The Economic Wisdom of Clean Energy

Clean energy offers the best chance we have in this country to take back our future, to create jobs, improve our economy, while enhancing our national security and permanently improving our environment.  The role of government is primarily to secure the national defense, to uniquely act in the collective national interest.  Similarly, the federal government plays a role in numerous other situations where the individual rights need to be protected, or standards of well being need to be upheld, such as economic well being or health.  In times of collective economic woe, the government has a responsibility to do what it can to protect the national well being.  This is one of those times and clean energy is the best vehicles to sustain and enhance our collective well being.

Each dollar invested in clean energy creates jobs, stabilizes and reduces our energy costs, increases productivity, reduces our foreign dependance on energy, creates exportable products and services, enhances our balance of trade, and significantly improves our environment.  The key differentiation with clean energy investments is the significant economic leverage achieved compared to any other investment, known in economic circles as velocity.  In aggregate, any dollar invested by the government usually has one dollar less of velocity as compared to a similar investment by the private sector.  Government begins in a disadvantaged position, caused by the tax effect on money.  Any investment on the part of government, therefore, must really bring unique advantage and not be duplicated in the private sector.  Clean energy fits that paradigm.

This country's clean energy strategy will focus on solutions that are economic, have a large impact, create jobs, increase productivity, improve our balance of trade, and enhance our environment.  The core elements of the three step clean energy strategy include:

1. Electricity - Accelerate proportion of economic renewable electricity, with a principal focus on enabling wind power.
2. Transportation - Accelerate the domestic development of very high mileage plug-in hybrids. 
3. Buildings - Accelerate the adoption of high efficiency end-use central systems, appliances and end-uses, including combined heat and power systems and geothermal heat pumps. 

The first role of government is to reduce the barriers to adoption, by eliminating regulation which discourages or hampers the development of these clean energy sources.  The second role of government is to encourage regulation that enables the development, deployment and adoption of these resources.  This would include tax breaks for developing and deploying these sources of energy.  The third step for government would be to provide financial incentives that directly reduce initial costs, such as tax incentives, rebates and grants.  It is important that the government share of these expenditures be kept low, so as to ensure only the most economic projects are built and that private capital is put to work, leveraging fundamentally scarce public resources. 

The Significant and Understated Benefits of Energy Price Reductions to the US Economy

As the world economy appears to be lurching towards a recession, the energy economy is experiencing its own share of disruptive and confusing dynamics, with significant changes in prices and demand.  Since the middle of July, commodity prices began falling from their peaks, with baskets of commodities down approximately 50% from July, 2008, through October, 2008 based on a review of information provided by Bloomberg.  Similarly, oil prices also peaked in July, 2008, hitting $137 per barrel on a global basis.   Since that time, oil prices have fallen to close to $60 per barrel on the New York Mercantile Exchange futures market.  

The drop in oil prices has a number of important effects around the world.  Notably, here in the United Sates, consumers have seen retail prices for heating oil and gasoline drop as well, relieving the upward pressure on consumer finances that higher energy prices caused.  According the the Energy Information Agency, retail gasoline prices peaked in July at around $4.10 per gallon, and has since fallen to around $2.80 per gallon.  With each automobile owner driving 12,000 miles per year, and average automobile efficiency around 23 miles per gallon, this price reduction is putting an additional $650 in each driver's pocket, and approximately $1,240 per household.  This reduction also applies to heating oil savings for consumers, further relieving consumer burdens.

For the nation's economy, this reduction in prices helps reduce the country's balance of trade due to oil.  On an annual basis, at the July level of pricing, the annual outflow of expenditures on foreign oil was close to $650 billion per year.  At the October level of pricing, the annual out flow is estimated to $285 billion, a savings of $365 billion.  This benefits our countries balance of trade, which helps the value of the dollar, and reduces upward pressures on interest rates.  

For OPEC countries these significant downward adjustment in pricing has significant impacts.  First, revenues are reduced significantly.  For many OPEC countries, oil revenues are the life blood of their country, with national budgets set with assumptions about future pricing and production levels.  As prices go down, OPEC countries are under significant pressure to maintain revenues, by keeping prices and production up.   

These economic benefits associated with energy price reductions are beneficial to the United States economy, and will soften the economic blow that we are receiving associated with the economic meltdown, adding an additional $1 billion per day of spending power to the people of the United States.  

  

The United States: The Saudi Arabia of Wind

Introduction

The United States has the opportunity to meet all of its growing demand for electricity with wind power.  Wind is an economic clean energy source with significant scale, as well as being domestically produced.  It is an important part of our new energy strategy to strengthen our economy, reduce carbon emissions, and enhance our balance of trade, comprised of four fundamental strategies:  (1) Accelerated Renewable Electricity - principally wind as well as biomass and solar; (2) Super Efficient Transportation with plug hyper-hybrids; (3) hyper efficient end-use technologies - focusing on very high efficiency combined heat and power and geothermal heat pumps, along with efficient lighting and appliances; and (4) hyper efficient buildings embracing envelope, controls and systems.  This article focuses on wind.

United States - The Saudi Arabia of Wind

The wind resource in the United States is known as the Saudi Arabia of Wind.  In 2001, Lester Brown of the World Watch Institute referred to the U. S. wind resource as the Saudi Arabia of wind power, identifying three states that could meet 100% of the U.S. electrical requirements:  North Dakota, Kansas and Texas.  Lester Brown was writing an article in response to the Bush energy plan of that time, with limited wind.  He considered it a plan for the early twentieth century instead of the twenty-first century because of its emphasis on coal, and diminishment of wind as a resource.  

