CARB Economics

California took steps to demonstrate its environmental mojo once again releasing draft regulations to reduce California’s carbon dioxide and other greenhouse gas emissions to 1990 levels by 2020.

The 135-page draft regulation by the California Air Resources Board [1]sets a declining ceiling on greenhouse gas emissions and permits emitters to buy and sell permits to achieve the targets.  CARB scheduled the draft rules for public comment and revision saying it plans to adopt final rules by December 2010.

 

The rulemaking is required under California’s AB32 Global Warming Solutions Act which initially targets the 600 largest sources of greenhouse gas emissions such as electric power plants, refineries and concrete plants. After 2015, the emissions reduction requirements also will apply to other industrial emitters and transportation fuels.

The CARB draft rules go farter, faster than the RGGI rules adopted for the northeastern U.S. states regional trading system which focused on carbon dioxide emissions by big emitters. California plans to include almost every source of emissions to reach its goal.

 

Negotiating the Scope of the Final Rules

 

As expected California businesses complain the plan goes too far too fast, and will cost too much. A state advisory panel is at work revising the cost estimates for the AB32 compliance rules including questions about providing allowance support to ease business into the program and moderate costs.  But those recommendations are not due until 2010.  Make no mistake this will be costly and those costs will be layered on top of electric utility rates already spiking because of California’s ambitious renewable energy portfolio standards, costs for adding smart metering and other regulatory drivers.

 

While California voters generally favor environmental clean up strategies they are only beginning to feel the cost consequences of these new rules and programs even as the brunt of the recession still bears down on them.  There is a risk of voter and ratepayer backlash and politicians are becoming more cautious, but the die is cast in California and the practical result is that voters are more likely to take it out on incumbents at the next election than roll back the rules.

 

The draft rules CARB released November 24 2009 avoided several very tough issues yet to be resolved—will power companies and other large emitters get free allowances and if they must pay, how much will they be required to use an auction of credits to cover their emissions requirements.  Remember, Waxman-Markey sought to buy support by giving away large number of emissions allowances.  California emitters have learned that lesson and also want allowances given at little or no cost up front in any final rules regime adopted.  Doing so may mitigate some objections but it also undermines the effectiveness of the rules and delays their desired results beyond the 2020 target date.

 

How Much Will This Cost?

CARB Chair Mary Nichols said she expected the cost of an allowance for a ton of carbon dioxide initially should be around $10 based on how other programs operated. That is about half the current European price.  While a low allowance price will ease some of the concerns of emitters and the business community, a low allowance price will not be enough to change behaviors enough to achieve emissions goals California set in AB32.

Put that in perspective, in the most recent auction of emission allowances in the ten Northeastern states which are part of the Regional Greenhouse Gas Initiative (RGGI) the clearing price for the roughly 31 million CO² emissions allowances that were just sold dropped in the latest auction for the 2009 vintage to $3.23 per allowance. The RGGI auction for the second three-year control period beginning Jan. 1, 2012 saw 2.2 million allowances go for the 2012 vintage cleared at $2.06 per allowance.

So California officials expect their emissions reduction strategy to cost more—much more than the one in place in RGGI.  But state regulators responsible for implementing the 33% RPS standard are already saying the cost of that program will be significantly more.  So it is reasonable to assume that layering AB32 compliance on top of the 33% RPS targets will result in substantial rate increases.

Can California Make this Work?

The California Public Utilities Commission (CPUC) said achieving the 33% RPS goal will take until 2024 not 2020, and cost as much as $12 billion more in new transmission lines just in California to get such large scale renewable energy to market.  It will also raise utility rates even higher than the 16.7% rate increase required to achieve the current 20% renewable portfolio standard by 2020; and may not be cost effective because natural gas prices would have to be higher than $13.87/MMBtu and any proposed CO² tax would have to be higher than $100 per ton for renewable energy to be an effective hedge against fossil fuel prices from today’s typical utility portfolio. [2]

Achieving the 33% RPS goal is a condition precedent to implementing the AB 32 emissions reduction goal.  The BIG RISK facing California’s breathtaking push forward on these dual goals of expanding the use of clean and renewable energy while reducing greenhouse gas emissions is that it will take longer, cost more—MUCH MORE—and may not work to change behaviors sufficiently to be sustainable over the long term unless the prices set are higher than most of us will find affordable or tolerable.

 

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[1] http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm

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

California Politicians Paycheck Payback

You will love this story.

Salaries for California state elected officials are set by a, more or less, independent California Citizens Compensation Commission, just one of the scores of appointed boards and commissions which serve as waysides for other politicians in transition.  This commission is a little different.  The Governor appoints members to seven seats by categories: small business, non-profit public interest organization, general population, labor (two seats, of course), compensation expert, and major corporation executive. Commission members serve six-year terms.

