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Green-Energy Activists Declare War on Rural Coloradans

Posted May 7, 2013 | folder icon Print this page

Some lawmakers in Colorado want to increase the cost of electricity for all Coloradans, especially those in rural areas. Awaiting Gov. John Hickenlooper’s signature, SB 252 would require rural electric cooperatives to dramatically increase the amount of electricity generated from renewable sources to 25 percent by 2020, up from the current mandate of 10 percent. This portends unambiguously higher electricity rates for Coloradans.

Electric co-ops in Colorado serve about 25 percent of the population in predominantly rural areas that span 70 percent of the state’s land. By mandating the purchase of more renewables, SB 252 would force co-ops to increase electricity generation costs. Tri-State G&T estimates SB 252 would cost its 18 member co-ops as much as $4 billion by 2020. In addition, one study found the current RPS will raise electricity rates by as much as 64 percent and destroy up to 29,000 jobs by 2015.[1] Further increasing the RPS will only exacerbate these negative economic impacts.

SB 252 would drive up electricity rates in two ways. First, as noted above, it would require electric co-ops to generate more electricity from renewable sources. Second, it would allow electricity rates to increase faster to pay for the high cost of renewable electricity. The current RPS allows electric co-ops to raise rates by 1 percent each year. SB 252 would boost allowable annual rate increases to 2 percent. Requiring utilities to generate more electricity from expensive sources would increase operating costs for electric co-ops. Boosting annual rate increases would allow co-ops to pass those increased operating costs to consumers.

For a preview of how a more stringent RPS would hurt Coloradans, consider the effects of the current RPS. Although slightly below the national average, Colorado has higher electricity rates than most of its neighboring states: Colorado jumped from middle of the pack to second highest residential electricity prices in the Mountain West since the RPS was implemented.[2] Additionally, Colorado Public Utilities Commission data show that the RPS was directly responsible for a 13 percent increase in Colorado’s electricity rates in 2012.[3] If passed, SB 252 would undoubtedly make electricity more expensive for Coloradans; the only question is the extent of the damage.

In response, Coloradans are rising up against SB 252. In a scathing editorial, The Pueblo Chieftain called SB 252 a “rural dagger.” The newspaper’s animosity is understandable: the city of Pueblo, Colorado receives power from the San Isabel Electric Association, a rural electric co-op. Even The Denver Post editorial board, which generally supports renewable energy mandates, urged caution: “Given the financial uncertainty and the potential economic impact on rural residents and businesses, we think supporters of the bill should consider lowering the proposed standard or extending the time frame.”

Given the onerous costs of increasing the RPS, it is no surprise that Colorado Rural Electric Association President Kent Singer implored ratepayers to oppose SB 252 in a recent op-ed:

“The co-ops are on track to supply at least 10 percent of our power from renewable energy sources by 2020, and are considering additional purchases of these resources when they make economic sense…Colorado’s electric co-ops support renewable energy and energy efficiency, but we oppose inflexible legislative mandates that do not take into account the unique characteristics of each electric co-op system.”

In 2004, Colorado became the first state to enact a Renewable Portfolio Standard (RPS) by ballot initiative.[4] The original RPS required large utilities serving 40,000 or more customers to generate 10 percent of electricity from renewable sources. Passed in 2007, HB 1281 extended the RPS to co-ops. In 2010, the Colorado legislature increased the RPS for investor-owned utilities to 30 percent by 2020.

Until recently, Colorado was on track to meet its RPS mandates. Colorado generated about 5.7 percent of its electricity from qualified renewable resources in 2009, exceeding the 5 percent mandate.[5] However, the state fell short of meeting its 2011 mandate of 12 percent even though utilities generated 10.4 percent from renewable sources.[6] That utilities boosted renewable generation by more than 80 percent in two years but still fell short of the RPS underscores the folly of inflexible renewable electricity mandates.

SB 252 will certainly drive up the cost of electricity in Colorado. If the Colorado legislature further increases costs for electric co-ops, rural families will suffer. Coloradans and all Americans deserve electricity derived from the most economical sources, not the most politically favored.

IER Policy Associate Alex Fitzsimmons contributed to this post.

[1] American Tradition Institute, “The Economic Impact of Colorado’s Renewable Portfolio Standard,” Dec. 2011, http://www.atinstitute.org/wp-content/uploads/2011/02/CO-ATI-RPS-Study.pdf

[2] According to EIA data, Colorado residential electricity prices were 9.03 cents/KWh in 2009 and 11.28 cents/KWh in 2013. In 2009, Colorado ranked fourth out of eight Mountain West states. In 2013, Colorado ranked second. Mountain West states include, in descending order of 2013 electricity prices: Nevada, Colorado, New Mexico, Arizona, Montana, Utah, Wyoming, and Idaho.

[3] See Testimony of William J. Dalton, Staff of the Colorado Public Utilities Commission, Sept. 21, 2011, p. 20, http://www.globalwarming.org/wp-content/uploads/2013/01/William-J-Dalton-Answer-testimony.pdf. Dalton estimated the cost of renewable acquisitions was about $343 million for 2012. Total electricity sales in Colorado were estimated to be $2.65 billion.

[4] See DSIRE for more information on the history of Colorado’s RPS, http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO24R.

[5] Institute for Energy Research, “The Status of Renewable Electricity Mandates in the States,” Jan. 2011, http://www.instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf.

[6] The Energy Information Administration (EIA) estimates that Colorado currently generates 14 percent of its electricity from renewable sources. EIA includes all hydroelectric generation, even though the RPS excludes hydroelectric in existence before January 2005. However, SB 252 would extend eligibility to several new sources. See http://www.eia.gov/electricity/data/state/annual_generation_state.xls.

