Tags: Carbon Pricing, Electric Grid, Electric Vehicles, Energy Policy, Feed In Tariffs, Lithium Ion Battery, Renewable Energy, Wind Energy
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A quick “hats off” to David Brancaccio and NOW on PBS for their well-researched and informative documentary on what Denmark is doing to attain energy independence and get off oil by building a version of the Renewable Electron Economy that is suitable for their resource base.
You can view the 23 minute show here:
This installment of NOW does a great job of connecting Denmark’s historical dependence on other countries for energy and their current drive to build renewable energy and electric vehicle infrastructure. Denmark is one of the first countries/regions to work together with Better Place’s electric vehicle infrastructure.
While the show does a great job in tracing the policy environment which is unusual for a technology focused story, it does miss that Denmark used a feed-in tariff for wind in the 1990’s to jump-start the Danish industry.
Furthermore, I believe this show should be required viewing for all policymakers who will be attending COP15 or who are currently deliberating about climate legislation in the US Congress, because it is an example of how “things actually get done” in the area of emissions cuts. There is NO MENTION of cap and trade or emissions trading. The sole request of the CEO of DONG Energy is that out of COP15 that a (preferably high) price on carbon emerges.
Furthermore, the piece shows the people of Denmark moving quite rapidly (relative to the US at least) towards a much more energy efficient and cleaner energy economy over the past 20 years and into the near future by the application of what might called “Energy (and now Climate) Keynesianism”. It is no mystery that the Western Europeans have taxed petroleum-derived fuels heavily to, among other uses, build and maintain public transportation. What the NOW piece shows is that Danish tax policy is designed to relieve congestion, reduce oil dependence, and now to support the growth of renewable energy by bringing in more electric vehicles and therefore more energy storage.
While those readers who are convinced that a “carbon price = cap and trade” or “carbon policy = cap and trade” will not be persuaded or will miss the signs, what the NOW episode shows that a truly conservative in the best senses of the word climate policy is a “Climate (and Energy) Keynesianism” with an international carbon price that is a dollar/euro/yen/renminbi amount. We know that we can shape energy use and generation activities by tax policy and by incentives for private development of clean energy generators (feed-in tariffs). As I have been documenting here in my series on Cap and Trade, we have many very good reasons to doubt with its 12 year history of middling results and expansive bureaucracy that the twisted emissions trading policy will be as effective. Furthermore it is simply a political end run around the obvious “Climate Keynesian” solution, where government’s and business’s roles are differentiated and validated. Cap and trade will interfere with or obscure the benefits of Climate Keynesianism.
Cap and Trade: A Tangled Web… A Project-Based Alternative – Part 4 November 5, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
Tags: cap and trade, Carbon Pricing, carbon tax, CSP, Electric Grid, electric transmission, Electric Vehicles, energy storage, Feed In Tariffs, Project-based Policy, rail electrification, Solar Energy, Wind Energy
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In the first two parts (part 1 and part 2) of this post, I discussed cap and trade as well-intentioned but a fundamental misapplication of the permit trading policy framework. I also went on to identify 11 basic elements of any climate policy regardless of instrument. In the third part, I describe a package of mostly familiar policies that integrated together will have a far more profound effect on emissions that the cap and trade system. In this, the last part, I offer a second alternative to cap and trade which I believe is the most aggressive and secure approach to cutting emissions, though does not exclude elements of the package in part 3.
Project-Based Carbon Mitigation Policy (PCMP): A Heterodox Climate Policy Framework
I’ve redesigned an approach that is not entirely new but has been sidelined in current high-level climate and energy policy discussions. I’m calling it Project-Based Carbon Mitigation Policy– PCMP. Instead of or in addition to starting with an abstraction like a carbon price, PCMP starts with specific large-scale regional, national or global projects that with greater than 95% probability will cut emissions substantially within the next few years; these projects implement technologies and processes that are known to directly replace fossil fuel use, directly reduce demand for fossil fuel or, with some agreed-upon degree of certainty, sequester carbon emissions. A goal and timeline are set for the reductions based on the implementation of that technology or process then PCMP reverse-engineers the economic and social policies that will enable the project to take place in a timely manner. PCMP does not exclude nor discourage the use of abstractions like price mechanisms and society-wide or global targets but it starts with the security and relative certainty of projects that are technology- and process-based, supervised by some responsible party or regulator, and funded. PCMP may end up being a route to a set of policies very much like the Comprehensive policy discussed in Part 3. A PCMP policy approach also openly acknowledges the role of government leadership in achieving carbon emissions reduction goals, an attitude which has been shunned in recent history in the US and elsewhere.
Viewing projects as the fundamental element of policy also allows necessary supporting infrastructure that facilitate many types of emissions reduction to become the object and focus of high-level climate policy. Build out of the electric grid and electrification of transport are key to a zero emissions industrial/post-industrial society though, due to the variable carbon intensity of electricity production their exact contribution as separate individual projects cannot be quantified. A combined approach linking low- or zero-carbon electrical generation with electrification of transport would qualify as PCMP projects.
Carbon mitigation projects based on tested technologies and processes are the only assured means of cutting emissions, along with their supporting infrastructure. Carbon pricing may influence projects to be initiated but the projects themselves are the primary building blocks of policy. The focus on what might be called “secondary” or tertiary levels of climate policy has, in my observation, interfered with or at least obscured the importance of these primary on-the-ground projects.
The most directive end of the PCMP project spectrum would be a government program, funded by tax revenue, that uses “command-and-control” to push through a project that is vital to our ultimate survival as a society implemented either by government contractors or via government employees. On the other end of the spectrum in terms of directiveness are rulings, changes in tax law, and the institution of technology and process standards that will tweak existing market behavior. A PCMP project will have a target emissions reduction by a certain date; optimistic goals should be shunned in favor of “worst case” scenarios to ensure that goals are met or exceeded. Incentives should be aligned for the project leaders, whether they be public or private employees, if they achieve or, better, exceed emissions targets.
Many existing government programs in the area of environmental protection already are project-based policies in that an existing technology, set of technologies or process is chosen for implementation but, to date, not taking the next step to target specific carbon emissions reductions. In the US, we have a number of house weatherization programs including a grant program for low-income homeowners and rebate programs for other homeowners. To convert these into PCMP programs, one would need to make specific greenhouse gas mitigation goals and a timeline, tuning the policy instruments to achieve these reductions along the stated time line. However, the notion behind the PCMP concept is that policies that support one or another project may be generalized to a sector-wide or economy-wide policy or have knock-on effects. National policies or international agreements would be “reverse-engineered” to support key projects as priorities.
Project-based Policy, Infrastructure and Synergies between Technologies
The building of new infrastructure or its supervision, key to carbon mitigation, almost always falls to government, which undertakes the building of infrastructure on a project by project basis. The emphasis on market solutions to climate change, which focuses on influencing the decision-making of individual market actors ignores the fact that most infrastructure is built by government planning and programs that anticipate rather than respond to economic demand. One way to understand the sequence of events in building infrastructure is perhaps best summarized by the line: “build it and they will come”. Within this Hollywood formulation, what is captured is the ability of physical infrastructure to create or support markets as well as influence behavior beyond the influence of prices and goods for sale.
The carbon price signal, either the clear carbon tax version or the muddied cap and trade variety, will not by itself initiate the building of new infrastructure in a timely manner, especially if we consider the politically likely (low) level of the carbon price in the next few years. Even if we look to the history of infrastructure for market behavior shaping infrastructure (“Go West, young man” and the US railroads), in the face of catastrophic climate change we are looking at an accelerated implementation of new infrastructure as replacements for serviceable but polluting infrastructure, requiring a pro-active government role that anticipates rather than responds to trends and price signals.
In addition, basing policy on or limiting policy discussion to carbon pricing alone has been a way to say: “we don’t know what the solutions will be”. However, besides ignoring the key role of infrastructure, this is, at this point in history, disingenuous and more importantly time-wasting. As I have pointed out in two posts I wrote over a year ago, we now have about 24 technologies or processes that together could cut carbon emissions by at least 90%. These technologies and processes ranged from CSP with storage, internetworked wind powerwith hydroelectric storage, transport electrification, afforestation, to even voluntary (partial) veganism. Eventually much celebrated technologies like building-integrated photovoltaics will also play a major role. Other, more “traditional” climate policies that may be established more generally like a carbon price may aid the implementation of a PCMP policy but the combination of a carbon price and PCMP projects will achieve emissions reductions most rapidly. The project-based approach starts with a core of concrete intended outcomes in the way of realized projects but then welcomes and expects follow-on effects both from the realization of these projects and from the facilitating generalized policies like a carbon tax or fee.
Many of the gains associated with the most powerful of the 24 technologies, with a couple exceptions, are based on synergies between different technologies, not the solo implementation of those technologies. The impact of electric vehicles on total emissions varies a great deal depending on the type of generation that is used in a particular area of the globe. A carbon price will help urge this process on but will not of itself incentivize the creation of these synergies.
In renewable electricity generation there are some synergies between technologies, for instance between hydroelectric storage and wind power, which would need to be integrated in a planned manner across numbers of jurisdictions. These synergies between technologies can only be realized rapidly via integrated resource planning with adequate financing. Grid operators have already engaged in integrated resource planning anyway throughout the over 100 year history of the electric grid. Linking this planning with carbon mitigation is a step towards the PCMP policy framework.
Prospective PCMP Projects (US)
PCMP Example #1: CSP with Storage
One of the few standalone, scalable renewable energy technologies that can directly replace fossil electricity generation one-for-one is Concentrating Solar Thermal Electric Power (CSP) with thermal energy storage (TES). With sufficient transmission and judicious siting, CSP with storage could supply almost all the world’s energy using a small percentage of the area of the world’s deserts. DESERTEC which is a large CSP investment and policy project for Africa, the Middle East, and Europe, could be configured as a PCMP with specific targets for replacing fossil generation.
The example PCMP project below applying CSP with thermal storage provides close to certainty in emissions reductions and can be accelerated with increased funding. This contrasts dramatically with the lack of control over emissions under carbon pricing alone inclusive of cap and trade with its false “certainty”. Effective carbon pricing would catalyze this type of development but would not “cause” it as would a targeted program focused on implementation of the technology.
CSP with TES – American Southwest/West of Mississippi
Region: 6 US States (California, Arizona, Nevada, Utah, New Mexico, Texas) – Replace Energy Production in 19 Western US States.
Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2020 in the WECC, SPP, MRO and ERCOT grids (50% natural gas/50% coal) without addition of new fossil generation. By 2030 replace 1200 million MWh/annum fossil generation in NERC.
Technology: Concentrating Solar Thermal Electric Power with Storage (Capacity factors from 35% to 70%) – 50GW installed by 2020, 250 GW installed by 2030 – mean capacity factor >50%. Formation of CSP industrial base to replace fossil generation.
Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02/annum by 2020, 905 million metric tonnes CO2/annum by 2030.
Finance mechanisms: guaranteed $.10/kWh rates (inflation adjusted) for 20 years for electricity sales plus $(2 + capacity factor/.25)/W (2010-2013), $(0.5 + capacity factor/.25)/W (2014-2017), $(capacity factor/.50)/W (2018-2020) innovation grant funded through carbon tax/fee (adjusted for the effect of the 30% Investment Tax Credit). Favorable tax treatment for mothballing and early retirement of fossil generation.
Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).
Supporting national and international policies:
- Carbon tax/fee facilitates implementation.
- Infrastructure: Renewable energy “smart”/supergrid
- Guaranteed Rates for Renewable Energy
- Contracting with Stakeholders for Greenhouse Gas Reduction Targets
- Special Master to Determine Compensation for Retired or Semi-retired Fossil Power Plants
PCMP Example #2: Combined Renewable Energy Power Plants
A combined renewable power plant connects a diverse set of renewable generators that together produce electricity according to the demands of grid operators and ultimately grid users. More complex than CSP with storage, this technology is still emerging though simply a matter of organizing existing technologies via smart, renewable-energy oriented transmission network.
Combined Renewable Power Plants – US
Region: All US States (can be generalized to almost any region of the world)
Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2025 in NERC grids (50% natural gas/50% coal) without addition of new fossil generation. By 2035 replacing 1200 million MWh/annum in NERC.
Technologies: Wind, Solar (CSP, PV), HydroelectricGeothermal, Marine/Wave Energy, Biomass, internetworked generators to load centers, “smart” grid management technologies.
Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02 by 2025, 905 million metric tonnes CO2 by 2035.
Finance Mechanisms: Bundled wholesale feed-in-tariffs with performance bonuses based on load-responsiveness of combined renewable power plants. Amount of tariffs as yet undetermined and would vary with renewable resource intensity.
Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).
Supporting National and International Policies:
- Carbon tax/fee facilitates implementation.
- Infrastructure: Renewable energy “smart”/supergrid
- Guaranteed rates for renewable energy/feed-in tariffs
- Contracting with stakeholders for GHG reduction targets
- Special master to determine compensation for retired or semi-retired fossil power plants
PCMP Example #3: Home Weatherization
The US Department of Energy has a goal of weatherizing over 1 million homes as part of the 2009 American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus package. This investment of $8 billion dollars is divided between $5 billion for grants via the states to weatherize homes of low-income homeowners and $3 billion dollars for rebates to other homeowners for weatherization upgrades to homes. The low-income grant program will limit grants to $6500 worth of work per home.
A review of the standard weatherization packages in 2002, indicates that the full package that would cost in the area of $5000-$6500 could cut from up to 7.5 metric tonnes of carbon emissions per year per house in high emissions/high heating demand areas like the Midwest, in particularly inefficient houses. In areas with lesser heating and cooling demands, like the Western US, the savings would be maximally 2 tonnes for an inefficient older, small single-family dwelling but the price tag would only be in the order of $2500/home.
However looking at the components of these packages there are certain measures that have much higher carbon reduction return on investment than others, most notably air sealing, programmable thermostat installation, water heater resets, low flow shower heads, and compact fluorescent lighting. An additional reduced package of these high impact measures would cost from $1000 to $1500 per home leading to emissions reductions of about 2 metric tonnes on average, to as many as 3.4 metric tonnes. It is possible to design then a “rapid” first-pass program of reducing emissions that would triple or quadruple the number of homes visited per unit expenditure. Later, a second program could revisit these homes to address the remaining issues like inefficient refrigerators, furnaces, insulation and water heaters that have substantial returns in reducing carbon but are more expensive.
In a few years time, we may have better measures based on among other things passive house technology, which may enable “deep energy retrofits” of existing houses that enable greater energy and emissions cuts with similar or lesser investment. In these cases, PCMP projects such as this one can revise their targets upwards.
Accelerated Home Weatherization Program with Carbon Targets
Region: All US States (start with high heating/high cooling areas)
Emissions Reductions Source: Reduce domestic combustion of fuel oil, natural gas, reduce domestic demand for electricity, especially at baseload.
Technologies: Building envelope air sealing technologies, insulation, high efficiency fluorescent lamps, refrigerators, water heaters, furnaces, programmable thermostats.
Target CO2 Emissions reductions from 2007 baseline: 60 million metric tonnes by 2020 from 30 million homes, 120 million metric tonnes by 2030 from 60 million homes.
Finance Mechanisms: Tax revenues fund low-income homeowner/renter grants (up to $6500 per home) and consumer rebates for energy efficiency upgrades.
Project Team: US DOE and state weatherization programs, utility officials.
Supporting National and International Policies:
- Carbon tax/fee funds and facilitates implementation.
