Tuesday, November 27, 2007

How not to make an energy policy.

First a caveat: When it comes to electricity generation, I'm an agnostic. In other words, I try to evaluate energy sources on their own merits, from cradle to grave, and I try my best to keep ideology out of the analysis.

So, when we're talking about our energy future, I believe it is essential to look at the big picture, to evaluate each fuel source, its pros, cons, and its potential for the future given all the geopolitical, economic and environmental challenges we face, and to develop a comprehensive plan that maximizes energy potential, minimizes risk, and makes room for new technological developments. There are two things we absolutely must not do: 1) turn reactionary decisions based on short-term situations into long-term policy, and 2) base our energy future on wishful thinking. And, speaking of coal and CO2 sequestration....

Reactionary decision-making
In the early 1970s, this country had about 12% of its generating capacity in natural gas-fired power stations. Then the OPEC embargoes hit and we legislated against using natural gas in power stations (the Fuel Use Act of 1979). The gas share of electric generating capability dropped to around 7%. Then, after the Fuel Use Act was repealed in 1986, we went on a gas-fired power construction binge in the late 1990s. Today, we have more gas-fired generating capacity than we have coal-fired! However, because the price of gas is so high, those plants only account for about 12% of actual kilowatts generated. Hmmm...1970- 12%. 2007- 12%.

Also in the 1970s, we were on a path to replace a significant amount of coal capacity with nuclear. Then Three Mile Island occurred. All the planned nukes were cancelled, and we were back to relying on coal. Not only that, the economics of the Clean Air Act of 1990 encouraged utilities to switch to Western coal because even though it has less energy per unit weight (a lower quality fuel than most eastern coal sources), it is low in sulfur and less expensive, even when transportation costs were factored in. Power plants representing tens of thousands of megawatts switched to Western coal because this was cheaper, in the short term (based on regulated utility economics), than adding sulfur dioxide scrubbers or some other alternative.

So, now we not only use much more coal, we use lower quality coal with poorer efficiency that emits more CO2. And, the result of all these jumps and starts is that, despite some interesting cycles in the trend lines, our energy source mix today looks remarkably like it did forty years ago.

Wishful thinking
The truth is that once you factor in the cost of reducing, or perhaps the better words are "managing" or "containing," CO2, coal ceases to be the low-cost option for electricity production. With the coal and sequestration song and dance, however, it looks like we're going to repeat history-- the power industry is rallying around CO2 sequestration as the savior of coal and believes we're going to solve our environmental and energy issues in one fell swoop by considering just one part of the overall problem. It's not just that there are huge technological challenges or significant efficiency and economic penalties imposed by separating CO2, compressing it, transporting it, and injecting deep into the bowels of the earth.

No, as serious as those issues are, that's not what makes me, a chemical engineer, nervous. Here's what makes me nervous: for the first time, instead of taking out large quantities of stuff from the earth, we will be deliberately putting in large quantities of stuff--stuff we don't want. And we're putting it in deep, injecting it into the subsurface of the earth where the sun don't shine, so to speak. (This process is very different from landfilling, which is a surface operation.) Plus, we are substituting a solid material (coal) for a gaseous material (CO2). Fundamentally, technologically, geologically, and ecologically, this is no apples to apples switch. These huge volumes of vaporous material will have to be monitored and contained for, well, forever. Kind of like spent fuel rods from nuclear plants.

Yes, sequestration makes coal similar to nuclear power. There is a residual waste stream that has to be managed beyond the timeline of quarterly reports and into forever. That's not a timeline that corporate America does well. And, we're talking about a huge volume of CO2 as opposed to nuclear waste which is, relatively speaking, small and easy to monitor and can be put where we can see it. Set aside for the moment the profound legal issues surrounding sequestration. Are today's sequestration sites tomorrow's sets for the 21st century Poltergeist movie?

Short-term decisions have long-term consequences
We have to recognize that the energy mix of the 1970s does not serve us well in the 21st century. But, it is also true that coal isn't going away anytime soon, and it behooves us to find more intelligent ways to use it (more about this some other time). Unfortunately, the electricity industry does not make revolutionary changes, and I might argue that, at least in my lifetime, it has hardly made any evolutionary changes. Because of its institutional structure, the best move King Coal can usually muster is to tread water and hope it all blows over one more time.

Why is this? One reason is that environmental regulation proceeds on a piecemeal basis, rather than a holistic one. We legislated against natural gas after the OPEC embargoes. Then we pinned all our hopes on natural gas and built capacity like crazy people. Then all the nukes were cancelled based on one accident, during which, by all accounts, the safety systems actually behaved the way they were supposed to, avoiding a truly calamitous event. Now, sequestration is the answer. We keep regulating, legislating, and reacting to one-time events or one type of pollutant with short-term measures, instead of truly evaluating the problem holistically, and ultimately, paying for a solution for the long haul. Sequestration will not be the single savior for the coal industry, let alone the planet. We must look beyond single saviors, and, instead, look to formulate a realistic policy that is not overly reliant on any one fuel, any one technology, or any one supplier. The question is can we look beyond the simplistic solutions, muster the political will, and formulate--and implement--a coherent energy policy to keep our nation's economic engine running and our lights on.

The foundations of our vision of a coherent energy policy, articulated in the book Lights Out, are as follows:

1. Conceptual
- Shift emphasis and money into the right side of the value chain and away from the left side--in other words don't focus as much on reducing consumption, but on managing consumption
- update the grid
- give consumers the tools to see/feel/understand/act on their consumption habits
2. Technological
- use nuclear to meet demand and manage CO2
- limit coal to "intelligent" coal
- fund massive development program for storage
- continue to commercialize "renewables"
- limit LNG to strategic imports for distributed power networks
- enhance effectiveness of microgrids and drive that process from a market/consumer perspective
3. Regulatory/political
- the backbone of the nation's electricity infrastructure should be "backstopped" by the federal government
- unleash the power of technology and competitive consumer choices (the power of the market) on the retail side
4. Financial
- financial engineering should NEVER displace systems engineering
5. Global
- secure all of the supply lines affecting our domestic electricity infrastructure
6. Social
- make electricity visible, understandable, and part of our everyday discourse.

And then, there's the Personal -- see Think: Less!

Thursday, November 01, 2007

Who takes over when King Coal loses his crown?

Two years ago, I was at an industry conference planning committee and I made the point that the global warming issue was beginning to run ahead of the energy industry's ability to contain it, and that, in many respects, building a coal-fired power station today is a "prudency review waiting to happen." For those of you who don't remember, many of the nuclear plants under construction in the 1980s got caught up in endless prudency reviews—a public process during which the utility's expenditures and resulting rate increases are picked at, prodded, probed, and often, ultimately, following many of those hearings, disallowed. Serious financial difficulty and even bankruptcy resulted.

