Welcome to the new R-Squared! Our goals here are to provide a place to engage in respectful and thoughtful debate about the very important issue of energy.

I thought it might be a good idea to summarize my positions on a wide variety of energy issues. Here I will attempt to briefly cover my views on oil, coal, ethanol (cellulosic, corn, and sugarcane), renewable diesel (green and biodiesel), nuclear power, solar power, wind power, and then climate change. I don’t intend to cover a lot of ground explaining my positions in detail; I will save that for future essays.

The most important thing to note is that I try to let the data determine my position. But that also means that as new data come in, my position may shift. Therefore, my positions shouldn’t be viewed as being etched in stone.

I try to take a scientific approach in which data have to constantly be sifted through, categorized according to level of credibility, and incorporated into the position as appropriate. Of course the categorization step is important, because there are studies that are funded by interest groups that I put into a vastly different category than independent, peer-reviewed research.

To put my positions into perspective, let me explain how I see the world. First, I view energy as one of the most critical underpinnings of our society. Without energy, modern society falls apart. Thus, I think energy policy is a critically important – and very underrated – issue.

I believe renewable energy is critical to our future. Development of renewable energy is what I do for a living. But I am also an advocate of responsible use of taxpayer money. But what I see a lot of in the world today is taxpayer money flowing to companies that are just out hyping their technologies. I don’t want to see energy policy influenced by gross exaggerations, and yet that is the situation I see today. That is what motivates me to write.

Here is a rundown, with the briefest of explanations, on where I see the world of energy today. I will break this up in transportation fuels, electricity, and then a word on climate change. This list is by no means comprehensive, but I have tried to include the major contenders/pretenders.

Transportation Fuels

Corn ethanol – My position on corn ethanol is often distorted by supporters of U.S. ethanol policy. I am not against corn ethanol. What I am against are some of the policies that we have put in place, such as subsidies on top of mandates. The benefits of corn ethanol are typically exaggerated by various interest groups, and what I try to do is sift the real from the hype to understand what corn ethanol is actually delivering for the taxpayer investments we are making. That usually runs afoul of the hype, and thus I am painted as anti-ethanol. What I would like to see corn ethanol do is get the fossil fuels out of their operations.

Sugarcane ethanol – Has some distinct advantages over corn ethanol. Two of the key challenges for producing ethanol are logistics of getting low-energy-density biomass in, and the energy required to convert to ethanol and purify. These issues aren’t much of a factor for sugarcane ethanol, because clean waste biomass is already at the plant as a result of the sugarcane processing. So they essentially have free boiler fuel, which minimizes the fossil fuel inputs into the process. That enables ethanol production that is relatively cheap, and that is largely decoupled from the impact of volatile fossil fuel prices.

Cellulosic ethanol – More hype than substance. This was the topic of my graduate school research in the early 90’s, and even then there was a very long history. In fact, cellulosic ethanol has been commercialized multiple times around the world, beginning in 1898 in Germany. The U.S. built two plants during World War I and shut them both down after the war due to poor economics. Another was built in the U.S. during WWII in Oregon, never produced ethanol during the war, and was closed down after the war. During the past decade there has been a race to reinvent the wheel and become the “first” to commercialize cellulosic ethanol. Worse, groups doing gasification to mixed alcohols started calling their product cellulosic ethanol. But there are very fundamental differences.

Renewable diesels – There are two major types, biodiesel and green diesel. There are two different ways to make green diesel; gasification and subsequent Fischer-Tropsch or hydrocracking vegetable oils or animal fats. Biodiesel relies heavily on methanol, almost exclusively fossil-fuel derived, and will never in my opinion be viable without subsidies. The green diesels are expensive to produce, but have more long-term promise in being able to make a real contribution to the energy mix.

Algal fuel – A subset of renewable diesel. As with cellulosic ethanol, more hype than substance here. There are a couple of possible routes that could work, but right now algal fuel is a very long ways from the market. Beware of those who promise $2 or $3 fuel from algae.

Petroleum – While I have a background in the oil industry, I don’t wish to see the world continue to rely on petroleum. There are many reasons that I will detail in a future post, but I think we have built a society that is far too dependent on oil. The consequences of oil shortages in a petroleum-dependent world are severe, and that is a risk that I don’t believe we can afford in the long run. On the other hand, I recognize the reality that the world has long run on cheap petroleum, and we will need petroleum for many years to come. Thus, I don’t favor punitive legislation that causes artificial shortages while demand is still high.

Natural gas – Much cleaner than coal for the production of electricity, and the U.S. is in a pretty good position with respect to supply. Can be used to produce electricity, heat homes, or even fuel cars. A key question for me in the corn ethanol debate is whether it makes more sense to directly fuel cars with natural gas instead of converting the natural gas into fertilizer for the corn and then steam for the distillation of the ethanol.

Electricity

Wind power – Cost effective in some locations, but hindered by the intermittent nature of the source. Some issues with bird kills and noise, but my overall impression of wind has always been favorable.

