The Energy Challenge - Priorities

[HenryTo]

This article is by Murray Duffin and originally appeared on energypulse.net on December 30, 2004. You can read more about this author at the following link: http://www.energypulse.net/centers/author.cfm?at_id=575

1) INTRODUCTION

Both the NEPDG report, and Senator Domenici's latest energy bill read like they had been developed in a vacuum. The strategic framework/analysis just isn't visible. In the corporate world, one common shorthand for development of such a framework is "SWOT analysis", i.e. Strengths, Weaknesses, Opportunities, Threats. The process is to analyze the pertinent aspects of your environment, define your future goal(s), describe the path from where you are to where you want to go, and then prioritize the first few steps on that path, with a clear understanding that, as you progress and conditions evolve, you have to continuously review and adjust. SWOT provides a convenient armature for that kind of plan development. There will usually be contending choices for means and priorities, so it is also necessary to define criteria that help to filter and rank the choices. A similar process can be useful to develop the framework for a National Energy Policy. Let’s begin with a (not necessarily exhaustive) stab at SWOT, at least covering the obvious elements, and then consider useful criteria.

2) SWOT
Strengths
We have 5 primary strengths relative to the energy challenge(s) we face, the first of which seems superficially rather contradictory. These are:

Our present economy is hugely energy inefficient, giving us plenty of room for rapid adjustment
All of the technologies needed in the short term, both to become efficient and to develop economic alternatives to oil and natural gas, already exist and are ready for large-scale deployment.
R&D on the longer-term needs is advancing rapidly, worldwide.
We have the “Saudi Arabia’s” of wind and solar in our Midwest and Southwest states.
Our best responses to the energy challenge are also synergistically suitable to the other 2 challenges we face, global warming and terrorism.
Weaknesses
Our weaknesses are mainly aspects of our culture. Some will change quickly in response to changing conditions. The most critical probably won’t change until forced to by crisis. These are:

Ignorance or denial, on the parts of legislators and industry leaders, both of the imminent challenges we face and of the solutions available.
Entrenched special interests that put their narrow concerns ahead of the common good.
The SUV culture that has been so assiduously created by auto company advertising and promotion, and the auto industry’s stake in that culture.
The Congressional/Industrial/Military complex and its sheer bloody-minded resistance to change.
Existing mind-sets (conventional wisdom) about energy and efficiency, with corresponding inappropriate and hard to change regulatory barriers and perverse incentives. We face a new energy paradigm that requires new thinking.
A less obvious weakness, but one that needs to be addressed, is the misconception evident in electricity deregulation. Deregulation is based on the idea of a free and competitive market for electricity, with production separated from distribution. In fact, the market is for efficient energy (heat, light and work), and distribution and production must be integrated to fully exploit renewables, especially wind.

Opportunities
The indirect opportunities are characterized primarily by synergy and altruism.

Increasing efficiency, reducing and recycling waste, and developing renewables all have the potential to be environmentally beneficial.
Mass produced, economic renewables can bring energy sustainably to the impoverished third world, increase our trade and give us a chance to do well by doing good.
Converting to an efficient, renewables based energy economy will create millions of jobs that can’t be offshored.
The direct opportunities are simply a list of the responses we have available –efficiency, conservation, waste reduction, wind, solar, biomass, clean coal, nuclear, etc.

The greatest opportunity is energy self-sufficiency, with corresponding strength and independence.

Threats
The primary threats are the declining availability of natural gas now and petroleum soon.
Related obvious threats are:

Exposure of our energy supply to terrorist attack, and
Our dependence on unstable, potentially hostile suppliers. A less obvious threat derives from the growing current account imbalance, putting ever more of our debt into the hands of foreign central banks and leaving us increasingly vulnerable to creditor manipulation. Perhaps the worst threat is of our own making: the apparent belief that the only answer to declining petroleum availability is to control the distant sources, with the resulting and totally unnecessary risk of resource wars.
3) Criteria
The above SWOT considerations already suggest several elements of a sound National Energy Policy, but before defining our policy, we need to test at least the major alternatives against some useful criteria. Key criteria, other than the obvious ones of direct cost and concentration of resource, could be Security, Sustainability, Environment, Economics, Ethics, Morals and Patriotism. (Note: The NEPDG did not even mention high-level criteria).

