Sunday, August 28, 2011

On the Strategy of Replacing Coal with Natural Gas - Try Wind Instead

Introduction
A lot of environmentalists and their organizations as well as "leading" think tanks/thinkers and the like have pursued a strategy of "bridging" the transition from coal based electricity to renewable based electricity with natural gas (Ngas) based electricity. Some even bought the line about nukes being less environmentally nasty than coal, and this triage mentality thus made room for nukes, or at least resulted in lessened opposition to them. It's a "do a bit less harm but not a lot less harm" concept, and even Jim Hansen bought into it with nukes, at least pre-Fukushima. Unfortunately for many of us, reality has dealt that "do less harm" a nasty punch in the proverbial hurting zone, at least in NY State, especially when coupled to the con-job of the decade (but hey, the decade is still young...), which is tight shale gas from the Marcellus/Utica formations.

And as it turns out, natural gas (Ngas) is now essential.... to the above average profitability of old coal and nuke sourced electricity. Without at least some Ngas in the mix, or with increasing amounts of wind power in the grid mix, prices for coal and nuke based generators stay low, and profitability is merely average or less, which is a heretical concept in corporate circles. Adding in more Ngas usage into NY State's electricity mix increases the price of electricity and especially the profitability of those other pollution sourced electricity producers. More Ngas consumption depletes reserves of Ngas faster, keeps Ngas prices higher, and also increases the prices residential and commercial users of Ngas for heat have to pay for their heating fuel. Plus, once Ngas using generators have been built (especially gas turbines, which cannot use coal or solid biofuels), owners want to keep them operating, especially in profit-making modes, and the coal and nuke based generators MOST CERTAINLY WANT THEM TO STAY OPERATING, if only for a small amount of time.

Maybe it's time to quit kidding around. If eliminating the pollution by-products from electricity is actually the goal, it is time to end the Ngas "bridge" charade, and go for the (mostly) wind-tidal-pumped hydro route in NY State. Besides, due to the high percentage of "fugitive" methane that escapes during the fracking process, there is effectively little to no benefit to using fracking sourced Ngas to make electricity versus coal (close to the same greenhouse gas global warming results, especially in the initial 20 years) with respect to greenhouse gas/climate warming potential. The only way to minimize pollution in NY associated with electricity production (rad waste generation, the occasional (but far too often) Fukushima-like radioisotope belches, CO2 pollution, particulates, CH4 pollution, etc) is to generate electricity via renewables, and as required, use pumped hydro (mostly) as a temporary electric energy storage route. Odds are, that also means changing the pricing system we have for renewables in NY State, but if a basket case (of conventional electricity policy "wisdom") like Japan can change (they introduced a Feed-In Tariff (FIT) system on August 26, 2011), maybe there is hope for NY State, too....

Discussion
In marginal pricing based electricity systems such as NY State has (also referred to as Locational Based Marginal Pricing, or LBMP), the highest priced generation of the total variously priced "blocks" of electricity needed to satisfy an hourly demand sets the price for all electricity for that hour. For example, even if 95% of the electricity for that hour is priced at 3 c/kw-hr and 5% is priced at 10 c/kw-hr, all electricity is priced at 10 c/kw-hr for that hour. However, if demand was completely covered by the lower cost electricity (in this case, 3c/kw-hr), the price would be 3 c/kw-hr for that hour. The highest priced generation comes from oil, followed by Ngas, wood, trash, coal, nukes and finally hydroelectric sources. In general, very little fuel oil is used these days, as it is much more expensive than Ngas (it helps to use common thermal units, such as dollar per million British Thermal Units, or $/MBtu); in 2009, oil supplied less than 1% of NY State's electricity supply, which in turn was 50% of 2008's fuel oil usage value. These days, oil usage to make electricity is pretty rare, a victim of "demand destruction", due to it's high price relative to everything else. The next highest cost way to make electricity is to use natural gas in an inefficient manner (the more inefficient, the more costly, such as in back-up gen-sets that are about 25% efficient), and the least expensive way to use Ngas is to use it via co-generation, where both steam produced and electricity made can raise the thermal efficiency to nearly 85%. When the by-product steam cannot be sold/used, the most efficient way to make electricity from Ngas is via a combined cycle system (a system composed of a jet engine and exhaust heat recovery unit used to make steam for a steam turbine), which have efficiencies averaging 45% in the Con Ed region/perhaps 50% in colder regions.

