 
Green Energy War

Pontifical Years: 2008 - 09

By John Geesman

Smashwords Edition

Copyright 2010 John Geesman

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21 Machetes

Contents

Preface

Chapter 1: About Green Energy War

Chapter 2: About John Geesman

Chapter 3: Beware the Ides of March!

Chapter 4: Does CCS Establish a Wartime Cost Frontier?

Chapter 5: IPCC Sets Climate Front Timeline

Chapter 6: Carbon Capture and Sequestration in Europe

Chapter 7: Lightbulbs -- Home Front in the Green Energy War

Chapter 8: DOE Efficiency Standards \-- Historic Weak Link

Chapter 9: UK Embraces New Nuclear, Coy About Subsidies

Chapter 10: Entergy's Nuclear Spinoff -- No New Construction

Chapter 11: UK Renewables -- Beating Your Head Against a ROC

Chapter 12: Border Carbon Charges -- A Whiff of Mustard Gas?

Chapter 13: Feed-In Tariffs -- A Redistribution of Power?

Chapter 14: Motivating the Generals

Chapter 15: EVs in Israel -- Energy Security on Wheels?

Chapter 16: NRG -- Candor on What Holds Back Nuclear Energy

Chapter 17: CARB's ZEV Retreat -- Dunkirk or Dien Bien Phu?

Chapter 18: McKinsey -- 17% IRR from Productivity Investments

Chapter 19: McKinsey, Pt. 2 -- Where the Gold Is Hidden

Chapter 20: McKinsey, Pt. 3 -- Seizing the Gold

Chapter 21: 10 Candles for the California ISO

Chapter 22: LBNL -- Reading the Utility Planning Tea Leaves

Chapter 23: EIA Oil Price Forecasts \-- the Limits of Intelligence

Chapter 24: Feed-In Tariffs Pull AES Solar Strategy Away from US

Chapter 25: Misunderestimating Bush's Climate Prattle

Chapter 26: Misunderestimating Bush, Pt. 2 -- Clean Coal Katrina

Chapter 27: Misunderestimating Bush, Pt. 3 -- Thumb on the Scale

Chapter 28: Misunderestimating Bush, Pt. 4 -- Contempt of Court

Chapter 29: Biofuels Smackdown – When Words Fail

Chapter 30: Biofuels – Wouldn't We Miss 500,000 Barrels a Day?

Chapter 31: Biofuels – Confusion, Conflict Among Allies

Chapter 32: Biofuels – Low Carbon Fuel Standard to the Rescue?

Chapter 33: Will Edison's Solar Play Trigger a Feed-In Tariff?

Chapter 34: New EIA Oil Price Forecast – Oops, We Did It Again

Chapter 35: How Big a Nuclear Renaissance Did We Buy?

Chapter 36: CBO Nuclear Report, Pt. 2 – Construction Cost Peril

Chapter 37: CBO Nuclear Report, Pt. 3 – Mitigating Factors?

Chapter 38: CBO Nuclear Report, Pt. 4 – EPAct's Limited Role

Chapter 39: Where, Oh Where, Have the CCS Projects Gone?

Chapter 40: General Motors – The Consequences of Strategy

Chapter 41: IEA Climate Report – The Relentless Logic of War

Chapter 42: IEA Report, Pt. 2 – Decarbonizing Generation

Chapter 43: IEA Report, Pt. 3 – Transport Sector Most Difficult

Chapter 44: IEA Report, Pt. 4 – Five Weak Links

Chapter 45: German Cabinet Bolsters Merkel's Hokkaido Stance

Chapter 46: Stage Set for New Renewables Strategy in UK

Chapter 47: A Policymaker's Cookbook for Feed-In Tariffs

Chapter 48: EIA Fudges Update to Longterm Oil Price Forecast

Chapter 49: California's Climate Plan Snowball Starts Its Roll

Chapter 50: UK Renewables Policy – No 'Rule, Brittania' Just Yet

Chapter 51: UK Renewables, Pt. 2 – Churchill or Friedman?

Chapter 52: Will the UK Require New Coal Plants to Use CCS?

Chapter 53: Discount Rates – The Divine Right of Economists

Chapter 54: Discount Rates, Pt. 2 – Why They Matter So Much

Chapter 55: So How Expensive is US Gasoline Anyway?

Chapter 56: Enhanced Geothermal – Drill Here, Drill Now?

Chapter 57: Enhanced Geothermal – Drill Here, Drill Now, Pt. 2

Chapter 58: Feed-In May Ease Southern California Squeeze

Chapter 59: Efficiency – California's Oldtime Energy Religion

Chapter 60: A Return to Arms

Chapter 61: McKinsey Finds $680 Billion Tumor on US Economy

Chapter 62: Who Brainwashed Texas on Renewable Energy?

Chapter 63: The Coming Nuclear Assault on the US Treasury

Chapter 64: Why Moody's Thinks New Nukes Are for Losers

Chapter 65: A Welcome Maturation in the LEED Rating Process

Chapter 66: Will Areva's Finnish Fiasco Spook US Taxpayers?

Chapter 67: Upon Being Named a Clean Power Champion

Chapter 68: UK Energy Leaders – Losing Their Religion?

Chapter 69: Free Trade, Global Warming, and Beliefs of Elites

Chapter 70: PG&E's Sham Ballot Measure Brings the War Home

Preface

Kierkegaard probably got it right when he confided to his diary that life must be lived forwards but understood backwards. While Barbara Tuchman waited some five decades before trying to make sense of the run-up to World War I, the DIY instant analysis made ubiquitous by the internet places a higher premium on the time capsule itself than on the reflections it spawns. And so I submit my message-in-a-bottle chronicle from a propitious time.

When I completed my term on the California Energy Commission in early February, 2008, I centered my post-government calendar on a cognoscenti-focused blog (www.greenenergywar.com) and my speaking schedule as the board co-chair of the American Council on Renewable Energy. What follows are the individual blog posts and podcasts, although web vernacular would characterize Chapter 1 and Chapter 2 as free standing "pages" from the greenenergywar site.

Arnold Schwarzenegger's global celebrity (I was a late-term, holdover appointee of his predecessor) drew considerable attention to California's climate policies. My perspective was rooted in the earlier, unforgiving financial pragmatism that tilted the state's energy dialogue so heavily (and controversially) toward efficiency and renewables in the late 1970s.

Advocates bring some shortcomings to the job of punditry, especially if they observe the sports discipline of not kvetching while their team has the ball. Mothers advise children that silence is the correct response when nothing nice can be said. Literary critics often glean more meaning from the white space, what is not written, than from the words on a page.

Still, the primary virtue in the dwindling number of entries after late 2008 may have been the pressure build-up of a capped well. Inevitably, the feedstock for this ebook – white space included -- became a weird and unintended prequel to the exuberantly nonfiction novella, 21 Machetes.

The opinion polls suggest that California voters next week will decisively reject Proposition 23, which would have effectively repealed the state's Global Warming Solutions Act (aka AB 32). If so, the electorate will affirm a decades-long embrace of a high expectations energy policy. And send a welcome signal to a despairing world.

JG

Orinda, California

October 26, 2010

Chapter 1: About Green Energy War

February 9, 2008

War as metaphor is a dubious tradition in modern American politics. Presidents use it to effortlessly summon urgency, priority, mobilization and (implied) sacrifice for a crusade against some amorphous foe. In the past several decades, various Commanders in Chief have declared wars on Poverty, Crime, Drugs, Cancer, Inflation, and Terror.

Many will observe that these jihads never succeed, especially when measured by the grandiose objectives and optimistic time frames announced at launch. With no Homosapien adversary from which to extract a formal surrender, how are these wars supposed to ever end? How will we know when we've won? Politicians' use of war as metaphor may rely more on the Cold War "perpetual struggle" trope than the WW II "finite resolution" model. This realization doesn't undermine the original motivation behind the policy as much as it limits the ongoing conceptual usefulness of the metaphor.

Within  90 days of taking office in 1977, President Carter declared U.S. energy challenges "the moral equivalent of war", borrowing a phrase from the early 20th Century pacifist philosopher, William James. "With the exception of preventing war," Carter said, "this is the greatest challenge our country will face during our lifetimes."

Carter's take was centered on resource scarcity: "We simply must balance our demand for energy with our rapidly shrinking resources," he said. "Our energy problems have the same cause as our environmental problems — wasteful use of resources." He called for a shift "to strict conservation, and to the use of coal and permanent renewable energy sources, like solar power." The alternative to his proposals, by Carter's estimation, "may be a national catastrophe." As he observed, "Our decision about energy will test the character of the American people and the ability of the President and Congress to govern."

Well ...

Without rehashing the Carter Administration's political effectiveness, technological choices, or allegiance to market mechanisms — all worthy topics better left to a more contemporary context — one conclusion seems beyond dispute: the United States (and the world) is in a worse energy position today than it was when Carter spoke. U.S. oil imports, the most politically salient indicator, tell the story in shorthand: an annual average of 8.6 million barrels per day in 1977; reduced to 4.3 million barrels per day in 1985; and increased to 12.4 million barrels per day in 2006, the most recent data available. Dependence on imports went down from 47% in 1977 to 27% in 1985, but ballooned to 60% by 2006.

Blame it on the policies. Blame it on the commanders. Blame it on the troops. Blame it on the public. Regardless the cause, the Moral Equivalent of War evolved pretty quickly into the Moral Equivalent of Desertion.

Concern about accelerated global warming was not on the policy radar screen during Carter's era. The momentum with which policy elites around the world have taken up the climate change imperative may reinvigorate the war metaphor. Al Gore, in his  Nobel Prize acceptance speech, observed that, "without realizing it, we have begun to wage war on the earth itself. Now, we and the earth's climate are locked in a relationship familiar to war planners: 'mutually assured destruction.' " (Ironically, the aforementioned William James, opposed to war but impressed by the civic bonding associated with militias, proposed a system of national service that would conduct "warfare against nature".)

But the stop-the-war meme, which resonates with many drawn to environmental issues, may not have the scalability or economic growth potential of its win-the-war cousin. The American yearning to provide leadership to a world adrift, the prospect of at least putative allies around the globe in common cause, the anticipated ease of enlisting industry in profitable pursuit of unassailable objectives ... it is heady stuff. Are we prepared to pay any price, bear any burden, endure any hardship in the long twilight struggle of our time?

On the ground, where the consequences of war are experienced firsthand, outcomes are determined by choices — often by choices made far away. What technologies are deployed? How are they paid for? Do energy security priorities conflict with environmental objectives? What subsidies are deemed essential to the greater good? Should strategic emphasis tilt toward bottom-up pluralism or top-down authority? What mix of price signals and government edicts is best? How does consent compete with coercion? What role does social equity play? When does transparency trump secrecy? Who decides which competing public values should prevail?

Metaphor is of limited utility in public debate, but that's more than none at all. As we say in California to the motorcyclists: "even if the helmet's fit leaves something to be desired, put the damn thing on your head — for your benefit and for ours." This is the Green Energy War.

Chapter 2: About John Geesman

February 9, 2008

Ten Time-Weighted Footprints in the Soft Sand of My Public Psyche:

1. 19 years (from 1983 to 2002) as an investment banker in the American bond markets, an unavoidably conservatizing experience regarding financial matters. Rule of law, sanctity of contract, ability and willingness to pay debt service as scheduled — these are the underpinnings of civilization, in my view.

2. 18 years (from 1951 to 1969) growing up in Lakewood, California, one of the original blue collar insta-suburbs built after World War II on the Levittown assembly line model. Civic equality was presumed with every fourth house a carbon copy.

3. 11 years (from 1978 to 1983 and from 2002 to 2008) of government service at the California Energy Commission, most recently as a Commissioner and earlier as Executive Director. Both experiences centered on the efficiency/renewables recipe which has become California's signature energy policy cuisine.

4. 8 years (from 1990 to 1998) on the Board of Directors, including 6 (from 1992 to 1998) as President, of TURN (The Utility Reform Network), California's largest and most vociferous ratepayer advocacy organization.

5. 5 years (from 1997 to 2002) on the Board of Governors, including 4 (from 1998 to 2002) as Chairman, of the California Power Exchange, the first domino to fall in the electricity "deregulation" fiasco. Flawed design, institutional inertia, nonexistent police presence, and ham handed political response — the marketplace equivalent of Hurricane Katrina.

6. 5 years (from 1973 to 1978) as a political activist, including work on the campaign staffs of successful candidates for Mayor of Los Angeles and Mayor of San Francisco and unsuccessful candidates for President and State Senate; co-authorship of a book on the sorry performance of the state Consumer Affairs department; lobbying on behalf of the Nader-inspired California Citizen Action Group; and helping to found one of the first solar water heating businesses.

7. 4 years (from 1969 to 1973) at Yale when it was described — by  the snarkily envious Harvard Crimson — as "the bell-bottoms in the Ivy League family", originally planning to be a journalist and finding a degree of encouragement as a Managing Editor of the Yale Daily News and stringer for the New York Times, only to succumb to the virulent disease of applying to law school instead.

8. 3 years (from 1973 to 1976) of alienation at the UC Berkeley Boalt Hall School of Law, immaturely put off by the trade-school-for-shysters aspects (e.g., assigned reading razor-bladed from library books) and prone to the diversions described in #6 above.

9. 3 years (from 1999 to 2002) as Chairman of the California Managed Risk Medical Insurance Board, growing enrollment in the State Children Health Insurance Program from 50,000 to 632,000 and creating real benefit for real people.

10. 2 years (from 2006 to present) as Co-Chair of the Board of Directors of the American Council on Renewable Energy (ACORE), carrying a California torch to light (zero emission) bonfires across the planet.

Chapter 3: Beware the Ides of March!

February 29, 2008

Coming soon to a parapet near you. Keep your eyes on this space!

Chapter 4: Does CCS Establish a Wartime Cost Frontier?

March 14, 2008

The presence of abundant deposits of coal in China, India, the United States — and its general lower cost as a feedstock compared to other energy sources — creates a presumption that, one way or another, this resource is likely to be used over time. Soldiers on the climate front of the Green Energy War are insistent that this only be done with full capture and sequestration of the associated carbon emissions, also known as CCS.

Permanently storing large quantities of carbon dioxide underground in geologic reservoirs is a significant scientific and institutional challenge. Demonstration of integrated systems of capture, transportation and storage in a range of different geologic settings is necessary. Resolution of issues regarding property rights, liability, site licensing and monitoring, compensation arrangements, and eventual transfer of custody to government is required. Development of a regulatory framework that inspires public support is a prerequisite for implementation on a large scale.

The significance of CCS to worldwide climate strategy was modeled in the 2007 MIT study on the future of coal. The Business As Usual scenario has annual CO2 emissions from coal climbing from 9 gigatonnes in 2000 to 32 in 2050. With CCS, annual CO2 emissions from coal are reduced to a range of 3 to 5 gigatonnes in 2050. The same MIT study characterized existing efforts to confirm the suitability of CCS as "completely inadequate."

Notwithstanding significant differences in toxicity, parallels to the still unresolved challenges of nuclear waste disposal are hard to dispel. The pertinent question for military planners in the Green Energy War: what does it cost to capture and sequester a tonne of CO2? According to the  California Energy Commission, between $50 and $100 per tonne for capture and compression — believed to be 70 to 80% of the total — with transportation and storage costs varying by site.

Is this the outer cost limit against which other climate change mitigation strategies should be measured?

**LISTEN TO PODCAST**

Chapter 5: IPCC Sets Climate Front Timeline

March 14, 2008

The most active front in the Green Energy War this past decade has been the international crescendo of alarm about climate change. The "Fourth Assessment Report" published by the IPCC in November, 2007 defines the time frame by which governmental actions should be evaluated. As  summarized by DEFRA, the environmental agency of the UK national government, the relevant points are:

• Global emissions must peak in the next decade or two and then decline to well below current levels by the middle of the century if we are to avoid dangerous climate change. This is economically and technically feasible, and can be achieved by technologies available now. Postponing action to cut GHGs will make it more difficult and costly to reduce emissions in the future, as well as create higher risks of severe climate change impacts.

• Our actions in the next decade will have a large impact on opportunities to avoid dangerous changes. Low carbon technologies are available, but without global agreements on emissions and effective policies to put technologies in place, GHGs will increase rapidly. Putting a price on carbon, so that polluters pay the price of their emissions, is critical. Governments must also invest more in energy RD&D to deliver technologies that supply the growing demand without emitting GHGs.

These are bracing insights from a Nobel Prize winning scientific panel. They provide a good benchmark for judging proposed strategies as the EU member states and the US move into the serious stage of political debate. Those determined to win the Green Energy War will demand nothing less.

**LISTEN TO PODCAST**

Chapter 6: Carbon Capture and Sequestration in Europe

March 14, 2008

Carbon capture and sequestration, the waste disposal technology underpinning the "clean coal" vision, is perceived by many as a strategic weapon in the Green Energy War's climate front — if for no other reason than to accommodate the seemingly irrevocable commitment China and India have made to coal to fuel their economic development.

Whether vision or mirage, the belief that CCS can make coal an acceptable fuel in a carbon-constrained regulatory environment is a business life raft for the American and European coal industries. Their adversaries, generally motivated by environmental and worker safety concerns with a more localized impact than global climate change, place a low priority on industrial life rafts and don't feel particularly compelled to find technological solutions to challenges emanating from China and India.

The European Union has staked quite a bit on CCS as a means to achieving its 2020 GHG reduction targets of 20% below 1990 levels. In a  January 2008 strategy document, the European Commission said that without successful deployment of CCS, the ambitious targets "will never be met." It intends to have up to 12 working demonstration projects operating by 2015.

The European Commission acknowledges that investment "in the order of tens of billions of Euros" will be necessary for successful commercialization of CCS, and that there is "no possibility of significant funding from the EU budget." Where is the money to come from? From the private sector and from EU member states, and possibly from simply requiring that CCS be used "if investment decisions are not made quickly enough."

Quite a contrast to the US, where the collapse of the public-private FutureGen project was announced one week later.

**LISTEN TO PODCAST**

Chapter 7: Lightbulbs -- Home Front in the Green Energy War

March 14, 2008

Nothing in the Green Energy War has stirred the hyenas of talk radio more than Big Government's move to override the marketplace's judgment about lightbulbs. The energy legislation signed into law by President Bush last December sets efficiency standards for lighting which will begin phasing out the incandescent bulb — a technology largely unchanged since the 1880s — in favor of compact fluorescents, halogens and LEDs.

The new products are three to ten times more expensive, but use 75% less energy and last eight to ten times longer. Translation: they can pay for themselves through utility bill savings within a matter of a few months but last as long as ten years. What's not to like?

Apparently quite a bit.  Market share for compact fluorescents in the US last year was 6%, compared to 80% in Japan, 50% in Germany, and 20% in the UK. Market research confirms American resistance, especially among women, to a perceived inferior quality of light from compact fluorescents.

So, the radio hosts scream, where does the Nanny State get off legislating another eat-your-vegetables mandate? As is often the case during wartime, a "principled" (i.e., ideological) reliance on market mechanisms may not deliver adequate results on the timetable demanded by military planners.

The relative ease with which the future of lighting has been changed by government fiat suggests a technique likely to be revisited. This was a compromise worked out between environmentalists, other do-gooders, the industry trade association, and profit-driven manufacturers like Philips, General Electric and Sylvania. The well-publicized tightening of CAFE standards, a more difficult and more timid compromise, represented a similar override of free market doctrine in deference to wartime necessity.

The pertinent question for the American polity: are we at war or not?

**LISTEN TO PODCAST**

Chapter 8: DOE Efficiency Standards \-- Historic Weak Link

March 14, 2008

By almost universal consensus, improvements in energy efficiency represent a core strategy in the Green Energy War. Because price signals alone have not prompted efficiency improvements to a level policymakers consider economically rational, there also exists a broad consensus that a legitimate role for government is to correct this market failure and establish minimum efficiency standards for key energy-using appliances.

Since 1975, authority has been vested in the federal Department of Energy to adopt such standards and to preempt state and local governments from doing so. Manufacturers, never enthusiastic about being told how to design their products, abhor a "patchwork" market where conflicting requirements are adopted by multiple jurisdictions.

In 2005, after decades of foot dragging by DOE under both Republican and Democratic administrations, 15 states and three public interest groups sued DOE to demand that it meet its statutory obligations. A settlement was reached in 2006 that established a schedule for completion of all of the standards by 2011.

