Source US EIA

California is experiencing growing concerns over resource adequacy.  The CAISO took the unusual step of objecting to the proposed shut down of the Calpine Sutter natural gas power plant at FERC saying the plant would be needed as soon as 2017 to assure resource adequacy and thus is made no sense to shut it down now.

Why is Sutter being shut down?

Because California electric demand is weak along with its economy, but all that renewable energy being added to the grid is classified as “must take” so the gas plant gets dispatched after any available other resource. The independent system operator says the growing number of wind and solar resources being procured to achieve the State’s 33 percent renewable portfolio standard (RPS) is adding substantially more volatility to the grid raising worries about resource adequacy because if the state’s thermal resources shut down there will not be enough load following capacity to back up all that intermittent renewable capacity and maintain grid stability.

CAISO asked FERC on January 25, 2012 to stop Calpine’s shut down of the 525-MW power plant near Yuba City at least until the end of 2012 by granting a waiver of its rules so it has time to bring its stakeholders together and make some hard decisions about how to assure resource adequacy. The first meeting of that stakeholder group will take place at CAISO February 6, 2012 and the participants have ten days after that to submit comments.  Why the sense of urgency?

Calpine planned to shut down the combined cycle power plant in May 2012 because it had not been classified a capacity procurement mechanism (CPM) plant.  A CPM designation improves the plant’s dispatch order in the CAISO supply stack as necessary for reliability purposes.  In this way Calpine gets paid for keeping the plant available.  Without that CPM designation Calpine loses money on the plant.

The catch 22 in the CPM designation is that to classify a plant as CPM it must be needed for reliability purposes by “the end of the calendar year following the current resource adequacy compliance year.”  CAISO is telling FERC that allowing even one load following plant like Sutter to shut down risks its resource adequacy calculus because there is too much volatility in the grid and it will get worse as more renewable energy resources are added. So while Sutter does not meet the technical letter of the CPM classification rule by being necessary for reliability by the next compliance year (2013) it will be needed by 2017—and the risk of shutting it down now for such a narrow and uncertain time difference is not worth the risk.

CAISO worried by sum of regulatory impacts on reliability

As if to put FERC on notice that there will be more of these filings to come, CAISO warned it would need Sutter and more load following natural gas-fired capacity like it after 2015 because new environmental regulations on once through cooling water use will force the retirement of 12,079 MW of existing California natural gas capacity over the next eight years.   California Public Utilities Commission to help assure resource adequacy by picking up the pace of procurement of load following resources in addition to all that renewable energy.

The bottom line is CAISO is forecasting a capacity gap of 3,570 MW by the end of 2017 and expects that capacity gap to grow to 4,600 MW by 2020 despite the addition of all that new renewable energy—if the current economic growth conditions continue as weak as forecast.  If California growth picks up faster—all bets are off.

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Image via Wikipedia

Spain’s new Prime Minister Mariano Rajoy suspended the nation’s feed in tariff subsidies for all new renewable energy projects January 27, 2012 announcing that Spain could no longer afford it given its budget deficit.  There has been widespread trepidation that the FiT program would be cut, but the swift and decisive action suspending the program entirely left the renewable energy industry reeling.

As if to remove any doubt about its future, the Prime Minister went further saying the administrative machinery to support FiT would also be dismantled.

Day of rapture for renewable energy

Share prices for renewables energy companies fell hard lead by Vestas Wind Systems A/S (VWS), the biggest wind-turbine maker, with a 2.9 percent share price decline. Abengoa SA, the Spanish solar mirror engineering firm fell 2.2 percent.  Iberdrola SA (IBE), the biggest renewable energy producer based fell 1.5 percent as it is more diversified across global markets.

The action did not effect “either the installations in operation, or those that are already registered” meaning all current projects are, for the time being, still receiving their subsidy payments.

The government said the suspension of the feed in tariff program would not put Spain’s contribution toward achieving the EU 20% renewable energy target by 2020 at risk, putting a good spin on a the reality that the out of control feed in tariff subsidies had produced installed renewable generating capacity and its essential gas fired combined cycle backup generation in Spain fully double the country’s peak demand.

Spain’s new government said it had to act to rein in the out of control cost of the subsidies for renewable energy projects to cut its 24 billion euros ($31 billion) budget deficit and reduce future power-system paid through the national budget. Industry Minister Jose Manuel Soria said that Spain’s energy problem had turned into a financial problem necessitating the end of the subsidy regime as power system debt increased because revenue from state- controlled prices no longer covered the cost of delivering power and the government did not want to increase electricity rates for fear it would worsen the economic conditions facing the country.

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• Spain suspends clean power incentive program to reign in costs (gigaom.com)

SOURCE: American Gas Association

In “Economic and Employment Contributions of Shale Gas in the United States” IHS Global Insight says shale gas production is producing significant benefits for the U.S. economy from lower natural gas prices, significant growth in direct and indirect jobs and substantial tax revenue.

The impact of the growth of unconventional gas is staggering.

• In 2011, unconventional gas market share reached 34 percent of all U.S. natural gas production. By 2035 it is expected to be 60 percent of all U.S. natural gas production. Better yet, the full-cycle cost of unconventional gas wells was up to 50 percent lower than the cost of natural gas from conventional wells.

• In 2010 unconventional gas was responsible for 600,000 jobs but is expected to grow to 870,000 by 2015 and 1.6 million in 2035. The cumulative impact of this growth in unconventional natural gas is expected to generate more than $1.9 trillion in capital investments into the economy delivering more than $933 billion in tax and federal royalty payments over the next 25 years.

• Lower domestic natural gas prices will save a typical US household $926 per year in between 2012 and 2015. Better yet, those savings from continued lower projected natural gas prices will grow to more than $2,000 per household by 2035.

These same low gas prices also benefit utilities producing an expected 10 percent reduction in generation fuel costs nationally, over the period to 2035. Even better, low natural gas prices will encourage more industrial growth across North America. Global Insight says industrial production will increase by 2.9 percent by 2017 and 4.7 percent, by 2035 helping rejuvenate America’s domestic manufacturing base.  The fastest growing segment of natural gas growth is fuel demand for power generation. Low gas prices keep customers happy and enable utilities to focus on other priorities.

There is good news and bad news about the impacts of unconventional natural gas on renewable energy and the clean energy future.  Low gas prices are ruthlessly efficient at undermining the economics of coal and nuclear baseload generation.  In fact, low gas prices are likely to have as profound an effect in reducing coal’s market share as the onerous EPA regulations proposed.  IHS CERA has forecast that as much as 36 GW of coal fired generation will be retired over the next ten years as a result of the combination of low gas prices and EPA regulations.  This is a lower estimate than others have offered but still a significant reduction in coal market share.

But low gas prices also pressure renewable energy in several ways.

1. Grid Parity Price is Going Lower. The very definition of grid parity against which renewable energy is measured is the price of natural gas fired combined cycle generation.  So lower gas prices also increase the gap between above market renewable energy costs and grid parity.
2. Low Renewable Efficiency versus High Gas Efficiency. All renewable energy requires back up from natural gas because of its intermittent nature.  So there is an increasing performance challenge facing renewables.  If your project requires backup from natural gas but if gas is cheaper, more flexible, has an efficiency rating of 65% compared to a solar efficiency of 20% and a wind efficiency of 35% and gas is fully dispatchable why not just build more gas once you reach your mandated renewable portfolio standard targets.
3. Subsidy Fatigue.  The expiration of the Section 1603 treasury tax grants and the diminishing enthusiasm for additional tax subsidies puts tremendous pressure on renewable energy especially solar whose production tax credit authorization expires at the end of 2012 compared to wind production tax credits that extend to 2016.
4. Losing the Technology Edge.  The business strategy of renewable energy has been to rely upon renewable portfolio standards across the states to create mandatory demand, depend upon Federal tax credits and subsidies to improve bankability reduce the cost gap, and increasingly to substitute cheap solar PV panels and wind turbines from China for more efficient newer technologies. The consequence of this survival strategy is that it leaves renewable energy weaker and more dependent upon the oldest, least efficient solar and wind technology.  Meanwhile natural gas power plant builders GE and Siemens have invested in improving the efficiency of gas combined cycle to about 65%. This is a huge gap for renewable energy to close given the average ~ 15% solar efficiency and ~ 35% efficiency for wind.  This is not the place American renewables companies want to be in a global competitive market nearing the achievement of state RPS targets.

The bottom line is low natural gas prices complicate the competitive market strategy of renewable energy.  While low gas prices hurt coal and nuclear badly they also bring down the grid parity price to beat for renewable energy.  To win long term renewable energy must refocus on improving its technology and efficiency to break the cycle of dependence on the oldest PV and wind turbine technology with the lowest efficiency ratings.  The clean energy future depends upon the best technology not the oldest and least efficiency.

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• Renewable Energy Must Make Tax Policy Change its Friend (insightadvisor.wordpress.com)
• Subsidizing Commodities Never Makes Sense (insightadvisor.wordpress.com)
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IBM Cloud Services Graphic by IvanWalsh.com via Flickr

The beginning of a New Year is the traditional time for predictions or New Year’s Resolutions.  We see them in every industry category.  Gartner is out with a list of its own that includes some items that could have some profound implications for the changing energy industry.

Here’s the Gartner list and my take on the energy industry implications if they got it right:

1. In 2013, the investment bubble will burst for consumer social networks, and for enterprise social software companies in 2014. If this means that we will not see the Facebook IPO until 2014 and by then it will disappoint all, I get it.  Social media has become a fad and Facebook has taught us that posting our rants and raves on the wall may get us attention but not respect. Since energy and utility companies are often late adopters this is good news.  Instead, I believe the real business potential from social media will be the tools for collaboration at work behind the firewall and the potential for collaboration across project teams, alliance partnerships and other secure settings to live into our virtual world of work future.
2. By 2014, 20 percent of Asia-sourced finished goods and assemblies consumed in the U.S. will shift to the Americas.  We all hope this is true and evidence suggest that the combination of rising wages and costs in China, concerns over intellectual property leakage, low energy prices in North America and the market share growth of China exports will play factors in this trend.  For the energy industry fuel demand for power generation will be an important metric and managing the price position and risk in the portfolio to get to grid parity pricing will make a huge difference to sustainable growth of manufacturing at home.
3. By 2015, 35 percent of enterprise IT expenditures for most organizations will be managed outside the IT department’s budget.  For many energy and utility companies the growth of IT has been faster than the investment in the core competencies of the business.  This has left many executives asking what business are we in?  Some of this is the horrible cost of enterprise software solutions and ongoing maintenance and configuration that means a permanent encampment for contracts from Accenture and other IT services firms.  IBM is putting a smarter planet name on it but the bottom line is the same we will be there for you until your money runs out!  The other IT problem beyond just cost is that the tail is wagging the dog in the functional organization of the enterprise.  Utility operations lost control of their legacy software years ago but have not seen its features and functionality replaced with better enterprise solutions.  Meanwhile, operating costs are creeping back up to backstop the lack of IT performance at the front line of the business.  Salesforce.com and other cloud-based software as a service business models are bearing down on SAP and Oracle and other enterprise solutions forcing them to compete at ‘grid parity’ with these new entrants.  It is healthy competition but do we have to wait until 2015?  Bring it on!
4. By 2015, low-cost cloud services will cannibalize up to 15 percent of top outsourcing players’ revenue.  This is music to my ears, it accelerates the transformation predicted in #3 above and also means that big data will not be used as an excuse to further embed enterprise giants in the Fortune 500 when cloud-based, predictive analytics solutions will be faster, cheaper and maybe better since the modules used in the Apps Stores will be better suited to the tasks at hand and all connected to the common data warehouse.
5. By 2015, mobile application development projects targeting smartphones and tablets will outnumber native PC projects by a ratio of 4-to-1.  The sleeper in the move to mobile could actually be Microsoft.  If it can remove the bloat from Windows, turn Office into genuinely user friendly apps, add mobile access on touch screen and other devices and leverage the power of Dynamics and SharePoint and other acquisitions the Microsoft ecosystem is going to be tough to beat.
6. By 2015, the prices for 80 percent of cloud services will include a global energy surcharge.  This shows Gartner’s lack of energy domain expertise.  It is more likely that those data centers will turn into net energy suppliers to the grid capturing the waste heat, automating virtually everything to enable energy efficiency and demand response and using their big data capabilities to perform revenue producing ‘side jobs’ that turn each data center into a profit center instead of big energy sink!
7. Through 2015, more than 85 percent of Fortune 500 organizations will fail to effectively exploit big data for competitive advantage. Big data is seen by many IT firms as the functional equivalent of the Y2K printing press opening the door to new hardware, software and services demands.  Moore’s Law and SaaS is our friend along with cloud services to make it work.  This must be a subliminal pitch for some Gartner advisory service to Fortune 500 players because it just does not seem to be a big deal.  Putting your data to work will not be nearly the challenging as deciding what to put it to work doing.  That problem is a management strategy and vision issue.
8. Through 2016, the financial impact of cybercrime will grow 10 percent per year, due to the continuing discovery of new vulnerabilities.  As a guy who recently had his STRATFOR account and my American Express card hacked the cybercrime this is here now.  I need no further predictions on this.  Those cloud based services we discussed earlier may be part of the solution for cyber crime if the cloud can be made more secure and less hackable.
9. By 2016, at least 50 percent of enterprise email users will rely primarily on a browser, tablet or mobile client instead of a desktop client.  Email as we know it and use it seemed ripe for transfiguration into a more robust collaboration platform that integrated more features than inbox and spam. The growth of tablets and mobile mean we have many more ways to access data, collaborate with friends, family and colleagues and put our data and ideas into action.  It’s time to reimagine email to be that integrated gateway to productive collaboration.
10. By 2016, 40 percent of enterprises will make proof of independent security testing a precondition for using any type of cloud service.  Only 40%?  I’d bet that by 2016 independent security testing will be ubiquitous and a condition precedent to using and cloud based service.  We can solve the cyber security and spam problem—and we must.
11. At year-end 2016, more than 50 percent of Global 1000 companies will have stored customer-sensitive data in the public cloud. DUH!  This is likely to happen before the end of 2012 Gartner-baby!  We will not trust the cloud to be the disintermediator of our IT future unless it can keep secrets.