In regions such as Western NY, the use of dedicated stand alone combined cycle systems powered by Ngas (NGCC) has largely become irrelevant; in 2010, less than 2.6% of regional electricity was supplied (46.1 MW out of 1762 MW) by Ngas, although some on-site generation was made but not sold into the grid (on-site generation). Thus, of the 566 MW of Ngas generating capacity, only 8.14% of that capacity, on average, was used. This small amount could have easily been displaced from any one of the three major coal burning facilities (Dunkirk, Huntley or Somerset), all of which operated in the 50% to 60% range, on average. However, if the Ngas facilities were shut down and their electricity was replaced by the coal burners, the result would have been LOWER wholesale electricity prices (Ngas is a more expensive way to make electricity, even when Ngas wholesale (hub) prices are quite low by historical standards, near $4/MBtu). With lower prices comes lower profits, and since these are for-profit companies extracting the Ngas from the ground, lower prices would not have allowed for that "Mr. Happy" feeling to be on display..... For WNY, even for those rare "peak times", Ngas usage could have been much less than was actually used, especially when supplemented by the 240 MW Niagara Falls pumped hydro facility (but more pumped hydro would be good to have...). However, by retiring many of the boilers at Huntley (4 of them at 86 MW each, total of 344 MW) and one at Dunkirk (86 MW), as well as by eliminating most co-generation possibilities (in 1998, Niagara Mohawk bought out 44 producers at a cost of nearly $3.4 billion), the probability that some Ngas sourced electricity would be needed on the NYISO spot market has been raised considerably. And this is great for the profits of the NRG (Dunkirk, Huntley) and AES (Somerset) Corporations. Furthermore, while there was a slight reduction is coal usage for WNY when Ngas was used to make 46MW, not much coal usage is avoided. In 2009, coal provided about 1066 MW of our regional (NYISO Zone A) electricity, or about 23 times as much as with Ngas based generators. The increase in particulate, acid gas and heavy metal poison pollution if that Ngas was replaced by coal, as well as CO2 pollution, would be pretty small....

However, that small usage of Ngas raised the price of electricity by close to 0.7 c/kw-hr (let's assume 0.74 c/kw-hr = $7.4/MW-hr). And while that may seem small, that cranked up the price to an average of 3.94 c/kw-hr from close to 3.2 c/kw-hr. That adds up to $114 MILLION last year ($7.4/MW-hr * 8760 hours * 1762 MW). But, at an average Ngas delivered price of around $6/MBtu and an efficiency of about 45%, a bid price of around 7 c/kw-hr (cost is about 6.1 c/kw-hr), the 46.1 MW of Ngas sourced electricity would have required the consumption of close to 3.06 million MBtu's of Ngas, at a purchase price of about $18.4 million. WNY electricity prices were about $114 million higher than they would have been without this "marginal pricing system", assuming that coal based electricity could have sold for 3.2 c/kw-hr at "minimal profit pricing". After all, in 2008, coal retailed for $57.81/ton with an average heat value of 11,248 Btu/lb; the "raw material price" would have been nearly $21.9/MW-hr (or about 2.2 c/kw-hr) for a plant that was 40% thermally efficient. The "cost" of that Ngas based electricity if it was priced at 7 c/kw-hr would have been $28.3 million. Note: all electricity producers also get additional revenue from the NYISO grid, such as "ICAP" and "UCAP", which is basically money paid annually for the ability to produce additional electricity on demand, or to just provide a known quantity over the course of a year. These fees can be considerable, and help offset low LBMP prices. An estimate of their value is around $62,500 per year per MW of generation capacity, although those these are also "bid" and subject to change. For the AES plant in Somerset, these could be worth about $40 million/yr, and for all of the coal burners in NYISO Zone A , this would have been nearly $111 million.

Maybe that's a lot of facts to digest, so let's recap. To make an average of 46.1 MW of electricity, about $18.4 million worth of Ngas had to be purchased at an average delivered price of around $6/MBtu. If this 46.1 MW was made for about 6 c/kw-hr and sold for around 7 c/kw-hr, that would have cost $28.3 million. And yet, electricity prices were yanked upwards by $114 million (from 3.2 c/kw-hr to 3.94 c/kw-hr) just to provide 2.6% of WNY's electricity. The coal burners got an estimated $7.4/MW-hr more for their electricity than would have otherwise been the case (last year the WNY average electricity price was 3.19 c/kw-hr). For them, that is an added $69 million in extra revenues for 2010. As the saying goes, "sweet"....

And now, along comes fracking, since conventional Ngas wells are getting tapped out in the US and Canada, despite the large increase in Ngas made as a by-product of oil production in the Gulf of Mexico (GOMEX). That oil tends to be loaded with methane; the Macondo well (BP blowout in 2010) was about 50 wt% methane. So called "unconventional gas" (tight shale, tight sandstone, coalbed methane, coal derived syngas to methane) is now providing around 50% of the methane used in this country, and that percentage is increasing - see http://www.theoildrum.com/files/Navigant%20NG%20Forecast.png. In some ways, this is a corollary to "Peak Oil", as over 45% more gas wells are needed (2009) to supply essentially the same quantity of Ngas as was made in 2000. This is a classic example of "running harder to stay in place", and an indication that it is time to get off of the treadmill...