Security
Consider that optimistically the USA has only 50 Gb of its original estimated, ultimately recoverable oil of 240 Gb (21%) left. Pessimists (realists?) estimate less than 30 Gb of an original 220. We can rush into a major and costly domestic supply side “drain America first” campaign, and deplete that remaining resource more quickly, or we can address the demand side and keep that resource well into the future as a reserve against unforeseeable contingencies. A US Army tank gets 0.2 mpg. What if we have to fight a war some time in the next three decades, and find import routes imperiled? Maybe we should maintain a serious domestic strategic reserve.

Also relative to ANWR, what can be less secure than our present Alaska pipeline, which the US military has described as indefensible, and which is already old enough and worn enough to pose significant maintenance issues?

Nuclear poses security risks mainly from the point of view of potential terrorist targets, and therefore considerations of site hardening have to figure prominently in nuclear planning and costing.

On the other hand, both energy efficiency and renewable energy resources are diffused throughout the nation, have no attackable choke points, are 100% domestic, and will not run out.

Sustainability
Any supply side source, other than renewables, is useable only once and ultimately runs out. Energy savings, once implemented, are exploitable forever after. Wind and solar are available as long as the wind shall blow and the sun shall shine. How can it makes sense to use energy and capital to build rigs and drill holes (many of them dry) when the same money could build wind turbines that never result in dry holes and provide energy year after year?

There is also the question of climate change. Even if there is still uncertainty, why take the risk of catastrophic consequences when we have excellent alternative choices? All fossil fuels add CO2 and other emissions to our atmosphere. Coal is worst, and coal to replace scarce oil is three times worse than the oil it would replace. Energy efficiency can eliminate the need to replace oil without any emissions. Renewables can ultimately replace coal without any emissions.

If we continue to waste our fossil fuel resources, burning them to fuel inefficient ends, we deprive future generations of potentially much more valuable chemicals and fertilizers that could sustain many aspects of their lives, including food production. If we deplete the fuels before we build the wind turbines and photovoltaic arrays, we may not have the energy with which to build them. We must not choose an unsustainable path, especially when a sustainable one is both more readily available and more economically attractive.

Environment
Apart from the debatable environmental questions of global warming and climate change, there are other serious environmental issues associated with fossil fuels and nukes. The primary ones are air quality and associated health issues. Others range from the local environmental devastation of strip mining (coal and tar sands) through pollution of aquifers to storage of nuclear waste and spent fuel. Many of the problems are extremely long lasting. Efficiency and renewables present no such issues.

Economics
To note just a few highlights:

Efficiency opportunities typically cost from 0.6¢ to 2¢ per KWh. Natural gas and coal impose costs greater than 4¢/KWh and nuclear, fully costed, will probably be above 5¢/KWh.
Wind is already as cheap as natural gas and coal, and costs are still dropping for wind, but will only rise for natural gas and coal. Solar energy presents no fuel price uncertainties.
Importing fuel presents a major balance of payments burden, and diverts resources to military protection of supply lanes that could be better employed domestically.
Drilling the ANWR does not make economic sense, even at today’s oil cost. No oil company is ready to jump in without subsidies and market guarantees. Every excess dollar spent on costly ANWR oil is a dollar not available for efficiency and renewables, resulting in more imports that could have been avoided, and worsening the balance of payments issue.
Importing nuclear fuel is also questionable.
Fossil fuels appear relatively more economic than they are because of unrecognized externalities that do not apply with renewables.
Ethics
The USA fought a Revolutionary War over taxation without representation. If we continue to imperil the energetic fate of future generations, without developing viable alternatives, we in effect impose a major tax, and future generations are clearly not represented in the decisions. We have an ethical imperative to safeguard their rights. Wantonly depleting the last of a valuable resource is totally contrary to that imperative.

Morals
As the acknowledged world leader both economically and militarily, (and most of us would like to think socially and politically), we have a moral duty to aid the development of our less fortunate brethren worldwide—not to increase their difficulties. Consuming fuels that they will need in the future as feedstock for chemicals, pharmaceuticals, and agriculture is contrary to this duty. Developing the technologies of efficiency and renewables, creating the market volume to lower costs, and easing their access to such technologies so they do not have to repeat our wasteful history fulfills our duty.

