makers from competing for any wind projects that get tax credits, then we effectively bar them from any wind projects at all.  All renewable energy projects today require tax credits or some other form of subsidy to be economically viable.  (This is because coal and oil get to impose the cost of pollution on our environment at no cost, thereby eliminating a major competitive advantage of non-polluting renewables – but that is a subject for another time).  Barring foreign turbine makers from renewable energy projects receiving tax credits effectively bars them from all renewable energy projects in the USA.

Third, local content rules make no economic sense and will force projects (and jobs) outside the USA.  Any developer who can put together a $1.5 Billion project in Texas has the ability to put that project together someplace else – such as in a foreign country that does not impose local content rules.  If politicians insist that only higher-cost domestic content be used in a wind project, then some developers will decide to put their $1.5 Billion at risk elsewhere.  Like in China.  Which will then get ALL the jobs, including the 300 construction jobs and 30 permanent maintenance jobs that this project will generate in the good ol’ USA.

Fourth, and finally for now, if we are going to refuse tax credits and subsidies to any energy company that creates jobs outside the US, then why don’t we start with the oil companies?  How about eliminating all tax benefits for any oil company that creates jobs outside the US?  Obviously that would be a stupid policy and would put most of the oil companies out of business.  It is just as stupid when it is applied to wind projects.  And it would have the same absurd result.

John Howley

Orlando, Florida

Of Energy Dreamers, Past and Present

Rich Karlgaard, the publisher of Forbes magazine, writes a column in every issue called “Digital Rules.” He is a very smart guy and, usually at least, very innovative and forward thinking.

I say “usually” because he just missed the boat in his latest blog entry on the future of renewables.

Mr. Karlgaard argues that we are stuck with coal, oil and nuclear as our major sources of electricity in the United States for the foreseeable future. He asserts that “[t]here is no way the U.S. economy can enjoy future prosperity without the big three electrical energy sources of clean coal, natural gas and nuclear.”

Why? Because only 10% of current electricity generation comes from renewable sources, and most of that comes from hydro. Solar and wind provide less than 3% of current electricity generation.

According to Mr. Karlgaard, solar, wind and other renewables cannot possibly meet a significant part of our electricity needs 10 years from now when they are starting from such a small base. His Forbes colleague Ken Fisher agrees, urging investors to “buy into fossil fuels” because they account for “89% of electricity” and “that fraction won’t change dramatically in the next decade.”

As for Thomas Friedman, John Doerr, and others who point to Moore’s Law and argue that renewables will experience the same rapid technological advances as semiconductors if given the right incentives, Karlgaard calls them “dreamers.”

Funny. That’s exactly what they said about Thomas Edison, Nicolas Telsa, and others who set out to build centralized electric power plants in the late 1800’s.

At that time, centralized electric power plants had an even smaller share of the market than renewables have today. In fact, there were only a couple of electric demonstration projects involving only a few hundred streetlights. Gas companies had a virtual monopoly on powering lights in homes and businesses, and the new electric power plants being built had to charge far higher prices than gas. The gas companies also had an existing and very efficient distribution system for their gas, while the electricity dreamers needed to build very expensive copper mains to carry the electricity to customers.

Edison, Telsa, Westinghouse, and the other dreamers who built our current centralized electric generation system also faced a number of very significant barriers beyond price. There was, for example, the fact that the electric motor had not yet been invented. So they were trying to sell electricity before it could be used in factories.

How did the dreamers prevail? Transportation and municipal contracts. The electricity dreamers got their break by building dedicated power plants for new electric streetcars and streetlights.