Source = http://www.theoildrum.com/node/4436

There are a number of problems associated with fracking, not the least of which is the high cost needed to tap into the rapidly depleting (3 to 4 years maximum) amount of methane obtained from such wells, which translates into a required price now near $10/MBtu (but current Henry Hub spot prices are near $4/MBtu....). Then there is the degradation of infrastucture (notably rural roads), the need to deal with all that water pollution, the needed quantity of pipelines to constantly be added (since fracked wells rapidly deplete, more wells and more "feeder" piping needs to be installed) and associated water pollution/air pollution that goes with the fracking business. And then there is emanated/"escaped" methane... so much methane escapes in the fracking process (about 7% of the total extracted from a given well) that the net greenhouse gas effect for this methane (assuming it is used to make electricity in a combined cycle, non co-gen facility) is worse than burning coal to make electricity in s similar non co-gen facility for the initial 20 years. By year 21, about 75% of the escaped methane gets converted by sunlight and oxygen into CO2 and water, so the intense infared absorbance by methane is not so much a problem.

Since the demand for Ngas for heat is declining in the residential (greater efficiency, lower thermostat settings), commercial (poor economy, greater efficiency) and industrial (fewer factories, greater efficiency, poor economy) heating sectors, the only growth market for now is Ngas for electricity generation. However, Ngas is unlikely to ever be cheaper than coal as long as the coal is burned in an existing, largely or fully paid off facility, especially without significant CO2 pollution fees (upwards of $50/ton of CO2; RGGI "fees" are now less than $1.80/ton these days). And while a new nuke would never be able to compete with a new or existing Ngas facility, fully or mostly paid off nukes produce electricity very cheaply (especially due to enormous subsidies for nukes), so an Ngas sourced electricity producer will never be able to compete directly with an old nuke. However, in markets like NY, Ngas, coal and nukes can act together very synergisticly, maximizing profits for owners while "giving the business" to consumers. Unfortunately for Ngas producers, not too much Ngas is required to maximize coal and nuke sourced electricity generation profits.

In order to boost Ngas prices, the demand and consumption of Ngas has to increase by between 2.5% to 5% from 23.4 trillion cubic feet/yr (tcfy) to upwards of 24.5 tcfy or else the supply has to drop (as in less drilling until excess capacity is used up) by close to 1 tcfy. If such a "Standard Oil rationalization" approach occurs, Ngas prices could rise to near $10/MBtu, and once again "unconventional" Ngas would be profitable. Of course, when this happens, a big chunk of the American economy will take a major hit, as money formerly used for other things will instead be diverted to Ngas producers. Those with low cost (old conventional fields, GOMEX oil producers with significant by-product Ngas production) will obviously make a killing, since that extra price will directly translate into profit (money for nothing, so to speak). The net effect will be a newly imposed sales tax of $138 billion/yr, transferred from most of us to the owners of a tiny fraction of our economy. It will promptly induce a mini-recession, or slow down any existing economic growth, too.

Of course, if Ngas consumption in the electricity producing sector drops, prices for Ngas will stay low and perhaps even drop more, and the rush to do expensive Ngas extraction of "unconventional" gas will slow down significantly. One way to do this is to keep replacing the use of pollution based electricity (Ngas, coal, nukes) with wind based electricity. Usually when new wind capacity is added, the most expensive form of electricity production gets shut down when growth in electricity is essentially stagnant (as is the present situation). Almost invariably, this most expensive stuff is Ngas sourced electricity. Furthermore, even if prices for Ngas miraculously rise (at least to holders of Ngas reserves) to $10/MBtu, in much of the U.S. that will stimulate wind turbine installations. the $10/MBtu is one of those "threshold points" where wind becomes a less expensive way to make electricity, even if all Federal subsidies for wind energy were eliminated.

Of course, why stop at replacing Ngas, and continue on with replacing aging nukes and old coal burners with any combination of biomass, biogas, pumped hydro electrical energy storage, wind, tidal, geothermal and when conditions warrant, with solar. After all, that was the plan in the first place, wasn't it? But at present, the Ngas industry and especially the frackers are desperately trying to convince America not to switch from Ngas to renewables. They want to make that "Ngas bridge" between nukes, coal and other assorted polluting sources of electricity and renewables as long as possible by pushing it far into the future. Even if it trashes our economy and our climate, too.

It turns out that the concept of using the "Ngas bridge" seems to have been a strategic blunder by many well meaning people and well meaning groups. In NY, that blunder also increased Ngas prices for residential heating customers, as well as Ngas heating costs for their commercial and industrial employers, too. And it cranked up the profits that could be obtained from coal and nuke sourced electricity, making it LESS LIKELY that these facilities would be replaced with ANYTHING, let alone renewables. Oh well...

Conclusion
Anyway, more reasons to install a Feed-in Tariff system ASAP, as it would drop prices for electricity (Merit Order Effect) as long as the bulk of the renewable sources were low cost (i.e. not solar) and also drop prices for Ngas based heating, all without the need for subsidies from taxpayers (direct grants and/or tax avoidance opportunities for those who pay a lot of taxes. It also has the capability of stopping the fracking epidemic in its tracks by keeping Ngas prices low for the next several years by suppressing the consumption of Ngas.