Solar power – I love the idea of solar power, but costs and intermittency are a problem at present for solar PV. Solar thermal may be a more cost-effective option, and it also has the advantage of being able to produce power after the sun sets (up until the temperature of the thermal mass gets too low).

Geothermal – One of my favorite clean electricity technologies. In the right location, geothermal can be a very cost effective and clean producer of electricity. Deep geothermal is another matter, as it has been linked to triggering earthquakes.

Hydropower – Same class as geothermal for me. While there are some issues, this is the case with all energy sources, and hydropower’s issues are mild compared to some other energy sources. Comparatively, hydropower ranks very high on my list.

Coal – Very similar situation to oil. We have created a society that is very dependent on coal, and there are numerous environmental issues associated with coal. On the other hand, it is easy to see why we are so coal-dependent: It is very cheap relative to other fuel sources, and it provides reliable power. In the minds of consumers, cheap and reliable has historically won out over environmental concerns.

Nuclear – If you look at the projections for the growth of electricity demand – combined with the desires of many to see coal plants phased out – there is no other option than nuclear that can deliver the desired amounts of electricity. So I think we are going to need to expand nuclear power in the years ahead.

Climate Change

This is really too complex to summarize briefly, and in doing so I am afraid my position may be misunderstood. Whether you accept the idea that man is contributing to climate change, I don’t believe it is a good idea to conduct such a grand experiment on the atmosphere because the ultimate consequences can’t be predicted. However, I can’t see any trajectory that will result in a global decline in CO2 emissions. Despite all of the best efforts (e.g., Kyoto Protocol), global CO2 concentrations continue to increase. As China and India continue to industrialize and improve their standards of living, they will demand cheap power. Any way I look at it, global CO2 concentrations will continue to head up until we start to run short of fossil fuels.

None of that is to imply that I don’t think it is very serious issue. My position has long been that I am not an expert in the field, and so I defer to the experts. The consensus has always seemed to me that atmospheric scientists believe that the activities of mankind are contributing to climate change.

On the other hand, I also believe that the issue should continue to be debated. There is far too much rancor over climate change, with each side hurling accusations and insults. Let the debate take place in a respectful manner, and let’s not try to shout down the other side, or suppress information. But at the end of the day, it just seems to me that our efforts to stop rising carbon emissions are futile.

I have certainly left out a lot, and major details are missing. Most of the energy options I mentioned above will be expounded upon in future essays. Or, if you don’t want to wait, feel free to start that conversation yourself.

Chet Culver, Chairman of the Governors Wind energy Coalition is leading the charge to push Congress towards minimum wind energy requirements.

An assembly of 29 governors is urging Washington to enact Federal legislation that would mandate electric companies to obtain a minimum of 10 percent of the power they provide through renewable energy within two years.  The proposal, allegedly designed to stimulate job creation as well as climate reform, was presented today by letters to the White House and to Congress from the Governors’ Wind Energy Coalition.

“Right now, this is about jobs,” said Rhode Island Gov. Donald Carcieri (R).

“We don’t want these things to get caught up in the broader debate and discussion [i.e. global warming] that will only slow us down,” added Iowa Gov. Chet Culver (D), chairman of the bipartisan Coalition, which includes the governors of 29 states.

With national attention focused on health reform proposals, the group is concerned that the Federal government has become sidetracked from the agenda of getting Americans back to work.

“Congressional action on the energy bill seems to have stalled,” said Carcieri in a statement. “It is our hope that these recommendations — and the national bipartisan consensus they represent — will advance the energy deliberations now under way in Congress.”

Other recommendations by the governors include:

• Developing new interstate electric transmission system infrastructure to facilitate access to these resources nationwide.
• Greater federal support for coastal and off-shore wind farms; and
• Extending the Treasury Department’s financing program that offers cash up front instead of the Investment Tax Credit, as well as a renewable energy production tax credit.

Senator Chuck Grassley, Iowa (R), thinks the Governors' joint proposal sets unrealistic objectives.

“People want more renewable energy. Congress can’t ask for a clearer signal for what works politically than what’s working at the state level.” says Reid Detchon, executive director of the Energy Future Coalition, told the Christian Science Monitor.  ”These governors coming forward like this is just one more indicator of public sentiment in favor of stronger requirements for renewable energy.”

Congress does not unanimously subscribe to the notion that the Coalition’s mandate presents realistic objectives. Indeed, Culver has not convinced his own State’s senior senator that the mandate can be reached by 2012.

While Iowan Senator Chuck Grassley (R) claims to have supported renewable energy portfolios in the past, he believes the Coalition has bitten off more than can be chewed.  “Probably not ten-percent by 2012,” Grassley says, “I don’t think that that’s possible but I surely think 15% by 2020 is possible.”

House of Representatives passed two bills.

Today, the House of Representatives passed two bills that would provide a considerable amount of money to both wind power and hybrid heavy-duty trucks. H.R. 3165, Wind Energy Research and Development Act of 2009 passed by a voice vote and was authored by Paul Tonko, a Democrat from New York.