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Source: Trefis

“In the last two years, the delivered cost of energy from PV was cut in half. NRG expects the cost to fall in half again in the next two years, which would make solar power less expensive than retail electricity in roughly 20 states. The expected drop in solar costs has the potential to revolutionize the hub-and-spoke power system, which currently makes up the power industry.”    — David Crane, CEO, NRG Energy

It was not supposed to be this way, and yet here it is—the highly regulated monopoly central station generation business model of the electric power industry in place for more than 100 years is being turned on its head by the combination of disruptive technology, disruptive regulation and disruptive global competition.  Every new disruption seems to accelerate the process of change.

David Crane is no stranger to exploiting disruptive change.  He has used it skillfully for years to turn NRG into a competitive powerhouse from its early beginnings as an unregulated subsidiary of Northern State Power in Minnesota. NRG Energy was reborn in 1992 after passage of the Energy Policy Act authorized exempt wholesale power generation in the US markets.

These new independent power producers made their early living exploiting the regulatory mandates and loopholes of the day just as renewable energy has done more recently.  Using PURPA’s mandate that utilities buy power from qualifying facilities at their avoided cost they build merchant generation typically natural gas-fired combined cycle power plants able to follow load and produce a variety of power products.

Later as investor owned utilities divested old power plants as a price for entry into new competitive retail energy markets, these exempt wholesale generators bought them, ‘pimped them out’ to run faster, better and cheaper than the utilities had done and sold the capacity and energy into the market. Later came  sale of nuclear power plants for those IPPs qualified to run then, then more recently as renewable portfolio standards, treasury tax grants and other subsidies made renewable energy the only game in town in a depressed, uncertain economy the end game was on.

How does China fit into this?  Low prices, always low prices from China’s ferocious exports machine able to commoditize solar panels and wind turbines and sell them to eager global markets at prices lower than domestic manufacturers.  It was for a while a virtuous circle stimulated by subsidies, lubricated by RPS mandates, supported by environmental advocates as the best thing since canned beer (recyclable aluminum cans of course).  The government provided regulations to create the mandates and subsidies to offset the above market costs of compliance.  Projects were promoted and helped along by politicians eager to pander and always ready to show up for the press at a green job creating ribbon cutting. Those were the good old days.

Today there are storm clouds on the renewable energy front.  The air is being cleared and the reality we see is the terror of grid parity and China’s export machine at work suctioning up subsidies and global market share, creating green jobs in China not Boston, and leaving the remnants of a growing renewable energy industry struggling to survive.

The glut of solar panels worldwide leads the David Crane’s to rethink business models.  It bankrupts advanced technology players like Solyndra no longer able to compete in a commoditized PV driven market.  It now forces entire nations like Spain, UK and Germany to unravel their feed in tariff policies because they backfired in the face of rapidly falling PV prices.

The fear of falling prices is accentuated by that lack of commitment on building better mousetraps.  Five of nine of California’s large approved solar thermal utility scale projects are abandoning their challenging molten salt projects replacing the technology with cheap PV panels.  The state of California is enabling this because it is more committed to reaching its 33% RPS goal than it is in advancing the real option value of renewable energy technology development. Yes the projects are cheaper, but the switch to PV from solar thermal gives up on energy storage in molten salts.  It gives up on improving efficiencies in next generation technology that China does not yet have.  It consigns ratepayers to overpaying for rapidly obsolescent technology. It wastes all the R&D effort that US DOE and the California Energy Commission say they are putting into new technology development.

It is time to break the cycle of the race to the renewable bottom.  Solar PV is at or near enough to grid parity that we should cease and desist from subsidizing its commodity purchase.  Focus tax credits and incentives on the next generation of technology.  Focus R&D on improving efficiency and driving down the balance of system costs.  Secretary Steven Chu made a big deal of the Sunshot program to drive down the cost of solar to $1 per watt.  Guess what?  Falling PV prices beat US DOE to that target so why are they still spending money on it.

Everything in the renewable energy business has speeded up, but it is often a race to the exits.  The unintended consequences of market manipulation whether done by industry to protect monopolies as utilities have done in the past, or by politicians eager to pick winners and losers in an industrial policy roulette with taxpayers’ money, or by export nations like China able to analyze the opportunities and position their export machine to vacuum up money out of the global markets for old technology now made cheap, cheaper and the cheapest ever.

The renewable energy industry has a promising future.  But that future belongs to the innovators, the new technologies able to drive up efficiencies and performance, drive down the balance of system costs, and position their products to compete head-to-head at grid parity prices with other technologies.  Chasing fickle government subsidies or joining the race to the bottom with commodity pricing of the oldest, least efficient technology is not the way to the future we want.  It turns renewable energy into a fad and consigns it to the same category as pet rocks!

The lesson is the fundamentals driven boom and bust business cycle is alive and well in the globally competitive energy industry and competitive market will not be denied rationalization and the constant search for equilibrium.  No amount of market manipulation, industrial policy gaming, or political correctness will stop it. Thank God!

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• Grid Parity Reality Hits Home for Renewable Energy (insightadvisor.wordpress.com)
• Solar grid parity 101 – and why you should care (grist.org)
• Solar Grid Parity 101 – Solar grid parit (solarmakescents.net)
• Solar Energy Worry List (insightadvisor.wordpress.com)
• California puts Solar PV on Utilities Christmas Shopping List (insightadvisor.wordpress.com)
• Renewable Energy Buyers Remorse: How Big a Risk? (insightadvisor.wordpress.com)
• Gold rush of federal subsidies for clean energy (seattletimes.nwsource.com)
• NRG Energy CEO: Roof-top solar cheaper than grid in 3-5 years (junkscience.com)
• A Gold Rush of Subsidies in the Search for Clean Energy (kleenergyecosystems.wordpress.com)

In the previous post I reviewed the unintended consequences of Germany’s generous above market prices feed in tariff subsidy in a fall global PV price market. The result was that German taxpayers spent a lot of money to promote solar energy market growth hoping to create a sustainable domestic market of clean energy producers and a growing market share of electricity sales from renewable energy to meet emission reduction targets.Instead they created a bubble now bursting because excess solar installations are driving up subsidy costs even while global PV prices are falling.

So German taxpayers will pay out more subsidies than planned leaving a big hole in the national budget. They pay higher utility bill surcharges for the renewable energy only to see the cash suctioned up by China’s efficient export machine undermining domestic German solar energy manufacturing just as in Spain and other countries with above market FiT subsidies.

The second unintended consequence for feed in tariff subsidies of photovoltaic panels is that the Government is spending money to promote the oldest, least efficient, and most easily commoditized solar technology thus playing to China’s export growth strengths, instead of investing in the next generation of more efficient, better performing and lower total cost technologies German engineering and manufacturing expertise is so capable of producing.

Average solar photovoltaic panel efficiencies are about 14% today.  Better solar technologies today near 20% efficiencies.  Compare that to the 60%+ efficiencies of natural gas combined cycle generation or the 85%+ efficiencies of baseload nuclear power.  But in Germany today nuclear is, well—radioactive!  The German government has decided in its wisdom after the Fukushima Daiichi disaster following the Japanese tsunami to phase out German’s nuclear power generation fleet at a cost of $1.7 trillion according to a Siemen’s estimate.  But it is going to take a lot of solar panels at 14% efficiency to replace all that 85% efficient nuclear power.

Germany’s feed in tariff accelerates installation of the most inefficient solar technology. Solar PV receives 56% of all green energy subsidies while producing only 21% of subsidized energy and that energy is only 14% efficient.

Wind energy in Germany which today supplies five times more energy than solar at the same cost. Small scale hydro provides six times the energy output at the same subsidy cost.  Solar subsidies also drive out spending on energy efficiency. But renewable energy is not Germany’s only goal. It also faces tiff targets for emission reduction so the lower the efficiency in producing energy from non-fossil sources the harder it is for German to meet the emissions reduction goals.  Thus the practical consequence is the cost of cutting a ton of CO2 emissions, is €5 from adding insulation in an old building to improve energy efficiency, or €20 in a new gas-fired power plant or €500 into a new solar energy system.  The Munich-based Ifo Institute for Economic Research says its research concludes the benefit to the climate is the same in all three examples but they have radically different costs and impacts.

So what did German politicians do?  They whacked nuclear and bet the farm on solar thus risking both their renewable energy goals and their emission reduction goals.  Oh, don’t worry they will achieve both of those goals but the cost will be staggering!

The lesson is never trust politicians with your wallet or your national priorities—they will spend both on politically correct short term choices until your money runs out.

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SOURCE: der Spiegel

Germany’s solar market has been red hot.  So hot, in fact, installations of PV panels in 2011 totaled a record 7.4 GW out of 28 GW installed worldwide according to Bloomberg New Energy Finance. Worldwide solar installations rose 50% in 2011 on falling PV prices caused by overproduction for exports in China.  But that red hot solar market is burning the sustainability out of Germany’s global solar market leadership.

But instead of celebrating its 7.4GW achievement there is wailing and gnashing of teeth in Berlin since the feed in tariff subsidized goal for solar installations in 2011 was only 3GW and the government is on the hook for subsidy payments for the excess.  Solar subsidies in Germany totaled more than €8 billion ($10.2 billion) in 2011, but produced only 3% of total power produced. Those 2011 solar installations alone will cost electricity customers an additional €18 billion in subsidy costs over the next 20 years according to Rhine-Westphalia Institute for Economic Research (RWI), and industry research group which estimated that total German subsidies for solar energy now total more than €100 billion.

This must stop!  Germany’s solar bill is like a parent getting his teenager’s spiking mobile phone bill 250% higher than expected because the kid’s phone habit is insatiable, the meter is running, and Dad is paying the bill.

Germany’s Economy Ministry joined the angry parent club proposing an absolute 1 GW cap on subsidies for installations in a replay of Spain’s ruthless but effective cap on solar subsidies that saw Spain reduced from world PV market leader in 2008 to 8th position in 2011.  Now Germany is debating the same tough love medicine despite industry complaints that such action will ruin the German solar market.

But for politicians forced to deal with this subsidy surprise over and over it gets worse.  German utility customers now pay a green energy surcharge on electricity bills of 3.59 cents per kilowatt hour of electricity. The German government had promised to limit the surcharge to 3.5 cents but was unable to keep that promise. Now because of the excess solar installations that green energy surcharge is also surging to 4.7 cents per kilowatt hour or about €200 more per year on a typical household energy bill in addition to the any other rate increases for actual costs approved by regulators.  In a volatile and weak EU economy spiking utility bills are not what politicians or voters want to face.

FiT in a Falling Price Market

Above market local feed in tariff subsidies in a falling global PV price market is forcing Germany to fundamentally rethink its support for renewable energy. The man responsible for paying Germany’s solar bill for these subsidies, Environment Minister Norbert Roettgen sounded like an irate parent when he got that bill.  He said the German government would begin reducing FiT subsidies monthly instead of twice yearly as in the past to “curb an unacceptable surge in installations” from feed-in tariffs providing subsidies at above- market prices for solar power.

The solar industry learned to game the twice year FiT subsidy review process in Germany so they often times projects to come on line to qualify for the higher FiT subsidy at the last minute.  For example, installations in December 2011 totaled 3 GW–the entire annual target—in order to qualify for the higher FiT subsidy before the rate dropped in January.  So much solar was installed that it will take a mere 225MW of additional installations in the first quarter of 2012 to trigger another 15% reduction in the Fit in July 2012 under the old rules.  Minister Roettgen hopes cutting the FiT allowance monthly will stop that gaming, but in case it does not do so—he said all solar subsidies would end in 2017.

Well, that cold turkey announcement sent solar share prices plunging in global markets.  Germany has been the hope and prayer for many solar companies seeking to avoid disaster from falling PV prices. Meyer Burger, Europe’s biggest maker of solar-panels, fell 6.6%. SMA, Germany’s biggest solar company, fell 5.3%. SolarWorld, the big German PV panel maker, fell 6.5%.

The lesson is feed in tariffs are a good way to jump start a new technology but they create dependencies and manipulate market behavior in ways that often have unintended consequences for all.  In Spain, Italy and other EU countries these subsidies created unsustainable ‘bubble’ markets that China was able to easily exploit to suction up subsidy money through falling prices for its export panels that undermined domestic producers, took global market share and used the proceeds to pay for its own domestic production capacity.

This is not the outcome anyone imagined—but it is the reality all must now face.

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Growth Forecast of US Shale Gas by US EIA

The decision by President Obama to reject the Keystone XL pipeline designed to bring Canadian oil to US Gulf Coast refineries was a surprise to no one.   Officially, the State Department said it rejected the project because the Republicans in Congress imposed a deadline of 60 days for review and decision on the project that was insufficient to allow consideration of the issues.  The rejection letter also invited the project sponsors to refile their application—after the election!

For the politicians this is a pure win-win.  All sides can score points on the issue while doing what they perceive as no lasting damage.  For business this is business as usual, large project developers are accustomed to delays, posturing and political extortion. The business calculus is not whether this is still a good project, it is the trade-off between the sunk cost and the to-go cost answer compared to the alternative uses of both financial and political capital.  For the special interest advocates on all sides and the media it is a feeding frenzy of bombast and bluster, green versus brown, 1% who want to remain profitable in their oil business versus the 99% who need their oil products but decry how much it costs.

Beyond political theater a profound energy debate is underway 

• Should America develop and use its own domestic energy resources to reduce our dependence on imported foreign oil from the Middle East, Venezuela and elsewhere and thus improve both our energy and domestic security?

• Should America and Canada expand their intimate and mutually dependent business relationship in an open, reliable manner?  Can America have its environmental cake and eat it too by using cleaner natural gas as a substitute for dirtier coal for power generation and thus reduce emissions?

• For environmental groups the question is will the good and affordable natural gas available from the boom in unconventional E&P be made the enemy of the perfectly clean but uncompetitive and unreliable renewable energy policy aspiration they seek?  Does it have to be all or nothing?

• Americans are asking the government to restore a sense of balance between regulatory costs and benefits.  Is it good enough to materially reduce the market share of coal and thus emissions with the substitution of cleaner but affordable, plentiful, reliable natural gas?   Americans support environmental protections but worry that regulation has been hijacked and turned against us to promote a political agenda that is undermining our economic and global competitiveness, undermining investment and job growth potential with onerous regulatory burdens, and is unreasonably intruding into our lives.  This is a major reason we tell pollsters we think the country is going in the wrong direction.