Last week, several announcements suggest that this was no melodramatic prediction. According to The New York Times, the Kansas Department of Health and Environment turned down a permit for 1400-MW of coal-fired power based on emissions of global warming gases. This is arguably the first time a coal plant has been denied for this reason. Let me repeat the state: Kansas. It's not California, Florida, New York, Oregon. Kansas is a coal-friendly state. Another story revealed that even in Montana, a coal-producing state (or at least one with significant coal reserves), coal plant permits are being fought by bi-partisan coalitions and that electric utilities concede that these groups are being effective. In other reports that cross my desk regularly, I noted that more than 10,000 MW of coal plants recently have been cancelled or postponed around the country.

As enthusiasm for coal wanes, it grows for nuclear even in some quarters that have fought tooth and nail against nuclear in the past. However, there's a problem. The fastest any nuclear plant can come on-line, given regulatory and financing hurdles, is around 2015. Meanwhile, electricity demand continues to grow. As much as the rewewables camp wants to believe it, solar and wind are not going to supply all or even most of the necessary power anytime soon. So what's going to happen?

I believe we will see a continuing and accelerating push for demand side management and efficiency (long-overdue, I might add), and in areas where new power plants must be built, they will probably be fired by natural gas. Further, the nation is expected to be importing much of that natural gas as LNG (liquefied natural gas) from countries that aren't exactly our geopolitical best friends. (Countries with large natural gas reserves include Algeria, Australia, Brunei, Indonesia, Libya, Malaysia, Nigeria, Oman, Qatar, and Trinidad and Tobago.)

My message here isn't that one power generating option is so much worse than another; they all have serious problems in the context of balancing supply, demand, price, and environmental impact. Coal and nuclear are the least expensive options, given all the parameters, and it appears that neither are coming to the rescue anytime soon. Rather, the message here is that natural gas is exorbitant and expected to remain so as long as petroleum inches towards $100/barrel. The message is that electricity rates will continue to go up and the only practical means of containing the impact will be to reduce consumption. The message is that the terror premium inherent in the price of natural gas and petroleum affects electricity prices. When LNG is used for power generation, electricity is held hostage to the same geopolitical vagaries that destabilize petroleum markets.

Here's my humble suggestion: Add that "terror premium" and the costs of defending global shipping lanes to the price of electricity generated with LNG. Defending our shipping lanes should be of increasing concern to us all. In just the past month, there have been several pirate (yes, pirate) attacks, one in which the United States Navy intervened to help North Korean sailors. (See BBC, Chonsun, Wired, International Maritime Bureau) Plus, the highest concentrations of pirate activity is around, you guessed it, some of those same countries listed above—the ones with large natural gas supplies.

Adding the “terror premium” into the cost of importing LNG is one way that clean coal plants (there are far better ways to use coal than those proposed by plants currently on the drawing board), renewables, domestically sourced natural gas, and even nuclear plants put on a faster track, can compete. If our electricity prices are going to be high, they might as well be high for good reasons--support for domestic and carbon-free-sources of electricity.

Tuesday, October 23, 2007

Progress on Storage

Two weeks ago, I moderated a panel at "Investing in Energy Storage Technologies," a conference in New York City sponsored by Financial Research Associates LLC. The good news is that unlike the many industry conferences on energy storage I have attended or participated in where we all sit around preaching to the already converted, bona-fide, interested energy tech investors attended this one. The better news is that two significant announcements were made that could very well combine for an inflection point in interest and investment needed to commercialize energy storage technologies for our electricity grid. The presence of the investors, along with the announcements, made this conference definitely worth attending.

First, American Electric Power Corp (AEP), one of our country's largest electric utilities, has announced a program to install up to 1000 MW of energy storage devices over the next 13 years. Of that, 1000 MW is based on a relatively new technology called the sodium-sulfur battery. AEP has been demonstrating this technology at the 1.2-MW scale at a facility adjacent to a substation. Now that it has gained some confidence in the technology, the utility plans to install 6 MW worth of these devices by 2008, 25 MW by 2010, and 1000 MW by 2020. This is an unprecedented commitment to energy storage for electricity infrastructure in this country. AEP admits that the cost-benefit evaluation is "marginal," but that the strategic and political values are "high." AEP's interest is in ensuring that distributed energy at non-utility sites can be smoothly integrated into its electricity production and delivery system. The conference presentation was given by Ali Nouri, AEP's manager of distributed resources.

Second, a piece of legislation is circulating in Congress titled The Energy Storage Technology Advancement Act of 2007. The Act comes with a funding commitment of $150-million. This money would be appropriated to cost-share technology demonstration projects. What this means is that, with respect to the electricity grid and distributed generation, the federal government seeks to facilitate the transition of storage technologies from R&D to commercialization. This news was delivered by Brad Roberts, Chairman of the Electricity Storage Association, who had just testified to the relevant Congressional committee the week before. This also represents a quantum jump in commitment; until now, the federal government has supported energy storage with a meager R&D budget of around $10-15-million.

Of course, it's a long way from a bill introduced in the House to appropriated money, but the favorable press alone should create a nice tailwind. Just to put this in perspective, the federal government has spent hundreds of millions of dollars over the last decade and a half supporting one coal technology, called integrated gasification combined cycle, or IGCC.

Who benefits the most from these twin announcements? We believe renewable energy proponents do. Large-scale wind and solar, in particular, cannot compete against nuclear and fossil fuels for electricity generation without commercial storage. The intermittency and unpredictability of the resource will ultimately prove formidable barriers to renewables achieving more than 5-10% penetration on the grid or to their ability to compete without significant direct subsidies. Energy storage converts an unpredictable resource, one that utilities are essentially forced to take, into one that can be scheduled into the markets.

For someone who has long been frustrated with the pace of progress in energy storage for electricity, I am happy to report that these two announcements could lead to the "knee in the curve" for which the industry has been waiting.

Friday, September 21, 2007

Regulation and New Technology

Over and over, people ask me questions like:
If the technology's there, why don't we have more wind (or solar)power?
Why do we have to use so much coal when we could use renewable energy?
Why aren't there smart meters installed everywhere?
Why don't we have a smart grid?
Why are my rates going up so suddenly?
Why? Why? Why?

Well, one of the most important things to remember is that, for the most part, our utilities live/work/play in a regulated environment -- particularly at the transmission and distribution level. Even in deregulated states, the movement is reversing towards re-regulation of electricity. The business model of a regulated utility is to invest in something and be allowed a reasonable rate of return on that investment by the regulator, the public utility commission (PUC). For the most part, utilities don't much care what they invest in, as long as they can be assured of a predictable rate of return.

So, if you don't like coal, believe strongly in renewable energy, and want smart grids communicating with a smart meter in every home, start lobbying regulators to compel utilities to invest in these things. The utility has to have a regulated rate of return for its shareholders (just about everyone who owns a basic mutual fund or has a pension) and as long as the PUC allows the utilities a regulated rate of return on the investment in renewable energy, smart grids/meters, it will happen.

The problem with the utility industry today is that it is facing increasingly difficult problems from all sides--demand for CO2 controls, deteriorating infrastructure, rising costs due to increased international demand for raw materials, competition for skilled workers, shareholders demanding their dividend checks, PUC's regulating every breath they take, and consumers who want cheap, reliable, electricity that's always available at the flip of a switch. It's a viscious circle of competing interests including the state PUC, the utility, and a generally disengaged consumer base...consumers who rarely pay attention to their electricity unless, of course, they've just experienced a loss of service or their rates are escalating abnormally.