H.R. 3165 directs the DOE to create a program of research and development that would improve the energy efficiency, reliability, and capability of wind turbines. Furthermore, this R&D would reduce the cost of building and maintaining the wind turbines and finally, it would optimize the design of them thus making them more efficient.

According to Tonko, “The United States has enough wind energy resources to meet all of our electricity needs several times over…”

H.R. 3165 authorizes that $200 million be sent each fiscal year from 2010-2014 on wind power. If this bill is enacted, it would be the first time that a set amount of money was authorized to be spent on R&D for wind power.

On top of passing the Wind Energy Research and Development Act of 2009, the House of Representatives also voted on H.R. 445, Heavy Duty Hybrid Vehicle Research, Development, and Demonstration Act of 2009. The bill provides for the Secretary of Energy to grant between 3-7 grants of up to $3 million on research and development for technology, such as a plug-in hybrid, for heavy duty trucks.

Because one fourth of the nation’s fuel is used by heavy-duty trucks, any sort of technology on making them more cost effective would have a great impact on the amounts of gasoline used on a daily basis. If the bill is enacted, manufacturers of heavy-duty trucks will be able to research, develop, and build hybrid heavy-duty trucks.

There are so many ways to achieve renewable energy. California is trying to develop their own plethora or renewable energy.

The utility companies want there to be flexibility in the bills because of numerous cases. First off, they want the option to import renewable energy from out of state so that they can meet the 33% bill. Furthermore, they want the opportunity to extend the 2020 deadline if they’re going to miss it. Their argument is that the markets can’t plan that far in the future and it is unfair to the utility companies to demand there be this reached deadline.

The fight is coming in from all parts. The environmentalists are worried that if the lawmakers allow this flexibility, it will prevent real change from occurring environmentally speaking and no good will come from it. Consumers are concerned that the cost of California residents’ energy bills will skyrocket. Furthermore, they’re trying to prevent these utility companies from getting the energy from elsewhere because they want to create jobs in California.

People are concerned that if the utility companies are allowed to import their energy, what will happen is that there will be no economic growth in California, only green growth, and the goal is for there to be a mix of both.

There’s also the issue of funding it. It could require as much as $115 billion to reach the 33% goal by 2020. This makes it increasingly difficult for utility companies to reach it, especially since its being suggested that they won’t even reach the 20% by 2010 as tehy were supposed to do. Instead, it may take as long as 2013 or 2014.

There are also discussions of using hydroelectric plants, but environmentalists are firmly against some aspects of it. They are looking into creating run-of-the-river plants where they divert water into the turbines to create electricity, but don’t block the entire river with a huge dam. This would please environmentalists as well as provide for more energy.

Governor Arnold Schwarzenegger has expressed a great interest in trying to turn California into a firm green energy producing state. With the economy shaky there, it would be incredibly beneficial for the state to have this flow of renewable energy. Most importantly, the environment would get a break from the constant release of emissions.

“We are very excited to be able to work with Wind Pro,” said Michael Coskun, Vice President of GWS Technologies, Inc. “Montana has terrific state and local incentives which will complement the current federal rebates, making this the perfect market to begin utility-scale installations and distribution.”

An example of a wind turbine turning wind power into energy.

According to sources within Montana, the state is currently developing more wind energy than any other state in the Union with the hope that by 2030, 30% of its energy will come from wind, greatly cutting back on the need for other nonrenewable sources.

The newly created department in the state, Energy Promotion and Development Division (2007), is responsibile for assisting and monitoring roughly 50 industrial projects that are in wind energy. These projects are all different sizes and in different stages of development, but the goal is for these projects to create over 4,000 megawatts of energy.

New transmission lines are in development that will greatly increase the amount of energy that can get around.

Created in 2005, GWS (GreenWindSolar) Technologies is based in Scottsdale, Arizona. They develop solar and wind-power renewable energy products and solutions. With wind being the fastest-growing source of energy, growing at 29% each year for the past ten years, it makes perfect sense why GWS Technologies Inc. was created.

——————————
U.S. Ramping Up Wind Power Programs Even As Concerns Surface About Possible Declines In U.S. Wind Strength

By William Patalon III – Executive Editor

Money Morning/The Money Map Report

Just as the United States is boosting its reliance on wind power, a new academic study set for release in August says that U.S. wind forces may be getting weaker.

Eugene S. Takle, a professor of atmospheric science at Iowa State University, and the director of the school’s “climate science initiative,” says the research study concluded that U.S. wind strength has potentially declined by 15% to 30% during the past 30 years – an average decline of as much as 1% a year.

While conducting the study – which will appear in the Journal of Geophysical Research – researchers reviewed wind data taken at airports around the United States, and then based their findings on two sets of figures: One set from 1973-2000, and the other from 1973-2005.

The study concluded that three factors could be contributing to the declines in U.S. wind strength: Land-use changes, a changing climate and changes in the kind of instruments used to measure the wind, Takle told MarketWatch.com.