Those are the energy debate questions in the 2012 election.  The good news is there are good answers.  The bad news is that it is a LONG TIME until November 2012 and so we must endure for a while longer the campaign, political advertising and endless scoring of points.

Be patient America—we’re winning!  

The revenge of competitive markets created the boom in unconventional oil and gas domestic production to fill the vacuum from lack of a coherent US energy policy—and it shows no signs of resignation.  It’s game on for domestic energy growth.

The market revenge for the regulatory regime bearing down on American markets is to export the coal, oil and refined products and even natural gas as LNG into higher priced foreign markets. The oil from Canada needs the refinery capacity in America to extract its full market value. America needs the refined products which are a (pardon the pun) a keystone of our own export growth.

The revenge of markets is that while the EU eschews horizontal drilling and hydraulic fracturing at home thus insuring that it is hostage to Russian gas imports.  While China continues to buy large quantities of oil from Iran, in part to irritate the US and because Iran is desperate for oil trading and will be forced to discount substantially to get China to buy.  While Venezuela self destructs from Hugo’s hubris and Nigeria suffers from a low grade civil war over corruption—the US domestic energy market is busy discovering new opportunities for growth from unconventional oil and gas.

And while the US Government dithers over restoring more traditional Gulf of Mexico deepwater drilling the technology and expertise of America’s oil and gas experts are busy on shore exploiting it.

America is getting it energy mojo back—-and there is nothing the politicians can do to stop it.

Related articles

• President Obama Rejects Keystone XL! (sierraclub.typepad.com)
• On the Keystone XL Project Rejection (spirofloblog.wordpress.com)
• Canada to US: You are Not the Only Hot Date for Keystone XL party! (insightadvisor.wordpress.com)
• Pipeline Protest: The 99% Strike Back Against Keystone XL (thinkprogress.org)
• Chamber touts Keystone XL, domestic energy to create jobs (energyindependenceforstates.com)
• Keystone XL Pipeline Would Increase Oil Prices in Midwest (desmogblog.com)
• My 2012 Predictions (insightadvisor.wordpress.com)

1. Benefits and Costs
2. Summary of the Rule
3. Clean Air and Reliable Electricity
4. Adjustments from Proposal to Final.

So what is the MACT rule?  First, some jargon to help you navigate the rules.  MACT is the ‘nickname’ for this rule.  It stands for Maximum Available Control Technology which is what the rules practical effect will require utilities to use to remove the pollutants from their exhaust gasses and emissions.  You may also see the acronym MATS which EPA prefers to use as the moniker for this rule.  It stands for Mercury and Air Toxins Standards which, I suppose, is used to make you more sympathetic to the onerous provisions of the rule.

As the EPA says MATS is a rule to reduce emissions of toxic air pollutants from power plants.  These emissions include heavy metals, including mercury (Hg), arsenic (As), chromium (Cr), and nickel (Ni); and acid gases, including hydrochloric acid (HCl) and hydrofluoric acid (HF) that are known or suspected of causing cancer and other serious health effects.

This MATS rule for power plants is intended to require MACT to assure that the plants reduce emissions from new and existing coal- and oil-fired electric utility steam generating units (EGUs).  But just to make sure EPA also revised the new source performance standards (NSPS) for fossil-fuel-fired power plants for particulate matter (PM), sulfur dioxide (SO2), and nitrogen oxides (NOx).

In fairness, the power industry and EPA have been fighting over rules for coal plant emissions including mercury for years both in the regulatory process and in court.  Each side has won and lost battles in this long war.  That mercury and toxin reduction rules were coming was no surprise, but the price the power industry is paying for resisting EPA all these years and besting them in court a time or two to frustrate mercury regulation is that EPA is imposing a relatively short timeline for compliance.  Three years, maybe four if local environmental regulators agree—and in the case of critical power plants a fifth year to assure the lights stay on.

Sounds like a long time to you?

This is where the allegations of a deliberate war on coal are raised because the timeline given to utilities to attempt to retrofit their older plants to meet MATS using MACT is about half the usual and customary time required to go through the various regulatory environmental review, permitting and state regulatory approvals necessary to even start the retrofit work let alone bid it out and complete it.  GOTCHA!  

But EPA says to utilities if you cannot comply in time you must confess that you are in noncompliance thus subjecting the utility to environmental lawsuits, potential fines and injunctions even as it methodically goes through the required regulatory process.

The practical result of this regulatory GOTCHA is utilities will be prudent and take the path of less torment and cost.  Many will shut down their coal plants by the compliance deadline.  Some will replace them with natural gas combined cycle plants.  Merchant generators will rush in to fill any gaps revving up existing underutilized power plants or making plants to build new ones—probably gas.  It isn’t a bad outcome long term except for the huge cost, short timelines and risk to resource adequacy from trying to do it so fast in every regional market.

Related articles

• EPA’s Killer MACT (papundits.wordpress.com)
• EPA Releases Emissions Rules for Coal-fired Power Plants (indiancountrytodaymedianetwork.com)
• AF&PA Statement on Boiler MACT Rules District Court Decision (whattheythink.com)
• EPA Acts On Power Plant Emissions (cen.acs.org)

There is a looming battle over the cost of energy between the ‘green at any cost’ versus the ‘green enough at a reasonable cost’ where wind/solar forces will battle natural gas—you can sense the fog of war ahead as the battle being set up.  The graphic above from a recent GTM Research report shows the reality in clear focus.

The policy landscape has been designed to drive toward clean energy policies sometimes without much regard to the cost.  It started with environmental groups challenging our polluting ways.  Over time those views gained mainstream acceptance and today there is broad public support for the goal of a clean environment, protecting air quality and water quality for the future.

We’ve supported the growth of regulatory requirements since the 1960′s to reduce contaminants and pollutants imposing environmental impact review procedures ahead of new construction of virtually anything today.  Congress and the states have passed environmental protection laws that continue to advance this policy agenda.  In the ‘good old days’ before our economy crashed business complained about the cumulative cost of these rules, but the public view was conditioned to see it as whining since it rarely affected us directly and we knew from looking around us that things needed to be cleaned up.

We needed this process of redemption to change our ways and correct the mistakes we have made from the days when the air was truly dirty and we dumped all manner of wastes into our waterways.  We sinned badly against our environment and it was time to repent, clean up our mess and our act.

That repentant view, however, gave way to a continual push for even more environmental ‘remediation’ not to fix things broken but to impose a view of the way things should be that came to be a tipping point in the battle brewing today. It began building slowly as public support for environmental protection grew.  Politicians took notice and jumped on board.  Laws were passed to score ‘greener than thou’ points, regulations were adopted to pursue green agendas.  Environmental impact statements were required and the process of getting building permits, operating permits and other regulatory approvals moved beyond reasonable mitigation to turn our regulatory permitting process into regulatory extortion.

Congress did not help by approving laws so vague that it essentially gave government agencies vast power to write rules so onerous, prescriptive and intrusive they bore little resemblance to their underlying enabling act.  This corruption of the legislative process has led to a corrosive regulatory kudzu covering everything with unintended consequences.

At some point in the process of environmental reformation and repentance we moved from seeking redemption for our past environmental sins and righting those wrongs to pursuing a ‘greener is required’ agenda that tilted the balance and transformed the message into a ‘green at any cost’ prescription.  Times were good, business was making money, the economy was solid, people were comfortable so we all were swept along by this greener is better consensus view.

We lived comfortably in that greener is better world for the past decade or so, but stuff happened.

It wasn’t the great recession although that was as close to ‘rapture’ that any of us wanted to get.  It wasn’t the loss of jobs, the erosion of our manufacturing base, the rise of China as the production factory of the world, the volatile price of imported oil.  Each of these things had a logical explanation.

Something happened that opened our eyes and showed us that we had eaten of the fruit of the tree of regulatory life in the center of the garden and realized we were now naked.  The great recession had the effect of breaking all of our comfortable cycles.  It changed the rhythm of life for everyone.  It forced us to confront reality or face our economic rapture.  And when we opened our eyes and saw that we were naked—we were ashamed and afraid.

Oh, Brother!  I know, you must be thinking where is this rant going?

Look around you, we still care about our environment.  We still believe in protecting the quality of our air and water and leaving this planet a cleaner, healthier place for our kids that we inherited.  We do. But our eyes have been opened to the reality that our willingness to accept this cumulative cost of greener is better has turned into regulatory kudzu.  You know kudzu, it is that coiling, climbing, trailing plant that grows along roads and forests covering trees with a shroud of dense foliage.  It eventually kills its host plant by blocking out the sunlight.  Efforts to eradicate it have proved difficult because of its relentless growth and insidious twining structure—and because environmental rules prevent spraying herbicides for fear we might threaten some endangered species.

Regulatory kudzu may be the existential threat to both our economic growth and our environmental sustainability.  And that is what the looming battle is shaping up to decide.   Will we spray some common sense herbicide on this regulatory kudzu before it chokes the life out of us?

What is the reasonable and appropriate balance between ‘greener is better’ and ‘green at any cost’?

• Has our regulatory kudzu made it so costly, so time consuming, so much of a hassle to build, manufacture, or drill anything in America that our businesses and our jobs go elsewhere to stay in business?
• Must we sacrifice our economic competitiveness in order to have reasonable environmental quality?
• Are these regulatory policies counter-productive in a global competitive market where renewable portfolio standards and solar subsidies in America and the EU are used by China to fund its excess production for export growth causing PV prices to fall so much that they drive domestic US and EU producers out of business to assure global market share dominance?

The coming battle over the cost of energy is being framed by unintended consequences.  The forward movement on these separate fronts revolves around energy choices or energy impacts on our economy.  But one unintended consequence is that regulatory kudzu is now being forced to compete with global economic competitiveness, the rebirth of manufacturing, domestic energy production growth, energy security and the need for reliable low cost energy to create sustainable jobs and restore America’s global economic competitiveness.  The flashing red light of regulatory kudzu overreach is being exposed not just in our environmental regulations but in financial and market rules, health care and labor and other areas as well.

The Battle for Low Cost Domestic Energy Security

The Rebirth of American Domestic Energy Production is Sustainable. After decades of growing American dependence on imported oil, America turned the corner using American technology and quiet American persistence the growth of unconventional oil and natural gas using horizontal drilling and hydraulic fracturing to unlock the previously uneconomic energy treasure under our feet.  With that technology America turned back imported liquefied natural gas (LNG) as a replacement fuel for declining conventional natural gas supplies.  American became a net exporter of energy in 2010 for the first time in decades.  The growth of domestic energy production and its rippling effect in job creation across places we scarcely imagined possible is changing our attitudes.  When North Dakota, West Virginia, Ohio, Pennsylvania can join the traditional big energy producing states of Texas, Alaska and California in benefiting from this rebirth of domestic energy production we have a genuine Spindletop on our hands.

The American War on Coal is a both an Economic and Regulatory Failure. The tsunami of new regulations designed to undermine the economics of coal fired generation as a power supply source in America is a failure.  Despite all the proposed new regulations pancaking on top of our already strong laws, the US EIA says that coal will still be a significant contributor to America’s power supply mix through at least 2035.  But guess what?  All that coal we have decided not to use in America is being exported to China where you can be assured it will not likely be used in as an environmental responsible manner as we would have used it.  Do you see the point?  We have elected to impose on ourselves the cost consequence of shutting down more than 80,000 MW of low cost coal fired power generation to reduce greenhouse gas emissions in America to reduce global warming or moderate the climate crisis (in Al Gore speak du jour) so that China and other emerging countries can buy that coal now exported by US companies unable to use it at home.  The US Court of Appeals has now stayed the Cross State Air Pollution Rule implementation, one of the most onerous of these new rules, meaning the court found the opponents of the rule are more likely than not to prevail in their appeal.  How do you spell S-T-U-P-I-D again?

The Holy Grail of Grid Parity has Arrived.  For years we have been told that wind and solar energy would come down in cost and when they reached grid parity (able to compete head to head without subsidies with natural gas combined cycle power generation) we would be victorious in energy transformation.  Grid parity has arrived.  Thanks the massive expansion of export production of photovoltaic panels and wind turbines in China designed to suction up all the renewable energy subsidy monies in markets where state regulators imposed renewable portfolio standards forcing utilities to buy renewable energy—many times above the market cost of alternatives—the price of PV panels and wind turbines are at or near grid parity in many markets.  In Europe, the costs of these above market feed in tariffs are unsustainable and being cut back.  In the US subsidies of any kind are increasingly suspect by a public that fearing rising federal debt and deficits and many states will soon reach their RPS goals and declare victory—except California which upped the ante to 33%.

Grid Parity is Our Friend.   Not only will grid parity pricing of solar and wind energy reduce the need for subsidies and thus restore the domestic market for the next generation of wind and solar projects using America’s best technology rather than China’s least efficient, grid parity pricing will more effectively undermine the economics on new coal and new nuclear power projects than anything the government regulators can imagine.  Faster, better, cheaper and with none of the regulatory kudzu overreach in the current war on coal.    The long term sustainable impact of this reliance on market forces is America will get both more clean renewable energy using the best technology, it will get less dirty coal and more clean natural gas generation.  It will accelerate the transition from large, hugely expensive baseload nuclear power to smaller, safer, modular small nuclear projects.

And then there is this, an epiphany is coming to light even in California.

In California in December 2011, the California Energy Commission released its draft 2011 Integrated Energy Policy Report, the biennial statement of California’s energy policy strategy.  The reaction of the utilities was decidedly skeptical.  In filing after filing they pointed out the cumulative cost of California’s energy policies are going to result in substantial rate increases.  They worry about the flight of business out of state to avoid the burdens in a fragile economy.  They worry about losing their opportunities for growth sufficient to cover the costs of all these regulatory burdens.

It was not a fierce battle but it was a shot across the bow. The time of economic reckoning or rapture draws near.  Get back to a reasonable balance fast is the plea.  Fight regulatory kudzu.  Resist being so green that everything turn brown from disuse.  We are searching for a new energy and environmental consensus—one that is balanced with environmental quality and economic competitiveness given equal weights.

Amen!

