Tag Archives: Regulation

The Dirty Little Secret of Economic Impacts of Federal Rules

Posted on by
Reply

“We, the U.S. Fish and Wildlife Service (FWS) and the National Marine Fisheries Service (NMFS) (collectively referred to as the ‘‘Services’’ or ‘‘we’’), propose to revise our regulations pertaining to impact analyses conducted for designations of critical habitat under the Endangered Species Act of 1973, as amended (the Act). These changes are being proposed as directed by the President’s February 28, 2012, memorandum, which directed us to take prompt steps to revise our regulations to provide that the economic analysis be completed and made available for public comment at the time of publication of a proposed rule to designate critical habitat.”  —Preamble to FWS–R9–ES–2011–0073, Proposed Federal Rulemaking published August 24, 2012.

If this is all you read about this proposed rules change, you’d think, “OK, no big deal this makes sense. We want the economic impact analysis of Federal rules to be complete—otherwise why bother.  We also want to see that complete analysis before the public comment period so we can actually comment on the estimated cost and impact of proposed rules.”

But according to a newly released Stoel Rives analysis of the impact and implications of the proposed critical habitat rules change, the dirty little secret is  you would be mistaken.

Critical habitat protection has been one of the most controversial and intrusive provisions of the Endangered Species Act (ESA).  The goal of the provision was to avoid doing more harm to endangered species thus giving them an opportunity to sustain themselves.  The ESA says Federal agencies may not take actions that destroy or adversely affect critical habitat.  There is nothing wrong with this goal, but the way it has been applied has resulted in situations where the designation amounts to a virtual taking of private property for a public purpose.

This critical habitat designation provision also creates opportunity for abuse of discretion if Federal agencies or environmental interveners use it to coerce outcomes that undermine the economics of proposed projects.  We often refer to this as NIMBY or other pejoratives, but they are symptoms of a Federal environmental regulatory process that is out of balance.  The review of the real implications of this proposed rules change is a good case study in the creeping process of environmental GOTCHA played out by rulemaking.

To balance the coercive potential of critical habitat designation, the Stoel Rives analysis reminds us that the ESA requires Federal agencies to “consider potential economic, national security, and other relevant impacts”. This includes economic impacts to private landowners and developers.  And in cases where this balancing of interests finds that there are more economic, national security or other benefits from doing so the Federal Agencies “may exclude an area from critical habitat” if those benefits outweigh the benefits of including it in the designation.

See why this is so contentious?

The case law is littered with conflicting decisions in these matters.  And that too creates opportunities for mischief.  Here we can even sympathize with Federal bureaucrats trying to write rules that will apply to all when a decision in one Federal court may be at odds with a decision interpreting the same provision differently in another.  That is what apparently provoked this proposed rulemaking.

Dueling Appeal Court Rulings

The Ninth Circuit Court of Appeals, the most overturned court in the nation, adopted a “baseline approach” to critical habitat designation which allowed the Federal agencies to consider only ‘incremental impacts’ in their economic impact analysis of critical habitat designation.  The practical effect of the ruling in the Western states where it was applicable was to enable the agencies to calculate the cost of a rule using minor additional administrative costs rather than the total regulatory burden.  The result , of course, was much more critical habitat was found to pass the cost benefit test and many more landowners were suing to stop it in Federal court.

In the Tenth Circuit Court of Appeals the same question was litigated and appealed with the opposite result.  The Tenth circuit said the baseline incremental approach used in the Ninth Circuit was unlawful precisely because it ignored the full cost of regulatory burdens in measuring the overall cost and benefits of the critical habitat designation as required by the ESA.

So what?

So the proposed rulemaking seeks to adopt the Ninth Circuit opinion allowing this incremental baseline approach and reject the Tenth circuit opinion.  If this proposed rule is adopted it surely will be litigated to the DC circuit where Federal rules are appealed and perhaps then onto the US Supreme Court.

You may comment on the proposed rule until October 23, 2012 as follows:

  1. Federal eRulemaking Portal: http://www.regulations.gov/#!home;tab=search . Search for FWS– R9–ES–2011–0073, which is the docket number for this rulemaking.
  2. U.S. mail or hand delivery: Public Comments Processing, Attn: FWS–R9– ES–2011–0073; Division of Policy and Directives Management; U.S. Fish and Wildlife Service; 4401 N. Fairfax Drive, PDM–2042; Arlington, VA 22203. We will post all comments on http://www.regulations.gov.

High Gasoline Prices and Politics are a Volatile Mix

Posted on by
Reply

Nothing infuriates Americans more than volatile, spiking gasoline prices.  Often the causes given for gasoline price hikes seem contrived.  Iran and Israel trade harsh words in press reports and before the ink is even dry of the page oil prices tick up.  Word of a fire at an oil refinery is enough to send prices shooting up as high as the flames on the cracker —and just as fast.

Those price spikes never seem to come down nearly as fast as they shoot up.  Politicians are quick to blame oil companies for gouging customers, speculators for manipulating markets, traders for withholding supply.

