Trouble in Smart Grid City

It sounded like a great idea—at the time.

Let’s put together a demonstration project to showcase the new smart grid technologies and do it right.  We’ll learn a lot from this experience we can apply to the rest of our service territories and we’ll get a lot of good will from investors, regulators and customers.

Let’s Build a Smart Grid City!

Xcel Energy is a good utility, well managed and focused on improving the use of technology to make its operations more efficient and environmentally responsible.  It operates in eight states from the Rockies to Minnesota so it has many regulatory masters to satisfy.  So to get the benefits of good will out of Smart Grid City, Xcel had to do it right.

Boulder, Colorado was chosen as the site for the project in March 2008 and plans began to take shape.  Early on Xcel was worried about how much the project would cost because it already knew it faced rates increases for Comanche 3, a new coal-fired unit power generation station coming into service.

As often happens in projects that require new, untested technologies the costs can quickly rise and Xcel Energy’s initial estimates of capital investment for the Smart Grid City of about $15.3 million grew as problems were encountered with the fiber optic cable required to support the project and other costs.

Xcel had anticipated some cost increases and was worried about adding to its rate increase request.  So it asked many of the potential vendors for the project to help sponsor it by paying a participation fee up front or providing in-find equipment or services.

After all more than 50,000 customers in Boulder, a progressive and green city, would be served by the project and Xcel pitched Smart Grid city as a way for these vendors including many start-ups to showcase their technology and gain a good reference to add to their credentials.  Nonetheless, it was a hard sell and in the end, while a few players did participate most of the major players did not.

Whether participation fees are a good strategy for such projects is an open question, but in the end the amount of participation fees raised was probably not worth the aggravation and did not save Xcel Energy from paying the bills and facing the music in the form of rate increases—about $11 million from its December 2009 approved rate increase went to toward costs for Smart Grid City.

How Much is This Going to Cost?

But that’s not the end of the story.  That rate increase award brought unwanted attention from Colorado regulators wanting more information and more oversight over the costs and benefits of Smart Grid City.[1] In an action that sends a chilling message to other utilities around the country, the Colorado Public Service Commission in one stroke undid all the good will Xcel hoped to get from this project by requiring the utility to seek a Certificate of Public Convenience and Necessity for the project.  This is PSC-code for ‘we reserve the right to disallow any costs for smart grid city we find later—after you’ve spent the money—were imprudent and thus should not be chargeable to ratepayers.

For Xcel this is a set up to get hammered by the Commission as the inevitable cost and transition to that smart grid enabled environment takes place.  And it isn’t a one-time trip to the wood shed either.  Some estimates of the cost of SmartGridCity approach $100 million.

Remember, all this smart grid technology depends ultimately in the political willingness of regulators to subject customers to real-time dynamic pricing to provide them with the economic incentive to moderate their demand to control their rising utility costs.  After a hundred years, utility customers are accustomed to average pricing and stable rates.   Occasional rate increases come along but we typically get 6 to 12 months advance notice and the opportunity to intervene and complain about them—and the regulators generally cut the rate increases back from the utility’s initial request so it does not hurt as much as we thought it might.

Real time pricing is real-time pain.  And real-time pricing will not be the option it is today.  Make a mistake of turning on your A/C at the wrong time of the day and you will pay—big time.  No rate cases, no excuses.

And in the smart grid technology world one of the most talked about topics associated with dynamic pricing is “pre-pay” which will replace traditional utility bills with credit cards and card readers so that we go on line and pay in advance for our energy in whatever amounts we can afford.  Combine real-time pricing with pre-pay and utility customers are in for big changes ahead.

Guess what, customers are not going to like all the smart grid we are going to pay for—no matter how much our politicians tell us “smart grid” is working.

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[1] http://www.dailycamera.com/archivesearch/ci_14346139?IADID=Search-www.dailycamera.com-www.dailycamera.com

Unsettled Science

It appears that climate science is not as settled as Al Gore professed even as late as Copenhagen. Reports of “errors” keep piling up as researchers take a fresh look at key findings and reports emanating from the international bodies and research universities most responsible for the body of literature being used to shape the world’s environmental and economic future.

“Skeptics Up, Obama Down, Cap and Trade Dead”

That was the conclusion of an ongoing series of investigative news reports in the UK on the IPCC and other research institutions linked to the UN’s Climate Change policy analysis. [1] Just a month ago, the panel was forced to retract is report on the rapid melting of glaciers after it was found that it could not be supported by the evidence. [2]

Correction Course on Political Correctness in Progress

That scientific research has been tilted toward a favored policy outcome is neither shocking nor new.  That the rest of the science community tolerated this “junk science” so long is the real tragedy.  This kind of passionate inquisition has been going on for centuries, but rarely has so much money been spent pursuing political correctness nor the risk of economic harm from such policy prescriptions so profound.  From faster melting glaciers, to rain forest collapse to agricultural production declines in Africa, the list of dire conclusions now being shown as based upon inadequate research, suddenly unavailable data, or just unsubstantiated opinion keeps coming like a slow trickle turned into a major flow.[3]

Exposing these “research errors” is useful and timely to be sure.  We can only hope that this tilting of science for the sake of continued research funding, professional advancement and tenure, or just vanity will be exposed and the erring parties discredited.  But where was “peer review” when we needed it?

As humans, we understand human failing, and can forgive it even as we discipline those who engage in it.  But we expect more from our governments and our rising cynicism and trust in government has a far more lasting and corrosive effect when we discover we are being mislead on the science and then mislead by politicians about the policies proposed as a result of reading that ‘political’ science.

It is NOT about the Environment, Stupid!

It would be a mistake of equal or greater proportion for those who cheer this collapse of climate change research to take it as repudiation by the public of our collective interest in being good stewards of the planet. The environmental movement has succeeded in persuading us that we must all act responsibly, avoid unnecessary pollution, and decry actions that needlessly despoil the planet or cause harm.  We still expect to leave the earth a cleaner place for our children than we found—as the cliché goes.

But something is changing in our sense of environmental responsibility.

This exposure of bad behavior by climate scientists will result  in more skepticism to be sure from this experience, and a better sense of the need for balance as a consequence of the economic recession we have experienced.  We still expect environmental responsibility.  But our definition of environmental economics is changing to include more balance of the cost and consequences of proposed policies against the benefits of enacting them.

Is there a Good Outcome from this Bad Science?

This could mean some profound changes yet ahead in the US and around the world after the effects of this climate change “crisis” plays out through the next election cycle:

• Reality Therapy in Mexico City. Hopes for a COP15 “do-over” in Mexico City should be diminishing considerably.  If anything, the next UN conference in Mexico City should be a place full of confession, repentance, remedial education and soul searching about the important of academic rigor, peer review and transparency as a foundation for re-starting the debate about the real science of climate change.
• US EPA Endangerment. US EPA must quickly back off its threatened endangerment finding before it risks having its authority in the matter gutted by an outraged Congress looking for someone to hang for this climate change embarrassment.  More than Waxman-Markey has been left bleeding on the sausage making floor of Congress, the Administration now lacks the political authority to pursue the same agenda by regulatory fiat.
• The Environmental Responsibility Act. Congress should require all Federal agencies and State governments using Federal money to include in any environmental impact statement or environmental review and/or Federal rule making an analysis of the economic impact of any such proposed action and a finding, subject to judicial review, that balances such costs and benefits in the public interest.  The law should also include a “loser pays” provision in environmental litigation to assure that environmental lawsuits are not used as tactics to extract settlements or pursue political agendas.
• AB32. This California law to regulate greenhouse gas emissions is actually an income redistribution tax act designed to evade the two-thirds rule on budgets and taxes in the California Legislature.  It gives the California Air Resources Board the authority to set carbon taxes administratively on an annual basis.  The likely consequence is that such fees will be pegged to the size of the California budget deficit and, conveniently,  requires no elected official to actually vote to raise taxes.  The California Energy Commission and California Public Utilities Commission have reported to the Legislature that they believe a carbon tax of $100 per tonne would be required to implement the policy goals of AB32 and the companion 33% RPS standard.  The collapse of the climate science foundation for AB32 will expose it for what it is. Besides, with RGGI and EU carbon credit prices falling like a rock to about $2 per tonne, AB32 will not likely produce the revenue California politicians’ dream of anyway after the climate science is “settled”.

So what?

Maybe unsettled science is a good thing if it forces a balancing of the costs and benefits of major policy changes in environmental laws and other public policies.  Voters are in a surly mood over the state of the economy and their anxiety about their own financial future.  This is the kind of political climate crisis that brought us Proposition 13 in an earlier California era.  Today there is no similar ‘quick fix’ for California unless we hit “reset” by authorizing one of the ballot measures being circulated today calling for a state constitutional convention.  For Congress, the path to hope we can believe in is actually swifter the old fashioned way Americans love—“throw the bums out” in the November 2010 election.

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[1]. http://www.theglobeandmail.com/news/opinions/the-great-global-warming-collapse/article1458206/

[2] http://www.telegraph.co.uk/earth/environment/climatechange/7177230/New-errors-in-IPCC-climate-change-report.html

[3] http://www.timesonline.co.uk/tol/news/environment/article7017907.ece

Is iPad the Killer App for HAN?

Since Apple announced the release of its iPad, there has been chatter about whether this will speed the market penetration rates for home area networks (HAN) and the potential they bring for turning energy strategies on their head.  You have to admit, the iPad certainly has sex appeal, and, at first look, appears to have more than enough capability to be that user-friendly “clicker” the masses need to make HAN easy enough to, well, use!

My own view is that the home area network has the potential to transform not just the way we use energy and equipment around our homes, but how we do business with the many vendors who supply them. No, I am not talking about buying my energy services from Apple, but I did read in a recent story in Earth2Tech [1]about a patent filed by Apple for a smart home energy management system dashboard which would use household electric wiring (powerline communications) to control energy consumption of appliances and household equipment. This may mean nothing since power line communications is an old idea that never seemed to get off the ground.  But it reveals that Apple is at least thinking along the same lines as Google, Microsoft, and others about how to use its iPad, iPhone and other gadgets and gear to control the gateway to the customer.

And, after all, isn’t that really Steve Jobs’ business model?  He wants to control the environment within which the entire range of Apple hardware, applications, software and services operate to improve the user experience and build value for his brand.  Who can blame him, the hardware that Apple produces is sleek and easy to love but the money made by Apple and its growth has been propelled by the ecosystem each new ‘got to have it’ piece of gear Apple releases creates and the share of revenue from its multiple streams.

Let’s face it the home area network will not really take off based upon managing our energy use no matter how much we care about the planet.  Energy management is a big hassle today and for the foreseeable future.  Until we are dragged kicking and screaming to real-time pricing for energy we probably are just not going to bother.  But we will get home energy management—sooner than we think—as a result of the natural convergence of energy, security, information and entertainment all controlled and managed by mobile toys and apps from Apple and others.

Steve Jobs has a shot at my home energy management business with an App from the AppStore even though I would never think for a minute about signing up for Apple Power & Light.  Google also has a chance to win me over with PowerMeter but it comes with baggage in my growing anxiety about how much Google actually knows about me and how it is using that information to track, target and train me.  OK, OK maybe this is being paranoid, but there is something off putting about trusting Google that I never think twice about when doing business with Apple.

But Apple and Google do not really want to sell me energy anyway.  They want a slice of my energy spend for the privilege of using their apps to connect with, integrate and make sense of the information about my energy use and bill.

There are likely to be plenty of home energy management vendors after my business when that day arrives, but I don’t really get excited about my GE refrigerator talking to me, or my thermostat being programmed just like by Windows Updates, or Comcast letting me see my energy use on the HAN Energy Channel on my TV. But I admit I can be seduced into an App or two for my phone or that new iPad I lust over.  Or I could wait for the Microsoft version which will let me use my X-Box to play home energy management war games against my neighbors and other around the world for the Super Bowl of HAN energy efficiency—-Call to (Green) Duty!

