If It’s December It Must Be PTC Time, Again
With the end of the year fast approaching, the US wind power industry faces yet another scheduled expiration of federal tax credits for new wind turbines. The wind Production Tax Credit, or PTC, was due to expire at the end of 2012 but was extended for an additional year as part of last December’s “fiscal cliff” deal. There are no signs yet of a similar reprieve this year.
With the PTC and other energy-related “tax expenditures” subject to Congressional negotiations on tax reform, this might truly be its last hurrah in its current form. It is high time for this overly generous subsidy to be “sunsetted”, and if it’s replaced with a smarter policy emphasizing innovation, the outcome could be beneficial for taxpayers, the environment, and even the US wind energy industry.
Too Big To Last
In its 20-year history, minus a few year-long expirations in the past, the PTC has promoted tremendous growth in the US wind industry, from under 2,000 MW of installed wind capacity in 1992 to over 60,000 MW as of today. For most of its tenure, the PTC did exactly what it was intended to do: reward developers for generating increasing amounts of renewable electricity for the grid at a rate tied to inflation.
Concerns Prompted by Tesla Fires
Several vehicle fires involving Tesla’s new high-end Model S sedan have attracted a great deal of media scrutiny. Two of the three reported incidents are now under investigation by the National Highway Traffic Safety Administration (NHTSA). Yet while the company’s founder, Elon Musk, is certainly correct in indicating that gasoline vehicles are involved in the overwhelming majority of vehicle fires, including most of those resulting in fatalities, the statistical comparison he has provided in interviews got me curious enough to track down the data for myself.
How Often Do Gasoline-Powered Cars Catch Fire?
The statistic that caught my attention was that Tesla suffers an average of one fire per 6,333 cars, versus a rate of one fire per 1,350 gasoline-powered cars. I’ve been driving for four decades and have probably observed several million cars on the road in that time, yet I’ve only seen a handful that were burned-out following accidents to the extent of the recent Tesla fires. I sensed something wrong, or at least counter-intuitive about the figures cited by Tesla.
Can CO2 Emissions Become A Useful Feedstock?
A fascinating article in Chemical & Engineering News describes current German research and development work focused on developing new industrial processes for making organic chemicals from CO2. These public/private partnerships capitalize on the country’s long expertise in industrial chemistry and its highly successful chemical sector. They are also extremely timely, not just because of growing concern about steadily increasing levels of CO2 in the atmosphere, but because Germany’s “Energiewende”, which includes the rapid phase-out of nuclear power, is actually raising the country’s emissions as it relies increasingly on coal for baseload electricity generation.
In my last post I explained why it is unlikely that fossil fuels could be phased out rapidly enough to threaten the current valuations of oil and gas firms. But if carbon-based fuels will be with us for some time, that leaves open the large question of what to do about the CO2 emitted when they are burned, particularly from stationary installations like factories and power plants. The long-mooted approach of carbon capture and sequestration (CCS) still faces significant obstacles in terms of cost and social acceptance. That makes CO2 utilization efforts such as those underway in Germany especially intriguing.
In their Wall St. Journal op-ed this week, Al Gore and one of his business partners characterize the current market for investments in oil, gas and coal as an asset bubble. They also offer investors some advice for quantifying and managing the risks associated with such a bubble. Their article is timely, because I have been seeing references to this concept with increasing frequency, including a recent article in the Financial Times, as well as in the growing literature around sustainability investing.
Although bubbles are best seen in retrospect, investors should always be alert to the potential, particularly after our experience just a few years ago. In this case, however, I see good reasons to believe that the case for a “carbon asset bubble” has been overstated and applied too broadly. The following five myths represent particular vulnerabilities for this notion:
1. The Quantity of Carbon That Can Be Burned Is Known Precisely
Mr. Gore is careful to differentiate uncertainties from risks, which he distinguishes for their amenability to quantification. For quantifying the climate risk to carbon-heavy assets, he refers to the widely cited 2°C threshold for irreversible damage from climate change, and to the resulting “carbon budget” determined by the International Energy Agency. As Mr. Gore interprets it, “at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2° of warming.” That would have serious consequences for investors in oil, gas and coal.
Forty Years After
In October 1973 the United States and other Western countries experienced a new phenomenon: an embargo on oil deliveries from a group of the world’s largest oil exporters, imposed in response to our military support for Israel during the Yom Kippur War then underway. Last week I attended a session in Washington hosted by the US Energy Security Council commemorating these events. It included a fascinating conversation between Ted Koppel and Dr. James Schlesinger, US Secretary of Defense at the time of the embargo and later the first US Energy Secretary.
The other, related purpose of the meeting was a presentation and discussion proposing that fuel competition provides a surer means of achieving energy security than our pursuit of energy independence for the next four decades following the Arab Oil Embargo. This idea warrants serious consideration, since energy independence, at least in the sense of no net imports from outside North America, is beginning to appear achievable.