The truth about gasoline price volatility is both a little more complicated and yet quite simple. The factors that seem to have the most impact on gasoline prices include:

  • Global Oil Swing Productive Capacity.  While the world has plenty of oil overall, prices are set by the amount of excess capacity at the daily margins.  That is how much oil is left over when all the contracts for delivery are met.  How much oil is available if something goes wrong?  If some refinery shuts down?  If some pipeline bursts?  If some war breaks out?   This marginal oil quantity has traditionally been controlled by Saudi Arabia’s ability to ratchet up or ratchet down the amount of oil pumped each day.  This control over swing productive capacity is what gives OPEC its market power and drives the rest of us crazy.
  • The Refinery Business Model.  The oil refining business is a hard way to make a living.  These plants are enormously complicated.  They require skilled precision to keep them operating at optimal performance and many things can—and do go wrong.  Yet it is almost impossible to build new refineries in the US today because of the environmental regulation, high capital costs and the NIMBY pressures in every potential location.  We live close the edge of full refining capacity, yet refining margins are very thin because the costs of operation are so high.
  • Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron refinery near my home in the San Francisco Bay area adversely affected the supply of the blends of gasoline used in many of the Western States.  A pipeline rupture in the Midwest reduced the supply of oil to refineries serving Chicago.  While do these incidents have such a major impact on gasoline supply and price?  Because the environment restrictions on fuels has created a system of boutique fuel blends that are virtual monopolies in many markets.  The gasoline produced in the Richmond Chevron refinery is specifically designed for the Western market and no other gasoline products can be shipped in from other states to make up for a supply shortfall when a fire or other supply chain problem happens. So having reasonable gasoline prices requires that virtually EVERYTHING must work perfectly in the gasoline production supply chain—or else.

It does not have to be this way, but Congress passes laws without the slightest regard to how they will be implemented or enforced in practice. Congress takes credit for Clean Air but allows bureaucrats to impose regulations that have costs or impacts far beyond what the law intended.   This happens because our environmental laws are written to ignore the cost while taking credit for the benefits.  Our laws allow Federal agencies to set their own standards for measuring benefits.  They are not subject to any burden of proof.  The laws allow comment periods on rulemaking proposals but the bureaucrats do not have to accept the comments.  The system is one-sided and so are the costs!

A more balanced and reasonable approach to environmental regulation would require Congress to approve major rulemakings by a Federal agency so it cannot avoid the accountability for imposing the costs.  Existing regulations should be subject to sunset provisions and forced to be reconsidered regularly to reflect changes in technology and other factors. New laws requiring regulations should not go into effect until the final rules to implement the law are approved by Congress. Just as environmental advocates can sue in Federal Court to enforce environmental laws, those subjected to them should be able to sue over the reasonableness of the impacts of the law and rules to force the government to own its burden of proving that the benefits outweigh the costs and do not constitute an unreasonable taking of private property for which just compensation is required.

These changes in our regulatory regime won’t get more refineries built, but they would inject some common sense into the regulatory process and force the Federal agencies that dream up all these rules that the benefits are worth the cost and the practical application of proposed rules is reasonable and in the public interest.

Don’t Mess with Texas, US EPA!

Posted on by
Reply

Don’t Mess with Texas!  That was the bottom line in a 23-page opinion by Circuit Judge E. Grady Jolly who headed a three judge panel from the Fifth US Circuit Court of Appeals based in New Orleans reviewing the appeal by the State of Texas of the US EPA action denying approval of a state requested Flexible Permit Program under the Clean Air Act.  The court said US EPA’s action was “arbitrary and capricious” and that its delay in deciding the matter was unreasonable.

The Appeals Court remanded the matter back to the EPA essentially forcing the agency to approve the plan or give the court a substantially better justification for denial.  The Appeals Court opinion is a woodshedding for US EPA:

“Sixteen years tardy, the Environmental Protection Agency (EPA) disapproved a revision to Texas’s plan for implementing the requirements of the Clean Air Act. The untimely disapproval unraveled approximately 140 permits issued by Texas under the revision’s terms, and now requires regulated entities to qualify for pre-revision permits or risk federal sanctions.”

It didn’t get better for US EPA after that either.

“We hold that the EPA’s disapproval of Texas’s plan fails Administrative Procedure Act review. Although the EPA acknowledges the distinct role of the states, which is Congressionally called for in the design and enforcement of State Implementation Plans, the EPA based its disapproval on demands for language and program features of the EPA’s choosing, without basis in the Clean Air Act or its implementing regulations. For the foregoing reasons, we GRANT the petition for review, VACATE the EPA’s disapproval of Texas’s plan, and REMAND.”

This case dates back to 1994 when Governor Ann Richards submitted the Texas Flexible Permit Plan to US EPA for approval.  EPA filed the request until a group of industrial parties sued more than ten years later demanding that EPA decide the matter.  The suit was settled with an agreement that EPA would issue a decision.

Judge Jolly’s opinion goes on:

“The EPA proposed disapproving the Program in 2009 and issued final disapproval of the Program on July 15, 2010. Proposed Rule; Flexible Permits, 74 Fed. Reg. 48,480 (proposed Sept. 23, 2009) (to be codified at 40 C.F.R. pt. 52); Final Rule; Flexible Permits, 75 Fed. Reg. 41,312 (July 15, 2010) (to be codified at 40 C.F.R. pt. 52). As a result of the EPA’s disapproval every facility with a flexible permit could face fines or other enforcement action irrespective of emissions levels. The petitioners now challenge the EPA’s ruling and seek to set it aside.”

That’s where the Judge threw the line on EPA discretion:

“We begin with the EPA’s primary ground for disapproving the Flexible Permit Program: The Program might allow major sources to evade Major NSR. The EPA found that the Flexible Permit Program “has no express regulatory prohibition clearly limiting its use to Minor NSR and has no regulatory provision clearly prohibiting the use of this submitted Program from circumventing the Major NSR SIP requirements.” 75 Fed. Reg. at 41,313.

The EPA’s concern is that the Flexible Permit Program, which Texas has represented as a form of Minor NSR, might make it possible for major sources to evade Major NSR. Id.

“This danger exists, the EPA argues, because of the absence of an express statement that the Program does not apply to major source construction or modification.”

