Electric Utilities and Carbon Taxes
- August 17, 2011
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Electric utilities yearly earn over $300 billion in revenues. Their primary output is electricity; a secondary energy source generated from any number of sources. This is a nice business with a solid returns and steady growth. Utilities underpin our economy and are indispensable to factories, commercial establishments, homes. They should be one of our domestic manufacturing heroes.
Instead electric utilities have become synonymous with 'dirty coal'. These utilities face an incessant stream of regulations and proposals to tell them how to produce energy. Even the largest business opportunity to come along in a century, the electrification of the transport sector, is met with a steady drumbeat of articles on why it can't be done.
There is a strong consensus this country needs a sound energy policy. Can and should Electric Utilities and Green Groups partner for this energy policy? Is a carbon tax an opportunity, instead of a stake in the heart of the industry? It may provide the opportunity to allow utilities to promote American jobs, increase our national security and dramatically improving our balance of trade, while improving revenue and profits.
Petroleum is the Largest Part of Our Energy Picture
Petroleum supplies 40% of the nation's primary energy, almost twice the amount supplied by coal or natural gas. At our peak, we imported $400B in oil, or conversely, exported $400B dollars worth of wealth. This often corresponds to 50% of our trade gap. This represents economic inefficiency: ship wealth out, burn it; then repeat cycle.
Utilities are the only large scale business enterprises converting disparate sources of primary energy into the secondary energy useable by virtually every piece of equipment and machine on the planet, i.e. electricity. Electricity is used by many industrial processes because it is affordable, clean (at the end use point) and allows for highly efficient equipment.
Petroleum is Inefficient
When you look at the efficiency of combustion engines versus electric engines, the potential savings in raw energy input is significant. Gasoline as a fuel has a net efficiency of about 12% to 18%. Electric motors are up to 90% efficient, with the final efficiency dependent on how the electricity is generated. Even under the 'worst case' scenario of using coal to generate the electricity, the conversion efficiency is 33% at the power plant. With transportation costs of the coal and the transmission losses, these drop to 20% to 24%. Under the "best case' scenario, through use of renewable wind and solar, the efficiency need not drop below 80% (when looking at use efficiency versus capture efficiency).
Manufacturing Job Exported
The common refrain is, 'jobs are lost because labor costs are lower elsewhere'. This is only partially true. Cost of energy and regulations all add to the cost of doing business in the US. That means in many cases we are exporting jobs so we can buy goods that are produced with more pollution than would have occurred if produced here. Our greatest trade imbalance is with China, where the energy required to produce goods is not nearly as efficient as the US. China produces over 4 lbs of CO2/$ of goods exported to the US (per National Academy of Sciences). This compares to 1 lb of CO2/$ of goods produced in the US. It is estimated the total import of CO2 emissions from China is 440 million tons of CO2 per year.
China also produces much more in the way of the regulated emissions of SOx (sulphur oxides) , NOx (nitrous oxides) and Hg (mercury) per good produced. This is in addition to the waste stream dumped into waterways and landfills. Many of these air emissions can cross the Pacific and affect the air quality in the US.
For utilities these lost jobs are lost industry and customers due to an uneven playing field with regards to the cost energy and pollution standards.
A tremendous amount of our resources are dedicated to protecting our sources of oil. Oil impacts us and the globe through conflict, pollution, and oil-funded terrorism. The Department of Defense itself has determined that ridding itself on the dependence of oil is a strategic challenge. A good article that goes into much more depth can be found at ndupress.ndu.edu, DOD's Energy Challenge as Strategic Opportunity, by Amory, Lovins, JFQ issue 57, pg.33-42, 2nd qtr, 2010.
Part of the Problem: Big Oil Controls the Message and has the More Powerful Allies
The oil companies have a huge vested interest in protecting the status quo. In an average year, the oil companies have profits exceeding $100 billion in the U.S. alone. This dwarfs the profits for the electric industry. Yet they are the industry leading the way for American dependency on unstable foreign countries for imported oil, the export of wealth and alteration of the environment. They control the message to the public so well that proposals increasing the cost of gasoline are immediately panned as a burden on society in the general press, while any action damaging the abilities of utilities to burn coal are viewed as good. They are now in the process of writing the regulations that will continue oil's supremacy and keep electric utilities a second class energy provider.
