Sunday, February 22, 2009

UB Choices

Every once in a while, it's good to examine "what could be" if certain institutions really decided to "Go Green" instead of mostly talk about it. In this particular case, the "low hanging fruit" - energy efficiency - has been analyzed and found to be a great investment - with easily calculated paybacks even at the low current energy prices (especially for electricity and natural gas). That analysis has been followed up with real actions, and with real improvements in energy efficiency. Very good. However, when it comes to guestimating future energy prices upon which to make long term investment decisions and to set priorities - those given very high level managerial responsibility appear to be AWOL, or at least "highly skeptical". And while the "future catastrophic effects" of global warming are acknowledged, no incorporation of those costs are added onto current fossil fuel sources (coal and natural gas for electricity, electricity and natural gas for heating, oil products for transportation) which are responsible for these "future catastrophic effects". Ignorance with respect to fossil fuel depletion does not help matters much, either, especially since THAT problem is more likely to hit before a significant fraction of the costs of Global Warming starts impacting NY State (and that is the drowning of NY City and Long Island by rising ocean waters that are a result of the breaking up of the Greenland ice-sheets). The result of these skewered investment examinations and priorities is completely predictable - and is effectively zip for investment in renewable energy generation. So here is one such examination about an institution which is really typical with respect to this problem, which is nationwide and not just local. And yes, there is a lot of room for improvement using the "peoples money of the State of New York".

------

If you take a drive from the junction of NY 400 and Rte 20 A west towards and past the Erie County border and venture into Wyoming county, you can see one of two recently installed wind farms in this region - in this case the Sheldon High Winds project (112.5 MW), which is owned by Invenergy. They also had to put a substation to boost the output of the wind turbines (already boosted to something like 34.5 kv) to 230 kv, and then they installed a 5 mile section to join it with a nearby set of 230 kv lines.



The other nearby one is the Wethersfield 2 windfarm that is owned by Noble Environmental Power (JP Morgan Partners), with 126 MW of capacity. Add these two projects (which both use GE 1.5 MW wind turbines) up, and you get 238.5 MW of wind capacity located on this north-south ridge 30 to 40 miles southeast of Buffalo. This represents an investment of close to half a billion dollars. Noble also needed their own 230 kv substation.

It's a nice rural area, and by and large, the locals seem to be pretty happy with the new improvements. And especially the lease payments (more than $5000/turbine per year) to property owners and nearby owners, and also the payments to the towns that they are in (big PILOT payments to augment or outright replace property taxes). Maybe this will also lead to happier cows, like this VERY famous one (cows and wind turbines are quite sympatico).


Now, these two companies (Invenergy and Nobel) are really only in it for the money - that's why corporations exist, after all - so this is not a starry eyed bunch of eco-freaks trying to save the planet from the ravages of fossil fuels. They are aided in this by getting some choice wind sites located close to existing 230,000 volt (230 kv) lines which then head off to the nearest market for their electricity product, probably Buffalo. And because of the bizarre way that the U.S. incentivises wind energy projects, these companies and their "tax equity investors" will be able to avoid payment on close to $360 million in income taxes in the next decade. In effect, as long as these folks pay more than $360 million in active and passive income taxes, the Federal government will give them back $360 million (about $2 million back for each $3 million invested). That makes their net investment about $140 million, or, to put it another way, we the people via our "agent" - Uncle Sam - will pay for roughly 75% of the installed cost of these, in an arrangement that keeps wind turbine electricity at about the same price as electricity produced by old, fully depreciated coal burners. Of course, what used to be pretty much a sure thing (well heeled investors perpetually having dependably large incomes which were taxable) is now more of a gamble, because if taxes on profits aren't paid because those profits went away for a while (Madoff investors, anyone?), well, these wind farms will be more like an financial albatross and not a cash machine. You don't get a tax credit if you don't pay taxes, and the same goes for deductions form taxable income - no income, no deductions from that income. Oops.....

