Displacing More Oil from Power Generation

Increasing the US contribution of wind and solar power, geothermal energy, and even nuclear power would have virtually no effect on our oil imports or energy security, because we use so little oil for power. However, a pair of articles reminded me that this logic doesn't necessarily apply elsewhere. On Monday the Financial Times described the rapid growth of electricity demand in the Middle East, much of it fueled by oil that might otherwise be exported. Saudi Arabia apparently burns up to a million barrels per day of oil for power generation in the summer. And last week Fast Company highlighted the potential of large fuel cells to replace the diesel engines that generate power aboard tankers and other ships. As oil prices again approach $100 per barrel, with the possibility of even higher prices ahead when the entire global economy has returned to normal growth, these situations represent golden opportunities to save large quantities of oil for other uses for which its nearest substitutes still cannot replace it at scale.

Based on Department of Energy data the US generated just 0.9% of our electricity from petroleum and its products in the last year, with more than a third of that fueled by petroleum coke, a low-value solid byproduct of oil refining. The 43.5 million barrels of petroleum liquids used in power generation in 2009 represented only 0.6% of the 6.9 billion barrels the US consumed that year. When you break that sliver down by location, much of it is used for either backup generation or on islands or other remote locations. In other words, the remaining potential to displace oil from power generation in the US is very small and not necessarily well-suited to the intermittent renewable energy technologies now in favor. (That should change as electric vehicles enter the fleet by the millions, but that prospect remains some years off, at least.)

That situation isn't representative of the world as a whole, however, with oil accounting for almost 5% of global electricity generation in 2007. It was even higher on a regional basis, at 7% outside the countries of the OECD and 35% in the Middle East. Globally this amounted to 5 million bbl/day, or nearly 6% of total oil demand. That might not sound like much, until you consider that a drop in demand of around 3 million bbl/day from the first quarter of 2008 to the first quarter of 2009 contributed to a decline in oil prices--ignoring the mid-2008 spike to $145/bbl--of roughly $50/bbl. The price of oil is truly determined by the last few million bbl/day of supply and/or demand. You don't need to be worried about Peak Oil to see the oil used globally for power generation as potentially low-hanging fruit for redeployment, and as a significant emissions-reduction opportunity.

The best candidates to displace that oil vary by country and region. For countries with a lot of natural gas, like the big producers of the Middle East, a switch to that fuel seems like an obvious choice. However, much of the world's natural gas outside North America, including most LNG on long-term contracts, is priced based on oil, so the savings probably wouldn't be as large as they would be here. Even for oil exporters like Saudi Arabia, it might still make more sense to burn the residual fuel from the country's many large refineries, instead of importing LNG (or developing more of its own gas) and investing in the refining hardware to turn that residuum into gasoline, diesel and jet fuel. That might explain why the Kingdom is pursuing nuclear power to cover much of its future generating capacity growth. Renewables have also been capturing a foothold in the region, particularly in projects like Masdar City.

Finally, the large-scale marine fuel cell opportunity described in Fast Company would target a segment where oil has a near monopoly, outside of military fleets: shipboard power. And while these molten carbonate or solid-oxide high-temperature fuel cells would still consume fossil fuels to auto-generate the hydrogen they use, their high efficiencies would reduce overall oil consumption in shipping. If it proves possible eventually to use even larger fuel cells as the basis for electrifying vessel propulsion, as the article speculated, then oil savings would be much more substantial. Global consumption of bunker fuel by ships amounts to roughly 3.7 million bbl/day, or around 4% of total oil demand. And the environmental benefits of such a switch would go beyond greenhouse gases to include significant local air pollution benefits, particularly in ports.

None of this represents new thinking, but rather an extension of some of the strategies by which the developed world of the time adapted to the high oil prices of the twin oil crises in the 1970s. Still, it's easy to forget that that the quantity of oil tied up in the sectors mentioned above exceeds the output of the entire North Sea at its peak. If oil prices hadn't buckled under the weight of the financial crisis and recession a couple of years ago and instead remained on their previous trajectory, I imagine we'd already be well down the path of freeing up more of this oil. Recent price trends suggest that the primary motivation for doing so could be about to return.

