Green Jobs Aren't Renewable Energy's Value Proposition

The recession and its aftermath have been simply awful for the emerging renewable energy industry, even though governments have tried hard to insulate the industry from the worst effects of the slowdown. Not only did the recession make it much harder for renewable energy projects and technologies to secure financing, due to weak demand and the hangover from the financial crisis, but it has focused the industry's management on a counterproductive metric: green jobs. Factories and projects are pitched on the basis, not of their efficiency and profitability, but of adding jobs that "can never be outsourced." Tell that to the 3,000 Danes who are being laid off by wind turbine maker Vestas, or the Scots whose jobs are in jeopardy due to the financial problems of a smaller wind supplier, Skykon. This problem isn't unique to renewables, but the misplaced emphasis on green jobs makes them particularly vulnerable to the collision of this aspiration with the realities of global energy markets.

I don't blame the industry for picking up on this theme. Politicians hit on it first as a way to justify continuing to invest taxpayer money in the subsidies required to keep renewables growing. That included the large infusions that became necessary when the "tax equity" market upon which project developers had depended to convert future tax credits into current cash became frozen after the bankruptcy of Lehman Brothers. As of this month, the US government has spent $5.4 billion on these renewable energy grants to fill this gap, with nearly half of that awarded in the second, third and fourth quarters (to date) of this year, even though tax equity transactions are showing signs of life again. Without a compelling story linking this money to employment, which understandably remains one of the primary economic concerns of voters, this would have been an even harder sell than it was.

One problem with this rationale is that the world has changed a lot since most of the current members of Congress came to Washington. Supply chains for practically every industry have become globalized, and renewables are no exception. If anything, as renewables increasingly become a global industry--growing out of their localized roots in places like Denmark and Silicon Valley--that trend will accelerate. The lion's share of future demand will likely be focused on Asia and Latin America, because of their higher economic growth rates and the related need to add enormous amounts of new energy infrastructure. That's a very different proposition than replacing existing energy infrastructure in the mature, developed economies because we don't like its emissions or its dependence on unsustainable fuels. Vestas understands that to serve the market in China, it needs more factories in China, and fewer in Denmark.

An even bigger problem is that making renewable energy more, rather than less labor-intensive works against it in the long run, by increasing its costs relative to conventional energy. In a recent analysis on green jobs the Geothermal Energy Association (GEA) touted its finding that geothermal power plants create more than 10 times as many person-years of employment per megawatt of capacity as equivalent natural gas-fired power plants. Unfortunately for the GEA, outside the Washington beltway and the state capitals where this message might play well that counts as a disadvantage, not an edge, because it translates into higher construction and operating & maintenance expenses. In order to arrive at the point at which they can compete without subsidies that look increasingly unsustainable in light of the large fiscal deficits in the developed economies, renewables must focus on driving down these costs and improving their productivity.

I am sympathetic to the plight of the millions of unemployed workers in this country and elsewhere in the developed world, and cognizant of their effect on the overall economy. However, energy is by its nature a capital-intensive business, and not a particularly labor-intensive one. To the extent its capacity to provide low-cost energy to the rest of the economy is influenced by the number of workers it takes to produce a megawatt-hour of electricity or a barrel of oil, fewer are generally better. Without diminishing the value of the jobs involved, I can only hope that once the economy resumes creating many kinds of jobs at a decent rate the renewable energy industry will return its focus to its primary value proposition for consumers and investors: providing low-emission, diverse and secure--and hopefully someday cost-effective--sources of energy for the economy, rather than putting more people to work.

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Is the Energy Crisis Over?

A quick check of Google Trends this morning confirmed my gut feeling that, other than from government officials, references to an ongoing energy crisis have fallen significantly in the last year. Google's statistics show that searches on this phrase have fallen back to about where they were in 2004 or 2005, though still somewhat higher than 2007. Their track of news references shows this trend even more strikingly. Without graphing the correlation, it appears to go hand in hand with energy prices that have fallen to levels that are no longer adding to our economic pain and in some respects provide significant relief. Does our waning interest in an energy crisis reflect the archetypal fickleness of the American psyche, or has the energy crisis that generated such a fever pitch of concern last year truly abated, and if so, will it soon return? A quick tally of some key statistics provides a mostly positive assessment, at least for now. While this doesn't justify complacency, it seems like a genuinely positive indicator at a time when good news has been in short supply.

The question I posed would have been a lot easier to answer if the Energy Information Agency's handy one-page summary of US primary energy production and consumption had been updated since 2007, when about the best one could say was that our net energy imports had stabilized at just under 30% of total consumption. But looking at the major components of US energy supply and demand in 2008, we see more than a few "green shoots." Net imports of crude oil and petroleum products, a much more useful measure of our dependence on foreign suppliers than just looking at crude oil imports, have fallen steadily from a peak of 13 million barrels per day in the summer of 2006 to around 11 million barrels per day. That didn't occur because US crude production was up--it's not--but because of the lagged but profound response of demand to higher prices.