After the settlement, a 2007 report by the General Accounting Office found that DOE had missed every one of 34 statutory deadlines covering 20 categories of appliances. The slippages ranged from one to 15 years, and the rulemaking process had only been completed for three of the 20 categories. Since the report came out, standards for an additional three categories of appliances have been adopted.

But the standards finally put forward by DOE leave a lot to be desired — the one for furnaces can be met by 99% of existing products on the market, the one for boilers rejected a tougher joint proposal by manufacturers and advocacy groups, and the one for distribution transformers spurned a significantly more stringent recommendation from the electric utility industry itself.

This part of the federal government is a long way from combat-readiness.

**LISTEN TO PODCAST**

Chapter 9: UK Embraces New Nuclear, Coy About Subsidies

March 14, 2008

Perhaps the most controversial question among climate activists worldwide is what role to assign nuclear power in the Green Energy War. The answer from the Labour Party government in the UK, with full support from the Tory opposition in Parliament: a very big one.

Publication in January, 2008 of the long-awaited  White Paper and Parliament's consideration of a new energy bill promise to presage similar debates in the US. But with some significant differences: the UK political culture seems considerably more sheepish about government subsidies for nuclear power than is the US.

Perhaps that's the legacy of the ₤3.4 billion government bailout in 2003 of British Energy, which operates eight of the 10 existing plants. Perhaps it's due to public apprehension over the estimated ₤20 billion taxpayer cost of disposing of existing waste, or the projected ₤70 billion taxpayer cost of decommissioning existing plants. Perhaps it's because foreign companies like Electricite de France and the German utility E.On seem best-positioned to build any new plants. Whatever the reason, the White Paper seems positively squeamish in brushing up against the question of what costs the government will allow to be socialized.

Past assurances that the private sector will pay all of the costs of decommissioning and waste disposal have morphed into paying a "full share" of such costs. It is now conceded that "in extreme circumstances the government may be called upon to meet the costs of ensuring protection of the public and the environment."

The presumed financial viability of the new plants is based on the anticipated price of carbon in the EU's emissions trading market being high enough to make nuclear cost-effective. Attempting to avoid the words "price support", the White Paper commits the Gordon Brown government "to reinforce the operation of the EU ETS in the UK should this be necessary to provide greater certainty for investors."

**LISTEN TO PODCAST**

Chapter 10: Entergy's Nuclear Spinoff \-- No New Construction

March 14, 2008

The second largest operator of nuclear power plants in the US, the New Orleans based company known as Entergy, is trying to secure regulatory approval to spin off five of its 10 nuclear plants into a separate, publicly traded company initially called SpinCo. This would create the first pure play nuclear company in the U.S. stock markets at a time of growing enthusiasm in some quarters over the role for nuclear on the Green Energy War's climate front.

The plants proposed for spin-off are fixer-uppers which Entergy bought over the past decade from their utility owners in New York, Massachusetts and Vermont. Entergy was able to achieve significant improvements in the performance of the plants — they now average capacity factors in excess of 90% — and sells their output into the deregulated electricity markets in the northeast for whatever price customers are willing to pay.

The thought is that the stock market will place a higher value on that kind of company than Entergy's current blend of deregulated and regulated assets. Entergy, a utility holding company, is going to maintain the utility ownership of its other five nuclear plants. The output from those plants is sold to customers at prices determined by cost-based regulation.

But the proposed SpinCo only takes the "merchant generator" paradigm so far. Entergy is comfortable with the spin-off absorbing the financial risk of nuclear plant operation. It draws the line at construction risk. The new company will not be building any new nuclear plants — "if they were going to do a merchant plant," Entergy's CEO told the  Wall Street Journal, "I'd sell my stock in the company."

Which gets to the crux of nuclear's financial challenge: how can private investors be sure how much it will cost and how long it will take to complete construction of a new plant? Absent the extraordinary ratepayer guarantees that politically sank the industry before, or distasteful taxpayer absorption of cost-overruns, will this technology make it to the battlefield?

**LISTEN TO PODCAST**

Chapter 11: UK Renewables -- Beating Your Head Against a ROC

March 14, 2008

In the Green Energy War, renewable energy is generally considered to be the ultimate weapon against whatever adversary is identified: energy security, climate change, escalating fossil fuel prices, etc. Significant disagreement exists about time frames, scalability, and costs, but a broad consensus exists among policymakers that promoting greater reliance on renewables is a desirable priority for government.

British Prime Minister Gordon Brown has acknowledged it will take a "fourth technological revolution" to develop a low carbon energy sector. He takes pride in the role the UK has played in pushing the EU to adopt a 2020 goal that 20% of total energy come from renewables — although his government has negotiated a lower 15% target for the UK. After many years of mobilizing international concern about climate change, Britain derives just two percent of its energy from renewable sources — third lowest in the EU, behind Malta and Luxembourg.

In the electricity sector, where some estimates suggest a 40% contribution from renewables will be required to achieve the 15% total energy target, the UK seems hindered by its peculiar attachment to Renewable Obligation Certificates, or ROCs. Since 2002, electricity retailers have been obliged to obtain a portion of their electricity from renewables, documented by the ROCs which they buy from renewable generators.

The volatility in the price of ROCs, typical for such a thinly traded market, does not make for a very bankable revenue stream. The "feed-in tariffs" used in Germany and Spain, which rely on the visible hand of government policy rather than the invisible hand of traded certificates, have produced significantly more renewables at lower costs.

London is the center of the world capital markets. Trading instruments are almost cultural icons. Whether market dogma yields to wartime mobilization may well determine the role renewables play in the UK's future energy mix.

**LISTEN TO PODCAST**

Chapter 12: Border Carbon Charges -- A Whiff of Mustard Gas?

March 14, 2008

World War I saw an escalating, though not particularly effective, use of poison gas by the combatants. Because of the horrific effect on victims, more often wounded than killed, the Geneva Convention of 1925 banned the use of such weapons. Considerable opprobrium has attached to their deployment ever since.

Free trade advocates have a similar view of retaliatory tariffs, and are particularly fearful of an uncontrolled chain reaction which severely constricts global commerce.

But for countries choosing to cap their greenhouse gas emissions without putting their own industries at a disadvantage, it can seem logical to impose a carbon import fee at the border. That's the gist of a  proposal put forward in the US by the utility holding company AEP and the International Brotherhood of Electrical Workers. What better way to force China, India and other developing countries to match any American effort to fight climate change?

Unfortunately, the French have made the very same argument in an attempt to "force" de facto American compliance with the Kyoto Accord.

Legal experts believe such an approach might be permissible under World Trade Organization rules based on the celebrated "Shrimp-Turtle" case between the United States and several Asian countries. The WTO Appellate Body upheld a US law that restricted import of shrimp caught in nets without turtle excluder devices. The US restriction was allowed to impact foreign process and production methods because it related to conservation of an exhaustible natural resource.

Complexity of administration, encouragement of tit-for-tat escalation by trading partners, thinly veiled protectionism for favored industries, reinforcement of an American unilateralism that antagonizes allies, chilling effect on the world economy — all of the expected downsides will be pointed out as Congress takes up the climate debate.

Wartime often prompts extreme measures. The Green Energy War is no exception.

**LISTEN TO PODCAST**

Chapter 13: Feed-In Tariffs -- A Redistribution of Power?

March 14, 2008

The zeal of the renewable energy movement is one of the wild cards in the Green Energy War. Opinion surveys show exceptionally broad "do-it-now" support in many countries. The depth and commitment of such support, and its ability to knock down barriers of institutional inertia, will ultimately determine the pace and scope of any transition away from fossil fuels.

Nowhere is this more true than in the electricity sector. The success of the Germans and the Spaniards in adapting an old American idea — mandatory long-term purchases by the utility grid — to renewable generation has triggered a European boom in wind and solar technologies. Giving renewable generators the legal right to "feed-in" their output to the grid at a regulated price, according to independent studies by the  European Commission and the UK's  Stern Review, has delivered more renewable electricity at lower costs than other approaches tried by EU member states.

What makes this policy design so successful? It shifts bargaining power away from the incumbent utility to the renewable generator. The legal entitlement to sell its output at a predetermined price provides the stability necessary to allow long-term financing for the renewable generator.

Ample debate will occur over the appropriate price to set. Should it vary by technology? Should it vary by region? Should it vary by time of delivery? To keep the pressure on for cost reductions and technological improvements, how rapidly should prices offered for future projects decline from those offered today? These questions are not very far afield from those addressed for conventional supplies by utility regulators every day.

Policymakers worldwide are gravitating in this direction, intent on accelerating technological change. The Canadian province of Ontario and the Australian state of South Australia have recently moved forward. Legislation has been introduced in a number of American states. Even the  UK is reconsidering its dubious ROCs scheme as it applies to micro-generation. Of such stuff are revolutions made.

**LISTEN TO PODCAST**

Chapter 14: Motivating the Generals

March 21, 2008

The past several years have seen considerable, and wishful, attention paid to the role of so-called "enlightened" corporate leaders in pushing the U.S. federal government into a more activist stance on climate issues. Some of this has been calculated political strategy, a dry-eyed search by environmentalists for middle-of-the-road message carriers. More of it has been naive sentimentality, reinforced by massive advertising expenditures designed to boost company image.

The sentimentalists tend to downplay the role which providing quantifiable benefit to shareholders plays in a CEO's job description. Shareholder value is an unforgiving metric, and usually measured over a relatively short time horizon.

It's been a jarring season for sentiment, as three reputed climate warriors veered seriously off-message and revealed a steely pragmatism that PR consultants dread seeing on public display.

First was Bob Lutz, Vice Chairman of General Motors for product development, widely heralded father of the coming Chevy Volt plug-in hybrid wonder car: "Global warming is a total crock of shit."

Then General Electric CEO Jeffrey Immelt of "Ecomagination" fame, one of the largest vendors of renewable energy technology in the world: "It's no great thrill for me to do this stuff. I'm not an environmentalist."

And finally Lee Scott, CEO of Wal-Mart, the world's largest retailer, whose "pay-less-live-better" mantra has increasingly embraced environmental themes of late: "We are not green."

Should any of this matter, beyond a small circle of corporate image polishers and gotcha journalists? Unequivocally, yes. Naive beliefs about business can undervalue the need to craft public policy objectives that adroitly exploit private sector motivations. A quest for false idols will divert attention from our most imperative task: harnessing America's corporate juggernaut to the challenge of the Green Energy War.

**LISTEN TO PODCAST**

Chapter 15: EVs in Israel -- Energy Security on Wheels?

March 25, 2008

The energy security front in the Green Energy War is broad and deep. Countries all over the world profess a desire to move away from oil — some out of concern for the environment and climate change, many from a desire to sidestep the debilitating economics of petroleum dependence, most with growing apprehension about continued reliance on OPEC exporters.

Nowhere are security concerns more intense than in Israel, where an initiative is underway to shift the automotive sector from gasoline to electricity. It's the brainchild of California-Israeli software entrepreneur  Shai Agassi, who has enlisted the Israeli government, Renault-Nissan and NEC-Nissan in a transformative effort with global ramifications. Armed with $200 million, the largest seed round venture capital financing in history, Agassi's company, Project Better Place, aims to test its innovative business model as much as vehicular and battery technology.

The Israeli government has committed to maintain its tax incentives for purchasers of electric cars for ten years. Renault and Nissan will provide cars, minus the batteries, at prices  comparable to those for gasoline-powered models. NEC-Nissan will provide lithium-ion batteries, which Agassi's company will own and maintain along with a network of recharging outlets and battery swap stations.

Customers will be charged  a monthly fee for expected mileage, like minutes on a cellphone plan. By Agassi's calculation, there's enough delta between the cost of powering such a car and its gasoline alternative to subsidize the purchase price of the car — perhaps to the point of giving it away. Again, the cellphone model. The intent is to make a fundamental shift in technology as frictionless for the customer as possible.

Agassi, who rose quickly through the executive ranks at SAP AG, is talking to 30 other countries. He may stumble. His numbers may be off. The batteries may have issues. The cars may cost more. The logistics of building so much infrastructure may be too daunting. But one thing is clear: new business models to deploy new technologies will be necessary attributes of the weapon systems of the Green Energy War.

And if he's successful, it may rank in significance with Churchill moving the British Navy from coal to oil in the early 20th Century.

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Chapter 16: NRG -- Candor on What Holds Back Nuclear Energy

March 26, 2008

The rhetorical fight over nuclear power continues to rage. It will retain a certain shadowboxing feel, at least in the US and EU, until markets or governments begin making the massive financial commitments necessary to construct new units.

For the past several years, the issue has been framed largely as one of technological open-mindedness. Are you stuck in an outdated, Chernobyl/Three Mile Island mindset or are you willing to think designs have improved? Juxtaposed against Bush/Cheney obstinacy on climate policy, a willingness to pursue nuclear is embraced by some as testament to the depth of their concern about global warming.

Questions about empiricism vs. faith, permanent waste disposal, and proliferation risks are generally deferred to some future Big Discussion.

Along comes David Crane, CEO of NRG, one of two US companies which hopes to use government loan guarantees to  build new nuclear plants as a "merchant generator". A primary characteristic of a "merchant generator" is that it must absorb (or lay off to vendors) all construction and completion risk — it has no captive customers, as regulated utilities do, who can be forced to eat cost overruns.

In announcing a new partnership between NRG and Toshiba, which builds a reactor originally designed by General Electric, Crane was pretty blunt with the  New York Times:

This is Toshiba putting their money where their mouth is ... The one principal risk you cannot lay off is who's going to build this thing on time and on budget ... On an $8 billion project, even if it is 80 percent debt, that still leaves $1.6 billion of equity, and people aren't going to risk the $1.6 billion unless you find someone who says, 'I'll build that for X million and in Y months.'

Yes, he probably meant "X billion". And no, it's not clear that the deal with Toshiba will prove sufficient to raise the rest of the equity. Or that the equity will be sufficient to absorb all of the construction and completion risk. Nor is it certain that Congress really intended the loan guarantees to be used in such a heavily leveraged financial structure.

But Crane deserves credit for calling attention to the threshold issues of financial viability that will determine the role of new nuclear plants in the Green Energy War.

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Chapter 17: CARB's ZEV Retreat -- Dunkirk or Dien Bien Phu?

March 28, 2008

The California Air Resources Board, widely regarded as the most aggressive technology-forcing regulatory agency in the world, has made a shambles of its "zero emissions vehicle" program since first mandating in 1990 that 10 percent of all new cars be pollution free by 2003 (roughly 100 – 150 thousand vehicles per annum). This week, in the fifth revision to the requirement, it  reduced that target to 7,500 over the three-year period 2012-2014.

At the same time, it bumped up the number of plug-in hybrids required of the auto manufacturers during the same period to 58,000.

But with CARB's loose definitions and complex system of credits, carry-backs, and carry-forwards, it's difficult to have confidence those numbers will actually be achieved.

Pullbacks are never pretty, even when tactically required. This one bordered on spectacle. It brought protests from the elder statesmen of the Green Energy War's energy security front: Reagan-era Secretary of State George Shultz and Clinton-era CIA Director James Woolsey. Shultz criticized CARB's continued prioritization of hydrogen vehicles over "alternatives that are viable today" while Woolsey spoke of "a great disservice to our national security ... increasing our dependence on oil."

In surreal California fashion, the director of the 2006 cult film "Who Killed the Electric Car" was rolling cameras in preparation of a sequel.

The same day CARB met, California-Israeli entrepreneur Shai Agassi was in Copenhagen, announcing that  Denmark will join Israel as a target market in his  Renault-Nissan, NEC-Nissan joint venture to apply a cellular phone service model to electric vehicles. As with Israel, his plan is to have 100,000 vehicles in the Danish market by the end of 2010. Ironically, Nissan was one of the auto manufacturers complaining that the earlier CARB ZEV requirement was too aggressive.

CARB intends to completely revamp its ZEV program, but not until late 2009. In the meantime, market forces will determine the pace of any move toward zero emission vehicles.

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Chapter 18: McKinsey -- 17% IRR from Productivity Investments

April 2, 2008

The private sector routinely outsources its most perplexing analytic challenges to management consultants. In that extremely competitive profession, the global blue chip standard is widely considered to be McKinsey & Company. Policymakers caught up in the debate over what contribution to expect from energy efficiency in the Green Energy War should give careful consideration to a  McKinsey report recently  presented to 450 institutional investors, Wall Street leaders, and CEOs from around the world.

Annual investments in what McKinsey calls "energy productivity" of $170 billion would cut the projected growth in global energy demand by at least half by 2020. That's the equivalent of 64 million barrels of oil a day, or almost 1.5 times today's total U.S. energy consumption. Achieving that reduction would deliver about half of the greenhouse gas abatement needed to hit the 450 – 550 parts per million target zone.

More significant, the investments would average a 17% internal rate of return and generate energy savings which ramp up to $900 billion annually by 2020. And the $170 billion annual investment is actually quite modest — about 1.6% of yearly global fixed-capital investment and 0.4% of yearly global GDP.

How is it that free markets have overlooked such a gaping opportunity? According to McKinsey,

A wide range of energy-market failures currently discourage consumers and businesses from embracing higher energy productivity, and they deter investors from making the capital outlays that would help end users to overcome initial financing barriers. These market failures include fuel subsidies that directly discourage productive energy use, a lack of information available to consumers about the kinds of energy productivity choices that are available to them, and agency issues in high-turnover commercial businesses.

There's a tired joke about the economist who was disdainful of his non-economist friend for picking up a $20 bill from the sidewalk. "If it were real, somebody would have already picked it up," is the received wisdom. But very few Green Energy War planners, let alone the economists among them, have ever made investments which compound at 17% over a lengthy period of time.

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Chapter 19: McKinsey, Pt. 2 -- Where the Gold Is Hidden

April 3, 2008

As Americans have been painfully reminded several times over recent decades, the possession of and respect for sound intelligence are prerequisites of successful military campaigns. The Green Energy War is no exception, which makes a clear understanding of the recent  McKinsey report on energy productivity all the more important.

The highly regarded management consulting firm  concluded that investing .4% of world GDP in energy productivity improvements between now and 2020 would save the equivalent of 64 million barrels of oil a day — nearly 1.5 times current U.S. total energy consumption. Such investment would create about half the abatement necessary to hold GHG emissions to 450 – 550 ppm. And achieve an average 17% internal rate of return as well!

Where will the war planners find these opportunities? The details in the report are fascinating. Breaking global energy demand into four broad sectors, the McKinsey modeling concludes that the industrial sector would absorb 49% of the annual investment capital, the residential sector 23%, the transportation sector 15%, and the commercial sector 13%.

Geographically, developing regions represent two-thirds of the investment opportunity — with China accounting for 16% of the total. US improvements make up 22% of the capital required.

Energy savings, improvement costs, and investment returns in the 17% rate-of-return portfolio vary widely across measures and geography, as one would expect. Imposing a minimum hurdle requirement of a 10% rate-of-return, McKinsey calibrates the measures by the dollars required to displace a quadrillion btus in 2020. While the industrial sector averages a $20 billion per quad cost, the US portion costs $26 billion per quad and the Chinese portion is $17 billion per quad. But even a comparatively high cost US investment, like combined heat and power at $43 billion per quad, generates a breathtaking 36% rate-of-return.

The residential sector has a similar, if smaller, variance. The total portfolio averages $15 billion per quad, the US portion coming in at $17.6 billion (with other developed countries slightly higher) and the Chinese portion at $13.5 billion. Amazingly,  residential lighting improvements in either the US or China generate a 500% rate-of-return by McKinsey's calculation.

 Eisenhower said that in preparing for battle he always found plans to be useless, but planning indispensable. Why should the Green Energy War prove otherwise?

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Chapter 20: McKinsey, Pt. 3 -- Seizing the Gold

April 4, 2008

The extraordinary findings on energy productivity  published recently by McKinsey & Company is a wartime anomaly. Not so much for its basic conclusion — Green Energy Warriors have long recited an energy efficiency catechism. But the magnitude (roughly half the GHG abatement needed to reach 450 – 550 ppm) and sheer profitability (a 17% rate-of-return) of the portfolio of measures should be a shock-and-awe awakening in a political debate still mired in the rhetoric of economic deprivation.

That it would take the world's leading management consulting firm to point this out is an even bigger anomaly. Markets are not supposed to allow arbitrages of such magnitude to build up unexploited. Regardless of the "myriad policy and market imperfections" that have brought this state of affairs into being, what does McKinsey recommend be done to capture the opportunity?

