Tuesday, April 25, 2006

Quantifying the value of energy independence

I've been working on a presentation for a biodiesel conference that I will give this Thursday. It occurs to me that biodiesel suffers from many of the same fundamental issues that other low-density energy sources do, like wind. Wind, I believe, is becoming entrenched as a commercial option for generating electricity. The long-term structural problem for most other "alt-energy" sources is how to maintain a viable business when prices for oil and natural gas return to "earth."

One way is to credibly and defensibly quantify the value of energy independence to national security. Yes, put it in monetary terms. We've developed a methodology, called E-Equity (trademark applied for), to do this, and we even applied it for a client, who wanted to compare the "value" of a mine-mouth coal plant against imports of liquefied natural gas (LNG)to fuel a combined cycle plant.

Two of the most important factors in our analysis were: (1) the quantities of methane that could escape into the atmosphere along the vast LNG supply line (methane is a 20+X more potent global warming agent than CO2), and (2) the defense- and security-related costs associated with protecting our petroleum and LNG supply lines.

This analysis makes many people nervous (we think it made our client nervous!). It is the type of analysis that is prone to wide swings depending on initial assumptions. Also, one has to make educated estimates about how much of our defense budget goes to protecting energy supply lines. In the case of biodiesel, it should be especially sensitive, since the defense department is one of the main customers for biodiesel! I'll find out more on Thursday. Stay tuned!

The value of domestic energy sources, whether corn, soybeans, coal, etc, with respect to national security may be difficult to quantify but I believe it can help improve the long-term financial investment framework for alt energy.