Hopes and dreams for the Department of Energy

The Senate last week unanimously confirmed MIT physicist Ernest Moniz as the new Secretary of Energy. As an MIT alumnus, I’m proud — but as an organizational scholar and (part-time) energy economist, I'm somewhat apprehensive.

A cabinet secretary is not just a domain expert, but a politician and an administrator. Sometimes capable politicians with domain expertise get appointed to the cabinet (John Kerry, Donald Rumsfeld) and other times they are mediocre politicians with little particular expertise (typically at Agriculture, Labor or Transportation).

College professors tend to be long on domain expertise and short on political or administrative abilities. Academic administrative experience tends to be a poor predictor of success in managing a federal bureaucracy. Harold Brown left the presidency of Caltech to become Jimmy Carter’s defense secretary, and probably was more helped by his Johnson-era DoD experience than anything he learned at Caltech.

Moniz is the second academic physicist appointed by the president to a job that once seemed crucial to his intended legacy. The first, Nobelist Steven Chu of UC Berkeley, was appointed at a time of seemingly unlimited resources to spend on research and fledgling cleantech companies.

Secretary Chu was obviously very smart, and his passion was in funding research, which he was able to do. However the climate changed after the Democrats lost the House in 2010, and after the bankruptcy of five DoE-funded startups (A123, Abound Solar, Beacon Power, Ener1 and Solyndra). At that point, any secretary trying to implement the president’s policy goals would be facing strong headwinds.

Even so, I’d be hard pressed to call Chu a success as an administrator and leader. Apparently I was not the only one who was unimpressed. An energy industry publication, Power magazine, was harsh in its assessment:

I believe it is fair to say that Chu was a failure at DOE, but nobody noticed. That’s not necessarily a harsh indictment. There have been, in my estimation, no successes at DOE. And that’s because it is an impossible job, created under circumstances that dooms the incumbent to failure. The Department of Energy is, to be honest, a fraudulent entity. It has almost nothing to do with energy, although Chu and his boss, President Obama, tried to transform it into an institution that somehow has relevance to the way Americans make, use, and pay for energy. Both failed…

As the National Journal reported upon Chu’s resignation, his lack of political skills were a mixed blessing: at first Congress enjoyed dealing with a non-politician, but when the going got tough, Chu was hobbled in his ability to represent (or lead) his agency.

I know little about Moniz other than his online biography. He was the founder of the greatly respected MIT Energy Initiative, which includes both science and also MIT’s decades-long experience with science policy. Before that, he was an undersecretary in Clinton’s DoE. His official home page lists a 2002 article on energy policy from Physics Today. Other than its embrace of “all of the above,” it’s about what you’d expect given his resume.

In the end, however, I think the past decade demonstrates that the emphasis on physics in energy policy is vastly overrated. Anyone with a college degree (except maybe a lawyer) can be taught about the four laws of thermodynamics and how to break down the 100 quads of energy produced and used in the U.S. every year.

However, energy is not a scientific problem, and only somewhat a business and systems problem. Fundamentally, it’s an economic problem: we have many sources of energy and for many uses (e.g. grid-connected electricity) the sources are completely fungible. The challenge facing the DoE and the government is simple: how do we most cost-effectively deliver the energy needed by American society to enable economic growth? Yes, R&D for new technologies will change that picture over time, but even with cool new technologies, the final resolution is an economic — what can we afford — rather than technical one.

Are biofuels doomed without subsidies?

A molecular biologist (turned biofuels entrepreneur) made a stark prediction Tuesday:

Famed genomics researcher J. Craig Venter, who is working to develop biofuels from photosynthetic algae, acknowledged this week that alternate fuels are “dead” unless the federal government mandates their use with a carbon policy.

Venter’s strongly worded statement came Tuesday night at the annual Stem Cell Meeting on the Mesa, after he was asked when synthetic biology might have a meaningful impact on the country’s energy production.

Without strong government intervention, Venter said, that day will never come. He works on biofuels, human health and other issues at Synthetic Genomics, the La Jolla company he co-founded. It partnered with ExxonMobil in 2009 to develop algae biofuels.

“It doesn’t matter what the scientific breakthroughs are, there’s no way to ever beat oil,” Venter said. “In fact, oil’s not even an issue right now because of all the new natural gas discoveries.

“So there’s no way economically for a new fuel made out of renewables to ever be able to compete with something an oil company can do, without sharp federal regulations and a sharp carbon policy that says, you can’t keep just taking carbon out of the ground, burning it and putting it in the atmosphere. Until we do that, there is no biofuel industry.”

Venter is no stranger to big bets (or government intervention). His Celera Genomics raced the NIH (and its Human Genome Project) to sequence the first human genome, which cost several billion dollars.

Now Venter is hoping for government intervention — implying a carbon tax on natural gas and other fossil fuels — to raise their cost enough to support synthetic biofuels.

However, the story by life sciences reporter Bradley Fikes suggests that the key problem is not subsidies (or taxes on competing technologies) — in part because taxes on oil would reduce demand and thus prices. Fikes quoted Berkeley energy economist Severin Borenstein:

Regulatory mandates to compel adoption of biofuels probably wouldn’t work, Borenstein said.

“It may work for the United States, and even that seems a political stretch, but it doesn’t really matter if it doesn’t work in the developing world,” he said. “The idea that the developing world is going to forgo cheap gasoline to use much more expensive biofuels, I think is fairly implausible for the near term.”

Science may provide answers in the long term, he said.

“I’ve come around to the view that we need to put a lot more into research and development and pursue every possibility, whether it’s biofuels or electric vehicles, in order to find something that could be cost-competitive,” Borenstein said.

The latter point suggests one of the major disconnects in the biofuels world, between the energy industry veterans who work in the market and the university molecular biologists who are used to NIH and NSF funding all their research. Is it time for biofuels to go back to being a series of university science experiments rather than being the basis of publicly-traded high-tech startups?

