West Bath
Siem Riep
Sri Lanka
Czech Republic
Bora Bora
Porto Alegre
Sao Paulo
San Nicolas
Hong Kong

Agenda for the New Secretary of Energy – You Can Work From Home!

Huff PostFor better or worse, there will be a new administration on or about 20 January of next year, and the scramble for jobs working in the new administration has already begun. In Washington this is politely called “transition planning,” and both Donald Trump and Hillary Clinton have already formed teams to engage in this recruiting and placement fair. Governor Christie leads the Republican team and Clinton’s is chaired by Ken Salazar, currently a Washington lobbyist but formerly a Senator from Colorado and Secretary of the Interior.

The best appointive jobs, depending on one’s point of view, are Secretary of State, Secretary of the Treasury, Secretary of Defense, Attorney General, or Supreme Court Justice. The job of Secretary of Energy is so low on the totem pole that at one point it was held by a dentist from South Carolina.

I worked in the Federal government as a civil servant and then a low ranking appointee for 15 years, and watched more than my share of transitions. Besides the jockeying for position, the other thing that happens is all the civil servants spend hours preparing transition notebooks to educate the incoming political appointee about the issues he or she would face, and what to do about them. Since we only knew, really, what we worked on, these were very bureaucratic documents, not strategic. Should this or that program be expanded or contracted, should this regulation be issued or reworked. Very little about new legislation to propose, and even less about broader strategic positions or initiatives. If the candidate had not said anything about new energy initiatives, then neither did we. We weren’t stupid.

In so far as the Department of Energy and its head are concerned, the interesting truth is that the competence of the appointee actually matters little. The energy situation of the US is remarkably good and getting better, and what is probably needed is the removal of barriers or old ineffective programs, not the creation of new ones. The job really doesn’t matter, and barring an unpredictable crisis, there won’t be a great deal to do. So give the job to just about anyone, it won’t make much of a difference. Maybe a chiropractor this time. Based on past experience this would probably be just as good as a university professor.

A quick review of energy issues should demonstrate why this executive selection doesn’t matter.

First a general primer. In the energy business, the US Government has only limited tools it can use. It can buy energy for its own use as a consumer, or it can sell or lease the energy assets—Federal lands generally, like off shore oil leases, or coal leases on BLM lands. It can force certain changes by regulation—higher mileage standards for new cars—but this is a limited tool. It can make energy cheaper or more expensive by adding taxes or tax credits to a particular energy source. The federal gasoline tax is one example, the solar and wind energy tax credits are another. There are other somewhat hidden subsidies addressed below. There is an existing web of such programs, taxes and subsidies and they can be tweaked a bit depending on one’s political agenda, but not much really needs to be done.

Take the general areas of energy policy one by one, starting with oil. Since the Arab oil embargo of 1973, domestic consumption of oil has engendered a whole lot of policy and even more rhetoric, and almost none of either has made much difference. President Nixon declared something called “Project Independence” in 1973, a reaction to the embargo. He wanted to build 1000 nuclear power plants by the year 2000. Fortunately we did not.

Similar words have followed with similar results. We were never brave enough as a country to add taxes to gasoline or crude oil, a policy that could have made a difference. We did create a Strategic Petroleum Reserve which was small but modestly useful as a fall back, but never really large enough to be a real reserve. But now we find ourselves in the position of no longer being beholden to OPEC, and instead being more than self-sufficient in oil. In fact, for the first time since 1949 we are even exporting our surplus on the world market. So much for fighting wars to ensure our supply of oil from the Persian Gulf. At least let’s hope so.

Was the Department of Energy the driver here? Nope, the industry heeded price signals and pushed the technology. First with three-dimensional modeling of underground deposits, an improvement made possible by better software and cheaper computing power, then with horizontal drilling, and finally with fracking. The next Secretary doesn’t need to do anything about this but sit on his or her hands and take credit.

Natural gas is almost as important to the economy. Because it is a gas (surprise), it is significantly more expensive to transport across large oceans. You have to liquefy it, which requires a temperature lower than minus 260 degrees Fahrenheit, and then keep it that cold until it can be turned back into a gas and delivered. Thanks to our natural endowment, we have never really been much of an exporter or an importer of this important commodity, although some companies, like Cheniere Energy have been smart enough to be both, at different times, when the timing was right. We have been generally self-sufficient in gas since we deregulated the price in 1978 and let the market determine what to do. It’s been a bit of a wild ride in terms of price, and it is likely to continue to be such. This has to some extent hampered US exploration and production, but here again technology has blessed us, and probably geography and geology as well. Fracking and horizontal drilling are as useful in finding and producing domestic gas as they are in finding oil. According to the EIA, in 2015 natural gas imports sank to their lowest level since 1986—30 years ago. They still exceed exports by about two to one, but since 97% of our imports come from the friendly Canadians, this has never seemed much of a national security problem. And despite the price uncertainly, in general price is low and natural gas this year is set to displace coal as the principal fuel used to make electricity.

What should the Secretary of Energy do about this? There’s no particular problem, and what would one do if there were—invade Canada? Just leave well enough alone, that’s worked so far.