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IER

Coal and Gas Fight Over Electric Generation Market Natural Gas

Posted May 6, 2013 | folder icon Print this page

The tide may be turning somewhat for coal and natural gas generation with coal regaining some of the market that it lost in 2012 due to low natural gas prices. Natural gas prices delivered to the electric power sector averaged $3.52 per thousand cubic feet in 2012, 62 percent less than in 2008 when it reached $9.26 per thousand cubic feet. For the first 2 months of 2013, they are higher on average by a slightly more than $1.00 per thousand cubic feet. This allowed coal to increase its share of electric generation to 40 percent for the first 2 months of 2013, compared to 37 percent during the first 2 months of last year, while the natural gas share of the generation market fell from 28 percent to 26 percent during the same time period.

This change, however, will not be a coal renaissance in the electric power sector since new and pending regulations by the Environmental Protection Agency (EPA) will ensure no new coal-fired plants are built and older coal-fired plants will find it uneconomic to continue operating because of increasingly-stringent EPA regulations.

5.3.13-IER-GenerationSharesYTD-MKM

Forecasts of Coal vs. Natural Gas Generation

Some analysts are forecasting that coal may supply 40 percent of the power market for this entire year, up from 37 percent last year, while natural gas will supply 25 percent, down from 30 percent last year.[i] The Energy Information Administration in its Short Term Energy Outlook is agreeing with the coal share of 40 percent for 2013, but its forecast for natural gas generation is higher at 28 percent, although still lower than the 30 percent natural gas share achieved last year in the generation market. EIA does not see a renaissance to coal’s almost 50 percent share attained not long ago, forecasting a continuation of the 40 percent share of the generation market for 2014.[ii] That’s most likely due to EPA regulations, which reflect President Obama’s promise in 2008 to reduce carbon dioxide emissions and his later pledge to “look for other means” to control such emissions.

EPA’s Regulation of Coal-Fired Power Plants

The Obama Administration’s EPA has promulgated new regulations that will result in the demise of the domestic coal generating industry. The new rules target mercury from coal-fired power plants (the Mercury and Air Toxic Standards), which many call Utility MACT because the rule requires “Maximum Achievable Control Technology” for mercury at coal-fired power plants. These technologies must be installed over a tight 3-year period between 2012 and 2015, raising the cost of generating power from existing coal-fired plants where the economics make sense to install the technology, or force plants to retire or to convert to natural gas where the economics of adding the additional environmental technology are not favorable.

The National Economic Research Associates found compliance costs to be $21 billion per year and lost jobs to amount to 183,000 per year. Because the increased costs will be passed to consumers through higher electricity rates, businesses will be forced to reduce jobs as well. Studies project that retail electricity prices will increase between 10 and 20 percent in most of the country and over 20 percent in the coal-dependent states in the Midwest.[iii]

EIA announced that plant owners and operators expect to retire about 27 gigawatts of coal-fired capacity by 2016 — four times the 6.5 gigawatts of capacity retired between 2007 and 2011 mostly because of the new regulations imposed by the EPA. In 2012, electric generators are expected to retire 9 gigawatts of coal-fired capacity, the largest amount of retirements in a single year in America’s history. The 27 gigawatts of retiring capacity is 8.5 percent of total coal-fired capacity (318 gigawatts). The 2012 record retirements are expected to be exceeded in 2015 when nearly 10 gigawatts of coal-fired capacity are expected to retire.[iv] Most of the units retiring are located in the Mid-Atlantic, Ohio River Valley, and Southeastern United States as shown in the map below.

eiamap

eiagensgraphEIA’s numbers are based on current utility expectations. The Edison Electric Institute expects a larger number of forced retirements—about 48 gigawatts of coal-fired units at 231 plants—between 2010 and 2022, or about 15 percent of the coal fleet.[v]

Further, pending greenhouse gas regulations will require all new coal-fired plants to reduce their greenhouse gas emissions even though there is no cost effective way to do so. This is essentially a ban on new coal-fired plants because the technology does not exist commercially for them to meet natural gas carbon dioxide levels that are required by the EPA regulation.

The coal industry has already taken action to improve air quality and new coal plants are cleaner than ever before. Pollution control technologies such as flue gas desulfurization, selective catalytic reducers, fabric filters, and dry sorbent injection have greatly reduced coal plant emissions. These advances in technology have enabled large improvements in air quality. Since 1970, the total emissions of the six criteria pollutants have declined by 68 percent, even though energy consumption has increased by 45 percent and the economy has grown by 212 percent.[vi] (The “criteria pollutants” are carbon monoxide, lead, sulfur dioxide, nitrogen oxides, ground-level ozone, and particulate matter.) The following chart from EPA shows the increase in economic measures compared to the decrease in pollution emissions.[vii]

wealthhealth Conclusion

Two factors have and are affecting coal-fired generation: natural gas prices and new and pending regulations from the EPA. Recent data have shown the effect that these factors have on the generation market. The higher prices of natural gas at around $4.50 per thousand cubic feet delivered to electric utilities this year is making coal more cost competitive compared to natural gas, but new and pending EPA regulations are likely placing a ceiling on the amount of generation one can expect to get from coal– at around a 40 percent share.


[i] Gas Generation Takes Beating, Falling 7.7% Because Coal Generation Jumps 8%, April 29, 2013, http://johnhanger.blogspot.com/2013/04/gas-generation-takes-beating-falling-77.html

[ii] Energy Information Administration, Short Term Energy Outlook, http://www.eia.gov/forecasts/steo/tables/pdf/7dtab.pdf

[iii] Washington Times, Chance to block Obama’s war on coal, June 19, 2012, http://www.washingtontimes.com/news/2012/jun/19/chance-to-block-obamas-war-on-coal/

[v] Politico, Who is killing the coal-fired power plant?, December 6, 2011, http://www.politico.com/news/stories/1211/69922_Page2.html

[vi] Environmental Protection Agency, Air Quality Trends, January 5, 2012, http://www.epa.gov/airtrends/aqtrends.html

[vii] Environmental Protection Agency, Air Quality Trends, http://www.epa.gov/airtrends/aqtrends.html. The specific graphic is available here:  http://www.epa.gov/airtrends/images/comparison70.jpg

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IER

Oil Shale Development in the United States and Abroad Oil

Posted May 2, 2013 | folder icon Print this page

We all know of the shale oil boom in the United States that has produced an explosion in domestic oil production primarily on private and state lands and helped to decrease our dependence on oil imports. Hydraulic fracturing and directional drilling have spurred economic growth in North Dakota and Texas along with other states with productive shale oil wells. But, oil shale, a different product, has yet to be developed in the United States, while Estonia, a country near Russia and Finland, gets 90 percent of its electricity production from it.

