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

Does It Matter Where Your Electricity Comes From?

Recently we switched our New Jersey home to a third party electricity supplier that gives customers a choice of either 20% or 100% wind power -- and that charges about 10% to 15% less per kwh than the utility's rates.

This is one of the little known benefits of energy deregulation. In many states, the delivery of electricity has been separated from the supply. Our utility company still provides delivery, service, emergency repairs, customer support and a single bill, but we can choose a third party for the supply portion of our bill.

With supply opened up to competition, third party suppliers are competing for our business by providing electricity that is greener and less expensive. It is similar to when long distance companies competed with one another after phone services were deregulated.

We quickly understood the financial impact of our choice when our electric bill went down, but I wasn't really sure about the "greenness" of the electricity. Was this just a marketing gimmick? After all, it's not as if the specific watts that find their way to our home can be identified as wind generated. The utility and the third party suppliers push all their electricity onto the same grid, and by the time it reaches our home you cannot distinguish between the watt generated by a dirty coal-fired plant and the nice, clean wind power that we bought. In fact, depending on the time of day, overall demand on the system, and strength of the wind, most of the electricity powering our home could be "dirty."

So, does it matter that we signed up and paid for 100% Green-E certified renewable power?

Yes. Because over time the demand created by people choosing renewable electricity will require more of it.

Watts, volts, and amps can be difficult to comprehend, so let me explain by analogy to something more tangible. Consider a car dealership that carries an inventory of 80 gas guzzling SUVs and 20 hybrids. If 8 out of 10 customers continue to buy the less fuel efficient SUVs, then the dealership will continue to replenish its inventory with 80% gas guzzlers and only 20% hybrids.

Now consider what will happen if 8 out of 10 customers start buying hybrids. The car dealer does not want to lose money. It will start to rebalance its inventory with more of the fuel efficient hybrids and fewer of the gas guzzlers. Which will cause the manufacturers to start producing more hybrids and fewer gas guzzlers.

The same thing can happen with electricity. If enough of us start choosing clean, renewable electricity, then more wind, solar, hydro, and geothermal plants will have to be built to meet the demand.

To help make that happen, we decided to promote the company that provides our home's clean, green electricity supply. We will earn a small referral fee whenever anyone signs up for the service through our web site and, more importantly, we will do our small part to increase the demand for clean and renewable energy.

If you live in New Jersey, Pennsylvania, Connecticut, or Maryland, you can click here to find out how much it will cost (actually, how much you will save) by switching to either 20% or 100% clean, renewable electricity. New Yorkers should be able to take advantage of this in a month or so, with Massachusetts and Illinois not far behind. You can also check with your utility or state regulatory agency to find the names of other third party suppliers.

With a little collective action that costs us nothing, and can actually reduce our electric bills, we can promote a cleaner and greener energy future.

John Howley
Woodbridge, New Jersey
www.HowleyGreenEnergy.com

$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

How Monitoring Dramatically Reduces Energy Costs

One of the most cost-effective ways to reduce energy costs is to monitor energy consumption in one minute increments and watch the trends over time. Almost every building will immediately find quick and easy ways to reduce energy costs by 5% or more. And knowledgeable professionals can often use the data to drive down energy costs by 20% or more and improve facility comfort and performance at the same time.

Let's take an actual example. Forward Energy Solutions recently subscribed to Continuous Energy Management & Optimization (CEMO) from Davies Energy Systems. The process involved two steps: (1) installing a real-time energy monitoring system from Noveda Technologies; and (2) having Davies Energy's engineers analyze the data and develop better ways to manage and optimize facility energy usage.

Here is the minute-by-minute display of electricity consumption that Foward Energy Solutions saw after just one day:


Notice the two distinct sets of spikes in energy consumption. The first occurred just before 4:00 a.m. when no one was in the building. The next set of distinct spikes started at 7:00 a.m. and continued until 5:00 p.m. Each of the spikes lasted only a minute or less and were not noticed by the people in the building. But over time they amounted to a significant increase in kwh consumption. They also may increase the peak demand charges on the company's monthly electric bill.

The culprits were quickly identified. A small refrigerator was malfunctioning and spiking the consumption at 4 a.m. An air-conditioning system in need of repair was causing the spikes during regular business hours.

Catching these types of problems generates immediate savings by reducing kwh consumption and peak demand charges. The avoided costs will continue to be realized each and every month into the future, often adding up to thousands of dollars in energy savings.

Identifying these types of problems early on also avoids the cost of more expensive repairs down the line. Without monitoring, no one would have noticed the air-conditioning problem until it stopped cooling the building -- most likely on the hottest day of the year. At that point, the company would have already wasted money on unnecessary energy costs, plus it would be facing the higher cost of repairing or replacing the air-conditioning system on an emergency basis. Not to mention the loss of employee productivity in a sweltering office until the repairs could be made.

