The Future of Energy

Stephen DeAngelis

February 24, 2009

Change is in the air. That’s nothing new, of course. Change is always in the air. But a lot people believe that when it comes to generating electrical power fundamental changes will arrive more like a blast of arctic wind than a soft summer breeze. The current recession, coupled with promises made during the U.S. presidential campaign, have only strengthened these expectations. Cuyahoga County, Ohio, commissioners tried to beat the crowd clamoring for federal funds during a visit by then President-elect Barack Obama [“Ohioans Seek Slice Of the Stimulus Pie,” by Peter Slevin, Washington Post, 2 February 2009]. The commissioners were seeking $28 million to help them build wind turbines on Lake Erie. Timing seemed fortuitous, as did the location. The President-elect was speaking at a factory that produces turbine components. Unfortunately, the commissioners never got close enough to speak to the President-elect personally, but they did manage “to slip an information packet to an aide.”

In an earlier post [The Green Update], I noted that The Economist was skeptical of government subsidies for alternative forms of energy. The magazine asserted that too often governments back the wrong technology and it stated its preference for the market deciding which technologies work best in different circumstances. Even The Economist, however, believes that alternative energy represents the future [“The future of energy,” 21 June 2008 print edition]. It also claims that anticipated changes in energy generation are “coming sooner than you might think.”

“Since the industrial revolution 200 years ago, mankind has depended on fossil fuel. The notion that this might change is hard to contemplate. Greens may hector. Consciences may nag. The central heating’s thermostat may turn down a notch or two. A less thirsty car may sit in the drive. But actually stop using the stuff? Impossible to imagine: surely there isn’t a serious alternative? Such a failure of imagination has been at the heart of the debate about climate change. The green message—use less energy—is not going to solve the problem unless economic growth stops at the same time. If it does not (and it won’t), any efficiency saving will soon be eaten up by higher consumption per head. Even the hair-shirt option, then, will bring only short-term relief. And when a dire prophecy from environmentalism’s jeremiad looks as if it is coming true, as the price of petroleum rises through the roof and the idea that oil might run out is no longer whispered in corners but openly discussed, there is a temptation to believe that the end of the world is, indeed, nigh.”

The article’s opening, of course, is a set up — a teaser. The Economist isn’t strapping on a sandwich board displaying in large letters “The End is Near”; rather, it’s trying to paint the sense of urgency that is driving some scientists to imagine and create technologies that will help save the planet’s environment without having to kill development at the same time.

“In the imaginations of a coterie of physicists, biologists and engineers, an alternative world is taking shape. … Plans for the end of the fossil-fuel economy are now being laid and they do not involve much self-flagellation. Instead of bullying and scaring people, the prophets of energy technology are attempting to seduce them. They promise a world where, at one level, things will have changed beyond recognition, but at another will have stayed comfortably the same, and may even have got better. Alternative energy sounds like a cop-out. Windmills and solar cells hardly seem like ways of producing enough electricity to power a busy, self-interested world, as furnaces and steam-turbines now do. Battery-powered cars, meanwhile, are slightly comic: more like milk-floats than Maseratis. But the proponents of the new alternatives are serious. Though many are interested in environmental benefits, their main motive is money. They are investing their cash in ideas that they think will make them large amounts more. And for the alternatives to do that, they need to be both as cheap as (or cheaper than) and as easy to use as (or easier than) what they are replacing.”

The money motive is the reason that the magazine believes that change is coming and coming fast. Such forecasts are also the reason that President Obama believes he can help create 5 million jobs in the energy sector and related green industries. The question is, why all the optimism? Well, for one thing, the article was written last June when oil prices were still high. As a result, The Economist wrote:

“For oil replacements, cheap suddenly looks less of a problem. The biofuels or batteries that will power cars in the alternative future should beat petrol at today’s prices. Of course, today’s prices are not tomorrow’s. The price of oil may fall; but so will the price of biofuels, as innovation improves crops, manufacturing processes and fuels.”