“If there have been trees growing or new buildings constructed near airports, it could impact the speed of winds on airports,” Takle said. However, it is also “[basic] meteorology that the wind is driven by differences in temperature between the poles and the equator, and those differences have been narrowed by climate change.”

Tough Timing

The findings come at time when the United States is making a serious push to increase the amount of electricity that’s generated by wind turbines grouped into so-called wind-power “farms.” Attempts to harness the wind are part of a broader national – or even global – commitment to “green” energy sources as a way of reducing dependence on oil and other fossil fuels for power generation.

Other power sources include solar, geothermal, hydroelectric and nuclear for commercial electricity production, while automakers are looking at new types of batteries and such innovations as power-storing “fuel cells” as alternatives to the conventional internal combustion engines that power most of the world’s cars and trucks.

The objectives are twofold. By decreasing the U.S. reliance on foreign oil, the country is hedging against the time when global supplies of the “black gold” begin to dry up, an eventuality that will propel the prices of crude and gasoline skyward. Diversifying away from oil and, perhaps, even coal is also a way of reversing – or at least slowing – environmentally ruinous (and politically controversial) global warming.

President Barack Obama is attempting to use the ongoing financial crisis to create a sense of urgency about America’s energy future, a challenge that no prior administration has yet been able to meet.

About one-third of President Obama’s $800 billion-plus stimulus package will go to infrastructure, with $30 billion allocated for U.S. roads and highways and another $10 billion earmarked for railways and mass-transit systems.

President Obama has also proposed spending $150 billion “over the next 10 years to catalyze private efforts to build a clean energy future.” The administration also proposes to increase the amount of electricity that comes from renewable resources from 10% in 2012 to 25% by 2025, Wall Street 24/7 reported in early January.

Creating the power is only part of the problem. Delivering it will be a challenge, too, especially given the country’s aging power grid. Upgrading that aging equipment is expected to cost more than $880 billion, according to a November 2008 report from the Brattle Group.

An Energy Boon For Entrepreneur T. Boone?

In many cases, those federal outlays will serve only as seed capital. It will likely fall to innovators in the U.S. private sector to really energize the alternative-power market.

One key player is legendary oilman and venture capitalist T. Boone Pickens, who has unveiled a plan to cut U.S. dependence on foreign oil through the power of alternatives such as wind and natural gas, Money Morning reported last July.

“We’re paying $700 billion a year for foreign oil. It’s breaking us as a nation,” Pickens said at the time. Former U.S. President Richard M. Nixon “said in 1970 that we were importing 20% of our oil and that by 1980 it would be 0%. That didn’t happen. It went to 42% in 1991 with the Gulf War. It’s just under 70% now. Where do you think we’re going to be in 10 years when our economy is busted and we’re importing 80% of our oil?”

Pickens wants to create what he calls a “bridge to the future” that will help cut slash the U.S. reliance on imported foreign oil by focusing on two specific alternatives:

• Cars that burn natural gas instead of gasoline.
• And electricity generated by wind power.

There’s a smooth and elegant logic to his strategy: By constructing electric-generating wind-power farms, the United States can free up natural gas supplies that currently generate 22% of the nation’s electricity. That natural gas can then be used to power cleaner-burning cars and trucks, thereby reducing our dependence on imported oil while also reducing the damage to the environment. This will also buy time for the development of other, even-greener, alternative sources of energy.

Pickens’ Wind Power Project

According to Pickens, wind power could eventually fulfill as much as 20% of the United States’ energy needs. Calling the Great Plains region of the United States the “Saudi Arabia of wind,” Pickens last summer launched plans for a $10 billion alternative energy project in the Texas panhandle that has the potential to one day become the world’s largest wind-power farm.

Picken’s Mesa Power LLP plans to purchase 667 wind turbines from U.S. industrial giant General Electric Co. (NYSE: GE). Each turbine can produce 1.5 megawatts of electricity – enough to provide the ongoing power needs of 360 to 600 U.S. homes, according to Money Morning calculations based on statistics provided by Oregon Power Solutions Inc., a Baker City, OR consulting firm.

The first phase of the Pickens project, already under construction, will produce 1,000 megawatts of electricity, enough energy to power 300,000 homes. GE will begin delivering the turbines in 2010, and current plans call for the project to start producing power in 2011.

Ultimately, Mesa Power plans to have enough turbines to produce 4,000 megawatts of energy. Overall, the “Pampa Wind Mill” project is expected to cost $10 billion and be completed in 2014.

Pickens has launched a “Pickens Plan” Web site, which is urges the country’s “energy army” to lobby Congress for funding and a commitment to green-energy projects.

Other Players Showing Interest

An Irish company – its interest in the U.S. alternative energy market piqued by the green-technology money included in the Obama administration’s stimulus package – on Monday acquired three Illinois wind farms located within 100 miles of Chicago, The Chicago Tribune reported.

Plans call for the Dublin-based Mainstream Renewable Power to invest $1.69 billion over four years to develop the wind farms. The purchase price was not disclosed.

