The oil rig explosion and resulting spill in the Gulf of Mexico is a mess no one needs, and if it turns out it could have been prevented no one should tolerate. A worse disaster, however, would be allowing this incident to derail America’s economic recovery and its energy future.
The events of the oil spill are moving too fast to yet make sense of what happened while action is being focused to stop the leak and clean up the mess. What we read in the press is part speculation, part rant and part reporting.
What we know factually is that the oil rig exploded, the safety shut off valves which were supposed to close the spigot on the oil either did not work or were not there. We know that this oil mess is now going onshore and threatening the wildlife, environment, and economy of the Gulf Coast. We also know that this has not happened before or often despite thousands of wells and rigs in the GOM—for that we should be grateful and also encouraged.
We know that President Obama who just recently defied his base and spoke in favor of expanded offshore drilling now is covered in a sticky political and public relations mess as a result of this spill. Now there are ugly reports surfacing pointing fingers at BP and the Government for not responding fast enough to mitigate the damage and making comparisons to the Katrina response or the Exxon Valdez spill.
Congress, never wanting to waste a crisis opportunity for headline grabbing, grandstanding and scoundrel thrashing, has called a hearing on the spill for early May. Attorney General Eric Holder announced he was dispatching a team of investigators and lawyers to the scene to find someone to hang and prepare the way for the army of trial lawyers about to descend on the region.
We need leadership now to clean up this mess!
The difference between politicians and leaders is the latter keep us focused on the desired end result—on achieving the articulated goal and cheer us on to achieve it.
Imagine the power of President Kennedy saying to a disbelieving nation in 1961 that “before this decade is done we will send a man to the moon and bring him home safely. We will do these things not because they are easy, but because they are hard!”
Politicians, on the other hand, distract us with vilification and vitriol that slows down clean up of messes, discourages investment and responsible risk taking needed in our economic life to grow our country and live into its potential, and dispirit us when we most need to be lifted up. Do you think President Obama’s trip last week to New York to grandstand on Wall Street while Congress hauled the leaders of Goldman Sachs to the dock for a flogging will do anything to clean up the financial mess left over from the crisis?
Fortunately, America is strong enough to weather the crises!
The good news is it will take more—much more, than a recession, a big oil spill, or an over-reaching government to tank the American economy or our spirit. We will clean up the mess on Wall Street and in the GOM! We will learn from the experience, fix the things that went wrong with remedies that do more good than harm to the patient.
The other good news is that while our politicians are ranting and over-reaching in the here and now, the American people still believe in and are still focused on living into the American dream and thus the long term goal of the prosperous pursuit of happiness for ourselves and our posterity in markets as free and competitive as we can tolerate.
So I’m going to end this rant with some “hopey, changey” things you can believe in:
- North Dakota has 2 billion barrels of onshore unconventional oil and gas—much more than expected according to the latest report from the North Dakota Industrial Commission. Read about here and be encouraged :
- ARPA-E invests in President Kennedy’s Vision by its focus on transformational technologies and primary research not because they are easy but because they are hard. Read about it here
- Honolulu is creating a District Cooling Project using cold ocean water to displace fossil fuels for A/C saving tons of emissions and reducing the need for 14 MW of power generation all at an amazingly affordable estimated cost of $245 million without a mention in the story about federal stimulus money, earmarks or grants. Read about this project here:
So turn off your TV and quit listening to ranting politicians distracting us from our dreams and discouraging us from using our imagination and resourcefulness and go out there and do something hard for America!
This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
The Western Climate Initiative partners meeting is being held March 3rd in Vancouver BC, but there won’t be much cheering in the stands after Arizona Governor Jan Brewer issued an executive order officially pulling Arizona’s commitment to reduce greenhouse gas emissions to reduce emissions to 15 percent below 2005 levels by 2020 as part of the cap-and-trade approach the Western States and Provinces agreed to in 2008. 
Back then the Federal Government under President Bush resisted action on cap and trade and WCI was seen as a politically correct strategy for encouraging collaborative action along the lines the Northeastern States had taken earlier in forming RGGI—the Regional Greenhouse Gas Initiative. Fast forward to the November 2008 election of Barack Obama and the Feds shifted their strategy and Waxman-Markey Cap and Trade legislation began rolling as a prelude to the main event which was to be a new global treaty at Copenhagen’s COP15-fest.
