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Using Solar to Produce Oil

We’re all familiar with solar as a way to generate electricity and hot water, but now it is being tested as a way to produce oil in one of America’s oldest oil fields. I recently took a Chevron-sponsored trip to their  demonstration plant near Coalinga, in California’s Central Valley. The plant is the first in the world to try using steam generated by a solar thermal plant for enhanced oil recovery (EOR).

Constructed by solar thermal leader BrightSource Energy and completed in August 2011, the 29 megawatt plant uses an array of 7644, 7-foot by 10-foot mirrors mounted on 3822 heliostats to track the sun throughout the day and focus it on a 327-foot-tall central tower.

Solar collector tower in Chevron Coalinga fieldSolar collector tower

There, a closed-loop system heats to 700° F, which is then run through a heat exchanger to turn water pumped up from the oil field into 500° F steam, which is in turn injected into the field to release the oil.

Chevron-steam-injection-wellA steam injection well

The heliostats are independently controlled by an automated system, and can tolerate up to 25 mph winds in full operation. In the event of a power outage, an on-site uninterruptible power supply turns the heliostats away from the tower, and then a generator fires up and circulates the fluids in the tower until the system cools down.

In order to minimize the amount of water needed to keep the mirrors clean in this dry desert environment, Chevron uses an Israeli-made machine that needs less than 1 liter of water to clean both mirrors on a single heliostat. Using de-mineralized water avoids the need to squeegee the mirrors and leaves no spots behind.

mirror-washing machineMirror-washing machine. Click image for a video of the machine in action.

Steamflooding EOR

Steam injection, or “steamflooding,” is one of several EOR methods used to extract the last dregs of old oil fields. This particular oil field was first discovered with a well dug by hand in 1899, and entered production in the 1890s. Production quickly ramped up to a peak around 40 thousand barrels per day (kbpd) in the early 1900s, then went into a typical long decline as the natural pressure of the field began to fall. Only about 5 to 10 percent of the oil in the field can be produced with “primary” recovery under natural pressure. Then hot water flooding was initiated, which is able to extract 15 to 25 percent of the oil. Steamflooding, which is thought to be able to extract 50 to 80 percent of the oil, began in 1964 and pushed production up to a new peak around 140 kbpd by 1990.

The steam spreads out over the top of the oil-bearing sands below, raising their temperature to about 250° F and lowering the viscosity of the thick, gooey “heavy oil” they contain. (Oil from this field weighs in at 12 to 13 API specific gravity, meaning it can just barely float in water.) The oil then drains down into production wells at 2000 to 4000 feet of depth, where it is pumped back to the surface. The steam essentially “cleans” the sands from the top-down.

Today, the roughly 10-square-mile Coalinga oil field produces around 7 kbpd from over 800 active wells. The oil is separated from the produced water, and sold to Shell. The water is cleaned up and recycled back through the system to be turned into steam again. Total recovery is thought to be only around 50 percent so far, so there is a lot of oil left to produce from this over 100-year-old oil field.

However, making the 52,000 barrels of steam needed each day is expensive. Optimizing oil production with the minimum amount of steam is a key operational objective, and Chevron has focused a great deal of effort on getting it right. They now claim to have a steam-to-oil ratio of around three—about half that of its nearest competitor, AERA.

Today the steam is generated from a combination of older traditional natural-gas fired boilers, plus three newer co-generation units. The co-generation units run 24×7 and use natural-gas fired turbines to produce 3 megawatts of power plus 4,000 barrels of steam per day each, and are 98 percent efficient.

One of the high-efficiency co-generation steam boilers

Together they generate about 48 megawatt-hours a day of excess power, which is sold to the local utility, PG&E. In total, the field consumes about 33,000 thousand cubic feet (mcf) of gas per day, most of which is obtained on-site (natural gas is formed by the same process as oil and is commonly found associated with it in an oil field).

Despite occupying about 100 acres of land, the new solar thermal plant contributes a small portion of the field’s steam needs. It produces about 350 barrels of steam per hour when in operation, or about 5 percent of the total steam needs of the field, according to Chevron. Construction supervisor Ray Guidry says the system offsets about 225,000 million BTU worth of gas each year, which I calculate to be just under 2% of the field’s total gas consumption. At full daytime output, the solar plant takes the place of just 2.6 of the 11 steam generators used in the field.

Mirror array (foreground) and the oil field (background)

Although Chevron would not disclose the cost of the solar plant, it is highly unlikely that it pencils out in that particular location, particularly when natural gas is currently trading at a historical low around $2 per mcf in the U.S. Even so, the solar plant probably offsets around half a million dollars worth of gas per year, and more importantly, about 12,000 metric tons of carbon dioxide.

The real value of the Coalinga project is to show that solar can provide the process heat needed to perform EOR in a heavy oil field, and yield valuable information about how to optimize that process. With that knowledge in hand, Chevron will be able to apply its technological know-how to unlock the substantial heavy oil resources that exist around the world, particularly in places where gas is either unavailable or too expensive to be a practical heat source. The same technology may also be useful at Chevron’s Kern River heavy oil field about 100 miles away in Bakersfield, which currently uses gas piped in from Northern California and is currently evaluating PV as a way to power its oil pumps.

Original Article on GetRealList

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Have Renewables Surpassed Nuclear in the U.S?

The latest EIA Monthly Energy Review caused a bit of a stir this week, as a few observers noticed thatUSrenewable energy had exceeded nuclear power. Cleantech bloggers werequick to seize on the 2.44 quads (quadrillion BTU) of renewable supplyin Q1 2011 vs. the 2.13 quads from nuclear generation as a sign thatnuclear power had entered its twilight years.

My own analysis suggests a different conclusion.

The last time renewables beat out nuclear on an annual basis was1997. There have been a few other recent periods in which renewablepower surpassed nuclear generation on a monthly basis—usually by amodest 0.1 quad per month or less—but generally speaking, nuclear hasled renewables since 1990.

As always, it’s crucial to understand the definitions. EIA defines“renewables” to include hydroelectric power, biomass energy (includingbiofuel), geothermal energy, solar/PV (both thermal and electric), andwind energy. Hydro and biomass make up the vast majority of thecategory.

The EIA annual data shows that since 2001, renewables have steadily closed the gap on nuclear, which remained basically flat:

https://i0.wp.com/solarfeeds.com/ad3/energy-production-us-2010.png?ssl=1

However, hydropower has been in a long, slow decline since 1997.Subtracting hydro, we see that ex-hydro renewables have contributed more than their share to the “renewables” category, posting an impressive90% growth since 2001. Surely, then, we are off to the races withrenewables?

Not quite.

Zooming in on the last two quarters, we see that in fact renewablesonly significantly exceeded nuclear in the month of March 2011, with again of 0.12 quads.

US Monthly Primary Energy Production by Source, Q4 2010 - Q1 2011

Further, nearly all of the gains in “renewables” owed to hydro.Ex-hydro renewables grew only 10.5% from September 2010 to March 2011,while hydro gained 85.5% and nuclear fell 5.3%.

In the ex-hydro category, wind accounted for 69.2% of the increasesince Q3 2010, and biomass made up 27.3%. Solar production was slightlydown (typical for winter) and geothermal posted a very modest 0.0017quad gain.

Seeing as how we haven’t suddenly built a new set of hydroelectricdams (indeed, we’re generally in the process of dismantling them) in the last six months, one must assume that essentially all of the gains that “renewables” have posted against nuclear are not due to a surge ofsolar, wind and geothermal generation, but merely a wet winter.

Sorry to rain on the parade.

In absolute terms, renewables just edged out natural gas, growing by0.188 quads vs. 0.121 quads in the last two quarters, and grew less than all fossil fuels, which increased by 0.248 quads.

Solar contributed 0.14% of the 6.68 quads of energy we consumed inMarch, while geothermal provided 0.28%, wind 1.53%, hydro 4.59%, biomass 5.52%, and nuclear 10.28%. Fossil fuels still make up 78% of ourprimary energy supply.

So it’s not quite time to bust out the champagne yet. If we’re goingto make up for the decline of fossil fuels—and likely nuclear and hydroas well—we’re going to have to build ex-hydro renewable capacity a whole lot faster than we are. (For calculations on that, see “Seven Paths to Our Energy Future.”) Further, there are many reasons to believe that biomass (meaningprimarily corn ethanol) will likely be a difficult source to expandmuch, so the rest of the renewables will really have to shoulder thebulk of the job.

Unfortunately, the GOP’s romance with nuclear power, its torrid loveaffair with the fossil fuel industry, and its scorn for renewables leave me with little hope that we’ll be pointing our federal policies in theright direction any time soon…at least, not in this Congress.

–Chris

Original Article on GetRealList

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Storage: A $200 Billion Cleantech Market in the Making

On the first day of this year, I wrote: “The intermittency problem of wind and solar will be largely solved this decade, as new storage solutions come tomarket.”

Yet the pace of progress in storage during just the first quarter has surprised even me. Readers of this space are well familiar with storage technologieslike pumped water, vehicle-to-grid, concentrating solar thermal, supercapacitors,hydrogen fuel cells, and flywheels. This week, I’ll take a look at a few unusual, utility-scaleapplications – Starting with The World’s Biggest Battery.

Fairbanks, Alaska, has taken battery storage to a whole new level.

An array of 13,760 NiCad batteries–“the world’s biggest battery”–wasdeployed in 2003 to provide emergency power in a place so frigid thatwater pipes can freeze in a few hours.

If the data I found is correct, the 1500 ton, 3680 amp-hour, 5000volt system can provide roughly 18,400 kilowatt-hours (kWh) of power.The array could discharge the power over a range from 27 megawatts ofpower for 24 minutes, to 46 megawatts for 5 minutes. That’s just enoughto keep the grid in Fairbanks humming when there are problems wheelingpower over from the generators in Anchorage.

At a cost of $30 million (in 2003), that works out to $1,630 per kWh. That seems pricey indeed when compared to the 15 cents/kWh regular grid power price in Alaska, but cost per kWh is the wrong metric to use. The real measure of its worth is in preventing damage to the health ofcustomers, infrastructure, and economic activity. By that measure, the$30 million seems like a bargain. The system provided 529 minutes ofbackup during outages for more than a quarter of a million customers inthe first year of operation alone.

Pumped Heat Storage

A newer and far cheaper solution is pumped heat storage. A startupcompany in the UK called Isentropic Energy has developed a modular system to store energy as heat, and claims it can do it for only $55/kWh.

The system uses two large containers of gravel, seven meters high and eight meters wide, with a reversible heat pump between them. Onecontainer is cold (-160° C) and the other is hot (500° C). Air pumpedfrom one vessel to another lets it operate reversibly, to generate orstore power. The claimed efficiency of the system is good, at 72-80%.

Designed for small utility scale applications, the first Isentropicsystems will deliver 16 MWh of power, making them slightly smaller, butvastly cheaper, than the battery array in Fairbanks.

Ice Storage

A new heat pump solution announced this year uses ice as a storage medium.

Colorado-based startup Ice Energy is offering a system that freezes450 gallons of water in large boxes placed next to air conditioners incommercial buildings. Freezing the water at night when grid power prices are low, then circulating air over the ice in the middle of the day,will let customers in warm climates shut down their air conditionerswhen grid power prices are highest.

The company claims its technology can slash fuel consumption by 30%by reducing the need for utilities to run expensive natural gas-firedplants to meet peak loads. Air conditioning accounts for as much as half the peak power demand in California.

In February, the company signed a $100 million deal for 6,000 oftheir “Ice Bear” units with the Southern California Public PowerAuthority for use at 1,500 locations in their Los Angeles service area.Each unit can reportedly shift 32 kWh per day of power demand fromdaytime to nighttime, and operates at about 85% efficiency.

I wasn’t able to track down enough data to calculate the cost per kWh of operation, but for the purpose of rough comparison we can hazard aguess. If each unit stores 32 kWh of power 200 days a year in LosAngeles, that’s 6,400 kWh/year of power storage per unit. At a cost of$16,667 per unit, that’s $3.47 per kWh. Although that leaves out thecost of using grid power to freeze the ice, and amortizes the cost overonly one year, it does suggest that Ice Energy’s system will be a verylow-cost form of energy storage indeed. Ice Energy CEO Frank Ramirezclaimed, “I think you can draw the conclusion that nothing will ever becheaper as a storage medium.”

