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.