Those Other Energy Subsidies

Energy subsidies have become a hot-button issue for both renewable and conventional energy, with each side claiming the other receives more than it should. This issue is on the agenda for the meeting of the G-20 group of nations in Seoul, because they committed to the phase-out of subsidies for fossil energy at last year's Pittsburgh summit and will report on progress at this week's session. This coincides with the release of a new forecast from the International Energy Agency highlighting the urgency of phasing out these subsidies for the sake of reducing greenhouse gas emissions. It's worth noting that unlike US incentives for energy production that have attracted so much flak here, the bulk of the subsidies the G-20 and IEA want to eliminate are for the consumption of fossil fuels; most of them are provided in the developing world, often by governments that can ill afford them. Putting an end to these practices is a worthy goal, and not just because of climate change.

In addition to promoting stronger government support for renewable energy, the IEA report highlighted $312 billion in counterproductive subsidies for fossil energy last year--the figure was much higher in 2008--compared with $57 billion for all renewables, including biofuels. The subsidies in question are mainly in the form of price controls and market manipulation by governments in developing countries, including both large net energy producers and large net consumers. These governments effectively pay consumers to use more energy by keeping prices lower than free market levels. This is clearly counterproductive with regard to combating climate change, because it leads to higher emissions, but I'd like to focus on another drawback, in terms of how it affects global energy markets. Its effects haven't been as obvious recently, with demand down and spare production capacity ample for the moment, but it contributed significantly to the extreme oil prices we saw in 2007 and especially 2008.

Whether as simple as fuel price caps set by government fiat or as complex as the Philippines' former Oil Price Stabilization Fund that I used to monitor regularly in the 1990s--it acted as a sort of central bank for energy prices, until it ran out of money--these mechanisms insulate consumers from the global price of energy, usually oil. The benefits on which these measures are justified even make a certain amount of sense, in terms of protecting consumers from the effects of market volatility and promoting prosperity. If all they did was to smooth out market fluctuations while still reflecting average market values over time, those benefits might outweigh the damage these policies do to both national treasuries and to the capacity of oil prices to match supply and demand. In practice, these efforts often become politicized and end up entrenching below-market prices for their most vocal constituencies. Unfortunately, this not only boosts consumption but it also muffles or blocks price signals when global demand approaches the limits of supply, as we saw a couple of years ago.

The consequences of this are both local and global. Locally, either oil companies or oil price funds require ever greater cash infusions from governments, as global prices go up but consumers miss receiving the message to conserve. This decoupling, compounded over large segments of global demand, amplifies global price increases and focuses the necessary demand response on those countries without such mechanisms, like the US. This helps explain why oil prices skyrocketed to $145/bbl from the $70s just a year earlier, because that's what it took to force demand in non-subsidized countries down by enough to adjust for the global tightness of supply. In other words, oil consumption subsidies intended to stabilize local markets are paradoxically destabilizing for global oil markets.

It's important to draw a distinction between consumption subsidies like these and the fossil fuel subsidies that have come in for significant criticism in the US, which are focused not on consumption but on production. In fact, if their critics' claims about the unresponsiveness of global oil prices to incremental US production were right, then they would have zero impact in promoting consumption, which is the issue of concern to the G-20 and IEA. I don't believe either side of that thesis is correct. Supporting US domestic production inherently helps stabilize global oil prices by reducing US oil imports, but it likely does increase consumption modestly by nudging prices a bit lower than they'd be otherwise. That gives rise to an awkward trade-off, pitting increased energy security against slightly higher emissions, contrary to the rhetoric of some "energy hawks" who suggest that these two issues are always aligned.

In any case, as long as the G-20's efforts are focused on phasing out subsidies intended to hold down fossil fuel prices, they are on the right track, though consumers in developing countries will be in for a nasty shock when their governments follow through with this initiative. At the same time, the alternative to incentives for energy production is not their unilateral elimination, but the rationalization of tax and regulatory structures so that producers in one country aren't at a disadvantage compared to producers in another country, or to other industries in their own country. Sorting that out would require an entirely different and much more complex effort, and not just by the G-20's membership.

