Pearl Street Power

US Electricity Industry Impact Report

2010-09-14T11:54:00.004-05:00

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
August 2010

Political

• Federal legislators are moving away from a renewable portfolio standard (RPS) and toward a clean energy (or no carbon) portfolio standard (a more bi-partisan approach politically), which would include nuclear power.

Electricity Generation and Storage

• At least four utilities and independent power producers – Tennessee Valley Authority, Xcel Energy, First Energy, and Edison International – have announced that they will retire or idle thousands of megawatts of older, smaller coal-fired power stations. This will eventually raise electricity prices to consumers and increase utility revenues.
• The North American Electric Reliability Corporation (NERC) has drafted a report regarding the integration of variable energy resources (wind and solar) and its impact on the reliability and security of the nation’s electricity supply. The report recommends to grid managers that they, “consider adjusting market and non-market rules and procedures “that limit technically capable resources from providing flexibility needed to support specific reliability functions….”
• AES Corp is positioning itself to be a leader in energy storage project development. The company announced in early August that it will deploy 44 MW of lithium-ion battery “smart grid stabilization system” (SGSS) modules made by A123 Systems.
• According to the Wind Turbine Price Index, published by Bloomberg New Energy Finance, the decline for turbines delivered in the last half of 2010 and the first half of 2011 is 15%. However, wind project power purchase agreement (PPA) prices, according to a separate report, have fallen below the level at which wind projects can make an adequate return on investment. PPA prices today are $40-50/MWh compared to $60-90/MWh just a few years ago.
• Two thirds of the massive shale gas resources can be developed in the U.S. at wellhead gas prices of $6/million Btu or less, thus potentially placing a ceiling on the long-term price of natural gas for many years to come.

Economy

• Unemployment increased from 9.4% to 9.6% in August
• The U.S. economy is “stuck” in an uncomfortable position between the end of the direct stimulus allocations by the government, slowness spending what has been allocated, and the beginning of robust consumer spending.
• Sales of new homes fell 12.4% in July from the previous month, existing home sales plummeted by more than 27%, home sales prices fell, and average home prices are 30% below their peak in 2006.
• U.S. exports contracted by 1.3%, probably reflecting the declines in manufacturing noted above, and imports increased by 3.1%.
• Even China revealed its first monthly contraction in manufacturing since early 2009.

Forecast

• Pearl Street believes that there is a more positive scenario that analysts are not paying attention to, a contrarian opinion that at least deserves consideration.
• There are indications that the natural gas industry has regained strength politically and this, combined with favorable price-supply scenarios well into the future, means that gas-fired power stations will be the “option to beat” going forward in electricity generation.
• There is clear evidence that, since utilities are not investing for growth and to earn a rate of return on that investment, given with all this legislative uncertainty, they intend to grow through M&A, or at least position themselves for higher growth in the future.
• Pearl Street believes that turbine pricing may get much worse before it improves and that it will be difficult for any supplier not already established to sell turbines without putting substantial project equity at risk.

US Electricity Industry Impact Report

2010-08-09T13:49:00.005-05:00

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
July 2010

Political

•Carbon cap and trade (and anything else related to carbon emissions, such as a tax) and a federal renewable portfolio standard (RPS) have been removed from recent Senate energy legislation (but could possibly be re-inserted).

•The energy storage investment tax credit (ITC) is still included in both the Senate and House versions of the bill, although the benefits to the storage community have been greatly reduced.

•BP’s catastrophic oil spill in the Gulf of Mexico has escalated the impact of environmental regulatory risk on all energy industries in the U.S.

•The Midwest Independent System Operator (MISO) has proposed to FERC a new category of transmission project that is helpful in integrating wind facilities.

•The latest Clean Air Interstate Rules require additional reductions of sulfur dioxide and nitrogen oxides from 900 fossil-fuel boilers in the eastern part of the country. These rules will make coal-fired electricity more expensive.

Electricity Generation

•A looming challenge for utilities involves the ever-present tension between federal authority and state government. For example, the billions of dollars handed out to utilities for Smart Grid projects are imperiled because state PUCs and government must approve the cost-share portion of the projects.
•San Diego Gas & Electric Co is including an energy storage component in its next rate case before the Public Utility Commission.

Economy

•Deflation has occurred for 3 straight months, making economists nervous about a long period of low growth or the onset of another recession. Deflation numbers show that consumers may be starting to hold cash back in anticipation of even lower prices.
•Unemployment has stabilized but appears to have leveled off at 9.5%. As long as employment remains stagnant, strong economic growth won’t materialize.

•Consumer confidence decreased to 50.4 in July; it takes a reading of 90 to indicate that consumers believe the economy to be healthy.

•The U.S. saw the second weakest rate of new homes sold in June. Weakness in housing leads to weakness in retail sales (e.g., furniture, appliances, etc.), building and construction materials, and all goods and services required for a new home.

Forecast

•Pearl Street’s analysis shows that, over the next several years, the U.S. will be moving towards an integrated national industrial and energy policy, regardless of who gets elected. Individual states will then implement this policy. This policy will be based on invigorating manufacturing employment and boosting exports, with generous, direct government involvement.

•When the forward pricing curves for natural gas began to look favorable well into the future, new regulations or restrictions may either prevent this new source of gas from getting to market or make it significantly more expensive to do so.

•Pearl Street continues to believe that all the political and electricity industry forces converge on a massive build-out of wind facilities.

Who knew? A politician gives a good speech on energy.

2009-10-09T10:47:00.003-05:00

On September 21, 2009, something happened on the floor of the Senate that is becoming increasingly rare: A Senator gave a reasoned, well researched, and intelligent speech on an important topic that was free of vitriol and over-the-top partisan back-biting. That the speech just happened to be on energy made it especially important to me and that it was given by the Senator from my old home state made it even better.

Lamar Alexander (R-TN) used his speech to advocate for nuclear energy which I agree with. I have long said that if we want to address global warming, we must build nuclear power plants. He and I have a slightly different view of wind--I think it definitely has a place in the electricity mix when used in concert with bulk energy storage and smart grid technologies--but wind and solar will never replace baseload coal no matter how much you may wish for a green future. It just ain't gonna happen. So, we need nuclear. And we need to get busy building nuclear plants today. Now.

Sen. Alexander's speech (our text is a little glitchy) is so on the mark when it comes to nuclear power, that I think it is worth repeating here (click for more on Alexander's energy views):

Mr. President, if health care were not our first concern today, energy and climate change would be. It is lurking in the shadows, having had a lot of work done in the House, and it is about to come before the Senate. So as to the remarks I wish to make today, if I had to put a title on them, I would choose this: What the United States should really fear about nuclear power.

Communications experts say fear is the best way to get attention when you are trying to win an argument. Groups who oppose nuclear power have certainly mastered that technique by playing to economic, environmental, and safety fears.

So I wish to introduce a little element of fear into my argument here. I want to suggest what could happen if we do not adopt nuclear power as a more important part of our energy future, if Russia and China and India and a lot of other countries go with nuclear--as they are now--while we get left behind. Are we going to be able to compete with countries that have cheap, clean, reliable nuclear power while we are stuck with a bunch of windmills and solar farms, producing expensive, unreliable energy or, more likely, not much energy at all? The whole prospect of the United States ignoring this problem-solving technology that we invented is what I fear most about nuclear power.