- Contracting with stakeholders for greenhouse gas reduction targets
- Decoupling investor-owned utility income from energy sales
- National and state mandates for energy efficiency
- Green building and energy efficiency certifications/standards
A PCMP project once it is approved, organized and financed can move immediately to the generation of detailed design, operational plans and the begin of construction or implementation. The reverse engineering portion comes in figuring out how to get to the point where the technologies or processes can be implemented. The key difference between a PCMP (aided perhaps by other policies) and a policy that essentially remains entirely agnostic about solutions is that a PCMP adds a stated intention and tasks a skilled project team to achieve a concrete material change in the processes that generate greenhouse gases. Then policy is built partially around that intention and the project team that is tasked with realizing that intention.
The PCMP approach is I believe the most aggressive and gives those who will be ultimately held responsible for protecting the climate, the world’s governments, maximal ability to accelerate efforts if needed. To achieve the very ambitious 350 ppm goal and follow the “Emergency Pathway”, the PCMP approach would have the best chance.
Good Intentions Alone No Longer Suffice
Cap and trade has been a convenient mechanism for politicians to avoid fundamental but necessary conflicts while giving themselves and others the impression that they are “doing something” about climate change. As the first international climate policy, it has attracted a community of people that have seen it as the sole alternative to inaction, therefore undeservedly has become a magnet for the good intentions of both the uninformed and the somewhat-better informed. The “cap” is a reassuring physical metaphor that suggests a level of control over emissions which, as I have demonstrated, the policy itself undermines. As cap and trade appears to address 5 of the 11 domains of climate policy, it is seductive for politicians to try to set up a “one stop shop” as a means to address the climate and energy problem.
However, there are much better policy frameworks out there of which I have shown two examples. Cap and trade’s fatal ability to insulate the ultimate decision-makers from the process of pushing for emissions cuts on the ground can be avoided in a number of ways. Above, I demonstrated a project-based policy framework that I called PCMP, which builds policy from the ground up and puts at the center the key role of developing zero-carbon infrastructure in addition to price-based instruments that influence investment and behavior. Or, in part 3, I showed how it is possible to implement a nine-part composite of simpler but synergistic policies that is more flexible, will be more effective, and ultimately more comprehensible to the public at large than cap and trade. Crucially this set of policies does not give away or obfuscate governments’ responsibility to protect society and the environment.
The cap and trade policy is a twisted remnant of a political era in which government was supposed to pretend that it wasn’t really government. It has fooled no one except some of its supporters. Government must be decisively and centrally involved in the implementation of carbon policy and there must be a rapid re-discovery of the value of good government in leading society through difficult times. Furthermore cap and trade as an instrument contains within it an open invitation for corruption and “capture” by powerful financial interests with few incentives to make concrete investments in the energy or land-use future. Any effective climate policy must establish clear guidelines and openly acknowledge government’s supervisory role in the transition to a new energy economy. I wish there were more shades of grey in this regard, but there aren’t.
No set of policies is, however, a magic bullet if there is not strong popular support for decisive action on climate and popular acknowledgement of the necessity for government’s leadership role. As it currently stands in the United States, the public still is woefully misinformed about climate, with for instance, a prominent pair of columnists for the New York Times perpetuating “global cooling” myths in their latest book. Against this background, climate policy appears to be a partisan affair rather than actions of the human community as broadly defined as possible that are based on our best science. If cap and trade is presented as the only alternative, this further undermines the cause of climate action and government responsibility because of the fundamental flaws in the policy. The equation of cap and trade with good intentions on climate action must be irrevocably broken.
Ultimately, political leaders must campaign with passion for the future of our planet and our societies, with empathy for the economically downtrodden and dispirited, informing the public about the alternatives available to minimize the impact of our two century fossil fuel bacchanal. Within the context of a better informed citizenry, only then can an effective climate and energy policy truly take effect, though the time to start on both campaigns is now.
Tags: cap and trade, carbon tax, Electric Vehicles, Feed In Tariffs, Infrastructure, rail electrification, Renewable Energy
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In Part 1, I offered a critique of cap and trade in its existing implementations and located key flaws which make it highly unlikely that it will achieve its emissions reduction goals, even if somehow it is strengthened. In part 2, I highlighted two problematic aspects of cap and trade and then went on to examine what are the fundamental challenges of climate policy. Then I offered a list of the general features of any effective climate policy.
Turning to positive solutions rather than criticsms, I will offer here two main options, the first one mainstream and the second heterodox and project-based; both of which are easily configured for quicker and more certain emissions reductions than via cap and trade.
Comprehensive Climate and Energy Policy Package with Carbon Tax/Fee
Climate policy has emerged with a focus on markets and changing market behavior (ignoring infrastructure development to a large degree), so the “mainstream” approach below would also transparently give responsible parties control over the process. While the “one-stop shop” aspect of cap and trade overextends this already misapplied policy, a package of interacting measures that are, with fairly straightforward calibrations, guaranteed to cut emissions quickly can easily be put together. The below policy package avoids handing off climate and energy policy to an unaccountable carbon market and invite undue influence by financial traders. It also has the potential to be much more effective than a cap and trade centered policies. On the other hand it is “market-based” in that it relies on the more accurate carbon tax/fee price signal to shape market behavior rather than cap and trade’s muddy signal.
1) Emissions-Reduction Path with Targets: Set an emissions-reduction path with target goal posts (2015, 2020, 2025, etc.): Not the reassuring “cap” metaphor but an analog to the cap without the false reassurances that it contains. The target or path could be expressed in terms of an average carbon-intensity for economic activity that yields the same path. Using a carbon-intensity target allows adjustments to be made so efforts to cut emissions do not shut down industries before they are able to transition to lower carbon alternatives. I would recommend the “emergency pathway” as defined by Greenhouse Development Rights that uses the 350 parts per million carbon dioxide target, though others may object to its ambitious goals.
2) Carbon Fee or Tax: Set a carbon price in the form of a carbon fee or tax fixed but rising year by year that will, according to at first estimates and then experience, reduce emissions along the path. If the tax does not yield the necessary cuts, increases in the tax/fee levels will be accelerated. A tax or fee enables companies to calculate the value of carbon emissions and make the actual investments that will cut emissions rather than deal with a broad range of expected carbon permit values, as would result from cap and trade.
- Calibration – A carbon tax would be calibrated to achieve the emissions targets along the path in bullet “1” though overachieving will be encouraged. If tax levels inflict damage on economic well-being or capacity, tax levels may be reduced, though it is to be expected that there will be periods in which some economic pain will be inflicted by the tax to encourage better economic decision-making and innovation. Expectations need to be set from the outset that some pain is involved in transitioning to a more sustainable economy, though excessive pain is to be avoided.
- Revenue stream – There are arguments among tax/fee advocates (as well as cap and trade advocates for the revenues from permit auctions) about where the revenues should go. Here are my recommendations:
- One third of the carbon tax revenues should be used to dampen the effects of the costs of rising energy prices on the poorest, preferably via energy efficiency upgrades to housing (modeled on weatherization programs).
- One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
- One third will go into a international carbon trust which will fund development products, changed agricultural practices, forest maintenance and growth efforts with strict performance standards and baseline assumptions.
- Exemptions and Credits – Some argue against any exemptions and credits, seeing a flat tax as simpler. However, I, as an example, believe taxing certain activities that cut carbon is counterproductive. Additionally I want to show that it is possible to develop and regulate cross-border certified emissions reduction credits in a tax system if such a credit sub-system ends up being desirable. I believe however that these necessary accommodations to the complexity of the situation are much more transparent and can lead to more productive dispute resolution than via the arcana of the trading system.
- It makes no sense to levy the full carbon tax level on the very infrastructure projects that lead to carbon neutrality. If a construction project embeds fossil emissions in a zero-emission technology (electrification of a train system, renewable energy infrastructure), then the emissions from construction equipment or concrete making for that project should be at least partially exempt. Alternatively there could be a percentage exemption depending on the level of carbon reduction achieved (coal to natural gas conversions).
- Just as with the current offset market it might be made possible to sell certified emissions-reduction credits that represent emissions reductions in other areas or other countries. These credits would need to be rigorously certified and limited to only a certain fraction of carbon tax liability.
3) International Agreements - Utilizing existing international institutions, nations around the world can come to agreements on both monetary fees for carbon emissions and overall emissions reduction targets. The addition of a monetary amount will force action by governments and businesses more rapidly than the abstractions of the carbon market. Agreements will focus on:
- Worldwide Emissions Targets and Path
- International Carbon Price(s) – Calibrated to achieving emissions targets, the international carbon price will be closer to actual microeconomic decision-making than permit pricing system of cap and trade. Choices are either a unitary price or a development-adjusted price depending on level of development. Some countries may be more “entitled” to pollute given their lesser historical contribution to total atmospheric concentrations of carbon. On the other hand, despite an “entitlement” to pollute more, some developing countries may want to go “cold turkey” and use the higher carbon tariff of the developed countries to spur sustainable development at home.
- Carbon tariff regime – with differential taxation in different countries, countries would levy tariffs upon importation either up to the amount of the unitary international carbon price or up to the amount of the development-adjusted carbon price. While this contradicts “free trade” orthodoxy, under an international agreement there should be no problem in levying this type of tariff. The WTO can be outfitted to handle disputes and generating agreements carbon tariffs and integrating climate policy with trade.
- International Standards and Best Practices – Agreement on standards, certifications, and grading systems for energy efficiency and low emissions technologies (see below)
4) Zero-Carbon Infrastructure Development– While the Obama Administration has embarked on pieces of this, a full-scale climate policy would front-load spending, including deficit spending, on building zero-carbon infrastructure and energy generation. The main source of funding would come from tax revenues and use fees. This area is largely neglected by the cap and trade instrument.
- Renewable Energy Supergrids and regional grids – Link high renewable energy areas with demand centers via development of a HVDC and where appropriate high voltage AC transmission.
- Renewable Energy Zones – Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
- Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
- Electric Freight Transport System
- Grade-separate and improve existing freight railbeds
- Add additional tracks to high traffic railbeds to allow more rail freight
- Electrify all high and moderate traffic rail routes
- Electric Passenger Transport System
- Build high speed rail backbone
- Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
- Build electrified bus and tram routes in high density/high-traffic city environments.
- Electric Vehicle Recharge Infrastructure
- Trickle charge (220V and lower) public charge network
- Battery-swap infrastructure
- Fast-charge (480V and higher) public charge network
5) Best Practices, Certifications, Standards and Rulemaking- Develop for most economic sectors, a set of best practices and standards that are based on cutting emissions as well as other elements of sustainable development (conservation of the earth’s natural wealth). Standards would be either voluntary or mandatory depending on the level of imposed costs of meeting these standards by market participants and the existence of alternatives to meet the overall goals of the standards. Rigorous standards like the passive house standard should be encouraged as well as graded standards that represent a “path” to carbon neutral solutions. In certain vital areas, standards may be come laws to rule out certain practices that are simply unacceptable. An example of the latter could be a moratorium on new coal power plants.
6) International Afforestation Program – Using revenue streams from carbon fees and tariffs, generate local solutions to maintaining living biomass. Carbon taxes or other disincentives may be levied on activities that release excess carbon into the atmosphere.
7) International Agricultural Carbon Sequestration Program – Using revenue streams from carbon fees, incentivize low-emission, high sequestration variants of agriculture and food practices. In the future, once a baseline for carbon sequestration may be achieved, carbon taxes may be levied on high emission forms of agriculture.
8) Black Carbon Reduction Program – One of the more tractable climate problems though still a challenge is to introduce existing emissions control technology or develop alternatives to combustion of hydrocarbons and biomass that produce soot or black carbon. We already have most of the technology to limit soot emissions from internal combustion engines and factories. More challenging is coming up with culturally-acceptable solutions for cooking with wood in less developed countries.
9) International Technical and Scientific Cooperation – Create the equivalent of an international energy and climate research fund that supplements the work being done on national levels towards specific technical solutions to emissions. Could develop in conjunction with IPCC WG III. One area of research should be emergency measures like geo-engineering.
If adopted as a package, the above measures address all 11 generic elements of carbon policy and have none of the 10 drawbacks of cap and trade. This approach transparently identifies governments as the responsible parties for reducing carbon emissions. This comprehensive climate and energy policy does not interfere with their ability to respond to changing climate circumstances and removes unaccountable financial markets from the core of climate policy.
“Picking Winners”: Policy Blunder or Necessity? December 12, 2008Posted by Michael Hoexter in Energy Policy, Green Transport, Renewable Energy, Sustainable Thinking.
Tags: Al Gore, California Air Resources Board, Cap and Trade System, Carbon Pricing, carbon tax, Economic Theory, Eisenhower Interstate System, Electric Vehicles, Energy Policy, Feed In Tariffs, Infrastructure Economics, Milton Friedman, Plug In America, Project Better Place, Renewable Energy, Repower America, Who Killed the Electric Car?
Listening to Science Friday on PBS recently, there was an interesting exchange between Dan Sperling, an influential member of the the California Air Resources Board (CARB) and Professor at the University of California at Davis, and Sherry Boschert, Vice President of the EV advocacy group, Plug In America. Sperling has been known to advocate hydrogen fuel cell programs at the California state level, a stance that has historically had the backing of Detroit automakers until very recently. Boschert and Plug-In America have been highly critical of the degree to which CARB has supported hydrogen to the detriment of battery-electric cars (BEVs) or other plug-ins (which includes EREV or PHEVs as well). This is a version of the conflict that became part of the influential documentary “Who Killed the Electric Car”.
While Sperling in this exchange was presenting himself as an advocate of “electric drive transportation”, he mentioned a number of times hydrogen fuel cell vehicles (HFCV), which use an on-board hydrogen fuel cell to generate electricity for an electric motor to drive the wheels (a.k.a. electric drive). Boschert pointed out that HFCV option has been used to delay and stymie efforts to deploy the much “readier” technology of plug-in battery electric vehicles for the last ten years in California and therefore around the nation. The essence of this accusation, also popularized by the “Who Killed..” film, is that policy support and advocacy of HFCV’s blocks the implementation of any clean fuel vehicles short and medium term as HFCV technology is always ten years away from commercialization. Boschert advocates a positive support policy for battery electric vehicles, like an embrace of public charging infrastructure for EVs by municipalities and state governments.
Sperling, though he claimed not to be opposed to supporting government EV programs, said that you didn’t want to “pick winners” in the technology derby to replace petroleum, citing the apparent disaster of corn ethanol. Boschert countered that winners were always being picked, pointing out that HFCVs were funded by government and industry to far higher levels than battery research and battery electric vehicles. She suggested that short of a government sponsored BEV roll-out program that there should be equal research funding for HFCVs and BEVs, though the first option was the preference of Plug-In America.
Efforts NOT to Pick Winners
In California’s debates around a number of pioneering pieces of clean energy and climate legislation and regulation, the notion of “picking winners” comes up on a regular basis as an unquestioned taboo for any measure or program. When in a discussion, someone suggests that policy be used to promote one technology or initiative and someone else in the room opposes that technology or the type of support, the accusation that one would be “picking winners” is thrown at the advocates of a prescriptive policy. While California has many technology specific support programs, there are also important central pieces of climate and energy regulation that are designed not to “pick winners”. The Assembly Bill 32, (AB 32) process which is California’s Global Warming Act of 2006, has almost inevitably gravitated towards a cap and trade system, which as is the Kyoto process, an effort not to pre-determine the price of carbon, nor commit California to a particular set of technological solutions to global warming. Accompanying this process, the CARB is also working on a “Low-Carbon Fuel Standard” (LCFS) which tries to group all reduced-carbon fuels for transport together, including electricity, mandating certain reductions in carbon content occur regardless of which fuel is discussed. Again, no “winning” fuel is picked in the LCFS.