We’re Behind You California—Way Behind You!
That is the headline to the story of the WCI today, but despite having ten remaining WCI members only the Golden State—now out of gold—is the only one of the WGI partners actually moving forward. In November 2009, the California Air Resources Board issued a preliminary draft regulation for its AB32 Global Warming Solutions Act implementation. 
The recession has had a sobering effect on all these partners and was the official reason for Governor Brewer’s executive order in Arizona. She said the cap and trade program would “devastate Arizona’s economy” and instead the state would use nuclear, solar and other renewable energy sources. But that was true before the recession except Janet Napolitano was Governor then moved on to be Homeland Security Secretary to President Obama.
Indeed, there was an embarrassing dust up recently when one Arizona legislator filed a bill to reclassify energy from the Palo Verde nuclear plant toward meeting the State’s renewable portfolio standard goals thus effectively ending the program by achieving its goal. While the bill was later withdrawn after howls of protest by the solar lobby the point had been made.
The problem for California is that it is now committed to implement AB32 by law. But the cold reality of achieving the policy objectives of AB32 will require natural gas prices of $13.87 per mmbtu and a carbon tax of $100 per tonne in order for the cap and trade program envisioned to be effective in changing behaviors enough to actually achieve the goals according to the CPUC and the CEC—the state agencies responsible for implementing it. And we’ll need to invest billions in new transmission lines to bring all that clean and renewable energy from Arizona to the Golden State—only one problem, we don’t have any gold to pay for it.
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
While our politicians stimulate smart grid and renewable energy until we tingle, debate about global warming and dream up subsidies of every type to revolutionize the energy business for the future, a funny thing is happening in the energy industry right here at home. We are re-inventing the energy business the old fashioned way—-by just doing it!
Three things drive this renewal of America’s energy future:
- Advanced technology including horizontal drilling and other E&P solutions to improve productive capacity, performance and overall potential of oil, gas and power resources right here at home.
- Investment realities are driving major oil & gas firms and a score of smaller, faster, more nimble competitors to use technology to go after real opportunities instead of depending upon gigantic plays in distant places of questionable political reliability.
- Untapped domestic opportunities are proving to be just as powerful a source of growth as chasing illusive foreign investment. In a world economy turned upside down doing business close to home, in stable markets, under the rule of law, where economics matter is proving attractive.
The result is the spectacular growth in unconventional gas in the US which is not only turning global markets and would-be energy monopolists upside down, but dramatically improving America’s energy security, energy reliability and our economy.
Don’t believe me?
The US Energy information Agency reports that over the last three years the United States has surpassed Russia as the global leader in producing natural gas. This is driven entirely by the growth in production from shales using American developed horizontal drilling, hydraulic fracturing and other techniques to unlock oil and gas from previously uneconomic plays. All across America E&P companies are bring new supplies of natural gas and domestic oil to market.
More exploration and geological analysis suggests that the potential for unconventional gas is substantial—very substantial and wide spread. Only a few years ago growth in demand for natural gas was a big problem because that demand threatened to turn the US gas market from a domestic market into a global one creating the same dependence on imported liquefied natural gas to meet demand as we have for oil imports. This risk of energy imbalance represented one of America’s greatest strategic threats.
Today in a few short years, without major government intervention—except staying out of the way, our energy economy and energy future is dramatically different—for the better.
Now consider Europe by comparison.
Collaboration between Germany and Russia and acquiescence by the rest of the EU has quickly lead to a situation where Europe is increasingly dependent upon imported Russian natural gas to meet its winter heating and industrial requirements. So in 2006 when Russia shuts off gas to Ukraine in a pricing dispute after Ukraine objected to a 400% increase in prices, the impacts were felt across much of Europe and served as a wake up call.
Russia offered to buy virtually all the exportable gas from Libya, Europe’s only logical alternative to Russian gas and has opposed pipeline construction projects it does not control to serve EU markets.