But, it is precisely at this time of increasing challenges that consumers need to wake up and pay attention to that magical thing called electricity that lights their world at the flip of a switch. it is up to all of us to think about what we want, what we need, and what we are willing to pay for in terms of electricity. This is no time to point fingers and ask why not??? It is a time to come together, become informed and engaged in the debate about the direction of our energy future.

Wednesday, September 05, 2007

The Price of Deregulation - 4 cents a kWh

In David Cay Johnston’s article in The New York Times (9/4/2007), “A New Push to Regulate Power Costs,” he writes about the fact that many states are rolling back their deregulatory initiatives. He says, “The main reason, he says, is price.

Ah, price. That magic number that is at the nexus of supply and demand. The problem with price in electricity markets is that it is not determined by supply and demand as in a free, deregulated market—even in those states where they was, supposedly, deregulation. In fact, we’ve long argued that deregulatory initiatives, as they were designed and implemented, had nothing to do with what most people understand as “deregulation” at all. Johnston points out that retail price controls, artificially induced competition on the wholesale side, and same old-same old metering does not a free market make. As Peter Van Doren of the Cato Institute says, “Just calling something a market does not make it a market.”

According to a study, quoted in the NYT article, conducted by the former Washington state utility regulator, rates in deregulated states run about 4 cents a kWh higher than in regulated states. Although each situation is different, there are several reasons that the cost of power in “deregulated” states has been going up so dramatically:

- Because many of these same states have tougher emissions regulations, they embraced cleaner-than-coal gas-fired power plants and have, therefore, been the victims of the escalating cost of natural gas for fuel
- As pointed out in the article, they artificially reduced prices during competition through “mandated” controls
- They did not put in place tools (smart metering) with which consumers can see/react to their electricity usage
- They have deregulated the wholesale market but not the retail market, so there’s a gap that suppliers can take advantage of
- They forced their utilities to divest their generation assets and allowed stranded cost recovery. Initially, the utilities got through that okay in terms of financial health, but now there are serious costs looming (fuel, transmission, global warming) and unless the regulator wants to see the utilities go belly-up, rates have to rise

Real markets only work when consumers have information on which to make decisions. Today, at the residential and small user level, there is no way to respond to higher prices (which would moderate load which would moderate prices). Only 15% of the country has an “advanced meter” on their home or business and these were mostly designed for the utility to shed meter readers (these meters can be read remotely). The really advanced meters—two-way communication devices that help the utility understand and control load and usage patterns—have not been widely adopted except for a few areas of the country. With no ability to respond to rising prices—say, changing the thermostat—consumers cry foul and turn to the regulators to keep their prices down.

Plus, keep in mind that when experts talk about prices being reduced to consumers through competition, they mean that the “average” prices across all consumers will decline. 90% of all consumers can pay a higher rate while 10% pay a lower rate—because they buy the most electricity and, like all bulk purchasers, enjoy the steepest discounts.

What Johnston doesn’t mention is the role that electricity storage—or rather, the lack of it—plays in the marketplace. Electricity is not like other commodities, at least not today, because we don’t have a way of storing it in the same way that wheat, corn, or even natural gas and oil can be stored. This product is unique in that sense. Electricity is produced for immediate, “on-demand” use, so the market for electricity is not like other markets. Also, the transmission system has not been upgraded to enable power to be easily moved in response to market signals (as opposed to emergency transfers). Because there are still so many “constraints” and “transmission loading relief” requests, any benefits from electricity markets is squelched. A robust system of electricity storage would allow a more responsive and “real” electricity market to emerge.

Wednesday, August 22, 2007

Think: Less - Revisited

According to Vice President Cheney's now infamous quip: "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." Well, maybe now it is. Jim Rogers, chairman and CEO of Duke Energy, has been getting a lot of press lately with his "save-a-watt" program, and it sounds a lot like the basis of an energy policy to me.

Thomas Friedman (NYT, 8/22/07) quotes Rogers as saying,"The most environmentally sound, inexpensive and reliable power plant is the one we don't have to build because we've helped our customers save energy." The idea is that by partnering with customers to make homes and businesses more energy efficient and utilizing smart devices to regulate electricity usage during peak times, watts are "saved", i.e. not used.

According to Friedman, Rogers goes on to say, "Energy efficiency is the 'fifth fuel'--after coal, gas, renewables, and nuclear. Today, it is the lowest-cost alternative and is emissions-free. it should be our first choice in meeting our growing demand for electricity, as well as in solving the climate challenge."

So, how do we get consumers to use more of this fuel--energy efficiency? Well, it ain't going to be easy.

In our Think: Less blog entry a few months ago, we said:
We have to recognize that this issue [the "greening of America," concern about the environment, and a willingness to conserve] is ultimately about people and the energy they use and the goods they consume...we have to accept less--less consumer goods and less convenience. There must be sacrifices and there must be changes in lifestyle if we are to make a difference. No pain, no gain.
No one wants pain, even if it means there will be gain down the road. There must be real, upfront information signaling to consumers what their energy consumption means.

That's where Rogers' smart devices come in. As one industry expert put it recently, one simple way to drive home the real value of electricity is through sub-metering, so that electricity is seen as providing a "service" instead of just a baseline commodity, With sub-meters applied to individual appliances or systems, the REAL costs of electricity will be much more easily understood. Imagine, getting your monthly electricity bill and instead of giving you a base kwh rate per hour, you got something like this:

Light - $ .02/kwh
Refrigeration - $ .04/kwh
Heating - $ .05/kwh
Cooling/Air Conditioning - $ .08/kwh
Computing - $ .04/kwh
Computing Power Reliability Surcharge - $ .02/kwh
CO2 Emissions Reduction Surcharge - $ .08/kwh

Would the average consumer change their electricity usage habits? Chances are, when it is spelled out so vividly, the answer would be yes.

It's not just a question of no pain/no gain; it's about no knowledge about consequences/no reason to change behaviors. Giving consumers the tools and the knowledge to make educated decisions about their energy usage is the only clear way we can expect them to make the choice to use a lot more of that 'fifth fuel'--energy efficiency.

Thursday, July 26, 2007

Electrical Storm-Lights Out Reviewed in the WSJ

Mr. William Tucker, whose own book, titled Terrestrial Energy: Rethinking Nuclear Power in the Era of Global Warming will be published next year by Farrar, Straus & Giroux, reviews both Lights Out and Phillip F. Schewe's The Grid in the July 21, 2007 edition of the Wall Street Journal. All in all, I was very gratified by his comments, although I was a bit puzzled by why he identified me as the founder of the newsletter Common Sense on Energy and Our Environment. I am, but the publication has been defunct for over a decade. (More on Common Sense at another time.) Mr. Tucker talks about Mr. Schewe's description of Edison getting the Pearl Street Station up and running, but neglects to mention that our company is named, uh, Pearl Street.