Even the nominal owners for the initail decade do keep their taxable incomes at a sufficient level, these projects only will be marginally profitable while electricity prices are depressed along with all things money-wise these days (about 5 c/kw-hr); they (Noble, Invenergy and their corporate bretheren/competitors) are betting higher future prices. The exact price needed is a bit of a secret, but it would probably be "north" of 7 c/kw-hr. If future electricity prices go higher soon, they stand to make boatloads of booty (profit), but if prices take a while to get to that level, the stash of cash they eventually obtain won't be as great. In fact, if electricity prices stay depressed for too long, profits will not meet expectations. And that is the corporate kiss of death with respect to getting more investment in Green Energy and those associated green jobs. Unfortunately, due to the "economic meltdown" that really kicked in when Lehman Brothers went bankrupt/was allowed to go bankrupt, this could be it for wind turbines in this region for a while, anyway. It turns out that the financial model based on incentives that require taxable income that can be avoided with wind turbine investments are just too risky for bankers in these days; arrangements like Ontario's Standard Offer Contract (SOC) are preferred to make nervous bankers lend the money for wind energy projects at reasonable rates. The huge bank loans needed to make the combined $500 million worth of investments happen just won't happen when loans get too pricey (high interest rates, high points get charged, higher equity percentages are required to get the loans and even worse, and shorter term loans (requiring higher yearly loan payments) are required). The higher financial risk associated with U.S. style incentives lead to higher money costs, which require higher electricity prices to pay off the riskier loans. While there are some new incentives in the Recovery Act (see here), $7 billion worth of help will only go so far when the need is for something like $2o billion worth of loans/financing if the industry is to keep up the 60% growth (which would be $27 billion worth of new installs for 2009) that occurred in the U.S. in 2008 (which were about $17 billion).

Why, you ask, all the bizarre financial machinations when simpler ways might exist? And just what are those, anyway? OK here - http://www.publicpower.com/effective_renewable_energy_policies.htm - is a link for some reading (presentations) at a recent renewable energy conference in Florida. You will need to have the Powerpoint or some equivalent program, and at least DSL, or lots of time......There, aren't you glad you asked....

Anyway, there are less risky ways to finance wind farms, and one of these would be for governmental customers of this electricity to step up and do the right thing, for a change. After all, many colleges and universities (via their PR people and/or leaders) talk a great talk with respect to Global Warming, and few would argue for greater energy gluttony - many, like the University of Buffalo (UB), have gotten religion with respect to energy efficiency, and that is be applauded. But when it comes to renewable energy investments - well, here's where most are MIA. UB, to its credit, did try better than many to "go green" with its electricity procurement, but that is a really low standard of comparison. The real standard should be how much money - please, enough with the PR - is invested in renewable energy for the institution. After all, when you purchase the means to produce 30 MW without CO2 pollution and fossil fuel procurement, that money no longer goes to feed corporate coffers of those who own the means to produce renewable energy - instead, it goes to (usually) different corporate coffers to purchase these MANUFACTURED items. And with enough market clout, maybe more local manufacturing of units or components of these units could take place. And after all, with respect to wind turbines, most of the jobs associated with wind turbines are in the manufacture of the devices and all the components that make up a wind turbine, and not with the installation, and certainly not in the operation and maintenance of the wind turbines. It is estimated that there are 15 manufacturing jobs per $ 1 million invested in a wind turbine, versus 0.6 jobs for the installation and maintenance aspects. So each GE turbine installed (at about $3 million per 1.5 MW turbine) made 45 jobs for manufacturing.

Now, for a University or college to invest in a wind turbine - well, it's not uncommon. Here is a picture of one Vestas V-82 being installed next to a college in Minnesota (not on the campus, but owned by the college):

There's even a video of the process, and also the story:

So, what would it cost for UB (or even better, UB, Buffalo State College and Erie Community College (ECC), since they are all publicly owned institutions) to do this? Well, keeping it simple and using UB only as an example, UB has roughly a 30 MW average electrical demand, though obviously it does fluctuate around that value, depending on time and day. Those GE turbines (like the ones recently installed in Wyoming County) in decent wind areas deliver about 1/3 of their rated capacity (again, depends on time and day), so each one would average 500 kw of electrical output (yearly basis). And if we saved 4 for on-campus locations (3 in the 'burbs, one on the Main St campus), where average yields would be about 25% (total would be 1.5 MW average output), 57 would be needed in a distant location(s), and 4 on campus, for an average of 30 MW from 61 turbines. At $3 million each, that comes up to a $183 million investment in renewable and cost effectibve electricity generation.

