Tuesday, September 14, 2010

US Electricity Industry Impact Report

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
August 2010


• Federal legislators are moving away from a renewable portfolio standard (RPS) and toward a clean energy (or no carbon) portfolio standard (a more bi-partisan approach politically), which would include nuclear power.

Electricity Generation and Storage

• At least four utilities and independent power producers – Tennessee Valley Authority, Xcel Energy, First Energy, and Edison International – have announced that they will retire or idle thousands of megawatts of older, smaller coal-fired power stations. This will eventually raise electricity prices to consumers and increase utility revenues.
• The North American Electric Reliability Corporation (NERC) has drafted a report regarding the integration of variable energy resources (wind and solar) and its impact on the reliability and security of the nation’s electricity supply. The report recommends to grid managers that they, “consider adjusting market and non-market rules and procedures “that limit technically capable resources from providing flexibility needed to support specific reliability functions….”
• AES Corp is positioning itself to be a leader in energy storage project development. The company announced in early August that it will deploy 44 MW of lithium-ion battery “smart grid stabilization system” (SGSS) modules made by A123 Systems.
• According to the Wind Turbine Price Index, published by Bloomberg New Energy Finance, the decline for turbines delivered in the last half of 2010 and the first half of 2011 is 15%. However, wind project power purchase agreement (PPA) prices, according to a separate report, have fallen below the level at which wind projects can make an adequate return on investment. PPA prices today are $40-50/MWh compared to $60-90/MWh just a few years ago.
• Two thirds of the massive shale gas resources can be developed in the U.S. at wellhead gas prices of $6/million Btu or less, thus potentially placing a ceiling on the long-term price of natural gas for many years to come.


• Unemployment increased from 9.4% to 9.6% in August
• The U.S. economy is “stuck” in an uncomfortable position between the end of the direct stimulus allocations by the government, slowness spending what has been allocated, and the beginning of robust consumer spending.
• Sales of new homes fell 12.4% in July from the previous month, existing home sales plummeted by more than 27%, home sales prices fell, and average home prices are 30% below their peak in 2006.
• U.S. exports contracted by 1.3%, probably reflecting the declines in manufacturing noted above, and imports increased by 3.1%.
• Even China revealed its first monthly contraction in manufacturing since early 2009.


• Pearl Street believes that there is a more positive scenario that analysts are not paying attention to, a contrarian opinion that at least deserves consideration.
• There are indications that the natural gas industry has regained strength politically and this, combined with favorable price-supply scenarios well into the future, means that gas-fired power stations will be the “option to beat” going forward in electricity generation.
• There is clear evidence that, since utilities are not investing for growth and to earn a rate of return on that investment, given with all this legislative uncertainty, they intend to grow through M&A, or at least position themselves for higher growth in the future.
• Pearl Street believes that turbine pricing may get much worse before it improves and that it will be difficult for any supplier not already established to sell turbines without putting substantial project equity at risk.

Monday, August 09, 2010

US Electricity Industry Impact Report

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
July 2010


•Carbon cap and trade (and anything else related to carbon emissions, such as a tax) and a federal renewable portfolio standard (RPS) have been removed from recent Senate energy legislation (but could possibly be re-inserted).

•The energy storage investment tax credit (ITC) is still included in both the Senate and House versions of the bill, although the benefits to the storage community have been greatly reduced.

•BP’s catastrophic oil spill in the Gulf of Mexico has escalated the impact of environmental regulatory risk on all energy industries in the U.S.

•The Midwest Independent System Operator (MISO) has proposed to FERC a new category of transmission project that is helpful in integrating wind facilities.

•The latest Clean Air Interstate Rules require additional reductions of sulfur dioxide and nitrogen oxides from 900 fossil-fuel boilers in the eastern part of the country. These rules will make coal-fired electricity more expensive.

Electricity Generation

•A looming challenge for utilities involves the ever-present tension between federal authority and state government. For example, the billions of dollars handed out to utilities for Smart Grid projects are imperiled because state PUCs and government must approve the cost-share portion of the projects.
•San Diego Gas & Electric Co is including an energy storage component in its next rate case before the Public Utility Commission.


