First Solar Chinese Installation – Not the Last
First Solar announced that it is going to build the world’s largest solar installation. No it is not going to build the 2GW farm in the desert southwest of America where country is headquartered. First Solar will be building it in the Mongolian desert. It will also most likely not manufacture the thin-film solar for the plant in its Perrysburg, Ohio location. First Solar is considering building a factory in China to meet the demand.
Imagine if Microsoft had to go Japan to meet its market demands in the mid 1980s. (Then moved all of their jobs there.) This is what is happening here. We are basically forcing an American born, young industry titan to sell its wares in China.
Tom Friedman on Saturday spoke about China this way:
It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.
This is not a green message. This is a good old fashion capitalist message. Are the Chinese becoming better capitalist than us?
In a week where even an innocuous speech by our President telling kids to study hard and listen to their parents is deemed controversial because it promotes a “socialist” agenda, it doesn’t bode well for the upcoming vote on cap and trade legislation.
Enjoying the Summer
The summer doldrums are here. For the past two weekends, I have gotten a chance to enjoy nature. I went camping in my home state of New Hampshire,blueberry picking and kayaking. I also walked the Freedom Trail in Boston yesterday. All of this is to say, that I had a nice break as this cartoon captures nicely.
Well this is the WordPress blog but the point is the same.
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In the end it was a easy legal decision for the Court to make. As I wrote about in my recent article Stonyfield Throws Yogurt On The Face Of New Hampshire Electric Company, a group of New Hampshire corporate rate payers banded together to fight the installation of a $457M mercury scrubber in a large coal power plant. For the group of ratepayers, spending close to 1/2 a billion dollars on an antiquated coal plant was unacceptable because of financial and ethical reasons. Financially they argued that the scrubber would cause their rates to unduly increase.
This is ultimately why the decision is a legal no-brainier for the Court. The scrubber had not yet caused rates to increase and the scrubber was mandated by the Legislature. The court basically said to Stonyfield ‘your beef is with the Legislature and not with the Public Utility Commission.’
The Merrimack Station Plant is New Hampshire’s largest coal fired power plant servicing 189,000 commercial and industrial clients. In 2006, the NH Legislature mandated that the operator of the plant, PSNH, install “the best known commercially available technology” to remove the mercury from the plant’s coal emissions. The legislation was very specific in requiring “at a minimum, 80 percent of the aggregated mercury content of the coal burned at these plants from being emitted into the air by no later than the year 2013.”
The price tag for this project was originally estimated to be $250M but it ballooned to $457M. Stonyfield Yogurt and other large corporate rate payers including, electro-optical equipment maker H&L Instruments and the Common Man restaurants thought that the price tag was too high. It wasn’t that they were against the idea of scrubbing mercury from the emissions; everyone seemed to be in favor of this. The petitioners didn’t think that investing $457M into a plant that spews 20% of the state Co2 emissions was a wise social investment.
The real motive behind the lawsuit was that the large ratepayers believe that PSNH is sinking more money into an environmental clunker when for similar money they could get a shinny new high low CO2 model.
PSNH argued that their hands were tied by the legislator. Essentially, in its decision the NH Supreme Court agreed:
To have standing to appeal an administrative agency decision to this court, a party must demonstrate that his rights “may be directly affected by the decision, or in other words, that he has suffered or will suffer an injury in fact.”
Stonyfield’s petition that they would be financially harmed is not the same as being financially harmed. PSNH has not yet sought to add the cost of the scrubber into the rate base analysis so there is no present tangible harm. When they do, the ratepayers will have standing to challenge the amount that rates should be allowed to increase.
For Stonyfield and the other large rate payers to ultimately prevail they would need to convince the Legislature to roll back the law. Since the scrubber project has begun, this is a long shot. That would ultimately leave the ratepayer with mercury in the emissions and high rates.
The Legislature ultimately thought they were doing something that everyone would agree was a good (albeit expensive) thing in scrubbing mercury from the power plant. The truth is a little murkier. PSNH gets to incorporate a $457M project into the rate base which makes them more money and forces consumers to pay more. This basically is a question of could the $457M be spent in a way that gives everyone more bang for their environmental buck. This was not the legal question that the Court had jurisdiction to decide.