Candidates duck energy debate

In anticipation of the first presidential debate, I was interviewed by a representative of LA’s second largest newspaper group. Here’s how it appeared in the front page of the Los Angeles Daily News:

From oil refineries in the South Bay to millions of motorists and other consumers, federal energy policy is critical to this region.

If President Obama truly favors a so-called "all-of-the-above energy strategy" that supports a mix of traditional and newer energy sources, some asked why do his policies restrict availability of coal, oil and even natural gas?

"I'm not sure what Obama could tell me to convince me that he sees a future role for fossil fuels," said Joel West, a professor of innovation and entrepreneurship at the Keck Graduate Institute of Applied Life Sciences in Claremont. "I'd more want to put him on record in supporting these things so later on he could be held accountable for that."

By contrast, Romney has emphasized traditional energy sources by calling for more oil drilling and fewer industry regulations in general.

"I'd like Romney to recognize that there are certain cases in which renewable energy can be successful today or can soon be successful with a little bit of government support," West said. "Because otherwise he risks being perceived as another stooge for the oil companies."

Due to a work commitment, I missed the debate but was later able to review the transcript. It appears that my worst fears were realized.

This is what Obama said:

I think it's important for us to develop new sources of energy here in America,
…
On energy, Governor Romney and I, we both agree that we've got to boost American energy production, and oil and natural gas production are higher than they've been in years. But I also believe that we've got to look at the energy sources of the future, like wind and solar and biofuels, and make those investments.

And here is what Romney said:

Energy is critical, and the president pointed out correctly that production of oil and gas in the U.S. is up. But not due to his policies. In spite of his policies.

Mr. President, all of the increase in natural gas and oil has happened on private land, not on government land. On government land, your administration has cut the number of permits and licenses in half. If I'm president, I'll double them, and also get the -- the oil from offshore and Alaska. And I'll bring that pipeline in from Canada.

And, by the way, I like coal. I'm going to make sure we can continue to burn clean coal. People in the coal industry feel like it's getting crushed by your policies. I want to get America and North America energy independent so we can create those jobs.

And then the candidates had this exchange:

ROMNEY: [T]he Department of Energy has said the tax break for oil companies is $2.8 billion a year. And it's actually an accounting treatment, as you know, that's been in place for a hundred years. Now ...

OBAMA: It's time to end it.

ROMNEY: And in one year, you provided $90 billion in breaks to the green energy world.

Now, I like green energy as well, but that's about 50 years' worth of what oil and gas receives. And you say Exxon and Mobil. Actually, this $2.8 billion goes largely to small companies, to drilling operators and so forth.

But, you know, if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive you get that rate down to 25 percent.

But don't forget, you put $90 billion, like 50 years' worth of breaks, into -- into solar and wind, to Solyndra and Fisker and Tester and Ener1. I mean, I had a friend who said you don't just pick the winners and losers, you pick the losers, all right? So this -- this is not -- this is not the kind of policy you want to have if you want to get America energy secure.

So,as predicted, Obama paid lip service to all of the above (his official energy policy) but could find nothing good to say about fossil fuels while pushing solar and wind, while Romney couldn’t find anything good to say about solar or wind while pushing fossil fuels.

Still, it was disappointing that the candidates were talking past each other, with neither willing to engage the center. The president has a consistent track record — compared to some other Democrats (e.g. Bill Clinton, let alone Joe Manchin) he’s not really interested in fossil fuels. Similarly, we would expect a Bush or a Cheney to do the oil companies’ bidding, but it seems surprising that Romney, a former blue-state governor, couldn’t find a more middle-of-the-road position on energy policy.

Solving the EV chicken & egg problem

As part of a settlement over the 2001 California energy crisis, NRG Energy promised to spend $100m to build EV charging stations across the state. On Friday a rival charging station company sued to block the settlement.

The settlement itself was fraught with ironies, since many saw NRG as the next most “evil” big business (after Enron) in the whole crisis. The settlement was trumpeted March 23 by Governor Jerry Brown, while the brownouts and blackouts brought the forced retirement (through recall) of his protegé, Gray Davis, who’d been chief of state (and a stabilizing influence) on Brown during his infamous “Governor Moonbeam” days.

According to the GTM coverage of the deal, NRG’s $100m would fund “a statewide infrastructure of at least 200 public fast-charging stations and another 10,000 plug-in units at 1,000 locations.”

There are other aspects of the plan that belong in la-la land, such as the Governor’s vision that (again according to GTM) “California’s personal transportation is to be essentially all-ZEV by 2050.” Fortunately for the state (and the governor), Gov. Moonbeam will be at least 20 years in the ground at that point, with his fanciful promise long forgotten. (For a whole range of reasons ± starting with batteries — electric vehicles will remain a niche product through the first half of this century.)

Still, EVs face a crucial chicken-and-egg problem: they will only get limited adoption without charging stations, and nobody wants to spend big bucks to install charging stations before there is an installed base of EVs. The governor’s settlement of his predecessor’s screw-up allows him to take credit for solving this (very real) “green” problem without spending any taxpayer money (which makes it a rare opportunity indeed). Or, as Michael Peevey, the head of his Public Utilities Commission, noted in the official press release

The settlement will launch a virtuous circle in which ever more Californians will feel comfortable driving EVs, and growing EV sales will in turn attract ever more investment in charging infrastructure to our state.

On Friday, San Francisco-based Ecotality sued the state over the governor’s deal with its competitors. As the Merc reported

Ecotality argues that the agreement "punishes" NRG for price gouging during the energy crisis by allowing it to invest money into its own business.

"Such 'punishment' is equivalent to a motorist settling his speeding citation by simply being required to buy a faster car, subsidized by the public," reads the lawsuit, filed Friday in the 1st District Court of Appeal in San Francisco.

I loathe crony capitalism as much as anyone, but the Ecotality suit seems to be minimizing the very real risk that NRG is running of owning a fleet of white elephants. (If the suit says California should take its lawsuit settlements in cash rather than business investment, that seems like a more promising argument to make.)