EU has been working overtime to build renewable energy projects to reduce its energy dependence but it requires hundreds of projects and deep subsidies to make a significant difference in that dependence. In a recent story in the UK, Gazprom Chairman Alexander Medvedev said the UK should be more “pragmatic” saying it would be impossible to meet the UK’s greenhouse emission reduction targets of getting one-third of its electricity from renewables by 2020 without gas. Medvedev may be closer to right than most Europeans want to hear when he says it will be one-third the cost to meet emission reduction goals if the UK just replaces its dirty coal plants with new gas plants rather than wind energy.
So we have the perfect lab experiment at work and we can see what the empirical results will be. Already, the Europeans are hitting bumps in the road with the failure of their feed-in-tariff regimes in Spain and Germany causing substantial disruption of their solar PV markets. Wind production in the EU is moving ahead and the EU will be the global leader in offshore wind production if it achieves its targets. But will it be enough?
Expanding clean and renewable energy use to reduce greenhouse gas emissions is an important part of a responsible, sustainable energy future for every market. But a rapid transition from coal baseload is a daunting challenge and it has a very high cost. And important as environmental sustainability is to our energy future, it is not the only strategic interest that must be protected.
Equally important is energy security and the avoidance of energy extortion that has plagued customer relationships with Russia. It is not as if the EU does not know this is a problem, but it is very difficult to escape the embrace of the Russian bear once he squeezes you.
For the US, the growth in unconventional natural gas is a change in energy dynamics that is revolutionizing our energy outlook and dramatically improving our energy security and economics.
The biggest risks for unconventional gas are not technical or market risks—they are political risks that the Congress and Administration will slap new taxes on domestic energy production that have a chilling effect on capital investment. If the domestic energy markets are left to work based upon the competitive laws of supply and demand, America is coming back strong.
The ARRA stimulus bill targeted $36.7 billion in spending for energy investments, with solar, wind, and the smart grid as the major focus for spending while biofuels, energy storage and carbon capture and sequestration projects saw targeted financing. This Federal money certainly stimulated the venture capital sector that saw it as a once in a lifetime cleantech binge.
Analysts said there were 356 deals in 2009 including 110 Series A and seed round start up deals, compared to 350 deals in 2008 and 222 deals in 2007 with a 2009 total capital invested of $4.85 billion down from $7.6 billion in 2008—the record year. Venture capitalists continue to bet heavily on cleantech and renewable energy with solar power investment of $1.4 billion in 84 deals according to GTM Research continuing its four year lead in the category. Biofuels saw $976 million in investment perhaps responding to the big bet made in the sector by XOM. 
The sleeper in the race was water with 33 deals totaling $130 million. Water and energy have always been integrally linked but the best way to profit in the water business is to provide the technology, advanced process services and equipment to increase supply, reduce waste and improve the efficient and cost effective treatment of water.
The Great Cleantech Flip Ahead?
The market also saw an uptick in capital investment from outside the United States and that combined with the stimulus and VC spending binge suggests rising demand for cleantech opportunities might mean a rush of IPOs in 2010 to cash in big time before the inevitable consolidation process eats some of the best opportunities. Timing seems right for increased deal activity in 2010 because Federal stimulus money is drying up and prospects for more gravy out of Washington are greatly diminished over worries about the deficit.
The VC trade press says investors are looking for opportunities in smart grid infrastructure perhaps hoping to pick up products and capabilities that can “tuck under” to make more complete and thus valuable solutions. The bigger fish are also looking opportunistically to eat the smaller fish in the consolidation process. Any anyone who did NOT get ‘stimulated’ or got VC capital infusion and now is threatened by those that did turning them into ‘fish food’ in the consolidation process now underway.
Global Competition is Good
The other factor at work is that as the markets improve we need for more deal flow to put capital to work, consolidate market share, and position for the next boom. This is a global competition with the US, EU and China as healthy rivals for this investment.
Fish Stew with Sour Wine in EU
The EU today is the weakest of the three global rivals with problems in Euro zone in Greece, Spain and others. Germany and France are working to address the economic problem but it is a distraction, adds uncertainty, and will require bailouts to prevent more damage. UK investors seem more attracted to the US markets than Europe leaving the problem to Germany with France along for the ride. Renewable energy in EU took big hits with the failure of feed-in-tariffs in Spain and then Germany two of the largest markets causing equipment prices to tumble worldwide as vendors dumped excess solar panels and China slurped up FiT subsidies from existing contracts.
