Friday, May 28, 2010

Will Ending Fossil Fuel Subsidies Help Renewables in NY?

Introduction
In most countries of the world, virtually all forms of energy are subsidized to some extent, and the U.S. is presently a firm believer in subsidies. For example, why would oil and natural gas (Ngas) extraction in the Gulf of Mexico (GOMEX) be allowed to happen with virtually no royalties, and also apparently no common sense and no likely regulation/inspection of Blowout Preventers (BOPs)? Or what about the two wars being waged - all oil related. Or what about the enormous military/naval/air force protection given to certain oil endowed areas, like Saudi Arabia and Kuwait? Odds are, those subsidies could be worth easily $80/bbl, about equal to the price paid for oil imported into this country (about $1 billion/day).

However, oil is almost exclusively used for chemicals or transportation - very little is used to make electricity any more. Oil has been priced out of the U.S. electricity market, as it is too expensive a fuel. For example, bulk fuel oil at $2/gallon (retail at $3/gallon) has a thermal price of nearly $16/MBtu; In contrast, natural gas (Ngas) goes for around $4.29/MBtu (before transportation costs of about $1.30/MBtu) on 5-28-2010 - almost 1/4 of the cost of fuel oil. The two fossil fuels of note in the U.S. for electricity production are now coal and Ngas.

Some have claimed that if the subsidies on fossil fuels were removed, then renewable energy sources would be competitive. Or, more properly, SOME renewable energy sources might be competitive in the electricity market. After all, production costs for renewable energy systems depend on what type is used and where they are located, in addition to what might be the allowed prices (such as Feed-In Laws). However, the degree to which these subsidies have to be removed, and the extent that polluting (coal, Ngas, nuke sourced) electricity prices will have to rise before renewables become the lower cost electricity production methods might surprise a lot of people.

Discussion
In NY, the two fossil fuels that matter in our electricity generation are coal and methane (Ngas). Depending on what part of the state is considered, coal is either the main refrain or not very relevant - about 2600 MW our of ~ 15,600 MW state generated electricity is made from coal. The current price of Appalachian coal (the kind used in NY) is about $60/ton. Prices are rising due to rumors of increased Chinese demand, as China has now apparently encountered "Peak Local Coal" - domestic Chinese coal production can no longer supply the demand for coal - "oops". Coal use in NY is mostly concentrated in Western and Central NY, and there are only 3 coal based co-gen systems - Niagara Falls, Kodak Park (Rochester) and Syracuse. Most coal usage in NY and almost all Ngas usage is non-cogeneration, and so the only money obtained from burning these fuels comes from sales of electricity.

Right now, the prices needed to be barely profitable are about 3 c/kw-hr for coal, and about 6.5 c/kw-hr for a stand alone combined cycle Ngas unit that is about 45% thermally efficient (NY State average according to a Con Ed engineer). For a co-gen system, required prices could be about half of that - the difference made up by sales of steam. As for prices needed by nukes...these might be around 2 to 3 c/kw-hr, although huge and difficult to calculate subsidies are involved with those prices, too. Obviously, owners of these facilities would like higher prices, but due to the Great Recession of 2007-2010, electricity demand in NY has shrunk by 5.8%, and prices have collapsed to these near subsistence levels - details for 2009 can be seen by examining the NYISO 2010 Goldbook (for the year 2009), which shows significant numbers of generating facilities operating well below capacity. In fact, most of NY's electricity producing assets (37 to 42 GW) sits idle most of the time, seeing as average usage is only 15.8 GW (we import (~ 2 GW) some from Quebec, but that is not counted). For example, Jamestown's Ngas unit was used less than 2% of its 47 MW capacity (though the JBPU did receive money from NYISO for stand-by capacity - about $2 million/yr). This is not an isolated occurance.

Anyway, there are a number of subsidies for both coal and Ngas - especially coal. These include various tax subsidies/tax credits, and the lack of compensation to victims of particulate air pollution - notably particles smaller than 2.5 microns, mercury emissions, as well as acid gas (resulting in sulfuric acid/nitric acid pollution). Both coal and Ngas also emit CO2 air pollution (fossilized forms of carbon/carbon compounds burned and dumped back into the air as CO2).

