China’s Opportunity

This week’s Bloomberg Businessweek had an article titled On China’s Electricity Grid, East Needs West, that explained the mega cities of China’s east coast are consuming resources from the coal rich areas in the country’s far western provinces resulting in lengthy transmission lines and growing instability among the minority ethnic groups there.

coal chinaOne of the biggest problems with having cities so far removed from the natural resources that power those cities is transmission.  In China, freight railroads and river barges are already overloaded and overcrowded.  This led party leaders to push for development of interior regions of the country and build high voltage transmission networks called the West-East Electricity Transfer Project.  By 2020 the total capacity of this project is projected to equal 60 Hoover Dams.

china water scarcityThe second problem with this large-scale coal driven buildup is the lack of water resources available to produce steam in these plants.  Many of these planned coal plants are located in water scarce regions including Xinjiang and Inner Mongolia and has led to tensions with ethic Mongolians and Uighurs who depend on farming and herding for their livelihood.  By tapping already stressed aquifers and wetlands, there could be a larger problem looming.

Coal currently generates 80% of China’s electricity and the country is responsible for half of the annual consumption of coal worldwide.  Following the traditional model of building coal plants located far away from the end users is simply not the answer.  While high-voltage transmission lines are more efficient that shipping coal by rail or barge, much of the electricity produced is still lost in transmission.

solar chinaA better idea would be harness China’s production capacity of solar PV cells and adopt a domestic policy of distributed generation.  DG is sited near the end user of the electricity and therefore less vulnerable to losses during transmission.  PV cells can be placed vertically up the sides of the country’s many skyscrapers eliminating the need to clear land for ground-based systems.  Smart building design is another idea that could drastically reduce demand for electricity and save the country from building expensive, inefficient, centralized power plants.

Distributed generationChina’s massive infrastructure build out has been nothing short of extraordinary.  Now it has the opportunity to leap ahead of other developing nations by committing resources towards building the next generation cities.  Distributed generation, microgrids, and smart integrative building design can all help to make this idea a reality.

DSCN4315

Advertisements

Subsidies to the Energy Industry

“I am a big fan of clean energy, but I am bigger fan of a robust economy.”

-Mr. Greenbacks, 2012

Subsidies to the energy industry are nothing new, they have been around for decades.  Generally speaking, subsidies fall into three main categories: Direct Spending, Tax Expenditures, and Loan Guarantees.   For most of the 20th century, fossil fuels have enjoyed a long run of subsidies such as tax breaks, tax credits, tax exemptions, and deferred depreciation, just to name a few.  This extended period government support firmly entrenched fossil fuels as the sole providers of energy by making renewable energy prohibitively expensive by comparison.  The roles reversed in 2009 with the passage of the American Recovery and Reinvestment Act that eliminated some subsidies for fossil fuels and expanded subsidies for renewables.  However, as you can see below, the level of support to fossil fuels is still 6x greater than renewables.

  • The IEA estimates that in 2010 worldwide fossil fuel subsidies totaled $409 billion.  That number is expected to rise to over $650 billion by 2020 unless changes are made.
  • By comparison, only $66 billion was spent to subsidize renewable energy.

Misguided Policy?
So what is the role of subsidies?  Subsidies should be used to level the financial barriers for new and emerging technologies in order to compete in the marketplace.  Once these technologies are mature enough to stand alone, the subsidy should be removed in order to let the market forces take over and determine a true price for the product.  The support should then go on to fund another technology that could possibly compete with the first one in order to advance a competitive marketplace.   By keeping the subsidy in place for too long, one can create artificial demand that encourages waste and can quickly drain government coffers.  This could apply to any industry, but right now we are focused on the energy industry.

So should we remove all subsidies to the energy industry?  No!  The renewable energy industry has seen more ups and downs than the Cyclone on Coney Island.  Most of these Boom and Bust cycles have been created through a rush of investment in good times (subsidy ON!) followed by a lack of capital (subsidy OFF!) when the music stops.  A clear and definite subsidy policy should be implemented in order to remove the uncertainty faced by investors of clean energy projects.

Subsidies to Renewable Energy
I am a big fan of clean energy, but I am bigger fan of a robust economy.  In today’s economic climate, governments must be extremely careful how they spend their resources.  The current policies offering subsidies to the renewable energy industry have done a wonderful job of creating widespread deployment of clean energy projects.  However, many of these projects are only profitable because of the subsidy.  Current policies should be revamped in order to drive innovation and cost reductions so that renewables such as wind and solar can compete with cheap natural gas WITHOUT the subsidy.

