Tuesday, April 28, 2009

A New York State 2009 State Renewable Electricity Plan

This is a shorter version of another previous post (http://wagengineering.blogspot.com/2009/04/ny-state-future-electricity-prices-and.html).

Here is a quick summary of a different NY electricity future – one with affordable (but not dirt cheap) home-grown renewable energy, and hundreds of thousands of jobs created in the process to make and install the units that will harvest this energy. It is a non-wimped out version of the new tentative NY State Energy Plan (which is better than the old one): http://www.nysenergyplan.com/NYS%20Energy%20Plan%20-%20Interim%20Report%20-%20March%2031%202009-web.pdf). This feed-In law based scenario would supply NY’s present level of electricity consumption, and would position the state to transition residential and a lot of commercial applications to renewable electricity based heat (including some ground sourced heat pumps, for those who can afford them). Yes, it is time to think of replacing natural gas use, not increasing it, unless you crave future economic (and other) danger and foolishness. This is very important, because North America’s natural gas supplies are not infinite, either – in fact, they are mostly consumed, and the replacement costs for new supplies – usually from smaller fields that are more expensive to tap – are rising. You should be able to spot the trend for natural gas, and why dependency may not bode well in the future - for more on this topic, see http://www.theoildrum.com/node/5323#more:

Of course, to undertake a conversion to a renewable future before that option becomes meaningless due to Global Climate Changes (and not for the better, either), those who invest in renewable electricity production need to be isolated from the wildly unpredictable fossil fuel supplies and prices. That can be done with a Feed-In Law option (see http://www.allianceforrenewableenergy.org/why-reps.html and http://www.greenenergyact.ca/), and at lower costs (on a complete basis) than can be done using quotas and government subsidies. Besides, both the NY State and U.S. Federal governments are way less than broke, and we really don’t have the money (huge amounts, too) to shovel to extraordinarily rich people and corporations (often not even U.S. citizens or companies) in the form of tax credits and deductions – which have to be made up by U.S. taxpayers who are lower on the Food Chain (lower income). Feed-In Laws are not a guarantee of easy money, but they do provide a lot less risk to investors and all those dependent on a growing industry (tired of being unemployed…?) compared to variable pricing/quota/tax payer subsidy system that evolved by accident in the U.S. Nowadays, large scale bankers will charge a hefty premium to finance such projects due to the high risk of the U.S. arrangement relative to Feed-In Laws.

First, here is a snapshot of NY electricity consumption – currently about 2.5 GW out of 16.44 GW (a GW is a gigawatt, or a thousand megawatts (MW)) on a delivered basis is supplied by renewables, and of that, 80% is supplied by a pair of NYPA hydropower projects (Niagara Falls, Massena). That hydropower can be made for less than 0.5 c/kw-hr, largely because the capital investments are largely or all paid off and there is a lot of energy made with very few people needed to do it. On average, NY’s electricity consumption is fairly constant. Also, notice how industrial usage has declined – this is where the most of the real wealth in the state comes from, especially now that the gig is up on the Wall Street Casino and related financial machinations. If you need a snapshot of why our real regional unemployment is so high, there it is – we import other’s unemployment when we import their manufactured goods, with little of value (want some funky financial products?) for exchange. And no, medical campuses and dreams of alchemy (bioinformatics) allowing someone(s) to (maybe) strike it rich won’t fix that problem…it will just keep taxes high, along with a few salaries for pseudo-academics who know how to milk the system (and the dreams) of those dispensing state monies.

Source: U.S. Dept of Energy/Energy Information Agency (EIA)

But, lets assume a mix of all of the above is used in a project to replace all of NY State’s polluting electrical generation (nukes, oil, natural gas, coal) with predictable priced renewables, using a Feed-In Law arrangement over the next 20 years – the “go for the gusto” version of a state energy plan.

Sources of renewable electricity applicable to NY State include onshore wind, offshore wind, tidal (underwater turbines in Long Island Sound) and run-of-river turbines (Niagara, St Lawrence, Hudson, etc). Photovoltaics (PV), while possible, are quite pricey – between 5 to 10 times more costly than on-shore wind. The Feed-In Law arrangement is used to facilitate this, since the alternative is not privately finance-able unless massively tax subsidized – with the benefits of these subsidies almost exclusively going to the upper 2% of the wealthy OF THE WORLD – not necessarily of this country - care of the recent financial disaster that is still unwinding.

Such an investment to convert NY to a more sustainable mode - no government money needed – would be financed by amortizing the capital over long terms (more than 20 years) and would paid back by electricity consumers. This is somewhat similar to what was done when the utilities also generated power which they then sold – in this case, it would be done with an environmental conscience, something that apparently was absent when foolhardy projects like Nine Mile 2 or “natural gas everywhere” were foisted on the public.

This would result in a lot of manufacturing jobs somewhere, along with associated installation jobs. These employed people would then support others (groceries, bars, schools, dental, doctors, etc) – on average, 5.5 others per manufacturing job (the multiplier effect). The beauty of renewable installations is that there are many advantages to local manufacture – including the high cost to transport the renewable energy generation devices from distant locations (also avoids currency fluctuations).

Of course, if these are not made in NY, the indirect jobs mostly vanish along with the manufacturing ones, and then the only benefits are in less CO2 pollution, less really nasty rad-waste generated (and permanently stored at the site of the generation), and less money exported from the state to pay for those fossil fuel imports. Of course, without the manufacturing, significantly fewer people would be able to afford ANY energy, let alone renewable energy, and that is a pretty bleak future.

The next question that pops up is how much more would this cost? Let’s assume that onshore wind goes for 10.5 c/kw-hr, offshore wind, tidal and run-of-river goes for 14.5 c/kw-hr and “big PV” costs 50 c/kw-hr, based on delivered energy costs of $6.67 million/MW, $10million/MW and $49 million/MW (or $2 million/MW, $4 million/MW and $7 million/MW on a capacity basis), respectively. These figures are also used to calculate the job figure – at 15 jobs/million dollars of capital investment.