Let me give you an idea of what I am talking about. A few years ago, in January 2006, the Chinese sent a delegation of nuclear scientists and administrators to the United States on a fact-finding mission. They toured the Idaho National Laboratory, the Argonne National Laboratory, and they visited GE and Westinghouse, trying to decide which technology to choose for their nuclear program.

Now you might wonder why anyone would be seeking our advice about nuclear power when we haven't issued a construction permit to build a new reactor in the past 30 years. But as Kathryn McCarthy, deputy director of the Idaho National Laboratory, said at the time:

The world still looks to us for leadership in this technology. They'd prefer to copy what we've already done. They don't like being on the cutting edge.

Well, that may have been true in 2006, but it's not anymore. The Chinese eventually chose Westinghouse technology for their first reactors. At the time, Westinghouse was an American company. In 2007, Toshiba bought Westinghouse, so now it is a Japanese-based company. Then when the Chinese got their Westinghouse reactor, they insisted on having all the specifications so they could see how it was put together. That is what we call "reverse engineering." As you might guess, China's next wave of reactors is going to be built with Chinese technology.

By 2008, the Chinese had shovels in the ground. The first four Westinghouse reactors are scheduled for completion by 2011. They also bought a pair of Russian reactors, which should be finished around the same time. They started talking about building 60 reactors over the next 20 years and just recently raised it to 132. They're in the nuclear business.

What have we accomplished in the meantime? Well, people in the United States have been talking about a "nuclear renaissance" in this country since the turn of the century. In 2007, NRG, a New Jersey company, filed the first application to build a new reactor in 30 years. They're still at the beginning of what promises to be at least a 5-year licensing process before the Nuclear Regulatory Commission. No one really knows how long this will take, since as soon as the licenses are issued, opponents will file lawsuits and the whole thing will move to the courts. If they are lucky, they might have a reactor up and running by 2020. Other companies have followed suit, and there are now 34 proposals before the Nuclear Regulatory Commission, but nobody in the United States has yet broken ground. So it is not likely the Chinese will be coming to us any time soon for more tips on how to build reactors. In fact, we will probably be going to them.

That is one aspect of what is going on in the world today. Here is another. As countries began constructing new reactors, it quickly became clear that the bottleneck would be in forging the steel reactor vessels. These are the huge, three-story-high, forged steel units that hold the fuel assembly--the reactor core. That means forging steel parts that may weigh as much as 500 tons.

In 2007, the only place you could order a reactor vessel was at the Japan Steel Works, and they were backed up for 4 years. Everyone started saying: This is going to be what holds up the world's nuclear renaissance. They will never be able to produce enough of those pressure vessels.

So what happened? Well, first, Japan Steel Works invested $800 million to triple its capacity. They are going to be turning out 12 pressure vessels a year by 2012. Then the Chinese decided to build their own forge. In less than 2 years, they put up a furnace that can handle 320-ton parts. They turned out their first components in June. Now they are building two more forges. So, you see, the Chinese will not be standing in line in Japan any time soon. The Russians are doing the same thing. They are in the midst of a big revival, planning to double the production of electricity from nuclear power by 2020. They are also building a forge and just cast their first 600-ton ingot in June. France, Britain, South Korea, and India are all following suit. Very soon, every major nuclear country in the world is going to be able to forge its own reactor vessels, except one--and that is us, the United States.

No steel company in America is capable of forging ingots of more than 270 tons. We are still stuck in the 1960s. That means when it comes to building reactors, we will have to stand in line in Japan or somewhere else. In fact, just about everything in our first new reactors is going to be imported. The nuclear industry tells us that at least 70 percent of the materials and equipment that go into these first few reactors will come from abroad. That is because we have let our nuclear supply industry wither on the vine. In 1990, there were 150 domestic suppliers making parts for nuclear reactors. Today, there are only 40, and most of them do their business overseas. Of the 34 proposals before our Nuclear Regulatory Commission, 20 are designed by Westinghouse, now a Japanese company, and nine are from AREVA, the French giant. General Electric, the only American company left on the field, has partnered with Hitachi. They together

shining in Arizona"? That was pretty good too. Now have you seen any GE ads, in this day of concern about climate change, that say that 70 percent of our carbon-free electricity comes from nuclear power? I certainly haven't.

Babcock & Wilcox is the one American company that stirred some interest recently when it announced plans for a new "mini reactor." This is a 125-megawatt unit that can be manufactured at the factory and shipped by rail to the site, where several units can be fit together like Lego blocks. This left the impression that America might be innovating again, forging back into the lead. But the complete prototype for the Babcock & Wilcox reactor is still 2 years away, and then it may take another 5 years to get the Nuclear Regulatory Commission's design approval. Meanwhile, the Russians are already building a mini reactor that will be floated into a Siberian village on a barge to produce power. The Russians have already got orders for mini reactors from 12 countries. So in spite of Babcock & Wilcox's fine effort--and I am certainly proud of them--the Russians are considerably ahead of us.

Let's take stock. There are 40 reactors now under construction in 11 countries around the word--not one of them in the United States of America. In fact, only two are in Western Europe: one in Finland and the other in France, both built by AREVA. All the rest are in Asia. Although we have not gotten used to it, Asia may soon be leading the world in nuclear technology.

Japan has 55 reactors and gets 35 percent of its electricity from nuclear energy, almost double the 19 percent we get here in the United States. The Japanese have two reactors under construction and plans for 10 more by 2018. The Japanese are finding they can build a reactor, start to finish, in less than 4 years. That is less time than it takes to get one American reactor through licensing at the Nuclear Regulatory Commission.

South Korea gets nearly 40 percent of its electricity from nuclear--that is twice as much as we do--and is planning another 8 reactors by 2015. So far, they have bought their reactors from the Japanese, but now they have their own Korean next-generation reactor--a 1,400-megawatt giant evolved from an American design. They plan to bring two of these on line by 2016. Taiwan also gets 18 percent of its electricity from nuclear and is building two new reactors.

In September, Bloomberg News reported that Japan Steel Works' stock had risen 8 percent on the Tokyo Stock Exchange because of China's decision to double future construction from 60 to 132 new reactors. They figure they will get some of the action at Japan Steel Works. Much of China's $586 billion stimulus package is going toward developing nuclear power.

"While China had been focusing on building new coal plants," said Bloomberg, "it has now shifted its focus to nuclear because of the environmental issue," said Ikuo Sato, president of Japan Steel Works, in Bloomberg.

Meanwhile, India is embracing thorium, a technology a lot of people think may eventually replace uranium as nuclear fuel. Thorium is twice as abundant as uranium and doesn't produce the plutonium everybody worries will be used to make a bomb. There is a lot of enthusiasm for thorium among scientists in our country. But it is India that is going ahead, with 6 reactors under construction and 10 more planned. They began with a Russian design, but they are also trying some American technology they acquired in signing their 2005 agreement with the Bush administration.

What about Chernobyl. Well, just like everybody else, Russia stopped all construction on new nuclear reactors after that horrible accident. But they learned their lesson and started constructing much safer reactors in the 1990s, completing the first in 2001. Now they have plans to expand along the lines of France, building two reactors every year from now through 2030. They have a very good reason. Russia has huge natural gas supplies, but it is wasting them by using one-third of it to produce electricity. They could get six times the price by selling natural gas to Western Europe. So they are replacing gas generation with nuclear--which is exactly the opposite of what we are doing here. Since 1990, every major power plant built in this country burns natural gas. We now get 20 percent of our electricity from natural gas--more than nuclear's 19 percent, and the natural gas percent is still going up.