“The U.S. market is of strategic importance to Mainstream, and the scale of the opportunity is strongly reflected in President Obama’s economic stimulus package, which includes $56 billion in grants and tax breaks for U.S. clean energy projects over the next 10 years and a budget of $15 billion a year to fund renewable energy programs,” Mainstream co-founder and Chief Executive Officer Eddie O’Connor said in a statement. “The administration’s goal of generating 25% of the nation’s electricity from renewable energy sources by 2025 will help revitalize the U.S. economy and protect consumers.”

The farms have the potential to generate 787 megawatts of electricity by 2013, The Tribune said. The most advanced is the 120-megawatt Shady Oaks project in Lee County. When finished next year, it should be able to generate enough electricity to power about 30,000 homes, Mainstream said.

The other two wind-power farms are the 467-megawatt Green River project, also in Lee County, and a 200-megawatt project set for Boone County. Construction on the Green River project will begin next year, while the Boone County project is still in is development stages.

This is Mainstream’s second North American deal in three months; it earlier announced a Canadian wind farm project. It has also announced plans to build a wind farm in Chile.

Founded a year ago, Mainstream was created to build and operate wind-energy, solar-thermal and ocean-current power plants in partnerships with government agencies, electric utilities, developers and investors in North and South America, Europe, and South Africa. Barclays Capital (NYSE ADR: BCS) has a 14.6% stake in Mainstream.

Going Global

As Mainstream’s proposed forays into South America, Europe and Africa demonstrate, the push to harness the wind isn’t limited to the United States.
As of the end of last year, worldwide wind-powered generators were capable of generating 121.2 gigawatts (GW) of electricity. Wind power produces about 1.5% of the world’s electricity and its use is surging: The amount of electricity generated by wind power doubled between 2005 and 2008 alone.

Several countries have already embraced wind power in a major way: As of last year, it accounted for 19% of electricity production in Denmark, 11% in both Spain and Portugal and an estimated 7% in both Germany and Ireland. As of this May, 80 nations around the world were using wind power on a commercial basis.

Not surprisingly, China is making a big push to commercialize wind power and by last year was already the world’s sixth-largest user of wind-generated electricity. The country’s largest manufacturer of wind turbines – Xinjiang Goldwind Science & Technology Co. Ltd. – went public last year, raising nearly $250 million. It has about 33% of China’s wind-power-equipment market, according to KGI Securities Co. Ltd., a Taiwan investment-banking and brokerage firm.

“As China’s wind power sector takes off, we think Goldwind is well positioned to become a major beneficiary, thanks to its strong brand and first mover advantage,” KGI wrote in a research report.

Not a Complete Answer

Although wind power has substantial promise, it’s not an infallible energy solution, and has some serious limitations – as the U.S. wind-power study shows. For one thing, although an estimated 72 terawatts of wind power on Earth can be potentially commercially viable – an amount that’s six times the estimated 15 terawatts of total power usage on earth – not all the wind energy flowing past any given point can be recovered.

Accoridng to a science axiom known as Betz’s Law – named for the German physicist, Albert Betz, who discovered the rule in 1919 – no turbine can capture more than 59.3% of the potential energy in wind.

And there are other challenges, some of which are caused by the natural lay of the land in a given location. In the United States, for instance, where there are now concerns about diminishing wind strength, some coastal areas may retain wind strength because of the greater temperature differences between the land and the ocean.

Given the growing importance of wind power, more study will be required.

Concludes the study: “Given the importance of the wind-energy industry to meeting federal and state mandates for increased use of renewable energy supplies and the impact of changing wind regimes on a variety of other industries and physical processes, further research on wind climate variability and evolution is required.”

[Editor's Note: Is it a new bull market, or just a bear-market rally that's going to separate investors from the last of their cash? For the shrewdest investors, it may not matter. A new offerfrom Money Morning is a two-way win for investors: Noted commentator Peter D. Schiff's new book - "The Little Book of Bull Moves in Bear Markets" - shows investors how to profit no matter which way the market moves, while our monthly newsletter, The Money Map Report, provides ongoing analysis of the global financial markets and some of the best profit plays you'll find anywhere - including such markets as Taiwan and China. To find out how to get both, check out our latest offer. ]

Renewable Energy Map for the U.S.

I like this map for two reasons. First, it shows the renewable energy possibilities across the country (solar, wind, cellulosic biomass, and biogas). But second, you can filter by planned and existing facilities for wind, advanced biofuels, and biogas. (However, I think some of the ones that they have called “existing” are not yet producing anything). There are a lot of small facilities that I have never heard of, and need to investigate when I have some time.

Offline now for a day or so as I make the journey back across the pond.