Once they built a base of electric generating capacity for streetcars and streetlights, the pace of innovation and growth quickened. Innovators began inventing other things to use electricity, including electric motors which revolutionized the economics of running a factory. By 1892 – less than 15 years after Edison’s first streetlight project – General Electric’s capitalization was $50 million. The incredible speed at which centralized electric power plants developed is described in The Power Makers, by Maury Klein:

“By 1900 electricity had become an integral part of American life, especially in cities. Between 1890 and 1905 the output of electric power in the United States increased a hundredfold. By revolutionizing production and manufacturing, electricity made possible the rise of the consumer economy that was to dominate the twentieth century and transform every corner of American life. Already factories consumed more than half of the electricity generated…. Arc lights illuminated the streets of even small towns and flooded with light the avenues of large cities. In 1902, some 51,000 electric streetcars whisked urban passengers along 22,000 miles of track."

Now Messrs. Karlgaard and Fisher may be correct that coal, oil and nuclear will still be significant contributors to our energy mix ten years from now. After all, centralized electric power plants did not force the gas industry into bankruptcy.

But the history of centralized electric power plants suggests that renewables can and will grow at a much faster pace than traditional fossil fuels as sources of electricity. Once started, that pace will accelerate as the competitive advantage of renewables starts having a significant impact on the bottom line.

Think about it. Five years from now, those who invested in solar and wind today will have ZERO fuel costs for that portion of their electricity needs, while those who did not invest in renewables today will still have to pay the cost of fuel for every kWh – and at higher prices than it is paying today. Add in the fact that renewable technologies five years from now will be even more efficient than today, and everyone will be clamoring for renewables. It is easy to see how the tipping point will be reached.

Or has it already been reached? China has just announced that it is constructing a 2 gigawatt solar power plant in Inner Mongolia, the largest solar plant in the world. That is on top of nearly 80 gigawatts of renewable energy that China has already built in recent years. When China has hundreds of gigawatts of fuel-free energy, what country will be able to compete when it must continually pay for fossil fuels to generate 90% of its electricity? More to the point, what country can afford to wait?

John Howley
Woodbridge, New Jersey

Pollution Economics 101

The oil industry is attacking the proposed climate change legislation that has passed the House and is on its way to the Senate. Here is a summary of the arguments from the American Petroleum Institute:

“The House climate change bill will increase costs of gasoline, diesel and aviation fuel, and drive jobs and production overseas, increasing greenhouse gas emissions (GHGs) in foreign countries that will have a new competitive advantage. Under the so-called ‘American Clean Energy and Security Act’, U.S. refiners will have to buy allowances, increasing their costs and giving a competitive advantage to non-US refiners. U.S. jobs will be lost and contrary to the bill’s intention, America will be less energy secure and more reliant on imports of gasoline and other refined products."

Wow. That’s a lot to swallow. Let’s take it step-by-step.

First, the proposed climate bill “will increase costs of gasoline, diesel and aviation fuel.”

Yes! Absolutely! Totally true! That is the entire point of the legislation! And it is a good thing!

Now before you think I am some kind of tree-hugging, left-leaning radical, let me tell you what the most famous conservative and libertarian economists say about the subject.

Alan Greenspan – the former Federal Reserve Chairman, acolyte of Ayn Rand, and self-described Libertarian – favors a hefty gasoline tax of at least $3 or more per gallon because, he says, we “need significantly higher gasoline prices to wean us off gasoline-powered motor vehicles.”

Milton Friedman agrees. Remember him? He was the Nobel-prize-winning economist from the University of Chicago who provided much of the intellectual firepower behind Reaganomics.

Why do these intellectual giants of conservative and libertarian economics favor taxes on gasoline? Simple. It has to do with something economists call “externalities.”

To understand externalities, consider a chemical company that offered to create more jobs and lower prices. There is just one catch. They will save the money to make this possible by dumping their toxic wastes into the pond in your backyard instead of disposing of the waste properly. In other words, they will make the cost of avoiding or cleaning up pollution “external” to the price of their product.

Obviously, that is not acceptable. Proper disposal of toxic waste is a cost of doing business and it should be factored into the price of the product – even if that means higher prices and/or fewer jobs.

