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.