Electricity is slightly more complicated. Let’s start with coal. Since 2010, 232 coal fired plants have been shut down, or about one third of the US fleet. In 2015 coal still provided 33 % of all electricity generated in the US. But as recently as 2010, that number was 46%. And going forward coal use will no doubt continue to decrease. Coal can no longer compete with natural gas or solar PV as to cost. Since 2012, 43 coal companies have gone bankrupt, including Peabody, the world’s largest. And environmental pressures are likely to continue, regardless of who is president. But coal loses just on cost alone.

The energy department has programs to push “clean coal” which, with regard to CO2, is an impossibility. Coal is just about 100% carbon. If you burn it to make electricity, where can the CO2 possibly go? The most recent demonstration project is the hapless Kemper plant owned by Mississippi Power. Its initial cost for 582 MW of generating capacity was $2 billion dollars. For utilities, cost per KW is the key comparative measure: Kemper started at almost $4000 per KW. Natural gas plants cost about $1000 per KW to build, utility scale solar about that and getting cheaper. After four years of engineering and construction, the Kemper cost is now estimated to be $6.7 billion. Changing coal into gas, and then burning it, then capturing the carbon, then putting it somewhere out of the way, has no economic future anywhere in the world.

The Secretary of Energy could stop funding foolish research on clean coal, and that would be useful, and could support adding environmental controls to existing power plants – the EPA’s “Clean Power Plan”. This will push coal out of the picture faster, but it’s ok if you just keep quiet about coal. It will go away based on economics.

What about nuclear? It doesn’t have any CO2 problems, why not push that? The US nuclear power industry owes its being to the Federal government, starting with the creation of the Atomic Energy Commission in 1946. Federal investment in nuclear fuel processing by uranium enrichment, waste handling, pooled liability insurance and other federal actions have nurtured the industry since the beginning. Uranium and its ugly brother plutonium make great bombs if massive destruction is your goal, but it is not an especially good way to make electricity. As Albert Einstein remarked, “Nuclear power is one hell of a way to boil water.” He might have added, “and dangerous, and leaves a pile of poisonous waste that lasts forever.” And then there’s that nagging safety thing, ask people who used to live around Fukushima.

So how’s the industry doing with all this government support? Going out of business, to be blunt. Not because of new rules, not because the waste is a problem, but because it has operating costs that are too high to compete with natural gas, wind and solar. A short list includes San Onofre and Diablo Canyon in California, the first already down, the second to be phased out due to costs in six years from now. And Exelon has announced it is closing Clinton and Quad Cities, citing $800 million of operating losses. The head of the Nuclear Energy Institute, the industry’s trade group and principal promoter, has publicly suggested that 15 to 20 more plants could be forced to close in the next five to ten years.

There are only sixty nuclear plants operating in the US, and two under construction.

One might wonder why a utility would attempt this building project. The Sumner nuclear plant, a 2200 MW, two reactor plant is under construction in South Carolina. Costs started out at $9.8 billion, or about $4500 per KW. The most recent public report has those costs now at $14 billion. Needless to say, the plant is three years behind schedule. It is possible that this will bankrupt the utility. The Vogtle plant being built in Alabama is also three years behind schedule, over budget, and unfortunately has a Federal loan guarantee. Einstein turns out to be correct. This is a complicated, complex way to make electricity. Too complicated to be done cheaply. And as for the radioactive waste generated, there is still no solution for what to do about it—another cost that someone, perhaps our grandchildren, will have to bear.

So Madame Secretary or Mister Secretary, what do you do? Other than removing some of the subsidies, and shutting down the pointless nuclear research and focusing on the waste problem, don’t do a thing. And for goodness sake, don’t give out any more nuclear plant loan guarantees.

Last but surely not least, what about renewables. Like nuclear power, wind and solar and other renewables have benefited from extensive government research support, and in recent years from a tax credit. The demand for these technologies has skyrocketed as prices have decreased. Solar panels are down in price more than 90 percent in the last six years, and the cost of new wind machines has decreased substantially as well. Those technologies now are equal in cost to gas fired power in many cases. In some locations Kwh prices are cheaper on a full cost basis, including all capital costs, than coal and nuclear power priced on an operating cost basis only. Yes, operating costs! The winning bid in the recent Dubai auction for solar power was three cents per kWh. Note that there is no Federal tax credit to lower costs in Dubai, so three cents is an unsubsidized number.

Yet again, it looks like the market is working, after years of Federal support. Do not renew the tax credits, although the industry will complain loudly. Time to push the chicks out of the nest; renewables can stand on their own. Yes, hands off.

What’s left? Batteries are key to electric cars, but they’re moving ahead smartly as well down the cost reduction curve. Energy conservation? Since 2004, US energy consumption has grown at less than 1 percent per year, while population and economic output (GDP) have increased each year by more than this rate. Thus the “energy intensity” both of the economy and per capita, good measures of energy conservation, have decreased significantly. And although it’s technically not conservation, all those solar panels on all those roofs certainly mean something.

Being Secretary is still a good employment, you go to ribbon cuttings, you testify on Capitol Hill, every so often you’ll be invited to the White House for a Cabinet meeting or a state dinner. You can sit back, relax and enjoy our good fortune, achieved with good judgment, good luck, some government support that’s no longer necessary, and mostly hard work and functioning energy markets.

So take the job, and make it your mission to say “no” to anyone proposing new programs or regulations, and try not to screw things up.


Published in Huffington Post  10/05/2016 03:02 pm ET

Share and Enjoy
This entry was posted in R.F. Hemphill. Bookmark the permalink.