With all of that pork, though, comes legislation that I believe was crucial (which some will say is just more pork). I have often complained about the instability of our energy policy. It is hard to plan expensive projects if the tax structure in future years is at risk of significant change. This has been the case with tax credits for wind and solar power (and of course the oil industry is constantly battling this). Projects have been delayed because it was uncertain whether the tax credits for solar power were going to be extended. Congress has been extending them by only a year at a time, and this really stymies investment. With the bailout bill, Congress has now extended the solar credits until 2016, which will provide a huge boost to the solar industry. Fortune’s Todd Woody explains:

Congress sets stage for solar boom

After months of failed attempts in Congress to extend crucial renewable energy tax credits, the end game came with lightening speed Friday afternoon: The House of Representatives passed the green incentives attached to the financial bailout package approved by the Senate Wednesday night and President Bush promptly signed the legislation into law.

That it took a the biggest financial crisis since the Great Depression to save billions of dollars of renewable projects in the pipeline for the sake of political expediency does not bode well for a national alternative energy policy. But the bottom line is that the legislation passed Friday sets the stage for a potential solar boom.

• The 30% solar investment tax credit has been extended to 2016, giving solar startups, utilities and financiers the certainty they need for the years’ long slog it takes to get large-scale power plants and other projects online. The extension is particularly important to those Big Solar projects that need to arrange project financing in the next year or so.
• The $2,000 tax credit limit for residential solar systems has been lifted, meaning that homeowners can get a 30% tax credit on the solar panels they install after Dec. 31. That will save a bundle – especially for those who live in states with generous state rebates – and goose demand for solar panels makers and installers like SunPower (SPWRA) and First Solar (FSLR). (If you buy a a $24,000 3-kilowatt solar array in California – big enough to power the average home – you can claim a $7,200 federal tax credit. Add in the state solar rebate and the cost of the system is cut in half.)
• Utilities like PG&E (PCG), Southern California Edison (EIX) and FPL (FPL) can now themselves claim the 30% investment tax credit for large-scale solar power projects. That should encourage those well-capitalized utilities to build their own solar power plants rather than just sign power purchase agreements with startups like Ausra and BrightSource Energy.

“The brakes are off,” says Danny Kennedy, co-founder of Sungevity, a Berkeley, Calif., solar installer that uses imaging technology to remotely size and design solar arrays. “In just six months since our launch we’ve sold about a hundred systems. With an uncapped tax credit for homeowners going solar, we expect business to boom.”

They did only extend the tax credit for wind by one more year, but wind energy is growing so fast that it may be able to survive without the tax credits in the not too distant future.

But if you are a fan of solar power, these provisions should dramatically boost the prospects of the U.S. solar industry.

For these reasons, I favor giving renewable energy sources some help. While I would prefer that we do this by raising fossil fuel taxes and letting the alternatives compete on equal footing, that isn’t going to happen because politicians consider such taxes political suicide. So what we have instead are various tax credits and subsidies to give alternatives a helping hand. Some of these, like subsidies for corn ethanol, I oppose because they also have significant costs that aren’t being factored in. But the tax credits for renewable electricity have been a good investment, in my opinion. They have helped boost investments in wind and solar power.

However, the impact of these tax credits has been limited because they have only been renewed for one or two years at a time. If you are evaluating the economics of a new solar plant – and the tax credit may disappear in two years – you are going to be very cautious about deploying your capital.

CNN Money provides some background on the situation:

Renewable energy’s biggest wish

NEW YORK (CNNMoney.com) — While politicians off all stripes are vying to be seen as saviors in the energy crisis, Congress isn’t giving renewable energy investors the one thing they say would help the most – long-term tax credits. Lawmakers from both sides of the aisle want the nation to move away from fossil fuels and become more energy independent.

The tax credits are substantial. They currently give wind, geothermal and biofuels projects 2 cents for every kilowatt hour produced. The current market price for electricity is about 5 cents per kilowatt hour, so it works out to a subsidy of about 40%, according to the Energy Information Administration.

For solar, businesses and individuals can get 30% of the cost of a solar plant or home installation refunded by the government.

These tax credits have been around in some form since the early 1990s, but since the late 1990 have only been renewed on a yearly basis. That’s a problem for anyone trying to develop large sources of renewable energy.

This is just another example, in my opinion, of the government being very short-sighted over energy policy. If the tax credits were extended for 10 years, it would be a huge shot in the arm for the renewable energy industry. Pay for those tax credits with a nickel a gallon gas tax, and it will be a win-win for energy policy.

Now that oil is over $100 – and in my opinion will be much higher in 5 or 10 years (T. Boone Pickens predicts $300/bbl in 10 years) – we will have tightened our belts a good deal by the time any of this oil could actually reach the market. Therefore, I think now is the time for Congressional hearings on opening up these areas. Let’s have an open debate on the issue. However, if these areas are opened for drilling, I have a compromise that should be very attractive to those in opposition.

Hopefully this essay conveys a pragmatic approach designed to bring two sides in this debate closer together. At present it is hard to imagine that they could be further apart. A big part of the reason for the chasm between views is that there is a great deal of misinformation and misunderstanding surrounding the issues. I hope to address those in this essay.