So what?

You noticed that my discussion of home energy management never once mentioned my local utility.  Those guys are living on borrowed time, and most do not realize it.  Whoever controls the gateway to the customer will be able to define the rules of engagement and you can bet they will lead with their high value-added products and services and through in a few home energy apps along the way to keep me hooked.  Utilities may not have a chance in this asynchronous home energy warfare ahead.  There is nothing fun about kilowatt hours and therms.

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[1] http://earth2tech.com/2010/01/17/how-apple-could-jolt-the-smart-home-energy-market/

China’s Stealth American Market Share Strategy

The San Jose Mercury News reported this week about Silicon Valley’s growing fear of China’s rapid entry into the cleantech space. [1] The story is part of a series on the green future for cleantech and how the US risks falling behind unless it spends more—much more to keep pace.

My first reaction was ‘don’t these people realize how much our tax money is being used to stimulate this sector already?’ Then I started looking at how much China is committing to cleantech energy research and applications and I began to feel their pain.

Let’s face it venture capitalists in Silicon Valley have met their investment match when China gets interested in a category.  And $100 billion per year targeted for cleantech is enough to make any private equity player nervous.

My second reaction was, with that kind of money to spend why should the US spend more?   Just let the Chinese do it, after all, they have the most to gain from cleaning up their own act.

And this is what really terrifies the Silicon Valley crowd.  They saw cleantech as the next big thing and have poured millions into start-ups of every type and used their political connections to get the Government to stimulate the sector until others are green with envy.  But all of it together barely touches the mischief potential of China let alone its ability to buy virtually anything and everything it wants to dominate the sector.

Time for the Cleantech Flip

The stars and planets were lining up so perfectly with California taunting the Federal Government to do something about global warming and passing AB32 to rub their noses in it. Then Obama wins the election and cap and trade legislation is pushed through the US House of Representatives. Then one of their favorites was named Energy Secretary and Steven Chu is a true believer in cleantech.  Stimulus money lubricated the chips and networks to keep things humming despite an ugly recession.

But Copenhagen’s grand party to update the Kyoto Protocol started to lose momentum and sputtered to an un-momentous stop when China and India made clear that they were only in it for the money and had no plan to support any treaty that slowed their economic growth.  And if there is one thing the good capitalists of Silicon Valley understand it is the ruthlessness of money.

California Solar Gold Rush

Chinese money has been breathing down their necks for the last three years as China’s share of the California photovoltaic solar panel market grew from 2 percent to 46 percent of the megawatts produced according to Bloomberg New Energy Finance while the market share of American companies in California fell from 43% to 16% in the same three year period.

This meant Silicon Valley had two choices: pour more money into the cleantech space to keep pace with the Chinese or get out while they still could.  The problem is the latter is not a great option in the middle of a recession.

The California market is not a bad place to be in the solar energy business.  After all it represents about 40% of the total US market for solar energy, but the Chinese doubled their market share in the California market in just one year.

So what?

So consumers should welcome Chinese investment in both the cleantech space and in California’s solar market.  In the short-term they will put fierce pressure on domestic Silicon Valley players by importing lower cost solar PV panels even if they are the older technology.  This will produce good deals for utility solar energy buyers and for the million solar roofs California hope to have.  And Federal stimulus money and state supports will pay for a good share of it. Over the mid-term Chinese capital will acquire many of the weaker Silicon Valley start-ups and scale the business improving its performance.

But market share and a hot market for solar panels is not the primary goal China has in America.  China wants and needs access to American technology, Silicon Valley entrepreneurship, and the brainpower America’s technology hubs offer to develop the next generation of cleantech to meet China’s energy and economic needs. Solar panels are just a small part of the cleantech space but they are a wakeup call to venture capitalists that they no longer dominate the space and cleaning up on it is not going to be as easy as they once thought.

On the other hand, this is an opportunity to meet the deepest of deep pocket investors.  Now there is an investment challenge even the ‘hair on fire’ guys on Sand Hill Road ought to relish.

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[1] http://www.mercurynews.com/green-energy

Back Door Strategy for Emissions Reduction

In October 2009, President Obama ordered Federal agencies to begin a planning process for achieving the goal of reducing greenhouse gas emissions from their operations by 2020.[1] Now, those Federal agencies are submitting sustainability plans to the White House Council on Environmental Quality.

Like every good employee, each agency is sucking up to the boss promising performance that will be a ‘model for the nation’!  Whenever you hear those words, be afraid, be VERY afraid!

The White House added up the promises and reported this week that the sum of the sustainability action plans will reduce the Federal Government’s greenhouse gas emissions by a whopping 28% by 2020.  That performance would mean the equivalent of saving 646 trillion BTUs, 205 million barrels of oil or taking 17 million cars of the road for one year. The agencies said going green is expected to save a cumulative total of $8 to $11 billion in avoided energy costs.

What they did NOT tell the White House was how much it will cost to avoid spending $11 billion.

Well maybe after seeing their budgets soar from stimulus spending they can afford it, you say?  Don’t count on it!  The Government provided the roadmap for this “cure” when the White House said it intended to “leverage Federal purchasing power to promote environmentally-responsible products and technologies.”

You see this coming don’t you?

The Federal agencies plan to pay the cost of sucking up to their boss by forcing everyone else who want to slurp at the Feds trough to change their behaviors so that the Federal Agencies can look good and take credit for reducing greenhouse gas emissions which each vendor will have to pay to play.

Now the General Services Administration (GSA) must tell the White House by April 2010 what new procurement rules it will impose on vendors to achieving these GHG emissions savings.  Here are a few of the rules being considered:

• Vendors and contractors must register with a voluntary registry or organization to report their greenhouse gas emissions; (read: Big Brother now knows how bad you are!)

• Federal contractors must track their greenhouse gas inventory and the actions they plan to take to reduce their emissions; (read: Big Brother can now decide if you are doing enough!)

• New rules to afford preference to vendors for minimizing emissions in their manufacturing process; and (read: We will decide if you are naughty or nice!)

• Imposing other yet to be defined sustainable practices to reduce emissions. (read: if our boss piles on more requirements later we’ll call you!)

So what?

So the president got to issue a great press release when he signed this Executive Order last October and another one now that the Federal agencies have saluted and said yes sir, this is how much we can stick it to our vendors sir.

GSA will now revise its procurement policies by April 2010 to pile on more requirements for registration, tracking, emission reduction planning and compliance tracking to EVERY procurement the Feds make.

Vendors will then raise their bids to reflect the additional compliance costs and the Feds will pass those costs along in the form of higher base budgets and project costs.

How much would you like to bet that all of this will cost more than the $11 billion the Federal agencies say they will save from doing all this political correct work in the Federal vineyards?

But wait, I saved the best for last!

Now, whether the Waxman-Markey Cap and Trade bill is passed or not or whether COP15 failed to produce a treaty or US EPA pursues its proposed endangerment finding, the Federal Government is undertaking the slow, methodical and ruthlessly efficient process of implementing them anyway through the spending prerogatives of the Government and its ripple impact throughout the economy.

How’s that for transparency?

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[1] http://www.linkedin.com/news?viewArticle=&articleID=106029201&gid=2747&articleURL=http%3A%2F%2Fjohnhowleygreenenergy.blogspot.com%2F2010%2F01%2Fpresident-obama-orders-28-reduction-in.html&urlhash=gf5K&trk=news_discuss

Appalachia’s New Killer Energy App: Natural Gas!

Black has always been a popular color for raw materials in the Appalachians.  Coal made the region famous and supported the growth of a nation for almost 100 years.  Concerns about greenhouse gas emissions, more recently, have tarnished the image of coal and made using it politically incorrect. But technology is bringing a new ‘energy killer app’ to market from those same hills and valleys, this time it’s gaseous, cleaner and just as hard to get to as the old lumpy stuff.

Unconventional Natural Gas is Remaking America’s Energy Landscape

In 2002, the US Geological Service estimates that there may be as much as 1.9 trillion cubic feet of natural gas in the Marcellus shale. [1] More recent estimates by Penn State geologists suggest Marcellus may have as much as 500 trillion cubic feet of gas—enough to supply the entire US natural gas need for two years. [2] The Marcellus play covers eight states stretching from the NE corner of Alabama to Western New York State.  The knowledge that natural gas is there is not new, but because it exists in cracks and pockets between the shale layers of the region it was difficult to get out with traditional drilling techniques that worked in larger gas formations elsewhere.  New technologies for horizontal drilling and fracturing or cracking the rock to release the gas have been successfully applied to on-shore natural gas with outstanding results.

The Marcellus play is not the only new source of domestic natural gas from “unconventional sources”.  Others include the Barnett shale[3] in Texas and Bakken play in North Dakota to Canada and new horizontal drilling opportunities in the Rockies.   These new technologies are also opening domestic production for oil in some of the same shale and oil sands across North America.  The Bakken formation covers 25,000 square miles in the Williston Basin in North Dakota and Montana and beyond into the prairie provinces of Canada.  USGS calls Bakken the largest continuous oil accumulation it has ever assessed and it may actually be larger once the USGS analysis of the Three Forks-Sanish formation is completed to determine whether it is actually a separate oil-producing formation or a drainage basin for flows from the Bakken shale. And there are other such oil and natural gas plays being explored and produced including the Fayetteville Shale[4] in north central Arkansas and the Haynesville shale[5] in northwestern Louisiana

Gas on Gas on Gas Competition Enhances America’s Energy Security

Together this growth in unconventional sources of natural gas has singlehandedly thwarted the rise of liquefied natural gas (LNG) imports and killed off scores of proposed LNG terminals on both coasts.  Today the potential for gas from lower 48 unconventional sources even threatens the economics of a new Alaska pipeline.  Indeed new natural gas production from unconventional sources has been the biggest news and the best hope for more domestic energy production in years and is changing the American energy security landscape for the better.

Only a few years ago it seemed as if America’s domestic natural gas industry would be globalized with growing dependence on imports of liquefied natural gas (LNG) from some of the same parts of the world that send us oil.  This growth in LNG imports posed a clear and present risk to America’s energy security and the expected increase in costs from LNG threatened to push even more of our industrial production off shore.  Today, that prospect is completely undone with global competition for LNG shaping up to pit Europe and Asia against each other for LNG imports from Algeria, Russia, Australia, Indonesia and elsewhere and North America serving as a dumping ground for unsold LNG at much lower prices.

So what?

America’s greatest contribution to the energy industry is technology and the expertise to deploy it. But for too many years, America’s energy policies forced major oil and gas companies to search elsewhere for opportunities to put that technology to work.  And there were many opportunities from low hanging fruit for a while, but those opportunities for scalable plays have been dramatically diminished by the rise of national oil companies and sovereign wealth funds.  This new class of players along with OPEC have locked down some of the best opportunities but lack the technology and expertise to exploit them on their own.

Then there is politics.  Russia seeks international investment to climb out of its economic collapse after the fall of the Soviet Union and big oil rushes in to take advantage of opportunities only to have the Russians push them out once the technology proves the reserves and ramps up production.  Venezuela and Mexico allow national politics to result in dramatic declines in their national oil and gas productive capacity and virtually kill the golden goose that has fed both treasuries.  Conflicts in Iran, Iraq, Nigeria, Angola and elsewhere sideline other key global players.  Saudi Arabia keeps pumping but is experiencing declining rates of output as its basins mature.  Even the North Sea is maturing and technology there and elsewhere is more efficiently sucking the oil out of these plays.

For America, unconventional gas growth shows the way for a more secure and optimistic energy future not just in Appalachia but in the upper Midwest, in Texas and the Southeast, in the Rockies.  These technologies also shows the way not just in the immediate growth in natural gas, but in the potential for oil both onshore as well as along the continental shelf on both coasts.