It's a surprisingly mundane list. The McKinsey report identifies "four priority areas for action that we need to get right":

1. Set energy  efficiency standards for appliances and equipment.

2. Finance energy efficiency upgrades in new buildings and remodels.

3. Raise corporate standards for energy efficiency.

4. Invest in energy intermediaries, like energy services companies and finance entities designed to profit by capturing the productivity arbitrage.

These simple themes obviously take on greater complexity when applied across international borders. By design, they rely on a mix of government and business actors as prime movers. They stretch to encompass both regulatory and market initiatives. Are they sufficient to achieve the full portfolio of productivity improvements? Probably not, but the single most striking feature of the McKinsey numbers is that they are based on an assumed oil price of $50 per barrel.

Even those Green Energy War planners most skeptical of market indicators might wonder how high the 17% rate-of-return would jump were today's $100+ price plugged in.

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Chapter 21: 10 Candles for the California ISO

April 7, 2008

_The following open letter to Yakout Mansour, CEO of the California transmission grid manager, was written for the April 7, 2008 edition of California Energy Markets._

Hey, Yakout — As a rule, former public officials should be denied access to the media because of their sworn duty to fade away. But when the editors of _California Energy Markets_ solicited tenth birthday greetings for my second favorite non-profit public benefit corporation (your corporate sibling, the CalPX, dead these seven years, is still first in my heart), how could I refuse?

Having just read your new Five Year Strategic Plan (the first few pages recite accomplishments akin to those attributed to the Glorious Republic of Kazakhstan in the opening scenes of _Borat)_ and knowing your preference to light a candle rather than curse The Darkness, let me identify the following road flares likely to lie in the ISO's path these next several years:

_1. You will be judged by your contribution to California's electricity infrastructure._ Intellectual fashions and market designs evolve more quickly than economists change underwear, but the enduring judgment of your success will be whether the process in which you are implicated provides adequate infrastructure for a growing population, a prosperous economy, and an improving environment.

_2. Soon, you will have to embrace priorities beyond the roll-out of MRTU._ Yes, MRTU Will Change Everything, but it is unlikely to be the automatic pilot for assuring adequate investment. Some of our best Smart Guys fail to distinguish between highly volatile price indicators and bankable revenue streams. To paraphrase  Amory Lovins: markets make an excellent servant, a questionable master, and a dubious religion.

_3. Unapologetically embrace your pivotal role in renewables development_ **.** It will probably determine your success in #1 above. The European Commission has  recommended that interconnecting renewables be _the transmission priority_ for EU member states — from infrastructure development, to priority dispatch, to cost absorption. Under what scenario will that not happen here? You'll probably have to drop your technology-neutral, policy by Immaculate Conception guise.

_4. You have a special cross to bear in commercializing storage projects, which may prove indispensable to wind integration with the grid._ As your recent intermittency report made clear, this is not a technology challenge as much as one of creating the appropriate market mechanisms to properly compensate the storage provider.

_5. Accept ownership of glitches like the interconnection queuing fiasco and move aggressively to fix them_ **.** Blaming the problem and its multi-year persistence on FERC rules has a certain postal system feel to it. Pointing to an even worse mess at the Midwest ISO reinforces this sense of unaccountability. Federal Express was born under similar circumstances.

_6. Recognize that the RPS program structure will likely change and that transmission planning will have to change with it_ **.** The CEC  found that a 33% target for 2020 will be necessary to achieve AB 32 goals, and that a feed-in tariff will be needed to get to 33%. More immediately, without a tariffed approach, how will the ratepayers avoid paying too much for the last several thousand MW of wind for the pre-built Tehachapi transmission system? Won't similar issues arise with pre-built lines for solar as well?

_7. The existing fossil generation fleet is sorely in need of modernization or replacement_ **.** How else will we get the faster ramping, less polluting units we need? Divine intervention? Silence in the face of flaccid utility long-term procurement efforts is no solution. Propping up the existing jalopies with multi-year "resource adequacy" contracts is no substitute. Speak up.

_8. The South Coast Air Quality Management District is the de facto supply planner in Southern California_ **.** They are not particularly impressed with the amount of renewables coming on line to date, and seem prepared to block new gas-fired plants in the air basin as a consequence. Given the centrality of SCE and LADWP to the state's renewables goals, they've got pretty good leverage.

_9. Don't get sucked into the intake structure of a generic argument on once-through cooling vs. grid reliability._ The State Water Resources Control Board faces a real legal imperative under the federal Clean Water Act, and a credible threat of sweeping court orders if it doesn't act. Plant-specific evidence can help, arm-waving rhetoric cannot.

_10. Diplomacy skills are likely to be your most effective means to accomplish your objectives._ The early years have stripped away whatever manifest destiny many attached to the ISO's ambition for geographic expansion. You have been forced to accept a fractious pluralism among control areas — both in-state and regionally. California's interests require a significant improvement in our ability to rally support for joint projects that stretch across the region. You are uniquely equipped to bring that about. Good luck.

Your friend/JG

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Chapter 22: LBNL -- Reading the Utility Planning Tea Leaves

April 8, 2008

The thankless job of the electric utility supply planner is designed to attract the quantitative, the analytic, and the prudent — not those with an ideological bent or propensity for heroics. Yes, politics constrains choices. The industry being what it is, there's a predictable tendency of planners to search for the "path of least resistance" — an underpinning of the laws of physics which often finds adherents among regulated businesses.

So what's going on in the bellwether western United States? A recently published report by the Lawrence Berkeley National Laboratory analyzed the 2006-2007 supply plans of 15 large investor-owned and municipally-owned utilities from nine of the 11 western states. (In classic Wild West tradition, Arizona suspended its requirement for integrated resource plan submittals in 1999 and New Mexico has only recently enacted legislation requiring them.)

The headline conclusions from the LBNL evaluation:

• a majority of the 15 utilities intend to meet at least half of their needs for new energy supplies through expansion of existing efficiency programs and new renewable projects;

• only three utilities selected portfolios where expanded efficiency and renewable initiatives will account for less than 10% of all new supplies;

• nine of the 15 utilities intend to size their efficiency plans based on a "maximum achievable" calculation of cost-effective potential — an  admittedly slippery rubric which focuses on existing program design as the only hammer in the toolbox;

• the other six imposed more arbitrary, non-economic caps on the quantity of efficiency improvements assumed in their resource plans;

• other low-carbon options, like new nuclear and advanced coal with CCS, "play a relatively minor role in utilities' preferred portfolios";

• five of the eight utilities from inland states selected preferred portfolios where pulverized coal without CCS provides anywhere from 20% to more than 90% of new supplies;

• in contrast, none of the seven utilities from coastal states selected any coal-fired generation.

The most remarkable observation of the LBNL report: 11 of the 15 utility base cases used levelized CO2 prices of  $4 – $20 a "short ton" in the 2010 – 2030 period and four — including the Los Angeles Department of Water & Power — assumed no carbon cost at all. LBNL's droll conclusion? "Some, if not most ... may be underestimating the 'most likely' cost of carbon emissions."

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Chapter 23: EIA Oil Price Forecasts \-- the Limits of Intelligence

April 10, 2008

Like it or not, by the terms of some unwritten protocol governing the Green Energy War, no single piece of intelligence is deemed to hold more value than the expected long-term price of energy. It not only informs strategy, it defines the outer boundaries of what is considered possible given the virtually universal conviction that price signals cannot be defied indefinitely. Even the most willful of policymakers are forced to make their peace with price.

This week, for the first time, the US government's Energy Information Administration crossed the Rubicon of triple-digit oil price forecasts by acknowledging that, at least for this year, oil will average $101 a barrel. In January the prediction had been $87.

In the accumulated failures of several decades of US energy policy, no single factor has proven more debilitating than the inability to accurately project price. The California Energy Commission  recently graphed the 25-year history of EIA natural gas price forecasts, displaying a grotesque pattern of wildly high projections in the early years and distressing underestimates in recent years. Numbers  released in 2006 by EIA show a similar divergence for oil.

When Julius Caesar and his army crossed the Rubico River, a boundary which separated the province of Cisalpine Gaul from Italy proper, the Roman Senate appropriately considered it an act of war. EIA downplayed the significance of this week's $101 announcement, adding a troops-home-by-Christmas  forecast of prices averaging $92.50 a barrel in 2009.

It remains to be seen whether EIA will alter its long-term projection, issued just last month, that oil prices will decline to $57 in real terms in 2016 before gradually rising to $70 in real terms in 2030. By these lights, it looks like another American Century.

The day of the EIA announcement, General Petraeus  recommended to Congress that US troop withdrawals from Iraq should be halted indefinitely this summer to allow further evaluation. "We haven't turned any corners, we haven't seen any lights at the end of the tunnel; the champaign bottle has been pushed to the back of the refrigerator," he said.

In the words of the Danish physicist,  Niels Bohr, "It is difficult to predict, especially the future."

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Chapter 24: Feed-In Tariffs Pull AES Solar Strategy Away from US

April 14, 2008

Honest military historians have never known what significance to attach to battlefield precedent. Their views range from the dour George Santayana ("those who cannot remember the past are condemned to repeat it") to the more celebratory  Yogi Berra ("it's deja vu all over again").

Why should the Green Energy War be different?

The  announcement two weeks ago of a $1 billion joint venture between AES and Riverstone Partners to build utility-scale photovoltaic power plants around the world over the next five years certainly stirred the gamut of emotions. Logically enough, the joint venture will focus on those countries with feed-in tariffs — notably, not the US — that make project economics more attractive.

Unmentioned in any of the press accounts was the peculiar  history of AES and its umbilical relationship with the original feed-in tariff, the Carter era's Public Utilities Regulatory Policy Act (aka PURPA). Now one of the largest independent electricity generators in the world, AES was founded in 1981 as Applied Energy Sources by two former federal bureaucrats, Roger Sant and Dennis Bakke. Its business strategy was to capitalize on the new law's requirement that utilities buy the output of more efficient, less polluting "qualifying facilities" at the utilities' avoided cost.

Big things happened in the two decades that followed. AES became one of the fastest growing companies in America, with profits increasing by some 650% from 1990 to 1994. Sant  landed on the Forbes 400 list of richest Americans. Bakke was heralded as "one of the best examples of postmodern management". The company acquired stakes in utilities around the world. Despite some rough going, AES appears to have weathered the post-Enron shakeout in the independent power market and is back in resurgence.

And energy policy? Sustained utility lobbying efforts have discredited PURPA. The US has opted for a witches' brew of tax goodies to promote renewables, subject to punitive budget scoring rules and fickle Congressional politics. Several  European Union member states have captured market share by modernizing PURPA into what they call "feed-in tariffs". The developing countries may be headed in a similar direction.

So the new AES Solar focuses away from the United States. As one of the leading stock analysts covering the industry  put it, "If we ever get our act together, the US could potentially be the biggest market for renewables. The US is blessed with a lot of wind and a lot of sun."

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Chapter 25: Misunderestimating Bush's Climate Prattle

April 16, 2008

Green Energy Warriors habitually identify George W. Bush as the culprit in the "who-thwarted-progress?" lineup of suspects which has substituted for US action on climate policy these past seven years. His putative mastermind, Dick Cheney, is a consistent runner up.

 Reaction to the mishmash of disingenuous and conflicting precepts bundled together into a White House speech today is likely to follow a  predictable "it's-too-little-too-late" theme. The more imaginative will attempt to spin it as a crafty move to preempt Congress from its supposedly imminent enactment of climate legislation.

In the words of an earlier Republican President, "We could do that, but it would be wrong."

A better approach would be a forensic analysis of the witness' statement for evidence of what at least some subset of the Republican Brain Trust believes are credible (i.e., not indefensible) positions. Unless one believes this movable skill set and its business sponsors will be completely vanquished from both the executive branch and legislative branch after the November elections, the emotional temptations of political hubris and/or Bush vilification may distract even the dispassionate analyst.

Context is perhaps the most significant factor here. The third session of the Major Economies climate group convenes this week in Paris. Although scoffed at as a diversionary alternative to the UNFCC process for negotiating a post-Kyoto agreement,  the proposal to focus climate diplomacy on mutual commitments by Big Players was a respectable gambit before its expropriation by the Bush Administration. Given its embrace by career diplomats among major foreign ministries around the world, it is likely to endure as a bargaining forum long past the American elections.

Set in that context, Bush's "commitment" to stop US growth in GHG emissions is more non sequitur than nonstarter.  As made clear in the IPCC's Fourth Assessment Report, global emissions — not just those in the US — must peak in the next decade or two and then decline by mid-century to well below current levels in order to avoid dangerous climate change. With a limp-wristed toss, the onetime Denier-in-Chief has thrown acceptance of an American target into the pot.

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Chapter 26: Misunderestimating Bush, Pt. 2 -- Clean Coal Katrina

April 17, 2008

President Bush's "new national goal"  announced yesterday, to stop the growth in economy-wide GHG emissions by 2025 and to make power sector emissions peak "within 10 to 15 years, and decline thereafter" rests heavily on technology. As he put it, "There are a number of ways to achieve these reductions, but all responsible approaches depend on accelerating the development and deployment of new technologies."

Rhetorically, this is a theme lifted straight from the renowned 2002 Frank Luntz GOP message playbook, as previously  deconstructed by climate blogger Joe Romm.

Substantively, it amounts to whistling past the graveyard of the Bush Administration's collapsed  ambitions to speed the commercialization of advanced coal technologies that incorporate carbon capture and sequestration. The President's oratory has walked this path before. "Let us fund new technologies that can generate coal power while capturing carbon emissions," Bush urged in his January State of the Union Address. The next day his Administration withdrew from its FutureGen project, citing unacceptable cost overruns.

FutureGen had been the flagship of the "clean coal" initiative launched in 2003. The Administration enlisted 13 private sector partners from around the world to cosponsor a 275-megawatt IGCC plant which would capture and sequester its carbon emissions underground. Under the agreement, taxpayers would be liable for 74% of the costs, and the private parties 26%.

Putting a brave face on a stunning implosion of expectations, DOE officials appeared before the House Subcommittee of Energy and the Environment the day before the President's latest speech and  insisted they had canceled the project in order to accelerate the realization of its objectives. The new plan calls for three or four plants and a renegotiated split of responsibilities between the government and the cosponsors. And a completion date of 2016 at the earliest, compared to the originally scheduled 2012. The subcommittee did not appear to be buying any of it.

As the Luntz strategy memo makes clear, Americans have an almost boundless belief in the power of technology and our role in making it available  to the world. "Clean coal" has been widely understood to be one of the cornerstones of this Administration's energy policy. In the Green Energy War, we are a long way from measuring up to what Franklin Roosevelt  described in 1940 as the "great arsenal of democracy". George Bush probably knows that better than most.

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Chapter 27: Misunderestimating Bush, Pt. 3 -- Thumb on the Scale

April 21, 2008

Parsing last week's Bush climate speech has intelligence value in the Green Energy War irrespective of the esteem in which its deliverer is held. The dimensions of the defensive perimeter thrown up by the Republican Message Command and its business allies are detectable. They suggest an awareness of the blowback risk created by the Administration's infidelity to the principle of technology neutrality.

In a political culture which demonizes the notion of government picking winners, the Bush electricity portfolio has been pretty heavily invested in  nuclear and  "clean" coal and considerably underweight in renewables.

With no wavering of commitment to past technology choices, the  Bush speech nevertheless called for "reforming today's complicated mix of incentives" by consolidating them into a "single, expanded program" organized around the following pragmatic principles:

• First, the incentive should be carbon-weighted to make lower emission power sources less expensive relative to higher emission sources — and it should take into account our nation's energy security needs.

• Second, the incentive should be technology-neutral because government should not be picking winners and losers in this emerging market.

• Third, the incentive should be long-lasting. It should provide a positive and reliable market signal not only for the investment in a technology but also for the investment in domestic manufacturing capacity and infrastructure that will help lower costs and scale up availability.

Even allowing for the say-one-thing-do-another debauchery of contemporary Washington, the variance with actual practice is breathtaking. And the words alone have little predictive significance for the trajectory of a mallard getting lamer and lamer. But the political forces embedded in Bush's speech will endure long past his presidency and would appear fully cognizant of the utter failure of current technology policy.

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Chapter 28: Misunderestimating Bush, Pt. 4 -- Contempt of Court

April 22, 2008

Based on the historic  US Supreme Court decision that brought him to the White House, George W. Bush probably ranks first among all US presidents in his acute appreciation of the co-equal role which the American Constitution affords the judicial branch of government.

That may explain the disdain his climate speech last week  expressed regarding the role of the courts:

Some courts are taking laws written more than 30 years ago — to primarily address local and regional environmental effects — and applying them to global climate change. The Clean Air Act, the Endangered Species Act, and the National Environmental Policy Act were never meant to regulate global climate.

An unusually blinkered approach to statutory construction, one that was specifically rejected last year by the Supreme Court when it was offered up by the Bush Administration's EPA in the landmark case,  Massachusetts vs. EPA _._ "The statutory text forecloses EPA's reading," the decision said, adding that "greenhouse gases fit well within the capacious definition of air pollutant."

Bush's remarks left no doubt that this was the very case that troubled him:

For example, under a Supreme Court decision last year, the Clean Air Act could be applied to regulate greenhouse emissions from vehicles. This would automatically trigger regulation under the Clean Air Act of greenhouse gases all across our economy ...

Precisely. The Supreme Court's decision emphasized that by providing nothing more than a "laundry list of reasons not to regulate," EPA had defied the Clean Air Act's "clear statutory command." The Court said that a refusal to regulate could be based only on "science and reasoned justification," adding that while the statute left the central determination to the "judgment" of the EPA's administrator, "the use of the word 'judgment' is not a roving license to ignore the statutory text."

Both decisions, Massachusetts vs. EPA and Bush vs. Gore, were cases resolved by narrow, 5-4 majorities. Sometimes that's how history unfolds. Losing arguments tend to have longer shelf lives in politics, however, than in law. The accelerated timeline of the Green Energy War will likely compel the Frank Robinson approach — named for the baseball hero  awarded the Medal of Freedom by President Bush in 2005. As Robinson  put it, "Close don't count in baseball. Close only counts in horseshoes and grenades."

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Chapter 29: Biofuels Smackdown – When Words Fail

April 24, 2008

The Green Energy War, like every military campaign since the beginning of history, is fraught with unintended consequences. But strategy, once committed to, often takes on an irreversible momentum of its own. And secondary concerns, in the  memorable words of the US Air Force Intelligence Targeting Guide, tend to be dismissed as "collateral damage".

Food riots in developing countries around the world have catapulted what had been more a fine-tuning review of biofuels promotion into a white hot debate of global morality. The UN's Special Rapporteur on the Right to Food has several times called the diversion of arable land from food crops to fuel crops "a crime against humanity" and requested a five-year ban on the practice.

Brazil's President Lula da Silva  blasted back,

The real crime against humanity is to discredit biofuels a priori and condemn food-starved and energy-starved countries to dependence and insecurity ... Don't tell me, for the love of God, that food is expensive because of biodiesel. Food is expensive because the world wasn't prepared to see millions of Chinese, Indians, Africans, Brazilians, and Latin Americans eat.

We want to discuss this not with passion but rationality and not from the European point of view.

And what is the European point of view? That depends upon who you ask. The UK appears ready to re-evaluate. Having just rolled in a 2.5% biofuel content to petrol and diesel this month, and facing a 5% target in 2010 — only half the level required of other EU members — Prime Minister Gordon Brown  plans

to look closely at the impact on food prices and the environment of different production methods and to ensure we are more selective in our approach. If the UK review shows that we need to change our approach, we will also push for change in EU biofuels targets.

But German Chancellor Angela Merkel  says that "inadequate agricultural policies in developing countries" and "insufficient forecasts of changes in nutritional habits" in emerging markets are what's to blame for the rise in food prices.

If you travel to India these days, then a main part of the debate is about the 'second meal'. People are eating twice a day, and if a third of a billion people in India do that, it adds up to 300 million people. That's a large part of the European Union. And if they suddenly consume twice as much food as before and if 100 million Chinese start drinking milk too, then of course our milk quotas become skewed, and much else too.

Not very edifying, and possibly just part of the predictable run-up to the May 7 EU meeting when the 27 member states convene to approve strict sustainability criteria for biofuels. According to the  Financial Times, though, the prospect of reduced policy support for biofuels is lifting the price of oil.

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Chapter 30: Biofuels – Wouldn't We Miss 500,000 Barrels a Day?

