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Posts from — October 2011

Perry’s Energy Speech: Part I (Real Energy, Real Jobs–but what about the governor’s windpower baggage?

Texas Gov. Rick Perry is swimming upstream in his quest for the Republican nomination for President of the United States, primarily from his weak performances during several debates. To improve his odds, last Friday he gave his first policy speech, titled Energizing American Jobs and Security.

Energy is that important. And it is a breath of fresh air that Perry’s analysis and prescription is 180 degrees from President Obama’s government-knows-best approach to energy and energy/environment.

Four Objectives

The Governor’s plan focused on four objectives that promise economic growth and numerous jobs in America. In Perry’s words:

  • “First, we will open several American oil and gas fields for exploration that are currently off limits because of political considerations.”
  • “It is equally important that we take a second step: eliminate activist regulations already on the books and under consideration by the Obama Administration.”
  • “The third part of my plan is to reform the bureaucracy, in particular the EPA, so that it focuses on regional and cross-state issues, providing scientific research, as well as environmental analysis and cost-comparison studies to support state environmental organizations. We will return greater regulatory authority to the states to manage air and water quality rather than imposing one-size-fits-all federal rules.”
  • “The fourth component of my plan is to level the competitive playing field among all energy producers. As the governor of the nation’s leading producer of wind energy, I clearly believe there is an important role for green sources of energy as a part of our generation mix. The fact is, every energy producer receives incentives and subsidies that cost taxpayers and distort the marketplace.”

He finished his address by stating that his plan is focused to “Make what Americans buy, buy what Americans make, and sell it to the world.”

I agree with these proposals. In particular, getting rid of all energy subsidies and tax incentives across the boardwill allow the market to direct the allocation of resources to energy sources that are profitable without government intervention. [Read more →]

October 17, 2011   11 Comments

Government as Referee: Who Regulates the Regulators?

A recent opinion-page editorial by a Ray Hankamer Jr. in the Houston Chronicle, Government as Referee for Society, espoused big government to promote basic protection in a modern society. 

Such is the romantic view of government; the Good Government and We the People view of democracy where the body politic is all of us (not us versus them). But the real world is different from this all-to-common textbook view.

Romantic Government

Hankamer begins:

“Leave the market alone and it will self-regulate just fine.” “Stop taxing the people and let them spend their own money instead of letting the government take it and waste it on ‘meddlesome bureaucrats and business-stifling regulators.’” This is the viewpoint of the tea party and many Republicans. But wait a minute: How would such a philosophy really work if implemented?

He then invokes the sports metaphor to conclude that we need federal regulators in an alphabet soup of agencies to do the necessary and sometimes dirty work to achieve fairness:

They are the public’s referees and umpires, such as the Securities and Exchange Commission, the Environmental Protection Agency and the Fish and Game Commission. They are there to enforce the rules for the good of all the people.

But when they are reined in, the public suffers. Remember Enron, WorldCom, Bernie Madoff, Stanford Financial, Lehman Brothers and all the other examples of the market being left alone to self-regulate?

One caveat, Hankhamer adds: “Overzealous referees and umpires can stifle an athletic contest, and overzealous regulators can do the same for an economy. But the suggestion that we can play the game with no supervision is preposterous.”

In response to Hankamer’s use of the tragedy of the commons as a pervasive reason for government intervention, I opined in a letter published by the Houston Chronicle: [Read more →]

October 14, 2011   6 Comments

Beyond Solyndra: Solar Energy’s On-Grid Torment

In Solar Energy Tough Love, I described the perverse impacts of government industrial policy on the solar energy sector in its vainglorious attempt to choose winners and losers.  That policy is failing, Solyndra aside. 

The market gods hate to be trifled with, and they respond with thunderbolts and torment.  Solar’s pain will continue until grid parity is reached. In the meantime, the solar energy sector must purge itself of government subsidies and address its weak financial performance.

So when I read the story in the trade press about SunPower’s wider Q2 losses I decided to get beyond the numbers to look at some of the market factors tormenting the solar business and holding back its true potential.

One key fact is that solar energy demand is up, but so are input costs for solar panels.  Rising demand stimulates rising production and thus excess inventory is a persistent problem and results in falling prices for PV panels.  Then there is the Feed in Tariffs (FiT) fits that cause burps and headaches as governments in Europe no longer able to afford the soaring cost of subsidies regularly adjust the tariffs—usually downward.

