Oil Disasters and Sub-Prime Mortgages: When Risk is Taken Out of the Price

The BP Deepwater Horizon catastrophe has much in common with the implosion of the sub-prime mortgage market. In both instances, very intelligent people failed to take basic precautions with risky investments. Why? Because the risks were not fully included in the investment analysis.

In the sub-prime mortgage market, the rating agencies gave what turned out to be deceptively favorable ratings to Collateralized Mortgage Obligations (CMOs), in part because the risks were chopped up and spread around in pools. Investors did not demand a high risk premium because they could not see the full extent of the risks.

Something very similar happened with BP's investment in the Deepwater Horizon. BP's spill response plan estimated the worst case scenario at 177,400 barrels of oil, a number that we now know was absurdly low. And the bulk of the risk was assumed by the US government when it limited BP's liability for damages claims to $75 million.

If BP had to assume the full risk (potentially billions of dollars) in a gulf that has seen some of the worst hurricanes (including Katrina), the insurance premiums or reserves required to cover that risk presumably would have been much larger. Larger insurance premiums or reserves would have reduced the potential return on investment for the project.

What would BP have done if the financial projections for the Deepwater Horizon project had been lower because they included the full cost of insuring against a multi-billion dollar risk? Maybe BP would have invested in a less-risky natural gas project that would have produced fuel with 30% to 40% lower carbon emissions. Or maybe BP would have invested in some of the new Green and sustainable technologies that it was touting in its advertisements. Or maybe it would have invested in a different oil project that did not carry the risk of destroying the fishing industry in the Gulf of Mexico.

Here's the bottom line: Our best hope for a future of clean and sustainable energy is to encourage rational investments by the private sector. That is only possible if the price of oil includes the full cost of pollution and the full cost of insuring against environmental disasters. Once that happens, alternative energy sources that do not carry those costs will become very attractive investments and the smart money will flock to them. So if you want to start a shift to cleaner and more sustainable energy sources, the first step is to stop subsidizing oil with free liability insurance courtesy of the US Government.

John Howley
www.HowleyGreenEnergy.com
Orlando, Florida

Mr. President, Put General Petraeus in Charge of the BP Catastrophe

Mr. President, if our shores were being attacked, you would not rely on profiteers and mercenaries to defend us. You would appoint our best General to lead the defense, and you would support him with our best troops. You would not "supervise" private companies and "approve" their decisions. You would appoint one person with authority to make all decisions, and that person would have undivided loyalty to you as President.

Well, our shores are under attack. By the worst man-made environmental catastrophe in history. Eleven people have died, untold thousands are losing their livelihoods, and the damage may haunt us for generations.

The first thing you must do is appoint a battle-tested General and call up the troops. Call the oil companies and tell them that you are drafting all of their top scientists and engineers. You want them in the gulf tomorrow morning. They will no longer report to the oil companies. Until this catastrophe ends, the scientists and engineers will report solely to a chain of command headed by General Petraeus who will be advised by Energy Secretary Chu.

They will not work only on plugging the blowout. They will also do everything possible to protect the people of this nation from the devastating effects of the blowout -- even if that means doing things that will increase BP's costs or reduce its future profits.

General Petraeus knows how to organize and lead people. He knows how to get things done. He will not be distracted by falling stock prices, profit and loss statements, or corporate lawyers advising on potential future liabilities. He will not increase the number of people cleaning the beach when the press is around, and then send them home without finishing the job when the press follows you back to Chicago or the White House. With General Petraeus in charge, you (and the American people) will be confidant that everything is being done with the sole objective of protecting our nation and its people.

Mr. President, you have said that we need the oil industry's superior expertise in deepwater oil drilling. That may be the case. But this is not about expertise. This is about leadership. It is not enough for you to "supervise" or "approve" everything that BP does.

We know from experience what happens when war profiteers and mercenaries like Halliburton and Blackwater make decisions subject to the "supervision" and "approval" of the US government. The profiteers make billions and the national interest is not well served.