In populist California the Pay Commission was created through the initiative process (how else!)  because citizens were fed up with state legislators raising their own salaries, giving themselves all state car allowances and boosting their per diem so they can be wined and dined at Sacramento’s many fine restaurants without having to spend their own money on it.

Proposition 112, passed by voters in June 1990, required the Commission to set the salaries and medical, dental, insurance and other similar benefits of Members of the Legislature and the State’s other elected officials.

Proposition 1F, passed by voters in May 2009, prevents the Commission from increasing elected officials’ salaries during budget deficit years.

So fast forward, after Prop 1F was passed the Pay Commission got the message that the voters were surly. California faces a major budget deficit and many of the special interest groups were also squealing that their programs are being cut in the Govenator’s proposed budget.  So in May 2009, shortly after the Prop 1F ballot measured passed the Pay Commission ordered the salaries of State Legislators and all state elected officials to be cut by 18 percent.  A scramble ensued at the State Capitol about whether they could actually do that!!!  EeeGads!

Politicians seeking cover on the issue sent their administrative staff from Senate Rules and Assembly Rules committees to the front lines asking Attorney General Jerry Brown whether the Commission could cut salaries (PLEASE, Jerry, save us!)  and whether any cuts approved would have to wait until the next Legislative Session (December 2010) to be effective ( or at least buy us time and wiggle room!) .

But Attorney General Brown is running for Governor so—surprise, surprise last week he issued a legal opinion asserting that, of course, state officials’ pay can be cut and the Commission can do so in the middle of their elected terms.

So on December 7^th (Pear Harbor Day—how fitting) the state will cut the pay of all 120 lawmakers and nine constitutional officers, including candidate Jerry Brown, now Mr. Fiscal Conservative instead of former Governor Moonbeam, a year earlier than expected, saving the state $2.8 million next year.

The Pay Commission Chairman Chuck Murray was surprised by Brown’s action telling the press there had been no discussion of implementing the pay cuts midterm since the Commission didn’t want a fight with the Legislature.

In addition to their salary, now reduced from $116k to $95k, California lawmakers get $173 for each day they are in Sacramento (so, of course, they always are!), and up to $400 a month for automobile leases, as well as state contributions for health benefits. The Pay Commissions order also whacks all of these benefits by 18 percent next month along with the pay cuts save the state another $1.2 million next year.

Let’s hear it for Populism in action!

COP15 Gets Hit by BRICs

You saw this coming didn’t you.  The countdown to Copenhagen was to be the place where the world finally was going to come to its senses and fix all the problems with the Kyoto Protocol—and make it enforceable worldwide.  What were we thinking?

The developed countries wanted action by the developing world—mostly the BRIC countries of Brazil, Russia, India and China—to agree to reduce greenhouse gas emissions on a fixed, enforceable schedule.  The BRIC countries said in response—not so fast —we’re just digging out of the economic mess you Americans and Europeans created for us with this recession and we have no intention to slow our economic growth rates.  And, oh, by the way, how much are you willing to pay us for reducing our emissions to get on board Al Gore’s private jet for this Copenhagen party?

Mon Dieu!  You mean you want us first world giants to pay you second world upstarts to clean up your act?  Besides you have a moral duty to save the planet from the climate crisis.

Yes, was the reply with practically no smirk—you buy all this stuff we produce and you want it cheap.  Clean up is expensive and will slow our growth and our global trade surplus.  Besides, if this is such a moral imperative, you should consider it a sacred duty to help us clean up this mess faster for the sake of the planet.

So month after month as the countdown clock to Copenhagen ticked onward, the consultative meetings were all the same tit for tat repeated over and over with little progress to show for it.  So the Danish Prime Minister seeing the ghost of Christmas future bringing a lump of coal for his stocking instead of a treaty sought to pressure the recalcitrant delegates by inviting their bosses—the heads of government—to the Copenhagen party.

The bluff failed.  The BRIC countries held their ground and the EU and American Administration conceded that there would, in fact, be no treaty agreement in Copenhagen. So the event is being rapidly ‘dumbed down’ from the treaty that saved the planet to just another consultative meeting—but with better food and drink.  Instead, the delegates will consider the event a framework for future consultative meetings.

So what?