I would, however, like to address several points he makes where I believe he mischaracterized my views.

On deregulation. Mr. Tucker writes that,
"Like many engineers, he [me] is nostalgic for the days of regulated monopoly, when the utilities built what the state approved at a guaranteed profit.The 1990s deregulation, he [me, again] charges, is at fault. But it is precisely because transmission lines are still not privatized -- serving instead as "common carriers" -- that this tragedy of the commons is occuring.
It's not so much that I long for the good ol' days of regulatory supremacy or that I think that deregulation, per se, is at fault here, but rather that I take issue with the manner in which deregulation unfolded. Most deregulatory plans were, in a word, dumb. And, in another word, shortsighted.

For instance, in one of the more egregious aspects of so-called deregulation, electricity rates were FROZEN in some states and reduced in others (in my opinion to show that deregulation was "working") and are only now catching up (in great leaps and bounds) to reflect actual market rates. Maybe I missed something in Econ 101, but I don't see how freezing or reducing prices unleashes positive market forces or changes consumer behaviors. (And, if I can toot my own horn here, I predicted this precise scenario way back when I was still Editor-in-Chief at Power magazine.)

Because of the way deregulation was conceived and implemented by state governments, transmission became the ugly stepsister...no one wanted to give her a second look, let alone invest billions of dollars, spend gazillions of hours fighting property owners and untangling redtape state-by-individual-state, just to try to dress her up and get her ready for the big dance. Transmission, as an investment, just wasn't very attractive.

As I write in the book,
Market activity and trading didn't cause a third-world grid. The way deregulation and competition unfolded simply made it much easier to make the big bucks from other parts of the value chain. And who wants to invest in something with a low return when there is an opportunity to be had over on the other side of the value chain?
But that doesn't mean that I believe competition is right for the whole system. There should be a "backbone" electricity generation/transmission capability that is regulated/monitored/secured by our government in case of national emergency and to provide a basic level of service to all consumers. My point is that the backbone shouldn't be subjected to unbridled competition, but careful competition with federal oversight. Competition is fine for some parts of the system and large customers buying at the bulk rate, but when our national interests are at stake, and consumers are affected, the backbone must be online, all the time.

On EMF. Mr. Tucker mentions the link (unfounded and overwhelmingly refuted) between transmission lines and cancer and notes that protests have often succeeded in stalling transmission installation, However, I don't think I mention EMF at all, and if I do, it is in passing...very quick passing. There are many more important problems with transmission siting than EMF. That problem is so last decade.

On distributed generation. There are several chapters in which I discuss distributed generation, but although Mr. Tucker writes that I demonstrate why backyard windmills and homefuel cells will not render utilities obsolete, I also write:
“The right side of the value chain requires a much greater emphasis on integrating generation, storage, grid interface equipment, and intelligent meters at consumer sites into an intelligent microgrid….To the extent possible, distributed microgrids should be based on renewable power systems—such as roof-mounted solar photovoltaics or small wind turbines on top of tall buildings.”

All in all, it was a very gratifying review. And if you're out there, Mr. Tucker, I'd like to buy you a beer and talk transmission.

If you have read the book, or are preparing to, please download the Lights Out Discussion Guide. We'd love to hear from you!

Thursday, July 12, 2007

Wind & Storage: Better Together

After returning from a long and much-needed vacation, it came to my attention that Mr. Tom Gray, Communications Director for the American Wind Energy Association, read the Reuters review of my latest book, Lights Out, and decided to take issue with my position on linking wind energy to electricity storage. It seems clear that Mr. Gray has not read the book, but has instead staked out his position based on the review alone. (Risingwind)

I suggest that Mr. Gray should 1) read the book, and 2) relax. In fact, he can rest easy in the fact that Lights Out does not bash wind or renewables at all and his intimation that I am an just another of the "anti-wind folks," whose "covert allies and backers in competing energy industries, are inventing new, creative additions [myths] daily" is simply, well, wrong. (Is this some sort of vast, engineering conspiracy he's referring to?)

In fact, should Mr. Gray read the book, he would find that it supports low or no-carbon solutions to the hilt. Mr. Gray should take off his ideological, one solution fits all, glasses, and look more closely at the full range of challenges and complexities inherent in the electricity generation industry.

Instead Mr. Gray is busy asserting that opponents to wind are actively promoting myths denouncing the viability of wind energy. Indeed, while Mr. Gray spreads the idea that "wind is variable, and so it really can't be a serious energy source without some form of storage" is "the oldest and most difficult [myth] to stamp out," experts across the industry are working hard to create an environment in which both physics and market forces converge to better integrate wind energy into the grid so that wind can truly become a major contributor to our energy supply.

Perhaps we would all take him more seriously should he admit that one major reason why wind energy proponents refuse to acknowledge the need for storage is that, without it, the wind industry will sell a whole lot more turbines, especially under current production tax credit subsidies and renewable portfolio mandates.

But, back to his criticism of my position on wind and storage. First of all, I don’t think I used the phrase “take off,” or if I did, it’s been taken out of context. That belongs to the journalist. (As you can see in the Reuters piece, it's not a direct quote.) In fact, I know that wind energy is taking off. It is approaching 1 percent of all the electricity generated in the US. (Coal is at 50%, nukes at about 20%, natural gas at 20%, hydro about 8.5%, wind around 1%, and biomass, solar, and geothermal make up the balance.) I know that wind is on a roll. And, I know that at percentages like this, the variable nature of wind isn't a big concern. But if the idea is for wind to become a significant contributor to our energy supply, then the fluctuations are a problem and they are different from the fluctuations imposed by other generating plants. Most of the latter are planned and can be moderated ahead of time. while wind speeds are varying all the time.

Over the last 30 or so years, I’ve sat in many technical sessions about wind and the grid impacts. Wind energy ideologues (yes, there are ideologues on all sides of an issue) refuse to admit there are any impacts, or if there are, they are someone else’s problem to solve and pay for. However, those who own, operate, and maintain the grid, continue to insist that these impacts are real, that better solutions are necessary, and the cost/pain must be shared by all. Storage is one solution; yes, it can be expensive, but there are multiple value buckets, which I point out in the book. There are other solutions for moderating the wind’s variability as well, some of which represent additions to the wind turbine system or the substation to which the turbines are connected. These also add cost. It is worth noting that all of the turbine vendors are working to solve the problem of grid impacts. We can kid ourselves politically and from a self-interest point of view that the impact is a red herring, but technologically, this is real stuff.

Electricity consumers will pay the bill either way. What I suggest in the book is that, as an industry, we should seek the best technological and the lowest cost solutions for all. It does no one any good--and indeed only impedes cooperation and progress--when we adhere to ideological positions that one thing is good and another thing is bad. When one understands the other values that storage brings to the system, I think ultimately coupling renewables with storage is the best way to maximize the fraction of renewables on the system at a reasonable cost.