You must relieve BP and all of its corporate officers from any authority to develop strategies or make decisions. They can provide technical support. They can serve as advisors. They can make suggestions. But you must have one person, and one person only, who is directly responsible for developing strategies and making decisions. And that person must have no loyalty other than his loyalty to you as President and to the People of the United States of America.

Mr. President, you promised us change. You promised us that we would no longer rely on war profiteers and mercenaries to defend this nation. We need you to keep that promise. Please put our best battle-tested General in charge of the situation and tell everyone else that they are reporting to him effective immediately.

John Howley
www.HowleyGreenEnergy.com
Orlando, Florida

$550 Billion In Welfare Payments for Dirty Energy

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

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

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

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

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

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

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

John Howley
www.HowleyGreenEnergy.com
Orlando, Florida

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

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

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

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

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

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

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

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

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

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

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

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

The choice is ours.

John Howley
Orlando, Florida

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

How Warehouses Become Power Plants

ProLogis, a warehouse and distribution company, is building a 2.4 megawatt solar power project on the roofs of seven warehouses in Portland, Oregon.

This is the second rooftop solar project built by Prologis and Portland General Electric (PGE), the local utility. Together, the two projects will generate 3.5 MW of solar energy.

There's more. ProLogis has solar power projects installed or under construction on 27 other buildings in France, Germany, Japan, Spain and the United States. The installations cover more than 8.1 million square feet (755,000 square meters) of roof space and will produce 13.5 MWs of electricity.

ProLogis says that it has another 450 million square feet (42 million square meters) of roof space available for solar installations on industrial buildings in the United States, Europe and Asia.

So could this be the start of something really big?

That depends as much on regulatory and financial environments as it does on natural environments.

Oregon and the European nations where ProLogis is building solar projects have regulatory and financial frameworks that make these projects possible. For example, the Oregon Renewable Energy Act mandates that the largest utilities in the State must deliver 25 percent of their power from renewable sources by 2025. To meet the mandates, Oregon utilities will require about 1,500 megawatts of renewable energy by 2025.

Oregon also has a feed-in tariff that allows renewable energy to be sold back to the grid. In the ProLogis project, all the generated power will feed directly into PGE's electrical system to serve its customers.

Oregon's incentives for promoting renewable energy include an extensive menu of financial incentives including tax credits, production incentives, and loans for renewable energy, on top of federal incentives.

Oregon's regulatory structure and financial incentives have created new business opportunities for everyone involved in the ProLogis project. PGE formed a joint venture with US Bank to own and operate the system and to secure state and federal solar tax credits to help finance the project. In addition to receiving rent payments, ProLogis established its own Renewable Energy group to procure new business, manage installations and provide development management services.

ProLogis hopes this will turn into an extension of its global distribution and logistics business. "Our program is unique because we have dedicated resources across the globe," says Drew Torbin, vice president of renewable energy for ProLogis. He adds that ProLogis has "the construction management experience and local relationships to get solar installations on the fast-track to completion."

John Howley
Orlando, Florida

President Obama Orders 28% Reduction in Government Greenhouse Gas Emissions

President Obama announced yesterday that the Federal Government will reduce its greenhouse gas (GHG) emissions by 28 percent by 2020. Every federal agency has been ordered to send a sustainability plan to the White House by June explaining how they will meet this ambitious goal.

The announcement came after a review of GHG emissions by all federal agencies that began when the President signed Executive Order 13514 back in October 2009.

A 28% reduction in GHG emissions would have a tremendous impact on overall emissions in the US, because the federal government is the largest single energy user in the country. It would reduce Federal energy use by the equivalent of 646 trillion BTUs, equal to 205 million barrels of oil or taking 17 million cars of the road for one year. It is expected to save a cumulative total of $8 to $11 billion in avoided energy costs.

Key to the success of the GHG reduction program is measuring and verifying actual reductions in energy consumption and GHG emissions. The Executive Order requires agencies to measure greenhouse gas emissions and to maintain a greenhouse gas inventory -- in other words, their carbon footprint. White House Council on Environmental Quality Chairwoman Nancy Sutley emphasized this point, telling reporters, "You can't manage what you can't measure."