Also, keep in mind that natural gas costs are unlikely to remain stable, or at current low prices, either as a result of a process known as supply destruction (existing prices do not justify current further investment in wells and/or pipelines) or via well depletion (this averages about 40% per year per well). Let’s take either a 3% per year or 6% per year rate of price rise for natural gas (these are very low estimates – the average is over 10% per year for the last decade). Shown below is what a typical NY residential consumer would experience:

As the renewable portion of the New York State electricity mix increases, the effects of the natural gas price rises become more muted, and by year 10, this renewable electricity mix is actually suppressing prices/dropping prices. Here is another view, showing the cost per month change on a yearly basis – that is, what is the change in the average monthly bill from year to year (the 3% price rise for natural gas is shown – at a 6% natural gas price rise, really significant differences occur):

Due to the way that NY’s current electricity is priced (an arrangement managed by the New York Independent System Operator, or NYISO – see http://www.nyiso.com), electricity prices are not the average of all electricity produced but instead, the highest price of the last bit of electricity needed to satisfy a given hour’s demand (marginal pricing). Thus, even if 95% of the electricity made in a given hour was bid in at 4 c/kw-hr and 5% was bid in at 10 c/kw-hr (average would be 4.3 c/kw-hr), the price for all electricity would be 10 c/kw-hr. In general, natural gas derived or even more expensive oil sourced electricity is most often the “last bidder”, and it tends to set electricity prices in this state. The NYISO system is supposed to insure competition between generators in the 11 zones in the state, but since coal, nuclear, hydroelectric, oil and natural gas sourced generators have drastically different production costs (and for oil, gas and sometimes coal, these prices vary drastically with time, and are unreliable), what happens is that natural gas using generators compete with other natural gas using generators, etc. Furthermore, electricity bills are a combination of NYISO (the generation price) and all the connection, transmission and distribution costs/prices. Last year, the average residential price for the generated portion was about 8.36 c/kw-hr statewide, though this varied by region. Believe it or not, the Western region (Zone A) was the least costly in the state. Odds are, “merchant wind” tends to have little effect on NYISO prices – especially at the present time, though this may change as the renewable content increases, and if it increases over time.

Prices for oil tend to be set world-wide, for natural gas, continent wide, and for coal, regionally (train transport is a big factor). Enormous subsides are provided to fossil fuel burners as either military protection, tax subsidies (oil and gas well depletion, for starts) and for now, effectively a free pass for CO2 pollution (the current RGGI CO2 pollution allowances are a pittance of what is needed to really behavior modify polluter’s actions, and to switch to non-polluting electrical generation approaches). The king of the subsidy racket is nuclear fission – no catastrophic insurance (Chernobyl Day is April 26 – remember? - http://en.wikipedia.org/wiki/Chernobyl_disaster), worth $250 to $500 million PER YEAR per reactor – assuming it would even be possible to obtain it - and no adequate rad-waste trash disposal system (ever hear of West Valley?) exits to this day in the U.S. - The Yucky (Yucca) Mountain option is now off the table. In fact, every form of energy production, and many forms of energy consumption are highly subsidized in most every country, and the U.S. takes a back seat to no one in that category. This arrangement really begs the question of what is defined as competition in NYISO, and also whether that is likely to be just an abstract economic theory, similar to the one about how risk can be valued via Collateralized Debt Obligations (CDO’s) using really great computers and really highly paid banker/traders.

In other words, competition needs quotes in the NYISO system – it is not a simple concept in the least. But, as gas costs go up (there are only a few pipelines, and those only have a few major suppliers), so will electricity prices. However, it will not be a steady and predictable rise – instead, there will be price spikes (averaging every 3 years in the U.S.) which will do big damage to the economy, followed by price collapses, when supply destruction occurs. Oil and gas prices are related, and gas and coal prices are also related due to the fact that some users can switch between fuels – hence, more complication, and potential for some not-so-pleasant “Black Swan Events” (http://en.wikipedia.org/wiki/Black_swan_theory).

On the other hand, renewable fuels (with the exception of biomass, like wood used to fire boilers, which will be priced in competition with oil and gas) have thoroughly predictable prices. These prices are largely a function of the installed capital cost, which in turn is highly dependent on the interest rate and term of the loans used to finance them. To connect renewable electricity prices to the highly variable (and also game-able and scam prone, at least on a short term basis) fossil fuel costs in a time of peak Oil and Peak natural gas production is folly on an epic scale (although there does seem to be a lot of that going around these days). Or, maybe it is a desire by some to do some gambling – sort of like basing your house mortgage interest rate on who won the Kentucky Derby, or the sports game of your choice. Who would do something that silly (AIG?)…..

So, what do you think of the future laid out here? Odds are, if you own a nuke or a coal burner, it’s not your cup of tea. And if you think that Global Warming and Peak Oil/Peak Gas are hoaxes for the tin-hat crowd (for example, someone with a high Inhofe Scale rating – see http://www.grinzo.com/energy_old/info_nuggets/inhofe_scale.html), well, it is also not going to be a “fave”. But, there are 19.4 million New Yorkers, and there are bound to be differing opinions. That comes with the turf.

Dave Bradley

Monday, April 27, 2009

NY State Future Electricity Prices and Feed-In Laws - The Detailed Version

This is an attempt at answering what turns out to be a tough question - what would the effect of Feed-In Laws be to the average NY State electricity consumer (i.e. residential customers)? For example, when would this snapshot of prices occur? What would prices be if no Feed-In Law was to be put in place, and we continued with the current mix of natural gas, coal, nukes, oil and hydro fired facilities, along with some "merchant wind", which tends to have no downward effect on prices. And at what renewable energy content in the NY State mix would this snapshot occur? After all, if only small amounts of renewables are added, the effect on prices (up or down) will also be small. Besides, Feed-In Laws stimulate renewable energy installations, so one would expect a significant quantity of renewable electrical generation to be installed. And hopefully a lot of new manufacturing jobs would start up in NY to supply the region with the equipment (valued in the many, many billions of dollars) that will produce home-grown pollution free electricity in mass quantities, replacing polluting electricity made with imported fuels.

So, a model of future renewable energy installations was made using a spreadsheet, after the relevant information on pricing and quantities was obtained from NYISO and the U.S. Energy Information Agency (EIA - see http://www.eia.doe.gov). Email me for the model, if you wish.