Related articles

• Kudzu Bug Eating Its Way across the South – Does It Endanger Soybeans Too? (invasiveplantnews.com)
• Beware the Big Green Wall Ahead (insightadvisor.wordpress.com)
• Is America’s War on Fossil Fuels Even Good Politics? (insightadvisor.wordpress.com)
• My 2012 Predictions (insightadvisor.wordpress.com)

TC Labs Natural Gas Pipeline Safety Works

The natural gas pipeline explosion in San Bruno California is a tragic accident no one wants to see repeated.  Recently Pacific Gas & Electric reported to the California Public Utility Commission that it found a dangerous leak on a Contra Costa County gas distribution line that has never been surveyed even though such inspections are required every five years.

There are two reasons this issue is important to me.

First, for five years I ran the natural gas pipeline safety inspection program in my role as Public Utility Division manager at the Illinois Commerce Commission.  I have seen my share of pipeline safety problems but thankfully nothing like San Bruno happened on my watch.  Most natural gas pipeline safety problems result from corrosion in the metal pipes and from the lack of regular inspection and maintenance.  The good news is most pipeline safety accidents can be prevented but it requires diligence.  The job of every pipeline safety inspection program is to assure that the utilities are performing that diligent inspection of their pipelines and addressing the leaks and corrosion issues discovered promptly.

The second reason this issue is important for me is that PG&E is MY natural gas utility provider and I live in Contra Costa county not too far from the pipeline never inspected.  The leaks PG&E discovered could have caused substantial property damage or injured people.  They were found in a Pittsburg, California gas distribution line that was part of almost 14 miles of pipeline that were “overlooked” in surveys that are required every five years. The Pittsburg leak was categorized a “grade 1″ leak meaning it represents a clear hazard to persons or property.  That leak has been repaired.  A total of 22 leaks were found in Contra Costa County communities of Brentwood, Byron, Concord, Danville (my home town), Discovery Bay and Pittsburg.  The lines had never been inspected because the 16 large maps covering them had been left out of a leak survey schedule that is required every five years.  This is the kind of preventable error that is giving PG&E a ‘black eye’ at the CPUC and from its customers—-‘how could this happen’ being the question most asked?

The answer is it happens more times that we know because much of the historical record of the natural gas pipeline system was paper maps and records and its care and maintenance is in the hands and heads of experienced pipeline maintenance and operations crews now rapidly reaching retirement age.

The answer to problems like this can also be found in technology.

I am a partner in Tech & Creative Labs a Boston-based collaboration of software and technology companies working together to extend the reach of their product capabilities to serve new business needs in the energy vertical.  As I discussed this pipeline safety issue with my colleagues we realized that we had technologies that could be re-purposed to help companies like PG&E address this problem and regain full control over their pipeline operations and its safe and reliable maintenance, repair and regulatory compliance.

So we put together a pipeline safety compliance solution we think works TODAY by bringing together a:

1. field data gathering and synching solution from the Alberta oil patch;
2. data visualization and dashboards solution used in manufacturing applications to manage work flows; and
3. social collaboration and learning solution that brings it all together to make it fast, easy to use and effective.

FIELD DATA GATHERING, SYNCHING SOFTWARE FROM THE ALBERTA OIL PATCH. Up in the cold remote oil and gas fields of Alberta the well operators need access to data about the well they come to inspect.  But there is no phone service or interest access.  So HOT BUTTON SOLUTIONS created a simple, elegant software solution that load well data on a memory card inserted in a rugged remote handheld device for use by the field crews to gain access to the well data.  The field crews inspect each well and take temperature and pressure reading as well as notes about any problems or anomalies they find in their inspection.  They enter that data on the handheld device and take it back to the office with them when their work is finished.  Each handheld device memory card is downloaded and its data “synched” so that updated information it is ready for the next crew to take into the field.

Simple, easy, rugged and reliable.

But the Hot Button synching software does much more than integrate the data.  It matches each field crew members assigned inspection tasks with the data reported to VERIFY the inspections were done.  It compares the latest readings with the historical performance of each pump, motor and other piece of equipment to identify anomalies.  Temperatures or pressures out of normal operating range indicate mechanical or equipment problems that need attention.  It documents the inspection process, findings and follow-up actions.

Now imagine if PG&E had this same simple system in place for its natural gas pipeline distribution system.  The work flow would allocate the pipeline segments for routine survey, inspection, maintenance and reporting to crew members.  It would specify the temperatures, pressures, pumps and motors, values and other appurtenances that are to be inspected.  That handheld device issues to each PG&E crew member would give him access to every data element PG&E has for each segment of the pipeline.  The system is the solution in this case.  Fourteen miles of pipeline do not go missing and unsurveyed when someone is assigned to inspect it and the software used to produce compliance reports on pipeline safety inspection to the California Public Utility Commission is the SAME solution used to track, inspect and audit the system or the software alerts you —hey what about those 14 miles of gas pipeline in the East Bay?

DATA VISUALIZATION SOFTWARE FROM MANUFACTURING AND FINANCIAL SERVICES.  The data for a complex network like a natural gas distribution system consists of thousands of records.  While data gathering and synching solutions can keep a database accurate and up to date that does not mean the data it contains can be turned into useful information or insight for field crews, gas system operators, utility managers or regulators.  Data overload is a big problem in every organization and one of the best ways to deal with it is technology that improves our ability to visualize the data and put it to work.

One of our partner companies is PANOPTICON a leading provider of data visualization software tools to help Fortune 1000 companies speed up their business processes, reduce operational and investment risks, detect anomalies (including fraud), and identify opportunities to increase profits and sales. Panopticon’s customers include 5 out of the top 10 largest banks and fund operators in the world, plus several of the largest industrial manufacturers, Consumer Packaged Goods (CPG) producers, architecture & engineering firms, energy companies, and telecommunications firms. Adding Panopticon’s data dashboards and visualization tools to the Hot Button data gathering and synching solutions creates a fast, easy, commercially available solution for doing exactly what PG&E and every other natural gas pipeline operator needs to do today.

COLLABORATION AND LEARNING SOFTWARE IMPROVES TEAMWORK AND COMMUNICATIONS.  Gathering data and organizing it is important to every natural gas pipeline safety solution but putting that data to work to support field crews today and train the next generation of workers across your organization is the sine non qua of safe reliable operation.  Social software is going mainstream and one of our partner companies provides an extranet collaboration solution called Ingeniux CARTELLA that is fast, easy to use and full of the features and functionality that puts gas pipeline safety data in the hands of field crew, engineers, inspectors and managers in ways we have not seen before.  Collaboration software is the perfect vehicle for giving employees access to best practices, work methods, and expertise to deal with any pipeline safety issue.  Why is this important?  Because for PG&E and many other organizations the baby boomers are retiring at an increasing rate and a critical transition strategy for gathering and transferring the knowledge and experience of existing pipeline crews and other employees is collaboration-driven learning solutions to speed that knowledge transfer.

Tech & Creative Labs is building solutions to complex business problems like this every day by putting to good use existing technologies actively working in other industries to solve the pressing business needs in our changing energy vertical.

Related articles

• PG&E finds leaks in gas distribution lines in Contra Costa County (mercurynews.com)
• SFgate.comMissing maps mean PG&E lines weren’t inspected (sfgate.com)
• Could Disruptive Technology Prevent another San Bruno Gas Pipeline Disaster? (insightadvisor.wordpress.com)
• 22 Leaks On Pipelines On Misplaced PG&E Maps; 1 Critical In Pittsbu (sanfrancisco.cbslocal.com)
• All Gas Companies are Affected by the San Bruno Pipeline Rupture (enerdynamics.com)
• Regulators say cost of PG&E pipeline repairs may be higher than estimated (mercurynews.com)

Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 48,000 times in 2011. If it were a concert at Sydney Opera House, it would take about 18 sold-out performances for that many people to see it.

Click here to see the complete report.

SOURCE: GTM PV Price Decline

For years advocates of wind and solar energy have been telling us that prices would fall and these clean, renewable technologies would be competitive with natural gas.  That sweet spot is often referred to as grid parity.

Congratulations that day of grid parity success has arrived!

At its December meeting the California Public Utilities Commission approved more than 500 MW of solar procurements by regulated investor owned utility and more than 294MW of those contracts were at or below the market price referent (grid parity).  Today we have a situation where demand for wind and solar is strong around the world and prices for solar photovoltaic panels and wind turbine prices are falling.  Other than California with its 33% renewable portfolio standard, many states are closing in on their more modest RPS goals for renewable energy.

Grid parity and falling prices for solar panels and wind turbines should be good news. But renewable energy has never felt more threatened.  Why?

Low Natural Gas prices make renewable energy less attractive today. The growth of unconventional oil and gas is expected to keep gas supply plentiful and prices low tomorrow and for the foreseeable future. Low natural gas prices are savaging the economics of coal fired generation and new nuclear power plants just as they put added pressure on solar and wind long term to improve efficiency to stay competitive.

Fish versus Wind Energy Competition for Environmental Re-dispatch.  Wind producers were curtailed last year by Bonneville Power Administration when heavy run-off forced BPA to release water in the Columbia.  To comply with Federal Court orders on dissolved gasses in the run-off water to protect fish, BPA said it had to run the generators to reduce turbidity.  The result more energy supply than demand so BPA curtailed wind generation.  Generators filed a discrimination complaint at FERC and FERC agreed with them ordering BPA to write new rules for environmental re-dispatch.  If that decision sticks renewables become harder to integrate since it raises prospect of take or pay contract requirements utilities are loathe to agree to. This issue also could turn into a conflict over who gets priority in environmental re-dispatch—wind or fish? The problem for wind in that argument is fish protections are covered by Federal court orders and environmental settlement agreements not easy to change.

Falling solar and wind turbine prices mean grid parity day of reckoning has arrived (competitively priced with gas).  That grid parity reality thus undermines the argument for continued tax subsidies. Consolidation in renewable sector is expected to accelerate as weaker firms sell out to bigger players with deeper pockets. Only the industrial giants can withstand the huge China oversupply by diversifying into new falling price global markets to take market share from local players. And guess what, those same industrial giants like GE, Siemens and others also have high efficiency natural gas combined cycle power plants to sell as well so it is not a question of whether they will have sales just what you buy.

Falling PV prices threaten or kill off utility scale concentrating solar power (CSP) and molten salt projects because they no longer are competitive with fast falling PV prices to meet state RPS goals. Remember that 54% of California’s last batch of solar project approved below the market price referent (grid parity). And some existing CSP and molten salt projects are switching technologies to cheaper PV panels on the same sites. These shifts from utility scale solar to distributed PV solar raises different integration issue. The good news is you need less high voltage transmission if new PV projects are built in load centers. The bad news is you need more distribution automation faster to make the grid more efficient and reliable. Worst case: you need more of both.

Power grid instrumentation is next wave of smart grid as smart meter saturation is reached. This is both good news and bad news for renewable energy integration. It opens the door to expanded renewables use in demand response and energy efficiency applications from customer aggregation.  It encourages more commercial and industrial combined heat and power (CHP), microgrids and prospects for energy storage and time shifting. But it forces renewables to compete on a grid parity basis with those ruthlessly efficient natural gas advanced combined cycle plants coming to market with efficiency ratings +60%.

It’s tough love competition ahead for renewable energy. If you must backup every MW of renewable energy with gas and gas fired generation is cheaper why not just build more gas?  Holy Inverter!

Welcome to grid parity!

Related articles

• Map Projects When U.S. Cities Will Achieve Grid Parity for Solar (cleantechies.com)
• Renewable Energy Must Make Tax Policy Change its Friend (insightadvisor.wordpress.com)
• Solar Grid Parity 101: How the Cross-Over Occurs (thinkprogress.org)
• California puts Solar PV on Utilities Christmas Shopping List (insightadvisor.wordpress.com)
• When Solar gets cheaper than the grid (tobiasbuckell.com)
• Grid Parity Reality Hits Home for Renewable Energy (insightadvisor.wordpress.com)

California’s Global Warming Solutions Act of 2006 or AB32 as it is often called was designed to reduce greenhouse gas emissions. For a while it was thought this law would be made obsolete by the passage of Federal Cap and Trade legislation.  But after cap and trade failed to in support in Congress and the Copenhagen Conference of Parties failed to win international agreement on extending the Kyoto Protocol, AB32 proponents have pressed forward.

But in a ruling handed down December 29, 2011 Federal Judge Lawrence O’Neill blocked implementation of the new rules.  The California Air Resources Board says it will appeal the judge’s decision.

Low Carbon Fuel Standard

On April 23, 2009 the California Air Resources Board adopted Low Carbon Fuel Standards to reduce greenhouse gas emissions and diversify the variety of transportation fuels in the state to reduce the carbon intensity of California’s transportation fuels by at least 10 percent by 2020.  The rules became effective on April 15, 2010. Opponents protested the new rules even before they were adopted in 2009 but CARB adopted them anyway so the National Petrochemical & Refiners Association and the Consumer Energy Alliance sued in Federal District court in 2009 claiming that among other things the California rules violate the Commerce Clause of the US Constitution and discriminate against oil and biofuels producers from outside of California.

The LCFS rules set annual performance standards that fuel producers and importers must meet beginning in 2011.  Applying the rules to fuel importers is one of the key issues in the lawsuit decided by Judge O’Neill because the importers allege that California is setting state standards that interfere with interstate commerce in violation of the Commerce Clause in the US Constitution. The LCFS applies either on a compulsory or opt-in basis to all fuels used for transportation in California including California reformulated gasoline, California ultra-low-sulfur diesel fuel, E85, compressed or liquefied natural gas, biogas, electricity, and compressed or liquefied hydrogen.

The California ARB said the rules will reduce California’s dependence on petroleum by 20 percent and make-up 10% of the state’s goal to cut greenhouse gas emissions by 2020. The regulation assigns a carbon-intensity score to various fuels forcing all gasoline and diesel fuel sold in California to be 10 percent less carbon-intensive by 2020. The low carbon fuel standard is being phased in over time with 2010 a reporting year only and 2011 was the first year that the rules required a reduction in the carbon intensity (CI) of transportation fuels by 0.25percent ramping up in subsequent years to meet the 2020 goal.

While California already has a series of ‘boutique motor fuels’ produced by in-state refineries specially formulated to reduce emissions in various regions of the state these rules are imposed on out of state refiners seeking to sell all fuels in California.

On December 8, 2011 just prior to Judge O’Neill’s ruling, CARB completed the latest LCFS Program Review Report summarizing progress to date and the ongoing work of stakeholders.  The next program review is not scheduled until 2015.  The program review report also outlines a range of rules from other states that bear on the issues as the stakeholders were unable to address all the “harmonizing” questions to avoid conflicts with other states rules.