The question is whether America will use this opportunity from the squeeze of big oil from many bigger international plays by national oil companies, the weaker demand in global markets, and the near-term leverage potential from proven technology to restore America’s energy balance and long term energy security by making it more attractive for oil and gas investments at home than abroad.  Doing so is good for the economy, good for our energy security, create many well paying jobs just when we need them most, and flow tax revenue into Federal and State government coffers.

What’s not to like about this?

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[1] Milici, Rober C., and others (2002). USGS Assessment of Undiscovered Oil and Gas Resources of the Appalachian Basin Province, 2002. Fact Sheet 009-03. United States Geological Survey.

[2] Engelder, Terry and Lash, Gary (2008). Unconventional Natural Gas Reservoir Could Boost U.S. Supply. Penn State.

[3] http://geology.com/research/barnett-shale-gas.shtml

[4] http://geology.com/articles/fayetteville-shale.shtml

[5] http://geology.com/articles/haynesville-shale.shtml

Turning Convergence to Strategic Advantage

As the feed-in-tariff problems of Spain and, more recently, Germany caused major ripple effects around the world for renewable energy especially solar photovoltaic technology players, the United States has become the market of choice for global players in renewable energy.  The most recent evidence of that is the outpouring of capital from China being investing in establishing market share in the space.

Why?

Because these global players see the convergence of state renewable portfolio standards, Federal stimulus money, investment tax credits and loan guarantees, and America’s insatiable appetite for technology and innovation as solution to a wide range of problems including greenhouse gas emissions reduction.  It is convergence and the welcoming of disruptive technology change that is part of the American genius for continually reinventing itself. While many nations criticize America, our culture, our economic freedom, or respect for the rule of law and opportunity quotient means that people around the world wants to be part of the action in America.

A New World Economic Order Taking Shape

Since World War II America has leveraged its capital and power to help nations and continents recover from the ravages of war, disaster, internal conflicts and other calamities as American treasure was used to rebuild and American power to defend against the Axis power, against Communism, and now Islamic extremism. We should celebrate the success of these achievements and wish our friends the very best in using them for their future economic growth and self interest.

Today, the results of those American efforts combined with the resourcefulness of Europe, Japan, Asia and elsewhere have brought us to a world where American military power is just as strong but America’s lessons in economic power has been multiplied in the faster growing economic miracles of Korea, the leverage of capitalism in China to raise up a great and proud nation, in Brazil and elsewhere.

I am not claiming American credit for these economic miracles, but let’s face it Communism and Socialism did not produce those results.  So today in the early stages of recovery from this great recession we have faced, is it time for America to think about how to point the way for the next stage of global economic growth and renewal?

Time to Emancipate the Children!

Is it time to emancipate the kids and tell them how proud we are of their accomplishments, but now it’s time to buy your own insurance, build your own house, and take responsibility for your own future.  We will help you and love you as always, but it is time for you to be independent.

This is NOT a sign of American weakness or isolation, but a symbol of strength and confidence.

Just as that idea was ruminating around in my head while reading about some of the problems in Europe, along comes an article from Rand Corp about Korea and whether the South is adequately preparing for what might happen in the North.[1] It said that South Korea has relied on American power to defend it for so long that it is failing to take the actions needed to prepare for the potential for either a North Korean attack or worse a North Korean collapse in the future.  Rand says that America is not helping Korea prepare because it is not forcing Korea to accept its adult responsibilities for its own future.

In Loco parentis!

We see that same phenomenon at work in Europe, I think.  I was reminded of that recently when the French were critical of American efforts to help Haiti as being inadequate.  Someone quipped that the French are “always there when they need us.”  It’s true isn’t it?  Europe is proud and haughty but dreadfully ineffective in making decisions, acting in its strategic best interests or projecting its potential power as a global player in the world.  It often acts like a teenager quick to anger but short on common sense.  There always seems to be time to fire off a ‘wise-ass’ text message slamming America, but never time to do their own homework!

The best evidence of that in recent years is the incredibly stupid growth in European dependence on Russian gas when they know that Russia will shut off the gas without a second’s hesitation if doing so achieves some tactical or strategic goal.  Europe dithers in admitting Turkey to the EU because of its angst over Turkey’s Muslim heritage yet many European nations having allowed Muslim immigration for years now refuse to assimilate them into the population so they can become members of the European family because they are not French-enough, German-enough.

Time to Focus on Economic Growth and Revival

America is coming out of recession and despite the rocky road to recovery ahead has great potential for growth and economic revival.  It is time for America to seize its opportunities and project its strengths to achieve that great revival.

Here are some ideas to consider:

1. Send Me Your Smart and Eager Yearning to Breathe Free! The greatest strategic risk in the world today is not the current economy, or security or terrorism it is demographics.  In Europe, Japan, China and elsewhere the population is aging and birth rates are low.  Immigration to America has produced a younger population so our aging problem is not as severe.  But our immigration problem is we are restricting access to America for the very people we most want and need—the bright, educated, smart, technology saavy H1-B dreamers and inventors of tomorrow.  Instead our lack of action has allowed America to be the safe haven of millions of poor seeking a better life.  While the latter are a source of immense talent, we also need the former better educated professionals.  Other rich and powerful countries facing a threat of population decline they cannot stop without changing demographics but their cultures prevent them from doing so.   So they seek to grow fast economically today hoping for a long, graceful decline.  The American tradition of multi-cultural assimilation of immigrants is one of our greatest accomplishments and one of our strategic advantages for the future.  Use It! The US should open the doors to immigration targeting students and well educated professionals eager for a vibrant place to expand their knowledge, take advantage of opportunities for better lives for their families and live the American dream.  If America can reinvest in its population of young, smart, talented and skilled to build a vibrant multi-cultural workforce from that melting pot it will remain the technology leader of the global economy and engine of economic growth for a long, long time.  The US should make strategic immigration reform a high priority.
2. Join in the Dance of Freedom and Self Discovery! The most pernicious and effective threat to tyrants around the world is the effective export of American culture, ideas, technology and example.  America should celebrate its way of life by sharing it with the world through open communications, unrestricted internet access and technology investments to defeat the best hackers and thought police from blocking access to the world’s ideas.  Google should be shamed into rejection of every attempt to restrict access to the world’s information by China and other countries.  And if it goes along with such shameful behavior others should challenge it by redoubling their efforts to fill the gap in access to the free flow of ideas.  America’s gift to the world is the spirit of freedom, the first amendment writ largely, and the welcoming of many voices.  Just do it!
3. Tough Love for the Emancipated Kids! I seek an America capable of projecting its ideas and its power anywhere in the world and make no apologies for that view.  It is what we do to be who we are.  For that reason I would say to South Korea that we expect you to step up and prepare to defend yourself and spend your own money doing so.  America will be there for strategic backup, for logistics, for projection of power and deterrence, but we are not going to permit you to off-load your defense responsibilities to us.  In effect, buy your own insurance!  We should tell the Europeans the same thing.  You can’t have it both ways, American defense and America to criticize as cover for your own weaknesses.  If you fear the Russians, quit buying so dang much of their natural gas!  I could rant on, but you get the point!

Looking out for America’s strategic interests

I do not want to sound like an isolationist and do not, for one moment, want to suggest that America should withdraw from the world or not face squarely the strategic challenges ahead.  I simply think we should be more deliberate and less apologetic about doing so. The recovery period ahead offers America a unique opportunity to get our act together domestically and we should do so internationally as well.  Our strategic interests are changing and so must our strategic priorities.

Will this make us more popular around the world?  Don’t bet on it!  The kids are going to be shocked that Mom & Dad are setting them free to get a job, find a place to live and buy their own insurance.  Maturity is a wonderful thing for kids—and spoiled nations. Besides, the ‘old folks’ still have a lot of life left in us and we intend to make the most of it.  If we do well enough, we might just leave a little of that good life capital behind for the kids after we’re gone!  Our kids will do fine in this tough love environment and get stronger in the process—we’re focused on assuring the best place on earth to protect the freedom and opportunity for our grandchildren.

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[1] http://www.rand.org/commentary/2010/01/21/KH.html

Climate Lawsuit Invitation

As we have often seen in many other circumstances, what cannot be won in the legislative chamber can often be found in a court of law.  So it is no surprise that the US Securities and Exchange Commission voted 3-2 at its January 26 2010 meeting to offer “interpretive guidance” on how US businesses should disclose information to shareholders and the public about the potential impacts of climate change on their business.  Apparently, advocates of various sorts had complained that business was describing these impacts on their operations differently and not consistently.

DUH!

We have not yet seen the formal written “guidance” since the SEC saw fit only to announce it ‘ex cathedra’ instead of publishing it in the Federal Register for all to see—how’s that for a good example of full disclosure?  But reports from the meeting by Bracewell and Giuliani lawyers said that the guidance was essentially that an appropriate disclosure should contain the following:

• Impacts of existing as well as pending climate-change legislation and regulation.
• Impacts of international accords and treaties on climate change or emissions.
• Actual or potential indirect consequences of climate change regulation or business trends.
• Actual and potential impacts of the physical effects of climate change.

Based upon the discussion at the meeting among the commissioners, the guidance is not intended to require disclosure of carbon footprint or actions companies are taking to reduce greenhouse gas emissions.  Apparently such a requirement would require the SEC to issue a formal notice of proposed rulemaking and then subject its proposed rules to due process.  Issuing “guidance” avoids the messy requirements of rulemaking but still provides the trial bar and environmental groups eager to sue a road map for going to court.

The commission said the guidance is not intended to modify the existing disclosure law. This is a carefully worded admission that the Commission, while trying to respond to the demands for political correctness and more pressure on companies to ‘get with the program’ on climate change still recognizes that lawful climate disclosure requires a finding of materiality by the company based upon an assessment of reasonable shareholder expectations performed on a case by case basis.

So what?

This is the worst kind of political and legal game playing, and a key reason the public is so cynical about the actions of our Government.

The consequences of meltdown at Copenhagen, the inability of Congress to pass the cap and trade bill, and the recent election losses for Democrats are sending the climate change advocates to the legal trenches. And this action by the SEC is scoring political points rather than serving the public interest.

This road map to climate litigation will follow the same strategy that has worked so well on other environmental issues—-go to court alleging  failures to disclose the “true impacts” of climate change on the company and shareholders from “pending” (not adopted) legislative proposals; international “accords” which might be agreed to by politicians (but not approved as legally binding treaties); and actual or “potential” impacts (PS: for a large fee Al Gore will be your expert witness at trial as long as he does not have to be cross-examined) about the effect of climate change.

The problem with this lawsuit strategy is the proponents want some affirmative action, and that will be much harder to achieve in court than merely using litigation to stop some action by business as EPA is beginning to find with the legal risks to a proposed endangerment finding.

The goal of reducing greenhouse gas emissions is one we should all ascribe to and it makes good business sense.  But realizing that goal requires practical, sustainable solutions not gimmicks that appear to produce change but are not really workable in competitive markets.  Driving up the cost of doing business with lawsuits or policy disputes that should be settled by the Congress or final regulations isn’t the answer for sustainable growth or sustainable environmental leadership.

Preparing for Scalable Growth

I make my living these days as a strategy advisor to technology and advisory firms eager to leverage their intellectual property for scalable growth. A strategy advisor is part priest confessor listening to the concerns and sins of the client, part heretic challenging the current business strategy or management thinking to help them see with fresh eyes, but the best service I perform for my clients is to engage them in a strategic conversation about scalable growth possibilities to get them out of the mental rut they are in and see the opportunities to grow where their clients are going— not where they are now.

The Amazing Power of “what if?”

