Sunday, November 24, 2013

Sustainable Economics: A Response to Post by Jo Confino, Executive Editor of The Guardian on Need for a Compelling Future Vision for Sustainability to Progress

Short Piece Written in Comments Section in Response to Post by Jo Confino, Executive Editor of the Guardian, titled: "Sustainability movement will fail unless it creates a compelling future vision

Ultimately, to survive, everything thing we do will have to be sustainable.  Everything.  Throughout history, societies have faced calamities, to which their collective response made all the difference between survival or collapse.  In most cases, societies were unable to perceive much less respond to their inherent unsustainable ways of living, such as the Mayans, Easter Island or the Anasazi.  Their societies were based on unsustainable and precarious systems of life support tied to the environment.  In some cases, challenges have been recognized and addressed, by perceptive and strong governments which was able to identify the problem and implement solutions. The Japanese in the 17th century were faced with extraordinary challenge of galloping deforestation.  The government instituted policies including using less wood for construction, putting in more efficient heating stoves, and switched to coal from wood for heating. Japan is currently about 70% forested.  In a more recent century, the world did come together to address CFC’s.  

As seen in the United States and Europe, our carbon emissions have come down over the past five years.  Some may say we have exported our carbon emissions to Asian countries.  That can account for some of the change, but it is also important to look at reduced miles being driven, higher efficiency of cars, the switch to lower carbon natural gas from coal in the United States, and the growth in renewable sources of energy in Europe and the United States.  The US and European economies are responding to higher oil prices, which has reduced the level of economic activity and reduced deleterious environmental impacts.  This provides a clue to our future and solving the problem in two respects.  First, economies of advanced countries do have a higher elasticity of oil price to demand than Asian countries.  Second, higher oil prices result in lower levels of economic activity, increased efficiency, and reduced environmental impacts.  The earth is telling us to cut back on energy, and we are.  The pace of the cut back may not be as steep a glide slope as what is sought, warranted or needed.  The implication is that we need to do something to (1) steepen the glide slope in developed economies; (2) reverse emissions growth in developing countries; and (3) address severe economic and well-being inequities around the world.

Governments will play a critical and pivotal role in turning the tide towards and accelerating the move towards a more sustainable economy.  The challenge with a capitalist system, well established in the literature and through practice, is the frequent absence of externalities, short time frame decision horizons, and boundary conditions that do not address social issues such as global inequity.  Nation states have a hard time being first, to take the lead on tackling large issues.  The move to address deforestation in the United States, for example, began with State and regional initiatives to set aside parkland in the early 20th century.   We can also see more recent examples of localization of environmental initiatives with RGGI in the Northeast, the carbon trading initiative in California, and the implementation of renewable energy standards in selected states, representing just a few of many excellent examples. 

Ultimately, realizing a sustainable economy is in the interest of business, governments and individuals.  Without sustainable resources, economic decline, which has already begun, is inevitable, and will be inexorable and painful.  Forestalling initiatives which align our policies and investments to be consistent with a move to a sustainable economy is not in our best interest.  Having a  sustainable economy is not inconsistent with our economic interests, in fact, ultimately it is 100% consistent.  This central tenant, that increased sustainability and increased economic well-being are one and the same, may perhaps be that new paradigm people are looking for.  The interests of sustainability and economics are not at cross-purposes, but are of one.  Any society, any collective peoples throughout time, who did not own and embed sustainability within their societies and cultures, did not survive.  

Where does this unified theory of sustainability and economics come from?  Two perspectives.  One, mentioned earlier, is understanding the history of societies that collapsed.  The second is through understanding the source of economic activity within our own economies, and extrapolating the future risks our economy carries without integrating concepts of sustaining the economy going forward.

The global economy has grown to an extraordinary degree over the past several hundred years, tied to the level of energy entering the economy.  The level of economic activity is explained by two things: one being the level of energetic inputs entering the economy, and the second being the level of efficiency and productivity to which those resources are put.  Energy plus Efficiency.  If we want to grow our economy, we have two choices, increase the amount of energy resources being consumed, and/or increase efficiency and productivity.  This is a very interesting finding, given that we can have a growing economy with a static level of energy resources entering the economy, as long as we improve the efficiency of resource utilization.  Second interesting finding is that if we can economically migrate our energy systems away from nonrenewable to renewable resources, while keeping energy use static and improving efficiency, we can once again have a growing economy while simultaneously reducing deleterious environmental impacts. 