Not everyone share’s Ecotality’s pessimism — or fear — about the impact of NRG’s buildout. As the other Bay Area newspaper, the Chronicle reported:

Jay Friedland, legislative director of an electric car advocacy group, said California's market for charging equipment should grow big enough, fast enough for multiple companies to thrive.

"We think this market is going to expand out pretty rapidly," said Friedland, with Plug In America. "And NRG could be a viable player, just like Ecotality and Coulomb could be."

Ecotality is right that NRG will have a leg up if this turns out to be a good business investment, but it’s lying to claim this will create a “monopoly.” (Electric charging stations are no more monopolistic than gas stations — the national market will support at least 3 competitors.)

Yes California is a desirable market to dominate, but if Ecotality wants to build its own stations, it is free (in a free market) to do so. It just needs to find a deep-pocket source of funding — a problem it had before March 23, and a problem that is solvable by selling itself (earlier, at a low valuation) to a major energy company like Edison, Exelon or PG&E.

The cost of German solar policies

Bjørn Lomborg is a controversial PhD political scientist who has questioned the cost effectiveness of various efforts to mitigate global warming.

His Feb. 16 syndicated commentary discusses the implications of Germany’s plans to drastically scale back its feed-in-tariff:

Germany’s Sunshine Daydream
By Bjørn Lomborg

Germany once prided itself on being the “photovoltaic world champion”, doling out generous subsidies – totaling more than $130 billion, according to research from Germany’s Ruhr University – to citizens to invest in solar energy. But now the German government is vowing to cut the subsidies sooner than planned, and to phase out support over the next five years. What went wrong?

There is a fundamental problem with subsidizing inefficient green technology: it is affordable only if it is done in tiny, tokenistic amounts. Using the government’s generous subsidies, Germans installed 7.5 gigawatts of photovoltaic (PV) capacity last year, more than double what the government had deemed “acceptable.” It is estimated that this increase alone will lead to a $260 hike in the average consumer’s annual power bill.
…
On short, overcast winter days, Germany’s 1.1 million solar-power systems can generate no electricity at all. The country is then forced to import considerable amounts of electricity from nuclear power plants in France and the Czech Republic. When the sun failed to shine last winter, one emergency back-up plan powered up an Austrian oil-fired plant to fill the supply gap.

Indeed, despite the massive investment, solar power accounts for only about 0.3% of Germany’s total energy. This is one of the key reasons why Germans now pay the second-highest price for electricity in the developed world (exceeded only by Denmark, which aims to be the “world wind-energy champion”). Germans pay three times more than their American counterpart.
…
Using solar, Germany is paying about $1,000 per ton of CO2 reduced. The current CO2 price in Europe is $8. Germany could have cut 131 times as much CO2 for the same price. Instead, the Germans are wasting more than 99 cents of every euro that they plow into solar panels.

It gets worse: because Germany is part of the European Union Emissions Trading System, the actual effect of extra solar panels in Germany leads to no CO2 reductions, because total emissions are already capped. Instead, the Germans simply allow other parts of the EU to emit more CO2. Germany’s solar panels have only made it cheaper for Portugal or Greece to use coal.
…
In the meantime, Germans have paid about $130 billion for a climate-change policy that has no impact on global warming. They have subsidized Chinese jobs and other European countries’ reliance on dirty energy sources. And they have needlessly burdened their economy. As even many German officials would probably attest, governments elsewhere cannot afford to repeat the same mistake.

Who lost Solyndra?

For the second time this summer, I found myself watching a C-SPAN congressional hearing on a major issue of economic policy. This time, the hearing was about the $535 million Federally guaranteed-loan to the now-bankrupt Solyndra, this time before a subcommittee of the House Energy and Commerce Committee.

The hearing was called by the (obviously hostile) GOP majority to compel testimony by two Obama administration representatives: Jonathan Silver (head of the loan guarantee program for the Department of Energy) and Jeffrey Zients, acting director of the Office of Management and Budget.

Silver, a former McKinsey consultant and private equity manager, didn't want to be bossed around by mere representatives with 1/10th or 1/100th of his net worth, but eventually settled down. Zients — with far narrower legal exposure — was much more cooperative and even a little more sympathetic to fiduciary concerns.

Some aspects of what happened were clear and undisputed:

• January 2009. The final decision of the DOE (under Bush) is to reject the loan without prejudice
• February 2009. After the stimulus bill passed, Obama's new DOE secretary wants to push through funding
• March 2099. The DOE offer a conditional loan commitment to Solyndra
• September 2009. The DOE approves the loan to Solyndra
• September 4, 2009 — Vice President Biden announces approval of the $535 million loan guarantee to allow Solyndra to build Fab 2.
• August 31, 2011: Solyndra declares bankruptcy, laying off 1100 employees

Before the hearing, the Washington Post published leaked e-mails that the approval was rushed so that Biden could make the announcement, although the Democrat majority argued it was quoted out of context. In one memo, a government analysts said the economic models forecast that Solyndra would go broke without additional funding.

The level of questioning by both sides was disappointing. Perhaps it is because both sides are populated lawyers who (mostly) are clueless about economics. Perhaps it’s because I know something about the industry and have been to Fab 2.

The arguments boiled town to a handful of issues, with the two sides were broken records. Republicans were trying to find out who lost taxpayer money and fight against “picking winners and losers.” Democrats (including Silver) tried to argue it was equally Bush's fault (even though Bush never approved the guarantee) and were obsessed with national "competitiveness" of keeping up with Chinese subisides for their solar companies.

In the most quoted statistics of the day, Silver stated that US global market share in PV fell from 40% in 1995 to 6% today (2010) versus 6% for China in 2005 and 54% today.

The two sides argued about whether the government renegotiated the terms of the loan (in violation of Federal law) or allowed Solyndra a workout. (Either way, the government’s interest became subordinated to a new round of private lenders — making it unlikely that the US will see the 20¢/dollar that it would have recieved with a liquidation).

While Solyndra was burning cash at the time of the loan guarantee, Silver (correctly) noted that this was not atypical for a high-growth company. (The point was echoed by far less knowledgeable allies on the committee). But as one of the representatives pointed out, the appropriate risk profile for private equity is different than that for taxpayer dollars.