There is something liberating and magic about giving clients permission to imagine a different future.  This is not squishy science.  A good strategy advisor will get you talking about your business, your customers’ needs, about the hot buttons and horizon issues that drive the markets.  This is the power of brainstorming and crowdsourcing rolled together.   Using scenario analysis to rehearse ideas, stress test opportunities across alternative views of the future, and assess critical infrastructure and other risks can be a powerful tools to make ‘what if’ actionable.

Turn the correction stage of the business cycle into a strategy advantage

Most of my clients are software or information services companies in the energy vertical.  They are accustomed to the energy boom and bust cycles and know that the correction side of that business cycle is often the best time to plot their strategy for growth as the inevitable recovery and build up stages unfold.  They do this because they need the lead time to build the products and services their customers tell them they will need when “things get better”.

Time is never an ally for a technology company.  The typical R&D process for new product development means that bad timing can result in going to market too soon before risks exposing your strategy to competitors giving them time to add features or functionality that better meets customer needs.  Take too long and you miss the sales window as competitors beat you to market sometimes with an inferior product.

For pure consultancies where revenue depends upon billable hours and utilization find the correction side of the energy business cycle to be ‘hell’ because they have only one recourse to right size their business—cut costs which means cutting people.  When demand recovers these firms must train new hires before they can actually do the work and many miss their growth opportunities or disappoint clients. Playing ‘what if’ is a powerful way of managing the uncertainty in the business.

The Time to go for Scalable Growth is NOW!

My advice to clients eager for scalable growth is to focus on how best to leverage their intellectual property, customer needs and relationships, and expertise to find the “sweet spots” in the market that enable them to scale organic growth through recurring revenue products, leverage their IP with applications and services to offer more complete solutions, and fill the gaps in their product or services menu by partnering, acquisition or new product development.

Recurring Revenue Products. For a pure consultancy which sells those billable hours mentioned earlier, the intellectual property of the firm goes home every night.  As the owner, you must find a way to keep it coming back the next morning jazzed about taking on your customers business problems and solving them.  It is one-time revenue and once booked, you must re-earn it again every month.

Recurring revenue business models seek to build it once, use it often and sell it many times. A classic recurring revenue product is a software license.  You build the product and support it, but revenue flows each year from the annual renewal of the license to use it.  The more licensed users the more revenue.

But what if you are a consulting or services company?  You still have IP that often goes un-monetized living as databases, as often repeated consulting services, as business processes or best practices developed over time.  Look in the in-baskets on your consultants desk and you will find a wealth of great ideas being hoarded for use on some future project.  Consulting firms all have core competencies and speciality practice area.  By focusing on standardizing the business process that makes those practices more billable, more productive and mining the shared learning from all those research products to create consistent, repeatable solution templates enables the firm to assign lower cost resources to prep or set up high value added projects for senior consultants and partners to improve profitability.

And even more important, productizing research and repeatable solutions creates an institution memory for any consulting firm and dramatically reduces the risk that any one consultant or team can walk out the door with a book of business or clients when delivering for those clients depends upon leveraging the copyrighted IP of the firm.

Recurring revenue products dramatically improve the quality of earning and thus the valuation of the business.  Like an annuity, they create a stable base of revenue to weather the ups and downs of the business cycle.  Build a product menu that works across the business cycle and you have a winning formula for scalable growth.

Repeatable Solution Applications.  If you have a software product or solution in place today, there is another opportunity for scalable organic growth from looking at the patterns of how your customers are using your product.  See a repeating pattern then look for the opportunity to build a repeatable solution to make using your product faster, easier and more convenient for your client.

‘Yes, there’s an app for that’!

Apple is the most famous but certainly not the first to use apps as a way of scalable growth in revenue, and anyone with an iPhone will immediately appreciate the power of the repeatable solution business model.  So look for those opportunities in your business and exploit them with the same ruthless efficiency Steve Jobs is doing today.

Apps do one more thing that is extremely powerful for your business.  They make your products sticky and irresistible to customers.  Faster, easier to use, consistent, transparent, cheaper than homemade—what’s not to like with that ROI calculation?  Get you customers hooked on your apps and they will be visiting you own iTunes-like store often.

Go for Complete Solutions. Did you ever buy a product and get it home only to discover, it needs another part to make it work.  Frustrating isn’t it?  The explosive growth of start-ups in cleantech, smart grid, renewable energy and energy information technology over the past few years is now being harvested for just that reason. There are many new products from these start-ups but few complete solutions.  As a result even successful product start-ups need to partner with others to give customers an end to end solution that actually works to solve the business problem.  Today the recession and changes in market demand have accelerated the consolidation across the value chain so if you have gaps in your solution set take stock.  The calculation is to buy it unless it’s cheaper and faster to build it yourself.  But hanging out there with a product that is not sufficient to actually solve your customers’ business problem is asking for trouble.  The bigger technology and energy market players love this consolidation stage of the market cycle because it represents a buyers’ market for products and capabilities to be tucked into their solutions.

So what?

Now is a perfect time for information and technology companies to focus on scalable growth strategies for the expected recovery ahead.  So play ‘what if’, talk to your customers and position your strategy and your products to help those customers go where they must.

Recurring revenue advisory or analytics products improve best practices, focus on the client satisfaction that comes from actually making a business task easier, faster and cheaper to perform thus improving the clients ROI by using your product.  Standardized research or analytics products take on the cachet of independent, transparent, consistent representations of the research specially and powerfully different your firm from competitors.

Productizing repeatable solutions not only improves the profitability of a consulting or services firm, it creates value from the community building process of users interacting and collaborating with the consultants, it improves EBITDA by making the consultants more productive, and it improve time to market for services enabling the firm to use speed to competitive advantage.

In a market place where cost control and ROI are key to success having complete solutions that are industry accepted, market tested, and fast and easy to use will attract customers who want fewer vendors, better products from someone they trust.

And that is the last lesson to scalable growth, when your customers use your products, services and expertise to make their own decisions actionable YOU become their trusted advisor and supplier of complete solutions that work to meet their business needs.

Build it once, use is often, sell it many times—the formula for scalable growth.

Fish Food

Cooler Pacific Ocean Currents Bring Record Fish Runs!  Who would have thunk it!

Did you see this story in the Wall Street Journal?[1] It described the near record runs of Steelhead Trout, Coho and Chinook salmon to Oregon rivers and streams over the past several years.  The Oregon Department of Fish and Wildlife (ODFW) said more than 680,000 Coho salmon alone returned to Oregon last year which was twice the number counted in 2007.  ODFW expects the 2010 spring run to match last year which would make it the biggest run since 1938!

Only a few years ago there was major concern about the falling fish populations.  Declines were blamed on loss of habitat, pesticide use by farmers, overfishing and—of course—global warming.  Environmental groups clamored for new regulations to protect fishery and habitat and the courts imposed water restrictions to increase stream flows.

I know something about anadromous fish(those that return to fresh water from the ocean to spawn) issues having spent three long years securing a settlement of the Mokelumne River hydropower relicensing proceeding at FERC for my then employer the East Bay Municipal Utility District when I was assistant general manager for operations.  Doing “fish deals” are tough, in part, because none of the state and federal wildlife agencies and environmental interveners sitting on the other side of the table have any fiduciary responsibility for the outcome.  It got so bad that we actually set up underwater cameras to video tape fish returns in the river at various points to document the runs.

Eventually we did get a settlement and the hydropower license was renewed securing the water supply for almost two million customers here in the San Francisco Bay area.  But it required spending millions of dollars to match the federal and state agencies claims about the “science” on the river. In the end the investment paid off, the only reason we won the settlement is that we went eyeball to eyeball with the resource agencies and were prepared to go to court to prove that our scientific research was better than their biological opinions which were based, errr, on their opinion not the science. And no good bureaucrat wants to be embarrassed by getting caught with his science down around his ankles.

So today , as you can imagine, there is a lot of explaining to do about why if global warming is so certain and the consequences so dire and irreversible we are seeing near record runs of salmon and steelhead in the Pacific Northwest.  Oh that’s simple says, ODFW, temperatures will warm again and runs will decline.

I guess that’s just one of those crazy cycles of nature isn’t it!  Meanwhile, ODFW sent out volunteers from among the unemployed to catch the returning fish after they spawn and take them to the canners.  ODWF proudly reported it processed 79,000 pounds of fish for the local food banks last month. Now there is a government stimulus program you can believe it!

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[1] Wall Street Journal, January 21, 2010, A-3

Getting the Massachusetts Message Right

The press is full of ‘blood in the water’ analysis of the meaning of the Massachusetts election of Scott Brown.  As a former Bay Stater I appreciate how stunning that victory was in both bad and good ways. For Democrats, accustomed to dominance it is a humbling experience.  But the GOP will make the same mistakes the Democrats have made if they see Scott Brown’s election as a triumph for their version of Washington truth.

Let’s face it, at the end of the day the general public see little difference between the behavior in Washington of the Democrats and the GOP.  Both parties over-reach when their power is felt to be dominant.  Both parties are controlled by their fringes on the left and right.  Both parties are hyper partisan.  And both parties have been equal opportunity offenders of the public conscious.

“We’re mad as hell, and we’re not going to take this anymore!”

The real message of Massachusetts is that the voters are saying ‘a pox on both your houses’. The tea party movement is a genuine demonstration of disaffection for the direction the country is going and should be seen by the Democrats as ‘in your face’ evidence of over-reaching.  Why don’t they see it?

The dirty little secret is they DO SEE IT, but they realize that they are likely to lose their dominance in the 2010 election (the party in power almost always loses seats in mid-term election historically). So the base of the Democrat party came to believe that Obama’s election gave them ONE SHOT at getting their agenda passed in the 2009-2010 term of Congress—and they decided to go for it.  But by so fiercely focusing on the end game for their left driven political base they have ignored the public majority in the center and shut-out the GOP on the right undermining the perception of a fair process in their overreach and risking an even worse political outcome.  Is this narcissism?  Is it desperation?

Don’t rejoice for the Republicans

The election of Scott Brown is not necessarily good news for them either. The truth is the GOP did a terrible job in the majority when they last held it and the behaviors of the Congressional GOP leadership and right-leaning base were just as obnoxious in their time in power as the Democrats are today.  Scott Brown’s election is as much a wake-up call for the GOP right as it is for the Democrat left.  And reading more support for the GOP into his election is a foolish fantasy for the right wingers.  The candidates who are winning in New Jersey, Virginia and now Massachusetts are NOT traditional GOP right wingers, but capable, reasonable, center of the road Main Street folks.

Change We Can Believe In

Scott Brown’s election is a savvy and, so far, successful attempt to take the Obama message of 2008 of ‘change we can believe in’ that the public signed up for and apply it to a center of the road style of governance that the public thought they would get in a President Obama.  Instead, Obama campaigned as one kind of president and has governed as a very different kind.  The public is feeling like he bait and switched them from a centrist agenda of positive, inspiring change to a left-wing agenda of government control over every aspect of our lives with debt that is never ending to fund it. And they are reacting negatively to it. The president remains personally popular among a general public that truly wants him to succeed, but he is at very serious risk of losing that benefit of the doubt.  And there is no way to blame the mess Obama is now in on his predecessor.  He did not inherit this political mess—he caused it.

Get back on the Green Line!

Like that Fidelity investments commercial that seems to run constantly these days, you know the one with the green line of “guidance” for the scared investor, Obama can still save his presidency by returning to the “guidance”  of his 2008 campaign message and living it as the centrist president the people voted to elect.  The election of Scott Brown gives him an opportunity to tell the left leaning base in the Democrat party they failed to deliver a product the people want and now must move to the center.  It is a tough love message of ‘follow-me or get run over’ that only he can deliver.  But unless he does he will have squandered his historic opportunity and ruined his legacy.

What should Scott Brown do?

Be the centrist independent the People of Massachusetts elected.  He may indeed be the 41^st vote against ObamaCare, cap and trade, and the political bribery of the Louisiana Purchase, Cornhusker exemption and other desperation deals which should now die a visible death. But Scott Brown must be a demonstrable change of political behavior in Washington to invest and grow the political capital he just received.