The Main Refrain:
Feed-In Laws (for a description, see http://www.allianceforrenewableenergy.org/why-reps.html) have proven to be the best way to introduce renewable electricity – more energy is installed, and at lower cost per unit of renewable electricity delivered than for systems based on tax subsidies and quotas. Of course, different renewable generation technologies have different production costs, so it is important to compare like systems. For example, to be a bit more specific, this means that commercial scale wind turbine installed in a place with a Feed-In Law (option or only choice) would be a lower unsubsidized cost electricity producer than if the same unit at the same installed cost and with the same resource is installed in a place with tax subsidies/quotas/variable electricity prices and/or other governmental subsidies (on an unsubsidized basis). The reason for this is rests in the predictability of the price obtained for the electricity, which in turn allows for lower risk (= lower cost) financing of this system. Feed-in Laws provide a minimum price for the particular renewable energy sold, but the profit obtained per project is a function of the renewable energy resource and the cost of the system/cost of the financing of the system. The best profit would come from the best resource/lower cost system/lower cost financing, and also from the most reliable system (if it does not work, it does not make energy/revenue for the owner). As for taxpayer based subsidies, what is given to the generator owners gets taken from taxpayers…..

The minimum price system is in contrast to the “casino system” of variable and “competitive” pricing systems, especially ones where the competing electrical energy production systems often have huge external costs that are not included in the cost of energy. New York’s NYISO system is like that (see http://www.nysio.com). True competition becomes meaningless under such circumstances, as the lowest sales price which electricity can be sold at would be a function of the amount of the external costs which can be offloaded onto someone else. A classic example of this is CO2 pollution from fossil fuel combustion. Assume for a bit that the “Stern Report” value for the social cost (= external cost) of CO2 pollution is correct at $85/ton of CO2 for a coal burning facility, and in this case, where 2.64 tons of CO2 is produced when each ton of coal is burned. When this cost is translated back to the price of coal, $224.40/ton of coal would be added to the price of the mined and delivered coal. If coal selling at $50/ton has an electricity raw material production cost of approximately 2.5 c/kw-hr (there are additional costs to coal burning, but these are ignored for the time being), coal “costing” $270.40 ($50/ton + $224.40/ton) would have an electricity raw material cost of 13.72 c/kw-hr, which is almost the same as raising the cost of coal by 5.5 times. An approximate break-even price that this electricity producer would need to obtain would be near 15 c/kw-hr, and this is much different than the present value of 4 c/kw-hr for an old, fully depreciated, commercial scale coal fired generator facility. Oil gets over $100 billion of U.S. Military “protection” each year. Oil and natural gas producers get the well depletion allowance tax benefit, and no CO2 pollution fee/taxes/auctions. Nuclear power gets a pass on catastrophic insurance ($250 to $500 million per reactor per year), a pass on high level waste disposal, as well as the benefits of about $1 trillion of R&D (mostly for military purposes, with spin-off into the commercial realm) which was paid for by the Federal Government since WW2. The possibility of assigning external costs is fraught with difficulty on just an economic basis, but defining these is more an exercise in politics. And if proper external costs are imposed, there will be complaints, and some “losers”, though it can be argued that most of us are all losers when external costs are socialized while the profits get privatized (and those become the winners in this bad for the world arrangement). Plus, the piper will eventually get paid…such as by the next generation.

There are also other problems with “competitive” pricing systems, mostly relating to the highly variable pricing of raw materials. In New York, very few of the raw material fossil fuels (coal, oil and natural gas) used in electricity generating facilities are produced/extracted/mined locally. In reality, there is a world oil price, and a North American natural gas price, as well as regional coal prices (Appalachian, Illinois and Rocky Mountain/Upper Great Plains (lignite)), which all tend to have similar DELIVERED pricing on a thermal basis in this state. Gas can only be delivered by pipeline in large quantities, and there are a very limited number of pipeline suppliers, who in turn can access a limited number of major suppliers. At present, there are wide discrepancies in the pricing of these fossil fuels on a thermal basis (coal is less than natural gas which is less than oil). An oil fired plant cannot compete with a coal fired plant – the coal plant will be significantly lower cost. And since all major power plants powered by fossil fuels buy these fuels (for the same types of fuels) at essentially the same price…electricity “competition” really becomes competition between coal, oil and natural gas, at least on a short and medium term basis. Furthermore, the only impact that NY electricity producers can have on prices for these raw materials is to not buy them, or buy as much of them – after all, less demand tends to lower prices, more demand tends to raise prices. Weather, massive corporate crime (Enron et al in 2000-2001), wars, revolutions, accidents (the gas processing facility explosion in Western Australia in 2007, for example), Peak Oil constrained demand destruction (2008-2009) or the current “maximum recession” of late 2008-2009 can drastically alter fossil fuel prices. Furthermore, these are all interactive, and often international. Fossil fuels are a “bumpy ride”, and prices are often based not on the cost of production but on “what the market will bear”. For example, the cost of production for new natural gas in the U.S. is now over $8.15/MBtu, but gas prices are now $3.60/MBtu…clearly an unsustainable situation, given that gas wells deplete by an average of at least 40%/year.

The roller coaster ride of fossil fuel prices is not beneficial for society, and especially consumers, though there may be some short term bargains at various times. Many consumers will purchase items that consume electricity based upon the price of electricity – high electricity prices tend to discourage waste/encourage high efficiency and also encourage innovation oriented at accomplishing a task with greater efficiency, while the opposite is true for low prices. The expectation of what future prices might be will also determine what items are invested in or purchased. This is especially true for commercial and industrial consumers, and also for electricity suppliers (most electricity plants last at least 20 years; the Huntley facility in Tonawanda was built in 1935). While occasional upgrades are done on many facilities, these are also long term investments. The decisions on such fossil fuel consumption units (and in massive quantities, too) actually will affect the future price of the fossil fuels – another interaction. In many ways, the policies that lead to these decisions are too important to leave to an unpredictable market.