Both Obama’s friends and foes see this an increasingly embarrassing scandal for the president. Republican moderate (and former CBS news producer) Peggy Noonan wrote

[One thing I’ve admired about Obama] has been a relative absence of deep political scandal. It's been good not to have a Watergate, a Whitewater. But there are signs this week that could change with the Solyndra loan scandal. The White House apparently tried to rush almost half a billion dollars of taxpayer loans to a solar panel manufacturer that later went belly up and took a thousand jobs with it. The reason for the rush: The awarding of the loan would make good PR. This looks bad, and if it's true, heads should quickly roll. It's one thing to be branded as "out of your depth but not corrupt," quite another when it's "out of your depth and corrupt." That is much worse.

Meanwhile, on Thursday night Jon Stewart of Comedy Central told Obama’s enemies “That Custom-Tailored Obama Scandal You Ordered Is Finally Here.”

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As ABC quoted Stewart:

“You know, stories about incompetence in government are only going to get you so far though. For this to truly become weapons-grade political fodder, you’re going to need incompetence with more than just a whiff of sinister cronyism,” Stewart said.

If this week’s hearing is any indication, we are unlikely to have any substantive discussion of the issues raised by the Solyndra default. Unlike Watergate, there was no bipartisan approach akin to “what did he know and when did he know it.”

The debate is a crucial one for the future of the American renewable energy industry. One side asks: can (and should) the government pick winners among American firms? The other asks: can the US industry survive without cheap government financing?

An end to ethanol pandering?

Subsidies for corn-based ethanol have for years been the third rail of politics in Iowa, home of the first presidential caucus. Just like social security in Florida, even suggesting that subsidies be cut has been the kiss of death for would-be presidential hopefuls. The Iowa Corn Promotion Board even has its own pro-Ethanol website.

Thus, it was very encouraging to see this article in Friday’s dead tree edition of the LA Times:

GOP presidential hopefuls take dim view of ethanol subsidies
Most of the candidates want to do away with the government subsidies, which cost $6 billion annually. The once-unimaginable message has support even in Iowa.

By Seema Mehta, Los Angeles Times

For decades, nearly every candidate who hoped to win the presidency has visited this state to pledge their allegiance to King Corn and to the government subsidies that have propped up its price and increased demand for it.

But for the first time, the GOP field is dominated by candidates who want to do away with such kickbacks. One even used his formal campaign kickoff in front of the gold-domed statehouse here to announce his opposition to such subsidies.

The reporter had chapter and verse about how the Republican presidential candidates were opposed to adamantly opposed to ongoing subsidies for corn-based ethanol. The reporter speculated that this might have to do with the importance of fiscal conservatism in the GOP primary this year, or even a decrease in the population of rural voters (who would presumably benefit from the subsidies).

The timing of the report might be a bit embarrassing to the NY Times, which in an unsigned editorial Monday called on Republicans to cut a $100 billion, 10-year ethanol subsidy. The NYT said that ethanol subsidies are being protected by House Republicans, even though (as it noted) the Senate has been unable to institute a reform that supposedly has bipartisan support.

I suspect what is protecting the ethanol subsidy is that the farm states are swing states in 2012 both for the presidency and control of the Senate. I suspect neither side wants to risk losing any votes in these states — since those who lose a subsidy are more likely to get upset than the general voting populace will be happy.

So despite the support of the GOP field and at least one former president, the corn ethanol subsidy is still with us — at least a little longer.

Livin' On A Prayer

While I was out of town at a conference, one of the big RE stories in California was the 2010 year end report of the California Solar Initiative. California added 194 MW of solar generating capacity in 2010 (vs. 132 MW the previous year).

As Dana Hull of the Merc explained it (with my commentary inserted inline)

In January 2007, California launched an unprecedented $3.3 billion effort to install 3,000 megawatts of new solar over the next decade and transform the market for solar energy by reducing the cost of solar-generating equipment.
…
The California Solar Initiative's road map calls for 1,750 new megawatts of solar power to be installed on residential and commercial roofs in the state by 2016. [Presumably the other 1.25 GW is utility scale. But does state really require that they be on rooftops rather than (say) a carport in a high school parking lot?]

Through the end of the first quarter of 2011, California had an estimated 924 megawatts of rooftop solar installed at nearly 95,000 sites -- putting it more than halfway toward meeting the solar initiative's goal.

Overall, the report left me puzzled as to the efficacy (or expected outcomes) of the CSI program. If in 4.25 years we’re about halfway to the residential/commercial goals — but incentives are almost entirely depleted — where will the remaining adoption come from?

This called to mind the refrain of the Bon Jovi hit that should be familiar to anyone who’s been to a teen dance in the past 25 years:

Whoa, we’re halfway there
Whoa-oh, livin’ on a prayer
Take my hand, we’ll make it I swear
Whoa-oh, livin’ on a prayer

I don’t be able to predict the future, but I can see two possible scenarios for how the remaining 5+ years of CSI will play out.

One is that the price of the equipment is close enough to grid parity that the additional 800 MW will be installed over the remaining years without resort to subsidies (despite calls for California to institute a feed-in-tariff).

The other possibility is that with subsidies gone, adoption will plummet. In that case, the people hoping for success without money behind it inhaled a few times too many when attending rock concerts.

What counts as renewable energy?

While working on a paper, I was looking through my notes about eligibility for California’s Renewable Portfolio Standard.