The costs of avoiding or cleaning up pollution, however, are not always incurred by the producer or passed on to its customers. For example, coal-fired power plants have delivered relatively low-priced electricity for more than 100 years, but have also been dumping carbon dioxide and other greenhouse gases into the atmosphere. The same with petroleum products like gasoline and diesel fuel.

That is why Greenspan, Friedman, and many other conservative and libertarian economists have favored taxes on gasoline and other substances that cause pollution. Because the failure to account for the cost of pollution tends to distort many basic economic decisions such as pricing and competition. People think they are getting a good deal because their gasoline and electricity are relatively cheap. But they are really only imposing the cost of pollution on the environment.

By imposing a tax equal to the cost of avoiding or cleaning up the pollution, the market will make rational choices based on the real cost of the polluting product. And – this is very important – inventors and investors will have an incentive to develop cleaner alternatives that can be sold at a competitive price without the pollution tax.

So, the oil industry does not get any points for arguing that the climate change legislation will increase the price of gasoline, diesel fuel, and aviation fuel. That is what it is supposed to do.

BUT! The oil industry has a very legitimate point when it argues that the proposed legislation will “drive jobs and production overseas, increasing greenhouse gas emissions (GHGs) in foreign countries that will have a new competitive advantage.”

Anyone who has seen horrific pollution in developing countries knows what will happen to our environment if we simply drive up costs in the more developed economies. Without a comprehensive, global approach to pollution and climate change, we will just shift the externalities (costs of pollution) from our own backyards to backyards of very poor and politically less influential people in developing countries. And we will not be able to fence in the adverse effects.

Which leads to questions that have more to do with politics than economics. How do we get to a global solution on climate change? To what extent must we, in the more economically developed world, take the first step and make the first sacrifices? And to what extent should we refuse to budge until the rest of the world agrees to follow?

And you thought economics was the dismal science. More on the politics and diplomacy of a global climate change agreement in later posts.

John Howley
Tokyo, Japan

Distributed Generation? Try Distributed Storage.

One of the hot topics in renewable energy is "distributed generation." If every home and business would install some solar panels or small wind turbines to generate their own electricity, then any excess electricity could be sold back to the grid. Build enough small solar photovoltaic systems and windmills, the theory goes, and we won't have to build as many coal-fired power plants.

Those who support this concept make analogies to the internet, where the computing power and brainpower of numerous individuals and their personal computers can be harnessed via distributed computing and wikis and social networks into something really big and powerful.

Will the same concept work with “distributed generation” of electricity?

Not exactly.

Asa an energy efficiency measure, putting solar panels and wind turbines on individual facilities is a very good idea. It will reduce the need for that facility to draw power from the grid. But for large scale production of electricity and selling back to the grid, distributed generation does not provide the quality control and economies of scale necessary for the efficient generation and distribution of electricity. Let’s look at those two issues:

Power Quality. The internet works by allowing everyone to post whatever information they want, without any initial filter on quality. That won't work on the electric grid.

An efficient power distribution system requires that power quality (voltage, harmonics, etc.) be maintained at all times. That is difficult enough to accomplish with highly variable generation sources such as wind and solar. Every time the wind dies down or clouds start to cover the solar panels in one geographic area, the grid would have to find power elsewhere to maintain adequate voltage levels. That is a very difficult and complicated task when you are dealing with large wind and solar farms. It is even more difficult when the wind and solar power is being supplied by thousands, or tens of thousands, or hundreds of thousands of different sources, each with its own variations in power quality.

Economies of Scale. Building small windmills and solar photovoltaic arrays is not very cost efficient. The number of workers required per megawatt -- and the gasoline they will use going from one site to another -- makes this a very inefficient process. And what about maintenance? Can we really afford a renewable energy system that requires maintenance crews to take care of generation capacity that is located at hundreds or thousands of different locations?

