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 Then, after the Fuel Use Act was repealed in 1986, we went on a gas-fired power construction binge in the late 1990s.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
- LEFT SIDE
- 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
- RIGHT SIDE
- 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.