In order to maximize the value of taxpayer dollars the following objectives should be implemented:

  1. Remove subsidies to the fossil fuel industry in order to establish a true market value that takes into account the negative externalities of these resources.  A small fee can be added to fossil fuel transactions to help fund clean energy research.
  2. New subsidies should promote efficiency gains and cost reductions through the use of steadily improving, performance-based standards.
  3. These subsidies should target advanced technologies, decrease as the cost declines, and be temporary in order to deter ongoing support.
  4. The US must increase its investment in R&D as well as leverage talent from universities and the private sector in order to establish public-private partnerships and regional clusters of advanced research and manufacturing.
  5. Utilize the strength and size of the DOD to drive commercialization of technological advances made through ARPA-E.

Implementing these policies will go a long way toward maximizing public dollars, creating a competitive clean tech industry, and ending the addiction to fossil fuels.

Innovation

Inn-o-vate good times! Come on! Yes, it’s a terrible play on Kool & The Gang but it has an underlying theme – adapt to new conditions or miss the party. Just as Kool’s 70’s funk beats stayed the same, our music tastes changed and The Gang was left behind. The same can be said of companies. As many business know by now, if you can not adapt, you fail. Plain and simple. Look no further than GM or Chrysler – they failed to take notice of the changing tates of Americans as well as the threat from overseas competition and bam!, bankruptcy. Business is a simple game of evolution – use your skills to adapt to the ever changing environment, or die. Every animal and species out there today is a result of several others who didn’t have the necessary skills to stay competitive and were thus gobbled up by something smarter, faster, or more innovative. Why should our companies be any different? Now is adaptation time for energy companies, utilities, manufacturers and America alike. This message goes out to the utilities – America wants clean power. We love our televisions, the ability to read at night, power tools in the garage and streetlights on our block. But we like breathing without an inhaler better. We are just plain “sick” of breathing contaminated air. We depend on you to keep our houses lit, so tell us how can we solve this problem together? We want you to be part of the solution, because we like you. You were there when Lucy met Desi, when Neil walked on the moon, when the Berlin wall came down. You lit our front steps when dad came home from work, when mom put herself through night school and would do homework on the kitchen table, and our living room every Thanksgiving when generations of family would gather for a meal. So, lets figure this problem out together – we need power, you need innovation. What is going to power our nation for the next 100 years and beyond? I only ask because fossil fuels are literally killing us. Instead of spending ridiculous amounts of money fighting regulation upon regulation, how about you invest a little scratch into clean energy R&D? A simple innovation in clean power could pay off exponentially for you with the predicted increase in demand. Or partner with the Department of Education and work with them on how future students can be better prepared to tackle the problems of the 21st century. If you dont, someone else will . . . and they are going to send you the way of the Dodo bird.

Primer on US Solar Industry

The following is an excerpt from a white paper I wrote this summer regarding the US solar industry.  I hope you enjoy!