Other players in the space are New Jersey-based CALMAC Manufacturing, which has been around since 1947, and Seattle-based startup OptimumEnergy, which makes software for chiller systems. As yet, I have notfound any public companies in the sector.

Using ice as a storage medium isn’t exactly new. Ice-based airconditioners have been used since the 1920s. In fact, air conditionersare rated in tons to denote the weight of ice they can produce in a day.

Distribution Instead of Storage

A different approach I mentioned in February is the $42 billion HVDC“supergrid” that nine European countries plan to build around the NorthSea. When completed, the connections would enable renewable power to beshipped around Europe at will, whether it’s being generated by offshorewind in Denmark, wave power in Scotland, solar power in North Africa, or hydropower in Norway.

Additionally, Norway’s hydropower facilities–equivalent to about 30large coal-fired power plants–could effectively function as powerstorage for the European supergrid. Excess production from any of theconnected generators could be used to pump water up to Norway’sreservoirs, then generate power at a later time by running thehydropower plants.

Compressed Air Storage

Compressed air storage is another older technology that is beingapplied in some new ways.

For example, startup SolarCAT, Inc. is working on its firstapplication in Arizona, which will use off-peak grid power to compressair in large underground salt caverns and other geological formations.The compressed air alone functions as a storage medium, but SolarCATintends to take the idea to the next level.

The compressed air can be heated to high temperatures with aconcentrated solar power (CSP) plant or another type of heater (such as a natural gas furnace), then used to power small, efficient turbines.

At this time, data on the cost of operation for SolarCAT’s system isnot available.

Compressed air has also been under consideration in various parts ofthe world as a storage medium for wind-generated electricity.

Ammonia Storage

A handful of companies are working on another new application of anolder storage medium: ammonia. Ammonia has been synthesized from natural gas and electrolysis for nearly a century, but it is mostly used tomake fertilizer.

The new idea is to use it as a storage medium for energy generated by sources like offshore wind turbines that are too far away from the grid for transmission lines to be economical.

For example, offshore wind platforms could send their power to anadjacent platform performing solid state ammonia synthesis. From thereit can be barged to land, where it can be used directly as a fuel, orpumped into a pipeline system. Ammonia is, therefore, a highly versatile medium, in that it can be used for generation, usage, storage, andtransmission.

Matthew Simmons, the longtime oil and gas industry investment bankerand peak oil expert, is a big proponent of the technology and wants tosee it used to enable distant offshore wind production off the coast ofMaine.

Ammonia has several advantages as a storage medium:

  • It can be stored for a long time, like propane, without leakage or spoilage.

  • It can be shipped long distances over water in relativelylow-tech barges. At distances over 1000 km, the cost of shippingammonia is about half that of shipping liquid hydrogen, and atdistances of 400 km, it’s competitive with DC transmission lines.

  • It’s highly scalable, and can be made in massive quantities(millions of tons per year).

  • An extensive delivery system for it already exists.

  • Its energy density is pretty good: about 13 kWh/gallon, ascompared to 9 kWh/gallon for liquid hydrogen.

The cost is attractive as well. Solid state ammonia synthesis fromelectricity is cost competitive with gasoline at about 4-6 cents/kWh.

Hidden Advantages

As with Fairbanks’ giant battery, the advantages of these newutility-scale storage systems extend far beyond mere cost per kWhmetrics.

They have real potential to reduce utilities’ reliance onfossil-fueled generation, as well as to enable significant growth ofrenewables. In effect, they can help sources like solar and wind becometrue baseload capacity generators. As they help shift loads from fossilfuels to renewables, they will also reduce CO2 and other emissions.

But arguably, the best benefits are intangible: greater energyself-sufficiency, better public health, resiliency, and extendedeconomic benefits–such as keeping revenue local instead of sending it to the Middle East, and maintaining grid stability. The extended economicbenefit of transmission support alone has been estimated at a whopping$197,486 per kWh.

New studies show that the energy storage market will double from $21billion in 2010 to $44 billion by 2015. As it develops, the cost per kWh will continue to fall.

Even so, it’s still an industry in its infancy, and could become a$200 billion market in time. California Attorney General andgubernatorial hopeful Jerry Brown recently proposed a bill that wouldrequire storage equivalent to 2.25% of peak power demand in the state by 2014.

Until next time,

Chris

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Political Momentum and Public Dialogue Shifting from Brown to Green

Every once in a while, the tone of the energy market shifts in a waythat seems subtle at the time, but is a major turning point inhindsight. I believe one is happening now.

January 2007was such a moment, a time of palpable excitement around renewableenergy. Solar, wind, and other renewable plays exploded that year, andFirst Solar (NASDAQ: FSLR) gained 866%. July 2007offered another, when the IEA had its "come-to-Jesus moment." Thedepletion of mature oil fields was finally out of the bag and in plainview, and it worked a sea-change on the debate about the future of oil.Fairy tales of endless growth gave way to a more earnest discussionabout whether unconventional oil could replace conventional oil, whichhad flatlined since the end of 2004.

I marked Memorial Day 2008as the moment when peak oil emerged from obscurity in the media, andthe debate shifted from denial to serious inquiry. My intensive studyof the subject, Profit from the Peak, had just been published and numerous media appearances followed where I explained what peak oil was about.

Now, anyone who is paying attention knows what it means (or at leastthink they know what it means), and the topic is casually included infinancial and news discussions.

But those were mere eddies compared to the wave I can feel buildingnow. It’s as if all the political momentum — indeed the entire publicdialogue about energy — has suddenly changed from Brown to Green.

In the wake of the failed Copenhagen talks, and with the potentiallyimminent death of cap-and-trade legislation, the world seems to haverealized what I’ve been saying all along: It’s better to incentivize than penalize. Focus on generating renewable energy first, and then worry about the emissions that remain.

Automobiles

Peakoil awareness has clearly motivated the auto industry to shiftaggressively into electric propulsion. Toyota U.S.A. President and COOJim Lentz said in November, "Our model on future energy is that we willprobably see peak oil some time around the end of the next decade, sowhether it’s 2017 or 2020, it’s gonna be some time in thatneighborhood."

GM Vice Chairman Bob Lutz was even blunter in his keynote at the LAAuto Show in December: "Going forward, the automobile industry simplycan no longer rely on oil to supply 98 percent of the world’sautomotive energy requirements."

Their response has been dramatic. Toyota’s Prius and GM’s Volt aretheir new flagship products. BMW, to my great relief, has abandoned itshydrogen car program and is going full-throttle into electric cars.Nissan and Mitsubishi are tooled for mass production of theirelectrics. Better Place, the recharging infrastructure and battery swapping play, has raised $700 million and it’s not even in operation yet.

Rail

Rail is moving back onto the U.S. national agenda, with $8 billion in new grants for high speed railannounced this week as part of its $13 billion share of the federalstimulus package. Florida is expected to capture $2.5 billion of thatfor a high speed link from Orlando to Tampa. A $171 million Departmentof Transportation loan announced this week will green-light therebuilding of San Francisco’s Transbay Terminal as a high-speed raildepot while the project’s $400 million federal stimulus application isreviewed.

To be sure, $8 billion is a paltry beginning-perhaps 2% of thefederal commitment that will be needed to really rail-ify America. TheSan Francisco-Los Angeles high speed line alone will cost on the orderof $40 billion. The full cost of installing high speed rail andintra-city light rail across America will be somewhere in the lowtrillions, it will probably take us decades, and most of the interstatelinks will have to be federally funded.

The stimulus money for high speed rail isn’t part of somecomprehensive national transportation strategy to counter the peak oilthreat, because no such strategy exists. But it could be the bestinvestment in the hastily conceived, shovel-ready jobs stimuluspackage, because it will give us in a critically important long-termasset.

For perspective on that $13 billion, consider that Beijing isalready executing its plan to build a $556 billion high speed railsystem linking nearly all its provincial cities in the next five years.The Shanghai-Beijing link alone is expected to create half a millionjobs. And unlike the $779 billion in the U.S. stimulus package thatwill not go to rail projects, Beijing’s investment will result in apermanent and absolutely vital asset.

Were the U.S. doing anything of the kind, I might never worry my weary head again about peak oil.

Wind and Grid

Astudy released this week by the U.S. Department of Energy’s NationalRenewable Energy Laboratory (NREL) showed that as much as 30% of theeastern seaboard and the Midwest could be powered by wind, and 20%could be done by 2024 — if the transmission lines existed.

NREL estimates the grid will need 20,000 new miles of backbone at acost of around $90 billion. Building it would create around 280,000 newjobs and give us a critical long-term asset. It’s a perfect example ofappropriate federal investment in national infrastructure, yet it facesNIMBY opposition everywhere. A heavier hand may be required to push itthrough. It’s good to see transmission reform legislation making itsway through Congress now, but I pray it doesn’t blow up into a states’rights hubbub.

Compare that to the $42 billion HVDC "super grid" that nine Europeancountries plan to build around the North Sea that will enable all ofthem to use renewable power, whether it’s being generated by offshorewind in Denmark, wave power in Scotland, solar power in North Africa,or hydropower in Norway. It will form the heart of a much larger, $400billion pan-European super grid; a critical link in achieving the EU’s20% by 2020 target.

Or compare again to China, with its $217 billion investment in electric grid infrastructure from 2006 to 2010 alone.

The good news is that while building the electric infrastructure ofthe future isn’t cheap, it isn’t expensive either. The NREL studyconcluded that the avoided future cost of coal-fired power would morethan offset the cost of the new grid infrastructure. We must assumethat’s before even factoring in any externalized costs, or any peak-oiladjusted estimates of the future costs.

However we’ll have to move faster. NREL’s 20% scenario is based on225,000 megawatts (MW) of new wind capacity, or 16,000 MW a yearthrough 2024. The U.S. installed only 10,000 MW of new capacity in 2009according to the AWEA, so we’d have to post a 60% growth rate fromcurrent levels to deploy that much.

Meanwhile, ten times that — more than 100,000 MW of offshore wind capacity alone — is currently under development in Europe.

Solar

Solar power is making progress on several different fronts.

The snowball of Chinese solar manufacturers opening plants in the U.S. rolls on, with the announcement that Suntech (NYSE: STP) is building a new plant in Arizona.

Distributed local generation is making great strides. In California,the Southern California Edison utility has launched a competitivebidding process for 225 MW of rooftop solar capacity, with a projectsize of 1-2 MW. Another 250 MW will be purchased from independent solardevelopers. Utility PG&E is expected to launch a similar 500 MWoffering soon. Even better, a proposed feed-in tariff for 1 to 10MW-sized renewable projects is in the works. The progress forbellwether California in distributed generation bodes well for the restof the country, suggesting that transmission grid support forutility-scale solar may become less of a hurdle for the industry as awhole.

Incentive programs elsewhere in the country continue to enjoyenthusiastic receptions where the price is right. A new $4 millionincentive offering for residential and small commercial solar inMassachusetts was fully subscribed in the first four hours this week,reflecting a strong build-up of demand. Generous rooftop solarincentives in states like New Jersey and New York are being exhaustedand replenished yearly.

Materials research in photovoltaics (PV) continues to show promiseas well, in areas like cell backing materials, adhesion methods, newcell formulations and production methods, and longevity testing andhardening. PV looks well on its way to cutting costs on a Moore’s Lawcurve.

Building efficiency is also enjoying an explosion of subsidies and new plays. Watch this space for developments in that sector.

Brown Going Down

Meanwhile, things aren’t going too well for the fossil fuel sector, which is under attack on every side.

Oil remains precariously balanced on the narrow ledgeof prices, as does natural gas to a lesser extent. The supply of bothremains sufficient to keep the specter of shortage marginal pricing atbay. Inventories are reasonably high, and prices aren’t high enough toinduce new drilling for high-risk or high-cost prospects. Even so, theworsening outlook for the refining sector continues to support theprice of gasoline and other finished products.