Changes in FiT shift demand from market to market as manufacturers adjust and seek to lose less margin on each incremental deal.  Often, as was true in SunPower’s Q2 report, revenue comes in at or close to investor expectation because demand is growing but cost and margin control has proven difficult and can quickly eat away at profits.

Key Factors

  • Deal Flow is Up but VC Funding is Down. The consolidation process in solar energy is clearly underway with the mixed news on the solar investment and funding front. While the number of venture capital funded solar deals remained about the same in Q2:2011 as the previous quarter (25 vs 26) the value of those deals fell to $354 million in Q2:2011 from $658 million in Q1:2011.  Even worse, that $354 million in Q2:2011 was down from $948 million in Q2:2010 even though deal flow increased 25 vs 18) according to Mercom Capital Group.
  • Bankability is limited, but deal flow schemes are abundant.  There are many vendors eager to sell solar energy systems but few of them are bankable meaning they look like what they are—a big credit risk.  So these solar firms spend much of their time dreaming up schemes to finance their deals.  Pace loans was one of those when upfront costs could be funded through government assessments like sidewalks and sewer lines.

It all sounded so logical and convenient until lien holders began to realize that the PACE loans would get priority ahead of the first mortgage in a bankruptcy since they were government bonds and that was a scheme not even Fannie Mae and Freddie Mac would tolerate.

  • One of those schemes is residential solar leasing.  Think about it!   If you are a homeowner and you want to ‘do the right thing’, save the planet and stick it to your utility company.  So you decide to put a solar rooftop system on your house but it costs thousands of dollars and tax credits and subsidies don’t cover all of it.  No problem, the vendor says we will lease you the system with no upfront cost.  This sounds like a great deal until you realize that you are signing a 20 year lease on equipment with rapidly falling prices and in a market of rapidly improving technology. [Read more →]

October 13, 2011   7 Comments

Solar Power Cost: Don’t Forget Intermittency (energy economics 101)

[Ed. note: David Bergeron is president of SunDanzer Development, Inc., a solar energy company located in Tucson. His earlier posts at MasterResource are Free-Market Solar: The Real Opportunity and Economic/Environmental Assessment of Grid-Tiered Photovoltaics: Arizona Lessons for the U.S.]

“The economic case for grid-tied PV is indeed quite hopeless, and the sooner we stop the misguided subsidies the sooner we can focus on actually addressing our legitimate energy and environmental concerns.”

The U.S. Energy Information Administration (EIA) recently published an excellent report on the projected cost of electricity generated by different technologies: coal, natural gas, nuclear, and various others, including renewables.

Levelized Cost of Energy

Their Levelized Cost of Energy (LCOE) calculation combines upfront cost with recurring cost to estimate the average cost of power produced by these technologies. Here is the EIA cost datafor coal, natural gas, and solar PV.

At first glance, it looks like PV could be competitive with coal or natural gas plants if the PV cost were to drop below 10 cents/kWh. But there is an important difference between PV and the traditional technologies which makes this simple cost comparison invalid.

But first, take a look at the cost of electricity from a coal plant. The total cost is projected to be 9.5 cents/kWh per the EIA study. About 6.5 cents of this is capital cost[1] and about 2.5 cents is the cost of the coal. Looking at the natural gas plant, one can see the capital cost is about 2 cents, and the fuel cost is about 4.5 cents.

Solar has no fuel cost element but significant capital investment.

Intermittency = Backup Required

But here is the rub. If you plan to power a city with PV, it is not sufficient to simply build a large PV array, because PV only produces power during the day. At night and during cloudy weather, a back-up power source is needed since there is no practical way to store the PV energy. [Read more →]

October 12, 2011   23 Comments

Rapid Loss of Arctic Ice: But Where is the Warming?

The numbers are in for this year’s summer sea ice extent in the Arctic Ocean. By most measures the ice loss in 2011 came in a close second to the current and still record holder, 2007.

But the failure to set a new record for the least amount of summer Arctic sea ice observed during the satellite era (which begins in 1979) has done little to alter the overall picture of what is going on there. Summer sea ice has been in decline in the Arctic Ocean since, conservatively, the mid-20th century, and it has been picking up steam. And sea ice declines in the Arctic are now pretty clearly discernible in the other seasons as well. (What has been going on around Antarctica is a different story).

But for those who lose sleep at night over the implications of the Arctic sea ice loss to both the local, regional, and global environments, there is a silver lining. The rapid loss of sea ice, coupled with the slowed rate of global temperature increase, is a potential indicator that the earth’s climate sensitivity may be lower than climate model determinations. If true, this means less warming per future unit of greenhouse gas emissions. 