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Perfect Energy

The recent start-up of the latest large-scale nuclear fusion experiment, the National Ignition Facility at the Lawrence Livermore National Laboratory, was greeted with the customary mix of fanfare and skepticism that has accompanied the quest for practical fusion power for as long as I have followed it, starting as a seriously nerdy child. MIT's Technology Review does a good job of describing the new facility, which will use high-powered lasers to attempt to create useful amounts of nuclear energy. But rather than focusing on the stupendous potential of fusion energy and whether this device might finally be the one to deliver on it, I'm more interested in what our dogged pursuit of this technology through decades of frustratingly slow progress says about our collective view of our current energy sources. How much of the search for fusion springs from its inherent value, and how much from our dissatisfaction with every other long-term energy option we possess?

The answer may lie in the generally-assumed characteristics of a successful commercial nuclear fusion reactor technology, providing cheap, reliable and concentrated energy from a fuel that is as ubiquitous as it is limitless, using a process that creates large amounts of power but essentially no harmful waste. Is that a realistic expectation, or merely the aggregated antonyms of the shortcomings of every existing energy source? Consider the alternatives:

• Fossil fuels are finite, and their production and use release a variety of unwanted byproducts, including greenhouse gases implicated in climate change. Their reserves are also unevenly distributed, giving rise to worrying levels of rent-seeking, resource nationalism, and geopolitical instability and insecurity.
  
• Wind power is intermittent, unpredictable and unsightly, requiring extensive adaptation of the power grid, ample fossil-fueled back-up, expensive energy storage or all of these to contribute reliably on a large scale.
  
• Solar power is more predictable than wind but still expensive, inefficient and cyclical, delivering less than a quarter of a day's peak output even in optimum locations. It takes well over 3,000 MW of solar installations to generate the same amount of energy as one 1,000 MW coal-fired power plant.
  
• Geothermal power is reliable and relatively cheap. However, the "hydrothermal" reservoirs--natural deposits of steam and very hot water--that it taps are unevenly distributed and often far from markets. Enhanced, or "dry rock" geothermal offers greater promise and flexibility, though it is still in its infancy and might also cause earthquakes.
  
• Ocean power taps waves, tides or temperature gradients, offering enormous potential while sharing many of the drawbacks of wind, solar and geothermal. It is also decades behind them in development.
  
• Biofuels' necessary shift away from unsustainable food-based feedstocks depends on unproven or expensive technology. Truly large-scale biofuel production entails harvesting and hauling vast quantities of bulky materials with low energy densities, raising serious questions about whether it can ever create a sufficient energy surplus for the rest of the economy. This limitation also applies to electricity generated from biomass.
  
• Perhaps fusion's first cousin, fission, comes closest to its ideal, providing large amounts of cheap kWhs on demand, around the clock and with very low emissions. Unfortunately, it's hobbled by the high construction cost of new reactors and concerns about safety, security, proliferation, and waste. Some of these are legitimate while others seem overblown, but the technology is no one's free lunch.

Don't get me wrong; I have always loved big science, and nothing would please me more than if the NIF performed exactly as advertised and heralded the dawn of a new era of energy abundance. However, given the long history of drawbacks and unintended consequences from all other energy sources, it seems unrealistic to suppose that any new source, including fusion, is capable of living up to all of its pre-deployment expectations. Fusion is perfect on paper, but then so is my favorite long-term energy option, space-based solar power--until the public becomes anxious about beaming megawatts of power to earth from space, or rogue nations develop anti-satellite capabilities that could hold our orbital energy supplies hostage.

I don't know what form fusion's unexpected drawbacks will take, should the NIF testing pave the way for commercial fusion power plants a decade or two from now. I do know we need a serious debate about the sorts of trade-offs we're willing to accept from any energy source we promote as part of the solution to our dual challenges of climate change and energy insecurity. At a minimum, we must move beyond the mindset in which no current technology can compete with the presumed perfection of those that are still on the drawing board or have yet to be deployed on a scale at which their flaws might become apparent. Our future energy diet will most probably be a messy mix of "all of the above", just as our current one is. Perfect energy remains an April Fool's story.

