The Bright and Dark Sides of the Smart Grid

As I was catching up on email that accumulated during my travels last week, I ran across two items highlighting the contrast between the shining potential of the emerging "smart grid" for energy and its darker, more dangerous side. In his keynote address at the first annual GridWise Global Forum, IBM's CEO Samuel J. Palmisano described the vision and opportunity of a closely interconnected, highly efficient global energy system, while the unfolding story of the Stuxnet computer worm infecting the control system of Iran's Bushehr nuclear reactor and other facilities serves as a chilling reminder of the vulnerabilities that will likely accompany this revolution. That doesn't justify clinging to our un-networked past, but it certainly strikes a cautionary note, as Mr. Palmisano himself pointed out.

Last week was a big one for energy conferences. I skipped both the GridWise session in D.C. and MIT's annual Emerging Technologies Conference to attend IHS Herold's Pacesetters Energy Conference. I'll share some of my insights and observations from the latter in the weeks ahead, but for now I recommend Mr. Palmisano's GridWise speech as a good overview of the characteristics of a truly smart energy system and the ways in which our present energy sources and distribution networks fall short of constituting a well-functioning system. Without being Pollyannish, it presents a more positive outlook than the widely-quoted comment from the same conference by GE's CEO Jeffrey Immelt, concerning US energy policy, "It's just stupid what we have here today."

Yet while most of Mr. Palmisano's remarks focused on the inevitability and benefits of knitting together and adding intelligence to regional, national and global energy infrastructure and markets (and other key systems) he also had this to say about the security concerns this would create: "And when it comes to security--the technology is robust, but as the world's infrastructure becomes networked and interconnected, the exposures multiply exponentially. How vulnerable is the world's essential infrastructure? Are our electric grids only going to be as secure as a website? If we don't come together to forge a new policy framework that protects the individual's privacy and the community's and nation's security, people may say 'stop.' And they should."

I don't know if he had intrusions like Stuxnet in mind. I also suspect it's going to take a lot more than a new policy framework to prevent governments, organized crime and random hackers from exploiting the inevitable security gaps in the smart grid and other smart infrastructure to cause mayhem. Having treated the nefarious work of spammers and hackers as more of a costly annoyance than an intolerable violation--when all that was at stake was personal and financial data--will we be as cavalier about similar risks to our physical safety and security? Or does the rise of the smart grid portend a great "hacker crackdown", to use the title of a classic book on the hacker subculture?

Much of the speculation about the sophisticated Stuxnet exploit, which apparently targets a particular kind of industrial process control hardware and software, suggests that it took the capabilities of a government to develop. However, if we've learned anything from the last couple of decades of computing advances, it's that anything a government can do today in this field a smart, motivated individual can do in the not-so-distant future, particularly once he knows it can be done; it's an irresistible challenge for some. Ubiquitous computer viruses today, endemic power plant and refinery viruses tomorrow?

I agree with Mr. Palmisano concerning both the inevitability of smart grid development and the risk that security concerns or actual events could halt this shift in its tracks. As we call on the grid--or more accurately, grids--to handle rapidly increasing numbers of distributed power sources, particularly intermittent ones like wind and solar power, and as customers demand more choices and more control over their energy usage, the old un-smart grid will soon cease to be up to the task. However, we're already seeing pushback against smart meters in some areas, without any concrete evidence of misuse of consumer data or other harm. Imagine what this would look like if the smart grid had to reboot as often as your PC or periodically became infected with malware that shut down parts of it for hours or days. I know that the companies and agencies involved in the smart grid are working hard on solutions to these challenges; however, I'm just as sure that it's going to require a completely different approach than the one we've employed for dealing with computer security, with operating system and anti-virus providers seemingly always one step behind the bad guys.

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Is Gasoline Too Cheap?