Patriotism
A policy of “drain America first” is bad strategically. Increasing dependence on unstable and possibly hostile foreign sources of vital resources is bad strategically. Increasing the current account imbalance unnecessarily is bad economically. Depleting scarce domestic resources that will be needed by future generations is bad morally. Policies and actions that are bad for the country strategically, economically and morally are, by definition, unpatriotic. Pending legislation in the House and Senate is unpatriotic. Promoting SUVs is unpatriotic. Ignorance may be a mitigating factor, but is not a defense.

4) Summary observations
The above presentation provides only a very limited and qualitative introduction to policy development. Brief reflection on anyone’s part can more fully flesh out the arguments. However, even from this truncated exposition it is clear that the hydrocarbon supply side approach fails all reasonable criteria, while the energy efficiency/renewables approach passes the test of every criterion. An extensive and quantified evaluation would make the case compellingly and irrefutably.

The problems we now face are unprecedented and the responses must be more creative and holistic than has been required in the past. Historically the energy industry has had the luxury of working with unlimited low cost resources so neither efficiency (especially on the part of the consumer) nor cleverness have been required, and narrow viewpoints were not a problem. In fact efficiency has often been opposed by an industry that historically puts short to medium term profit ahead of long-term considerations. That luxury is now disappearing. Creativity, conservation, efficiency, innovation, whole system thinking, ingenuity, open mindedness etc., will now be critical to success.

It is interesting to note that the large majority of energy advisors to the NEPDG represent the constituencies that stand to benefit the most from the emphases apparent in the NEPDG report, i.e. oil and gas industry, nuclear, coal-fired electric utilities, and the coal industry. There were no renewable industry representatives, and no experts on the practical opportunities for energy efficiency. A good national energy policy requires inputs from a much broader group of experts, including national security analysts, ethicists, environmentalists, neutral economists, and, most importantly, renewables and efficiency experts.

5) Recap
With the SWOT analysis and the above criteria in mind, let us summarize key points from the previous “Energy Challenge 2004” papers, and then try to identify policy priorities.

Premises

Natural gas is already in decline in North America and will fall far short of the EIA 2020 demand projection.
Natural gas cannot be imported from distant points economically or in enough volume to offset national shortages.
Oil will be in decline worldwide by 2010, and out of the energy picture before 2050.
America’s oil will decline faster than world average due to loss of market share.
Because of the above, the energy policy time horizon must be 30 to 50 years.
Nuclear is not popular, not cheap and not necessary, but will be part of the solution.
Coal is abundant and cheap, but dirty and producing CO2. Clean technology needs R&D.
Reducing energy intensity, (conservation and efficiency), is the quick, low cost way to reduce foreign dependence.
Reducing energy intensity creates jobs, saves money and helps payments balance, benefiting the economy.
Promises

Wind is abundant, clean and already cheap, but calls for infrastructure development.
Solar is more abundant and will become cheap with development and economies of scale, but requires major development of manufacturing capacity.
Ocean energy seems abundant, but is not yet practical. Much R&D is needed.
There is vast room to practice energy economies.
63 quads of present oil and natural gas can be replaced by 21 quads of renewably generated primary electricity over time, due to relative economic productivities.
Hydrogen is the likely replacement for fossil liquid transportation fuel.
Problems

Hydrogen generating costs still have to come down, and storage needs development.
Natural gas pipelines need upgrading for hydrogen transport.
Evolution from a hydrocarbon to a hydrogen economy, including wind/solar ramp-up, needs decades, so must to start now.
Transition from fossil/wasteful to renewable/hydrogen/efficient will be resisted by the “froms” at every step.
Needs

Public knowledge of the threats and opportunities and means of effecting energy efficiencies and savings, i.e. a publicity and education program.
Regulatory reform to promote “negawatts “ instead of megawatts.
A new system of incentives, - standards, “feebates”, tax the “bads” reward the “goods”
A reallocation of subsidies from oil, gas and coal to efficiency, renewables and clean coal.
6) Priorities
From the above, based on the timing, seriousness and nature of the threats and opportunities, we can identify a few key priorities and appropriate actions, in rough order of urgency and importance.