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Building the Low-Emissions Future

Last week The Economist published a detailed assessment of the state of play for capturing and storing the carbon dioxide emitted by power plants and factories. Although it skirted the assertion of many environmentalists that "clean coal" is inherently an oxymoron, the article's tone was generally skeptical concerning the cost and ultimate efficacy of the technology. Coincidentally, Greenpeace released a study featuring an ultra-low-carbon scenario created in conjunction with the European Renewable Energy Council. It proposes that by 2050 the US could shed all coal-fired power generation, as well as all nuclear power and most natural gas-fired power, along with nearly 80% of the petroleum used in transportation--all replaced by renewable electricity and biofuels. If the Economist regards carbon capture and sequestration (CCS) as "expensive and unproven", I can only imagine the terms it might use to describe the extraordinary transformation required to achieve the outcome Greenpeace envisions. The necessity of reducing greenhouse gas emissions dramatically by mid-century and the serious obstacles to replacing our entire energy economy with renewable energy sources in that time frame reinforce the importance of continuing to pursue CCS, in spite of its uncertainties.

I've been following CCS for a long time, and I've written about it many times on this blog. Without diminishing the technical challenges involved, I see them as being manageable with existing and foreseeable engineering know-how, without a scientific breakthrough. I attribute the prolonged absence of a large-scale demonstration of fully-integrated CCS on energy sources more carbon-intensive than natural gas to the mismatch between its costs and current monetary benefits. Whether the cost proves to be closer to the low or high end of the range of estimates included in the article, from roughly $40-115 per ton of captured CO2, it's hard to imagine a utility or oil company taking on the investment and operating expenses involved without the incentive of a transparent and fairly predictable price on carbon emissions. Whatever the cost of CCS might be, it can't be considered in a vacuum, and that is the biggest shortcoming of the Economist's otherwise thorough analysis.

As the US Congress prepares to embark on its latest effort to enact a greenhouse gas cap and trade bill, it's important to think about where its enormous pool of emissions savings will be found, and at what cost. CCS is only one option among many. Happily, a fair amount of work has been done in this regard, including a study by McKinsey & Co. for the Conference Board a little more than a year ago. A key chart from their report portrays a potential medium-term supply curve for emissions reductions. It indicates that while there might be a number of ways to cut CO2 at low or even negative cost--changes that would pay for themselves--achieving deeper cuts would require the contribution of costlier solutions, including CCS.

It's also worth noting that the current cost per ton of CO2 reductions from some of our current climate change strategies exceeds most estimates for CCS. In my recent posting on the application of energy storage to solar power, I calculated an effective cost of power for a couple of utility-scale solar projects in Florida at around $0.25/kWh. That's a premium of at least $0.20/kWh compared to a coal-fired power plant (without sequestration.) Based on typical emissions of 2.1 lb. of CO2 per kWh generated from coal, that implies an abatement cost of $190/ton of avoided CO2. In the likelier event that the power backed out by solar was generated from natural gas, the effective abatement cost could be even higher, because of the smaller emissions savings involved, despite the higher cost of gas-fired power compared to coal.

That comparison doesn't imply that solar power will always be a high-cost source of emissions reductions, or that CCS represents some kind of silver bullet for climate change. At the same time, coal now accounts for 23% of US primary energy consumption, 49% of our electricity generation, and nearly two-thirds of our baseload-capable generation. The difficulty of replacing baseload power with cyclical or intermittent sources makes me very skeptical of any low-emissions scenario that ignores CCS or assumes we can jettison coal entirely, not to mention forgoing nuclear power, the second-largest baseload power source in the US and by far our largest source of low-CO2 power. My specific comments on the Greenpeace scenario are posted elsewhere. At a minimum, any claims that it proves we can achieve the administration's 2050 emissions goals with only "green" energy options and efficiency gains are unwarranted. As useful as they are, scenarios can only point the way to possible futures. They can't provide firm proof of anything.

That leaves us with the hard work of cobbling together a broad set of climate solutions, in response to a price signal on emissions. In my assessment, that mix is very likely to include awkward elements such as CCS, along with deeply unglamorous things like improved farming and ranching practices. Contrary to the conclusions of the editorial accompanying the article on CCS, the technology is worth pursuing for reasons that have nothing to do with "placating the coal lobby." Nor does the cost of proving its feasibility look so high as to "deprive potentially cheaper methods of cutting emissions of cash and attention," particularly when the administration expects to carve out $120 billion for energy R&D from the proceeds of cap & trade over the next ten years. And even if it did, it's one of the few options that could be applied to reduce directly the emissions from the fossil fuels that still account for 85% of the energy we consume. That could make the difference between a manageable transition to a low-emissions world and an upheaval as bad as the current financial crisis.

