3. Economic and Policy Drivers for Clean Energy and Transport Infrastructure
(originally published September 9, 2008)
In the first two parts of this summary series for policy makers, we have established that electric driven transport can fairly rapidly substitute for petroleum in most ground transport applications and that renewable electric generators will be the most quickly deployable and functional of the available energy alternatives. Building a renewable electron economy is the key frontline approach we have to creating an energy system that does not depend on exhaustible resources or emit fossil carbon into the atmosphere. However, there are challenges and barriers to overcome in order to move quickly towards the clean energy economy of the near future as we have not yet seen a strong, spontaneous market for such a solution emerge on its own. This is where policy and the structure of our financing system for infrastructure and energy are key.
Is Al Gore’s Goal of 100% Clean Electricity in 10 years Possible?
Al Gore and the Alliance for Climate Protection have issued a call for us to “Repower America”, generating 100% of our electricity from clean sources within 10 years. Gore’s call has sometimes been reported as 100% renewables but if you read his statements closely, he says “clean” sources; he may be including nuclear and coal CCS in the mix though the examples he usually puts forward are renewable energy alternatives. I support the efforts of the We Campaign, yet I believe leaders of the climate protection movement need to level with the American people about what will be involved in building this much energy and transport infrastructure that rapidly. Ambitious goals are good but it would be still better, to set into motion financial and policy mechanisms that will ensure a rapid start to this project. Involved in those decisions are not only the purity of noble intentions but also tough decisions and some sacrifice.
Renewables: Virtuous Side Salad or Energy Main Course?
Much renewable energy policy has incentivized the building of renewables as a virtuous “side salad” for a basically functional but dirty electric generation system, our main energy “meal”. In fact, energy industry insiders including Dick Cheney have misrecognized renewable energy, the first power source for the first electric grid, as simply an ineffectual display of personal virtue. Despite the current Administration’s lamentable record in moving America toward our energy future, somewhat more forward-looking state-level policies have actually tended to reinforce the view of renewable energy as a personal statement or an act of corporate social responsibility for utilities or their large-scale customers. These state-level policies have often focused on rooftop photovoltaics or delivering a small fraction of wholesale energy through renewable generators, the Renewable Portfolio Standard policies or RPS.
While these, often token, policies have helped keep the renewable energy industry on life support, policies like the RPS, will not by themselves, drive the building of a largely renewable or all-renewable grid. In an era where we are now targeting closing down fossil generators and replacing them with renewable generators, policy instruments will have to change as the focus switches to building an integrated Renewable Electron Economy.
Renewables and the Cheap Energy Contract
Recent political maneuvering around the issue of offshore (and Alaskan) drilling has highlighted the continuing strength of what I have called “the Cheap Energy Contract”, a social contract particularly strong in North America in which energy costs are supposed to contribute only negligibly to family and corporate budgets. A politician who does not throw themselves full-force into rhetoric or actions designed to depress the current price of energy at the pump or electric meter today risks the ire of voters whose focus has narrowed to present day pocketbook issues.
More than just being addicted to oil, Americans are addicted to cheap energy. Cheap energy today is supposed to be a cornerstone of our democracy, even though maintaining its low cost at this moment in time is extremely costly for the environment and for the future price of energy; the focus on low energy costs keeps us hostage to exhaustible and polluting fossil sources. We are seeing versions of the Cheap Energy Contract emerge in the developing world (India, Indonesia, and China) in the form of oil subsidies, subsidies which are becoming increasingly difficult for these governments to afford as the price of oil continues to climb.
Artificially cheap energy keeps energy alternatives out of the market until there are major supply disruptions or a continuing pattern of punitively sharp price spikes in existing dominant energy supplies; worldwide 85% of supplied energy originates from fossil sources, mostly coal, natural gas, and petroleum. Electricity from renewable generators is still in most cases too expensive for those who adhere to the dictates of the Cheap Energy Contract, and is therefore dismissed by commentators who insist on a price for clean energy that matches that of current dirtier energy supplies. RPS laws, for instance, usually mandate that utilities bring the requisite percentage of renewable generators online at “least cost” without regard for power quality and therefore the ultimate usefulness of the renewable generator.
Even advocates of clean energy are swept up in the vortex of assumptions surrounding the Cheap Energy Contract. For instance, climate and energy analyst Joe Romm, with whom I agree on many points, often criticizes nuclear, fossil or other energy sources he opposes by using their (high) cost as a decisive argument against their continued use or future deployment. When he does this, in my opinion, he reinforces a framework that emphasizes cheap energy now, an argument that easily can blow back in his face if he argues FOR most renewable energy sources to be deployed today at their current price levels.