And be aware, all these countries that are developing nuclear just aren't building them for themselves. They are selling to the rest of the world as well. AREVA is building reactors in Finland, China, Italy, Brazil, and Abu Dhabi. The Russians have signed deals with China, Iran, India, Nigeria, and Venezuela. They are even selling to us. In July, Tenex, Russia's uranium corporation, signed a long-term contract to supply fuel to Constellation Energy, which has reactors in Maryland and upstate New York. It was the sixth contract Tenex signed with an American utility in the past 2 months.

How did the Russians end up supplying us with uranium? It is a long, interesting story and the most important players stood and worked on this Senate floor. In 1996, Senator Sam Nunn, Senator Pete Domenici, and Senator Richard Lugar pioneered a remarkable deal with the post-Soviet Government, in which we would buy highly enriched uranium from old Soviet bomb stocks. The uranium would be sent to France, where it would be "blended down" from 90 percent fissionable material to 3 percent to be used in American reactors. For the last two decades, old Soviet stockpiles have supplied half our nuclear fuel. One out of every ten light bulbs in America is now powered by a former Soviet weapon--one of the greatest swords-into-plowshares efforts in history, although few people seem to know about it. Now the Russians

Once upon a time we were pioneers in nuclear technology. Forty years ago, we were the only people in the world who knew how to deal with the atom. That is not true anymore. We have shied away from the technology while everyone else has forged ahead. Even Europe is coming back. The British have announced they are going nuclear. They have hired the French national electric company to help. Italy closed all its nuclear reactors right after Chernobyl but ended up importing 80 percent of their electricity at a huge cost. Now they have announced they are going back to nuclear as well. France already gets 80 percent of its power from nuclear and has the cheapest electricity in Europe, not to mention the second lowest carbon emissions, behind Sweden, which is half nuclear. France also sells $80 billion worth of

So does that mean we have fallen completely behind? Not at all. In fact, there is a great irony to all this. We still know how to run reactors better than anyone else in the world. Our fleet of 104 plants is up and running 90 percent of the time. No one else even comes close. France, for all its experience, is still at 80 percent. Other countries are even lower. We still understand the technology better than anyone else in the world. But because we have placed so many obstacles in our path, we aren't allowed to build reactors anymore. And that is what scares me. We are gradually losing our economic place in the world.

Now a lot of people say: Well, what is the difference? So what if we fall behind on nuclear technology. We will forge ahead with something else. Well, there are several reasons to be concerned:

First, there is energy security. America already spends $300 billion a year importing two-thirds of our oil from other countries. If we remain on the current path of no new nuclear power or start depending on other countries to build our reactors and supply us with fuel, we are going to be even more vulnerable than we are today. The best way to reduce imported oil, aside from ramping up domestic production, will be to use electricity to power cars and trucks. At first, we can plug our electric vehicles in at night when there is much unused electricity. After that, we should be using nuclear. We can't have Americans going to bed every night hoping the wind will blow so they can start their cars in the morning.

Second, there is the matter of technological leadership. Americans produce, year in and year out, 25 percent of all the wealth in the world. Most of that wealth has been driven by new technologies. We were the birthplace of the telephone, the electric light, the automobile, the assembly line, radio, television, and the computer. But nuclear energy--perhaps the greatest scientific advance of the 20th century--is passing us by. The 21st century is going to run on clean, cheap, greenhouse-gas-free nuclear power. And, how can we criticize India and China for not reducing their carbon emissions when we refuse to adopt the best technology ourselves?

Then there is weapons proliferation. In the 1970s, we gave up on nuclear reprocessing in the hope that by not dealing with plutonium, we would prevent nuclear weapons from spreading around the world. That has turned out to be an unwise decision. France, Britain, Russia, Canada, and Japan went right on reprocessing and no one has stolen plutonium from them. Instead, rogue countries, such as North Korea and Pakistan, have found their own ways to develop nuclear weapons. The technology of bomb making is no big secret anymore. The real problem is that by reneging on world leadership, we have left the field to others. For instance, right now the Russians are building a commercial reactor for Hugo Chavez in Venezuela. He is not exactly friendly toward the United States. To make things more interesting, Manhattan District Attorney Morganthau recently wrote in the Wall Street Journal that his office has recently uncovered evidence that Iran may be providing Venezuela with missile technology.

But what worries me are these two issues: First, if we do decide to move toward a nuclear-based economy and we have to import 70 percent of the technology and equipment, how are we any better off than when we were importing two-thirds of our oil? We will just be creating jobs for steelworkers in Japan and China instead of the United States. Second, if we don't move toward a nuclear-powered economy but try to do everything with conservation and wind and solar, we are going to be sending American jobs overseas looking for cheap energy.

So to ensure we have enough cheap, clean, reliable, no-carbon electricity in this country to create good, high-quality, high-tech jobs, here is what I believe we have to do. The United States should double its production of nuclear power by building 100 nuclear reactors in 20 years. Nuclear today provides 70 percent of our carbon-free electricity. Wind and solar provide 4 percent. Nuclear plants operate 90 percent of the time. Wind and solar operate about one-third of the time.

The Obama administration's Nobel Prize-winning Energy Secretary, Steven Chu, says nuclear plants are safe and that used nuclear fuel can be safely stored onsite for 40 to 60 years while we figure out the best way to recycle it. Producing 20 percent of electricity from wind, as the Obama administration proposes, will require building 186,000, 50-story turbines--enough to cover an area the size of West Virginia--plus 19,000 miles of new transmission lines to carry electricity from remote to populated areas. One hundred new nuclear plants could be built mostly on existing sites.

To produce 3 percent to 6 percent of our electricity, the taxpayers will be subsidizing wind to the tune of $29 billion over the next 10 years. The 104 nuclear reactors we have today were built basically without taxpayer subsidies. It will cost roughly the same to build 100 new nuclear plants, which will last 60 to 80 years, as it would to build 186,000 wind turbines, lasting 20 to 25 years. And this doesn't count the cost of transmission lines for wind. Finally, there will be twice as many green jobs created building 100 nuclear reactors as there would be created building 186,000 wind turbines.

An America stumbling along on expensive, unreliable renewable energy, trying to import most of our energy from overseas, is going to be an America with fewer jobs and a lower standard of living.

Nuclear opponents continue to prey on fear of nuclear power. The truth is, if we want safe, cost-effective, reliable, no-carbon electricity, we can no longer ignore the wisdom of the rest of the world. The real fear is that we Americans are going to wake up on one cloudy, windless day, when the light switch doesn't work, and discover we have forfeited our capacity to lead the world in creating jobs because we ignored nuclear power, a problem-solving technology we ourselves invented.

A Hero’s Tribute

2009-03-12T12:50:00.001-05:00

By Mark Glaess, Manager
Minnesota Rural Electric Association

Andy Reichwein was among lineworkers from the Minnesota-based Connexus Energy who joined thousands of other linemen from across the United States to restore power to storm-stricken co-ops earlier this month. The brotherhood that is the nation’s lineworkers left their homes, left their families, left their attendant tasks to attend to the hundreds of thousands of co-op members located in Arkansas, Missouri and Kentucky who saw electric lines littering roads and ditches. No national headlines hail the sacrifices Andy made, nor do these linemen ask for such.