For coal, tax credits/deductions and subsidies amount to about $12 Billion/yr - and are a very significant fraction of total coal sales of about $30 billion/yr. Next comes the medical costs of the particulate/acid gas/Hg - estimated to be $62 billion/yr by the Physicians for Social Responsibility. Finally, there is the cost of that CO2 pollution - estimated as at least $85/tonne of CO2 by the Stern Report. For the Appalachian coal used in NY State, one ton produces about 25 MBtu of heat and about 2.5 tons Co2/ton of coal. And given that about 1 billion tons of coal are burned in the U.S. each year, the acid gas/particulate/Hg toll costs about $62/ton of coal. The subsidies/deductions/credits also add up to about $12/ton of coal, on average. For a plant operating at 40% thermal efficiency, each ton of coal would make 10 MBtu worth of electricity (25 MBtu * 0.4), or about 2.93 MW-hr of electricity.

The total subsidies (including avoided externalities, which are a subsidy) would be worth about $287/ton of coal - which is much greater than current prices of $60/ton. At $60/ton, the raw material cost for a coal burning plant that gets 40% thermal efficiency would be near 2 c/kw-hr, while the subsides would be worth 9.8 c/kw-hr (approximately 10 c/kw-hr). Thus, the subsidies and external (and presently avoided) costs for coal, nationwide, are about $287 BILLION/yr, which is almost 10 times the $30 billion/yr spent on coal (about half of U.S. coal is from open pit mines in Colorado/Wyoming/North Dakota, and it retails for near $12/ton; it also has a heat value of near 9500 Btu/lb, or 19 MBtu/ton, or less).

At present, about half of the 410 GW (formerly 424 GW in 2007) of electricity sold (more is made than sold; some is consumed by self-generation/co-generation) in our country comes from coal, and in general, coal-sourced electricity is among the least expensive electricity made. If all subsidies given to coal were suddenly taken away, most electricity prices would move up to the level set by coal users (some exceptions are the regulated electricity markets, where transmission owners get to own generation facilities, and prices are set by state regulators on a cost plus allowed profit basis). Since NY is an unregulated market, prices for all electricity sold on a spot market/short term basis (that not covered under long term power purchase agreements) would zoom upwards by about 10 c/kw-hr. If even half of U.S. electricity sales were to experience a 10 c/kw-hr price rise, this would be approximately a $180 billion shock to the economy. Or about 30% of the petroleum price shock of 2007-2008. Given the fragile state of the economy, that is probably not a good idea. The added demand for Ngas would in turn raise the price of Ngas, adding to the shock.

For Ngas, subsidies via the well-depletion allowance are only about $1 billion/yr. The avoidance of clean up costs for depleted wells (especially tight shale wells) is difficult to quantify, and the same goes for proper disposal of "produced water" and spent fracking fluids. One proposed massive subsidy is for the Alaskan gas pipeline, which could be upwards of $20 billion, but this has not happened yet. Since methane in Ngas is a fossil fuel, burning it also creates CO2 pollution - about 122.5 lbs of CO2 per MBtu (o.06125 ton CO2/MBtu). Using the same value of $85/ton CO2 pollutant, the Greenhouse gas cost for Ngas should be about $5.21/MBtu. This is also more than the current spot market price for this material.

At present, the cost to transport Ngas to NY State is about $1.30/MBtu, so the delivered price on May 28 would be $5.59/MBtu. At a 45% thermal efficiency, a stand-alone combined cycle facility would have need a price of about 5.7 c/kw-hr to justify making electricity. The CO2 pollutant cost would be similar, at 3.95 c/kw-hr (close to 4 c/kw-hr). At present, Ngas prices are far below what the true replacement price is of about $10/MBtu. This meta-stable situation is temporary, and a "hangover" of GOMEX oil production and the bubble of 2007-2008. The $10/MBtu price would result in electricity priced at about 10.2 c/kw-hr without the full CO2 cost added in, or 14.2 c/kw-hr with the CO2 pollution cost added in.

A better idea would be to phase in this price increase over a 10 year period. This also makes for an easy model - coal derived generation costs for stand-alone (no co-generation) facilities would go up by one penny per kw-hr per year for 10 years, largely in the form of fees to the Federal Government; after all, they get stuck with most health care costs, and also most of the environmental cost. Ngas prices would need to rise by about 0.4 c/kw-hr per year, since less CO2 per delivered kw-hr is made using Ngas.

