Three Goals of a Carbon Price

Miles McDonald, Voltaire Power Company

Australia has just enacted a carbon tax law that it will implement mid-2012.  Is a carbon tax a better policy than a Cap & Trade policy?  Better minds than mine disagree over the answer to that question and the primary reason for disagreement is that they are both susceptible to misuse when in place even though both have the ability to effect the right kind of change – which is to say, to reduce carbon emissions while mitigating the cost of doing so.

I’m going to sidestep that argument and I’m also going to concentrate on the Power Sector to the exclusion of all others for this article.  And now I will suggest that a “Carbon Price” has three goals to achieve in order to use to realize the ultimate objective of reducing the carbon emissions of the power sector of any given jurisdiction without jacking the price of energy and killing the economy:

1.       Reduce Demand for Electricity

2.       Re-dispatch (using different generators as first call)

3.       Lowering the emission profile of new generation to be brought on-stream

And now I’m going to further suggest that the way to do any of this is to RECYCLE the revenue of a carbon price, not to remit them to a government treasury but to the goal of reducing emissions and mitigating the cost of doing so.  How do you ensure that the revenue stream doesn’t end up in the government coffers?  Put the revenue stream in the hands of a Trustee charged with the goal of reducing emissions and the cost of electricity where possible.

Will a Carbon Price achieve these three goals? What are the Problems?

Reducing Electricity Demand:  The problem here is that the elasticity of price for electricity is actually even smaller than that of gasoline.  And as everyone knows, as the price of gasoline goes up so does the grumbling; but not the reduction in use. 

Re-dispatch:  There is a base demand for electricity that is fulfilled by hydroelectric, nuclear and wind facilities because they have the lowest marginal cost to produce that electricity.  They are also low carbon emitting sources.  As demand runs above base, other generators are called on-stream such as Coal, Fuel Oil and/or Natural Gas, probably in that order.  So how high does a carbon price need to be to turn off coal and run renewable energy generation?  To make a broad statement, you could double the price of electricity to consumers and reduce emissions by about 5%.

From a consumers point of view, it is the clearing price of power that matters in a wholesale power market.  Without a really high carbon price you can’t displace coal and a really high carbon price ain’t going to fly, politically.  So, with, say, a $25 carbon price,  if demand runs to a level that requires fossil fuelled generators to run then that higher price of electricity is paid for every single MWhr of electricity produced at that time.  The result is a windfall in gains for generators with a lower marginal cost of production and that windfall is paid for by consumers. (residential, commercial and industrial).  Basically, the carbon price is passed on to consumers in a magnified form because even non-emitting generators get the higher clearing price.

New Generating Capacity:  There is a better argument here.   A Renewable Portfolio Standard, or a Feed-in Tariff or other proactive government policy allows a market operator to insert renewable generation at the bottom of the bid stack so that the (at this time) higher price of renewables is paid for renewable generation without influencing the clearing price of all other generators. 

AND NOW THE GOOD NEWS

McKinsey & Company have a rather famous carbon abatement curve, as shown below.  What it shows is that Energy Efficiency programs can reduce emissions at an incredibly inexpensive rate.  Follow the curve, as the cost of abatement climbs steeply and then less so from left to right.

So what is the message here?  If you take the carbon revenue stream and apply it to energy efficiency programs to ‘buy’ energy efficiencies the cost has been worked out by Robert Cowart of the Regulatory Assistance Program (RAP) to be about $0.03 per kWhr.   Not bad, eh?  Take revenue, buy efficiency and reduce demand.  Reduce demand and reduce the amount of time that fossil fuel is used to generate electricity and thereby reduce carbon emissions.  Better still, there are economies of scale in the purchase of energy efficiency programs.

Source: A cost curve for greenhouse gas reduction; The McKinsey Quarterly

CONCLUSIONS

Putting a price on carbon is a great idea, but it is incomplete.  The bottom line is that utilizing energy efficiency programs, renewable portfolio standards, Feed-in-Tariffs and other policies greatly accelerate the reduction in GHG emissions.   Putting the carbon revenue stream in the hands of a Trustee with a mandate to reduce GHG emissions ensures that the overarching ambition is achieved.

Need an example?  The Regional Greenhouse Gas Initiative of the Northeast and Mid-Atlantic states of the U.S.A.  www.rggi.org    Read’em and weep.