“Although the EPA’s concern over the potential for Major NSR evasion involves the Agency’s interpretation of a law, it does not involve the interpretation of a federal law. Before approval by the EPA, a SIP revision is state law for which the EPA’s interpretation is not authoritative. Luminant Generation Co., LLC v. EPA, 2012 WL 3065315, at *14 (5th Cir. July 30, 2012) (citing American Cyanamid, 810 F.2d at 493). We need not, therefore, accept that Major NSR evasion is probable based solely on deference to the EPA’s interpretation of the Texas law that forms the basis of this petition. “

“Furthermore, the EPA did not make findings demonstrating that the Flexible Permit Program “would interfere with any applicable requirement concerning attainment” of NAAQS “or any other applicable requirement” of the CAA. Although we do not here decide whether the EPA must make findings before concluding that a SIP revision would interfere with the requirements of the CAA, the lack of findings moots any suggestion that we must defer to the EPA’s technical expertise. The EPA did not rely on its technical expertise in rejecting the Flexible Permit Program, and we cannot either. Thus, our interpretation of the Texas law that forms the basis of this petition is not influenced by deference to either the EPA’s interpretive or fact finding ability. We do not decide whether the EPA must make fact findings demonstrating interference with the CAA because it is unnecessary in this case: The EPA has failed not only to put forth evidence demonstrating interference, but also to put forth a cogent theory on how Texas’s manner of drafting would result in interference. The standard for disapproving a SIP revision—that the revision would interfere with the CAA—surely requires more than the EPA’s bare conclusion.”

“The Flexible Permit Program does not allow Major NSR evasion because it affirmatively requires compliance with Major NSR. The operative language, found in 30 Tex. Admin. Code § 116.711(8)-(9) (2010), states with respect to Major NSR. . . .”

This will probably not be the last time bureaucrats are challenged for substituting their administrative discretion when the plain language of the law does not fit a policy objectives.  But the courts are beginning to take notice especially when the consequences of such actions are as material as they are in this Texas case.  Good facts make for good case law and this time Texas had them on its side.

The Revenge of Competitive Markets and the Big Shift in Energy Economics

Posted on by
Reply

The economy, jobs and the debate over the direction of the country dominate 2012 political campaigns.  Nowhere is the political rhetoric fiercer than on energy issues.

Today there is wave after wave of new Federal regulation designed to favor clean energy strategies at the expense of fossil fuels that still provide most of our energy resources.  There is broad public support for environmental quality but we see Federal energy industrial policy as hugely expensive, highly disruptive with spotty results.

Meanwhile, over the same period we saw phenomenal growth in domestic oil and natural gas production made possible by the disruptive innovation technologies horizontal drilling and hydraulic fracturing in unlocking the economic value of previously uneconomic energy supplies.  The results of this big shift energy transformation are clear and measurable.  The volume of domestic oil and gas production is growing.  The price for natural gas has been completely decoupled from oil prices. Domestic natural gas prices are near historic lows. The expectation that the US was running out of natural gas and must import LNG to make up the difference has been turned completely on its head.  Supply production now exceeds domestic demand and by 2011 the US began to export natural gas and was beginning to rationalize the energy pipeline infrastructure for both oil and gas to bring supply from the shale basins to the Gulf coast storage, liquids processing and refining infrastructure and enable exports of oil and LNG from these new sources. Step by step, state by state the private energy industry isn’t waiting for the government to act because there is opportunity, jobs, business growth and profits on the line and shareholders expect business to pursue them.

The contrast between the public sector and private sector energy strategy results is evidence of the big shift taking place all across America.  If anyone thought America’s best days are behind us, take a look at the genius of America at work today.  America is reinventing itself again.  The combination of the drive to get our economy growing and get America back to work is converging with new technology and the entrepreneurial spirit of private enterprise.

Domestic Energy Production Growth is leading America back to Work

Over the past five years, the US private sector has produced more than 96 percent of the increase in domestic oil production  on private and state lands according to the Institute for Energy Research. While more than two trillion barrels of oil are estimated to be recoverable from Federal lands, the policies and regulations in place by the Federal Government has actually resulted in a decrease in energy production on Federal lands.

Why did the private sector account for such a huge percentage of this growth?  Because America still believes in private property rights including the right of land owners to benefit from the mineral resources their property contains.  So energy producers avoided the Federal government by working with private property owners and states to develop domestic energy resources that helped the states create jobs, increase tax revenue, and put more money into the pockets and bank accounts of the private sector.  Those revenues and profits are rippling through the economy.  That is why North Dakota has an unemployment rate of about 4% compared to a national average twice that.

The inconvenient truth in this growth of domestic energy production is the realization that the decline and fall of fossil fuels is not inevitable.  Despite the waves of onerous new Federal regulations on coal in pursuit, the private sector has adapted profoundly changing the economics of fossil fuels driving down the price of cleaner natural gas and exporting unused coal production.  The irony in this is low natural gas prices are more ruthlessly efficient at undermining the economics of coal fired generation than all of the US EPA rules combined.  But low natural gas prices are an equal opportunity competitor forcing nuclear power and renewable energy to also compete with grid parity natural gas prices for a place in the energy food chain.

The big shift is that low natural gas prices force a de facto compromise in the long battle to define a clean energy policy for America.  Natural gas is 40% cleaner than coal and expanding its use produces substantial environmental benefits over coal at a fraction of the cost of all the EPA regulations, litigation and political infighting.

Low natural gas prices also go a long way toward restoring America’s economic competitiveness in manufacturing, in chemicals, and job creation made possible by repatriating outsourced production driven out of the country by high energy costs.  To realize this revival in manufacturing and production in the private sector, the Federal Government must fix the problems in our corporate tax rates that make the US the highest corporate tax rate in the world and remove the tax barriers to repatriating earnings that now confiscate 35% of the revenue brought home.

But too much dependence upon natural gas is risky business.  While today we have natural gas prices below $3 per MMBTU it was not long ago that gas prices were above $13 per MMBTU.  Indeed, natural gas prices are among the most volatile of the world’s commodity prices.  The way to avoid getting hurt by fuel price volatility is to diversify.   That is why we need baseload coal and nuclear.  That is why we need rooftop solar and wind energy.  That is why we need strong markets for energy efficiency and demand response.