Costs remain a bit too high for the comfort of marginal producers,as evidenced by an interview with Royal Dutch Shell CEO Peter Voser inLondon’s Financial Times this week. The company was no longercounting on growth from tar sands production, he said, and its plan toexpand operations in Albert by roughly half a million barrels per dayremained shelved. Conventional oil and gas drilling is their newstrategic direction, simply because the costs are so much lower thanfor tar sands development. (This, of course, is no surprise.)

The commodities markets in general seem to be showing signs ofpost-traumatic stress disorder, or at the very least recency bias. Thetrade is overwrought on fairly inconsequential signals, and there seemsto be a roughly equal balance between those expecting higher and lowerprices. I’m beginning to suspect that this will be a lowsignal-to-noise ratio year for the commodity sector, with tradersslugging it out in a narrow price range and fewer solid tradeableopportunities than the last several years offered.

Concerns over public water supply contamination from hydraulicfracking shale gas operations aren’t going away, and the EPA has set upa consumer complaint hotline. We simply don’t have enough informationyet to know whether the issue is overblown or a serious enough problemto kill the practice. However, public sentiment isn’t likely to yieldto science on this issue any time soon and could dampen the enthusiasmfor new shale gas development.

The effort to stop mountaintop removal in coal operations isn’tgoing away either, and emissions control is still very much in play atthe EPA.

The news is nearly all bad. The fossil fuel industry wakes up everyday to a drumbeat of reports on oil spills, tanker trafficinterruptions, environmental lawsuits, and so on, but their main salespitch to the public is a weak one about jobs. Their message continuesto fall hard on the consumer’s ear, which is much more attuned now tothe questions on long-term supply, security, and sustainability.

The Browns are looking more the lumbering, hidebound beast everyday; meanwhile, a thousand alternatives sprout around them. Theytrumpet their investments in clean energy, but the fact remains that itstill represents a small fraction of their investment in new BTUsoverall.

I don’t know what to call it: the Great Eye, the hive mind, theideasphere… but it has turned and its attention is fixed onrenewables. The Browns will find it hard to get any love this year, butthe Greens will be the belle of the ball.

Until next time,

Chris

Note: If you want to see where the Greens gather to do business, you should join my colleagues and Green Chip Internationaleditors Sam Hopkins and Nick Hodge at the ReTech 2010 conference inWashington, D.C. taking place February 3-5. You can choose from 6different informational tracks that will get you up to speed on all thechanges taking the U.S. and global economy from Brown to Green. Check the conference website for more information.

The Day the World Turned from Brown to Green originally appeared in Green Chip Stocks.Green Chip Review is a free 2x-per-week newsletter, is the firstadvisory to focus exclusively on investments in alternative andrenewable energies.

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Senators, Congressman Push to Keep Solar Jobs in U.S.

Following closely on the heels of Evergreen’s decision to outsource to China,a quartet of legislators representing three different states and bothsides of the political spectrum introduced earlier this week a bill intended to bolster solar manufacturing jobs in the United States. A bipartisan piece of legislation supported by the Solar Energy Industries Association, the Solar Manufacturing Jobs Creation Act aims to provide a tax credit, which is intended to encourage more American solar companies to produce solar equipment stateside.

U.S. Senators Debbie Stabenow (D-MI), Robert Menendez (D-NJ) andMichael Bennet (D-CO), as well as U.S. Congressman Dave Camp (R-MI),publicized the legislation on Tuesday, though Congressman Camp will notbe introducing companion legislation to the House until later inNovember. With huge, recession-fighting hopes pinned to the widespreadgrowth, adoption and utilization of renewable energy—a report from last weekestimated that clean energy could produce up to 850,000 manufacturingjobs in the U.S.—the bill is the most recent push from legislators tospur solar production at home. Over the past decade, the U.S. has gonefrom producing over 40 percent of the world’s solar photovoltaic cellsto producing a paltry 5 percent, according to SEIA—a trend that theSolar Manufacturing Jobs Creation Act hopes to directly challenge,particularly since SEIA declares it capable of creating 315,000 U.S.

However, keeping solar businesses away from cheaper (andconsequently more cost-effective) pastures is easier said than done,especially when the bottom line comes into view.

“There is a lot of capacity going in the ground in Asia.But I think as companies do their own homework and do cost comparisonit is compelling that the costs in China or low — low capital costs,low labor costs, low overhead costs,” said Evergreen Solar’s chiefexecutive Richard Feldt on a conference call with analysts.

Our ears: we’ll keep ‘em close to the ground.

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Can Renewables Replace Fossil Fuels?

With peak oil already upon us, sustaining oil supply is akin to running up a down escalator.

Or, as Nate Hagens put it at the ASPO peak oil conference earlierthis month, “Technology is in a race with depletion and is losing (sofar).”

The urgent question then is: Can renewables fill the gap of oil depletion?

Mind the Gap

The most recent global data summarized by fuel available from theEIA is, unfortunately, for 2006 and only preliminary (I know they’retrying to improve their reporting but seriously, they need to do betterthan that), but we’ll use what we’ve got.

In 2006, the total amount of energy the world consumed was 469 quadrillion BTUs, or quads.*  Charted in percentage terms, the global fuel mix looks like this:


If the latest informationI gathered at the ASPO peak oil conference is correct–and I think itis, or at least is as close to correct as anybody is going to come atthis point–then we should expect oil to begin declining at about 5% peryear starting around 2012 – 2014.

Of the 157 quads provided by oil, at a 5% decline rate we’ll lose7.85 quads per year, or 1.7% of the world’s primary energy supply.

The “Geothermal and Other” category, supplying 1.6% of the world’sprimary energy, represents all the renewable sources combined:geothermal, solar, wind, biomass, and so on.

Since 1.7% is very close to 1.6%, we can put the challenge ofsubstituting renewables for oil this way: Starting around 2012 – 2014,the world will need to build the equivalent of all the world’s existing renewable energy capacity every year just to replace the lost BTUs from oil.

Fortunately renewable energy of all kinds is enjoying a massivegrowth spurt, attracting trillions of dollars in investment capital. Onaverage, the sector seems to be growing at about 30% per year, which isphenomenal…but it’s not 100%.

In terms of BTU substitution, then, it seems unlikely that renewables can grow at the necessary rate.

Not Just BTUs

However, the challenge is more complex than mere BTU substitution.

Replacing the infrastructure, particularly transportation, that’sbased on oil with one based on renewably generated electricity will initself require energy–and lots of it. As Vail pointed out, between80-90% of the energy inputs for renewables must be made up front,before they start to pay any energy out.

Even if renewables were able to make up all of the lost energy fromoil, still more would be needed to afford any economic growth.

In all it seems a fair bet that it will take at least a decade forrenewables to merely catch up with the annual toll of oil depletion.The gap will likely manifest as fuel shortages in the OECD when thedeveloping world outbids it for oil, and a long economic recession ordepression…unless efficiency comes to the rescue.

To that point, Jeff Vail, an associate with Davis Graham &Stubbs LLP, said at the conference that population increase alone couldoffset as much as 30% of the improvement in conservation andefficiency. He noted that despite the recession, car sales are up 29%in India as people buy their very first cars.

Falling Net Energy

Another driver of the down escalator is that the net energy (EROI,or energy returned on energy invested) of nearly all fossil fuelproduction is falling.

Dr. Cutler Cleveland at Boston University has observed that the netenergy of oil and gas extraction in the U.S. has decreased from 100:1in the 1930’s, to 30:1 in the 1970’s, to roughly 11:1 as of 2000.

Simply put: As the quality of the remaining fossil fuels declines,and they become more difficult to extract, it takes more energy tocontinue producing energy.

This begs the question: What EROI must the replacements have to compensate for oil depletion?

Vail presented several models attempting to answer it. In hisoptimistic scenario, assuming a 5% rate of net energy decline and anEROI of 20 for the renewables, the “renewables gap” was filled in year3. In his pessimistic scenario, assuming a 10% rate of net energydecline and an EROI of 4 for the renewables, the gap wasn’t filleduntil year 7.

For a sense of how reasonable those assumptions are, we must turn tothe academic literature, since no business or government agency has yetshown any particular interest in EROI studies (much to my dismay).

Studies assembled by Dr. Charles Hall (source) put the average EROI of wind at 18 (Kubiszewski, Cleveland, and Endres,2009); solar at 6.8 (Battisti and Corrado, 2005), and nuclear at 5 to15 (Lenzen, 2008; Hall, 2008). No data is available for geothermal ormarine energy. All the biofuels are under 2, making them non-solutionsif the minimum EROI for a society is indeed 3 (Hall, Balogh and Murphy, 2009).

[A quick aside: The huge range of the nuclear estimate is oneindication of how difficult it is to accurately asses the costs ofnuclear, which is part of the reason I still haven’t written thearticle I know many of you are hoping to see some day. I’m working onit, and still looking for current research with appropriately inclusiveboundaries and updated numbers. Nearly everyone is still using costestimates that predate the commodities bull run, not even realizing howit distorts their analysis. So far I have found nothing to change myoutlook that the nuclear share of global supply will stay roughly thesame for several decades.]

I am not aware of any studies on the EROI of biomass not made intoliquid fuels–for example, methane digesters using waste, landfill gas,and so on–but its sources and uses are so varied that if the numberswere available, they probably wouldn’t be very useful. While suchapplications are generally good, they’re not very scalable—they workwere they work, and don’t where they don’t.

Theorem of Renewables Substitution

Where EROI analysis leaves us is unclear; it needs more research anda great deal more data. There are some useful clues in it though.

First, we know that biofuels–at least the ones we have today–won’thelp much, other than providing an alternate source of liquid fuelswhile we’re making the transition to electric.

Second, we know that solar tends toward Vail’s pessimistic scenario, and wind fits the bill for his optimistic scenario.

But here’s the rub: The lowest EROI source, biofuels, is the easiestto do, with the vigorous support of a huge lobby and Energy SecretaryChu himself. Rooftop solar is the next-easiest to do but making up thelost BTUs takes longer due to its moderate EROI. And the source withthe highest EROI, wind, is the hardest. (I explained why solar iseasier here.)

Therefore I propose the following, slightly snarky Theorem of Renewables Substitution: The easier it is to produce a source of renewable energy, the less it helps.

The Winner: Efficiency

All of these factors–the declining supply, the pressures of thedeveloping world on demand, the renewables gap, and the theorem ofrenewables substitution–underscore how crucial efficiency is toaddressing the energy crisis.

It also underscores how profitable the entire energy sector will be for many, many years to come.

With supply maxed out, and demand at the mercy of a developing world, the name of the game now is doing more with less. More efficient vehicles and appliances, building insulation, co-generation…and all the other ways to eliminate waste.

I know it doesn’t have the sex appeal of, oh, say space based solar power, but it’s where the real gains will be made.

Until next time,

Chris

[This is Part 3 of a series of my reports from the 2009 ASPO Peak Oil Conference. See also Part 1 and Part 2.]

* The thermal values (heatcontent) of various fossil fuels are typically measured in BTUs. OneBTU is roughly equivalent to the heat produced by burning a woodenkitchen match. One cubic foot of dry natural gas contains approximately1,031 BTUs. For those who prefer their data measured in joules, 1 quad= 1.055 exajoules (EJ, or 1018 joules). Renewable energy,however, is typically measured in kilowatt-hours (kWh), or the amountof energy delivered by a one-kilowatt source over the course of anhour. 1 kWh = 3412 BTUs.

By Chris Nelder
Friday, October 30th, 2009

Image: World Primary Fuel Mix, 2008. Chart by Chris Nelder. Data source: EIA Annual Energy Review 2008 (released June 2009)

Originally Written for last week’s Energy and Capital, I explored some recent research in search of an answer to the question: Can renewables replace fossil fuels?

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Why The Energy Revolution Needs China

If we want an example of good long-term resource planning, we might want to look to China. While the first world spent the last decade taking on debt andlevering up dubious assets like dot-com startups and subprimemortgages, then suffering the inevitable fallout, China kept its debtrelatively modest and its currency depressed while it accumulated avast war chest of foreign-exchange reserves–some $2.1 trillion worth asof the end of June, according to the Wall Street Journal.

Now, with a significant risk of the US dollar and other currenciesnot backed by hard resources imploding after the greatest spree ofworldwide money-printing in history, China is prepared (if not anxious)to exchange its potentially worthless forex holdings for hard assetslike oil, metals, and fertilizer.

chinese-dragon-red_sm

Theirtiming was perfect. The prices of all key commodities fell sharply inthe financial crisis of 2008, leaving undercapitalized developers andthose with more marginal resources on the ropes and gasping for fundingto continue operations.

