Money to burn

By Marie Shields, Editor

More than a million people attended his inauguration. He plans to radically cut back our carbon emissions and break our dependence on foreign oil. But where will President Obama find the money to save us from ourselves?

“It will be very, very difficult to achieve the plan's goals short-term. People have to realize that this is a long-term process”

Thanks to the well-documented financial downturn, things are looking tricky for many companies in the energy sector. Constellation, for example, saw its stocks drop into the basement when it lost its credit line after the collapse of Lehman Brothers. Reliant found its credit lines closed after Merrill Lynch was acquired by Bank of America. Energy companies with heavy investments in merchant generation, such as Calpine, NRG, Dynegy, Mirant and Exelon, saw their share prices fall by an average of 50% at the end of last year.

Given the difficult economic circumstances, this doesn’t seem like a good time to be pumping billions of dollars into building infrastructure to support new technologies whose benefits are unproven. Yet that’s exactly what freshly inaugurated President Obama is doing with his plan for ‘new energy for America.’

The plan promises to “help create five million new jobs by strategically investing $150 billion over the next 10 years to catalyze private efforts to build a clean energy future; within 10 years save more oil than we currently import from the Middle East and Venezuela combined; put one million plug-in hybrid cars on the road by 2015; ensure 10% of our electricity comes from renewable sources by 2012, and 25% by 2025; and implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80% by 2050.” Laudable goals, indeed. But just how feasible are they?

One of the major problems with Obama’s plan is that is fails to outline in detail how these goals will be achieved. John McConomy, US Power and Utilities Transaction Services Leader for analysts PricewaterhouseCoopers, points out: “There’s still a big question mark around the details of this energy policy, particularly as it relates to controlling greenhouse gas emissions – whether we will do this be through cap and trade, or through a tax – how long the production tax credits will be in place, and whether there will be a need for new nuclear. It will be very, very difficult to achieve the plan’s goals short-term. People have to realize that this is a long-term process.”

Promises
Obama says his government will provide investment to encourage efficiency, invest in low-emission coal plants, advance the next generation of biofuels and fuel infrastructure and begin the transition to a new digital electricity grid. This money will supposedly come from revenue generated from the proposed new cap-and-trade auction. However, the exact details of the auction process are not yet clear, nor do we know how much money it will generate.

Such systems rarely run smoothly, as is shown by the situation in Europe, which recently introduced an emissions trading scheme. Each European country developed its own allocation for the number of certificates it would issue, and as a result, in some countries certificates were over-allocated. This meant there were too many emissions credits on the market, and their price dropped sharply. While not exactly a failure, it did mean serious readjustments needed to be made to the scheme.

What is also unclear is the amount of money that will be expected to come from the utility companies themselves. Given the current financial environment, many companies will already find themselves strapped for cash, even without the need to find extra money to pay for new technology.

Because of this, says McConomy, “The whole process will be more expensive and will take a longer time than initially estimated. Companies across the industry are cutting back on investment due to the credit crunch and they’re being very, very smart about how they deploy their limited capital. We will see projects delayed, and some may be cancelled. The impact of this is that if the economy comes back quickly, there’s a risk that the power companies will have to purchase expensive third party power, their reserve margins may shrink and rate rises may be required sooner rather than later, with a potential rate shock to consumers, which will be troublesome for politicians.”

Money for building
Another challenge facing the US utility sector is its aging infrastructure. Even the best-maintained equipment wears out eventually, and a lack of investment in recent decades means that some has been in place for 30 years or longer. Distribution as a percentage of revenue decreased from 5.7% in the 1980s and early part of the 1990s to 3.5% in the past decade..

Obviously, there is upgrading to be done. The building of new nuclear plants to help in the race to lower emissions will need capital. Ramping up alternative energy technologies will require a major investment. In a financial downturn, where is the money going to come from?

President Obama himself admits that the cost of rebuilding will be considerable, and will add to the already enormous budget deficit. But he argues that this is the only way to break the vicious cycle gripping our economy.

The sunny side
Obama’s plan states that 10% of the country’s electricity must come from renewable sources by 2012. Naturally, this has delighted existing alternative energy suppliers, although even they are concerned by the feasibility of making this change given the state of the financial markets.

According to Denise Bode, CEO of the American Wind Energy Association, “The US wind energy industry welcomes and applauds President Obama’s vision of a clean energy future and his understanding of the vital role that renewable energy can play in the recovery of our economy today. We look forward to working with the President on the ambitious new energy policy agenda that he has outlined, including an early-action national renewable electricity standard, and investment in clean energy transmission ‘superhighways’ to cost-effectively bring renewable energy to consumers.”

However, she does sound a cautionary note: “The industry also looks forward to delivering on the President’s call to double renewable energy production over three years – but we can do so only if Congress makes an immediate, temporary change to the existing federal incentive for wind to make it effective in the current economic and financial context.”