•Deflation has occurred for 3 straight months, making economists nervous about a long period of low growth or the onset of another recession. Deflation numbers show that consumers may be starting to hold cash back in anticipation of even lower prices.
•Unemployment has stabilized but appears to have leveled off at 9.5%. As long as employment remains stagnant, strong economic growth won’t materialize.

•Consumer confidence decreased to 50.4 in July; it takes a reading of 90 to indicate that consumers believe the economy to be healthy.

•The U.S. saw the second weakest rate of new homes sold in June. Weakness in housing leads to weakness in retail sales (e.g., furniture, appliances, etc.), building and construction materials, and all goods and services required for a new home.


•Pearl Street’s analysis shows that, over the next several years, the U.S. will be moving towards an integrated national industrial and energy policy, regardless of who gets elected. Individual states will then implement this policy. This policy will be based on invigorating manufacturing employment and boosting exports, with generous, direct government involvement.

•When the forward pricing curves for natural gas began to look favorable well into the future, new regulations or restrictions may either prevent this new source of gas from getting to market or make it significantly more expensive to do so.

•Pearl Street continues to believe that all the political and electricity industry forces converge on a massive build-out of wind facilities.

Friday, October 09, 2009

Who knew? A politician gives a good speech on energy.

On September 21, 2009, something happened on the floor of the Senate that is becoming increasingly rare: A Senator gave a reasoned, well researched, and intelligent speech on an important topic that was free of vitriol and over-the-top partisan back-biting. That the speech just happened to be on energy made it especially important to me and that it was given by the Senator from my old home state made it even better.

Lamar Alexander (R-TN) used his speech to advocate for nuclear energy which I agree with. I have long said that if we want to address global warming, we must build nuclear power plants. He and I have a slightly different view of wind--I think it definitely has a place in the electricity mix when used in concert with bulk energy storage and smart grid technologies--but wind and solar will never replace baseload coal no matter how much you may wish for a green future. It just ain't gonna happen. So, we need nuclear. And we need to get busy building nuclear plants today. Now.

Sen. Alexander's speech (our text is a little glitchy) is so on the mark when it comes to nuclear power, that I think it is worth repeating here (click for more on Alexander's energy views):
Mr. President, if health care were not our first concern today, energy and climate change would be. It is lurking in the shadows, having had a lot of work done in the House, and it is about to come before the Senate. So as to the remarks I wish to make today, if I had to put a title on them, I would choose this: What the United States should really fear about nuclear power.

Communications experts say fear is the best way to get attention when you are trying to win an argument. Groups who oppose nuclear power have certainly mastered that technique by playing to economic, environmental, and safety fears.

So I wish to introduce a little element of fear into my argument here. I want to suggest what could happen if we do not adopt nuclear power as a more important part of our energy future, if Russia and China and India and a lot of other countries go with nuclear--as they are now--while we get left behind. Are we going to be able to compete with countries that have cheap, clean, reliable nuclear power while we are stuck with a bunch of windmills and solar farms, producing expensive, unreliable energy or, more likely, not much energy at all? The whole prospect of the United States ignoring this problem-solving technology that we invented is what I fear most about nuclear power.

Let me give you an idea of what I am talking about. A few years ago, in January 2006, the Chinese sent a delegation of nuclear scientists and administrators to the United States on a fact-finding mission. They toured the Idaho National Laboratory, the Argonne National Laboratory, and they visited GE and Westinghouse, trying to decide which technology to choose for their nuclear program.

Now you might wonder why anyone would be seeking our advice about nuclear power when we haven't issued a construction permit to build a new reactor in the past 30 years. But as Kathryn McCarthy, deputy director of the Idaho National Laboratory, said at the time:

The world still looks to us for leadership in this technology. They'd prefer to copy what we've already done. They don't like being on the cutting edge.

Well, that may have been true in 2006, but it's not anymore. The Chinese eventually chose Westinghouse technology for their first reactors. At the time, Westinghouse was an American company. In 2007, Toshiba bought Westinghouse, so now it is a Japanese-based company. Then when the Chinese got their Westinghouse reactor, they insisted on having all the specifications so they could see how it was put together. That is what we call "reverse engineering." As you might guess, China's next wave of reactors is going to be built with Chinese technology.

By 2008, the Chinese had shovels in the ground. The first four Westinghouse reactors are scheduled for completion by 2011. They also bought a pair of Russian reactors, which should be finished around the same time. They started talking about building 60 reactors over the next 20 years and just recently raised it to 132. They're in the nuclear business.