Sound like a Plan? What are your thoughts?

DB

Some references:
http://www.eia.gov/cneaf/electricity/st_profiles/new_york.html for oil, gas, coal prices
http://www.eia.gov/dnav/ng/hist/na1170_nus_8a.htm for Ngas well numbers

Friday, August 19, 2011

A Keynesian FIT - A Cure for What Ails Us Nowadays

Summary
At the present time, renewable energy generation investments that use Feed-In Tariff (FIT) pricing systems appear to be the best systems devised to promote employment in the manufacture of renewable energy systems as well as providing renewable energy at the lowest real cost. They require no tax subsidies/grants from governments, and they make renewable energy projects "bankable" at any scale - including ones that range from a few thousand dollars (residential rooftop photovoltaic) to offshore wind projects in Germany that cost in the neighborhood of $US 1.5 to $US 2 billion. These projects become bankable because the prices (based on electrical production cost plus a reasonable, socially determined return on the investment) are fixed for long terms (usually 20 years) and "economic curtailment" (cutting off grid access to the renewable energy provider when prices are deemed "too low" or even negative) is not allowed. As a result, the risk of project developers defaulting on their bank loans (up to 95% of the project) is very low, and this allows for low cost, long term loans, and the use of "less expensive equity" to be used.

When projects are financed by debt, and the sales of electricity over a long term are used to pay back these loans, that is economically stimulative. It is analogous to the government going into debt (issuing bonds) to finance socially useful investments, such as hydroelectric projects, road, bridges, sewer and water systems, rapid transit that does not use or and gasoline, etc. In fact, when NY State built the Niagara Falls power project in the 1956 to 1960 period (after the old one fell into the Niagara Gorge), this was a Keynesian stimulus. The bonds for this (NYPA bonds) were repaid via the sales of the electricity made - look, no taxes! However, getting repaid for water, sewer, schools, roads and other projects that make our lives better via taxes also fits the Keynesian bill.

In either case, money is created when businesses, individuals and governments go into debt to build things. This creates a demand for manufactured things (steel, concrete, etc), and that also creates a demand for labor and other things. This economic boost can get countries out of a deflationary death spiral, which happens when interest rates are near the zero point and yet businesses still won't borrow to make investments, because they don't perceive that there is the demand for their products or services needed to justify those investments. So people don't get hired, and those lucky enough to still be employed are busy saving money in case they too get unemployed (due to lack of demand), thus perpetuating this dreadful arrangement. The Keynesian Stimulus will get economies out of that horrible quicksand of insufficient demand. They work, whether private and/or public debt. The trick is not to do foolish investments, like betting on the price of tulips or dubious internet stocks, or even more foolish bets on which way stocks will go, or whether bonds based on fraud will get repaid.

So, if a massive renewable energy effort is initiated, and no government debt is incurred, this will start off an economic stimulus. And since these are real wealth creation efforts, ones which avoid consumption of fossil fuels that we either often import and/or subsidize via tax credits, deductions or via avoided external costs (somebody does pay those, just not the owners of those using or selling the fuels), this is not a wealth destroying operation, like the recent sub-prime fraud epidemic was. Look, economic stimulus and with no new taxes and it also makes energy without CO2 or particulate pollution or the possibility with a Chernobyl/Fukushima FUBAR, too! Cool....

Sign me up for some of this good stuff.....

Introduction
John Maynard Keynes was a famous British economist and intellectual who played a key role in the recovery from the Great Depression. A detailed history and discussion of him and his ideas can be found at http://en.wikipedia.org/wiki/John_Maynard_Keynes. One of his key insights concerned the ability of an economy to recover from a "demand shock" (a sudden lowering of economic demand) that often results when excessive financial market speculation (Ponzi schemes, frauds, bad bets, epic wide-scale theft by bankers of their customers deposits, etc) "bubbles" pop. The conventional (classical) theory (and soon that of Monetarists) was that an economy would rapidly come to the equilibrium of "maximum utility" without help from governments, but The Great Depression and the present "Great Recession" showed that concept to be false. Keynes showed why "sub-par" outcomes could result for very long periods (decades), and why government had to step in and raise demand to avoid a "deflationary death spiral". Much of his theory is based on a rejection of the "rational actor" construct, by entering/integrating insights from psychology and human behavior into economic theory. After all, economies are the construct of human beings.....