Francis X. Lamparello, P.E., the Chief Technology Officer at Davies Energy Systems, says that he finds these types of issues in almost every building. But these problems are just the tip of the iceberg when it comes to saving energy. "Buildings are living, breathing entities that must be monitored and adjusted on a continuous basis," he says. "For example, maintaining proper air pressure inside the building can keep warm air from entering in the summer, and letting in more cool outside air on a sunny Fall day can give you 'free cooling' to offset the heat caused by the sun shining on the windows." All of these energy saving solutions, he points out, are free or inexpensive once you have real-time monitoring and expert advice on how to manage the facility.

What's next for Forward Energy Solutions? Now that they have the data, they are working with Davies Energy on a number of additional ways to drive down their energy costs. More on that in later blog posts.

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

Northeast and Mid-Atlantic Governors Commit to Low-Carbon Fuel Standard

Governors of 11 Northeast and Mid-Atlantic states signed a Memorandum of Understanding (MOU) on December 30 that commits their states to developing a regional Low-Carbon Fuel Standard (LCFS), a market-based, fuel-neutral program addressing the carbon content of fuels.

The proposed regional LCFS would involve a market-based, fuel-neutral program to address the carbon content of fuels. If adopted by states, it would apply to the transportation sector, and potentially to fuels used for heating buildings. According to a press release issued by the Governors, a regional LCFS has the potential to reduce transportation-related greenhouse gas emissions, which represent approximately 30 percent of emissions in the region, reduce regional vulnerability to petroleum price volatility, and facilitate the long-term transition from petroleum-based fuels in the transportation sector. In addition, the Governors expect that the regional LCFS will spur economic growth related to development of advanced technologies and green energy jobs.

The Low-Carbon Fuel Standard initiative began in June 2008, when Massachusetts Governor Deval Patrick sent a letter to the governors of all 10 member states of the Regional Greenhouse Gas Initiative (RGGI) inviting them to work together on developing a Low-Carbon Fuel Standard that would apply to the entire region, creating a larger market for cleaner fuels, reducing emissions associated with global climate change, and supporting the development of clean energy technologies. Based on Letters of Intent signed in December 2008 by state environmental commissioners, the participating states - the 10 RGGI states plus Pennsylvania - have been doing preliminary work toward designing a regional LCFS program.

The LCFS MOU signed on December 30 establishes a process to develop a regional framework by 2011 and to examine the economic impacts of an LCFS while getting input from business and environmental stakeholders. The 11 signatories include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.

Click here for more information on the LCFS work in the Northeast and Mid-Atlantic region.

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.

When Big Oil Buys the Gas Company

Earlier this week ExxonMobil, the world’s largest publicly traded oil and gas producer, announced that it had agreed to buy XTO Energy, the second-largest producer of natural gas in the US. ExxonMobil will acquire XTO for stock valued at $31 billion, making this the biggest oil and gas deal in four years.

This acquisition (and more like it) will have very significant impacts in at least three areas: energy prices; advances in natural gas innovation; and climate change legislation.

1. The Impact on Energy Prices

By acquiring the second-largest natural gas producer in the US, ExxonMobil will increase its ability to influence natural gas prices.

Prices for natural gas under long-term contracts are currently fairly close to prices for oil when measured on a cost per BTU basis. But prices for natural gas on the spot market are much lower -- often as much as 400% lower -- than prices for oil. The more natural gas that remains available on the spot market, the more likely it is that prices for natural gas under long-term contracts will come down.

When independent natural gas companies like XTO selling gas on the spot market, there is pressure on prices for natural gas to go down. Which makes gas a nice alternative to oil and coal. Which ultimately puts pressure on oil and coal prices.

ExxonMobil and other major oil companies that buy natural gas companies could influence prices by simply selling less natural gas on the spot market. The major oil companies have plenty of cash, so they could hold onto their natural gas inventories until the gap between gas and oil narrows. That is not good for consumers . . . or for the country.

2. The Impact on Natural Gas Innovation

Over the last decade, a handful of the nation’s small energy companies discovered huge amounts of natural gas in new fields stretching from Texas to Pennsylvania. XTO was one of these companies. It grew almost unnoticed into the nation’s second-largest gas producer by amassing a substantial portfolio of gas fields and developing expertise in the complex technology needed to extract the gas from shale beds.

If the major oil companies buy up these smaller, innovative companies that are making all the new natural gas discoveries, then who will pursue new natural gas technologies in the future?

Good question.