China Demand for Growth is High but Sustainable Growth Means Coming to America.
Strange as it seems from the political sparring between the Obama Administration and China over issues like arms sales to Taiwan and chicken parts, Iran nukes and North Korea sanctions issues, these two rivals seem linked at the hip even if the lips are bantering. Rivalry results in tiffs like this but the core relationship between the US and China is too interdependent for either to do something stupid.
China needs American markets to export its goods and sustain its growth. It buys US dollars and increasingly invests capital in US assets and businesses to further diversify its portfolio and reap the benefits from the most stable world economy returning to growth. Besides, China needs something only America can provide—technology and brainpower to deploy it.
The US needs China to finance our deficit and recovery by continuing to buy dollars and increasingly invest in American business to allow the US Government to dig out of its deficit hole. The US also needs China to drive down the cost of goods sold and especially to drive down the cost of renewable energy equipment such as solar panels and wind turbines to grid parity prices with natural gas. Unless this happens, renewable energy is not sustainable or affordable long term.
If the global rivalry is managed and healthy both China and the US can win big time. If they permit other issues to distract them from their strategic relationship both lose potentially big time.
The US is the World’s Best Hope for Recovery
Like it or not, the US is still the world’s most influential superpower even when its economy is weak. We likely will survive the Obama Administration stumbles with a big debt but that can be fixed over time with a robust recovery. That must be our single minded focus—putting Americans back to work and leveraging their ingenuity to drive markets, technology, innovation and growth around the world.
Grid lock in Washington DC is a wonderful thing.
It constrains the worst aspirations of both political parties. Recent elections in the US have humbled the Democrats, but the Republicans make a huge mistake if they see the Democrats stumble as their gain. Voters are surly and have a ‘pox on both your houses’ attitude that will require human political sacrifice to purge. And November 2010 is shaping up to be a time of wholesale political sacrifices threatening all incumbents. This sends our beltway bandits running for cover, but voters smell blood and will not be denied. There are risks in electing a new Congressional majority of people with little elected office experience, but the genius of America has always been our ability to reinvent ourselves when we needed it most. America is in the early stages of that process of renewal which will play out in 2012 in the next presidential election.
The Return of Prudence in Energy Costs Looms
Meanwhile we have market and economics work to do. On the energy front we have seen explosive growth of clean and renewable energy from wind and solar. We have been over stimulated in smart grid investment—ahead of its full potential—so we are likely to see a consolidation of players, firming of interoperability standards, and then a pause while the political issues that will determine the next wave are decided. The issues are mixed for the energy markets.
Renewable portfolio standards have created incentives for wind and solar growth but rising utility rates to pay higher than market costs for renewables are starting to hit the fan and ratepayers do not like it. In addition, we lack the electric transmission capacity to bring all this new renewable energy to market and we lack the political will to speed up the environmental review and transmission construction to make it work. NIMBY could crater the renewable energy market in the US over transmission line siting and construction.
COP15 meltdown and the collapse of credibility for climate science research have stalled emissions reductions advances. We do not know if this is temporary or fatal. The market for carbon credits is sinking like a rock in both EU and US with emissions allowances now selling for as little as $2 per tonne. At those prices there is no incentive to invest in more expensive solutions—just pay the penalty and let the government worry about it.
Smart meters are being installed as an accelerated pace but largely sit unused and un-useful without the changes in policy like real-time pricing or dynamic pricing as it is now being called to give customers the incentives to make smart energy decisions. Utilities face a tsunami of meter data heading their way with limited capability to do anything with it. Customers really don’t want all that information and as long as we continue to have rates based upon average prices and regulatory lag in rate cases—we just keep on living our lives.
So all of this geopolitics, venture capital investment, and policy hassle is going to converge in a giant pause as we await the next election and torment our politicians. Ratepayers will increasingly complain more loudly about rising utility bills and regulators will rediscover “prudence” looking for a way to slow down rate increases and save their skin.