Another fact that needs to be considered is job creation. Renewable electricity generation requires considerable investment, which translates into considerable new business activity and job creation. The greatest immediate benefit for large scale renewable energy generation is job creation – it is a Keynesian Stimulus done either with or without government expenditure of money (tax credits/tax deferments/subsidies). When done without government subsidies, the costs would be carried by the electricity consumers. The capital portions of these investments are paid off by amortizing the investment over a number of years, much like the 30 year house mortgage. The operating costs for fossil fuel based generators (mostly fuel and profits – and large profits when the fuel price is low relative to the electricity price) get paid for in the rates charged for electricity. Since renewable sources have minimal (if any) fuel costs, and low operating costs (taxes, land rent, O&M, insurance, etc) only add a small percent of the total cost of electricity, most of the electricity production cost for them is paying off the investment (principal and interest) in the renewable generation system. The lower the interest rate and the longer the loan term, the lower the annual money costs will be for a given investment.

By providing a minimum price for the electricity in Feed-in Laws, those loaning the money for such long term investments also minimize their worries (that the loan won’t get paid back). For a given annual energy resource (very readily obtained, and this tends to vary by only a small amount each year) and a given price for energy, such a project will have a known and predictable income. In contrast, without a reliable price, project cash flows become more a matter of probability and less certainty (= gambling), and thus, a loan on that arrangement is riskier than one with a known price/known cash flow. After all, the less risky the loans, the more lenders, the longer term the loans, and the lower annual capital (money) costs are the lower interest rates will be. Furthermore, if the incentives provided by tax credits or tax deductions are only probabilities of an incentive (what if no tax is paid due to a recession? – no tax paid, no tax credit or useful deduction), that just adds more to the risk of a loan default, and that means shorter term loans, more points charged on loans, lower percentages of the project that will be financed by the loan (higher equity requirements), more loan partners (spreading the risk, adding to the cost, as somebody will charge fees for arranging the loan package, too), and higher interest rates charged on loans. That adds to the operating cost of the project, means less capacity is installed, and means that less people will be employed to produce the lesser amount of renewable energy systems installed. An alternative is greater governmental subsidies, and that eventually means that higher taxes must be paid by taxpayers. In general, if the beneficiaries of the subsidies are very high income people, the renewable energy subsidies have the perverse effect of transferring money from the less well off to the extremely well off. Oops…..

Anyway, what about the effect of massive renewable energy introduction in NY State on NY electricity rates? For the time being, assume that average electricity prices (which are highly natural gas price dependent) stay at the 2008 levels (which is the last time we had a functional economy), and demand was roughly equal to supply on an economic macroeconomic basis. Also, short term trends like natural gas supply destruction can be ignored for the time being - see http://www.theoildrum.com/node/5323#more for more on that issue. In this instance, just assume that on average, future electricity prices will be higher due to higher natural gas exploration and production (E&P) expenses. In addition, all fossil fuel usage will become more expensive (at what rate is not known) as a result of newly arrived at CO2 pollution related expenses (taxes, cap and trade, as well as carbon capture and storage (CCS)).

In 2008, NY used an average of 16.44 GW of electricity (= 16,440 MW) – or 144.382 million MW-hrs. The following table shows this data, and how this was distributed. In addition, the price paid for generated electricity statewide averaged $83.60/MW-hr, while the average cost for delivered electricity was $167.36/MW-hr. Residential customers paid the highest rates, naturally. Roughly half of the money all customers paid to utilities/distribution monopolies went to transmission and distribution (T&D) expenses, profits for the distribution monopolies, property taxes to state and local governments and miscellaneous fees/sales taxes. State electricity prices are strongly related to natural gas and to a lesser extent, oil, since these are the highest marginal cost electricity producers. Even though lots of (and the majority of) NY electricity is supplied by lower cost hydroelectric, coal and nuclear (“baseload power”), these sources only set electricity prices during low demand periods.

Table 1
NY State Electricity Information – 2008
Category GW TW-hr/yr $ million/yr $MW/hr % Total

Residential 5.62 49.395 9,279 187.85 34.18

Commercial 8.81 77.408 12,736 164.53 53.89

Industrial 1.66 14.610 1,754 120.05 10.10

Transportation 0.33 2,918 394 135.02 2.01

Total/ave 16.44 144.283 24,163 167.36 (ave) 100%

Note: GW = Gigawatts = 1000 MW; TW-hr/yr = Terawatt-hrs/yr = 1 million MW-hr/yr
1 cent/kw-hr = $10/MW-hr

The last estimate of how residential users consume electricity can be found at http://www.eia.doe.gov/emeu/reps/enduse/er01_ny_tab1.html. For the time being, assume that the 5974 kw-hr/yr per residence consumption rate has remained constant. This implies there are 8.268 million residential customers in NY State in 2008. That consumption rate translates into a 498 kw-hr/month per residential customer. In that aspect, NY is one of the more efficient states in the country.

Another interesting set of data concerns how electricity is being used within the state. Since 1990, industrial usage of electricity has declined by about 50%, while commercial usage has increased by about 50%. These trends show the buildup to the Wall Street meltdown of late 2008 – and where more and more of the state’s economy was involved in office and retail work and less with the production of useful goods (see Figure 1).

Figure 1

At present, NY has about 2.5 (assume 2.44) GW of renewable energy on a delivered basis) – over 80% is hydroelectric based. To convert NY from an unsustainable to sustainable state, electricity-wise, would require about 14 GW of new renewable electricity generation on a delivered basis, or about 47 GW of land based wind turbines that averaged 30% of their rated output. Assume that 23.3 GW of onshore capacity could be installed (7 GW delivered, 30% of rated output), at a cost of about $2 million per MW of capacity, or $6.7 million per delivered MW (and 10.5 c/kw-hr). Another 6.5 GW of a combination of offshore wind, tidal and run-of-river could be tapped; the latter group would have a delivered cost of $10 million per MW (and 14.5 c/kw-hr), and mostly would be installed after the initial set of onshore turbines. Finally, PV could also be installed, but an average price of 50 c/kw-hr and at $7000 per kw of installed capacity ($49 million per delivered MW and at average annual yield of 14.2%), this is rightly considered to be “pricey power”. In addition, an average price rise of either 3% or 6% is assumed for fossil fuels, which is far below what has been for the last decade (natural gas production costs have risen by 10%/yr for the last 9 years). Odds are, natural gas price rises will get more pronounced in the near future due to the fact that the best sites have already been tapped out, and the remaining gas wells yield lower quantities for shorter times, and tend to be more expensive to drill. In addition, some “mega fields” have been found in North America, but these are located in the extreme Arctic regions, and pipeline costs are extreme, to say the least. And there is the matter if the tundra and those frozen bogs/lakes melting, rendering pipelines a figment of the imagination…