John Thain, by comparison, is the former Chairman of the New York Stock Exchange and the last CEO and Board Chairman of Merrill Lynch. Among Thain’s notable accomplishments were losses exceeding $25 billion yet paying $4 billion in bonuses, including pocketing $10 million and dropping $1.2 million to spiff his office. Those deft corporate decisions netted him an invitation from the New York Attorney General Andrew Cuomo. Cuomo likely expressed the same disbelief, as did Congress, when the CEOs of Chrysler, Ford and General Motors taxied into Washington D.C. on their individual corporate jets to plead for $25 billion in loans to reinvigorate the companies they drove into the abyss.

The hundreds of thousands of rural electric consumers who lost light, heat, and fresh food in the Southeast are among America’s less fortunate. Minnesota’s electric cooperative members, for example, record a per capita income 20% below the state average. It’s likely a sadly similar statistic in your state too. Through the Rural Economic Development Loan and Grant program, the nation’s co-ops create jobs and opportunities. The National Rural Utilities Cooperative Finance Corporation, or CFC, by the way, made that program available obtaining, with National Rural Electric Cooperative Association’s assistance, federal guarantee of their loans with the interest savings going to create the $1 billion loan/grant program.

Matthew 23 records the Sermon on the Mount where Jesus observes as you have done “to the least of them, you have done to me.” That becomes our calling, and the calling of each electric cooperative. We are to take care of the poor. That’s the reason we promote programs designed to assist the least of them. It’s also the reason why NRECA framed “Our Energy, Our Future,” to clearly state the co-op’s case for affordability in the face of climate change legislation and other cost pressures on electric rates. FDR also makes the case for this co-op philosophy when he once observed: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide for those who have little.”

John Thain and others lost billions of dollars of those he never knew. Andy Reichwein died while trying to restore electricity to folks he never knew. A tragic accident snapped the pole Andy was straddling sending him to the ground along with a transformer which hit him in the head. Andy leaves behind a wife, a four-year old daughter and friends who grieve his death. The bucket trucks that accompanied this fine young man to his funeral also signified the depth of our program’s convictions – raising high the poles to carry the current providing both light and hope to the least of them. That also makes Andy Reichwein among the very best of them.

Let's all pause to think hard about this.

It's all about energy and infrastructure. Finally.

2009-01-16T13:27:00.002-06:00

Okay, it may not be ALL about energy and infrastructure, but finally it looks like we've got people paying attention to infrastructure engineering rather than just financial engineering. President-elect Obama's stimulus plan appears to go in the right direction. I'd argue it's not enough, of course, and that we need more on research and development and more for energy storage in particular (to support those renewables!), but it's something. Here are some of the details (list from WSJ):

Highlights of Economic Recovery Plan
Spending

Energy
$32 billion Funding for "smart electricity grid" to reduce waste
$20 billion + Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit
$6 billion Funding to weatherize modest-income homes

Science and Technology
$10 billion Science facilities
$6 billion High-speed Internet access for rural and underserved areas

Infrastructure
$32 billion Transportation projects
$31 billion Construction and repair of federal buildings and other public infrastructure
$19 billion Water projects
$10 billion Rail and mass transit projects

Attention Obama and McCain: Electricity Matters!

2008-10-14T23:17:00.000-05:00

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...

What happens now?

2008-10-10T10:51:00.003-05:00

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.

It’s time to talk electricity!

2008-09-11T10:43:00.003-05:00

This election cycle it is critical to get the candidates talking about the future of electricity in America.

Electricity is SO fundamental to our economy and our modern way of life that most people don't even think about it. The industry has done such a good job that today we have (relatively) affordable, reliable, robust power available to homes and businesses. But, if we don't address the challenges facing the industry, the future of affordable, reliable, and robust power may not be secure. The challenges are many, the solutions complex. Climate change policy, energy independence, skyrocketing commodity costs, inadequate transmission infrastructure, incessant demands for renewable energy, and conservation all affect electricity policy, and become de facto back-door electricity policy.

The future of our economic well-being and competitiveness depends on crafting a smart electricity policy--not only reacting to our challenges with a hodgepodge mess of initiatives that are neither well thought out or feasible. So, right now, take the time to write a letter to the editor, craft an Op-Ed piece, write or call your elected representatives and make your voice heard!

Talking Points on our Electricity Future

:: Electricity is absolutely critical to our economy and to our modern lifestyles.
- We have to manage the impact of all of these environmental and economic pressures on our electricity infrastructure.
- Nothing substitutes for its convenience, cleanliness (at the point of use), and versatility.
- It supported our entire infrastructure, from server farms to water supply, and therefore is a critical part of our national security.

:: Electricity is the one energy that is Invisible—Except When It Isn’t There.
- Voters and ratepayers have to think about electricity before their lights go out or their rates skyrocket.
- Unlike gasoline, consumers don’t see the price of electricity, so they cannot respond viscerally to it. When you don’t know the cost of something, you can’t understand its value and you have little incentive to change behavior. Right now, electricity rates are escalating everywhere but most of this is to pay for the excesses and the deficiencies of past deregulatory and competition programs! Future rate shock will pale in comparison and we won’t be paying for the right things unless voters get engaged now!

:: 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), or legislation that spends more time in court than in practice, and we lurch from election cycle to election cycle catering to narrow special interests instead of adhering to a flexible but long-term policy or plan.

:: 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 more transmission
- Transmission is the smallest component of value in the production and delivery value chain but represents the greatest investment and infrastructure gap for long-term reliability, security, and price stability.
- Transmission knits our national grid together but a terrorist attack on a key interconnecting substation can black out half the country. We must protect the grid for what it is, the linchpin for survival and comfort.

:: 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, which requires substantial RD&D funding.

:: 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. Financial engineers have been extracting money from the nation’s electricity infrastructure, and little of it is put back to work.

: We must begin to address global warming now! Addressing global warming can be elegantly simple.
- Use nuclear power combined with more renewable energy supported by energy storage technologies (both carbon-free sources) to move away from fossil fuels for electricity production and revamp the transportation infrastructure for electric vehicles.

Winter temperatures in the August heat

2008-08-21T11:59:00.003-05:00

Sometimes in this great game of energy consumption and environmental impact, all you can do is plead for someone to just pay attention.

Unlike most of our posts here on the larger vision, new technologies, and policy frameworks, this one simply describes the last two days I spent in Chicago. In sum: It is August and I was freezing.

Not outside, mind you. A few years ago, I was in Chicago in August when it was cool enough for a light winter jacket. No, this time, I was indoors. Literally, everywhere was over-air-conditioned. And I asked around. I was by no means the only one freezing.

I was in the Hyatt Hotel O'Hare, a large meeting room at the Stephenson Convention Center at Rosemount, a charter bus to Wrigley Field (Yes, I believe this is the year Cubs fans will no longer have the curse to blame their poor showings on year to year), and the Field Museum. Everywhere, the AC system was doing refrigeration, not cooling.

I am used to being over-AC'ed in Houston. But that's a city that proudly proclaims to be the energy capital of the world, in production and consumption. But Chicago? This is the city that increasingly is referred to in the same breath as "green cities," "cities that work," cities making a collective effort to inculcate green building design into the urban psyche.

I suspect I know the reason, but it's really only an excuse. It was cooler than normal for August. Spaces are commonly over-air-conditioned in the summer under these conditions. Or, in the case of the Field Museum, it could have been a combination of the unseasonably moderate temperature and smaller number of crowds in the space.