The oil shale industry in Estonia employs about 1 percent of the national work force (over 7,500 people) and provides four percent of its gross domestic product. The United States has 2.6 trillion barrels of in-place oil shale resources and almost 1 trillion barrels of technically recoverable oil shale[i], well beyond the resources of Estonia. Yet, our government has decided that those resources, which lie predominantly on federal lands, will not be open to research and development. Without research and development, oil shale cannot become a marketable resource.

Shale Oil vs. Oil Shale

Shale oil is conventional oil trapped in shale rock. Because the oil produced from shale oil formations is conventional, it is fluid and does not require special processing. Oil shale, on the other hand, is sedimentary rock that contains kerogen, a solid organic material. When the kerogen is heated to high temperatures, it releases petroleum-like liquids that can be processed into liquid fuels. Shale oil resources are spread over much of North America, but oil shale is concentrated primarily on federally owned lands in the western United States in Utah, Wyoming, and Colorado.[ii]

Oil-Shale-Graph-2

Source: http://www.instituteforenergyresearch.org/wp-content/uploads/2012/07/Oil-Shale-Graph-02.png

U.S. Shale Oil Development

The development of hydraulic fracturing with directional drilling has produced a boom in domestic oil production in the United States from shale oil. For example, in 1995, the Bakken shale formation in the western part of North Dakota and eastern Montana was estimated by the U.S. Geological Survey (USGS) to contain 151 million barrels of recoverable oil. But with advances in drilling and production technologies, including the expanded use of techniques such as hydraulic fracturing and horizontal drilling, the USGS revised its estimate by a factor of 25 in 2008. And, just recently, the agency announced that the Bakken and the Three Forks formations in North Dakota, South Dakota and Montana contained an estimated mean of 7.4 billion barrels of undiscovered technically recoverable oil, double its 2008 assessment[iii]. In other words, USGS’s estimate of the amount of recoverable oil in North Dakota has increased almost 50-fold since 1995. Some oil analysts, however, estimate that Bakken could hold 24 billion barrels of recoverable oil.[iv]

Texas with the Eagle Ford shale formation ranks first among the states in oil production. North Dakota ranks second, recently surpassing Alaska and California, due to its Bakken shale oil resources. According to the Bureau of Economic Analysis, in 2012, North Dakota led the nation in personal income growth (growth in before-tax income received by all residents from all sources, including wages, rents and transfer payments). Personal income growth in North Dakota increased by 12.4 percent in 2012 over 2011 levels, marking the fifth time in the past six years that North Dakota has recorded the nation’s fastest-growing personal income. Texas ranked second with average personal income increasing by 4.8 percent in 2012.[v]

The shale oil (and shale gas) revolution is a testament to what happens when people are allowed to explore for oil resources. People have known for decades that the Bakken and Eagle Ford contain oil, but the only reason these areas are so prolific today is because people can access the resources. Oil shale contains vast resources, but instead of allowing the access that has facilitated the shale oil and natural gas revolution, the federal government keeps oil shale off limits. 

U.S. Oil Shale Resources

The USGS estimates our oil shale resources to be even greater than our shale oil resources. The United States has 2.6 trillion barrels of oil shale in-place, with about 1 trillion barrels that are considered recoverable under current technological conditions. The nearly 1 trillion barrels are about four times the amount of Saudi Arabia’s proven oil reserves—a large enough supply for 140 years at our current rate of oil use. Before leaving office, the Bush administration offered to lease these resources for research and development that could lead to commercial development but they were withdrawn by the Obama administration.[vi] Private sector research and development is necessary for development, but oil companies will not invest the hundreds of millions of dollars required to develop the necessary technology unless they are able to produce the oil and bring it to market. This fact led Congress to require the president to develop exactly the sort of provision offered by the Bush Administration in the Energy Policy Act (EPACT) of 2005.

Oil-Shale-Graph

Estonia’s Oil Shale Deposits

In 2005, Estonia was the largest producer of oil shale in the world, but since then it lost its ranking to China. There are two kinds of oil shale in Estonia – Dictyonema argillite (claystone) and kukersite. The kukersite deposits have been known to exist since the 1700s, but full-scale mining did not begin until 1918 when 17,000 tons were produced by open-pit mining. By 1940, the country was producing 1.7 million tons of oil shale annually and in 1980 it peaked at 31.4 million tons from eleven open-pit and underground mines. After 1980, production fell to about 14 million tons in 1994 and 1995, but increased again and in 1997, the country was producing 22 million tons of oil shale from six room-and-pillar underground mines and three open-pit mines. The output was used to generate electricity, produce petrochemicals, and to manufacture cement as well as other products. In 1997, Estonia provided subsidies to oil-shale companies totaling 132.4 million Estonian kroons ($9.7 million).[vii]

Proved reserves of kukersite are estimated to total 5.94 billion tons. The kukersite deposits are located in northern Estonia and extend eastward into Russia toward St. Petersburg where it is referred to as the Leningrad deposit. The Tapa deposit, a younger deposit of kukersite, overlies the Estonia deposit. The older marine Dictyonema Shale deposit underlies most of northern Estonia. While geological reserves of Dictyonema argillite in Estonia are estimated at approximately 70 billion metric tons, larger than the kukersite reserves, its quality is poorer and as such is not currently being produced.