One more thing...it is interesting to note that on his own blog, Mr. Gray does eventually admit that when wind does become a major contributor to the grid, variability will be an issue. Why not tackle that issue now and create the most favorable environment for wind energy's future growth and development?

Thursday, June 14, 2007

Railroad decline

Jason Said:
Illusion # 2Friedman refers to how President Eisenhower responded to the communist threat by building an Interstate system, which "enshrined America's car culture (atrophying our railroads) and locked in suburban sprawl and low-density housing," which all combined to get us 'addicted to cheap fossil fuels."

I am constantly amazed at how naive my southern bretheren can be (all NASCAR fanatics). Chattanooga was once the heart of the southeastern railroad industry, carrying food, cotton, livestock, all kinds of things to the northeast, and transshipping manufactured goods from the midwest to Florida. The rails were the "magic carpet made of steel" (remember "City of New Orleans" by Arlo Guthrie?). Now this system of rails, so energy efficient, has been neglected and allowed to decline. This is a tragedy, but may one day reawaken, if we are smart enough to see the energy benefits of rail. I'd say rail is about 10 times as effiient per ton/mile as trucks.

In the 50's the interstate system, cheap oil, and the luxury of personal transportation led to the replacement of rail cars with tractor trailers for shipment of goods. And I suppose this is a natural consequence of free market economics - service and price dictate who gets the freight. The railroads may be the most energy efficient, but the business model declined to the point where trucking could beat them on service and cost. My family benefited from this, trucking flowers all over the southeast.

If we are going to get serious about reducing oil use, for economic, political, and environmental reasons, we need to reexamine the rail network in this country, how it has been allowed to decline and be underutilized, and what we can do to promote the energy efficiency of this mode of transport. And, as Jason said in his book, don't forget that 50 or 60 percent of our electric power is fueled by coal, delivered in oil-fired diesel locomotives on aging rails. Our Arab trader friends still have their hands in our pockets - that oil from the middle east is 75% of the price of moving $6 a ton coal from Wyoming to plants east of the Mississippi that sells for $23.

The energy pipeline is getting longer and more global and we better look at how we can rescue the rails, we may need them one day. Ha, this is from a guy from Chattanooga "Choo Choo City" TN. God bless Glenn Miller, one day Chatta-boogie with be back on top.

Wednesday, June 06, 2007

The looming electricity rate shock

At a book signing event last night for Lights Out: The Electricity Crisis, the Global Economy and What It Means To You (Wiley, 2007), several people asked about electricity rate hikes. The two primary questions everyone wanted answers to were: 1) why are rates going up and 2) how high will they go.

Rates are going up now and going up rapidly for several reasons. One is that utilities are building new facilities to meet demand. The bigger reason, however, is that, especially in states like Illinois, electricity rates have been frozen for at least five years. Why? As part of the deregulation and competition program. Can you imagine the economist that would inject “competition” into an industry by forcing suppliers to freeze prices? Illinois isn’t alone, however. Many states did this. And now, rates are going up because we’re finally going to pay for the absurdities of most state deregulation programs.

Also, rates are going to go up because the power stations we’ve built over the last ten years burn natural gas which has gone up in price by five to ten times since these power plants were planned. And, for those who advocate more LNG-fueled plants, remember that as supply lines stretch and more and more LNG is imported, our electricity system--the foundation of our modern economy--will become increasingly vulnerable to similar price fluctuations and to the same kind of geopolitical influences that affect our oil supply. Personally, I don't think that's a very good idea. In my view, LNG should stand for Let's Not Go [There].

But there's an even bigger driver of future rate hikes looming overhead. Namely, global warming. As long as we're all consumers of electricity, we're all going to pay the price for addressing CO2 emissions that accompany its generation. And if we want to go to a low/no-CO2 emissions generation future, i.e. nuclear and renewables, then we're all going to pay the price for building new nuclear plants, subsidizing renewable projects, investing in energy storage and upgrading/lengthening our transmission lines to serve remote solar and wind farms.

When asked how high rates would ultimately go, I made an educated guess and said, "Higher than you think." Will rates double? Probably. At least in some places, and in others, they could go even higher. Are average rate payers aware of the sticker shock looming on the horizon? No.

Here's what industry CEO's had to say on the issue recently:

Public Not Ready For Cost Of Climate Change Fight, Say CEOs At S&P's Utilities Conference

NEW YORK June 5, 2007-- (Standard & Poor's, Writer: Robert McNatt)

Several industry chief executives at Standard & Poor's Annual Utility Conference, held in New York City on May 31, expressed the fear that one of the hottest topics in the power sector, global warming, was likely to become ever more contentious and difficult as consumers become aware of the costs of remediation. Those costs would almost surely result in rate hikes that could generate a regulatory and political backlash and have major implications for ratepayers, investors, and the utilities themselves. The five CEO panelists at the conference, "Will Surging Demands Jolt Credit Stability?" emphasized that the best approach to combating global warming would include a gradual phase-in of remediation costs for ratepayers who--despite the growing emphasis on renewable energy sources--are still likely to depend heavily on fossil fuels in the next dozen years. Finally, the panelists agreed that successfully reversing the effects of greenhouse gases will require serious commitments from governments, utilities, and industries in fast-growing overseas economies, notably China, which have become a rising source of carbon emissions.

Domestically, the full cost of reducing greenhouse gases is probably not yet apparent to ratepayers, said Thomas F. Farrell II, president and chief executive of Dominion Resources Inc., a major power generator in Virginia. "It will cost hundreds of billions of dollars and take decades to accomplish," he said. "It will have to include cars, be nationwide, and won't just hit electrical utilities." But consumers and businesses will have to be ready to contribute to the effort by reducing the amount of energy they use. "Before we leap to rate increases," said Ralph Izzo, chairman, president, and CEO of New Jersey-based Public Service Enterprise Group Inc., "there is a fair amount to be done in conservation."

Wednesday, May 30, 2007

Lights Out...available now!

I'm happy to announce that my latest book, Lights Out: The Electricity Crisis, the Global Economy and What It Means to You is now available. While my previous two books have been geared toward a professional audience, Lights Out is written in an approachable style that will enable anyone interested in our electricity infrastructure and energy policy to grapple with even the most complicated aspects of the industry.

It has always been a mystery to me why Big Oil is constantly covered by the mainstream press while the electricity industry seems to be an ignored stepsister. Perhaps the enigmatic figures of the past, such as Edison, Tesla and Westinghouse, pale in comparison to the romance of the rough and tumble world of Texas wildcatters or Middle Eastern sheiks in billowing white robes. Whatever the reason, it seems more than shortsighted when you stop to think that the ability to ensure the uninterrupted supply of electricity at a reasonable price is absolutely essential--even more essential than oil--to economic growth and to the survival and prosperity of modern society. After all, when our electricity service is disrupted, our water, telecommunications, transportation and banking systems grind to a halt and our homes, business and, indeed, all the modern conveniences of our daily lives, shut down.