Recently the EPA announced their intent to regulate greenhouse gas emissions (GHG). The power utilities are the target of the regulations while the oil industry has their wrist slapped. The EPA focuses on industrial emissions and bypasses the source of the majority of GHG, the 36% of the US total produced by the transportation sector. According to the IEA, between transport, refining and consumption, oil products produce 42% of the GHG emissions. As proposed, the EPA regulations offer a large benefit to the oil industry and oil exporting countries over domestic electric utilities.
There needs to a shift in the message and approach. The biggest contribution to CO2 and NOx is the production and use of petroleum and not electricity generation. Even if an electric car were to be powered by electricity generated by an average coal fired power plant, emissions would be close neutral for CO2. Coal, Nuclear, Wind, Solar, Hydro are all domestic resources to produce the energy to displace oil. The faster we can electrify the transportation sector, the quicker we shift our energy future into US hands.
If one scans the job openings at utilities it sometimes appears there are more openings for lawyers and compliance staff to weed through regulations, meet regulations, negotiate with environmental groups, meet suits from regulators and negotiate permits for power plants than for those to create and operate the production process itself. In general, this situation of constant negotiation, confrontation and shifting regulations benefits many parties (e.g. lawyers, politicians, and media). Unfortunately, it is the utilities and the consumer who foot this bill.
As with so many compromises, electric utilities and the Green groups need to find common ground and seek balanced solutions that promote American security and jobs. Both power utilities and the environmentalists (green's) should be in favor of advancing transportation electrification at the lowest cost to the consumer. Instead of focusing on increasing the cost of coal, there should be a partnership to help utilities shift resources and capital to reduced emission domestic production.
Regulations need to be neutral or favor U.S. manufacturers. Cap and Trade and policies forcing best available control technology (BACT) are typically a burden on US companies which, when possible, are passed on to the consumer. Often jobs end up being shipped overseas to companies who pollute freely and often enjoy subsidies for their production facilities.
Now is the time for Congress to focus on jobs and instill certainty into the planning process for electric utilities. The utility companies need allies in congress to pass sensible legislation. Without allies, the rules will primarily be written by the oil lobby, perpetuating our dependence on foreign oil.
Cap and Trade Versus Standards
Cap and Trade creates a whole industry whose purpose is to shuffle pollution about the country. Yes, it does put a hard price on polluting and allows flexibility, but overall it is more an employment act for lawyers, politicians and financial people. This is a tremendous additional cost, just to price pollutants.
Standards should be set for power plants and transportation sectors. They should have compliance windows and a known trajectory for ratcheting the standards to more restrictive levels. Ideally utilities would have a 20 to 40 year time horizon of stable regulations to properly plan major investments. The flexibility comes in the standards design, which, while setting up individual plant limits, may have a more restrictive regional limit, much like how cars have a pollution limit per vehicle and a fleet standard on a mpg basis. BACT and related doctrines should be eliminated and replaced with common sense targets (perhaps a tall order for Congress). Utilities have a lot of smart people working for them, and they may have some great ideas and strategies to meet standards if not forced into dictated solutions. BACT often forces post combustion controls in lieu of controlling air emissions at their source. Pollutants controlled after the fact, versus during the process, always add cost. This benefits neither the utility nor the consumer and hence the last resort should be mandated control options. New source review needs to be eliminated so projects which improve efficiency are not held back for fear of triggering more expenses.
Standards created should apply to power production facilities along with the transportation sector. For example, air pollution standards for NOx, SOx, CO2, HC, and Hg all should be in lbs/kw-hr or an equivalent type standard reflecting the efficiency of the conversation process. Transportation should no longer presume gasoline only and the miles/gallon standard should include miles/ lb of CO2.
CO2 Taxes -- The Great Equalizer?
Mention taxes, and most people welcome this as much as someone announcing Adolf Hitler and Attila the Hun are stopping by for dinner. However, this may be one situation where taxes can help the electric utilities and the American manufacturing base.
Instead of arguing over CO2 limits, the utility industry should co-opt the argument and argue strongly for the case that assigning a cost to CO2 is imperative and therefore should be applied equally to all sources. Very simply, if you charge an electric car on 100% of coal generated electricity; you would break even or come out slightly ahead on the CO2. NOx and VOC's would be significantly lower (especially in the cities), while SO2 would depend on the fuel and control technology. As utilities move into high efficiency coal, nuclear and renewable energy, this advantage grows, until such a point if the cost of CO2 is high enough, fueling your vehicle with petroleum becomes a luxury. For utilities this creates an opportunity to expand market share.