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Commodity Cycles and Renewable Energy Costs

It's an article of faith for many that the costs of renewable energy sources will continue to decline, even while the costs of many other forms of energy increase. This view is supported by the impressive experience with both wind turbines and solar photovoltaic (PV) installations over the last couple of decades. The latest survey of US solar cost trends from the Lawrence Berkeley National Laboratory (LBNL) showed that between 1998 and 2009, the capacity-weighted average cost of PV installations fell by more than 30%, from $10.80/Watt to $7.50/W, with another drop of roughly $1/W occurring during 2010. However, it's important to think about what's behind these trends when assessing their future progression. Continued cost declines are subject to many uncertainties, not the least of which is the current rising tide of commodity prices as the global economy recovers.

The rationale for continued cost declines that I encounter most often is based on volume: If we install more wind and solar capacity, costs will fall in a virtuous cycle, making subsequent installations cheaper and prompting even more of them. The underlying logic behind this argument derives from empirically observed "experience curves", in which cost components such as manufacturing fall by a set percentage for each doubling of cumulative output. The problem with these curves is that they tend to flatten out fairly quickly, delivering their maximum effect in the early years of a technology, when doublings are frequent. Then they slow significantly as the technology gains scale and the interval between doublings grows. A look at global wind turbine capacity shows that it doubled four times between 1996 and 2008. At the currently expected pace of additions, the next twelve years could produce just two or three doublings. And as the experience curve effect slows, other factors including commodity costs can overwhelm it.

We saw that a few years ago, when the boom economy stoked by the inflating global financial bubble drove up commodity and construction costs to such a degree that wind project costs stopped falling and began to rise. These pressures eased after 2008, mainly because the recession and financial crisis reduced overall demand for construction and raw materials, while the rapid growth of renewable energy equipment manufacturing, especially in Asia, led to overcapacity and stronger price competition. That probably accounts for much of the effect that LBNL saw in its solar trends in the last two years, rather than the sort of scientific and engineering improvements that drive experience curve effects.

So what is likely to happen as the economy rebounds and the slack that developed is taken up? We're already seeing the early results in higher prices of raw materials such as steel. And higher prices for oil and coal, which are important inputs in the extraction and processing of many other raw materials, should intensify the pressure already being felt from the demand in developing Asia. For renewables, this could be further complicated by tightening supplies of critical materials such as rare earth metals, Tellurium, Lithium and other key ingredients of electric motors, thin-film solar modules, and electric vehicle batteries. Toyota and other makers of hybrid and electric vehicles are working on ways to circumvent these materials, but the results might not come fast enough to prevent a crunch.

The renewable energy industry is counting on a return to economic growth to boost demand for electricity. Together with government-mandated renewable energy targets, that should translate into increased demand for equipment like wind turbines and solar panels. However, if the underlying source of that demand increases their material and construction costs just as governments are coming under increasing pressure to reduce subsidies for the industry, the result might be that the end-users of these products could see their effective costs go up for the first time in several years. That would be a rude shock for those who believe that these costs must inevitably fall as installations grow.

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The Commission Finds...

I've been skimming through the report of the presidential commission on the Deepwater Horizon accident. Lacking time to read every word, I'm finding it on the whole a moderate document. By that I mean that it will not satisfy either those who expected the commission to repudiate deepwater drilling entirely or those that harbored faint hopes that it might issue a blueprint for a rapid return to drilling incorporating the key learnings of the disaster. Instead, as a number of observers have pointed out, its findings point to a complex web of contributing factors--in the process implicating the entire industry--and its recommendations suggest a thicket of new regulations and added fees for oil & gas exploration in US waters.

Anyone awaiting gleaming insights and Ah-ha! moments such as those that exemplified the Rogers Commission's investigation of the space shuttle Challenger accident was bound to be disappointed. With no commissioner having direct knowledge of the theory and practice of offshore drilling in the way that the Rogers Commission included some of the leading lights of the US aerospace community at the time, there was no one to lead it to such results, only paid technical staff to carry out the guidance of a team led by professional politicians. That's not as bad as it sounds. Given the breakdown of what little trust existed for the oil & gas industry, a commission made up largely of experienced oil executives, petroleum engineers and geologists would have lacked credibility with governmental decision makers and the public. However, the composition of the commission surely presaged the outcome of its work.