This article was written with significant help from Manchester, NH attorney Francis Murphy.
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Interview with Heatspring Founder Brian Hayden
Heatspring isn’t a renewable energy company. They are an educational company that focuses on teaching contractors, HVAC professionals and architects about renewable energy. They help create the green jobs that politicians love to reference when talking about renewable energy. Brian Hayden is Heatspring’s co-founder, President and is the company’s director of education. Brian and I conducted this interview by email during the past week.
Brian, can you give the readers a brief overview of Heatspring and where you see the company going in the next couple of years?
Heatspring's Brian Hayden
HeatSpring is an education company. We currently have classroom based classes as well as online courses. We focus on teaching classes in the clean energy industry and right now we’re specifically working in the solar and geothermal space – answering the educational needs of installers and designers. We work closely with instructors to develop content that is “real world” and focused on sharing their years and years of expertise in an organized and “newbie” friendly way. We get people from other industries taking our courses (for instance an airline pilot who was laid off took our HeatSpring’s Geothermal Accredited Installer course in MN (http://www.msnbc.msn.com/id/29497454/)) but we also get a lot of people already in an industry like HVAC who are perceiving a shift in home and building owner’s needs and are gearing up to maintain their customer base by expanding their offering. In the next couple of years, we’ll be staying the course and keeping our ear to the ground for what building professionals need to sustain this surge in green building activity. We’re also getting involved with government to have a say in where the stimulus money is going. We want to be fully in the know about grants and incentives so that our customers have the resources they need to be an informed designer and installer.
Very cool. It seems you are on the frontline of the green jobs movement. What do you see as the biggest barriers to getting “newbies” and industry professionals involved in geothermal or solar projects?
The biggest barrier is just knowing where to start. We get a lot of calls from people who are hesitant to attend our course because they’re worried it will be over their head. What we tell them is that it’s a lot of information, so being ready to attend and soak a lot in is a pre requisite but having experience is not. Another thing we find is sort of an “unwillingness” if you will to begin by subcontracting out pieces of work to partners and wanting to be in charge of everything. A big reason we’re in the business we’re in is because we believe in properly installed and well designed systems for home and building owners so that’s what we stress to students. Jumping in over your head on a big project without the network of support partners and talented subcontractors can be disastrous and will hurt the bottom line of a project. Our classes are comprised of many professionals, so a “newbie” could come and potentially meet partners, and understand where they fit into the project now and eventually where they want to be. Getting there takes time and a personal investment in building skills in the industry to sustain rather than just ride the wave of what they are reading in the papers as being a “hot industry.”
Knowing where to start seems like a problem on the consumer side as well. It is a difficult maze to cut through the tax rebates, technology decisions and financing options especially when you consider the alternative of just hooking up to the grid. As you have been teaching these courses, do you see the number of subcontractors decreasing and the project becoming more streamlined for the consumers?
The spike in consumer demand placed a lot of stress on the sales arm of installing contractors. They couldn’t qualify leads fast enough and there were a lot of people just kicking tires. Installers responded poorly in many cases – using high prices and slow response times to weed out all but the most serious customers. That is changing. The companies that are winning now are the ones who have streamlined their sales process and make it simple. The number of subcontractors hasn’t gone down but it’s less transparent to the consumer, which is a good thing.
Do you think that as the solar and geothermal industries grow, that professional development standards will evolve as well?
Professional development standards are already maturing in a grass roots kind of way. Our customers tell us that having an accreditation to show their customers helps their credibility in a market that’s fragmented right now. A homeowner not in the industry has very little to go on when choosing between contractors… it’s not all about the price of the project but the value of a properly installed system that will reap the most benefit for them. This mentality is pushing the installer to prove themselves to their customers, and education is a clear way of doing this. Within the education space there will be evolution as well I’d imagine. Getting installers and system designers to consistently select not the cheapest training around or the most convenient, but the training with the best instructor and best content will naturally happen which is why we always try and keep the instructor standards high and the content designed to be real and “roll up the sleeves” style of learning.