China Investment Corp. (CIC), the country’s sovereign-wealth fund,had a $300 billion portfolio at the end of 2008, which is mostly heldin Chinese banks. The fund wisely decided to sit on the sidelinesduring the carnage of last year, spending only $4.8 billion on globalmarkets.

But 2009 has been a different story, as China swooped in to buy upnatural resources at distressed prices. Chairman Lou Jiwei told the Journal last weekend that CIC invested as much in one month this year as it did in all of 2008.

Since December, China has spent $17 billion on foreign energy assets alone.

The point was driven home this week with the announcement thatPetroChina had agreed to make its largest oil sand investment to date,a $1.7 billion, 60% stake in the Athabasca Oil Sands Corp.’s MacKayRiver and Dover projects. China already owns part of several otherCanadian oil and gas developers.

Other small oil sands developers, including UTS Energy Corp. (TSE: UTS), Connacher Oil and Gas Ltd. (TSE: CLL), Oilsands Quest Inc. (AMEX: BQI) and Opti Canada Inc. (TSE: OPC) rose on the news, in speculation that they could be the Red Dragon’s next targets.

At the Reuters China Investment Summit this week, vice-generalmanager of Beijing Sinodrill Yang Junmin said he expected foreignprojects to rise from 20% of the company’s income to 50% within twoyears, and that the company is in talks with miners in Australia,Indonesia and the Philippines for long-term joint venture agreements.

Oil is but one of China’s resource ambitions, however.

Metals

China launched a spate of both friendly and hostile overtures formining properties this year, particularly in Australia and Canada.

Australian mining giant Rio Tinto (NYSE: RTP)made headlines when it rebuffed a $19.5 billion offer to buy stakes inits largest iron ore mines by Aluminum Corp. Of China Ltd. (Chinalco)in June, but the latter is now making another run at Rio Tinto for itsbauxite and alumina resources.

Zhang Yansheng, director of China’s Institute of Foreign Trade ofthe National Development and Reform Commission, was sanguine after thefirst deal fell apart, telling news agency Xinhua that otheropportunities await. “With demand and money in hand, why do we worryabout lack of iron ore resources?” he sniffed.

This spring, mining companies owned by the Chinese government boughtlarge interests in Australian mines operated by Lynas Corp. and ArafuraResources, both of which lost their financing in last year’s crisis.

Copper has been another high-priority target, with China’s importsof unwrought copper and products up 118% year-over-year. BNP ParibasFortis estimates the nation now holds more than 800,000 tons of themetal off-market, although imports appear to have cooled off withprices on the London Metals Exchange having risen to a 10-month high. Scotiabank economist Patricia Mohr estimates that Chinese consumption of refined copper will be up 20% on the year.

Imports of nickel, zinc, and other base metals have surged this yearas well, as China seized the opportunity to stockpile them on the cheap.

What really got the world’s attention this week, however, was a report by the New York Timesthat China had virtually cornered the world market for rare earthelements. Half the world’s production of rare earths comes from asingle mine in Inner Mongolia, according to the Times. Chinaproduces 93% of the world’s output of rare earth elements like terbium,dysprosium and neodymium, which are used in key parts–like lasers,magnets and other special materials–of everything from nuclear reactorsto missiles to wind turbines and hybrid car motors.

China has cut back on exports of rare earths over the last threeyears, preferring to husband its resources for the long term. In sodoing, it also secures its place as a top manufacturer of crucialcomponents for the green energy revolution.

Solar PV

On a related note, China has come under considerable criticism for“dumping” solar photovoltaic (PV) panels and components on the worldmarket, cutting panel prices nearly in half over the last year. In aninterview with the Times last week, the chief executive of Chinese solar manufacturer Suntech Power (NYSE: STP) admitted his company was selling solar panels on the American market below its manufacturing and shipping cost.*Suntech, which makes nearly all of its product for an overseas market,is expected to become the world’s number-two supplier of PV cells thisyear, second only to First Solar (NYSE: FSLR).

PV competitors in Germany and the US cried foul over the allegationsand launched investigations to see if there are any prosecutablecharges, while analysts and lawmakers fretted about whether China wouldovertake the West in PV manufacturing.

The fuss seems a bit misbegotten to me. Of course China willovertake us in PV–all the advantage is on their side–and that may be agood thing.

The US is moving at a snail’s pace in supporting renewable energy;our manufacturers are undercapitalized; our political leadership is ahydra without a long-term energy strategy; and we make our renewableenergy businesses live and die on their own instead of subsidizing themdirectly–the minimal federal stimulus spending on research anddevelopment notwithstanding.

By comparison, China turns out more engineers every day; theirmanufacturing and labor costs are super cheap; they capitalize ontechnological advancements very quickly; and the government gives itssolar manufacturers generous direct support.

Besides, China is not just exporting finished PV product to theWest. They’re also exporting solar components and assembling modules inthe US to minimize shipping costs. For example Centron Solar, whichrepresents a consortium of 30 Chinese solar companies, has establisheda sales hub in Eugene, Oregon and plans to set up assembly shops inmultiple US cities. Their strategy offers a triple benefit, by creatingnew jobs, enabling us to deploy more PV at a lower cost, and reducingworldwide petroleum consumption.

Crisis and Opportunity

Resource-rich nations may resent and fear China’s resourceacquisition spree, but would be wise to take a broader view of thesituation.

After all, oil is but the first of the world’s critical resources topeak and go into decline. A century of cheap and easy resourceextraction is behind us, and all fossil fuels and most industrialminerals will reach an intolerable point of diminishing returns overthe next century.

By adopting a protectionist stance, commodity producers can retainownership of their resources and keep more of the revenue at home. Butas strapped for investment capital as they are, and with commodityprices still too depressed to paint a picture of profitability in theshort-to-medium term, the strategy could stifle new development andultimately shortchange their own futures.

Opening their arms to China might be the rest of the world’s besthope for surviving a volatile future of commodity prices even while thecosts of resource extraction continue to rise.

Simply put, taking a decades-long approach to strategic resourceplanning and investment is much easier for a centralized, authoritariangovernment than it is for a democracy that turns over its leadershipand changes tack every few years. China has displayed both the will andthe ability to control its resource future for the long term whileWestern free enterprise concerns itself with beefing up next quarter’sbalance sheet.

I’m not suggesting that investors should pile into Chinese resourceplays at this point. The best part of the shopping spree is probablydone, and there are fresh indications that Chinese banks are nowlooking to rein in lending and spending. Should resource prices gainmaterially from here, China could even decide to unload some of itsstockpile at a nice profit.

But we should forget about “energy independence.” For the world toaccomplish a speedy transition to a renewably-powered electricinfrastructure as we face the end of oil, we may need China much moredesperately than anyone now imagines.

Until next time,

chris nelder

Chris Nelder

Originally Published in  Energy and Capital

*Steven P. Chadima, Vice President, External Affairs for Suntech America, writes with this correction:

I just noticed (and enjoyed) your post today on China’s“energy revolution.” However, you have, I am sure unintentionally,perpetuated an inaccuracy that first appeared in the New York Timeslast week. We worked with the Times to correct the errors, but as youundoubtedly would guess, while the original story appeared on A1, thefollow-up appeared on B4 and was unfortunately missed by most.

But let me correct the record here: we do not sell modules in the USor in any other market below our marginal costs. You can verify this bylooking at our audited financial statements, which show that ouraverage selling price is 17-20% above our costs (i.e., gross margin).The confusion stemmed from Dr. Shi’s statement that our US operatingmargins were negative due to heavy investment in sales and marketingteams, which will result in greater sales in future years. This is ofcourse true of many companies both foreign and domestic as they attemptto bring new products to new markets.

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Hard Questions and Sustainable Solutions

Human Nature, Not Technology, Is The Challenge

The more I probe the hardest questions about the future of energyand our best shot at sustainability, the more I am convinced that thereal questions are not about technology, but about human nature.

We have all the technology we need to make homes that produce theirown energy. We know how to build high-efficiency rail and sailingships. We know how to grow food organically and sustainably. We havethe science to create economic systems that internalize all effects andoperate in a beneficial manner. We’ve had the quantitative knowledgefor decades that we would eventually go into resource and environmentalovershoot.

We certainly have the technology to build an all-electricinfrastructure entirely powered by renewables. We will crack thestorage problem and all the other technical problems. I have no doubtthat the technology also exists to build an all-nuclear solution, oreven an all-hydrogen solution.

We have the technology to recycle all our water and reclaim all ourwaste. We could even control our population if we had the will.

We also know what real sustainability means. I don’t think I haveever seen it better put than by my friend Paul Hawken in his book, The Ecology of Commerce:

Sustainability is an economic state where the demandsplaced upon the environment by people and commerce can be met withoutreducing the capacity of the environment to provide for futuregenerations. It can also be expressed in the simple terms of aneconomic golden rule for the restorative economy: Leave the worldbetter than you found it, take no more than you need, try not to harmlife or the environment, make amends if you do.

The real problem is we don’t want to act that way. Virtually no business in existence meets that standard.

Technology and knowledge simply aren’t the issue.

We don’t want to think about having to put CO2 back in the groundafter we burn fuels. We don’t want to worry about the waste from ourconsumption. We don’t like to hear about limits to anything we want todo. We don’t want to rearrange our stuff, our lifestyles, so that theyare truly sustainable. And we certainly don’t like anybody telling uswe can’t have more kids.

In fact we don’t even like to think about it, so when the subjectcomes up, we dismiss it with a flip comment like, “So I suppose youwant us all to be living in caves and working by candlelight?”

The upwelling of emotions that this topic inspires—especiallyfear—usually makes a neutral and scientific discussion out of thequestion.

And from fear, most people leap to faith: faith in the perfectwisdom of free markets, faith in technology, faith in human ingenuity.No rational discussion needed.

Nor is this aspect of human nature a news flash. ‘Twas ever so. Atthe suggestion of a smart hedge fund manager buddy, I recently putThucydides’ history of the Peloponnesian War in my reading queue forclues on how humanity actually performs when presented with seriousfiscal and resource challenges.

I know some very smart people who are fully armed with the data onresource depletion and peak oil, and who still choose to believe in acornucopian future where humanity acts wisely, humanely, justly, and inconcert with a view toward long-term planning, solving all of ourproblems without any serious hardship.

This time, they contend, it will be different. After all, aren’t weentering the Age of Aquarius, when humanity finally embraces unity andunderstanding?

Well, forgive me for being skeptical. The degree of cooperation theyenvisage has no precedent whatsoever in human history, and there arethousands of examples to the contrary.

In fact I was a bit shocked today when I looked back on my first opus on sustainability (”Envisioning a Sustainable Future“), published in my online magazine Better World 13years ago, and realized that all of the problems are the same now asthey were then, only worse: population, energy, water, extinction,environmental destruction, flawed economic theory, global warming, andhumanity’s problem with long-term planning.

It gave me pause. A long pause. Are all my efforts, and those of myfellow agitators for sustainability, simply battling human nature? Andif so, what good is it?

Tantalizing Technologies and Hard Questions

At this point, 13 years later, the questions are even less tangible:How will people respond to the coming changes? Can the politicalsupport for truly sustainable solutions be marshaled? Will the economyhold out long enough to accomplish the transformation? And how willdeclining energy supply impede our efforts?

Certainly, in theory, we could replace 220 million light ICE carsand trucks with electric models, and heavy transport trucks with acombination of biofuels, natural gas, and hydraulic storagetechnologies. The technology exists. But will we have the investmentand primary energy supply to build them, if we simply let the marketand politics guide us?

Consider “Cash for Clunkers.” Using data and estimates from the New York Times,I calculate that the program pays off in nine years at $70 oil, and infive years at $120 oil. In terms of effective investment in the future,that’s really not too bad. (The photovoltaic systems I designed andsold in my previous career typically paid off in more like 20 years,before incentives.)

