Wednesday, August 6, 2008

Your Ideal Energy Energy Act of 2009

I've had an on going back and forth with friends over solutions towards U.S. energy issues. Without stating drilling for oil (which is a separate argument and under a best case scenario only would account for an increase in 1% of oil supply by 2030), what would your ideal Energy Act of 2009 contain? Off the top of my head, I came up with the following:

1) Regulate speculation - I think the SEC is more than able and should be given a budget increase to stop the unnecessary speculation that has added over a dollar to the price per gallon of fuel.

2) The federal government will invest $30-50 billion a year in clean energy technologies (lets say, for ten years), many of those programs being in partnership with the private sector. To help get that funding, all tax breaks and subsidies to oil and coal companies would be eliminated (they don't need them).

3) All levels of government should offer retraining to any factory worker that is losing or has lost their jobs in the areas of solar, wind, geothermal, and the like. Firms should have to sign an agreement that in order to get federal or state tax breaks and subsidies they must hire within the US. This will create a community aspect to these new energies, leading to a quicker adoption of them.

4) We should target the top ten states that are on the verge of an energy crisis, such as New York, and immediately fund and put into motion the construction of nuclear power plants. I hate nuclear power and I hope that some day we can shut them all down and never have to use them again, but we will need them in these states.

5) Mandate that all new homes be outfitted with solar panels - it should have been done during the previous housing boom, but that ship has sailed.

6) Mandate all homes in the western states (many of which are growing the fastest in the country) be outfitted with geothermal technology.

7) Outfit all U.S. power plants with energy recycling technology. Currently, we waste over 50% of the power we generate. If power companies don't do it, they are fined heavily until they do. Time for playing games with them is over...

8) Major cities should institute strict conservation and sustainability codes. Portland can do it...Philly is beginning to do it...they all can do it.

These are just quick ideas...what are yours?


Chris McClure aka Panhandle Poet said...

Prog: None of the above.

I will try to come back and post when I have a little more time.

Chris Crawford said...

I agree with some of your ideas and disagree with others. Here are my reactions:

1. No, let's not rein in the speculators -- they are performing a valuable service. They are anticipating future prices in a market that's too dumb to figure out that prices in the future will be higher. Speculators can only make money when people are too stupid to see where things are going. Yes, they raise prices today -- but they lower prices tomorrow. If they didn't do that, they'd lose their shirts.

2. I agree that we should eliminate all tax breaks and subsidies to the fossil fuel industries -- they're making windfall profits now and will continue to do so far into the future. But I'm reluctant to put a lot of research money into private industry. They have high overhead costs and much of that money ends up paying management, not doing research. The financial incentives are already there: anybody who can come up with a clean way to utilize coal will make billions. We need only make it clear that we'll be tightening up the environmental constraints on fossil fuels; those windfall profits will give the fossil fuels companies the capital they need to invest in the technology.

However, my comments are confined to research in fossil fuels. I think that there's a place for federal funding of solar electricity.

3. No comment.

4. I don't think we need to fund nuclear power. I think what we need is a big push to establish a standard design that can be quickly licensed. Construction times due to regulatory delays are the killer problem with nuclear plants these days. If we have a standard design that gets rubber-stamp approval, nuclear power will suddenly become a lot cheaper.

5. First, I assume you refer to solar heating, not solar electricity. I would rather avoid the mandate approach -- there are too many houses with lousy solar prospects. Instead, I prefer a tax break for solar water and space heating.

6. Geothermal?!?!?! That's definitely NOT something you set up at home. Perhaps you're thinking of earth-based heat pumps. I have one on my house, but the capital costs were huge and the break-even time was pretty long. Moreover, I have an ideal setting for this. Most people don't. I think that, again, we could encourage this technology with some tax breaks, but mandating it will waste huge amounts of money.

