$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

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