Well, I will let you “roll up your sleeves” and get back to work. It seems things are heating up at Heatspring?
You know, the summer is always a bit of a slower time for people to take a class. The good news is, that it’s because our customers have been incredibly busy. Our fall courses are filling up now and we see that every year those months are a good time for our customers to hunker down for three days and get an accreditation and information that will drive their business towards what their clients are asking for.
Well, enjoy the rest of the summer because it seems that the fall will be pretty busy.
Thanks, you too Gerard!
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Alternative Energy: Wartime Build Up Or Bubble Forming?
While reading Michael Lewis’ wonderful article entitled “The End of Wall Street’s Boom,” it hit me like a ton of bricks. The follow up article to Lewis’ book Liar’s Poker, details how sub-prime mortgages and bond derivatives became a house of cards bound to collapse. I kept thinking while reading it, what will be the green movement’s “credit default swap”? Is all of the stimulus spending creating a bubble that is bound to collapse?
On the other hand, are we not going fast enough to reverse climate change? Do we need a wartime mentality where a fast build up creates enough momentum to achieve our climate change objectives? Others will argue that incremental and methodical changes will not cut it. They would also argue that overcoming the status quo cannot happen in bit sized chunks. How can we balance the need for speed without a high-speed crash?
Another EcoEquilibrium discussion; should we push forward faster and risk the formation of a bubble, or should we plot ahead more methodically to avoid the boom and bust cycles that have plagued the environmental movement for decades?
Is it human nature to form speculative bubbles in the hopes of a quick dollar? There was even a tulip bubble in the mid-seventeenth century where tulip contracts traded for the equivalent of four tons of beer. Could the massive stimulus package with all of its green energy initiatives create another bubble?
Dan Reicher, Google.org’s director of climate and energy initiatives put it this way “The dog finally caught the car. ” In the video below he describes how clean energy advocates have been asking for a billion here and a billion there and seemingly overnight wound up with $80 billion. He said that anyone in the audience “could write the New York Times or Washington Post story a year from now about how we didn’t spend the money well.”
Diana Propper, a clean-tech venture capitalist at Expansion Capital Partners agrees. She was recently quoted in this CNET article:
“I worry that there’s so much money being sloshed around, whether it’s venture capital or corporate or government money, that it will be spent inefficiently…. The risk of a bubble is real.”
Bubbles aren’t necessarily bad things. Sure the internet bubble left a lot of folks holding worthless Pets.com stocks but it also left millions of miles of fiber optics cables allowing for cheap high speed internet connections. As summarized by Daniel Gross in his book Pop!: Why Bubbles Are Great For The Economy:
[I]f you take the long view … it’s possible to detect a pattern that emerges in bubbles and their aftermaths. Especially bubbles that leave behind a new commercial and consumer infrastructure. With apologies to Oliver Stone, these bubbles, for lack of a better word, are good. These bubbles are right; these bubbles work. Thanks to the American penchant for creative destruction and the U.S. bankruptcy system, investors — and the economy at large — tend to get over bubbles quickly. … The stuff built during infrastructure bubbles — housing and telegraph wire, fiber-optic cable and railroads — doesn’t get plowed under when its owners go bankrupt. It gets reused — and quickly — by entrepreneurs with new business plans, lower cost bases, and better capital structures. And when new services and businesses are rolled out over the new infrastructure, entrepreneurs can tap into the legions of users who were coaxed into the market during the bubble. This dynamic is precisely what has made Google the “it” company of this decade …(Bold original to book)
One of the reasons that the current financial crisis was so damaging is that it didn’t leave anything positive like internet connectivity or railroads in its wake, just overvalued home prices. If renewable energy is a bubble, than the best we can hope for is that when it pops it leaves us with cheap solar technologies and a cleaner planet. The positive social impacts can be stressed over the negative financial impacts.
There are some that believe we are not going far enough, fast enough. There are those that argue that the Waxman-Markey Energy bill should have stronger renewable energy standards. The former Energy Commissioner of California John Geesman has written a blog called the Green Energy War where he calls for a societal war to be fought on many fronts.