7. Extracting energy from heat is costly business. Getting the first 30% is cheap and easy. Going for the next 10% costs more money. The next 10% costs even more. Mandate higher efficiencies and utilities will simply go bankrupt. Then where would we be? The utilities aren't deliberately throwing away usable energy -- they're not that stupid. They find the most profitable setting. Now, there are ways to increase thermal efficiencies, primarily through two-stage systems where high-temperature heat generates electricity and low-temperature heat is used for other purposes. The most efficient of these schemes send steam out as a heat source to other users -- but this only works well in cities, and we don't like having power plants in cities, so we don't do it. There are some possible uses in siting factories close together. For example, plywood construction, I believe uses lots of low-temperature heat. So we could site plywood factories next door to power plants. But this requires government support in terms of long-term guarantees, zoning issues, and so forth.

8. I agree that conservation is the best overall solution, but again, I don't like the inefficiencies inherent in mandatory schemes. Increasing the price of energy by 10% will trigger a lot more useful conservation than mandatory schemes.

As for my own ideas, in general, I like the price mechanism. It gives people a chance to find the best overall fit to their needs, without cramming anything down their throats. I think that the best thing government can do is to act as a "smoothing speculator" by adding taxes to energy usage that are frequently readjusted so that the consumer knows two things: 1) the net price of energy will steadily rise; and 2) it will never jump up suddenly (because taxes would be lowered in such a case).

E. R. Dunhill said...

I like the idea of mass-localization of production. This makes sense on many levels. And (surprise, surprise), I like to see others with a practical view of nuclear energy.
I'm concerned over the use of mandates, particularly with respect to specific technologies. Laws can take a long time to change, and technologies can outrun them quickly. I'm dealing with this issue as I work on a green-buildings program in my community. Instead of mandating specific technologies, we're recommending certain technologies or certain endorsements/certifications (Energy Star, LEED, &c), while trying to leave a policy opening that allows people to innovate and use good business sense. Also, it's something I'm just beginning to grapple with, but I think there may be an opportunity for electric cooperatives to help realize site-level generation.
As for training, I would love to see community colleges create more green-collar technical curricula. Skilled trade programs are already common, as are paraprofessional programs in disciplines like geographic information systems or landscape architecture. This is a framework to provide local labor with skills in demand in local or regional markets, while offering some educational breadth.
I think if we transition to a more market-driven environment, one in which people and businesses pay for things they use, sustainable solutions will be natural outcomes. Geography must also play a central role in sustainable energy policy, favoring locally appropriate technologies, with state and local governments (and consortia thereof) playing a much larger role than they do now, and with consideration to bioregions, watersheds, and airsheds.

Chris McClure aka Panhandle Poet said...

Pardon the lengthy reply, but please stick with it all the way through rather than reacting piecemeal.

1. Speculation. In a market driven economy, price is set by many factors. Ultimately, the spot cash market is determined by the quantity demanded and the quantity available at any given moment. The futures market was designed to provide a mechanism for price protection to buyers and sellers of the good in question (oil). To be effective, it must be open to a greater number of participants than just the actual buyers and sellers of the product. The buyers and sellers in the futures market are guessing whether the price at some future date will be higher or lower than it is today. When a preponderance of participants believe that it will rise, they create a bull market in which their expectations are somewhat self-fullfilling -- subject of course to outside market factors such as what's going on in Iraq, the latest government reports, etc. The futures market is all psychology.

Rather than regulating speculation, which is what makes the futures market work, there is a need to address the bullish psychology of the marketplace. The quickest way to do so is to announce that we will drill for more oil (notice how the market reacted when President Bush lifted the Executive moratorium on drilling the OCS). The worst thing that could happen is to send a market signal that we will be tightening supplies (things like imposing higher capital gains taxes on oil companies which affects their funds for drilling, imposing additional regulatory burden, etc.) Sadly, this is exactly the tack that Nancy Pelosi and Harry Reid were taking prior to adjournment of Congress. When they recessed, the pressures on the marketplace from the "what are they gonna do to us" thinking by investors caused the price to decline. In lieu of signaling a greater supply in the future, the best signal Congress could send the marketplace was to adjourn.

