By Michael J. Zimmer

I like the fundamentals of the biomass footprint even more now this year. Wind is facing trouble with the PTC extension, turbine product availability, a nagging de minimis capacity factor, and need for transmission that isn’t being developed nationwide. Transmission constraints could strand many new renewable energy projects over the next five years, as occurred for cogeneration, small power producers and independent power projects during the prior decades.

Now is the time to diversify the renewables supply base with existing technologies that have more base-load attributes—such as geothermal, hydropower and biomass, including landfill gas and municipal solid waste. Biomass in particular offers great potential for increased expansion in the next five years.

The key to success for advanced biomass development will arise from the ability to lock up sufficient and reliable fuel supplies. Failure to do this will keep biomass from scaling up until non-cultivated, closed-loop fuels become competitive on an emissions-cost adjusted basis. The determining factors are political, structural and technical/agronomical at this stage.

The political issue comes down to GHG regulation and setting carbon costs. If the GHG regulatory calculus prices carbon under $50 a ton, it will be a long time before any alternative power sources can really compete with fossil fuels, particularly coal. Until carbon emissions credits reach $50 a ton, coal plants won’t sequester carbon, but likely will just buy credits in a compliance regime. That’s exactly what occurred after enactment of the Clean Air Act Amendments of 1990, when major scrubber investments and more capital intensive strategies were postponed for a dozen years or more.

The technical issue arises from the difficulty of securing firm fuel supplies. A closed-loop solution could project biomass ahead of wind and solar in many ways, making it the least-cost renewable supply option with better operating characteristics. But I’m hearing more discussion bemoaning the possible environmental costs of increasing reliance on cellulosic energy sources. What happens after 10 cycles of harvesting switchgrass, poplar and kudzu, without any serious fertilizer input? A natural biome replaces humus nutrients with necrotic material from the previous growing season. If we’re burning that material, the humus will disappear and eventually the soil will turn into sand.

However, by aggregating supplies under a regional “hub” approach, a closed-loop system can allow careful management of growing biomass areas. And of course biomass fuels from such sources as forest thinnings, sawdust and bark from private and government properties could be aggregated by rural communities. Rural development funds to supply clean, untreated lumber for biomass power production could revitalize local forest industries. And federal and state lands can contribute feedstocks from efforts to cull overgrowth and avoid forest fires.

Additionally, biomass power plants with waste-heat capture equipment can provide thermal energy for drying, processing or other industrial or commercial purposes. This enhances the community tax base, prompts a new feedstock industry, increases local jobs and contributes to the local economy.

From a public-policy perspective, the critical factor will be for lawmakers to include supply chain and logistics support in energy legislation, to create a closed-loop biomass fuel industry and provide proper scale to capture the potential of biomass power. Inordinate focus on creating incentives for supply, without anticipating the complete logistics of transportation, storage, handling and distribution, is a fatal flaw of many of our national energy strategies for all of our fuels and power strategies. Correcting this flaw will allow the industry to harvest the true potential of dispatchable biomass power.

Michael J. Zimmer is Of Counsel with Thompson Hine LLP in Washington, D.C.

Posted: June 26th, 2008 under biomass, carbon regulation, renewables.
Comments: none

By Michael T. Burr

Every article we publish in Public Utilities Fortnightly is incomplete. The virtual cutting room floor is always littered with content that didn’t fit for one reason or another.

For this year’s CEO Forum feature story, we asked several utility leaders about climate change regulation. Very little of what they said made it into the June cover story, “Conservation Compact,” so we’re presenting a more complete edit of their responses here in the Public Utilities Blog.

While it’s fair to say none of the CEOs departed far from their corporate message about the topic, their comments illustrate growing concerns among utility executives about how to regulate greenhouse gases fairly and effectively.

Chris Dutton, Green Mountain Power

Fortnightly: Given your experience in a RGGI state, what’s your perspective on federal greenhouse gas regulation? How can utilities reach a compromise on GHG regulation and allocation methodologies?

