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Two Energy Revolutions in The State of the Union

Geoffrey Styles's picture
, GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

  • Member since 2018
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  • Feb 14, 2013
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wind powerIt was no surprise that energy and climate change featured prominently in Tuesday’s State of the Union speech, giving me plenty to discuss in my on-camera interview with Reuters this morning. The President devoted an entire section of his address to these topics, leading into it in a very upbeat way: “Now is the time to reach a level of research and development not seen since the height of the Space Race.  And today, no area holds more promise than our investments in American energy.”  You’d never guess from that introduction that this president faces a strikingly different energy challenge than his seven most recent predecessors. There are two energy revolutions underway in the US, and the unplanned one is racing ahead of the one to which he devoted most of his remarks–and most of his efforts on energy for the last four years.

Let’s start with the positives.  Even more than in last year’s speech, President Obama presented energy as more of an opportunity than a problem. He described our impressive recent progress in oil and natural gas production, renewable energy generation, and the reduction of greenhouse gas emissions.  As fact-checkers have pointed out, he stepped into aspiration when he claimed credit for doubling automobile fuel economy–a goal that might or might not be attained by 2025–but even this fits within a broad set of energy trends that are all finally moving in the right direction.

The President also endorsed a very good idea that has been floating around for a long time, but has never been seized upon.  He suggested funding R&D for electric and natural gas vehicles and biofuels with the revenue from federal oil and gas lease bid premiums and royalties.  This “Energy Security Trust” would yoke the success of future energy technology to the enormous cash cow represented by the vast oil and gas resources beneath public lands and waters.  He’ll have to sort out the allocation of revenues with the states, who surely won’t want the new set-aside to come from their share.  If he can work that out, the government will have an even bigger vested interest in ensuring that responsible oil and gas development on these lands proceeds, in order to advance energy innovation.

Yet as pleased as I was with those aspects of his remarks, I couldn’t help noticing that he still speaks about renewable energy in much the same way he did four years ago, as though we’ve learned nothing in the meantime.  He wants us to out-China China in investing in solar energy, despite the fact that many of China’s leading solar manufacturers are struggling with the same low margins that have led to a string of solar bankruptcies in Europe and the US, as rampant global over-capacity fuels cutthroat competition.  He also apparently wants to make the wind Production Tax Credit permanent, rather than reforming and phasing it out, as even the leading US wind energy trade association has suggested.  The fact remains that no government on earth can afford to subsidize renewables at the current generous rates all the way up to full-scale deployment.  They need to be encouraged to become fully competitive with conventional energy as soon as possible and then set free. 

Nor has the President lost his enthusiasm for citing statistics like the doubling of the energy that “we generate from sources like wind and solar.”  Yet increasing wind power from 1.3% of US electricity generation to 3%, and solar from 0.02% to 0.1%, is not what has set the stage for the US to become a significant net exporter of various forms of energy, and possibly even energy independent.  He spoke strongly in favor of natural gas and briefly noted oil’s strong gains, but it’s not clear that he sees them as the engines of economic growth that they could be for the next decade and beyond. 

Perhaps that’s because after a long stretch in which US efforts on climate change and energy security seemed perfectly aligned, they are now moving out of sync. The 12% reduction in energy-related CO2 emissions since 2007 is largely attributable to fuel switching from coal to gas in the power sector, along with reduced oil demand in a lethargic economy.  There’s more scope for both; however, if all the present trends continue it will become harder to fit the reality of surging oil production and looming natural gas exports into a constrained emissions box. 

In that context, the President’s call for a new, “bipartisan, market-based solution to climate change,” and his threat to act via executive order if Congress fails, left enormous gaps of necessary detail.  Does President Obama really want another bitter contest over cap-and-trade, as one might conclude from his reference to the McCain-Lieberman efforts of 2003-5, or is “market-based” to be interpreted as a carbon tax, which is coming back into favor in some circles?  What was entirely missing was the necessary admonition to Congress to avoid larding any future climate bill with the kind of distortions and pork-barrel spending that turned its most recent effort, the bill by Reps. Waxman and Markey–both of whom were presumably in the room and deserve to feel slighted–into a 1427 page monstrosity.

Judging by my inbox this morning, many people liked what they heard concerning energy and climate.  Groups as diverse as the Blue-Green Alliance and the American Petroleum Institute cited portions of the address in support of their agendas.  And at least in the Energy Security Trust idea there were hints of the revitalized energy vision I was hoping for, in which the US rides the wave of shale-driven energy transformation while innovating the technologies of renewable energy, transportation and energy efficiency to the levels necessary to take over from oil and gas by mid-century.  There’s always next year.