When Roosevelt became president in early 1993, the effects of 3 years of austerity as formulated by Andrew Mellon (a very wealthy banker and then US Treasury Secretary for Herbert Hoover) had proven to be a massive failure. Instead, Keynesian policies were tried, where the government became the purchaser and employer of last resort. Some initial policies, many carried out by Harry Hopkins, put millions of unemployed people to work building dams, roads, bridges, government buildings, schools, auditoriums, and doing public art (Federal Emergency Relief Administration = FERA, Civil Works Administration = CWA, Works Progress Administration = WPA), and thus avoided widespread starvation, death by freezing (no money, no heat) or associated diseases on cold, starving people. Usually, when things get that bad, violent uprisings occur, as people tend not to like to die from lack of food, water and heat, especially when some (the wealthy) are doing fabulous; Keynesian policies were thus an antidote to violent revolution and the associated violent repression (often paid for by wealthy people, or else enforced via armies and police) of such outbreaks of resentment by mass quantities of impoverished people. Soon, institutions known as Hoovervilles (encampments of homeless people living in tents) became much rarer. Giving millions of people jobs (and money in exchange for their labor) stimulated the demand for manufactured items (steel, concrete, housing, cars, for example), and these newly employed could actually afford to buy things, like food, housing, pay rent, buy cars, etc. It brought the economy from the steady and rapid declines of 1929 to 1932 to actually an expanding situation from 1933 to 1938 (austerity introduced in 1938 created a recession, though not a depression), which was eventually cured by WW2.

The Present Problem
Right now (August 2011), one of the major problems facing much of the world and especially the United States is the lack of Economic Demand, also called Aggregate Demand. This is exemplified by excessive unemployment, massive under-use of productive capacity (factories sitting idle), low prices for electricity and natural gas, and real wages and median incomes that are dropping with respect to inflation. Basically, producers of things are having a hard time selling what they are presently making, since customers no longer have the money to buy stuff at the rate they used to (US car sales are about 11 million in 201o, and were 17 million in 2017), and especially at the prices they used to buy them. The housing glut and the failure of housing prices to stop falling/rebound to former levels and result in additional sales is also emblematic of a collapse in demand, or a stagnant one verging into a collapsing one. And since customers are not buying, producers are not making, and they are not hiring people to make stuff or provide services. And since the bulk of Demand is made up of the purchases by those receiving wages, this is quite the circular firing squad.....

So what to do about this situation? One way to stimulate Demand is to lower interest rates, but for the US government, short term T-bills (3 month) now go for essentially 0.25%, and 10 year ones are now selling with less than 2% interest rates. In effect, we at at the "zero interest bound"; lower rates are only possible if the government PAYS people to store money (negative interest rates), which is an absurd arrangement, especially when we have a national debt of over $14 trillion, and paying people (and mostly rich people, too) to store money instead of using it to pay down the debt or for now, just to rack up less debt is ridiculous and morally obscene.

So, looks like the Monetarist solutions (adjusting the money supply by adjusting interest rates) are now inappropriate. Loaning people more money, even at really cheap long term interest rates, just won't work when those people have inadequate income to pay back those loans, and they have insufficient income due to the combination of the lack of jobs and higher cost of energy, notably petroleum. Additional factors, such as higher costs related to health care, college educations and many other items, as well as the increasing costs associated with a climate mutated to a hotter mode via the CO2 pollution that comes from burning fossil fuels does not help the situation, either. So fewer loans get taken out, and less stuff and services get purchased. And down the spiral we go....

The Keynesian FIT
At present, a manufactured distraction about "the US Debt Crisis" has nearly brought calamity onto the world financial markets, when conservatives and "teabaggers" threatened to have the US. default on its debts/obligations committed to in past times. This would have thrown millions, and possibly tens of millions of those employed in the US out of work, rapidly, when US debts were no longer considered safe, and by extension, just about all state, local and corporate debt, too. The price for passage of a $2 trillion debt extension was forced austerity, especially in coming years. More than 1 million people will either not become employed or be thrown into unemployment as a result of this ill-considered policy by Republicans and epic cowardice/excessive caution (take your pick) by the Obama administration. Furthermore, a poorer future economy (especially leading to the 2012 Presidential election) seems to be the intended purpose of this Republican congressional action. Of course, the poorly performing economy will collect fewer taxes as less people are employed, and this will actually ACCELERATE the rate of debt piling up. And more austerity will lead to the results presently being experienced in much of Europe - continuing impoverishment, economic decline and inability to pay off loans to foreign banks/creditors.

So, by not going into debt and using that borrowed money (especially at today's low interest rates) to employ people, the government deprives itself of future revenues, insuring greater future debts, as well as greater expenditures for food stamps, unemployment payments, medicaid, etc (assuming we wish to avoid Hoovervilles filled with desperate starving people). And the winners in the current economy - the upper 2% who have seen their incomes and wealth rise dramatically in recent times - can't find any money making investments that will employ people, due to insufficient and possibly declining demand. And they can't or won't ("they already have two of everything") spend their money fast enough for a "trickle down" effect to become meaningful. And one of their prime choices - loaning money out to poor and middle class people who will try to maintain current living standards not possible to sustain via constant or shrinking real wages - becomes a money loser when these borrowers can't pay back the loans. This sorrowful situation is described in a paper written by the International Monetary Fund employees, no less - see http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf. The paper shows that as the income and wealth inequality in our country INCREASES, our economy becomes LESS STABLE, and more prone to "crashes", panics, recessions and then whopper recessions known as depressions. And the way to cure this is to produce more real wealth and distribute it to the lower and middle classes (as in create useful work and pay fair wages for this work), so that the lower and middle classes are not driven into "debt slavery" with no chance of paying it back. After all, when they don't pay back their loans because they have no income to do so, bad things happen, both to people (such as increased impoverishment, homelessness and alcoholism) and to economies, too. And this can percolate through the economy in many ways - such as when students can no longer pay back loans taken out for further education - overcoming this situation (very relevant for Buffalo, for example): http://www.nakedcapitalism.com/2011/08/bryce-covert-recession-has-lit-the-fuse-on-explosive-student-debt.html. And besides, money has an odd habit of "trickling up", not down, the income scale.