The California PUC has an interesting and comprehensive taxonomy of what counts as renewable energy:

• Biomass - any organic material not derived from fossil fuels, including agricultural crops, agricultural wastes and residues, waste pallets, crates, dunnage, manufacturing, and construction wood wastes, landscape and right-of-way tree trimmings, mill residues that result from milling lumber, rangeland maintenance residues, sludge derived from organic matter, and wood and wood waste from timbering operations.
• Biodiesel - Biodiesel is a type of biofuel made by combining animal fat or vegetable oil (such as soybean oil or recycled restaurant grease) with alcohol and can be directly substituted for diesel. (Source: MTC/link)
• Fuel cells using renewable fuels – electricity produced from the creation and breakdown of hydrogen. If the hydrogen source is a renewable fuel, this technology is RPS eligible.
• Digester gas - gas from the anaerobic digestion of organic wastes.
• Geothermal - natural heat from within the earth, captured for production of electric power, space heating, or industrial steam.
• Landfill gas - gas produced by the breakdown of organic matter in a landfill (composed primarily of methane and carbon dioxide), or the technology that uses this gas to produce power.
• Municipal solid waste - solid waste as defined in Public Resources Code Section 40191.
• Ocean wave - an experimental technology that uses ocean waves to produce electricity.
• Ocean thermal – an experimental technology that uses the temperature differences between deep and surface ocean water to produce electricity.
• Tidal current - energy obtained by using the motion of the tides to run water turbines that drive electric generators.
• Solar Photovoltaic - a technology that uses a semiconductor to convert sunlight directly into electricity.
• Small hydroelectric (30 megawatts or less) - a facility employing one or more hydroelectric turbine generators, the sum capacity of which does not exceed 30 megawatts.
• Solar thermal – Use of concentrated sunlight to produce heat that powers an electric generator.
• Wind - energy from wind converted into mechanical energy and then electricity.

Does anyone notice what’s missing? (Hint: it’s only the largest source of renewable energy in California, the US and the world.)

A call for government inaction

A recent S&P report suggests that the US electric utility industry would be better off if the US government picked consistent inaction over inconsistent intervention in the energy sector.

The report, “U.S. Electric Utilities Seek Clear Direction From Washington On Energy Policy,” suggests major uncertainty for US utilities until more coherence is achieved. (I haven’t seen the report because it seems to be only for RatingsDirect subscribers unless you want to pay $500.)

Energy policy is of course one of the messiest examples of government intervention in the entire country, with national, state and municipal policies that include direct regulation, taxation, subsidies and land use. A consistent policy is essential for industry to make long-term capital investments, whether it’s a 10 year search for oil or gas, a 20 year lifespan for solar panels or a 30-40 year lifespan for a power plant.

A posting by Mimi Barker on RiskCenter summarizes the problem:

Standard & Poor's Ratings Services believes that U.S. electric utilities and their bondholders would benefit from a clearly articulated, comprehensive, and consistent U.S. energy policy.
…
Any energy policy evolves from a complex and intertwined system of legislative bodies, executive departments, and courts, not all of which are federal, that influences how the private sector develops energy resources and allocates capital. So when we say energy policy, perhaps what we mean is political leadership that coalesces and shapes public opinion in a way that supports long-term investment in energy assets.

"In some ways, overall regulatory risk in the sector has moved slightly from the states to the national stage as big-picture issues--with big price tags--like climate change, economic stimulus, and the reliability of the transmission grid threaten to overtake the mundane matters of rate cases and earned returns as the key factors supporting credit ratings," said Standard & Poor's credit analyst Todd Shipman.

Sheila McNulty on the FT offers another quote from the report:

Making resource decisions and committing a utility’s balance sheet to support those decisions has never been more complicated or littered with more potential pitfalls, and diminishing credit quality is a result.

And, as she notes, industry is starting to feel the confusion.

John Rowe, chairman and chief executive of Exelon, the power producer, spoke about this issue in a recent speech when he said US energy policy has been driven by a mess of mandates and power subsidies for nuclear, cleaner coal, gas, wind solar and other renewables – a constant urge to pick winners and losers. In his words: “Congress needs to slow down. We are already doing enough to give all of these things a chance.”

We have a fundamental collision between the political world — where the goal is a 15 second soundbite on tonight’s new and long term is an election 2 years away — and the long-term time horizons of all companies in the energy sector.

In the US, we’ve come to take a steady reliable supply of electricity as a given, something that distinguishes us from, say, rural India. The mismanagement of California’s electricity deregulation shows us that policy that can make the system less reliable and more expensive. And the recent contraction of Japanese industrial production due to electricity shortages shows us the broader economic impact of an unreliable energy infrastructure.

It would be nice if that would be enough to make the politicians pick stable rules and then butt out, but of course that’s not going to happen. This is one of those rare cases where I wish we had a Lee Kuan Yew.

A testament to the power of bureaucracy

While many Californians seek to promote green power, there’s an even strong and more renewable form of power: government bureaucracy.

On behalf of SolarTech, the PV trade association, our SJSU business honors students have completed one study on overcoming permitting obstacles for residential solar in the state, and are about to finish another.

Meanwhile, the Sacramento Bee shifts the problem from an insider’s concern to a broader political audience in an article entitled “Permit Process Clouds Solar Energy Project.” It notes that politicians have talked about streamlining permitting for utility-scale solar, but not residential solar. This oversight calls into question the goal of a “Million Solar Roofs” by 2018.

A few paragraphs capture the heart of the problem:

Solar providers often complain about having to wait hours in line to submit permits and weeks to get final approval.

The result: Installing rooftop solar panels often takes two to three months from start to finish. In contrast, installing a central air conditioning system, which requires about the same amount of work, can take two weeks, Hahner said.

PV may have some safety issues. The industry clearly needs a technical solution — say UL certification of computer-controlled panel/inverters — that would make connecting a solar panel as foolproof as plugging in a refrigerator or room-sized air conditioner.

Even more crazy is when these regulations apply to solar hot water, which as my colleague Jim Mokri pointed out, is not high technology but 19th century plumbing.

The Bee offers this vignette:

Ed Murray, president of Rancho Cordova-based Aztec Solar Inc., said he ran into a number of hassles trying to get a permit from San Joaquin County for a simple $5,000 solar water heater.

Usually these kinds of permit applications are handled over the counter, but this one turned into a drawn-out process. Murray said he and his employees had to drive to the unincorporated Stockton area three times as part of the review.