Meanwhile, investors who want to cash out have two choices: sell out to now to strategic buyers looking for good deals and get your money out of cleantech, renewable energy and smart grid while the getting is good. Or, if you feel lucky, wait for a good window in an improving economy and try the IPO route to cash in big time.
The problem with the latter strategy is that window of opportunity may not arrive in time and the global competition is going to keep moving. Sit and wait to cash out and you may miss the next big wave after cleantech or the hassles over rates and policy may hurt your flip.
My prediction: Prepare for the big fish food feast ahead where flip, consolidation, and a new focus on riding the next wave will be on the menu. What is that next wave? Well, think about it, you really don’t need any of this cleantech, smart grid or renewable hassle if you control the communications networks to make all of that as well as streaming TV, home area networks and the more fun side of life work faster, better, cheaper do you. Now we’ll pay big money for entertainment and faster, wireless communications on new iPad toys. Energy—its a big hassle.
Can I get the sports package with that? To go, please.
It appears that climate science is not as settled as Al Gore professed even as late as Copenhagen. Reports of “errors” keep piling up as researchers take a fresh look at key findings and reports emanating from the international bodies and research universities most responsible for the body of literature being used to shape the world’s environmental and economic future.
“Skeptics Up, Obama Down, Cap and Trade Dead”
That was the conclusion of an ongoing series of investigative news reports in the UK on the IPCC and other research institutions linked to the UN’s Climate Change policy analysis.  Just a month ago, the panel was forced to retract is report on the rapid melting of glaciers after it was found that it could not be supported by the evidence. 
Correction Course on Political Correctness in Progress
That scientific research has been tilted toward a favored policy outcome is neither shocking nor new. That the rest of the science community tolerated this “junk science” so long is the real tragedy. This kind of passionate inquisition has been going on for centuries, but rarely has so much money been spent pursuing political correctness nor the risk of economic harm from such policy prescriptions so profound. From faster melting glaciers, to rain forest collapse to agricultural production declines in Africa, the list of dire conclusions now being shown as based upon inadequate research, suddenly unavailable data, or just unsubstantiated opinion keeps coming like a slow trickle turned into a major flow.
Exposing these “research errors” is useful and timely to be sure. We can only hope that this tilting of science for the sake of continued research funding, professional advancement and tenure, or just vanity will be exposed and the erring parties discredited. But where was “peer review” when we needed it?
As humans, we understand human failing, and can forgive it even as we discipline those who engage in it. But we expect more from our governments and our rising cynicism and trust in government has a far more lasting and corrosive effect when we discover we are being mislead on the science and then mislead by politicians about the policies proposed as a result of reading that ‘political’ science.
It is NOT about the Environment, Stupid!
It would be a mistake of equal or greater proportion for those who cheer this collapse of climate change research to take it as repudiation by the public of our collective interest in being good stewards of the planet. The environmental movement has succeeded in persuading us that we must all act responsibly, avoid unnecessary pollution, and decry actions that needlessly despoil the planet or cause harm. We still expect to leave the earth a cleaner place for our children than we found—as the cliché goes.
But something is changing in our sense of environmental responsibility.
This exposure of bad behavior by climate scientists will result in more skepticism to be sure from this experience, and a better sense of the need for balance as a consequence of the economic recession we have experienced. We still expect environmental responsibility. But our definition of environmental economics is changing to include more balance of the cost and consequences of proposed policies against the benefits of enacting them.
Is there a Good Outcome from this Bad Science?
This could mean some profound changes yet ahead in the US and around the world after the effects of this climate change “crisis” plays out through the next election cycle:
- Reality Therapy in Mexico City. Hopes for a COP15 “do-over” in Mexico City should be diminishing considerably. If anything, the next UN conference in Mexico City should be a place full of confession, repentance, remedial education and soul searching about the important of academic rigor, peer review and transparency as a foundation for re-starting the debate about the real science of climate change.
- US EPA Endangerment. US EPA must quickly back off its threatened endangerment finding before it risks having its authority in the matter gutted by an outraged Congress looking for someone to hang for this climate change embarrassment. More than Waxman-Markey has been left bleeding on the sausage making floor of Congress, the Administration now lacks the political authority to pursue the same agenda by regulatory fiat.