But, since increases in Federal debt to employ people is now FORBIDDEN by Republicans, what can be done?

Creating Money
Money actually gets created anytime someone or some entity (governments and/or businesses), takes out a loan. One way to do this is via "futures contracts", where someone pays a supplier now for an item (corn, oil, electricity, orange juice) that will be supplied at a set price at a future date. The creation of millions of Residential Mortgage Backed Securities (RMBS) in the 2002 to 2008 era was also a massive "money creation" effort that worked until the homeowners (those paying the money to the banks and trusts that owned the RMBS) could no longer afford their payments. Another money creation was the CDO's (Collateralized Debt Obligations) which more or less served as as insurance on RMBS's. When about 5% of the mortgagees could no longer make their RMBS payments, the entire system underwent a massive collapse. The payments could not be maintained because the combination of stagnant wages, higher oil prices, education and health care costs as well as the high cost of "adjustable rate mortgages" whose rate ballooned upwards after a few "teaser years" were greater that incomes from wages. Add in higher unemployment, and PRESTO - massive recession. Of note is the critical effect of the spike in energy prices from 2007 to 2008 (oil, coal AND natural gas, plus electricity) in this "Black Swan" type event.

Another way to create money and debt is with the electricity system. If companies take out loans to pay for improvements/repairs in transmission systems, and also for renewable energy electricity making systems (which require no fuel purchases, and is VERY important these days), and those loans and investments are paid for via sales of electricity for a 20 of more year time length, this also works to "create money" and well as to create wealth (the renewable energy generation and transmission equipment, which will probably last 25 to 50 years, and which avoids the purchase of fuels). As long as the risk of non-repayment of the loans/investment is small (which can be arranged for this industry), the cost of that money (interest rate, term of loan/investment) can be low, and thus the yearly repayments of the incurred debt can also be minimal due to the high likelihood of repayment. It would be as if the government were issuing bonds to produce and distribute electricity (which can also be done). Both have the same economy stimulating effect, and both can also make the world a better place as a result of these investments, especially if the electricity production is done with renewable (non-depleting) and non-polluting (no fossil fuels or nukes) approaches.

Renewable energy systems like wind turbines have very predictable future energy production rates. And since they use no fuel (methane, coal, oil, nuclear), fluctuating fuel prices have essentially no impact on the cost to produce this energy. There is also zero danger of nuclear mishaps with renewables; the downside of nukes can be seen in the recent Fukushima FUBAR, which is likely to result in close to a million cancer deaths, and several hundred billion US dollars in economic losses. There is also no waste disposal problem with wind turbines, and also no water usage to deal with/pay for. In other words, this can be a very safe and stable investment, provided the price is kept sensible and close to or actually constant. The trade off for this sensible pricing to the owners would be stable, sensible prices to consumers. The stable prices would mean no great discounts when gas prices collapse, but not great price spikes when gas prices surge, either.

And that's where Feed-In Tariff systems for renewable electricity pricing come in. Renewable energy investments become pretty safe (and for speculators, less desirable, because they only return average rates of returns that are associated with legal, less risky investments), because with predictable annual energy outputs, known prices and no "economic curtailments", a predictable flow of money to the renewable energy producer would result. And this means that bankers and investors can get repaid. Which is all they care about, or at least their primary concern. And since the capital repayments are between 75% to 90% of the cost of most renewable energy systems, this is an important way to get rid of a lot of extraneous extra cost for renewables. Such systems are proven as workable, and are responsible for the majority of renewable energy production and investment in the world, to date.

And on August 26, 2011, Japan passed feed-in law legislation, despite intense opposition from the nuclear industry. But, after 3 full scale meltdowns/core breaches, they don't have much say in this matter any more. Japan will attempt to not only replace all of their nukes eventually, but the several of them now idled (imported fuel oil and liquified natural gas are being used to replace the electricity either not made or not "conserved" by these shut down units, of which there are a lot more than the 6 at Fukushima). They are also going to try and prod their stagnant (but still quite prodigious) economy in this manner. It is a shame that so many people had to be poisoned (hundreds of thousands, if not millions have been "nuked" with fallout) before this more sensible route of Feed-In laws was passed.