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The End of the World As We Know It?

The opinion section of the Sunday New York Times made for sobering reading this weekend. While the Times has hardly been a bastion of economic optimism of late, three op-eds stood out for their shared sense that we might be on the brink of truly wrenching change. Tom Friedman invoked an enviro-economic tipping point, citing one expert's prognosis of a "Great Disruption;" a best-selling author saw the risk of "economic cataclysm" in the bursting of Eastern Europe's foreign debt bubble; and another found parallels to the Austria-Hungary of 1913, one year before the war that ended at least three empires and mortally wounded a couple of others. But while the systemic unraveling of the past six months or so makes such possibilities likelier than they would have been just a few years ago, the odds still favor a much less drastic result than revolution or apocalypse. The enormous recent increase in the range of uncertainties we face lends added credibility to the direst scenarios. However, it's important to realize that these predictions are not certainties, unless our responses make them so. That applies to energy, as well.

When I think about the possible paths of energy supply and demand over the next few years, they depend much less on specific energy or environmental trends than on the future state of the economy. Forecasting oil prices has become meaningless without a clear view of growth, particularly in the US and China. Demand may have rebounded recently in the US, but the combination of a crippling financial crisis with a deep cyclical downturn has Americans questioning the future in ways that I haven't seen in decades, other than the immediate aftermath of 9/11. The tangible effects of what noted historian Niall Ferguson has dubbed the "Great Recession" serve to reinforce the hangover of millennial angst from the turn of the century, which manifested in the more extreme views of Y2K and more recently Peak Oil. Layer in the propensity of my own Baby Boom generation to see itself at the epicenter of great events, and the stage is set for receptiveness to the view that we stand on the brink of unprecedented, permanently life-altering change.

When I was involved in my first scenario planning project at Texaco, we came up with three remarkably insightful views of the future of the energy industry, at least two of which have remained relevant far longer than any of us could have guessed. They received wide distribution throughout the company and had the general support of many in upper management. However, that project also came up with the seeds of another scenario, a much darker view involving the rejection of globalization and a growing wave of anti-Americanism around the world. Although in some respects it was no less prescient--or challenging--than the other three scenarios, it went nowhere, because the context for exploring it didn't exist in 1997. The external consultants who guided us through the process advised us not to pursue it, or risk destroying the credibility of the entire effort. That was good advice, even in retrospect, and it served as a useful lesson about the way that assessments of the future interact with our views of the present and our experience of the past. They must also be grounded in reality.

That's certainly true for energy, today. However much we might consider our energy future to be in flux, our views of it must take into account the embedded dominance of fossil fuels in our energy systems. Given the scale of these systems, that dominance will still exist next year and the following year, no matter what policies are enacted in the US or elsewhere. This might all seem to be up for grabs, but that's really only true in the long term. I've believed for a long time that we are on the threshold of a revolution in the ways that we produce and use energy, and it has arguably already begun. But no matter what happens in the economy, short of a massive global collapse, this revolution cannot be completed overnight. It will take decades, and that is equally true of our response to man-made climate change, which took a century to create.

Whenever I watch the news or read the latest statistics about the economy, I worry about what next year might look like. The uncertainties are huge and daunting. But I also know that while the chances of a Great Depression-style collapse or a radical socio-enviro-political transformation have risen, the economic future is likelier to resemble the last few decades, minus the unsustainable levels of personal and institutional debt. In the same way, the energy transformation is likely to play out as a set of big, gradual shifts: away from coal and other carbon-intensive fuels and toward renewable energy and nuclear power, and away from liquid transportation fuels and towards the eventual electrification of most ground vehicles. These transitions will take time, and that means that, whatever their price, a decade from now there will still be electricity and natural gas for the appliances and devices you buy today, and there will still be fuel for the car you buy today. That's one set of uncertainties over which we shouldn't lose sleep.

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