Furthermore, a well crafted tax would penalize countries that have lower emission standards. Goods imported from countries emitting more air pollutants than the US should pay an import duty/tax. If designed properly, the many cheap oil based goods (i.e. plastic) would see significant price increases relative to their U.S. manufacturing counterparts. Energy intensive manufactured import goods would also see their competitive position eroded. This would be a strong proactive stance versus, for example, waiting for currency exchange rates to equalize.
The strongest policy for creating U.S. jobs through taxation (hard to believe I typed that), is to have the taxes applied to the main air emissions of NOx, SOx, HC and CO2, with tiered taxing or penalties. Imported goods would be taxed on the average pollution associated with the manufacturing country. The main advantage to this is all but the very oldest coal plants are cleaner than power plants in countries such as China and India.
The challenging part would be using the funds from such a tax to promote indigenous energy resources. Funds collected should be funneled straight back to consumers, manufacturers and utilities. Consumers should receive rebates for low emission vehicles (e.g. those with electric motors, whether electric hybrid or pure electric). The increased gas tax should be funneled back to the states for promoting new manufacturing facilities. Utilities should receive credits and tax benefits equivalent to or better than those the oil and gas industry receives for capital investment in new renewable energy facilities and base load nuclear.
The goal of this proposed policy is not an overnight shift away from coal or oil, but to first shift our dependence from foreign oil to US energy sources, whether to coal, wind, solar, nuclear, etc. and to build momentum at a faster pace for creating the manufacturing base to retool our infrastructure. If at the same time we remove some of the bias against manufacturing goods in the US, all the better.
Where Does the Money Come From?
As it is now, the electric industry is facing an aging infrastructure in both the power plants and the grid. Further, they are facing billions in compliance costs for pollution controls. Adding to this demand for capital through increasing electricity production or changing the production mix seems prohibitively expensive.
However, the numbers pale in comparison to what we are already spending (wasting?) on petroleum. With oil at a $100/barrel price we are spending roughly $900 million per day. We then get the privilege of borrowing money from other countries (i.e. China, Saudi Arabia) and paying interest on this debt essentially forever. Even at 3% interest we get to pay another $27Million indefinitely annually for each day we continue with current practice.
Investing instead in U.S. energy resources, whether high-efficiency coal, nuclear, solar, wind, hydro, and energy storage; plus investing in upgrading the grid to world standards, can create immediate jobs, tax revenue, and a reduction in the daily oil bill. For example, many articles cite the high cost of solar, with only 300MW to 400MW of production for a $1 billion in capital. For the amount money saved in 10 days on oil we can build out 3,000MW of expensive solar. Instead of paying interest, we can pay the fuel cost of zero and reap the benefit for 20-30 years.
The proper design of the tax policy would reduce this import bill and funnel the money back to US utilities, consumers and manufacturers. The result would be an investment stream that pays for itself.
How to Get the Money Back
Ideally any funds collected through such taxes would be directed to a quasi-govt agency with its own budget and the main mission to eliminate import of foreign oil and to promote and help utilities switch to a more diverse energy production base. The charter would limit the bureaucracy to some set limit (e.g. 10%) with the rest of the funds remitted back to utilities, consumers and state energy agencies. In concert, the government should drop/phase-out all existing energy subsidies in the general federal government budget, while simplifying and providing certainty to environmental targets. Finally, transmission line policy needs to be put under the category of interstate commerce with a single set of federal rules to facilitate the movement of power throughout the country.
Utilities need to seize the oncoming CO2 regulations as an opportunity to restructure the energy industry in a manner favoring them. Currently, they are fighting a loosing battle as they have become defenders of 'dirty coal'. The nation needs to know utilities are the one industry capable today of delivering clean domestic end use electricity. The government needs to back out of telling the industry what to do and remove the bias favoring big oil. The government needs to promote and set standards which provide certainty for planning. The government's tax policy needs to promote heavy investment in domestic production resources, while penalizing the importation of goods made with dirty energy production.