- The Environmental Responsibility Act. Congress should require all Federal agencies and State governments using Federal money to include in any environmental impact statement or environmental review and/or Federal rule making an analysis of the economic impact of any such proposed action and a finding, subject to judicial review, that balances such costs and benefits in the public interest. The law should also include a “loser pays” provision in environmental litigation to assure that environmental lawsuits are not used as tactics to extract settlements or pursue political agendas.
- AB32. This California law to regulate greenhouse gas emissions is actually an income redistribution tax act designed to evade the two-thirds rule on budgets and taxes in the California Legislature. It gives the California Air Resources Board the authority to set carbon taxes administratively on an annual basis. The likely consequence is that such fees will be pegged to the size of the California budget deficit and, conveniently, requires no elected official to actually vote to raise taxes. The California Energy Commission and California Public Utilities Commission have reported to the Legislature that they believe a carbon tax of $100 per tonne would be required to implement the policy goals of AB32 and the companion 33% RPS standard. The collapse of the climate science foundation for AB32 will expose it for what it is. Besides, with RGGI and EU carbon credit prices falling like a rock to about $2 per tonne, AB32 will not likely produce the revenue California politicians’ dream of anyway after the climate science is “settled”.
Maybe unsettled science is a good thing if it forces a balancing of the costs and benefits of major policy changes in environmental laws and other public policies. Voters are in a surly mood over the state of the economy and their anxiety about their own financial future. This is the kind of political climate crisis that brought us Proposition 13 in an earlier California era. Today there is no similar ‘quick fix’ for California unless we hit “reset” by authorizing one of the ballot measures being circulated today calling for a state constitutional convention. For Congress, the path to hope we can believe in is actually swifter the old fashioned way Americans love—“throw the bums out” in the November 2010 election.
The press is full of ‘blood in the water’ analysis of the meaning of the Massachusetts election of Scott Brown. As a former Bay Stater I appreciate how stunning that victory was in both bad and good ways. For Democrats, accustomed to dominance it is a humbling experience. But the GOP will make the same mistakes the Democrats have made if they see Scott Brown’s election as a triumph for their version of Washington truth.
Let’s face it, at the end of the day the general public see little difference between the behavior in Washington of the Democrats and the GOP. Both parties over-reach when their power is felt to be dominant. Both parties are controlled by their fringes on the left and right. Both parties are hyper partisan. And both parties have been equal opportunity offenders of the public conscious.
“We’re mad as hell, and we’re not going to take this anymore!”
The real message of Massachusetts is that the voters are saying ‘a pox on both your houses’. The tea party movement is a genuine demonstration of disaffection for the direction the country is going and should be seen by the Democrats as ‘in your face’ evidence of over-reaching. Why don’t they see it?
The dirty little secret is they DO SEE IT, but they realize that they are likely to lose their dominance in the 2010 election (the party in power almost always loses seats in mid-term election historically). So the base of the Democrat party came to believe that Obama’s election gave them ONE SHOT at getting their agenda passed in the 2009-2010 term of Congress—and they decided to go for it. But by so fiercely focusing on the end game for their left driven political base they have ignored the public majority in the center and shut-out the GOP on the right undermining the perception of a fair process in their overreach and risking an even worse political outcome. Is this narcissism? Is it desperation?
Don’t rejoice for the Republicans
The election of Scott Brown is not necessarily good news for them either. The truth is the GOP did a terrible job in the majority when they last held it and the behaviors of the Congressional GOP leadership and right-leaning base were just as obnoxious in their time in power as the Democrats are today. Scott Brown’s election is as much a wake-up call for the GOP right as it is for the Democrat left. And reading more support for the GOP into his election is a foolish fantasy for the right wingers. The candidates who are winning in New Jersey, Virginia and now Massachusetts are NOT traditional GOP right wingers, but capable, reasonable, center of the road Main Street folks.