So How Much Do Renewables Cost?
One of the attractions of renewable energy is that for most renewable generators, except biomass power plants, the cost of the fuel is free. However even more so than with a conventional power plant, much of the expense of a renewable generator is concentrated at the beginning of the power plant’s life. The cost of electricity is the sum of the initial, fixed capital costs for building a generator, variable costs of maintenance and fuel, any profit or return on investment, and finance costs divided by the usable energy produced over the lifetime of the generator. Currently, renewable generators range in cost from expensive (small installations of rooftop or building integrated photovoltaics) to competitive (large onshore wind turbines at windy locations). For renewable energy, the strength of the renewable resources at a given location has a major effect on the price of energy, as the capital cost is approximately the same for areas with higher and lower strength resources, yet the same equipment will produce much more energy in a more favorable location (for wind in particular).
Furthermore, most natural renewable energy flows are relatively diffuse; they have a lower “power density” than the energy flow that is emitted by a coal or gas fire or a nuclear chain reaction (exceptions are some powerful rivers, tidal flows, and hot geothermal wells). This means that the capture devices for renewable energy flows must, in most cases, be physically larger to take in the same amount of energy as a coal or gas power plant well-supplied with fuel. The large size of the generator means the production and installation of more concrete, steel, silicon, and/or glass as an initial investment. To the chagrin of some renewable energy advocates, also a larger size of the installation and the generators involved usually produces a significantly lower cost per unit energy relative to a small installation of the same technology, contradicting the “small is beautiful” philosophy that has become an unquestioned mantra in many quarters.
Despite the initial investment hurdle and current uphill financial battle, setting up a renewable generator in a favorable location pays off in the long term. Using the measure Energy Returned on Energy Invested (ERoEI) that measures the net energy yielded based on the energy input into a process, renewable generators using current technologies return from 20 to 50 times the energy required to manufacture, construct, and maintain them. This number will tend to go up as the renewable industry becomes more efficient: early solar panels in the 1970’s may have had an ERoEI of less than one (negative net energy) but now the roll-printed solar cells of the innovative company NanoSolar may return over 150 times the energy required to make them, paying back the energy used to make then in approximately a month. The latter amount is superior to the ERoEI of an oil gusher of high quality crude from a large oilfield; analysts currently believe the ERoEI of our current more “difficult” oil is around 5 and is decreasing as oil becomes more difficult to extract and is of lower quality.
In current dollar terms, building new renewable generators is for the most part not yet competitive as the future rise in cost of fossil fuels is usually discounted, while the environmental, energy security and EROEI advantages of renewable generators are not priced into the energy they generate. Energy from existing renewable generators that have already been paid for (older hydroelectric dams or geothermal wells) produce energy at a very low cost. Among new generators, large on-shore wind generators in windy areas produce energy at 6 to 8 cents/kWh which is competitive with new fossil generation. However, the value to the power system of electricity produced from wind, which often does not blow in sync with energy demand, is less than that produced using an energy store, like coal, natural gas, biomass, stored thermal energy of the sun, hydroelectric reservoirs and pumped storage, large batteries and other clean energy storage devices.
Most of the renewable generators and storage devices required to build the renewable electron economy currently produce what might be called “mid-priced energy”, energy that is neither dirt-cheap nor prohibitively expensive. The single generation technology that is the most rapidly deployable that can replace the services of coal and natural gas power plants is solar thermal with storage, which can produce power for somewhere between $.15 and $.20/kWh, inclusive of reasonable profit, in the desert Southwest of the United States. Large-scale photovoltaic arrays can produce energy at around $.25/kWh when the sun is shining in the Southwest. We will expect these prices to go down substantially, once we have created consistent demand for these technologies. Small installations of photovoltaics on rooftops remain relatively expensive, producing energy at somewhere between $.45 to $.60/kWh because design and installation costs are spread over a very few solar panels. Geothermal wells will produce at variable costs from $.10/kWh to $.25/kWh for more difficult, lower temperature resources.
In general these more controllable or predictable renewable generators produce electricity from anywhere from a few cents to several tens of cents more than what utilities want to pay per kWh for wholesale generation in current markets. The gap between the market, “buy” rate and the economically feasible “sell” rate for renewable plant developers is then the object of most renewable energy promotion policies throughout the world. Building up these industries will in most cases drive the cost of energy down as economies of scale are achieved and technologies develop.