April 28, 2008

As debate  continues to rage over the role which biofuels policies have played in the extraordinary inflation in world food prices, a sobering awareness may spread. Crop-based fuels like ethanol and biodiesel may have already become an indispensable element of global supplies of liquid fuels. Their absence could have a significant impact on the price of oil.

That's the gist of some recent cautionary remarks coming from the International Energy Agency, generally considered the analytic watchdog for the energy consuming interests of the developed world. By IEA's estimate, biofuels make up about half the new fuel coming to market this year from outside the OPEC cartel.

In the words of William Ramsey, deputy executive director of the IEA, "If we didn't have those barrels, I'm not certain where we would be getting those half a million barrels," adding that OPEC has indicated that it will not increase supply.

What would be the impact on oil prices without those barrels? Using a slightly different analysis, focused on an annual increase in global production of biofuels of about 300,000 barrels-of-oil-a-day equivalent, a Merrill Lynch commodity strategist  told the Wall Street Journal that oil and gasoline prices would be about 15% higher if biofuel producers weren't increasing their output.

Significantly, that 300,000 barrels-a-day amount represents one-third of the world's growth in the demand for oil last year, which was about 900,000 barrels-a-day.

How much blame does biofuels demand deserve for increases in world food prices? The institutional  estimates vary. The UN's Food and Agricultural Organization says 10 – 15%. The International Monetary Fund  says 20%. The International Food Policy Research Institute says between a quarter and a third. Others generally fall in between.

And what degree of culpability should be assigned to the price of oil, or the perverse feedback loop between oil and the US dollar that seems to have ignited all commodity prices, or the petroleum dependence that has made all of these conditions possible (if not inevitable)? Oddly, there's been no similar outcry yet.

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Chapter 31: Biofuels – Confusion, Conflict Among Allies

April 30, 2008

Worldwide, there are three principal motivators — or fronts — in the accelerated move away from current methods of consuming fossil fuels that is known as the Green Energy War. As with most large scale endeavors attracting so many participants, communication and understanding across fronts can prove exceptionally difficult. It is by no means always clear that everyone is fighting the same war.

The most politically resonant front with international publics is the energy security front, although it takes on significantly different meaning based on national setting. In the US, with its vehicular culture and its longstanding animus to the Middle East, the focus is overwhelmingly on gasoline and diesel — the "energy independence" shibboleth, a political perennial since the Nixon era, is centered on the fuel tank. In Europe, apprehension over Russia's aggressive use of pipeline flows as a political instrument has placed most of the energy security focus on natural gas. In China and Japan, securing supply lines for all forms of energy is the priority.

The environmental front, especially when framed as a fight against global warming, has dominated discussion among cultural elites. This is particularly true in Europe and the US, and extends to the diplomatic infrastructure of multiple international organizations, both governmental and non-governmental. Depth of conviction and social cohesiveness are primary resources on the environmental front. The global nature of the climate change challenge has tended to promote "carbon footprint" as a preferred universal metric by which to calibrate policy options.

The third front in the Green Energy War, the economic development front, is somewhat amorphous and has yet to generate the breadth of support of the other two. Its soldiers are planners attempting to re-channel the financial revenue flows created by today's energy system in directions that will create local jobs and economic growth. Its coloration varies widely according to national circumstance, but commonly includes "green collar" jobs advocates and farm crop (as opposed to livestock) lobbies.

The biofuels banner has been flown on each of these fronts, but even the strongest of allies find subordination of interest and accommodation of others difficult in the heat of war.

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Chapter 32: Biofuels – Low Carbon Fuel Standard to the Rescue?

May 1, 2008

Simultaneous with the intense  food vs. fuel debate presently underway, biofuels advocates on the environmental front of the Green Energy War have faced  forceful arguments over the greenhouse gas impact of current policies promoting ethanol and biodiesel. Their  response has been to emphasize the benefits expected from "second generation" biofuels like cellulosic ethanol, and to advocate technology-neutral, performance-based policies like a Low Carbon Fuel Standard.

California embraced a Low Carbon Fuel Standard for transportation fuels in 2007 and is preparing for its implementation in 2010. Last week the Governor of Massachusetts, as well as the state's legislative leadership,  endorsed such a standard and broadened it to include home heating oil. There is hope of similar support from the other northeastern states who are signatories to the Regional Greenhouse Gas Initiative.

The  belief is that this is a superior approach to the volumetric renewable content floors set for certain fuels by federal law. A Low Carbon Fuel Standard focuses on lifecycle GHG emissions, would include natural gas and electricity as transportation options, and would penalize high carbon fuels like liquid coal or oil from tar sands. Federal policy, although broadened last year to require advanced biofuels and to consider direct and indirect land use impacts, is seen by many environmentalists as too narrow.

Consideration of worldwide direct and indirect land use impacts is emerging as  a litmus test for biofuels support among climate warriors. As with many policy objectives in the Green Energy War, it is exponentially easier to advocate than to accomplish. In the words of the  California researchers, who advocated pushing forward:

One major concern ... is development of appropriate frameworks for analyzing and regulating the land use impacts of fuel production. Current approaches ... are static, extremely simple, and based on old data. One possible solution would be to develop a meta-model that links lifecycle assessment and macroeconomic models to predict indirect land-use changes ... However, this seems a daunting task, given the enormous data gaps, model uncertainty, deep uncertainties about future policies, prices and technologies. In particular, this approach is likely to have very limited application in a regulatory context. Therefore, better methods for the analysis and regulation of indirect land use change effects are required.

Daunting data and modeling challenges are a familiar presence on the climate front, but those in the trenches of the transition away from petroleum dependence would do well to remember they have somewhat more simplistic, but no less valiant, allies on the  energy security and economic development fronts of the Green Energy War.

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Chapter 33: Will Edison's Solar Play Trigger a Feed-In Tariff?

May 6, 2008

Ask any Green Energy Warrior what it will take to win the war, and the answer is likely to be "technological transformation." The feed-in tariffs in Europe and the renewable portfolio standards in the US focus on independent generators to prompt this change, implicitly believing the existing utility industry is too set in its ways to adapt quickly enough.

For utility-scale technologies, this judgment hinges on credible assumptions about willingness to incur technological risk and the inherent inertia of government-supported monopolies. For smaller technologies like distributed generation, the presumption is even stronger because the existing utility business model seems so widely divergent.

Which makes Southern California Edison's proposal to install and own 1-2 MW photovoltaic systems on leased warehouse rooftops so potentially revolutionary. Little powerplants. Connected directly to the distribution grid. No transmission required. Utility rate base. Within the insular precincts of transformative utility regulators, this feels like the grail.

The California Public Utilities Commission has poked and prodded its regulated utilities for several years to make just this type of investment in renewable generation, as opposed to simply purchasing the output from independent generators. The rationale is that an affirmative business motivation by the regulatee to implement the regulator's policy preferences is more enduring — and more scalable — than begrudging compliance with fiat.

But the move has prompted apprehension among some of the pioneers in the solar industry, who fear unfair competition and discriminatory treatment from a ratepayer-subsidized behemoth. They argue that there is nothing about solar energy that suggests it is a natural monopoly and point to the well-documented history of cost overruns and technological stultification associated with rate based investments.

The California regulatory culture suffers from an erratic resolve to bring downward pressure on costs. The Edison solar enterprise will achieve much greater significance if it is continuously benchmarked against a comparably sized program of non-utility projects, focused on the same market sector and supported by a feed-in tariff at the same ratepayer cost. The Green Energy War needs a broad mobilization, not a preferential selection of defense contractors.

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Chapter 34: New EIA Oil Price Forecast – Oops, We Did It Again

May 8, 2008

In the rear view mirror that seems to guide the US federal government's energy price forecasting, this week's revision to the Energy Information Administration's official "Short-Term Energy Outlook" looks unavoidable. The bigger question, exactly when the view forward through the windshield bug splatter of flawed assumptions will change, is less clear.
Last month, EIA crossed the  psychological threshold of triple digit oil prices for the first time in history. It projected that for the twelve months of calendar 2008, the benchmark West Texas Intermediate price would average $101 a barrel. This was up from an $87 a barrel projection in January. Now, according to the latest figures from EIA, the 2008 price will average $110 a barrel.

But the ever optimistic green eyeshades at the EIA retain their hold-your-breath-this-is-almost-over insouciance, at least for now. Prices will decline to an average of $103 a barrel in 2009. A month ago they thought next year's price would be $92.50. It's all relative, however, and a decline is a decline.

Actually, the French poet, Jacques Delille, put it better when he  said, "Fate chooses our relatives, we choose our friends."

What is EIA's 2009 comparative optimism based upon? In their words:

If non-OPEC production rises _as expected_ and some OPEC members add production _as planned_ , surplus crude oil production should increase and ease upward price pressures by early next year. The expected surplus capacity, however, is less than projected in last month's Outlook. (emphasis added)

There's still no word as to what the impact will be on EIA's long-term price projections. The last official long-term forecast was published in March. It predicted a decline in real prices to $57 a barrel in 2016, followed by a gradual increase to $70 in real terms in 2030.

Considerable attention has been drawn to the effect on the climate front of the Green Energy War caused by changes in the perception of the pace of glacial melting and CO2 buildup. Similar changes will be likely on the energy security and economic development fronts as well, as the US government haltingly makes painful adjustments in its official view of future energy prices.

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Chapter 35: How Big a Nuclear Renaissance Did We Buy?

May 19, 2008

As the debate over the future role of nuclear power in the Green Energy War continues to sharpen, the US Congressional Budget Office  released a seminal text this month. The report succinctly describes the financial incentives in the Energy Policy Act of 2005 (EPAct) for third-generation nuclear technology, and projects levelized costs for the small number of plants expected to benefit. The study was commissioned by the patron saint of modern US nuclear promotion, New Mexico Senator Pete Domenici.

If there is a Medici family bankrolling the nuclear renaissance, it is most certainly the American taxpayer. Coming from the legislative branch's official scorekeeper of all federal expenditures, the CBO report could serve the same function as the invention of double-entry bookkeeping in the 14th Century by the founder of the Medici Bank. It might establish an accepted reference point.

Among CBO's most striking  conclusions:

• In the absence of both CO2 charges and EPAct incentives, conventional coal and natural gas technologies would most likely be the least expensive source of new electricity generating capacity.

• CO2 charges of about $45 per metric ton would probably make nuclear competitive with conventional coal and natural gas technologies as a source of new baseload capacity, even without EPAct incentives.

• At CO2 charges below $45, natural gas is probably a more economic source of baseload capacity than coal. CO2 charges would have to be less than $5 per metric ton for coal to be the lowest cost source of new capacity.

• EPAct incentives, even in the absence of CO2 charges, would probably make nuclear a competitive technology for a few of the 30 plants currently being proposed.

• Regardless of the incentives provided by EPAct, uncertainties about future construction costs or natural gas prices could deter investment in nuclear. In particular, if construction costs "proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s, or if natural gas prices fell back to the levels seen in the 1990s, nuclear would not be competitive."

• CO2 charges "would probably have to exceed $80 per metric ton in order for nuclear technology to remain competitive under either of those circumstances."

Even the $45 per metric ton level is a considerable distance above the range currently being debated in Congress.

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Chapter 36: CBO Nuclear Report, Pt. 2 – Construction Cost Peril

May 21, 2008

The notable  assessment of the future role of nuclear power,  published this month by the Congressional Budget Office, derives significance less from its breadth or depth than from the insight it provides into the thinking of Congress' official fiscal scorekeeper. The report, assembled at the direction of revered nuclear champion Senator Pete Domenici, casts a wary (though bleary) eye at construction cost risk.

In assembling the levelized cost analyses it used to compare baseload generation technologies, CBO used so-called "overnight" capital costs. This focuses on the cost of a power plant as if it was built and paid for immediately, implicitly addressing the financing costs attributable to the time required for construction in more general assumptions. CBO's base case assumption of $2.4 million per installed megawatt of capacity came from the Energy Information Administration's most recent projections, but was compared to estimates made in other studies by MIT and the International Energy Agency. Ultimately, CBO evaluated scenarios ranging from $1.2 to $4.8 million per installed megawatt.

"The breadth of that range reflects the uncertainty associated with the cost of building new nuclear plants in the United States," the report stated, "and is wide enough to capture plausible further increases in construction costs." It's important to keep in mind that these are overnight costs, with no time-driven financing costs specifically included.

Why such a broad range of overnight costs? Beside observing that no nuclear plant has been ordered in the United States since the 1970s, the appraisal is pretty unvarnished:

CBO's assumption about the cost of building new nuclear power plants in the United States is particularly uncertain because of the industry's history of construction cost overruns. For the 75 nuclear power plants built in the United States between 1966 and 1986, the average actual cost of construction exceeded the initial estimates by over 200 percent ... Although no new nuclear power plants were proposed after the partial core meltdown at Three Mile Island in 1979, utilities attempted to complete more than 40 nuclear power projects already under way. For those plants, construction cost overruns exceeded 250 percent. (An average of 12 years elapsed between the start of construction and the point at which the plants began commercial operation. The overruns in overnight costs did not include additional financing costs that were attributable to post-accident construction delays.)

But, then, overnight costs don't attempt to reflect financing costs. So they fail to identify the full cost impact of construction delays. But the first maxim of private sector investment decision making is to evaluate all identifiable risks. Seems like a disconnect.

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Chapter 37: CBO Nuclear Report, Pt. 3 – Mitigating Factors?

May 27, 2008

Although it contains  a remarkable blind spot regarding financial risks stemming from construction schedule slippages, this month's  major nuclear assessment from the Congressional Budget Office is appropriately sober about the magnitude of risks attributable to construction cost overruns. If construction costs average as high as they did in the 1970s and 1980s, CBO concludes that CO2 charges will have to exceed $80 per metric ton for new nuclear plants to be cost competitive.

Nevertheless, CBO's base-case assumption is that new nuclear plants can be built at an "overnight" cost about 25% less than the historical average. Why this optimism? In CBO's words:

NRC's revised licensing process for nuclear power plants is expected to reduce midconstruction modifications, which were blamed for many cost overruns in the past. Moreover, vendors argue that advanced reactors will have lower construction costs because they have fewer parts than older reactors.

More specifically, the CBO report points to the 1989 changes adopted by the Nuclear Regulatory Commission to reduce cost uncertainties by allowing utilities to fulfill more regulatory requirements before starting construction. CBO also takes comfort from the experience of the Tokyo Electric Power Company in the mid-1990s in constructing two advanced boiling-water reactors "at costs and schedules close to manufacturers' estimates."

CBO is quick to acknowledge, however, the contrary experience of a more current example in Finland with a different design, an advanced pressurized-water reactor. That project "continues to have difficulty adhering to original cost estimates." Citing  a Wall Street Journal article, CBO observes that by March 2007, the Finnish project, which had initially been estimated to cost 3 billion Euros, had fallen 18 months behind schedule, causing costs to increase by 700 million Euros.

More recent  announcements put the Finnish project, which is called Olkiluoto 3 and is considered an important trailblazer for new nuclear plants in Europe, at a full two years behind schedule with costs escalating to as much as 1.5 billion Euros over budget.

Which reinforces the new projections  released today by Cambridge Energy Research Associates regarding trends in North American power plant construction costs. All generating technologies have experienced significant cost increases since 2000, but since 2005 nuclear has taken a breakaway lead. The scorecard since 2000: coal, up 78%; natural gas, up 92%; wind, up 108%; nuclear, up 173% .

Where that nuclear number falls in CBO's range of $1.2 to $4.8 million per installed megawatt is by no means clear.

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Chapter 38: CBO Nuclear Report, Pt. 4 – EPAct's Limited Role

May 29, 2008

There may be no aspect of the Green Energy War more in need of an honest scorekeeper than the question of what to expect from nuclear power. This month's  appraisal from the Congressional Budget Office provides significant insight into how the legislative branch's official bean counters see it.

Over the long haul, according to CBO, attaching a significant charge to CO2 will have a much bigger impact in commercializing third generation nuclear technology than any of the widely publicized subsidies contained in the Energy Policy Act of 2005. But using CBO's base case of "overnight" capital costs of $2.4 million per installed megawatt — about 25% less than the experience of the 1970s and 1980s — it will take CO2 charges of $45 per metric ton to make nuclear cost competitive against natural gas generation. If construction costs of all generating technologies were to double (as they have since 2000), in CBO's judgment it would take CO2 charges of $150 per metric ton to make nuclear cost competitive.

For reference, the price "off-ramp" being discussed in the Lieberman-Warner cap-and-trade legislation is $22 – $30 per ton.

CBO sees the incentives contained in EPAct as important, but only for a likely first few plants. It divides the incentives into three categories. First, are the r-and-d costs, where the federal taxpayers pay 50% of "first of a kind" licensing and design expenses — DOE has participated with three industry consortia attempting to license advanced reactor designs, a process which CBO estimates will cost between $300 and $500 million for each of the designs.

The second category of EPAct incentive is aimed squarely at construction cost risk: a taxpayer guarantee of debt financing on up to 80% of construction costs, limited by DOE to three plants per reactor design; and a taxpayer absorption of certain regulatory delay risks, limited to $500 million for each of the first two plants and $250 million for each of the next four.

The third category of EPAct incentive addresses operating costs, and the most important of these is a production tax credit of up to $18 per MWh for the first eight years of operation, limited to $7.5 billion and not adjusted for inflation. Although CBO calls the production tax credit "the most substantial one" of the EPAct incentives, it also notes that because of inflation "the maximum value of the credit is likely to decrease substantially by the time advanced nuclear plants begin operating."

So what's CBO's takeaway?

The maximum allocation of benefits currently available under EPAct would most likely lead to the planning and construction of at least a few new nuclear plants in the next decade, even in the absence of carbon dioxide charges.

And from CBO's perspective, that might not be so bad:

The cost of new nuclear capacity would probably be higher if utilities attempted to build a large number of power plants over the next decade. For instance, building all of the 30 proposed nuclear plants over the next 10 to 15 years — roughly the period of availability for the production tax credit — could significantly increase construction costs for nuclear power plants by increasing demand for scarce components that are necessary to build reactors (for example, specialized steel forgings).

Seems like more of an art fair than a renaissance.

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Chapter 39: Where, Oh Where, Have the CCS Projects Gone?

June 2, 2008

Two dispatches from the carbon capture theater of the Green Energy War's climate front make clear that to describe current efforts as being at a standstill might be wildly optimistic.

The Bush Administration's  cancellation of FutureGen in January was a highly publicized fiasco. "Perhaps worse,"  says the New York Times, "in the past few months, utility projects in Florida, West Virginia, Ohio, Minnesota and Washington State that would have made it easier to capture carbon dioxide have all been canceled or thrown into regulatory limbo."

Meanwhile, the European Union, just 14 months after member states pledged to have 10 – 12 demonstration projects in operation by 2015,  has yet to determine how to pay for these efforts and last week decided instead that the better course of action is to wordsmith the target. Henceforth, the three natural gas-related projects underway in non-member Norway  will be considered as part of the member states' commitment.

Long considered the indispensable underpinning to the "clean coal" vision, carbon capture and sequestration is a classic Big Science r-and-d challenge. Progress is likely to come in fits and starts, time frames may stretch considerably, costs will prove difficult to control. Additionally, uncertainty about achieving the desired solid state in various subsurface geologic conditions and the inadequacy of existing legal frameworks to assign liability complicate the institutional agenda.

Why does it matter? Reliance on CCS is embedded in virtually every 2050 climate stabilization strategy published to date. It occupies three of the 15 "wedges" in the  oft-cited Pacala-Socolow construct. The highly regarded Clean Air Task Force  concluded that rapid deployment of CCS "must be a central tenant (sic) of any sound global energy policy." IPCC  studies have placed special emphasis on the significant contribution expected from CCS. The European Commission's  strategy paper last January said that without successful deployment of CCS, its ambitious 2020 GHG reduction targets "will never be met."

Whether 2015 was ever a realistic European time horizon for CCS deployment probably has little bearing on the strategic significance attributed to CCS for 2050. But in a world where China alone is expected to install more than 800 GW in the next eight years — greater capacity than installed in the entire European Union since 1945 — and 90% of that is expected to be coal, the recent setbacks raise two fundamental questions:

• is it within the capacity of the governments of the developed countries and appropriate private sector counterparts to coordinate, competently manage, and adequately fund a CCS research and demonstration effort commensurate in scope and urgency with the GHG mitigation benefits attributed to CCS?

• in the meantime, can these same actors rise above today's otherworldly, sterile debate over ultimate technology choice and deploy a time-sensitive strategy emphasizing energy efficiency and currently available renewable technologies?

