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Posts from — February 2013

McClendon’s Price Lesson at Chesapeake (“Depletable” resources expand)

“[Free energy] markets tend not only to clear, but to clear faster and at lower prices than anticipated.”

The resignation of Aubrey McClendon as CEO of Chesapeake Energy provides a good case to study in corporate strategic planning. Ignoring his financial side deals, for which he has received a good share of criticism, the wisdom of his primary strategy, the aggressive pursuit of shale resources, is an open question to many. Although he has been hailed as a pioneer and risk taker, clearly those risks have gone bad and should be examined.

Higher Prices: A Bad Bet

The core failing was his decision to bet the firm (essentially) on high natural gas prices. From 1997 to 2005, wellhead prices had increased from $3/Mcf to $8/Mcf (2010$), the highest level historically. This, combined with a neo-Malthusian mentality, convinced him and many others that prices would not be mean-reverting, but remain at levels from two to three times the historical average.

In nearly my entire working career, energy executives have complained that prices for energy were too low for them to successfully invest. At one energy economics conference, the moaning about inadequate prices was so frequent that the award winner for contributions to the profession, Richard Gordon of Pennsylvania State University, reminded the audience that markets tend not only to clear, but to clear faster and at lower prices than anticipated.

In a more practical sense, there is a tendency to ignore the fact that mineral and energy prices are both cyclical and mean-reverting, despite being “finite” and thus “running out.” Numerous market analysts have been criticized for excessive bullishness about prices in the past decade, but many have correctly described the situation as one of cyclical behavior, not of a permanent shift to a high price environment. [Read more →]

February 28, 2013   1 Comment

Dominion Virginia’s “Green” Solar Program: Bad Economics for a Misplaced Cause

“[T]here is no companion prerequisite that such renewable programs be cost-effective or deliver reliable power…. This program appears designed for the privileged few to enjoy a subsidized electric energy existence, provides those ‘green bragging rights’ mentioned by a solar installer in this courtroom last September, but little else.”

Last May, Dominion Virginia Power petitioned the Virginia State Corporation Commission to introduce a voluntary ratepayer program to support up to 3 MW from distributed solar installations. Dominion seeks to offer the public an alternative to an existing, net-metering, residential solar panel program. This voluntary test Solar Panel Program would be guaranteed for five years at a “buy all/sell all” $0.15/kWh. It would be limited to an initial maximum scale of 0.2 percent of 2010 peak load.

Solar is an intermittent power source that would require storage to be on a stand-alone basis. The Dominion program offers a solar energy buyback on a firm (non-interrupted) basis, which requires cross subsidization from conventional energies.

The $0.15/kWh price is below what the U.S. Energy Information Administration estimates to be the cost of distributed solar, which is north of $0.25/kWh. Multiple tax breaks explain the difference ($0.022/kWh production tax credit; accelerated depreciation, etc.). Solar executive David Bergeron has estimated that the as much as 90 percent of lifecycle solar costs are hidden, due to special government subsidies. [Read more →]

February 27, 2013   4 Comments

Maryland Offshore Wind: O’Malley’s Folly

“The Governor … earned the nod of those representing poorer districts by packing the bill with millions of dollars in grants to boost small and minority-owned businesses that might involve themselves in the offshore sector…. [P]rice caps on electricity bills [hides] the billions of dollars of extra cost that $190/MWh energy adds up to.”

Maryland governor Martin O’Malley is convinced he’s found the right formula for ensuring that his state becomes the first to site a wind facility off its coastline. Last week Maryland’s House quietly approved HB 226. The Senate version (SB 275), although still in Committee, is also expected to pass despite much controversy over cost and risks to captive ratepayers–and back-door cronyism for developers and other special interests.

But don’t be fooled by the political victory. Despite the Governor’s grand claim that his bill will deliver offshore wind at an affordable price, the numbers tell a different story. O’Malley’s folly will deliver a paltry 80 megawatts of offshore wind at most, while draining billions of dollars from the State’s economy.

Offshore Wind: Too Expensive to Meter

Technological, environmental and visual impacts have slowed offshore wind development in the United States, but the primary, universal  issue is cost. Offshore wind is not economically viable without significant public support, as O’Malley knows. [Read more →]

February 26, 2013   4 Comments

The Light Brigade: Confronting the Anti-Energy, Pro-Blackout Rally in DC

“We love energy with conviction, while they hate it with confusion.”

- Alex Epstein

On Sunday, February 17th, 350.org and the Sierra Club hosted the “Forward on Climate” rally on the National Mall in Washington D.C. It was billed as thelargest climate rally in history.” Just like the anti-Keystone XL rally in 2011, protesters pushed the Obama administration to continue to block the Keystone XL pipeline, which would bring crude oil from Alberta, Canada, to U.S. refineries.