Disagreement, But The Outline of A Compromise
Yesterday I watched the livestream of a National Journal’s event, “Biofuels Mandate: Defend, Reform, or Repeal” from Washington, DC. I encourage you to skim through the replay. The session highlighted a wide range of views concerning the US Renewable Fuels Standard (RFS), including those of the corn ethanol and advanced biofuels industries, poultry growers, chain restaurants, environmentalists, and small engine manufacturers. Although these broke down pretty sharply along pro- and anti-RFS lines, I thought I detected hints of the kind of compromise that might resolve this issue. I’d like to focus on the elements of such a deal, rather than rehashing the positions of all of the participants, with one necessary exception.
The Requirement for Reform
The most disappointing contributions to the discussion occurred during the interview with Representative Steve King (R, IA) by National Journal’s Amy Harder. If we accept Mr. King’s perspective, we should embrace the RFS as being as relevant today as when it was conceived, with no changes required. That flies in the face of the serious market distortions now manifesting in the “blend wall” at 10% ethanol content in gasoline. Among other things, Mr. King claimed that a 2008 reduction of $0.06 per gallon in the now-expired ethanol blenders credit brought the expansion of the corn ethanol industry to a standstill. The industry’s own statistics tell a very different story, with US ethanol production capacity having grown by a further 86% since that point.
The Under-appreciated Renewable
I’ve been fascinated by geothermal energy for years, and the publication of the latest “International Market Overview” from the Geothermal Energy Association (GEA) provides a good opportunity to examine how this proven, low-emission energy technology is changing and expanding into new opportunities.
Global geothermal power capacity grew by just under 5% in the 16 months since the group’s previous international survey. That’s slower than the recent growth of wind and solar power, although its worth recalling that global solar output only caught up with geothermal in 2011 and still lags behind it in the US. Sufficient projects are apparently now under development or construction eventually to double global geothermal capacity to over 23 gigawatts (GW).
Bloomberg and others have reported that in August the Canadian Prime Minister sent a letter to President Obama, proposing to work with the US to reduce greenhouse gas emissions from the oil and gas sector as a way to facilitate US approval of the Keystone XL pipeline (KXL.) The only surprising aspect of this story, if accurate, is that it has taken so long for so obvious a solution to be floated. If, as I believe, opposition to the pipeline has little to do with potential spills and local rights of way, and everything to do with the emissions profile of Canadian oil sands crude — accurately or not — then environmentalists should welcome this overture.
All CO2 Is Equivalent
You would never know it from protest slogans conflating all types of air pollution as if they were identical, but the characteristics and effects of greenhouse gases (GHGs) like CO2 are very different from the smog-forming emissions from automobile tailpipes or the sulfate pollution from coal power plants. For that matter, air containing 400 ppm of CO2 (0.04%) is no more harmful to breathe than pre-industrial air with 280 ppm of CO2. More relevant to the current topic, it is also a fact that the climate consequences of each ton of CO2 emitted to the atmosphere are the same as for every other ton, regardless of where they are emitted or from what source. While scientists can distinguish CO2 from fossil fuel combustion from the CO2 you just exhaled, based on differences in the ratio of carbon isotopes they carry, the effect of these on global warming is essentially identical.
The SPR Grew Without Buying A Barrel
Although mainly focused on the oil market’s current jitters over Syria, Liam Denning’s Wednesday “Heard on the Street” column in the Wall St. Journal neatly highlights the extraordinary degree to which resurgent US oil production and weaker US demand have boosted the effectiveness of US oil inventories, including the US Strategic Petroleum Reserve (SPR). Without adding a drop — the SPR actually shrank a bit in 2011 — the reserve’s potential to replace daily imports in a crisis has soared as those imports have declined.
In the near term this could prove extremely helpful should expected US-led reprisals against the Syrian government result in a regional disruption of oil flows. Longer term, it serves as a further reminder that the existing SPR was designed for another era and is overdue for a major rethink.
Two Conversations about A Tragedy
It’s been just over a month since a train loaded with crude oil from North Dakota derailed and exploded in the Canadian town of Lac-Megantic, Quebec, killing an estimated 47 residents. In the interval since the accident, the relevant authorities have focused on ascertaining the cause of the accident and determining how best to improve rail safety. However, there has also been another, less-customary conversation about whether oil in general, and the specific oil on this train, might be too dangerous to transport by rail at all. That conversation would benefit from some context that appears to be absent.
Both conversations began with a tragedy in a place I recognized immediately. Ten years ago my wife and I passed through Lac-Megantic and drove along the Chaudière river that originates there, on its way to the St. Lawrence. It’s an area of natural beauty and historical significance. The images of destruction and of oil spilled in the river were gut-wrenching.