Using present day prices as the starting point, here is how generated (not delivered!) electricity prices would rise over a 10 year time frame, all in cents/kw-hr, Ngas1 is at a Henry Hub price of $4.29/MBtu, and Ngas2 is at a Henry Hub price of $10/MBtu:

Year......Coal........Ngas1......Ngas2

0 .......... 3 ......... 5.7 ............ 10.2
1 ........... 4 ......... 6.1 ............ 10.6
2 ........... 5 ........ 6.5 ............ 11.0
3 ........... 6 ........ 6.9 ............ 11.4
4 ........... 7 ........ 7.3 ............ 11.8
5 ........... 8 ........ 7.7 ............ 12.2
6 ........... 9 ........ 8.1 ............ 12.6
7 .......... 10 ....... 8.5 ............ 13.0
8 .......... 11 ....... 8.9 ............ 13.4
9 .......... 12 ....... 9.3 ............ 13.8
10 ........ 13 ....... 9.7 ............ 14.2

As can be seen, it takes at least 5 years before Ngas at its current depressed levels becomes equivalent to coal, while at the higher price, Ngas is always slightly more expensive. Some other things to consider are that as the demand for coal slips somewhat, prices will drop significantly. For example, if coal was to get repriced at $30/ton, the coal based price could drop by approximately 1 c/kw-hr, and coal and Ngas would not become price equivalent until year 7. Furthermore, as the demand for Ngas rises, so would its price. Another factor to consider is that Ngas can be readily converted into gasoline and diesel fuel; should that happen, Ngas would then be priced similar to oil, and coal would always be cheaper as a source for electricity.

The higher electricity prices will deter some electricity usage, but not that much. In addition, the delivered prices are composed of generated prices plus connection, delivery and demand charges, so the final delivered price will not rise at the same rate as the generated prices.

The Renewables Entry
In order to justify investing in renewable energy projects, the electricity "price floor" (set by coal and Ngas) must be similar to or greater than the price needed for renewable energy. In general, the only forms of renewable energy that would be competitive in NY State are wind, hydro, run-of-river, tidal, biogas and biomass. And in general, offshore wind and new nukes would be too expensive versus coal sourced electricity that is subsidy-free (~ 13 c/kw-hr). In NY, onshore wind would require about 10 to 13 c/kw-hr as a price; less if somewhat subsidized. Thus, wind turbines would not be used in any significant way until years 8 to 10 have passed. The alternative would be to subsidize wind while NOT subsidizing coal, which would probably not fly... And if old plants are kept on line until then, the result would be a "Business as Usual" scenario, with few, if any replacements of polluting plants brought on-line until year 8. Adding in the inflationary pressures that would come from higher electricity prices, it might actually be a decade before wind and coal become competitive. Note: at no time would solar PV ever be competitive. Furthermore, electricity is a significant cost component in the manufacture of PV panels, and raising electricity prices would raise the cost of PV manufacturing significantly (this is why PV manufacturers are always looking for super-cheap electricity provided by hydro or polluting technologies.

A possible approach that might be tried is to subsidize renewables using the proceed from pollution taxes/fees which were supposed to be used to offset the costs of pollution (health care, population migration, climate change costs, etc). However, this will become a battle over which renewables get subsidized. For example, the delivered capital cost of PV is about $50 million per MW net output; supplying 1 GW/yr of output via PV in NY could consume close to ~$40 billion/yr in subsidies. With onshore wind costing about $7 million/MW delivered (slightly more for less wind regions), supplying 1 GW would probably only require $7 to $10 billion. And with subsidies, the drive to become more cost effective would tend to be minimized.

The usual thought with regards to removing all subsides/getting external cost paid is to rebate the money collected (for example, the 10 c/kw-hr on coal usage) to consumers on a per capita basis. However, while this may stave off a recession induced by electricity price shocks, it would not provide any incentive to install more renewables.

The Feed-In Law Approach
Instead of raising the price on essentially all coal/Ngas derived electricity (which is ~ 70% of all electricity now made in the U.S.), Feed-In Laws work by another means. They allow the real costs of production plus a reasonable profit (and societally determined profit rate, too) to be paid for. By giving renewables preferential access to the grid and a price that is based on cost plus a profit, renewables prices become freed of any dependence on fossil fuel prices, and they get access to low risk, low cost debt and equity (resulting in lower cost installation). Initially there is often a lowering of energy prices due to the merit order effect (MOE). However, over time, electricity prices would become identical to renewable energy prices as the renewable energy content of the grid mix tends towards 100% renewable in a gradual manner. And as fossil fuel prices keep rising due to depletion (especially significant for Ngas), their usage would gradually (hopefully not TOO gradually) decline towards no usage.

The advantage of this approach is that significantly more jobs are created immediately, since renewables are profitable as soon as the Feed-In Law gets passed no matter what polluting fuels and pollution sourced electricity are priced at. The subsidy/external cost removal system would not create significant new renewable energy installations/new jobs until several years have passed, and the price of polluting energy becomes higher than the price of some renewable energy generation approaches.