"The customer was about to pull out of the project because he was so frustrated that it was taking so long," said Murray, who noted that the permit was approved Thursday.

This is one of the main reasons that I see California’s RE policy as mereley Grand Kabuki by publicity-seeking politicians, rather than a serious attempt to reduce carbon emissions or the use of fossil fuels.

Politicians can’t change the cost of silicon, the efficiency of CIGS, the cost of capital or the scale efficiencies of the big five Chinese manufacturers. They can, however, change regulations — if they really want to. But obviously they don’t want to.

A new class of carpool cheaters

The Merc reports that the Prius and other California hybrid owners are finally losing their carpool cheating stickers. Come July 1, the 85,000 privileged owners of a yellow sticker will no longer be allowed in the carpool lane.

Instead, the $1,500 subsidy to affluent buyers of expensive high-mileage cars will pass to those who buy an EV such as the Nissan Leaf. (Chevy Volt owners need not apply). We are repeating the mistake again, just with another class of privileged few.

Transportation writer Gary Richards found at least one honest Prius owner who recognizes the mistake:

“I am happy to see the carpool access experiment come to a much-deserved end,” said Ted Coopman of Santa Cruz, who never applied for stickers for his 2005 Prius. “While I support inducements for buying hybrids, granting carpool access was a major mistake. Hybrids don't get people off the road, and reducing traffic is the primary reason for carpool lanes.”

If gasoline prices remain high, California is going to need the lanes for actual carpoolers. So lets hope that the state doesn’t fill those lanes with 85,000 single-occupant EV owners.

RE: viable niche vs. subsidized mass market?

In Wednesday’s WSJ, engineering consultant Josh Prueher argues that the way to promote renewable energy is to encourage adoption in self-funding niches rather than proffering government subsidies to help spur adoption in mass markets.

Prueher points to the inherent problem with any subsidies:

In the renewable energy industry, subsidies typically involve federal and state governments imposing a small tax or an electricity rate hike on each one of us. The government then awards the proceeds to a few winners that, in the best case, have demonstrated the technical and business potential to grow into competitive companies. In the worst case, they've demonstrated little more than superior lobbying capability. In all cases, subsidies deny the market its proper role of directing capital. It's important to note that the traditional energy industry also receives billions of dollars in government subsidies each year; perhaps it's more effectively hidden from public scrutiny.

The PV entrepreneurs and managers say that subsidies are a necessary evil in the short term but they look forward to when they are no longer necessary. Some seem more sincere than others.

Instead of these subsidies, Prueher notes that we already have a fully functioning unsubsidized market where RE has a cost advantage: the off-grid market. This market — whether rural US or military outposts — is typically served by diesel generators.

The logistics cost of supplying fuel to these generators — whether on an offshore platform or the military front lines — are “staggering”:

For instance, unlike you and me, who pay on average from 3 cents to 16 cents for a kilowatt hour of electricity from the grid, these large consumers pay between 50 cents and $2.

From this, we already know what an unsubsidized RE market looks like:

Those high costs are sending a strong, clear price signal to the energy market to provide cheaper and more reliable sources of electricity and fuel. Namely, we need to develop renewables, energy storage and energy-efficient technologies that do not require expensive logistical support. While the off-grid market is small relative to the on-grid energy behemoth, it is of sufficient size and depth to justify strong competition, private investment and product development—without subsidy.

While he’s right in principle, in practice I don’t see how we get from here to there. The venture-funded SV PV companies and the Chinese-funded Big Five are addicted to purchase subsidies, whether as taxpayer rebates or (as in feed-in tariffs or RPS standards) mandated wealth transfers from electricity users.

If I were doing a bootstrap startup, I’d make a self-funded startup that targeted a cost-effective niche. But the nature of venture-funded startups that their founders/owners have to bet it all on double-zero — to swing for the fences — because it’s better (at least for venture investors) to have a small chance of huge success rather than a good chance of a modest success.

California PV: at what price?

With Gov. Brown’s assent, the California legislature has formalized the 33% in 2020 Renewable Portfolio Standard imposed by Gov. Schwarzenegger. Even without a feed-in tariff, the state is marching towards having more RE usage than the rest of the US or Western Europe.

A quick glance at the California Solar Initiative data — back when the CSI incentives were relevant — shows that residential solar is relatively inconsequential in the state’s RE energy footprint. The real action is on large commercial and utility scale installations.

Last year saw a huge rush of utility scale plants being started in the Mojave before before federal subsidies expired.

However, energy writer Richard Nemec wonders whether these plants ever made economic sense. Earlier this week he wrote in the Los Angeles Daily News:

nine projects were given the green light, collectively totaling enough megawatts to equal about two San Onofre nuclear plants. Three months into 2011, however, two of the largest projects slated for the Southern California desert regions have been sold, utility contracts canceled and their futures put in doubt.

To date, three of the major projects are under construction, but a lot of that work is preliminary, awaiting more complete financial backing.

In addition to problems completing projects, there is also the price that the utilities (and thus businesses and consumers) will be paying for their power:

The state regulatory commission's consumer unit report concluded that approved solar contracts for the state's major private-sector utilities have collectively been about $100 million overpriced. This sort of largess does no one any good.

One reason for paying inflated prices is the RPS standard. Another is the expiring federal subsidies which caused firms to rush deals to regulatory approval before key issues were resolved.

This is perhaps the Achilles heel of utility scale: the small-numbers irrationality. When you have nine deals, it takes only a few bad decisions to have one-third or half of the projects collapse.

For residential and small commercial, some owners may behave irrationally, but in the long run we’ll expect buyers to act in their own self-interest: if the systems make sense, people will buy them and if they don’t, they won’t. (Yes, some consumers will pay a green premium to save the planet, but most probably won’t.)

The CPUC report looked at 184 projects — you would think enough to see a pattern in the proposals, and perhaps for the industry to figure out what’s feasible and not feasible. But I think the combination of RPS and federal subsidy deadlines induced an irrationality into the process.