What have we accomplished in the meantime? Well, people in the United States have been talking about a "nuclear renaissance" in this country since the turn of the century. In 2007, NRG, a New Jersey company, filed the first application to build a new reactor in 30 years. They're still at the beginning of what promises to be at least a 5-year licensing process before the Nuclear Regulatory Commission. No one really knows how long this will take, since as soon as the licenses are issued, opponents will file lawsuits and the whole thing will move to the courts. If they are lucky, they might have a reactor up and running by 2020. Other companies have followed suit, and there are now 34 proposals before the Nuclear Regulatory Commission, but nobody in the United States has yet broken ground. So it is not likely the Chinese will be coming to us any time soon for more tips on how to build reactors. In fact, we will probably be going to them.

That is one aspect of what is going on in the world today. Here is another. As countries began constructing new reactors, it quickly became clear that the bottleneck would be in forging the steel reactor vessels. These are the huge, three-story-high, forged steel units that hold the fuel assembly--the reactor core. That means forging steel parts that may weigh as much as 500 tons.

In 2007, the only place you could order a reactor vessel was at the Japan Steel Works, and they were backed up for 4 years. Everyone started saying: This is going to be what holds up the world's nuclear renaissance. They will never be able to produce enough of those pressure vessels.

So what happened? Well, first, Japan Steel Works invested $800 million to triple its capacity. They are going to be turning out 12 pressure vessels a year by 2012. Then the Chinese decided to build their own forge. In less than 2 years, they put up a furnace that can handle 320-ton parts. They turned out their first components in June. Now they are building two more forges. So, you see, the Chinese will not be standing in line in Japan any time soon. The Russians are doing the same thing. They are in the midst of a big revival, planning to double the production of electricity from nuclear power by 2020. They are also building a forge and just cast their first 600-ton ingot in June. France, Britain, South Korea, and India are all following suit. Very soon, every major nuclear country in the world is going to be able to forge its own reactor vessels, except one--and that is us, the United States.

No steel company in America is capable of forging ingots of more than 270 tons. We are still stuck in the 1960s. That means when it comes to building reactors, we will have to stand in line in Japan or somewhere else. In fact, just about everything in our first new reactors is going to be imported. The nuclear industry tells us that at least 70 percent of the materials and equipment that go into these first few reactors will come from abroad. That is because we have let our nuclear supply industry wither on the vine. In 1990, there were 150 domestic suppliers making parts for nuclear reactors. Today, there are only 40, and most of them do their business overseas. Of the 34 proposals before our Nuclear Regulatory Commission, 20 are designed by Westinghouse, now a Japanese company, and nine are from AREVA, the French giant. General Electric, the only American company left on the field, has partnered with Hitachi. They together

shining in Arizona"? That was pretty good too. Now have you seen any GE ads, in this day of concern about climate change, that say that 70 percent of our carbon-free electricity comes from nuclear power? I certainly haven't.

Babcock & Wilcox is the one American company that stirred some interest recently when it announced plans for a new "mini reactor." This is a 125-megawatt unit that can be manufactured at the factory and shipped by rail to the site, where several units can be fit together like Lego blocks. This left the impression that America might be innovating again, forging back into the lead. But the complete prototype for the Babcock & Wilcox reactor is still 2 years away, and then it may take another 5 years to get the Nuclear Regulatory Commission's design approval. Meanwhile, the Russians are already building a mini reactor that will be floated into a Siberian village on a barge to produce power. The Russians have already got orders for mini reactors from 12 countries. So in spite of Babcock & Wilcox's fine effort--and I am certainly proud of them--the Russians are considerably ahead of us.

Let's take stock. There are 40 reactors now under construction in 11 countries around the word--not one of them in the United States of America. In fact, only two are in Western Europe: one in Finland and the other in France, both built by AREVA. All the rest are in Asia. Although we have not gotten used to it, Asia may soon be leading the world in nuclear technology.

Japan has 55 reactors and gets 35 percent of its electricity from nuclear energy, almost double the 19 percent we get here in the United States. The Japanese have two reactors under construction and plans for 10 more by 2018. The Japanese are finding they can build a reactor, start to finish, in less than 4 years. That is less time than it takes to get one American reactor through licensing at the Nuclear Regulatory Commission.