According to the AWEA, the wind industry has been booming, creating thousands of new jobs. But now, with the economic downturn and the turmoil in the credit markets, that momentum is threatened. The association is urging its members to call on Congress to restructure the existing production tax credit for renewable energy so it will work to attract financing for new wind projects even during the economic slowdown, and to extend the PTC beyond 2009 to provide additional stability to the industry.

Solar Energy Industries Association President and CEO Rhone Resch also feels there is an urgent need for new money: “Congress must use the stimulus bill to move us away from our backwards-looking, recession-burdened economy and toward a new era of recovery and prosperity, with solar and wind leading the way. Our industries have become powerful economic engines in the US, each year creating tens of thousands of new jobs and billions of dollars in economic investment. And we have the potential to put many thousands more Americans back to work. But due to the recession, projects are now being put on hold, factories are closing and workers face potential layoffs unless Congress refines the tax credits now so they work as originally intended.”

High cost
Producing energy from current wind, solar and biomass technologies is more expensive than using fossil fuels or nuclear energy. In order to make renewables economic, companies depend on incentives, and these incentives have tended to be in the form of production tax credits (PTCs). For the past few years, PTCs have only been granted for one additional year.

The problem with this, as PwC’s McConomy explains, is that when you’re looking at investing in green technologies, you need more than a year. “When you only have clarity for one year that you’re going to have that production tax credit, it’s tough to make that investment decision. Without the tax credits, wind and solar are not as economic as fossil fuels, and people will spend according to their pocketbooks. For example, if I’m planning on building a wind farm, I need to go to my shareholders and tell them how much I’m going to spend. It can be tough, particularly in today’s financial environment, to make such capital expenditures without those credits being in place.”

Another cloud hanging over the industry is the lack of agreement about what constitutes a ‘renewable’ energy source, what the targets for using renewables should be, and when they should be achieved. Each state currently sets its own renewable portfolio standard, has its own targets, and has set a certain year in which it aims to hit these targets. Add to that the Obama team’s plan to introduce a national renewable portfolio standard, and there is a lot of potential for confusion.

This has resulted in a lack of clarity in how best to make a smart decision on where to invest. It makes sense to introduce renewable portfolio standards and encourage the use of green technology, but the definitions, the amounts and the timing vary enormously between states. Any federal plan will attempt to supercede what the states want to do, and in some cases are already doing, and the resulting complications could take some time to unravel.

Coming clean and green
Obama’s plan also promises to encourage energy efficiency, invest in low-emission coal plants, advance the development of biofuels and fuel infrastructure and begin the transition to a new digital electricity grid, or ‘smart’ grid.

These are pretty vague goals that don’t always hold up under close examination. Let’s take ‘encourage energy efficiency’ for example: any big energy company worth its salt is doing this already. Check almost any utility company website and you will find a myriad of references to customer efficiency programs, customer awareness campaigns, partnerships with local government to reduce emissions, and implementation of ‘smart grid’ metering systems that give them more control over customer energy usage.

Exelon, for example, has produced a detailed plan for reducing its greenhouse gas emissions called ‘2020: A Low Carbon Roadmap’. In it, the company promises to reduce, offset or displace more than 15 million metric tons of greenhouse gas emissions per year by 2020. This doesn’t mean, of course, that Exelon will suddenly become emission-free – only that it will emit gases at a lower rate than in 2001.

Even to achieve this goal, the plan states, “Our best estimate is that the cost to implement the greenhouse gas abatement initiatives described in this plan would be in excess of $10 billion. Construction of a new nuclear plant would only increase that estimate,” although it doesn’t make clear where this money will come from.

Exelon’s plan also recognizes that long-term success in managing climate change requires broad changes in public policy, particularly in legislation to limit overall greenhouse gas emissions: “New low-carbon generating technologies will be slow to advance without dynamic, competitive markets; utility-sponsored energy efficiency programs for customers will be unsustainable if utilities can’t recover the associated costs; and the large upfront capital costs and risks associated with constructing new nuclear plants will be more than private investors can bear without federal loan guarantees.”

At the coal face
Then there’s the debate about so-called cleaner coal. The Obama plan calls for investment ‘low-emission coal plants’, and this in turn is endorsed by the new Energy Secretary, Steven Chu.

At his confirmation hearing, Chu reiterated comments he had made previously about coal being his worst nightmare, saying that “if the world continues to use coal the way it is using it today, not only in the United States but in Russia, India and China, it is a pretty bad dream.”

However, Chu was forced to back pedal slightly in order to keep Republicans and coal-state voters happy. He refused to introduce a moratorium on new coal plants, favored by some environmentalists, instead backing the development of carbon capture and lower emission plants. “We will be building some coal plants,” Chu said. “One doesn’t have a hard moratorium on something like that when we search for a way to capture carbon and store it safely.”