So what does this mean?

The implications of this ruling could materially affect California’s ability to implement AB32.  If upheld on appeal, the decision could spill over into the electric power industry since California also restricts imports of coal fired generation and requires certain renewable energy projects be located in state to qualify for renewable portfolio standards.  It is unclear whether Judge O’Neill’s ruling extends beyond motor fuels to electricity.

Related articles

• Judge Blocks California’s Low-Carbon Fuel Standard (forbes.com)
• Judge Enjoins California’s Low-Carbon Fuel Standard (green.blogs.nytimes.com)
• California’s Low Carbon Fuel Standard Rattles Drivers Association (environmentalleader.com)
• California Air Resources Board amends the Low Carbon Fuel Standard (greencarcongress.com)
• Judge Blocks California Low-Carbon Fuel Rules (foxnews.com)
• California Moves Forward with Strong Low Carbon Fuel Standard (switchboard.nrdc.org)
• Air Resources Board Accelerates Electric Vehicle Market (switchboard.nrdc.org)

EIA International Energy outlook 2011 Coal figure_5-sm

The conventional wisdom is that the US EPA’s virtual war on fossil fuels especially coal is part of a concerted policy prescription to reduce greenhouse gas emissions and save the world from the consequences of global warming, climate crisis or climate change as it has been variously called.  EPA has promulgated rules including the Cross State Air Transport rule, the Maximum Available Control Technology Rule and the Once thru Cooling Water Rule among others to give life to this policy regime.  The estimated impact on power supply could be the premature retirement of up to 83,000 MW of coal fired power generation.

There is no standardized methodology for calculating the cost benefit ratio of Federal regulations just as there is no duty of the part of any Federal agency to balance those regulatory costs and benefits.  Regulatory beauty is thus in the eye of the beholder.  Environmental advocates see these rules as the best news since sliced, organic whole grain bread.  Opponents see them as a direct frontal assault on electric reliability and the American way of life.  Somewhere there is a prudent balance that represents the public interest, but as yet there is no consensus on where that balance is.

I have no personal beef with the general policy view that we should reduce our impact on the planet as good stewardship and avoid spewing toxins in the air or water.  There is broad public support for these environmental goals.  We have made good progress in cleaning up both the air and water as a result of past regulations.  And while there is always squawking about how much the regulation costs industry and thus the public we have mostly found ways to make it work.

I could even be persuaded to the view that these recent EPA regulations are a reasonable next step in our longer term goal of good stewardship except for several ‘inconvenient truths’ about the rules, their intended impact and the process being used to promulgate them.

Crude oil Imports Falling

Those inconvenient truths are as follows:

1. The New EPA Rules are Unnecessary—Low Natural Gas Prices are Eating Coal’s Lunch.  These rules are more about politics and pandering to the President’s environmental base than they are good stewardship.  I would argue that doing nothing would produce reductions in coal fired generation almost as profound as these rules because of the withering effect of low natural gas prices on the economics of coal fired power plants.  Those low gas prices are due almost entirely to the growth in unconventional oil and natural gas development in North America made possible by horizontal drilling and hydraulic fracturing.  Increase domestic natural gas supplies have cratered imported LNG in the US and decoupled natural gas prices from oil prices.  The prospect of long term low natural gas prices is hurting coal as profoundly as any of these regulations.  The irresponsible impact of the new rules is to speed up that process and put electric reliability at risk by prematurely retiring coal generation before there is a reliable replacement in either natural gas or renewable energy.
2. The New EPA Rules are Ineffective—They have no material effect on global coal use or emissions reduction. Achieving the broad stewardship goal of reducing global emissions requires the cooperation of many nations.  We have known since the failure of the Copenhagen conference of parties that there would be no worldwide agreement on reducing greenhouse gas emissions.  The non-OECD countries were more than willing to let the OECD especially the US and EU bribe them to comply knowing full well that their own strategic imperatives for economic growth meant they would cheat.  The EU was seduced by that fraud, but President Obama to his credit refused that no-win deal.  So the bottom line of the new EPA rules is we could shut down every American coal plant and it would have no material impact on global GHG emissions because China is building new coal plants at the rate on 1 GW.  The US EIA’s International Energy Outlook for 2011 says world coal consumption is projected to increase from 139 quadrillion Btu in 2008 to 209 quadrillion Btu in 2035, at an average annual rate of 1.5 percent. Regional growth rates are uneven, with little growth in coal consumption in OECD nations but robust growth in non-OECD nations, particularly among the Asian economies.
3. The EPA War on Fossil Fuels is Bad for the Clean Energy Economy.  The sin of the EPA political agenda driving this war on fossil fuels is the belief that it represents good public policy.  The sacrilege is that it undermines the transition to a sustainable clean energy economy by making the perfect (no fossil fuels) the enemy of the good (substitute cleaner natural gas for dirtier coal and oil).  And in so doing, the policy weakens America’s domestic energy security and reliability and makes us more dependent upon imported oil and global fuel markets.  The best evidence of the redeeming power of unconventional oil and natural gas is the robust growth in domestic supplies over the past five year enough to bend the long term trend lines in our favor after decades of slow decline in domestic production.  Low natural gas prices are the mothers’ milk of industrial rebirth making it economic for chemicals, plastics, and other energy intensive industries to return to the US creating jobs, paying taxes and reducing our balance of payments deficit.

The policy hostility toward domestic energy production may seem like a short-term winner in the 2012 election but it undermines our national security, undermines our economic recovery, and undermines our shared policy goals of migrating to a cleaner energy economy that is sustainable, profitable and job creating. That makes is neither good policy nor good politics.

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But 2012 is an important national election year in the United States and the stakes are high for the candidates and for our nation.  Our economy is in the ditch.  We lack consensus about the road to travel.

I think the path forward is becoming more clear to us but choosing it requires us to stand up to our politicians telling them that they work for us and this is the way we want things to work—-and here are the results we expect them to achieve—or else.

We don’t know what the future holds for us in 2012, but here is my list of ten things I think are possible:

1. Perfect Regulatory Storm leads to 2012 Public Backlash.  The cumulative impact of new USEPA MACT, Cross State, and Once Thru Cooling regulations on fossil fuels hits home, rising utility rates loom as above market renewable energy projects come online, growing reliability worries as critical power generation resources are targeted for forced closure, and slow economic growth combine to create a public backlash against government policies at the Federal and State level that are seen as hurting economic recovery, energy reliability and job growth.
2. High Global Oil Price Volatility Drives Demand for Domestic Energy Production.  Global economic weakness, Euro zone financial crises and the potential for more conflicts in the Middle East and with Iran conspire to keep oil prices above $100 per barrel with regular higher spikes.  Pressure grows for the US government to get out of the way of domestic energy production for energy security purposes.  Modest permit growth in the Gulf of Mexico and elsewhere are seen as token by proponents and sacrilege by environmentalists.
3. Unconventional Oil & Gas is Our ‘Energy Spring’.  The growth of unconventional oil and gas is seen as America’s strategic advantage and best line of energy security defense.  But it gets worse for opponents of horizontal drilling and hydraulic fracturing as West Virginia’s legislature adopts new drilling rules that assure its role filling the economic gap left by the EPA war on coal.  Growth in low cost natural gas creates slow but growing movement by chemicals, plastics, steel and other manufacturing industries dependent upon feedstock fuels to bring manufacturing and jobs home from abroad.  But they face a barrage of hostile regulations that threatens to spoil the homecoming.  This enrages business and labor who find common cause in this ‘energy spring’ bringing a rebirth of manufacturing and with it good paying union jobs in the Midwest and other markets where shale gas E&P is prominent.
4. Keystone XL Pipeline Tipping Point.  The President resists making a decision on the Keystone XL pipeline project to bring Canadian tar sands and shale oil south to the Gulf coast to take advantage of the world’s largest refining capacity.  Occupy Keystone protesters loudly protest the project and capture headlines.  The President fears his environmental base supporters will abandon him, but labor support for the project builds because of the 20,000 jobs the project represents.  In a rare coalition of Labor, Industry and Republicans, the House of Representatives votes to approve the Keystone XL project by attaching it to every must pass bill and pressure builds on Senate Democrats to go along—or else. A veto-proof majority in the Senate votes to approve the project in a package that also includes a full 12 month extension of the payroll tax cut and unemployment insurance.
5. It’s About Jobs and the Economy, Stupid.  A funny thing happens after the Keystone XL decision, the animus between labor eager for job creation and environmentalists seeing their promised land of green energy policies slip away breaks out in full force.  The President is caught in a place he desperately wanted to avoid—being forced to choose between two constituencies.  He doubles down on his calls for taxing the 1% hoping to change the subject and reunite the coalition that elected him.  But then another financial crisis hits overexposed banks in the EU causing global stock markets to fall and with sectarian violence in Iraq escalating rapidly oil prices up rise sharply, gasoline prices skyrocketing to near $5 per gallon and the Fed scrambling to contain the economic damage.  Calls grow to expand domestic energy production in the US but environmental groups scream and the President dithers offering to release more oil from the Strategic Petroleum Reserve instead.  Business, labor and many states see their dreams for a rebirth of manufacturing, job creation and tax revenue being put at the mercy of uncontrollable international events.  After lobbying the White House hard for action and getting nowhere, business and labor come together in a coalition with the Republicans in the House to sponsor the American Economic and Energy Security Act of 2012 which prohibits the US EPA or any Federal agency from interfering with state decisions on permitting E&P activities within the state for unconventional oil and gas development, suspends EPA rules including the Cross State Air Rule, the Utility MACT rule and the Once thru Cooling Rule until completion of a report to Congress on setting uniform standards for assessing the economic impact of all Federal rules, and requires specific Congressional approval of any new rule or regulation with a cost impact of more than $100 million per year.  Business and Labor work Senate Democrats the same way they did for the Keystone XL decision.  The bill passes with the same veto proof majority, the President vetoes it anyway and the bill is passed over his veto.
6. India and EU join US in Solar Dumping Charges against China.  China’s strategy of increasing subsidies and supports for PV panel production in an effort to increase domestic demand and thus assure a soft landing for its export potential backfires and more manufacturers pour into the market to build PV panels.  Despite expected growth in China PV installations to 3GW in 2012, anti-dumping complaints grow as India and the EU join the US complaint.
7. Solar PV Margins and Prices Collapse and China Responds by Forcing Consolidation of PV Producers.  The new year announcement that Foxconn Technology Group will begin producing solar power modules by May 2012 in China’s Jiangsu province added a new threat to the falling margins for Chinese manufacturers.  The Chinese government begins forcing smaller weaker  polysilicon companies to merge or go out of business to rationalize PV production and maintain export growth by increasing PV efficiencies while lowering costs.  This strategy exacerbated the problems of PV producers around the world especially in the EU where a weakening euro squeezes manufacturers facing higher materials costs in a market of falling PV prices.  Global PV consolidation and fall-out of weaker players accelerates in an effort to reduce PV supply glut and stabilize prices.  But with smaller subsidies PV prices continue to fall.
8. The Biggest Customer Benefit from Smart Meter Deployment is Democratizing the Grid. Global smart meter deployment is forecast to triple by 2016 according to IHS iSuppli to 62 million units.  That surge is brought on by rapid market penetration in the EU and Asian markets even as US markets reach saturation.  The expected result is more than a doubling of forecast global revenue from semiconductor manufacturing. Expect to see a quickening pace of grid instrumentation and control that enables customer aggregation to gain energy efficiency and demand response benefits, microgrid development to secure benefits of net metering from combined heat and power projects and rooftop solar in new industrial projects, and speed the transformation of utility business models from central station generation and energy delivery to distributed energy resource management.  Global smart meter deployments force agreement on interoperability standards which rapidly emerge or are imposed by market leading manufacturers giving customers more plug and play choices for controlling energy use.
9. From Smart Meters to a Secure Flexible Modular Grid.  Adding smarter technology to the 100 year old power grid structure in place today in North America is a good start but is not sufficient for the vibrant growing economy America and the rest of the world hopes for in our future.  We see the outlines of that modular grid future emerging today.  As we rebuild America’s industrial manufacturing base and energy infrastructure the power grid has got to change with it.  Again the iSuppli forecast suggests that semiconductor revenue growth is likely to result in a spurt of adaptive innovation between 2012 and 2016 to set the stage for this growth.  The reason is the expected growth in logic integrated circuits (ICs) for precise measurement and communications added to smart meters and microcontrollers, digital signal processors and microprocessors to extend the grid instrumentation.  iSuppli says greater use of system on chip (SOC) to integrate the functionality of the product into a single device will produce the biggest bang for the buck. Adding digital grid instrumentation makes possible a wider range of predictive analytics for grid performance, outage management, distribution automation and congestion management.
10. Restoring America’s Strategic Competitiveness requires focus on the Big Three E’s.  Our goal is not to use less energy, it is to use energy wisely, productively and, yes, sustainably to achieve our strategic economic and security goals. The Three Big E’s: economy, environment and energy are an inseparable part of our national, natural and personal well being.  The big mistake in our national environmental and energy policies is that they fail to balance the natural policy goals with our national economic and global strategic competitiveness imperatives and the reality that we need to make a living to be sustainable.  We need balance between the three big E’s to achieve responsible sustainable results.  We lack that balance today, getting it back is essential for a good 2012 and beyond.

Happy New Year!

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Dorothy from the Wizard of Oz Image via Wikipedia

As smart meter deployment reaches saturation points across North America there is disquiet about what is next.  It all seemed too fast and too easy.  The idea of smarter power grids was seductive promising reduced line losses, more efficient integration of renewable energy, happiness, prosperity for all.  You see my point?

We’ve reached what the Gartner folks like to call in geek-speak the ‘trough of disillusionment’. That ugly place where just when we thought we could see the new world a storm blows up threatening to crash our boat on the rocks.   What’s driving it? 

There are several simple explanations for the current disquiet.  The most obvious is making the mistake of equating smart grid with smart meters.

The Federal government spent billions supporting the roll-out and deployment of smart meters during the depths of the recession in part because it was easy and visible.  In reality smart meters are the tail that is trying to wag the digital transformation going on sensor by sensor, link by link across the power grid.  But now we’re reaching the stage where millions of smart meters are installed and customers are asking “is that all there is?”