Even if petroleum imports begin growing again as the economy recovers, they will do so in a global market that for at least the next several years will have ample spare capacity--a crucial measure of the market's ability to meet higher demand without creating another severe price spike. In a webcast earlier this week, Global Insight, CERA and IHS Herold (the sponsor of this blog) presented analysis suggesting that the combination of lower demand and higher output have lifted global spare oil capacity from its minimum of barely a million barrels per day in 2005 to more than 6 million this year, or nearly 8% of demand. Together with high oil inventories in consuming countries, this should cap the eventual recovery of oil prices well below the levels we saw last year. It remains to be seen whether $80 oil would prove as harmful to the weak economic recovery most economists expect next year as $140 oil did to an economy teetering on the brink of collapse.

Natural gas presents a remarkable and more uniformly positive story. A few years ago I was seriously worried that a steady decline in US gas output, coupled with strong demand supported by environmental regulations were setting us up to become major importers of gas from outside North America, putting the US in much the same position for gas as we were already in for oil. What a difference a couple of years makes. As detailed in a recent Wall St. Journal article, gas production has rebounded sharply as a result of the exploitation of enormous deposits of gas in deep shales that until recently had looked inaccessible. Marketed gas production last year was up 7% over 2007 and a whopping 13% above its 2005 trough. As a result, imports are down, especially in the form of LNG. This mini "gas bubble" could deflate, if the low gas price and tight credit continue to depress drilling activity, particularly by the independent gas producers who were mainly responsible for the recent surge in production. But as the Journal notes, the underlying resource looks robust enough to carry us well into the future. Whatever its other pitfalls, the Pickens Plan would not fail for lack of natural gas.

If anything, the electricity picture is even more encouraging. Demand in 2008 was essentially flat, compared to the prior year, and the composition of generation shifted modestly away from coal (down 1%) and other fossil fuels (down 4%), while electricity from nuclear, hydro and other renewables expanded by 2%, led by a 51% increase in wind power output. Wind, solar and geothermal power accounted for just 1.6% of all generation, but the broader group of low-emission sources, including nuclear, made up nearly 29% of the total. This looks set to continue growing, as long as the current nuclear fleet, which accounted for 2/3 of that figure, stays on line and eventually expands.

I recently ran across an interesting analysis examining the extent to which the economic crisis might have been precipitated by an oil price shock--the primary feature of the energy crisis that attracted so much attention in 2007-08. I expressed similar suspicions last December, if in less elegant economic terms. Which was the chicken and which the egg is of more than merely academic interest, because if the energy crisis was a principal contributor to the bursting of a financial bubble that couldn't last forever, rather than merely another manifestation of that bubble, then it seems that the chances of another devastating energy price spike in our near future ought to be a little lower. That would be another piece of good news to add to a generally positive current view of energy.

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Natural Gas Limelight

A decade ago, natural gas looked like the certain winner of a shift to lower-emission energy sources, as concerns about greenhouse gas emissions grew. The path to that outcome has been much bumpier than expected, however. Rising natural gas prices and supply concerns coincided with another shift, this one among environmentalists who identified gas as a key element of a "carbon economy" they were driven to transform, rather than the least-emitting fossil fuel. These dynamics are shifting again, and the future again looks positive for the US gas industry, thanks in part to the increased visibility created by the Pickens Plan and a new industry PR campaign. Its improved supply outlook and relative pricing against oil are helping, as well.

Since 1998 demand for natural gas in the power sector has grown by 50%, and gas-fired turbines now account for 41% of US generating capacity and 21% of net generation. But by 2004 US gas production had dipped by about 5% from its recent high in 2001--a slump that was deepened in 2005 and 2006 by the lingering effects of Hurricane Katrina. As a result, natural gas prices are running at about four times their 1998 level of around $2 per million BTUs, and winter spikes to $10 or higher have become the norm. As recently as a couple of years ago, many analysts saw natural gas as the country's quiet energy crisis, with our import dependence beginning to mirror that of oil.

Today, that perspective has been dramatically altered by the success of the US gas industry in tapping unconventional sources, including coal-bed methane and the shale plays that are driving the success of companies such as Chesapeake Energy. BP is purchasing a 25% interest in Chesapeake's Fayettville Shale assets. Although it comes too late to save many of the gas-intensive industries that moved offshore in search of lower input costs, and while I'm skeptical of claims that the US might become a net natural gas exporter, the resurgence in US gas production could not come at a better time, given our intertwined concerns about energy security and climate change.