How Do We Build (Energy) Infrastructure?
The enthusiasm for unregulated markets in the last 30 years of American public policy has obscured how large pieces of infrastructure get built. Unregulated markets, to work according to their ideal, require economic actors to be able to create competing offers which are judged by consumers or buyers according to the total value they represent. Infrastructure by its nature involves building structures so massive that to build competing pieces of infrastructure is considered to be economically inefficient if not socially undesirable (two roads or bridges that “compete” with each other would be an eyesore and end up being much more expensive for society). Power plants inclusive of larger renewable energy installations can be considered on the smaller end of “infrastructure” but are still too massive to build “on spec”. Infrastructure then can only get built by large economic actors like governments or corporations opening a bidding process by which manufacturers and construction companies attempt to earn the multi-year contract to build that infrastructure.
There is however, an abiding interest by both the buyer and the public in general in the quality and durability of that piece of infrastructure, which by its nature is supposed to last from anywhere from 10 to 50 years. So, a bidding process is not simply looking at the lowest total price of the contract but at the quality of components within that total price through an engineering analysis. A formula “cost plus reasonable profit” is used to determine by the buyer and by third party firms whether the bid is realistic and will produce the desired result. Additionally in such a long process there is also an interest in the continuing financial viability of the firm selected, that if it went bankrupt in the middle of construction, would further complicate the process. The “low-balling” of bids is then less attractive than it is in the pure market setting. While there are disadvantages to this formula, it provides a nascent or vital industry with security that pure market pricing does not.
Most of the electrical infrastructure that we have currently was built several decades ago by the utilities, usually large private companies, under government regulation or built directly by the federal government itself. Winning the contracts to build this infrastructure has involved a combination of the offer of appropriate technology and price considerations. Consulting engineering firms and government regulators combine to try to keep bids from being padded too much yet on the other hand to ensure that quality standards are not endangered and the bidding firm will remain viable. This type of cooperation between buyer and seller is not the norm in the ideal “free” market. However, ideal free markets have rarely been involved in building the unique structures that make up most public infrastructure, nor do we have a plausible model for a free unregulated market to be able to do so in the future.
The cost of power is partly derived from the costs of building energy infrastructure plus a reasonable regulated profit; historically the pricing for infrastructure and the resultant power has been arrived at through negotiations between public utilities regulators and power companies. With the vogue for markets extending to all aspects of economic life, legislators have attempted to introduce, post-hoc, market competition to reduce the price of power but these efforts have had mixed if not at times disastrous financial consequences for utilities. While in some places this has reduced the cost of power to consumers for at least a period of time, the costs of building and maintaining infrastructure has not been fully accounted for in the rush to impose market structures on the electricity system. The continuing push towards deregulation, which still has ideological momentum despite bitter experiences in California at the beginning of the decade, does not promote the building of new infrastructure, let alone a new, replacement clean power infrastructure that would reliably produce power. Furthermore, there are few mechanisms in the current market that would accelerate the retirement of existing fossil plants for new clean energy power plants.
While neither “cost plus reasonable profit” nor unregulated market pricing are ideal, universal pricing mechanisms, there is little in this world that is ideal and universal, especially in the hotly contested area of how to pay for vital commodities and infrastructure.
Non-Transparent or Hidden Renewable Energy Promotion Policies
Tax Credit Policies
One of the ways that the gap between market and the feasible price has been bridged is through the offering of tax benefits to investors in renewable energy plants. Just as the oil and gas industries have enjoyed various tax benefits to encourage investment in drilling, exploration and production facilities, in the last couple decades, investors in renewable generators have enjoyed either production or investment tax credits that contribute about 3 cents to the value of a kilowatt hour of renewably generated electricity for the producer. While these subsidies are set to expire at the end of 2008, most plans for new installations of renewable energy generators are contingent upon their renewal.
Tax credit policies have three drawbacks that make them politically vulnerable: they are largely invisible to the public, they are dependent upon the state of the federal budget and Washington politics, and they apply mostly to large corporate entities rather than small investors. A tax credit is paid via drawing tax revenues from other taxpayers and budgets, not necessarily from tax revenues from other parts of the energy sector. These credits have also been terminated a number of times over their checkered history, putting the renewable energy industry on a roller-coaster. Finally, they are most attractive to large corporate investment vehicles and do not represent an incentive for small and medium investors to get into the renewable energy game.