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Chapter 40: General Motors – The Consequences of Strategy

June 4, 2008

For many analysts, the Green Energy War is characterized by the same unpredictable chaos associated with all military conflicts. Intelligence is limited. Unanticipated conditions rapidly appear. Developments cascade with unenvisioned quickness. Even the best of battle plans  seldom unfolds as expected.

That's certainly the bewilderment flowing from General Motors Chairman and Chief Executive Rick Wagoner at yesterday's annual shareholder meeting. He  blamed $4-a-gallon gasoline prices for a "structural shift" by American consumers away from large vehicles and announced the closure of four North American assembly plants that make SUVs and pickups. It's a reduction of manufacturing capacity from 4.2 million vehicles a year to 3.7 million.

Wagoner indicated GM will also consider selling the hyper-burly Hummer brand, which the New York Times reported it "once regarded as a pillar of future growth." "These prices are changing consumer behavior and changing it rapidly," Wagoner said. "We don't believe it's a spike or a temporary shift. We believe it is permanent."

But are GM's problems a result of sudden surprise or longterm strategic misjudgment? The Wall Street Journal, calling the move an "abrupt shift",  said it was "an acknowledgment that ... Wagoner miscalculated in 2005 when he bet big on trucks." Between 2004 and 2007, GM lost more than $55 billion, and it reported a loss of $3.25 billion for the first quarter of 2008. Its stock is near a 26-year low, about one-third lower than when Wagoner took over in 2000. And its market valuation is less than one-quarter of what it was in 2000.

Of course hindsight tends to be 20/20, and even the vainglorious forecasting profession has generally stayed humble about the recent run-up in gasoline prices. But wouldn't it have made sense over the years, in terms of corporate strategy, to reduce the role of fuel price risk in GM's profitability algorithm? Didn't the entire industry go through a similar fuel price driven kill-off some three decades ago?

In fact, given the extraordinarily large footprint of automotive manufacturing in most developed economies around the world, wouldn't it have made good national policy this past quarter-century to eradicate the fuel price risk infecting the industry?

Wagoner told the annual meeting that his turnaround strategy has "made significant progress on all fronts." One wonders how much more progress his shareholders, his lenders, his employees, or his countrymen will tolerate.

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Chapter 41: IEA Climate Report – The Relentless Logic of War

June 9, 2008

Two days after the  derailment of the long-awaited climate  debate in the US Senate, the International Energy Agency last week issued its how-to-do-it  report on achieving a 50% reduction in greenhouse gas emissions by 2050. The self-regarding greatest deliberative body in the world got sidetracked by a demand to have the 491-page bill read out loud. The IEA, energy think tank to the western nations that make up the OECD (think NATO without guns), made abundantly clear that achieving even the low end of the 50 – 85% reductions called for by the IPCC will require a "global revolution ... in the way that energy is supplied and used."

The 640-page IEA report is the battle plan requested by the G8 leaders a year ago at their German summit meeting after agreeing to "seriously consider" emission reductions of up to 50% by 2050. The report is intended to be a focus of discussion at next month's summit in Japan.

What context does IEA set for its 2050 assessment? A four-fold expansion of the global economy, perhaps approaching ten-fold in developing countries like China and India. In the absence of policy change and major supply constraints, a 70% increase in oil demand and a 130% increase in CO2 emissions. A possible increase in the eventual stabilization level of average global temperatures of 6 degrees Centigrade, perhaps more. The bottom line — "significant change in all aspects of life and irreversible change in the natural environment."

Based on what it describes as "optimistic assumptions about the progress of key technologies," IEA concludes that hitting the 50% reduction target will require deployment of all technologies involving costs of up to $200 per metric ton of CO2 saved when fully commercialized. The average cost of the technology portfolio is much lower than this marginal cost, however, ranging from $38 to $117 per metric ton depending upon the mix of technologies. On the other hand, "if the progress of these technologies fails to reach expectations," marginal costs may rise to as much as $500 per metric ton.

By IEA's estimate, the 50% reduction from today's levels will require 48 gigatonnes fewer emissions in 2050 than its business-as-usual scenario. Where do these savings come from?

• 36% from end use fuel efficiency and end use electricity efficiency

• 21% from renewables

• 19% from carbon capture and sequestration from both power generation and industrial uses

• 11% from end use fuel switching

• 7% from power generation efficiency and fuel switching

• 6% from nuclear

Next month's G8 summit will probably have a different ambience than the United States Senate. No one is likely to ask that the report be read out loud.

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Chapter 42: IEA Report, Pt. 2 – Decarbonising Generation

June 10, 2008

The climate strategy  published last week by the International Energy Agency, an analytic response to the commitment made by G8 leaders in 2007 to "seriously consider" GHG emission reduction targets of 50%, is emphatic about the need to "decarbonise" the generation of electricity. The IEA identifies three principle ways to achieve this:

• Major improvements in end-use efficiency, equivalent to a one-fifth reduction in electricity production, through "tough efficiency regulations for buildings ... (and) appliances ... (i)n both developed and developing countries..."

• A "massive switch to renewables for power generation" and a "substantial switch to nuclear". By 2050, non-hydro renewables make up 46% of global electricity production, nuclear nearly a quarter, and hydro about an eighth.

• Significant deployment of carbon capture and storage for both coal-fired and natural gas-fired generation. The report characterizes CCS for power generation (as well as for energy-intensive industrial applications) as "the most important single new technology for CO2 savings".

The IEA report is careful to acknowledge that national preferences may play an important role in technology selection: "considerable flexibility exists for individual countries to choose which precise mix of CCS, renewables and nuclear technology they will use to decarbonise the power sector." But that may not quite capture the full dynamic. According to the IEA's business-as-usual estimates, more than two-thirds of greenhouse gas emissions will be coming from non-OECD countries in 2050.

Another important feature of the IEA report is that achieving a 50% reduction from today's level of emissions by 2050, the low end of the IPCC's stabilization target range, will require "(s)ubstantial early retirement of capital stock." In the words of the report

... one-third of all coal-fired power plants not suitable for CCS will need to close before the end of their technical life (sic). It is recognized that this will be a large step for countries heavily reliant upon coal, but a necessary step requiring careful management.

When the IEA report is taken up at next month's G8 summit, it may guarantee the Green Energy War a permanent place on future G8 agendas.

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Chapter 43: IEA Report, Pt. 3 – Transport Sector Most Difficult

June 12, 2008

The agenda-setting function of last week's  IEA climate report was reinforced by two developments yesterday. First, German Chancellor Angela Merkel  endorsed US President George Bush's plans for a "major economies" climate summit held in conjunction with next month's G8 summit in Hokkaido, Japan. And second, a 2050 GHG reduction target of 50% was  jointly recommended by the national science academies of thirteen countries, including all of the G8 nations as well as Brazil, China, India, Mexico and South Africa (i.e., all of Bush's "major economies" except Australia, Indonesia and South Korea).

In the words of the IEA report, the 50% reduction target constitutes a "tough challenge" which "implies a very rapid change of direction." On a gross basis, without placing a value on fuel cost savings or other avoided externalities, the IEA estimates a cumulative price tag of $45 trillion dollars (in real 2005 terms) by 2050. Amazingly, $33 trillion of this total is associated with the transport sector.

Achieving a lesser target of holding 2050 emissions to today's levels would require "major improvements in the efficiency of conventional vehicles ... increased penetration of hybrids ... (and) low-carbon footprint biofuels." Stepping this up to hit a 50% reduction target entails "a substantial decarbonisation of transport, which is likely to be costly in a sector dominated by oil products and the internal combustion engine."

The IEA analysis breaks the transport sector into two categories. Trucks, shipping and air transport are the chief users of low-carbon biofuels (which are subject to limits of sustainable production and cropping), because other non-hydrocarbon options are expected to be very expensive to apply to these transport modes.

Electric batteries and hydrogen fuel cells are the main alternatives for cars, although the IEA says it is difficult at this stage to judge which of these technologies — or which combination of them — will be most competitive. "Based on fairly optimistic assumptions about technology progress and cost reductions, electric and fuel cell vehicles are expected to cost around $6,500 more in 2050 than conventional vehicles." Those are uninflated 2005 dollars. The IEA concludes that nearly one billion electric and fuel cell vehicles need to be on the roads by 2050 to achieve the 50% reduction.

It remains extremely unclear how similar  Bush's desire for "a long-term binding goal" will prove to Merkel's hope for "some kind of binding targets", or the extent to which either the G8 or the "major economies" will follow the IEA script at Hokkaido. But one thing should be apparent: the stage has been set.

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Chapter 44: IEA Report, Pt. 4 – Five Weak Links

June 16, 2008

Depending upon the outcome of next month's Hokkaido G8 summit, especially its "major economies" side event, the  IEA's recent climate report could establish the framework by which the world struggles to develop the successor agreement to the Kyoto Accord. How useful this will be is likely to turn on the specificity attached to George Bush's  acceptance of a binding target for the US and the meaning of China's and India's embrace (through their national science academies) of a 50% reduction target for 2050.

Substantial diplomatic resources have been invested, as tends to happen in the waning days of a US presidency, in creating a heavily orchestrated moment.

Green Energy War planners will find value in scrutinizing some of the stretch points for government policies in the IEA 50% reduction scenario, remembering that it does not purport to be a blueprint. General Eisenhower's plans-are-useless-but-planning-is-indispensable  mantra remains the gold standard for this type of activity. Accordingly:

1. If more than two-thirds of the 2050 emissions are coming from non-OECD countries, the primary thrust will be technologies and policies that export well to developing countries. Can global leaders rise to this political, technical and diplomatic challenge?

2. If more than 70% of the gross investment required is for the transport sector, will domestic employment concerns allow governments to negotiate and regulate their way to the target or will the twin tornados of technology and market forces be allowed to blow freely?

3. If carbon capture and sequestration, for both electrical generation and energy-intensive industries, is truly "the single most important new technology for CO2 reduction", are there realistic prospects for the US and EU member states to overcome budgetary apprehensions and mount a coordinated research and demonstration effort of appropriate scale?

4. If non-hydro renewable electricity is to provide 46% of all generation by 2050, at what point must the IEA's opaque call for "clear, predictable, long-term economic incentives" be translated into a focused system of harmonized feed-in tariffs? The methods used by Germany and Spain have  proven demonstrably more successful and more scalable than the politically easier "invisible hand" policies promoted by the UK and the US, which have been neither clear, predictable, nor long-term.

5. At what point does the nuclear industry's difficulty in attracting private capital for new plants, as most recently seen by the  disappointing bid process for British Energy, severely undercut the IEA's assumption that it can provide one-quarter of all generation in 2050?

If the Hokkaido summit confounds the skeptics and launches the IEA's 50% reduction scenario as the post-Kyoto agenda, these are five topics that need urgent resolution to elevate the effort above an adventure in computer modeling.

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Chapter 45: German Cabinet Bolsters Merkel's Hokkaido Stance

June 23, 2008

Combatants on the climate front of the Green Energy War have long looked to Germany for inspiration. Despite  deepening rifts in Angela Merkel's "grand coalition" government, and some obvious soft spots in the package, the CO2 reduction measures endorsed by her cabinet last week will reinforce the German imprint on any progress which comes out of next month's G8 summit in Hokkaido, Japan.

The  measures, which must still be approved by both houses of parliament, aim to achieve a 35 or 36% level of reductions in CO2 emissions by 2020 compared to 1990 emissions. They  focus on:

• requirements that newly constructed or refurbished buildings meet stricter energy efficiency requirements, and that utility bills for multifamily housing be calculated on household consumption rather than apartment size;

• increasing the tax on the highest CO2 emitting commercial trucks to 28.7 euro cents (about $.44) per kilometer from the current 15.5 euro cents (about $.24);

• increasing the tax on more modern, lower emitting commercial trucks to 14 euro cents per kilometer (about $.21) from the current 10 euro cents (about $.15);

• expanding the electric transmission system to better accommodate offshore wind generation in the North and Baltic Seas.

The measures complement an earlier package approved by the lower house of parliament this month extending Germany's renowned feed-in tariff. The aim is to increase renewable generation to 30% by 2020, up from the current 14%, and to double the reliance on combined heat and power to 25% in the same time period.

German environmentalists are  complaining about what was dropped from the package, which was delayed twice by a bitter dispute between the minister for the environment and the minister for the economy. Among the abandoned items were an emissions tax on personal autos, a required retrofit of efficiency measures and mandatory use of "smart" meters in buildings. They believe the measures will only achieve a 30% reduction, and point to the acknowledged shortfall in meeting the previously announced 40% reduction goal.

But the minister of the environment  said EU measures will probably produce the remaining 4 to 5% in the coming years, and that Germany has already achieved a 20% reduction as of last year compared to a 21% target for the 2008-2012 period under the Kyoto Accord. "We're the only country in the world to follow up ambitious pledges by putting them into practice," he said. "We'd like to see other countries start, at the very least, to meet their own Kyoto targets."

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Chapter 46: Stage Set for New Renewables Strategy in UK

June 24, 2008

This morning's press briefing by the Prime Minister's Spokesman confirms that the long-awaited UK Renewable Energy Strategy will be published in two days. The report, underway for some time, is being rushed forward after a  blistering criticism of the Gordon Brown government's performance by a committee of Parliament.

The UK government proudly  claims credit on one of its web sites for playing "a key role" in securing agreement among European heads of state to "a binding target of 20%" of the EU's electricity, heat and transport energy supply to come from renewable sources by 2020. That was in the spring of 2007, Tony Blair's last official  summit. Since then, the government has negotiated a lower target of 15% for the UK, ranked third worst in the EU total energy standings with 2% renewables (ahead of only Malta and Luxembourg), and faced growing criticism for dithering.

Focusing on the UK's electricity goals of 10% renewables by 2010 and 15% by 2015, which it doubted are sufficient to achieve the 2020 EU target for total energy, the parliamentary committee blasted "not only the adequacy of the UK's targets ... but also the lack of progress that has been made toward achieving them." In the committee's view, renewable generation will have to grow from the 2006 level of 4.6% to between 35 and 40% in 2020 to achieve even the 15% total energy level currently expected by the European Commission.

"We find it highly unlikely that, given current progress, the UK will meet the Government's ambition for 10 per cent of electricity to be generated from renewables by 2010, let alone the EC Mandated Target for ... 2020."

Perhaps most biting of all, the committee observed that throughout its inquiry

we have been consistently disappointed by the lack of urgency expressed by the Government — and at times by the electricity industry — in relation to the challenge ahead. We expect the Government to take a greater lead on this matter, and hope that a clear strategy for progress will be forthcoming.

Coming on the heels of an embarrassing  revolt by 37 Labour MPs recently over the absence of a feed-in tariff for renewables in the Government's proposed Energy Bill, the ball, as they might say at Wimbledon, is in Gordon Brown's court.

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Chapter 47: A Policymaker's Cookbook for Feed-In Tariffs

June 25, 2008

The nature of the Green Energy War varies considerably around the world, but support for feed-in tariffs is an increasingly common litmus employed by renewables advocates globally to evaluate the efficacy of government efforts. Remarkably successful in bringing large amounts of renewable capacity online in Germany and Spain, the feed-in tariff has become the  preferred policy mechanism for jurisdictions more intent on tangible results than the creation of abstract trading instruments, intermittent tax goodies or unenforceable portfolio requirements.

This snowballing worldwide movement may have been immeasurably boosted by publication this month of  a report by KEMA, Inc. for upcoming stakeholder workshops at the California Energy Commission on feed-in tariff design and implementation issues and options. The report explores in lay terms the rich array of choices available to policymakers seeking to redirect the electricity system's massive payment streams from the dry rot in traditional utility supply plans toward technologies better suited to the challenges of the future.

Although it goes to considerable lengths to be value-neutral in what choices should be made, it dryly notes an admonition by the California Public Utilities Commission last year that feed-in tariffs should not be "open-ended" in light of the earlier experience under PURPA which resulted in an "overwhelming response with too much potential supply."

That might look pretty good right now to most Californians, in a state which continually struggles to meet the electricity needs of a growing population and where the vast majority of renewables contracts signed by investor-owned utilities have come in at or below the so-called "market price referent." This benchmark price is based on what electricity would cost from a new, efficient, natural gas-fired combined cycle plant. Some 70 – 80% of the projected cost is based on fuel. Because gas-fired plants are the most likely new generation to be built by utilities across the US, the cost comparison with renewables is likely to have broad applicability.

And the real value of the KEMA report is the universal applicability of its identification of issues and options. Those prepared to tell regulated monopolies what to buy to better serve their customers' interests will find themselves well-endowed. Heavily packed with references to published analyses of feed-in tariffs around the world, the KEMA report will likely become a field manual for those soldiers blazing a trail to a renewable tomorrow.

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Chapter 48: EIA Fudges Update to Longterm Oil Price Forecast

June 26, 2008

In the ocean liner turning process that characterizes a great nation's change in view of strategic inputs, nimbleness and agility are more applauded in speeches than observed in practice.  Media coverage of yesterday's release by the US Energy Information Administration of the "highlights section" of its International Energy Outlook zeroed in on the "high price case" which sees oil climbing to $186 per barrel, unadjusted for inflation, in 2030.

To distract attention from the "reference case" projecting an inflation-adjusted price of $70 per barrel in 2030, and to perhaps lay claim to we-weren't-born-yesterday bonafides on a day when West Texas Intermediate traded for physical delivery at $134, the official EIA release stated, "Given current market conditions, it appears that world oil prices are on a path that more closely resembles the projection in the high price case than the reference case." Nor does the release at any point indicate that the "high price" of $186 in 2030 is actually $119 when adjusted for inflation.

Parenthetically, the reference case actually sees prices declining to $56 in inflation adjusted terms by 2016, before beginning their gradual climb to $70 in 2030. What are the core assumptions that lead the US government's official energy forecasters to believe that it's about to become morning in America once again?

Well, its not demand — in the reference case, world liquids demand grows from 84.3 million barrels a day in 2005 to 112.5 million in 2030. In the high price case, it grows to 99.3 million barrels per day. Not exactly downward pressure on prices. And one shouldn't attach too much precision to these numbers — the EIA's  Annual Energy Outlook, released today, moved the global demand number in the high price case down to 98 million barrels from the 99.3 million projected one day earlier. Talk about demand destruction ...

Nor does US production of crude ride to the rescue. "A large part of the domestic oil resource base has been produced ... new oil reservoir discoveries are expected to be smaller ... With a few exceptions ... the remaining domestic petroleum basins have been significantly depleted."

In the reference case, total US liquids supply — which includes crude, natural gas liquids, ethanol, biodiesel, coal-to-liquids, etc., as well as refinery processing improvements — increases by 2.2 million barrels per day between 2006 and 2030. It's hard to see that pushing prices down to $70 in a 112.5 million barrel per day market.

No, the driver for massive price reductions in the reference case is best described in EIA's own words:

total supply in 2030 is projected to be 28.2 million barrels per day higher than the 2005 level of 84.3 million barrels per day. The reference case assumes that OPEC producers will choose to maintain their market share of world liquids supply, and that OPEC member countries will invest in incremental production capacity so that their conventional oil production represents approximately 40 percent of total global liquids production throughout the projection. Increasing volumes of conventional liquids (crude oil and lease condensates, natural gas plant liquids, and refinery gain) from OPEC members contribute 12.4 million barrels per day to the total increase in world liquids production, and conventional liquids supplies from non-OPEC countries add another 8.6 million barrels per day

And what if previously expressed concerns over OPEC's ability and/or willingness to expand production, or access to and potential for increases in non-OPEC production, persist? Then EIA's high price case, which still involves an inflation-adjusted reduction in today's price, steps up:

The composition of supply differs substantially between the reference and high price cases. High prices encourage the development of previously uneconomical unconventional supplies, which account for a much larger portion of total liquids supply than in the reference case in 2030 (nearly 20 percent, as compared with about 9 percent in the reference case). Conventional supplies decline over the projection period in the high price case, by 1.5 million barrels per day, compared with an increase of 21.0 million barrels per day in the reference case. The high price case assumes that OPEC member countries will maintain their production at near current levels. As a result, OPEC is willing, in this case, to sacrifice market share as global demand for liquids continues to grow.

Green Energy War analysts may be tempted to blame the complacency which has infected US energy policy these past several decades on the Pollyannish forecasts that have become the trademark of EIA. Before any military tribunals are convened, however, it would be wise to remember that the primary task of policymakers is to craft strategies that are robust across a range of different scenarios and at least partially insulated from flawed assumptions.