More recently, there are two prominent players on the national stage that are referring to the Saudi Arabia of Wind, namely T. Boone Pickens and the former governor of Maine, Angus King. The Pickens Plan is promoting a significant wind development project, amounting to  4 gigawatt wind project, five times larger than any other project.  He is developing is project in the Texas Panhandle.  Angus King uses the term as well, referring to the Gulf of Maine as the Saudi Arabia of Wind.  He is developing a project that is a 5 giga watt project off the coast of Maine.  

According to the American Wind Energy Association, the achievable wind resource in the United States is equivalent to twice what we need, with wind able to provide 10.7 trillion kWhs per year, leveraging just the available resources on land.  Most of this resource would be realized in just twenty states.   Simply put, we have an extraordinary amount of available wind resources to drive our economy forward, creating jobs, clean energy and reducing foreign dependancy for our resources.  

Wind Power Economics

Wind is frequently referred to as being competitive with coal power plants.  There are many factors which come into play, which determine the resulting economics of wind power installations.  These factors include site specific influences, specific wind turbine design and size, as well as state and federal incentives.     

Wind Resource - One of the most critical factors impacting the economics of a specific wind development is the location relative to the wind profile.  Wind profiles are categorized by the quality of the wind, represented by seven classes that correlate to Wind Power Density (watts/meter squared).  It is critical that any wind project seek to maximize the potential energy yield based on the wind profile of each  specific location. 

When characterizing the wind resource, the amount of energy in the wind increases with the square of its speed, such that average wind speed is not an adequate measure of the energy potential in the wind.  Also, the wind speed at which the wind turbine cuts in and cuts out is a critical factor in determining how much of the wind resource is realizable.

Wind Turbine - The choice of wind turbine is important in two principal regards - the size of the turbine and its power curve, i.e., rated output at different wind speeds.  In the past ten years, the average size of wind turbines installed in the United States has doubled, from just over 700 kW in 1997 to 1.6 MW in 2006.  These larger wind turbines are more efficient per unit of energy generated per dollar invested due to scale economies, more efficient designs, lower cut in speeds, and lower manufacturing costs.  In the past two years, however, turbine costs have increased along with increased global demand for wind turbines and increasing commodity materials' costs.         

Production Tax Credit - The economics of wind projects are enhanced by the variety of financial incentives provided at state, regional and federal levels.  One of the important economic contributors in the United States is the Renewable Electricity Production Tax Credit.  The PTC provides tax credits on a per kWh basis for specific renewable electricity sources.  The credit for wind is 2 cents per kWh.  

Renewable Portfolio Standards - Currently, 24 states and the District of Columbia have instituted renewable portfolio standards that require electricity generators to provide a specific percentage of their energy in the form of renewable energy.  These 24 states and the District of Columbia represent approximately 50% of all of the electricity consumed in the United States.  RPS requires electricity suppliers to sell an increasing percentage of renewable electricity, which they can satisfy either by producing or purchasing qualifying renewable electricity, purchasing renewable energy credits, or by paying penalties.  In Massachusetts, for example, retail electricity suppliers must provide a minimum of 4% of their retail kWh sales from renewable sources in 2009.  The required percentage is increasing by 1 percentage point each year without end.  RPS standards result in increasing the demand for renewable energy resources, creating a higher market price for wind power.

Renewable Energy Credits, Renewable Energy Certificates, Green Tags and Carbon Offsets - Global warming concerns have resulted in a range of voluntary and compliance initiatives to decarbonize our energy resources and economic activities around the world.  For wind power developers, the opportunity exists to monetize the environmental attributes associated with electricity production.  These environmental attributes can either be retired or applied to meet social or obligatory environmental objectives.  For example, compliance RECs in Connecticut are about $25/MMWh for Tier 1 renewables, and $45/MWh in Massachusetts.  Solar RECs in New Jersey are about $265/MWh, while RECs in Texas are selling for about $5.25, with pricing reported for July, 2008 as reported by Evolution Markets.  Voluntary REC markets are pricing wind from $3 to $9/MWh in regional and National markets (source: Evolution Markets).

Accelerated Depreciation - Wind projects also qualify for 5 year accelerated depreciation schedules.  

Land versus Water - Water based installations are typically more expensive from a capital installation cost perspective than land based installations, yet offer significant counterbalancing financial benefits.  The cost of supporting an ocean based turbine can result in an increase of about 35% to the total cost.  On the other hand, the wind resource in the ocean is typically greater and more consistent, the projects can be much larger, and can be closer to population centers, reducing transmission losses.  For example, the installed cost per kW could be $1,200/kW on land, while costing as much as $1,500/kW in the ocean.  The favorable aspects can more than outweigh the disadvantages, especially with recent advances in sea based tower designs.  

Summary

The results of these economic drivers is that an unsubsidized wind energy project today can produce electricity for about 4 cents per kWh, as compared to 5 cents per kWh  2000, and 40 cents per kWh in 1979.

Wind power installations in the United States are growing at approximately 35-40% per year, with the current installed based of wind power projects exceeds 20,000 MW, with another 9,000 currently under construction, according to the American Wind Energy Association.    

The US Department of Energy, along with AWEA and others now expect that achieving 20% electricity market penetration by 2030 is achievable, representing approximately 300,000 MW of connected load, according to the US DOE and AWEA. Based on recent trends driving wind power costs down, coupled with the identification of large scale locations favorable for development, it is very likely that we will realize an even greater level of wind power in the United States.  The effect of achieving this level of wind power development will be significant in terms of job creation, electricity price stabilization, and environmental benefits.