Discussions
Jessee McBroom's picture
Jessee McBroom on Feb 14, 2013

I will go out on a limb here and suggest a minor version of Some of All of The Above. With respect to perpetual subsidies for wind and other renewable energy technologies; they should be allowed to expire when an alternative energy technology that is a zero emissions technology becomes cost competitive with cheap fossil fuel energy production and grid parity has been achieved. I am not bashing fossil fuels here. I am merely concerned with arresting the global emissions of GHGs and Black Carbon or Particulate associated with the use of fossil fuels without adequate emissions reduction technology applied to the emissions of facilities employing cheap fossil fuel for energy production and the extraction processes for the obtainment of these fossil fuels  or the oil they are sometimes produced from.As oil and gas extraction technologies are also subsidized to this day; these subsidies should also be allowed to expire when the technology has been proven to work.

Geoffrey Styles's picture
Geoffrey Styles on Feb 14, 2013

Jessee,

A couple of clarifications: Wind and solar don't displace oil in the US, because less than 1% of US electricity generation is based on oil, and most of that in remote locations or back-up roles for which wind and solar can't compete. 

As for the subsidies, do the math to see that the tax breaks oil & gas companies get are only worth a small fraction per unit of energy produced, compared to the ones that renewables receive.  If oil & gas received incentives at the same level as renewables, the annual cost to the government wouldn't be the $4.7 B/yr that the President has proposed cutting, but more like $120 B based on last year's production.   That's because none of those incentives is remotely as generous as the Production Tax Credit or Renewable Investment Tax Credit. The write-offs oil & gas companeis take are equivalent to those (depreciation, Sec. 199 manufacturing deduction, etc.)  that every other manufacturing business in America gets. 

As for how long renewables should be incentivized at current rates, remember that the current system doesn't reward innovation, just production or installation.  The one-year extension of the PTC alone was estimated by the Congress to cost us $12 B, to grow US wind power by maybe another 20%, which would take it to around 4% of total generation. 

Jessee McBroom's picture
Jessee McBroom on Feb 14, 2013

Thank you Geoffrey. I have to agree with your statement. I was acyually thinking of the seemilgly perpetual subsifies of the oil and gas industries as each new extraction technique is subsidized for exploration and then development prior to the R&D of Renewable Energy Sources and Technologies. The current fossil fuel industries have enjoyed the subsidized improvements in technology for some time. A lot longer than any renewable other than Hydro Electric. A marked Advance in Hydro Electric may enjoy the benefit of  a subsidized imptovement; but I rarely hear of these. With respect to your final paragraph; I agree. As I said before. Once a technology has matured to a point of grid parity with fossil fueled systems, I believe it should cease to be subsidized. The exception to the rule; I suppose would be some radically new and advanced version that out performs existing techniques by leaps and bounds.Say even a PV module that promissed to be a 1000% improvement over existing technology; but would require some millions to develope. 

Geoffrey Styles's picture
Geoffrey Styles on Feb 14, 2013

Jessee,

There's a huge difference in cost between R&D and deployment.  Certainly the US Government has funded all sorts of R&D over the years, much of which has ultimately benefited various industries and companies including oil and gas and renewables.  That's a well-accepted role of government.  However, this is qualitatively different than paying 2.2 cents/kilowatt-hour (the energy equivalent of today's price per million BTU of natural gas at the Henry Hub trading point) for the output of thousands  of wind turbines. 

Jessee McBroom's picture
Jessee McBroom on Feb 15, 2013

I agree entirely Geoffrey. R&D will always cost considerable ammounts of money. It is worth the investment most of the time I think. I also agree it is very hard for a technology to compete with the price of gas fired electric production. The cost of R&D through to Development of a good piece of technology usually is a very good investment in tax dollars generated from employment directly related to the developed and applied technology by Industry. Some flop; but most do not. We have Wind Solar Geo Thermal and Hydrogen and Fuel Cells as well as Electric Cars to look forward to; as a RESULT of R&D. The country is also able to scale back on the coal fired facilities in use because considerable incentives in the areas of wind and solar electric generation. I will just state again; that I believe when a technology has matured and proven itself it no longer requires subsidies. I think industry should get used to the idea that the subsidies should not be eternal. This country really needs to start trimming its' budget if we are to remain solvent.

Randy Voges's picture
Randy Voges on Feb 15, 2013

Speaking of out-Chinaing China, wonder if anybody in the White House has noticed that they burn a lot of coal.

Geoffrey Styles's picture
Thank Geoffrey for the Post!
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