Sleep easier. [Read more →]

October 11, 2011   5 Comments

The EPA’s Benefit/Cost Jihad on U.S. Electric Utilities

[Ed. Note: Also see Mr. Vaughn's previous post: The U.S. EPA’s Regulatory Clean Air Benefit-Cost Estimates (30 free lunches for the price of 1?)]

President Obama’s deferment of the EPA’s latest ozone standards puts on hold annual compliance costs that the Agency estimated at $90 billion by 2020. The Wall Street Journal termed the $90 billion figure an “undoubtedly lowball estimate.” [1]

Undoubtedly, to be sure (more on that in a moment). Even so, it’s news when the EPA ‘fesses up to costs as serious as $90 billion, instead of estimating chump change, such as the $0.8 billion a year estimated for the proposed “Clean Air Transport Rule” (CATR) aimed at utilities.

Getting Into the Numbers

The $0.8 billion estimate has flown under the media’s radar but—in its own way—merits more media attention than the $90 ozone number. That’s because the $0.8 billion plays the role of denominator in the EPA’s nuttiest claim of all time: a benefit-cost ratio of 350-to-1 for a proposed regulation written under the Clean Air Act (CAA). Playing the role of numerator in that ratio are $280 billion of annual (mostly human health) benefits. [2]

Heretofore, the EPA’s benefit-cost ratios for its CAA regulation were only about one-tenth as grandiose—in the vicinity of 35-to-1. [3] Even 35-to-1 is mind-boggling enough but 350-to-1? That’s the equivalent of a private-sector CEO claiming that the company’s latest “must-have” gizmo will attract 350 willingly-paid dollars out of customers’ wallets for every dollar’s worth of resources consumed in the process—or $349 of pure profit out of every $350 of revenue. Wall Street would dismiss that CEO as obviously delusional.

The EPA, however, caters not to Wall Street cynics but to audiences wanting to believe that yet another CAA regulation will crank out phenomenal benefits at almost no cost. So, in that respect, the 350-to-1 claim is just more of the same from the EPA. But, the ratio is so obviously way-over-the-top that it signals something way out of the ordinary: a jihad against the regulated power industry. [Read more →]

October 10, 2011   4 Comments

“Energy and Society” Course: Professor Desrochers’s Model for the Academy

Pierre Desrochers is a scholar’s scholar. His prolific research, writing, and teaching facilitate our own research and learning. His reference and use of some of our work is a vindication of sorts.

I recently encountered Professor Desrochers syllabus for Energy and Society, a course that he is currently teaching at the University of Toronto Mississauga.  Wow! Lucky are his students; this course is a model for its subject for North American and far beyond.

Desrochers sets out three main objectives for this course:

• To cover the basic physical, technical and economic issues related to energy use;
• To cover broadly the history of energy development and use;
• To introduce students to past debates and current controversies.

He describes the course as follows:

The development of new energy sources has had a major impact on the development of both human societies and the environment. This course will provide a broad survey of past and current achievements, along with failures and controversies, regarding the use of various forms of energy.

Understanding of technical terms, physical principles, creation of resources and trade-offs will be emphasized as a basis for discussions about energy options. The local and global dimensions of the economics and politics surrounding the world’s energy resources will be recurring concerns in this course.

The lecture titles and readings follow. [Read more →]

October 7, 2011   1 Comment

Behind the ‘Green Jobs’ Curtain: Economic Fallacies and Counterfacts

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

- Henry Hazlitt, “The Lesson,” Economics in One Lesson. (1946, et seq.)

Solyndra’s impending liquidation, replete with 1,100 layoffs and U.S. taxpayer liabilities in excess of a half billion dollars, has put so-called green jobs initiative of the Obama Administration in negative light.

But make no mistake: recent loan guarantees from the U.S. Department of Energy to new solar projects to beat a September 30th funding cutoff is business-as-usual as the foes of oil, gas, and coal desperately seek business traction for an uneconomic energy.

From Climate Alarmism to ‘Green’ Jobs

With unemployment on the rise and new jobs scarce, politicians are keen to create employment, at least the visible kind that they can sum up for the public. And so yesteryear’s talk about addressing global warming (remember cap-and-trade?) has taken the back seat to policies geared towards restarting the sluggish economy.