If he succumbs to being just the 41^st vote for the GOP he looks like every other sleazy politician in Washington instead of living into the legend he inherited with the seat of Ted Kennedy.  By being the new “lion of the Senate’ for the center of the road majority of the American people Scott Brown can give President Obama an opportunity to reclaim the captaincy of his listing ship of state and he disciplines both extremes on the left and the right with the true message from the Massachusetts election.

Now that would be change we can believe in.

Crude Reality

Chevron announced today that it planned to restructure its money losing refinery operations to bring costs in line with profitable operations.  During the last quarter of 2009, Chevron’s refining business lost a staggering $600,000 per day according to Deutsche Bank.  And it was not alone, other refiners are also underwater in this most difficult of the big oil sectors.  Is it little wonder why we have not seen a new refinery built in the US since 1976.

Only a few months ago we were all cussing big oil for skyrocketing gasoline prices, and indeed for a while the sector made profits.  But the boom and bust character of this business often seems to defy logic as supply and demand responds to market realities.

Up the road from my home in the San Francisco Bay area is Chevron’s 100 year old Richmond, California refinery.  When prices were high Chevron proposed upgrading the facility to enable it to process a wider variety of crude oils from sources around the world.  All the required environmental impact studies were done revealing that the upgraded plant would improve refinery efficiency and economics while adding operating flexibility to process a wider variety of crude oils.

Not so fast said, the environmental intervener EarthJustice which filed suit in state court to force Chevron to demonstrate that processing heavier crude oil types at the upgraded plant would not harm the environment.  This is the legal equivalent of the “when did you stop beating your wife” question. While this lower court decision requiring more studies is more likely than not to be overturned on appeal, it had the effect to delaying any improvements at the Richmond refinery perhaps for years.

Yesterday, the economic consequences of that delay fell upon Richmond like a major oil spill. The Richmond City Council, egged on by local environmental constituencies, had urged more studies as a strategy to press for more tax revenue out of Chevron to remove its objections. The company just said “NO!”

Chevron said it is now more likely than not to sell or close the Richmond refinery eliminating 1200 well paying jobs and millions of dollars of tax revenue and income recycling throughout the East Bay area economy.

The crude reality is the fastest way to improve refinery profits today is to close excess capacity around the world at a time when demand is down and invest in facilities that can operate more flexibly in the future as demand recovers by processing crude from many sources to make products of many types.

So what?

So the customary environmental strategy of using the courts to impose delay in hope of negotiating concessions just backfired on Richmond, California.  Instead of adding more good paying jobs and seeing tax revenue grow, Richmond will need to call in the redevelopment agency.

Perhaps, Chevron can unload this white elephant on the Chinese or some other investor, who knows.  One thing seems certain the new owner is not likely to be as civic minded as the folks from down the road at Chevron who gave up after a 100 years.  There must be a California solution to this problem—maybe Richmond can collect all the French fry oil and turn it into unleaded!

Germany: Another FiT Bites the Dust

As widely expected Germany reduced its solar photovoltaic feed-in-tariff (FiT) by 17% effective April 1. 2010 following the earlier lead of Spain which took the same action last year.  This cut is deeper than expected and comes at least a quarter sooner than once thought likely and is on top of the 10 percent already approved in the German Renewable Act.

The solar industry was braced for this action but there is no way to mask the impact it has on solar market players since Germany was Europe’s largest buyer of solar equipment fueled by these deep subsidies.

Until this action German solar projects realized 32 Euro cents per kilowatt-hour (about 45 US cents) in subsidy. And it cost German taxpayers more than 9 billion Euros to produce the more than 8 GW of solar PV that lead the world’s markets while it was in effect.  After the new rules take effect in April, solar PV power in Germany will cost 27 Euro cents (or about 40 US cents) closer to the costs of solar power.

Because Germany’s subsidy policy fueled a spectacular, but unsustainable growth in market share, many of the industry’s leaders including China’s leaders Yingli and Suntech, and First Solar and SunPower of the US.  But the biggest impact will fall on the German solar companies according to DZ bank analyst because they are so dependent on the German domestic market.  German firms Q-Cells realized 56% of sales, Solar World saw 67% of sales and SMA Solar saw over 70% of sales from German domestic markets.  All of these firms, both German and international players, all now have heartburn over their sales exposure in the German market.  Reuters reported that analysts say that lower prices will provoke a fierce shakeout in the industry much like Spain earlier forcing higher cost players to quit the market.  Inventories of solar panels may also be sold off at similar fire sale prices to monetize investment and preserve cash.

So what?

Renewable energy is on a roll and we want to encourage its growth and market penetration.  But to be sustainable renewable energy must make it in the cold, and sometimes ruthlessly competitive global market place.  Feed in tariffs and other subsidies may produce short-term results as we have seen in Spain and Germany, but true scalable growth will only come when solar and wind generation can be delivered at competitive, grid parity prices.  Any other scheme is not sustainable over the long term. And each such scheme distracts the manufacturers from their one true path to success—driving down the installed capacity cost to grid parity in every market they seek to win.

California TREC toward RPS Finish Line

California’s investor owned utilities are on the hook to meet the state’s 20% RPS goal by the end of this year.

Guess what?  They are not going to make it.

That’s no surprise as we have known that for some time.  Best estimates by the state agencies most responsible for achieving California’s ambitious renewable energy and emissions reduction goals, the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) estimate it will take until 2014 to satisfy the 20% RPS goal.  So obviously, those responsible want to speed things up.

This is not to suggest that California’s utilities have been sitting on their assets, they have worked hard—very hard to procure just about every responsible wind and solar project available to meet these targets.  By the end of 2009, about 7 GW of CPUC approved renewable energy projects is under development in the state, and another 4.8 GW is proposed and waiting for CPUC approval.

Obviously, the emphasis was to develop RPS-eligible projects of substantial size to meet the targets, but now the CPUC has issued a revised proposed decision to speed up RPS projects by certifying projects of smaller size and even allow homeowners to participate in the renewable energy procurement program.

In a December 23, 2009 action, the CPUC published a revised proposed decision [1] that opened the RPS competition to small scale projects and even homeowners with solar roof tops to participate in the program to supply compliant renewable energy to utilities to meet their RPS targets.  The decision authorizes tradable renewable energy credits (TRECs) and unbundled REC contracts for California’s RPS program and permits out-of-state projects to compete in the California RPS.

The proposed decision was released for public comment and will not be final until approved by the full CPUC at the end of the comment period.  The proposal permits California’s utilities meet up to 40 percent of their RPS target each year with TRECs. Under the original program utilities could buy renewable energy credits (REC) each worth one megawatt of renewable power supply. No one is pretending this will suddenly bring the utilities up to the 20% RPS goal, but it opens the door to more participants in the program.

Send in the Clowns!

While opening the market to many more projects of small size sounds good, what is less clear is whether these small players will produce results that are worth the additional administrative cost to keep track of them.  Certainly California’s aspiration for a million solar roofs suggests the need for a customer-focused program to marshal that distributed generation resource to reduce demand on the utility grid.  And providing revenue from net-metering also helps reduce the overall cost of customer-financed generation.

Under California’s current rules distributed generation systems are not eligible for RPS credit, but projects less than 3 MW can take advantage of California’s standard offer feed-in tariff.  This proposal seeks to close these gaps in participation and marshal as much renewable energy potential toward achieving the RPS goals as possible by giving many more players the opportunity to perform.

The Long Slog to 33% Renewable Energy by 2020

Remember, while California struggles to reach the 20% by 2010 RPS target, the real goal is the 33% by 2020 and that feels like a very steep hill to climb.  This decision is tough to argue against because there is a growing number of small scale projects that can contribute toward achieving the RPS goals, and indeed it may encourage more homeowners and small business to install solar roofs and wind turbines to help mitigate their costs.

Customer Aggregators Rejoice!

But—the big winners in this change in rules may be the growing ranks of customer aggregators who see this as a license to scale their business.  Growing firms like EnerNoc have been assembling a sizable portfolio of  industrial, commercial and, perhaps, now residential customers to take advantage of the net metering and TREC revenue streams while also participating in energy efficiency, demand response and customer-owned generation options to reduce or control their overall energy cost.

The scalable growth of this customer aggregation segment is the nightmare scenario for the traditional investor owned utilities that fear losing control over the gateway to customers and may be stuck paying for small incremental supply at high administrative costs because doing so is “administratively convenient” for the CPUC and politically correct in “doing something” to achieve the 33% RPS target when doing so may not be economic and may not even be reasonable or in the public interest if the policy consequence is driving utility rates to unaffordable levels.

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[1] http://docs.cpuc.ca.gov/efile/PD/111679.pdf

The Customer Aggregation Threat to Utility Business Models

In October 2009 I wrote that there is a convergence of market, economic, environmental and regulatory forces underway that is changing the way investor owned utilities see renewable energy from something they must do to satisfy their regulators to something they MUST do to survive.  I described ten factors that lead me to this conclusion:

1. Renewable Portfolio Standards are here to stay.
2. Carbon emissions constraints are likely to happen.
3. Consolidation is sweeping the wind and solar manufacturing industry.
4. De-coupling rules are limiting earnings growth from commodity energy sales.
5. Efficiency and Demand Response regulations open the door to aggregators.
6. Home Area Network (HAN) technology threatens control of customer gateway.
7. Congress allows utilities to earn investment tax credits on renewable generation.
8. NIMBY is likely to limit or kill most new transmission construction.
9. Without transmission access renewable energy developer failure rates rise.
10. Maybe a distributed generation business model based upon renewable energy owned by the utility is not such a bad place to be for an investor owned utility.

I argued that this convergence of forces is engaged in a battle to kill the economies of scale for large central station generation. While wind has captured the most renewable energy market share, it is solar power that is the most pernicious threat to the utility business model because it represents the foundation for a distributed generation alternative to the traditional utility. The only thing standing in the way is cost.

Customer Aggregation Threat Ahead

Today I want to add an additional threat to the utility business model to consider: customer aggregation. What got me thinking about this is the report that PG&E was backing a June 2010 ballot measure in California to require 2/3 voter approval of aggregation programs undertaken by cities and counties in the state. In due diligence, I should tell you that my former firm, Global Energy Decisions, was hired by PG&E to assist in evaluating the reasonableness of the proposed annexation of PG&E’s Yolo County service area by the Sacramento Municipal Utility district (SMUD).  Our analysis found that this proposed annexation made no sense for the people of Yolo County because their rates would go up to purchase the energy to serve them.  But perversely, the annexation also made no sense for SMUD because it lacked the energy and capacity to serve the new territory without buying those additional resources at substantially higher costs thus raising the rates and the portfolio risk for all its Sacramento ratepayers. Working for PG&E in this assignment cost me SMUD as a client, but I still believe today our independent analysis did the People of Sacramento a good service by exposing the financial risks.

Down in the San Francisco Bay area there is rumbling of new challenges to PG&E service territory by the City and County of San Francisco and Marin County.  This action by PG&E in passing petitions and securing sufficient voter signatures to put the matter on the ballot suggests the utility takes the threat seriously. Why the voters of San Francisco or Marin would willingly subject their energy future to the whims of the Board of Supervisors requires more psychoanalysis than I am qualified to provide, but PG&E thinks they might be crazy enough to do it or they would not be passing the petitions.

Right Threat Assessment but Wrong Enemy

Will all due respect for my friends at PG&E I think they got the threat right but the enemy wrong.  Customer aggregation is indeed a potential threat to the utility business model, but the real threat is not the muni challenge but this same convergence of forces that is likely to bring us smart grid, Home area networks (HAN), efficiency and demand response services and the quest to be more responsible energy consumers.