The cost of energy, however, plays an important role on our level of economic activity.  Higher energy costs mean a lower level of economic activity, constrained by efficiency improvements.  If sustainable sources of energy are a lot more expensive than non-renewable, then we will see a lowering of economic activity.  The pace of the transition will be governed by the relative economics of the alternatives, and the degree of incentives required to level the economic playing field, and the pace of capital formation and its availability.  Fortunately, the economics of renewable energy are getting close to being competitive without subsidies, with costs continuing to move down over time with scale economies and continuous improvement.   So what is the process to make this happen?

(1) Build a specific vision of where we want to be and when in terms of sustainability.  For example, 80% sustainable in 40 years.  Great detail and specificity by sector, end-use, activity, etc. is highly recommended. (2) Identify specific performance metrics to track performance along the way, such as proportion of renewable energy on the grid, transportation, heating, etc. (3) Implement market incentives to encourage private capital to make investments.  Put a price on carbon, set up carbon caps with trading, keep CAFÉ going, eliminate subsidies on non-sustainable resources, reduce transition and market barriers where possible, expand RPS requirements to every state, implement stretch and zero net energy building codes in every jurisdiction in the country, implement net metering tariffs in every state, increase CHP incentives, invest in expanded public transit, etc. (4) Implement government initiatives to transition government faster than private markets. (5) Expand incentives and reduce market barriers for investments in energy efficiency and productivity.  (6) Incentivize investments in technology innovation tied to renewable energy and efficiency and productivity.

The prescriptive set of activities identified above are no surprise to anyone involved in accelerating our transition to a sustainable economy.  The effort to adopt these steps has to take place throughout society, to build a groundswell of activity that is sound and impactful, building up from the local, state and regional levels to the national and international level.  Significant progress has been made in specific sectors and in specific countries, such as Denmark with wind, German with Energiewende, and Texas with wind power.  There are many more examples, including renewable fuels and efficiency, but the pace has to increase and the efforts have to expand.        

Wednesday, November 13, 2013

Japan's Solar Feed-in Tariff (FIT) Worth An Astounding $3.15/watt!

Japan implemented a significantly generous solar feed in tariff, equivalent to $0.42/kWh for 20 years.  It is expected that this will result in every available inch of available land being deployed with solar until there is no land available.  One innovation is the newly opened 70 MW Kyocera solar plant, which covers 315 acres of land filled in a shallow area off the coast of Japan.

The present value of the solar FIT is equivalent to $3.15/watt, which exceeds the fully loaded installed system price.  Hence, we are going to see an unprecedented boom in solar deployment in Japan over the next few years.  

Below is Japan's tariff schedule for renewable energy along with several photographs of the Kyocera plant..