References

Richard Cowart, Regulatory Assistance Project  www.raponline.org

Per-Anders Enkvist et al, McKinsey & Company   www.mckinsey.com

Regional Greenhouse Gas Initiative,  www.rggi.org

Wikipedia,  http://en.wikipedia.org/wiki/Ontario_electricity_policy#Central_planning_and_traditional_regulation_versus_competitive_markets

Christian Hewicker et al,  Power Perspectives 2030, European Climate Foundation

Putting a Price on Carbon, Yale university    http://e360.yale.edu/content/feature.msp?id=2148

Carbon Tax Passes Senate, Jeremy Thompson, ABC News http://www.abc.net.au/news/

SOLAR IN 2012

SOLAR IN 2012

What are the macro events that will take place in the Solar world in 2012?  In this article I look at the supply and demand of solar equipment and installations and also the price of the grid electricity they aim to supplant.  Put these topics together and you get the goal of producing electricity for a return that makes economic as well as environmental sense.

                                                                                     Picture from Wikipedia

What is good for solar manufacturers is generally bad for solar installers; and vice versa.  The common thread is the cost of installed capacity ($/W), which goes up to make manufacturers happy and goes down to make installers happy.

To make them both happy, the local price of retail electricity needs to rise, and that typically depends on the price of fossil fuels.

Put them together and you can see that the cost of renewable generation ($/kWhr), which is dependent on its capital cost since there is no fuel cost, must be as close to, if not below, the combined capital and fuel costs of fossil fuel generated electricity, per kWhr.

TOPIC #1: SOLAR MANUFACTURING SUPPLY AND DEMAND

2011 was a bad year for solar panel manufacturers. Solyndra went bust and BP Solar has decided to dump manufacturing in favour of EPC and ownership of solar plants.  Why?  Well, to state the obvious, Germany pulled the rug out from beneath demand with their tariff rate cuts and China has continued on its 2006 central plan to become supplier to the world.  In its 2011 five year plan, China has stated its renewed intention to take the lead in all renewable energy sectors.

In 2012 look for a continued reduction in supply as solar manufacturers retrench, reduce inventory and consolidate generally.  China will continue its march toward solar supply dominance but will face headwinds in the form of low demand outside of its home market.

Demand in 2012 will moderate its plummet, having absorbed the impact of reduced German and Italian Feed in Tariff offerings.  The world’s largest economies will continue to struggle under the weight of financial debt and subsequent turmoil and politicians will not generally find the courage to raise the price of electricity to include all costs of production, let alone by incenting renewable energy sources to join the Grid.

RESULT #1

Solar Manufacturing will consolidate and increase efficiency.  Manufacturers will spend 2012 reducing inventories, aiming for profitability and foregoing the previous ambition of increased marketshare.  Solar EPC will struggle with opposing forces that will play out differently in different locations.  Their product costs will continue to be low and perhaps even fall further.  On the other hand the government incentives that have been necessary to encourage the building and integration of solar plants into the grid will falter.  To mitigate this particular problem EPC firms will need to meet grid pricing without significant incentives.  Which brings us to the prices of fossil fuels…..

TOPIC # 2:  FOSSIL FUEL PRICING

This one is pretty easy.  It will go up.  Whether ‘it’ is natural gas, oil or coal.  The argument that the world economy is only running on three cylinders is valid but misses the point that the world economy is more and more becoming a world economy, and not simply a western economy.  China and India alone, even with faltering growth rates, will display a growing demand for fossil fuel energy that will easily outstrip the reduced demand from Europe and America.

To further pressurize the prices paid for fossil fuel, both Australia and the EU are moving ahead with policies that place a significant price on carbon.  Read: higher fossil price.  In the case of the EU a reduction in the number of carbon credits made available to industry will prop up the price of carbon and thereby increase the cost of fossil fuels.  Australia sells a lot of coal to China.  Their tax on carbon will increase the cost to China of all their energy, including electricity.

RESULT #2

If you live in British Columbia then your price of electricity can follow the cost of falling water: i.e. not going up.  But if, on the other hand, you live somewhere where the electricity generators use fossil fuels to create electricity, all I  can say is – somebody is going to pay more.  And the likely result is going to be a closing of the gap between the price of renewable generation and fossil fuel generation of electricity.

ONE LAST THING – R&D

Venture Capitalists have been spoiled by the kind of returns generated by the likes of Google or social media sites.  By and large they are losing their appetite for the more mundane, if more certain, returns afforded by investments in renewable energy.

I predict that you will see a pull back in VC activity in our sector and an increase in CV activity.

CV?  Corporate Venturing.  Corporate balance sheets are reported to be strong on the whole and companies are looking harder at both the possibilities of reduced energy use and that of strategic investment.  Strategic investment in nimble, freer thinking entrepreneurial firms that can become takeover targets if/when their particular idea becomes marketable.

Want to let me know your thoughts?  Great!  Miles.mcdonald@voltairepower.com

Corporate "Next Practices"

This chart from the World Resources Institute (http://www.wri.org/chart/corporate-next-practices) lays out in generic and adaptable form the way that companies can develop their skill at incorporating a responsible climate strategy into their culture.  Click on the picture for a clearer view.