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Chapter 49: California's Climate Plan Snowball Starts Its Roll

June 30, 2008

Wading into one of the most self-regarding political cultures on the planet, Dr. Rajendra Pachauri, chairman of the UN's Intergovernmental Panel on Climate Change, last week  injected a small bit of perspective into California's celebration of the  release of the "Draft Scoping Plan" for implementation of its heralded "Global Climate Solutions Act."

"It would be nice if California, one of the largest economies in the world, cut greenhouse gas emissions to 5% below 1990 levels," he told a Sacramento gathering, "it would send a strong message to the rest of the US." The Kyoto Protocol calls for industrialized countries to reduce their emissions by an average 5.2% below 1990 levels in the 2008 – 2012 period. The assembled Californians remain focused on the political battles still to be fought to achieve the Global Warming Solutions Act's target of bringing emissions down to 1990 levels by 2020.

Dr. Pachauri told them that the European Union is moving rapidly to reduce its emissions to 20% below 1990 levels in 2020. Still, the impact California's efforts have already had in altering the American political landscape is widely recognized. As context, the White House Council on Environmental Quality chair, James Connaughton, lobbying India to commit to a longterm reduction target at next week's  Hokkaido summit of major economies, recently  let slip that even if the US stabilizes emissions by 2025 as President Bush  urged this April, it will stabilize at a level 16% above 1990′s.

Although vague on details, the direction outlined in the Draft Scoping Plan does not shrink from political challenge. With a targeted reduction of 169 million metric tonnes of CO2 equivalent, the Plan would derive 31.7 million tonnes from the well-publicized vehicle tailpipe standards blocked legally (or, illegally) by the Bush Administration; 26.4 million tonnes from tightened energy efficiency requirements, including a mandatory building retrofit requirement at time of sale; 21.2 million tonnes from raising the Renewable Portfolio Standard expected of utilities to 33%, up from 20%; and 16.5 million tonnes from a Low Carbon Fuel Standard that would alter the chemical content of gasoline and diesel.

There is a lengthy list of other measures with smaller impacts, and a large (35.2 million tonne) catch-all of "additional reduction from capped sectors", most of which is likely to come from a cap-and-trade program. Of considerable significance, the Draft Scoping Plan emphasizes the Western Climate Initiative's regional approach to cap-and-trade. Breathing life into this envisioned market of other Western states and Canadian provinces will require a major investment of political capital, but could stand as Arnold Schwarzenegger's signature legacy — especially if climate legislation in the next Congress proves difficult to enact.

And the Draft Scoping Plan adroitly throws back into the California Legislature's lap the market-versus-regulation divide that has framed much of the dialogue between Schwarzenegger and some Democratic leaders. By only relying on cap-and-trade for roughly one-fifth of total emission reductions, the document in effect challenges the Legislature to make some hard choices (e.g., a mandatory retrofit at time of sale) or expect a larger role for cap-and-trade. The starkest example is the expansion of the Renewable Portfolio Standard to 33% — a proposal which has been bottled up in a legislative committee by utility lobbyists for over a year. If the Legislature cannot muster the gumption to enact an initiative in the subject area most popular with the public, renewable energy, the ideological critique of Schwarzenegger's reliance on market instruments will seem pretty hollow.

The Draft Scoping Plan is not without its deficiencies — it completely abstains from choosing between auctions and give-aways for the emission allocations a cap-and-trade system would employ. It also takes a characteristically state-centric approach to relations with local governments — patronizing advice on improved land use planning, vague talk of regional emission reduction targets, traditional hoarding of carbon fee revenues to pay for state (but not local) administration of the program. The political value of enlisting the states as meaningful partners in innovation dawned too late on the floor managers of the doomed Warner Lieberman bill. The same hubris seems present in Sacramento.

But Green Energy Warriors will find plenty in the Draft Scoping Plan to cheer. The soaring but ambiguous speeches about the scope of change required by 2050 is past. The abstract debate over political philosophies will dissipate. The focus now is on the nuts and bolts, calibrated against an easily measured target in a fairly near-term 2020. An important milestone has been achieved.

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Chapter 50: UK Renewables Policy – No 'Rule, Brittania' Just Yet

July 4, 2008

Because the Green Energy War has to date been driven by a proverbial coalition of the willing — only the growing number of climate jihadis and the somewhat smaller sect of renewables zealouts see the subject as determinative of mankind's fate — government commitments, with some notable exceptions, have been long on rhetoric and imagery and short on tangible performance. "You say you want a revolution," the esteemed British energy analyst, John Lennon,  might say — "well, you know, we're all doing what we can."

Eight months after his  landmark speech to the World Wildlife Fund calling for a "fourth technological revolution" to create a low carbon economy, UK Prime Minister Gordon Brown last week trumpeted his government's initiation of yet another "consultation" process that is designed to produce a Renewables Strategy in the spring of 2009. The  consultation document was rushed into print one week after a committee of Parliament  excoriated Brown's government for a "lack of progress" in meeting its existing renewables goals and a "lack of urgency" about meeting its even larger renewables commitments to the European Union.

The consultation document is clear on the magnitude of the 2020 challenge: "we will have to increase the proportion of our energy coming from renewables ten-fold from 2006 levels, three times more than current policies are designed to achieve." When Prime Minister Brown said this "step change" would constitute "the most dramatic change in our energy policy since the advent of nuclear power" he may have understated the magnitude of scale-up and the shortness of time frame involved.

But the document is particularly murky about what the "step change" will actually cost. The  widely quoted ₤100 billion  cost (about $200 billion) is based on a $70 price per barrel of oil in 2020 — at $150 per barrel, the cost of the "step change" would be reduced by 35-40% according to the document. Similarly, if some of the effort could take place abroad, the program would be "significantly less expensive." The document estimates that meeting just 1% of the target from overseas could reduce costs of the overall effort by 15-20%. And reducing demand would have a further beneficial (though unquantified) impact on costs — the government intends to require all new homes to be zero-carbon by 2016, and all new buildings by 2019.

Of major significance, and with a promise for a separate consultation on "significant further increases in energy efficiency" later this year, the document observes,

Because energy efficiency measures are generally lower cost than building additional renewable supply, our analysis suggests that it will be economically worthwhile to introduce such measures with marginal electricity options, up to a cost of around ₤45 (per tonne of CO2).

That's roughly $90 per tonne, more than double today's price in the European Emissions Trading System. Assuming the $70 oil price, the document says the "step change" will cause a 2020 increase in electricity bills of 10-13% for domestic customers and 11-15% for industrial customers. But if oil turns out to be $150, "the percentage increase in electricity bills could fall by three-quarters."

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Chapter 51: UK Renewables, Pt. 2 – Churchill or Friedman?

July 10, 2008

The bipolar personality of the electricity chapters in the UK's renewable energy  consultation document is more than simply the kind of literary tic often associated with government reports written by multiple authors. It vividly illustrates a deep conflict in the government's policy objectives between meeting commitments made to the European Union concerning 2020 targets for renewables and fostering the vision for competitive electricity markets pioneered by the UK in the 1990s. Lurking in the background is the centrality which the London carbon market is expected to play in preventing catastrophic climate change.

Reconciling these differences in time to craft a coherent strategy for taking renewable electricity generation from 2006′s 4.4% to the 30-35% range in 2020 is likely to prove extremely daunting. Prime Minister Gordon Brown has promised to have such a strategy in place by the spring of 2009, but in the eviscerating words of the Liberal Democrat shadow chancellor, Mr. Brown's tenure at No. 10 Downing Street seems to have transformed him from Josef Stalin into Mr. Bean.

The consultation document makes the fundamental conflict pretty clear in its discussion (and rejection) of feed-in tariffs similar to those which have successfully added large amounts of renewables capacity in Germany and Spain:

A switch to a different support mechanism such as feed-in tariffs would raise a number of practical questions on how this would fit with our existing market arrangements.

We would have to consider who would pay the feed-in tariffs. We do not believe that it would be practically feasible to place such an obligation on electricity suppliers – since any renewable generator could ask any supplier to pay the tariff, a supplier might end up with a disproportionate burden of tariff payments. This would result in a competitive disadvantage which could probably not be addressed adequately through redistribution of burdens later on. If the tariffs were paid by a single agency (for instance the grid operator, or a newly formed agency), the cash flow needed by this agency would have to be financed.

Further questions arise on the impact on competition in the wholesale electricity market of 30% or more of our generation coming from renewables compensated through fixed feed-in tariffs rather than through a competitive market system. Under the RO, renewable generators participate in the wholesale market; if they receive fixed feed-in tariffs, they no longer do. We would want to ensure that the renewable electricity itself (if not the support paid through feed-in tariffs) could still remain part of the competitive wholesale market.

The demonstrable cost-insensitivity of regulated utilities, and the superior cost profile of new natural gas-fired power plants owned by non-utilities without captive customers, fueled a movement in the 1990s UK and (less successfully) elsewhere to "deregulate" wholesale electricity markets. This was a bit of a misnomer in light of the substantial regulation left in place, but most of the English-speaking world considers it apostasy to be less than resolute in support of "competition." Although originally envisioning a much grander face-off between generating technologies, in practice — because most new generation in "deregulated" markets has been gas-fired — competition theory has devolved to a differentiation on the basis of heat rates and plant availability.

This principle is not unimportant, but not especially well-designed for inducing investment in generating technologies whose costs are comprised mainly of capital amortization — like most renewables and nuclear — and which need to run whenever possible. And, as the consultation document makes clear, the very existence of the EU renewables target undermines to some degree the EU's Emissions Trading Scheme, which the document says "is core to our long-term strategy for reducing carbon emissions from electricity generation at least cost."

(I)t is important that we understand the impact of a push for renewable energy in the period to 2020 on our long-term strategy. The EU ETS would not, on its own, bring forward the level of renewable electricity generation that might be required to meet our 2020 target because there are a number of lower-cost alternatives for reducing emissions that companies would be expected to exploit first. One consequence of incentivising investment in renewables is therefore to reduce the demand for ETS allowances and so result in a lower EU ETS carbon price relative to what it would be without a renewable energy target.

Begrudgingly, the consultation document acknowledges that unfettered market forces are not the only factor in determining the nation's energy interests:

However, as the Stern Review emphasised, carbon pricing alone will not be sufficient to reduce emissions at the scale and pace required. Government action is also needed to stimulate the development of a broad portfolio of low-carbon technologies and reduce costs. By pushing the deployment of renewables, while also taking active steps to open up the way to the construction of new nuclear power stations (set out in our January 2008 Nuclear White Paper) and taking a leading role in developing and demonstrating CCS technologies, we are ensuring that there are a range of options available to power companies when they are looking at managing their emissions. The choice of which generating technology to invest in is then for the market to make.

And so one of the principal schisms in the Green Energy War is laid bare: what level of urgency, or what commitment to allies, compels extraordinary measures to expand the scale and accelerate the pace of change? To what degree should the tenets of the marketplace, the secular religion of the Anglo-American world, be traduced to accomplish a seemingly crucial objective? These questions currently reside in what Napoleon miscalculated to be "a nation of shopkeepers" but they foreshadow a more intense debate coming in the US, characterized as "a nation of day traders" in the 1990s. Are the challenges which confront us better addressed by the formulations of a Winston Churchill or a Milton Friedman?

Are you listening, Mr. Bean?

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Chapter 52: Will the UK Require New Coal Plants to Use CCS?

August 5, 2008

With thousands of demonstrators  expected to converge this weekend on Kingsnorth, a powerplant site in Kent where the German utility E.On hopes to build the first new coal units in Britain since 1974, a much larger battle is emerging in Parliament that may force-feed private sector embrace of carbon capture and sequestration.

A July 15  report by the House of Commons Environmental Audit Committee puts a significantly sharper edge on several years of ongoing criticism by the Committee of the Government's "serious lack of both clarity and urgency" in its CCS strategy. The Committee is comprised of nine Labour MPs, five Conservatives, and two Liberal Democrats. The "bite" in the report is much less its "once-again-we-are-extremely-disappointed" tone than its core substantive recommendation:

The Government cannot allow the prolonged operation of unabated coal stations; doing so will make it very unlikely the Government will meet its own carbon reduction targets. The Government should set a date by which all power stations will have to have emissions per unit of power generated below a certain limit (set in terms of kg CO2/MWh) or face closure. This limit should be based on capturing at least 90% of carbon emissions. By setting such a deadline and making its intentions clear a strong signal will be sent to the power generation industry about the future of coal and the importance of CCS.

For new plants, the Committee says there are two principal ways to accomplish this. The Government could implement a proposal similar to that made recently by the Royal Society (the UK equivalent to the US National Academy of Science), that licenses for new coal plants only be granted on condition that operating permits would be withdrawn if a plant failed to capture 90% of its carbon emissions by 2020. Alternatively, the Government could impose an upper limit on permitted emissions, as has been done in California, set at a level where unabated coal-fired power stations could no longer operate.

This latter approach echoes a  speech made by Tory leader David Cameron in June:

So that's why I can announce today that a Conservative Government will follow the Californian model, and implement an Emissions Performance Standard. This would mean the carbon emissions rate of all electricity generated in our country cannot be any higher than that generated in a modern gas plant. Such a standard would mean that a new generation of unabated coal power plants could not be built in this country.

Mindful of the high costs of CCS and a likely efficiency penalty of 10 – 40%, the House of Commons Committee was particularly scornful of the Government's single-minded focus on the carbon price established by the EU's Emissions Trading Scheme to induce investment in CCS. Citing Energy Minister Malcolm Wicks' admission ("Will it be enough? I do not know."), the Committee conclusion was clear:

... it is evident that the Government will need to accompany its faith in the carbon market with measures to mandate the installation of CCS technologies ... We cannot rely solely on the carbon price, either now or in the future, to ensure the implementation of CCS technology. There is a real risk that the EU ETS will not deliver a carbon price that will make CCS cost effective **.**

Given the interconnectedness of the Green Energy War, similar debate in the US and Germany seems inevitable.

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Chapter 53: Discount Rates – The Divine Right of Economists

August 13, 2008

Strategists in the Green Energy War are forced to make do with the analytic tools the early years of the 21st Century have made available to them. How to properly value future costs and future benefits has long been a conundrum for decisionmakers in all walks of life who are called upon to choose between alternatives in the present. The "time value of money" is a truism of economic orthodoxy, but ethicists have always questioned whether it gives proper attention to the interests of future generations.

The computer models which are used to frame the options in modern public policy address this challenge by specifying a numerical rate at which to discount future cash flows. More often than not, this discount rate is set to approximate the cost of capital of the real party at interest in the decision, the belief being that such a rate should fully capture the value attached to a choice between today and tomorrow. It would be hard to invent a better approach to capturing the arithmetic of private investment decisions made inside the widget factory.

The construct doesn't work quite as seamlessly with decisions affecting broad swathes of the public, or society at large, so the "cost of capital" is transformed into a "social discount rate". There are competing philosophical approaches about how best to do that, but for the most part the arguments seldom find interest outside the insular world of economists. Recently, this debate has raged white hot over the appropriate social discount rate to apply in evaluating strategies to combat global climate change — which may stretch the concept beyond its breaking point given the several hundred years modeled — but few non-economists have participated or paid any heed.

Truth be told, despite its often conclusive impact on quantitative analyses, policymakers spend surprisingly little time scrutinizing the rationale for the discount rates their models employ. Even the regulation-phobic George W. Bush administration chose to avoid too much contemplation, directing its agency heads in 2003 to use both a 7% real cost of capital and a 3% real social discount rate in conducting regulatory evaluations without providing much guidance for when one would be more appropriate than the other.

Spotting a dichotomy in the hidebound electric utility practice of evaluating supply options with cost of capital discount rates but socializing fuel price risk with automatic pass-throughs to customers, the California Energy Commission last year  directed that utility supply plans be evaluated with a 3% social discount rate applied to future fuel costs unless the utilities "can demonstrate that these costs should be assigned to shareholders." Such a change would place a higher quantitative value on fuel displacing supply options, a matter of some significance in a state which has seen the electric system's reliance on natural gas jump from 36% to 46% over the last decade. The Commission has scheduled  a public workshop in Sacramento next week to explore these implications further.

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Chapter 54: Discount Rates, Pt. 2 – Why They Matter So Much

August 14, 2008

Pragmatists in the Green Energy War tend to consider natural gas a necessary transition fuel for electric generation. They are cognizant of the role quick start, fast ramp gas generation will play in integrating intermittent wind and solar generation until large scale, dispatchable demand response and storage technologies become commercial realities. They embrace the material environmental benefits offered by modern gas-fired plants when compared to coal, even if only a half-way step toward decarbonising electricity. And they acknowledge the easier financeability of such plants in contrast to faith-based options like nuclear power.

Even the environmentally fastidious regulators in California have approved permits for more than 25,000 MW of new gas-fired capacity over the past decade. But like the chef who develops too friendly a relationship with the cooking sherry, it is possible to have too much of a good thing. Despite a recent  burst of euphoria about new supply prospects from several shale fields in Texas and Appalachia, declining production from traditional US basins has wreaked havoc on gas price volatility over the past eight years. And, perhaps unavoidably,  gas price forecasts have more closely resembled astrology charts than usable investment planning documents.

Because regulators, for lack of any better alternative, treat gas price volatility as if it were force majeure and allow electric utilities to automatically pass through fuel costs to their customers, there is a certain "path of least resistance" inevitability to the increasing gas dependence of the generation system. The problem is compounded in jurisdictions like California and other markets where the merchant generator model has imploded and the utility buys fuel for virtually all plants, whether utility-owned or not.

To avoid a classic "moral hazard" problem, since the entity making the financial decisions effectively bears none of the consequences of its decisions, requires a vigorous enforcement of the fiduciary obligations established by common law agency principles — a standard not always achieved by the regulatory sector. From a practical standpoint, there is considerably greater leverage in policing the technology choice embedded in the initial capital investment decision than in second-guessing operating costs after the plant is built. For a new gas-fired combined cycle plant, fuel costs can make up 70 – 80% of the total life-cycle costs of generation.

So what discount rate should be applied to future fuel costs? While POV, or narrative point of view, is a literary discipline ingrained in the hundreds of thousands (if not millions) of Californians who have submitted script treatments to Hollywood studios, it traditionally has been a foreign concept to the state's investor-owned utilities and their regulatory enablers. But it's pretty straight forward — on whose shoulders (rightly or wrongly) do the fuel costs fall? The inertia of regulatory custom has discounted these costs at the utility cost of capital, but the notion of shareholder liability for these costs is Academy Award quality science fiction.

A staff analysis  prepared for next week's  workshop at the California Energy Commission calculates the difference in present value fuel costs over 20 years for a new gas-fired combined cycle at 55-69% greater when a social discount rate is used. Plants are seldom retired before age 35 or 40 in California, so this estimate is likely understated.

To take Peter Gunn, who probably always dreamed of being appointed a regulatory commissioner, somewhat out of context: "There are eight million stories in the naked utility. This has been one of them." The pathway to fossil fuel addiction seems indisputable, the number of similar circumstances (e.g., energy efficiency of automobiles, buildings, appliances, etc.) indeterminate.

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Chapter 55: So How Expensive is US Gasoline Anyway?

August 23, 2008

Strategists attempting to gauge the likely scale and scope of Green Energy War initiatives after the clamor of the current election cycle is past may gravitate to the lodestar of gasoline prices. Posted outside every service station in statutorily prescribed type-size, these context-less numerals are the primary navigational aids by which most Americans determine whether energy is a problem or not.

A  provocative missive fired off by two well-known climate/energy policy skeptics from the libertarian Cato Institute, Indur Goklany and Jerry Taylor, in the Los Angeles Times two weeks ago veered a bit off course and may end up working contrary to its intended purpose. Their primary conclusion: "(g)asoline is more affordable for American families now than it was in the days of the gas-guzzling muscle cars of the early 1960s."

The opinion piece was somewhat opaque on data, but clear that its conclusions regarding affordability were based on average per capita disposable income. Goklany had been  more descriptive of his methodology and data sources on the Cato blog in July.

The hundreds of comments registered on the  web sites of the Los Angeles Times and other newspapers where the Goklany-Taylor piece has appeared followed a predictable course. Most were variations on the you-must-be-crazy theme; many were dismissive of the ideological affiliation of the authors; more than a few pointed out the widely held analytic preference for focusing on median incomes rather than averages, especially given the increasingly skewed distribution of US incomes of the last several decades.