Oil Shales in Estonia and Sweden

estonia-sweden-oil-shale-map

Source: http://geology.com/usgs/oil-shale/images/estonia-sweden-oil-shale-map.gif

Unfortunately, because oil shale in different parts of the world has different qualities, the production process must be modified to account for those differences. Estonian oil shale companies are interested in developing the technology to market U.S. oil shale resources, and so are other companies, who need to gain access to U.S. oil shale leases.

Other Oil Shale Deposits

As the figure above shows, Sweden also has oil shale deposits. Before and during World War II, oil shale from the Alum Shale was produced, but production stopped in 1966 due to the availability of cheaper supplies of petroleum. During that production period, about 50 million tons of oil shale was mined at Kinnekulle in Västergötland and at Närke.

China also has oil shale resources totaling 720 billion metric tons located in 80 deposits of 47 oil shale basins. China’s oil shale industry was established in the 1920s. Similar to its development in Estonia, oil shale production in China had decreased and then started increasing again in 2008 when oil prices increased. Several Chinese companies are engaged in shale oil production and its use for power generation. China became the largest shale oil producer in the world after 2005, taking top ranking from Estonia. In 2011, China produced about 650,000 metric tons of shale oil.

Two of China’s principal resources of oil shale are at Fushun and Maoming. The Fushun oil-shale deposit is located in northeastern China just south of the town of Fushun in Liaoning Province. The total resource of oil shale at Fushun is estimated at 3,600 million tons. Production there began in 1926 under the Japanese and peaked in the early 1970s with about 60 million tons of oil shale mined annually then dropped to about 8 million tons in 1978. This reduction was partly due to increased discovery and production of cheaper crude oil within China. The Maoming oil-shale deposit has oil shale reserves estimated at 5 billion tons.[viii]

The first commercial production of shale oil in China began at Fushun in 1930 with the construction of “Refinery No. 1,” and was followed by “Refinery No. 2,” which began production in 1954, and a third facility that began producing shale oil at Maoming in 1963. The three plants eventually switched from shale oil to refining cheaper crude oil.  In 1992, a new plant for retorting oil shale was constructed at Fushun.

Brazil, Germany, and Russia also have oil shale deposits. More than 80 deposits of oil shale have been identified in Russia. The kukersite deposit in the Leningrad district is burned as fuel in the Slansky electric power plant near St. Petersburg.

Conclusion

Oil shale deposits, different from shale oil, exist around the world and countries are seeking its development. Estonia, for example, produces 90 percent of its electricity generation from oil shale while China is the world’s largest producer. Our oil shale which lies mainly on federal lands is currently under lock and key by the Obama administration, which withdrew the leases that the Bush administration had opened to research and development. Current oil prices should be high enough to encourage the development of the technology to bring those resources to market if only access were not restricted. Technically recoverable oil shale resources in the United States could provide Americans with 140 years of oil shale at current usage rates.


[i] Institute for Energy Research, North American Energy Inventory, http://www.energyforamerica.org/wp-content/uploads/2012/06/Energy-InventoryFINAL.pdf

[ii] Institute for Energy Research, Hard Facts, April 26, 2012, http://instituteforenergyresearch.org/hardfacts.pdf

[iii] Guardian, USGS doubles estimate of Williston Basin recoverable oil, April 30, 2013, http://www.energyguardian.net/usgs-doubles-estimate-williston-basin-recoverable-oil andThe Hill, Interior Department boosts estimates of oil and gas resources in North Dakota, April 30, 2013, http://thehill.com/blogs/e2-wire/e2-wire/296953-feds-nd-oil-gas-reserves-much-greater-than-thought-

[iv] The Wall Street Journal, How North Dakota Became Saudi Arabia, October 1, 2011 http://online.wsj.com/article/SB10001424052970204226204576602524023932438.html

 

[v] Fuel Fix, Energy boom pushes states to the top of income growth list, March 28, 2013, http://fuelfix.com/blog/2013/03/28/energy-boom-pushes-states-to-top-of-income-growth-list/

[vi] Bloomberg, Salazar to rewrite Bush’s oil-shale plan, February 25, 2009, http://www.chron.com/disp/story.mpl/

headline/biz/6280852.html

[vii] Geology, Estonia and Sweden Oil Shale Deposits, http://geology.com/usgs/oil-shale/estonia-sweden-oil-shale.shtml

[viii] Geology, China, Russia, Syria, Thailand and Turkey Oil-Shale Deposits, http://geology.com/usgs/oil-shale/world-oil-shale-countries.shtml

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Author:
IER

Climate Change Madness: Do the Europeans know what they are doing? Biomass

Posted April 30, 2013 | folder icon Print this page

British leaders are making some truly bizarre decisions in an effort to reduce carbon dioxide emissions and comply with European renewable electricity mandates. For example, they are converting a coal-fired plant to burn wood chips that are shipped from the United States. A wood burning plant qualifies under the European rules for meeting electricity generation mandates from renewable energy for the purpose of reducing carbon dioxide emissions from energy producing sources.  But this move is sheer lunacy for it will increase rather than decrease emissions while increasing the price of electricity to consumers. Yet the British parliament has whole-heartedly embraced the move. Have legislators gone mad?

The British Drax Plant and Its Conversion

The Drax plant in Yorkshire, England is one of the biggest coal-fired power plants in the world with an almost 1,000 foot-tall flue chimney, 6 boilers, and 12 very large cooling towers. It consumes 36,000 tons of coal each day, providing 7 percent of the country’s electricity. Starting next month, the plant will be converted to burn millions of tons of wood chips a year, costing £700 million ($1.085 billion). [i]

Most of the wood chips will travel 3,000 miles across the Atlantic Ocean, coming from trees downed in the United States. Drax is building 2 plants in the United States that will turn the wood from trees into chips that can be transported by ship to Yorkshire and then hauled to the power station by railway trucks. In order to prevent spontaneous combustion, the wood chips must be stored in domes where the humidity is controlled before they can be pulverized into powder. (Wood is 1,000 times more prone to spontaneous combustion than coal.)