Indeed, more Americans have grown skeptical about potential threats posed by climate change. According to a recent Pew Research poll, fewer Americans believe that global warming is a real threat than they did five years ago. A similar poll found that the top two priorities for Americans were the economy and jobs, while global warming ranked dead last.

So now, the sales pitch for forced energy transformation revolves around catch phrases such as the “renewable energy economy,” “green jobs,” and “leading the world in clean energy technologies.” In short, environmental policies have been rebranded as job creators.

What is a ‘Green’ Job?

Our report, The Dirty Secret Behind Clean Jobsreveals numerous flaws with this approach. The definition of “green jobs” is vague; green job subsidies are based on flawed economic principles; and assumptions for job growth are inaccurate or downright false.

One is the shifting definition of what is a ‘green’ job. Is a green job a new job that has been created by a new environmental initiative? Or when an existing job has been made more environmentally friendly? Maybe both?

And what exactly is ‘green’ and not ‘green’? Often this term itself is based on dubious assumptions about economics, environmental impacts, etc. Indeed, some green initiatives have turned out to be more damaging to the environment than the status quo.

For example, ethanol is seen as a renewable fuel; and thus, those involved in its manufacture have green jobs. But according to a recent report published by the EPA, refining ethanol can actually emit more greenhouse gases than gasoline. Green jobs are not always green. [Read more →]

October 6, 2011   3 Comments

Peltier: ‘Chart a New Course’ (POWER magazine editor rejects windgas for gas)

“The cost for wind’s little or no environmental benefit is high.”

- Robert Peltier, “Chart a New Course.” POWER, September 2011, p. 6.

POWER magazine’s editor-in-chief, Dr. Robert Peltier, is in the energy reality business. An honest broker, the professional engineer and former Stanford University professor assesses rival technologies as he sees them. And so at times, he is at odds with groups such as the American Wind Energy Association that peddle uneconomic technologies.

Peltier’s lead editorial in the September 2011 issue of POWER magazine is notwworthy for its arguments and for its import in the history of energy thought.

Future scholars will look back on our present debate and assess who had the best arguments, and who was willing to take risks to advance them–and who were the for-hire millers using half-truths and PR hits to evade the implications of consumer choice, technological reality, and sound science (and yes, climate science is hardly settled in favor of alarmism but just the opposite).

Peltier’s article, excerpted below, is italicized in places for emphasis by the present writer. Links have been added as well. [Read more →]

October 5, 2011   8 Comments

‘Price Gouging’ Law: Why Waste State and Consumer Resources during Emergencies?

[Ed. note: This post follows yesterday's post by Donald Hertzmark challenging a call for federal price controls on energy.]

The spectacular problems that beset the Federal Emergency Management Agency (FEMA) after Hurricane Katrina have led analysts of weather emergencies to look elsewhere for leadership, or even evidence of competence.

Increasingly, that leadership has been found prominently in the private sector: among companies being recognized for their emergency response capabilities are big box retailers like Walmart and Home Depot and the regional restaurant chain Waffle House.

One reason that some government agencies may be failing is that their attention is directed to the wrong things. High on that list is policing against high prices during emergencies. Basic economic analysis finds that price gouging laws end up wasting state government resources and wasting consumers’ time during emergencies.

New Jersey re Hurricane Irene

If you review official announcements in the days surrounding Hurricane Irene, you’ll notice that in some states much emphasis was placed on warning merchants against price gouging and encouraging consumers to report “suspicious price increases.”

Just before Hurricane Irene came ashore, the State of New Jersey thought it importantto urge “consumers to be alert for potential abuses including gasoline price gouging, home repair scams, and fraudulent charity solicitations.”

Subsequently the state reported receipt of 103 consumer price gouging complaints, which the state duly investigated. The investigation ended up finding no stations guilty of price gouging, though three stations allegedly violated the state’s law against changing gasoline prices more than once in a 24-hour period. The three stations have been cited by the state.

Several persons died in New Jersey due to flooding, and the damages may reach “billions of dollars” according to Governor Chris Christie. These are real emergency issues. In response, among many other actions, the state had investigators out counting how many times gasoline stations may have changed prices within each 24-hour period since the emergency was declared.

Maryland’s Experience

But, you protest, without the anti-price gouging law and attempts to enforce it, New Jersey residents would have been held hostage by greedy gasoline retailers anxious to exploit consumers in peril.

Really? Neighboring Maryland doesn’t have a law against price gouging. Anyone notice Maryland consumers being exploited by greedy gasoline retailers? [Read more →]

October 4, 2011   3 Comments