Last week saw some degree of concession. Taylor  acknowledged on the Cato blog that median income data for 2007 and 2008 are unavailable to corroborate his conclusion. He reformulated his thesis slightly to "(t)he percent of income we spend on transportation has been remarkably constant over time even though the distance we travel per capita has nearly tripled", but conveniently excluded 2008 gasoline costs from this calculation. Still, he concluded that "no matter how you slice the (available) data, it tells more or less the same story ... the cost of driving is reasonably affordable today relative to what it has been in the past."

But Taylor  was back in the Los Angeles Times blog two days ago talking about "the high price of gasoline at present".

What to make of all this? Well, there's the "nation of whiners"/"mental recession" critique  put forward by former-Texas-Senator-turned-Swiss-banker Phil Gramm. And, of course, the "figures don't lie but liars figure" adage usually attributed to Mark Twain. But in a year which has seen  declining real wages and an  unprecedented destruction in home equity values, it would seem the American middle class is entitled to a certain amount of economic angst even if the Goklany-Taylor assessment is broadly accurate.

Using the early 1960s as a reference point, though, to establish that current gasoline prices are no big deal may carry a different message than intended by the Cato ideologues. The pay-any-price-bear-any-burden era of American aspiration seems to resonate with both sides of today's presidential campaign, whether the "national greatness" conservatives or the "yes, we can" liberals. After the noise of electioneering dissipates, US national leaders may feel emboldened to escalate efforts in even the  toughest theatre of the Green Energy War, the transportation fuels sector.

And one of the green lights will have been inadvertently provided by two libertarian economists.

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Chapter 56: Enhanced Geothermal – Drill Here, Drill Now?

September 10, 2008

A surefire indicator of hubris in American business is the misbegotten belief that success in one enterprise is a predictor of likely success in another, unrelated one. Established companies periodically flirt with this conceit — whether for executive ego gratification, perceived risk diversification, or earnings growth imperative.

The energy industry has generally had an unhappy experience with such corporate cross-dressing, ranging from Pacific Lighting's foray into retail drugstores, to Mobil's purchase of Montgomery Ward, to Exxon's move into word processing machines. None of these ventures ended well.

But a faith in transferable skill sets is the very foundation of the venture capital industry, and arguably much of America's high tech success over the past thirty years.

So a fusillade of bells and whistles went off last month when Google, the iconic business success story of the past decade,  announced that its ongoing search for renewable energy with the potential to be cheaper than coal had landed on the Rodney Dangerfield of all energy sources,  geothermal.

The star power generated by Google's announcement has cast a new spotlight on a 2006 report entitled  "The Future of Geothermal Energy", which was compiled by an 18-member panel of experts assembled by the Massachusetts Institute of Technology. Among the MIT panel's conclusions:

• enhanced geothermal is a 24/7, fully dispatchable baseload generating resource with minimal greenhouse gas and other emissions, small land use footprint per unit of energy generated due to relatively compact above ground equipment, and no storage or back-up power requirement;

• geothermal potential is often ignored in national projections of evolving US energy supplies, perhaps because it is associated with high-grade hydrothermal resources near the earth's surface that have been tapped for decades but are perceived as too few and too limited in their geographic distribution to be of major significance;

• today's hydrothermal resource — about 10,000 MW worldwide, with 2,800 MW in the US (mostly in California) — rarely requires drilling deeper than 3 km (10,000 feet) although current drilling technology can reach depths greater than 10 km (30,000 feet);

• applying a 150 – 200 degree Centigrade threshold for electricity generation, and a 100 – 150 degree Centigrade threshold for space or process heating applications, distribution of the deeper, so-called "enhanced geothermal" resource requiring engineered reservoirs is almost ubiquitous in the US (and perhaps elsewhere) between depths of 3 – 10 km;

• technology supply curves predict costs dropping below 6 cents per kWh when aggregate installed capacity climbs above 100 MW — a marker likely to require only a few projects;

• a surprisingly modest government RD&D investment of $300 to $400 million, matched by $400 to $700 million of private investment, over a 15-year period to build several plants at different sites could launch a commercialization deployment that would see installed capacity of 100,000 MW by 2050 — roughly 10% of today's US nameplate generation capacity;

• outstanding issues are all related to enhancing the connectivity of the stimulated reservoir to the injection and production well network. "Notably, they are incremental in their scope, requiring extending current knowledge and practical field methods. There are no anticipated 'showstoppers' or fundamental constraints that will require new technologies to be discovered and implemented..."

What's not to like? Well, until a still fruitless change of heart this year, the visionaries in the Bush Administration  have attempted to zero out the DOE geothermal budget for the past two fiscal years. As the  wildcatter from Wasilla put it last week, "the fact that drilling won't solve every problem is no excuse to do nothing at all."

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Chapter 57: Enhanced Geothermal – Drill Here, Drill Now, Pt. 2

September 14, 2008

As Albert Einstein famously  observed, "politics is more difficult than physics." The US congressional energy debate end-game these next two weeks seems destined to prove this out.

At its core is bipartisan recognition of an inchoate, nationwide, don't-just-stand-there-do-something groundswell. Where this sudden, tidal upheaval leads in the months ahead is anything but certain. While empiricism and reason may exert some gravitational pull over time, for now the political instinct is to pander.

"Drill, baby, drill" was the  guttural chant of the Republican convention, a peculiar adaptation of the "burn, baby, burn"  anthem of the 1965 Watts Riots. But even the accomplished wordsmiths  crafting lyrics for the warrior princess of Wasilla felt compelled to seek some buffer, disavowing the notion that drilling will solve all of America's energy problems with a maternal "as if we all didn't know that already."

The refusal of the major oil companies to reinvest more of their exceptional profitability — comprised largely of the economic rents conferred on a commodity owner when markets turn its way — into new energy production these past several years fuels much of the divisiveness.  According to Rice University's James A. Baker III Institute for Public Policy, last year the five largest international oil companies plowed about 55 percent of the cash they made from their businesses into stock buybacks and dividends, up from 30 percent in 2000 and just 1 percent in 1993. The percentage they spend to find new supplies has remained flat for years, in the mid-single digits.

This pattern fosters a predictable agitation for a windfall profits tax in the Congress, and an equally predictable counter-argument that too many potential US development opportunities are legally off-limits. Many analysts  consider Exxon's risk averse investment "discipline" to be the template for the other majors.  As demonstrated before, accumulating repurchased shares in the corporate treasury provides Exxon a low-cost war chest for future acquisitions in a consolidating industry.

All of which makes enhanced geothermal fascinating territory in the Green Energy War. As described in the  comprehensive assessment compiled by MIT, the overlap with the oil and gas industry is considerable:

• "Because the process for drilling oil and gas wells is very similar to drilling geothermal wells, it can be assumed that trends in the oil and gas industry will apply to geothermal wells."

• "Additionally, the similarity between oil and gas wells and geothermal wells makes it possible to develop a drilling cost index that can be used to normalize the sparse data on geothermal well costs from the past three decades to current currency values..."

• In parallel with development activities in California and northern Nevada in the 1970s and 1980s, geothermal development in the Philippines and Indonesia spurred on the supply and service industries;

• "There was continual feedback from these overseas operations because, in many cases, the same companies were involved — notably Unocal Geothermal, Phillips Petroleum (now part of Connoco Phillips), Chevron, and others."

• "The current state of the art in geothermal drilling is essentially that of oil and gas drilling, incorporating engineering solutions to problems that are associated with geothermal environments, i.e., temperature effects on instrumentation, thermal expansion of casing strings, drilling hardness, and lost circulation."

• "(A)s hydrocarbon reserves are depleted, the oil and gas industry is continually being forced to drill to greater depths, exposing equipment to temperatures comparable with those in geothermal wells."

Irrespective of whether the current shootout in Congress breaks the drill-tax-invest stalemate or bridges the election year fossil vs. renewable polarization, the pace of development of US geothermal resources may provide a good litmus for progress going forward. And for good reason: a virtually ubiquitous resource with abundant potential drilling sites; competitive production expenses with declining cost curves; and considerable need for the innovative prowess in reservoir management and drilling technology the oil and gas industry has relied upon for three decades to squeeze more resource from declining basins.

As the MIT experts concluded:

Using reasonable assumptions regarding how heat would be mined from stimulated EGS reservoirs, we ... estimated the extractable portion to exceed 200,000 (exajoules) ... or about 2,000 times the annual consumption of primary energy in the United States in 2005. With technology improvements, the economically extractable amount of useful energy could increase by a factor of 10 or more, thus making EGS sustainable for centuries.

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Chapter 58: Feed-In May Ease Southern California Squeeze

October 8, 2008

A surprise  announcement last week by Southern California Edison that it plans to adapt its 2009 Renewable Procurement Plan to include feed-in tariff provisions for projects under 20 MW in size could be a game changer.

No other region of California perplexes electricity planners like the sprawling Los Angeles Basin portion of SCE's service territory, which stretches from the Pacific Ocean to the rapidly growing suburbs of San Bernardino, Riverside and Orange counties. The California Energy Commission  called attention to the region's excessive reliance on aging power plants in 2004, and  recommended in 2005 that Edison be directed to procure new supplies that would eliminate such dependence by 2012.

Separate developments in three other legal venues have recently tightened the supply/demand vise in the Los Angeles Basin:

• the Independent System Operator, California's transmission grid manager, has remained adamant that grid stability requires that approximately 75% of electric capacity come from within the Basin. The California Public Utilities Commission has adopted this as a binding resource adequacy requirement.

• the State Water Resources Control Board, facing a credible threat of litigation by ocean protection activists, has issued a draft rule to phase out use of once-through cooling at power plants in the Basin between 2015 and 2021. This will likely force the retirement of existing plants, but with uncertain prospects for replacement at the same sites.

• the South Coast Air Quality Management District was  blocked in court from tapping its so-called "priority reserve" to provide reduced cost emission offsets to new power plants it deemed needed, an effort to overcome the high cost and low supply of such offsets in the Basin. The District's  efforts to circumvent the court decision by a last minute amendment to the state budget legislation collapsed last month when revealed on the California Progress web site.

As is now widely understood, California's outmoded and deeply inadequate transmission grid has delayed the arrival of out-of-Basin renewables until significant upgrades are completed. Nor is it clear what impact, if any, such transmission upgrades will have on the emerging ISO/CPUC local reliability convention that three-quarters of the Basin's capacity needs be met from within the Basin.

So attention naturally shifts to smaller, distributed generation projects within the Los Angeles Basin that can be quickly connected to the distribution grid. The Rule 21 Working Group spent several years negotiating a streamlined interconnection protocol between utilities and generators. All that has been lacking for commercial success has been the presence of a long-term, creditworthy power purchase contract. A feed-in tariff would change that.

And a fascinating  presentation by the solar developer, GreenVolts, at an Energy Commission workshop, applies the CPUC's cost-effectiveness model to calculate the locational benefits of distribution-connected projects. On average in California, according to GreenVolts, generation connected to the distribution system is at least 35% more valuable than generation connected to the transmission system due to lower line losses and reductions in required infrastructure upgrades. Not to mention the avoidance of the 7-8 year interconnection purgatory the transmission planning process currently requires.

Of course, as with any contractual obligation, the devil is in the details. Considering more than two decades of unrelenting hostility, most distributed generation advocates believe that with Southern California Edison, the devil is at the table. But there's  new management at the holding company. And growing regulatory and legislative pressure for feed-in tariffs. And an undeniable interest in greasing the skids for CPUC approval of the utility's  $875 million entry into the 1-2 MW rooftop photovoltaic business. Plus the need to keep the lights on in the Los Angeles Basin.

**LISTEN TO PODCAST**

Chapter 59: Efficiency – California's Oldtime Energy Religion

October 20, 2008

October has not been a particularly uplifting month on the climate front of the Green Energy War. The worldwide financial freeze-up has sent summer soldiers across the globe scurrying for the  presumed security of retreat. Even the nominal master of ceremonies of the UN's Framework Convention on Climate Change puts it flatly: "If industry is in a difficult pass, most sensible governments will be reluctant to impose new costs on them in the form of carbon-emission caps."

Dispatches from the economic development front of the Green Energy War tell a much different story. A trio of recent reports — from the  Center for American Progress, the  UN Environment Programme, and the  US Conference of Mayors — all trumpet the significant job-creation benefits of redirecting some of the legacy energy system's enormous payment streams away from fossil addiction to more benign clean energy resources. The economic hydraulics of channeling these revenue flows has long been an unheralded feature in the Green Energy War.

Use of econometric models to make projections about the future is a well-accepted practice among policy advocates. Less common is to use such models to crunch through mountains of historical data to evaluate the effect of past policies. That is the significance of a  study released today by David Roland-Holst, an economist at UC Berkeley's Center for Energy, Resources and Economic Sustainability. Beside projecting the effects of potential future policies, Professor Roland-Holst evaluated the economic impact of three decades of California's electricity efficiency initiatives — mandatory standards for new buildings and appliances, and utility-managed programs to help their customers save energy.

What did his study find?

• cumulative household savings of more than $56 billion in utility bills.

• creation of some 1.5 million full-time equivalent jobs, with a total payroll of roughly $45 billion.

• much slower growth, though still positive, in jobs in traditional energy supply chains like oil, gas and electric power. For each job foregone in these sectors, however, more than 50 new jobs were created across the state's diverse economy.

• reduced dependence on energy imports, with a greater percentage of household consumption directed to in-state, employment-intensive goods and services, whose supply chains largely lie within the state and have a strong multiplier effect on job creation.

Proselytizing the primacy of environmental values is a longstanding stereotype of the Golden State persona, but sanctimony and triumphalism rarely play well east of the Sierras even in the best of times. Analysts  familiar with the famous  McKinsey cost curve showing massive economic savings in energy productivity improvements will be unsurprised, but those who believe that looming global recession signals a needed retreat — or at least a temporary cease-fire — in the Green Energy War would do well to review the California historic record.

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Chapter 60: A Return to Arms

May 8, 2009

With perhaps less character development arc than  Hemingway's Lieutenant Henry experienced during his time away from the front, several quarters of forced absence from the Green Energy War narrative focuses the mind on how much has changed — and what has stayed the same — in the 11 months since the collapse of the Warner-Lieberman climate legislation in the US Senate.

The headline changes are well-noted: the Obama ascendancy; the global recession; the revival of Keynesian economic intervention; the reduction of the Republican caricature to faith-healers, snake-charmers and xenophobes. But less celebrated circumstances will also shape the US battlefield environment in the months ahead. Among them:

• despite the euphoria over the  $80 billion of clean energy funding in the Economic Recovery and Reinvestment Act (about 10 % of the total), this is hardly transformative and fiscal constraints as well as channel overload will likely limit further federal spending. The real challenge will be to redirect the flow of private investment.

• in an environment where economists ranging from Greenspan to Bernanke to Summers to Krugman have all bemoaned a global savings glut, paying for such a transformation — in the US and abroad — is more a function of mobilization, deployment and financial engineering than austerity, invention or small particle physics.

• the Environmental Front, particularly its climate theatre, dominates the interest of policy and media elites in the Green Energy War — sometimes (e.g., biofuels) to the exclusion of all else. The less galvanizing Economic Front and Energy Security Front are embraced only sporadically and opportunistically, though they may have broader resonance with the public. A pragmatic strategy would continuously rebalance munitions across all three.

• psychological exhaustion  corrodes support of the Green Energy War among the American public just as it does for other open-ended military efforts. Those who find doom-and-gloom about long term prospects an effective political motivator should ruminate on Social Security or Medicare funding issues. Progress is more likely to come in short bursts of terrifying intensity.

• slavish devotion to the price mechanism, whether for oil or for carbon, as a sole determinant of policy is destined for severe signal to noise challenges with predictable paralysis of investment. Policymakers simply have no antidote for the havoc caused by price volatility and, to borrow from  the President borrowing from the Bible, need to build their house on rock.

• while most of the  analytic herd assures itself that it can see the next oil supply crunch coming, and NYMEX crude is up nearly 80% from its December lows, there is a growing belief —  held by both EIA and Exxon Mobil — that US light duty vehicle demand for gasoline has peaked and may be entering a period of long term decline. Political implications: extremely unclear.

• if the dizzying oil price fluctuations of the past year are just another cyclical ride (albeit accelerated) through the Bermuda Triangle of resource constraints, worldwide recession and currency valuation, a  more profound secular change may be afoot in US natural gas supplies. Technological advances which have rendered shale deposits commercially accessible have reversed perceptions of a declining American resource base, with production actually growing 11% over the past two years. Ramifications for the electric sector: potentially huge.

And so the fight is rejoined, not without some  understandable pre-battle  jitters. Henry Waxman continues to delay his markup but declines to alter his Memorial Day deadline for action, prompting consternation in some but anticipation in others aware of his tutelage by the legendary Phil Burton in the dark arts of counting and maneuver. A long, raucous excursion to the sausage factory awaits.

Chapter 61: McKinsey Finds $680 Billion Tumor on US Economy

August 10, 2009

The latest energy efficiency  report by McKinsey, corporate America's favorite management consultant, was repeatedly sited in last week's Senate committee hearing on Waxman-Markey. As well it should be. The report concludes that an investment of $520 billion (present value) thru 2020 in cost-effective efficiency improvements in the non-transportation sector would produce an amazing net present value of $1.2 trillion of energy savings. That's a stunning reduction of 23% of projected end-use demand in 2020, and a 15% annual reduction in GHG emissions below 2005 levels — roughly the entire Waxman-Markey target for 2020.

Regrettably, the discussion of energy efficiency, in the US at least, typically plays more as a poker game between archangels — "I'll see you one virtue, and raise you two" — than as a medical exam into what retards economic growth. Everyone is in favor of improvement, but failure to act is excused as an understandable human shortcoming akin to a weakness for desserts or inadequate consumption of dietary fiber.

On the other hand, a dead weight loss of $680 billion, nearly 5% of a $14 trillion economy, should prompt concern across the ideological spectrum. Consider the social dislocation and political upheaval caused by today's recession, the worst since World War II, currently clocking in at a  3.7% decline in GDP.

McKinsey is scrupulous in identifying the structural distortions in the energy end-use markets that create this drag, and the institutional changes necessary to remove it. But again and again the point is made: when properly accounted for, these changes don't cost money, they save money. A lot of money. Money that can be used for something else.

As Congress staggers into its August recess, and the Coalition to Do Nothing musters its forces, McKinsey & Company — the Marcus Welby of management consultants — confronts every American with the question: how would you treat this tumorous abscess which consumes more economic life-blood than any recession in living memory?

Chapter 62: Who Brainwashed Texas on Renewable Energy?

August 13, 2009

As the Coalition to Do Nothing, now operating under the nom de guerre  EnergyCitizens , revs up its own version of astroturf rallies with a launch  in Houston next Tuesday, a brief glance at context makes pretty damn clear just how expensive it will be to persuade ordinary Americans that down is up, hot is cold, and Energy Salvation is to be found by staying in bed with fossil fuels.

Just this week, the Wall Street Journal  summarized a proprietary research report by investment analyst Sanford C. Bernstein to the effect that the rapidly increasing amounts of wind in the Lone Star State's generating mix puts **downward** pressure on costs and "can have a material impact on the price of power." And that's not from the Sierra Club, or the Union of Concerned Scientists, or the Obama White House. It's from one of Wall Street's most respected research shops.

Bernstein goes on to say, "The growth of wind power in ERCOT over the next three years will markedly lower the consumption of gas and coal by conventional generators." For a state that's the largest emitter of GHGs in the US, and which would rank seventh worldwide if it were a separate country — as some think it is — that's a pretty big deal. But make no mistake, there are some potential losers: Bernstein says Energy Future Holdings (formerly TXU), NRG Energy and PNM Resources are "most at risk" of falling margins in their traditional generation business.

But the Bernstein conclusions were probably no surprise to the 85% of surveyed Texans who told Governor Rick Perry's pollster last April that Texas should increase the production and use of renewable energy sources like wind and solar. Among the  highlights of the survey of 993 Texans, 858 registered voters (margin of error +/- 3.2%, and 3.3% for registered voter subsample):

• more than 79%, including 71% of Republicans and 73% of self-identified conservatives, support financial incentives such as loans, subsidies and temporary tax reductions to recruit renewable energy businesses and associated jobs to Texas.

• there is a statewide consensus to "require" electric companies to provide a certain percentage of their product from renewable sources such as wind and solar. Support crossed party, racial and gender lines — 86% of Democrats, 59% of Republicans, 89% of Hispanics, 84% of females under the age of 55 and 61% of males over the age of 55.