The private markets are searching for energy equilibrium—that sweet spot in the market that assures high reliability of energy supply, the cleanest practicable balance of fuels and resources, at the lowest possible price.  Low energy prices are one big advantage for America’s economic recovery but they are not the only advantage of our tradition of reinventing America to adapt to changing times.

Disruptive Innovation Technology is our friend—just as horizontal drilling, hydraulic fracturing and other disruptive innovation technologies are helping to transform America’s energy value chain, information technology and operations technology are converging into strategies, applications and best practices to streamline and optimize the way America does business.

Instead of trying to pick winners and losers, the Government should create a competitive marketplace with fair rules, no subsidies and turn the private sector loose.  The genius of America is our ability to continuously reinvent ourselves to adapt to change.  The failure of government is impeding that disruptive innovative change.  The 2012 election campaign question is which candidate is better able to unleash the genius of America once again—and then get out of the way!

Natural Gas is Cleaner, Cheaper, Easier and Riskier

Posted on by
1

There is much to like in the growth of natural gas as the marginal fuel of choice for power generation.  Clean, cheap, easier to site, quicker to build, fewer regulatory or environmental hassles—-and it cuts emissions 40% compared to coal.

A new study by Professor Lawrence M. Cathles, Cornell University, recently published in the journal Geochemistry, Geophysics and Geosystems calls natural gas a transition step to a low-carbon energy future of wind, solar and nuclear energy.  He says hydraulic fracturing is driving down the price of natural gas and the risks from fracking are well worth the benefits.

On the surface Professor Cathles’ conclusions seem tough to argue with.  What’s not to like about a forty percent reduction in greenhouse gas emissions at low natural gas prices.

But I’m not as sure we should blindly sign up for either the professor’s transition to a wind, solar and nuclear future.  Nor am I convinced that it makes sense to project the current low natural gas price conditions forward.  We’ve seen this movie before.  Are we so enthralled with natural gas prices below $3 that we forgot that they were above $13 not that long ago.  Anyone trying to manage a power generation portfolio will tell you that one of the great uncertainties in trying to forecast natural gas prices—one of the world’s most volatile-priced commodities.

Today, horizontal drilling and hydraulic fracturing have unlocked the natural gas resources previously uneconomic from the shales across North America.  The result is historic low prices, historic high supply levels with America trying to do the same thing in natural gas  that China has done skillfully in solar photovoltaic panels and wind turbines—boost exports and bring home the bacon!  I doubt America’s natural gas exports will ever rival China’s export prowess, but the lure of high LNG prices in Asia and elsewhere is enough to worry Russia, Qatar and other gas exporting nations.

Depending upon nuclear power for a clean energy future is also a movie we have seen before.  The same looming threat of high interest rates, higher inflation, regulatory uncertainty and long tortured approval, permitting, and construction cycles killed off the last wave of proposed nukes.  Low natural gas prices even in the absence of these other risks is successfully undermining the future of the next generation of nukes as well.

Wind and solar have been the regulatory and political favorites of the past decade and both have made tremendous progress.  In 2005, at Global Energy Decisions we published Renewable Energy: The Bottom Line to support our conclusions that wind first and later solar would become mainstream resources and we were willing to give independent market opinions on renewable energy projects when the numbers penciled out.  This study was important in its time adding credibility to a fledgling industry that has serious bankability problems. But despite their success, these renewable resources are a small share of the total installed power generation capacity and their intermittency make it difficult for them to displace coal or natural gas.  Having a large fleet of baseload nuclear energy with supplemental renewables is a good combination but it has a low probability of success.

That brings me back to the central question of whether gas is too risky.  Today we have an abundant supply of natural gas and the prospects of more from the domestic energy growth of shales.  But what would happen is the US EPA slaps onerous regulations on hydraulic fracturing which limits the growth potential of horizontal drilling?  Our $3 natural gas price could quickly turn back into the $13 natural gas prices we experienced less than a decade ago when we thought it would be necessary to import LNG to make up for the domestic natural gas shortfall from conventional drilling.

What would happen is, in the absence of building new nuclear power plants, we begin to experience the double whammy loss not only of the existing coal fired generation but the retirement of the existing nuclear fleet?  The tube corrosion problems at California’s two nuclear power plants is amble evidence that surprises can happen.  There is no way wind and solar can make up for the loss of both coal and nuclear baseload.  We can build plenty of gas fired combined cycle generation and gas peakers but the price of natural gas will certainly go up and become more seasonably and regionally volatile.

The fallacy in professor Cathles’ logic is that without new nuclear power generation there is NO transition plan.

Depending upon natural gas to carry the day in a transition period while other baseload resources slowly exit the fleet as they are replaced with new resources is one thing.   But relying upon natural gas to carry the weight of baseload generation from both coal and nuclear priced or regulated out of the market, carry the weight of load following resources in a (hopefully) recovering economy as demand grows and regional reserve margins shrink, and count of natural gas to back up all that renewable energy from wind and solar is asking for ugly price volatility surprises and market instability.

The market ‘transition’ we are more likely to see is dramatically higher utility rates and less grid reliability.  The reason is we are soon to face the cumulative cost of policy biases in favor of renewable energy, a smarter grid, reduced greenhouse gas emissions and the shift to power generation of the emissions burdens of transport to trump a ‘least cost, best fit’ strategy of assuring grid reliability.  We’re going to need all the low natural gas prices we can get to help offset the cumulative cost of our industrial policy changes, but it is not going to be enough to prevent rates from going up—way up.