In short, the real threat is from the likes of EnerNOC, Oracle, Battery Ventures or IBM or similar services firms who see the potential profit from leveraging energy information from smart meters with energy efficiency/demand response/distributed generation to game the dynamic pricing rates structures likely on the horizon to control the gateway to customers. Meanwhile, aggregating commercial and industrial customers around energy efficiency, energy management, green building solutions and the like proves the concept.

Need more examples of this at work?

• Oracle believes building energy management will be a big market. A recent story reported that Oracle’s Energy and Environment Group was asked to find out why a grocery store customer experienced peak power hours at 5am. Quite unusual since peak power typical happens in the heat of the afternoon when air conditioning is going. Some detective work found that the demand surge happened when the bread bakers arrived and turned on all the ovens at once. Oracle worked out a staging of energy use based upon production to reduce the peak and lower demand charges.
• Tracking energy by time of use. A similar example from Mike Dauber at Battery Ventures showed a pattern of high energy demand at a warehouse grocery chain in the middle of the night. Equipment checks and sensors showed no malfunctions. On site, the inspector found delivery trucks unloading at the same times and workers were opening all of the freezer doors at once and leaving them open until the delivery was complete. Changing the procedures solved the problem.
• EnerNOC hired by Morgan Stanley to manage energy at HQ. EnerNoc bought Cogent Energy in December 2009 to accelerate its diversification from demand response to energy management.  It won a contract from Morgan Stanley to analyze its offices for savings using its newly acquired commissioning software to harvest data at five minute intervals at 8,000 nodes at the bank and devise efficiency strategies. Press reports said that EnerNoc claims it has identified $100,000 in initial savings.

So why is this a threat to the local utility?  Because few utilities offer to help these clients save energy because most are still in the business of selling energy as a commodity.  PG&E is different in that its rates are decoupled meaning PG&E profits from the effective management of its portfolio against performance targets not commodity energy sales, but you can bet that few utilities have the software and solutions that these examples indicate to help customers solve their energy problems.  Not yet that is!

There’s an App for that!

Time is not an ally for utilities. Patently Apple reported recently that Apple filed patents for an easy to access energy management solution that uses devices plugged into power outlets to capture energy use information using power line networking and sends it to an App on your I-Phone or maybe that new Apple tablet you are lusting over.  The App reportedly would let you turn lights and appliances on and off on your I-phone.

So what?

The real threat to traditional investor owned utilities is not from mischievous municipal utilities or their politicians, it is from the convergence of energy, entertainment, information technology and the services needed to integrate and manage them that transform commodity products into value added services we never knew we needed and now cannot live without.  And with that transformation goes control over the home area network (HAN) gateway to the customer –and life for the utility will never be the same again.

The Next Boom Got Busted in Florida

Florida is a state with great promise, a great location, but sometimes a bipolar political climate.  And the ‘Ugly Florida’ is on a rampage of late pushing aside the fun and tech savvy Florida so often portrayed in its brand messaging.  The latest temper tantrum by Ugly Florida was the one-two punch from the newly reconstituted Florida Public Service Commission rejecting most of the rate increase requests from Florida Power & Light and Progress Energy.

The FPSC ruling in FPL’s rate case allowed only a $75.5 million revenue increase compared to the $959 million requested this year an additional $427 million increase in 2011. Adding risk to injury, the FPSC also suspended revenue from customers for a storm repair reserve fund reducing its own staff recommendation by $50 million. FPL had sought $150 million a year for the fund that only has $215 million in it—hardly enough to pay for damage from even one tornado. Spreading the pain around like one of those Florida tornados, the Florida Commission also shut out Progress Energy (PGN) request for a $500 million rate increase saying that increasing utility bills at a time when consumers are being hurt by the recession was wrong.

What’s going on?

Politics, Fear of Backlash, and Terror in the Political Class!

The political class is running scared in Florida, and they should.  Governor Charlie Crist is running for US Senator and it seems everybody else is running for Governor.  Crist started the ugly Florida phase by dumping several members of the FPSC and replacing them with political storm troopers to give him more political cover and a ‘man of the people’ image.  The Governor’s image is being hurt by incumbency, the impacts of the recession, Florida seniors rising fury over health care reform, and the business community worry over policies like self-insuring against hurricanes that make Florida a much riskier place to do business.

Florida’s investor owned utilities are a well run group and they are not accustomed to being woodshedded.  So in response to the Commission’s order, FPL suspended investments in Florida worth about $10 billion over the next five years and called a halt to efficiency and reliability projects, as well as building new nuclear reactors and uprating its Riviera Beach and Cape Canaveral plants. This will cost Florida thousands of jobs—good jobs and is a shot across the eyebrows of politicians.

“What part of DO NOT SCREW THIS UP, don’t you understand?”

Both Standard & Poor’s and Fitch credit rating agencies put FPL on credit watch with negative implications saying that the FPSC’s lower-than-expected rate decision combined with the State’s crummy economic outlook “impede the ability of the company to achieve credit metrics that support current ratings”. These actions remind the politicians that bad decisions do have consequences and lower credit ratings for utilities raise the cost of debt just like for consumers.  In this case affecting the cost of more than $11 billion of debt securities and thus are the cruelest rate increase of all because neither ratepayers, the company nor Florida get anything of value from it.

So what?

So investment in Florida’s energy infrastructure will take a little longer and cost more, maybe much more.  Florida’s economy has a steeper climb out of the recession and the best stimulus of all private capital invested in real projects that create real jobs will now go elsewhere—or just go away.

Florida politicians seeking populist cover now own the problem of the Florida economy with nowhere to hide and better not wait for the Obama Administration to bail them out.  Enterprise Florida will fight back quietly but ruthlessly to get these politicians on the right track by starving them of campaign contributions.

FPL’s unregulated business is one of the nation’s leaders in clean and renewable energy with plenty of places to do business these days and so its focus can be on growing shareholder earnings and value outside the Sunshine state.  Progress Energy can hunker down and focus on its Carolina business.  Soon, perhaps sooner that the FPSC thinks, it will be hauling these companies back to rate court and “ordering them to build” to meet an expected energy shortage when the inevitable recovery materializes.

One more thing, Florida politicians better pray for good weather because there is not enough money in the state’s “rainy day fund” for anything more than damage from spring run-off.

The Global Warming Sting: California Balances its Budget and Saves the World

The sting was revealed but the hook is not yet set by the January 11^th exposure[1] of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.

The Set Up

On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election.  By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.

The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so.  There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.

The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.

The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates.  This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists.  There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.

Placing the Hook

At its January 11^th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy.  The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.

Sounds good, right?

Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!

The timing was subtle but perfect.  Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces.  So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.

Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit  sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama.  Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.

Perfect Sting or Fatal Error?

So will California use Carbon Taxes to fill the hole in its state budget?  The perfect cure it seems to state politicians.  Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap?  Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections.  High stakes!

But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget  by keeping the lion’s share for budget spending.  This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget.  The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.

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[1] http://www.climatechange.ca.gov/eaac/meetings/index.html

$100 Carbon Tax or Bust!

After the collapse of the COP15 treaty prospects, proponents of curbs on emissions are scrambling to find Plan B.  It is not an easy thing to do.  In the US the best prospect to breathe life back in the emission reduction campaign, the Waxman-Markey cap and trade bill, is dying a slow death in Congress where fears about another hit on the economy in the face of persistent 10% unemployment has sent members running to the exits.

Carbon Allowance Prices Fall

Meanwhile, in carbon markets in Europe and the US carbon credit prices are plummeting and with them hope that cap and trade will provide the incentive for significant reductions.  EUA (European carbon allowance) futures ended 2009 at 12.53 euros/tonne, down 21 percent from 2008 closing prices as reported by Reuters. The Regional Greenhouse Gas Initiative covering the Northeastern states held an auction for CO2 allowances and the price came in at a little over $2.00 per tonne.

On voluntary carbon markets, where allowances are traded based upon bets about demand for them in the future prospects for passage of Waxman-Markey were not good and futures prices for allowances fell. 2010 vintage carbon futures on the Chicago Climate Exchange fell from $1.65/tonne to only $0.15/tonne in 2009. Reuters reported that 2009 volumes for voluntary carbon offsets were 40-50 percent below 2008 volumes, and demand fell substantially in December, which is usually a busy month is that market.

Going into 2010 the futures markets in allowances was horrible. European industrial firms were busy estimating their emissions output for 2010 in order to sell excess EUAs early while prices were higher than forecast for later in 2010.  Not a good sign for the allowance market or policy makers who expect dumping EUA early will lead to even lower prices later in 2010.

The Ticking Time Bomb in Cap n’ Trade Models

That allowance price problem was the context for the questions put to Dr Severin Borenstein, Director of the UC-Berkeley Energy Institute.  Severin is a very smart, very savvy guy who has been at the front lines of energy research long enough to know a few things about policy analysis.  Speaking recently at a meeting of private equity players focused on the clean tech and energy space he commented on allowance prices and whether cap and trade legislation could revive prospects for effective green house gas emissions reduction policies.

“There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels.  Analysis to date hasn’t focused on resource price change in response to cap and trade – resource scarcity and price changes are likely to be central,” he said. [1]

He went on to say that he felt that it would require a carbon allowance price of between $80 and $100 per tonne to displace coal.  Achieving significant reductions in greenhouse gas emissions needed to focus on that coal displacement goal or market participants would simply pay a lower carbon tax and make only modest changes in their behaviors.

Coincidentally, this is almost exactly what the California Energy Commission and California Public Utilities Commission said in their implementation report on AB32 the California Global Warming Solutions Act to the California Legislature.[2] In short, these state agencies charged with implementing GHG emissions reduction concluded that natural gas prices would need to be $13.87 or higher per MMBtu and the applicable carbon tax would have to be $100 per tonne or higher for the program to be effective in achieving its goals for emissions reduction.

So what?

The BIG PROBLEM Waxman-Markey supporters and environmental advocates face is to get their policy goal implemented they must raise gas prices and carbon taxes so high it will crater the economy and keep them there long enough to drive a stake through the heart of the coal industry once and for all so it cannot be resurrected.

If you think the greenmail price was high for a vote for ObamaCare in Nebraska and Louisiana wait until you see what it will cost to buy off enough politicians to get 60 votes for this cap and trade program in an election year.

And if Waxman-Markey cannot find 60 votes, then Plan B logically would be to unleash US EPA with its endangerment finding to wreak havoc on the coal and utility industries.  The problem with such blunt instruments of torture as regulations is that a lot of unintended consequences can happen along the way.

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[1] http://www.greentechmedia.com/articles/read/severin-borenstein-on-cap-and-trade

[2] http://www.cpuc.ca.gov/PUC/energy/Renewables/hot/33implementation.htm

6.5 Quake Reminds Us California is a Wild Ride

USGS now pegs Saturday (Jan 9 2010) earthquake about ten miles underneath the Pacific Ocean off the California Coast near Eureka at magnitude 6.5.  Had it hit 200 miles south closer to the heavily populated San Francisco Bay are this would have been REALLY bad.

Here in the Bay Area we didn’t feel this latest quake but are still talking about a swarm of smaller quakes over the past few weeks on the Calaveras Fault running along I-680 (why do we always build our freeways and important buildings on the fault lines?) which shook the place. Most of these are harmless like a plane flying over low and a sonic boom rattles the windows.  The scary ones are the silent side to side shaking that seems to last longer and if big enough do more damage. We have had both here so we’re uncertain here at the base of Mt Diablo whether the devil is planning to shake forth with a twin sister mountain or not some day.

Those of us who live in California are accustomed to a wild ride.  After all this is the place where all things strange and wonderful originate. We tolerate the leftest of the left politicians because we balance them out with the rightest of the right militiamen-types.  Unfortunately, over the last decade or so we have elected too many of each to the California Legislature so we had to send the Terminator to tame them.  Instead over the last five years he had alternatively broken bread with each to keep them guessing about who he might “dispatch” next if they cross him.  You have to be mean to be Governor of California since you have no power.