Conclusion
Well, there you have it. If a region like Western New York wants lots of real wealth creating jobs that will boost up the middle class and employ mass quantities of unemployed people, this Keynesian FIT option can do it. And if most of this is focused on the lower cost renewables (wind, tidal, biogas, biomass), as these generation sources are incorporated, natural gas followed by coal and nuke based generation - notably the Indian Point "twins" now endangered by a 10 to 15 foot tall tidal surge coming up the Hudson River on a full moon care of Hurricane Irene (think tsunami at Fukushima) - can get replaced, and electricity will still remain affordable. And with our vast pumped hydro storage potential (also job creating, as we will need more than the Lewiston and Blenheim-Gilboa sites for this, but we have lots of hills co-located with water sources...) and inter-connection with other grids (Quebec, Ontario, New England, PJM, MISO), the short term variability of winds, tides and sunlight should be a surmountable problem.

Odds are, employed people who can afford the real cost of electricity is a better situation than unemployed people who can't afford subsidized pollution based electricity. Besides, a nasty dose of Cesium-137 will render much of NY's real estate wealth worthless, as will the rising ocean levels and "super-canes" spawned by Global Warming. And if you think we are going to install the required amounts of renewable energy capacity in the next decade without Feed-In Laws or the "Quebec Option" (or both), well, how would you like to buy a condo near Daiichi/Fukushima, Japan? Waterfront is now really cheap in that part of the country....

Saturday, August 13, 2011

The Poor Standards of Standard & Poor's

......... W. C. Fields, in "My Little Chickadee" - Some advice: Never bet against this Card Shark!
Source: http://cache2.allpostersimages.com/p/LRG/37/3706/1TCAF00Z/posters/my-little-chickadee-w-c-fields-1940.jpg

Introduction
As many of you might have heard, Standard & Poor's (S&P), a division of the McGraw-Hill Publishing Corporation (and whose CEO is also head of an organization called the Business Roundtable), which makes money rating bonds and other financial instruments, downgraded the U.S. Debt rating on Friday, August 5, "after hours". The downgrade dropped the U.S. bonds from the best and safest in the world (AAA) to the almost best in the world (AA+), at least in S&P's eyes. However, come Monday morning, investors rushed to buy U.S treasuries, raisng the price of bonds (and thus lowering the interest rate to be paid on them), and in effect, showing S&P's analysis to be "D " grade, which is as low as it goes on the bond rating scale (also called "junk status"). In theory, if the downgrade meant anything, prices on T-Bills should have fallen, and the interest rates on those bonds should have risen, but that did not happen. However, the stock market and the values of stocks and various indicies based on those stock took a net drop over the week (more on that, later). In other words, the "flight to quality" route was to go from investments in private companies (stock and corporate bonds) to U.S. government bonds. At present, 10 year long T-bills are going for less that 2.2%, and 3 month long ones are essentially at 0%. And there is a long line of buyers trying to get their hands on some of those. Well, in a period of horrible economic times when economic demand is close to non-existent and the potential for a "double dip recession" and a "deflationary death spiral" are unacceptably high, T-bills with puny interest rates are looking like the best thing available to put cash (as well as things that get sold for cash, like stocks, corporate bonds) into these days.

Well, in theory, that's capitalism "speaking" and the "voice of the market" in action. So who would pay for advice from those useless hustlers, con-artists and grifters at S&P that pass themselves off as analysts, anyway, unless you wanted to know what NOT to do? The other two big ratings agencies (Moody's and Fitch) kept the bond rating of the U.S. at AAA. And in making the downgrade, S&P was off by $2 trillion in THEIR estimate that the U.S. was going to be $4 trillion further in the hole by some future date. Oh well, this is the same firm that was rating "toxic" sub-prime residential mortgage backed securities (RBMS bonds) as "AAA" for much of the last decade, until that house of cards imploded (along with Moody's, Fitch and others). It turned out that S&P was being paid to lie about the stability and value of these RBMS bonds by the banks who were compiling these disasters in waiting and selling them off to suckers made "unsuspecting" by those wonderfully reassuring S&P "AAA" ratings. So, S&P has a problem with accuracy, credibility, ethics and honesty - no big deal, right, they all behave like that, right?

And besides, what has this got to do with the wind industry?

DISCUSSION
Actually, a lot. The wind industry is a very capital intensive business, where yearly revenues might only be 10% to 15% of the cost of the investment (not profit, just from the sale of the electricity made). Without access to low cost (low interest rate for long periods of time, like 20 years) money, most of the projects now being installed would never be installed unless the price of electricity went sky-high (which would allow high interest rates to be paid on short term loans because of the huge flow of money coming from expensive electricity sold to customers). And at present, higher electricity prices in the form of a price spike would lower the demand for electricity, lowering the price, and making sales and installations of wind turbines less likely. That same secnarion goes for ANY new electricity generation system, too - nukes, coal based, natural gas or biogas based, too.