It's an article of faith among many observers of the oil industry that gasoline is too cheap in the US. Environmentalists and economists point to various externalities that aren't included in the price consumers pay, while carmakers and alternative energy developers need a (much) higher price to make advanced vehicle technologies and substitute fuels competitive without subsidies. When someone asks, "Too low compared to what?" the response usually draws a comparison to prices in Europe and elsewhere. Yet while perusing a clever historical price comparison tool on the Energy Information Agency's website, I was struck by how high today's gas prices are, when adjusted for inflation, compared to those that prevailed for most of my life--other than during energy crises. That's surely a factor in current weak US gasoline demand, which has been running slightly below last year's, and a full 3% less than the record levels of 2007.

In the course of searching for a standard table of historical gasoline prices, I recently ran across a handy new feature (or merely one I hadn't seen before) of the EIA's Short-Term Energy Outlook report. It allows the public to compare the nominal and real prices for crude oil, gasoline and other fuels, and electricity, over a flexible interval adjusted with a slider control. The first thing I noticed was that although today's price for West Texas Intermediate crude oil of $76 per barrel seems pretty low compared to its $145/bbl high in July 2008, it's actually higher than the inflation-adjusted price for most of the period from 1973-2006, with the exception of the aftermath of the second 1970s oil shock. Now, the Consumer Price Index might not be the most appropriate measure of inflation for crude oil, as I've described in some detail before, but it is perfectly reasonable to apply it to gasoline prices.

On that basis, this week's national average of $2.72 per gallon--$0.17/gal. more than one year ago--is higher than the $0.53/gal. average (equivalent to $2.32/gal. today) for 1974, following the Arab Oil Embargo that helped trigger a severe global recession. It's higher than the $1.17/gal. average ($2.37/gal.) for 1985, before a flood of new production from the North Slope, North Sea and elsewhere broke OPEC's pricing power for more than a decade. It's even higher the $1.35/gal ($2.20) that we paid in the final lead-up to the first Gulf War in late 1990. In fact, it's almost a full dollar higher than the $1.75/gal. inflation-adjusted average for 1986-2005.

When gas prices dipped below $2.00/gal. in late 2008 and early 2009, that provided a significant stimulus to an economy suffering from the combination of a recession and financial crisis. At today's level, however, not only are gas prices not stimulating the economy, but they must be a significant drag on it. Our consumer psychology may be anchored for the time being on $4 as the gauge of what constitutes a high gas price, but compared to the prices that were in effect when our current patterns of mobility and employment were set and the vast majority of the US vehicle fleet was purchased, $2.70 seems more than sufficiently high to inflict economic pain.

Don't get me wrong. I understand full well that a realistic assessment of the cost of greenhouse gas emissions would add at least another $0.10-0.20/gal. to gas prices, and that the current level of US motor fuel taxes is inadequate to pay for the proper maintenance of our highway infrastructure, let alone all the other transportation priorities we'd like to pursue. Other economies have adjusted to much higher gas prices, though these do not prevent the European Union from being a larger net oil importer, in aggregate, than the US is. If OPEC can keep crude oil above $70/bbl when global demand is slack, it's anyone's guess how high it will go when the global economy is actually growing strongly, again. Yet while higher gas prices may well be in our future for many reasons, we should recognize that today's prices remain at oil-crisis levels, and the view of them as "too low" is very much in the eye of the beholder.

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Green Jobs and a Renewable Electricity Standard

With a full-blown climate bill off the table at least for this year, a coalition of renewable energy project developers, trade associations, investors and technology providers is apparently rallying around a simpler energy bill that has been on the back burner since last year. The group's arguments in favor of the bill's key provision of a national "renewable electricity standard" (RES) focus on "green jobs" and concerns that China is passing us by. There is merit in both of these themes, though not to the extent that the RES Alliance for Jobs suggests. A national RES, which would require utilities to source a growing proportion of electricity supplies from renewable energy might help project developers and investors, but its impact on cleantech manufacturing--which is at the heart of the employment and competitiveness issues--looks much less direct.