Designers of these policies feel they are reducing government involvement to its intent while removing arbitrary rules and decisions from the process. In theory, the idea of “not picking winners” sounds great but, as in all things, between the conception and the realization reality intrudes.
The Theory: Government as Referee
The economic profession and economic modeling in business settings are right now at a watershed moment, where those individuals and theories which foreshadowed the precipitous downturn of the last few months are given a great deal more credence than the orthodoxy of only a few months ago. In this period of flux, it is reasonable to think that some old assumptions may no longer hold water, at least during the period of crisis if not thereafter.
In the last three decades, economic policy and influential parts of the economics profession have tended to hold up the ideal of an almost entirely unsupervised market, where individual and corporate economic choices in aggregate would dictate the direction of economic life. Expressing a belief in the individual or corporation as consumer and entrepreneur, these supply side or libertarian economic theorists believed that only unregulated market forces arrive at the optimal outcome. By contrast, government is considered by advocates of this approach to be necessarily a hindrance to economic success and growth. This view has remained largely unchallenged in both the Democratic and Republican parties until the recent financial system near-collapse and sharp economic downturn.
While the ideal of self-regulating markets has inhibited efforts at regulation in many areas of the economy, not everybody gave up on regulation even in the heyday of this ideal. In those environments where regulation has been accepted as a necessary evil or even a desirable economic tool, there have been attempts to incorporate the ideal of the market into economic policies. In California, which has a history of state-level energy regulation that has continued through the last few decades, policies that interfere less in the market are considered more desirable than those that dictate to private businesses what should happen. The latter is termed “command and control”, which sounds less desirable than a “market-based” regulation scheme.
In the ideal market-based regulation, legislators, regulators, and the government executive branch develop rules that express a desired social outcome in its broadest, most abstract form and then allow private actors to try to fulfill those desired social aims in any (legal) way they can. In the case of a cap and trade system, the notion is that the intended goal is a set amount of global warming gas emissions that will be reduced in subsequent years. The auction system for pollution permits is the means by which businesses acquire permits to emit a certain amount of greenhouse gases. When there are no more permits, the business can no longer pollute or face harsh fines. As another example, California’s Low Carbon Fuel Standard, the amount of carbon in the fuel is regulated but there is no selection of which fuel is necessarily or potentially that with the lowest carbon content.
So in a market-based regulatory system, once the rules have been set in place, the government acts as a referee, enforcing the rules but otherwise allowing market actors to make their decisions within the constraints of the system. In the case of cap and trade, there are two levels of market mechanisms built in: one is through the bidding on pollution permits and the other is allowing businesses and individuals to figure out by themselves how they are going to reduce their carbon emissions. The competing carbon tax concept is not an “un-market-based” solution though it removes the first level of market mechanisms as compared to cap and trade, instead allowing businesses and individuals to figure out on their own how they are going to avoid emitting carbon and therefore paying more carbon taxes. So cap-and-trade is doubly market-based, while a carbon tax would be a more conventional regulation where government determines a social goal and shapes the market through a disincentive.
The Other Theory: Prescriptive Policies, a.k.a. “Picking Winners”
While there is no hard and fast line between the market-based and a prescriptive policy, there are many policies in the area of energy where government expressedly prohibits or promotes one activity/technology or another. The longstanding US tradition of research funding for particular energy technologies is, in a way “picking winners” though the federal government has tried to spread this funding around to some extent. In the area of lighting, for instance, certain inefficient fixtures (probe-start metal halides) will be prohibited by the US DOE for sale as new fixtures as the first of January. The criticism by Sherry Boschert of hydrogen policy holds true: hydrogen fuel cells have received inordinate funding in comparison to battery technology, an imbalance that historically has had the support of Detroit automakers. Biofuel mandates in combination with the enormous subsidies for corn production and corn ethanol are prescriptive policies.
While to a self-regulating market theorist prescriptive government policies are always inefficient and, adding some rhetorical inflation, “disasters waiting to happen”, defenders of a prescriptive policy would counter that scientists and political leaders reflecting scientific and common wisdom have found that one solution is, along one or more desirable dimensions, better or substantially worse than others. Cigarette smoking was found to cause cancer. You didn’t wait until individual effected people discovered that they were getting sick and dying sooner if they had smoked: government put in laws that make the sale of tobacco more difficult and mandate public warnings of smoking’s hazards. There was a statistical relationship between smoking and cancer which market actors alone could not perceive, especially given the socially reinforcing and addictive nature of smoking. In lighting, probe-start metal halides use more energy than pulse-start metal halides or linear fluorescents for the same light output: this black and white finding by engineers led to an eventual step-wise ban on the sale of probe-start fixtures.
A prescriptive policy then depends on scientific knowledge to determine, before the market can discover the difference, that one course of action is more helpful than another course of action. The trust in scientific knowledge is key for most prescriptive policies, though prescriptive policies could also rest on the consensus of political leadership or polls and perceptions of popular sentiment. It is no wonder that declines in the authority that people attribute to scientists in the US has led to a drift away from prescriptive policies, at least in the public presentation of policy actions. Despite the diminished prestige of science in the US pantheon of values over the past few decades, the US government is the largest funder of scientific research in the world and also, still continues to operationalize that knowledge when it comes to implementing policy.
Beyond Prescription: Government Sponsorship
A “stronger” version of a prescriptive policy is one in which the government not only prescribes a particular solution but pays in part or in full for the realization of that prescription via taxpayer dollars. The proposed economic stimulus packages including the much-discussed Green New Deal ideas, would be government sponsored programs by definition. Bailouts of or support packages for individual firms or industries are government sponsored prescriptions for how the economy should remain or change in the future. Public education is a prescriptive policy that is also government sponsored: not only should children be educated but taxes will provide the means by which they can be educated. Most highly industrialized countries outside of the United States have more government sponsored programs than the US, particularly in the area of social welfare. By contrast, the US government has sponsored a very large, expensive, and technologically sophisticated military relative to other countries.
In the area of energy and transport, a government sponsored program could range from a rebate program for electric vehicle purchase to as large as the building of new power plants like the Hoover Dam or TVA projects or a system of long-distance power transmission lines for renewable energy. These facilities could either be managed by the government as part of a public power authority or be sold off to private investors to manage. Tax credits for oil and gas exploration or renewable energy projects are also a form of government sponsorship as to pay for these credits, taxes need to be levied or programs cut in other areas. In any case, government sponsorship contradicts even more the ideals of advocates of the self-regulating market in the tradition of Friedrich von Hayek and Milton Friedman, as government would have a hand in setting prices or enlarge its role as a provider of services.
Real Dangers of Picking Winners
While in tone this piece would seem to be critical of the categorical rejection of “picking winners’, there are some real dangers in picking winners, especially when the process is itself wrapped in an ideology of doing the opposite, i.e. NOT picking winners. The list below are potential real dangers of picking winners keeping in mind that these are not nearly the exclusive property of this decision making system; other forms of decision making including more market-based ones share some of these drawbacks.
1) Corruption – Picking winners if done non-transparently and without full attention to democratic principles can lead to and/or be the product of corruption. Picking winners involves collaboration between government and industries or professions that can shade into collusion if not pursued in a deliberate fashion with full public justification. Bribes in various direct and indirect forms can influence the selection process.
2) “False” Winners – Picking winners can lead to a self-justifying selection of a technology or system that ends up being of lower quality and service than another option. Corn ethanol, with only hope and little scientific justification, became a false winner.
3) Economic Inefficiency – As per “2”, the government or other authority that is vested with the power to pick the winner could pick a technology or system without regard for the ultimate costs of implementing that technology. Government officials may have no mechanisms that hold them responsible for cost overruns or other inefficiencies. The potential for inefficiency may need to be balanced against the desirability of the goal.
4) Lack of Accountability – related to “1” and “3”, the selection of winners may occur in ways in which those who make the decisions do not experience the effects of those decisions. Government officials, representing the people of the US, may not be able to be held individually responsible in some circumstances.
5) Foreclosure of future technological developments – picking a winner can narrow the market opening or close it entirely for an emerging or future technology that may turn out to be superior. Monopolistic or oligopolistic control of markets can have the same effect.
6) Decision-making without scientific backing – A winning technology or system may be selected without access to or utilization of the best scientific knowledge available; as we shall see below the success of “picking winners” is heavily dependent on high quality science.
7) Decision-making without Socratic wisdom – Decision makers may feel empowered without knowing what they don’t know. Without knowing where and to what degree they are ignorant allows decisions to be made that may ultimately be short-sighted.
8) Arrogant self-justification – in a further development of “7” decision makers may attribute to themselves the cloak of infallibility or may downgrade the wisdom and perspective of those who are outside their coterie. These attitudes may spring from the privilege of being able to make crucial decisions in combination with a wealth of information and resources at their disposal.
9) Economic and Political Despotism – the worst case scenario upon which much criticism of state-led policies are based, is that “picking winners” is the leading edge of authoritarianism. Despite the tendency recently in our politics to dwell on this worst outcome, government initiative in the economy does not NECESSARILY lead to despotism as we have seen with the New Deal, WWII mobilization, the Marshall Plan, the Interstate Highway System, etc.
As we shall see below, these dangers are not necessarily an ultimate condemnation of all efforts to pick winners.
Infrastructure as Prescription
While the ideal of the self-regulating market can be helpful in describing how consumer choice shapes truly competitive markets, a strict adherence to this ideal leaves a gap in our understanding of how energy and transportation infrastructure gets built. Infrastructure is a good or service that underlies basic social functioning as well as the use of other goods and services. “Infra” means “under” and infrastructure does in general support a variety of other structures or institutions that are more visible to us. Elements of infrastructure are usually a means to other ends. In most cases, to build competing pieces of infrastructure is economically inefficient, as the label is usually applied to physically large objects linked together into a large system. There are also only a few actors that have the resources to build infrastructure, most notably governments and some very large corporations that often operate in markets that tend towards monopoly or oligopoly. Infrastructure then tends to be a natural monopoly, either being managed entirely by the government or highly regulated by the government to prevent private companies from exercising monopoly power over consumers. People in advanced industrialized societies have come to view a functioning infrastructure as a (free per use) entitlement or at least a relatively affordable service that operates in the background.
A mixture of social and natural scientific analysis plus educated guesswork by a few leaders in the public and private sectors is involved in planning, proposing and building infrastructure. Likely demand for a new or existing technology is estimated and then plans are made for the necessary infrastructure to be built. Sometimes at some point in this process, a bond measure or other financing instrument is submitted either to a legislative body, a corporate board or stockholders meeting, or to the electorate for approval, thereby engaging in a democratic or deliberative process. As deliberative or democratic as one or another stage of the process may be, many potential competing infrastructure concepts are not placed into a market-like competition, a process for which we have no precedent and would seem to be prohibitively time-consuming and expensive.
Financing can be arranged either through the issuance of bonds or for infrastructure built by the private sector, stock offerings may be employed. In the end, a “prescription” for what the society needs is devised that it is difficult to shape through the iterations of consumer buying behavior that is the ideal case for a competitive market. Once infrastructure is being built, market actors then often devise their own plans to take advantage of the new or improved infrastructure (new housing developments, businesses etc.). The market then accommodates itself to and/or exploits the infrastructure which has been justified based on sound engineering, transport and urban planning principles.
Recently there were two large public transit infrastructure project proposals that won electoral approval in California: a San Diego to Sacramento high speed rail project and an extension of the popular BART system south from San Francisco and Oakland to San Jose. In a society committed to life after petroleum, reducing GHG emissions, and de-congesting the roadways, it made sense to the planners and then to a majority of the voters to provide more electric passenger rail lines for both long distance and local use. In the extension of the BART, one can project that transit-oriented residential and commercial development will be built around the new stops of this16 mile commuter rail extension.
In terms of the current discussion, in each of the California measures, a “winner” proposal was picked by a coalition of political leaders, campaign funders and transit planners and then submitted for approval to the electorate. While there was no market competition between different alternative infrastructures, there were opponents of each of the plans that sometimes backed up their opposition with alternative ideas in various stages of elaboration and detail. Ultimately, it is assumed that if leaders and experts put together a compelling proposal that appears to serve voter/human needs that the infrastructure project will be “good enough”. The process of putting together a marketplace of these ideas and proposals would for both the producers of the proposals and the consumers of these proposals represent many multiples more of effort and money in just the initial stages of the projects. To build infrastructure often requires that an operational concept of “need” be available rather than simply see infrastructure concepts as a competition of “wants” or desires, as is typical in market competition.
It would then seem that in the world of infrastructure projects, a prescriptive approach has advantages over experiments in building a market ideal or competition between proposals. Perhaps through improved cybergovernment initiatives a more interactive proposal generation process could be designed, yet this more democratic approach is not identical to the real-world interactive nature of markets where real products and services are offered and chosen among by consumers. Then, there may very well be something in the nature of infrastructure projects, their uniqueness, site-specificity, high expense and long duration that lends itself to leader-driven and prescriptive decision making, even as certain aspects of that process can take into account the preferences of the end users. The changing whims and trends of markets operate on a different timeframe than persisting on over a period of a decade or more building immense physical objects and systems.
Advantages of Prescription/Picking Winners
Here then are some of the advantages of prescriptive or government sponsored programs:
1) Potential for rapid implementation – There are fewer stops between design and construction start if a winner has been picked. If there is a clearcut winner why take additional steps?
2) Potential to be oriented towards long-term viability – local, more immediate economic concerns can be balanced against any number of different factors that may represent a longer view of social value than voters or consumers can typically calculate at the voting booth or turnstile.
3) Expense of generating multiple proposals short-circuited – In addition to time costs, there are monetary costs to generating multiple ideas for submittal to the public or to regulatory boards.
4) Potential to be based more directly on scientific findings – As considerations of a market-based competition can be, at least in the design, avoided, more elements of scientific understanding that have no bearing on current market concerns can be considered. Scientific findings may at times stand counter to wishes of a consumer market, as with smoking cessation or beyond the current perception of market actors, like global warming.
5) Government can insure higher risks – with some massive earthworks and higher risk technologies government endorsement and insurance is an absolute necessity.
6) Government can use directive policies – Some infrastructure projects require the use of public lands or eminent domain. While there have been questions lately that notions of the public good can play a role in economic life, government and its representation of the popular will or sentiment can more legitimately represent these wishes than private corporations.
7) Integration of varying technologies – a prescription can contain as few or as many elements as needed to fulfill the mission. The interdependence of different technologies and roles can be contained within the infrastructure plan.
8) Multi-factor Systemic approach – diverse factors or organizations can be added or subtracted from a prescription, externalities can be internalized and vice versa.
9) Concrete expressions of intent – The hand of the market or the setting of abstract rules, such as those that limit emissions, do not concretize popular sentiment or support as much as the building of physical objects.
For those who are committed to an economic model that sees good coming only from the interaction of independent economic actors, the above advantages will pale in comparison to the previously listed dangers of picking winners. However, in building infrastructure, there seems to be no way to avoid risking those dangers if we want to arrive at the physical outcomes that increasing numbers of analysts are saying are necessities.