South Korea gets nearly 40 percent of its electricity from nuclear--that is twice as much as we do--and is planning another 8 reactors by 2015. So far, they have bought their reactors from the Japanese, but now they have their own Korean next-generation reactor--a 1,400-megawatt giant evolved from an American design. They plan to bring two of these on line by 2016. Taiwan also gets 18 percent of its electricity from nuclear and is building two new reactors.

In September, Bloomberg News reported that Japan Steel Works' stock had risen 8 percent on the Tokyo Stock Exchange because of China's decision to double future construction from 60 to 132 new reactors. They figure they will get some of the action at Japan Steel Works. Much of China's $586 billion stimulus package is going toward developing nuclear power.

"While China had been focusing on building new coal plants," said Bloomberg, "it has now shifted its focus to nuclear because of the environmental issue," said Ikuo Sato, president of Japan Steel Works, in Bloomberg.

Meanwhile, India is embracing thorium, a technology a lot of people think may eventually replace uranium as nuclear fuel. Thorium is twice as abundant as uranium and doesn't produce the plutonium everybody worries will be used to make a bomb. There is a lot of enthusiasm for thorium among scientists in our country. But it is India that is going ahead, with 6 reactors under construction and 10 more planned. They began with a Russian design, but they are also trying some American technology they acquired in signing their 2005 agreement with the Bush administration.

What about Chernobyl. Well, just like everybody else, Russia stopped all construction on new nuclear reactors after that horrible accident. But they learned their lesson and started constructing much safer reactors in the 1990s, completing the first in 2001. Now they have plans to expand along the lines of France, building two reactors every year from now through 2030. They have a very good reason. Russia has huge natural gas supplies, but it is wasting them by using one-third of it to produce electricity. They could get six times the price by selling natural gas to Western Europe. So they are replacing gas generation with nuclear--which is exactly the opposite of what we are doing here. Since 1990, every major power plant built in this country burns natural gas. We now get 20 percent of our electricity from natural gas--more than nuclear's 19 percent, and the natural gas percent is still going up.

And be aware, all these countries that are developing nuclear just aren't building them for themselves. They are selling to the rest of the world as well. AREVA is building reactors in Finland, China, Italy, Brazil, and Abu Dhabi. The Russians have signed deals with China, Iran, India, Nigeria, and Venezuela. They are even selling to us. In July, Tenex, Russia's uranium corporation, signed a long-term contract to supply fuel to Constellation Energy, which has reactors in Maryland and upstate New York. It was the sixth contract Tenex signed with an American utility in the past 2 months.

How did the Russians end up supplying us with uranium? It is a long, interesting story and the most important players stood and worked on this Senate floor. In 1996, Senator Sam Nunn, Senator Pete Domenici, and Senator Richard Lugar pioneered a remarkable deal with the post-Soviet Government, in which we would buy highly enriched uranium from old Soviet bomb stocks. The uranium would be sent to France, where it would be "blended down" from 90 percent fissionable material to 3 percent to be used in American reactors. For the last two decades, old Soviet stockpiles have supplied half our nuclear fuel. One out of every ten light bulbs in America is now powered by a former Soviet weapon--one of the greatest swords-into-plowshares efforts in history, although few people seem to know about it. Now the Russians

Once upon a time we were pioneers in nuclear technology. Forty years ago, we were the only people in the world who knew how to deal with the atom. That is not true anymore. We have shied away from the technology while everyone else has forged ahead. Even Europe is coming back. The British have announced they are going nuclear. They have hired the French national electric company to help. Italy closed all its nuclear reactors right after Chernobyl but ended up importing 80 percent of their electricity at a huge cost. Now they have announced they are going back to nuclear as well. France already gets 80 percent of its power from nuclear and has the cheapest electricity in Europe, not to mention the second lowest carbon emissions, behind Sweden, which is half nuclear. France also sells $80 billion worth of

So does that mean we have fallen completely behind? Not at all. In fact, there is a great irony to all this. We still know how to run reactors better than anyone else in the world. Our fleet of 104 plants is up and running 90 percent of the time. No one else even comes close. France, for all its experience, is still at 80 percent. Other countries are even lower. We still understand the technology better than anyone else in the world. But because we have placed so many obstacles in our path, we aren't allowed to build reactors anymore. And that is what scares me. We are gradually losing our economic place in the world.