And once the capital investment of the renewables has been paid off, the price needed to keep making electricity would drop by about 75% or more. This assumes that these systems would last longer than their rated lifespan of (generally) 20 tears. Based on the old clunker turbines installed in Denmark and California during the early 1980's, this would most likely be true. In some cases, minor upgrades/repairs could be done, and another 10 to 20 years of operation could be obtained. But, once they are retired and mostly recycled, the "normal" electricity production price would again be needed.

Conclusion
A sudden removal of all subsidies, and imposition of all external costs now avoided would impart a severe price shock to our economy, inducing another recession nationwide similar to what occurred in California during the Enron crime wave of 2000-2001 (see review of "Conspiracy of Fools"). Thus, removal of the subsidies and the payment of external costs now avoided would need to be gradually introduced - for example, over a 10 year period. Unfortunately, this would still not help get more renewable energy installed, and would not result in significant new manufacturing jobs for renewable energy systems for several more years.

In contrast, the Feed-in Law system creates jobs immediately, and in large quantities. The initial effect would be to lower prices in state where deregulated electricity markets are allowed (such as NY) due to the MOE, but over time prices would rise to meet the mix of renewable energy prices until their investment has been paid off, at which time operating cost of ~ 2 c/kw-hr could be covered with prices of 3 c/kw-hr. In fact, wind turbines that have their capital investment paid off tend to be as cheap to operate as a subsidized but paid off old nuke/old coal burner.

DB

Tuesday, May 11, 2010

Dear President Obama - About That NY Renewable Energy

Dear Mr. President,

As you do you whirlwind tour of Buffalo and presumably a Town Hall where there will be way more questions, comments and requests to/for you than there are hours in a month, odds are you will be asked about the intersection of two great current needs in this part of the world. These are:

1. Where will the energy to run things come from?

and

2. Where are any of those rumored to be jobs?

Essentially, and especially, where are those Green Jobs - aside from Ontario (more about that in a bit)? For the Buffalo area, these Green Jobs are far too rare (if they exist at all for the manufacture of renewable energy systems) and there are at least 30,000 people in the City of Buffalo that would like one that pays at least some money, if not at least a living wage. And that is just a low ball estimate.

Now, some of these Green Jobs are involved in energy efficiency - specifically, fixing up existing houses and buildings. It will be great when these are not like "energy sieves", leaking profuse quantities of heat to the great outdoors, which tends to be chilly for several months of the year up on America's North Coast. And while that is a great idea, the implementation has been far too slow for most people's liking, but rumor has it, some progress is being made on this front.

But, it's a whole different story, and not a nice one, either, with regards to the production of renewable energy in NY State. In case you do not know and have not been told, the renewable energy industry essentially collapsed in the summer of 2008, and more or less went into severe hibernation following the completion of the Sheldon High Winds and Whethersfield 2 wind farms in nearby Wyoming County, NY. Nothing (wind turbine wise) in NY State has been built since the winter of 2008-2009. Last month $400 million worth of wind farms (201 MW capacity) were canceled by Noble Environmental Power (a JP Morgan "derivative") because the low prices for "market priced" electricity did not justify the investment, even with the NY Renewable Portfolio Standard "bonus" of ~ 1.5 c/kw-hr for the initial 10 years.

Meanwhile, in Ontario (which has similar renewable energy resources to much of NY State), there is a massive boom going on with respect to renewable energy. This has been made possible with NO new governmental grants/tax avoidance subsidies and assistance - instead, it's happening via the Green Energy Act's Feed-In Law provisions. The recent award of ~$9 billion worth of contracts for 2500 MW of capacity (a lot of solar photovoltaic in this batch of contracts are going to receive about 70 cents/kw-hr, and they will be installed at ~ $7 million per MW of capacity - much more than the wind farm cost of ~ $2 million/MW of capacity and ~ 13 c/kw-hr for the purchased energy) is a pretty decent start on things.

It is like night and day. In NY, at present only old (and generally old polluting) energy sources are decently profitable (during the price spike of 2007-2008, they were obscenely profitable) - this is essentially old nuke, old coal and old, small privately owned hydroelectric facilities. But in Ontario, these new renewables energy systems (mostly wind turbines) will be used to shut down their coal fired generation units, and also to avoid another financially catastrophic (and stupid) investment in new nukes (the previous ones almost bankrupted the province with $30 billion in debt). In fact, a recent RFP for two nukes disclosed that it was more cost effective to install offshore wind turbines (at ~ $10 million per delivered MW of generation) than for new nukes (at ~ $12 million per delivered MW of electricity).