As the famous baseball player Ty Cobb once said, “Speed is a great asset; but it’s greater when it’s combined with quickness – and there’s a big difference.” Hopefully all this VC and stimulus money will be a grand slam.
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Guest Post – Original Syn
By Francis Murphy
It does seem to be a summer of algae, as stated in a recent WSJ article. That article and two other things caused me to troll the web for information on algae as a source for biofuels.
Too Green Shores
I have a Google alert for Garykennedy, a town of the banks of Lough Derg in Ireland, where I own a small cottage. I was alerted to a Nenagh Guardian article entitled “Smelly Green Slime Pollutes. Lough Derg.” According to a local marine biologist, the slime is from the “rotting filaments” of algae, Cladophora, which has proliferated in the lake due to an increase in pollution and the presence of an invasive foreigner, the zebra mussel. Following web leads, I learned that sections of the Great Lakes have the exact same problem for essentially the same reasons.
Agricultural runoff and municipal sewerage have caused phosphates and other nutrients to load the lakes and the rivers that feed them. The zebra mussels filter much of the lake water, making it clearer. As a result, more sunlight reaches deeper depths. The added sunlight and nutrients cause algae blooms to proliferate. When the blooms get beached, they, and any organisms they are carrying, begin to rot. Added to the obnoxious mix are the fecal droppings of any marine birds that feed on the slime.
The picture accompanying the article of the carpet of green slime on the lake’s shore was not unlike the blanket of seaweed that coated a private beach in Little Compton, RI, that I recently visited. Rough weather had set loose the seaweed and each wave brought another load ashore. A tractor raked it up into piles. Later, it was scooped up and placed above the high tide line.
I wondered whether those piles would be used by anyone as fertilizer as seaweed’s nutritional benefits have been well known for centuries. I remember seeing years ago on the Aran Islands wooden baskets filled with seaweed on the backs of donkeys carried from the shore to farm. Whatever arable soil there is on those rocky islands has come from such efforts.
My web based investigations informed me that the Latin word for seaweed is algae. Lately, green news flashes are replete with reports of new efforts to extract biodiesel or bioethanol from algae. Could those rotting piles of seaweed be put in a kind of big juicer to produce some green fuel, I wondered?
Green Soups
No, my research disclosed. Although seaweed is an algae, it is characterized as macroalgae. Being cultivated for biofuels are microalgae, such as phytoplanktons (which happen to be the first link of the marine food chain). Some farms have used open ponds but the main effort now is to identify specific species of algae that are rich in lipids and grow them in a highly controlled bioreactor.
All some algae need are CO2 as a nutrient and sunshine to activate a photosynthetic process with oxygen as a byproduct. Various techniques have been developed to extract oil from the harvested algae. Burning algal fuel will essentially be carbon neutral as the same CO2 that is taken up in algae growth is given off again when the fuel is burned. Some bioreactors are being placed aside industrial plants where the CO2 can be captured for cultivation.
Green Creatures
Chasing web links brought me to companies where the emphasis is on biotechnology, hunting for the right genomes so the most productive species of algae can be identified (or made).
This approach may have gone beyond algal farming to bioengineering with a recent announcement by a Cambridge, MA, startup, Joule Biotechnologies. It claims to have a technique that makes fuels directly from a photosynthetic conversion of sunlight and CO2 by a microorganism. The company’s CO is quoted as saying that the raw material is “not algae, not cellulose, not corn,” but rather a “highly – engineered the photosynthetic organism.” Patents have been applied for according to the announcement. A patent search revealed an application that describes “A process for photosynthetic production of ethanol [that works by] inducing the transgenic designer plant, algae, or plant cell to express said at least one transgene to provide at least one designer ethanol-production pathway in the chloroplast.”
I think that translates to mean that they have designed an organism through genetic modification that is by splicing onto it genes from another organism so that the new creature will produce oil photosynthetically. Apparently though the oil is somehow secreted from creature thus improving on the extraction process that is usually employed with algae whereby the oil is squeezed from harvested algae.