Dutton: I think the better and fairer approach is a carbon tax. Whether that’s politically feasible is another issue, but that’s a more competitive and less cumbersome approach than a cap-and-trade program, which has a whole host of complications associated with it.

New England as a region has a relatively small carbon impact, in terms of generation, because of the predominance of natural gas and nuclear power in the supply. There’s very little coal in New England, so those issues are a little different for us than they are for parts of the country that depend on coal-fired generation.

One of the things we’ve been able to do outside the power supply arena is to change the way we behave in the four corners of our business. We’ve converted all our line trucks and operating vehicles to biofuels. And we operate with an office blueprint that is radically different from what’s typical in our business. At Green Mountain Power there are no private offices. I as the CEO have a work area that’s about 9’x9’, and we have low partitions. There’s no private office. That’s meant we require a lot less office space than is traditionally the case, and you can guess the corporate culture advantages this approach brings. We try to be very transparent in our behavior within the company and in our interactions with both regulators and the general public, and a part of that transparency is the idea there are no hidden agendas. Part of that concept is no private offices.

We’ve been operating this way for about eight or nine years and we just love it. It gives the place a sense of energy and direction that didn’t otherwise exist. But also, shen you operate in a place that doesn’t need as much space, you don’t need to heat and cool it.

J. LaMont Keen, Idaho Power

Fortnightly: What’s your perspective on mandatory greenhouse gas regulation?

Keen: GHG regulation now seems certain to happen. The presidential candidates both support regulation in some form and it has been ruled that carbon is a pollutant that EPA should regulate. The discussion now centers on how and what type of regulation will occur.

Whatever the form carbon regulation takes, it’s important that regulatory efforts be applied economy-wide. We recognize the electric utility industry is probably the easiest to regulate, but if carbon regulation is to succeed no single sector should be unfairly burdened. More importantly, time frames should also be consistent with development of the carbon capture and sequestration technologies needed to comply.

If applied appropriately, either a carbon tax or a carbon cap-and-trade mechanism could work. Either way, the key is getting adequate research dollars collected and applied toward developing the necessary technologies.

In a cap-and-trade program, how allowances would be apportioned is the million dollar question, raising serious issues of effectiveness and fairness no matter how the apportionment is done. Whatever method takes place, it is appropriate that companies gain some recognition for the wisdom of earlier decisions to invest in and develop emission-free forms of generation.

Fortnightly: How will the industry reach a compromise on that? I’m hearing diametrically opposed views on this.

Keen: I don’t believe it’s appropriate for the allocation method to come out in a way that’s biased against companies with a smaller carbon footprint today. Some of the concepts I’ve heard discussed might do that.

I think it’s very speculative at this point. The devil truly is in the details, and it’s going to be a divisive issue for the industry. It’s possible for the industry to come together and strike a balance, but we have some fundamentally different starting positions for the discussion.

Bill Johnson, Progress Energy

Fortnightly: What’s your perspective on federal greenhouse gas regulation?

Johnson: Carbon regulation is a certainty. We believe that a well-designed cap and trade system will have the least negative impact on our customers and the overall economy, and will help us make real progress toward a low-carbon economy. An effective climate change policy must be achievable with timelines that are in harmony with technology. It must also be affordable, with reasonable allowances that put all states and players on a level field, and include provisions that protect consumers from rate shock and limit the damage to the economy.

Fortnightly: What would a level field look like for a ratepayer in a state that already has a relatively small carbon footprint, and has been paying high rates for a long time? Should their climate friendly infrastructure pay off in this level field?

Johnson: This whole subject is pretty complicated. When allocating allowances, those most affected by the new standards should get the most mitigation. Coal dependent customers will carry the brunt in two ways, paying for emissions and paying for new infrastructure. We need to have no-cost allowances in the early years, and more costs as technology develops.

