Credit crunch takes bite out of clean technology?
Ken Silverstein, who is Editor-in-Chief of EnergyBiz Insider published an article on April 28, 2008 saying that the credit crunch has taken a bite out of Clean Technology. He notes that, “This year, the credit crunch is taking its toll. Clean energy investments made in the first quarter of 2007 totaled $3.7 billion, says New Energy Finance. But the same group attracted only $2.4 billion in the first quarter of 2008. It says that private equity investors cut the level of their investments by 64 percent, reflecting the uncertainty and volatility of the financial markets as well as the credit crisis.”
I offer several comments:
Ken and many others, refer to ‘Clean Tech’ as a synonym for renewable energy and/or for new technologies like fuel cells. This is a needlessly restrictive definition that obscures the real reasons we deploy so little Clean Energy. The most cost effective clean energy plants use proven technologies to recycle otherwise wasted energy. Like wind and solar, these energy recycling plants burn no incremental fossil fuel and emit no incremental pollutants of any kind. The discussion of clean energy would benefit from including all of the clean energy options.
- Fuel cells produce slightly less NOx than modern gas turbines, but only the molten carbonate versions currently offer electric-only efficiencies as good as gas turbines and reciprocating engines. The real clean energy value comes from locating the prime mover – turbine or fuel cell – near a thermal load and doubling the net electric efficiency by displacing boiler fuel with otherwise wasted heat.
Clean energy is held back by much more than current credit issues, and neither the 2007 or 2008 rate of constructing clean energy plants begins to optimize our 33% fossil efficient electric system. Here are a few of the problems, all of which stem from flawed regulatory approaches, which regulations could be fixed to enable and induce profitable clean energy deployment.
- Environmental regulations provide no carrot for building plants that produce less than average emissions of any particular pollutant per megawatt-hour of delivered electricity or thermal energy. An output allowance system that gave every plant an allowance of the average emissions/MWh and then required all plants to secure allowances equal to actual output would allow clean energy plants to earn added revenue selling allowances, and could largely replace the herky-jerky system of annual production tax credit extension to congressionally favored technologies (that are a subset of total clean technology approaches.
- With no carbon policy, there is no credit to clean energy plants for delivering power with reduced greenhouse gas emissions per MWh. Moving to a four pollutant output allowance system that included CO2 emissions would allow clean energy plants to earn more of the value those plants create.
- PURPA, which was designed to encourage higher efficiency, was premised on taking business away from utilities, earning unanimous utility opposition. In today’s world of distribution only utilities, we could encourage deployment of highly efficient combined heat and power and wasted energy recycling with legislation that offers long term contracts from the ISO or from the distribution utilities, but keeps the retail load with the utility.
- Prior to deregulation, electric users bore the risk of all generation, once a plant was accepted as prudent and put in rate base. This enabled a relatively low cost of capital for generation plants with high leverage and ‘widows and orphans’ equity certainty. Deregulation has thrown the baby out with the bath water, offering no long term contracts for any power. Banks were willing to loan money against non-contracted gas turbine plants in the late 1990’s, but then lost their shirts in 2002-3 when natural gas prices quadrupled. Banks and other lenders now demand power sales contracts that are three years longer than the debt repayment term. As a result, very little new capacity has been built in the past five years. The independent power industry continues to operate inefficient plants at a profit, largely because no one is building enough new and more efficient plants to destroy the value proposition of converting fossil fuel to electricity at 30 to 45% efficiency. Electric users bear the cost of the regulatory system failure to devise mechanisms to offer long term contracts for Clean Energy.
- The New Source Review section of the Clean Air Act has effectively prevented investments in energy productivity at any existing electric or thermal plant for the past 38 years. If a plant owner invests in more efficiency, which reduces CO2 and criteria pollutant emissions per MWh, EPA can void the plant’s operating permit unless it adds enough pollution control to meet current Best Available Control Technology or BACT emission levels, which is typically prohibitively expensive. Again, moving to an output allowance system applied equally to all delivered MWh could replace NSR and allow investments in efficiency.
In short, the failure to deploy profitable clean energy is caused by flawed regulations, which were designed for yesterday’s issues and constrained by yesterday’s technology. These regulations create massive vested interests in preserving the fossil inefficiency of the U.S. heat and power system. We essentially force our citizens to pay to warm the planet. As the great philosopher Pogo once said, “We have met the enemy and he is us.”
Good review of policy barriers. If politicians were able to tackle just one, which do you think is most important? Also, what do you think about tax credits for alternative energy?