Another startup, OriginOil, announced a new patent – pending approach to algal oil that also shortcuts the extraction process. It utilizes a photo-bioreactor in which a spiral of LED light rotates. This technology, it is claimed, accelerates the growth rate of algae as it brings light to all depths of the reactor container. Thus, it is not just the algae on the surface that gets the benefit of the light. The company also claims to have a more efficient extraction technique. Electromagnetic pulses are sent through the reactor to break the cell walls of the algae thereby allowing the release of a vegetable oil that in turn separates from the water and remaining “biomass.” The prized oil then can be skimmed away.
One theory is that the crude oil we are depleting so rapidly was formed from primeval algae. Harvesting algal oil now may make use of this new crude sustainable.
Now if only someone could engineer away that excess macroalgae on the shores of Lough Derg that’s hurting my property values…
Francis Murphy is a partner of Stewart and Murphy, P.A. He has practiced law for 25 years in Manchester, NH. Before attending Fordam University School of Law, he received his Masters Degree in Anglo-Irish Studies at University College of Dublin. He is a avid follower of alternative energy trends and enjoys spending time with his children and extended family in Rhode Island. He lives with wife in Nashua, NH. He has 4 clildren and 2 grandchildren.
Is This The Tipping Point Month? Exxon and Wal-Mart Jump Into Renewalables and Sustainability
Historians look back at famous events and sniff out watershed months where movements go mainstream. The “summer of love” marked the arrival of the counter culture. 1939 was baseball’s tipping point with the founding of the Hall of Fame, the Little League, and the Negro League as well as the first radio simulcast, Joe DiMaggio’s retirement and Ted Williams’ emergence. When the USSR launched Sputnik in 1957, it spawned the space race. Super Bowl III featuring Joe Namath’s famous guarantee moved football from a fringe sport to a Sunday afternoon American tradition.
Histories first drafts are full of false starts. But will historians write ‘July 2009 was when the green movement really started to change’. (Hopefully historians will give it a better name than the “green movement”)
Why is this month the month? Exxon for the first time made a significant investment in renewable energy. Wal-Mart announced a sustainability index that promises to look into their suppliers sustainability efforts. All this after the US House passed compressive cap and trade carbon legislation and the stimulus with $71 billion its green incentives kicked into full gear. Mix in the release of the Microsoft Hohm home energy management software, and this month has a lot of signs of being the month.
The New York Times wrote an article stating that some see Exxon’s $600 million investment in the algae-based biofuels company Synthetic Genomics as a ‘paradigm shift.‘ Exxon’s foray into renewable energy is especially important, because up until now Exxon has not only stayed clear of alternative energy investments, but they have seemingly relished playing the naysayer. As quoted in the NY Times article:
Just six months ago, Exxon Mobil CEO Rex Tillerson said his company was not investing in alternative-energy efforts because “we think these technologies are old. If there is going to be a fundamental shift” from fossil fuels, he said, the technology “hasn’t been discovered” (Greenwire, Feb. 17).
Contrast this to the press release issued by Exxon and Synthetic announcing the partnership.
“This investment is an important addition to ExxonMobil’s ongoing efforts to advance breakthrough technologies to help meet the world’s energy challenges,” said Dr. Emil Jacobs, Vice President of Research and Development at ExxonMobil Research and Engineering Company. “Meeting the world’s growing energy demands will require a multitude of technologies and energy sources. We believe that biofuel produced by algae could be a meaningful part of the solution in the future because of its potential to be an economically viable, low net carbon emission transportation fuel.”
That is quite an about face from February to July. It doesn’t matter if Synthetic Genomics makes it or not, Exxon has broken into the market. Couple this with industrial giant Dow Chemical’s $50 million investment in Algenol Biofuels Inc., and this has become as the Wall Street Journal puts it “The Summer of Algae.” Not quite as catchy as ‘the summer of love’, but not bad either.
July has also brought us Wal-Mart’s plans for a sustainability index. While Wal-Mart has made efforts to green their stores in the past couple of years, this represents a shift from a internal focus to the greening of Wal-Mart’s entire supply chain. It is hard to find a better metaphor for a movement going mainstream than it entering a Wal-Mart store; a movement is no longer fringe when it threatens to appear on every single Wal-Mart price tag in middle America.