In the foreword to the document, which is probably all that many will ever read, I was reassured to see a broad recognition of the importance of petroleum to the US economy, the challenges involved in moving away from it, and the necessity of exploiting the resources of the Gulf of Mexico. The commission also pointed out that our conscious decision to focus offshore drilling in the Gulf and not elsewhere carries risks--a surprising admission considering that one of the commission chairs played a significant role in the establishment of that policy. However, I was disappointed at the sweeping indictment of the practices of the entire industry.

The commission was neither tasked nor staffed to investigate the entire US offshore drilling community. Such an undertaking would have required either years or a much larger effort. The parallel to the implication that because most of the industry uses the same contractors, then most of the industry must operate in a similarly risky manner would be as if the Rogers Commission had found that because most rockets and many aircraft were built with components from the same suppliers, most rockets and aircraft must be as risky as the shuttle proved to be. That logic is shaky, at best.

My own experience in the industry doesn't qualify me to pass judgment on the overall quality of the commission's investigation or the full implications of its technical and procedural recommendations. However, in my quick perusal of the document several points jumped out at me that seemed to reflect a limited perspective. I'll highlight two examples.

First, with regard to the risk of fatalities on offshore facilities, the report concludes that "From 2004 to 2009, fatalities in the offshore oil and gas industry were more than four times higher per person-hours worked in US waters than in European waters, even though many of the same companies work in both venues." This was backed up by a chart on page 228 comparing these statistics from several sources. Yet while every fatality is one too many, and no one should be complacent about them, I was astonished that it didn't seem to have occurred to the commission's staff to compare these accident statistics to the US industrial safety statistics, either overall or in similar industrial settings. In a brief Google search I turned up the "Census of Fatal Occupational Injuries Summary, 2009" from the Bureau of Labor Statistics of the US Dept. of Labor. Converting the average US fatal work injury rate of 3.3 per 100,000 full-time equivalent workers for 2009 (the year before Deepwater Horizon) to a comparable rate of 1.6 per 100 million manhours, it appears that offshore work is roughly three times as hazardous as the average of all work. When you consider that the latter reflects the contribution of tens of millions of service and government workers in categories for which highway accidents and homicides account for the largest share of risk, I'm not sure how much lower I'd expect the fatality rate to be for a group of people working long hours aboard facilities jammed with rotating equipment and heavy objects. The subject at least deserves a more thorough look than it was given here.

Then there's recommendation G2, which is the catch-all funding mechanism for all the extra regulatory work required to carry out the commission's other recommendations. I don't disagree that the agencies that monitor and issue permits for offshore drilling should be staffed with enough professionals of suitable experience and training to provide effective oversight and to minimize bottlenecks and delays in the permitting and oversight process. However, the idea that the industry should pay for this with added fees--based on a half-baked analogy to the telecommunications industry--ignores the enormous funding mechanism that's already in place in the form of the lease bonuses, rents and royalties collected by the government from these companies. In the previous fiscal year the agency formerly known as the MMS reported $2.3 billion in revenue from activity on the Outer Continental Shelf, after collecting $9.1 billion the year before. If the federal government has been spending these funds for other purposes, rather than allocating a sufficient portion to protect its investment, there's no guarantee that additional monies collected from the industry would be spent more wisely.

Ultimately, the questions of what happened on the Deepwater Horizon and who bears the blame are likely to be resolved in a court of law. It may be just as well that the commission didn't wait for all the evidence to be in to issue its findings. But they also can't be viewed in isolation. We live in a world in which OPEC seems to be quite content to sit on its ample spare production capacity and watch oil prices ratchet back up towards $100 per barrel and potentially higher, as the global economy recovers. The oil buried under the Gulf represents one our best hedges against OPEC's understandable satisfaction with the status quo. Yes, we need better response capabilities for future spills--some of which is already in the works--and yes, the industry must increase its focus on offshore safety and accident prevention. At the same time, we also need the industry to resume drilling absolutely as quickly as feasible under the new guidelines. The apparent lack of urgency on the part of the commission and administration to make that happen seems divorced from the broader context.