Does that mean our electric power systems will continue to be centralized? Yes, but only on the generation side. On the storage side, distributed networks may offer an excellent solution to the problem of matching generation with demand.

The biggest inefficiency in our current electric power system is caused by the need to build excess generation capacity to meet peak demand. Many electric utilities have generators that are used less than 40% of the time. They exist solely to provide extra power when it is needed -- like from 7 am to 7 pm when every office building has its lights, computers, fax machines and HVAC systems turned on. And on that very hot August day when everyone turns on their incredibly inefficient window air-conditioning units at the same time.

Power companies must build enough generating capacity to handle the highest possible peak demand for electricity. When we operate substantially below peak capacity (like, almost every night of the year), that peak capacity goes wasted.

The real problem is not generation, but storage. If we could use that generating capacity at night and store the electricity for the next day, then we would have a truly efficient system.

Fran Lamparello, my good friend and business partner, sees the future of energy storage by looking at the past. Fran has spent his entire working life in different aspects of the energy industry, from designing building controls systems to running a home heating oil distribution business. He envisions a time in the near future when the electric utilities will address energy storage the same way the home heating oil industry did. At the customer's home or business.

By putting storage tanks at each customer's home or business, the oil companies turned their customers into a "distributed storage" network. It was a very efficient system. The distributor could buy home heating fuel during the off season when prices were low, and then store it until the winter. The distributor did not have to pay for storage of large fuel inventories because it could store that inventory at the customer's home or business. Properly sized, an oil tank at the home or business also reduced the number of trips that had to be made to deliver fuel to the customer.

Fran and I predict that you will see the same type of distributed storage system with electricity. As the efficiency and cost of fuel cells and other storage mechanisms for electricity improve, you will see utilities offering to put that storage mechanism on site at the customer's location. It may be in the form of electric cars as Tom Friedman predicts in his book "Hot, Flat, and Crowded," or it may be in the form of fuel cells.

The real value of the internet model for electricity is not “distributed generation.” It is “distributed storage.” Do not put a solar panel on every roof. Put a hydrogen fuel cell in every backyard or basement! Or an electric car in every garage!

John Howley
Manila, Philippines

US and China Forge a New Path on Climate Change

Last week the US and China signed a Memorandum of Understanding agreeing to cooperate on climate change. Some have criticized the document as nothing more than an “agreement to agree” that failed to address the contentious issue of firm targets for carbon emissions reductions.

This criticism misses the point.

To begin, consider how far the US-China relationship has come in such a very short time.

In April 2001, just months after the Bush Administration took office, the US sent a military plane near Hainan Island in China. China responded by forcing down the plane and detaining the 24 American crew members for 10 days until the US apologized.

The message then was clear: Do not mess with us.

In stark contrast, China began its relationship with the Obama Administration by sending 150 senior Chinese officials to Washington to discuss the global economy and climate change. Before leaving Washington, they signed an agreement to cooperate on renewable energy, smart grid technologies, electric vehicles, carbon capture and sequestration, joint research and development, clean air and water, and protection of natural resources.

A very different but equally clear message: We want to work with you on climate change.

Consider also the importance of a US-China consensus on: (a) the existence of a climate change problem, and (b) the need to address it.

Many in the Bush Administration – including Vice President Cheney – did not believe that we had a problem or that we needed to do anything about it. The official position on climate change was that America should not sign any agreements until China and other developing nations agreed to firm targets to reduce their greenhouse gas emissions.

China responded by arguing that they should not consider firm targets until the US and other developed nations first agreed to firm targets to remediate their much longer history of carbon emissions.

As Wu Changhua of The Climate Group in Beijing has noted, very little progress was possible when the US and China each “used the other as an excuse for inaction.” The agreement last week is meaningful because it signals an intent by both sides to find ways to work together. That is the essential first step towards any progress.