The United States has until recently lagged behind Europe in terms of embracing solar energy.  However, over the past few years there has been a steady increase in federal and state incentive policies that make solar energy more beneficial to producers and consumers alike.  Due to the lack of a clear federal mandates, there are many policies and incentives offered through the federal government, state governments, local governments, utilities, and private companies.  These incentives can be mandates to acquire a certain amount of energy from renewable sources, cash grants, tax credits, tax exemptions, performance based incentives such as feed-in tariffs, accelerated depreciation of equipment as well as many other measures.
Renewable Portfolio Standards
Renewable Portfolio Standards (RPS) are state policies that require energy suppliers or utilities to purchase a certain amount of energy from renewable sources such as solar, wind, and geothermal.  For example, Arizona can say that 2% of its energy must be generated from renewable sources.  This also creates a market for renewable energy credits (REC’s) that can be purchased, sold, or traded by the utility to comply with RPS policies.  Currently, 29 states and the District of Columbia have enacted RPS policies.  Together these states account for almost 40% of the US electricity load.  In addition to requiring a certain percentage of the electricity mix come from renewable sources, states can create “carve outs” or “set asides” that specifically target a certain type of renewable energy.  One example of this is New Jersey’s solar carve-out that requires 5,316 GWh of solar power by 2026.  There is no federal RPS yet although the Obama administration has advocated for 25% of America’s electricity come from renewable sources by the year 2025.
Financial Incentives 
Financial incentives can include grant programs that usually target larger commercial or industrial projects and offer direct cash payments to defray the cost of eligible systems or equipment.  A rebate is another financial incentive that is offered to the purchaser after a system has been installed in order to make the cost of the system more competitive compared to conventional energy systems.  These direct financial incentives lower the initial cost of the technology and lead to an increase in production, thereby decreasing the price further.  The goal is to have producers ramp up the production cycle to reduce costs to the point that a subsidy is no longer necessary.  Performance based incentives are cash payments resulting from the actual energy output of a solar system on a dollar per kilowatt-hour ($/kWh) basis.  These incentives are generally reserved for large scale solar facilities, however, there is a new interest in feed-in tariffs based on their success in Europe that can be used on a smaller scale and even residential properties through the use of net metering.
Net Metering
Net metering allows the owner of a solar system to sell back energy to the grid via a contract with the utility at a determined rate per kilowatt-hour.  Basically, electricity flows both ways through the meter – using power when it needs it and selling power back to the grid when the solar system is producing more energy that the facility is using.  Net metering is the cornerstone of distributed generation, and distributed generation lends itself to solar photovoltaic installation on residential and commercial properties.  Distributed generation not only allows a PV user to power their property, but it also rounds out the peak electricity loads that utilities face in the afternoon when power comes from the dirtiest sources.   There is no federal net metering policy yet, but 43 states have adopted policies to allow it.
Two of the most common financial incentives are direct cash incentives that provide money to lower the upfront costs associated with solar projects and tax incentives that reduce the tax liability of the individual, company, or organization that installed the solar energy system.
Federal Grant Program
Currently, the federal government is offering direct cash incentives for solar energy through the Federal Grant Program, but more than 30 states and 130 utilities throughout the US offer anywhere between a few hundred dollars up to a million in cash for solar PV projects.  In 2009, as part of the American Recovery and Reinvestment Act (ARRA) the federal government passed the Section 1603 Treasury Grant Program that offers a renewable energy grant worth 30% of the value of qualified renewable energy projects including solar, wind, and geothermal.  This grant includes commercial, industrial, or agricultural solar projects started before 12/31/2011 and completed by 12/31/2016.  As of May 5, 2011 the 1603 program has awarded 2,044 grants for solar electric technology totaling $936 million for more than 6,300 individual solar projects in 45 states and has supported over $3.1 billion in investment. The largest problem with direct cash incentives is that they have to be budgeted for and are not politically feasible in difficult economic times.  This leads to volatility in the solar industry and discourages long-term investment and stability.
Federal Tax Credits
Tax incentives including credits, deductions, and exemption are other financial incentives that the federal and state governments are using in order to expand solar energy production.  An investment tax credit reduces the taxpayer’s liability for a portion of the cost of buying and installing a solar energy system.  Investment tax credits are fairly straightforward and usually limit the dollar amount that the taxpayer can claim.  Policy makers favor tax credits because the amount of the incentive generally does not have to be appropriated or withdrawn from a budget.  By encouraging development through tax credits, policy makers hope to grow the industry and eventually create jobs in solar and related industries and thus increase the tax base in that district.  The 2009 American Recovery and Reinvestment Act (ARRA) also extended the investment tax credit through 12/31/2016 for residential solar electric installations.  The credit is equal to 30% of expenditures with no limit to the maximum amount.  The ARRA allows taxpayers eligible for the federal renewable electricity production tax credit (PTC) to take the federal business energy investment tax credit or to receive the grant from the US Treasury Department instead of taking the PTC for new installations.  Currently, twenty-one states and Puerto Rico offer personal and/or corporate investment tax credits to help offset the expense of purchasing and installing solar energy equipment.  Tax credits range from 10% to 50% of project costs, with maximum credit limits ranging form $500 to $12,500 for residential systems and from $25,000 to $10 million for commercial systems.  However, a major drawback of the investment tax credit is the policy discourages institutions with a low tax liability from reaping the benefits.  Recently, some states and municipalities have attempted to remedy this problem by creating provisions that would allow a “pass-through” option whereby the tax credit can be claimed by a third party who does have a tax liability.  This could include a partner of a non-profit as well as homebuilders who integrate solar systems into new construction.  In either case it encourages solar power systems to organizations that would not normally be afforded the tax benefit.

The Air Up There . . .

I read an interesting article this weekend in The Economist called Air-Quality Regulations: Don’t Hold your Breath. At issue is the EPA’s Cross-State Air Pollution Rule or CSAPR for short. CSAPR is set to take effect January 1st, 2012 and would require that power plants in 28 states (mostly east of the Mississippi with the exception of the Northeast) reduce their emission of sulphur-dioxide and nitrogen-oxide by 27% and 46% below their 2005 levels respectively. As you can imagine by the political bickering in Congress the past few years, this rule is bitterly opposed by at least 36 entities who have petitioned the US Court of Appeals for the DC Circuit to stop the EPA from implementing CSAPR.