So July 2009 brought the two largest US companies making major investments and announcements involving climate changes and sustainability. You might doubt how genuine these efforts are, but they are efforts none the less. You can’t doubt the efforts of the fifth largest company in the United States, GE who has a lot of skin in the game on their eco-imagination product line and marketing efforts.
Let’s not forget about the US Government. The Department of Energy is set to release $2.4 billion in grants for advanced battery technologies that could lead to plug-in vehicles. This is after the announcement (I know, not in July but in late June) of $8 billion in financing to Ford, Nissan and Tesla Motors for the development of electric cars. Overall this is the beginning of $71 billion in stimulus spending aimed at jump starting green initiatives. This trickle will turn into a flow out of Washington over the next couple of months.
Sometimes the best news stories pass by without a grand moment. None of these moments received as much attention as Michael Jackson’s death. Grand moments are easy for historians to point to and say ‘this started it all.’ Other times it is just the overwhelming force of so many smaller news stories that a movement goes mainstream.
It might be fitting that the battle to combat climate change doesn’t make a grand entrance because there was no grand moment in creating climate change; it was just the slow build up of CO2 since the industrial revolution. 20 years from now, historians might just see this as the month.
Guest Post – Green Travel
By Ruth Ansell
It’s a sign of the times. We refill drinking bottles instead of buying bottled water. We shred and recycle white paper at our office. We generally try to avoid wasteful packaging and products.
Eco Friendly Hotel Soap
When we travel, however, the only sign of ecological awareness is often a much ignored sign about re-using hotel towels, or not changing the sheets every night during a lengthy stay. Toiletries are still routinely provided in small and wasteful packages, where more is thrown away than consumed (unless you swallow your pride and take them home with you to finish.)
I am pleased, however, to see the beginning of change. My daughter stayed at a hotel in Maine last summer which asked guests to take the open bar of soap in order to avoid its waste. On a recent trip to Yosemite Park’s historic and luxurious Ahwahnee Hotel, I was pleased to find an ergonomically shaped and waste reducing bath soap, with a large hole in the middle, produced by earth wisdom, and packaged in a natural, recycled carton printed with soy based inks. Other toiletries were similarly packaged. Although still not as good as a refillable soap or shampoo dispenser, at least it’s a start. We should encourage all of the major hotel chains to take this step.
Ruth Ansell is a trust and estate lawyer in New Hampshire. She is a partner at Ansell & Anderson P.A.. She is a regular speaker on estate planning and administration to attorneys and other professionals for the New Hampshire Bar Association. She is also active with the American College of Trust & Estate Counsel, as well as the NH Bar Foundation and the NH Estate Planning Council. She is a avid traveler, enjoys blues music and going on walking tours throughout the world and in her home state of New Hampshire. She lives with her husband Erik in Bedford, NH.
How Are Electric Rate Determined And What Incentives Do Power Companies Have To Invest In Smart Grid
Recently on an online discussion board, someone asked me “what incentives do the utility companies have to invest in smart grid technology?” It is a great question and one that gets to the heart of several issues. The basic answer is that utilities have some interest in investing in smart grid technologies depending on how their rates are structured. Utility companies also have some reasons to think that smart grid technologies might hurt their long term profits.
In order to understand why public utility companies would both benefit and be potentially harmed by smart grid technologies, we first need to understand how utilities make money and what smart grid technologies are.
How do Utilities Determine Their Rates:
Although there are variations to this, the basic way that power utilities make money is by state regulatory boards taking a look at the utility companies expenses and revenues. The utility companies expenses contain fixed costs including the cost of building power plants, maintaining power lines, gas pipelines, employee payroll, unavoidable maintenance costs and even the cost of buying new yellow ladder trucks. There are also variable costs such as the cost of natural gas, oil, coal, and the cost of electrical output.