First is the shortage of natural gas, with new demand primarily for electricity generation. The available natural gas must be used as efficiently as possible:
Encourage utilities to address distributed combined heat and power (CHP) plants, target 70%+ efficiencies.
Refuse licenses for plants less than 50% efficient, and require replacement of inefficient SCGTs, with new CCGTs.
Deregulate utilities to favor promotion of efficiency over expansion.
Require rapid implementation of load management to reduce demand peaks.

Oil will be the next problem, and is used nearly 70% for transportation. There is no supply side solution. Therefore the first priority is transportation efficiency. The first 5 actions:
Close the light truck CAFÉ loophole for all but the 5% that are legitimate light trucks
Raise CAFÉ standards by 5%/yr for the foreseeable future
Enable and require surcharges for inefficiency, at the gas pump as well as licensing
Support development of clean, efficient trucks and busses
Encourage and promote development of urban rapid transit.

Third, promote both efficiency and renewables:
Provide promotion, education and incentives in support of efficiency
Strengthen office and residential building standards enforced by a “feebate” system
Set efficiency standards for utilities to reduce primary fossil energy per kWh delivered, and gradually raise the bar
Incentivize wind farm growth to >30,000 MWp per year by 2010, and support the necessary distribution system developments
Incentivize development of at least 5 large solar PV plants and sufficient polysilicon support capacity by 2010.
Negotiate voluntary efficiency improvement agreements with industry sectors
Raise taxes on inefficiencies – motors, appliances, HVAC, lighting etc.
Provide support to the “Western Governors” to double their goal of building 30 GW of renewable (mainly solar thermal) capacity by 2015.

Protect, not accelerate depletion of, our remaining domestic oil and natural gas resources, both as a hedge against future emergencies, and as chemical and agricultural feedstock.

Accelerate development of the AFR to maximize use of uranium, and provide for permanent elimination of plutonium.

After all the above the last major problem is coal:
Support rapid development of clean coal technology
Create a carbon emissions trading scheme analogous to the Clean Air Act SO2 scheme
Set progressively tighter CO2/kWh goals for utilities.
Require rapid replacement of old dirty inefficient coal fired plants with fluidized bed IGCC plants.
Provide “third party covenant” financing or equivalent to financially enable the above replacement.
7) Conclusion
In business, when faced with a choice between two apparently equal but largely opposite choices, or when conflicting beliefs lead to conflicting choice, the rule is to make the most easily reversible choice. This guideline, for obvious reasons, is often referred to as the least regrets or no regrets rule, or the principle of prudent choice. If we launch a policy based on the expectation of plenty, and scarcity happens, we will have crisis, economic disruption and forced reaction. In the worst case, if we are too slow to respond, we can trigger major supply instability and a hard to reverse downward spiral. If we base our policy on the expectation of declining resources, and are surprised by plenty, we will have a more efficient economy, more energetic choices available, more jobs, and we will be able to relax a little and accept slower progress with no harm done. Clearly the prudent decision is to assume coming scarcity and react accordingly.

Fortunately, the best choice for America is also the choice that will avoid having America labeled as immoral by the rest of the world, and by history. The “no regrets” choice is also the one that will ensure that our children and grandchildren will have no regrets about the choice we made.

It is not necessary to address all issues before rolling out a good first-cut National Energy Policy, but the above elements should be recognized, and the priorities acted on quickly. The most important and potentially productive ones should be addressed first. The policy can then evolve over time as events unroll and experience is gained.

Perhaps the most critical needs are to ensure that policy is not dictated or excessively influenced by the coal, oil, gas, nuclear and automotive industries, and to be sure we have “seen most of the elephant”, not just the above interested parties’ views. This issue is above partisan politics and narrow commercial interests. It calls for deliberation and wisdom, not political one-upmanship. Our elected leaders are going to have to do an awful lot better as we progress down this road, or they will end up doing a great disservice to America.

[HenryTo]

The Schumpeter quote was totally taken out of context - given that the article was written in the early phase of World War II. Let's read the entire article instead:

http://www.jstor.org/view/00650684/ap040025/04a00040/2?frame=noframe&userID=a9e82e10@ucla.edu/01c0a80a6d00501c252ca&dpi=3&config=jstor

In particular, the top of page 4:

[rffrydr]

Here's somebody from the "other side" also looking for an ideal above economics:

http://financialsense.com/stormwatch/geo/pastanalysis/2008/0328.html
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Conservation makes the front page, "The Oil Habit"

http://www.latimes.com/business/la-fi-cover30mar30-sg,0,4363275.storygallery
_________________
Today is the Tomorrow you worried about Yesterday!