But I digress from the shaking Mother Nature inflicted yesterday.  The Wise Men at the USGS tell us there is something like an 80% probability that THE BIG ONE will hit California over the next 30 years bringing all the damage and risk we worry so much about but do so little to guard against.  Oh, we have good building codes NOW but many buildings still predate them.  We raise our bridge tolls to pay for retrofit AFTER the Cypress Freeway collapsed in Oakland in the last large quake–Loma Prieta—in 1989.

But Californians rarely buy earthquake insurance.  Why?  It costs too much and the deductible are so high that if THE BIG ONE hits you probably are better off just walking away from your property and throw the keys on the bank table.  Besides these days we’re so far underwater in real estate values, earthquakes are the least of our economic worries.

So what?

Every day in California the sun rises in the East and shines warmth and optimism down on us until it sets over the Pacific in a glorious burst of orange and blue glory to remind us of who is in charge!  We have two choices: worry about tomorrow or enjoy the gift of today.  It is not fatalism at work, it is reality.  We anticipate tomorrow but live in today.  It reminds us to hug our family just a little tighter each time we depart and rejoice just a little more each time we all return safely.

And one more thing, the next time I have a chance to vote on any of those fruitcakes and nutcases we sent to Sacramento I’m voting NO WAY SUCKA!

But not to worry—-next up Governor Moonbeam is coming back!  We like our leaders larger than life, we just wish they would figure out what to do AFTER give them the light sabre!

“OBIWAN, you’re out only hope!”

Life on the PG&E Budget Plan

I long ago networked my home PCs and MACs and each new one seems to relegate the older ones to back up duty as storage or other uses. And with three college-age kids they all needed laptops.  Then they went away to school and it was blissfully quiet, and then they trickled back from college and brought their laptops—and stayed for a while.

My wife turned over her iMac and Mac laptop to our movie maker son who needed them for video editing, and we bought her a new laptop–a PC with Vista!  Jeez!  I will never get out of the doghouse for that one!  So I made up for it by buying her a new IPod touch, but she kissed my cheek and told me it was a “nice try” but not sufficient!  After 35 years of marriage, women have a way of cutting to the chase.  Yes, she got a new laptop she wanted!  I’ve learned a few things after 35 yrs.

I’ve invested in new TVs with each one seemingly flatter, brighter, bigger and screwed to some wall instead of dominating the floor space. So now we can, literally, go from room to room and never miss anything on TV.  Except I like to watch Fox News and she hates that—so I generally watch Fox news in my home office.  And, of course, with new HD TVs we had to have Comcast HD service and a new settop boxes.  We have Wii, Nintendo, PlayStation, PlayStation 2 and now PlayStation 3 which even doubles as a Blu-Ray player. In short, technology comes but the old stuff never seems to go around my house.

No wonder my electricity bill to PG&E is so high.

But my utility is here to serve me—right?  That’s why they recently installed a Silver Spring Network smart meter on both my electric service and natural gas service—so I can see how much money I am spending every 15 minutes instead of once a month when it is time to pay up.

But soon I will face another decision.  What will I do with all the information my smart meter wants to give me?  For a while, at least, the answer is nothing since even though PG&E has a very progressive tiered rate system it has not required me to go to time of use pricing.

When that happens I will need to go see my doctor for blood pressure meds I’m sure, because, it’s not PG&E that is out to get me it is the convergence of my family’s electronic appetites and my politicians lust for everything green and detest for all black fuels even though they are cheaper that will get me.

Now when someone in my family says, we need a bigger TV for the family room I can say “not today.”  But when my politicians say to PG&E you MUST buy more renewable energy AND YOU MUST PAY MORE FOR IT THAN MARKET RATES so the renewable energy company will build more of it and PG&E says “YES SIR!” and passes the higher cost along to me, I don’t have the option of saving “not today, thank you.”

Except wait, maybe I do!  My option is to use less.  So I became worse than my own father was when I was a kid about grousing about turning off lights and other electric gear when not needed.  It got so bad that my family declared the need for an intervention so my wife takes me by the hand and says “we need to have a talk”.  Oh Crap!  I have heard that before and it never turned out well for me.  She says in that calm teacher voice that makes me want to jerk my hand back before the ruler strikes. (NO, they don’t do that now but they did when I went to school!)

“You have grouched around about turning things off for more than two months and what good has it done?” Then she whipped out two PG&E bills and said look at the bill!  So I did, and BEHOLD we used less kWh in the second month than the first.  SEE! I said we used less energy!

“Yes, dear,” she replies “but how much did we pay?”

Oh, oh!  Busted!

We paid the same!  Why because despite all the new gear, new rules, new rates, and loud rants we were still on a “budget plan” which averages our bill over the year so the amount paid was exactly the same $682.00 each month!

No surprises!

“Yes but we used less energy and that is good,” I protested.  “And can you imagine what we’d save if we reduced our consumption to Tier 3 instead of Tier 4 rates, I argued. Instead, I got “THE LOOK”—you know that look!  It says plainly: you are on thin ice, buster, so consider your next smart remark carefully!

“ But we paid the same and what you saved in energy just went back to PG&E to sell again—and trust me at these rates they do not need the money!” says my sweet wife.

So there you have it, we are at the Rubicon for electricity rates.  The last mile problem for HAN will be that the drivers for going to the trouble of setting it up all focus on entertainment and the hassles are all associated with energy.  So being Pavlovian, we entertain ourselves now and live foolishly on the “budget plan” while our politicians get way with piling up the cost of our energy future until someday it breaks our bank and our backs from its crushing weight.

The result is there are going to be surprises—big surprises in our rates as the full cost of my politicians aspirations pile up on my energy bill.  The next time by budget plan resets it will inch up and again, and again and again!

We think renewable energy is good for the planet, and it is!  We think clean and green and efficient is being socially responsible—and it is.  But we’re are being under-told the truth about what these policies are costing us and over-sold the benefits in political rhetoric never subjected to the cold hard competitive market place. Subsidies, production tax credits, investment tax credits, feed-in tariff costs are not free and they may not be economic, and sooner than later the sum of these costs will make our energy bills unaffordable.

The way state RPS policies, emissions reduction policies, tax credits, and the requirement that my utility pay more than market rates for the clean energy it sells me add up soon I’ll need to turn into the “grouch” again and try to use less.  My only hope is to use less, much less, and to stay on my level billing budget plan for as long as I can.

There is one more thing I can do which is my secret plan for success—get the rest of my kids to move out and pay their own PG&E bills!  I’ll even donate electronics gear to get them started including all the old PCs and MACs they want to take with them except, I am getting fond of that PS3 blue-ray feature—and Call of Duty!

Governator to Speaker Pelosi: Hasta la Vista, Baby!

Arnold gave his last State of the State message to the California Legislature telling them essentially that the State’s fiscal situation is going to get worse before it gets better.  We all knew this but Arnold seems to have been in denial or putting a good spin on it.

Why?

Well, for one thing, he has had his hand out in Washington hoping for a Federal bailout of the $22 billion deficit the Golden State faces by June 2011.  So making nice was probably good politics.

But when he blasted Congress for the ObamaCare legislation pending and essentially trashed California’s Congressional delegation for going along with it, we knew something had changed.

What was it?

Maybe Nancy is losing her earmark touch?  After all, the Napa Wine Train got $49 million to keep the San Francisco crowd chugging across the Golden Gate without getting a DUI ticket for the trip.  But the rest of the state can eat dust especially the Central Valley which had its water turned off by the Feds and a Federal Judge.

Maybe Dianne Feinstein is mad at Arnold for proposing so much solar power in the Mohave that all the enviros are pounding on her door to stop it?

Maybe Congressman Waxman is too distracted these days after the Copenhagen meltdown to pay attention to constituent issues?

Senator Boxer has been uncharacteristically quiet these days.  Maybe she is running scared with Carly on her heels and a more conservative Republican Assemblyman pushing Carly to go rogue.

The most likely answer is that Schwarzenegger’s support for health care reform and cap and trade were political moves to win Administration support for a bailout.  But it sounds like the Feds said they already owned the California voters and didn’t need to spend $22 billion to buy them all over again like they had to do in Nebraska for Ben Nelson or with the Louisiana Purchase for Senator Landrieu

So what?

Arnold will leave the State in about the same bad mess he inherited with a few more zeros tacked on.  California will still have the same dysfunctional state government dominated by the fringes and those on the state payroll.  Business will continue to flee the state in search of lower taxes and a more business friendly place to work.  Citizens will also go to other states but probably not Nevada or Arizona.  And even illegal immigration is down since there is a slowly dying agribusiness in the Central Valley that is dried up.

And underneath it all, California will still be the same vibrant, innovative source of new ideas it has always been–just waiting to be freed from the constraints of a State Government and political class that no longer serves its strategic interests.

Sun Stroke in the Mohave!

A solar smack down is brewing in the Mohave Desert.  It pits Senator Dianne Feinstein and a group of environmental groups that claim they want more clean and renewable energy including solar power, but just not “here” against project developers who see the Mohave as the perfect place for such development. [1]

Recently, Senator Feinstein filed a bill to establish two new national monuments on Federal lands to discourage future solar projects in the area.  You might think that California would be eager to attract projects, but we’re discovering that even renewable energy projects are not always welcome.

“If we cannot put solar power plants in the Mohave Desert, I don’t know where the hell we can put them,” said California Governor Arnold Schwarzenegger.

What’s happening?

Solar photovoltaic projects often cover large areas to scale their output potential. But Senator Feinstein and the opponents say the sheer size of such projects will do irreparable harm to the habitat of the desert.

This experience in the Mohave may be one reason we will see many more gas combined cycle plants built in the future. It’s not easy being green even in California.

Other solar projects in California are facing similar criticisms and this is the NIMBY problem that exasperates renewable advocates and developers. The Federal Government and the State of California have been enthusiastic supporters of renewable energy.  For example, Federal stimulus funds would pay for more than 30% of the $1.8 billion cost of the Solargen project in the Central California if the project can get through the permitting and environmental review process by December 2010. With the clock ticking, you can bet that there is furious work on all sides going on behind the scenes to produce an acceptable outcome.

It will be tough to match the locational attributes for the Solargen preferred site according to CEO Mike Peterson who recites them like they were the Nicene Creed: 20 miles from the nearest town; 90% of the solar intensity of the Mohave Desert; five willing sellers; 18,000 acres of property with high voltage electric transmission lines running right through them, and the money ready to go to build the plant and create both construction and operations jobs in a part of California that really needs them.

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[1] ERRATA: In an earlier version of this story I mistakenly identified the Solargen project as one of the projects in dispute in the Mohave Desert.  This was not correct and I apologize for the error.  The Solargen Energy Panoche Valley Solar Farm is not located in the Mojave Desert or even on Federal Land which is the focus of Sen. Feinstein.

Mavericks Riding the Wave of Electic Rate Increases

This time of year in California the ocean currents and weather set up patterns of very big waves beloved by surfers from around the world.  It is tricky to know when the Mavericks surfing competition will take place so airplane tickets and surf boards are ready as enthusiasts watch the California weather reports.  Give them the signal and they descend on the Central California coast.

For California ratepayers 2010 brings a kind of Mavericks competition with energy bills as the era of rate freezes closes with a decision in December 2009 approving electricity rate increases for all classes of customers of PG&E including Tier 1 “baseline” customers which had been frozen since the early days of wholesale power competition in the 1990’s for PG&E and SCE customers.

The energy mavericks have been the upper tier ratepayers who have the misfortune of living on the hot side of the mountains or in the desert or the great Central Valley where gas heat isn’t a big problem but summer air conditioning is a must.  These Mavericks have borne the brunt of frozen rates since the revenue requirement from the frozen Tier 1 baseline customers was pushed up the user curve and added to already higher rates.