The state board determines customers rates by adding up all of these expenses and adding a return on investment (profit margin). They then divide by a “normal year” of power usage (normalized for weather, economic conditions etc.) to come up with a per kilowatt per hour (kWh) rate. This is the rate that you see on your bill. This system was devised when governments mandated that power companies expand access to give poorer residents far off the grid access to electricity.
Most of an electric companies expenses are fixed which basically means that they have to maintain the same number of power plants, high tension wires and yellow ladder trucks no matter if I turn my AC on once during the summer or crank it to 11 day and night. These fixed costs are difficult to trim.
Electric companies also have variable revenues. The amount of electricity that is used and paid for by the customer varies based on weather, economy, additions or subtractions in the customer base, demographic shifts, new technologies, and other factors that affect sales. This makes it highly probable that the utility company will sell more or less electricity than the “normal” year that their rates were based on.
Because it is difficult to trim large fixed costs, the easiest way to generate larger profits is to sell more electricity. Electric companies are already guaranteed a healthy rate of return based the “normal” year rates but of course shareholders demand more than the guaranteed profits. This creates a strong “throughput incentive.” Stating what we all already know, electric companies make more money when they sell more electricity.
What is often underestimated is just how strong this throughput incentive is. Some have calculated (Harrington, 2007, 1994) that a 1% increase in sales might lead to a 5% increase in profits. This is also true inversely. A 1% decrease in sales could lead to a 5% decrease in profits. Others have calculated that a 5% reduction in sales leads to a 23% reduction in profits for a vertically integrated utility, and leads to a 57% reduction in profits for a distribution only company. So under the current rate structure, electric companies really-really have an throughput incentive. Also if demand goes up enough they can get the state boards to approve another power plant (which is a new fixed cost with a guaranteed profit margin).
There are different ways to address the regulatory structure to better promote energy efficiency. One of the most common methods of addressing the throughput incentive is decoupling. As Bill Clinton recently explains, decoupling “has the power to disconnect how much you pay from how much you use.” Decoupling seeks to separate the fixed costs from the variable costs. Instead of assuming a “normal year” in deciding the rates, the electric company gets a rate tune up every quarter or year to match exact sales numbers. If electricity sales fall because of increased energy conservation than the electric rates are adjusted upwards to make up the difference and obtain the same profit.
EPA Decoupling Example
While the consumers rates would go up, the idea is that the total bill would still be less for the consumer if they conserved energy. (see example to the right from a EPA primer on decoupling)
Decoupling is not without its critics. Primarily critics focus on the fact that as consumers use less electricity their rates increase. Opponents would argue that this would be a temporary increase and long term this would prevent the utility company from additional building new power plants and other capital expenditures that would cause rates to increase.
Other critics argue that guaranteeing “windfall profits” to monopoly utility companies is not the best way to promote conservation. They say that utility companies can do very little to promote conservation and decoupling really just shifts the economic risks from the utility companies to the consumer.
Other commentators have stated that taking away the throughput incentive doesn’t create a conservation incentive. This just allows the utility companies to remain neutral and allow the consumers to make their own decisions. These critics have charged the government to create a efficiency portfolio standards (EEPS) which would mandate that the utility companies find a way to be more efficient. EEPS would put the utility companies in the energy conservation business.
California has had energy decoupling for the past 32 years and their energy consumption is 55% of the national average.
(Before you think ‘but California’s energy system is a mess!’, in 1996 California decided that energy deregulation was a better alternative to decoupling. This lead to the disastrous energy blackouts and record profits for companies like Enron. After the deregulation experiment California went back to decoupling).
What Is The Smart Grid And How Does It Effect The Way That Utilities Make Money?
This brings us closer to answering the question at hand: “what incentives do the utility companies have to invest in smart grid technology?” You can see the answer is that utility companies, unless they are regulated in a way that decouples revenues from throughput, do not have an strong economic incentive to invest in smart grid types of project that promote energy efficiency. They do however have other types of incentives that have thus far gotten them to dip their toes in the water.