3. The Impact on Climate Change Legislation

Oil is one of the major contributors to carbon emissions worldwide. Gas is a much cleaner fuel.

The oil industry and its trade organization, the American Petroleum Institute, have vehemently opposed any aspect of climate change legislation that would raise the price of petroleum-based products. In contrast, the natural gas industry has supported many aspects of climate change legislation. Because natural gas has relatively low carbon emissions, any restriction on carbon emissions will give it a competitive advantage over oil and coal.

If the major oil companies buy up all the significant natural gas companies, then who will advocate for climate change legislation?

Another good question.

John Howley

Orlando, Florida

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

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

The Economics of Energy Conservation

I remember watching President Jimmy Carter on television during the OPEC Oil Embargo. He was wearing his Mr. Rogers sweater, sitting in front of a fireplace, and telling the country that we all must conserve energy. His message was plain. Energy conservation means making sacrifices, like turning down the thermostat and putting on sweaters to keep warm in front of a fire.

Being fond of comfortable wool sweaters, wood fires and the notion that a little personal sacrifice could help eliminate our dependence on foreign oil, I was taken with President Carter's message. Unfortunately, President Carter's approach to energy conservation was not sustainable. You cannot heat the clean rooms in semiconductor manufacturing plants with fireplaces in the winter, nor can you cool hospital operating rooms by opening windows in the summer. Most big energy consumers -- factories, hospitals, office buildings and other commercial and industrial enterprises -- were not going to solve the energy crisis or our dependence on foreign oil by going back to a simpler time or by doing less.

We soon found out that even personal sacrifice would last only so long. Once the immediate crisis of the embargo ended, our society lost its sense of urgency about conservation. Within a few years we had discovered the joys of driving gas guzzling SUVs.

Fast forward 30 years to where we are today, the early 21st Century. Al Gore and others have focused our attention on global warming and the need to reduce carbon emissions. At the same time, we are facing another energy crisis caused by rising energy costs. Oil above $100 a barrel. Electricity rates going through the roof.

This time we are talking about energy conservation in terms of becoming more efficient. Major corporations and venture capitalists have jumped on the bandwagon, asserting that conservation is not just good for our environment, but it is also good for business. For example, the President and CEO of Wal-Mart noted in a recent interview that his company is pursuing energy efficiency because it is good business -- consistent with the company's founding principles -- to cut costs by becoming more efficient:

“We looked at what Sam Walton started and how he developed the company. It was by eliminating waste, bringing in efficiencies. And by thinking about sustainability from our standpoint, it really is about how do you take cost out, which is waste, whether it's through recycling, through less energy use in the store, through the construction techniques we're using, through the supply chain. All of those things are simply the creation of waste. We found it's consistent with the entire model we've had since Sam opened the first store.” H. Lee Scott Jr., President and CEO, Wal-Mart Stores Inc., quoted in “Waste Not”, The Wall Street Journal, March 24, 2008.

Even altruistic environmentalists have made their arguments for conservation based on what is most cost effective. For example, the Canadian Chapter of the World Wildlife Federation has focused on the cost-saving benefits of energy efficiency: “Energy efficiency investments such as building retrofits are one of the lowest-cost and most effective options for reducing greenhouse emissions.” WWF-Canada Backgrounder, March 24, 2008.

How do businesspeople determine whether energy conservation measures are "cost effective"? They simply compare the financial returns available from investments in energy conservation projects with returns available from other types of investments. This requires nothing more than an analysis of (a) how long it will take for the financial savings generated by an investment in the energy conservation project to equal the cost of that investment, known as the PayBack Period; (b) how long those financial savings will continue in the future; (c) what those savings equate to in terms of a percentage return, known as the Internal Rate of Return; and (d) an adjustment for the company's cost of capital, depreciation on any equipment that is installed as part of the conservation project, and other factors.

For example, if replacing an incandescent light bulb with a compact fluorescent bulb (CFL) costs an average of $2.00 (including labor) and will result in a reduction of $2.00 per year in the cost of electricity, then the CFL pays for itself in one year and the PayBack Period is one year. If the CFL will last 10 years, then each investment of $2.00 in CFLs today will generate financial savings of $20 over the life of each new bulb. A very rough Internal Rate of Return is close to 100% because your $2.00 investment is generating 100% return ($2.00 per year). Put another way, to match the return on your investment in CFLs, you would have to invest in something else that generated almost 100% per year.

The actual Internal Rate of Return is less than 100% because you have to factor in your cost of capital -- that is, how much did it cost you to earn or borrow the original $2.00 investment -- and other factors such as depreciation of any equipment installed as part of the conservation projects. But for our purposes, it is sufficient to understand that energy efficiency investments with one-year PayBack Periods are extraordinary investments that cannot be matched by almost any other investment, at least not without taking on much more significant risks.