When I examined a draft of the American Clean Energy Leadership Act of 2009 (ACELA) last summer, I found it preferable to the bloated Waxman-Markey bill that the House had just passed. ACELA was more genuinely bi-partisan, coming out of the Senate Energy and Natural Resources Committee chaired by Senator Bingaman (D-NM), and it took a more realistic view of the continuing importance of a broad spectrum of energy resources, not just renewables. However, along with various other energy measures over the last year, it was overshadowed by other legislative priorities and the Macondo oil leak. In the event that this bill gets another chance before the new Congress takes office next January, we should understand what an RES can and can't do.

The industry is doubtless correct that expected demand for renewable energy hardware plays a key role when companies decide whether to begin or expand production of such gear in the US. An RES would likely boost demand for this equipment. However, as the reports earlier this year and late last year concerning the share of the Treasury's renewable energy grants awarded to non-US firms and projects using non-US equipment made clear, this is a necessary but not sufficient condition for a healthy US cleantech manufacturing sector. Absent a concerted effort to make US manufacturing more globally competitive, much of the benefit--including many of the associated "green jobs"--would accrue to other countries. An RES, like other measures emphasizing deployment, rather than manufacturing, would be a weak domestic job creator, at best. And that's without factoring in the job losses in energy-intensive sectors resulting from the higher electricity prices that a national RES would impose, as the costs of compliance get passed on to ratepayers.

Another reason that an RES, at least at the modest levels contemplated under the ACELA bill, probably wouldn't spark a huge wave of renewable energy development and manufacturing is that most of the states with significant wind, solar, or geothermal resources already have their own RPS mandates in place, generally at levels well above those that would be set by the national RES. So at least one likely short-term result would be inflation in the prices of the renewable energy credits (RECs) that make these standards work, as the states without much reliable wind or sunlight, or easily accessible hydrothermal reservoirs, scrambled to cover their new quotas from out-of-state providers. This would be a real boon for REC traders, at the expense of regulated utilities and their ratepayers.

As for being beaten by China in clean energy technology, this is a serious concern, particularly in light of recent reports that some Chinese support for cleantech might violate World Trade Organization rules. At the same time, we must factor in the reality that China has become the "workshop of the world", not just for cleantech hardware but for many other products, as well. If we wonder why China makes 40% of the world's photovoltaic cells and 30% of the world's wind turbines, the answer has a lot in common with why they also make so many of the world's laptops, PCs and flat-screen TVs. It also helps that China has one of the world's fastest-growing electricity markets, creating enormous internal demand for a wide variety of generating technologies, including renewables. Since US electricity demand has been growing much more slowly, and has recently declined, renewables here can't simply capture their fair share of growth; they must squeeze something else out--typically something that produces electricity more reliably or cheaply.

As I noted in last Monday's posting, renewable energy still needs help to compete with conventional energy. Finding the right means of providing that help is complicated by the aftermath of the financial crisis and recession. A national RES comes off second-best to a lot of other approaches that don't seem very feasible right now, and in any case it won't solve our unemployment and global competitiveness challenges. Perhaps it's the least-bad comprehensive support we can realistically provide renewables today, if we are truly convinced we must provide extra assistance beyond the federal tax credits and state-level policies already in place--and which its implementation would render somewhat redundant. That's a far cry from the expansive claims being made for it by a number of entities that stand to gain if it were enacted.

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Fuel Economy Gold Standard

I've long been fascinated by the X-Prize approach of providing substantial (but not astronomical) incentives for key breakthroughs: private sub-orbital flight, lunar landers, and most relevantly for this blog, the Progressive Automotive X-Prize for a 100 mile-per-gallon car, which began in 2006. The latter competition has been won by a trio of extremely efficient cars with very different architectures, power sources, and appearances. Splitting a $10 million prize probably won't even come close to reimbursing these teams for the cost of developing their cars, but the associated visibility should lead to some valuable opportunities. In a larger sense, the competition has served another useful purpose, In addition to furthering the technology for continuing to improve the efficiency of mainstream automobiles, it provides a gold standard reference against which to gauge the lavish claims of fuel economy we've already begun to hear from the makers of various plug-in electric vehicles.