Now a lot of people say: Well, what is the difference? So what if we fall behind on nuclear technology. We will forge ahead with something else. Well, there are several reasons to be concerned:

First, there is energy security. America already spends $300 billion a year importing two-thirds of our oil from other countries. If we remain on the current path of no new nuclear power or start depending on other countries to build our reactors and supply us with fuel, we are going to be even more vulnerable than we are today. The best way to reduce imported oil, aside from ramping up domestic production, will be to use electricity to power cars and trucks. At first, we can plug our electric vehicles in at night when there is much unused electricity. After that, we should be using nuclear. We can't have Americans going to bed every night hoping the wind will blow so they can start their cars in the morning.

Second, there is the matter of technological leadership. Americans produce, year in and year out, 25 percent of all the wealth in the world. Most of that wealth has been driven by new technologies. We were the birthplace of the telephone, the electric light, the automobile, the assembly line, radio, television, and the computer. But nuclear energy--perhaps the greatest scientific advance of the 20th century--is passing us by. The 21st century is going to run on clean, cheap, greenhouse-gas-free nuclear power. And, how can we criticize India and China for not reducing their carbon emissions when we refuse to adopt the best technology ourselves?

Then there is weapons proliferation. In the 1970s, we gave up on nuclear reprocessing in the hope that by not dealing with plutonium, we would prevent nuclear weapons from spreading around the world. That has turned out to be an unwise decision. France, Britain, Russia, Canada, and Japan went right on reprocessing and no one has stolen plutonium from them. Instead, rogue countries, such as North Korea and Pakistan, have found their own ways to develop nuclear weapons. The technology of bomb making is no big secret anymore. The real problem is that by reneging on world leadership, we have left the field to others. For instance, right now the Russians are building a commercial reactor for Hugo Chavez in Venezuela. He is not exactly friendly toward the United States. To make things more interesting, Manhattan District Attorney Morganthau recently wrote in the Wall Street Journal that his office has recently uncovered evidence that Iran may be providing Venezuela with missile technology.

But what worries me are these two issues: First, if we do decide to move toward a nuclear-based economy and we have to import 70 percent of the technology and equipment, how are we any better off than when we were importing two-thirds of our oil? We will just be creating jobs for steelworkers in Japan and China instead of the United States. Second, if we don't move toward a nuclear-powered economy but try to do everything with conservation and wind and solar, we are going to be sending American jobs overseas looking for cheap energy.

So to ensure we have enough cheap, clean, reliable, no-carbon electricity in this country to create good, high-quality, high-tech jobs, here is what I believe we have to do. The United States should double its production of nuclear power by building 100 nuclear reactors in 20 years. Nuclear today provides 70 percent of our carbon-free electricity. Wind and solar provide 4 percent. Nuclear plants operate 90 percent of the time. Wind and solar operate about one-third of the time.

The Obama administration's Nobel Prize-winning Energy Secretary, Steven Chu, says nuclear plants are safe and that used nuclear fuel can be safely stored onsite for 40 to 60 years while we figure out the best way to recycle it. Producing 20 percent of electricity from wind, as the Obama administration proposes, will require building 186,000, 50-story turbines--enough to cover an area the size of West Virginia--plus 19,000 miles of new transmission lines to carry electricity from remote to populated areas. One hundred new nuclear plants could be built mostly on existing sites.

To produce 3 percent to 6 percent of our electricity, the taxpayers will be subsidizing wind to the tune of $29 billion over the next 10 years. The 104 nuclear reactors we have today were built basically without taxpayer subsidies. It will cost roughly the same to build 100 new nuclear plants, which will last 60 to 80 years, as it would to build 186,000 wind turbines, lasting 20 to 25 years. And this doesn't count the cost of transmission lines for wind. Finally, there will be twice as many green jobs created building 100 nuclear reactors as there would be created building 186,000 wind turbines.

An America stumbling along on expensive, unreliable renewable energy, trying to import most of our energy from overseas, is going to be an America with fewer jobs and a lower standard of living.