Smart grid technologies refer to the building of a two way information system between the consumer and the grid operators. Think about this, we take for granted that a person has to come to our home and read our electric meter. This is the equivalent of the phone company coming to our house to see how many phone calls we made. Also during a severe storm that knocks out power, the consumer must call the power company to let them know that they have no power. Otherwise the power company would have no idea. This is kinda messed up huh? Why is this? Because power flows to our home, spins a meter on the way in and no information flows back to the grid operator.
They have no idea what time of day I used my power and for what use. This information is valuable to them because while power costs the same to us all day long, it costs more for utilities to produce during peak usage hours. (For example, if on a hot day so many people have turned on their AC at 5 PM that it is overwhelming their existing power plants, they might choose to turn another otherwise idle plant on or buy the power from outside of their network at higher rates). Smart appliances would let the grid know when they are going to come online.
The two way network facilitates demand management which allows the grid to operate more efficiently. Theoretically the smart grid will level the consumption over the day. Companies such as EnerNoc specialize in facilitating the communications between the utility company and consumers to enhance efficiency. Their business model is that both the utility company and the consumer would split the economic benefits. Remember how we discussed how it is difficult for utilities to trim costs? Well the smart grid allows them some mechanisms to trim expenses and therefore make greater profits.
In the long run, greater energy efficiency helps decrease the need for the construction of new transmission lines and power plants. Consumers would see the benefits in increased grid reliability and eventually decreased energy rates.
Despite utility companies currently being in the energy sales business and not in the energy conservation business, there are some other incentives for utility companies to invest in smart grid technologies namely that smart grid projects are expensive. As we discussed, energy sales make most of utility companies profit margins, but their rates are decided mostly by their fixed costs. Adding a couple hundred million (or billion) dollar smart grid infrastructure project to a utility companies fixed costs will undoubtedly help keep their rates high in the short term as the smart grid assets depreciate. If the smart grid works and the utilities end up selling less electricity, in the absence of decoupling it is not good for the balance sheets in the long run.
The other (smaller) incentive for utility companies to invest in the smart grid is that many states requires renewable energy to be a percentage of the utility companies energy portfolio. The Waxman-Markey cap and trade bill calls for a renewable energy standards (RES) that mandates a utility company get 15% of their energy from renewable sources by 2020. It will be difficult for electric companies to achieve this RES mandate without the help of smaller communal or household power generation. Roof-top solar panels or small business run wind turbines can help generate collectively enough power to help meet the RES standards. Without smart grid technologies it would be difficult to achieve the billing protocols to allow for these smaller renewable installations to prosper.
The biggest incentive for public utilities may be societal pressure. They see which way the wind is blowing. They know that the way they operate today might change 1, 5, 10 years from now. They all expect some sort of carbon price to be set either by tax or via cap and trade. With the price of carbon going up and more pressure to decrease greenhouse gasses, utility companies are being innovative for the first time in a while. It is somewhat like newspapers putting their stories online during the 1990s. They didn’t know how they were going to make money on it, but they could see if they didn’t do it they might not have a business in the long run. It doesn’t hurt the stimulus package is giving money away for smart grid types of projects.
So long answer, I know. Smart grid technologies will not succeed if legislative changes to do not simultaneously occur that change the way utility companies make money.
Daily Show Covers the Cap and Trade “Excitement”
“America’s most trusted newsman”, John Stewart devoted most of his show last night to climate change. Not making me feel good about my blog topic, when explaining the Waxman-Markey cap and trade bill he fell asleep on his desk (that happened to have a giant cream pie waiting for him).
He offers a scathing review of the process on which Waxman-Markey (AKA The American Clean Energy and Security act) was passed in the house. As he explained how the bill was passed, the ecological superhero, Capn’ Trade gets stripped of his powers as different concessions are made. Stewart’s satire is in full effect as the legislative bartering leaves the Capn’ in a compromised position involving a Donkey.
It is true that the bill was watered down from its original goals but later in the program the Secretary Chu-ses to accentuate the positive.
While Stewart is right that some of the climate change issues are well dry…I don’t think they are any dryer than say health care reform, budget deficits, or judicial nominations.
Stewart is very good at synthesizing complicated topics, I hope he doesn’t get bored by this topic because his pressure is needed to make Capn’ Trade strong again.