One of the main aspects that impressed me about the Automotive X-Prize was the determination of its founders to avoid the superficial approach of merely counting how many gallons of liquid fuel each competing car burned, in favor of a comprehensive energy consumption metric, MPGe, or miles per gallon equivalent, which is based on the gasoline-equivalent energy used, regardless of source or form. MPGe gave the X-Prize judges a fair and unbiased means of comparing cars running on gasoline, ethanol, hydrogen, electricity, or any other energy carrier, onboard or offboard.

Now, as long as our primary concern is reducing our dependence on imported oil, a simple view of gallons of gasoline consumed isn't all bad. Displacing gasoline with electricity or hydrogen produced from domestic energy sources provides important benefits for energy security and our balance of trade, even if it doesn't save much actual energy in the process. One of the main arguments for vehicle electrification is that we can generate electricity in many different ways, but we can only produce gasoline or effective liquid-fuel substitutes for it in a few ways. However, in the long run, total energy consumption matters, particularly because of its strong linkage with emissions. Running a Nissan Leaf or GM Volt on electricity generated from coal--as would be the case in large swaths of the country--certainly saves oil, but it doesn't do very much for the atmosphere or climate. That's where MPGe comes in, and that's why I was pleased that the EPA and Department of Transportation have proposed something similar in their new fuel economy stickers for cars.

So when you see an ad for a new plug-in car that claims that to get effectively 100, 200, or even 300 miles per gallon, you should take a careful look at it, both in terms of MPGe and the physical characteristics of the car in question. This is what a real 100 mpg 4-passenger car looks like: the 830 lb., one-cylinder engined Very Light Car of the Edison2 team--from Virginia, I might add. Or consider the 187 MPGe Wave II two-seater plug-in battery electric car from Li-ion Motors. Cars like this show what it takes to deliver that kind of efficiency on a comprehensive basis. If you're buying a plug-in production model in the next year or two, and it looks more like a normal passenger car than these do, with room for four or more passengers and equipped with all the usual accessories we've grown accustomed to, then you should recognize that while it might burn little or no fuel from petroleum, that's not the whole story.

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Avoiding Commoditization

It's no secret that it's tough to make money in a commodity business. However, that's precisely what most renewable energy companies are attempting to do, by going after some of the biggest, most commoditized markets of all, in fuel and electricity. An article in MIT's Technology Review about a New Zealand biofuels start-up illustrates one path around this trap, by producing specialty products, though there are others, including various branding strategies. Choosing the right strategy may depend as much on where an industry is in its lifecycle as on the actual output of the company's technology.

It wasn't so long ago that even the enormous US gasoline market retained significant non-commodity attributes. Fuel marketers successfully differentiated themselves on service and perceptions of quality, and those that were best at this were able to command an extra penny or two at the pump--a huge uplift in profit margin when gas was under a dollar a gallon. One of the classics in this line was an old Shell marketing campaign focused on "Super Shell with Platformate", implying a unique formulation that delivered more power and more mileage. Only when I started working in the industry did I learn that essentially all gasoline contained Platformate, which was just a brand name for a common gasoline component that had been catalytically reformed to turn straight hydrocarbon molecules into higher-octane ring compounds. Today, with the basic formulation of gasoline set not by refiners but by federal and state environmental agencies, fuel marketers have attempted to differentiate themselves on the basis of infusing branded additives. I'm not sure how successful that has been, outside the niche market of motorists driving high-end vehicles with expensive, high-performance engines.

The New Zealand biofuels company in today's article, LanzaTech, is apparently using tailored bacteria to convert carbon monoxide from steel mill and power plant flue gas into ethanol and useful chemicals. The process is doubly interesting, because although carbon monoxide is not of great concern as a greenhouse gas, it is a major local pollutant, and it can slow the decay of other greenhouse gases and contribute to atmospheric ozone. Producing ethanol puts LanzaTech into direct competition with the rapidly growing output of crop-based biofuels producers, including highly efficient production from sugar cane in the tropics. But by targeting the production of petrochemical intermediates (used to make other chemicals) like butanediol, they can access higher-margin, less-commoditized markets. A facility wouldn't have to produce much of these products, along with the ethanol, to boost its profitability by enough to make a difference.