Under these circumstances, NY state electricity prices would be affected to a slight extent every year if Feed-in Laws were instituted, and the effect would increase over time as the system gets a higher renewable content. The effect is a function of how fast the renewable energy systems are installed, the mix of them, and how fast oil and natural gas prices rise. However, electricity prices that are dependent upon oil and natural gas prices (which will be rising for a number of reasons, including the cost to replace depleted reserves with new supplies) are rising anyway on a long term basis – as well as being extremely unpredictable and volatile on a short term basis. For example, the current replacement price for crude oil is estimated as $62/bbl (present price is less than $50/bbl), and for North American natural gas it is $8.15/MBtu (present price is less than $4/MBtu). Natural gas prices needed for a 10% return on investment (ROI) have been increasing at rate of approximately $0.62/MBtu/yr according to Credit Suisse, the large investment bank, because the new wells are being drilled into smaller fields, or else tapping into soils from which gas extraction occurs is expensive (tight shale formations, coal bed methane). Prices will go up anyway even if no new renewable energy supplies are added to the current supply mix. The Credit Suisse prices and E&P costs are shown in Figure 2.

Natural gas prices tend to set the electricity prices in New York State, partly due to the bidding system set up by NYISO, and partly because so much of NY’s electricity is provided by natural gas. In general, the lower costs of hydroelectricity, coal and depreciated nuclear (the average age of the 6 nuclear facilities in the state is 34 years, and all have had most or all of their capital costs paid off, including the new ones incurred by the sale of these facilities to corporations such as Constellation and Entergy) do not set the state’s electricity prices except during periods of very low demand.

Figure 2

In the proposed high renewable content scenario, prices that would be paid to suppliers by consumers is a function of what types of renewable energy systems are installed, and how many of a particular kind are installed. In general, the delivered electricity cost increases in the order of onshore wind, offshore wind/tidal/run-of-river, biomass and finally photovoltaic (PV). Prices made via biomass combustion (wood) can also be volatile, depending on the price of the biomass, and will be related to the prices of fossil fuels through cross-competition.

In this study, the following installed capacity schedule for renewables shown in Figure 3 (delivered basis and capacity) is modeled. In this, by 2030, all of NY’s electricity would be supplied by a mix of hydroelectricity, wind, tidal, run-of-river and photovoltaic, with short term electrical energy storage provided by pumped and deferred hydroelectricity a bio-fuels (ethanol, methanol, ammonia, methane and other biomass derived liquids). No provision for the replacement of the natural gas used by residences for heat and hot water with electricity is considered – this would tend to increase electricity consumption, more than matching any gains in electricity efficiency (such as replacement of incandescent bulbs with compact fluorescent and LED’s).

Figure 3

The results of the combination of a renewable Feed-In Law initiated aggressive (= not wimpy) renewable energy installation program on residential electricity rates is shown in Figure 4. The comparison is against the prices the average NY resident experienced in 2008, and projected forward with a 3% per year electricity price inflation (based on higher future prices for oil and natural gas). These are displayed as it would affect the average NY residential customer, who paid an average of 18.785 cents/kw-hr for 498 kw-hr/month (assumed to be 500 kw-hr/month in this study). Their NYISO generated price component for their total electricity price was 8.36 cents/kw-hr for 2008. If the 3% price rise rate for fossil fuels remains, the average monthly bill would rise by $32.78/month in 20 years. Savings via the Feed-In Law installed renewable energy systems versus the fossil fuel option are much more pronounced if rising natural gas and oil prices push electricity prices upwards at an average of 6% per year.

Figure 4

In figure 4, the average monthly price increase per year is plotted versus the year for the given renewable energy installation shown in Figure 3 (in other words, increase or decrease versus the year before). No assumed increase in T&D costs and distribution utility monopoly profits is assumed – a bold assumption to be sure. Initially there is a price rise in either case (no Feed-In Law or Feed-In Law), but prices initially rise slightly faster due to the Feed-In Law. The difference between the renewable and fossil fuel based scenarios is very small until year 4, but then the Feed-In Law energy scenario becomes slightly more expensive by year 6. The difference between the fossil fuel and renewable option is greatest by year 8 (of almost $2/month), but then the trend is reversed. By year 8 there is up to a $3/month per year higher cost associated with the Feed-In Law prices and ~ $1.75/month per year for the no-renewables case, but shortly after (by year 12), the Feed-In Law option is actually less expensive than the “as-is” arrangement. Part of this is due to the large percentage of electricity provided by Feed-In Law initiated renewables - almost 40% of NY’s electricity would be derived from renewable energy sources by 2017 in this model, and 50% would be supplied by 2019.
Thereafter, the Feed-In Law becomes a progressively more economical arrangement, and by year 20, the average residential customer would save $12/month versus the fossil-fuel (or NYISO system).

In Figure 5, the average monthly cost for residential electricity is shown, using a pair of “AS IS” scenarios (i.e. mostly polluting power based electricity generation). In one case, a 3% fossil fuel inflation rate per year is assumed (extremely unlikely – probably too low), and for another, a 6% inflation in fossil fuel prices is assumed (more likely, though still probably understating natural gas and oil price rise rates by 2015 to 2030).

Figure 5

During the initial decade, price differences between the NYSIO system and the RFIL system are quite similar – largely because there is not enough of the RFIL contribution to the state electricity mix to make a big difference. As the RFIL contribution becomes significantly large enough, electricity price rises slow down or actually begin to decrease. In a NYISO system, renewables would have essentially no impact on prices, and would “go along for the ride”. NYISO electricity prices are set by the last marginal cost producer needed to satisfy the demand for a given time, and these are almost always oil or natural gas based, since they can be rapidly dispatched. When renewable prices are added on a merchant basis, they generally would be lower cost (especially due to the huge tax subsidies paid out by the Federal government/paid out by lower and middle income taxpayers). Wind turbine developers/owners in the “merchant system” have less than zero incentive to try and keep prices low, and prices would generally be set by increasingly scarce natural gas anyway, its scarcity in turn adding to price pressures on this price-setting fuel.