Integrated Energy and Stimulus Plans: Unthinkable without “Picking Winners”
The Repower America plan might be called an “integrated energy and economic stimulus plan”. The similar proposal I have been putting forth over the past year or so, the Renewable Electron Economy, based on the engineering analysis of Ulf Bossel, that we should shift most of our energy demand to electrical devices and use renewable energy as much as possible to generate electricity is another example. In an integrated energy plan, the general types of energy conversion devices are prescribed as are the types of energy extracting or generating devices, so there is an integrated match: if you are proposing an “electron economy”, you want to make sure that there will be a coordinated hand-off between the demand for electricity and its supply. Electricity, as it is difficult to store, requires a more tightly integrated system than the trade in and consumption of the stable molecules that compose fossil fuels.
The call for planning has come from a number of political quarters. T. Boone Pickens, not previously known as advocate of economic planning, has recently promoted that the US develop a plan to get off foreign oil, bemoaning, in passing, the lack of such planning over the past 3 decades. Pickens’ plan serves his economic bets on particular technologies but he has been public-spirited enough to suggest that planning itself was necessary and lacking in our political discourse. Plans can also emerge independent of government involvement: manufacturers of electric cars are now considering creating a standard high voltage quick-charge interface for their cars, so that all quick-charge capable vehicles will be able to use a future standard high-voltage charger. This is analogous to standardizing the size of the aperture of fuel nozzles and gas tank mouths. In getting together on a standard, the manufacturers are picking a winner.
The Repower America plan is largely, in the terminology I use, a renewable electron economy plan. Its ambitious goal of converting the US electrical energy supply entirely over to clean sources within a period of 10 years leaves little room for experimenting with different high-level physical or policy instrument designs. For one, deciding that electricity should be the clean energy carrier of choice is “picking a winner”, though it is based on a growing consensus of engineers, advocates and experts on energy. Furthermore, reflecting a growing consensus, the plan suggests that there are some clear winners in the area of clean generation technology that should immediately receive government and industry support: wind, solar thermal with storage, and geothermal energy, along with sufficient transmission infrastructure to integrate these into the existing grid. Additionally, and in this technology choice is left more open, 28% of energy demand will be reduced through the adoption by end users of energy efficient technologies. Along with the Repower America plan, Al Gore has supported a carbon tax yet, I believe, he has no illusions that this tax alone can drive the building of the infrastructure required to achieve the Repower America goal.
Renewable Energy Payments: Prescribed Markets
One accusation leveled at the now ever more widely implemented feed-in-tariffs a.k.a. Renewable Energy Payments that support renewable energy is that they “pick winners”. This is partially true in the sense of picking a broad category of clean energy technology but not true in the sense of picking individual private firms as winners. A renewable energy payment system, like that proposed by Rep. Jay Inslee or like those now in use in many European countries, sets wholesale prices for renewable generators of a wide variety of types and sizes. The idea is to provide investment security for builders of renewable generators that we know will generate a certain amount of clean electricity: the guaranteed wholesale, generally above current electricity market, price per kWh allows the builders to recover their investment plus a reasonable profit. The system of cost plus reasonable profit is used frequently in the construction industry when large scale one-of-a kind projects are commissioned for a particular buyer.
The designers of renewable energy payment systems counter claims that they are not competitive or market based by pointing out that they displace competition from the deployment of generators to the manufacture of generation technologies. In a feed in tariff system, project developers want to purchase generators that will maximize their profit, so the intended effect will be to drive the cost of renewable generators down. A renewable energy payment system then picks certain technologies as winners but not the actual implementation of those technologies by different manufacturers. Feed in tariffs can be justified in economic terms as a prescription of payments by the consuming public for a positive externality; carbon pricing is a payment by emitters to the public for a negative externality.
A renewable energy payment system could be designed that drives the implementation of a plan like Repower America. In this case payments would reward the building of some of the wind, solar thermal and geothermal generators required by offering higher tariffs for the desired generators. Thus a prescriptive plan can contain within it markets for the technologies prescribed. The infrastructure of the Unified National Smart Grid can provide a framework for multiple smaller markets for building generators and generating electricity.
Exercising Leadership with or without Carbon Pricing
If we know what is “right” in a scientific sense, given a certain goal and the constraints of reality, why not proceed to do it with necessary but deliberate haste in consultation with popular representatives? If we are facing a potentially very deep economic crisis and are largely convinced that infrastructure projects can function as fiscal stimuli, why not charge ahead? The aversion to “picking winners” that we have developed over the preceding three decades would seem to say: “no, find a regulatory framework within which profit-driven economic actors will discover that there is a market for something like this and build something like it”. The focus on carbon pricing schemes as the main motive force in transforming our economy is one more example of our aversion over the last few decades to government and to a lesser extent corporations taking a leadership role. We, luckily or unluckily, may be at a watershed moment where leadership is now desired or even highly prized.
Carbon pricing schemes, whether cap and trade or a carbon tax, attempt to circumvent the process by which government actors and leaders in the economy would take responsibility for building large projects. Instead they could say: “the cap and trade system or carbon tax made me do it”. While having an ingenious policy framework which compels actors to act both in their long-term and short-term good is desirable, it is highly unlikely that such a system will by itself initiate and finance the building of all the Repower America/Renewable Electron Economy infrastructure we will need.
To embark on a path, such as building a Repower America-like clean energy infrastructure, will require leadership, a quality that is much praised but in its actual manifestations is often controversial. To build a Unified National Smart Grid, for instance, will require leaders or a leader, perhaps President-elect Obama, to explain to congress and the American people why we should build this piece of infrastructure now. This also means taking responsibility for both the “upside” of this large project (jobs created, energy independence, climate protection, new technologies) and the “downside” (costs, use in certain areas of eminent domain, appearance of electrical transmission towers). Too often, advocates of complex policy instruments seem to want their policy instrument to remove all of the ambiguities and ambivalences associated with the leadership role.
Likewise, a renewable energy payment (REP) system will require political leaders and electrical grid regulators to commit themselves to support renewable energy generators like wind turbines, solar thermal electric power plants in the desert, and photovoltaic installations on the ground and on rooftops. Not only would the institution of such a system attempt to benefit from the virtuous appearance of clean renewable energy generators but also offer direct financial support to those generators via guaranteed and premium wholesale electrical rates. While many support schemes sidestep the price of renewable energy by using indirect means like tax credits or carbon pricing, the REP systems name the prices and therefore require leadership to be exercised by declaring in public both the benefits and the costs of clean energy.
As recent announcements by President-elect Obama suggest, we have reason to hope that our next President will grasp the opportunity to lead the building of the necessary infrastructure we need to emerge from this economic crisis and to meet the challenges of the 21st century.
Building the Renewable Electron Economy – Economic and Policy Drivers for a New Clean Energy Infrastructure: Summary for Policymakers Part 3 September 9, 2008Posted by Michael Hoexter in Energy Policy, Green Marketing, Renewable Energy, Sustainable Thinking.
Tags: Al Gore, Cheap Energy Contract, ERoEI, Feed In Tariffs, Green Power Marketing, Infrastructure Finance, Renewable Energy Payments, Renewable Portfolio Standard, We Campaign
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In the first two parts of this summary series for policy makers, we have established that electric driven transport can fairly rapidly substitute for petroleum in most ground transport applications and that renewable electric generators will be the most quickly deployable and functional of the available energy alternatives. Building a renewable electron economy is the key frontline approach we have to creating an energy system that does not depend on exhaustible resources or emit fossil carbon into the atmosphere. However, there are challenges and barriers to overcome in order to move quickly towards the clean energy economy of the near future as we have not yet seen a strong, spontaneous market for such a solution emerge on its own. This is where policy and the structure of our financing system for infrastructure and energy are key.
Is Al Gore’s Goal of 100% Clean Electricity in 10 years Possible?
Al Gore and the Alliance for Climate Protection have issued a call for us to “Repower America”, generating 100% of our electricity from clean sources within 10 years. Gore’s call has sometimes been reported as 100% renewables but if you read his statements closely, he says “clean” sources; he may be including nuclear and coal CCS in the mix though the examples he usually puts forward are renewable energy alternatives. I support the efforts of the We Campaign, yet I believe leaders of the climate protection movement need to level with the American people about what will be involved in building this much energy and transport infrastructure that rapidly. Ambitious goals are good but it would be still better, to set into motion financial and policy mechanisms that will ensure a rapid start to this project. Involved in those decisions are not only the purity of noble intentions but also tough decisions and some sacrifice.
Renewables: Virtuous Side Salad or Energy Main Course?
Much renewable energy policy has incentivized the building of renewables as a virtuous “side salad” for a basically functional but dirty electric generation system, our main energy “meal”. In fact, energy industry insiders including Dick Cheney have misrecognized renewable energy, the first power source for the first electric grid, as simply an ineffectual display of personal virtue. Despite the current Administration’s lamentable record in moving America toward our energy future, somewhat more forward-looking state-level policies have actually tended to reinforce the view of renewable energy as a personal statement or an act of corporate social responsibility for utilities or their large-scale customers. These state-level policies have often focused on rooftop photovoltaics or delivering a small fraction of wholesale energy through renewable generators, the Renewable Portfolio Standard policies or RPS.
While these, often token, policies have helped keep the renewable energy industry on life support, policies like the RPS, will not by themselves, drive the building of a largely renewable or all-renewable grid. In an era where we are now targeting closing down fossil generators and replacing them with renewable generators, policy instruments will have to change as the focus switches to building an integrated Renewable Electron Economy.
Renewables and the Cheap Energy Contract
Recent political maneuvering around the issue of offshore (and Alaskan) drilling has highlighted the continuing strength of what I have called “the Cheap Energy Contract”, a social contract particularly strong in North America in which energy costs are supposed to contribute only negligibly to family and corporate budgets. A politician who does not throw themselves full-force into rhetoric or actions designed to depress the current price of energy at the pump or electric meter today risks the ire of voters whose focus has narrowed to present day pocketbook issues.
More than just being addicted to oil, Americans are addicted to cheap energy. Cheap energy today is supposed to be a cornerstone of our democracy, even though maintaining its low cost at this moment in time is extremely costly for the environment and for the future price of energy; the focus on low energy costs keeps us hostage to exhaustible and polluting fossil sources. We are seeing versions of the Cheap Energy Contract emerge in the developing world (India, Indonesia, and China) in the form of oil subsidies, subsidies which are becoming increasingly difficult for these governments to afford as the price of oil continues to climb.
Artificially cheap energy keeps energy alternatives out of the market until there are major supply disruptions or a continuing pattern of punitively sharp price spikes in existing dominant energy supplies; worldwide 85% of supplied energy originates from fossil sources, mostly coal, natural gas, and petroleum. Electricity from renewable generators is still in most cases too expensive for those who adhere to the dictates of the Cheap Energy Contract, and is therefore dismissed by commentators who insist on a price for clean energy that matches that of current dirtier energy supplies. RPS laws, for instance, usually mandate that utilities bring the requisite percentage of renewable generators online at “least cost” without regard for power quality and therefore the ultimate usefulness of the renewable generator.
Even advocates of clean energy are swept up in the vortex of assumptions surrounding the Cheap Energy Contract. For instance, climate and energy analyst Joe Romm, with whom I agree on many points, often criticizes nuclear, fossil or other energy sources he opposes by using their (high) cost as a decisive argument against their continued use or future deployment. When he does this, in my opinion, he reinforces a framework that emphasizes cheap energy now, an argument that easily can blow back in his face if he argues FOR most renewable energy sources to be deployed today at their current price levels.
So How Much Do Renewables Cost?
One of the attractions of renewable energy is that for most renewable generators, except biomass power plants, the cost of the fuel is free. However even more so than with a conventional power plant, much of the expense of a renewable generator is concentrated at the beginning of the power plant’s life. The cost of electricity is the sum of the initial, fixed capital costs for building a generator, variable costs of maintenance and fuel, any profit or return on investment, and finance costs divided by the usable energy produced over the lifetime of the generator. Currently, renewable generators range in cost from expensive (small installations of rooftop or building integrated photovoltaics) to competitive (large onshore wind turbines at windy locations). For renewable energy, the strength of the renewable resources at a given location has a major effect on the price of energy, as the capital cost is approximately the same for areas with higher and lower strength resources, yet the same equipment will produce much more energy in a more favorable location (for wind in particular).
Furthermore, most natural renewable energy flows are relatively diffuse; they have a lower “power density” than the energy flow that is emitted by a coal or gas fire or a nuclear chain reaction (exceptions are some powerful rivers, tidal flows, and hot geothermal wells). This means that the capture devices for renewable energy flows must, in most cases, be physically larger to take in the same amount of energy as a coal or gas power plant well-supplied with fuel. The large size of the generator means the production and installation of more concrete, steel, silicon, and/or glass as an initial investment. To the chagrin of some renewable energy advocates, also a larger size of the installation and the generators involved usually produces a significantly lower cost per unit energy relative to a small installation of the same technology, contradicting the “small is beautiful” philosophy that has become an unquestioned mantra in many quarters.
Despite the initial investment hurdle and current uphill financial battle, setting up a renewable generator in a favorable location pays off in the long term. Using the measure Energy Returned on Energy Invested (ERoEI) that measures the net energy yielded based on the energy input into a process, renewable generators using current technologies return from 20 to 50 times the energy required to manufacture, construct, and maintain them. This number will tend to go up as the renewable industry becomes more efficient: early solar panels in the 1970’s may have had an ERoEI of less than one (negative net energy) but now the roll-printed solar cells of the innovative company NanoSolar may return over 150 times the energy required to make them, paying back the energy used to make then in approximately a month. The latter amount is superior to the ERoEI of an oil gusher of high quality crude from a large oilfield; analysts currently believe the ERoEI of our current more “difficult” oil is around 5 and is decreasing as oil becomes more difficult to extract and is of lower quality.
In current dollar terms, building new renewable generators is for the most part not yet competitive as the future rise in cost of fossil fuels is usually discounted, while the environmental, energy security and EROEI advantages of renewable generators are not priced into the energy they generate. Energy from existing renewable generators that have already been paid for (older hydroelectric dams or geothermal wells) produce energy at a very low cost. Among new generators, large on-shore wind generators in windy areas produce energy at 6 to 8 cents/kWh which is competitive with new fossil generation. However, the value to the power system of electricity produced from wind, which often does not blow in sync with energy demand, is less than that produced using an energy store, like coal, natural gas, biomass, stored thermal energy of the sun, hydroelectric reservoirs and pumped storage, large batteries and other clean energy storage devices.
Most of the renewable generators and storage devices required to build the renewable electron economy currently produce what might be called “mid-priced energy”, energy that is neither dirt-cheap nor prohibitively expensive. The single generation technology that is the most rapidly deployable that can replace the services of coal and natural gas power plants is solar thermal with storage, which can produce power for somewhere between $.15 and $.20/kWh, inclusive of reasonable profit, in the desert Southwest of the United States. Large-scale photovoltaic arrays can produce energy at around $.25/kWh when the sun is shining in the Southwest. We will expect these prices to go down substantially, once we have created consistent demand for these technologies. Small installations of photovoltaics on rooftops remain relatively expensive, producing energy at somewhere between $.45 to $.60/kWh because design and installation costs are spread over a very few solar panels. Geothermal wells will produce at variable costs from $.10/kWh to $.25/kWh for more difficult, lower temperature resources.