Lights Out is our attempt to level the playing field and to give electricity its due while also proposing a comprehensive road map outlining technical solutions and regulatory reforms--for both the supply and demand side--that will put us on a more rational policy path and help us avoid the serious consequences of an unhealthy electricity infrastructure. The book is divided into three parats that provide a detailed look at:

1. How today's electricity system works--from the extraction of the raw energy source to the electricity-consuming appliances in your home--and what happens as the supply lines begin stretch or break down

2. Why the strongest, most vibrant economy in the world is increasingly dependent upon a production, transmission, and distribution system that continues to be built for the LAST fifty years, not the next half century

3. What can be done to rescue us from the current path we're on--from embracing new technologies ready for deployment to reformulating business models based on common sense, not market or political ideologies.

Needless to say, I think you should buy the book. After all, I've got a kid heading off to college this fall! But, more importantly than my daughter's college finances, it is imperative that this story get told, that people start to pay attention, that industry leaders stop reading from yesterday's playbook and begin to take the bold steps needed to correct systemic problems, and that politicans and policy makers stop wrapping themselves in ideological arguments and start addressing the serious challenges facing our electricity industry.

Wednesday, May 16, 2007

Up Up and Away…An Electric Power 2007 Recap

Have you checked your electricity bill lately? Chances are your rates have gone up. From east to west, north to south, electricity rates in America are on the rise. Although no one specifically addressed rate increases, the bulk of the speakers at the recent Electric Power 2007 Conference reported on issues that directly impact the escalating costs of power generation.

So what are these issues? There are three basic factors at play here:

1. Public demand for solutions to global warming
2. Increased global demand for commodities
3. Tight labor market.

Global warming. In the past, environmental concerns have come and gone. Will this time around be different? With the prospect of global warming on the horizon, many think so. Strategists at major power companies across the country are recognizing that the public demand is real and that they must be a part of framing the solution. As Duke Energy’s CEO has stated in the past, “If you are not at the table, then you are on the menu.” Today Duke’s strategists, among others, are calling for carbon legislation at the federal level to avoid fifty states imposing their own plans.

Although many recognize that automobiles also contribute to the problem, accounting for almost 25 percent of CO2 emissions, it is pretty clear that it is easier—politically—to hold the electricity industry’s feet to the fire rather than the auto industry—and the nation’s drivers of autos. After all, as Robert Peltier, Editor in Chief of Power magazine said, “Cars vote, power plants don’t.”

So, the most likely scenario is that the big energy companies are going to continue to carry the largest regulatory and financial burden for decreasing greenhouse gasses even as the economy grows and the demand for power increases. And at every step of the way, as regulatory and financial burdens increase, they will be passed on to the ratepayer.

Commodities. Part of those burdens are reflected in the rising costs of building new plants to meet increased demand and of bringing existing plants up to original design efficiency with new technologies. From time spent in the permitting process to construction and operation, everything costs more. And with tough competition for commodities coming from rapidly-developing China—where a new power plant comes on line practically every week—we’re going to see costs escalate even more. Because China is building so many new power plants, the demand for commodities has escalated dramatically. In fact, here at home, project costs are being dramatically revised upward well before ribbons are cut and ground is even broken.

Labor. As the global economy grows, the demand for power increases and more power plants are in the planning stages around the world. The big question is who’s going to run them. The supply of qualified labor in the U.S. is shrinking as the existing talent pool ages and fewer qualified personnel move into the market. Drawing new talent into the workforce is a daunting task that requires increasing pay incentives and opportunities.

While there are other issues impacting rising rates, these three are the fundamental drivers that are reflected in higher costs to end users as well as long-term challenges to the industry at large.

All of these issues are dissected and analyzed in "Lights Out: The Electricity Crisis, The Global Economy, and What You Can Do About It," now available at www.amazon.com or your local retail bookstore.

Wednesday, April 25, 2007

Think: Less

The journalist Thomas Friedman deserves a tremendous amount of credit for raising awareness of energy and environmental issues within a global framework. His piece in the The New York Times Magazine, April 16, 2007, highlights many of the issues we face as a nation in the "greening" of Main Street. However, even an advocate for a green America like Friedman fails to recognize perhaps two of the greatest illusions under which we're all living .

Illusion # 1
In the introduction to "The Power of Green," Friedman states, "I am not proposing that we radically alter our lifestyles. We are who we are--including a car culture." Later in the intro he says: "We have not even begun to be serious about the costs, the effort and the scale of change that will be required to shift our country, and eventually the world, to a largely emissions-free energy infrastructure over the next fifty years."

Hmmm. Perhaps the reason we haven't "even begun to be serious..." is that we haven't even begun to face the fact that shifting to a fully "largely emissions-free energy infrastructure" will, most definitely, radically alter our lifestyles. In other words, even before Friedman gets through with his introduction he has contradicted himself and exposed the first illusion standing in the way of an American Green Revolution. The illusion is that all we need to do is "fuel our future in a cleaner, greener way." So go ahead. Everybody jump on to the green bandwagon where no [radical] change in lifestyle is required.

Illusion # 2

Friedman refers to how President Eisenhower responded to the communist threat by building an Interstate system, which "enshrined America's car culture (atrophying our railroads) and locked in suburban sprawl and low-density housing," which all combined to get us 'addicted to cheap fossil fuels." A direct consequence of the growth of our successful car-based economy is that today, developing nations around the world are frenetically following the American model of development--complete with more and bigger cars for more and bigger highways so that more (and bigger) people can get to and from their more and bigger houses. This is a direct consequence of our success. The problem with consequences is that you don't always know what they'll be. Celebrated solutions to complicated problems often create unintended consequences that turn out to be worse than the original problem. Like kudzu, the vine planted in the South for erosion cotrol which has taken over entire mountainsides. Or the combustion engine--the perfect solution for cities battling the age-old horse manure problem.

The reality is that every energy solution on a national or global scale involves both a change in lifestyle and a known, but usually ignored, long-term consequence. The change in lifestyle is, of course related to the demand side of the energy equation. We--each of us--control that and are, ultimately, responsible for our own consumption. As for the supply side of the equation, Friedman lists some of the potential big solutions. I'm listing them here with some of their long-term consequences:

-Replace coal-fired power stations with natural gas fired ones.
If we do this on a massive scale, we'd end up importing huge quantities of liquefied natural gas (LNG), probably from the same countries that feed our addiction to oil. And as I think we are all aware by now, many of these countries do not necessarily share our geopolitical views.

-Sequester underground massive amounts of carbon dioxide from coal-fired plants. Imagine if all the world did this, we'd transform the global warming problem into a CO2 concentration problem. Because one really big C02 burp from deep below the earth's surface would be catastrophic, we'd have to ensure that all of this gas stayed where it belonged. The consequence is a management problem out to, well, forever.

-Build more nuclear power stations.
This is my favorite solution, but it has a consequence as well. We have to manage long-term high level nuclear waste, decaying through its half-life, for tens of thousands of years and we can't even get Yucca Mountain, or an acceptable alternative, up and running to manage our waste today. Planning for tens of thousands of years is like planning for, well, forever.