There is a logical Plan B that might actually work:

1. Keep On Building Clean Renewable Power Generation. The United States and European Union can keep on expanding their use of clean and renewable energy sources to replace imported fossil fuels and domestic coal to improve energy sustainability.
2. Praise China for Driving Down the Cost of Wind Turbines and Solar Panels. China can help them by driving down the production cost of wind turbines and solar panels to grid parity first to meet its own energy demand growth and improve its environmental quality—and then export the products to the rest of the world to sustain its economic growth.  India and Brazil can so more of the same.  Forget the Russians, they got gas to sell!
3. Shift Wind and Solar Subsidies to Clean Coal Transformation. The US and EU can reduce and eliminate the wind and solar subsidies as China imports drive down the costs of renewable energy to mainstream grid parity levels.  They can then use the savings to advance carbon capture and sequestration to clean up their own coal act, reduce their dependence on imported wind turbines and solar panels from China, and make their vast coal reserves a cleaner, more sustainable energy resource once again. Besides, if the Chinese are going to storm the US and EU markets like they did Spain let them do so the old fashioned way—-earn it with low prices.
4. Build More Nukes! The US and EU should build more clean nuclear power generation as a hedge against coal for base load power generation.  This reduces our dependence on coal, reduces greenhouse gas emissions and reduces the EU dependence on imported Russian gas.  This even works for Japan since their build almost all of the containment vessels for these nuclear plants.
5. Invest in Unconventional Natural Gas Exploration. The good news story in energy is the growth of natural gas supply from unconventional sources.  This has been a boon in North America but the technology should help Europe and other markets unlock their own potential from unconventional gas and reduce the world’s dependence on LNG.
6. FERC High Voltage Transmission. In the US and Europe building transmission is difficult.  In the US we build only 3000 miles of electric transmission lines compared to more than 13,000 miles of natural gas pipelines for the comparable period because electric transmission siting and permitting is fragmented across the states while gas pipelines are all handled by FERC. Give FERC the authority to build electric transmission and then build a lot of it to bring more clean renewable wind resources from Texas, Iowa, Wyoming and other hard to get out of places into the markets that need them.
7. Just Say No! The BRIC countries will eventually clean up their own environmental act or risk their economic growth and public health.  Let them!

And guess what, we did all of this without Waxman-Markey passage, without Emissions Trading Schemes, and without a Copenhagen Treaty—and Al Gore saved a ton on money on buying his emissions credits by not having to fly his private jet to Copenhagen.

Maybe the planet is still safe after all.

Will Anger Over Rising Utility Rates Kill the SmartGrid Messenger?

Regulators and politicians have piled costs onto utilities to achieve their clean, green and on my watch agendas.  The cumulative impact of state renewable portfolio standards, spending for smart meters, investments in transmission and distribution upgrades to integrate renewable energy in the system, and ongoing capital expenditures was certain to raise utility rates.

The problem is ratepayers have been oblivious to what was happening—until now!

There is a tsunami of rising utility rates heading our way.  By some estimates electric rates could double over the next several years.  If natural gas prices return to their historic levels gas heating costs will spike as usual in cold weather adding to the misery index.

Here in California that tsunami is hitting.  The Fresno Bee carried a story about more than 100 people coming to a town hall meeting called by PG&E to educate consumers about the new smart meter technology PG&E is installing in their area.  Ratepayers in attendance wanted to hear none of that!

“The meters, in my opinion, are not very smart.”

That is what one customer told a state senator who came to get some good publicity from the ‘good news’ story of smart metering technology coming to Fresno.  But it didn’t quite work out that way.

According to the Fresno Bee reporter, Pablo Lopez, many PG&E customers brought their utility bills to complain about their skyrocketing costs.  Since the meeting was about smart meters that’s what they blamed for the cost increases.  The PG&E reps tried to explain that the billing increases were caused by summer heat and increased usage, but customers were having none of it.  When PG&E reps then told the crowd that the higher bills were the result of rate increases approved by the California Public Utility Commission in March 2009 you could have been trampled by the politicians heading for the door!

The other complaint even from customers who favored use of smart meters was that the part of the system that provides real-time information to customers about their energy use so they can make adjustments will not be in place for “years”.

You see what is coming, don’t you?

Use PG&E as an example.  This is a well managed utility that is at the forefront of smart metering technology, expansion of renewable energy in its portfolio and all the other things we say we want our utilities to do.  But we are beginning to get the utility bills to pay for these improvements—and we don’t like it.

PG&E has more than 9 million customers in California and about 1.7 million now have electric smart meters while 2.3 million have gas smart meters.  More than 78% of the Fresno senator’s customers now have smart meters so now he has a big problem too.

So by the end of the town meeting the senator was quoted by the Fresno Bee as saying:

“People don’t see the value in this program.  They just see higher cost, and that makes them angry.”