But unlike the 2011 rally, Sunday’s protesters were challenged by Alex Epstein and his Light Brigade, an “educational counter-protest” whose members wore bright yellow t-shirts and shared their sincere appreciation for life-giving energy. I am proud to say I was part of that group.

Alex et al. did a great job of explaining to an adamantly anti-oil crowd just how much better their lives are because of oil. It was interesting to watch people realize that their whole day was predicated on oil – the polyester clothes they were wearing, the ibuprofen they took that morning, the computer chips in their phones, their plastic water bottles, the synthetic rubber in their shoes, not to mention the gas in the cars they drove to get there (even an abridged list is mind-boggling).

However, one key point that unfortunately never sank in with anyone we talked to is that the climate has become dramatically safer with fossil fuel-driven industrial improvements. It seemed like no one cared about that crucial fact. [Read more →]

February 25, 2013   7 Comments

Beyond Locavorism: Food Diversity for Food Security (carbon-fuel transport remains essential)

“The diversification of our food supply sources via cost-effective and large-scale, long-distance transportation is one of the great unappreciated wonders of our age…. [T]he best way to improve the security of humanity’s food supply is to press forward with specialized large-scale production in the world’s most suitable locations, backed up with ever more scientific research and greater reliance on (for the foreseeable future), carbon fuel-powered long-distance trade.”

In a speech delivered in 1875, the Australian entrepreneur Thomas Sutcliffe Mort observed that the advent of the railroad, the steamship, and artificial refrigeration had paved the way to a new age where the

  • “various portions of the earth will each give forth their products for the use of each and of all,”
  • “over-abundance of one country will make up for the deficiency of another,” and
  • “superabundance of the year of plenty… for the scant harvest of its successor.”

Humanity’s long history of famine and chronic malnutrition, he pondered, had not so much been the result of God’s not having provided enough and to spare, but rather the unavoidable consequence of the fact that “where the food is, the people are not; and where the people are, the food is not.” It was now, he observed, “within the power of man to adjust these things.” [1]

“Foodsheds”: A Recent Lesson

The prosperous age forecasted by Mort soon came to be and even the specter of famine soon disappeared from the collective memory of the citizens of advanced economies. [Read more →]

February 22, 2013   7 Comments

Germany’s Unaffordable Wind Power ($0.07/kWh surcharge for $0.20/kWh power, anyone?)

[Update: Germany Stops Fighting Arithmetic and Ramps Up Construction of Economically Sensible Power Generation]

Two years ago we looked at the claim that wind generation can save money for power pool customers.  We found that the supposed savings could be realized only if the elephant in the room – the above-market feed-in tariffs – were ignored.

In other words, the total amount spent on electricity purchases from a power pool was augmented by the additional amounts consumers pay to fund the feed-in-tariff (FIT).  As long as wind generators can bid a low price but receive the higher FIT, then they have an incentive to underbid, thereby reducing pool prices, but not overall costs.

In addition, we looked at what an economically least cost system might look like in Germany over the next ten years.  We found that it features more coal and lignite, keeps most nuclear plants operating, and builds new gas-fired plants.

The annualized differential in total costs for Germany between the no-nukes, no coal and lots of wind forecast pushed by Germany’s Greens and an economically least cost expansion plan amounts to more than $120 billion over ten years and perhaps as much as $200 billion.  A lot of money, in other words.

Update: Since these two posts were published in 2010 Master Resource contributors have made a strong case that Germany’s overinvestment in wind and solar has harmed the nation financially without any compensating improvement in electricity supply Compounding the overreliance on wind is the planned phase-out of the country’s nuclear power plants – baseload power that will need to be replaced with something other than wind.

It now appears that Germany has made peace with mathematics and economics, and not just in the energy sphere.  The country has embarked on a major effort to build reliable power plants for the future. [Read more →]

February 21, 2013   20 Comments

Power Density Separates the Wheat from the Chaff

“Power density (W/m2) is perhaps the most revealing variable in energetics…”[1]- Vaclav Smil

It may be a bit of an exaggeration to say that understanding power density may be all the average person requires to put our energy sources and needs into perspective, but there is some merit in this argument. Unfortunately, this view of energy matters remains little discussed, probably because it appears rather academic.

This post attempts to overcome this by further illustrating the concepts. It will also demonstrate how industrial-scale wind and solar PV electricity generation plants fail to meet this important, high-level standard of performance for electricity sources required by mankind, particularly in developed societies, but increasingly in developing and even undeveloped societies.