This strategy could also be beneficial for companies using costly processes for converting cellulosic biomass into fuel, particularly as they scale up from laboratory and demonstration scale, because scale is a key limitation on specialty products. One of the main reasons these products are typically worth a lot more than commodity fuels is that they are produced and used in relatively small quantities, and their markets aren't large enough to attract the biggest competitors. The first industrial-scale gas-to-liquids (GTL) facilities made good margins selling waxes and other specialty products along with the high-quality diesel they produced, but as GTL becomes more mainstream, with plants like Oryx GTL and the giant Pearl GTL in Qatar, that option becomes less valuable.

Biofuel start-ups already face enough technology challenges without focusing all their efforts on making ethanol that can't be differentiated from the output of corn ethanol plants that have been at this game a lot longer and have mastered not only the production process, but also the intricacies of managing their large supply chains--a huge, under-appreciated challenge for cellulosic biofuels. Focusing initially on specialty products, to the degree their technologies allow, would give them time to scale up and work out the kinks, before tackling a market in which cost is everything.

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Post-Stimulus Transition for Renewable Energy

One of the largest uncertainties affecting the US renewable energy sector is how it will make the transition from the special subsidies provided under last year's stimulus bill (American Recovery and Reinvestment Act of 2009) back to the "normal" incentives available prior to the financial crisis and recession. The key element of this concerns the Treasury renewable energy grant program, which has stood in for the "tax equity" market that stalled around the time Lehman Brothers went under. Eligibility for the grants expires at the end of this year, and companies that have benefited from them are calling for an extension into 2011 or beyond. That looks like a long-shot at this point. However, another proposal not specifically aimed at renewable energy could provide exactly the sort of transition support the industry requires, while also beginning the necessary task of treating this sector more like others.

As of the Treasury Department's most recent update, renewable energy projects have received a total of $5.2 billion under the "1603" grant program, with more than 85% going to large-scale wind farms. Solar electric and thermal projects received $330 million, or about 6%, trailed by geothermal, biomass power, and small-scale wind. With the financial markets that developers had previously relied on to exchange future tax credits for current cash in disarray last year, the 1603 grants were a crucial stop-gap. However, with electricity demand still lagging and renewables facing strong competition from cheap natural gas, the US wind industry has gone into a slump that might deepen further, once developers' new projects are no longer eligible for up-front cash grants, forcing them to wait for tax credits that accrue as power is generated.

Several proposals to extend the 1603 grants are floating around the Congress, including one from Senator Cantwell (D-WA), but the mid-term elections are looming and the mood in the country is turning away from direct economic stimulus, so an extension is far from a sure thing. Nor does the argument that the grants are deficit-neutral, because they merely accelerate payments, entirely wash. Once the incentive for wind power reverts to the Production Tax Credit (PTC) or substitute Investment Tax Credit (ITC) on 1/1/11, companies would again need substantial taxable earnings to claim it, and not all would qualify. That's one of the main reasons that cash up front was such a powerful incentive for developers. It's also never been clear how the tax equity market was expected to revive fully as long as firms could get cash from the Treasury instead, without any transaction fees beyond filling out the paperwork. Whatever we do about the expiring stimulus grants, we need to get this market on a trajectory back to normal.

The best solution for bridging this transition might involve a measure that doesn't seem to have been aimed at the renewable energy sector at all. Last week President Obama proposed allowing businesses to expense 100% of capital investments in 2011. This would kick in just as eligibility for the 1603 grants ends, and at the 35% tax rate that most corporations are subject to, it could actually be worth more than the 30% renewable energy ITC upon which the grants were based. That would help compensate for the difference between receiving these funds up front and waiting to file a tax return. The new benefit would also be calculated on the amount invested, like the grants, rather than the quantity of power produced, as under the PTC.