Energy Dodged the Dodd Frank Bullet

Posted on by
Reply

Energy industry appears to have successfully dodged a big Dodd Frank bullet with the Commodity Futures Trading Commission (CFTC) decision July 10, 2012 by a 4-1 vote defining a “swap” for energy transaction purposes as largely exempting any regulatory driven environmental transactions.  The types of typical transactions exempted includes environmental commodities, power supply peaking supply contracts, tolling agreements and many natural gas supply contracts, as well as environmental transactions including carbon offsets, emissions allowances and renewable energy credits.  All remain exempt from CFTC rules.  A decision classifying these transactions as swaps would have subjected them to onerous new regulations under Dodd-Frank.

A combination of prayer, constant lobbying and unanimity of opposition across the energy industry over the last two years since Dodd Frank was approved by Congress and signed into law by President Obama seems to have worked.  But the rising chorus of worry about the cost and implications of defining swaps as a forward and thus subjecting them to the Dodd Frank rules was also holding up the rulemaking process itself because the CFTC has jurisdiction over swaps and options, but not forwards. So until it defined a swap the Dodd Frank rules remained stalled.

The decision by the CFTC keeps energy transactions with volumetric optionality outside the technical definition of a swap thus allowing the industry to continue to use contracts that changes the volume of natural gas, electricity or other energy commodities consumed during the course of the agreement.  That flexibility always made practical sense but this is Washington DC and practical is not always politically correct.

The American Petroleum Association, the American Gas Association, the Coalition for Emission Reduction Policy, the Environmental Markets Association, the American Wind Energy Association and other energy industry trade groups had been persistent and blunt in their views that the CFTC should not mess with the basic contract vehicles that help keep the energy market balanced.

The CFTC decision now starts the clock ticking on more than 20 Dodd-Frank rules pending for reporting, clearing, trading and record-keeping which can now be finalized as early as September. Those firms that are covered by the swap definition have sixty days to register and disclose their required data.  But the Energy industry was not the only interest looking for relief. The swap definition adopted by the CFTC also includes exemptions for life insurance, property and casualty insurance, interest-rate caps on consumer mortgages and home heating oil agreements and other retail transactions were also exempted.

Smart Grid versus a New Blue Mustang

Posted on by
Reply

When smart grid was in its infancy the toy of choice was a smart meter.  Like a stuffed animal in the crib every home had one.  Now smart grid is reaching adolescence and the toys cost more.  A lot more.

The smart grid phenomenon is maturing and that is shifting the way the electric power industry addresses the changes, opportunities and risks it brings.  Smart grid burst onto center stage stimulated by more than $3 billion in Federal stimulus money like a teenager with raging hormones.  Instant gratification was provided by spending on flashy smart meters and pimped out communications systems used to collect the data the meters spit out.

Yes there were growing pains, big data, too much data, worries over who had access to data and what they would do with it.  These issues are largely being worked out without major hiccups even while a few locations still quarrel over the health, safety and other objections to going digital.

A new study by Zpryme called The Optimized Grid was released in July 2012 charting the forecast of smart grid growth around the world through 2020.  The study says the current opportunity for smart grid vendors is expected to grow to nearly $34 billion by 2020 compared to about $6 billion today.

Holy Rate Hikes!

North America’s global market share of that growth will shrink from 44% of today’s market to about 28% as growth in Asia Pacific catches up.  Even so that 28% of $34 billion represents about $9.5 billion of 2020 market opportunity in North America compared to about $2.6 billion today.

North America is expected to reach saturation in deployment of smart meters by 2014—that will be the easy part of the transition to smart grid.  The tougher and longer to implement process of distribution automation and grid optimization, the evolution of the distributed energy strategies for the future and the transition in fuel use and technology mix will take longer to accomplish.

Optimizing the power grid is a slow process of upgrading and integrating new technologies to improve efficiency, make power flows and communications works seamlessly two-ways instead of just from the utility to the user.  Integrating renewable energy, combined heat and power, microgrids and thousands to new entrants as market participants democratizes the grid like never before but also dramatically increases the security risks and vulnerabilities.

Experiences like the recent storms in the Eastern interconnect which took down power lines and left millions in the dark for days sensitize both utilities and customers to the need for better grid reliability which we often take for granted.   Distribution automation will never prevent a tree from falling on a power line but it might be able to isolate the outage, re-route service from other sources, and even ‘self-heal’ some equipment malfunctions or restarts—-but that will cost money—big money!  Making all these smart grid improvements is what is going to absorb the bulk of that investment that gets North America to a $9.5 billion smart grid market by 2020.

While digital technologies have improved substantially, distribution automation is not a new idea.  What jump started smart grid was the willingness of the Federal Government to spent $3.4 billion in Federal stimulus money on it.  Now that money is spent and distribution automation is back where it started.  To win approval from state public utility regulators in rate increases, DA must be able to produce benefits worth its costs.  And since we are now going to be spending our own money not Uncle Sam’s (WAIT!  That is our money too!) the burden of proof is higher.

Yes, your utility rate will go up, but you already knew that.

The question is whether it will be worth it when the smart grid is fully built out.  The engineers estimates that smart grid improvements could reduce distribution losses by as much as 30%.  The U.S. Energy Information Administration says that US electric distribution losses totaled 261 billion kWh in 2010 so clearly there is room for improvement.  Worldwide the loss number is higher with average worldwide electricity losses averaging about 9%.

In 2005, the Electric Power Research Institute (EPRI) estimated the cost for integrating distribution substation automation to the grid infrastructure at about $10 billion and feeder automation at $70 billion. But those estimates are old and the cost is likely to be higher, much higher as new regulations for security, interoperability standards, regulations and other costs are added up.

And that remains the question ratepayers want answered.  Will the benefits of smart grid be worth the cost?  Should I give my kid the keys to my old Honda with lots of miles on it but still many miles left even if I have to fix it every so often—-or buy the kid that new Mustang convertible he wants!   As ratepayers we won’t get that choice—we will pay the equivalent of many new Mustangs in higher rates but you will never get to drive it and chances are your power is still going to go off when the wind takes down some tree.