We’ve seen oil prices plummet along with demand. That situation, as we all know, is temporary. The global economy has not gone into eternal recession. It may take some time to climb out of the current financial canyon, but climb we will and development will continue. Development requires electricity and it is to that topic the article next turns.

“Electrical energy … will remain cheaper than petrol energy in almost any foreseeable future, and tomorrow’s electric cars will be as easy to fill with juice from a socket as today’s are with petrol from a pump. Unlike cars powered by hydrogen fuel cells, of the sort launched by Honda, … battery cars do not need new pipes to deliver their energy. The existing grid, tweaked and smartened to make better use of its power stations, should be infrastructure enough. What matters is the nature of those power stations. They, too, are more and more likely to be alternative. Wind power is taking on natural gas, which has risen in price in sympathy with oil. Wind is closing in on the price of coal, as well. Solar energy is a few years behind, but the most modern systems already promise wind-like prices. Indeed, both industries are so successful that manufacturers cannot keep up, and supply bottlenecks are forcing prices higher than they otherwise would be. It would help if coal—the cheapest fuel for making electricity—were taxed to pay for the climate-changing effects of the carbon dioxide produced when it burns, but even without such a tax, some ambitious entrepreneurs are already talking of alternatives that are cheaper than coal.”

I’ll discuss in a later blog some of the breakthroughs to which the article refers. The implicit question asked by the article is whether these breakthroughs are sufficiently innovative to force change. It notes that this is not the first time people have predicted that a turning point has been reached.

“Older, more cynical hands may find this disturbingly familiar. The last time such alternatives were widely discussed was during the early 1970s. Then, too, a spike in the price of oil coincided with a fear that natural limits to supply were close. The newspapers were full of articles on solar power, fusion and converting the economy to run on fuel cells and hydrogen. Of course, there was no geological shortage of oil, just a politically manipulated one. Nor is there a geological shortage this time round. But that does not matter, for there are two differences between then and now. The first is that this price rise is driven by demand. More energy is needed all round. That gives alternatives a real opening. The second is that 35 years have winnowed the technological wheat from the chaff. Few believe in fusion now, though uranium-powered fission reactors may be coming back into fashion. And, despite Honda’s launch, the idea of a hydrogen economy is also fading fast. Thirty-five years of improvements have, however, made wind, solar power and high-tech batteries attractive. As these alternatives start to roll out in earnest, their rise, optimists hope, will become inexorable. Economies of scale will develop and armies of engineers will tweak them to make them better and cheaper still. Some, indeed, think alternative energy will be the basis of a boom bigger than information technology.”

Of course, a lot has happened in the eight months since that article was published. As noted above, oil prices have plummeted as the world sank into recession. In addition, the collapse of the financial sector has dried up essential funds for developing alternative energy sources about which The Economist was so optimistic Renewing Green Development: New Incentives May Be Needed as Projects Lack Financing,” by Steven Mufson, Washington Post, 9 January 2009].

“Six months ago, some of the biggest names in solar- and wind-project finance were firms such as Lehman Brothers, Morgan Stanley, GE Capital, Wells Fargo and Municipal Mortgage & Equity. But many of those firms are mired in their own financial crises, and existing tax benefits for renewable energy projects are now unattractive to them. A technical aspect of the bank bailout has even made renewable tax incentives useless for some profitable banks. That has left the developers of big wind and solar projects struggling to find the capital needed to continue their expansion. And many firms are retrenching.”

Such developments have overshadowed the optimism expressed in The Economist. Even amidst its optimism, the magazine did conclude on a cautious note:

“Whether that boom will happen quickly enough to stop the concentration of carbon dioxide in the atmosphere reaching dangerous levels is moot. But without alternative energy sources such a rise is certain. The best thing that rich-world governments can do is to encourage the alternatives by taxing carbon (even knowing that places like China and India will not) and removing subsidies that favour fossil fuels. Competition should do the rest—for the fledgling firms of the alternative-energy industry are in competition with each other as much as they are with the incumbent fossil-fuel companies. Let a hundred flowers bloom. When they have, China, too, may find some it likes the look of. Therein lies the best hope for the energy business, and the planet.”