Where on earth would UB get $183 million in order to free themselves from fossil fuels with respect to electricity? Why, imagine UB asking for that kind of money for anything (yearly expenses ~ $1.5 billion), let alone something that is about the most important thing that there is.....like a future not despoiled by Global Warming gone wild, where in comparison a Mad Max movie would be more like a children's cartoon show (well, that was more about some consequences of Peak Oil....but you get the idea, calamity wise). One could even use that famous word from Mad Max for the size of that investment....Humongous.

Actually, with the election of Barack Obama, and the need for "shovel ready" projects coupled to all the recently shelved NY Sate projects...a renewable energy investment is almost a natural, a "no-brainer". It sure does fit the definition of job creating and replacement of fossil fuel pollution (just follow the 230 kv lines from UB Amherst...they go right to the Huntley coal burning facility in Tonawanda, NY....). There is even a special subsidy given to municipalities and states/state institutions (even NYPA......) to make up for the lack of tax based incentives - particularly the Production Tax Credit (PTC, 2.1 c/kw-hr for 10 years) and the rapid depreciation (MACRS, worth about 3 c/kw-hr as spread amoung the initial 10 years). This subsidy is also worth 2.1 c/kw-hr, and is known as the REPI (Renewable Energy Production Incentive). For 30 MW for 10 years, this adds up to over $55 million (it also gets raised if there is inflation). So that would cut the net installed cost to $128 million. Then there is the RPS arrangement for NY State..last year that was worth 1.5 c/kw-hr for 10 years. Or there could be private purchasers of those "Green Tags". They would be worth $39 million over a decade. So now the net installed cost would be $89 million. Not bad for electricity whose cost (just the generated part - transmission is something different) is worth $131 million (at $50/MW-hr) to $158 million at $60/MW-hr over the 10 year period when the subsidies are in effect, without taking into account the time value of money. Of course, at some point in the future (for example, when high natural gas prices start to come back into effect - a result of the current binge of "supply destruction" presently going on), electricity prices will assume the "hockey stick profile" and get very expensive, very fast. That would make this an even better investment, but the timing of these price spikes is so difficult to predict.....

Well, aside from the net cost, what would payments be like, and what would the electricity cost? Lets say you could get 5%/20 year bonds (UB is a NY State entity, and the payments on NY bonds are not taxed at both federal and state levels..). The net payments at that rate on $183 million would be $14.7 million per year, and in addition to that there are the costs to maintain the units/pay rental on land, etc, worth about 1.5 c/kw-hr. For the initial ten years, $9.47 million per year (REPI + Green Tags) - worth about 3.6 c/kw-hr - could get taken off the principal, or used for something else. The $14.7 million (principal and interest) per year is about 5.6 c/kw-hr, and then adding the 1.5 c/kw-hr (O&M) gives 7.1 c/kw-hr - similar but a bit more than the going rate for generated electricity. Adding these up for the initial 10 years (5.6 + 1.5 - 3.6) gives a value of 3.5 c/kw-hr for the initial ten years, and 7.1 c/kw-hr for the next ten years. After that, the electricity would cost approximately 1.5 to 2 c/kw-hr, until the turbines either no longer work or get replaced.

There are some easy ways that this cost could be lowered (lower interest rate, for example, or longer loan term). Another option is the CREBs route (Clean Renewable Energy Bonds), which are zero interest to the bond issuer (a passive income tax investor gets tax credits as interest on these bonds). These could drop costs to SUNY by another 1.2 c/kw-hr, but CREBs bonds are highly sought after (there are only $1.6 billion in new CREBs bonds in the new Stimulus Bill that was just passed), and it requires some influence in the halls of Congress to "make the case".

Even so, it's less money than would be spent with private industry owning the wind farm (which would need 7 to 8 c/kw-hr via a long term power purchase agreement). Anyway, for the initial 20 years, the cost of electricity from these turbines would average near 5.3 c/kw-hr once the subsidies are taken into account, and possibly as low as 4 c/kw-hr if the CREBs bond could be obtained (none in NY have to date, it is believed). Of course, these are stable prices - fossil fuel price spikes have no effect on wind speeds, or on the cost to produce wind derived electricity.