In general these more controllable or predictable renewable generators produce electricity from anywhere from a few cents to several tens of cents more than what utilities want to pay per kWh for wholesale generation in current markets. The gap between the market, “buy” rate and the economically feasible “sell” rate for renewable plant developers is then the object of most renewable energy promotion policies throughout the world. Building up these industries will in most cases drive the cost of energy down as economies of scale are achieved and technologies develop.
How Do We Build (Energy) Infrastructure?
The enthusiasm for unregulated markets in the last 30 years of American public policy has obscured how large pieces of infrastructure get built. Unregulated markets, to work according to their ideal, require economic actors to be able to create competing offers which are judged by consumers or buyers according to the total value they represent. Infrastructure by its nature involves building structures so massive that to build competing pieces of infrastructure is considered to be economically inefficient if not socially undesirable (two roads or bridges that “compete” with each other would be an eyesore and end up being much more expensive for society). Power plants inclusive of larger renewable energy installations can be considered on the smaller end of “infrastructure” but are still too massive to build “on spec”. Infrastructure then can only get built by large economic actors like governments or corporations opening a bidding process by which manufacturers and construction companies attempt to earn the multi-year contract to build that infrastructure.
There is however, an abiding interest by both the buyer and the public in general in the quality and durability of that piece of infrastructure, which by its nature is supposed to last from anywhere from 10 to 50 years. So, a bidding process is not simply looking at the lowest total price of the contract but at the quality of components within that total price through an engineering analysis. A formula “cost plus reasonable profit” is used to determine by the buyer and by third party firms whether the bid is realistic and will produce the desired result. Additionally in such a long process there is also an interest in the continuing financial viability of the firm selected, that if it went bankrupt in the middle of construction, would further complicate the process. The “low-balling” of bids is then less attractive than it is in the pure market setting. While there are disadvantages to this formula, it provides a nascent or vital industry with security that pure market pricing does not.
Most of the electrical infrastructure that we have currently was built several decades ago by the utilities, usually large private companies, under government regulation or built directly by the federal government itself. Winning the contracts to build this infrastructure has involved a combination of the offer of appropriate technology and price considerations. Consulting engineering firms and government regulators combine to try to keep bids from being padded too much yet on the other hand to ensure that quality standards are not endangered and the bidding firm will remain viable. This type of cooperation between buyer and seller is not the norm in the ideal “free” market. However, ideal free markets have rarely been involved in building the unique structures that make up most public infrastructure, nor do we have a plausible model for a free unregulated market to be able to do so in the future.
The cost of power is partly derived from the costs of building energy infrastructure plus a reasonable regulated profit; historically the pricing for infrastructure and the resultant power has been arrived at through negotiations between public utilities regulators and power companies. With the vogue for markets extending to all aspects of economic life, legislators have attempted to introduce, post-hoc, market competition to reduce the price of power but these efforts have had mixed if not at times disastrous financial consequences for utilities. While in some places this has reduced the cost of power to consumers for at least a period of time, the costs of building and maintaining infrastructure has not been fully accounted for in the rush to impose market structures on the electricity system. The continuing push towards deregulation, which still has ideological momentum despite bitter experiences in California at the beginning of the decade, does not promote the building of new infrastructure, let alone a new, replacement clean power infrastructure that would reliably produce power. Furthermore, there are few mechanisms in the current market that would accelerate the retirement of existing fossil plants for new clean energy power plants.
While neither “cost plus reasonable profit” nor unregulated market pricing are ideal, universal pricing mechanisms, there is little in this world that is ideal and universal, especially in the hotly contested area of how to pay for vital commodities and infrastructure.
Non-Transparent or Hidden Renewable Energy Promotion Policies
Tax Credit Policies
One of the ways that the gap between market and the feasible price has been bridged is through the offering of tax benefits to investors in renewable energy plants. Just as the oil and gas industries have enjoyed various tax benefits to encourage investment in drilling, exploration and production facilities, in the last couple decades, investors in renewable generators have enjoyed either production or investment tax credits that contribute about 3 cents to the value of a kilowatt hour of renewably generated electricity for the producer. While these subsidies are set to expire at the end of 2008, most plans for new installations of renewable energy generators are contingent upon their renewal.
Tax credit policies have three drawbacks that make them politically vulnerable: they are largely invisible to the public, they are dependent upon the state of the federal budget and Washington politics, and they apply mostly to large corporate entities rather than small investors. A tax credit is paid via drawing tax revenues from other taxpayers and budgets, not necessarily from tax revenues from other parts of the energy sector. These credits have also been terminated a number of times over their checkered history, putting the renewable energy industry on a roller-coaster. Finally, they are most attractive to large corporate investment vehicles and do not represent an incentive for small and medium investors to get into the renewable energy game.
Tax credits may have a role in promoting reinvestment in existing infrastructure, by, for instance, incentivizing the large railway companies to electrify their rights of way, as suggested by Alan Drake.
Renewable Energy Credits (RECs) or Green Tags
Another method for trying to make up the difference between a wholesale market price for power and the feasible price for renewable energy investment is to sell a green power attribute separately from the power itself as a “green tag”. Also called “Green Power Marketing”, the idea is that companies and organizations can buy these tags to green their power mix, even though they are actually using the mix of power that is available in their area at their facilities. This is the closest one can get to a “free” market in renewable energy (credits) and those who are enamored of unregulated market mechanisms favor this type of approach.
Studies have found that REC schemes only have a mild stimulative effect and are a relatively expensive means of promoting renewable energy; there are suggestions that the traders of these credits are the prime beneficiaries of an REC system. Furthermore, RECs stimulate mostly large onshore wind farms as green power marketers are only looking for a “green” attribute at the lowest cost; to build the renewable electron economy we will require a more diverse set of renewable generators.
For small renewable generators that operate on the premises of a power consumer, power companies allow the customer to “run their meter backwards” crediting the customer for the full retail cost of the electricity they generate on premises. While this may appear to be simple and fair compensation to the customer/owners of the generator, the (hidden) subsidy for net metering comes from other power users who compensate the power utility for lost profits from the sale of electricity to those self-generating customers. A limitation of net metering is also the loss of any revenue for over-sizing the on-site generator and overproducing clean electricity above and beyond usage on-site.
Transparent Clean Energy Policies
The foregoing finance mechanisms tend to hide the costs of building renewable generators by concealing the actual cost per unit electricity and for the ratepayers or taxpayers as a whole. In an era when so much is hanging on energy policy, it makes more sense to consider policies that do not pull punches when it comes to costs and benefits.
Renewable Energy Payments (REPs)
A more transparent approach to spurring the market for renewable energy technologies are Renewable Energy Payments (REPs) a.k.a Feed-In Tariffs. REPs name and guarantee a feasible price for renewable power from supported technologies under a variety of conditions related to the size and siting of the generator. A successful REP system supports a variety of technologies and prices electricity to allow plant developers to recover their investment plus a reasonable profit. Another way to put it is that an REP system constitutes an open ended power purchase agreement for 10 or 20 years that allows plant builders to receive financing at favorable rates because of the investment’s security, due to the guaranteed wholesale power price. In successive generations of plants, some REP systems are designed to reduce the level of the tariff to encourage the industry to become more efficient. Some REP systems have a built in inflation factor to adjust the level of the initial tariff to reflect changes in the value of money. REPs are typically paid for via a supplemental charge attached to all power sales in the electricity system, pooled among the widest set of power users.
REP systems have been successfully applied in Germany and Spain and have recently been introduced in Ontario, France and Italy. Since the inauguration of their current REP system in 2000, the Germans, for instance, have more than doubled the fraction of electricity attributable to renewable energy from 7% to over 14%. Estimates are that German power users will pay on average a maximum of 2.80 euros ($4.11) per account per month in 2015 when the effect of their REP law will be at its projected maximum, so the REP tariffs do not contribute much to overall power costs to consumers. If it were considered to be more politically acceptable to pay for the surplus power payments attributable to the REP tariffs in part through tax revenues rather than through electric rates, such a system could be designed.
An REP system starts out at “cost plus reasonable profit” but to counteract inefficiency in the renewable energy industry needs to “degress” the tariff levels for successive generations of plants or introduce market elements into pricing. The German tariff steps down in successive new generations of plants and recently the solar rooftop tariff was reduced a higher than usual 9% for 2009 installations while there was higher allowance made for offshore wind to encourage that industry; both moves generated their share of controversy, which is almost inevitable in such an environment. In Spain, there is a market option which encourages renewable generators to heed the needs of the electricity market through a demand-based incentives in addition to a premium paid for clean energy based on the type of technology.
Direct Government Investment
Though less likely to be applied in the US in the current political climate where the levying and spending of tax monies is considered to be an imposition rather than payment for public services, the federal government itself can, as was the case with the Hoover and Bonneville dams, commission renewable generators in situations where risks or payback is too uncertain for private companies to undertake. An effective REP law, however, might make government’s involvement in direct power generation limited to the development of research reactors or in commissioning renewable generators for use by government facilities. A commitment by government installations to run their operations largely or entirely on renewable energy could provide a test bed for an all-renewable grid for the broader society.
Though potentially rife with inefficiencies, issuing bonds may be one method for governments to finance new infrastructure. While government bonds are the equivalent of a credit card for the government, the total financed portion of the new infrastructure is stated in the bond. Bond issue may be a necessary evil in building key pieces of infrastructure that are not amenable to a performance-based standard like an REP.
Small renewable generators, largely rooftop solar PV arrays, can also receive a rebate directly from a power company or state agency that is based on a formula that reduces the upfront cost to buyers of purchasing and installing this equipment. These incentives require the ready availability of funds either from government coffers or from the utility company itself and would present cash flow problems for these entities if applied to larger generators, as rebate payments would need to be paid in very large chunks to co-finance the new power plants.
Building a National Grid
As is currently the case with the building of long-distance transmission, the federal government will need to take a leading role in building new transmission that will connect load centers with areas which are most favorable for renewable energy development. Main renewable energy areas that require new transmission are: the Great Plains, the intermontane regions of the Rocky Mountains, offshore on the Great Lakes and Pacific and Atlantic Coasts for wind development; desert and semi-arid areas of the West and Southwest for solar thermal and large scale concentrating solar PV; links between geothermal wells and centers of electric demand.
Large states with substantial renewable resources, California and Texas have started planning for zones where transmission lines can be built as renewable generators are built in that zone. As transmission can take many years to build, these lines will bring renewable energy to market as soon as generators are commissioned and ready to generate electricity.
Passing the Buck or Paying the Piper
We have just gone through a period of time in the United States when very little new public infrastructure has been built (with the exception of wired and wireless telecommunications infrastructure). Led by a generation and a half of politicians and economic theorists as well as our own inclinations, Americans have become used to believing that a cheaper, more convenient option is always within reach through reliance on increasingly globalized markets. Our national specialization has become consumption, holding up the export economies of countries with lower labor costs by consuming ever more cheap goods, taking on increasing levels of debt in the process.
We, as a nation, have become unable to pay ourselves living wages to do the work that is required at home to keep standards of living in our country within reach of other advanced industrialized countries, nations that have not taken such a radical path towards deindustrialization and consuming beyond their means. Our specialization as over-consumers has started to shut our own people out of the ability to earn enough through their work to buy what they need to live and thrive; the more goods and services we feel compelled to buy the less we can afford to pay for each good or service, barring a substantial growth in our individual or median national income.
Building a new infrastructure involves years if not decades of work and the construction and manufacture of large physical structures here domestically, all of which cost money. We will need to organize a way to pay for this infrastructure either through payments for services, like electrical rates or through tax revenue. The notion that opponents of this line of thinking will put forward is that monies collected through taxes or regulated pricing will be inevitably wasted as they have not been distributed through a process of free exchange by independent consumers choosing between alternatives in a marketplace setting.
I would put to those who hold up the ideal of a market with choices equally arrayed for discriminating consumers to choose, that we would lose years of time and much money in creating this market for infrastructure services, a novelty within world history. Already we have seen experiments in various electric systems, such as California, with deregulation but with little positive learned about the nature of these goods and services and their most efficient means of delivery.
Instead, we need to face the music and start reckoning that we must spend more on necessary clean energy infrastructure to ensure that we have a tolerable or even pleasant way of life as oil depletes and carbon concentrations rise. Spending more, whether through electric rates or taxes means paying one’s neighbors and friends wages that they can live with to do the work that needs to be done to keep our United States at or near the lead of the next industrial revolution.
Those who stubbornly insist on paying only the cheapest price, yet want a new clean energy infrastructure are for all practical purposes waiting for a rich charitable patron or technological windfall, to “make it all better”. Technological optimists, spoiled by the microelectronics and Internet revolutions, hold out for the ultimate cheap generation and storage solutions that will match our current price expectations. We can hope this will happen but we cannot bank on hope alone. “Free” market enthusiasts look around for the next better deal or ways to push pricing down to current price expectations against what looks like to be a permanent bull market (with ever-rising prices) for commodities, the commodities of which energy and transport infrastructure are made. The reality of the world however does not always conform to one’s preferred social or economic ideal.
If we look around though, we will see that we together can be our own patrons; we as a culture can place a higher value on energy and our own livelihoods, as workers and investors in our own society. We can pay somewhat more for something that we have taken for granted but that now requires our attention and sustained effort.
Tags: Energy Finance, Feed In Tariffs, Production Tax Credits, Renewable Energy, Solar Energy, Wind Energy
In the last couple posts in this series, we’ve established that in industrial economies, price expectations for energy are low for fundamental economic reasons (mechanical work must displace human labor or animal work) but that in the US and Canada, these expectations are further depressed by low population densities, in many locations extreme ambient temperatures and temperature swings, and a preference for “big” vehicles and buildings. All of the latter mean that more mechanical or thermodynamic work needs to be done by energy-consuming machines to reach a desired outcome. As petroleum prices soar, we are starting to feel the pinch of an economy based on exhaustible fossil fuels, priced well below their actual costs for too many years. The direct and indirect subsidies to fossil fuel extraction and overuse were part of the now somewhat outdated Cheap Energy Contract that holds governments and energy regulators responsible for keeping energy prices much cheaper than actual costs, especially if we take into consideration the environmental and climate costs of fossil fuel combustion.
The expectation that energy be cheap and our heavy reliance on these massively subsidized but polluting forms of energy, present special challenges for the building of a new clean energy system. Transforming the energy business involves building large amounts of infrastructure that must be financed either through tax revenues (thereby subsidized by other parts of the economy) or private investment that is paid back through consumer payments for energy or energy-related goods or services. If the prices of the latter must be low, private investment will not be commensurate to the task as investors will have few chances to see their money again with a reasonable return. If additionally there is an anti-tax bias in the country, there will be few funds available from public coffers to finance infrastructure.
The major costs of renewable energy, especially renewable electric generators, are the initial capital costs of the generators, transmission lines, and the clean energy storage devices we will eventually need to balance energy flow on the grid. The fuel is free renewable energy flux but as we have learned, that flux is, in the case of the most plentiful forms (wind and sun) not of such a high power density, so renewable energy technologies must take in a wide cross section of that flux to come close to matching the output of conventional generators using more compact fuels. This means building many capture devices and large storage devices. “Many”, “large”, and “new” mean a greater initial capital investment to match our current power needs, front-loaded costs that must be paid over time.
The critical importance of increased energy efficiency in this equation is reducing at some point in the future the overall societal need for capital investment in future clean generators as well as being able to throttle back now on existing fossil generators and the development of new polluting generators.