My question is, why isn't anyone paying attention and doing something about it? It seems all it takes is for a facility manager to dial back the control system or change the settings if the control system is automated.

Chicago this week seemed like a city where gasoline costs $1.50 a gallon, they have a special deal on petroleum for the low, low price of $25/barrel, and electricity rates are still frozen at 1995 levels.

So, the next time you are talking up green building design, renewable energy mandates, demand side management, energy independence, and the horrors being inflicted on all of us by global oil companies, let's remember that we're not part of the solution until we start paying attention.

Energy storage: It's time to get excited!

2008-08-19T09:55:00.004-05:00

For years, I've been speaking and writing and (sometimes, even) ranting about the sad state of our electricity grid. Now, I'm really getting frustrated. Every day I learn about some new effort to wean ourselves from coal by putting up huge windfarms or solar arrays. Everyone is on the solar and wind bandwagon, but still no one is talking about transmission. Or at least talking about it realistically. It's easy to say we're going to put up X number of miles of new transmission, but getting the permits, access to the land, and dealing with private owners and multiple state governments isn't so easy.

We all know that to meet our nation's demand for electricity, wind farms and solar arrays are going to have to be huge. And they are, more often than not, going to be located at some distance (often hundreds of miles) from where the electricity demand is located. Think North Dakota and Chicago, or West Texas and Houston. If we truly want to shift our dependence from coal to renewable wind and solar, we need a grid that will support the shift--one that reaches from North Dakota to Chicago and West Texas to Houston. But, beyond that, simply extending the grid only solves one of the problems.

The other problem is intermittency. No matter what wind proponents tell you, intermittency is a problem. Ask any grid operator. The physics of operating the grid demand that the electricity fed into it NOT be intermittent. A surge or sudden drop in electrons can actually cause the system to trip offline. I don't think anyone running a business or a home wants to depend on intermittent electricity --we all want quality, usable electricity 24/7. The point is that the electricity generated by the wind farm, for instance, has to get to the demand center and it has to be fed onto the grid in a way that does not disrupt the physics of the transmission wire...it's a little more complicated than saying, oh, some electrons have arrived, let's dispatch 'em on the wire and ship them out to neighborhood A or factory B.

So, not only do we need a new network of transmission lines to get energy from the remote source to the demand center, we also need a way to solve intermittency. But what gets me so frustrated is that the solution to making solar and wind installations economically viable and physically dispatchable is energy storage--and yet, when was the last time you heard anyone get really excited about storage?

We'll I'm excited about storage. In fact, I'm really excited. I believe storage is the key to changing the way we think about electricity, global warming and energy independence. Storage has the potential to change how we live our lives. I'm not just talking about large scale storage that enables renewable energy; I'm talking about energy storage in all its sizes and all its possibilities.

Today, the world’s electricity system is essentially a massive network we are all plugged into. Everything we depend on that runs on electricity must be plugged in. Even our small modern conveniences—our cell phones or laptops—must be plugged in and recharged. We live lives connected to the grid.

Tomorrow, however, the traditional, one-way, electricity grid may be, literally, a relic of the past. Instead of being attached to the grid, we can set ourselves free with powerful living, transportation, and communications storage devices that allow us to use the grid simply as a base charging station. Our storage devices will both draw electricity from and feed electricity into the base station. And the base station will be fed by sustainable wind, solar and thermal energy that relies on bulk storage devices to make them both economically and physically viable.

In fact, the key to addressing global warming and our dependence on foreign oil is energy storage. Energy storage increases the ability of solar and wind to meet our energy needs, therefore reducing our dependence on coal. With more wind and solar feeding our base charging stations, energy storage eliminates coal from the equation and enables the electric transportation revolution. The electric transportation revolution eliminates our need to import oil from nations that don't necessarily have our best interests at heart. And, beyond all that, powerful energy storage devices open up a vast new world of possibilities for how we live, work and play in the future. Energy storage is central to addressing our current challenges and to enabling a sustainable future. It's past time we all got excited it!

More talk of rising rates

2008-05-17T11:01:00.003-05:00

As we've been saying here for well over a year (much longer in print and speeches), rates are going to head higher--in some areas, much higher. Recently bloggers and industry analysts have picked up on this issue and are also writing about the coming increases. Here's a piece first reported in the South Florida Business Jouranl and then picked up by MSNBC:

Global warming bill could raise natural gas, power costs
By Kent Hoover
South Florida Business Journal
updated 7:00 p.m. CT, Sun., May. 11, 2008

High gasoline prices may be today's energy crisis, but electricity rates and natural gas prices could become even bigger headaches for businesses in the future.

Pending legislation to cap greenhouse gas emissions would increase the cost of electricity and natural gas, according to a new analysis by the Energy Information Administration. The federal agency studied the potential impact of the Lieberman-Warner Climate Security Act, which would cap emissions of carbon dioxide and other gases tied to global warming. EIA projects the legislation would reduce carbon emissions in 2020 by up to 36 percent below what they would be under current regulations.

More than 80 percent of the emissions reductions would come from the electric power sector, EIA projected. This would be achieved through expanded use of nuclear power and renewable energy sources, as well as deploying carbon capture and sequestration (CCS) technology at fossil-fuel power plants.

If cleaner sources of power and CCS technology are not developed quickly enough, electric utilities would increase their use of natural gas as a substitute for coal, according to the study. This would result in "markedly higher" natural gas prices, EIA predicted.

That would impact Florida Power & Light Co., which relies on gas to generate 50 percent of its energy. The company gets 20 percent of its power from nuclear power, and recently announced plans to add two reactors to its Turkey Point plant near Homestead.

FP&L only gets 5 percent of its power from coal; the remainder is from oil or purchased from other utilities.

FP&L has filed to increase the average consumer bill by about $2.50 next year to help pay for the two reactors, according to news accounts of regulatory filings.

Nationwide, the proposed regulatory changes would increase the price by 5 percent to 27 percent by 2020, compared with what would happen under current regulations, according to EIA. By 2030, the price would be 11 percent to 64 higher.

These higher energy costs would hurt the economy, with the impact growing worse over time as the emissions caps become more stringent, according to the study. Manufacturing would be the hardest-hit sector, EIA predicted.

Higher costs worry manufacturers
The Lieberman-Warner bill "runs the risk of doing more economic harm than environmental good," said John Engler, president and CEO of the National Association of Manufacturers.

"Manufacturers are the most natural gas-intensive sector, and affordable natural gas is essential to the long-term competitiveness of manufacturing and the U.S. economy," Engler said. "We cannot continue to propose increases in the price of natural gas while failing to expand domestic gas exploration and increase investment in nuclear energy technology."

The U.S. Chamber of Commerce contends the bill's timetable for greenhouse gas reductions is unrealistic.

"In fact, the only way to get there - without shutting down economic activity - would be to use technologies that don't yet exist," chamber President and CEO Tom Donohue said.

'Price signals' to spur innovation
Development of these new technologies, however, would accelerate if Congress caps carbon emissions, environmentalists say.

The legislation would distribute allowances for carbon emissions and allow companies to trade them. Companies with low carbon emissions, for example, could sell allowances to companies with high emissions.

This cap-and-trade system would send "price signals" that would unleash investment in new energy technologies, said Eric Svenson, VP of environmental health and safety at Newark, N.J.-based energy company Public Service Enterprise Group (PSEG).