Well, what's the excuses not to do the right thing by the planet? One of them is that the University does not want to compete with private industry....but they certainly compete with private universities and colleges, other public colleges and even community colleges. Besides, private industry needs to tack on profits, and for the foreseeable future, credit will be much more expensive to most private entities than public ones. How about the "we have other priorities" excuse? While this is a big list that includes R&D in hot future areas (but apparently not viable renewable energy, to any great extent), there are also some less savory areas of expenditure that are being pushed. Like a proliferating and highly paid administrative management as well as a sports program that has been growing at an average of 9.86% for the last 10 years, and with little sign of stopping. For example, here's the data, and here's the trend, sports-wise (or sacred cow-wise):

Geez, that $183 million is not even the money spent of sports during the last 12 years, but sports is fun...for some. And it's supposed to be a great hustle on alumni, who will (presumably) fork over much money when UB has semi-pro sports teams upon which much money is expended. Well, at least that's the theory.

Of course, we know from the recent history of the oil and natural gas industry that exponential growth (in extraction of a finite resource, or consumption of a finite source of money/income (like NY State taxes)) can only go on for so long. This is where the Logistic function or its analog the Gompertz function comes into play (i.e. expenditures would be expected to eventually level off and maybe even decline in time), but enough with the math. So far, however, it's up, up and away for the sports program expenditures - estimated to be near $26 million (not including pensions, taxes, health benefits, etc for staff and sports faculty) for 2008-2009. This trophy was obtained with a considerable portion of that $26 million last year - but it sure is shiny!

The Mid-American Conference Football Trophy

Finally, there is the The American College and University Presidents Climate Commitment - a list of the signatories is here. UB's current President John Simpson joined up with 270 others, including Jacqueline Johnson of the Univ. of Minnesota at Morris (they also have their own Vestas V-82, just like St Olaf, and the Morris turbine is involved in renewable ammonia R&D, paid for largely by Uncle Sam). But, with only a few exceptions, not many of the signees have their own commercial scale (= not a toy) wind turbine on or purchased by their college or university. UB is with the majority on that one.

Anyway, in the balancing of priorities (football vs. wind turbines), wind turbines usually lose, as does the planet. Because when it comes to allocating resources, beer and circuses (well, watching college football is a good excuse for those at college to engage in ...humongous (that word again) ethanol consumption, assuming an excuse is required) rules. Thus, concern about rising CO2 levels is pretty much paper thin, equivalent to the paper upon which the signatures were written. So as Earth Day comes around, keep your eye on the budget, especially the one pertaining to capital investments, as that tells more truth than all the fancy websites with good intentions broadcast far and wide. Will the money ever get placed where the mouth is? Inquiring minds might want to know....

Saturday, February 7, 2009

February 2009 Rpt

All kinds of people seem to numerically keep track of things, and wind turbine enthusiasts fall into that category. At the beginning of every year, the results of the previous years results get tallied up, and they can be found at the Global Wind Energy Council - http://www.gwec.net. You can either hunt around on their front page of find the summary of last year's efforts here. The U.S. installed 8358 MW, and NY installed about 400 MW of that, with 475 MW still in construction. The most intensive efforts were in Texas, followed by Iowa and several other states like Kansas, Oklahoma, Oregon, Washington, Minnesota, North Dakota, Wyoming, Illinois and Indiana (check out the AWEA wind map when you get a chance). A lot of the US "wind corridor" in the Great Plains is starting to get a tiny fraction of its potential developed.

For much of the year, the renewable energy business was, as Paris Hilton is fond of saying, "HOT!" And the wind industry seems to be one of the leading forms of both new installs and more importantly, delivered energy. For example, the PV industry did quite well in terms of new capacity, but delivered energy from PV is often less than 15% of capacity, versus over 30% for most new wind turbine installations, and PV installation costs did not really drop much at all (see here and here). However, without the massive support needed and possible via Feed-In Laws, US PV demand may collapse in 2009, destroying potential profitability in the industry for a while. Even the EtOH industry did OK, despite the financial screw-up by Vera-Sun with respect to betting on corn futures (they went bankrupt as a result of those bad bets), producing about 9.2 billion gallons last year, or 42% more than in 2007. That works out to about 0.6 million barrels per day (mbd), or 6.7% of gasoline usage for 2008.

Just for some good news, the 2008 US gasoline was about 8.9 mbd, down 3.8% from 2007 value of 9.3 mbd.