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High Coal Prices Bode Well for Renewables

I don't pretend to follow the coal market to any great extent. No one can keep track of everything. However, as I was reading an article in today's Wall St. Journal on the impact of the current Australian flooding on US coal exports, and another in the Financial Times concerning the implications of the timing of the floods for annual coal contract pricing, the dots seemed to connect. It struck me that all other things being equal, higher coal prices ought to be positive for natural gas, the main substitute for coal in electric power generation, while also giving renewable power a shot in the arm. That couldn't come at a better time for US wind power developers and the wind turbine manufacturers that supply them, many of whom are coming off a bad year.

As the Journal points out, the Australian state of Queensland is the leading exporter of the coal used in making steel. With much of Queensland under water, US coal exporters are finding a ready market for their output, with exports expected to surge by 10% this year. Although metallurgical coal represents a different segment of the market than the thermal coal that goes into power plants, the internationally-traded market for the latter has also tightened considerably, with prices well above $100 per ton, and apparently above their 2008 record levels. Nor is this solely the result of the Australian floods. Despite coal having fallen into disfavor in the US, its global fundamentals remain strong, supported by robust economic growth in developing countries that rely on it as a source of cheap and reliable power generation. China's coal demand has nearly tripled since 2000.

The first beneficiary of higher coal prices ought to be natural gas. The competition between gas and coal is complex, depending on the interaction between demand and available generating capacity in regional power markets. However, between 2007 and the most recent 12 months for which EIA data are available, the overall share of gas in US power generation increased from 21.6% to 23.7%--even as total electricity demand declined by about 2%--while coal's share fell from 48.5% to 45.4%. Much of this shift has been facilitated by the effect of expanding natural gas production on the price of gas into the power sector. The total share of non-hydro renewable power also grew during this interval, from 2.5% to 3.8%, even though intermittent sources like wind and solar power are likelier to compete head-to-head with gas-fired generation, rather than coal. So if renewables were taking share from gas, as a result of federal renewable energy incentives and state renewable portfolio standards, then gas was taking even more share from coal.

Today's high coal prices ought to support the continuation of that dynamic. While more expensive coal might not lead directly to the construction of more wind farms, it should certainly push up prices for baseload and mid-load electricity, making gas more competitive in those segments. That ought to boost gas prices, in turn making renewables more competitive with gas. Add in the return of some of the electricity demand that disappeared during the recession and developers of wind and solar projects should see increased interest from utilities in signing long-term power purchase agreements (PPA) for their output. The lag in PPA interest and weak financing environment were big factors in last year's lull in US wind turbine installations, which appear to have been the lowest since at least 2007, at roughly half the record level set the previous year.

That disappointing performance came in spite of the industry's receiving $3.2 billion in Treasury renewable energy cash grants, which were extended with much fanfare for another year as part of the lame duck tax compromise. Anyone expecting the extension of these incentives to lead to a surge of wind turbine installations this year was paying too much attention to their own PR; the best the industry could realistically have hoped for in the extension was to avoid falling off a cliff. However, if coal prices remain strong for the balance of the year and the economy continues on its current pace of recovery or improves on it, then the combination of all these factors just might contribute to a healthy rebound for wind.

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Energy from Wastewater

Producing energy from waste is hardly a new idea, as illustrated by efforts such as the landfill methane-to-LNG project I mentioned in November and by numerous demonstration projects to turn various forms of solid waste into liquid fuels. However, I don't normally think of wastewater as having any noteworthy energy potential to extract. An emailed press release from the American Chemical Society announcing the publication of a paper on this subject in Environmental Science & Technology opened my eyes. Based on tests of wastewater streams in Britain, it might be possible to produce at least as much energy from wastewater as is normally used in the process of treating it. That's an intriguing prospect, although we should put it in perspective.

The press release and the paper included a number of statistics, some more accessible than others. One of the two wastewater streams tested in the UK had an energy content of 7.6 kilojoules per liter, which as the ACS noted is equivalent to each gallon being able to light a 100 watt bulb for 5 minutes. (The other sample contained twice that much energy.) That still doesn't sound very impressive until you factor in some other statistics in the report, such as the 12.5 trillion gallons per year of wastewater processed annually in US sewage treatment plants, at an energy cost of around 1.3% of US electricity consumption. That suggests that in theory US treated wastewater might generate as much power, net of processing requirements, as we currently get from biomass power plants fired on wood, which supplied just under 1% of our electricity last year.