Of course, lower prices could be arranged by minimizing the solar input (which is very expensive relative to wind and even natural gas), as well as by maximizing on shore installations and minimizing off-shore installations. In addition, prices could be arranged for wind turbines to decline over time as is occasionally done in Germany. Finally, as the production capacity for renewable energy systems in the state increases, production costs may well decline due to increased competition by equipment suppliers, as well as economies of scale.

However, the main benefit of the installation of large numbers of renewable energy systems is not necessarily the fossil fuels displaced, or the lower future prices relative to fossil fuels, or even the CO2 pollution that is avoided. The main benefit lies in the increase in the number of manufacturing jobs (a mix of medium and high skill) as well as the resulting Keynesian stimulus to business and society. The capital investment results in employed people, who in turn support other people. According to economists associated with the Apollo Project, 5.5 other jobs are created by one high value added manufacturing job. An estimate of the number of jobs that would result form the total of $136 billion over 20 years (a maximum of $9.56 billion/yr) is shown in Figure 6.

Figure 6

Of course, these are jobs that would be created somewhere. Only a tiny fraction of those will be realized in NY State if the manufacturing is done elsewhere, which would be an incredible tragedy and travesty. But, hopefully that will be avoided. There are up to 1 million jobs that could be created (Fig 6) during some years, and at minimum, several hundred thousand. We could use them in the Niagara Frontier, to say the least.

Monday, April 6, 2009

April Report - Part 1

NY's electrical production is largely done with old power plants (though sometimes with new internals), based mostly on fully depreciated facilities. Most of the electricity is made from fossil fuels, followed by nuclear (6 operating reactors, the newest one over 20 years old) and hydroelectric sources. So far, most plans to make this a more sustainably based arrangement have been far too timid, and have been based on mitigation of CO2 pollution (CO2 originating from fossil fuel combustion). In general, little is said about the more immediate problems of Peak World Oil supply or Peak North American Natural Gas supplies. So, since nature abhors a vacuum, here is one attempt at a "non-wimpy" plan to remedy this situation, dealing with peak oil, peak gas and global warming in a "maximum job creation" mode.

We all know that NY State's current mix of electricity sourcing is largely unsustainable - less than 15% of the NY total electricity supply comes from two major sites, those being Massena (~ 775 MW average output) and Niagara Falls (~ 1425 MW). However, there is about 1 GW of Quebec Hydro electricity, which is not cheap, and has, believe it or not, mercury issues (see 1 and 2). The NY hydro units total about 22oo MW of some of the least expensive (after all, all of the initial investment has been paid off) electricity generation in North America - costing less than 0.25 c/kw-hr to produce this (and that is being generous). For the remainder of NY's electricity, most comes from OLD nukes, OLD coal burners, and less old natural gas/oil burners. Much of the NY gas/oil sourced electricity comes from combined cycle units which were relatively inexpensive to build, but which become very expensive to operate when the prices for oil (usually really cheap (by oil standards) cuts of grungy, "bottom of the barrel" Bunker C (or #6 fuel) oil) and/or gas) rise. The prices of gas (methane) and certain oil cuts are relatively volatile, having peaked in the summer of 2008 - for the time being. These prices are apt to spike again when the current trend of "supply destruction" (well depletion and the shut down of exploration and extraction activities, due to recent low price trends), but for now, are "affordable". The price spiking will probably occur through shortages of natural gas, brought about by two years of the selling price for natural gas being below the cost to produce new gas in the U.S. and Canada - which is now near $8.25/MBtu. Note: gas wells deplete at between 40%/year to 80% per year (with the higher depletion rates for coal-bed methane and tight shale gas wells), while oil wells deplete at rates near 5 to 10% per year. So, "do the math" - U.S. operating rig counts for March 2009 are about 50% of what they were in June of 2008, and most of these are for natural gas. Coal prices also experienced a recent price spike in 2007-2008, only to come crashing back to near where they started from - due to the coupling between natural gas and coal with respect to electricity generation.

Furthermore, these old facilities are what is known as cash cows...very little job creating capital improvements with them mean very few new jobs associated with such improvements. By and large, these facilities produce huge amounts of electrical power with minimal employment. After all, the bulk of job creation for most electricity generation lies in the manufacture, assembly and installation of these systems, and not in the actual manufacturing (of that that electricity) operation. But, also in theory, using fully written off facilities to manufacture anything means that production costs should be less than if the owners of these facilities also had to pay down the loans/bonds made for capital infrastructure, which should translate into lower prices for consumers......

However, in NY State, the electrical generation system does not operate in such a fashion, for the most part. Instead, it operates using the new York Independent System Operator (NYISO) system, a complicated bidding system where prices are determined for each hour in 11 distinct districts (zones) of the state. The prices paid are those of the most expensive bidder to needed supply power for that zone when bids (quantities and prices) are arranged from lowest to highest. Should a bidder set too high a price, their power would not be selected in this marginal pricing/Dutch Auction system. In general, the price paid by consumers is the maximum which can be charged, and not the manufacturing cost plus a reasonable profit. Again in theory, these are supposed to be equivalent statements, but reality tends to be different from theory, and this is no exception. NYPA is one exception, but most of it's electricity is contracted out at cost (in theory, at no profit) to Municipal Electric Utilities within NY and in nearby states, some to local industrial customers (Alcoa in Massena being the biggest customer at 408 MW) near the hydro facilities, and the small remainder is distributed around the state or sold for profit at the NYISO price to private electric distribution monopolies, like National Grid. Most residential customers of these private company monopolies rarely notice the difference. Besides, NYPA's hydroelectricity is mostly dispersed per the instructions of the Niagara Power Act (an Act of Congress).

Since very little of the money going to those generating electricity in NY is for paying down capital expenditures, and the labor component of electricity manufacturing tends to be small, most of the money paid for the generation part goes to fossil fuel purchases and profits. In many cases, the profits go to private partnerships, companies that are not public (unlike companies where people can buy and trade stock in them, such as AES, owner of the Somerset coal burner in Niagara County). Even the property taxes paid by these are a small fraction of the total. For nukes, most of the monies sent to generators seems to go out as profits, while for fossil fuel burners (as in the Somerset plant), fossil fuel raw material would be a major expense, followed by profit to the owner (in this case, AES).