Total installed capacity throughout the world increased by 36% to 27.065 GW above 2007's very impressive installed amount. The total wind capacity in the world is now 120.791 GW and climbing. The US (8.358 GW) and China (6300GW) installed the most capacity, followed by India (1800 GW), Germany (1665 G) and Spain (1609 GW). The wind industry is now a worldwide industry (there are even 3 x 300 kw Enercon units them on Antarctica, with two more planned for the next season when this is possible). The US now has more turbine capacity installed than any other country. However, if China's installation rate continues to expand, it will soon overtake the US. They are also staking out manufacturing of these (they are very Mercantilistic, after all), and may soon begin exporting these in significant quantities. In Europe, 43% of all new electrical generating units installed (on a capcity basis) were wind turbines in 2008. Wind is definitely going mainstream.....

Over the last 13 years, the average rate of growth in installations was 23.5%. This translates into doubling every 3 years. And something to look forward to, providing the bizarre tax incentive system used in the US does not "go off the rails" during the next few years. Maybe something more sensible will be added to the mix....

Here is an example of what happens when Feed-In Laws produce "too much" installed capacity in a given area, in this case, Spain. The week of Feb 10 is going to be very windy in Spain along the Atlantic, and wind farms will be cranking out copious quantities of energy, near or at their maximum rated capacity. As a result, the power prices for non-renewable electricity....are dropping significantly, since with Feed-In Laws, the renewable energy must be bought at fixed prices and paid for before any "unclean" power is purchased. In Feed-In Law systems, renewables have priority, and can't be bumped off to keep fossil fuel facilities operating at their economically optimal rates, as is done in the U.S. This also makes fossil fuel facilities less profitable in Feed-In Law countries versus those who strictly adhere to "market systems", but after all, that is the point, isn't it? So, some of the fossil fuel sources, especially natural gas based ones, will have to shut down, and the coal burners will have to throttle back on coal usage.

Finally, from a nifty website that streams renewable energy news (http://www.renewableenergyfocus.com) comes this item . It states that U.S. wind turbine demand will exceed $10 billion by 2010. Oops...actual demand for just the wind turbine machines was over $11 billion in 2008 - and when installations are considered, the total capital outlay was close to $17 billion. Once again, the potential for wind as a major energy source, and not just as a trivial one, has been underrated. The U.S. is significantly hampered by its market and tax credit/tax deduction incentivised system, but in spite of this, wind was one of the most significant factors in new electrical generation systems. The net output of these new installations should be about 3000 MW, or about 3500 MW of coal based units. In many cases, wind is now displacing planned new coal and new nuke installations....

In 2007, the wind turbine purchases went something like this (for 5244 MW of capacity), in billions of dollars:

2007 2008 (est)
Nacelles..................$ 4.295 $ 6.9
Rotors.....................$ 1.695 $ 2.7
Towers....................$ 1.050 $ 1.6
Balance of plant......$ 0.24 $ 0.4

Total........................$7.280 $11.6

These (60% to 100%/yr) are the rates that could be possible should the people, via their government, decide to do this. Wind could be of a similar size to automobile size (~ $200 billion) if the growth rates of 2007 (100%/yr) or 2008 ("only" 60%/yr) are continued over the next few years. After all, a linear growth rate yields in an exponetial result, and an increasing rate of growth does even better. After all, this is an important part of how the U.S. won WW2...we just outproduced our opponents..all of them. Several new US wind turbine factories opened up (Vestas, Siemens, Acconia, Fuhrlaender) and several others expanded capacity (GE, Clipper, Gamesa), and the same holds for makers of blades and towers as well as a host of other parts. In Canada, Enercon, RE Power and AAER also opened or started construction for wind turbines and components. Ultimately, this could be very beneficial in a variety of ways, all the way to cement, steel, glass (fiberglass for blades), copper wire, epoxy resin (for blades), coatings, cranes and the forging industry, as well as to the electrical infrastructure business (aluminum wire, transmission towers, ceramic insulators, transformers and switchgear). How cool is that?

Speaking of cranes, this one is a new variant, (new product) that could be made in the US, but for now must be imported from Germany. It can save several days of crane setup and "un-setup" compared to a crawler crane (such as the modest sized one being presently used to construct the Federal Court building in Buffalo). This crane is mobile and can drive on highways when contracted, only needs 4 supporting truckloads of equipment (versus 16 to 18 for a big crawler crane), and can reduce installation costs significantly, since in construction, time is money. See also this link:

From a great article at http://www.eurotrib.com/story/2009/1/21/175330/942

Dave Bradley

ShareThis

 
Web Analytics