The Internal Rates of Return for investments with two-year and three-year PayBack Periods are also extraordinary. If an investment pays for itself within 2 years, then it is generating financial savings equal to 50% of its cost each year. And if an investment pays for itself within 3 years, then it is generating financial savings equal to 33% of its cost each year. Depending on how long the savings will last (10, 20 years or more), the cost of the company's capital, etc., investments with two-year and three-year PayBack Periods usually will generate Internal Rates of Return in the range of 30% to 45%.

Since energy efficiency investments carry very little risk (and a lot of side benefits), any energy efficiency investment that generates an Internal Rate of Return of 30% to 45% makes good business sense. It is almost impossible to get that type of return on your investment anywhere else without taking on significant risks.

The bottom line: A CFO will almost always invest in energy efficiency projects that have PayBack Periods less than three years, because Internal Rates of Return over 30% are hard to find without taking on significant risks. And a CFO is almost compelled to invest in energy efficiency projects that have PayBack Periods in the two-year range, because low-risk Internal Rates of Return over 40% are almost impossible to find.

The Internal Rate of Return for energy efficiency investments with four-year PayBack Periods are also good. A four-year PayBack Period means the investment is generating savings equal to 25% of the investment every year. Even after discounting for cost of capital, the Internal Rate of Return should be in the 15% to 20% range. This is still very good considering the relatively low risk of energy efficiency investments compared to the types of risk that must be taken to obtain returns of 15% to 20% in other investments.

In addition, energy efficiency investments generate other types of returns that make them much more valuable than pure financial investments. These side benefits include reducing carbon emissions, generating good will as a "green" company, reducing maintenance costs on equipment that now runs more efficiently, etc.

PayBack Periods longer than four years are more difficult to justify on financial considerations alone. Depending on cost of capital, a five year PayBack Period will generate an Internal Rate of Return that often is in the same range as what the company can earn by reinvesting in its own business. The energy conservation project then starts to compete with other internal capital needs. Do we conserve energy? Or do we expand our plant so we can grow into an important new market? The energy conservation project can still win out, but not on financial considerations alone.

What are the implications when companies make their energy efficiency decisions based on Internal Rates of Return? I've already gone on too long for today, so I'll save that for another blog entry. In the meantime, I look forward to your comments and questions on this primer on the economics of energy conservation.

John Howley
Hong Kong

Oil (and golf) Lessons

Yesterday's plan for an afternoon of golf with Sue and Charlie ended suddenly when the lightening siren went off before we finished the second hole. Not wanting to leave Florida without playing golf, I showed up at my local course this morning hoping for an opening.

The starter got me out with a couple from Switzerland. Liz is a hospital administrator and Bruno just retired after trading oil for more than 40 years from offices in Singapore, Japan and Switzerland. Much as I dislike talking business on the golf course, this was an opportunity I could not pass up.

Here's what Bruno had to say:

JH: Do you miss trading?

BB: I never thought we would see oil over $100.

JH: How much of that is due to the weak dollar?

BB: A majority. That plus speculation. You have increased demand from places like China and India. But speculators have pushed prices past what demand can support.

JH: What about supply?

BB: There are some refinery bottlenecks, but we don't have an immediate crude shortage.

JH: What do you think about the new interest in global warming and conservation?

BB: Actually, I feel a little guilty. I spent my career helping to put all that carbon in the air.

JH: Do you think we can sustain the current interest in clean energy?

BB: I hope so. We'll see what happens when energy prices drop again.

JH: You sound pretty certain that will happen.

BB: Prices will drop suddenly when speculators realize that they have gone beyond what the fundamentals will support. Over time the dollar will get stronger too. It doesn't deserve to get stronger, but it will.

JH: How much will prices drop?

BB: That is difficult to calculate. There are too many variables. You have subjective variables like the panic of speculators caught on the wrong side of the trades, and a lot of other variables like inflation.

JH: The government statistics still show relatively low inflation numbers.

BB: The government must not buy milk or bread.

JH: When will oil prices drop?

BB: Do you think this putt will break to the right?

I took the hint. My interview was starting to distract Bruno from his game. He had been straight off the tee all morning, and now he was pushing everything to the right. Liz noticed too, and she stepped in to get Bruno focused back on golf.

She began by saying something in German that sounded a little harsh. Bruno straightened his spine. Then she switched to English to give him the most basic golf advice, but in the sweetest way. "I'll watch where the ball goes, darling," she said. "You can keep your head down."

John Howley
Orlando, Florida