Compliance with the measurement and reporting requirements will have a significant impact on virtually every company that does business with the federal government. For example, Section 2(h) of the Executive Order directs each federal agency to ensure that 95% of new contracts for products and services (except weapon systems) are energy efficient (e.g., Energy Star), water efficient, bio-based, environmentally preferable, non-ozone depleting; contain recycled content; and are non-toxic or a low-toxic alternatives. It will be up to the supplier to prove that their products meet these criteria.

The General Services Administration (GSA) is required to give the White House additional procurement recommendations by April of this year. The GSA is considering:

• requiring vendors and contractors to register with a voluntary registry or organization for reporting greenhouse gas emissions;

• requiring contractors, as part of a new or revised registration under the Central Contractor Registration or other tracking system, to develop and make available its greenhouse gas inventory and description of efforts to mitigate greenhouse gas emissions;

• using Federal Government purchasing preferences or other incentives for products manufactured using processes that minimize greenhouse gas emissions; and

• other options for encouraging sustainable practices and reducing greenhouse gas emissions.

When President Obama first signed the Executive Order last year, the White House issued a press release announcing that it was intended to "leverage Federal purchasing power to promote environmentally-responsible products and technologies."

The message to private business is clear: If you want some of that purchasing power to come your way, then you better start measuring and documenting your carbon footprint, energy efficiency, and sustainable practices.

John Howley
Orlando, Florida

The Mouse That Roared: Micronesia Challenges a Czech Power Plant

World government conspiracy theorists must be foaming at the mouth.

The Federated States of Micronesia has demanded that the Czech Republic allow an international audit of a planned upgrade of the largest coal-fired power plant in the Czech Republic . . . and the Czech Republic acceded to the demand.

Micronesia made the demand pursuant to recently adopted European Union regulations allowing any nation in the world to challenge construction or upgrades of industrial sites emitting carbon dioxide. Under EU law, transboundary environmental impact assessments are part of normal procedure.

The essence of Micronesia's claim is that the upgraded Czech power plant should be required to use the best available technology for the project. The Czech plant is the 18th-largest CO2 emitter in Europe, emitting 40 times more CO2 annually than the whole of Micronesia.

Why is a nation on the other side of the world complaining about a coal-fired power plant in the Czech Republic? Micronesia is a chain of more than 600 islands in the west Pacific, and some of its land area has already been lost to rising ocean tides. It asserts that failure to control CO2 emissions in the Czech Republic will further contribute to the warming of the planet blamed for rising ocean water levels. It fears that climate change could also result in more intense and damaging storms.

“Climate change is real and it is happening on our shores. It’s a matter of survival for us,” Andrew Yatilman, the director of Micronesia’s Office of Environment and Emergency Management, told Reuters.

The Czech utility that owns the plant, CEZ AS, asserts that it is using the most advanced technologies and that the refurbished power plant will emit less CO2 than it does now. The plant's efficiency will increase from a current level of 32.8% to 39.06%, a spokeswoman for CEZ AS said.

NYC Mayor Bloomberg Promises to Clean Up Toxic Heating Oil

The Environmental Defense Fund (EDF) praised New York City Mayor Michael Bloomberg for addressing the issue of toxic heating oil in New York City during his State of the City speech this afternoon. The mayor pledged that his administration will be "greening the heating fuels used in our schools and big buildings."

The mayor's announcement follows an EDF report last month showing that just one percent of New York City's buildings -- those burning the dirtiest grades of heating oil -- produce more pollution than all the city's cars and trucks combined.

"Mayor Bloomberg's pledge to green the dirtiest types of heating oil is one of the biggest steps New York can take to reduce soot pollution linked to asthma and heart disease," said Isabelle Silverman, an attorney for Environmental Defense Fund. "The dirtiest grades of heating oil must be phased out by 2020. Ten years is a long enough timeframe for buildings to convert and get the best use out of the older burners that can't burn cleaner fuel right away."

More information on toxic heating oil is available on the EDF Website.

John Howley
Orlando, Florida