Existing Clean Energy Finance Mechanisms
If the Cheap Energy Contract is becoming difficult to sustain for a whole host of reasons, alternative society-wide economic agreements about energy finance are still in flux. There are a number of contenders, none of which have fully established themselves in an era of dwindling fossil resources and increasing carbon constraint. Many are “end runs” around existing social agreements about energy pricing and the building of new infrastructure.
No (Energy) Social Contract, No Subsidies
Some players on the energy market (many of whom believe they represent the lowest cost producers) claim that regulations and government subsidies raise the cost of energy. These energy free marketeers echo sentiments of libertarian (a.k.a. neo-liberal) economists who believe that less regulation automatically leads to markets determining the least expensive price for energy by competition. A totally unregulated market in energy would not price in the cost of pollution including carbon emissions. Some green-inspired market advocates then would allow a cap and trade system to assign a cost to carbon emissions without other new regulation or government subsidy.
After Kyoto, groups of regulators and activists worldwide have been working towards assigning a price to carbon emissions that may have the effect of driving energy markets towards cleaner solutions. Within this general model there are two contending groups: one that believes the carbon price should be set by a cap-and-trade system that determines the carbon price by the balance of supply and demand for pollution permits and the other that believes that a carbon tax or fee set by regulators is more efficient. In either case, the price on carbon will at least start driving energy users towards more efficient use of expensive energy. It is doubtful that at this point in time, regulators will set or engineer the carbon price to be so high as to advantage some of the currently more expensive renewable energy solutions in a purely economic comparison. At very high carbon prices, great economic pain would be inflicted for a number of years as low carbon alternatives to our current energy conversion system would take a while to develop and represent singly and together large capital investments. Those who hope to rely solely on carbon pricing tend to downplay the historical benefits that fossil energy producers and fossil electric generators enjoy representing and benefiting from as they do decades of sunk costs and subsidies that most carbon pricing systems are not designed to account for; therefore they can act as a catalyst but only at very high levels will switching to renewable fuels appear high on the agenda.
The American renewable energy industry has some large wind, geothermal and solar projects on the ground because of tax breaks that large institutional energy investors have benefited from on and off over the past couple decades. The ITC or Investment Tax Credit allows investors to write off 30% of their investment from their taxes while the PTC or Production Tax Credit provides investors in certain mostly renewable generators a few cents tax credit that adds up to a substantial incentive. The ITC and PTC were cut out of the Energy Bill of 2007 and are now again up for a vote and potential veto by President Bush. As a form of renewable energy finance, the ITC and PTC have been effective for those renewable energy projects that have won power contracts with utilities and can otherwise compete on cost inside US utilities’ generation portfolios. The tax subsidies have worked best as supplements to other forms of subsidy and pro-renewable regulation.
Tax subsidies have proven to be politically vulnerable because they are a form of indirect subsidy that are difficult to understand or empathize with for the average voter. Furthermore the benefit of these subsidies has accrued in the US disproportionately to larger renewable projects. The current funding plan to reinstate the ITC/PTC pits the renewable energy industry and its Congressional supporters directly against fossil fuel companies and their allies that has led to the current political fight over reinstating the tax credits, the outcome of which will be decided soon.
US, Japanese and European governments have long funded research into renewable energy through various national labs and grant programs. In addition, some demonstration or early commercialization stage power plants have received grants as a way to reduce risk and help obtain additional private funding. While the US has not under the current administration directly funded the building of new power plants, the European Commission has issued grants to help build new solar power stations in Spain.
As I noted in my post introducing the Cheap Energy Contract concept, there are green energy supporters who believe that massive pre-commercialization subsidies either from the side of government or grants/investments from private sources will create revolutionary cheap renewable energy technologies. Shellenberger and Nordhaus see government investment in renewable energy research as key to what they have named their book and think tank, a “breakthrough” in clean energy generation costs. Google’s RE<C strategy sees private investment as a partial or complete replacement for government subsidy to the same end.
Both direct and indirect subsidy by government requires at some point tapping into revenue from taxes, either revenue diverted from existing budgetary items or revenue from new taxes.
Some financial subsidy to renewable energy takes the form of upfront payments upon the purchase of a renewable generator, mostly small generators for homes or businesses. The California Solar Initiative is the largest example of a rebate program but other US states have had similar rebates. Funds for these payments usually come from the electric rates paid by all ratepayers within a region or they could also be paid through tax dollars. While these programs in combination with tax breaks have been able to stimulate solar development, there are reports that these programs are overly bureaucratic and are not stimulating enough renewable energy development. The advantage of a rebate program for residential customers and small businesses is that it lowers the upfront payment and lessens “sticker shock”.
Renewable Energy Quota Systems
Certain states in the US and various European countries have adopted requirements that utilities generate a certain percentage of the electricity they sell from renewable sources by defined target dates. Renewable Portfolio Standards or RPS laws assess fines to utilities that do not achieve these goals. With the RPS, a utility is supposed to find the “least-cost” renewables though there are some RPS laws that stipulate carve-outs for particular local resources, requiring that a certain percentage of the RPS be wind, solar, etc. By arrangement with regulators, utilities should be able to recover any disparity in cost between the renewable resources and regulated generation rates though this is not necessarily a part of the RPS law’s intention: the notion being that in the requisitioning and bargaining process the cost of the renewable generator will be brought down in price to levels close to the (mostly fossil) market rate. RPS laws are present in some US states, varying from levels such as California’s 33% by 2020 to as low as 5% in some states. Some states are allowed to fulfill their RPS requirements by buying green energy certificates from outside the state.
Without carve-outs for particular resources or technologies, RPS statutes drive utilities to buy energy from the currently most mature, least expensive technologies, usually onshore wind. The quota does not place the positive motivation for achievement within the actors who make the crucial decisions, the utilities, who are put in the position to avoid a penalty rather than gain a reward. Some leaders of utilities with a better regional energy mix, with a keener business sense, or with ethical motivations have taken a somewhat more inspired and creative approach to the RPS mandates than others. As RPS’s are based on achieving a standard level, overcompliance is not necessarily rewarded.
Renewable Energy Certificates/Green Power Marketing
RPS’s and voluntary carbon offset programs are often backed by “green tags” or REC’s (renewable energy certificates). These certificates are a way for investors in renewable energy to make additional money in excess of the wholesale electric rate they earn by selling the green “attribute” of generated power to third parties not involved in the power sales transaction. RPS standards that allow the purchase of RECs are big stimuli to what is called sometimes “Green Power Marketing”, i.e. the selling of RECs. These tradable certificates are the closest thing to a “free” market in renewable energy; notably they are a derivative of the energy itself, traded on an auxiliary market rather than a payment for energy delivered.
Feed-in Tariffs: A New Energy Contract?
With the exception of carbon pricing, in the US system some combination of the above are currently operative, yet there is growing interest in feed-in tariffs, a system that operates on different principles than each of the above. The reason for this interest is that for most concerned policy makers and renewable energy activists who take the threat of global warming seriously, transition to a Renewable Electron Economy is not happening fast enough. Many states are lagging in achieving RPS goals. The general agreement that a move to renewable energy is advisable has not been backed up with policies that enable effective action. Because of rapid rates of installation of renewable generators, people are looking to the example of Germany and Spain, where feed in tariffs have been most successfully established. Germany more than doubled the amount of renewably generated electricity on its grid from 2000 to 2007 (6% to 14%) while Spain has moved up to become the number two producer of wind electricity and is leading the fast growing solar thermal electric industry.
Feed-in tariffs represent a “New Energy Contract” in that they are a social agreement that re-prices energy to allow a transition to a higher proportion of renewables in the electric system. Feed-in tariffs are performance-based incentives that pay premium per kilowatt-hour rates to renewable generators to compensate them for early adoption of new cleaner technologies. Feed-in tariffs in their most successful forms are priced to reflect the cost of generation plus a reasonable profit. The point is to help jump-start the renewable energy industry by rapidly creating economies of scale in the manufacture of technologies like solar panels, wind turbines, solar thermal collectors or geothermal exploration and well-drilling. Furthermore the stable return on investment for generators reduces the finance costs for projects, which ordinarily are very high for new riskier ventures. FITs are a form of open 10 to 20 year power purchase agreement for qualified generators in distinct categories. Grid access and payment are guaranteed for generators that meet whatever the qualifying criteria that are set in the feed in tariff law. The costs of the feed-in tariffs are borne by all ratepayers in proportion to their electricity use and in Germany currently account for 3% of electricity expenditures by consumers. A rate-pooling mechanism across the widest possible rate-base is desirable to spread the costs among the beneficiaries as we all benefit from increased use of renewable generation.
As an example of a FIT menu of tariffs, in Germany the 2009 onshore wind tariff is 8 eurocents/kWh, offshore wind 14 eurocents, large solar PV farm 35 eurocents, small roof-mounted PV 45 eurocents, hydroelectric 4 to 7.5 eurocents depending on size, biomass 8 to 10 eurocents with a 2 eurocent bonus for innovativeness or district heating, geothermal ranging from 7 to 15 eurocents depending on size. Tariffs can vary depending on the strength of the renewable resource as well as on the size of the generator itself. A full menu of feed-in tariffs can extend one or two pages at most, detailing distinct classes of generator by size or location.
One difference between feed-in tariffs and other policy instruments is that feed-in tariffs can operate almost entirely as a standalone policy alternative, depending on a few social institutions for their effective growth. Feed-in tariffs benefit from a financial system that recognizes feed-in tariffs, is prepared to offer low interest loans based on the security of the tariff, and also allows mutual fund-style joint investment in renewable generators, allowing small and large investors to participate. Unlike tax based systems in the US, the funding for feed in tariffs runs largely through the private economy; emphasis is placed on the bankability of a project under the tariff system. Funding for a solar installation on a home or apartment building can become as simple as getting a car loan, while funding a large renewable installation will after financial due diligence enjoy the interest rates usually accorded the lowest risk business loans. Feed-in tariffs are successful because when priced right they are a strong incentive and design the electricity market to prioritize increasing the proportion of renewable generators. They also incentivize the project builders and owners themselves, those who make the decisions to site and buy renewable generation technologies. Yet they also put pressure on plant developers to efficiently design, situate and maintain their generators as payment is contingent upon producing electricity.
Historically feed-in tariffs of any sort were actually first formulated in the United States in 1978 with PURPA which required utilities to buy energy from renewable generators at the “avoided cost” of fossil generators. PURPA was implemented differently state by state and had a mixed history of success in helping the US renewable energy grow. PURPA also was criticized by some as expensive in an era of low natural gas prices as well as lack of acknowledgement of the cost/benefit ratio of renewable generators. In California, the first generations of wind turbines and some early solar installations have their roots in California’s implementation of PURPA.
German legislators from Left and Right in the 1990’s arrived upon feed-in tariffs as a way to promote local and regionally produced green energy and protect it from lowball pricing by the German utility industry. A product of the collaboration between the very conservative CSU and the Greens, the original tariff was a guaranteed per kilowatt hour wholesale price to small hydroelectric plants, wind generators and solar installations. In the year 2000, the pricing formula of cost plus a reasonable profit was instituted in the first German Renewable Energy Law (EEG) to further promote the development of economies of scale in a wider range renewable technologies. The new law introduced the concept of “degression” which means that future manufacturing efficiencies are forced by reductions in the per/kWh cost each successive “class year” of generators. The German law is considered an unqualified success for the German renewable energy industry that now employs approximately 210,000 people in a country of 82 million people. In a country without the traditional large hydroelectric resources of its more mountainous neighbors in the EU, Germany now generates 14% of its electricity from renewable sources with the goal to reach 25-30% by the year 2020.
Some critics of feed-in tariffs claim that they are not competitive or market-based but analysts of these tariffs point out that they are just different market design mechanisms than other renewable promotion mechanisms. Feed-in tariffs shift competition from between merchant generators or project builders to competition within each technology type between technology companies. The lowest cost/highest return technology will get more business as projects built with that technology will be able to make more money.
The nomenclature “feed-in tariffs” is considered to be not very descriptive nor euphonious, so people have suggested a number of alternatives. A leading US feed-in tariff advocate and consultant, Paul Gipe prefers “advanced renewable tariffs” which distinguishes older “feed-in” arrangements to the grid from the second generation of tariffs. U.S. Representative Jay Inslee has called them “Clean Energy Buy Back” in his recently introduced national legislation.
Both Germany and Spain have had a great deal of success with feed in tariffs but actually implement them differently. Germany have fixed tariffs that are determined using the formula average project cost plus reasonable profit and a fixed reduction of the tariffs for each generation of generators to pressure the industry to become more efficient. The Spanish have added to this a market option that can allow generators to make more or less money than a fixed tariff depending on the momentary demand for electricity and therefore its market price.
In many countries now with partially or completely deregulated electricity systems, wholesale electricity generation prices are determined either in anticipation of or by the minute-by-minute balance of supply and demand. There are also markets for additional services that help stabilize the grid. In Spain renewable generators are being encouraged to participate in these markets by being able to opt into these markets while still enjoying some bonus for their clean, renewable attributes.
In the Spanish system then, every year generators can choose whether they want to be compensated with a constant, German style tariff or operate by what they call the premium tariff system. In the premium tariff system, a generator can be compensated either a little less than or somewhat more than the fixed tariff for their technology depending on the market price of electricity at the time of generation. In the case of concentrating solar power or solar thermal electric, in Spain a generator can chose to be compensated at a fixed rate of 27 eurocents per kWh or be compensated somewhere at a rate between 25 and 31 eurocents depending on the market price of electricity at the time of generation. The latter scheme is more remunerative for a solar technology and may also incentivize the use of thermal energy storage to take advantage of late afternoon and evening peak demand. Most generators in Spain opt for the market option as it generally pays off. The Spanish system also allows the tariffs in existing agreements to be adjusted by as much as 2% a year to reflect inflation or changes in cost. Furthermore, in Spain, generators over a certain size are required to forecast their output to grid operators or be penalized.
The Spanish premium tariff system is then designed through successive generations of installations to gradually bring renewable generators into a wholesale electricity market where time of use and other services to the grid and electricity consumers will become the basis for payments in the future once cost parity between conventional and renewable generators has been reached.
Pre-conditions for a Successful Feed in Tariff System
If feed-in tariffs are the most successful system for accelerating renewable energy deployment, what conditions need to be present for these policy instruments to actually work?
1. Social acceptance and enthusiasm needs to be widespread for transitioning from fossil to renewable sources of energy, allowing marginal increases in electricity cost in exchange for cleaner energy. Some social and political patience will be essential in meeting inevitable challenges and adjustments required to work out the nuances of any new program.
2. The tariffs should be set at a price that compensates plant builders for their costs plus a reasonable profit
3. The tariffs need to be guaranteed for a period of time (10 to 20 year contracts) that assures return on investment and the law itself should be in effect for as much as a decade or longer to create a more stable investment climate for renewables. If some technologies no longer require this protection they can be phased out of the coverage of the tariff sooner than other technologies.
4. A tariff law that encompasses a wide variety of technologies helps balance the strengths and weaknesses of each generating technology. Including residential, community and wholesale generation technologies will help push renewable energy development on all fronts.
5. Tariffs should “degress”, go down in price, with each successive class-year of generators to encourage early action and increases in industry efficiency. A feed-in tariff system will become obsolete when costs are brought down and prices for fossil fueled generation inevitably rise.
6. A pooling mechanism for sharing costs of the tariffs should be instituted and spread across as wide rate base as possible. Within that rate base, costs need to be shared equitably.
7. Resolving physical or social barriers to energy development such as transmission or assessment of environmental impacts should be standardized, transparently negotiated with all stakeholders, and compressed in time given the urgency of increasing the proportion of renewably generated electricity in the generation mix.