The legislature (and the new governor) has made it clear that it wants more RE power used in the state. It remains to be seen whether they will pay attention to the inherent flaws in their mandated approach — rushing adoption ahead of grid parity — or will just ignore the wasted millions (if not billions) because it doesn’t show up as a tax that they can be blamed for.

A smarter way to deploy smart meters

It’s no secret that PG&E has created an enormous controversy in California — encouraged by the PUC — with its aggressive push to force smartmeters on its customers. The newspapers and TVs have run story after story on the controversy, there have been hearings and a state investigation, and still cities are “banning” smart meters on a variety of grounds.

The imposition of smartmeters is the ultimate manifestation of a technocratic view of energy management, fueled by $3 billion in stimulus money. On the one hand, smart meters allow demand management and time-of-day metering, and are seen by many as the lynchpin of $200 billion in worldwide investment on bringing the electric distribution grid from the 19th century into the 21st.

On the other hand, customers are seeing their bills increase — both to pay for the meters and for time-of-day use — without any increase in the available energy. The meters are being fought on the left over price increases and on the right over the invasion of privacy.

Now a Texas utility wants to try a different approach. As VentureBeat reports:

It’s interesting to see that one pilot happening in the U.S. is coming at the game with a new approach: Focus on the making the consumer happy about the smart grid. In particular, it wants to demonstrate that the smart grid can improve the quality of consumers’ lives, much in the same way apps add value to the lives of iPhone and smart phone users.

Brewster McCracken, director of the Pecan Street Project in Austin, Tex., says its smart grid demonstration project is unlike any others in that is most concerned with the value to the customer, and not the utility. Part of the project’s goal will be to study how — and whether — the smart grid can provide value to the customer.

How about that? A public utility working to do something that benefits customers? (I’m guessing they came up with this on their own, without any help from the Public Utility Commission of Texas.)

The idea of being customer-driven is not something that comes naturally to big monopolies, particularly utility companies who get their revenues by spending money by lobbying for rate increases, then increase their rate base that is multiplied by guaranteed rate of return. (NB: This culture proved to be a disaster for the phone companies during the 1980s and 1990s when they actually had to compete for customers.)

This also applies to the big suppliers to the power companies, who wouldn’t know a consumer if one bit them on the backside. Even GE — with more than $90 million spent on its Ecomagination consumer PR blitz — isn’t really interested in listening to customers, but instead wiring its meters into local smart grid procurements.

With their assumption of all-knowing, all-seeing command-and-control planning, the top-down government bureaucracies are even worse than the top-down ones at the utilities or the industrial manufacturers. If you want to see Soviet-style central planning in North America 20 years after the collapse of the Soviet Union, this is where you’ll find it.

So the Austin public-private collaboration and its leaders should be applauded for their initiative. The old “small is beautiful” Jerry Brown would have loved and trumpeted a decentralized initiative like this, but I guess the state budget quagmire and its $25 billion deficit are occupying 110% of his attention right now.

Thank you, Mr. President

The retired POTUS on Thursday voiced his own concerns about the effect corn-based ethanol is having on food prices and political stability in the developing world. As the AP reported:

WASHINGTON (AP) — Former President Bill Clinton on Thursday warned farmers that using too much corn for ethanol fuel could lead to higher food prices and riots in poor countries.
…
He said the United States needs to look at the long term, global effects of its farm policy.

“I think the best thing to say is we have to become energy independent, but we don't want to do it at the cost of food riots,” Clinton said.

In doing so, he was somewhat less decisive than his vice president, Al Gore. (Perhaps Bill’s wife still expects to run for president in Iowa some day.) Still, this is moderating his position clearly in support of ethanol three years ago, as expressed in his book, Giving.

Despite this equivocation, corn ethanol’s most adamant opponent, the Wall Street Journal, offered rare praise for the former president:

America's political addiction to ethanol has consequences, from raising the price of food to lining the pockets of companies like Archer Daniels Midland. So we're delighted to see another prominent booster—Bill Clinton—see the fright.

Actually, the effect of American ethanol consumption on overseas food riots was noted last month by critics on both the left and right, tied to UN statistics showing skyrocketing food prices to record highs over the past six months. The pressure and evidence have been building ever since.

A Princeton researcher, Tim Searchinger, published a thoughtful commentary in the Washington Post two weeks ago, which was followed up by articles in Time and a scathing editorial in the Chicago Tribune entitled “Burning Dinner.” The rebuttal to Searchinger (a former EDF activist) was to call him a “Gasoline Whore.”

While the unrest in the Middle East is new, the opposition to shifting food for use in fuel is not, as 2007 articles in Business Week and Technology Review make clear.

What’s changed in the last four years has been an increasingly wide range of biofuels that can provide a greater quantity of fuel without this impact on food prices. (Some of these alternatives would be very good for California.) Overseas food riots have raised the urgency enough to spark interest in ethanol alternatives across a wide political spectrum.

Given this elevated level of discourse, the time has come for Energy Secretary Steven Chu to re-emphasize that corn-based biofuels are only “a transitional crop” and for the budget-cutting Congress to start the phaseout of subsidies for them. The country has less than a year to forge a new national consensus before the 2012 presidential election prompts a new round of farm state pandering.

Imagine no fuel from food - I wonder if you can

The Wall Street Journal this morning notes that 39.4% of US corn went for ethanol in 2010, up from 7% in 2001. Corn prices are up 67% from a year ago.

US corn growers account for 39% of the world's corn production. Converting all the country’s corn to ethanol would replace 4% of US oil consumption. As a fuel, corn ethanol is distinctly inferior to gasoline: it creates more smog, is a less efficient fuel and damages car engines.

Even Al Gore has sworn off ethanol pandering to farm state voters. But this didn’t dissuade the lame duck Congress last month, when it extended the $5 billion tax subsidy by a year.

It would be nice to think we could end the lunacy of converting fuel to food — either based on economic logic, or as other biofuels (such as cellulosic ethanol or algae-based fuels) take off.