So what is the dispute about and what does it mean for our economy? Those against the rule say that forcing power plants to meet these requirements would cost the consumer more in higher electricity bills as well as cut jobs at a time of 9% national unemployment because the utilities could idle some of their less efficient coal burning plants, costing jobs to plant technicians not to mention related industries such as mining. Others oppose the regulation simply because they see the federal government as interfering on state issues. Supporters of states rights argue that the government should outline a pollution reduction target and leave states to their own authority to meet the limits. The EPA claims that CSAPR will prevent 13,000-34,000 pollution-related premature deaths, and yield between $120 billion and $280 billion in health and environmental benefits annually.

Here is the way I see it. If the states wanted to create their own regulations, they would have done so by now. Why is the Northeast immune from this new law? Because those 9 states(ME, NH, VT, MA, RI, CT, NY, DE and MD) created a club called the Regional Greenhouse Gas Initiative (RGGI) that tackles the emission problem head on. By being proactive about this problem, these states now have wiggle room in terms of the decisions they can make. In addition, RGGI states show that not only are the emissions reductions working, but jobs are being created and $3 to $4 of benefits are being created by every $1 invested in the program.

In response to shutting down the old coal fired plant at the cost of jobs: do it! Shut that dinosaur down. And while you are shutting it down, start hiring Americans to build a new natural gas, wind, solar, geothermal or nuclear plant (or read my related post on distributed generation). This will create even more jobs as well as provide us with energy than doesn’t burn our eyes and harm our lungs. Side note: Don’t site a nuclear power plant on a fault line or frack under a watershed supplying drinking water to 19 million people – that is just stupid!

Climate change is one of the major problems facing our country, but another big one is health care costs. Any small business or large corporation will give you the same answer when it comes down to costs of employment – health care costs are absolutely prohibitive and are only expected to increase. Allergies, asthma, chronic obstructive pulmonary disease, and lung cancer are all results of air pollution. I see a trade off here – either face the cost now and comply with the new regulations, or keep the status quo and face higher health care costs later on.

If I can think of one inelastic product out there, it is electricity. When the price of gas rises, people drive less. They still get up and go to work each day, but they do drive less. If the price of electricity increases, you can be sure people will still turn on their coffee makers each morning and televisions at night. But hopefully the increase will make people think about turning the lights off when they leave a room. After all, if using electricity more sparingly prevents little Johnny from a visit to the emergency room, maybe he can stay in school long enough to graduate and earn a decent paycheck at the new clean energy plant instead of the old coal-fired one that almost killed him.

***UPDATE***: The American Economic Review just released a study on the air-pollution damages for several industries in the United States.  Its findings suggest that the economic loss from poor health due to pollution from coal fired plants is 0.8 to 5.6 times the market value of the power itself.  It doesn’t require an advanced degree to figure this one out.  A copy of the report is attached.

Centralized vs. Distributed Generation

Centralized Generation has been the predominant power distribution system in the United States for a long time but there seems to be many drawbacks to this plan and many more reasons to switch to a distributed generation system.
Centralized generation is what you typically think of when you think of a power plant, whether it be coal, natural gas or large scale solar. This involves a large factory where electricity is produced, usually situated far away from the end user. Many times, these projects face hurdles such as “not in my back yard” from communities and opposition from environmental groups because the project must be built away from civilization and usually ends up destroying precious natural habitat. The projects can be an eyesore, produce pollution, and are generally inefficient due to the distance the electricity must travel before it gets to the users.
Distributed generation has been gaining traction in recent years, especially in the solar community because these projects are small and convenient. An example would be solar panels on top of a building that would use the electricity produced. It just makes sense. Now picture solar panels on the roof of every building in New York City – some buildings would use more energy than others and the excess energy could be sold back to the grid through the use of net metering. Distributed generation also makes sense from a security standpoint because the power source is spread out over a wide geographic region and less vulnerable to a single occurrence. As anyone who lived in the northeast during the 2003 Blackout remembers, something as simple as overheated wires touching a tree branch can cause power failure for millions. This is simply unacceptable. Long term, we need to move towards smarter development and community planning, but in the short term net metering can reduce our energy costs as well as allow us to sell energy back to the grid during peak hours. Who wouldn’t like to get a check from their utility every month?