2. We are dependent on the "infernal" combustion engine. We are stuck with oil or a very close substitute for the forseeable future. There really are very few subsidies and tax breaks to oil companies. I know, you will cite the billions of dollars in one particular study that gets hashed around by the "greens" and their cohorts -- it is way off base. It includes "screw-ups" that occurred in the Clinton administration in which a release clause was left out of offshore drilling contracts that were created to incent drilling when the price of oil was $28/bbl. That "screwup" has since been corrected in all new contracts. It also includes the lower sales tax rates imposed by states on the sale of gasoline. They don't include the fact that every state imposes high rates of taxes on gasoline in the form of road and bridge taxes. It also includes the difference between long-term capital gains tax versus taxes on ordinary income. These differences are available for ALL businesses -- not just big oil. It also includes the depletion allowance which is similar to depreciation -- which is available to all businesses. These tax differences are designed to encourage investment in capital items that will insure future productivity -- not just a quick profit.

We do need to get away from oil, but it will take a very long time to do so. We have to replace a lot of cars, trucks, trains, etc. in order to do so. Then, we have to replace the fuel infrastructure that supports all of those cars, trucks and trains.

3. Why should the government (me -- I'm a taxpayer) be responsible for retraining people laid off? What happened to self-reliance? Independence? You know, those traits that built this country? That being said, I do agree that there are times when it is in all of our best interests to do so. We need productive citizens, not more welfare recipients. I just don't believe the government is the most efficient vehicle for such retraining. If it must be government funded, make it a competitively bid contract by a private provider. We will waste less that way.

4. Hydrogen fuel cell technology holds promise. Natural gas is just another hydrocarbon. So is ethanol. I believe there is something that we haven't yet discovered that will revolutionize the way we think about energy. I do think that taxpayer money would be well spent on basic research in all areas of energy -- including ways to stretch our oil supply. I do not believe the government should be subsidizing ethanol or solar energy. The more it tinkers with the marketplace, the more inefficiency enters the marketplace. A free market is the best way to efficiently and effectively allocate resources. Let it work. Keep the government out. Spend the tax dollars only on basic research and then move it into the marketplace. I think that any technology developed using government funds should be available in a non-exclusive license with a royalty paid back to the treasury. Of those funds, 50% should go into a revolving research fund and 50% should be applied to the U.S. debt.

5. Mandates are bad news. Just talk to your local school system. They deal with state and federal mandates that are unfunded. Then they are expected to raise the funds to meet the mandates from the local tax base. Often they are dealing with tax rate ceilings that are also mandated. It is a no-win situation.

Rather than a mandate, use incentives. It's the difference between "I'll give you a piece of chocolate cake if you'll clean your room" and "If you don't clean your room I'll take away your cell phone." Both will probably get the desired result but one will create harmony and the other will create anger, resentment and a definite disharmony.

Incentives need to be in the form of tax credits.

6. I don't know if West Texas would be considered a Western State, but geo-thermal isn't a particularly good option here. Solar and wind work. So, who pays for the mandate? I prefer chocolate cake myself.

7. We waste power because consumers demand that it be immediately available at all times. Solar and wind energy only add to the waste by conventional generation methods. The more we regulate, the more we create problems. The marketplace can solve a lot of that waste if we used a variable rate structure based on demand load.

8. The more that you restrict and regulate, the more you increase costs. The poor will not be able to afford to live in a city that has high regulatory burden without additional assistance. What if instead of implementing green building codes, we spend the money it would take to enforce such codes on recycling technology and waste reclamation or conversion to fuel. Create incentives for green buildings -- don't mandate and regulate. Make the market friendly to green.

miggs said...

I love the energy recycling energy -- not surprisingly, since I'm associated with Recycled Energy Development, a company that turns waste heat into power at manufacturing facilities. Over two-thirds of our nation's greenhouse emissions come from the production of waste and heat; thus, the real action in reducing this pollution is in increasing the efficiency of the power industry, not in small-time stuff like better gas mileage.