8. Energy investment should be open to and remunerative for all types of investor through both cooperative and large corporate investment vehicles. In deregulated markets, barriers to utilities investing in generation directly need to be amended to allow utilities to profit from feed-in tariffs alongside other investors.
9. A financial system that recognizes the value of the tariff’s purchase agreement and loans money accordingly is key; sometimes public lending institutions can pioneer lending for early projects to demonstrate the viability of the system to private-sector banks.
If the above conditions are present or can be created, success with a feed-in tariff system is highly probable. If the groundswell in the US continues apace we may very well see successful feed-in laws on a local or national level within the next few years.
The Renewable Electron Economy XIII: Valuing Energy and Energy Services February 19, 2008Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Marketing, Renewable Energy, Sustainable Thinking.
Tags: Energy Economics, Energy Efficiency, Energy Policy, Feed In Tariffs, Green Power Marketing, Renewable Energy
The events of December when the US Congress dropped an extension of the existing tax credits for renewable energy from the 2007 energy bill have highlighted the need for the renewable energy industry to take a different tack in the area of policy support and marketing strategy. The importance of support for renewable energy is key, as tax breaks have stimulated investment in wind, solar, and geothermal energy in the years that they have been in force, yet there is a dramatic fall-off in new project starts when the tax credits have elapsed in 2000, 2002, and 2004. The current tax credits may be revived but their spotty, on-again, off-again history points to a fundamental problem of a lack of consistent, dependable support for renewable energy in the US. The tax credits were fairly easy to cut because they are a relatively indirect subsidy, though the oil and gas industry with a much stronger lobby also have benefited from indirect (and direct) subsidies. The more indirect the subsidy, the more difficult it is to build public support for re-instating that subsidy and the more dependent on the informal power of lobbying. In the instance of the 2007 energy bill, the oil and gas companies won one more round, even though these large energy conglomerates have started to develop side-lines in renewable energy.
The “Cheap Energy Contract”, the society-wide social and political contract that is still in effect in the US and Canada, makes both overt and hidden subsidy a necessity. In the age when oil and natural gas was “easy” and geopolitical strains had not yet emerged around Middle Eastern oil reserves, subsidy to oil and gas companies may have been welcome to those companies but probably not necessary. Now, with skyrocketing global demand for energy, oil and gas subsidies reduce risk for Big Oil, allowing for record profits to continue to roll in while oil prices remain high but still not yet at politically unacceptable levels. Soon the guarantee of cheap energy may no longer be able to be sustained with oil and gas, if market forces push the price of these resources still higher. The Iraq war can be taken partially or in its entire financial and human cost as a failed attempt at an oil subsidy, as it is unlikely that the war would have been started if Iraq did not sit on top of some of the largest oil deposits.
Those who insist on a “free” totally unregulated and unsubsidized market in energy believe, but have never demonstrated, that energy would be less expensive without government intervention or aid. Of course, some government subsidies go directly to a private company’s bottom line but a) our economy is based largely on the profit motive so this would apply as well to the oil industry and b) the services or funds that government provides would cost these private firms a lot more on the private market and therefore would lead to still higher oil prices. The low price of fossil energy subsidizes our most important commodities including food; the recent hike in food prices is partly attributable to rises in energy costs. Presidents Bush and Reagan never seem to have allowed their championing of unregulated markets to interfere with oil subsidies.
Energy and Human Use
Fundamentally, for human beings, there are two types of energy: energy that people can eat and energy that people don’t or can’t eat. Analysts of the social aspects of energy distinguish between exosomatic and endosomatic energy: endosomatic energy is what people can eat while exosomatic energy is the energy that is used outside the human body, either by work animals or machines to achieve some desired end. (“Somatic” = relating to the human body; “endo”= inside; “exo”=outside).
We use the word “energy use” in modern societies to refer to exosomatic energy use. There is a pretty tight correlation between the level of economic development and the amount of exosomatic energy used: for instance, the richest country in the Western Hemisphere, the U.S., uses about 30 times more energy per capita than Haiti, the poorest country. While there are satiation mechanisms for endosomatic energy which most of us have from birth (we stop eating when we are full), we have no internal limit with regard to the use of exosomatic energy. This lack of an internal limit on the use of exosomatic energy has not become a major issue for us until we came to recognize in the last couple decades the relationship of fossil energy use with climate change.
As mentioned in the post in this series on the electric farm, exosomatic energy use enables a geometric increase in the power to do work that individuals can exert. In agriculture, the use of fossil-fueled tractors and harvesters, enables a single farm worker to support 40-50 people in the US with food when at most a single worker in agriculture might be able to feed just a few people on his or her muscle power alone. A driver of a massive off-road diesel dump truck like those used in mining can carry more ore in a day than perhaps a few thousand people could. The electronic tools of the Internet, fueled by numerous power plants, allow an individual to communicate simultaneously with thousands or even millions of others within a few minutes. As Tad Patzek has observed, excess exosomatic energy can turn any of us into an everyday superhero, which is for many of us, an attractive prospect.
The Low Valuation of Energy
If (exosomatic) energy, in combination with technologies that can convert that energy to useful work, turns us into superheroes, wouldn’t this be a highly valued product?
As it turns out, not so much, as being a “superhero” is part of the expectation of our working and home lives in developed countries. Furthermore it is usually the energy conversion technology that gets all the glory, the car, the train, the mobile phone, rather than the energy resource itself. Energy use is not the focus of the activities we do: we don’t say “oh goody! I’m using a whole bunch of energy now!” Something like 80% of exosomatic energy in the societies of the world comes from fossil sources. Cheap fossil energy subsidizes all other activities in advanced societies. We expect to be able to travel at many times walking speed and to do lots of work with little effort on our part. Furthermore, most crucially, the price and availability of the endosomatic energy that we need, food, is highly dependent on energy; so of necessity all non-agricultural economic activity is dependent on the low cost of energy.
Energy then is part of the “frame” of economic activity and even more than that the “frame” of the frame of economic activity (enables plentiful, affordable, and varied endosomatic food energy which frames all economic activity). Just as we don’t pay much attention to the frame of a picture, most of us don’t pay much attention to energy. As an example, at this moment I am not paying attention to the electricity being consumed by my computer but instead focusing on the words I am writing. I am also not hesitating to go back and revise or rewrite something (I don’t blog in stream of consciousness…sorry) for fear of using more energy, the attitude of most computer users. In contrast to electricity, petroleum prices in the US are now at levels where obliviousness to the cost of energy is no longer as common as it once was.
High Per Capita Energy Use and Social Inequality
One of the byproducts of the North American way of using and valuing energy is that the lifestyles of a majority of the population are highly dependent on cheap energy. People can live in larger houses with larger yards if they are able to travel longer distances for less money; they can also afford to heat and cool them using the relatively inefficient devices and methods in our current building stock. Long commutes are a burden of those residents of high cost urban areas with moderate means who wish to own homes. Rural life in widely dispersed farms and farm towns is viable and bearable because of very high levels of petroleum use and the readiness to travel hundreds of miles on a regular basis. In addition to work, what many of us do for fun and leisure often is highly dependent upon petroleum or cheap electricity (monster trucks, airplane flights, power boats, game consoles, computers, plasma TVs). Partial exceptions to this style of life can be found in the highly concentrated urban areas of the Eastern Seaboard, though immediately adjacent are suburban areas where high per capita energy use is typical. Furthermore cultural and real estate trends are now placing a higher value upon urban living, pushing the middle classes and poor out of the most vital urban areas to the suburban and exurban periphery, and more dependence upon cheap energy.
It is no wonder that energy pricing is politically sensitive though most policymakers favor moves that attempt to minimize energy costs over the short term rather than provide long-term solutions.
The Ethical Valuation of Energy post Carbon
In contrast to the low economic valuation of energy, the discovery of the negative externalities associated with fossil fuel use, i.e. carbon emissions and warming, have led to energy use becoming one of the key political and ethical issues of this new century. Now the avoidance of using fossil energy and the installation of renewable energy generators has developed a high moral valuation. Crudely stated, there is now “good” and “bad” energy use. While this valuation is subjective, it is very widely held and has inspired numerous pricing mechanisms that either tax fossil fuel use or increase the revenue accorded clean energy as a way to promote the expansion of renewables. Carbon trading markets have arisen as a means of instantiating and, with legal backing, enforcing this moral valuation in the arena of economic exchange.
The newness of the higher valuation of energy use, in the negative, has not yet led to cultural attitudes in the West that show a positive respect for energy use. We do not yet treat gasoline or electricity as precious, nor have we developed the analogue of cultural rituals that show respect for material and natural bounty that one finds in less industrialized cultures or in our own religious observances before eating food.
The Culture of Energy Efficiency and Energy Conservation
We have found at least a partial substitute for cultural rituals that re-value energy or high energy prices in the movement towards greater energy efficiency and energy conservation that has grown in fits and starts since the 1973 Oil Crisis. In the United States, California has been the standard bearer, with state policies since the late 1970’s that at least in the electricity and natural gas sectors have made energy efficiency a requirement and a revenue center for utilities.
While energy remains somewhat cheap, energy efficiency has again become a virtue as well as a way to save money as concern about global warming grows and carbon pricing is anticipated. Cultures with higher energy costs have already built some degree of energy efficiency into their building and transport systems, but the moral valuation of energy efficiency may lead to more aggressive, pre-emptive moves to cut energy costs.
Analysts usually distinguish energy efficiency that involves installing devices that do the same work using less energy, and energy conservation, which means altering end use activities to save energy. For a time, in the 1980’s and 1990’s in areas without binding laws or high energy prices, energy conservation fell out of favor, though now cultural re-valuation in the shadow of global warming has led to an “up-valuation” of energy conservation in our cultures. Large energy users are increasingly being paid to become involved in demand response programs in the overburdened electrical system where energy use is turned down in response to system demands or automatically via pricing signals. Energy conservation is an attempt to invent something analogous to a satiation mechanism for our use of exosomatic energy.
The Sustainability Criterion
In addition to carbon emissions, in the last couple decades sustainable use of energy resources has also emerged as a value. To use energy in way that doesn’t draw from exhaustible resources or endanger the livelihood of future generations is a new and fairly rigorous criterion. Renewable energy, of course, is supposed to satisfy this criterion, while nuclear energy does not.
Energy: Commodity or Segmented Market?
Until the emergence of concern about carbon emissions and sustainability, energy has been viewed as a commodity, i.e. a good of low, uniform value affordable by most consumers. The opposite of a commodity market is a segmented market, which can contain commodity products at the low end, branded mass produced products, and customized products and one-offs, some of them handmade. The latter types of products can sometimes be “premium” products that can command larger sums for their greater quality or functionality. The uniformity of energy products has additional usefulness in that it adds value to end use devices that can be used across a broader range of situations. Electricity and crude oil have been treated as commodities though refined petroleum products allow some limited differentiation and branding. Now, there is an emerging trend towards a segmented market, as energy is being divided into “clean” and “dirty”, “sustainable” and “unsustainable” energies.
As this series focuses on electricity, the new differentiation among types of energy refers to differences between electric generators and not between energy carriers: we are still dealing with electricity of a particular voltage, frequency, etc that drives the same machinery for the end users/buyers. While historically pricing and valuation of electricity did not include consideration of sustainability or environmental impacts, we are rapidly working on ways where these impacts are put into the value equation.
If one generates electricity using a sustainable, clean method, does one then have a premium product or simply an expensive means of generating the same commodity? By avoiding negative externalities in the present (carbon emissions) and creating a sustainable technology (benefit to future generations), while generating electricity, greater social benefit is created. By creating a premium product out of this type of generation, a portion of this greater benefit can be recognized by and compensated for in a higher price.
There are currently two methods of segmenting the electricity market in favor of renewables as premium products, one focused on the retail end and the other on the wholesale end. On the retail end, Green Power Marketing is a largely voluntary system that creates a parallel market to the conventional market for electricity. Each MWh of cleanly generated electricity is issued a Renewable Energy Certificate or REC, which can be traded and sold to those who want to support or are required to support renewable power generation. Renewable Portfolio Standards for utilities create a market for RECs, as do carbon offset programs and voluntary Green Power purchases by ethically motivated individuals and organizations. REC markets and RPS policies are the renewable energy programs found in most of the United States, some European countries.
Segmenting the wholesale markets, some countries and regions have implemented feed-in tariffs that set a menu of premium wholesale rates for renewable energy generators, that allow for recovery of costs plus a reasonable profit. Feed-in tariffs are tailored to specific technologies and are meant to allow renewable technology companies to gain economies of scale by stimulating market demand for their technologies. Feed-in tariffs mix in with existing electric rates, leading to increases of a few percent a year in the total cost of electricity. Implemented most successfully in Germany and Spain, feed in tariffs have been the most decisive instruments to spur the increase of renewable electric generation as they are simple and reduce finance costs and project risk. Feed in tariff laws are now being considered in Michigan, Minnesota, and California, which already has a very limited feed in law on the books.
Future of Valuing and Pricing Energy
If we are serious about reducing greenhouse gas emissions and developing a sustainable energy system, we will need to both increase our energy efficiency by a large factor and also switch over from fossil to renewable generators at a fairly rapid pace. Placing a higher value on energy, either planfully or forced by necessity when fossil fuel prices rise, is the most likely route to building a clean energy system for ourselves and future generations. A segmentation, either at the retail or the wholesale end (or both) will help drive economic actors towards making the investments and purchasing decisions that favor cleaner, more sustainable energy over the fossil energy that is still the norm. This “New Energy Contract” is yet to be written but it will be no doubt a topic of discussion for years and decades to come.
The Renewable Electron Economy XII: The “Cheap Energy Contract”…Bedrock or Dinosaur? January 14, 2008Posted by Michael Hoexter in Energy Policy, Green Marketing, Renewable Energy, Sustainable Thinking.
Tags: cap and trade, Carbon Pricing, Coal Pricing, Energy Pricing, Feed In Tariffs, Financing Energy, Oil Subsidies, Renewable Energy
Other than functional differences between renewable and fossil fuel generators, one of the main issues related to green and renewable energy are the capital and the per unit energy costs of new, cleaner energy systems. While the prices of oil and natural gas will certainly go up, the comparison with more plentiful coal remains the most challenging. The target or acceptable price for market entry of clean energy is a subject of heated debate among people who agree that we should move to renewable energy. Clean energy debates mirror most discussions of energy in this regard, as the decisive argument for the commercial value of an energy source is in most contexts its cost per unit energy to the buyer.
At the OpenEco camp/un-conference last week in San Francisco sponsored by Sun Microsystems, activists in the area of sustainability came together to brainstorm, discuss and network around a number of issues. One of the topics that came up frequently in different contexts was the target price or acceptable cost for energy, though there were other worthy topics discussed in parallel at this generally excellent multi-focus un-conference.
Among those presenting, Ted Nordhaus and Michael Shellenberger, the authors of the new, fairly controversial book BreakThrough, covered a range of topics, one being that government and technology companies should be working together to make clean energy cheap. In other contexts, the price of energy came up again in a discussion about whether the new cap and dividend idea (distributing the proceeds of selling carbon credits as dividends to people to offset the impact of energy costs) works. In still other sessions, the issues of subsidies for energy were discussed as both a political and an economic issue.