Preparing for the Next Boom

Posted on by
Reply

It does not feel like recovery.  Recovery is a time for rationalizing the old and positioning for what is to come.  I know it seems like the economy is still in the ditch.  But now is the time to get to work preparing for the competitive, smart-grid enabled, distributed, global energy future.

But first we still have some clean-up work to do. 

Over the last two energy business cycles we saw high inflation crater nuclear power generation, the rise of exempt wholesale power generators, qualifying facilities, wind and solar power all competing to take its place.  Competition was the regulatory policy of choice after the huge cost overruns of nuclear power that combined inflation, high interest rates, supply shocks from embargoes of Middle East oil, and a worry that the US was running out of natural gas.

PURPA in 1978 and the Energy Policy Act of 1992 ushered in avoid cost qualifying facilities and merchant power producers. The energy market consulting business needed new tools.  Production cost models of electric supply and demand leveled the playing field and provided an independent view of reserve margins, expected wholesale electricity prices, avoided cost and the optimal fuel mix to achieve least cost, best fit balance in a power supply portfolio.

By 2007 as the boom stage in the last power business cycle was giving way to bust, the contraction in consulting work lead to consolidation of the power market modeling players.  That brings us back to the present. Preparing for recovery, the market again needs help navigating the volatility and uncertainty in fuels and fundamentals around the world.  But today the market is different but the tools are the same.

We transformed the energy marketplace from the fragmented utility dominated regional markets into the multi-market integrated transmission markets.  Renewable portfolio standards and Federal stimulus money helped scale the growth of wind, solar, demand response and other alternative technologies.  Smart grid technologies shifted the focus to performance optimization needs emerging in a distributed energy world of rooftop solar, microgrids, combined heat and power projects, customer aggregators and other new entrants.

Those old production cost modeling tools are still used and useful but they are no longer sufficient to manage a portfolio of fuel, power production, customer segments and self-generation along with procurement contracts dynamically changing. Integrated, smart grids require collaboration and interoperable technologies.  Global competition for solar PV and wind turbines has undermined national protectionist industrial policies.  Domestic energy production growth  brought falling natural gas prices turning regulatory drivers on their head and sacrificing political correctness on the altar of lower costs.

And that is just the electric power side of the energy industry.

On the upstream oil and gas side, the world has tilted on its axis from the growth of unconventional production using horizontal drilling and hydraulic fracturing to extract oil and gas from shales and oil sands.  So profound has been this transition that North America turned into an energy exporter because we can no longer consume all the natural gas and soon oil we are able to produce and there is no place left to store it.  The growth in domestic energy production of oil and gas is now intimately linked with the electric power side of the energy industry.  Falling natural gas prices are savaging coal fired generation, nuclear power and renewable energy forcing each to compete with near record low gas prices.

While the Federal Government issues waves of needless new regulations, it is low natural gas prices that are killing the economics for many coal and new nuclear power plants.  Wood Mackenzie now estimates that 78 gigawatts of coal fired power plants will be retired as a result.  ICF confirms that estimate saying 50 gigawatts of coal and 70 gigawatts of older fossil fuel power plants will be retired by 2016.

The question is what will replace it?  Environmental advocates hope it will be renewable wind and solar.  We are certainly building plenty of it.  But volatility happens and it does not spare the politically correct.  Oversupply of photovoltaic panels and wind turbines from China flood world markets to suction up subsidies and feed in tariff supports to capture market share.  Today we have two times more PV supply than demand and PV producers and wind manufacturers are feeling the pain. This market imbalance is rapidly bankrupting the solar and wind producers we are counting on to meet the next wave of growth in the energy business cycle.

And then there is this.  Despite environment policies opposing fossil fuels, the least cost, best fit, most sustainable alternative to coal is not solar and wind but natural gas fired generation. That is why we are fighting over fracking because low gas prices force renewable energy to compete despite rules jury rigged to favor it.

We still need energy fundamental analysis of supply and demand to plan for our energy future.  Power markets may still be regional but fuels markets are global and so is the competition for access to the energy supply.  Managing an energy portfolio today is more like managing a hedge fund.  And then are the messy problems of customers— customer aggregators, combined heat and power, demand response, net zero building codes, microgrids, Tres Amigas-like potential grid boundary hoppers not to mention the looming hope for more dynamic pricing, energy storage, electric vehicles and net metering.

See what I mean?  Fundamentals matter. Economics matter.  Technologies matter. Rules matter but so does balance if we want it to be sustainable.  Competition brings balance between each element, each fuel choice and each alternative technologies forced to compete on a level playing field where the rules are not rigged to preselect winners and punish out of favor losers.  Only then will be achieve the least cost, best fit balance that produces the best available environmental results for the next boom.

Getting our energy economics balanced is essential to economic recovery and sustainability.  If we undermine our energy potential for growth we risk losing an entire generation struggling to pull our nation out of the ditch.

 

The Search for New Energy Market Consultant Leadership

Posted on by
Reply

The energy industry has been turned on its head by the impacts of the recession, global energy competition, and new regulations to reduce greenhouse gas emissions, expand renewable energy, and make the power grid smarter.

The insatiable energy demand from emerging economies is driving technology change making the oil patch more digital and accessible through horizontal drilling and hydraulic fracturing. Disruptive innovation technology dominates the transformation of the energy industry.

Even the tragedy of the BP oil spill in the Gulf of Mexico turned into a catalyst for change as drilling activity in the Gulf was hurt by the moratorium so oil rigs went elsewhere and savvy E&P professionals looked for ways to stay in business while the mess got cleaned up in the Gulf.   Onshore drilling in shales by scores of small, scrappy firms grew tremendously helping pick up the slack.