Commenter Chris Crawford says the utilities wouldn't be throwing away energy if it was actually profitable. He's right, but for the wrong reasons. The utilities are indeed acting in their economic interests, but energy is not a free market, and dumb regulations make it so that utilities have no real incentive to recycle energy. Specifically: 1) utilities get to pass all operating costs on to consumers, so decreasing operating costs doesn't increase profits; 2) the Clean Air Act has a provision that grandfathers in old, dirty plants, and says that if these plants to ANYTHING major to change the facility, they have to go whole hog and put in the top-of-the-line technology in the entire plant. That means we still have plants from the 50s and 60s that are, in effect, legally prohibited from increasing their efficiency.

Chris is right that maximizing the use of waste heat requires that power plants be near other buildings, as in cities. After all, heat doesn't travel well; if you send hot steam down a pipe, it has turned into cold water by the time it reaches anyone far away. That's why we need to change regulations to encourage (rather than discourage) cogeneration plants, which are small power generators located on site at manufacturing facilities, hospitals, universities, etc. These plants recycle their own waste heat, using it not only to create more electricity, but to provide heat to their own buildings. They are utterly efficient, and the only thing stopping them is more dumb regulations that protect utilities.

Chris Crawford said...

Chris M, thanks for the informative post. I hadn't realized that oil company subsidies were low; could you comment on the bill passed a year or two ago that included broad support for a number of kinds of research by fossil fuel companies? At the time, there was a lot of commentary that it presented a huge windfall to the oil industry -- but I don't recall any details.

There's a nasty catch regarding your idea of requiring royalties to be paid back to the government for research that was funded by the government: it's really hard to draw a clear line between funded research and startups using technology based on research. For example, suppose that three professors leave their university to launch a biotechnology firm. Suppose that their technology is based on the work of all three -- but one of the was funded by government money. So, should they be liable for one-third of their profits? All of their profits? What if the one scientist who took government funding had done so five years earlier but had accepted no government money afterwards? It's really tough hammering these things out. I have a good friend whose job it was to move research technology out of the university and into the marketplace. Their approach was to encourage faculty to launch startups, and then negotiate a specific deal in each case, a deal customized to insure that the startup could get off the ground but the university would still earn royalties if the startup was a success.

The best way to improve our overall energy efficiency is to increase energy prices and let the market respond. The problem is that some energy prices are subject to wild fluctuations, which makes planning all the more difficult. That's why I prefer a steep anticipatory tax that anticipates future price increases and is frequently adjusted to ensure that the energy consumer is guaranteed a predictable price for energy.

Miggs' point about the perverse economic effects of utility pricing is solid; our public utilities system really creates some crazy scenarios. That's why we are slowly moving towards the opening up of the electric power market. If my memory hasn't failed, I believe they have been doing that in Great Britain, with good results so far. With a truly competitive market for electricity, we really could open up the doors for all sorts of innovations. However, a crucial step in making this happen is peak rate pricing. Nobody will want to accept responsibility for providing peak power when it's at the same price as base power. This will, in turn, require replacement of all our power meters with clocked meters. That's not horribly expensive, but it will take some time to accomplish.

One of the other benefits of an open power grid is that it makes cogeneration schemes more economically viable. If a big hotel, say, sets up its own generating station, they can use the excess heat to heat the building, and sell surplus power as opportunity rises. This would also induce them to schedule some high-energy-consuming activities for base load hours (say, 1 AM to 7 AM) to take advantage of cheaper prices. Just a few tweaks to the market open up great opportunities for improvement.

Chris McClure aka Panhandle Poet said...

Chris C. A quick response on the royalty issue -- royalties are paid on patented technology. If government subsidized research went into obtaining the patent, a royalty should be paid to the government. It doesn't have to be very large on a per unit basis in order to generate significant return to a technology fund. What if the government received $0.001 for every foot of Velcro sold? Just think of what it would do for the Federal coffers? It could even help fund a mission to Mars.

E. R. Dunhill said...

Prog et al,
I've had a change of heart. DoT and EPA should mandate that all new cars be modeled after Fred Flintstone's ride. We can stop using oil altogether.