-Halt all cutting and burning of forests.
It seems hard to imagine how this wouldn't radically alter our lifestyles, unless the world's population starts writing on papyrus (I can foresee an increased demand for sedge subsidies) and living in trees.

In other words, the serious long-term problem of global warming will be replaced by serious long-term problems of a different sort. Clearly demand side is critical... and, barring some startling new invention that creates limitless energy out of thin air, that means changes in lifestyle.

There's also a third illusion that has to be confronted before we'll make any progress "greening" Main Street and creating a green political movement on the scale of what Friedman advocates. The illusion is that we (very generally speaking, of course) care about the rest of the world--really care. I'm not going to even try to delve into the sociology of empathy and behavior, but it is interesting to note that, as just one example, we don't seem to care much about the hundreds of Iraqi citizens who die every day. We can't even get respected journalists like Friedman to report on the daily death toll of Iraqis. Americans only count American casualties. And Americans are only concerned (again, generalities here) about the American way of life. But, strange as it may seem, for America to truly go green, we have to care about what happens "over there." What we do here has repercussions around the world. We drive big cars, live in big houses and buy lots of stuff. Then we make movies about it and sell them all over the world where lots of people watch them and then decide that they too want to drive big cars, live in big houses and buy lots of stuff. Or some people may decide that the American way of life is bad and decide to fly planes into tall buildings to prove their point.

The bottom line is that we have to care about the impact our energy-guzzling lifestyle has on the rest of the world. Likewise, developing nations, like China and India, have to care about how they are developing and what they are pumping into the air. Friedman talks a lot about the political impact of oil and how it ties into national security. But, the same is true for electricity as well--especially if we start importing more LNG. The saying "Think Globally, Act Locally." may be trite, but it has never been more true.

I don't want to leave you thinking I'm disparaging Friedman. He's providing a valuable service by trying to create a national debate about these issues. However, I don't think we should kid ourselves. We have to recognize that this issue is ultimately about people and the energy they use and the goods they consume. We have to accept that we will most likely transform one long-term national or global problem for another. Acknowledging this is he first step to minimizing the impact. Finally, we have to accept less--less consumer goods and less convenience. There must be sacrifices and there must be changes in lifestyle if we are to make a difference. No pain, no gain.

Friedman states that his motto is "Green is the new red, white, and blue." But combating global warming isn't just an American endeavor. Green has has to be about other peoples' flags and colors, too. I'm working on a catchy motto of my own...something like: "Think: Less." It's a dangerous illusion to believe all of this won't require sacrifices to our lifestyles. We've got to quit thinking we need so much. It's a stretch, but just like we became the global model for consumerism, maybe Americans can become global models for de-consumerism,

Wednesday, April 04, 2007

Planning Ahead: Securing our Electricity Infrastructure

Recently Carnegie Mellon held it's Third Annual Conference on the Electricity Industry. Focusing on "Ensuring that the Industry Has the Physical and Human Resources Needed for the Next Thirty Years," the conference drew participants from around the world--from Bucharest to Seoul and Brazil to China--and, of course exotic Pittsburgh. (You can read Leonard Hyman's summary of the conference at and review conference proceedings at http://www.ece.cmu.edu/~electricityconference.)

Although I found the whole conference compelling, one paper in particular stood out--and no, it wasn't the one I presented. But, first things first.

The first speaker set the tone. Ed Schlesinger, Department Head, Electrical & Computer Engineering, Carnegie Mellon, began by noting that, for the most part, the power is usually on. Our televisions and toasters, microwaves and computers generally work, our gas pumps generally pump, and our lives generally proceed day to day with few interruptions in our power supply. Because everything works so well, the average person has no idea that there are considerable problems in the industry. But, all is not well. And the public needs to know.

That premise--that the public needs to know where things stand in the industry--is critical. It's the premise of my new book, Lights Out: The Electricity Crisis, The Global Economy, and What It Means To You. We need to get the word out that the current situation in the industry is untenable, If we continue waking up each day assuming that the lights will be on and taking no action to ensure that indeed they will continue to shine for years to come, then we're contributing to the problem. As industry professionals, it is our responsibility to talk to more than just each other.

And we have a responsibility to alert the public to potential problems. Indeed, the one topic that stuck out for me is the one that Granger Morgan, Carnegie Mellon, tackled. Morgan reported that The Office of Technology Assessment revealed that terrorists could inflict massive damange to the electricity industry. When did they say that? In 1990! he also noted that a National Research Council (NRC) report from 2002 reported that terrorists could inflict the greatest damage by hitting the electric system. And now, he says that yet another NRC report is on the way.

What do these reports forsee as the primary targets? Well, while the public has nightmares about planes flying into nuclear reactors--which have armed guards and reinforced structures designed to withstand attack, the "juciest" targets are the critical substations scattered around the country, protected only by chain link fences, that ties our grid together.

In Lights Out, I write:

From a grid security and reliability perspective, and for the sake of our functioning electricity markets, I propose that perhaps, just maybe, we should be treating these critical substations like they were nuclear plants. Here it is a little more directly: our regional substations are critical assets that are essential to our national interest and should be viewed and protected as such. There you have it. So far, however, all the talk of change has gone no where fast.

Think about what it might look like if we suffer a coordinated attack on critical substations...it's not pretty. I'm in agreement with Morgan that more--much more--attention needs to be paid to the role our electricity system plays in national security. The grid is vulnerable. Very vulnerable. As for planning ahead, we need to take action to stockpile, as Morgan said, equipment, portable transformers, batteries and other local solutions that would enable damaged substations to get back up and running for rapid service restoration. It really is a matter of national security.

For those interested in the full scope of topics addressed, other conference papers ran the gamut. Here are just a few of the issues discussed:

• designing a future grid that can adapt to new technologies as they are developed
• planning for and scheduling reactive power
• pricing and metering
• the market motivations behind bidding and contracting procedures
• monetizing the cost of global warming and the vulnerabilities to attack and energy dependence (my presentation - available at http://www.pearlstreetinc.com/Carnegie_Mellon_Presentation_2007.pdf)
• structural barriers to reliability
the need for new regulations/definitions of performance and reliability
• retail competition and deregulation
• intelligent two-way troubleshooting
• degrading frequency response standards
• demand side management and energy storage

Wednesday, March 21, 2007

Wanted: A real energy services company

You know what the electricity business needs? It's own nascent Google, or Microsoft, Boeing, General Electric, or Blackberry type of company working to apply practical business models to consumer energy services around electricity delivery and consumption. A company, in other words, strong enough, technologically rich enough, politically savvy enough, and suitably capitalized to capture consumer imagination and sentiment. A company that can change the balance of power in the electric utility business from the supply side to the demand side, and make good money doing it. In my forthcoming book, "Lights Out: The Electricity Crisis, the Global Economy, and What It Means To You," I pose the issue rhetorically, but, in reality, it is serious business.

I was privileged to speak at an industry conference last week at Carnegie Mellon's Electricity Industry Center (part of the Tepper School of Business). The audience was small but the brain power was highly concentrated. Leonard Hyman, one of the keenest industry experts and observers I know, delivered a dinner address on the ten challenges facing the electricity industry. Afterwards, I asked him if he saw a company, large or small, that could truly act as a force for change in the business. Always refreshingly honest and blunt, his answer was, in a nutshell, no.