The Future of Electricity Supply & Demand

 “The overall conclusion of the 22nd Survey is that there is no shortage of energy resources in the world either today or for decades to come. It is the way we are using these resources that has to change to ensure sustainable energy future.”            World Energy Council

First – The Demand Curve
(Picture: Hole in Ozone Layer over Antarctica)
According to the World Energy Council (WEC), about a quarter of the world’s population still does not have access to commercial energy. The economist Intelligence Unit (EIU) reckons that world energy use has doubled over the last forty years and will double again over the next forty years, even allowing for increased energy efficiencies.  This coincides with the WEC prediction that India’s and China’s power demand will continue to stress their in-place energy infrastructure.  While internet and IT growth in general  has grown in line with Moore’s Law, electricity generating assets that come on stream stay on stream for 40 years or so; not just until the next big thing comes along.  And that means that we need to think  long and hard right now about what to put in place to deliver supply for the future.

Meeting Demand with …..What Kind of Supply?

Right now about 80% of the world’s primary energy comes from fossil fuels.  That excludes hydroelectricity and nuclear power generation.  So what do we fill the demand pipeline with in future decades?

Coal? Two-fifths of the world’s electricity is currently produced by burning coal.  The efficiency of a coal burning plant can be as low as 30% and yet the low price of this fuel makes it attractive to those who do not bear the cost of cleaning up its by-products. 

Hydroelectricity?  Hydroelectricity generally requires falling water – and that means a dam.  Dam infrastructure incurs its own environmental concerns and is unlikely to be a high growth area in the future; especially given population growth in the areas of the world where this technology is politically feasible. 

Nuclear? Fukushima may not have killed nuclear prospects but, combined with exploding capital costs for new installations and European memories of Chernobyl, it has severely curtailed nuclear growth rates.

Natural Gas?  Hydraulic Fracturing, or ‘Fracking’ is a technology that is enabling the capture of natural gas from deep in the earth.  Natural Gas is rapidly becoming a replacement for other fossil fuels in the production of electricity but it is not without its sins.  Fracking is under attack from environmentalists and others over concern for health and safety and the environment and in fact is banned in some countries. Nevertheless, natural gas is considered a viable source of relatively cheap energy, if you exclude all the costs of extraction, not to mention the cost in GHG emissions.

The Transmission Question? And to exacerbate the power generation quandary there are electricity losses from transmission over long distances.  ‘Line losses’ increase with distance electricity must travel to get from supply to demand, and distance travelled generally increases with size of generating plant.

So What’s Left?

The Sun.  Solar Energy in the form of biofuels, geothermal, wind energy, photovoltaic and other technologies, most of which need to drop in price in order to approach a price parity with current electricity supplies.  Technologies such as these are increasing in power production efficiency and dropping in price with increasing manufacturing sophistication.

The problem here is that these renewables currently account for about 1% of current electricity generation and there simply isn’t the infrastructure in place to allow them to fill the anticipated increase in demand for electricity without sufficient policy assistance such as carbon pricing. Combined with the forty year generator life average, the result is that fossil fuels will dominate energy infrastructure and infrastructure growth for the foreseeable future unless the real cost to the environment is written into the production of electricity by the use of fossil fuels. 

Energy poverty is a word that keeps popping up.  A world of scarcity will increase the cost of fossil fuels according to the law of supply and demand.  But even so, the cost of renewables trickles lower and lower as they strive to reach the holy grail of grid parity.  In geographical locations with higher marginal cost of electricity generation renewables will surpass fossil fuels in cost efficiencies – within a decade if carbon pricing becomes more commonly adopted.

Miles McDonald

Resources:

http://www.businessresearch.eiu.com/sites/businessresearch.eiu.com/files/downloads/Global%20Energy%20Conversation_transitions%20from%20West%20to%20East_0.pdf

http://en.wikipedia.org/wiki/Hydraulic_fracturing

http://www.worldenergy.org/documents/ser2010exsumsept8.pdf

Effects of a Roof on Solar Planning

Schumpeter / The Economist

Why firms go green

Despite governments’ failure to put a price on carbon, more businesses see profits in greenery

Nov 12th 2011 | from the print edition

SHORTLY before the 2009 UN climate summit in Copenhagen, many companies got into green. The summit was expected to lead to new regulations restricting greenhouse-gas emissions. Dozens of chief executives came to see history being made and to be seen on the right side of it. But Copenhagen was a flop. Most firms turned their thoughts elsewhere. Only four bosses showed up at the next annual climate meet, in Cancún. Few are expected at this year’s bash, which begins in Durban on November 28th.