There was brisk business after the meeting with customers signing up for PG&E’s ‘budget plan’ which is a level billing plan to avoid rate spikes.  It does not lower the overall bill but it can help customers avoid surprises.  A growing share of utility customers use it, but guess what, no one told these ratepayers at the town hall meeting that the only way smart meters make sense is if the CPUC adopts real-time pricing and lets them feel the rate spikes so they use less energy to save money.

So what?

To borrow a phrase from a previous political disaster “the chickens are coming home to roost” and the consequence of the mostly (so far) state mandates for more renewable energy, more demand response, more energy efficiency, no coal, no new nuclear, no new hydropower and now smart meters is that our utility rates are programmed to double and may go even higher over the next few years.

The most visible factors for customers will be smart meters and renewable energy and the big risk for both utility and regulators is that public support for these programs could fall dramatically as the cost increases pile up.  The tsunami will continue and get worse for the politicians who are now so visibly supporting or demanding these programs when voters remember on Election Day 2010, 2012, 2014 and beyond when their opponents remind them that the senator from Fresno and elsewhere supported all these programs that raised your rates.

Moderation, people!  We need clean, renewable energy and a smarter more digitally proficient transmission grid to achieve our energy and environmental goals.  But the public will not support programs that come to be seen as unfair, unreasonably costly, and politically driven without also experiencing the tangible benefits they bring.

And when the tsunami hits the beach—or Fresno—those politicians that demand so much, so soon will be behind you——way behind you!

Comp Crap!

Like most people I am always shocked at the level of bonus payments and other compensation paid out by some Wall Street firms in a given year.  It seems obscenely excessive.

Part of the reason for it—a big part—is the arcane complexity of the IRS Code and Byzantine tax regulations which encourage sleight of hand and short-term thinking in order to favor one special interest cause over another.  Congress bears responsibility for this, but prefers to bash others rather than fix the problems encouraging risky behaviors.

Now in a one-two punch by politicians and bureaucrats both the pay czar and the Fed have imposed compensation caps or slashed the pay of key executives.  But there has never been a law against making money by following the tax code, if you can do so.

And guess what, there still isn’t!

This is revenge politics—a kind of ‘let’s find someone to hang’ designed to distract us from the failure of Congress and the Administration to craft solutions to the financial, regulatory, entitlement and other economic issues that bedevil us.  While that fear of revenge politics may discourage the TARP banks or GM or Chrysler execs from challenging these pay rules, there will be such a challenge in the courts.  I predict these rules will be swept aside as unconstitutional over reaching.

The irony in this eagerness to punish the bankers is that imposing these new rules TODAY has the practical effect of driving out of these institutions the very people recently put in place to fix the mess left by their predecessors.  Good luck with that!

Is it November 2010 yet?

Add this sorry story to a growing list of reasons people are realizing that this is not the ‘change we can believe in’ this is the change we fear.  It is the change that bleeds us of our liberties, deprives us of our choices, imposes the fiat of czars to replace the rule of law, and undermines confidence in our future when we need it most.

This too shall pass.

Moonwalking from Copenhagen

The countdown to Copenhagen is ticking away toward the UN climate change conference to be held there in December billed as a ‘must succeed’ event to save the world from the fate of global warming and greenhouse gas emissions.

Do I sound skeptical?

There is a lot at stake in the outcome of this over-hyped Copenhagen conference but the risks are mostly that the assembled politicians will engage in short term political correctness at the expense of long term economic growth.  The good news is that there are enough conflicts among the countries participating that the real threat of consensus to do something stupid is fast diminishing as evidenced by the posturing going on to reduce expectations.

Reading the press clippings from the round of consultative meetings is akin to reading the gossip pages or watching coverage of a Hollywood event.  As a student of history I am reminded of the infamous quip from Alice Roosevelt who said, “Dear, if you have nothing nice to say about people, please sit next to me.”

So what is being said?