Even so, Cash for Clunkers was reviled for swapping out over aquarter-million cars for more efficient ones at a mere cost of $1billion. What are the chances we’ll have the political support to do220 million vehicles that way? Especially if oil gets more expensiveand we start having shortages and more heavy industry failures when oilgoes into decline a mere two years from now?

Sure, we can run airplanes on “renewable” synthetic diesel fuel madefrom green waste such as yard clippings, and early investors in suchtechnologies will make a bundle. Rentech’s (AMEX: RTK)recent announcement that it had signed a deal to provide as much as 1.5million gallons per year of the stuff to eight major airlines sent thestock soaring over 360% in two weeks.

But 1.5 million gallons per year is nothing, and thanks tothe transport and handling cost of green waste, it doesn’t scale. If itrequires transporting massive amounts of the feedstock withdiesel-powered trucks, it isn’t sustainable either. Need we evendiscuss recycled fryer oil?

Similar problems bedevil the alcohol fuels and biofuels, includingalgae. There are many interesting approaches to both in the lab, butfor a long list of reasons (including water availability and the netenergy of the processes), they don’t scale well. I don’t see any of thebiofuels making more than a 50% gain from their current paltry levelsfor a good many years yet — and then we’ll be having so many otherproblems with energy, water, food, and the economy, that the long-termoutlook gets very murky.

Sure, we can try to turn to Canada’s tar sands and deepwater heavyoil as the good cheap stuff runs out, but a cursory look at their netenergy tells us that doing so is an attempt to play the oil game intoovertime, not an attempt to do something sustainable. Thinkingotherwise is simply denial.

A straightforward analysis of the data suggest that once we takepeak oil, peak gas, and peak coal into account, there may not be enoughtime left to use cheap fossil fuels for the decades it would take toaccomplish a transformation to true sustainability, let alone the humanwill to do it. And the experience of the last year gives me noconfidence at all that the world can smoothly transit this inflection point in economics.

Yet I want to foster inspiration, not desperation. For most people,hope is as essential to survival as food, water, and air. And there is hope— not for business as usual, but for a much better kind of business.Not for endless growth, but for a more sustainable future.

But I am not one for false hope. I have endeavored to bring a doseof realism to this column for three years now, and I will soldier on.The opportunities to create sustainable solutions and profit from themare probably greater now than they have ever been. It’s our task tofind them, promote them, invest in them. . . and beyond that, hope forthe best.

Until next time,

chris

Chris

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Utility Scale Solar Heating Up

Utility scale solar got a big boost this week as Interior Secretary KenSalazar announced a new plan to designate 24 tracts of public landadministered by the Bureau of Land Management (BLM) as study areas fordevelopment of solar power plants.

Theeffort is in support of President Obama’s target to generate 10% ofU.S. electricity from renewable sources by 2010, and 25% 2025. Thenation currently generates more than 1000 megawatts (MW) fromphotovoltaics, and 600 MW from thermal concentrated solar power (CSP)systems.

The BLM plans to spend $22 millionevaluating about 670,000 acres, or more than 1,000 square miles ofland, in Nevada, Arizona, California, Colorado, New Mexico and Utah insearch of sites with at least three square miles of good solarexposure, favorable slopes, access to roads and transmission lines, andminimal environmental impact.

Salazar estimated that the areas couldgenerate nearly 100,000 MW, and announced his intention to have 13commercial scale solar power plants under construction by the end of2010. BLM is already considering environmental reviews for twoNextLight Silver State arrays in Nevada, totaling 407 MW. (Forcomparison, typical coal-fired power plants in the U.S. are 500 to 700MW in size. One megawatt of coal-fired capacity will power 400 to 900homes, depending on their location and demand for air conditioning.)The BLM has already begun the process of developing environmentalimpact statements for three solar projects in California, including twoby Stirling Energy Systems totaling 1,600 MW of capacity, and the 400MW Ivanpah project by BrightSource Energy.

Nelder Chart 1 7-3-09BrightSourceEnergy CSP plant (pictured on the right), which uses an array of small,flat mirrors on heliostats that track the sun and focus its rays on acentral "power tower" where the generator is located.

Applications for 10 MW or larger plantswould be fast-tracked under the new program, which will radicallystreamline the permitting and development process and assumeresponsibility for one of the most burdensome aspects of gettingutility scale solar plants built: environmental reviews.

The BLM has been struggling to process abacklog of pending applications for 470 renewable energy projects,including 158 commercial solar projects totaling some 97,000 MW—enoughto power 29 million homes, and equivalent to 29% of the nation’selectricity demand, according to the agency.

At present, zero permits have beenapproved. Progress has been impeded by concerns over speciesprotection, availability of water (primarily for the cooling cycles ofthe power plants), and a maze of approval processes in multiplegovernment agencies with overlapping jurisdictions.

Projects nearing approval will beexpedited under the plan, and existing applications for projects inapproved areas will be given priority.

"With coordinated environmental studies,good land use-planning and zoning, and priority processing, we canaccelerate responsible solar energy production," Salazar said.

Minimizing Environmental Risks

Environmentalreviews have been especially troublesome, since utility scale solarprojects require large (10-15 square mile) areas to be "walled off."But isolating even a five square mile tract can impact wildlifecorridors and drainage. Many projects have been put on hold overconcerns about endangered and protected species including the Mojaveground squirrel, the desert tortoise, the California kit fox, and theYuma clapper rail.

In March, California Senator DianneFeinstein threatened to propose legislation that would designate morethan 800,000 acres between the Mojave National Preserve and Joshua TreeNational Park as a national monument and off-limits to development,because it contains desert tortoise habitat, wildlife corridors, andendangered cactus. She wrote Salazar, requesting that 12 proposed solarprojects in the area be stopped.

At the Concentrating Solar Thermal Power2009 conference San Francisco, CA last month, I came to understand justhow challenging the environmental aspect was in a presentation byCharles Ricker, the Senior Vice President of Business Development forBrightSource Energy. Oakland, California based BrightSource is one ofthe world’s premier CSP developers, with 2.6 gigawatts (GW) ofcommitments, equivalent to 25% of the world’s solar thermal generatingcapacity.

Ricker related his company’s long andtorturous slog to build the Ivanpah project. After securing a powerpurchase agreement (PPA) for 300 MW with California utility PG&Eand a 100 MW PPA with Southern California Edison, getting well along inthe permitting process with the California Energy Commission (CEC) andBLM, raising capital, securing access to transmission lines, buying aSiemens turbine and a Riley boiler receiver, and negotiating a contractfor construction that was to break ground later this year, thediscovery of 25 desert tortoises in the area held up the whole works.

Avoiding such deal-killers will be a keyfocus of the new BLM process. The study will specifically exclude"sensitive lands, wilderness and other high-conservation-value lands aswell as lands with conflicting uses" such as mining claims, accordingto the Department of Interior press release. "Areas with a knowndensity of cultural sites" and those "of known Tribal concerns" willalso be excluded.

Once a given area is approved fordevelopment, companies applying for projects will be able toincorporate the BLM clearances as part of the environmental impactstudies required by the National Environmental Policy Act.Consequently, it should greatly reduce the cost of doing theenvironment evaluations, as well as the investment risk.

Fat Incentives

Helpingto shoulder the burden of environmental clearing, permitting andapproval is a critically important benefit at a time when raising thenecessary capital continues to be a major hurdle. Banks are still veryreluctant to lend for renewable energy projects. One presenter at theCSP 2009 conference explained that Florida Power & Light had to tap12 banks to round up a lousy $350 million in financing for what wasessentially a no-risk renewable energy utility project!

Another presenter noted that banks willstill not finance storage systems for CSP projects because of theirlack of a commercial track record. This is extremely unfortunate asthermal storage offers the potential for CSP plants to operate 24/7 andcompete head-to-head with coal-fired and nuclear plants, providinground-the-clock "baseload" capacity. Numerous technologies includinghigh pressure concrete, mineral oil, molten salts, and direct steamstorage are now available or under development that could crack thisall-important limitation and pave the way for utility solar to takeover a large part of the nation’s electrical supply load. Withoutstorage, solar plants can’t function when the sun is down.

In an effort to make utility scale solarprojects more attractive to investors, a host of government incentiveshave been launched.

First, the new BLM process will befunded by $41 million dollars given to the agency under the AmericanRecovery and Reinvestment Act of 2009 "to advance the nation’sdevelopment and transmission of renewable energy on public lands."

The federal stimulus package alsooffered a package of incentives designed to further minimize theinvestment risk for commercial solar plants. A cash grant program fromthe Treasury covers 30% of the project cost with no limit, andfunctions like a tax credit. Better yet, Treasury must grant it if a project meets the application requirements.

Congress also appropriated $6 billionfor a program administered by the Department of Energy that willsubsidize the risk premium (10-15% of the total loan) to backstop theinvestment risk for projects that are ready to start construction bySept 30, 2011.

Additional financial incentive programsare available at the state level. Arizona will assess property taxes ona mere 20% of the depreciated property value. New Mexico offers aproduction tax credit against state taxes for 10 years, capped at200,000 MWh/year, and a 6% "advanced energy tax credit." Nevada has anabatement incentive that will reduce normal sales taxes of 6.5% – 7.75%to just 2.6%, and reduce property taxes by as much as 55% for CSPprojects; the incentives expire in 2049. Colorado offers a permanentproperty tax assessment that will value solar energy projects at thesame level as comparably sized non-renewable facilities, giving them anassessed value that is far lower than the actual value on a slidingscale. Utah offers a sales tax exemption as well.

With policy and financial support at itsback and the BLM clearing the path ahead, the future looks brightindeed for utility scale solar, the cheapest solar watts around. It’snot easy to find publicly traded stocks that are positioned to benefitfrom the technology’s next wave of expansion, but that’s why we’rehere.

Until next time,

Chris

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7 Paths to Our Energy Future

How to Navigate Peak Fossil Fuels. . .And Profit

By Chris Nelder
Friday, June 26th, 2009

I have dished out a healthy share of criticism about the paths weare taking into the energy future, so perhaps it’s time I offered somepaths of my own. I will outline them as simply as possible, since thedata and thinking behind them could fill a book.

First we must know where we’re going.

Credible models show that by the end of this century,essentially all of the fossil fuels on earth will be consumed—oil,natural gas, and coal. Presumably, whatever fuels do remain at thatpoint will be reserved for their highest and most valuable purposeslike making crude oil into plastics and pharmaceuticals, not burning itin 15% efficient internal combustion engines.

Consider the following world model for all fossil fuels:

Nelder EAC chart 1

Source: “Olduvai Revisited 2008,” The Oil Drum, by Luís de Sousa and Euan Mearns. Cumulative peak is Data sources: Jean Laherrčre for natural gas, Energy Watch Group for coal and The Oil Drum for oil. [This is an exceptional study and I recommend it to my readers!]

By the end of this century then, a mere 90 years from now,we’ll need to have an infrastructure that runs exclusively on renewablygenerated electricity, biofuels, and possibly nuclear energy. That’swhere we’re going.

Fortunately, there is more than enough available renewableenergy to meet all of our needs, if we can harness it. Unfortunately,we’re starting from a point at which less than 2% of the world’s energycomes from renewables like wind, solar and geothermal.

Hydro provides about 6%, and nuclear about 6%, but forreasons too numerous to get into here, some of which my longtimereaders have already heard, I don’t believe either source will increasemuch in the future, and both could actually decline.

Our challenge then is to make that 2% fraction grow toreplace about 86% of the world’s current primary energy, in 90 years orless.

We are currently at peak oil, a short, roughly 5-year plateauwhich goes into terminal decline around 2012. All fossil fuel energycombined peaks around 2018, less than a decade from now.

All strategies for accommodating the fossil fuel decline require decades to have any significant effect. The now-iconic study “Peaking of World Oil Production: Impacts, Mitigation, & Risk Management”(Hirsch et al., 2005) demonstrated that it would take at least 20 yearsof intensive, crash-program mitigation efforts to meet the peak oilchallenge gracefully. Another study, “Primary Energy SubstitutionModels: On the Interaction between Energy and Society,” (C. Marchetti,1977) showed that it generally takes decades to substitute one form ofprimary energy for another, and 100 years for a given source of energyto achieve 50% market penetration.