A recent sampling of letters to the New York Times gives a flavor of the views of the opposing sides:

To Drill or Not to Drill? There’s the Rub

First a letter opposed to further drilling:

Allowing offshore drilling for gas as a solution to high fuel costs, as President Bush urges Congress to do, is as sensible as growing more food in response to rising levels of obesity or robbing a bank in response to overspending one’s budget.

While it is not popular, the clear answer, as it is in the case of overeating and overspending, is to cut back in the consumption of food, in the consumption of one’s salary and in the consumption of fuel.

Painful as it is, I applaud the $4 gallon because it is the one thing that has finally gotten the public to focus on the fact that we need to consume less. For the first time, one hears from every quarter, turn off the lights in rooms you are not in, recycle that paper, drive less and take public transportation or ride your bike. That is the kind of talk political leaders should be encouraging, not new ways to keep up the old habits.

And one in favor:

As a 40-year Alaskan, I can tell you that opening of the Arctic National Wildlife Refuge is the most sensible solution for America’s oil problems. Most of the people who are trying to stop drilling in the refuge have never been in our state.

You have no idea how little space they are talking about. Take a regular envelope, pretend that is the refuge … now where you would put the stamp, that is the area they want to open.

Alyeska Pipeline has worked, the gas pipeline is in the process, and the Arctic National Wildlife Refuge should be. Congress is making this a party fight. How about putting that energy into fighting for all Americans, as oil prices don’t care whether you are Republican or Democrat?

So, where does the truth reside? Is it not worth the effort? Or can we “drill here, drill now” and make a significant step toward energy independence? Let’s investigate.

What is the Objective?

This is the key to the entire debate. Different groups have different agendas, and desires are often based on misinformation. Take a couple of extreme examples. I consider myself an environmentalist, but one who is practical, and informed on energy issues. Let’s take an environmentalist who may be less-informed. Like me, they are concerned about the impact of continued fossil fuel consumption on our environment. When they think of drilling, they envision oil slicks washing up on the shore, and a polluted ANWR. They see oil companies – not ordinary citizens – as the primary beneficiaries if drilling is allowed. They are optimistic about the ability of alternative fuels to rapidly scale up and replace depleting fossil fuel reserves. Or, they don’t fully understand the implications of falling fossil fuel reserves, or in an extreme case they don’t care and think the earth could use a healthy die-off of the human population.

Each of these groups is going to be vehemently opposed to opening up areas to additional drilling. They simply don’t think there is a need, and that it will simply delay our transition to alternatives. Those in Congress who are so outspoken against additional exploration likely fall into the category of ‘alternative fuel optimist.’ If they can only keep the ban in place, alternatives, mass transit, and conservation will rise to the challenge. The key to this approach is that the alternatives must deliver when they are needed, and they must cover severe shortfalls. What if they don’t? What is Plan B? Shortages? Rationing?

For our other extreme example, let’s consider the Hummer-driving, non-negotiable lifestyle mentality. The majority of this group is also not very informed on energy. They believe that underneath U.S. territory lies an ocean of oil, waiting to be tapped – if those darned environmentalists would only get out of the way. They are prepared to drill through a polar bear’s head if it will mean cheap gasoline – which they know it will. These people are going to be very outspoken about the need to drill anywhere, anytime. This approach suffers from a very similar problem as the previous approach: What if the oil that is available simply can’t cover any severe shortfalls? What if the expectations of these vast oceans of oil lead us to delay actions on alternatives? Again, what is Plan B? Military action?

The majority of us fall somewhere in between, but it breaks pretty sharply along party lines. Democrats don’t want to drill, Republicans think we should drill. Perhaps we should first develop an idea of the stakes.

How Much Oil is at Stake?

That’s a big problem. We don’t know. All we have right now are ‘educated’ guesses. Multiple government agencies have made assessments. The Minerals Management Service in the Department of the Interior estimated in 2006:

The MMS estimates that the quantity of undiscovered technically recoverable resources ranges from 66.6 to 115.3 billion barrels of oil and 326.4 to 565.9 trillion cubic feet of natural gas. The mean or average estimate is 85.9 billion barrels of oil and 419.9 trillion cubic feet of natural gas.

Of that, they estimate that reserves in areas currently off-limits to exploration amount to just under 18 billion barrels. Based on the 2007 U.S. consumption rate of 20.7 million barrels of oil per day, 18 billion barrels would last just under 2.5 years.

The EIA estimate from areas currently off-limits to exploration was very similar at just over 18 billion barrels:

Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf

This graphic was recently used in a post at Grist by Joseph Romm, who argued that the amount of oil that is off limits has been greatly exaggerated. Based on the above graphic, Romm has a point, as the amount of undiscovered oil in areas open to exploration is more than twice the estimate from areas off limits to exploration. However, much of that oil is in mile-deep water that will be very expensive to develop. So the comparison isn’t necessarily apples to apples.

Estimates of recoverable oil from ANWR are of a similar magnitude. The Energy Information Administration (EIA) in a 2008 report noted:

In the mean oil resource case, the total volume of technically recoverable crude oil projected to be found within the coastal plain area is 10.4 billion barrels, compared to 5.7 billion barrels for the 95-percent probability estimate, and 16.0 billion barrels for the 5-percent probability estimate.