Allocation of allowances ought to be based on emissions levels. Carbon emissions is where the allowances ought to go. I don’t think it’s a good idea to try to increase rates in some parts of the country because rates in other parts are higher. That doesn’t seem like a sound public policy basis for addressing carbon emissions.

Mark Jacobs, Reliant

Fortnightly: What’s your position on federal GHG regulation?

Jacobs: We’re committed to environmental stewardship. The best approach is a national policy rather than state by state. We believe a cap-and-trade system is the best approach, because it has worked incredibly effectively for SOX and NOX, and we also think it’s important that any legislation provide enough lead time to allow new technologies and market forces to work.

Energy efficiency is one of the easiest and most cost-effective approaches to addressing GHG emissions, and the smart energy things we’re doing will have a meaningful impact on the carbon footprint.

What happens to credits and allocations of allowances will get a lot of attention and debate, but we believe there should be a bridge provided for existing generation, and some of the proceeds raised by the auction need to go into development of new technology. We don’t think it’s appropriate to be taking proceeds and subsidizing known technologies. Someone might say they ought to get a price break for building a nuclear plant, but the prices are such today that people will build it without the incentive. We ought to take the proceeds and put them into the technology solutions to store CO2.

Dennis Wraase, PHI Holdings

Fortnightly: Given your experience in RGGI states, what’s your perspective on federal greenhouse gas regulation? How can various utilities and generating companies, with different resource strategies, reach compromise on things like allocation methods?

Wraase: As someone who operates in four states—which fortunately are somewhat together in RGGI—I think it would be far better to have a federal standard than to have 50 states doing 50 different things. Also the sooner we get to this, it will solve an awful lot of problems with power plants that need to get built and technology that needs to get developed.

A lot of the efficiency projects we do don’t include social cost. So once a dollar value is assigned to carbon, there may be more efficiency projects that become cost beneficial. That would be helpful.

As for a compromise, I’m not sure the industry will ever come around to agreeing, and neither will the states. This is a winners-and-losers proposition. That’s why I’m one of those who’d be more in favor of a tax as opposed to cap and trade. It avoids a lot of problems associated with how you allocate allowances, which is highly controversial. A tax is easily understood and can be applied economy wide.

Posted: June 24th, 2008 under carbon regulation, climate change, energy policy.
Comments: 1

By John A. Bewick

The Presidential candidates increasingly are including energy-policy issues in their stump speeches. And the Democratic contenders propose enormous spending programs—from $50 billion (Sen. Hillary Clinton) to $150 billion (Sen. Barack Obama)—with a New-Deal style appeal for investing in the country’s energy future.

Last year, Obama said, “This is our generation’s moment to save future generations from global catastrophe. It will take a grass-roots effort to make America greener and end the tyranny of oil.”

Clinton, in a speech at the National Press Club, said “Instead of national security dictating our energy policy, our failed energy policy dictates our national security.”

Sen. John McCain likewise includes the energy theme in his campaign promises. In April 2007 he said, “We have the urgent need and the opportunity to build a safer and thriving future with more diverse, reliable, and cleaner energy. But it will take another indispensable commodity to make it happen—American leadership.” McCain is well known as the perennial co-sponsor, with Sen. Joe Lieberman, of legislation that would mandate carbon constraints.

It seems the next president, regardless of who it is, is going to attack development of clean energy vigorously. If mountains of public money are to be spent on development of new technologies, there is an equally mountainous question of how those funds should be managed to assure the money is not wasted—i.e., that the investment yields commercially viable, clean energy technologies that get widely deployed in the coming decades. Who should manage this project—the federal government or the private sector?

While the Department of Energy might seem like an obvious choice, its track record suggest otherwise. For one thing, DOE’s annual appropriations are subject to political whims, as well as political competition inside the beltway—with defense, health care, education, and other departments clamoring for their share. Further, the agency’s tendencies to pick so-called winners like FutureGen before the facts are in about commercial viability suggests it would be the wrong model for managing a New Deal-scale energy development effort.