How High Will Electricity Rates Go?

I wrote recently about the surprise electricity customers in the Central Valley got when they opened their electricity bills.  The bills reflected the summer A/C period so they were high, but unfortunately smart meters had been installed about the same time and there was some good publicity sought by utility and politicians over the smart meters bringing the promise of a more efficient energy future.

Killing the Utility Messenger Won’t Solve the Problem

That protest of rates was BEFORE this latest rate increase kicked in for PG&E and a similar one for Southern California Edison (SCE).  Temperatures outside have cooled down, but inside ratepayer are slowly steaming.  Their immediate focus is the utilities that are sending them the bills.  But PG&E, SCE and Sempra are regulated and they charge the rates that the CPUC tells them to charge—no more and no less.

PG&E’s 2010 rate structure looks like this:

	2009 Rates ¢/kwh	2010 Rates¢/kwh
Tier 1 Baseline	11.5	11.9
Tier 2 up to 130%	13.1	13.5
Tier 3 up to 200%	26.1	27.6
Tier 4 up to 300%	38.1	40.6
Tier 5 over 300%	44.3	47.4

California has a tiered rate structure of inclining blocks meaning the more energy you use the higher the rate.  With the rate increase approved by the CPUC average rates will go up 3%.  But average is the politicians’ way of spinning the news about rates.  For Tier 1 baseline customers this means their rates will rise from 11.5 cents per kilowatt hour to 11.9 cents—high by national averages but a good deal in California.

But for the Tier 5 customers rates go up from 44.3 cents per kilowatt hour to 47.4 cent. OUCH!  This may be good energy efficiency inducing behavior and it certainly has worked, but it only portends the rate increases to come when the full costs of renewable energy and smart meters and other demand side programs are factored into rates over the next few years.

Calculating the impact on your electricity bill from a CPUC rate change is a little like doing your Federal Income Tax with its own Alternative Minimum Tax equivalent in the tiered rate structure for tiers 3, 4 or 5.  You need a lot of time and a good calculator.  If you want to see for yourself go to the link below for a detailed explanation that is guaranteed to put you to sleep before you get to the answer.[1]

“Nothing concentrates the mind so well as the near term prospect of a hanging,” said Mark Twain.

The next wave of California Mavericks will not be surfers but waves of ratepayers heading to Sacramento looking for someone to hang over the looming cost of living into the political correctness that is driving energy policy in the Golden State.  It sounds great!  It makes great headlines! We love to be green and clean and at the cutting edge of technology.  But being at the bleeding edge of policy as well as technology often costs more—much more. But add these looming rate increases to an economy with 10% unemployment, huge budget deficits, and surly voters and you have a volatile cocktail at the next election for any incumbent.

This wave of rate increases will be like the Mavericks surfing contest which brings out dare devils to ride the waves.  But in this case it will take deeper pockets and a better economy to be able to afford our energy future.

“How do you turn the world’s 6th largest economy into the 15th largest?” as the old Sacramento joke goes. ” You make it subject to California regulation.”

Or in an economy deeply under water, Californians might decide move to Texas or Iowa where taxes are low, baseload generation moderates rates, wind energy is plentiful and the rates are not 11.9 cents per kilowatt hour let alone 47.4 cents. As an added bonus—in Texas there is no income tax!

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[1] http://www.pge.com/myhome/customerservice/financialassistance/medicalbaseline/understand/

Pushed off the PATH

They tried to put a good face on it, but Allegheny Energy (AYE) and American Electric Power (AEP) pulled the plug on their Potomac-Appalachian Transmission Highline (PATH) in a filing made December 21, 2009 before the Virginia Corporation Commission. [1] The official reason is that electricity demand has fallen off because of the recession and thus the project is not needed as soon as had been anticipated.

The project sponsors preserved their options to file a new application at a later date—way later!

The project had faced a host of objections ranging from the typical NIMBY issues of property owners objecting that the high voltage transmission lines would be too close to their property or undermine their property values.  There were also complaints that the environmental analysis failed to consider the potential for expanding energy efficiency and renewable energy from wind as alternatives to the project.

Coal in Green Clothing

The principal protagonist heading up the opposition to this PATH project is the Piedmont Environmental Council based in Warrenton, West Virginia.  PEC has been fairly candid about its opposition to the project.  And the real reasons for its opposition has nothing to do with any of these “official” excuses.  PEC’s problem is summed up in its online members update on the status of opposition to the project.[2] The real sin of the PATH project sponsors is that they are coal fired power generators who refuse to promise that the new transmission line they propose to build will not carry coal-fired power in the future.  Without such assurances, which would be unreasonable to request formally and impossible to enforce, the project just does not pass the political correctness test.

Why We Need National Interest Electric transmission Corridors (NIETC)

So the environmental advocates have decided to kill the PATH project which would have expanded transmission access to a wide range of renewable energy resources because it might also carry power from coal or some other politically incorrect source.  Adding insult to injury, they got ten Democrat Governors to sign on to a letter to the various state regulators also opposing the project.[3]

Why is this signpost of the energy future?

Access to Markets is Essential to Renewable Energy Scale

The promise of both renewable energy and energy efficiency require, among other things, broad access to markets to bring renewable resources from Wyoming, Iowa, Texas and other places to the demand centers where such energy is required.  But the same is true for energy efficiency and demand response and a range of other demand side programs which offer the potential to change the future of the energy market place by making a true market in efficiency and demand management.  BUT, and this is a big but, scale is required to make these programs effective in achieving our emissions reduction and efficiency goals.

Access to Markets is Essential to Deliver the Promise of Smart Grid

Smart grid investments being stimulated by the Federal Government, encouraged by the States including these same politically correct Governors, will fail unless two conditions are in place to enable their full economic and market potential.  The first is transmission access to get renewables to market where they are needed in our fragmented and congested electric power grid.  And the second is scalable market potential so customers for energy efficiency, demand response, DSM programs and all those smart grid networks, sensors, boxes and gadgets can actually make a profit ‘doing well” while “doing good”.

If this is a signpost then don’t hold your breath waiting for the potential for smart grid and energy efficiency and renewables to save the planet because another part of the solution for these ills has just been pushed off the PATH!

By the way, we are still awaiting the USDOE release of the 2009 Congestion Study which was due to Congress in September 2009 but has yet to receive the necessary “clearances” from the White House to deliver it.  I guess it is safe to assume that PATH will not be one of the new NIETC transmission corridors proposed by USDOE.  The hold up can be either a good signpost or a bad one—we will not know until it is released.

If USDOE proposes a number of new NIETC corridors that substantially expand the transmission potential for renewable energy and to create a market in DSM and energy efficiency it will be a great signpost for the future.  My fear is that delay in releasing the report just like the PEC opposition to PATH is a signpost that environmental opponents care more about killing off power generation and transmission projects they don’t like than they do in creating a vibrant, sustainable, competitive market where renewable energy and demand side options can flourish.

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[1] http://pathtransmission.com/PATH_VA_Press_Release_12-29-09.pdf

[2] http://www.pecva.org/anx/index.cfm/1,517,2546,0,html/Coal-in-Green-Clothing

[3] http://www.pecva.org/anx/ass/library/96/east-coast-govs-transmission-ltr.pdf

If Smart Grid Data Demands Don’t Swamp Utilities, the Hackers will!

There is a growing anxiety that smart meter deployment being stimulated by Federal stimulus money and pressure to move faster from state utility regulators will swamp the data boat of many, if not most, utilities.  As I started digging into this issue I quickly discovered I was not the only one, nor the first, to raise it.  Last May, Beth Pariseau wrote extensively on this Smart Grid storage topic for Searchstorage.com.  [1]

It turns out that I have a personal connection to two of the utilities most often cited on the smart meter front: Austin Energy and PG&E.  Having once managed Austin Energy and Austin Water when I was Assistant City Manager for Utilities and Finance in Austin Beth’s interview with current Austin Energy’s CIO, Andres Carvallo piqued my interest.  Compared to the data management issued Austin faced when I was there the expected usage trends with smart meters are staggering.  My other connection to this issue is through PG&E, my energy provider here in the San Francisco Bay area.  Recently, PG&E installed a smart meter from Silver Spring Network on my house. So here is the essence of Beth’s data tsunami story as represented by these two smart grid leaders.

The 400 MB Per Smart Meter Data Storage Requirement

At Austin Energy which is finishing the roll-out of its first 500,000 meters, the annual increase in data storage grew to 200 TB from 20 TB including disaster recovery backup for 15 minute meter sampling for the first stage residential integration. More frequent meter data sampling dramatically scale the data requirements.  Austin’s experience to date suggests that storage of about 400 MB per meter per year are required minimally for the 15 minute sampling standard.  The Pacific Gas and Electric experience was comparable adding 1.2 PB of meter data storage for its initial 700,000 smart meters rollout or about 170 MB per meter per year sufficient for a twice daily meter sampling.

The 100 Petabyte Smart Meter Storage Need and Growing

In August 2009 FERC issued its “Assessment of Demand Response and Advanced Metering” offering two scenarios for smart meter deployment data requirements.  Scenario 1 was a partial rollout of 80 million meters with and the full deployment scenario 2 of 140 million meters by 2019. Based upon the Austin Energy and PG&E experience, the FERC study suggests the need for roughly 100 PB of information within the next ten years.

Think about it this way for comparison: 1 PB=1 quadrillion bytes; or 1 PB=data filling 20 million four drawer filing cabinets filled with text files.

Data Tsunami Ahead to Make Smart Grid Work

Obviously big network and storage providers are rubbing their hands together in glee at the prospect of suctioning up a big share of the money to be spent on smart meters. Utilities, on the other hands, must be wondering whether smart grid is really a dumb idea especially if they try to do it “on the cheap” with low frequency sampling.  Just like our own home computer experience, I predict that the roll out of smart meters will lead to the insatiable appetite for more and more and more storage, frequency sampling and applications to make use of this tsunami of data coming our way.  Otherwise, why bother.

Hackers See Smart Grid as the Ultimate Video Game

And if you think just the demand for additional data storage is the biggest problem facing smart grid rollouts, they you just have not heard about the smart grid data hackers.   At a utility security conference this past summer, one security firm set up a graphic simulation showing how simple it would be to take over the smart grid today.  Their simulation showed how over 24 hours an average hacker could gain access and control over about 15,000 out of 22,000 homes by infecting their smart meters with a worm that captured control over the device.  Great, you say, just let the utility send the hacker your next utility bill and see how they like it!

But Terrorists See Smart Grid as their Ticket to Ride the Grid

But the problem is there are a lot of bad guys out there who are quite capable of using that control to do serious damage to our critical infrastructure.  This is the nightmare scenario for Federal , State and Utility security officials—a cyber attack.  That is why FERC has set out a set of critical infrastructure protection rules that require utilities to beef up their security.  The National Institute of Standards and Technology is working actively to tighten the nation’s critical infrastructure protection standards. [2] The Federal stimulus grants for smart meter installation all come with regulations requiring utilities to take proactive and immediate steps to boost security.  The question is whether the advances of smart grid technology will actually make us more vulnerable to these kinds of cyber attacks than the good old dumb meters that controlled nothing but our utility bill.

So what?

One more thing to think about, not only will you have to pay for all these smart meters and the data storage to keep up with the vast amount of information they produce, but now you have to pay for the security needed to keep some terrorist or teenage mutant ninja hacker from attacking your smart meter or worse the smart grid.

It makes you long for the good old days when all the terrorists did was toilet paper your front yard or egg the car windows.

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[1] http://searchstoragechannel.techtarget.com/news/article/0,289142,sid98_gci1355355,00.html

[2] http://www.nist.gov/testimony/2009/cyber%20sec-smart%20grid%20house%20hs%20hearing%20furlani%20final.pdf