Therefore, we are going to have to accomplish most of the renewable energy revolution in a scenario of ever-declining fuel supply.In just 50 years, we’ll be working with about half our current energybudget. So in fact we may only have about 50 years to build most of thenew renewable energy and efficiency capacity we will need to get usthrough the end of the century.

Another important factor is that exports will fall off much faster than total supply. (See my article on the oil export crisis from last year.) Foucher and Brown(2008) have shown that the world’s top five oil exporters couldapproach zero net oil exports by around 2031. Net energy importers likethe US could be increasingly starved for fuel as decline sets in andaccelerates, and net energy exporters could wind up shouldering much ofthe burden of new manufacturing. This factor means that we will have tofront-load as much of our development as possible.

The final and most important factor is population. The fewpopulation models that actually take fossil fuel depletion into accountassume that global population increases roughly out to the global fuelpeak, and then stabilizes at that level or declines naturally whileeconomic development promotes lower fertility rates and renewables andenergy efficiency increase to fill the gap of declining fossil energy.I understand why this assumption is made—because the alternative is tooghastly to contemplate—and for the immediate purpose of this article Iwill go along with it. I will note however that history and scientificobservation of populations suggest some sharp episodes of decline aremore likely, and in my estimation we will end this century with aconsiderably smaller population than anyone forecasts, at some levelwell below today’s.

How, then, can we replace or offset through efficiency atleast 40% of our current energy supply with renewables in the next 50years, while fuel prices are rising and the global economy is flat orshrinking due to a lack of fuel?

Seven Paths to Our Energy Future

A proper model for achieving this goal would be a very largeundertaking, the sort of thing that should be done by a team of expertswith a budget. (Is anybody at the Department of Energy listening?) ButI can identify some key pathways that are, in my estimation,no-brainers. Because the solutions going forward will be quitedifferent for each country, I will limit my recommendations to the US.

1: Rail. Rail should be Priority 1, andshould be granted the largest portion of public funding. We shouldbegin as quickly as possible with light urban rail, and work over thenext 40 years to build a comprehensive high-speed long-distance railsystem.

Rail is by far the most efficient form of overlandtransportation we know, and moving people out of their cars and freightoff the roads will yield real and immediate savings in liquid fuelconsumption. Not only will this help alleviate America’s need forrapidly declining oil exports, it is a proven, fairly low-tech,sustainable and workable solution that would allow renewably generatedelectricity to be phased in over time with minimal disruption.

2: Rooftop Solar PV. Utility scale projectslike giant solar farms in the desert and giant wind farms in theMidwest (or offshore) all face serious hurdles in siting, permitting,environmental impact, and transmission capability. Rooftop photovoltaic(PV) solar systems face no such issues and can be deployed right now,building capacity incrementally over time. PV has been proven in thefield commercially for over 30 years and, speaking as a formerresidential and small commercial solar designer, I know that it canprovide 50-100% of the needs of most small buildings.

Rooftop PV also has a capital advantage. Whereasutility-scale solar and wind projects need to secure large powerpurchase agreements in order to raise enormous amounts of capital thatwill be tied up for decades, small rooftop PV systems are purchasedoutright by the end-users, assisted by ratepayer-funded incentivesystems. Simply getting projects done is considerably easier.

From a funding perspective, rooftop PV is arguably one of theeasiest sources we can develop, and options are proliferating. Citieslike Berkeley and San Jose are offering municipal bonds to financelocal projects, which keeps the financing small, local, and low-risk.Third-party financing companies are springing up all over the country,making it possible for home and business owners to put solar on theirroofs with no out-of-pocket expenses and pay them off at the same ratesor less than they’re already paying to utilities, with nearly zero riskto all parties. End-users enjoy an additional benefit of having aknown, fixed cost for their future power, even as fossil fuel pricesskyrocket.

Another very important advantage is that rooftop PV is distributed, which contributes to the resiliency and robustness of the grid. In most modern neighborhoods, no grid upgrading is neededto support rooftop solar systems. More distributed power generationalso means fewer points of failure: a cloud over here is compensated byclear sky one mile away. It also enables micro-islanding,which would allow most of the grid to stay up when there is an outage,instead of taking vast chunks of the country’s grid down along with itas we have seen in the recent past.

Utilities also win with rooftop PV, because it means theydon’t have to spend an enormous amount of effort and money in search ofenough clean, green kilowatt-hours to meet their renewable portfoliostandards, nor spend it on beefing up their grids. It essentially costsutilities zero to take up energy produced this way; in fact it can be a net benefitto them because the homeowner ends up paying for the new smart metersthey plan to deploy across their grids anyway (at a cost of tens ofmillions of dollars).

Feed-in tariffs (FiTs) that pay a premium for kilowatt-hoursgenerated by rooftop PV have been employed with great and immediatesuccess in Germany and Japan, to the point where both programs will belargely phased out within the first decade. Support for a national FiTin the US is still weak, but I believe it could become a reality if thepublic were educated about the success it has enjoyed elsewhere in theworld.

3: Alternative Vehicles. Since reconfiguringour urban topology around transit and deploying light rail will takedecades, we will need some transitional solutions that still allow usto get around in cars for a good many years. All-electric and plug-inhybrid electric vehicles are a two-fer: They can take advantage ofgrowing renewable electricity supply, and they can function as a giant,distributed battery for intermittent renewable sources usingvehicle-to-grid (V2G) technology. In time, V2G could provide the finallink that allows renewable energy to fully displace fossil fuels.

We will need to begin building the electric vehicle charginginfrastructure as quickly as possible to accommodate these newvehicles, but it needn’t be any more complicated than deploying a newrow of parking meters. This I think is a good and proper use of publicfunding. The automakers themselves should be able to find adequatefunding via the private sector, with perhaps a modicum of federalsupport for research to jump start next-generation development ofbatteries and propulsion systems.

Compressed natural gas vehicles are another transitionalsolution that would take advantage of domestic gas supply while cuttingdemand for imported crude.

Biofuels may also play a role, although I continue to beskeptical about how much they can truly achieve once net energy (EROI)and food-vs.-fuel tradeoffs are taken into account. Corn ethanol failsthese tests, but to the extent that cellulosic biofuels pass them, theycould take a substantial bite out of our demand for petroleum. Still,it will take a decade or more to scale it up to significant levels.

Before the global economic downturn, our replacement rate wasabout 14 million new cars and light trucks per year. We have about 250million such vehicles now. At that rate (we’re well down from it now),it would take 18 years to replace the fleet, but we probably won’tmaintain that rate while the economy shrinks and fuel prices rise.Therefore we should concentrate on a rapid, near term deployment ofalternative vehicles, before it gets prohibitively expensive anddifficult to do so, even if they wind up having all the sex appeal of amass produced WWII Jeep.

Ideally, we will only have to replace a fraction of the current fleet, with the rest of the traffic having been moved to rail.

4: Efficiency. Most of the efficiency gainswe can make are thermal: reducing the energy it takes to heat and coolbuildings. These gains ultimately translate into less coal and naturalgas demand, so they will do little to reduce our demand for oil, whichmust be our first priority. In the long run however, efficiency mustmake up for any shortfall in renewable energy production, so it must bepursued continually over many decades.

More efficient regular gasoline and diesel vehicles also belong in this category, and may reduce our dependence on oil if they are sufficiently efficient and the gains aren’t nullified by the Jevons paradox.In my view, anything under 25 MPG is simply pathetic at this point, andundeserving of any federal support. Incentives for more efficient ICEvehicles should be geared to produce the greatest possible gains infuel economy, not the watered-down “Cash for Clunkers” bill we got,which will ensure another several years’ worth of inefficient SUVproduction.

5: Utility Scale Renewables. Rooftop PV maybe able to fill the short-term supply gap if aggressively pursued, butin the long term we’ll need every renewable kilowatt-hour we can get.We’ll need large solar plants across the Southwest, and huge wind farmsin the Midwest and offshore. Geothermal and marine power can also makemajor contributions in time, but they’re babies now, and will needpublic guarantees and funding to reach the level where they arecommercially viable technologies.

6: A Beefier, Smarter Grid. In order tocarry all the new renewable power, we’re going to need a bigger, moreresilient, and smarter grid. The good news is that we already have mostof the technologies we need in this area. All that we lack is the willand the funding to put it in place. In the same way that it tookfederal funding and initiative to create the interstate highway system,the grid will also probably need to be nationalized and its enhancementfunded publicly in order to meet this challenge.

A key element of the new grid will be long-distancehigh-voltage direct current (HVDC) power lines to transmit the powerfrom the large utility scale projects to the cities where it’s needed.This must be on the short- to medium-term agenda since it must be readyto take on real capacity within 20 years and be nearly full-blownwithin 40 years.

7: Keep Drilling. If we back off too muchtoo soon from oil and gas production, it could leave us withoutadequate or reasonably priced fuel to accomplish this transformation,and sink the entire effort. I think we’ll need as much oil and gas (andto a lesser extent, coal) as we can possibly produce in order to pullit off. Just imagine how difficult it will be to produce a solar panelor a large wind turbine using only renewably generated electricity tomine the raw ores, crush them, transport them, smelt them down and turnthem into stock, transport them again and turn them into end-products,then transport them a final time and install them. I think it’s safe tosay that we have no idea how to do all that without liquid petroleumfuels.

The twilight years of hydrocarbon fuels are essentially uponus, but we’ll need them more than ever as they peak out and decline. Wewill have to keep drilling, and the oil business will have to be ableto turn a fair profit.

At the same time, I have long maintained that after a nearlya century of commercial operation, the petroleum businesses should beable to get by on its own, without public subsidies of any kind. Ifthat means the price of fuels goes up, then so be it. We’re going tohave to start paying a fair value for those finite, rapidlydisappearing resources some day, and price increases will onlyencourage efficiency and alternatives.

Just Do It

Turning these conceptual pathways into action will not beeasy, and we may be forced into action before we have perfect clarityabout where we’re going and what it’s all going to cost. Yet I have nodoubt that if we move on these seven pathways as quickly as possible,we will make progress in the right direction. There will be time tofine-tune it later.

Over the long term, the economics of energy are clearly infavor of renewables. The costs of producing and burning fossil fuelscan only increase, and the costs of renewable energy will fall fordecades before stabilizing.

Finding the money to rebuild so much of our infrastructurewill no doubt be a challenge. But if we’re willing to put a $2.5trillion debt burden on the future to bail out the financial system,and untold trillions more to provide military protection for the oilresources that remain, perhaps it’s just a question of priorities. Ihave no doubt that the money would be better spent on building anenergy infrastructure that will actually sustain us.

The successful pathways are the profitable pathways. Thinkrail, small solar PV, alt vehicles, efficiency, utility renewables,grid, and drill, baby, drill.

Until next time,

Chris Nedler

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Oil Implications for Cleantech Investors

The future price of oil is a vitally important consideration forcleantech and renewable energy investors. When prices are high, it’sgood for cleantech, and when they’re low, it’s bad. Yet too fewcleantech investors are equipped with the ability to forecast them.

The price of oil is set daily and globally by a complex interactionof many factors, including supply and demand, relative valuations ofcurrency, speculation in oil futures, delayed feedback loops, economicgrowth rates, money flows of large investors, geological factors,geopolitics, and many more.

Oil shot to $147 in 2008 because of a particular highly leveragedalchemy of those factors, and it fell to the low $40s today as theleverage unwound and global recession took its toll on demand. Suchvolatility makes for an extremely cloudy investment outlook,particularly when the investment horizon is measured in decades. Thatvolatility is likely to increase in the coming years.

In order for cleantech investors to succeed then, they must have adeep and rigorous understanding of these factors and be able toanticipate oil prices.

Here are a few essential clues to reading the oil markets. (See also my article of last week, “Updated Oil Price Outlook.”)

Global Oil Production Has Peaked

The rate of global conventional crude oil production has been stuckat roughly 74 million barrels per day (mbpd) since 2005, despite atripling of oil prices over that period, ending oil’s long history ofsupply growth. This is predicted by peak oil models, which describe howoil production grows, peaks, and then falls in a rough bell curve shapefor any given oil producing region. All increases in “oil” supply since2005 have come not from regular conventional crude, but from unconventional liquidssuch as heavy and deepwater oil, oil sands, natural gas liquids, andbiofuels, bringing the world supply of “all liquids” to between roughly84 and 86 mbpd since 2005 (Energy Information Administration, April 2009 International Petroleum Monthly).