[diesel]

IMO all of our economic systems perpetuate social stratification, elitism, nationalism and racism, primarily based on economic disparity. As long as a social system uses money or barter, people and nations will seek differential advantage by maintaining the economic competitive edge or failing that by physical force!

In terms of alt energy plays I am playing that via infrastructure going forward as Henry has suggested. I like ABB and SI. The world is going electric after all!
_________________
“I was once Snow White, but I drifted” – Mae West

[emergingwave]

Thank-you Mr. To and Mr. Eye of Providence.

I shall contemplate your responses further. The link about evolving economies and alternative energy contains some hopefulness.

Yes, we are Nature. A good friend of mine once said, "not everything in Nature is natural."

Or rather then contemplating is there an after life, ask yourself, have you lived yet?

"Sell your cleverness and buy bewilderment.
Cleverness is mere opinion, bewilderment is intuition." Rumi

This economy sure is bewildering! I am enjoying the learning process and I appreciate this forum. Thank-you both for responding to my enquiry (which is probably a little out of the context of investing.)

I am inspired to research good alternative energy investments though!!

[rffrydr]

...Yet it is the very same capitalism that can and has brought us to the brink. Invention brought us the car; capitalism its manufacture--traffic control its use.

Capitalism may be a "system" but as such it's blind and uncaring--and fundamentally vulnerable on many questions, especially time: harvest old-growth trees for maximum efficiency; wait, the market changes, it values them in themselves. Supply? The great forests of the eastern US are "parks"--they had to be destroyed along with their market--before they could be recreated. Same with the beaver top-hat. Same with the fauna of North Aftrica in supplying the "demand" of the ancient Roman Forum. Our National Parks are a response to capitalism. Most of what we take for our modern government is a response to captalism's failure. The best capitalism has to offer when run to its limits is "charity." This continues today with Gates and drugs for diseases nobody will pay to treat.

So the question is how you harness the natural engergy of self-interest as an agent of change and wealth building to the social necessity of its limits. Ultimately this is a moral question--otherwise "we murder the competition" would be more than just a slogan.

You can ask whether Truth has anything to do with it? The Protestant Work Ethic, is that truth? But that's an entirely different question--which few dare to ask.

So, Emerging Man, it sounds like you're looking for a new sense of descent with modification. That's Darwin's description of nature--for which We, seemlessly substituted "evolution." Would you deny this impulse to "evolve"? What would you say of Ghandi's grand failure? Or the "success" of the Quakers or the Israeli Kibbutz? What bothers you most about what we've got? Do you think its enough to have an economics of existence? --of growth? How about an after-life? Rest assured, there is one to be had
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

I would have to agree with rffrydr. Specifically, what is the "greatest good?" Perhaps it is "maximizing society's utility over the long-run" or something to that effect but it is difficult to align that with our form of government or with the different beliefs of those on this board - let alone the US. Unfortunately, given my writing committment and other obligations, I have not had much time to study these (philosophical) questions but some to consider are:

1) Social Security: This social contract was entered into for us by many of us before we were even born. This was done for the "greater good" but how "fair" is this given that many of the post baby boomers (based on current projections) would be drawing funds that were less than what we had contributed on a present value basis?

2) "Us" versus "them" mentality: Do you define the "greater good" from a pure US standpoint or do you take into account the entire global population? If the latter, why is most of Africa chornically poor?

3) Perhaps the world would be a horrible place to live in if we continue to burn fossil fuels 100 years from now. But 100 years from now, most of us would have passed, so why should we sacrifice our materials needs/wants today and conserve energy and/or clean up the environment by investing in alternative and "clean" forms of energy?

As far as I know, the capitalist society - along with our free press, education system, and open mind - is probably the best economy to solve any environmental or potentially humanity-harming problems going forward.