Change We Can Believe In
Scott Brown’s election is a savvy and, so far, successful attempt to take the Obama message of 2008 of ‘change we can believe in’ that the public signed up for and apply it to a center of the road style of governance that the public thought they would get in a President Obama. Instead, Obama campaigned as one kind of president and has governed as a very different kind. The public is feeling like he bait and switched them from a centrist agenda of positive, inspiring change to a left-wing agenda of government control over every aspect of our lives with debt that is never ending to fund it. And they are reacting negatively to it. The president remains personally popular among a general public that truly wants him to succeed, but he is at very serious risk of losing that benefit of the doubt. And there is no way to blame the mess Obama is now in on his predecessor. He did not inherit this political mess—he caused it.
Get back on the Green Line!
Like that Fidelity investments commercial that seems to run constantly these days, you know the one with the green line of “guidance” for the scared investor, Obama can still save his presidency by returning to the “guidance” of his 2008 campaign message and living it as the centrist president the people voted to elect. The election of Scott Brown gives him an opportunity to tell the left leaning base in the Democrat party they failed to deliver a product the people want and now must move to the center. It is a tough love message of ‘follow-me or get run over’ that only he can deliver. But unless he does he will have squandered his historic opportunity and ruined his legacy.
What should Scott Brown do?
Be the centrist independent the People of Massachusetts elected. He may indeed be the 41st vote against ObamaCare, cap and trade, and the political bribery of the Louisiana Purchase, Cornhusker exemption and other desperation deals which should now die a visible death. But Scott Brown must be a demonstrable change of political behavior in Washington to invest and grow the political capital he just received.
If he succumbs to being just the 41st vote for the GOP he looks like every other sleazy politician in Washington instead of living into the legend he inherited with the seat of Ted Kennedy. By being the new “lion of the Senate’ for the center of the road majority of the American people Scott Brown can give President Obama an opportunity to reclaim the captaincy of his listing ship of state and he disciplines both extremes on the left and the right with the true message from the Massachusetts election.
Now that would be change we can believe in.
Chevron announced today that it planned to restructure its money losing refinery operations to bring costs in line with profitable operations. During the last quarter of 2009, Chevron’s refining business lost a staggering $600,000 per day according to Deutsche Bank. And it was not alone, other refiners are also underwater in this most difficult of the big oil sectors. Is it little wonder why we have not seen a new refinery built in the US since 1976.
Only a few months ago we were all cussing big oil for skyrocketing gasoline prices, and indeed for a while the sector made profits. But the boom and bust character of this business often seems to defy logic as supply and demand responds to market realities.
Up the road from my home in the San Francisco Bay area is Chevron’s 100 year old Richmond, California refinery. When prices were high Chevron proposed upgrading the facility to enable it to process a wider variety of crude oils from sources around the world. All the required environmental impact studies were done revealing that the upgraded plant would improve refinery efficiency and economics while adding operating flexibility to process a wider variety of crude oils.
Not so fast said, the environmental intervener EarthJustice which filed suit in state court to force Chevron to demonstrate that processing heavier crude oil types at the upgraded plant would not harm the environment. This is the legal equivalent of the “when did you stop beating your wife” question. While this lower court decision requiring more studies is more likely than not to be overturned on appeal, it had the effect to delaying any improvements at the Richmond refinery perhaps for years.
Yesterday, the economic consequences of that delay fell upon Richmond like a major oil spill. The Richmond City Council, egged on by local environmental constituencies, had urged more studies as a strategy to press for more tax revenue out of Chevron to remove its objections. The company just said “NO!”
Chevron said it is now more likely than not to sell or close the Richmond refinery eliminating 1200 well paying jobs and millions of dollars of tax revenue and income recycling throughout the East Bay area economy.
The crude reality is the fastest way to improve refinery profits today is to close excess capacity around the world at a time when demand is down and invest in facilities that can operate more flexibly in the future as demand recovers by processing crude from many sources to make products of many types.
So the customary environmental strategy of using the courts to impose delay in hope of negotiating concessions just backfired on Richmond, California. Instead of adding more good paying jobs and seeing tax revenue grow, Richmond will need to call in the redevelopment agency.
Perhaps, Chevron can unload this white elephant on the Chinese or some other investor, who knows. One thing seems certain the new owner is not likely to be as civic minded as the folks from down the road at Chevron who gave up after a 100 years. There must be a California solution to this problem—maybe Richmond can collect all the French fry oil and turn it into unleaded!