So when the interest rates charged to private companies (like wind developers or utilities) goes up while electricity prices stay in the pits (as is the case nowadays), that trashes the wind biz. And old pollution based electricity generation units stay online for longer than they should, such as occurred at Fukushima. And look what THAT begat: Cesium 134 and 137 contamination as far as the eye can see, in Japan - http://www.dailykos.com/story/2011/08/12/1006409/-Nuking-Japanthe-Ugly-Truth. Yum.... There may well be more than the 1 million people dead that occurred from radiation poisoning unleashed by Chernobyl from Japan's most recent bad nuke experience, because Japan has no where to relocate the 3 million living in highly contaminated areas.. Relocation is about the only option when it comes to mass radionucleide poisoning on an epic scale when reactors go into "oops" mode.

There is a lot riding on those interest rates. For example, here is the fraction of the original loan principal that has to get paid every year on loans:

20 year, 0.0%/yr FCF = 0.05000
20 year, 2.5%/yr FCF = 0.06414
20 year, 5%/yr FCF = 0.08024
20 year, 7.5%/yr FCF = 0.09809
20 year, 10%/yr FCF = 0.11746

10 year, 0.0%/yr FCF = 0.10000
10 year, 2.5%/yr FCF = 0.11426
10 year, 5%/yr FCF = 0.12950
10 year, 7.5%/yr FCF = 0.14569
10 year, 10%/yr FCF = 0.16272

The equity payments (rates are usually higher for that than loan repayments) and loan repayments together are often more than 75% of the required selling price for electricity provided by wind turbines. Going from a 20 year 5% rate loan (essentially impossible to get by private industry these days, though still possible for states and municipalities, who can get such bonds at perhaps 4% rate for 20 years) to a 10%/10 year loan would require that the money obtained by sale of electricity and any subsidies be 1.75 times greater. Bummer.... prices would need to go up by at least 1.75 times for the increased cost of money (higher interest rates and shorter loan terms).

So what is S&P's angle anyway? Here are some thoughts:

Contained in a few of the comments (especially the initial ones by the blogstress Yves) are statements about S&P leaking their political decision to downgrade the U.S. to certain "hedgies" and banks on Tues, Weds and Thursday (downgrade occurred on Friday afternoon, after markets are closed). See http://www.nakedcapitalism.com/2011/08/did-standard-and-poors-break-sec-regulations-in-disclosing-its-downgrade-to-select-parties.html

So if these hedgies and select customers of S&P (especially some big banks) then went and shorted various stocks and stock compisite funds (i.e. bet that the markets and/or those stocks would take a giant dump), those shorting would make lots of money. And if they also bet against the implied message from S&P on the value of T-Bills (that is, they went long on T-bills, whose value tends to rise when stocks get dumped and when there is a mass flight to safe havens like T-Bills) more money gets raked in. Lastly, there is the bets on commodities category, especially gold.... Gold would also be exected to rise in value when stocks get dumped en masse...

Maybe this partly explains why S&P would not change their mind even after the $2 trillion math error (off by 50%, no biggie) was rapidly revealed on Friday afternoon. With no downgrade, those shorting and longing on this insider info could be screwed, royally, as what would have been a Sure Thing would actually now be a thing of Real Chance. That would violate the W.C. Fields "Chickadee" rule:

Upon seeing a couple of people (including Mr. Fields) paying poker, a young boy asked,
"Hey mister, is that a game of chance?"
And Mr. Fields replied, ever so truthfully,
"Son, not the way I play it."

So, having such insider info would be quite lucrative on the Big Casino playing field. Also, the CEO of McGraw-Hill (owner of S&P) is head of the Business Roundtable, which is where S&P gets a lot of its clients for the "advice" it gives, or the ratings they give to corporate bonds... So even if the directors of M-H and S&P don't directly benefit by doing the betting, shorting and "longing" themselves, their clients can and often do so, and M-H profits from a cut of that action, anyway. And anyway, it's still illegal, still worth a perp walk, providing the government decides to or bothers to investigate.

Of course, there are also other things at play, such as the "rentier" class wishing to impose austerity and further impoverishment on most of us, and profiting from and on this shift of wealth from the middle class to the uber echelons quite handsomely, too...

And that's where our Caveman President (as in, man, he sure does cave in a lot to Banksters) comes in, as well as those he appoints to police the Big Casinos (as there are a few of those gaming parlors these days).

More Golden Crumbs, as they are referred to in the Bonfire of the Vanities, for some really crummy types.....

Also, here is more information on some of this potential S&P nastiness:
http://news.firedoglake.com/2011/08/12/sec-investigating-sp-over-whether-they-leaked-news-about-downgrade-to-investors/

And the money quotes:

"The Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew of its decision to downgrade US debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say."

" There is credible speculation that S&P’s downgrade crusade over the past several months is tied up in their lobbying efforts to keep federal regulators from changing the structure of the credit rating agencies. If they did leak selectively, it was done to make the impact of the downgrade larger and more painful for the US government."

DB




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