This energy transformation has profoundly affected North American domestic energy production from onshore E&P activity in the shale and oil sands rapidly turning both the US and Canada into energy exporting nations, reducing our dependence upon imported oil and driving down the price of natural gas by decoupling oil and natural gas prices.

North Dakota passed California as the third largest oil producing state and is closing in on Alaska’s second place. Energy infrastructure designed to move product from the Gulf of Mexico north across North America is being rationalized as pipelines reverse flows to bring oil from shales and oil sands to the Gulf coast refineries and storage for export.

Global energy competition has also produced global rivalries for market share growth.  China caught the wave of regulatory demands and incentives by commoditizing production of solar photovoltaic panels and wind turbines to capture global market share.  Prices are falling worldwide to the cheers of environmental advocates and customers and the agonizing cries of competing domestic producers bankrupted by low-bid Chinese prices.

GTM Research released its latest study of global solar photovoltaic supply and demand entitled PV Technology, Production and Cost Outlook: 2012-2016 which estimates that there is twice as much global PV supply (59 gigawatts) than demand (30 gigawatts). This is the reason solar PV prices have fallen hard and fast and are likely to continue to do so until the market clears and stabilizes. The GTM analysis says more than 60 gigawatts of wafer, cell and module manufacturing capacity must be shut down by 2015 to rebalance PV supply and demand.

This global imbalance is driven by feed-in-tariffs and other subsidies, renewable portfolio standard procurement regulations and government loan guarantees in the EU and US that stimulated demand, but provoked an unsustainable supply response at a huge cost to taxpayers and ratepayers.

Energy Market Consulting and Analytics is also being Rationalized.

The traditional boom and bust cycle of the energy industry was amplified by the power of the global recession and slow economic recovery. The energy industry is driven by fundamentals across markets.  After a nearly ten year build-up and boom stage that ended with the recession in 2008, the fortunes of energy market consultants and analytics services also have radically changed. Many traditional energy market consultants and software vendors were hurt as the market fell.  Consolidation saw many of the market leading players bought up.

  • ABB bought Ventyx and turned it into its software integration shop.
  • SAIC bought RWBeck for its critical infrastructure protection division.
  • Siemens acquired Pace Global.
  • Deloitte acquired Altos Management’s MarketBuilder software.
  • PA Consulting and Navigant shifted scaled back their energy practices.
  • WoodMac private equity parent, Charter House, put it on the auction block after buying it in 2008 in a fire sale price now hopes to cash in a flip.

One by one the dominoes have fallen as the traditional energy market consulting leaders during the last boom have morphed hoping to survive the bust. As a result, in 2012 there is a vacuum in the energy market analytics consulting leadership.  Smaller regional consultants picked up some of the slack but these players lack the scale to cover the whole global energy competition story. Energy analytics model vendors cut software R&D and many traditional models are aging, data quality is slipping, and the skills needed to run them are harder to find. The door is open for new modeling technologies and fresh ideas as the energy market moves from bust into recovery then build-up on its way to the next boom.

Disruptive Innovation is a good thing except when it happens to you

Tech and Creative Labs (TCLABZ) was born out of the disruptive innovation realization that insight about this energy market volatility could be extracted from the online dynamic interaction of people trying to figure out what is going on, what might happen next, and what if I do “X” instead of “Y”?

We believe disruptive innovation technologies help us see new opportunities among the volatility and risk in the world around us.  Spain, Germany, and the US among others have learned the hard way that they cannot adopt feed-in-tariffs, subsidies, RPS standards or industrial policies of picking winners and losers in isolation anymore without also considering the disruptive innovation effect of global energy competition.

Energy fundamental analysis are still important, but disruptive innovation techniques like temporal and semantic text analysis, online collaboration and community-building to extract the wisdom of the crowd provide a fast, efficient, consistent basis for evaluating energy fundamentals, assessing opportunities and risks across alternative views of the global business future that are actionable.

Scenario analysis is a powerful qualitative partner to the quantitative rigor of predictive energy analysis of supply and demand.  The energy industry is in the midst of transformational change where technology is turning analytics into an interactive ‘contact’ sport leveraging data with algorithms to quantitatively filter, synthesize and see patterns and trends that provide insight to modify our behavior and target our choices for better results.

By helping us play better defense in our volatile world, disruptive innovation technology can deliver performance in the near term when we need it most.  But extracting the strategic benefits of change long term depends upon our ability to use these same technologies to play offense to project our business into adjacent markets at the right time, with the right product features and functionality to adapt to changing needs ahead of the competition.

Disruptive innovation technology is closing the gap between strategy and executive.  It is leveraging fundamental analysis of energy supply and demand to forecast prices but then using the results of that analysis with advanced analytics tools to enable artificial market simulation across scenarios to project the analysis forward and drill it down into the details of operations and execution with the full benefits of It/OT convergence.

Energy market transformation is happening now

The biggest challenge for energy analytics software product strategy is not building it but conceptualizing what to build. The energy challenges facing China are vastly different than those in California or Missouri and so are the economics, market rules, and customer expectations.  One size rarely fits all, but best practice, advanced technology application, and the expertise and tools to deploy them is what brings customers.  Retaining those customers and expanding wallet share of their services spend only happens when the solutions deliver high quality results, consistently, and competitively.

Large organizations are often a confederation of silos loosely organized around a common strategy.  After a while the culture of the organization drives it more than its strategic imperatives.  Internal competition among business units is as fierce as with competitors.

Collaboration technology is leveling the playing field enabling smaller firms transform themselves from ‘go it alone’ silos into horizontal collaborators working together with other smart, fast, nimble firms using the same data, same tools, and access to the same expertise.  Ecosystems grow from the interaction of community of users finding partners to fill gaps in their solution and those who find a sweet spot in the market and quickly assemble a team to produce the revenue and EBITDA to drive the strategy forward.  Change is often swift and disruptive in today’s global competitive markets.