The boom, of course, hasn’t happened. In fact, people like President Obama are hoping that with government help they can help jump-start a boom that will create jobs and pull the economy out of the current crisis. Mufson reports on the current state of things in the U.S.:

“[In January], a maker of towers for wind energy turbines, DMI Industries, said it would lay off 20 percent of its workforce at facilities in North Dakota, Oklahoma and Ontario. … LM Glasfiber, a maker of wind turbine blades, said it would lay off 150 workers at a plant in Little Rock. Last fall, Florida-based FPL, one of the biggest owners and developers of wind power in the country, scaled back ambitious expansion plans for 2009 by about 25 percent. ‘Many people have asked us if we are interested in their wind development projects and many more — recognizing the futility of the economics and the financing situation — are simply shelving their projects,’ said David Crane, chief executive of NRG Energy, a major electric power generator. Solar prospects have clouded, too. Construction of big concentrated solar plants — covering acres of land and built as utility generating stations — has essentially stopped going forward. ‘We had dozens in development just a few months ago,’ said Rhone Resch, president of the Solar Energy Industries Association. The source of funding, he said, has ‘dried up.’ Obama’s economic advisers are negotiating with Senate leaders about how to revive stalled projects in the renewable sector. One issue is how to structure new incentives and whether to increase the current budget year’s deficit or figure out a way to push the cost into later years.”

In late January, the renewable energy sector did receive some good news which was contained in the stimulus package passed by the House of Representatives [“Renewable power gains in House stimulus bill,” by Rosalie Westenskow, Washington Times, 2 February 2009].

“The U.S. House … passed the largest stimulus package yet, sparking cheers from renewable power producers who say it contains some obscure provisions essential to their survival. The $819 billion piece of legislation, unveiled by House Democratic Party leadership, … contains billions for new investments in energy, including $8 billion in loans for clean technology projects, $6.7 billion for retrofits of federal buildings to make them more energy efficient and $11 billion for development of a new national electricity grid. While these high-dollar direct investments have stolen the spotlight, one of the most welcome provisions for renewable industry leaders lies in two passages of the American Recovery and Reinvestment Tax Act, a bill that will be combined with the stimulus, which tweak existing incentive programs. The Investment Tax Credit provides a 30 percent tax credit for residential and commercial solar installations, and Congress extended the incentive for another eight years as part of last fall’s $700 billion stimulus package. Lawmakers also extended the life of its sister program, the Production Tax Credit, which provides 1.9 cents per kilowatt-hour for wind, geothermal and a few other technologies. Now, the House wants to make those credits refundable. In other words, instead of saving money on taxes, investors in renewable energy would get a direct payment within 60 days of application equivalent to the tax credit through a grant program at the Department of Energy. The refundable status of the credits would last for two years, through 2010, with no cap on the amount of funds available for distribution. With credit drying up quickly, this represents a lifeline for the industry, said Greg Riddle, a tax partner at Orrick, Herrington & Sutcliffe LLP, a multinational law firm that’s active in renewable energy policy.”

The final stimulus package signed by President Obama in mid-February did contain a lot of money for green projects. “An impressive $60 billion dollars of the $790 billion will be spent on alternative and clean energy, scientific research, and various environmental projects” [“$60 Billion for Green in the Stimulus Bill: Where the Money will Go,” by Brian Merchant]. Merchant also reports that the package includes “a three year extension for tax credits for wind energy. Before the bill, wind energy advocates had to lobby every year to get the credits extended. Now, the tax credit is safe for at least three years—an encouraging message to wind energy proprietors.” He then goes on to detail where that money will be spent:

The Stimulus Green by the Numbers: Where the Money Will Go
And here’s what’s got everyone so excited: (from the National Resource Defense Council)