State regulators were complicit in this confusion of smart meters with smarter grid by ordering utilities to take the Federal money and ask questions later.  State regulators often had different motivations including a desire to expand the use of renewable energy from wind and solar into the supply mix or to reduce power plant emissions.

Smart grid is NOT the same thing as the clean energy economy. This co-mingling of political goals lead to the other factor driving the smart grid trough of disillusionment today.  Just because we install smart meters on the side of our houses does not mean the air will suddenly be cleaner or that solar panels will magically appear on every roof.

The smart grid trough of disillusionment is like Dorothy in the Wizard of Oz who comes pleading with the Wizard to send her back to Kansas only to discover as the curtain is drawn back that the Great and Wonderful, All Powerful Oz is just a man standing at a switchboard creating a light show for dramatic effect.  Only in the case of the Smart Meter wizard, customers tend to blame that smart meter for causing their rates to spike on hot days, pushing them into a higher tier in the dynamic pricing scheme.  It’s not true but it matters little to an angry customer.

In truth the trough of smart grid disillusionment is driven by the sum of our fears revealed as the curtain is drawn back allowing us to see for the first time that our utility bills are going up and up because our politicians are piling on us their pet projects and politically-correct policies and state and federal regulators being good politicians themselves are doing what they are told.

But just as Dorothy awakens to find herself in Kansas, there is a lot of quiet work going on behind the scenes to add ‘smarts’ to the power grid after all to realize some of those promised benefits.  Some of the best opportunities will come in distribution automation that uses sensors and advanced predictive analytics to improve grid reliability, quickly identify outages, isolate the affected area before it craters the rest of the grid, and reroute load to keep the lights on or more quickly turn them back on.  Those smart meters are the source of data that will enable vendors to build programmable appliances, energy management specialists to improve the efficiency of pumps and motors, enable microgrids to create a more modular, secure and diverse power system.

There is real potential in the smart grid, but getting out of the trough of disillusionment requires escaping from the grip of politicians and regulators so that the markets can work their magic to rationalize technologies, integrate products into end to end solutions, focus on improving the customer’s bottom line rather than the politicians bragging rights.

Perversely, one of the best opportunities to see whether smart grid can perform up to our expectations may come from one of the most unexpected places—Illinois.  The circus over Commonwealth Edison of Chicago and Ameren of St Louis utility requests to deploy smart grid technologies in the Land of Lincoln led to a political contest only Chicago politicians could love. Bills were introduced and passed, Governor Quinn vetoed them, utilities doubled down on their lobbying pressure and the Legislature overturned the Governor’s veto adding ‘trailer bills’—the ways political deals are cut in Illinois—that specified specific performance metrics for utilities in implementing smart grid.  If these metrics stick they represent one of the first attempts to define acceptable performance outcomes for smart grid.

So don’t give up on smart grid yet—we can climb out of the trough of disillusionment.  But the next time you are in Springfield, Illinois go rub the nose on Abe Lincoln’s statue at his tomb for good luck (a local tradition).

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North America's Power Grid

There is much to admire in Eastern Interconnection Planning Collaborative (EIPC) the consortium of over two dozen electric system planning authorities from thirty-nine US states and two provinces in Eastern Canada that make up the Eastern Interconnect, the giant power grid that covers this vast part of North America.  But scenario planning at least what we have seen to date in the EIPC phase 1 effort is nothing to write home about.

EIPC’s purpose is to focus stakeholder attention on a “bottom-up” assessment of the issues facing the power grid including the grid expansion.

The EIPC planning process is led by a 29-member Stakeholder Steering Committee (SSC). The SSC chose the three scenarios for use in assessing issues in Phase 2 from among eight resource options studied.  More than 72 sensitivity runs were used to assist the SSC refine the three scenarios.

The three scenarios chosen for further study in Phase 2 are:

EIPC SCENARIO 1: Nationally Implemented Federal Carbon Constraint with Increased EE/DR.

This scenario does not use the term cap and trade but it represents similar reduction in carbon emissions by 50% from 2005 levels in 2030 and 80% in 2050 driven by a Federally-set CO2 price.  In addition to meeting the 30% of the nation’s electricity requirements from renewable resources by 2030 from scenario 2. This is the all you can eat scenario for green energy appetites. This scenario includes substantial energy efficiency, demand response, distributed generation, smart grid and other low-carbon technologies where the costs for EE and DR are subsidized by the CO2 revenues.

This scenario incorporates a progressively larger CO2 price adjusting annually so that the pain increases until the goal of 42% reductions in CO2 emissions by 2030 is achieved.  The scenario assumes the CO2 prices are flat after 2030 because electricity demand has been reduced.

This scenario requires the most expansive transmission build-out of the three scenarios, enough to accommodate the transmission needs under Scenario 2, the nationally-implemented RPS. That new transmission is described as including ‘hardened inter-regional transmission build-out with a transfer capacity of 37,000 MW—an enormous inter-regional transfer expansion.

However, the sensitivities run by the planning team found that even this level of transmission capacity expansion was not sufficient even with high CO2 prices to distribute the renewable energy capacity imagined in the scenario, with appropriate natural gas combined cycle generation back-up.

EIPC SCENARIO 2: Regionally-Implemented National RPS Scenario

This scenario assumes a regionally-implemented RPS to serve 30% of each region’s load in 2030 with renewable resources. The Scenario assumes utilities will purchase renewable energy credits from other entities to make their targets from qualified renewable facilities including wind, solar, geothermal, biomass, landfill gas, fuel cell using renewable fuels, wave energy and hydropower. This scenario assumes the need for ‘moderate transmission expansion’. This scenarios is a combination of Future 6 from the planning analysis which has significant supply diversity with coal, gas, wind, nuclear, hydro, offshore wind and other renewables including substantial offshore wind and Future 3 (state and regionally-implemented carbon constraint future) with significant coal retirements.  This scenario has 3,100MW of total transmission capacity much less than scenario 1.

EIPC SCENARIO 3: Business as Usual Scenario

This Business As Usual (BAU) has no new federal, state or regional energy or environmental policy or program changes. As the current state of policy this is essentially the base case with scenarios 1 and 2 forming bookends for a full range of options consideration.   Currently proposed EPA regulations including the Transport Rule, Utility MACT Rule, Utility NSPS Rule, Coal Combustion Residuals Rule, and Cooling Water Intake Structures Rule are assumed to be implemented.  Fuel prices remain stable and there are no major technological advances. Inter-regional transmission transfers are not expanded beyond current projects. The scenario involves significant coal plant retirements and new generation construction of renewables and natural gas combined cycle that would require new transmission to assure system reliability.

EIA Electric Power Generation by Fuel to 2035

Scenario analysis is a powerful tool for managing uncertainty.  By giving permission to think outside the conventional wisdom about future events, scenario analysis allows and encouraging consideration of equally plausible alternative futures.  The best scenarios are those that separate themselves from other scenario stories and timelines.  If there is too much overlap the scenarios all run together and the ability to test alternative strategies, investments, portfolio risks and technologies is diminished.

A reading of the EIPC process in phase 1 reveals the core problem with the approach used and why it is unlikely to result in the best outcomes.  The bottom line is these are not really scenarios at all, they are sensitivities off the base case.  Business as usual can lead to only two politically correct conclusions: we need more renewable energy so we can reduce coal and thus emissions; or we need a carbon tax to raise the price of coal so that renewable energy can be sustainably competitiveness, demand will be reduced and thus emissions will go down.

Huh?

If that is all there is to this exercise then a lot of companies are wasting a lot of time and money. Perhaps the problem is US DOE is paying for much of this work and is not interested in hearing what the industry REALLY thinks about the energy and environmental future. Perhaps the stakeholders doing this planning analysis are too invested in the current strategies to consider alternatives.  Perhaps, the utilities making this exercise possible are worried about irritating their regulators by offering contrarian views to the political correctness on display.

SOURCE: Scalable Growth Strategy Adivsors

I’d offer the following alternative scenario ideas:

SMART GRID GRINCH.  (Muddling Through)

• Long slow economic recovery means weak demand growth, return to historic average demand growth of 1-2% per year by mid scenario.
• No cap and trade and carbon offset trading schemes falter.
• Smart meter installation reaches saturation point but customer benefits are few.
• Utilities look for earnings growth in reduced operating costs and improved productivity.
• Push back on dynamic pricing in a weak economy means the best we can do is modestly tiered pricing for electricity—not enough to stimulate demand response.
• Regulators facing growing rate increase pressure from cumulative costs of new emissions regulations, above market renewable energy projects approved, and the need to assure reliability as coal plants retire.
• Regulators feel political pressure on rising rates and cut back rate relief requests.
• RPS stalls as states ‘declare victory’ at 20% RPS goals.
• Renewable project growth stalls except for rooftop solar.
• NIMBY stalls most new transmission development in the states.
• Retiring coal plants replaced by natural gas combined cycle.

NIETC WORLD (Merchant Energy Driven Competition)

• Growth in unconventional oil and gas development in the US jumps starts the economy.
• Low natural gas prices undermine the economics for coal and nuclear baseload power.
• US EPA regulations against coal emissions results in substitution of natural gas for up to 83GW of coal plants.
• Low cost natural gas fuels a clean energy industrial rebirth making the US a magnet for new manufacturing.
• Demand for natural gas grows as fuel demand for power generation increases to replace retiring coal, back up new renewable energy and fuel combined heat and power and microgrid industrial development drives an emerging distributed energy future.
• Demand for new natural gas pipelines, high voltage electric transmission and refining grows.  FERC authority over electric transmission clarified by Congress to match natural gas to encourage economic growth.
• Industrial innovation drives the clean energy future with low cost fuel, easy access to transmission and distribution and new markets for clean energy technologies.

CUSTOMER AGGREGATION (Insurgent New Entrant Driven Competition)

• Smart meter saturation and meter data access to third party vendors attracts customer aggregators to expand their market beyond just commercial and industrial customers.
• FERC drives growing market for energy efficiency and demand response with new tariffs that leverage expanding transmission build to support renewable energy access.
• The combination of smart meters and data, transmission access and OT/IT convergence create new customer aggregation driven energy management products and services.
• Consolidation accelerates as big players see market potential for EE/DR and energy management integrated into merchant energy driven portfolios.
• Integrated resource planning is revived by state regulators to restore balance between demand and supply options in utility portfolios as RPS targets are met and subsidies reduced or eliminated in favor of ‘least cost, best fit’ options.
• The growing potential for DR and EE breathes new life into energy storage technologies.

TRANSFORMATION (Utility-driven distributed energy transformation)

• Low natural gas prices and new EPA and state regulations force retirement and replacement of older coal fired power plants, once through cooling water plants, and first generation inefficient wind and solar units.
• Growing use of microgrids to manage combined heat and power projects at the C&I level increase the demand on utilities to play choreographer for a more distributed energy future like it or not
• Turns out, utilities like the DER evolution, because it speeds distribution automation and extracts more benefits from smart grid investment and creates a new market for utility owned EE, DR and supply options to fill the gaps thus improving earnings.
• Regulators see the benefits of utility focus on grid reliability, security and modular grid management and adopt rate structures that fund transformation to a DER future upon approval of the integrated resource plan.
• This scenario results in less new transmission build to serve large remote power plants and a transformation of the grid into a modular, more secure, infrastructure plan.

Let’s hope Phase 2 of the EIPC effort can move beyond political correctness and do some really imaginative thinking about our energy future worth the tax money we are going to spend on it.

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There is broad public support for environmental laws and regulations that force businesses to clean up their act and not dump their waste products into our air and water.  Since Rachel Carson’s Silent Spring we have been fed a continuous stream of messages about protecting the environment and it is now part of our cultural DNA.

Much of the easy and obvious stuff is now accomplished and embedded in our daily work and lives. But just because we can celebrate our successes does not mean we don’t have room for further improvements especially as advances in technology make possible things we scarcely could imagine a few years ago.

Our disquiet about environmental balance

The reasons for that disquiet are many and cumulative.

1. The marginal cost of the new environmental regulations proposed by the US EPA such as the Cross State Air Rule, the Maximum Available Control Technology Rule and others are staggering while the marginal benefits seem modest.
2. The cumulative impact of regulatory demand for above market cost renewable technologies seems likely to drive up utility rates even after large tax subsidies are paid to promote, develop and construct the clean energy projects.
3. The combined impact of new environmental regulations force reduction in the use of fossil fuels before their replacements in wind and solar can be built economically and in enough scale causing concerns about energy reliability.

Our disquiet is growing because increasingly we see our Federal and State Governments pursuing political policies that cross our public interest line in the sand about reasonableness, responsibility, security, fairness and affordability.

Our disquiet is real because we see our government policies being hijacked by special interest groups and politicians that pander to them for support that are at odds with our own sense of balance.

Our disquiet is pent up ready to explode because at a time when we need our economy to grow and create jobs to restore America’s global economic competitiveness, we sense that our own laws, rules and politically correct policies stand in the way of a recovery we badly need.

The latter day risk for business that indiscriminately polluted our air and water and failed to stop it was the enactment of new laws and regulations to force compliance with our consensus polity view that we wanted to leave the planet a cleaner place for our children than we inherited.

The growing risk for environmental advocates and government regulators is that policies which push too hard, too fast and cost too much for too many will be seen as irresponsible and unsustainable. 

We refuse to tax, spend and regulate ourselves into a permanent state of economic non-competitiveness in pursuit of an environmental agenda we see as too much politics and not enough common sense.

The sleeper issue in the 2012 election is the need for balance between environmental responsibility and economic responsibility.  The mood of the public seems to be telling us that the Obama Administration is pushing us too far, too fast, too hard with its regulatory revenge for the failure to win Congressional approval for Cap and Trade Carbon legislation.  We are coming to believe this push too hard is more politics and environmental responsibility as the consequences of the newly adopted regulations pile up.  The Republicans will make a mistake if they interpret our disquiet as a revulsion of environmental responsibility.  We don’t want business interest to be able to do anything they want just as much as we don’t want environmental interests to be able to hold us hostage to rules that protect a bug, or rat, or fish more than the interests of people and our national economic interest.

We want balance people—why can’t you see that!