Actually harnessing that potential wouldn't be simple. As you might imagine, and as the paper confirms, wastewater is hardly uniform. It contains a wide array of compounds that would require different techniques to produce energy in useful forms such as hydrogen, methane, or direct electricity. The more techniques required at one facility, the bigger the investment involved. Another complication relates to the low concentrations in which these energy precursors are found in wastewater. The team at Newcastle University measured them at levels in the hundreds of parts per million--well below 1%. That implies the need for either separation before processing or handling very large volumes. Either approach adds to cost or complexity. Still, the idea of producing energy from this source at the sewage treatment plant goes one step beyond the usual logic of waste-to-energy projects: Not only is the cost of the feedstock low or effectively negative, but it requires no additional transportation; it's already flowing through the plant.

Extracting energy from wastewater won't solve all of our energy or environmental problems, and it might prove to be more costly than it's worth. However, the paper's conclusion, that this merits a closer examination in a wider variety of settings, seems entirely justified. It makes even more sense in the context of our growing need to make better use of the water portion of this waste.

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The Results of Energy Policy

The combination of an energy event yesterday in Washington, DC that I was unable to attend and a comment I received on Monday's posting got me thinking about energy policy in the context of the new year and the start of the new Congressional session today. National energy policy has been debated throughout my adult life, whether the policy of the time was clearly articulated and effectively executed or not. The most important question is not what the policy says, but what it does and whether that aligns with what the nation really needs its energy industry to deliver. In my view our current energy policy is on the wrong track, and the new Congress and the spirit of bi-partisan cooperation that emerged in the recent lame duck session provide an excellent opportunity to revise it along more effective lines.

I would summarize our current energy policy as being focused on promoting greater efficiency and the development and deployment of new energy technologies, in order to reduce our dependence on imported energy from unstable or unreliable sources, and to reduce our emissions of greenhouse gases, more than 80% of which are associated with our production and consumption of energy. That sounds fine, but in practice the effect of that policy appears to be replacing low-cost energy with higher-cost energy, while attempting to maximize the employment associated with producing clean energy, rather than minimizing its cost.

What are the results so far? Well, the significant reduction in US oil imports that we've experienced recently is attributable mainly to the weak economy and high unemployment, rather than to improvements in vehicle fuel economy or domestic biofuel production. And the reduction of greenhouse gas emissions that has occurred in the last several years has mainly resulted not from policy-related measures to expand wind power or replace incandescent lights with compact fluorescents, but from two events with little connection to energy policy: the recession--particularly the slowdown in US manufacturing--and the unexpected growth of natural gas production from shale resources. That might not be a fair gauge of what current policies could achieve in the future, but it's clear that an energy policy that depended on economic weakness for its success would be contrary to our national interest.

For decades the de facto energy policy of the US promoted cheap and abundant energy to sustain economic growth. We live in more complex times, but focusing most of our current energy efforts on solutions that are still small-scale and high-cost seems unlikely to do much for the economic recovery. If we were really serious about fueling the recovery, we'd be at least as interested in promoting abundant, low-cost energy at a scale suitable for the needs of a $14 trillion economy, and for which employment gains in the energy industry didn't come at the expense of productivity. A study on the trade-offs between resource access and new taxes on the oil & gas industry that was prepared in conjunction with the release yesterday of API's "State of American Energy" report provides a case in point.

An international energy consultancy analyzed the potential production and employment gains associated with expanded access to the domestic resources that are currently off limits in places like the eastern Gulf of Mexico, the Atlantic and Pacific coasts, and the Arctic National Wildlife Refuge. They also looked at the federal revenue and employment impact of higher taxes on the US oil & gas industry, along the lines of a series of proposals from the administration and Congress in the last two years. They found that access to off-limits oil and gas could yield up to an extra 2.8 million barrels per day of oil and gas liquids and 6.6 billion cubic feet per day of gas by 2025, with direct and indirect gains in employment of more than 500,000 workers. By contrast, increasing taxes on the industry would not only reduce production and employment, as domestic opportunities become less attractive than those elsewhere, but also reduce total federal revenues from taxes, royalties and leasing, following a brief uptick in the initial period after their introduction. Although I'm not sanguine about the chances for increasing access when the administration has just reversed its earlier expansion, that would at least be more consistent with an effective energy policy than raising taxes on the production of energy.