[rffrydr]

The problem with "nature" is that it doesn't exist. That is, there is no "it" apart from us...or, we too, are nature. And nature changes...it evolves. With us and, perhaps surprisingly, without us:

http://www.un.org/esa/population/publications/migration/migration.htm

I'm with Kurosawa and the old japanese notion of balance, self-reliance and moderation--yet the world moves on:

http://www.jefflindsay.com/Overpop.shtml
_________________
Today is the Tomorrow you worried about Yesterday!

[emergingwave]

Thanks for your thoughtful reply. I am interested in the greatest good but I am not interested in ideologies (if that makes any sense).

I am wondering if you would know of any writings that point to an "ideal economy" that aligns with the greatest good. That is "natural" and not overtly political or religious.

I suppose that it appears as a paradox that I am contemplating an ideal economy without "ideologies." Something senses that this is practical and possible. There are experimental communities out there that are practising new sustainable economies. (I am in the process of researching them)

I think it is possible to be practical and hold ideals. I am talking about going beyond the duality of jaded cynicism and pie-eyed naivety. Somewhere beyond and in the middle of those apparent opposites.

[HenryTo]

There are many flaws in that article and the "rigidity" of his "model" (if you can call it that) makes it unworkable in the real world. Some random thoughts:

1) His view on capitalism is overly simplistic and is essentially wrong. Schumpeter debunked that view (essentially Karl Marx's) over 65 years ago in his book "Capitalism, Socialism and Democracy." e.g. the rich getting richer and the poor getting the poorer. Nothing is mentioned about the composition of each group (e.g. the Forbes 400 list turns over once every 20 years) or the fact that the "poor" in today's society has a better lifestyle than the kings and queens of the 17th century. Schumpeter's work, meanwhile, has withstood the test of time. Curiously, in the 1975 introduction by Tom Bottomore (a British Marxist Sociologist) the author criticized Schumpeter's dismissal of "decentralization in a socialist market economy" as a viable model (i.e. decisions being made in different centers of activity as opposed to be imposed uniformly from above) and subsequently praised the "Yugoslav model." The last I read, Yugoslavia hasn't been doing so well since the 1970s.

2) What he defines as "imaginary" needs are sometimes held in higher regard than his "physical" needs - this has been true since the Stone Age and would remain so in the future as long as human nature remains the same. e.g. women starving themselves to lose weight, kids working part-time jobs to get an iPod, Japanese women in their 30s living with their parents and spending the majority of their income buying Prada handbags, etc. His views are a curiousity at best - but represents a very narrow view of how the world "might" work - a typical high school science project.

3) His over simplicity is similar to how Karl Marx essentially viewed capitalism - but Marx articulated his views 150 years ago - revolutionary at the time but have since been debunked many times, not just in writing but empirically as well. The author's model has a slight chance of working if every one of us was a "greater good maximizing automaton." What does the author suggest we should do if we are not, and don't accept his ideology? This is another revolution in the making - and I believe the world got tired of that a long time ago.

4) The modern capitalist society is designed to promote and satisfy ALL needs of every individual - not just materialistic needs. The needs are prioritized based on the weighted-dollar demand of all individuals in a capitalist society. In that vein, the author is misguided as - given the right incentives and education - the environment and long-term "clean" energy needs can be a top priority as well - to the extent that this fulfillment satisfy a psychological need that is greater than a short-term materal need - or to the extent that this "sacrifice" result in the creation of a greater capacity to satisfy material needs over the long-run and on a present value basis.

[emergingwave]

On my search to get a sense of the possibility of an economy that aligns with natural laws I found this article.

http://www.fdavidpeat.com/forums/funding/lothar.htm

[rffrydr]

How about fuel from the carbon in the air? Los Alamos says possible:


http://dotearth.blogs.nytimes.com/2008/02/13/federal-lab-says-it-can-harvest-fuel-from-air/index.html?ref=business
_________________
Today is the Tomorrow you worried about Yesterday!

[diesel]

Pants that can charge your Ipod, Cellphone.

http://www.nzherald.co.nz/section/story.cfm?c_id=5&objectid=10492432

[rffrydr]

Solar-Hydrogen prototype auto:


http://dotearth.blogs.nytimes.com/2008/02/07/the-sun-powered-hydrogen-toy-car-is-here/index.html?hp
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Keeping it simple in solar:

http://economist.com/search/displaystory.cfm?story_id=10202728
_________________
Today is the Tomorrow you worried about Yesterday!