Monday, November 11, 2013

JAPAN STARTS UP OFFSHORE WIND FARM NEAR FUKUSHIMA

Source: Associated Press
— Nov. 11, 2013 5:27 AM EST
ONAHAMA PORT, Japan (AP) — Japan switched on the first turbine at a wind farm 20 kilometers (12 miles) off the coast of Fukushima on Monday, feeding electricity to the grid tethered to the tsunami-crippled nuclear plant onshore.
Japan Offshore Wind Farm
The wind farm near the Fukushima Dai-Ichi nuclear power plant is to eventually have a generation capacity of 1 gigawatt from 143 turbines, though its significance is not limited to the energy it will produce. Symbolically, the turbines will help restore the role of energy supplier to a region decimated by a population exodus following the multiple meltdowns triggered by the March 2011 earthquake and tsunami.
"Many people were victimized and hurt by the accident at the Fukushima Dai-Ichi nuclear power plant, so it is very meaningful to have a new source of energy — renewable energy — based here," said Kazuyoshi Akaba, a vice minister of economy, trade and industry, after the turbine was turned on.
"It is the government's mission to ensure this project is a success," he said.
The project also highlights Japan's aspirations to sell its advanced energy technology around the globe.
Trading houses such as Marubeni Corp., which is leading the consortium building the offshore wind farm, are investing aggressively in renewable energy as well as conventional sources, helped by government policies aimed at nurturing favored industries.
All of Japan's 50 viable nuclear reactors are offline for safety checks under new regulatory guidelines drawn up after the Fukushima disaster. Utility companies have applied to restart at least 14 reactors under those new guidelines, which include more stringent requirements for earthquake and tsunami protections, among other precautions.
In Japan, the push to tap more renewable sources to help offset lost power capacity, and reduce costs for imported natural gas and oil, also got a boost last year with the implementation of a higher wholesale tariff for energy generated from non-conventional sources.
Japan, whose coast is mostly ringed by deep waters, is pioneering floating wind turbine construction, required for seabed depths greater than 50 meters (165 feet). The 2 megawatt downwind floating turbine that began operation Monday was built at a dry dock near Tokyo and towed to its location off the northeastern coast. Six huge chains anchor it to the seabed 120 meters (almost 400 feet) below.
The turbine is linked to a 66 kilovolt floating power substation, the world's first according to the project operators, via an extra-high voltage undersea cable.
As the government and Tokyo Electric Power Co. struggle to clean up from the nuclear disaster and begin the decades-long task of decommissioning Fukushima Dai-Ichi, Japan's energy industry is in the midst of a transition whose outcome remains uncertain.
Most leading members of Japan's ruling Liberal Democratic Party and the powerful business lobbies such as Keidanren, and many experts, argue that wind and other renewables alone simply cannot make up for the steady and huge baseload power produced by nuclear plants.
"I favor renewables. But it would be irresponsible to create a pie-in-the-sky claim that renewables alone are the answer," said Paul Scalise, a fellow at Tokyo University and expert on Japan's energy industry. "There is no such thing as a perfect power source."
He cites figures showing wind power's average generating capacity at 2 watts per square meter versus 20 watts per square meter for solar power — and 1,000 watts per square meter for nuclear.
Eventually there could be dozens of wind turbines off Fukushima's scenic but deserted coast. The project is meant to demonstrate the feasibility of locating these towering turbines in offshore regions where the winds are more reliable and there are fewer "not in my backyard" concerns. Bigger turbines that might create noise problems onshore are not an issue so far offshore.
Yuhei Sato, the governor of Fukushima Prefecture who has lobbied hard for support following the 2011 disasters, said he expected local businesses to benefit from the wind farm. A research center is planned for Koriyama, a city further inland, and studies are underway on the impact of local fisheries from the floating turbines.
"We are moving ahead one step at a time. This wind farm is a symbol of our future," Sato said.
In theory, Japan has the potential for 1,600 gigawatts of wind power, most of it offshore. About a dozen projects are already in the works, from Kyushu in the south to Hokkaido in the north.
But wind power can be notoriously unstable: when the switch was pushed to "on" on Monday, the audience of VIP officials watched tensely as the wind turbine's blades, displayed on a video screen at a tourist center onshore, appeared becalmed. Eventually, though, the blades slowly began rotating.

Boeing to Deploy 9 MW of In-River Turbines with RER Hydro in Montreal

Boeing and RER Hydro to Provide Quebec with Clean Hydrokinetic Power
Agreement marks the 1st commercial sale of hydrokinetic turbines
Source:  Boeing Company Press Release
BECANCOUR, Quebec, Nov. 11, 2013 -- Boeing [NYSE: BA] and its partner RER Hydro of Montreal have entered into a multiyear agreement with the government of Quebec to provide 40 hydrokinetic turbines that will generate about 9 megawatts of clean, renewable power.

Once completed, the St. Lawrence River near downtown Montreal will have the world’s largest river-generated, hydrokinetic turbine farm.

"This agreement between industry and government will deliver renewable power while protecting the environment," said Boeing Defense, Space & Security President and CEO Dennis Muilenburg. "It also builds on Boeing's long-term, strategic partnership with Canada, supporting customers from aerospace and defense to clean energy, generating high-quality jobs, and making a difference in the community."

Imad Hamad, RER’s chief executive officer, added that "Because it’s not a dam, the turbines generate clean power without disrupting the river flow or the natural habitat. Numerous independent studies demonstrate that our technology has no negative impact on fish or other marine life."

This agreement is the first commercial sale of this technology. RER, which has been testing a prototype in the river for more than three years, will build the turbines in its new manufacturing plant here, thus creating the world's first river hydrokinetic manufacturing base in Quebec.

Boeing and RER signed an agreement last year giving Boeing exclusive rights to market and sell the turbines around the world. Boeing is providing program management, engineering, manufacturing, and supplier-management expertise, in addition to servicing the turbines. Boeing currently works with 40 suppliers in Quebec, contributing to the $1 billion in economic revenue Boeing generates annually across Canada.

As a leading developer of ecologically minded hydrokinetic harvesting solutions that preserve free-running rivers and their ecosystems, RER Hydro Ltd. has successfully created a cost-effective and environmentally friendly technology that requires minimum civil works and has no negative ecological impacts. The TREK (Kinetic Energy Recovery Turbine) technology is an innovative, proven solution that allows for the large-scale harnessing of the vast hydrokinetic energy available in rivers across the world.