• India Says Get Realistic. Environment Minister of India Jairam Ramesh laments that the Copenhagen delegates need to get realistic or the conference will face the same fate as the Doha Round of trade talks.  Interesting that he should make such a linkage because the implications of any agreement on enforceable reductions in greenhouse gas emissions on economic growth is the key issue dividing developed countries and fast growing developing countries.
• Environmentalists Worry No Deal Will Be Reached. You can tell that this conflict is serious when the environmental groups complains about the lack of leadership going into Copenhagen necessary to reach agreement and worried that the talks might fail accuses the developed countries of EU and the US of continuing to “dodge the hard decisions on slashing their emissions and funding the transition to a low carbon economy.”[1]
• China Leads Developing Countries in Rejecting Enforceable Targets. In Bangkok at a recent consultative meeting of those going to Copenhagen, frustrations spilled out on the table as China led 131 of the 180 countries at these advance climate talks in accusing the EU and US of “rejecting historical responsibilities” and trying to “fundamentally sabotage” the Kyoto protocol and the international negotiations over what will replace it.  Translation:  We the developing countries successfully avoided any accountability for our rapidly growing emissions in the Kyoto Protocol and we have no intention of allowing you EU and US “do-gooders” to force us into being accountable at Copenhagen for reducing our emissions especially if it slows our economic growth.
• Sudan has the Audacity to Accuse Others of Not Taking Responsibility. Sudan chairs a group of emerging countries called the G77 at the talks. In Bangkok Sudan’s representative said that the rich countries want to “kill the protocol.”  Translation:  Leave us alone at Copenhagen like you did in Kyoto Protocol. We will not agree to any enforceable targets imposed on us.
• We Don’t Have the Votes to Pass Waxman-Markey.  Carol Browner speaking for the US was forced to concede that there was no way the US Congress was going to pass this controversial bill before the Copenhagen event.[2] This was embarrassing for the Obama Administration which had hoped to have a bill signed by Copenhagen to wave in the face of the developing countries and complete the Obama apology tour for the US failure to sign onto Kyoto.

So the moon walking away from the Copenhagen cliff begins. . .

The Obama Administration says it wants an entirely new strategy to replace a legally binding world agreement with a voluntary one. This would be a big change from the Kyoto approach which set global emissions targets to a Copenhagen strategy of setting national targets.  For the EU this is blasphemy, but it likely is music to the ears of China, Brazil and India—-and no one cares what Sudan thinks anyway.

Ironically, after pillorying George Bush over rejection of the Kyoto Protocol, the Obama Administration now is proposing to scrap it completely in favor of what appears to be a self-policing set of national targets. The US risks being accused of undermining the Kyoto framework and its system of defining global emissions reduction targets by the Europeans and the environmental groups.  The issue between the US and EU involves how the national targets are set, but this can probably be finessed.

If the worst that emerges from Copenhagen is a set of fiery speeches about the horrors of global warming and emissions levels followed by a set of self defined and self enforced national emissions reduction “targets” that would be a good outcome.

It reflects another practical reality for President Obama—there is probably no way to get any Copenhagen Treaty—even a benign one approved by the US Senate in the run-up to the 2010 Congressional elections, and probably less chance after that.

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[1] http://www.panda.org/?177782/Climate-talks-could-go-the-way-of-trade-talks-as-leaders-lose-nerve-WWF

[2] http://www.guardian.co.uk/environment/2009/oct/04/us-climate-change-bill-browner

Is the ‘Change We Can Believe In’ a Disappointment?

Whether you voted for Barack Obama or not, there was a palpable sense of pride and hopeful expectation in his election.  We wanted to believe.  We who voted for McCain secretly rooted for him anyway. We lived into one of the most powerful strengths of America—our ability to change course.  And let’s face it, the Republicans ran out of gas—and good ideas long before the end of Bush’s second term.

So for the 2008 election we had a choice.  A wise old war hero who spent so much time in Congress he didn’t inspire us with where he might take us.  Or a brash, audacious young man whose soaring speeches reminded us of Camelot but offered little detail on where the “change you can believe in” would also take us.

We went for change we hoped we could believe in from a fresh face we hoped could deliver it.  And, in any case, we were ready to throw out the incumbents.  But after this first year of the Obama presidency we are losing much of our idealistic enthusiasm for what it is bringing us.  Yes, he faces tough problems not of his making.  But in some cases, he is making them worse—potentially much worse.

So far we are still willing to give him the benefit of the doubt.  The good news is we still hope these first year stumbles are the result of inexperience and that he will learn FAST from these missteps. The bad news is our sense of doubt is growing that maybe this is not going to turn out to be Camelot again after all. The awarding of the Nobel Prize largely for his aspirational leadership may turn out to be the turning point.  That it comes so soon is also both good news and bad.

At a time when we need for the recovery to take off, it is being diminished by growing fear of trillion dollar deficits built on a promise of stimulus that turns out to be the mother of all pork fests but producing very few jobs. Our president is outsourcing his leadership role to a Congress quite capable of screwing up a two-car funeral.  While he continues to deliver his campaign stump speech and blame his predecessor.

At a time when we are at a crossroads in the fight against terrorism and our “allies” in NATO largely refuse to fight, our President keeps apologizing for America’s perceived sins and shortcomings.  His equivocation undermines our best allies, emboldens our worst adversaries and cheers the Europeans—at least the Nobel committee.  Did they forget they spent the first half of the 20^th century killing each other until America came to their rescue to fight off the state sponsored terrorism of European warlords, Nazis and Fascists and then stay to defend them against Communism?