These discussions have resonated with concerns that I have had about whether we are pricing energy correctly given our very legitimate interest in switching from polluting to non-polluting forms of energy production. Can the United States and other industrialized nations, afford a new energy infrastructure if we continue to value energy at the price levels we are used to? For a long time, particularly since WWII, we in the US have been operating under a society-wide “Cheap Energy Contract.”
What is the “Cheap Energy Contract”?
The Cheap Energy Contract is an unwritten multilateral contract between the governments, citizens, and energy companies in industrial countries, but is in particular force in the United States. What the Cheap Energy Contract says in approximation is:
1) Government, Consumers, and Energy Producers are parties to this Contract
2) Energy costs for consumers and industry must be negligible for all but the most energy-intensive industries (think aluminum or logistics).
3) Per unit energy costs must be low enough to allow temporarily doubled or tripled rates of energy use not to “bust the bank”.
4) Real or artificial energy shortages are unacceptable
5) Government is ultimately responsible for guaranteeing that energy is cheap and available; elected officials risk being voted out of office if energy prices rise substantially or energy availability is reduced either through government action or independent of government action.
6) Depending on which political ideology vis-à-vis regulation is currently dominant, government subsidy of energy may need to be hidden in indirect forms.
7) Dominant players in energy markets sacrifice some freedom to set prices for political influence and subsidies: oil companies have more pricing power though more competition than electricity retailers who are regulated by public utilities commissions.
It is surprising how durable and pervasive the Cheap Energy Contract is, even though no one has written it down, nor is there an official enforcement procedure. Though the word “entitlement” is usually used to describe official government sponsored programs, cheap energy is generally considered to be an entitlement by American consumers and American businesses.
The founders of the oil business realized that their business depended upon scaling up rapidly and defeating whale oil and other competitors in the marketplace. In addition to canny business calculation, John D. Rockefeller believed he had a mission of bringing cheap illumination via kerosene to the masses by keeping prices low and pushing competitors out of the business. Recognizing the political sensitivity of electricity’s natural monopoly, the founders of the electricity business, in particular Samuel Insull, tried to pre-empt anti-trust actions by transparently negotiating the cost of electricity with public officials and keeping it low. To reach economies of scale in both businesses required mass acceptance and therefore low prices. Maintaining the low prices and supply of these energy sources however was sometimes beyond the power of private corporations, which led to more active involvement of the US government.
The Cheap Energy Contract is one of the “third-rails” of American politics: if you touch it, you risk (political) “death”. While the price of electricity has been heavily regulated, the price of oil is more variable and also potentially more capable of inflicting economic pain on consumers. Observations of the outcomes of Presidential elections in the last 40 years indicate that one-term Presidents Ford, Carter, Bush Sr., lost their re-election bids during a time of higher oil prices. Political manipulation of oil prices to win or lose elections through direct or indirect means is one topic of conspiratorial theories that may or may not have a basis in reality.
Carbon Pricing and the Cheap Energy Contract
As both buyers and sellers of energy were happy with the Cheap Energy Contract in an era of abundant fossil fuels and government was happy that they were happy, there has historically been little opposition to the Contract. The first full-scale assault on the Cheap Energy Contract has come recently as concern over global warming has led to first environmental leaders then broader sectors of our society questioning the wisdom of using fossil fuels to power our civilization. Most concerned politicians and activists now agree that assigning some price on carbon emissions and therefore on energy consumption may slow the consumption of fossil energy and support the development of greener, largely renewable energy.
Carbon pricing therefore threatens to break the Cheap Energy Contract and this has ignited a firestorm of controversy from energy producers, energy-intensive businesses, as well as elements of government that see the maintenance of the Contract as their fundamental duty or in their own political self-interest. While most proposals currently being aired are on the side of modest or low prices for carbon ($20-$30/tonne), the institution of mechanisms for pricing carbon set up a means by which future increases might seriously boost the price of energy. Even in countries where the Kyoto protocol is in force, the effect of the cap-and-trade system has not significantly affected the price of energy due to mistakes made in administering the system in its first iteration.
While one can expect political resistance from the energy industry and mass consumers of energy, the Cheap Energy Contract has shown its durability even among those concerned about the planet’s future. Google’s recent announcement of RE<C takes as its target a price of electricity equivalent to that of depreciated coal plants or at least a price that would compete in China or India with coal. Shellenberger and Nordhaus advocate government subsidies for clean energy research and development until it is “cheap”. In this they are following the early pricing strategy of John D. Rockefeller in requiring that the new energy be as cheaper or cheaper than the old energy (though Rockefeller was always concerned that pricing would dip below his costs “drowning” his enterprise). While it is not clear that these supporters of clean energy are opposed to carbon pricing, there is clearly a different focus than those who see a carbon price as the entering wedge in pushing out fossil fuels. While it might be argued that those who seek to promote research and development into cheaper clean energy and those who seek to raise the price of dirty energy can work together, there is implicitly and explicitly a disagreement about the future of the Cheap Energy Contract and therefore what will be an acceptable price for clean energy.
Post-Carbon Pricing Rebate Systems
It is conceivable that carbon pricing can be instituted that raises energy prices for those who can afford it and compensates more economically vulnerable individuals and sectors for the increased prices at least on a national level. One such idea, cap and dividend, has been put forward by UMass Amherst’s James K. Boyce and Matthew Riddle, a plan that suggests distributing the proceeds of carbon permit auctions to the population in payments that will lessen the impact of increased energy prices especially on those who use less energy. One can imagine other systems of attempting adjustments in which exceptions can and will be made in various forms for vulnerable industries, critical sectors and the poorest. On the other hand, to make an exception of whole nations such as China in a carbon pricing system would seem to defeat a good portion of the intention of that system.
Fuel Taxes and the Cheap Energy Contract
In certain areas of the world, particularly Europe and Japan, the Cheap Energy Contract has never been in force to the degree that it has been in the United States and Canada. While the American and Canadian industrial economies grew in an environment of cheap, domestically produced energy, Europe and Japan have had to fight and bargain more for fossil energy sources, in particular oil, from the beginning. Compact settlement patterns have also enabled greater use of public transportation in Europe and Japan, so automobile use can be viewed as a luxury in those countries.
Fuel taxes while they exist in the US and Canada, have been for many years much higher in Europe and Japan leading to pump prices for the same petroleum products to be almost twice as expensive as they are in the US and Canada. Along with market factors that boost the price of energy, Japanese and European consumers and citizens have never shown the sensitivity to energy pricing that Americans have. Additionally the Europeans and Japanese have accepted taxation as an instrument to fund government services more readily than Americans have in the last 3 decades. Thus it is difficult to assert that a Cheap Energy Contract now exists in those countries, though there are clearly political and economic upper bounds to the pricing of energy set at higher levels per unit energy than in North America.
Clean Energy Incentives and the Cheap Energy Contract
While taxes function as a disincentive, many countries with aggressive goals for renewable energy have now adopted premium price controls for renewably generated electricity. Advanced feed in tariffs or premium payments for renewable energy, were introduced in Germany in 1992 and have since been adopted in other European countries, Ontario, and are under consideration in several US states. Not a tax or a source of revenue for government but a pay for performance premium, an advanced feed-in tariff for electricity sets a menu of higher prices per kWh for different renewable technologies that decrease gradually over the years to encourage innovation and efficiency. As the price of electricity is already regulated, feed-in tariffs are folded into existing regulatory structures for energy. Retail customers pay slightly more for their electricity, as the electric utility is charging them for a mixed bundle of electricity generated from conventional and renewable sources. When the pricing of these tariffs is set accordingly, investment in renewable energy becomes a solid long-term investment for individuals and energy investors, as a favorable return on investment can be projected for 20 years into the future. Though utilities may have concerns that they will be left holding the bag with regard to paying higher prices for clean energy and then not being able to pass the cost on to ratepayers, these laws allow all related increases in cost to be passed on to the consumer.
An advanced feed-in tariff arrangement is then a new Energy Contract that expresses that consumers are to pay more for clean energy to support its growth. Though this new form of agreement originated in countries where low energy prices have not been viewed as an entitlement, they may yet be applied in the US and Canada on a broader scale. Feed-in tariffs are not taxes but price controls so may be more politically palatable in the US but they are a departure from the Cheap Energy Contract. They also have the advantage of stimulating supply and demand simultaneously and therefore jobs and investment in the area of renewable energy.
Government Subsidy and Energy Pricing
Though the image of the oilman is that of a rugged individualist, the energy business is a business where some form of help from the government has become an historical norm. The recent defeat of the attempt to switch subsidies away from the fossil fuels to renewable energy in the Energy bill of 2007, lead to a net loss of support for renewable energy. Among the negative consequences that the oil industry’s lobby group the American Petroleum Institute raised was the potential for shortages of oil if subsidies did not continue.
It makes sense that as the government is on the hook for keeping energy prices low and cheap energy available, that energy subsidies would be part of the game. Furthermore, finding and protecting energy resources, in particular oil and gas fields, is a risky business that would ordinarily lead to unacceptably high fuel prices if the government did not cover many of the externalities.
While many politicians have been pursuing or holding up a “free” market, libertarian style ideal of autonomous market functioning, the reality of energy markets and the Cheap Energy Contract leads to a state of consistent energy subsidy to keep energy prices at politically acceptable levels. An open recognition of the costs of energy both those currently recognized and unaccounted-for environmental costs, might allow political debates about direct and indirect energy subsidies to be carried out in a more transparent way. Furthermore a recognition that paying those costs will ultimately come through some form of taxes or through the price of energy may allow the public to consider what kind of subsidy it prefers at this point in time.
The Cheap Energy Contract and the Built Environment
As noted above, America’s physical infrastructure in the 20th Century was designed upon the basis of the Cheap Energy Contract, something that Peak Oilers have been pointing out for some time. Urban and suburban sprawl as well as widely dispersed settlement in rural areas is based on cheap energy. Likewise, cheap energy subsidizes the long distances between production and consumption of goods as well as a particularly widely dispersed distribution network for those goods. While Peak Oilers predict the collapse of this way of life as petroleum gets scarcer, it is not clear what efficiency measures and clean and/or “alternative” energy solutions might help to ease the transition to an oil-independent way of life. When these solutions may emerge, what their political and market appeal would be, and at what price, remains to be determined.
The Cheap Energy Contract and Energy “Addiction”
The above suggests that Americans and Canadians in particular are compelled to demand cheap energy, in particular cheap transport fuels, or face the possible collapse of many sectors of the economy and population shrinkage. Uncharacteristically for a former oilman, President Bush declared that America is “Addicted to Oil” in his State of the Union address of 2 years ago. The addiction metaphor has been overused to describe a whole variety of social and psychological ills but it may very well be appropriate in relationship to cheap fossil energy. Unlike various mood-altering substances, the elements of individual choice and behavior are not as decisive as society-wide trends and decisions that can change our economy and way of life. On the other hand, the addiction metaphor might help individuals to be able to see how energy use supports their lifestyle and thus make more intelligent decisions about lifestyle based on the realization that our historical patterns of living are overdependent upon unsustainable fuels.
The Cheap Energy Contract: Pro and Con
There are intelligent people of good will on both sides of this sometimes stealth and sometimes open debate about what is an acceptable price for clean energy. It makes sense then to outline what are the factors that speak for and against accepting the energy pricing status quo and what speaks for and against breaking the Cheap Energy Contract.
Continuing with the Cheap Energy Contract
- “Guaranteed” cheap energy enables energy-dependent economic and social activity
- “Guaranteed” cheap energy maintains the current infrastructure in the US and Canada
- Cheap energy keeps energy markets accessible to most economic players, discourages formation of a segmented energy market.
- Clean cheap energy would be affordable for developing countries
- Clean cheap energy may address traditional objections to it in the current market
- Cheap energy maintains an abundant food supply and low food prices
- Cheap energy pricing encourages economies of scale, technological development in the area of cost-reduction, and/or business efficiency in the energy business
- The Cheap Energy Contract attunes government and energy producers to the economic needs of energy consumers.
- Cheap “dirty” energy does not price in environmental costs including carbon emissions
- In the case of oil, the Cheap Energy Contract will be broken or become prohibitively expensive by geophysical realities and rising worldwide demand.
- A Cheap Energy Contract encourages an attitude of entitlement among consumers and businesses as consumers.
- A Cheap Energy Contract may discourage investment in more expensive but promising clean energy sources.
- A Cheap Energy Contract may require high levels of government subsidy
- Cheap Energy Contract in combination with a lack of government transparency risks corruption or influence of government officials by energy interests in favor of subsidies.
- The Cheap Energy Contract excludes most clean sources of energy that are as of early 2008 not “cheap”
- Cheap energy does not encourage consumer energy efficiency
- Cheap energy maintains the current infrastructure in the US and Canada (which may encourage social fragmentation and discourage community)
Breaking the Cheap Energy Contract
- Opens the possibility to price in environmental externalities including greenhouse gas effects
- May reduce pollution and greenhouse gas emissions
- Will tend to encourage an attitude of responsibility in energy consumers toward energy use
- Will encourage investment in energy efficiency
- Will increase the likelihood that energy investors can recover and profit from their investment in new clean energy infrastructure
- Allows pricing for cleanly produced energy to be adjusted to more closely reflect its current 2008 costs.
- May open the discussion to whether energy production can be autonomous from government subsidy.
- May open the discussion as to which mechanism of paying for energy is most efficient: pure pricing (price controls plus market), taxation (subsidy) plus price mechanisms, etc.
- May encourage transparency in government energy policy
- Certain implementations may have negative economic effects on low-income high energy users and industrial sectors without rebate mechanisms or other allowances.
- May encourage inefficiency in energy production if pricing signals are too favorable to waste and complacency
- New clean energy technologies may remain in their first generations unaffordable for rapidly developing industrial economies like China and India
- Certain implementations of a New Energy Contract may encourage accusations of political favoritism.
- Food prices may require additional subsidy if energy input costs go up.
- Writing a New Energy Contract will require detailed data collection, hard-headed analysis even wisdom which are sometimes in short supply.
Cheap Energy Contract or New Energy Contract?
Is the future an “Expensive Energy Contract”? Probably not: Expensive energy will shut down much economic activity and is an unrealistic goal in a commodity business. Peak Oil theorists are in some senses projecting an “Expensive Energy” future in the scenarios they paint of the contraction of suburbia and a petroleum dependent economy.
Does this analysis favor the continuance of the “Cheap Energy Contract” in a carbon restricted future? If history is any guide, cheap energy may be able to be maintained with increased subsidy paid via taxes or with less subsidy, in the event of some immediate technological breakthrough or breakthroughs in the area of renewable energy. The latter events cannot be excluded from the realm of the possible and this is certainly a hope. The commitment of private and public funds to clean energy research and development is one prong of any movement towards a clean energy future. On the other hand, maintaining the Cheap Energy Contract with a revolutionary or heavily subsidized clean technology does not bring in the positive effects of higher price that encourage energy efficiency. If the “Cheap Energy Contract” does continue in force, we can all hope for and work towards greater transparency in the area of energy subsidy, so the consuming public understands what they are actually paying for the energy they consume and don’t consume.
Do we need a “New Energy Contract”? Probably. Certainly we need to bring the interests of future generations and the health of our natural environment to the negotiating table that were shut out of the original “Cheap Energy Contract”. It may be that a period of increased energy prices will help finance a transition from a carbon-dependent to a carbon-free energy system that once paid for, will allow for energy prices to once again decrease relative to the overall costs of living and doing business. A full accounting of the probable and actual costs of our current energy system and a future one will be a help in determining how we build a new energy future.