Alas, that represents a realistic assessment of the Durban summit’s chances of delivering anything like the long-term certainty that businesses crave. Of 300 bosses of big global firms recently quizzed by Ernst & Young, 83% said they wanted to see a legally binding multilateral deal struck in Durban to update the ailing Kyoto protocol and help to put a price on carbon emissions. But only 18% expect this to happen. The absence of a clear climate policy helps explain why, for example, investment in British clean technology fell from around $11 billion in 2009 to $3 billion last year. It would also suggest that any firm factoring a steep carbon price into its plans—as Shell does, assuming a notional price of $40 a tonne—should quietly lower it.

Yet this is not the whole story. Despite the failures of the UN process and a tough economy, many firms are increasing their eco-friendly investments. Of Ernst & Young’s respondents, 44% said their company’s spending on sustainability—a woolly term that refers partly to the welfare of employees but mainly to green strategies—had increased since the 2008 financial crisis. Another 44% said that, unlike tumbling public spending on greenery, it had stayed the same. This is consistent with a discernible trend, argues Juan Costa Climent, Ernst & Young’s head of sustainability. Many companies have found that, even with little carbon regulation, some sorts of green investment make commercial sense.

Improved energy efficiency and waste management are obvious examples. With oil prices so high, small changes can save a lot of money, which is why companies that adopted ambitious emissions-reduction targets around the time of Copenhagen have tended to stiffen, not slacken, them. They include Walmart, which adopted energy-efficiency targets in 2005 and claims to be saving over $200m a year on transport fuel alone. Tesco aims to be carbon-neutral by 2050 and claims to be saving £150m ($239m) a year. According to the Carbon Disclosure Project (CDP), a watchdog that collects information on the emissions of over 500 large companies, 59% of emissions-reducing investments made so far—mostly in energy efficiency or renewable energy—will pay for themselves within three years.

The falling price of renewable energy is starting to offer firms another way to cut costs. A big advantage of solar and wind energy is that it is distributed: put a panel or a turbine on a factory roof and you have electricity to drive machinery. This makes it attractive to mining companies, which operate in inconvenient places where they cannot easily plug into a national grid. BHP Billiton and Rio Tinto are both investing in renewables. So is Alcoa, an aluminium producer, which is also attempting to measure its environmental impacts. This could provide a defence against future emissions regulations or perhaps help it grab green subsidies.

In a recent survey of CDP’s companies, 68% claimed to have made their global-warming strategy part of their core strategy, up from 48% last year. Given a surfeit of green PR bunkum, it is not easy to know whether they mean what they say. But if they are sincere, it is probably because they believe they must plan for a world in which water and other natural resources are increasingly scarce. Commodity prices are rising, and droughts seem increasingly common in fast-growing developing countries, including China and India. According to a recent survey by PwC, most bosses believe that resource scarcity is a bigger threat to their medium-term prospects than climate change more broadly.
The companies making the most noise about resource constraints are, by and large, the ones already known for their greenery. Yet that is not necessarily a reason for cynicism. These firms include Coca-Cola, Unilever, Nestlé and PepsiCo, all of which have big ambitions in developing countries and use a lot of water. Each firm’s embrace of greenery has followed a similar pattern. At least partly in response to being attacked by green activists—including Coke for using HFC refrigerant gases, Pepsi for dumping plastic waste and Nestlé and Unilever for their ties to palm-oil companies linked to tropical deforestation—all have been improving their environmental record for a decade or more. In the process, they appear to have become seriously convinced about the benefits of being green.

More than just being seen to be green

Cutting energy costs is only part of the story. A world of scarcity will create new opportunities for money-making: by developing products that use fewer valuable resources, for example, or which allow users to use less. “We know what the future looks like,” says Gavin Neath, Unilever’s head of sustainability. “We know water will be very scarce, we know that energy prices will be much higher, we know sanitation will be ghastly in increasingly crowded urban areas.” He may or may not be right, but Unilever is certainly putting its money where his mouth is.
It has started selling products in Asia specially designed for that resource-constrained future, including detergents that clean well at relatively low temperatures and can be rinsed off using relatively little water. In a forthcoming report, the McKinsey Global Institute, a think-tank, will argue that using energy and resources more efficiently could save the world $2.9 trillion a year by 2030, and massively curb emissions. It could also make clean firms a lot of filthy cash.

An energised industry

Nov 14th 2011, 16:05 by The Economist

What are the world's biggest sources of renewable energy and where are they located?
EFFORTS to tackle climate change include heavy investment in renewable sources of electricity around the world. Solar power saw the biggest leap in 2010, with the installed base jumping 70% compared with 2009 to 40 gigawatts. Wind power also grew strongly, adding 24% of generating capacity. Yet the biggest source of renewable electricity, hydropower, and the smallest, geothermal, both only added 3% to capacity. Finding usable sources of either is becoming increasingly hard or costly. The region that saw the biggest growth in renewable energy projects was power-hungry Asia. Investment in renewables also saw the biggest leap since 2007, with $243 billion spent, a 30% increase over 2009.