But it turns out that the MAIN reason the Green Energy Act was passed was to get some serious manufacturing jobs initiated in Ontario. The province had gotten hammered with the downturn in the automobile industry in the 2006 to 2008 time period - similar in number to what happened in Michigan. But, when North American car sales dropped by ~ 40%, and manufacturers had no paying customers for their products, well, massive unemployment and recessionary ripples were the inevitable result. And with the downturn in electricity usage (partly caused by factory slowdowns/shutdowns), and losses in provincial and banking revenues, no one could justify any new investments in manufacturing job creating enterprises, especially ones doing the world a favor and replacing polluting coal burning electricity plants with non-polluting renewable ones.

Enter the Feed-In Law. It replaces the "marginal based pricing" electricity system (well tuned to fluctuating fossil fuel prices) for renewables with electricity sold on an average cost to manufacture plus a reasonable profit basis. Prices for electricity are set by the technology, so that electricity made by onshore wind turbines is priced lower than that made by photovoltaics, and onshore wind is less expensive than offshore wind. Contracts between the grid operator (in general, Ontario Hydro, a government owned corporation) and suppliers (companies, single owners, cooperatives, etc) are set for 20 year terms, allowing the developers to access low cost (due to low financial risk made possible by prices actually defined over 20 years) equity and bank loans. So far, $9 billion worth of contracts have been signed for the first year. And there is also major investments in new transmission lines being undertaken (also job creating) so that even more renewable electricity can be installed and delivered to Ontario customers. So far, an estimated 20,000 jobs will soon be filled. Not bad for a start - only 30,000 more to go to fulfill the initial goals of the GEA.

And as a by-product, the renewable energy installed will actually be lower cost than could identical systems installed in an identical resource in NY State. That is mostly due to lower interest, longer term debt, lower required equity percentages, lower required equity returns (less financially risky), and the fact that more of the renewable energy systems will be manufactured locally (thus avoiding sometimes onerous transportation costs). In another strange twist, electricity prices will actually drop via the "Merit Order Effect", with the addition of some more expensive renewable electricity - an artifact of the "marginal pricing". And then there is the offshore wind proposed - up to 20,000 MW in lakes Ontario, Erie and Huron. This energy will also allow for the replacement of coal burners and the avoidance of natural gas consumption to make electricity, creating jobs at no loss in revenues to the government. In fact, those new jobs added and the new businesses formed will result in greater tax revenue.

So, such an arrangement would be really nice of NY State. In fact, short of governments either subsidizing via grants, tax avoidance and operating subsidies (and probably not the NY State one, as we are way less than broke thanks to "Bu$h the Tooth's" legacy of "The Great Recession"), no renewables will be installed in NY until prices recover (and for a significant time, too) to their 2007-2008 levels (about double present levels). And by then, most hope to get those renewable energy systems manufactured in NY, with associated new jobs and businesses, will be gone, since already established manufacturing capability will exist in Ontario, as well as Quebec (they use the government electricity monopoly Quebec Hydro issuance of big Power Purchase Agreements (PPAs) to install wind turbines, with mandated local manufacturing).

So how could we get a Feed-In Law in NY? Well, it would be nice if you could call up several key NY State legislators (Assembly, Senate, especially those in the Energy Committees) to pass NY bills A187 and S2715. Maybe you could have a constructive word with our Governor. Or maybe you could have your aids and key officials do this on your behalf. That would be a nice start. And if a bill comes out of the U.S. House and Senate that modifies the byzantine 1935 Federal Power Act and the "recent" update, the PURPA law, which allows Feed-In Laws unambiguously in states that choose this option, well, please sign it.

Otherwise, if you come to NY and talk Green Jobs, but nothing is done to get rid of the crazy arrangement where renewable electricity prices are set by polluting electricity sources (oil, natural gas, coal and old nukes), there won't be any Green Jobs involved in the manufacture of renewable energy systems for installation anywhere in NY. Your audience will roll their eyes, groans will be heard as the crowd's collective impatience is tested. And then you will be off to some other locale, with aids left to deal with the mess. You might not even ever get why the crowd would be so cool and stand-offish to what should be a real popular message. After all, most people really do prefer renewable energy to polluting energy, and they really do want renewable energy jobs. But endless promises of that which is never delivered - and in NY, Green Jobs CANNOT be delivered to any significant extent under the current arrangements/laws/incentives/"legal bribes" (tax avoidance incentives like tax credits, tax deductions) to the really, really rich) - well, as my favorite band in known to say, "It gets to wearin' thin".

from http://jimbaker.files.wordpress.com/2008/04/gratefuldeadls1.jpg

So, if you really want to see Green Jobs made in NY and renewable energy systems made and installed all over NY, please start working that phone....

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