This will certainly be welcome news for projects such as FutureGen, an alliance between the big coal producers and the Department of Energy. FutureGen bills itself as a “public-private partnership to design, build and operate the world’s first coal-fueled, near-zero emissions power plant . . . [to] prove the technical and economic feasibility of producing low-cost electricity and hydrogen from coal while nearly eliminating emissions.’” (Note the ‘near’ and ‘nearly.’) Apparently the plant will “prove the technical and economic feasibility of producing low-cost electricity and hydrogen from coal while nearly eliminating emissions.”

Sounds great, doesn’t it? We can break our dependence on foreign oil, save the environment, and keep using coal! Of course, coal isn’t renewable, but we’ll forget that for now. The real problem with clean coal is that it doesn’t exist.

Or so say the environmental groups. Late last year, the Reality Coalition – composed of the Alliance for Climate Protection, the League of Conservation Voters, the National Wildlife Federation, the Natural Resources Defense Council and the Sierra Club – launched a national advertising campaign to put forward what they say is a simple truth: that there is no such thing as clean coal.

The campaign was conceived to counter the millions already spent by the coal industry on promoting the opposite: that clean coal does exist and is already being used in plants in the US. According to the environmental groups, this is simply untrue. “Everyone has a role to play in creating our clean energy future,” says Sierra Club Executive Director Carl Pope. “It’s time for the coal industry to stop fighting against efforts to bring about a green economy and instead start living up to its clean coal rhetoric.”

“Big coal is spending millions to make us think that coal use today is ‘clean’,’” adds Natural Resources Defense Council President Frances Beinecke. “But all their dirty money can’t hide the truth – coal as it’s used today is the dirtiest climate-killing fuel on earth.”

That’s not to say that we can’t use technology to make coal less dirty. But this does not seem like the best use of already limited resources, given that coal is not renewable. Better to allocate what funding we have to developing technologies for wind, solar and hydro electricity sources. Or, perhaps, nuclear.

Nuclear explosion
Secretary Chu advocates a nuclear program, including a department loan program for new reactors and developing a long-range plan for dealing with nuclear waste.

PwC’s McConomy says nuclear energy is an essential part of any green energy strategy. “It is very efficient and the operating costs are significantly less than other base load technologies. There’s a zero carbon footprint. The main issue is it costs so much money. It’s incredibly difficult for a single company to build a nuclear plant with a minimum cost of $10 million. We’re probably looking at 12 to 15 years out before we see the first one built in the US.”

The safety issues that plagued the nuclear industry in the 1970s have largely been resolved, but the disposal of waste remains a problem, raising questions about whether nuclear energy is truly ‘green’. According to McConomy, “Current nuclear operators are still storing the waste on-site and until there is a viable policy, there will always be a cloud over the entire nuclear resurgence.”

However, he also points out that, “50% of our power in the US is either coal or oil driven. That’s not going to disappear tomorrow, so companies will still maintain those plants, but when you look at what the world is trying to do and the success of nuclear in Europe and in the US, it has to be part of a viable energy policy going forward. The main issues are cost, lead time, citing issues, and acceptance by the local populace; but in the big picture, in the long term, it has to be part of the policy.”

Show me the money
Clean coal, nuclear, renewables, new technology, new infrastructure – any way you slice it, we’re going to need a lot of money to build this new energy future of ours. Where will it come from? The answer at the moment seems to lie in increasing an already enormous budget deficit. This idea has made some industry leaders wary.

PSEG CEO Ralph Izzo, for example, a self-confessed “fan of what Obama and his team have been saying,” worries that most of the funding for the necessary capital improvements will come from future taxpayers. He feels that charging current rate payers would make for a fairer distribution of the penalties involved, given that those of us currently consuming cheaply produced electricity or gas are, in a way, contributing to the problem.

“This is as opposed to simply saying, ‘Regardless of how much energy you consume or what type of energy you consume, I’m going to now borrow money from the federal treasury and burden future taxpayers,’ because eventually this does have to get paid back,’” he says.

So what can we do? We can’t go backward – that’s what we’ve been doing for the past eight years. We can’t stay as we are, or there will be little of our planet left for future generations. We must but to pursue new strategies to cut back our consumption and find new energy sources. In a way, Obama has no choice. He has to follow through on his strategies to bring about a greener, more energy-efficient future. What we need now are more details about how much this will cost us, and how, exactly, it can be achieved.

FutureGen

FutureGen is a public-private partnership between the Department of Energy and the FutureGen Industrial Alliance, Inc, a non-profit consortium of leading international energy companies.

The Alliance is responsible for the design, construction, and operation of the facility. The DOE is responsible for independent oversight and coordinating participation of international governments.

Alliance member companies will invest $400 million toward the project’s cost and bring technical expertise and power plant engineering and construction experience to the project.

The total cost of the project is estimated at $1.5 billion, with the vast majority going toward the design and construction of the plant and the balance to carbon capture and sequestration and other aspects of the facility.