Nuclear opponents continue to prey on fear of nuclear power. The truth is, if we want safe, cost-effective, reliable, no-carbon electricity, we can no longer ignore the wisdom of the rest of the world. The real fear is that we Americans are going to wake up on one cloudy, windless day, when the light switch doesn't work, and discover we have forfeited our capacity to lead the world in creating jobs because we ignored nuclear power, a problem-solving technology we ourselves invented.

Thursday, March 12, 2009

A Hero’s Tribute

By Mark Glaess, Manager
Minnesota Rural Electric Association

Andy Reichwein was among lineworkers from the Minnesota-based Connexus Energy who joined thousands of other linemen from across the United States to restore power to storm-stricken co-ops earlier this month. The brotherhood that is the nation’s lineworkers left their homes, left their families, left their attendant tasks to attend to the hundreds of thousands of co-op members located in Arkansas, Missouri and Kentucky who saw electric lines littering roads and ditches. No national headlines hail the sacrifices Andy made, nor do these linemen ask for such.

John Thain, by comparison, is the former Chairman of the New York Stock Exchange and the last CEO and Board Chairman of Merrill Lynch. Among Thain’s notable accomplishments were losses exceeding $25 billion yet paying $4 billion in bonuses, including pocketing $10 million and dropping $1.2 million to spiff his office. Those deft corporate decisions netted him an invitation from the New York Attorney General Andrew Cuomo. Cuomo likely expressed the same disbelief, as did Congress, when the CEOs of Chrysler, Ford and General Motors taxied into Washington D.C. on their individual corporate jets to plead for $25 billion in loans to reinvigorate the companies they drove into the abyss.

The hundreds of thousands of rural electric consumers who lost light, heat, and fresh food in the Southeast are among America’s less fortunate. Minnesota’s electric cooperative members, for example, record a per capita income 20% below the state average. It’s likely a sadly similar statistic in your state too. Through the Rural Economic Development Loan and Grant program, the nation’s co-ops create jobs and opportunities. The National Rural Utilities Cooperative Finance Corporation, or CFC, by the way, made that program available obtaining, with National Rural Electric Cooperative Association’s assistance, federal guarantee of their loans with the interest savings going to create the $1 billion loan/grant program.

Matthew 23 records the Sermon on the Mount where Jesus observes as you have done “to the least of them, you have done to me.” That becomes our calling, and the calling of each electric cooperative. We are to take care of the poor. That’s the reason we promote programs designed to assist the least of them. It’s also the reason why NRECA framed “Our Energy, Our Future,” to clearly state the co-op’s case for affordability in the face of climate change legislation and other cost pressures on electric rates. FDR also makes the case for this co-op philosophy when he once observed: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide for those who have little.”

John Thain and others lost billions of dollars of those he never knew. Andy Reichwein died while trying to restore electricity to folks he never knew. A tragic accident snapped the pole Andy was straddling sending him to the ground along with a transformer which hit him in the head. Andy leaves behind a wife, a four-year old daughter and friends who grieve his death. The bucket trucks that accompanied this fine young man to his funeral also signified the depth of our program’s convictions – raising high the poles to carry the current providing both light and hope to the least of them. That also makes Andy Reichwein among the very best of them.

Let's all pause to think hard about this.

Friday, January 16, 2009

It's all about energy and infrastructure. Finally.

Okay, it may not be ALL about energy and infrastructure, but finally it looks like we've got people paying attention to infrastructure engineering rather than just financial engineering. President-elect Obama's stimulus plan appears to go in the right direction. I'd argue it's not enough, of course, and that we need more on research and development and more for energy storage in particular (to support those renewables!), but it's something. Here are some of the details (list from WSJ):

Highlights of Economic Recovery Plan

$32 billion Funding for "smart electricity grid" to reduce waste
$20 billion + Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit
$6 billion Funding to weatherize modest-income homes

Science and Technology
$10 billion Science facilities
$6 billion High-speed Internet access for rural and underserved areas

$32 billion Transportation projects
$31 billion Construction and repair of federal buildings and other public infrastructure
$19 billion Water projects
$10 billion Rail and mass transit projects

Tuesday, October 14, 2008

Attention Obama and McCain: Electricity Matters!

I've tried numerous times to get through to the candidates, but so far, none of them are knocking at my door seeking my advice. I've sent books to every member of Congress who sits on a committee that has anything to do with electricity and infrastructure. I've traveled across the country speaking to groups large and small talking about the state of the electricity industry, and I know there are many out there who share my concerns about our electricity future.