Despite the fact that coal is the least-expensive source of electricity generation in England, the owners of the Drax plant realized that a recently instituted carbon tax on fossil fuels would put them out of business if they continued to burn coal eventually making their electricity become twice as expensive. The political incumbents in Britain decided last year to give any coal-fired power station that switched to ‘biomass’ the almost 100 percent ‘renewable subsidy’ that owners of onshore wind farms get.

A British Carbon Tax and an EU Mandate

A new carbon tax introduced in Britain on April 1 is applied to every ton of carbon dioxide produced during electricity production. While the tax is starting out low, it will increase each year, making the cost of generating electricity from coal double within 20 years, at which point it will no longer be economical for Drax to generate electricity from coal.  Along with the carbon tax, the British government will also be subsidizing electricity produced from its list of ‘carbon neutral’ power sources that will further increase consumer electricity bills.

The U.K. carbon tax is defined as a carbon price floor (CPF) that will increase from 16 pounds per metric ton of carbon dioxide ($24.80) in April 2013 to 30 pounds per metric ton ($46.50) in 2020, in constant 2009 prices. The resulting carbon tax is calculated as the difference between the carbon price floor, adjusted for inflation, and the European Union allowance (EUA) price, which is the 12-month average settlement on the European Climate Exchange for the relevant EUA futures contract. The tax for this financial year is 4.94 pounds per metric ton of carbon dioxide ($7.66) and in 2014/2015, it is 9.55 pounds ($14.80). IHS CERA calculated the 2015/2016 rate at 18.29 pounds per metric ton of carbon dioxide ($28.35) resulting in an annual doubling for two successive years.[ii]

Carbon Price Floor Graph

Source: Reuters, http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=2013_03_19_11_19_74d421b3e60d438c97efc8096a67ea9f_PRIMARY.jpg

The conversion of the Drax plant to wood chips will significantly contribute to meeting a target imposed by the European Union (EU) that commits Britain to producing almost a third of its electricity from ‘renewable energy’ within seven years. Upon completion, Drax will have the capability to generate 3,500 megawatts of electricity from a qualified renewable source, contributing more than a quarter of the EU target for the use of renewable energy. The reliability of the converted Drax plant along with its size will produce far more generation than the country’s wind farms.

The Issues the U.K. Politicians Aren’t Confronting

The energy policies that the United Kingdom has put in place have consequences that will affect the lives of its citizens and their pocketbooks. The country’s energy policies mean the electricity will cost more, that electric supplies may not be sufficient to meet future demands, and that little will be achieved in emissions reduction because of actions of other countries and the consequences of biomass conversions on the life cycle of the fuel.

It will cost two to three times as much for Drax to generate about the same amount of electricity from wood as it does from coal, i.e. fuel costs will double or triple. The government is providing a subsidy that will eventually be worth over £1 billion a year that make the Drax conversion to ‘biomass’ economical. But for electricity consumers in Britain, bills have already increased by over £1 billion ($1.55 billion) a year because of subsidizing wind farms; the Drax subsidies will increase them even more.

Those coal-fired power plants not converting to ‘biomass’ are being forced to close. An EU anti-pollution directive has resulted in the closure of several coal-fired power plants such as Kingsnorth in Kent, Didcot A in Oxfordshire and Cockenzie in Scotland with a combined capacity of almost 6,000 megawatts, which leaves natural gas to back-up wind power that cannot be relied upon to generate power when needed. For example, on a recent windless day, the country’s 4,300 wind turbines combined to generate just one thousandth of demand (29 megawatts).

But natural gas supplies from the North Sea are diminishing, making the country dependent on expensive natural gas from Qatar, Algeria, and Russia that will also be affected by the carbon tax when burned to produce electricity. Early in March, Britain’s supplies of natural gas in storage were down to 2 weeks of coverage–the lowest amount ever. The low electricity supplies are worrying some that the country may face major power cuts that it cannot endure due to its dependence on electricity not just for home heating, but also computers, traffic lights, and a whole host of other needs.

The irony of the situation is that Britain is moving away from coal as other countries which have been big proponents of reducing carbon dioxide emissions are moving to build more coal-fired power plants. Germany is building 20 new coal-fired power plants to back-up its wind and solar plants and to replace its nuclear plants; the first of which (2,200 megawatts) came on line last September. China, the world’s largest emitter of carbon dioxide, is building at least one coal-fired unit a week and is planning to build 363 more coal-fired power plants to fuel its fast growing economy.  India is also planning to build 455 new coal-fired power plants to fuel its growing economy.

And then there is Japan, who is building coal-fired power plants to replace its nuclear power after the accident at Fukushima in 2011. Japan is currently using idled oil-fired power plants, but expects to build cheaper coal-fired power plants in the future. Tokyo Electric just added 2,600 megawatts of coal-fired generating capacity from two new plants that started operation this month. Other new coal-fired plants are expected to follow as Japan works on decreasing the time for processing permits from up to 4 years to a maximum of 12 months. In order to consume more coal, Japan is planning on revising by this October its Kyoto Protocol commitment to reduce carbon dioxide emissions by 25 percent from their 1990 level by 2020.[iii]

There is no carbon dioxide benefit to burning wood at the Drax plant.