This time of year in California the ocean currents and weather set up patterns of very big waves beloved by surfers from around the world. It is tricky to know when the Mavericks surfing competition will take place so airplane tickets and surf boards are ready as enthusiasts watch the California weather reports. Give them the signal and they descend on the Central California coast.
For California ratepayers 2010 brings a kind of Mavericks competition with energy bills as the era of rate freezes closes with a decision in December 2009 approving electricity rate increases for all classes of customers of PG&E including Tier 1 “baseline” customers which had been frozen since the early days of wholesale power competition in the 1990’s for PG&E and SCE customers.
The energy mavericks have been the upper tier ratepayers who have the misfortune of living on the hot side of the mountains or in the desert or the great Central Valley where gas heat isn’t a big problem but summer air conditioning is a must. These Mavericks have borne the brunt of frozen rates since the revenue requirement from the frozen Tier 1 baseline customers was pushed up the user curve and added to already higher rates.
How High Will Electricity Rates Go?
I wrote recently about the surprise electricity customers in the Central Valley got when they opened their electricity bills. The bills reflected the summer A/C period so they were high, but unfortunately smart meters had been installed about the same time and there was some good publicity sought by utility and politicians over the smart meters bringing the promise of a more efficient energy future.
Killing the Utility Messenger Won’t Solve the Problem
That protest of rates was BEFORE this latest rate increase kicked in for PG&E and a similar one for Southern California Edison (SCE). Temperatures outside have cooled down, but inside ratepayer are slowly steaming. Their immediate focus is the utilities that are sending them the bills. But PG&E, SCE and Sempra are regulated and they charge the rates that the CPUC tells them to charge—no more and no less.
PG&E’s 2010 rate structure looks like this:
|2009 Rates ¢/kwh||2010 Rates¢/kwh|
|Tier 1 Baseline||11.5||11.9|
|Tier 2 up to 130%||13.1||13.5|
|Tier 3 up to 200%||26.1||27.6|
|Tier 4 up to 300%||38.1||40.6|
|Tier 5 over 300%||44.3||47.4|
California has a tiered rate structure of inclining blocks meaning the more energy you use the higher the rate. With the rate increase approved by the CPUC average rates will go up 3%. But average is the politicians’ way of spinning the news about rates. For Tier 1 baseline customers this means their rates will rise from 11.5 cents per kilowatt hour to 11.9 cents—high by national averages but a good deal in California.
But for the Tier 5 customers rates go up from 44.3 cents per kilowatt hour to 47.4 cent. OUCH! This may be good energy efficiency inducing behavior and it certainly has worked, but it only portends the rate increases to come when the full costs of renewable energy and smart meters and other demand side programs are factored into rates over the next few years.
Calculating the impact on your electricity bill from a CPUC rate change is a little like doing your Federal Income Tax with its own Alternative Minimum Tax equivalent in the tiered rate structure for tiers 3, 4 or 5. You need a lot of time and a good calculator. If you want to see for yourself go to the link below for a detailed explanation that is guaranteed to put you to sleep before you get to the answer.
“Nothing concentrates the mind so well as the near term prospect of a hanging,” said Mark Twain.
The next wave of California Mavericks will not be surfers but waves of ratepayers heading to Sacramento looking for someone to hang over the looming cost of living into the political correctness that is driving energy policy in the Golden State. It sounds great! It makes great headlines! We love to be green and clean and at the cutting edge of technology. But being at the bleeding edge of policy as well as technology often costs more—much more. But add these looming rate increases to an economy with 10% unemployment, huge budget deficits, and surly voters and you have a volatile cocktail at the next election for any incumbent.
This wave of rate increases will be like the Mavericks surfing contest which brings out dare devils to ride the waves. But in this case it will take deeper pockets and a better economy to be able to afford our energy future.
“How do you turn the world’s 6th largest economy into the 15th largest?” as the old Sacramento joke goes. ” You make it subject to California regulation.”
Or in an economy deeply under water, Californians might decide move to Texas or Iowa where taxes are low, baseload generation moderates rates, wind energy is plentiful and the rates are not 11.9 cents per kilowatt hour let alone 47.4 cents. As an added bonus—in Texas there is no income tax!