Tax credits may have a role in promoting reinvestment in existing infrastructure, by, for instance, incentivizing the large railway companies to electrify their rights of way, as suggested by Alan Drake.
Renewable Energy Credits (RECs) or Green Tags
Another method for trying to make up the difference between a wholesale market price for power and the feasible price for renewable energy investment is to sell a green power attribute separately from the power itself as a “green tag”. Also called “Green Power Marketing”, the idea is that companies and organizations can buy these tags to green their power mix, even though they are actually using the mix of power that is available in their area at their facilities. This is the closest one can get to a “free” market in renewable energy (credits) and those who are enamored of unregulated market mechanisms favor this type of approach.
Studies have found that REC schemes only have a mild stimulative effect and are a relatively expensive means of promoting renewable energy; there are suggestions that the traders of these credits are the prime beneficiaries of an REC system. Furthermore, RECs stimulate mostly large onshore wind farms as green power marketers are only looking for a “green” attribute at the lowest cost; to build the renewable electron economy we will require a more diverse set of renewable generators.
For small renewable generators that operate on the premises of a power consumer, power companies allow the customer to “run their meter backwards” crediting the customer for the full retail cost of the electricity they generate on premises. While this may appear to be simple and fair compensation to the customer/owners of the generator, the (hidden) subsidy for net metering comes from other power users who compensate the power utility for lost profits from the sale of electricity to those self-generating customers. A limitation of net metering is also the loss of any revenue for over-sizing the on-site generator and overproducing clean electricity above and beyond usage on-site.
Transparent Clean Energy Policies
The foregoing finance mechanisms tend to hide the costs of building renewable generators by concealing the actual cost per unit electricity and for the ratepayers or taxpayers as a whole. In an era when so much is hanging on energy policy, it makes more sense to consider policies that do not pull punches when it comes to costs and benefits.
Renewable Energy Payments (REPs)
A more transparent approach to spurring the market for renewable energy technologies are Renewable Energy Payments (REPs) a.k.a Feed-In Tariffs. REPs name and guarantee a feasible price for renewable power from supported technologies under a variety of conditions related to the size and siting of the generator. A successful REP system supports a variety of technologies and prices electricity to allow plant developers to recover their investment plus a reasonable profit. Another way to put it is that an REP system constitutes an open ended power purchase agreement for 10 or 20 years that allows plant builders to receive financing at favorable rates because of the investment’s security, due to the guaranteed wholesale power price. In successive generations of plants, some REP systems are designed to reduce the level of the tariff to encourage the industry to become more efficient. Some REP systems have a built in inflation factor to adjust the level of the initial tariff to reflect changes in the value of money. REPs are typically paid for via a supplemental charge attached to all power sales in the electricity system, pooled among the widest set of power users.
REP systems have been successfully applied in Germany and Spain and have recently been introduced in Ontario, France and Italy. Since the inauguration of their current REP system in 2000, the Germans, for instance, have more than doubled the fraction of electricity attributable to renewable energy from 7% to over 14%. Estimates are that German power users will pay on average a maximum of 2.80 euros ($4.11) per account per month in 2015 when the effect of their REP law will be at its projected maximum, so the REP tariffs do not contribute much to overall power costs to consumers. If it were considered to be more politically acceptable to pay for the surplus power payments attributable to the REP tariffs in part through tax revenues rather than through electric rates, such a system could be designed.
An REP system starts out at “cost plus reasonable profit” but to counteract inefficiency in the renewable energy industry needs to “degress” the tariff levels for successive generations of plants or introduce market elements into pricing. The German tariff steps down in successive new generations of plants and recently the solar rooftop tariff was reduced a higher than usual 9% for 2009 installations while there was higher allowance made for offshore wind to encourage that industry; both moves generated their share of controversy, which is almost inevitable in such an environment. In Spain, there is a market option which encourages renewable generators to heed the needs of the electricity market through a demand-based incentives in addition to a premium paid for clean energy based on the type of technology.
Direct Government Investment
Though less likely to be applied in the US in the current political climate where the levying and spending of tax monies is considered to be an imposition rather than payment for public services, the federal government itself can, as was the case with the Hoover and Bonneville dams, commission renewable generators in situations where risks or payback is too uncertain for private companies to undertake. An effective REP law, however, might make government’s involvement in direct power generation limited to the development of research reactors or in commissioning renewable generators for use by government facilities. A commitment by government installations to run their operations largely or entirely on renewable energy could provide a test bed for an all-renewable grid for the broader society.