A unit of The Boeing Company, Boeing Defense, Space & Security is one of the world's largest defense, space and security businesses specializing in innovative and capabilities-driven customer solutions, and the world's largest and most versatile manufacturer of military aircraft. Headquartered in St. Louis, Boeing Defense, Space & Security is a $33 billion business with 58,000 employees worldwide. Follow us on Twitter: @BoeingDefense.
# # #
B-roll video is available to the media through the contacts below.

Contact:       
Robert Sterling
Ventures
Boeing Defense, Space & Security
Office: +1 314-233-1816
Mobile: +1 314-681-3463
robert.sterling2@boeing.com

Miriam Djebbar
RER Hydro
Office: +1 514-685-8735 ext. 7410
Mobile: +1 514-267-4526
miriam.djebbar@rerhydro.com

Saturday, November 2, 2013

Energy Prices Have Doubled in 15 Years, Imperilling Future Economic Growth and Prosperity

There are several points to make about energy prices.  First, energy prices in the United States, based on all forms of energy at the retail level, reached their peak in 2007, at $22.79/MMBtu.  Second, by 2010, energy prices had fallen 13% below the peak, and, in 2013, are heading back up.  Prices in the chart below are expressed in inflation adjusted 2011 dollars.

A third point is that overall energy prices track petroleum prices very closely, demonstrating the enduring dominance of petroleum in our economy.  Sustained high prices for energy in our economy are impinging on overall economic activity and employment.  In 2013, energy prices are nearly twice what they were in the 1990's.

Our energy picture presents a fundamental challenge for the country's long term economic growth and prosperity.  As has been presented in earlier blog posts, overall employment in the United States is 98% explained by energy use and petroleum prices.  The great recession of 2008 caused a downdraft in employment, with a return to pre-recession levels not likely to take place until 2018.

Petroleum remains a significant force and commanding presence in our economy.  Petroleum prices appear to drive overall energy prices in the economy.  Our ability as a nation to influence petroleum prices has slipped from our grasp, with emerging countries such as India and China driving up and sustaining high levels of global oil demand.  It has also been discovered that Asian countries have a lower elasticity of demand to price compared to developed countries.  Asian countries, in other words, are more resilient to high prices than in the United States.  The implication is that we are captive to market forces acting on petroleum beyond our control.    

In addition to a loss of our ability to influence oil prices to our favor, it appears that we have also entered a new higher energy price plateau that has caused our economic fortunes to dim.  Higher energy costs have caused demand to be tempered along with a reduction in economic activity.  To sustain the economy requires reducing energy costs, increasing energy use and increasing energy efficiency and productivity.

Creating a more robust, resilient, equitable and sustainable economy can be accomplished, although it won't be without its challenges.  To have a growing economy, even at moderate growth rates, requires a combination of low cost energy, increased energy consumption, and continuous improvement in energy efficiency and productivity. To regain control over our economic future, to unshackle ourselves from the vagaries of foreign markets and their associated high demand and high price regime, requires increasing the mix of less volatile and domestic sources of energy.

Petroleum and equivalent liquid energy products constitute approximately 36% of our energy use in the United States.  This points to the great utility of petroleum and equivalent liquid fuels, which is difficult to replace or find substitutes.  Significant efforts have been expended to produce liquid fuels, including ethanol and other biomass based liquid fuels.  These efforts have been challenging due to poor energy balances and high costs.  In addition to trying to alternative liquid fuels, significant efforts are underway to increase transportation efficiency with hybrids and other technologies, and introduce alternative fuel vehicles, considering electric cars and hydrogen vehicles.  All of these technologies are expensive, may have performance challenges, and can require significant infrastructure investments.  Finding a lower cost alternative to petroleum with equal or better utility is one of the most difficult challenges facing our economic future and well being.

The boom in natural gas in the United States has been quite beneficial to the economics of electricity generation and reducing the country's carbon emissions.  The cost to produce a kilowatt-hour with natural gas in late 2013 is approximately 30% less than the cost to produce an equivalent kilowatt-hour from coal.  This is due principally to the significant increase in natural gas production due to fracking, which in 2013 accounts for approximately 28% of the natural gas supply in the United States.  The increase of natural gas supply drove prices down, with coal plants becoming uneconomic as a result.