The EIA also presumes that it will take 10 years to scale up and bring production online:

At the present time, there has been no crude oil production in the ANWR coastal plain region. This analysis assumes that enactment of the legislation in 2008 would result in first production from the ANWR area in 10 years, i.e., 2018.

The primary constraints to a rapid development of ANWR oil resources are the limited weather “windows” for collecting seismic data and drilling wells (a 3-to-4 month winter window) and for ocean barging of heavy infrastructure equipment to the well site (a 2-to-3 month summer window).

The timeline broke down as 2 to 3 years to obtain leases, 2 to 3 years to drill an exploratory well, 1 to 2 years to develop a production development plan, and 3 to 4 years to build infrastructure.

What’s the bottom line? With an estimated 18 billion barrels of oil offshore and 10 billion barrels in ANWR, there is potentially enough oil there to meet four years of U.S. demand. However, in terms of imports, currently around 13 million barrels a day, there is potentially enough there to eliminate oil imports for nearly 6 years. Further, based on my proposal below, there may be enough there to eliminate imports for 20 years.

Finally, consider the economic ramifications. If we do nothing, despite well-intentioned calls for conservation, our insatiable demand for oil imports will continue. With production from some of our major suppliers having peaked (e.g., Mexico) and with internal consumption in other countries negatively affecting their exports, the price of oil will be under constant upward pressure over the long term. If we don’t produce those 28 billion barrels of oil, we will go and buy those barrels on the open market. At today’s oil price, that means that about $3.5 trillion will leave this country, much of it flowing into countries that are hostile to the U.S. By keeping that money at home, we can not only create jobs, but we have an opportunity here to fund a transition away from oil, and to more sustainable options.

Let’s Compromise

Both sides generally agree that our dependence on petroleum is a problem. Among the arguments from both sides is that this dependence puts our national security at risk and that it endangers the environment. I think both sides would agree that a long-term solution to the problem could be a combination of conservation, along with alternative options such as higher efficiency vehicles, electric transport, and mass transit. Where large numbers will start to disagree is whether this is achievable in the short-term, or whether it is going to take a few more years and a few more technological developments.

I fall into the latter category, for a variety of reasons. I am pretty familiar with a lot of the alternatives, and they are simply not competitive even at gasoline prices of >$4/gallon. To illustrate that point, consider Europe, where gasoline prices in many locations are now approaching $10/gallon. Even at that price, fossil fuels remain the dominant choice for transportation. It is going to take more than price – or at a minimum much higher prices than Americans probably anticipate – to drive us away from a very high level of dependence upon fossil fuels.

So how about a compromise? I propose that we open up some of the more promising areas to exploration, and then devote the royalties to funding fossil fuel alternatives. We could subsidize public transportation. We could provide a tax credit of $1,000 for each person who purchases a car that gets over 40 mpg. We could borrow a page from T. Boone Pickens’ plan, use these oil revenues to fund wind and solar power, and displace natural gas which could then be used to displace petroleum.

It is true that the oil won’t flow from these areas for perhaps a decade, but by then we are likely to be in very bad need of it. Prices will probably be very high, which means the royalties from the oil will provide a lot of money for funding alternatives. This should be a compromise that parties from both sides could agree to. If not, then what’s going to happen is that as prices continue to rise, so will the pressure to drill, and Congress will eventually cave in to these demands. But by failing to earmark the money for alternatives, it will just postpone the inevitable. So now is an opportune time to hold open Congressional hearings on the subject.

That’s a compromise I prefer. However, one that would have even greater support behind it would be to return an oil dividend to U.S. citizens (as Alaska has historically done). That is tangible for people, whereas funding the alternatives may not be. However, while I think this compromise would find wide support among many people with stretched budgets, it does nothing to address the problem of oil dependence. That, in my opinion, must be part of any solution.

A final excerpt from those New York Times letters summed it up best, in my opinion:

People say we should have a Manhattan Project-style program to develop alternative energy. That is fine, but while the Manhattan Project was continuing, we did not put World War II on hold while we waited for the atom bomb. The conventional war was continually fought throughout that time.

Conclusion

As I recently calculated, we could displace a great deal of our fossil fuel consumption with solar power, but it will ultimately take a multi-trillion dollar investment. We could borrow from T. Boone Pickens’ plan and use wind and solar power to displace natural gas that is currently used to produce electricity. That natural gas could then be used in CNG vehicles to displace petroleum. The net impact would be a large reduction in our fossil fuel consumption (and note that it is much easier to produce natural gas from biomass than it is to produce liquid fuels).

We sit on top of trillions of dollars of oil. We should use it – sparingly – to wean ourselves from oil dependence. The realistic alternative to this is that we continue to be highly dependent upon petroleum. As a result, we will watch those dollars flow out of the U.S. – right up until the point that our imports dry up and we watch a new generation of sons and daughters march off to fight resource wars because of our failure to plan ahead.