Equally encouraging are the reasons why the US and China are beginning to work together:

1. A solid consensus in the US on the need for renewable energy. This consensus rests on beliefs that transcend partisan lines, including: (a) that US national security requires a shift away from dependence on foreign oil; (b) that we are leaving a legacy of significant environmental damage for generations in the not-so-distant future; and (c) that economic growth in the US depends on becoming a world leader in new, clean energy technologies.

2. A recognition in China that it must move quickly to prevent environmental disaster. In each of the past five years, China has built an average of 70 gigawatts of electric generating capacity – about the same amount as exists in all of France. Most of these plants have been dirty coal plants with obvious environmental impacts. Remember when China had to shut down factories before and during the Beijing Olympics to make sure the air quality would not kill the athletes? China knows that it cannot continue on this path.

Does this mean that the US and China will agree on firm targets for greenhouse gas emission reductions in Copenhagen later this year?

I hate to disappoint you. But I think the answer is "No."

The underlying message of the agreement signed in Washington last week is that the US and China are going to forge two paths to address climate change. Yes, they will still argue with one another over how much each country should reduce its carbon emissions and by when. But at the same time, they will pursue a second path of cooperation towards achievable solutions with or without an agreement on targets.

Those looking for simple solutions to climate change will be very disappointed by the absence of firm emission reduction targets in Copenhagen later this year. But what would you rather have? A Copenhagen Agreement on firm targets without any agreement on how to reach them? Or a Copenhagen Agreement on how to reduce greenhouse gas emissions without firm targets?

Whichever you prefer, get ready for the latter.

John Howley
Manila, Philippines

We Are The Solution

Last week I gave a presentation on “Energy Efficiency Best Practices” to more than 100 CEOs of multinational corporations. The presentation began with a disclaimer. I did not intend to talk about alternative energy. I would focus, instead, on energy efficiency. On how companies can dramatically reduce their energy costs -- without changing what they do -- simply by using existing technologies to make their facilities run more efficiently.

Just to be clear, the first slide in my presentation said: “Focus on Efficiency.” Then I ended with the same slide: “Focus on Efficiency.”

What happened during the Q&A session? No one asked about energy efficiency. Instead, every one asked about alternative energy. What about electric cars? What about fuel cells? What about biofuels? What about cellulose? What about solar? What about wind?

Why were they asking about alternative energy? Because we all want to find the magic new technology that will make energy both environmentally friendly and inexpensive. Then we won’t have to do anything ourselves.

Don’t get me wrong. I’m no Luddite. In fact, I firmly believe that over time very smart scientists and engineers will make major breakthroughs that will eliminate our dependence on carbon-based fuels. Just in my lifetime, the microprocessor has revolutionized communications, media, data processing, medical diagnostics, and virtually every aspect of our lives. Once discovered, similar types of breakthroughs in energy and power generation will relegate carbon to the same dustbin of history as the rotary telephone.

But continuing to waste energy while waiting for alternative energy breakthroughs is a bit like continuing to spend recklessly while waiting to hit the lottery. It might happen someday. Maybe not. Even if it does, who knows when.

In the meantime, we have such a simple solution…….and it is us. Simply by taking very basic steps, we can reduce our energy consumption by 20% or more without altering our lifestyles or business practices. And we can do that today with existing technologies that have very short paybacks.

So, please, a little focus on efficiency.

John Howley
Hong Kong

The Laws of Physics

The first law of thermodynamics (conservation) holds that energy cannot be created or destroyed. The total amount of energy and matter in the Universe remains constant, merely changing from one form to another. Simply put, we cannot get energy from nothing.

Think about what that means for our hopes (and dreams) of a carbonless future for energy. Unless the first law of thermodynamics is disproved, we will always have to transform some form of matter or energy to get energy. If not carbon, then something else. Neutrons for nuclear plants. Food for biofuels. Land for windfarms. Silicon or some other material for solar panels.

Which leads to that other basic law. There is no free lunch.

John Howley
Manila, Philippines