And then there was health care.  Oh, how we wanted to believe in change on this front.  We know the current system needs fixing.  We know it costs too much.  We could all sign up for options—public or not—if they brought more choice, better service and lower costs.  But the stark reality is this debate has little to do with health care and everything to do with politics.  The politics of trial lawyers that means there is no mention of tort reform anywhere.  The politics of insurance companies who first try to ‘cut a deal with the devil’ promising large costs savings if the Democrats will not take their monopoly profits away—only to have Speaker Pelosi renege on the deal and demand more.  Then there is the politics of labor unions making it difficult for Congressional Democrats to tax “Cadillac” health plans in a desperate search for revenue when the Cadillac being taxed is union health plans.

Like the drip, drip, drip of a leaky roof the ceiling overhead is getting saturated, and there is only one outcome.  It is not too late for the Obama presidency, but if they hear the footsteps of impending failure we have yet to see a “surge” of new leadership direction from that end of Pennsylvania Avenue to take back control from Congressional Democrats who are running the Obama bus in the ditch.

So I’m not sure whether that is the good news or bad news.  I am still waiting for some change I can believe in, but am coming to realize that it is, perhaps, not BAD if none of these grand plans make it out of Congress.

Smart Grid: Scalable Interoperability or Bridge to Nowhere?

SmartGrid is one of those transformation technology advances that offer both the promise and the threat of change—big change in the way we make, deliver, use and pay for energy. But smart grid is about more than energy.  To make it work, smart grid technology also requires communications equipment, computing hardware, peripherals, sensors and appliances, and the software to run them, gather the data from them, store it, analyze it, protect it and visualize it in meaningful, actionable, secure ways.

Even if the convergence of these communications, hardware, software and energy industries can come together to deliver on the SmartGrid promise, the whole thing could end up being a bridge to nowhere if utilities are unprepared to embrace it, if politicians drive up the costs by added mandates and requirements that are not supportable without deep and unsustainable subsidies, or regulators fail to adopt utility rate structures—dynamic pricing it is called—to expose customers to the real-time price consequence of energy consumption to encourage us to change our behaviors and thus create a market for SmartGrid technology and services.

Oh, and there is one more pothole to consider on the road to SmartGrid.  There are hundred of vendors each with their own proprietary software, equipment, protocols and requirements little of which works together—that’s the interoperability worry Energy Secretary Chu is rightfully obsessing over today.  He’s right.  As consumers we refused to learn to program our VCRs, we depend upon technicians to “calibrate” our HD TVs, and program our set-back thermostats.  All this SmartGrid stuff must be plug or play or else—we won’t use it.

I’m learning there are many obstacles to taking a simple idea—make all this stuff work together, and do it now.  These are just some of the smart grid pain points we’re facing:

1. What is Smart Grid anyway? The answer is it depends upon who you ask. When most of us hear about smart grid what comes to mind is the idea of “smart” meters that work both ways to give us feedback about our energy use as well as tell the utility how much to bill us.  Turns out that smart grid is about more than just meters.  Behind the scenes are communications networks, data centers, computing and storage hardware, sensors and devices that gather and transmit data, software that interprets data and feeds it to various users in ways that are actionable, secure and timely.  Feel the pain yet?  Smart grid is way more than just a meter telling my utility how much energy we use—and everyone along that energy, metering, networking, communications, hardware, software, marketing, energy generation, transmission, delivery and services value chain want a piece of the action.
2. Who’s in Charge of Building the Smart Grid? Not only are there many vendors in the smart grid value chain, there are state and federal regulators, investors, manufacturers, power grid operators, politicians, environmental and industry special interest groups and many others who want to shape and influence the design of a smart grid, the rules it uses to operate, the investment required and returns earned, stimulus and other tax money invested, ratepayer funds involved and how they are used.  For the most part, the only ones NOT involved (yet) today are end use customers for whom the smart grid is intended.
3. How much will all of this cost? You had better sit down for this!  While the Federal Government allocated $3.5 billion of the stimulus money for smart grid improvements, industry estimates are that building out the full smart grid may cost from $100 billion to $400 billion.  Count on the higher number!
4. Interoperability or Will All This Stuff Work Together?[1] The US Department of Commerce released a draft report on September 24th that includes 80 initial standards intended to make the vast array of interconnected systems and devices that comprise the Smart Grid work together to provide a secure, efficient, sustainable and environmentally friendly national electric grid as part of the National Institute of Standards (NIST Framework and Roadmap for Smart Grid Interoperability Standards, Release 1.0).  In fairness, this is a very big task and more than 1500 industry participants are involved in drafting a set of protocols, best practices and technical standards so we don’t have to endure the same ‘and the winner is BluRay’ market competition among all the manufacturers.
5. Who Owns the SmartGrid? Well, today the IT solutions for Smart Grid communications are proprietary and vertically integrated—that is one of the driving reasons for the interoperability standards in Pain Point 4 above.  The goal is to replace all of this with an open, standards-based architecture for SmartGrid communication to assure acceptance and rapid deployment. Between government standards and utility integration of these new technologies into the energy delivery system from which we get our electricity the objectives is to create that smart grid interstate highway system with as few toll booths and trolls as possible.  The telecom industry went through a very similar transition when its requirements for wireless and fiber optics and expanding networks forced it to do so. What emerged in telecom was the Session Initiation Protocol (SIP) as a solution for these needs. SIP was used usher in the widespread use of multimedia, unified communication and other devices we use today.  Many of the same approaches are now being considered or adapted as the energy, information technology and communications industries converge.
6. Why Are We Building the SmartGrid Anyway? That too, depends upon whom you ask.  But the goals have been to digitize the power grid to enable the use of new technology to improve energy efficiency, reduce greenhouse gas emissions, enable demand response, facilitate access to renewable energy resources, and allow new energy rate structures called “dynamic pricing” to encourage conservation.  These goals are fraught with potential conflicts at the federal, state, regional and consumer level—but keep asking that question.
7. Smart Meters Work Both Ways. Often when we heard about smart grid it is often in the context of smart meters replacing the old one-way utility meter that for generations has measured how much energy or water we use so the utility can send us a bill.  Smart meters enable two-way communication so that the data about our energy use can be gathered, analyzed, storage, and fed back to use in useful ways to achieve the goals outlined in smart grid pain point #6.  What will we do with that information? That is the big question.
8. Petabytes of Meter Data Management. Think about it, today the utility meter reader comes by our house once a month to read the meter and a week or so later we get a bill.  With Smart Grid the meter is read automatically not monthly, not weekly but perhaps as often as every 15 minutes.  But some standards call for equipment to be able to gather use data ever 2 seconds to “optimize” the performance and security of the grid.  Dealing with all this data is the elephant in the room of Smart Grid implementation.  So much information that it can easily overwhelm today’s utility information systems.  Solving this problem will require a massive new investment in information technology hardware and software—and time.
9. Scalability is the Elephant in the SmartGrid Control Room. When you add up all these pain points it creates another, even bigger problem.  Solving the smart grid is tough enough for one utility.  What happens when you combine the vendors, equipment, standards, policies, dynamic pricing rules, communications, data and all the rest for more than 200 investor-owned utilities and several thousand smaller publicly owned municipals and co-ops.  This is the ‘Manhattan Project’ equivalent for the Smart Grid—Scalability.  It is safe to assume that there is no computer system or network capable of managing the Smart Grid in real-time, 24/7 across even one of the three grid interconnects let alone do this for the entire North American Electric Reliability Corporation area.  Building the Smart Grid is the functional equivalent of going to Mars.
10. If They Build the SmartGrid will we Use it? You had to ask didn’t you! That is like asking why anyone would ever need a personal computer—as the CEO of IBM once did.  Why would anyone need a wireless telephone?  TV?  The advance of technology is relentless, permanent, and unstoppable.  And we all benefit from it and are betting that we can leave the planet cleaner, safer, and more user-friendly for our kids than we found it.  But some technologies win and others are rejected based upon ease of use sufficient to make them indispensable tools for living our lives.

Smart Grid technology promises to transform the way our power grids work and how we use energy—and $400 billion seemed like a lot of money before we got to know the Stimulus program.  But if we could truly realize these policy and commercial goals through SmartGrid IT investments it would be a far better use of our tax money than building Bridges to Nowhere.

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[1] http://www.nist.gov/public_affairs/releases/smartgrid_interoperability.pdf

Energy Economics and the US Dollar: Side Show

Here is the San Francisco Bay Area we have a dangerous cultural phenomenon playing out on the streets.  It’s called a “side show” where groups of people use Twitter and text messaging to randomly select a location to rapidly assemble in their cars and motorcycles to perform spins, wheelies, and other dangerous stunts and then disperse before the cops arrive.  This is the modern version of the drag race, but people can and do get hurt.

We have a similar kind of “side show” playing out in the chatter about the value of the US dollar and its implications for energy prices. Recently that side show has taken the form of press rumors that there is a conspiracy to dump the US dollar as the world’s reserve currency for a basket of others.  Separately, but playing on the same theme are the periodic rants from the bad boys of the world from Iran, Venezuela and others blessed with oil but cursed by stupid leaders who urge shifting oil trading into some non-dollar denomination.