Economic projections often miss the impact of technological advances, said Dan Bakal, director of electric power programs at Ceres, a Boston-based coalition of investors and environmental groups.

"There is no model that can adequately capture the ability of our industry to innovate," he said.

Electric utilities are "on the cusp of making massive investments" over the next 10 to 15 years to meet future demand, said Melissa Lavinson, director of federal environmental affairs and corporate responsibility at PG&E Corp., the San Francisco-based parent of Pacific Gas and Electric Co.

(FP&L's new nuclear plants may cost up to $18 billion.)
Congress needs to enact climate change legislation soon so that utilities are "making the right investments," Lavinson said.

The impact of the legislation on electricity users, including businesses, could depend on how allowances for emissions are distributed. A report by Ceres, the Natural Resources Defense Council, PG&E and PSEG concluded consumers would benefit if as many allowances as possible were auctioned, instead of given to utilities. Proceeds from the auctions could be used for energy efficiency programs, investment in clean energy technologies and rebates for consumers, the report said.

Energy efficiency is the most cost-effective way to reduce greenhouse gases, Bakal said.

Reducing the gases could be critical to the local economy. Scientists have linked them to global warming and rising sea levels, which could threaten the coastline and water supply.

Global warming bill
Status: Senate will consider Lieberman-Warner Climate Security Act (SB 2191) in June
Provisions:

Establishes progressively lower caps on greenhouse gas emissions.
Distributes emissions allowances, which could be traded and banked.
Provides economic incentives for carbon capture and storage.
Tightens appliance efficiency standards and building efficiency codes.
Source: Energy Information Administration

© 2007 South Florida Business Journal
URL: http://www.msnbc.msn.com/id/24660180/

Financial engineering, LNG and CCS

2008-04-03T15:53:00.002-05:00

You probably know about what you paid per gallon last time you filled your gas tank. But, do you know what you paid per kilowatt hour last month to keep your lights on?

If you don’t know, you’re not alone. Unfortunately, when it comes to paying attention to electricity, most people would rather, well, not. But, here’s the catch. If you don’t know what electricity costs, you can’t place a market value on it. And, if you can’t place a value on it, how can you possibly know whether or not you’re getting a good deal.

Today, in fact, you’re not getting a good deal. Plus, I believe the deal is going to get a lot worse because, at least in the near term, we are likely to be relying not on coal, not on nuclear, not on renewable energy, but on exorbitantly priced natural gas.

To understand why, let’s look at what’s happening across the country. In reaction to CO2 concerns, coal plants are being cancelled or postponed. In reaction to nuclear energy fears, new plants can’t get past the initial permitting stage, and, even if they could, the earliest we could get a new unit on line is about 2017. Wind energy is getting built and financed, but slowly, and turbines run, at best, only 35% of the time. There have been several recent success stories for high-profile solar projects, but, if our appetite continues to grow, our electricity infrastructure won’t be able to satisfy the demand for high-quality, reliable, 24/7/365 electricity.

But let’s go back to coal for a moment. Citi, JPMorgan Chase and Morgan Stanley made big news recently with the announcement that they will not finance new coal plants without carbon capture and sequestration. Their reluctance may be due to stated concerns about global warming. However, the same financiers are also skittish about providing the debt financing for nuclear plants which don’t produce any CO2. The skeptic in me began wondering about their sudden desire to go green and got me thinking about what else might be at stake for Wall Street.

To understand what else might be driving the financiers, it is instructive to review a couple of things that happened in the wake of the California Energy Crisis and Enron meltdown. First, Wall Street firms picked up a fleet of gas-fired power plants for pennies on the dollar. Those plants represent about 80% of the generating capacity owned by Wall Street, which turns out to be about 5% of the total generating capacity in the U.S. Secondly, most of the electricity trading operations picked up stakes and moved from energy-based firms in Houston to financial firms on Wall Street. Third, Wall Street has begun salivating at the prospect of trading carbon credits and allowances.

We know that corporations and investment firms have a fiduciary duty to act in the best interests of their shareholders. In this case, that fiduciary duty has conveniently converged with the growing movement to limit CO2 emissions from coal, lingering fears of nuclear energy, dominance of the electricity trading market and, by extension, dominance of any proposed cap and trade system, and a portfolio of gas-fired plants.

I don’t think it’s farfetched to guess that some very smart financiers see that if no new coal or nuclear plants come on line, and reserve margins continue to shrink, then the best way to reliably keep the lights on is with electricity generated at gas-fired plants. Seen from this vantage point, it makes perfect sense that the financial firms suddenly care about reducing CO2 emissions. If you (1) own the gas-fired power plants, (2) control the trading of gas and electricity, and (3) acquire and control the carbon credits, going green is, in fact, your fiduciary duty.

As a bonus, going green means more transactions. A carbon cap and trade system will generate more transactions, which generate more fees, which, in turn, create “transactional value,” which is, it is important to note, very different from intrinsic value. Wall Street, we must remember, specializes in financial engineering, not infrastructure engineering.

So, Wall Street is driving the financial push toward lower CO2 emissions while also pushing for a transaction-based cap and trade system which they will control. The catch is that rather than investing for the long-term with more sensible options such as renewables with storage, no-CO2 nuclear, or even so-called clean coal, we’re served up increasingly expensive electricity from gas-fired plants with a shiny, new cap and trade system on top.

Whether you think carbon capture and sequestration is the answer or not, the bottom line is there’s money to be made by not investing in it. The big money is in natural gas-fired electricity. At least for the short-term. And in a transaction society, the short-term is all that matters. In the long term, however, we will all pay the price—in higher rates, lower service, greater dependence on imported natural gas, reduced investment in low-CO2-producing generation, and the continuing, long-term neglect of our electricity infrastructure.

Coal gets battered again while natural gas waits in the wings

2008-01-31T14:58:00.001-06:00

Coal has been taking blows from environmentalists for a long time, but the prospect of climate change and coal’s contribution to atmospheric CO2 has put it at the center of the bulls eye. Many in the electricity industry continue to insist that coal is less expensive than new gas and that states that keep the lights on with coal have lower electricity costs than those that don’t—with the exception of states that rely on hydropower.

But, if the economic consequences of global warming are added into the equation, the math looks less clear. When discussing clean coal and carbon capture and sequestration (CCS), the equation, in fact, becomes fuzzy. (No one really knows how and where carbon sequestration will work and how much it will add to the coal bill.) As I’ve often said about climate change--perception is everything. If the majority of citizens in the US believe in climate change and believe that burning coal contributes to the buildup of CO2 in the atmosphere and to global warming, then the electricity companies are going to have to start at least acting like they’re listening. (If the markets start taking CCS into consideration, the cost of coal will change dramatically—and the electricity companies will most definitely start listening.) So far, the primary response to American’s concern about climate change has been a lot of talk about CCS and clean coal, but the announcement that DOE has decided to scrap FutureGen, just a month after the Mattoon, IL site was announced, says a lot.

Deputy Energy Secretary Clay Sell said he and Secretary Bodman learned last March that the price tag for the FutureGen project had gone from an original $950 million to $1.8 billion. "I knew (then) that we were in to something that would not end well," Sell said, according to the Associated Press. Hmm. DOE knew last March that the costs were out of hand and that the program was in trouble. But, the PR train had left the station and the FutureGen dream just kept on chugging along.