On the plane ride home, I sat next to a professor from the conference, an economist and an active member of GridWise, an industry center for collaboration on progressive electricity delivery. I asked her a similar question: Who do you see on the demand management side of the business that could truly disrupt the existing state of inertia? She mentioned a company called Site Controls Inc. I thought about companies like Silicon Energy (now owned by Itron). Then she mentioned Enernoc. I appreciated her insights, but on reflection, I wondered whether these companies had the staying power to truly dominate this part of the business. Maybe Enernoc has a shot if its IPO plan, announced February 13, goes well.

I thought about some of the electric utility subsidiaries, like DTE Energy (affiliated with Detroit Edison Co), Keyspan Corp, and Sempra, all of which appeared to be aggressively pursuing a national market in energy services, at least up until a few years ago. It was always unclear whether these subsidiaries were truly interested in demand response and management or in expanding supply through different market channels. There are fledgling companies out there pursuing the micro-grid business model, although I often feel they end up taking two steps back for every one step forward. Sixth Dimension was one, Encorp was another. There are several others. Large conglomerates like Emerson have all the pieces internally to dominate this end of the business. but I don't see an aggressive posture or a market strategy in place to do so.

We often joke in the industry that the core competency in the electric utility is "managing the regulator." It really isn't a joke. Success in the electricity industry often takes far more energy devoted to regulatory policy and politics than it does to technology or the customer experience. Most of these companies lack that recognition or else they proved that they were good at managing the regulator in their service territory, but not that of another utility. Another issue is that we are not even close to a national market in electricity, in fact we've regressed in recent years, and so state regulators still hold tremendous power over the process.

However, I'd like to put the question out there. What company(ies) do you see that can break the traditional electricity service paradigm? I'd love to hear your suggestions keeping in mind the elements noted above: technologically rich, political and regulatory savvy, well capitalized--and not distracted by revenues coming from other parts of the value chain. Suggestions welcome!

Friday, March 09, 2007

Industrial Ecology as a means of reducing the carbon footprint

I'm off to Carnegie Mellon University next week to give a presentation on Pearl Street Inc's E-Equity(TM) methodology at their annual Electricity Conference. E-Equity is a way to incorporate the principles of industrial ecology, a field of study mostly hovering in academia, into the evaluation of power generation options. Industrial ecology studies the "externalities," or the social costs of businesses that are not reflected in the financial accounting.

Pearl Street's E-Equity model looks at the "holistic" costs of power generation. It assigns values for "externalities" such as emissions and discharges and looks at the impact a plant has on the community in which it is sited as well as larger positive/negative impacts on the plant's business/environmental "ecosystem." E-Equity also includes economic penalties associated with defense-related expenditures to protect our global energy supply lines.

One area where defense-related externalities come into play is with the projected massive imports of liquefied natural gas (LNG) into the U.S. 25% of our fossil fuel deficit could be made up by LNG in 20 years, according to the Energy Information Administration. A rational person would have to assume that some amount of the U.S. global defense budget should be apportioned to petroleum and LNG, although I'm sure both sides of the political spectrum could argue for days about what that percentage might be. The bottom line, though, is that renewable energy, coal-based power, and nuclear plants all evaluate more favorably compared to LNG when this externality is fully exposed.

We performed an analysis of defense externalities for a mine-mouth coal project in Illinois and found that $30-million in annual value could be credited, when compared to an LNG-fired combined cycle plant. The larger point isn't how accurate this number is (we had to make some educated assumptions), but that it is a significant value. The fact is, any option--wind, solar or coal gasification--that uses a domestic source of energy would come out favorably when compared to LNG. In fact, it is my contention that, unless defense costs are factored into the long-term economic story around these options, we are doomed to repeat the cycle of relying on imports when OPEC and the other exporters decide to prevent demand destruction by lowering or stabilizing prices. This has a grave impact on the ethanol program. You can just see ethanol become the first "synfuels" of the twenty-first century once petroleum prices stabilize under $50/barrel.

Another E-Equity dimension we'll be talking about at Carnegie Mellon is looking for carbon credits up and down the electricity production value chain. For example, when a power station recycles flyash into concrete manufacturing, each ton of flyash recycled eliminates close to one ton of carbon dioxide! That's because it replaces Portland cement, which is an energy-intensive product. Here's another example: If you burn petroleum coke in a power station (a few plants burn 100% pet coke, many utiilty plants co-fire pet coke), a byproduct of petroleum refining, you avoid the carbon impact of mining and transporting coal long distances. All of the energy options on the table should be put under the E-Equity microscope.

There are great examples of industrial ecology being applied by forward acting owner/operators and project developers. When financial values for carbon are fully exposed through cap and trade policies, these best practices should become more prevalent.

Monday, February 26, 2007

TXU-saved from itself

In an earlier post, I likened TXU, the giant Texas electric utility, to the Enron of yore. Now the Barbarian at the Gate*, Henry Kravis and is buyout firm, KKR, might be better labeled the angel at the pearly gate.

Late last week, it was widely reported that KKR had made a buyout proposal to TXU, the largest U.S. private equity deal ever. When I first read it, I thought, are they nuts? Why would KKR want the one utility vilified for wanting to build new coal plants the old-fashioned way? I couldn't find anyone in the industry who thought what they were doing was smart. Even those who champion coal didn't believe the cost numbers they were putting out there. While everyone else's costs for power plants (of lal types) were going up, TXU's were going down. I make an example out of TXU in my forthcoming book (available in May), "Lights Out! The Electricity Crisis, The Global Economy, And What It Means To You," stating that it represents everything that most everyone wants to change about the electricity industry.

Surprise! Literally the next day, I read that the first thing the buyers plan to do is scrap TXU's ambitious but fatally flawed plan to build coal plants. Instead, one element of the new go-forward plan would be to spend $400-million on energy conservation. That's peanuts compared to the $10-billion TXU would have to spend to build the 10,000 megawatts of generating capacity the utility was planning. But at least the strategy had changed. Of course, I also read that the money could be used to finance the buyout so let's not pretend that the cold warrior from the leveraged buyout days of the 1980s all of a sudden got a streak of altruism.

Still, the news is a breath of fresh air strategically for the electricity industry. I'm not a basher of coal by any means-plenty of better ways to use the stuff are available than the option TXU had selected. Mostly, I interpret this move, supported by the back story of KKR and its financiers seeking the advice and counsel of environmental groups, as a sign that the investment community is also aligned with public opinion behind the idea that global warming must be addressed. I also think this is a healthier and more practical sign than Al Gore winning an Oscar for his docu-drama on global warming, "An Inconvenient Truth."

The air over Texas may be cleaner but KKR's bank account will be fatter, too. An angel with less soot on the white robe, perhaps?

*A book called "Barbarians at the Gate" was written about KKR and the hostile takeover of RJR-Nabisco in the 1980s.