But the real lunacy in the U.K. is the reasoning for converting the Drax plant to wood. The entire point is a belief that burning biomass would, on net, reduce carbon dioxide emissions, especially compared to coal. But that’s not the case in the real world, especially with the Drax plant.  Any carbon reductions would take many years to be realized when dealing with the life cycle of the process of growing trees, making wood chips, transporting them to consumers, and combusting them into electricity. A researcher at Princeton University calculated that if whole trees are used to produce energy, they would increase carbon emissions compared with coal by 79 percent over 20 years and 49 percent over 40 years and that there would be no carbon reduction for 100 years until the replacement trees have matured.[iv]

Conclusion

The result of Britain’s energy policy is ever-increasing energy bills and likely power outages. According to the UK Daily Mail, Britain’s politicians “live in such a la-la land of green make-believe that they no longer connect with reality — and seem unable to comprehend the national energy crisis now heading our way with the speed of a bullet train. But the sad truth is that we ourselves should be neither laughing nor crying. We should be rising up to protest, in real anger, at those politicians whose collective flight from reality is fast dragging us towards as damaging a crisis as this country has ever faced.”

Unfortunately, the United States could follow in Britain’s footsteps if we are not ever vigilant in making our politicians aware of the energy system and how it works in this country. Germany’s residences already play 3 times what we pay for electricity and almost 20 percent of England is in energy poverty, providing more than 10 percent of their household income to non-transportation energy needs. We need to learn from their mistakes and insist our policy makers do so as well.


[i] Daily Mail, Eco madness and how our future is going up in smoke as we pay billions to switch from burning coal to wood chips at Britain’s biggest power station, March 8, 2013, http://www.dailymail.co.uk/news/article-2290444/Madness-How-pay-billions-electricity-bills-Britains-biggest-power-station-switch-coal-wood-chips–wont-help-planet-jot.html

[ii] Reuters, Britain’s carbon tax: unfair and ineffective, March 19, 2013, http://www.reuters.com/article/2013/03/19/column-wynn-carbon-uk-idUSL6N0CB4M820130319

[iii] Sydney Morning Herald, Japan turns back to coal-fired power plants, April 26, 2013, http://www.smh.com.au/business/japan-turns-back-to-coalfired-power-plants-20130425-2ihb0.html

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Author:
IER

Earth Day and Capitalism

Posted April 26, 2013 | folder icon Print this page

On Monday millions of people around the world celebrated Earth Day. Although there are always exceptions, it’s safe to say that the vast majority of these people are in favor of more government regulations to (allegedly) protect nature and the environment from the unchecked greed of a pure capitalist system.

In this post I’ll explain that this thinking is backwards: A true laissez-faire economy based on private property offers incentives for wise stewardship of natural resources. History shows that the most mismanaged habitats and ecological disasters in history went hand-in-hand with strong government.

Capitalist Myopia?

One of the standard arguments for government intervention in the arena of exhaustible resources is that private market transactions allegedly lack the capacity for a long-term perspective. For example, proponents of government subsidies to renewable energy sources will often argue that the planet only has x years left of oil, making it imperative for humanity to wean itself of its “addiction” to fossil fuels, or for the US to end its “dependence on foreign oil.”

In the first place, it is a bit odd to deal with the problem of oil running out in 50 years, by forcing humanity to stop using oil much sooner. But more fundamentally, the argument overlooks the fact that modern capitalism has an entire network of markets devoted to the future availability of commodities. Indeed, it’s surprising that the interventionists missed them, when they have the word “future” in their very name: They’re called futures markets.

Elsewhere I have spelled out in detail the operation of futures markets, and how the prices of futures contracts (for various dates) interact with the spot price of oil, in order to “regulate” the rate at which oil is consumed today, versus held off the market for future use.

Even if we took the “finite resource” logic at face value, and imagined all of the world’s oil were in one giant pool being drawn down over time, the operation of markets would produce very long-term thinking. For example, if people were consuming so much oil from the pool that it would run out in a few years, then speculators would buy and sell various financial instruments, causing the delivery price of a future barrel of oil to rise much higher than the current spot price. This would give producers an incentive to slow down current production rates, leaving more oil in the pool for future years. The higher spot prices in turn would give an incentive to consumers to switch away to activities involving less use of petroleum products. In other words, the profit motive would guide everyone’s behavior in the exact way that the interventionists want, with far more precision and feedback mechanisms than top-down rules.

Yet in reality, it is very misleading to think of the world’s supply of oil as one giant, known pool, which we are constantly reducing. When people cite statistics saying, “We only have a few decades of oil left,” they are referring to reserves that have been discovered. There are still plenty of oil deposits that we haven’t yet discovered, and which therefore don’t show up in the standard statistics.

Simply put, it’s not efficient to go find every last drop of oil on planet Earth. Instead, the efficient thing is exactly what private business does—it spends significant amounts on exploration and discovery, but only to provide a very comfortable margin. As “known reserves” are whittled down, people go out and find more oil. This is the same process that every household uses with regard to food in the pantry. Nobody looks at the number of soup cans in the kitchen, does some quick arithmetic, and then exclaims: “We need to start eating renewables, like the grass on the front lawn. If we don’t make the switch, at this rate, we’ll run out of chicken noodles next Tuesday!”

Government Officials Focus on the Moment

Ironically, it is governments that suffer from myopic incentives. Unlike private owners, government officials are only temporary custodians of the natural resources under their control. They don’t have the same incentives to preserve the long-run value of such assets, but instead will have a tendency to dole out favors to their cronies while in power.

For example, take the problems of “overlogging” and “overfishing.” The culprit here is government-owned forests and bodies of water. You never hear of a farmer slaughtering all of his pigs because the price of pork is high; no, private owners know that to maintain a lifetime flow of revenue, they need to hold back current production and allow natural, reproducing resources (whether pigs, trees, or salmon) to flourish.