As citizens we are tired of Washington games of political gotcha with our best interests.  We are tired of the states taxing us and regulating us into submission for pet politically correct causes environmental or otherwise.  We think the regulatory process has been hijacked, is out of control and no longer serves the public interest.  We see the constant political scoring of points in Washington as corrosive and cynically being used to extract the maximum political cash out of special interest groups and lobbyists.  It turns us off!

The bottom line is there is a looming big green wall ahead where our tolerance of political correctness and massive costs and disruption for little or small marginal environmental gains will foul the nest and ruin the habitat of broad public support.

Actions will hit the big green wall if they seem to do more harm than good to our global economic competitiveness, undermine our domestic energy production, security and reliability or favor rats over people one too many times.

Our current environmental laws are broken because they do not impose a duty of balance on the parties bringing the actions.  They do not allow a rational defense against lawsuits and regulations based upon the reasonable balancing of costs and benefits.  They do not require explicitly in the environmental laws that courts play the role we intended courts to play as an honest referee equitably balancing the interests of people and fish in the public interest.  Our national economic, energy security and global competitiveness public interests are at least as important as the habitat needs of rats, frogs, and lizards.

The big green wall is a day of rapture and reckoning ahead when the American public shouts ENOUGH!  We’re mad as hell and we are not going to take this anymore!  There is a high probability that environmental overreach will be the spark that ignites that explosion but the fire and brimstone consequences will spread out across a regulatory process out of control that fails to serve the public interest, is too easily manipulated by special interest groups on both the left and right and presents a clear and present danger to America’s future.

Balance!  Reasonableness!  That is our Advent prayer!

Related articles

• Disruptive Economics for Growth (insightadvisor.wordpress.com)
• EPA tells nation’s dirty power plants to clean up (sfgate.com)
• Stay on top of environmental delinquents, Ottawa told (theglobeandmail.com)
• Should Voters Have More Say in the Regulatory Processes That Drastically Affect Their Lives? (reason.com)
• Two pieces of legislation threaten public protections: the REINS Act and the Regulatory … (thehill.com)

Rio State Flag via Wikipedia

Chevron’s accidental spill of about 2,400 barrels of oil offshore in the Frade oil field has turned into a fracas that threatens Brazil’s hopes of developing its massive offshore oil capacity.  Chevron admitted the leak, fixed it and reports suggest no oil fouled the beaches.  But now prosecutors in Campos near Rio de Janeiro are threatening fines of more than $11 billion and criminal charges against Chevron executives.

Chevron accused Brazilian officials of grandstanding and over reaction which only added more fuel to the fire.  The environment secretary in Rio state threatened to permanently suspend Chevron and its drilling partner Transocean from operating.  That threat caused Brazilian federal officials to go into damage control mode.

Brazil’s goal is to double its oil production capacity by 2020 to around 7 million barrels a day. But to achieve that goal Brazil needs the best technology and experience since the largest Brazilian oil company, Petrobras, is not capable of performing the deep water drilling needed to gain access to the off shore oil and Transocean owns 7 of the 10 drilling rigs now in operation.

As the oil industry scratches its head asking what is really going on in Brazil, the answer may have as much to do with local politics and money as with a genuine concern about the environment.

Brazil’s federal government is trying to build public support for offshore oil development by promising to equitably distribute oil royalties across the Brazilian states.  This has created a fury of protest from the coastal states nearest where the drilling occurs. Rio, in particular, has complained that the Federal plan will cost the state more than $7 billion in oil royalties. Money Rio and its cities like Campos say they need for the infrastructure development and other costs for the 2016 Olympic Games.  So if the Federal government takes the oil revenue away, local officials seem to be threatening to undermine that very revenue potential by wrapping themselves in the green flag and hauling the oil miscreants into court to exact fines at least as large as the revenue losses they expect to incur with the Federal plan for oil wealth transfers.

Conveniently, the criminal charges filed against Chevron executives by the City prosecutors in Campos must be approved by Federal prosecutors before they can be arrested and formally charged.  Those Federal prosecutors are also, conveniently, out of the office until after the New Year.  So the issue is playing out in dueling press releases and accusations.

Does this smell like politics to you?

Chevron says it is committed to Brazil and expects the problem to be resolved in a reasonable fashion.  This is a prudent statement.  Brazilian officials at the Federal and State levels obviously have work to do to arrive at a compromise that the People of Brazil judge fair and equitable.

If this is resolved quickly the oil industry will chalk it up to local politics and greed—concepts they are accustomed to facing in every newly oil rich market.  If it is not solved quickly or amicably then Brazil will clearly be the loser.

Those Transocean rigs now working in Brazil likely came out of the Gulf of Mexico when the US shut down drilling after the BP spill.  Now that President Obama needs the votes in the Gulf coast states to win re-election oil drilling permits are starting to be issued again so those Transocean rigs can pull up anchor and be hauled back to the Gulf.  Chevron can focus its efforts in other markets and let Brazilian politicians sit there debating how to split zero revenue equitably among the states.

Related articles

• Chevron and Transocean Asked to Shut Down Brazil Operations [UPDATE: Chevron Responds] (gcaptain.com)
• RIG Good For $70 If Transocean Skirts Brazil Spill Penalties (forbes.com)
• Brazil Sues Oil Giant Chevron For $10.85 Billion Over Offshore Leak (businessinsider.com)
• Brazil’s oil problem (finance.fortune.cnn.com)
• Prosecutors seeking $10B from Chevron for leak (seattletimes.nwsource.com)
• Chevron Halt Sought by Brazil Prosecutors as Remedy to Spill (sfgate.com)
• Chevron, Transocean Spill May Trigger Fines, Bans in Brazil (businessweek.com)

SOURCE: Black & Veatch Energy Market Perspective Dec 2011

‘Make Change Your Friend. ’ That was the political advice of former President Bill Clinton when people would come to him seeking support for one cause of another.  It is a strategy that offers promise of political compromise, something we do not see often in Washington DC today.

But it also carries risk by appealing to the worst of Washington’s modus operandi because it often results in large omnibus bills larded with earmarks and policy giveaways.  Citizens hate this but conflict is the mother’s milk of Washington. The dirty little secret of Washington is that the more controversial, contentious and outrageous the proposals the better it is for political contributions for legislators as lobbyists compete with each other to win favor or fend off hurtful actions.

SOURCE: AWEA Wind Manufacturing in the US

Eavesdropping on the Conversation about Renewable Energy 2012 Prospects.  I recently had the opportunity to participate in a webinar sponsored by a large Washington DC-based law firm that represents players in the renewable energy business.  The speakers were all government affairs directors of well-known renewable energy companies.  The topic of the event was discussion of the legislative prospects for renewal of the 1603 treasury tax grants this year (not likely) to prospects for renewal of the production tax credits and investment tax credits next year.(possible but you can’t take it to the bank).

SOURCE: GTM Research PV Price Decline Curve

There was a sense of trepidation in the voices, but not panic. What was curious was how the tone of the discussion even when speaking about the need for policy and regulatory certainty had matured into a strategic discussion of long term policy needed to keep the renewable energy industry going rather than a knee-jerk plan to survive the next expiration date of one subsidy or tax gimmick or the other.  That tone can best be summed up in the following views:

1. State Renewable Portfolio Standards are Nearing Goal.  Protecting the RPS standards is important since many of the state requirements depend upon it.  Perversely the result of achieving the current levels of RPS and declaring victory means less need for PTC/ITC since fewer new products will be needed to achieve the mandates.
2. Prospects for National Clean Energy Standards or Carbon Taxes are Nil.  This is an idea whose time has past and it is unlikely to come back soon given.  States with such targets argue a national CES is not needed.  States without one argue it is not wanted.
3. Looking for an Omnibus Opportunity to Hitch Renewable Ornaments.  The view of the speakers was the current controversy over renewing the payroll tax credit and unemployment benefits may actually be a good thing for the renewable energy industry because it sets up the prospects for a big omnibus bill in early 2012 onto which PTC/ITC, 100% depreciation bonus and maybe 1603 grants could be attached.
4. China PV Panel Dumping Issue is Posturing and Politics.  The current trade debate is causing both sides to posture and hold alleged offenders accountable under the WTO rules.  China has responded to the US anti-dumping complaint on PV panels with a threat of countervailing tariffs on US autos.  This escalation has risks for both sides but also may result in some compromise. In short, politics since both sides recognize they each have more to lose than gain from letting this dispute escalate out of control.
5. Go for Master Limited Partnership for Renewables.   Current legislative constraints prohibit use of MLPs to new industries including renewable energy.  This lives into the Clinton Corollary about making change your friend by substituting MLP as an alternative to PTC/ITC.  Opposition was seen as low key but persistent mostly as existing MLP industries protect their own.
6. Sequestration will affect Federal R&D Spending.  Worries were apparent over the implications of the failure of the Super Committee and the need for spending reductions on the prospects for research and development investments in energy by the Federal Government.  Most of the panelists expected only modest reductions in overall appropriations but were pessimistic about loan guarantee programs and 1603-like tax grants.
7. Grid Parity Blessing and Curse.  The potential loss of 1603 was estimated to affect 37,000 solar industry jobs mostly for installations but perversely falling solar PV prices would mitigate some of that impact.  The biggest impact is a slowdown of new wind and solar development until the industry gets to grid parity and finds alternative financing.  It could also see the attractiveness of the US market adversely affected if demand and subsidies in other markets were more attractive.

SOURCE: EIA Domestic Growth of Low Priced Natural Gas is the Real Challenge for Renewable Energy

The Renewable Energy Bottom Line: 

The transition from adolescence to adulthood for renewable energy is underway. A big part of that process of maturation is a recognition that if you want to be an independent adult and make your own decision you must give up your allowance and quit using your Daddy’s credit card to support yourself.  The subsidies and tax policy supports are more likely than not going to phase out and go away.  Renewable energy must learn to make its own way at grid parity prices in competitive markets.  That said, there are lots of ways to participate in the adult games of tax policy poker and spin the bottle lobbying.  Sometimes the experience is wonderful, sometimes you wake up with a hangover.

Renewable energy leaders expect a continued hard push in 2012 to complete as many wind and solar projects as possible to qualify for the PTC or ITC to take advantage of Uncle Sam’s allowance for as long as it lasts.  In that sense the renewable business strategy continues to look like a sprint on the project side of the business. They expect to continue to work to protect renewable portfolio standards gains state by state.

On the policy side of the renewable energy business, however, there is a near-term focus on not missing an opportunity to leverage legislative friends to get renewable energy ornaments attached to any omnibus spending, tax or tax policy bill likely to pass.  In this sense, the renewable energy industry is trading its jeans and tee shirt for a business suit and sipping wine with members of congress instead of swilling beer with its frat brothers in AWEA and the solar lobby.  But there also is a growing recognition that the tax policy and business model framework of the renewable energy industry is changing as it reaches as appetite for tax subsidies wanes in the face of debt and deficit spending pressures.  New ideas are emerging that live into the probably future of a clean energy economy—but do not depend upon FiT or other gimmicks.  Going mainstream is a strategy for long term success in renewable energy as in other fields of endeavor.

The good news is both wind and solar renewable energy is at or near grid parity offering hope that strategies to ‘make change the friend of renewable energy’ is possible if good ideas can be planted and nurtured that wean renewables off unsustainable subsidies and fickle tax policy swings and more toward sustainable, certain and mainstream financing and investment policies like MLP as a politically acceptable trade-off as Congressional wrangling over debt, deficits and tax policy plays out in an election year.

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EIA US Nuclear Fleet Construction History

If you wonder why there are not more mergers of utility companies in the United States, the lessons from the experience of Exelon and Constellation will open your eyes. It appears that these two companies will finally get regulatory permission to get married, but both have had to kiss a lot of frogs before they found the prince or princess emerging from this deal.

We need more mergers of good performing utilities like these two if we are to live into the potential of smart grid and a clean energy future.  The technology, investment and scale required for success simply is not possible in the fragmented utility markets we have today.  We kid ourselves if we think we will see the customer benefits from all the spending on smart grid if each combination of utility pairs must go through the same tortured courtship these two have endured.

See the graphic above showing the construction history of the US nuclear power generation fleet.  Do you notice that there is not a lot of potential shown on this graphic for new nuclear plant construction in the US through 2035?  That is why Exelon needs this merger with Constellation and why Duke and Progress Energy feel the urge to merge to focus on new market growth.   Running a high quality nuclear fleet may be a steady income business but it does not attract investors looking for growth.

But state regulators considering this deal are treating it as if they have just found the Golden Goose and can force it to squat and lay golden eggs to fund their pet projects.  Read the press release yourself and look at the larded up regulatory extortion (earmarks!)  in spending on projects these two have been forced to do to get the State of Maryland to go along with the deal.

Duke and Progress Energy are facing similar demands in their own regulatory approval process.  Mostly they hold their nose and agree to the regulatory extortion in order to move forward, but both the public and investors are smart enough to realize that some of these regulatory demands have little to do with protecting the public interest and everything to do with politics.

Why Put Up with This?

Utility Fragmentation versus Monopoly. The utility business is fragmented because it was formed largely from the late 19^th century growth of small companies.  In those early days of the electric power business there often were many small light companies serving the same city.  Soon the barons of the power business realized the inefficiency in this and Sam Insull began the process of bringing the companies together in the early 20^th century.  The result of those efforts was too much of a good thing with the formation of monopolies and all their consequences.  The public policy response to monopoly power was utility regulation and until the 1960’s the rationalization process that emerged worked well.  The ‘regulatory compact’ of reasonable expansion of power generation in order to meet the post-World War II need for power to fuel our growing economy saw the economies of scale work to our advantage with each new power plant typically lowering the average cost of service.  Life was good in those ‘Leave it to Beaver’ days.

The Nuclear Power Roller Coaster. Things changed forever in the 1970’s with the ugly combination of oil price spikes, conflicts in the Middle East, inflation, worries that the US would run out of natural gas, and plans to build a fleet of nuclear power plants.  We know this ugly history—‘too cheap to meter’ turned into ‘OMG how much is this going to cost’!  Then came the Three Mile Island incident and the great hopes of the nuclear energy sector were dashed on the rocks.  Later the Chernobyl catastrophe sealed the fate of the nuclear power industry in America.  But through all that chaos more than 100 nuclear power plants were built and put into service and they have performed spectacularly as the plants were spun off to wholesale power-producer owners who operated them with the care and precision of a fine Swiss watch.  Today that first generation of nuclear power plants still provides about 20% of our electric energy with no carbon emissions.  But more than 50 years later politicians are still arguing over where to put the spent nuclear fuel waste even though a facility was built to house it more than 20 years ago.  But unfortunately it was built in Nevada in the home state of an opponent who happens to be the Senate Majority Leader.