One strategy for large scale job creation in NY State would be to redirect the flow of money paid for fuel and/or "cash cow" profits and instead have this invested in renewable energy manufacture and installation. While this would do NY residents little good if the devices were largely manufactured elsewhere (no direct or indirect jobs to NY'ers, money exported to "elsewhere" to purchase these systems), this could do a lot of good if the manufacture of these units (final assembly and most of the components that go into these) was done in NY State. After all, about 15 job-years of manufacturing are involved per million dollars of installed wind turbine ($66,667 per job-year, including benefits). And since the multiplier effect for such jobs is about 5.5 support jobs/manufacturing job (versus about 1.5 per service sector job), a billion dollars expended on wind turbines would create 97,500 job-years, somewhere. The trick is to make that "somewhere" within NY State. Commercial scale wind turbines are big, a pain to transport, and transportation can add significant expenses ($200,000 or more) per turbine, so local manufacture has its benefits, as does the manufacture of the components going into these units - all 8,000 or more. It could be more or less like having a functional automobile manufacturing industry in this region, again......

Anyway, it's just basic business that if a manufacturer feels they can sell their product for a sufficient profit on a repetitive basis, year after year, then they will (or at least might) build new manufacturing facilities, or expand/change over existing ones. However, if the demand for the product is too uncertain, and/or prone to wild fluctuations from year to year...they probably won't invest in a new facility. And even if they wanted to, sane bankers would presumably not do so...and their permission for the loans probably would determine if this investment could be done. The same goes for smaller component manufacturers - without a demand for the product, it would be foolish to invest in the manufacture of that product. So if you want to attract renewable energy system manufacturers such as wind turbines, providing an expanding and reliable market would be helpful. That in turn requires that those installing these systems can expect a reasonable return on their investment, and that they can pay off the loans (70% or more of the installed cost). It also means that if they can get lower cost loans (such as from less financially risky speculative business models) stretched out over longer terms, they would be more likely to invest in these new and/or improved manufacturing facilities. So, wildly fluctuating electricity prices can be the kiss of doom for such installations, which in turn would mean that there is no need for the manufacturing that would provide the renewable energy systems. Some predictability is needed, as there are more than enough risks associated with most efforts, but extra uncertainty is just an invitation to a more probable bankruptcy.

So far, NY State has failed miserably at the task of getting any significant wind turbine manufacturing in this state, despite the $2.5 billion that has been spent since 2005 on the ~ 1300 MW of capacity installed since then. We get relatively expensive, highly subsidized (5 c/kw-hr via Federal tax credits/deductions which have to be made up for by other taxpayers, often NY'ers) electricity and no jobs, and a minor decrease in CO2 pollution from this state. In theory, at a constant electricity demand, this newly installed renewable energy has been the functional replacement of the Huntley coal burner (now down-rated to 400 MW). However, this wind derived electricity has gone into/will go into the replacement of oil and natural gas that would have been used to make electricity - equal to about 26 billion cubic feet/yr or 4.6 million barrels/yr of oil product (which required about 5.1 million equivalent barrels of crude oil to make, since about 10% of crude oil is used in the refining process). Natural gas-wise, this will avoid about 1.6 million tons/yr of CO2 pollution (or double that for fuel oil), but not using all that gas is probably more important in the short term (next decade) than the avoided CO2 pollution.

In 2006, the last year for which there is data from the Energy Information Agency of the U.S. Department of Energy, NY used about 142 million MW-hr of electricity (and about 146 million MW-hr in 2007); this corresponds to 16.2 to 16.6 GW on an average basis. In general, electricity consumption in NY has a slight increasing trend, though there are instances of decreasing use (see graph). For 2006, the average retail price for all of this electricity was 15.27 c/kw-hr, which means an annual electricity bill for all of the state's customers of $21.7 billion. But just how much of this is spent on actual electricity generation?

Source - U.S. Energy Information Agency

The actual amount of money spent on electricity production can be estimated from the NYISO prices, as these reflect the prices charged ONLY for the generated portion, while other expenses are paid by customers (transmission, demand charges, connection fees, taxes and the System Benefits charge). However, some of the zones are quite small, and one zone (NYC) has about 34% of the state's consumption. The average NYISO price for some zones is fairly low priced, but as expected, Long Island is the most expensive. Of course, average prices can vary from year to year, in the NYISO system, just to make matters more complicated.

For 2008, a reasonable value for the price charged for generated electricity would be 8.34 c/kw-hr, based on the weighted (by quantity of electricity consumed) prices for each zone. The priciest zones were (average prices) Long Island (10.0 c/kw-hr) and NYC (9.9 c/kw-hr) while the West zone (includes Buffalo) was 5.9 c/kw-hr, and the cheapest in the state. That the cheapest in the state also corresponds to the worst job growth and among the poorest economic performance shows that the relationship between economic vitality and electricity prices may be more complicated than is the widely held, nearly religious belief that cheap energy and job growth/better economies go hand in hand.

So if NY's electricity consumption in 2008 was about 145 million MW-hr/yr and the retail price stayed similar at 15.27 c/kw-hr, total expenditures for electricity would have been about $22 billion dollars. But the generated portion was only about $12 billion. So, about $10 billion went to utility profits for Transmission and Delivery (T&D), T&D expenses, demand charges, connection fees and assorted taxes and fees (such as the System Benefits one that funds NYSERDA).