I also know there are many pressing issues on our candidates' and current legislators' minds, but electricity must be considered a "front and center" priority if we are to grow our economy, maintain our national security, and address energy independence and global climate change.

So, I've put together a set of talking points. Whether you agree or not with every single point, share them with friends and colleagues, send them to your elected representatives, and work to get the candidates--and America--talking about electricity.

Talking Points

:: It’s time to talk electricity!
Because during a time of political change everyone will be talking about:
Climate change energy independence, skyrocketing costs for commodity energy sources, inadequate transmission infrastructure, and unrealistic demands for renewables and conservation

:: Electricity is absolutely critical to our economy and to our modern lifestyles.
- Nothing substitutes for its convenience, cleanliness (at the point of use), and versatility.
- It is the product at the base of our entire infrastructure, and therefore a critical part of our national security. Electricity’s role in national security, whether we’re talking about a terrorist attack or a natural disaster like Katrina, gets little attention from inside or outside the industry.

:: Electricity is the one energy that is Invisible—Except When It Isn’t There.
- Nobody cares or thinks about electricity until their lights go out or their rates skyrocket.
- When you don’t know the cost of something, you can’t understand it’s value and you have no incentive to regulate/change your patterns of consumption.

:: When it comes to infrastructure, Americans suffer from the long-term consequences of short-term thinking.
- We pass short-term palliatives (ethanol, wind production tax credits for two years, etc) and lurch from election cycle to election cycle instead of adhering to a long-term policy or plan, granted one that needs to be modified as we go.

:: When it comes to infrastructure, Americans suffer from the long-term consequences of short-term thinking.
- The industry has always been structured to pay more attention to supply than demand, and to pay more attention to building the “next thing” rather than achieving superior performance from the “last thing.”
:: Transmission, although critical to every kind of electricity generation and distribution, is becoming an example of the “tragedy of the commons.”
- We are setting ourselves up for unrealistic expectations for wind because many of wind depends on transmission, storage and many of its strongest proponents can’t seem to distinguish between a kilowatt and a kilowatt-hour.

:: Energy storage is essential!
- Optimizing our existing infrastructure and ensuring a viable and cost-effective pathway for large-scale renewable energy requires a new piece of the production and delivery value chain, energy storage, accompanied by a supply chain that doesn’t even exist yet.

:: We need infrastructure engineering—not financial engineering!
- Our electricity infrastructure has become the victim of financial engineering. Our ability to manage assets diminishes as our infatuation with managing balance sheets grows.

:: The solution to addressing global warming is elegantly simple.
- Use nuclear power combined with more renewable energy supported by energy storage technologies to move away from coal for electricity production and toward clean, renewable energy for electric vehicles.

Here’s the “How to Prevent Lights Out” Plan:
(1) Expand our nuclear power capacity with nuclear fuel reprocessing. Nuclear is the most economical way to meet the constraints we face on the production side of the electricity value chain and it helps address global warming and helps speed the move from petroleum-based transportation to electricity-based transportation.

(2) Fix and expand the transmission grid. In the book I try to convey how downright dysfunctional transmission seems to be right now. We should not have a grid characteristic of the “third world.” And that’s what engineers who know it well call it, not just me. A chain is only as good at its weakest link and for electricity production and delivery, that link is transmission.

(3) Make sure every ratepayer has an advanced meter that displays the price of electricity (preferably on their refrigerator!) and how much is being consumed, and allows utilities to interact with users to manage demand. We cannot successfully manage electricity demand without these consumer tools, and this day to day knowledge of the value of the product. These meters must become two-way interactive point devices for automating demand management.

(4) Limit Liquefied Natural Gas (LNG) imports, or better yet, abandon the idea for electricity production. Do we really want the bedrock of our economy, and our infrastructure, subjected to the same geopolitical vagaries as petroleum and that boasts a 20x more potent warming agent than carbon dioxide?

(5) Use coal intelligently by extracting its full value of coal at the mine site. We must learn to think of electricity as one of several byproducts of coal and mine-mouth processing facilities as coal refineries. Shipping coal that is mostly water thousands of miles across the country doesn’t make sense.