So what about the private sector? The Electric Power Research Institute (EPRI), funded by the utility industry, has prepared a comprehensive and detailed RD&D program for developing commercial, climate-friendly power generation technology. EPRI brings a great degree of industry credibility, but its budget model severely constrains its resources, and its track record is mixed, when it comes to wide-scale deployment of technologies developed.

The Gas Research Institute might be a model worth replicating. It generated 30 percent success on commercial ventures—twice the normal industry rate of success—with a benefit/cost ratio of 7:1. GRI selected its projects under the oversight of a government watchdog—FERC—with multiple review boards—including industry, academia, public interest groups and technical experts—all contributing in a formalized project appraisal methodology that winnowed out the important, likely winners with amazing success.

Plus GRI’s funding model bears more resemblance to the broad-and-deep stream that might characterize a New Energy Deal. GRI was funded by a surcharge on interstate gas pipeline sales.

It comes down to this: whom do you trust? No one I know trusts the government to develop commercial products. And historic examples support this sense of mistrust.

After World War II, Alfred Loomis shut down the MIT Rad Lab that had developed radar during the war by January 1946, because he felt companies like RCA and Motorola would do a much better job of exploiting the commercial potential of electronics. By contrast, the National Laboratories associated with atomic energy were not closed. And while they have produced valuable research, their efforts have paled in comparison to what the RCAs and Motorolas of the world have produced.

America might need a New Deal to finance the mammoth clean energy challenge, but such an investment must be managed by the private sector—perhaps in a GRI-style structure—to ensure public spending actually results in cost-effective technologies being developed, commercialized and deployed.

(EDITOR’s NOTE: This blog entry provided a preview of John Bewick’s article, “Cultivating Clean Tech,” which appeared on the cover of Fortnightly’s May 2008 issue. Bewick, formerly secretary of environmental affairs for the Commonwealth of Massachusetts, is founder of Compliance Management Inc., an environmental consultancy based in Hingham, Mass. -MTB)

Posted: April 2nd, 2008 under 2008 elections, R&D, energy policy.
Comments: none

By John H. Herbert

Traditionally, when Wall Street is stuck in a bear market, utility stocks enjoy relatively strong performance. But will utilities maintain their defensive posture when talk of a recession turns into reality? The answer may be no, because the most pressing current economic problems—specifically a declining housing market, cratering credit markets and rising commodity prices—all create special problems for maintaining utility profits.

Utility companies’ current and future net income increases roughly in proportion with floor space. In other words, new homes and additions to existing homes create more demand for electricity and natural gas—not just this year but in future years.

Annualized sales of new single family houses fell to only 604,000 units in December 2007. Compare this to the record level of nearly 1.4 million homes in July 2005. During that same period, large additions were being built onto existing homes across the country. Accordingly, the Dow Jones Utilities Index during this period was posting gains 16 times greater than the Dow Jones Industrial Average.

In December 2007 floor space additions from new homes were so low that they probably didn’t cover the decline in floor space from physical depreciation of existing homes. This declining trend is not likely to reverse anytime soon, based on the large and growing stock of unsold homes.

Furthermore, much of the recent decline in housing activity is associated with credit problems in the mortgage market, and these problems have spread to other credit markets. For example, credit card interest rates and fees for many utility customers have increased. These costs have risen along with inflation in prices for gasoline and other basic commodities that utility customers purchase.

These pressures may affect utilities’ collection rates and bad-debt expenses, as utility customers put off the timely payment of utility bills. They know they can do this because most will continue receiving service even if their payments are overdue. Others will not pay their utility bills at all, because they will abandon houses they can no longer afford. Increasingly late payments and uncollectible bills will reduce utility cash flow, increase short term borrowing requirements and trim income.