• while respondents said they supported more investment in all forms of renewable energy, 61% felt the state should require a certain percentage of electricity be generated from solar and 53% said they would support such a requirement even if it added $2 to $3 to their monthly bill.

• when respondents were asked whether they would pay more up front for energy-efficient appliances if they were able to save money on their electric bill, over 93% said they would do so. Even among lower and middle income residents, 93 % said they would pay more for appliances that would save them money over time.

• nearly as many respondents, 87%, say they would support state-required energy efficiency codes and appliance standards for all newly constructed homes and buildings to help reduce electricity consumption.

In the  words of the Wall Street Journal,

This wasn't a push-poll from a group of tree huggers either. The poll was commissioned by the Cynthia and George Mitchell Foundation. That's George Mitchell of Mitchell Energy fame, the guy who more or less discovered the prolific Barnett Shale and built the Woodlands development north of Houston. He sold Mitchell Energy to Devon Energy in 2002 for a cool $3.5 billion. The pollster is Mike Baselice of Baselice & Assoc. of Austin, who works for Republican Governor Rick Perry.

So, as the EnergyCitizens begin their propaganda campaign, smug in their consultants' advice that money can conquer the most daunting challenge, they might do well to ponder: who lost Texas?

Chapter 63: The Coming Nuclear Assault on the US Treasury

August 16, 2009

Its namesake may have had the House of Medici and the Holy See, but as the long-in-tooth Nuclear Renaissance edges closer to put-up-or-shut-up time in the US, it is making one more run — and a very big one — at its more plebeian underwriter: the American taxpayer. The assault vehicle is an amorphous  financial guarantee provision in the Senate energy bill creating a Clean Energy Deployment Administration along the lines of Jimmy Carter's short-lived Synthetic Fools Fuels Corporation.

For the past decade, the nuclear industry has reaped considerable benefit among policy elites by re-framing the swarm of issues which buzz around its future into the singular humanist query: doesn't the threat of accelerated global warming compel a technological open-mindedness and a rational consideration of alternatives rather than the emotional reaction to over-hyped fears spread among an earlier generation by a mediocre movie for which Jane Fonda was nominated, but did not win, the Academy Award?

Some flies you can defer swatting (permanent waste disposal); some you can shoo away (safety); some you can dismiss (cooling water); some you can ignore (proliferation) — but there comes a day in the life of every proposed nuclear project when somebody's got to invest. Big bucks. That fly bites.

An impressive arsenal of data from the currently operating 104 reactors shows nuclear to be a reliable, low-cost provider of electricity. But the industry has been blithely uninhibited from concealing the misleading survivorship bias in such numbers — according to the  US Nuclear Regulatory Commission, of the 253 units originally ordered by American utilities, 71 were canceled before construction, 50 were abandoned during construction, and 28 were permanently closed before their operating licenses expired. So while you can fool some of the people some of the time, a talent like Bernie Madoff probably only comes along once a generation.

Wall Street has been hip to this jive since the WPPS-Seabrook-Shoreham fiascoes, and using increasingly strident language to make itself clear. Even in the halcyon financial markets of 2007, the six then most prominent investment banks (two of which no longer exist, one of which is now 36% owned by the US government)  formally notified DOE that government loan guarantees would have to apply to 100% of all debt in order for new nuclear projects to access the capital markets:

Lenders and investors in the fixed income markets will be acutely concerned about a number of political, regulatory and litigation-related risks that are unique to nuclear power, including the possibility of delays in commercial operation of a completed plant or 'another Shoreham'. We believe these risks, combined with the higher capital costs and longer construction schedules of nuclear plants as compared to other generation facilities, will make lenders unwilling at present to extend long-term credit to such projects in a form that would be commercially viable.

Two months ago the credit rating agency  Moody's Investors Service, a de facto gatekeeper to the US capital markets, still reeling from blistering criticism (and potential legal liability) over its failure to detect the metastasizing sub-prime mortgage crisis, was even less subtle:

Moody's is considering applying a more negative view for issuers that are actively pursuing new nuclear generation...We view new nuclear generation plans as a 'bet the farm' risk for most companies, due to the size of the investment and length of time needed to build a nuclear power facility.

Nor, according to Moody's, will this assessment change much even with the prospective federal loan guarantees

which will provide a lower-cost source of funding but which will only modestly mitigate increasing business and operating risk profile...

What better time to call in the American taxpayer?

Chapter 64: Why Moody's Thinks New Nukes Are for Losers

August 17, 2009

While receiving little attention in the popular press, and perhaps even less in Washington, D.C., you can be assured that  Moody's stern admonitions this June about the financial risks posed by new nuclear plants ("a bet the farm risk for most companies") has been carefully read by every utility CEO and CFO weighing future supply options.

With a world-weariness typically associated with excessive recitation to errant children of broadly understood truths (at least among that subset of Wall Street which follows utility finance), the words used in the 21-page rebuke were unrelenting:

• "Moody's is considering taking a more negative view for those issuers seeking to build new nuclear power plants."

• "But from a credit perspective, the risks of building new nuclear generation are hard to ignore, entailing significantly higher business and operating risk profiles, with construction risk, huge capital costs, and continual shifts in national energy policy."

• "Few, if any, of the issuers aspiring to build new nuclear power have meaningfully strengthened their balance sheets, and for several companies, key credit ratios have actually declined."

• "Moreover, recent broad market turmoil calls into question whether new liquidity is even available to support such capital-intensive projects."

• "History gives us reason to be concerned about possible significant balance-sheet challenges, the lack of tangible efforts today to defend the existing ratings, and the substantial execution risk involved in building new nuclear power facilities."

• "Historical rating actions have been unfavorable for issuers seeking to build new nuclear generation — of 48 issuers evaluated during the last nuclear building cycle (roughly 1965-1995), two received rating upgrades, six went unchanged, and 40 had downgrades. Moreover, the average downgraded issuer fell four notches."

• "We view new nuclear plans as a 'bet the farm' endeavor for most companies, due to the size of the investment and length of time to build a nuclear power facility."

• "We increasingly sense that none of the issuers actively pursuing these endeavors have taken any material actions to strengthen their balance sheets."

• "As a result, it has become increasingly likely that pursuit of new nuclear projects will result in some near-term rating actions or outlook changes."

Moody's also cautioned utilities not to be taken in by the current political enthusiasm for nuclear projects in some quarters:

New nuclear power construction appears to enjoy strong political and regulatory support in a number of jurisdictions, especially the southeastern states, where there is now legislation afoot to promote it ...

Nevertheless, regulatory risks will persist over the longer term, and we increasingly think it unlikely that everything will work out as intended. We are concerned with the size of the investments being made even before the NRC grants a COL; the ongoing potential risks from displacement technology developments over the course of the construction period; and the recovery of sizable sunk costs, should an issuer abandon a project in the future.

These longer-term risks are difficult to quantify today, but the possibility of abandoning a construction project should not be fully dismissed, regardless of the low probability of such an occurrence today. We remain concerned that should an issuer walk away from a nuclear project, for whatever reason, its multi-billion investment may not be fully recovered, or it may be amortized over a long-term period. This could introduce some material financial distress for almost any issuer.

Those more conditioned to getting such facts-of-life advice from country music might heed the words of  Denise Rains:

_You can roll the dice and take your chances, risk it all on him like I did._

_Who knows? You might get lucky. But as for me, it ended ugly._

_You can hold onto the hand you're holdin' when you know you should be foldin'._

_Girl, keep the cards close to your heart._

_Don't bet the farm._

_Don't bet the farm._

_Don't bet the farm._

Chapter 65: A Welcome Maturation in the LEED Rating Process

August 31, 2009

Today's New York Times breaks the not quite earthshaking  news that a quarter of LEED-certified buildings do not save as much energy as their designs predicted. Last week the US Green Building Council (USGBC), which administers the LEED ("Leadership in Energy and Environmental Design") program, announced that it would begin collecting energy consumption information on a voluntary basis from all the buildings it has previously certified. That comes on top of a new requirement this year that conditions LEED certification of a newly constructed building on provision of all energy and water bills for the first five years of operation.

A  study performed for the USGBC last year by the New Buildings Institute found that 21% of LEED-certified buildings had energy performance below even a code-compliant building. Even more troublesome, the 2008 study  suggested that energy performance monitoring might be something of an afterthought for most LEED building owners: only 121 of the 552 that had been certified under LEED for New Construction Version 2 through December 2006 were able to supply the full year of post-occupancy energy numbers required to participate in the study. Collecting the data for even this small pool of projects required "an extraordinary level of effort" according to Brendan Owens, USGBC vice president of LEED technical development.

While hard-bitten types have been critical of the feel-good, easy-to-be-green aura of the LEED process for some time, it's the capacity for self-correction and commitment to increasing empirical rigor that is the real story here. Ethicists have long debated whether human endeavors are best judged by their intent or by their consequences. The USGBC has made clear that in the Green Energy War it will be results that count most.

Chapter 66: Will Areva's Finnish Fiasco Spook US Taxpayers?

September 1, 2009

You've got to wonder what went through Duke CEO Jim Rogers' mind yesterday when he saw the Areva announcement of more cost overruns and schedule delays for its new reactor construction project in Finland.

Areva  reported that it would set aside another $787 million to cover anticipated losses on the Olkiluoto project, bringing the total of such charges against earnings to $3.3 billion on what was originally supposed to be a $4.3 billion turnkey project. That's a 77% overrun. Oh, and the plant is already three years behind schedule.

It was only 75 days ago that Rogers, aka  "Duke Nuke 'Em" to Wall Street Journal readers, was sharing the spotlight with Areva's telegenic CEO Anne Lauvergeon in Piketon, Ohio to announce plans to build a new 1,600 MW reactor. "I'm confident I can fund it," Rogers  told the New York Times. A bit more restrained, Ms. Lauvergeon said that the financing was an issue for Areva's customers, not for Areva itself.

The romance between Areva and its first real customer, the Finnish utility TVO, has definitely cooled. Yesterday Areva  said it "will only commence the final phases of the construction when TVO has agreed upon the proposals that have been made or issued contracts that provide for the requested modifications." These proposals and contract modifications, Areva said, were due to TVO's "inappropriate behavior in contract management" including conduct which "is not in line with standard industry practices."

As described in yesterday's _Energy Daily_ (subscription required):

Delays at Olkiluoto have been unfortunate for the nuclear industry as a whole, which has watched the Finnish project with interest as the first new reactor to be built in a western country in years. It is also a high-profile project for Areva as the first commercial deployment of its EPR reactor, although France's national utility, EDF, has since begun to build another EPR in Flamanville, France.

Duke's  earlier experiences with nuclear construction weren't altogether pleasant. It pulled the plug on two of its five planned projects, incurring some $600 million in cancellation costs but recovering about a third of that through rate increases. Still, Rogers is banking on a nuclear play to get the climate legislation through the US Senate. As he  told Platts in an interview last week:

"We need to find a way for the four to nine Republican senators who are strongly pro-nuke to craft a nuke provision that would bring them in support of a bill," Rogers said, noting this would create centrist bipartisan support. Without naming the senators he saw in this group, he added that there has not been talk of such an amendment to his knowledge.

A nuclear amendment could have provisions to bring confidence in nuclear waste disposal, speed license approvals, or provide loan guarantees not to utilities but those providing the equipment for the new units as a local economic stimulus option, he said.

So the role to be played by Areva, which is 91% owned by the French government, in the US Nuclear Renaissance is still to be determined. But the role of the American taxpayer may be coming into focus.

Chapter 67: Upon Being Named a Clean Power Champion

September 2, 2009

The following remarks were delivered to the Center for Energy Efficient and Renewable Technologies (CEERT) at their Clean Power Champion award ceremony September 2, 2009, in Sacramento, California.

I'd like to thank CEERT for the recognition, and especially for the personal honor of being on the same program with two individuals I have long admired —  Alan Lloyd and  Bill Stall. Alan has had a larger say in rethinking what society should expect from its vehicular transportation than perhaps anyone alive. And, for somebody like me who went to college planning to be a journalist, Bill Stall epitomized the enduring and ennobling power of the written word when enlisted for humanity's betterment.

I'd also like to recognize the CEERT staff for two things for which we are all indebted.

First, they have been the heart and soul of California's Renewable Energy Transmission Initiative, spending countless difficult hours in stakeholder meetings to identify needed transmission routes that are consistent with our environmental values The future of California's utility-scale solar and wind and geothermal development will be determined by the use which is made of their work product.

And second, they deserve thanks for the unyielding insistence they have brought to the renewable energy debate — in every public forum — that we focus on megawatts rather than megawords.

When the 20% Renewable Portfolio Standard was signed into law  in 2002, California derived 11% of its electricity from renewable sources.  In 2008, that number was 10.6%. Every school child in California knows that most of that comes from policies enacted when Jerry Brown was Governor some 30 years ago. Since 2002, we have changed the fundamental direction of climate and energy policy in this country. And we've spread a California gospel about efficiency and renewables across the globe. But we've yet to move the needle in terms of our own electricity generation.

CEERT keeps us focused on how much there is still to do, and I'm proud to be associated with each of you. Thank you.

Chapter 68: UK Energy Leaders – Losing Their Religion?

September 10, 2009

_"And I don't know if I can do it. Oh no, I've said too much. I haven't said enough."_

 Michael Stipe _, R.E.M., 1991_

An odd but recurrent attribute of the waning months of any political administration is the self-incriminating re-examination of core precepts which flows from the lips of the hitherto devout. That process is well under way in the energy parishes of Gordon Brown's Whitehall, but the free market unified field that has enveloped UK energy policy from Brown to Blair to Major to Thatcher may be shaking with more than just the usual tremors of self-doubt, remorse and regret.

The ramifications for the US are likely to be profound.

The most recent apostasy is last month's energy security  report from former Minister of State for Energy Malcolm Wicks. Under the banner heading, "Can market arrangements deliver an appropriate fuel mix?", the Wicks report observes:

Many commentators argue that gas, the cheapest and quickest technology to install in significant mega-wattage, is likely to take an increasing share of the power generation market, to replace closing coal-fired stations, and also potentially some nuclear power stations in the middle of the next decade. These gas-fired power stations would then be a part of our power mix for decades afterwards...We would potentially be locking-in import-dependence at an uncomfortable level and have an unbalanced fuel mix leaving UK businesses and consumers highly exposed to future moves in international gas prices.

I believe that the Government needs to consider carefully whether there are cost-effective ways of avoiding this outcome. Effective demand reducing energy efficiency measures might be sufficient while extending the life of existing plant where feasible and legally permissible could also contribute, giving more time for the deployment of alternative generation technology including nuclear, with its long lead times. The Government and industry will wish to consider whether it needs to take a more strategic role in determining the fuel mix for power generation, perhaps within bands, to try to avoid a 'dash for gas.' If it did so, it would need to ensure that the regulatory and market structures provided sufficient assurance to operators that they would be able to sell the power that they generated to justify investment in non-fossil power-generation. This would be a significant move away from the 'market knows best' orthodoxy but it might be justified on energy security grounds. It would echo the welcome moves to ensure that sufficient renewables capacity is installed.

The Financial Times  catalogued the most dirigiste of the recommendations, and the Tories zeroed in on Wicks' recommendation that Britain triple its reliance on nuclear power from today's 12-15% to 35-40% by 2030. "If companies want to build new nuclear plants without subsidy they are very welcome to do so, and we are clear that the UK is a very attractive place for new nuclear investment," the shadow energy minister Charles Hendry  said. "But if you set an aspiration like that, the danger is that the industry will say: 'If you want that, we have to have a subsidy'."

But the sacrilege seems to be gaining momentum. Former Tony Blair confidante Lord Browne of Madingley, the past CEO of British Petroleum who now serves as president of the Royal Academy of Engineering, is perhaps the most prominent  heretic:

... we must fundamentally rethink the objective of energy policy in this country. Competition has been the guiding star of UK energy policy since the 1980s and it worked well while there was a surplus of energy infrastructure capacity. But price competition is now failing to deliver the new, more diversified infrastructure that we urgently need to bolster energy security and meet our climate change targets.

I remain convinced that the market is the most effective delivery unit available to society. But the market will need a new strategic direction, and a new framework of rules, laid down by government.

In an  interview with the Guardian, Lord Browne compared the current need for urgent investment and new infrastructure with efforts to develop North Sea oil and gas fields in the 1970s and 1980s. "High oil prices provided a strong market pull. But governments also gave industry a helping hand, creating generous tax incentives and regulations, and helping to build strategic infrastructure," he said. "There's even more cause for government intervention today. That's because energy security and climate change mitigation are public goods. They would not otherwise be recognised by the free market." Browne said the UK risked being left behind in the global race to develop a low-carbon industry if ministers relied on market mechanisms such as carbon trading to drive change. "A lot of people say carbon trading, the European emissions trading scheme, will take care of this. In theory it can, but in practice it won't."

Historians will find it difficult to measure the relative efficacy of UK vs. US energy policy these past 35 years, and may well view the comparison as a race to the bottom denominated in squandered opportunities, abdication of responsibilities and willful avoidance of unpleasant facts. But the commonalities will outnumber the differences, which makes the current ecclesiastical unraveling in Britain so pertinent.

Chapter 69: Free Trade, Global Warming, and Beliefs of Elites

October 9, 2009

It wasn't more than a few decades ago that acceptance of the merits of global tariff reductions enjoyed the same place in the catechism of forward-thinking policy elites that belief in anthropomorphic climate change occupies today.

As the pre-Copenhagen tussling between the US, China and India over border carbon fees suggests — on the surface, just a replay of threats made by France against the Bush-era US — stitching these two seemingly inconsistent canons together is likely to preoccupy the diplomatic class for some time to come. A more peculiar challenge, and arguably easier to resolve, is the rollback of tariff and non-tariff barriers to free trade in clean technologies.

A couple of years ago, a major World Bank study  estimated that if tariffs and non-tariff barriers were removed on four basic "clean energy" technologies (wind, solar, clean coal and efficient lighting) in 18 developing countries with significant GHG emissions, there would be "huge gains" in the volume of trade ranging as high as 63.6%.

Based on this analysis, these barriers were seen as a "huge impediment" to the transfer of these technologies to developing countries — with the example highlighted of energy-efficient lighting in India subjected to a 30% tariff and a non-tariff barrier equal to 106%.

But developing countries  argue that it's the intellectual property rights afforded to "climate friendly" technologies that represents the real protectionism. The Group of 77 and China proposed in June "to mandatorily exclude from patenting climate-friendly technologies held by Annex II countries which can be used to adapt to or mitigate climate change." Annex II refers to 24 developed countries identified in the UN Framework Convention on Climate Change.

As General Electric — sometimes viewed as a US national champion despite the fact that 53% of its assets reside elsewhere —  told Congress this week

Such measures would be counterproductive from the point of view of combating climate change because they would deter innovation and technology deployment. In addition, they would be severely detrimental to US export interests ... Companies will be careful to avoid licensing technology or even selling products to customers in countries where those customers could reverse engineer, take and use the intellectual property rights.

The G-20 summiteers in Pittsburgh two weeks ago may have stretched credulity a bit in their  commitment to "phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption." They were circumspect in their enthusiasm for statecraft's more humdrum task of lubricating commerce in clean energy technology: "The reduction or elimination of barriers to trade and investment in this area are being discussed and should be pursued on a voluntary basis and in appropriate fora."

Those looking to salvage some substantive achievement from a likely-to-disappoint Copenhagen might well focus here.

Chapter 70: PG&E's Sham Ballot Measure Brings the War Home

January 24, 2010

Masquerading as a taxpayer protection committee, San Francisco utility PG&E has qualified the "New Two-Thirds Vote Requirement for Local Electricity Providers" for California's June 2010 ballot. In trying to hardwire permanent business advantage for itself into the State Constitution, PG&E faces off against local governments, municipal utilities and irrigation districts that are prohibited by law from spending any funds advocating for or against ballot measures. PG&E has already contributed $6.5 million to the effort, and its board has reportedly authorized a $30 million budget. It is the only funder.

The targeted jurisdictions, including those trying to organize renewable procurement under the State's community choice aggregation law, are core contributors to the pluralism that has been the wellspring of California's policy innovations. Unavoidably, the Green Energy War will be focused for the next 20 weeks on fending off this assault. Battlefield updates will be posted at http://pgandeballotinitiativefactsheet.blogspot.com/

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