Instead it appears the corn subsidy won’t end until the politicians can replace it with some other gift to farm state voters. Perhaps the Feds can overcome Eastern opposition to Midwestern exports of wind-generated electricity, which would certainly be popular in Iowa. (Or maybe the two parties can just move the date of the Iowa presidential primary.)

Cartoon Credit: Science Cartoons Plus by S. Harris

Sunny and dark side of deregulation

10 years ago, the California energy crisis came to fruition. Blackouts and shortages rocked the state, made us a mockery of the country and brought down a governor.

Since that time, it’s been tough to find a balanced appraisal of this event. Leftists blamed evil corporations, rightists blame inept government while accounts that consider both perspectives are few and far between.

Economist Seth Blumsack of Penn State offers the rare exception, writing in December’s issue of IEEE Spectrum and posted to the public website this month. (The website comments are also helpful.)

Against the government, there was only partial deregulation which never engendered real competition. Against business, a few companies (notably Enron) were able to game the system for their own ill-gotten gains.

As Blumsack points out, electricty markets are not (and perhaps never will be) fully competitive. In this regard, the last mile resembles wireline telephone companies and other “natural monopolies.” Meanwhile, all energy markets are plagued by demand that is highly inelastic in the short run. (If gas prices double, over time I can buy a smaller car or move 15 miles closer to work, but I can’t do it tomorrow morning.)

Overall, the results are mixed. The partial liberalization has increased efficiency. On the other hand, increased pressures for efficiency have changed the energy grid from a cooperative effort to a zero-sum battle.

Blumsack contends that deregulation means higher cost of capital and thus higher project costs. It’s also possible that deregulated developers have more incentives to cut costs while regulated utilities — like a government entity — will quite freely spend money not their own.

Finally he points to the role of markets in promoting green energy. Markets can be used to buy anything, and most American states are using them to procure geen energy.

The Sputnik fallacy redux

In his speech Monday to the National Press Club, Energy Secretary Steven Chu said that clean energy represents a new "Sputnik” for the US. In this remake of the space rate, the Red Chinese are playing the role of the USSR.

To quote from the official press release:

A New Sputnik Moment
Secretary Chu said that China's investments in clean energy technologies represent both a challenge and an opportunity for the United States. While China's experience with rapid, large scale deployment of technologies makes it an important global testing ground and creates opportunities for scientific partnerships between our two countries, it also means that America cannot afford to take our scientific leadership for granted. Secretary Chu stressed that our economic competitiveness depends on jump-starting the next round of American innovation in clean energy.

Dr. Chu’s slides even more explicitly make the Sputnik analogy, quoting Dwight Eisenhower.

As CNET reported his remarks:

Chu said that the U.S. needs to fund research in clean-energy technologies in order to stay apace and take advantage of the economic opportunity that cleaner energy technologies represent globally.

"America still has the opportunity to lead in a world that will need a new industrial revolution to give us energy we want inexpensively and carbon free," he said during his presentation, which was Webcast. (Click for PDF of slides.) "I think time is running out."
…
He said there are risks in the status quo which were detailed in a report called Business Plan for America's Future which was authored by business leaders including Bill Gates, venture capital investor John Doerr, GE CEO Jeff Immelt, and former Lockheed Martin CEO Norman Augustine.

The report said there are many benefits to moving to a cleaner energy system in the U.S., including public health, protection from climate change, and cleaner air, but none of these are recognized by the free market. Also, the scale of investment required in new energy technologies in beyond the scope of commercial companies, which is why the government should fund research and development.

As I noted six weeks ago, there are two problems with this line of reasoning.

First, the cheap Chinese manufactured goods are helping reduce CO2 outputs even if they take market share from US and German firms: Western leaders have to decide which is more important, saving jobs or saving the planet.

Secondly, the idea that renewable energy policy can be approached like a moonshot is a fallacy that was demolished by three leading innovation economists (who all have strong environmental sympathies). (Official Research Policy article here, working paper here).

Dr. Chu’s answer is to throw more money at federally funded technology development. I realize that Dr. Chu is a scientist who spent years spending DOE R&D money, but the answers are going to found in industry, not federal labs.

Yes, the US is and remains the innovation leader of the PV world. But the problem is not technological innovation, but in business models and manufacturing efficiencies. I don’t know what kind of business advice Chu is getting, although both Doerr and Immelt have shown their priority is to get the government to subsidize their EE/RE bets.

Nothing that Chu suggests will change the fact that China has 4x as many young people and will someday have 4x as many science PhDs as the US. Nor will it change the fact that the cost of capital and land and labor (and energy) is so much cheaper for Chinese manufacturing that none of his proposals would bring back US manufacturing in any significant way.

If the US is not going to be exporting manufactured goods to any significant degree, what can it do? It can try to imitate Germany of a decade ago and sell lots of goods to its domestic market before that market is swamped by imports. Or it can try to export technology, services and other innovations that are not so manufacturing- and cost-sensitive.

An honest (ex) politician

Corn-based ethanol makes no sense from the stand point of economics, food policy, energy policy or land use policy. Monday, former senator and presidential hopeful Al Gore admitted this reality: even as a former politician, it puts him in a select group who will admit this Emperor Has No Clothes. (It also confirms the speculation at the time of his divorce that he never plans to run for president again).

As Reuters reported:

"It is not a good policy to have these massive subsidies for first generation ethanol," said Gore, speaking at a green energy business conference in Athens, Greece. First generation ethanol refers to the most basic, but also most energy intensive, process of converting corn to ethanol for use in vehicle engines.

"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small," he said, referring to how much energy is produced in the process.

The U.S. ethanol industry will consume about 41 percent of the U.S. corn crop this year, or 15 percent of the global corn crop, according to Goldman Sachs analysts.

Alas, half of the GOP senate thinks they’ll be a presidential nominee in 2012 — about the same number of Democrat senators assume it’s possible for 2016; pandering to foolish farm state subsidies is a bipartisan effort. (Perhaps the GOP House members will live up to their budget-cutting claims.)

So while it would be nice to end the ethanol craziness, it seems like things are going to get worse before they get better.