The greenhouse gas advantage of natural gas for power generation looks significant, compared to coal. In 2000 the average US gas-fired power plant emitted nearly 40% less CO2 per kilowatt-hour than the average coal-fired plant. But with wind and solar power booming, this glass was increasingly viewed by environmentalists as 60% full, rather than 40% empty. That did not stop gas from gaining market share at the expense of coal, but its green image hasn't held up as well as its supporters expected. Some of that luster is being restored by the attention generated by Mr. Pickens, who casts gas as an environmentally-friendly bulwark of US energy security. Recent remarks by Speaker Pelosi and Senator Obama suggest that this approach is working.

It also helps that the Pickens Plan focuses on increasing natural gas consumption in transportation, where its emissions benefits and cost savings align nicely. A natural gas vehicle emits about 25% less CO2 per mile, measured from "well-to-wheels", than the comparable gasoline car, and it appears to be slightly greener than a flexible-fuel vehicle running on E85. Factor in the substantial price discount for compressed natural gas, compared to gasoline, and this ought to be a winning proposition for consumers, particularly if legislation to provide incentives for buying or converting a car to run on compressed natural gas passes.

Let's put all of this in perspective. Higher US natural gas production should provide economic and environmental benefits for the entire country, even if it doesn't result in a gas glut, but it is still no panacea. At 23 trillion cubic feet (TCF) per year and growing, US gas consumption still exceeds the highest previous level of US production, 22.6 TCF in 1973. And with US electricity demand having grown by 78 million MWh last year--a multiple of the additions from wind and solar power--and with new coal-fired plants being canceled left and right, natural gas consumption in the power sector seems likely to increase, not decrease, at least for the next several years. That means that in order for gas use for transportation to grow large enough to have an impact on US greenhouse gas emissions, it must compete for its share of growing production, or rely on imports, undermining its perceived energy security benefit. Moreover, politicians tempted to nudge the market in the direction of more natural gas cars should keep in mind that much of the nation's gas is consumed in ways that would have a large and fairly direct impact on consumers' wallets, should increased competition for it drive up its price.

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Pay-Go for Renewable Energy Credits

While Congress and the Presidential candidates are busily debating far-reaching energy proposals, the existing tax credits for wind and solar power and other renewable energy are still slated to expire at the end of the year. The uncertainty about their continuation is apparently beginning to slow down new installations and may be putting some of those vaunted "green collar" jobs at risk, at least temporarily. Although a broad consensus supports their renewal, the hang-up is over funding. I'd like to offer an alternative that at least makes policy sense, if not political sense. Its appeal will be limited by the reticence of both sides of this debate to be seen explicitly raising the price Americans pay for energy.

I've lost count of the number of times the Senate has missed extending the Renewable Electricity Production Tax Credit (PTC) and the Solar Investment Tax Credit (ITC) this year. Six? Seven? One of the latest such efforts was S.3335, the "Jobs, Energy, Families, and Disaster Relief Act of 2008". Voting against something with that title must have felt like voting against motherhood and apple pie, although the bill should more accurately have been designated the "Renewable Energy and Comprehensive Pork Act of 2008," including as it did such diverse provisions as a "Seven Year Cost Recovery Period for Motorsports Racing Track Facility," "Provisions Related to Film and Television Productions," and my favorite, the "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children." I wish I were making this up. Having previously failed to satisfy the requirement for revenue neutrality, also known as "Pay-Go", by singling out the oil & gas industry for loss of a manufacturing tax credit--an idea resurrected in the proposed "Gang of 10 Compromise"--the revenue provisions of this bill focused on tax changes on deferred income and securities transactions.

All of this seems unnecessarily convoluted. If the Congress wishes to adhere to the principal of revenue neutrality with regard to incentives for renewable energy, the most sensible place to seek funding is one that also encourages energy demand reduction, to complement the PTC's and ITC's supply and efficiency contributions: a tax on the forms of energy these renewables are intended to displace. Contrary to a widely-held misunderstanding, oil accounts for less than 2% of the US electricity supply, so wind , solar, and other forms of renewable electricity displace virtually no petroleum. But even as Americans are driving less and consuming less gasoline, thanks to high fuel prices, electricity demand continues to grow steadily. From April 2007 through March 2008, US electricity demand was running 2% ahead of the previous 12 month period, on a par with its five-year average growth rate of 1.6%. Considering that last year 72% of our power was generated from the combustion of fossil fuels, taxing electricity consumption to pay for the extension of the PTC and ITC would reduce both demand and emissions, while hastening our widely-desired conversion to renewable energy sources.

I've seen a wide range of estimates of the cost of renewing the PTC and ITC. At last year's installation rate for wind power alone, extending the PTC indefinitely would add roughly $300 million each year to the federal deficit, compounded. That aggregates to about $17 billion in lost federal tax revenue over 10 years. A tax of 0.1 ¢/kWh on sales of fossil-fuel-generated electricity would raise more than $25 billion over that period, while increasing the average consumer's monthly bill by only about $1 per month. If we're looking for "Pay-Go" that aligns policy with purpose, that seems like a much better candidate than taxing other forms of energy production and potentially leaving us even less energy-secure than we were.

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