In contrast, look at the incentives facing a government official in charge of setting the price on, say, logging on state-controlled forest land. He may not be in charge past the next election, and doesn’t personally own the real estate under his control. Therefore, he has no personal financial interest in maximizing the long-run market value of the forest land, the way private owners would. Instead, he has the incentive to cut a sweetheart deal to a logging company, which will extract more timber in the present than might be optimal. Moreover, the general lack of markets and private property in other assets on the state-controlled lands, causes environmentalists to decry “capitalism” (and seek tighter regulations) when in fact the mismanagement is due to government control in the first place.

When it comes to mineral deposits, the situation is usually reversed: Rather than develop coal, oil, and natural gas resources at the economically appropriate rate (which would maximize the market value of the expected stream of revenues from the deposits), government officials will restrict current output in order to cater to environmental groups. This is a very costly decision—which forfeits many billions in potential federal revenue and keeps gasoline prices higher—that does not translate into personal financial hardship for the individuals making such leasing decisions, because they wouldn’t be the ones to personally pocket the extra revenues from a better policy.

Where Are the True Ecological Disasters?

Critics of unfettered capitalism like to point to the Three Mile Island “disaster,” which dovetailed with the apocalyptic movie The China Syndrome and scared a generation of people about the dangers of nuclear energy. Yet despite the uproar, it is difficult to document many actual victims of the accident. (One nuclear physicist quipped that his heart attack from the stress of dealing with Jane Fonda and other activists made him the only demonstrable victim of Three Mile Island.) If even one person developed cancer unnecessarily, that is one person too many, of course, but people die in accidents all the time. The Three Mile Island accident hardly offers a lesson on the free market and energy production, the way interventionists like to frame things.

In contrast, the former Soviet Union really was an environmental disaster. As a Boston Globe correspondent wrote in 1990:

MOSCOW – In the minds of millions, the environmental disaster that is the Soviet Union is summed up in one word: Chernobyl.

The world’s worst nuclear disaster ever, the 1986 power-plant explosion that spread radiation as far as the United States, has taken at least 250 lives, forced the evacuation of 115,000 people and cost $12.8 billion in cleanup and lost energy. The catastrophe continues to unfold in leukemia cases now being diagnosed.

But horrific as it was, Chernobyl was in some ways an environmental sideshow for the U.S.S.R.

The country today is facing not just one environmental crisis, but a series of overlapping threats that have developed over 50 years. Its outdated and inefficient heavy industries are environmentally as well as financially costly. An estimated 50 million Soviet citizens are living in cities and towns beset by serious air pollution.

…

“Forget Chernobyl for a moment,” said Yury Shcherbak, a medical doctor, member of the Supreme Soviet and chairman of the republic’s activist Greens.

“Imagine that there’s a state in the United States that has 3 percent of the country’s land mass but 25 percent of its industrial capacity – nearly all of its heavy industry, such as coal and steel, inefficient and highly polluting. Imagine that it exports energy but keeps the pollution for itself. And finally imagine that 60 percent of the land had been overplowed and is eroding.”

Add to that the world’s worst nuclear accident, Shcherbak concludes, and you’ll get a picture of the state of the Ukraine.

Conclusion

Contrary to most of today’s environmental activists, free-market capitalism has incentives for the preservation of the long-term value of natural resources. Both theory and history show that overriding private property rights in favor of government authority, will actually make nature less secure. After all, the same greedy impulses that infect private businessmen, will also be present in government officials. The crucial difference is that market prices show private owners the costs of their actions.

It’s true that proponents of government intervention can use sophisticated arguments concerning “negative externalities” to challenge the efficacy of market prices. (I have written elsewhere on the problems with this logic in the case of carbon taxes.) Even so, it’s important for the public to learn the general presumption in favor of private property, rather than government edict, as an important component of safeguarding natural resources and environmental quality.

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Author:
Robert Murphy

Europe’s Renewable Fuel of Choice: Wood

Posted April 24, 2013 | folder icon Print this page

Americans are led to believe that Europe is awash in wind and solar power, but the renewable most consumed is wood, says the Economist.[i] According to the Economist, wood, the fuel of preindustrial societies, represents about half of all renewables consumed in the European Union in some form or another—sticks, pellets, sawdust. The European Union has a target of getting 20 percent of its energy from renewable resources by 2020. To get that much renewable energy, it cannot rely solely on wind and solar power. Unfortunately for its carbon reduction goals, the reliance on wood is not helping for it emits more carbon dioxide than coal.

Wood produces carbon when it is combusted into electricity and it produces carbon when it is formed into pellets for import into Europe. Europe must import wood pellets because it does not have sufficient wood to meet its demand. The wood combustion life cycle was thought to be carbon neutral because of the carbon dioxide consumed as trees grow. However, as one researcher indicated, it would take 100 years for the replacement trees to mature.

Europe’s Renewable Consumption

Wood or biomass accounts for about half of Europe’s renewable energy consumption. In Poland and Finland, for example, wood supplies more than 80 percent of renewable energy demand. In Germany, despite its push and subsidization of wind and solar power, 38 percent of non-fossil fuel consumption comes from wood.

Europe’s increase in wood consumption is a result of its requirement to obtain 20 percent of its energy from renewables by 2020. Europeans have found that they cannot meet that target from solar and wind power alone despite the inroads they have made with those technologies.

Europe has three-quarters of the world’s installed solar photovoltaic capacity and 39 percent (109 gigawatts) of the world’s total wind capacity of 282 gigawatts. Europe added 12.4 gigawatts of wind capacity in 2012. Germany leads Europe in total wind capacity installed at 31 gigawatts followed by Spain with almost 23 gigawatts.[ii] Both countries set targets for renewable energy growth early on in the race for green energy and provided fairly lavish subsidies. Since then, both countries have severely reduced those subsidies due to high and increasing electricity prices (Germany) and increasing debt (Spain). Germany, for example, has residential electricity prices that are 3 times those in the United States.