(6) Fund a massive development program for electricity storage. As important as renewable energy sources (solar and wind) are to carbon-free electricity and to moving to electric vehicles powered by renewable sources, they will only gain a minimum of traction and will be subsidized into eternity if we don’t solve the problem of intermittency, and get the public to understand the difference between a kilowatt and a kilowatt-hour. And, they will wreak havoc on our transmission and distribution grid. Electricity storage has many other benefits, too; they facilitate electricity markets (all other commodities make use of storage to moderate supply and demand), make the transmission grid more robust, and improve our infrastructure security (think strategic petroleum reserve).

(7) Shift money and emphasis from the left side (the production side) of the value chain, to the right side, the consumption or demand side. Markets and deregulation really could work and help manage demand, but they have to be instituted far more intelligently than the last time we went through this.

(8) Federalize the backbone of the electricity infrastructure in the same way almost every other critical industry—health care, banking, airlines, home mortgages, transportation, etc—is backstopped by the federal government (e.g. consider only the impending bailout of Fannie Mae and Freddie Mac)

(9) Make electricity part of everyday discourse. Let’s not get bent out of shape just when the lights go out. If everyone sustains their engagement with this unique, ubiquitous and ever so valuable product, then we will surely have a more rational future with it. At the very least, it needs to be as important as gasoline prices and petroleum in public and political discourse.

(10) Concentrate on infrastructure engineering—not financial engineering! Increasingly, the destiny of the electricity industry is controlled by the financial industry on shorter and shorter time horizons. This is exactly opposite what you want for sensible, long-term infrastructure investment.

Whether you agree with all the points or not, the important thing is to get America talking about electricity infrastructure. Please help get America talking...

Friday, October 10, 2008

What happens now?

Most people outside the electricity industry are startled to learn that it is the largest industry in America. When you say "energy," most people think ExxonMobile--not the electricity cooperative on the edge of town. As I've railed so many times, people just don't "think" about electricity.

Now, more than ever, it's time to start thinking--and thinking hard. The electricity industry relies on debt to finance at least half of the cost of building power plants. So, what happens to the electricity industry now that free-flowing credit has come to a screeching halt?

What politician will want to add the costs of carbon to the price of anything today?

How will wind projects fare? The same firms that have been financing and developing these projects are the same ones we're reading about on the front pages of our favorite news outlets, the same ones begging to get their hands in the Fed's pockets.

Both John McCain and Barack Obama talk about the need for new nuclear power--McCain talks about a building 45 new plants by 2030. But, if building one new plant means borrowing millions of dollars for construction costs, how is even one new plant going to get off the ground? Right now, businesses can't get short-term loans to cover payroll, let alone millions for such a major construction project.

If investors were skittish about financing the debt for nuclear plants six months ago, how do those firms feel today. Investors are poorer today (as I type the market is down 305 pts at 8273) and many about to become quasi-socialized. Oh, and now that the Fed is guaranteeing all of the bad debt from the mortgage business financial engineering, it just adds that to the growing deficit from fighting wars on two fronts, and not getting any control over spending. The only "bright" spot is that as consumers stop buying foreign goods, our deficit will shrink...but, on the other hand, as American consumers stop buying foreign goods, the whole global economy shrinks....)In other words, the government is broke unless the Fed's pocket stretches halfway around the world to China and Japan. But in our "world is flat" global economy, when we tank they, tank too.

The bottom line is, the electricity industry one of, if not THE, most asset intensive industry in the country and without debt financing, nothing new gets built.

Here's what I think:

(1) Regulated utilities are king--they can still raise money by raising rates and secure their long-term investment needs,

(2) companies who own assets like power plants or gas reserves are princes-when all of the debt inflated value is wiped out, they still own some real things with value,

(3) competition in electricity is dead-even Warren Buffet is investing in utilities because they are regulated, stable income producing businesses,

(4) the financial engineers, who move from one source of trading volatility to another, will move to carbon trading. In five to 10 years, that will be the next Wall Street scandal,

(5) we will likely see a massive infrastructure building program here, not unlike the 1930s, and, signaling the final death knell of globalization--at least for electricity--the government will direct this program towards energy independence--nuclear, clean coal, wind, solar, coal-based refineries, ethanol, and all the rest will be subsidized to the hilt.

The grand experiment in privatization, deregulation, unfettered free markets, etc, is over.