• $6 billion for clean and safe water, creating more than 200,000 jobs
• $4.5 billion for greening federal buildings
• State energy grants, issued through the Treasury Department, that will fund renewable energy projects that are eligible for the available tax credits
• Funding for the state energy program, which includes important utility reforms and building code conditions
• $2.5 billion for energy efficiency and renewable energy Research and Development
• $5 billion for the Weatherization Assistance Program, creating approximately 90,000 jobs
• A multi-year extension of the renewable production tax credit
• A more effective tax credit for home efficiency upgrades
• $6 billion in loan guarantees for renewables, transmission and leading edge biofuels
• $2 billion for advanced batteries
• $9.3 billion for intercity rail, including high-speed rail
• $27.5 billion for highways (this large pot of money is not exclusively for highways, and states and cities must use this flexibility to invest in fuel-efficient public transportation)
• $8.4 billion for transit
• $1.5 billion in competitive grants for transportation investments (which could be used for public transportation)

As always, the devil is in the details and it’s too early to understand exactly how the money will be spent and who will decide. The Economist, as noted earlier, recommends that the market should sort out winners and losers and that government’s should stay out of that business. But with credit dried up, some help is likely to have to come from the government. So where should the government place its bets. That is a question that The Economist‘s science editor, Geoffrey Carr, tried to answer last June [“The power and the glory,” 21 June 2008 print edition]. He’s betting on wind and solar because the “future price of these resources—zero—is known. That certainty has economic value as a hedge, even if the capital cost of wind and solar power stations is, at the moment, higher than that of coal-fired ones.” Even though the article was written at time of high oil prices and before the economy crashed, Carr makes a good case for why energy is likely to be the sector in which the next boom takes place.

“The market for energy is huge. At present, the world’s population consumes about 15 terawatts of power. (A terawatt is 1,000 gigawatts, and a gigawatt is the capacity of the largest sort of coal-fired power station.) That translates into a business worth $6 trillion a year—about a tenth of the world’s economic output—according to John Doerr, a venture capitalist who is heavily involved in the industry. And by 2050, power consumption is likely to have risen to 30 terawatts. Scale is one of the important differences between the coming energy boom, if it materialises, and its recent predecessors—particularly those that relied on information technology, a market measured in mere hundreds of billions. Another difference is that new information technologies tend to be disruptive, forcing the replacement of existing equipment, whereas, say, building wind farms does not force the closure of coal-fired power stations. For both of these reasons, any transition from an economy based on fossil fuels to one based on renewable, alternative, green energy—call it what you will—is likely to be slow, as similar changes have been in the past. On the other hand, the scale of the market provides opportunities for alternatives to prove themselves at the margin and then move into the mainstream, as is happening with wind power at the moment.”

The other reason that Carr thinks that the energy sector will be home to the next boom is that it is ripe for technological advances and may create synergistic booms in other fields as well.

“The innovation lull of the past few decades also provides opportunities for technological leapfrogging. Indeed, it may be that the field of energy gives the not-quite-booms in biotechnology and nanotechnology the industrial applications they need to grow really big, and that the three aspiring booms will thus merge into one. … This renewed interest in energy is bringing forth a raft of ideas, some bright, some batty, that is indeed reminiscent of the dotcom boom. As happened in that boom, most of these ideas will come to naught. But there could just be a PayPal or a Google or a Sun among them.”

Carr points out that developing nations, not just rich ones, are also likely to embrace alternative sources of energy if they prove cost efficient.

“Poorer, rapidly developing countries are also taking more of an interest in renewable energy sources, despite assertions to the contrary by some Western politicians and businessmen. It is true that China is building coal-fired power stations at a blazing rate. But it also has a large wind-generation capacity, which is expected to grow by two-thirds this year, and is the world’s second-largest manufacturer of solar panels—not to mention having the largest number of solar-heated rooftop hot-water systems in its buildings. Brazil, meanwhile, has the world’s second-largest (just behind America) and most economically honest biofuel industry, which already provides 40% of the fuel consumed by its cars and should soon supply 15% of its electricity, too (through the burning of sugarcane waste). South Africa is leading the effort to develop a new class of safe and simple nuclear reactor—not renewable energy in the strict sense, but carbon-free and thus increasingly welcome. These countries, and others like them, are prepared to look beyond fossil fuels. They will get their energy where they can. So if renewables and other alternatives can compete on cost, the poor and the rich world alike will adopt them.”

The bottom line is that future of energy looks bright — even during these dark times.