5-27-09 Nelder Chart1

Figure 1: World Oil and Gas Production Profiles, 2008 Base Case
Source: Colin Campbell, ASPO Newsletter No. 96, Dec. 2008

A close study of the all liquids peak reveals a bumpy plateau fromroughly 2005-2012, after which oil production will go into terminaldecline. The absolute peak will likely prove to have been July, 2008.

The International Energy Agency (IEA) projects that under normalcircumstances with regular maintenance and investment, simple depletionof mature fields will cut about 5% from the global supply each year,which is far in excess of what new oil projects may hope to offset.

While the world is certainly not “running out of oil,” since nearlyhalf of it is yet to produce, the world has definitely run out of cheapand easy oil. From now on the oil we produce will be progressivelyharder to get, and more expensive. This point has been emphasized inrecent years by the CEOs of nearly all major oil companies, as well asthe major oil data providers like EIA and IEA.

Production Cost

The cost of producing oil varies widely between under $20 for oldprojects in Saudi Arabia, to $100 and up for sources like oil sands andshale. The global average cost of a new barrel of oil production capacity has been estimated at between $60-80.

5-27-09 Nelder Chart2

Figure 2: Oil Production Costs
Source: Cambridge Energy Research Associates

The domestic budgetary needs of producers also play a role, withOPEC producers needing at least $50-60 oil, and Russia needing $70.

Future production costs will be even higher. Credible expertsmaintain that oil will have to remain above $100/bbl before investorswill commit to the expensive and risky marginal projects that willdeliver the oil we need over the next several decades.

5-27-09 Nelder Chart3

Figure 3: Oil Production Costs and WTI Price
Source: CIBC World Markets, StrategEcon Jan 23, 2009

Saudi oil minister Ali al-Naimi has warned that the world needs $75oil to sustain ongoing investment. Current prices “are wreaking havocon the industry and threatening current and planned investments,” hesaid.

With oil selling for half the new production cost, only olderconventional fields are currently profitable. Well-capitalizedcompanies like Chevron and Shell can afford to continue investing withsuch an uncertain horizon, but marginal producers have been forced tolay down their rigs and cut back on development as credit availabilityfell along with prices.

Consequently, projected new oil production for 2012 and beyond maynot materialize, for a lack of investment now. It typically takes 2-10years for oil production to commence once a project has broken ground.

Under-investment is precisely what the IEA warned about in its World Energy Outlook 2008, in which they said the world would need to invest over $1 trillion dollars per year for the next 22 years just to maintain current supply levels.Under the current credit crunch and low oil prices, that kind ofinvestment is simply not happening. This is likely to accelerate theglobal decline rate to 9% and above, according to the IEA.

Oil Is Priced At The Margin Of Supply

Athin, roughly 3% margin in spare production capacity is the prime moverof the oil markets. Supply remained flat while demand grew from 2005through the first half of 2008, driving spare capacity from over 2 mbpdto less than 1 mbpd, which precipitated a spike in oil prices. Whendemand fell sharply with the global recession, spare productioncapacity grew to more than 4 mbpd, and prices overshot well below theproduction cost.

Whenthe global economy recovers, perhaps in the 2010-2011 time frame, spareproduction capacity will collapse to a thin margin, and prices willspike again. BP Chief Executive Tony Hayward said in November,“Increased demand will stretch the system to its limits, and this willcause another upward spike in the price.”

  2006 2007 2008 2009 2010
World Oil Demand:

 

 

 

 

 

OECD

49.6

49.1

47.6

45.4

45.9

-% chg

-0.

-0.9

-3.2

-4.5.

1.0

non-OECD

35.4

36.7

38.0

39.1

40.8

-% chg

3.6

3.5

3.6

2.9

4.3

Total World Demand

85.0

85.9

85.6

84.6

86.7

-% chg

1.2

1.1

-0.1

-1.2

2.5

 

 

 

 

 

 

World Oil Supply

84.5

84.4

85.8

85.5

84.8

-% chg

-0.2

-0.1

1.6

-0.4

-0.8

 

 

 

 

 

 

Excess Supply
(+ve)/Demand (-ve)

-0.5

-1.5

0.2

0.9

-1.9

West Texas Crude, Year-end ($/bbl)

61

96

45

65

100

Table 1: World Oil Supply, Demand and Balance (mbpd)
Source: US Dept of Energy (history), CIBC World Markets (forecast)

Volatility

In the coming decade, we should expect a series of cycles like theone we saw over the last 12 months. As supply remains flat and beginsto decline, demand will dictate the price. As global demand increasesalong with economic recovery, spare production capacity will quicklydiminish to almost zero, and prices will spike again, causing demand tocrash and prices to fall. As these cycles continue, we may expectvolatility to increase.

For cleantech investors, this is both good news and bad news. Poorprice visibility will tend to restrict investment capital in the oilpatch until such time as the global oil price stabilizes above $70 abarrel. At the same time, the predictability of the renewable energycost structure will increasingly favor it. For example, investors maycome to view a modest 4% return on a third-party solar financingarrangement as a very desirable and stable investment.

For oil investors, current prices are an unquestionable bargain. Oilinfrastructure providers and companies with sizable reserves now offerthe investment opportunity of a lifetime.

Ultimately, the decline of oil, followed by the peak of natural gasand coal in roughly the 2020 – 2025 time frame, means that renewableenergy and energy efficiency technologies probably cannot grow fastenough to fill the gap. Therefore, the growth opportunity for thosesectors is essentially unlimited for the foreseeable future.

For detailed data, charts, and analysis on the peaking of fossilfuels and the renewable renaissance, investors may want to explore myexhaustively referenced book, Profit from the Peak (Wiley, 2008). My second book, co-authored with my colleagues Jeff Siegel and Nick Hodge of Green Chip Stocks, is Investing in Renewable Energy (Wiley, 2008) and offers a more detailed focus on renewable energy and cleantech.

Until next time,

Chris Nelder

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The Great Divide on Energy Policy

When I accepted the invitation of the American Petroleum Institute(API) to attend the 2009 Offshore Technology Conference (OTC) inHouston on their dime, I couldn’t resist the offer out of sheercuriosity. But I had little notion of how illuminating it would be, onso many levels.

This isn’t your ordinary,bland-slide-decks-with-boring-exhibits conference. It’s the cuttingedge of the oil and gas business, or perhaps more accurately, thecutting edge of all industry: offshore, particularly deepwater (over1000 feet of water) drilling. Giant machines, sprawling constructionsof pipe and pumps and electronics and incredibly high-tolerance partslitter the sprawling exhibit hall. The speakers are top executives inthe oil and gas industry, and policy leaders on energy and climatechange. Some 60,000 people from all over the globe will attend thisyear’s conference. In short: It’s immense.

I could describe the utterly amazingtechnology on display here. I could share what I learned about the oiland gas industry’s deep commitment to safety and minimizing itsenvironmental impact. I could inundate you with data and names andaffiliations.

But that’s not what the discussion at this conference is about—not from my perspective.

The top issues of the energy industryrevolve around policy more than technology. Should we drill ANWR andthe Outer Continental Shelf (OCS)? Can we achieve energy independence?How can we grapple with climate change without destroying the economy,and the sources of energy on which we utterly depend? Can renewablessupplant fossil fuels?

As critical as these policy debates are, I see little in the way of progress.

An Ironic Debate

I saw a parade of oil industryrepresentatives plead for a transparent and fact-based public dialogueabout our energy options for the future. We should step away from theall-or-nothing debate on fossil fuels vs. renewables, they said, stopdemonizing any of our potential energy sources, and get serious aboutaddressing our energy problem before it’s too late. As the head of theAPI said, “The energy issue will intensify until cooler heads prevail,”and the debate desperately needs to be depoliticized.

But in the next breath, apparentlyunaware of the obvious contradiction in it, I saw those same executivescomplain bitterly about the policymakers who stand in the way of theirprogress. I heard them discount the potential of wind and solar to meetour energy needs, while trumpeting the much smaller footprint of modernoil and gas production. I heard overblown claims about how technologywill continually increase reserves, and how offshore drilling inAmerica could solve our problems if only they were allowed to do it.

One executive decried the “cheap shots”taken at the oil and gas industry by climate change activists, and thena few moments later mentioned how much he liked a print ad that offereda false choice between offshore drilling and high gasoline prices.

I asked a panel of oil companyexecutives how a potential 2 – 3 million barrels per day (mbpd) of newoil production from the OCS by 2030 (according API and EIA data) wouldfigure against the background of steadily declining North Americansupply. The only response I received was that 2 mbpd is a lot, we’d behappy to have it, and if we don’t start drilling for it now, we’llregret it.

I heard not one word suggesting that oilproduction may have in fact peaked, no mention of decline rates, norany hint that there might be any limits on supply other than thepolitical will to develop new sources.

The oil and gas industry doesacknowledge that the burning of their products probably contributes toclimate change. They are resigned to the fact that carbon will sooncome with a price, and they are intent on helping to define how thatwill be done under the rubic that “If you’re not at the table, you’regoing to be on the menu.” At the same time, they seem to have a greaterappetite for a political approach to the climate change debate than anobjective evaluation of the data.

The green side of the debate is,unfortunately, no better. An attendee stood before a panel of major oilcompany executives and ask how the energy industry could engage morefruitfully with policymakers and the public on climate change, thenadmitted that she had boycotted a recent local presentation by T. BoonePickens about his energy plan for the country simply because he was anoil baron. She considered it an act of conscientious objection.

The contradiction of her positionapparently escaped her as well, along with the fact that of all the oilbarons in America’s history, Boone is arguably the mostforward-thinking and realistic, and a major proponent of moving beyondoil. Her story offered a classic demonstration of how too-principledpositions on energy so quickly lead to stalemates.

As a longtime advocate for renewableenergy and a former solar system designer, I have been to my share of“green” conferences. I have often heard the utterly unrealistic claimsof renewable energy advocates, and listened to them vilify the oilindustry. They seem to have as little appetite for the facts on fossilfuels as the fossil fuel industry has for objective evaluation ofrenewables.

So while I agree with the conferencespeakers who called for a balanced, non-demonizing policy debate, whatI see is both sides—the green/climate change side and the fossil fuelside—retreating to their corners, throwing up walls of propaganda, anddemonizing the other side.

The middle ground, where truth and progress reside, feels virtually empty.

I am left to ponder, once again, whythat is. And once again I come to the conclusion that you can’t makepolicy without politics. What we have here is simply politicalmaneuvering with each side trying to gain an edge by overstating theirpositions, in hopes that when the dust settles, they’ll be left holdingsomething. It is most emphatically not a neutral and balanced dialogue.

In fact, there is no dialogue at all.Cleantech people go to cleantech conferences, and oil and gas industrypeople go to oil and gas conferences, and rarely do the two crowds mix.In the halls of Congress there is much shouting, but little listening.At the end of the day, it is the art of political compromise, not data,which drives policymaking.

The oil and gas industry remains miredin denial about the peak and decline of its products. Renewableadvocates are still lost in a dream about quickly replacing fossilfuels with green energy and an infrastructure that runs on it. Climatechange concernists continue to pin their hopes on visions that cannotpossibly be realized in the time frames they need. No side trusts theother.

Ten Inconvenient Truths

Allow me then to stake out a bit ofmiddle ground, based on what I believe to be the objective facts, in aneffort to bring the parties together and perhaps make some actualprogress on the policy front.

  1. We have extracted nearly all of theworld’s easy, cheap oil and gas, and now we’re getting down to thedifficult, expensive stuff. The largest untapped resources that remainare in extreme places like deepwater and the Arctic, and marginalformations like shale. As a result, global oil production has for allintents and purposes peaked. Natural gas production will also peak in10 to 15 years. Neither technology nor high prices will change that.Therefore we must begin to replace those fuels with renewables, and usewhat remains much more efficiently, with the expectation that most ofthe world’s oil and gas will be gone by the end of this century.