Competition, Smart Grid and the Clean Energy Future.  Fast forward to the first decade of the 21^st century and we have seen tremendous change for both good and ill.  The boom at the beginning of the new century turned into a bust as housing, politics, regulation and finance combined to crater the economy.  In those boom years concerns over greenhouse gas emissions and the desire for renewable energy leading to politically correct policies built on the zero-sum game of trashing low cost coal fired generation.   Higher energy prices, renewable portfolio standards and government subsidies were part of an industrial policy to convert the low cost energy economy into a clean energy economy driven by renewable energy and smart grid to reduce emissions while using the regulatory hammer on coal and fossil fuels and ignoring nuclear.

EIA Electric Power Generation by Fuel to 2035

Unconventional Oil & Gas is Renewing America’s Competitive Future. But the inconvenient truth turned out to be the quiet but ruthlessly effective market response to the regulatory constraints.  Unconventional oil and natural gas exploration and production boomed in unimaginable places like North Dakota, Alberta, Saskatchewan, Nebraska, Kansas, West Virginia, Pennsylvania, and Ohio as well as in familiar places like Texas and Oklahoma.  Instead of worry about running out of natural gas as we did in the 1970’s the US is now an exporter of natural gas.  Competition from unconventional oil and gas enabled by horizontal drilling and hydraulic fracturing has turned America’s worry into America’s clean energy future.

The price of natural gas has been decoupled from oil prices and that now is roiling global markets.  Low natural gas prices hurt coal fired generation (unable to compete with lower gas prices) as well as renewable energy from wind and solar (unable to compete with lower natural gas prices even with subsidies).  The growth of unconventional oil and gas E&P is revving America’s growth engine again and will lead the way out of the current economic ditch.

Get Thee to Grid Parity—Fast!  Competition is also helping to quickly rationalize our clean energy policies and the market potential for wind, solar and other renewable energy sources.  This is not happening because of our government policies at the Federal or State level.  Those policies have only driven up costs of energy and hurt America’s global competitive economic position.  But global competition is driving down the prices for wind turbines and solar photovoltaic panels because of the ruthless competition from China and its desire to build global market share for its exports.  Who would have thunk it!  The communists are out-competing the industrialized free world.  Our own government policy of subsidies as well as those of the EU countries were so generous that China suctioned them up by dumping PV panels at prices below domestic manufacturers worldwide.  That is what caused the solar market crash in Spain and Germany and the bankruptcy of Solyndra and Evergreen Solar here in the US and it is driving every solar firm to grid parity prices as a fierce pace.

The same thing is happening to carbon markets around the world as the political correctness of buying carbon offsets (indulgences) is trumped by the economic and political reality of the lack of a global agreement on reducing greenhouse gas emissions.  Durban COP17 conference that recently ended in South Africa was an excuse for thousands of people claiming concern about the environment to fly thousands of miles to achieve nothing.  The markets have spoken and the politicians are no longer able to spend other people’s money for this or other pet causes.

The good news is for once we should enjoy this ride because the combination of competition from China driving down PV and wind turbine prices and competition at home from unconventional oil and gas production growth driving down natural gas prices is the corollary to the perfect storm transforming our domestic energy market into a lean, mean, competitively priced machine.  Yes it is hurting coal our traditional low cost energy supplier.  In fact, competition is hurting coal a lot more than EPA regulations by stopping most new coal fired generation power plant construction.  The logical replacement for that coal will be natural gas combined cycle generation that is cleaner than coal and load-following to back up renewable energy.

The bad news is EPA is still a terrible drag on the energy market creating uncertainty across the overall economy and still needs to be reined in before it kills off coal before we can build the cleaner natural gas and renewable replacement for the existing units.  We need for the existing coal units to keep running through 2035 according the the US EIA to assure grid reliability and a smooth transition to the clean energy future.

Our government policies are not helping the transition t0 the clean energy future.   They are hurting it by interfering with the constructive natural market forces of competition and rationalization sweeping out the weak players and dirty units and replacing them with better, cleaner, smarter technologies and the consolidated, scalable growth players needed to make it work.

The government must get out of the way!

By delaying the Keystone XL pipeline project the Obama Administration hopes to avoid alienating its environmental base by enraging its labor base.  That labor base will side with Republicans in supporting the pipeline project over the President’s objections. That is the preferred ‘political fix’—Labor and Republicans combine efforts (compromise!) so the pipeline will go forward and the president will be able to tell his environmental constituents those darn Republicans made me do it!  Politics!

That gets me back to the Exelon-Constellation merger.  This is a good combination of good companies and the public interest in served by scaling the ability of high quality utilities to help shape the clean energy future.  Regulatory extortion still means throwing millions of dollars of ratepayer money for politically correct projects (regulatory earmarks)  in the deals but the end justifies the means—-if you hold your nose and believe that a strong, competitive, scalable growth position is better than the alternative for customers, for investors, for American competitiveness and economic growth—and thus the public interest.

Exelon brings the solid income of a diversified utility business and a good performing nuclear fleet.  Constellation brings a strong retail, wholesale competition portfolio.  Together these two businesses operate in as many as 38 states.  They can provide high quality stable rates to their regulated utility customers while positioning the rest of the business for growth with a diversified portfolio of renewable energy, natural gas and retail energy marketing designed to leverage smart grid technology, a diversified market footprint and a clean, efficient, competitively priced portfolio of energy resources.

The faster the government gets out of the way the faster we can get to the clean energy future that is affordable, efficient and sustainable without subsidies as a result of the ruthlessly efficient competitive market rationalization process that separates the princes from the frogs.

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Image by Mel1st via Flickr

As part of its year-end approval of pending renewable energy procurement contracts the California Public Utilities Commission got some good news from the falling prices of solar PV panels. Of the 544 MW of solar projects on the CPUC’s December 15^th agenda 294 MW (54%) were at or below ‘grid parity’ which is defined in California market price referent rule as the costs of building a new combined cycle natural gas fired power plant. The other projects approved were priced higher but still judged reasonable by the CPUC when other cost factors such as transmission costs were considered.

Southern California Edison reported to the CPUC that it has cancelled proposed contracts with 95MW of solar PV projects because the transmission costs were too high. But SCE won the day with approval for15 PV projects totaling 144 MW using a Renewable Standard Offer program designed to attract small projects of up to 20MW using a reverse auction process where the project offer a price and compete for a place in the total 250MW to be procured.  The CPUC reviewed the process and found it produced very attractive price results for customers each priced lower than the 2009 MPR of $108.98/MWh.

SDG&E’s request to purchase 96-150MW, from Tenaska Solar Ventures was approved.  PG&E also won approval for a proposed purchase of 150 MW PV from Sempra Generation, which was also priced below the market price referent cost.

Not counting the recently approved projects, California’s big three investor owned utilities now provide 17% of their 2010 retail electricity sales from renewable power sources with PG&E at 15.9%, SDGE at 11.9% and SCE at 19.3%.  Each has a way to go to reach the 33% RPS target so they will keep shopping until they drop beyond this Christmas season.

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 “In the past few months, SOLON SE had engaged in intensive efforts to carry out a financial restructuring. It held talks with investors, the financing banks and the guarantors. Today, the negotiations on an amicable solution failed. SOLON SE will now use the opportunities for a restructuring within the insolvency proceedings.  An application for the opening of insolvency proceedings was subsequently filed for the following subsidiaries: SOLON Photovoltaik GmbH, SOLON Nord GmbH and SOLON Investments GmbH.” —Solon SE (S001) press statement

That was the short sweet announcement that Solon SE, Germany’s first photovoltaic panel producer listed on the stock exchange in 1998, was setting another milestone by filing for bankruptcy in German courts December 13, 2011 after its share price plummeted along with the falling fortunes of the once booming solar energy market.

The company laments that it was unable to overcome the perfect storm that is blowing solar companies onto the rocks.  The elements of that perfect storm are well known.  The politically correct push for ever more renewable energy driven by feed-in-tariff subsidies that created a feeding frenzy among producers of photovoltaic panels in Germany, Spain and elsewhere in Europe, but also attracted the attention of China eager to build its export capacity.

Overproduction of PV panels led to a glut in global markets, falling prices blamed mostly on China suctioned up the FiT subsidies to build market share for its export production and crashed the growth potential of domestic  EU producers.  Those producers responded by dumping panels thus driving down prices even further.

Generous but unsustainable feed in tariff subsidies created voracious demand for rooftop PV solar projects, so much so that the government funds for FiT subsidies were exhausted and so were the treasuries and debt limits of the EU governments.

In the end, Solon SE’s efforts to speed up cost cutting and extend the loan term were a futile effort to avoid a year end 2011 275 million-euro ($357 million) loan payment to Deutsche Bank AG and seven other German banks.  Given the rest of the euro crisis embroiling the EU, the banks were in no mood or position to compromise.  Checkmate.

SOURCE: GTM Research PV Price Decline

Now the vultures are circling the green energy camp waiting for other weakened players to falter. Both Q-Cells SE (QCE) and Solarworld AG (SWV) are feverishly trying to avoid the same fate as demand for solar panels falls in Germany and debt payments loom.   Conergy, another player at risk, swapped debt-for-equity in a recent transaction which turns over control to hedge funds Sothic Capital and York.

Solar Industry Rationalization is at Autobahn Speeds . Share prices of other solar players also fell sharply with Solon SE’s bankruptcy filing.  Part of the reason, apart from the overall economic uncertainties, is that feed-in tariff in Germany in January 2012 drop to 23-24 euro cents per kilowatt hour for large roof-top installations roughly the same level as consumer power prices. This is a radical change from the heady days when large FiT subsidies made solar extremely attractive to consumers since those big subsidies guarantees a solar power price for 20 years. Italy’s solar feed-in-tariffs have also fallen to 25-27 euro cents per KWh and are today modestly above the country’s grid price.  Solar prices are at near grid parity in Spain and other countries are racing to get there.  Britain had FiT subsidies almost two times higher than Germany but those supports are being cut in half to reflect the unsustainability of the payments by governments and changing market conditions.  US solar markets face the expiration of the 1603 Treasury grants and the discredited DOE loan guarantee program this year and a fight to keep production tax credits and investment tax credits next year.

Profitable margins or not, solar energy is reaching grid parity pricing in the EU.  While it has been a fast painful decline and a death spiral for some, those that survive hope to find a mature, healthier and more sustainable market future.

This rationalizing of the overheated solar market is also finally coming home to roost in China.   Press reports in China’s Guangzhou Daily say about 50% China’s solar PV producers have stopped production, 30% cut output in half while only 20% are trying to maintain production.  Digitimes Research and CSG Holding’s press reports say only the top tier PV producers in China have production rates over 80% of capacity.  But even those cutbacks could still keep an oversupplied market awash in panels for some time.

Germany has been one of the world’s largest and most robust markets for solar PV panels so the falling dominoes in Germany are clear evidence that the shakeout in the solar industry is accelerating. China will also have to change its strategies to maintain its export growth perhaps picking up the slack from falling FiT subsidies by offering financing terms for China exports to keep production up or investing in surviving solar companies or projects around the world.  Either strategy is likely to produce more sustainable results and, at least, align the incentives of the market players to reduce the boom and bust market ride.

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Image via Wikipedia

The comedic opera that played out in Illinois from the legislative battle over smart grid is typical of the Land of Lincoln where everything is political and everything has its price.  But while the outcome is not what was planned or predicted it may end up being an interesting lab experiment on whether smart grid can earn its keep.

In full disclosure I spent five years working for the Illinois Commerce Commission as Manager of its Public Utilities Division and then my last year there as General Manager of the agency.  I learned to navigate the Illinois political calculus including “freeze exceptions” for hiring state employees which served as a pretext to send me a list of patronage candidates to consider. If I would agree to hire one from the list I got my freeze exception.  If not I had to wait.  I was never forced to hire anyone but there clearly was a cost for not doing so.

I also learned that just because utilities were regulated by the Illinois Commerce Commission did not mean they were helpless subjects to be trifled with.  There was always a political way to fix a problem.  That is the situation with Exelon’s need to move forward with smart meter deployment and smart grid implementation.  It was not a matter of whether this was a good idea only how much it would cost to implement—and to win the approval needed to do so. Ameren thought it could piggyback on a good deal and ended up being caught in the crossfire.

The problem was smart meter deployment got caught up in a series of other issues including the extended power outages from a string of storms that made customers mad and put politicians on the defensive.  Then there is the minor problem that Governor Pat Quinn has been an unabashed ratepayer advocate and frequent opponent of utilities for more than 30 years.  Then there was the concern of the utilities that the ICC might not approve their smart meter costs as “prudent” after the fact so they wanted approval in advance rather than rolling the dice. No dice said the Commission. Add to that the political sparing between the Governor and Legislature and you have the classic makings of a Chicago-style fight.

When the utilities went to the Legislature over the heads of the ICC to get legislative approval for the terms they worried the Commission would not approve—the fight was on!  Everyone who wanted or needed to score points found reasons and ways to do so.  Governor Quinn got his points scored by vetoing the bill.  Take that!

But that enraged the Legislative leaders who cobbled together another political deal with a veto-proof majority and sent it back to the Governor.  To get that veto proof majority the trailer bill, as these things are called, was loaded to the gills with favors for those who delivered the votes to rub the Governor’s nose in the mess.

What does this have to do with the final outcome of a bill that sets performance standards for smart grid implementation?  In street language this might be called “stink control” in the halls of the Illinois General Assembly this is getting the people’s business done.

So the utilities (Commonwealth Edison and Ameren) will get their smart grid deployment but the amount is reduced from $3.2 billion to $2.6 billion and they must spend one-half on upgrading the transmission grid to reduce power outages.  Yes customers will pay more—that was never in doubt. But the performance metrics have more to do with predefining the terms of regulatory approval to take away some of the discretion the ICC exercised than they do with setting a model for anyone else to follow.  And the price the utilities are paying for this new ‘model of smart grid accountability’ is that they must use the smart grid approved revenue to fix the outage problems that give politicians headaches AND THEN still perform to make smart grid work.

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