For electricity production, the United States has shifted towards cleaner lower cost natural gas, and seen relatively significant increases in renewable energy, including wind turbines and solar power.  The economics of both wind and solar have improved dramatically over this time period as well, with wind competitive with coal and the solar becoming competitive in extremely large deployments in sunny Western states.

The addition of renewables to the German grid, for example, are wreaking havoc on standard utility economics, in new and unexpected ways.  Renewables are capital intensive and have zero fuel (marginal) costs.  In a standard utility economic model, wholesale generation prices are set by the marginal cost to produce the last kilowatt hour in each hour.  Grid operators dispatch generation resources using a system called economic dispatch, dispatching the lowest cost power plants first.  Baseload powre plants have typically been nuclear power plants and coal plants, which had the lowest marginal operating costs and basically ran most of the time.  Next up historically, covering the shoulder portion of the demand curve, would have been natural gas power plants.

Historically, heat rates and fuel costs for natural gas plants placed them at an economic disadvantage to coal plants.  With the advent of fracking, driving down natural gas costs, and continuous improvement in the efficiency and heat rates of natural gas power plants, especially combined cycle combustion turbines, gas plants are have lower marginal costs than coal plants in the United States.  As such, natural gas plants are displacing coal plants in the economic dispatch order in the United States.  For several hundred hours per year, when the highest demand occurs, grid operators typically dispatch the highest marginal cost plants, including oil and diesel power plants.

Wholesale generators are compensated for their electricity production applying the marginal rate in each hour to all electricity produced in that hour.  Based on historic patterns, this approach has been understood, and investments in generation assets have been based on this economic construct to cover plant fuel, O&M and capital costs.  This economic paradigm, in place for decades, however, is going through a radical and disruptive change, with the introduction of non-dispatchable zero marginal cost renewables, and the introduction of demand side / distributed generation resources.

In locations as diverse as Germany and Texas, with independent grids and high penetration of renewable resources, grid economics have been upended.  At times, on both grids, negative wholesale pricing was used to discourage power production.  This occurred at times when non-dispatchable renewables were operating at full blast, typically a very windy period, and demand for power on the grid was at a low point, typically at night. In addition to negative pricing, grid operators also shut renewable plants down.  The effective of negative pricing impacts both renewable and conventional power economics.

In Germany, the low marginal cost of renewable power is being applied as the basis for compensation for conventional power plants.  In addition, the operating hours of natural gas plants are being cut back with the increased generation by renewable power.  Renewable power plants are given preference on dispatch, to the chagrin of conventional power plants.  The earnings of power companies in Germany have been significantly reduced.  E.ON AG, for example, is suffering reduced earnings year over year, with a loss reported in the third quarter of 2013.  It attributes the losses to poor economic performance of natural gas resources and the priority given to renewable power.

The economic impact of renewable power is disruptive in two ways.  First, renewable power plants are allowed to operate when the wind blows and when the sun shines, given preference on operation over other resources.  This cuts into the operating hours of standard power plants, reducing their capital cost coverage ratios.  The second impact is the reduction in marginal costs applied to conventional power plants.  Renewables are shifting marginal costs downward at times which were at once higher cost regimes on the dispatch curve.  this is reducing the revenues for conventional power plants, hurting their economics.

The other area of concern to utility companies is the devolvement of customer energy demand associated with expanding distributed generation, increased efficiency and greater demand response, all of which reduce utility revenues.  The combination of solar power, fuel cells and improved efficiency reduce the revenues associated with customers that implement energy reduction initiatives.  As such, there are fewer kilowatt-hours sold, and fewer kilowatt-hours to spread fixed costs of operating utilities.  As a result, utilities have to increase the rates they charge for electricity, to compensate for fewer electrons being sold.  The customers that have taken advantage of solar and efficiency incentives, increasing electric rates have less of an impact than those customers that have not improved their efficiency or reduced their load through distributed generation.

As rates go up, and efficiency and distributed generation costs go down, incentives to switch away from the utility increase, and more and more customers will further reduce their electricity purchases from monopoly utilities.  In many parts of the United States, utility companies have already had to abandon their generation business, focusing on transmission and distribution.  Many utilities are investor owned utilities, with their capital sourced through public capital markets.  As their revenue models are called into question, and electric revenues are flat or declining, utilities may hit tipping points, where regulators won't support ever increasing electric rates applied to dissipating electric sales.  At that point, investors may run for the exists, destroying the IOU utility compact put in place nearly a century ago.  This is getting interesting.