So now, Sell says that DOE will solicit industry applications for new CCS projects in conjunction with new coal plants. The government will pony up the money for the CCS projects, each designed to capture 1 million metric tons of CO2, while industry will build the new plants. (I wonder if anyone in Washington has heard that communities across the country are just saying no to coal?)

Coal is in trouble. In fact there's a movement afoot to demonize coal and cast it as an enemy of mankind. This is a movement that is gaining ground amongst future ratepayers. According to the Christian Science Monitor, (Thursday, Jan 24) the battle against coal is taking shape across the country this week with Focus the Nation: Global Warming Solutions for America. “Organizers bill the culminating day, Jan. 31, as the largest teach-in in the nation's history, drawing parallels to the civil rights and antiwar movements of the 1960s and '70s. More than 1,500 institutions, most of them colleges and universities, will host classes, documentaries, performances, energy-saving competitions, and discussions with political leaders.”

To get students to understand the role of coal in energy, at least one college is literally dumping piles of coal on campus to illustrate how much is needed to power the student’s daily lives. Others are staging mock battles between a windmill and a smokestack, and at one university, taking a page straight from the Aristophones’ Lysistrata, a one-woman show is being staged in which the “fictional first lady calls for a boycott against sex until the nation starts a serious dialogue about climate change.”

The bottom line is that the coal industry better start taking these concerns seriously. If they don’t, coal is going to be just a lump in the nation's stockings and natural gas is going to come out smelling like a rose.

How not to make an energy policy.

2007-11-27T16:01:00.000-06:00

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!

Who takes over when King Coal loses his crown?

2007-11-01T11:16:00.000-05:00

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.

Progress on Storage

2007-10-23T09:04:00.000-05:00

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.

Regulation and New Technology

2007-09-21T11:49:00.000-05:00

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.

The Price of Deregulation - 4 cents a kWh

2007-09-05T15:53:00.000-05:00

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.

Think: Less - Revisited

2007-08-22T14:00:00.000-05:00

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
Plus:
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.

Electrical Storm-Lights Out Reviewed in the WSJ

2007-07-26T14:36:00.000-05:00

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!

Wind & Storage: Better Together

2007-07-12T09:41:00.000-05:00

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?

Railroad decline

2007-06-14T09:29:00.000-05:00

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.

The looming electricity rate shock

2007-06-06T13:17:00.000-05:00

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."

Lights Out...available now!

2007-05-30T11:19:00.000-05:00

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.

Up Up and Away…An Electric Power 2007 Recap

2007-05-16T14:17:00.000-05:00

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.

Think: Less

2007-04-25T11:57:00.000-05:00

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,

Planning Ahead: Securing our Electricity Infrastructure

2007-04-04T12:36:00.000-05:00

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

Wanted: A real energy services company

2007-03-21T09:01:00.000-05:00

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!

Industrial Ecology as a means of reducing the carbon footprint

2007-03-09T17:15:00.000-06:00

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.

TXU-saved from itself

2007-02-26T09:57:00.000-06:00

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.

Realities of Distributed Energy

2006-07-18T08:35:00.000-05:00

I responded to a post about distributed energy (www.energycentral.com and their EnergyPulse series of essays) at another site with the following. The original post came from an organization that is trying to create awareness about distributed energy within investment circles:

I teach my kids (and anyone else who will listen) to pay as much attention to the source of information as the information itself. In this case, let's be honest, DE Financial Group was formed to give definition and focus to distributed energy (DE) within the investment community. "Not (as Seinfeld's gang would say) that there's anything wrong with that." This is one of those articles that positions DE within the investment community against other better defined sectors (like public utilities, oil/gas, etc). Lumping everything but the kitchen sink into DE does not add clarity to the situation. I define DE as power generating or management devices that function on the customer's side of the meter and tend to exclude large industrial plants mostly dedicated to providng power to a single facility.

Being familiar with, or having direct experience in, every incarnation of DE since the early 1970s (Total Energy, Packaged and Micro-Cogeneration, Purpa and small Power, and now distributed power, let me add some pearls of wisdom:
1. You need high electricity prices and low premium fuel prices to make DE economics work.
2. if the incumbent distribution utility isn't working with you, it is working against you, usually in ways you won't discover until too late. (Who else remembers Purpa-killer rates in Southern California?)
3. The distributed computing model does not seem to be analogous for distributed power. Distributed computing broke the paradigm by being faster, better, cheaper. There was also no "incumbent" supplier to deal with, because there was no supplier at all for "computing."
4. The "customer" usually doesn't care about DE because historically (not currently), energy costs are typically a small component of overall costs. Other value elements like reliability don't resonate because the customer really has no way to bencmark it.
5. Most practical DE options are still fuel based (e.g. natural gas) and therefore do not improve the environmental footprint much, especially in the area of global warming. Just because funding for fuel cells comes from a renewable energy budget item doesn't make today's fuel cells a renewable technology.
6. Creative investment ideas have backslided. We're about to embark on a new round of construction of coal and even nuclear power stations, because that is what the financiers understand. Investment doesn't flow to the best ideas; it flows to the most predictable (at the time of the investment anyway) returns.
7. Practical and confident use of DE depends on energy storage devices and power electronics (PE) more than most observers give credit, and most R&D funders are neglecting. Ultimately, this may be the "Achilles heel" of the sector, unless greater resources and attention are devoted to them.

All that said, I think DE does have a future, in the form of micro-grids. Tying multiple devices together, and own/operating them like a "utility" using advanced automation and power electronics allows you to achieve economies of scale, as long as a utility-like entity is still responsible for the customer interface. Once this model is proven to achieve lower rates for the long term, all of the stakeholders should be mollified.

Our multi-decade strategy for electricity infrastructure development should include a "robust backbone" based on the traditional grid model (large centralized plants, long transmission lines, large energy storage facilities, etc) and micro-grids in high population centers, industrial centers, or special reliability situations (telecom, chip-makers, etc) that unify the DE resources, especially for those areas that truly place a value the benefits DE can bring.

The "real" aftermath of Enron

2006-05-25T09:27:00.000-05:00

The electricity side of the energy investment cycle is cranking back up again. People are telling me all the time that there is so much money chasing so few good opportunities in energy, and this runs the gamut from alt-energy, energy-tech, and traditional power station projects.

I am wondering if TXU is the next Enron. It has been Wall Street's darling for almost two years. Nothing but high praise has been heard for its recently announced plan to build 11,000 MW of new plants, some in Texas, but throughout the country. 11,000 MW? The last company to make statements this bold was, well, Enron. I have no doubt that the message was heard by other utilities: Build new power plants, whether in rate base or private, and your predictable returns on investment will be rewarded by the Street. Warren Buffet believes in electric utilities, so why shouldn't everyone else?

In 2001, there was a rumor going around Houston. The big Wall Street "trading" firms didn't think that energy trading should be headquartered in Houston. Commodities trading belonged with the New York firms. Don't look now, but most of the energy trading has now been acquired and is now operating out of New York. If I were to draw a connection between this outcome and the downfall of Enron and the other big energy trading firms (Dynegy, Williams, El Paso, etc), some would label me a conspiracy theorist. I'm not making a connection, just an observation.

New energy investment funds are starting up. Venture capital is looking for opportunities. When a respected VC like Vinod Khosla publishes white papers on ethanol, you know others are going to follow. I met a number of new energy investors at a recent biodiesel conference I presented at. They are eager for new ideas. They have little real capability to separate a bad idea from a good one, or a technology that works from a technology that can create a market, or how long it takes to cultivate an energy system for project, from inception to kilowatts or Btus out the other side. They have little awareness of just how slow this business changes, or that it tends to cycle, rather than change.