There's an additional advantage to this approach, which would put the decision for capital investment and allocation entirely back in the hands of corporate managers and boards--who are accountable for their results--rather than government bureaucrats with little experience at running a business or gauging which projects make sense and which don't. And if it means that companies that can't wait until they file taxes to collect the benefit must convince a banker or other investor of the merits of the project, that's an extra layer of market discipline that might winnow out some projects now, but would help ensure that those that survive are more viable.

In the long run, renewable energy must stand on its own feet, without incentives that are orders of magnitude larger, per unit of energy produced, than those for conventional energy. Most renewable electricity technologies aren't ready to make that leap, but forcing them to rely on the same 100% investment expensing that other businesses would be given next year (if enacted into law) looks like a good first step, instead of extending a stimulus program that must end sooner or later.

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Climate-Proofing Infrastructure

Even in an election year, it's hard to make infrastructure repair sound glamorous. Perhaps that helps explain why the latest annual report card on the condition of US infrastructure from the American Society of Civil Engineers was so dismal, a "D" overall. In any given year, there are usually more exciting things to spend our money on, until we realize we haven't spent enough on these necessary props for our civilization for decades. The president's latest proposal to improve roads, rails and runways could help, though it faces skepticism from those who thought such fixes were already covered by last year's federal stimulus package. Perhaps what's missing is a green angle, and I don't mean that cynically.

If there are any aspects of infrastructure that have acquired a hint of glamour, lately, it's the ones that deal with making energy more sustainable or reducing emissions. The "smart grid" comes to mind, along with renewable power generation. As I was reading a recent New York Times op-ed concerning whether this year's bizarre weather is attributable to global warming--it's not, but it could be a taste of things to come--it occurred to me that climate-proofing our roads, power lines, train tracks, sewers, and other basic infrastructure could be at least as important as much more controversial policies addressing whether and how to reduce greenhouse gas emissions. In fact, whether climate change is caused in whole, partly, or not at all by humanity, we must still deal with its consequences. And even if all greenhouse gas emissions ended tomorrow--an impossibility--the climate is predicted to continue warming for a long time. That makes adapting our infrastructure to withstand climate change a suitably green endeavor.

However we explain this year's odd weather, including massive floods, heat waves and the fires in Russia--which incidentally contributed to a spike in US ethanol prices by driving up corn prices--scientists expect our future climate to include more such events. A few years ago, "adaptation" was taboo to some environmentalists, signaling defeatism. They bet everything on "mitigation"--reducing emissions. Since mitigation may not happen soon enough, on a large enough scale globally to make a difference, nothing we do can avert the need for adaptation to a world of less benign weather. In that respect any jobs created by a concerted effort to shore up our infrastructure to cope with more frequent weather events would be just as green as those associated with building and installing wind turbines and solar panels.

What might this entail? Well, most of the detail is outside my area of expertise, but if a bridge needs to be replaced, perhaps the new one should be designed to provide more clearance between the river and the roadway, with higher floodwaters in mind. Similarly, should highways be built (or rebuilt) with better drainage where flooding is a growing risk, or using concrete or asphalt formulated to withstand more extreme heat and cold? And having spent more than a decade living in regions subject to high winds and ice storms, putting utility lines underground makes lots of sense even without climate change, and it could become indispensable with it. In some respects this merely boils down to widening the routine assumptions that engineers make concerning the conditions that a piece of infrastructure must withstand during its lifetime, in order to cope with more uncertainty.

All of this costs money and competes with other priorities. The more resilient (and expensive) we make each project, the fewer of them we're going to do, unless we make upgrading our infrastructure--and not just the semi-glamorous parts--a much higher priority than it has been. That would require a different mindset, and not just with regard to the risks of climate change. Nor are the political rewards likely to be quick, because if anything, it involves the antithesis of the "shovel-ready" projects the stimulus targeted, since much will need to be rethought first. That wouldn't have deterred the generations of Americans that built the systems that must now be replaced; it shouldn't deter us, either, particularly if we recognize the connection to what many see as the greatest challenge of our century.

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