This is even without taking into account:

(1) The persistent erratic (short term – minutes) and unreliable (medium to long term – hours to days) nature of electricity production that wind and solar PV provide; (2) their high costs; and (3) many other considerations described here.

This is not to diminish the importance of these other matters, but the contemplation of them all together is fairly elaborate and perspective is easily lost.

In summary, power density is the “gold standard” as a high-level pass/fail measure of an energy source’s value to humanity. [Read more →]

February 20, 2013   5 Comments

BC Hydro’s Billion Dollar Climate Bill

“BC Hydro is forecast to lose one billion dollars over the next four years, as a result of the pursuit of green electricity…. The public policies that politicians of all stripes have imposed on us to address climate change will haunt us for years.”

British Columbia, Canada’s westernmost province, is blessed with an abundant and almost unlimited capacity to generate hydroelectric power. This capacity is the result of the farsighted policies of past BC provincial governments that invested in, or encouraged investment in, a series of hydroelectric mega-projects in the 1950’s, 60’s and 70’s. British Columbia has enjoyed the benefits of inexpensive, clean electricity ever since.

Apart from stints of economic contraction that, coincidentally, accompany BC’s infrequent brushes with the government’s socialist New Democratic Party (NDP), BC’s economy has generally boomed in large part as a direct result of our hydro electric capacity.

Canada has a history of creating public utilities to generate and transmit energy, which for British Columbia is BC Hydro. BC Hydro is highly regulated with respect to rates and operations and traditionally operated as an independent, apolitical entity.

That changed when politicians from all parties, driven by the media and statist intellectuals, recognized the increased revenue potential from surcharges and “green” taxes based on the notion of CO2-induced climate change. BC Hydro became an instrument for public policy, and a new way for government indirectly to fund green energy initiatives.

BC Hydro is forecast to lose one billion dollars over the next four years, as a result of the pursuit of green electricity. [Read more →]

February 19, 2013   10 Comments

AWED Energy & Environmental Newsletter: 2/18/13

The Alliance for Wise Energy Decisions (AWED) is an informal coalition of individuals and organizations interested in improving national, state, and local energy & environmental policies. Our basic position is that technical matters like these should be addressed by using real science.

Instead of a science-based approach, our energy and environmental policies are typically written by those who stand to economically or politically profit from them. As a result, anything genuinely science-based in these policies is usually inadvertent and accidental.

A key element of AWED’s efforts is public education. Towards that end, every 3± weeks we put together a newsletter to balance what is found in the mainstream media about energy and environmental matters. We very much appreciate MasterResource for their assistance in publishing this information.

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An important, new, professionally made film about wind energy is Wind Rush. Although the director makes the obligatory inaccurate statements about wind energy “benefits” (the media has to be balanced!), the message is inescapably that wind is not everything it’s made out to be.

I’ve updated my page about fixing the RPS situation. We will be working with citizens where the political atmosphere is receptive to fixing some of these charades. If you have solid evidence that your state is such a case, please let us know by emailing me, ASAP.

More reports about greed energy economics:

Another PTC storm Brewing.

A fine article on the underreported costs of wind energy [Read more →]

February 18, 2013   7 Comments

Free Market Environmentalism: Julian L. Simon Memorial Award Remarks

“We appear to be on the Road to Serfdom, paved with green bricks rather than red bricks…. It is actually likely that the United States is now approaching State ownership of about 50 percent of all its land—a level of socialist land ownership unequalled in the world.”

It is a fabulous honor to receive the Julian Simon Memorial Award. Julian was one of the seminal thinkers of the 20th century—and one of the first to challenge the radical Greens’ attack on freedom and progress.

Simon demolished the limits to growth and the belief that human progress was bound in a Malthusian straitjacket, and limited by the known or presumably known physical supplies of natural resources. He argued that the ultimate resource was the limitless nature of man’s mind—his intelligence, innovation, discovery, and invention, constantly discovering and creating new resources where none had existed before. For instance, the looming scarcity of copper vanished with its replacement by abundant beach sand, by silica.

In the past decade, the doomsayers returned again, gleefully predicting the end of growth and the need to reduce population and living standards because of their long hoped-for exhaustion of fossil fuels and the arrival of peal oil and peak gas. But then to their dismay, they witnessed the ultimate resource, man’s intransigent mind, turn the Earth’s abundance of shale deposits into a potential cornucopia of oil and natural gas, requiring nothing more than a drill and water pressure—hydraulic fracing—to once more shatter the supposed limits to growth. [Read more →]

February 15, 2013   3 Comments