The growth challenge for the energy vertical is to collaborate blending good technologies, information products, core competencies, and expertise into integrated end to end adaptive, agile solutions that work in the “sweet spots” of the energy industry across more than one alternative business future.

Speed can be a competitive advantage in a competitive global energy market where rapid response to market changes is essential.  When it can take up to a year to spec and procure an enterprise software solution and then another year or two to configure, install and debug it at a cost of services consulting equal to two to five times the software license fee—-the business model is broken.  The pace of change in the energy industry demands new solutions, faster response to changing business needs, and a better value or ROI.

The challenge is turning business strategy into action across global markets not by just licensing tools but by creating a continuously improving community of users that harness data, applications and expertise to deliver standardized best practice solutions to serve business needs around the world.  Using those standard best practice products relentlessly thousands of times each year will perfect them and make them better.  Packaging and offering those solutions and value-added services across a growing community ecosystem for consulting, operations and technology partners and customers completes the circle to scalable growth from recurring revenue sources.

The Search for New Energy Market Consultant Leadership is On!

The door is open for new energy market analytics leadership as the market leaders from the last boom get bought up or scaled down.  The fall will be swift as these former market leaders cut back on R&D and run out the clock harvesting their license fee revenue while not investing in improvements to features and functionality that make their software better, easier to use or adaptable to the new market realities.

The question is what will replace these aging giants.  The answer is likely to be consultants who can bridge the gap between the last generation of models and tools and the next generation of predictive energy analytics tools that blend the fundamental analytics focus on the long term ‘least cost, best fit’ analysis with the short-term performance analytics and optimization focus on reducing costs, improving ROI and assuring compliance faster, better, cheaper than before.  Disruptive innovation tools are producing the benefits of IT/OT convergence and they are using the web-driven powers of collaboration, pattern and trend analysis to extract insight from the dynamic interactive wisdom of the crowd.  Big data will not longer be a big problem as easier to use solutions run circles around the lumbering, bloated enterprise software giants with faster, better, cheaper solutions.

The good news is out energy future is looking brighter.  More choices, better technology, lower costs except for the regulatory driven industrial policy now waging a fierce battle on the global energy competition stage.  But even the most entrenched and political correct energy regulatory policies are being rationalized by the ruthlessly efficient forces of global energy competition as the market clears the way for the next boom.

Death by a Thousand Fracking Rules: An Update

Posted on by
Reply

On June 26, 2012 the US Department of the Interior extended the comment period on its proposed rules of hydraulic fracturing on federal lands for sixty days to September 10, 2012 at the request of the Governor of Wyoming and others who said they needed more time to study the implications of the proposed rules.  Governor Matt Mead had asked for ninety days.  Advocates for the rules also wanted more time in order to stiffen the proposed requirements to include forced disclosure of the chemicals used in the fracking solutions to be used.

Interior Secretary Salazar has made clear that he favors Federal rules governing the use of horizontal drilling and hydraulic fracturing rather than rely on a state by state approach.  But the President is campaigning on a strategy of opening up Federal lands to expanded domestic energy production so it seems impolitic to impose new rules than place onerous and expensive burdens for doing so before the election.

Hydraulic fracturing has been regulated largely by the states.  This made sense since it was used in a few states where there was experience with the players and techniques.  State regulation has a vastly different character to it since there has generally been a much better balancing of interests between environmental and economic concerns in protecting the public interest.

Wyoming has had its own rules on hydraulic fracturing in place for more than two years but most drilling in Wyoming is taking place on Federal lands so the Department of the Interior’s Bureau of Land Management rulemaking is effectively a Federal preemption especially across the Western states where the Federal Government is the largest landowner.  But the lack of an environmental problem requiring Federal regulation has not stopped the advocates of rulemaking that seems more interested in achieving a policy goal of slowing the growth of domestic oil and gas production.

With the comment period on the Department of Interior fracking rules extended until September 10th this seems a clear signal that the Obama Administration is unlikely to issue new rules in this area before the election but wants to be action ready to do so after the election no matter what happens.

The Interior Department proposed new rules for hydraulic fracturing on lands controlled by the Bureau of Land Management (BLM). (May 4th –comment period extended to September 10, 2012). The proposed rules impose new well-bore integrity assurance requirements to verify that fluids used do not escape during fracturing operations. Public disclosure of chemicals used during hydraulic fracturing are required to be posted after fracturing operations is done.  Oil and gas operators would also be required to have a water management plan for fracturing fluids that flow back to the surface.

The other issue is the Federal Government preemption of the states— an age old turf war with the states.  The rules proposed and adopted try to avoid raising too much outrage especially before the election.  But the President’s environmental base does not see the states as allies in pursuit of their political agenda.

Federal rulemaking is still seen as a war against domestic energy production pursued by other means.  For the oil and gas industry just trying to do their jobs by developing America’s domestic energy potential, new Federal rules are a mixed blessing.  On the one hand the uncertainty about future rules imposes enormous unquantifiable risk. The estimated costs of the Department of Interior fracking rules proposed range from $60 million to $1.4 billion to implement—-and this is just one rulemaking in what is lining up to be a world series of new rules.  The piling on of Federal rules on top of state rules drives up the costs and undermines the economics of many projects.  But that is precisely the political objective of these rules—to achieve a policy outcome that likely cannot be won in Congress or at the ballot box.

Domestic energy production from shale is the real deal! It is revitalizing our future and our economy.  It is creating jobs.  It is producing tax revenue.  It is improving our energy security and reducing our dependence upon Middle East oil.  Rules that clarify ambiguities and promote best practices are good for the industry and good for the country.  Rules that drive up the costs, delay operations, create conflict and confusion are not helpful.