Betsy Taylor:
The single most important change is to replace CAA command and control regulations and NSR with universal output allowances for four pollutants - CO2, NOx, SOx and particulate matter. Give every unit of heat and every unit of power an allowance for each pollutant equal to the average emissions per unit of output for the country, then require each power plant and each thermal plant to obtain allowances equal to actual, continuously measured emissions. Void NSR for all generation plants that comply. Allow trading.
This keeps all money in the energy system, causing no net increase to consumers (but shifting of wealth, as happens with all regs.)The carrots make all clean energy more attractive to develop, and match the cost of the sticks to dirty energy. Markets set the price of allowances. Then congress reduces schedules reduced allowances each year and corrects for load growth to assure absolute reductions of each pollutant every year.
Re tax credits for alternative energy:
Market forces will pick the best approaches if the values created by and costs of each approach are fully paid for/priced. The energy market has many distortions of price, guarantees of some technologies and/or owners, barriers, etc. that have led to hugely suboptimal decisions on heat and power plants. The best approach is to remove the barriers. Tax credits for the technology du jour are further distortions, that try to cancel out other regulatory flaws.
Given the magnitude of change needed to slow climate change, we have to do the heavy lifting of correcting the worst flaws. We simply cannot reduce emissions fast enough with band aids on the deeply flawed energy and environmental regulatory mess.
Tom Casten
Thank you. Is there any place, perhaps some other country, that has done a better job with environmental regulations? Is anyone doing universal output allowances? What has been their experience?
Don’t you have to admit that the Clean Air Act has had many positive impacts? Is it wise to scrap it for something that few countries or states have tried?
Hey Betsy — I don’t think Tom is saying to scrap the Clean Air Act. On the contrary, he wants to strengthen it. To take one example of the problems with the original CAA: under that bill, dirty power plants were allowed to remain online by being grandfathered in. If the plants were substantially altered, they’d have to go whole hog and put in the best available clean energy technology. If they did nothing, they’d get to keep staying dirty under the grandfather clause. Thirty years later, it turns out the plants decided to stay dirty. We could end that gaping loophole and go a long way toward improving efficiency.
Betsy and trapman:
I completely support the goals of the CAA and acknowledge much progress, but the act methodology is deeply flawed.
At the time of passage, technology did not exist for economic continuous emission monitoring, which removed output standards as an option. Today we have highly reliable devices that are affordable to measure criteria pollutants.
The CAA sets up a command and control structure in which a government official decides the appropriate BACT technology for each permit application. This forces the pollution control industry to focus on being named BACT, because nothing else has a market, even though it might control NOx, for example, at 2% of the cost per ton removed versus the current BACT approach. Output based allowances switch these choices to the market and enable every control technology to compete. This would greatly reduce the cost of emission control.
The CAA does not recognize efficiency as a control technology. In my view the problems of global warming dwarf the regional problems caused by other pollutants and we cannot afford to keep regulations that discourage or fail to reward efficiency. Output based allowances reward efficiency.
There are examples in Europe of output based regulation and they have induced rapid deployment of clean energy.
Tom Casten
But aren’t you worried that coal companies and big utility firms will use any sign of doing away with the Clean Air Act as an excuse to loosen regulations and allow more pollution? The Clean Air Act isn’t perfect but it has reduced pollution. I’m worried about doing away with some of its provisions. I’d be less worried if I knew more about European examples of the substitute of output based regulations being effective.
We have no hope of timely or profitable reduction of GHG emissions as long as 70% of CO2 sources are subject to New Source Review. The ‘devil we know’ is a major contributor to needless expense and needless inefficiency of energy services - of heat and power.
Yes, changes to the CAA carry danger. There are always attempts by vested interests to insert words/concepts into any bill to their industry’s favor. And do not think the folks with concerns are just the electric utilities and coal companies. Every operator of any major pollution source, which includes virtually all industrial plants as well as all electric plants, would welcome the end of the New Source Review rules that effectively block any modification to the process.
However, the NSR methodology is largely responsible for stagnant electric industry efficiency and it greatly retards efficiency improvements to industrial processes, because it is prohibitively expensive to give up an operating permit and redesign the process to comply with BACT.
Before clinging to this 1970 methodology, consider what we are suggesting in its place. Every plant, regardless of age, fuel, technology, or location, would have to achieve average emissions per unit of output and then drop emissions every year or buy allowances from cleaner plants. Today, all the old plants are free to continue emitting each pollutant at historic levels. Today, new plants bear all of the burden for cleaner air, and this often prevents new clean energy. Output based pollution allowances remove this goofiness and will clean the air much faster and much cheaper, and, as a bonus, reduce GHG emissions and fuel use.
Tom Casten