There are problems with the value of the US dollar but being dumped as the world’s reserve currency is not likely to be a consequence of its current weakness.  Let’s face it, who else in the world would put up with all these other countries, can float as much debt to create a cash pool big enough to park other currencies, or has the underlying maturity and financial strength (even today) to be the market clearinghouse for the global economy?

So what does this have to do with energy?

Commodity markets particularly in oil have been used, and abused, as a way to compensate for the weakness of global equity markets, currency fluxuation, and to increase the liquidity for traders in a time of market uncertainty.  But the cure for that is to strengthen economic fundamentals, restore confidence in the markets, and shift focus from a need to CYA near term to growing earnings and valuation long term.

Yes fundamentals matter both for the broad economy of nations and the world—as well as energy.  On the energy side, we are engaged in a rather healthy debate right now about our energy future, mix of fuels, sources of power generation and the price we are prepared to pay as consumers to achieve the emissions reduction aspirations of our politicians.  The recession is buying us time (how’s that for sick logic?) to have this debate, but reality is setting in sooner than some politicians had hoped.

For the same reasons the US dollar is likely to continue as the world’s reserve currency (there simply is no practicable alternative!) I suspect the world’s energy balance will come through this period of reflection and debate recognizing the realities that the fastest path to a cleaner environment is through healthy, productive, growing economies around the world where investment in new technology is made, energy efficiency in new plant and equipment is built in to expansions, and the social policy is worked out to enable global markets to work efficiently with the least distortion from trade barriers, subsidies, or misguided industrial policy experiments.

Don’t expect that prescription to come from Copenhagen or Washington or Brussels or Beijing.  But competitive global markets have a way of enforcing balance, and consumers still look out for their own economic self interest.  So the best defense for both nation states and individuals is healthy, competitive, open world markets including energy.

The Utility Future is Renewable Energy Distributed Generation

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.

If this sounds like hype to you, consider the following ten factors:

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.

This convergence of forces is engaged in a battle to kill the economies of scale for large central station generation from coal and nuclear power.  While wind energy has captured the most renewable energy market share and early enthusiasm for clean energy choices, it is solar power that is the most pernicious threat to the utility business model.  Solar represents the foundation for a distributed generation alternative to the traditional utility.  The only thing standing in the way is cost.

While we can expect to see substantial construction of natural gas fired combined cycle generation to back up renewables, balance load, and follow load, the probabilities of carbon capture and sequestration anytime soon are low given the high costs and unproven technology, and NIMBY problems of siting and permitting.

The utility conclusion: let the government invest in CCS and take the risk.  Except for a few nuclear power specialists like Exelon, Entergy, Southern and a few others, expanding nuclear power under these convergence conditions is not worth the risk especially if inflation is likely during the construction period.  Build new pulverized coal even if it is scrubbed—not a chance.

So if you’re the utility CEO and your shareholders are asking how you plan to grow earnings what would you do?

If you are a traditional Midwestern utility with an established base of coal fired generation you will invest the money to add scrubbers to every plant not so outfitted (about 60% of coal plants are not scrubbed) and do whatever you can responsibly to do clean up plant operations, reduce emissions and run those plans as long as you can to extract their full remaining value.  Then you build renewable energy with natural gas back up.

If you are an investor owned utility with an operating nuclear power plant your choices are more complex.  You likely face a life extension decision, a turbine replacement investment decision—the question is do you feel lucky?  If your engineering analysis says you are more likely than not to recover your incremental investment in the plant you probably will ‘go for it’ and hope for low inflation.  Prudence suggests a well functioning nuke in a carbon constrained market will do well.  Then you build renewables and back them up with natural gas.

If you are an investor owned utility in the California or Southwest, you have no coal, you can’t build more hydro, you can’t build more nuclear, so you build renewable energy particularly concentrating solar power (CSP) and then you build distributed generation solar and some wind in your service territory or close by to mitigate transmission needs.

And then you make it hum like a Swiss watch.  You embrace energy efficiency and demand response with a vengeance, you roll out smart meters and dynamic pricing and you wrap yourself in the green flag of inconvenient truth and use all the available powers of convergence to transform your investor owned utility into a distributed generation utility that strives to engage customers in a process of self-denial, self-control and self sufficiency all with the help of a million solar roofs some of which your utility will own.

And why will you do this Mr. Utility CEO?   Because it will be the best way to make your allowed rate of return on equity; grow your unregulated distributed generation business, and defend yourself against the onslaught of giants seeking to aggregate your customers, bundle commodity energy with other ‘stuff’ and resell it at premium prices you dream to charge in a dynamic pricing world ahead.