Thus, I find it almost the height of irony that the last vestiges of the Enron scandal are dribbling out of the courtroom and into the papers, while the energy investment machine is cranking up full force once again. Last time, it was the digital economy, a liberalizing global economy seeking market-driven solutions, and Y2K creating a need for new electric generating capacity. This time, it is the high price of natural gas, the need for national energy security, and a need to protect (or even close) our borders that is driving the business. We were opening up the world' economy as a "free-market" (I don't believe there is any such thing, but that's another point) leader. Now we are figuring out how to run an economy with China and India as the emerging "big dogs."

Well, maybe the aftermath is really just the beginning.

Quantifying the value of energy independence

2006-04-25T11:45:00.000-05:00

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

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

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

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

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

Wind Turbines--Get ready for a wild ride!

2006-03-28T11:01:00.000-06:00

Am I the only one in the industry who thinks that the wind turbine business is shaping up to be a repeat of the gas turbine business in the 1990s? Actually, there is a Siemens executive who spoke at an industry conference last year and alluded to this situation. Beyond his allusion, I've heard or read precious little.

I am referring to the industry's earlier infatuation with the advanced F-class gas turbine technology. Despite warning signs and mounting evidence of serious operational and performance issues in the field, in the mid-1990s, the orders kept coming (worldwide) and by year 2000, we had a situation of irrational exuberance. Utilities and merchant generators were lining up, paying deposits, accepting escalating prices, and swallowing service agreements on supplier terms just to stay in the queue for hundreds of these machines. Ultimately, the segment collapsed with the post-Enron malaise, but it was pretty clear to intelligent industry observers that the situation had, relatively quickly, become untenable.

We have analogous factors at work in the wind turbine market. Once again, General Electric (GE) is driving the market, and forcing the other suppliers, once the technological leaders, to play catch up. Just like with gas turbines, wind turbine technology is being scaled up rapidly to reduce costs and improve the economics. Demand worldwide is substantially ahead of supply of turbines and components. Other parts of the supply chain, like building transmission to serve wind farms, are lagging behind as well. The industry will consolidate to three dominant suppliers (as it does for virtually all major components in the power industry). Finally, the reliability issues are just beginning to surface. These machines are deceptively simple. The blades are pushing the limits of structural engineering and transportation (therefore need to be field erected), and the power electronics packages supplied with these machines get ever more complicated because of the grid interface and the intermittent nature of the energy source.

The number one problems facing wind project developers today is turbine supply. Not permitting. Not subsidies. Not financing. New suppliers will jump in to fill the void.

At the same time, the one power generating option that best satisfies (notice I did not say completely) all stakeholders today is a wind farm. Ratepayers are happy because it is renewable. Utilities are happy because they can build something, and relatively quickly, and maintain control (unlike distributed energy at customer sites which can cause loss of utility load). Investors are happy because the production tax credits and long-term power purchase contracts offer a predictable financing model. Environmentalists are happy because there are no emissions. Landowners (typicaly farmers) are happy they get some revenue for their land. Regulators are happy because no seems particularly unhappy, and there are no fuel costs to worry about.

Like gas-fired power in the 1990s, all stakeholder interests seem to converge on wind power today. But that is pushing up demand, pressuring suppliers, and forcing technology deployment and rapid cost reductions. The only question is this: Is irrational exuberance a year away, two years, five years?

We called the F-technology bubble through a widely references industry report, entitled, "Banking on Advanced Gas Turbines: Prospects for a Financial Meltdown," issued in October 2000. I was the principal investigator for that report.

We think we're on to something similar with wind turbines. It may be early, but the same warning signs are appearing.

What do you think?

Is more nuclear power inevitable?

2006-03-28T08:58:00.000-06:00

It is difficult to reconcile social, economic, energy, and economic issues, but I've been stating for more than five years that greater reliance on nuclear power is inevitable. I don't harbor any ill will towards other sources of energy and electricity. In fact, I am staunchly agnostic! I believe in conservation and at least containing, if not reducing, one's personal environmental footprint. I am a proponent of coal as much as I am a proponent of wind and renewables. I am a proponent of things that make sense, face reality, and move us forward.

I find it ironic, though, that we are becoming fixated on the lowest density energy sources at a time when global economic growth and energy supply and demand (driving prices to historical highs) suggest we should be relying on the highest density sources.

So I want to offer a scenario that you don't read or hear about in the media.

Here's my premise: If we are to satisfy economic growth and supply significant quantities of electricity at reasonable prices worldwide, and decelerate growth in carbon emissions, without adding undue investment or technological risk (infrastructure must be financed, after all), then we need to pursue a policy of nuclear power plant construction concurrent with a program to convert transportation systems from fossil fuels to electricity. I would add that the only place where additional governmental intervention is needed would be to accept and manage the liability of high level nuclear waste. Reprocessing of the fuel would go a long way towards minimizing the waste management issue.

Nuclear power and electric vehicles require little stretch in today's technological know-how. Both can be incrementally improved to reduce cost but neither requires breakthroughs.

The nuclear industry doesn't need subsidies (such as provided in the energy bill) to build new power stations or demonstrate advanced reactors. It does need regulatory certainty that decisions made today won't come back to haunt them later. The financial community needs a predictable financial model, unlike what occurred during the last nuclear construction program.

This scenario is the only plausible one if you want the most electricity generation for the lowest carbon generation in the fastest amount of time at a fair cost to consumers and society. There are other excellent options if you can accept more modest carbon reductions, higher priced electricity, mandated reductions in energy demand, and other factors.

Yes, there are tradeoffs. Big ones. We build new targets for terrorist attacks. We have to store and manage the wastes for thousands of years. But no option comes with a clean bill of health. Logically, it seems to me we're better off exploiting our highest density energy source (nuclear fuel) to supply our most valuable and flexible primary energy source (electricity).

I am not agreeing or disagreeing with the science of global climate change. I am accepting that the popular vote is already in. Most people seem to believe it is a problem demanding a solution. Truthfully, if you read between the lines, energy company executives have already "baked" carbon constraints into their short and long-range planning scenarios.

At some point, we may have to accept that both managing global climate change and the nuclear fuel and waste cycle require cooperative international efforts, the first to maintain a healthy planet, the second to prevent abuse and terrorism.

Do I think coal is out? Absolutely not. We can get so much more out of a ton of coal (electricity plus numerous other products) than we do today. It just has to be exploited and priced in such a way that the externalities (negative impact on society) or converted to "internalities" (beneficial impacts for society). I am a huge fan of mine-nouth coal facilities that generate electricity, recycle ash into construction products, produce fertilizer, convert sulfur emissions into gypsum, supply pipeline quality natural gas and/or other "refined" products, and recycles or sequesters carbon dioxide. When the full value of coal is extracted on the basis of industrial ecology, it makes tremendous sense.

Am I against renewables? Don't be foolish. How could a thinking person be against a fuel-free source of electricity? But these sources are low density, intermittent, and therefore involve costs that are also not being properly accounted for. Making the economics work on a mass scale will likely require technological breakthroughs.

What are your thoughts?

Out of the box blog

2006-03-24T10:23:00.000-06:00

Welcome to Pearl Street Inc's blog covering technology deployment, regulatory issues, and investment ideas throughout the global electricity production and delivery value chain.