Note: an excellent overview of NY's energy situation can be seen here: http://tonto.eia.doe.gov/state/state_energy_profiles.cfm?sid=NY

Since the official 2008 numbers are not yet published, let's use the 2006 consumption figures with average 2008 fuel prices. These are:

Coal 2394 MW 9.417 million tons/yr $60/ton $ 565 million/yr @ $60/ton
Oil 795 MW 8.488 million bbls/yr $100/bbl $ 849 million/yr @ $100/bbl
Ngas 4802 MW 32,788 MBtu/hr $9.41/MBtu $2,703 million/yr @ $9.41/MBtu

The total spent would be around $4.1 billion/yr if the oil and Ngas were used at 50% thermal efficiency. However, a lot of gas using generators are peaker units which are less efficient, so the actual amount spent was probably closer to $5 billion/yr on fossil fuels. This represented about 47 million tons/yr of CO2 pollution, and at the so-called social cost of CO2 pollution ($85/ton, from the Stern Review), that works out to a value of nearly $4 billion/yr for Global Warming, and almost entirely unpaid for CO2 pollution, or about 2.8 c/kw-hr. That would have made NY's 2008 average electricity production price about 11 c/kw-hr....but of course, no real effort to slow down the drowning of Long Island and NYC via significant CO2 pollution taxes/fees is being done, as RGGI auctions are $3.38/ton of CO2, not $85/ton of CO2....and not much of a CO2 pollutant deterrant at all...

Anyway, if $12 billion was spent on electricity and $5 billion was spent on fossil fuel, what about the remaining $ 7 billion? Since new plant construction in NY for new fossil fuel burning has been very small in the last few years (just one large Ngas plant near Albany in the last 5 years, and several 50 MW peaker units in NYC), capital costs are pretty low. As is labor cost, since these generation facilities tend to be highly automated arrangements. And most facilities are not taxed to a great extent (property tax wise)...well, it looks like the owners of the old nukes (mostly Entergy) are raking in boatloads of money. So is Quebec Hydro, which exported an average of 1 GW very low production cost hydro to NY (but priced at the NYISO rate).

Here are the percentages and amounts of the prime NY electricity sources:

2006, % MW-hr MW
Total 100.0 142,265,432 16240.35
Coal 14.7 20,968,648 2393.68
Petroleum 4.8 6,829,869 779.67
Natural Gas 29.6 42,071,192 4802.65
Other Gases - -
Nuclear 29.7 42,223,899 4820.08
Hydroelectric 19.2 27,344,655 3121.54
Other Renewables 1.8 2,606,487 297.54
Pumped Storage -0.5 -756,156 -86.32
Other 0.7 976,838 111.51

Based on the high priced year of 2008, about half of the money spent by all NY consumers of electricity was spent on the actual generation of that electricity. That is, of the $22 billion spent on the purchase of electricity, about $12 billion was spent on the generation of electricity. Of that $12 billion, a bit less than $5 billion/year was used to buy fossil fuels, almost all of which were imported from outside of NY State. There is nothing to show for consumption of these fuels but some memories of "good times", and the approximately 50 million tons/yr of CO2 pollution, which has a half-life in the atmosphere of around a century.... There was also a huge chunk of money sent out of state for profits that originated from the 6 depreciated operating nukes nukes. The Indian Point 1 reactor has been permanently shut down (operated from 1962 to 1975) as a safety hazard. Here is some information on these:

Unit, Rated Output (MW), Start - End Date, Age, Op Rate, Owner(s)
Nine Mile 1 609 1969 40 90% Constellation, 100%
Nine Mile 2 1148 1988 21 92% Constellation, 88%, LIPA, 18%
Gina 610 1970 39 79% Constellation
Fitzpatric 838 1975 33 93% Entergy
Indian Point 1 275 1962 - 1975 13 0% Con-Ed (shut down-safety hazard)
Indian Point 2 1020 1974 35 93% Entergy
Indian Point 3 1025 1976 33 92% Entergy

Average rated capacity is 875 MW, average operating age is 34 years and average operating rate is 90.6%.

All of these nukes are operating at a furious pace, and are prolific cash cows for their owners for two reasons. One is that they were bought from the original owners/operators at bargain prices, mostly after or totally after the original plant was paid off. And even though about 500 to 1000 people are needed to operate each one of these facilities, the labor cost is surprisingly small as a function of sales (< href="http://www.nirs.org/neconomics/nuclearcosts2009.pdf">http://www.nirs.org/neconomics/nuclearcosts2009.pdf (37 page .pdf). By the way, Chernobyl Day is April 26......

For 2008, about $12 billion was spent by NY electricity consumers for the actual product that their money was allocated for - the manufacture of electrical energy. Due to lower oil, gas and coal prices, the generation cost for 2009 may be half of that. Meanwhile, about $10 billion per year is spent on delivering this product to market - and also on the profits for the major NY State distribution monopolies. All the money spent on profits for nuke and fossil fuel plant owners represents, in a way, gluttonous consumption, and little remains behind for this expenditure. And very few jobs are produced in NY State for this expenditure of $12 billion in 2008.

It would be far more sensible to use some large portion of that stream of $12 billion/yr for the installation of made in NY renewable energy systems - particularly wind turbines, run-of-river turbines, tidal turbines and pumped hydro storage systems. In that way, the money paid out by NY electricity consumers (residential, commercial, industrial and governmental customers) would flow to job producing activities in the manufacture of these systems, and of even more jobs that follow (5.5 additional for each manufacturing one) which support these manufacturing employees - usually in services. The renewable energy can be used to phase out the fossil fuel and nuclear facilities, which largely serve as non-job producing conduits to export money out of the state. For example, Entergy is the holding company based around Midsouth Utilities (and Louisiana Power and Light) while the nuclear part of Constellation (former Baltimore Power and Light, dating back to 1816 (City gas provider to Baltimore)) has been half sold off to Electricitie de France (EdF) in 2008.

Probably the best way to achieve this redirection of NY electricity consumers monies would be through a Feed-In Law option. The result would be unsubsidized electricity that is also disconnected from the pricing of depreciated coal/nuclear power plant production. It would allow reasonably profitable installation of large amounts of renewable electricity generation (big units and small ones, too) to be rapidly installed due to the easier financing brought about by the drastically reduced financial risk associated with tax credits/depreciation based financing, and predictable prices for the renewable electricity. And while some or even many of these new Feed-In Law based renewable facilities might be "remotely owned", the Feed-In Laws actually allow for the real possibility of local ownership for at least some of the wind farms would result. At present, only 0.25 MW of commercial scale wind turbines (one turbine) in NY (0.02% of NY's 1350 MW of commercial scale units) is locally owned.

Food for thought as we approach "C-Day".


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