Though potentially rife with inefficiencies, issuing bonds may be one method for governments to finance new infrastructure. While government bonds are the equivalent of a credit card for the government, the total financed portion of the new infrastructure is stated in the bond. Bond issue may be a necessary evil in building key pieces of infrastructure that are not amenable to a performance-based standard like an REP.
Small renewable generators, largely rooftop solar PV arrays, can also receive a rebate directly from a power company or state agency that is based on a formula that reduces the upfront cost to buyers of purchasing and installing this equipment. These incentives require the ready availability of funds either from government coffers or from the utility company itself and would present cash flow problems for these entities if applied to larger generators, as rebate payments would need to be paid in very large chunks to co-finance the new power plants.
Building a National Grid
As is currently the case with the building of long-distance transmission, the federal government will need to take a leading role in building new transmission that will connect load centers with areas which are most favorable for renewable energy development. Main renewable energy areas that require new transmission are: the Great Plains, the intermontane regions of the Rocky Mountains, offshore on the Great Lakes and Pacific and Atlantic Coasts for wind development; desert and semi-arid areas of the West and Southwest for solar thermal and large scale concentrating solar PV; links between geothermal wells and centers of electric demand.
Large states with substantial renewable resources, California and Texas have started planning for zones where transmission lines can be built as renewable generators are built in that zone. As transmission can take many years to build, these lines will bring renewable energy to market as soon as generators are commissioned and ready to generate electricity.
Passing the Buck or Paying the Piper
We have just gone through a period of time in the United States when very little new public infrastructure has been built (with the exception of wired and wireless telecommunications infrastructure). Led by a generation and a half of politicians and economic theorists as well as our own inclinations, Americans have become used to believing that a cheaper, more convenient option is always within reach through reliance on increasingly globalized markets. Our national specialization has become consumption, holding up the export economies of countries with lower labor costs by consuming ever more cheap goods, taking on increasing levels of debt in the process.
We, as a nation, have become unable to pay ourselves living wages to do the work that is required at home to keep standards of living in our country within reach of other advanced industrialized countries, nations that have not taken such a radical path towards deindustrialization and consuming beyond their means. Our specialization as over-consumers has started to shut our own people out of the ability to earn enough through their work to buy what they need to live and thrive; the more goods and services we feel compelled to buy the less we can afford to pay for each good or service, barring a substantial growth in our individual or median national income.
Building a new infrastructure involves years if not decades of work and the construction and manufacture of large physical structures here domestically, all of which cost money. We will need to organize a way to pay for this infrastructure either through payments for services, like electrical rates or through tax revenue. The notion that opponents of this line of thinking will put forward is that monies collected through taxes or regulated pricing will be inevitably wasted as they have not been distributed through a process of free exchange by independent consumers choosing between alternatives in a marketplace setting.
I would put to those who hold up the ideal of a market with choices equally arrayed for discriminating consumers to choose, that we would lose years of time and much money in creating this market for infrastructure services, a novelty within world history. Already we have seen experiments in various electric systems, such as California, with deregulation but with little positive learned about the nature of these goods and services and their most efficient means of delivery.
Instead, we need to face the music and start reckoning that we must spend more on necessary clean energy infrastructure to ensure that we have a tolerable or even pleasant way of life as oil depletes and carbon concentrations rise. Spending more, whether through electric rates or taxes means paying one’s neighbors and friends wages that they can live with to do the work that needs to be done to keep our United States at or near the lead of the next industrial revolution.
Those who stubbornly insist on paying only the cheapest price, yet want a new clean energy infrastructure are for all practical purposes waiting for a rich charitable patron or technological windfall, to “make it all better”. Technological optimists, spoiled by the microelectronics and Internet revolutions, hold out for the ultimate cheap generation and storage solutions that will match our current price expectations. We can hope this will happen but we cannot bank on hope alone. “Free” market enthusiasts look around for the next better deal or ways to push pricing down to current price expectations against what looks like to be a permanent bull market (with ever-rising prices) for commodities, the commodities of which energy and transport infrastructure are made. The reality of the world however does not always conform to one’s preferred social or economic ideal.
If we look around though, we will see that we together can be our own patrons; we as a culture can place a higher value on energy and our own livelihoods, as workers and investors in our own society. We can pay somewhat more for something that we have taken for granted but that now requires our attention and sustained effort.