  2. Drilling for oil and gas drilling in theOCS and ANWR must and will be done; our need for those fuels is simplytoo great to pass them up. An additional 2-3 mbpd will put a dent inthe roughly 12 mbpd we now import, but if we drill for it now, it won’tcome to market for 10 years or more. By that time, it probably won’teven compensate for the depletion of conventional oil in North America,nor will it do much to reduce prices. But it will be cruciallynecessary, and producing it won’t make an ugly mess of the environment.

  3. Renewables are clearly the long-termanswer, as is an all-electric infrastructure that runs on its cleanpower. However, it will likely take over 30 years for renewables toramp up from a less than 2% share of primary energy today to 20% ormore. They probably won’t even be able to fill the gap created by thedecline of fossil fuels. Oil and gas currently provide about 58% of theworld’s primary energy, and they will remain our primary fuels for along time to come.

  4. It will take many decades to reconfigureout transportation systems to run on electricity. It will take decadesto fix our wasteful, leaky built environment so that it doesn’t need asmuch energy to begin with. None of the solutions will come quickly oreasily.

  5. Neither renewables nor fossil fuels nornuclear power alone can bring “energy independence.” Indeed, ifindependence means isolating ourselves from the rest of the world’senergy commerce, it might not even be desirable.

  6. We must pursue all sources ofenergy immediately and aggressively if we hope to meet our futureneeds, and pitting one against another is counterproductive.

  7. Nuclear power will not growsignificantly in the next several decades, as nearly all of theexisting reactors will need to be decommissioned within the next 20years, and a new generation of reactors must be built to replace them.After we do that, a renaissance for next-generation nuclear energy maybe a possibility but it will only happen after we have confronted thecrises of peak oil and peak gas. It may produce no net reduction inemissions at all.

  8. It is quite possible that even our bestefforts on all fronts will not achieve the carbon emission targets wehave set. Climate change must be confronted via a unified policy onemissions and energy supply, which is to say that in our zeal tocontrol emissions, we take care not to squelch the production of theoil and gas that constitutes the majority of our energy supply, atleast until we have something to replace it. To do so could haveunintended and paradoxical consequences, like impeding the manufactureof renewable energy devices, and contributing to tight supplysituations that once again cause fossil fuel prices to skyrocket andfurther damage the economy. Rather than emphasizing the uncertainty onclimate change data, and fomenting fear about the cost of mitigation,all sides must come together in a depoliticized dialogue strictly basedon neutral scientific analysis.

  9. We should use accurate and unbiasedmodels of the future growth and decline curves of all forms of energyfor policymaking—models based on historical data, not faith. If thedata says we’re likely to recover another 1.2 trillion barrels of oilworldwide and no more, then we should not assume that future drillingand technological progress will somehow turn that into 3 trillionbarrels of recoverable oil.

  10. Carbon emissions will soon come with aprice. Drilling the remaining prospects for oil and gas will beexpensive: From the decision to invest until first oil is produced, itcan take 10 years and $100 million dollars to drill the first well in anew deepwater resource, using rigs that cost $1 million a day to run,and the production platform can cost as much as $5 billion. Deployingthousands of wind turbines and square miles of solar will be expensive,slow, and difficult. Replacing millions of inefficient internalcombustion engine vehicles with electric and plug-in hybrids will beexpensive. Rebuilding the nation’s rail system will be hugelyexpensive. In short, the good ol’ days of cheap electricity andgasoline are likely gone forever, and all the solutions going forward will be expensive.

I share the industry’s concern aboutenergy illiteracy, but it cuts both ways. It’s true that as long as oiland gas provide the majority of our energy supply, we must continue toinvest and drill for it, and the industry must work hard to educate thepublic and policymakers about that. But to claim that limits ondrilling are the only problem, or that renewables cannot provide theenergy we need in time, exploits that illiteracy and deliberatelyconfuses the debate.

The fact is that there are good peopleand good intentions on all sides of the issues, and none of them wantsto destroy the environment or the economy.

As I see it, neither the fossil fuelindustry nor renewable boosters are yet willing to come out of theircorners and work with each other in an honest fashion to develop atruly viable path forward on energy. Until both sides put aside theirexaggerated claims and partisan bickering, the public will remainconfused about the true options and continue to use politics, notneutral data, as their guide. That cannot produce good policy, and itdoes all of us a grave disservice.

Such unhelpful contentiousness, denial,and cheating on the numbers is a luxury we can no longer afford. Ourenergy and climate change problems are real, they’re urgent, andthey’re getting more so every day. It’s time to set the tactics of thelast war aside, wring politics out of the dialogue, and start grapplingin an honest and direct way with real solutions. Nothing else will do.

Next week, I’ll dive back into energydata, and share some observations about the impressive technology andthe potential of offshore drilling.

Until next time,

chris nelder

Chris

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Macro Musings on Earth Day and Green Energy

I love Earth Day. I have celebrated itfor decades, by planting my garden or going for a hike or attending anevent. (This year I’ll be spending it as I have spent the last 10 days,staying put and nursing a nice case of poison oak I picked up whilegetting up close and personal with nature the weekend before last.)

This year it seems to have achieved awhole new level of popularity with a flourish of local celebrations.Everywhere I turn, I see messages encouraging people to plant avegetable garden, reduce their energy and water consumption, install asolar system, buy “green” stuff…even offering “five ways to green upyour sex life.”

The media are saturated with adsapplying a fresh coat of green paint to corporate images and logos, andthe news has never been greener.

As I write, the FORTUNE Brainstorm:Green 2009 conference is under way, featuring an impressive lineup ofbusiness leaders and visionaries who are working on everything fromelectric cars to energy to emissions control to green businessstrategy. (Check out the Twitter feedfrom the conference.) The best and brightest in the tech andenvironment worlds, bringing a wide array of ideas and technologies,are finally engaging directly with business to make progress on themost important challenges of our time.

Simultaneously, at the Dow JonesAlternative Energy Innovations south of San Francisco, startups arepitching their inventions to investors, including new technologies inefficiency, solar, electrical storage and water.

Putting an end to a long-fought battle,the EPA finally agreed last week that “greenhouse gas pollution is aserious problem now and for future generations,” threatening publichealth and triggering climate change. This paves the way for policyaction and significantly clears up the investing horizon for cleanenergy technologies.

In the House, debate commenced yesterdayon the “American Clean Energy and Security Act,” a bill submitted byHouse Energy and Commerce Committee Chairman Henry Waxman and EdwardMarkey (D-MA) that would cut greenhouse gases more than 80% by 2050through a cap-and-trade mechanism, and propose new standards for energygeneration and use. It would be the most sweeping climate changelegislation ever attempted.

A slew of great news from the renewable energy world also crossed my desk this week.

Sempra Energy announced plans to build a48 megawatt (MW) expansion of its existing photovoltaic (PV) powerplant in Nevada. When completed, the 58 MW installation will be thelargest PV solar plant in North America.

First Solar (NASDAQ: FLSR)secured financing for a 53 MW solar power plant, which would be thelargest in Germany and provide enough power to run 14,000 homes.

The Vatican announced plans to build a100 MW, $660 million solar plant that would generate six times as muchpower as the tiny nation uses, with the excess exported to Italy. It’sa great investment under Italy’s generous feed-in tariff program, whichpays up to €0.49 per kilowatt hour for the clean power when the retailprice of grid electricity is about €0.16.

Most exciting to me was a new $1billion, 200 MW solar project announced for Arizona, thesunshine-blessed state where I grew up. This plant would be in additionto a 280 MW CSP plant now being built near Phoenix by Spanish energytechnology giant Abengoa SA (MCE: ABG). Together, the two plants will provide enough power for 130,000 homes.

Other impressive, utility-scale solarprojects have been securing approvals and production agreements,including a planned 600 MW solar thermal project in Nevada, and a 1,300MW plant in Southern California, both built by BrightSource Energy.

Geothermal power is also finally takingoff. A new report from Emerging Energy Research identified over 9,000MW of new geothermal generating capacity now in the global pipeline,which would nearly double the current 10,500 MW of global geothermalcapacity. Of the new capacity, 4,400 MW are from US projects.

The news has been equally encouraging onthe demand side. Electric car manufacturers are racing to bring theirproducts to market, and engineers are making fast strides in obtaininga 60 to 100 mile range on a charge. Within the next two years,consumers should have an exciting array of choices for electric andplug-in cars. 

Smart grid technology appears to be the hottest area for investmentcapital and media attention, and was reportedly the subject of the onlyover-capacity session at the FORTUNE conference.

Efficiency projects are likewise popping up, like wildflowers in spring.

As an energy analyst keenly interestedin renewable energy and sustainability, I have never been moreencouraged about the progress being made in both the business andpolitical spheres. These announcements are particularly impressive inlight of the fact that the world is still suffering from a seriouscredit crunch.

But as an individual investor, the outlook is somewhat less rosy.

It’s (Still) All About the Financials

As I worked over some charts this week,looking for profitable investments in a market that remains chaotic, Ihad a stunning realization: Every chart had basically the same line!

Consider this six-month chart of ETFs for the real estate, financial, oil, Dow Jones industrial, and retail sectors:

4-22-09 eac nelder chart

While some sectors have clearlyperformed better than others, it’s basically the same line in everysector, plus or minus 20%. Year-to-date, the correlation is evenclearer.

Within the energy sector, thecorrelation is stronger still, with coal, oil, natural gas, solar,wind, and geothermal stocks all moving together in a tight-knit group.

Try it yourself. Plot a few of yourfavorite sectors together and play with the time frames. I think you’llfind largely the same patterns since the market meltdown began lastsummer. Only traditional hedges like gold, tobacco and food plays runcounter to the overall market trends.

That told me one thing: The markets are still all about the financials, which in turn have been all about real estate.

That was a sobering thought, because Idon’t believe the market rally of the last six weeks for a minute. Itwas led by the financials, and frankly they have cooked the books.

I have nearly lost track of all the waysthat the Fed, Treasury, and SEC have attempted to stave off theinevitable realization that the banks are insolvent. TARP.TALF. PPIP. (Collectively, they mean “printing of trillions of dollarsout of thin air.”) Refusing to disclose who received those trillions.Suspending mark-to-market. Taking the banks’ word at the result oftheir self-administered “stress tests,” and then forbidding them toshare those results with the public until May. And so on.

Only in a game that has been rigged andre-rigged repeatedly could the banks pull off the hallucination thatthey were profitable in Q1, especially to the point of claiming recordquarterly profits! But that’s exactly what they did, and the marketfollowed their rally.

Let me be unequivocal about this: Whatwe have witnessed in these vain attempts to sustain a fundamentallyunsustainable financial system is a sham, an insult to ourintelligence, and the biggest heist in history.

When this flood of taxpayer moneyrecedes, the truth will be known, just as graveyard corpses float up tothe surface after a New Orleans flood.

I don’t know when that will happen;after all, that is the entire point of these games, isn’t it? To givethe big money just enough time to get away clean before the house ofcards falls on the taxpayers’ heads?

But I have little doubt that eventually,it will. It could happen in three weeks, when the stress test resultsare made public. Perhaps it could happen this summer, when scuttlebutthas it that a number of damning insiders will blow their whistles.Perhaps we will have to wait until China starts dumping dollars. I justcan’t say.

When it does though, the market willundergo another bone-shuddering meltdown, and everything will fallagain—potentially marking the true bottom of the recession.

The lesson here is clear: traditionalfundamental analysis is useless. It’s been useless since real estatestarted dragging down the financials and took the whole market withthem nine months ago. Even technical analysis is useless for long-terminvestors (although it remains the bread and butter of day traders). Soyou can stop looking at the financial statements and evaluating sectorsand drawing lines on your charts.

Until the financial mess is finallywashed up and hung out to dry, you can throw a dart at a dartboard topick your long term investments, and get roughly the same returns.

Energy investments are, unfortunately,no exception. Renewable energy simply can’t continue to attract thelarge amounts of capital needed to sustain unprecedented growth untilthe banks are straightened out. Fossil fuel producers can’t keepdrilling and mining into progressively marginal deposits until theprices of their commodities recover, which can’t happen until theeconomy recovers (for signs of the recovery, watch Asia).

So by all means, get your reusableshopping bag, swear off bottled water forever, turn off anything thatisn’t in use, install a solar system, and plant your vegetable garden.With my sincere blessing.

Just don’t let a rigged market make a chump out of you.

Until next time,

Chris

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