We have a long, bi-partisan tradition of well-intended but ineffective energy policy, and the current policy continues that trend, even if its shortcomings differ significantly from those of past policies. The good news is that we have many more options and choices than we did when the US energy policy debate began in earnest in the 1970s. What we need now is a policy that recognizes that most of these sources, old and new, are important for our present and future energy security, but that what we chiefly require is abundant low-cost energy to fuel an economic revival strong enough to help shrink our enormous federal, state and local fiscal deficits and resulting massive debts, which also have solid bi-partisan pedigrees. It should also put us on a path to lower emissions from whatever sources can deliver them on a meaningful scale and at a cost that we can afford.

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The Year of Regulation?

Some new years seem newer than others, bringing major changes rather than just the turning of a calendar page. 2011 is shaping up that way, with a return to divided government in the US and the beginning of national greenhouse gas regulation by the EPA based on that agency's interpretation of the Clean Air Act, rather than as a result of explicit new Congressional legislation. As the ongoing legal battle over this between the EPA and the state of Texas demonstrates, there's a lot at stake, and the final outcome has not yet been determined.

When the US Supreme Court ruled in 2007 that CO2 and other greenhouse gases constituted pollution that was subject to regulation under the Clean Air Act, it set in motion the process that is now culminating with the EPA's proposed rules for regulating these gases. Initially this will take the form of what the agency calls New Source Performance Standards, applying only to new facilities and modifications within existing facilitates, and only for sources emitting more than 50,000 tons per year of greenhouse gases (GHGs). That exempts residential and most business activities using less than the energy equivalent of about two gasoline tank-trucks per day. The first phase of these regulations is specifically targeted at power plants and oil refineries, and over time it could significantly alter the way that electricity is produced and oil refined in this country.

I've argued for years that this is entirely the wrong way to go about reducing emissions, because greenhouse gases are global, rather than local in effect, and a command and control approach applied to point sources of CO2 and other GHGs will miss many of the least expensive emission reduction opportunities while forcing businesses to focus their efforts on some of the most expensive. Cap and trade or some other means of establishing a price on emissions would have been much more efficient, although the version of cap and trade passed by the House of Representatives in 2009 was a miserable excuse for such a system, distorted as it was by preferential treatment for favored groups and sectors.

But this isn't just a question of economic efficiency; it's also a question of effectiveness. Regulating power plant emissions addresses 34% of total gross US GHG emissions, including roughly 92% of the emissions from the coal value chain, while regulating refineries tackles less than 10% of the emissions from the petroleum value chain--and some of the hardest ones to cut, at that. Refineries are already about 90% efficient. Squeezing even more efficiency from them--which would be the net effect of capping their GHG emissions, since most of those are associated with the combustion of fossil fuels--is likely to cost a lot more than the value of any energy savings such changes would yield. That could have a significant impact on states like Texas, which is home to more than a quarter of the country's refining capacity. The result would also increase national energy costs in either of two ways, with higher operating costs at US refineries being passed on to consumers in the price of fuels, or by reducing US refining throughput and capacity and increasing our reliance on product imports. The latter works directly against the widely-held notion that anything that reduces emissions must automatically be good for our energy security.

None of this is set in stone, although I certainly wouldn't bet against some version of it coming into effect. The incoming Republican chairman of the House Energy and Commerce Committee has already indicated his determination to restrain the regulation of GHGs by the EPA, and even without a majority in the Senate the House, which controls the government's purse strings, could make it much harder for EPA to pursue this course. At the same time, several previous sponsors of Senate energy and climate legislation have expressed interest in a new, bi-partisan approach to energy, and it's not inconceivable that watering down the proposed EPA regs could become part of a deal to establish a national low-emission energy standard that would include not just renewables, but also nuclear energy and possibly even natural gas. I will be watching these developments with great interest in the weeks and months ahead.

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