The Federal Reserve has lowered the federal funds rate over the last six months primarily to shore up financial markets. Yet utility costs of capital have remained relatively steady, as financial institutions have built a larger spread into loans to balance perceived market risks and offset mortgage-market losses. Moreover, the Fed may need to increase rates in the second half of the year if prices for energy and other basic commodities remain elevated, and if core inflation stays above the Fed’s target level. This could boost utility borrowing costs and reduce utility income. Interest rate hikes appear increasingly likely as economists at the Fed and elsewhere focus more on stagflation, which has re-emerged as an economic bugaboo.

Thus until credit markets, housing markets and inflation stabilize, investors should not count on utility stocks remaining defensive.

Editor’s note: Certainly rising interest rates would put pressure on the utility industry’s cost structure. By itself, that wouldn’t end utilities’ role as a defensive investment. Rather, capital costs are only one factor in a complex set of forces driving up overall costs and complicating utility rate cases—and therefore utilities’ value proposition. To the degree the U.S. economy contracts, regulators will be increasingly reluctant to grant favorable rate treatment for expected capital expenditure plans. Shareholders may need to wait several months longer to ride the wave of a growing rate base. -MTB

Posted: March 11th, 2008 under Current News, utility stocks.
Comments: none

By Courtney Barry

Environmental advocates in Texas are crying “bird kill!” over potential damage to a fragile ecosystem caused by proposed wind turbines. But is that really the issue driving opposition?

Aligned as “Coastal Habitat Alliance,” environmentalists, Audubon Societies, and the 825,000 acre King Ranch in South Texas seek to halt progress on two planned wind projects. The wind farms would put more than 600 turbines on 60,000 acres of land located near Corpus Christi. Last December the Alliance filed suit in both federal and state court, naming several defendants, including the PUC, the Texas General Land Office (which oversees wind farm development), and the projects’ developers and investors. David Newstead, of the Coastal Audubon Society, a member of the Alliance, says the projects could affect as many as two to three hundred bird species. Now ranchers and landowners are showing up at hearings, challenging the wind facilities on environmental grounds.

Jack Hunt, CEO of King Ranch, claims the sited area is “full of wetlands, endangered species, threatened species, migrating birds, and over wintering birds…We recognize the value of wildlife.” But reviewing the case history, before the talk of an environmental assessment, and before a public relations firm started fronting media questions for the Alliance, a long economic thread becomes evident. Early challenges to the wind projects raised concerns about hunting revenue loss, and tax abatements. Environmental concerns were raised too, but Hunt also acknowledged biodiversity is why King Ranch is world renowned as a hunting destination favored by presidents, foreign dignitaries, and CEOs. Indeed, hunting at the ranch bring in five times as much revenue per acre as cattle-raising does. That ability to command a hunting premium will be affected by the turbines, Hunt said. He also opposes hefty tax abatements for project developer PPM, claiming they will cost the county millions in tax revenue.

And from the King Ranch’s point of view, it doesn’t help that the neighboring Kenedy Ranch, where the turbines will be situated, stands to garner all the profits—between $1,200 and $5,000 per turbine each year, according to sources.

Still, ecology is the binding factor for the Alliance, and many people say the siting is just plain wrong. Ned Ross of FPL, which has scouted regions for wind, and has significant wind development in Texas (Panhandle region), says FPL was not interested in developing the area around the Gulf Coast, for various reasons including avian activity. Ross, aware of all the dissention created by the lawsuits, says “The courts are going to have to make a call on that.”

A hearing on the merits in the state case is set for March 5, focusing on the original transmission line order handed down from the PUC, and whether the Alliance can intervene, says Doug Fraser, assistant attorney general handling the case for defendant PUC. In the federal case defendants have filed a motion to dismiss, but the court has not yet scheduled a hearing date.

In related news …
Hunting & Fishing Groups Call for GHG Regulation

Posted: February 18th, 2008 under Current News.
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