In the electricity sector, wood has several various advantages including co-firing wood with existing coal-fired power plants (mixing 10 percent wood with 90 percent coal) that are already grid-connected and requiring little new investment. Since wood is not an intermittent fuel source as is wind and solar, it does not require back-up power. It is also popular with European electric utility companies because it allows them to continue to operate their existing coal-fired power plants.

According to the International Wood Markets Group, Europe consumed 13 million metric tons of wood pellets in 2012 and its demand is expected to increase to 25 to 30 million tons a year by 2020. According to the National Firewood Association, the 2012 European consumption of wood pellets is equivalent to over 4 million cords of wood, which equates to over 4 million ‘big’ trees and over 8 million ‘average size’ trees.[iii] The General Sherman tree, which is a giant sequoia tree located in the Sequoia National Park in California, is by volume the largest known living single stem tree in the world. To obtain 4 million cords of wood, it would take the trunk of 9,751 General Sherman trees.

General_Sherman_1469870071

Source: General Sherman Tree in 2007, http://en.wikipedia.org/wiki/File:
General_Sherman_1469870071.jpg

Because Europe does not produce enough timber to meet this type of demand, imports of wood pellets are increasing. They increased by 50 percent in 2010. According to the European Pellet Council, global trade in wood pellets is expected to increase five- or six-fold to 60 million metric tons by 2020. Much of that will come from new wood-exporting businesses that are booming in western Canada and the southern United States.

According to a report by Wood Resources International, the southern United States surpassed Canada last year as the leading exporter of wood pellets to Europe, exporting in excess of 1.5 million tons. Those exports are expected to reach 5.7 million tons in 2015. During the third quarter of 2012, three companies announced plans for new pellet plants in Georgia and six others were under construction in the south, together adding as much as 4.2 million tons of capacity by 2015.[iv]

The increase in wood consumption has caused an escalation in prices. According to data published by Argus Biomass Markets, an index of wood-pellet prices increased by 11 percent, from 116 Euros ($152) a metric ton in August 2010 to 129 Euros ($169) a metric ton at the end of 2012. Since the end of 2011, prices for hardwood from western Canada increased by about 60 percent.

Wood’s Carbon Content

In theory, if the biomass used to power electricity comes from energy crops, the carbon generated from combustion would be offset by the carbon that is captured and stored in the newly planted crops, making the process carbon-neutral. But what is happening in Europe is not carbon-neutral. Carbon neutrality depends on the type of biomass used, how it is processed, how fast it grows, and how far the fuel must be transported. That is, the whole life cycle of the fuel must be taken into consideration.

The wood that Europe is using produces carbon through combustion at the power station and in the process of making pellets that includes grinding it up, turning it into dough and submitting it under pressure. The process of producing the pellets, combusting them, and transporting them produces carbon—about 200 kilograms of carbon dioxide for each megawatt hour of electricity generated.

A researcher at Princeton University calculated that if whole trees are used to produce energy, they would increase carbon emissions compared with coal by 79 percent over 20 years and 49 percent over 40 years and that there would be no carbon reduction for 100 years until the replacement trees have matured.

History of U.S. Energy Consumption

Homes in the United States were once heated entirely by wood. (See graph below.) In the mid 19th century with the advent of railroads, coal became a significant energy source heating homes, supplying energy to heavy industry, and generating electric power.  However, the principle fuel in the United States for heating and manufacturing until well after the Civil War was wood.

The 20th century brought the internal combustion engine and the production of oil that supplies our transportation system and heats homes in the Northeast. The United States gets more energy from oil than from any other source. Natural gas production and consumption followed after World War II, heating homes, supplying industrial users and generating electricity.[v]

At the bottom of the graph below are other sources of energy consumed in the United States including nuclear power, hydroelectric power, wood, and other renewable energy (solar, wind, and geothermal) that represent a small fraction of the energy used in the United States despite the push to increase their use through mandates and subsidization.

pm-gr-energybysource-616

Source: http://www.npr.org/blogs/money/2013/04/10/176801719/two-centuries-of-energy-in-america-in-four-graphs

Total biomass consumption in the United States in 2012 was 4.36 quadrillion Btu, of which 45 percent (2 quadrillion Btu) was wood, 44 percent were biofuels, and the remaining 11 percent was waste. Of the 2 quadrillion Btu of wood consumption, less than 9 percent was used to generate electricity. The majority of the wood consumption (65 percent) was used in the industrial sector, and 25 percent was used in the buildings sector, mainly in residential homes.

Conclusion

The European Union has set a goal to obtain 20 percent of their energy from renewables by 2020. To meet that goal, European industries have increased their consumption of wood, which the European Union allowed as an acceptable renewable and even subsidized. The outcome, however, is that the European Union has created a subsidy which is expensive, does not reduce carbon emissions, and is not encouraging new energy technologies.

According to the European Environment Agency, the assumption “that biomass combustion would be inherently carbon neutral…is not correct…as it ignores the fact that using land to produce plants for energy typically means that this land is not producing plants for other purposes, including carbon otherwise sequestered.”


[ii] Global Wind Energy Council, Global Wind Statistics 2012, February 11, 2013, http://www.gwec.net/wp-content/uploads/2013/02/GWEC-PRstats-2012_english.pdf

[iii] National Firewood Association, Biomass Called Environmental Lunancy, April 10, 2013, https://nationalfirewoodassociation.org/2013/04/biomass-called-environmental-lunacy/

[iv] Dogwood Alliance, The Use of Whole Trees in Wood Pellet Manufacturing, November 13, 2012, http://www.dogwoodalliance.org/wp-content/uploads/2012/11/Whole-Tree-Wood-Pellet-Production-Report.pdf

[v] NPR, Two Centuries of Energy in America, in Four Graphs, April 10, 2013, http://www.npr.org/blogs/money/2013/04/10/176801719/two-centuries-of-energy-in-america-in-four-graphs

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Author:
IER