DoGooder Equity
Upon reading some manager/principal/owner interviews in business publications, the publisher asks, “What keeps you awake at night?” My answer to that would be: Nothing. The reason for this is utilities are regulated monopolies and the energy efficiency program portfolios they run are cost effective. I.e., we, as an industry, are contributing to net wealth generation for consumers and not just redistributing it – it’s EE or power plants, poles and wires and either way, the consumer pays, and we are helping them pay less.
A major reason I am a huge advocate of EE programs is that they are cost effective, and what does that mean? – it typically means it is cheaper to run programs than build power plants and requisite transmission systems to pipe the electricity to points of use (distribution). I sleep knowing I’m contributing to a wealthier, more efficient society that also happens to burn less resources.
One such cost-effectiveness test is the ratepayer impact measure test or RIM test. The RIM test “measures what happens to customer bills or rates due to changes in utility revenues and operating costs caused by the program”[1]. Programs that pass the RIM test have a benefit to cost ratio greater than 1.0, indicating unit energy costs are reduced as a result of programs and therefore, programs benefit all customers whether or not they participate in programs.
So, I’m really liking this. Customers that choose to do nothing benefit, but participants benefit even more. However, like everything else, politics, do-gooderism, and waste seep into program portfolios.
Regulators generally frown upon and disallow utilities to make money on their programs. This needs to change, and I’ve discussed this in the past. The regulated utility business was created on a forever upward trend in demand and sales. This has ground to a halt, and in some cases reversing largely as a result of EE programs. Well by golly, whaddya say we let utilities in on the action in a cost effective manner where all B/Cs are >1.0? Not allowing this is kind of the mirror image of do-gooderism. Do-gooders don’t allow utilities to make money because they are obliged to give it away, apparently.
Small business programs are generally not cost effective but they exist often in the form of direct install (DI) programs for equity, as in fairness, reasons. Small businesses as a whole send millions of dollars in EE riders (EE charges, typically 1% of the bill) to fund programs, but they are very difficult to serve effectively for a whole raft of reasons that can be part of another rant. Rather than market to, and actually get small businesses to pay for projects like everyone else, it is less expensive from a program perspective to just give them stuff – replace lighting for example. I.e. cost of free < cost of laborious arm twisting. I understand this angle, but it is doesn’t make a lot of sense in the presence of a RIM B/C > 1.
Another political thing that seeps in is workforce development and jobs. This torques me as it often adds to the cost and subtracts from the benefits to ratepayers. In our space (buzzword of the year, which means market), it takes years and years and years to gain expertise to look at a building and say, that was built in 1979[2], it has rooftop units[3], electric reheat[4], the comfort is terrible[5], and half the variable air volume boxes likely do not function properly[6], partitions (interior walls) have been erected and demolished four times over and the zoning is dorked – all information gathered by Google Earth and street views without even stepping foot in the building or even the state in which it resides. And so on and so forth for 20s buildings, 60s buildings, 80s buildings, 90s buildings. A person learns what to expect after having been in dozens of these buildings and simply looking at a satellite image, and a street view is a bonus.
Regulators, administrators, and possibly third-party program implementers in some jurisdictions expect to train contractors how to fix these buildings. Again, it’s do-gooderism over greater net wealth generation. I would hire business partners (subs) that are competent and highly qualified to deliver results, as needed and locally when it makes sense. I do not want to teach a 7th grade science class to set a broken femur – pins, rods, casts and all, which is essentially the equivalent of effectively indentifying and developing all cost effective measures that exist in a typical poorly-performing, wasteful facility or process. It takes years, not a couple days or week to develop these skills. Doing so is expensive, inefficient, ineffective, and bad for ratepayers.
We will create the need to hire people for our subs and ourselves. What difference does it make if Jimmy and Sue work on our team or someone else’s? That’s the way it works – the best for everyone involved. Does anyone expect Fluor to be forced to hire local schmucks to build its power plants? When it makes sense, such as buying concrete locally rather than trucking it from three states away, yes. For structural engineering, not so much.
[1] California Public Utilities Commission
[2] From the architecture – dark and depressing.
[3] Can see them on Google Earth.
[4] Because Jimmy Carter thought we were going to run out of natural gas – no kidding.
[5] Because they distributed heat from the ceiling and heat rises.
[6] Everyone on the perimeter has a 1500 Watt space heater at their work station.
Old School EE
Forging on from last week’s Arthur Fonzarelli crash into Arnold’s chicken stand, this week I will posit some challenges and problems presented with state takeovers of energy efficiency programs. Per last week’s post, Wisconsin has fallen from 8th place in the nation to 17th place since the state essentially took over its energy efficiency programs. This is according to the American Council for an Energy Efficient Economy, ACEEE, a well respected national think tank (my term) and advocacy organization for energy efficiency.
One problem is the money moves further away from where it is collected. The further program spending is from the point of collection, the less care there is in its cost effective investment and avoidance of waste. This is natural, and it is a fact. A local, charitable non-profit is going to more carefully spend its money because local donors are right there to see the results for themselves. If they want continuing donations, the local charity will be very frugal. Moving on to local government, citizens know school board members, city council members, county commissioners, and so forth. Do you think these representatives are going to be a little more sensitive to their largess when constituents may verbally tear them apart while filling up the tank at Kwik Trip or blast them in front of everyone at the next board meeting?
On the other end, taxing and spending at the federal level comes with very little accountability or care. We have revenue rolling in from all over the country – income, payroll, Medicare, excise, corporate, and a few dozen other taxes and fees – and we have spending at 1.5 times that rate all over the world. Spenders don’t care about taxpayers because they are not personally confronted by them. The people responsible are insulated like mob bosses. Write to one. You’ll get a form letter describing how great their legislation is on an unrelated topic. Nice. Have you ever been around a US senator or house representative? They ooze with goo, and slide like (per my Tennessee friend) a greased eel in a barrel of snot.
When money is collected by a utility and spent for its customers, there is clearly more responsibility in spending that money. For one thing, they are under the eyes and thumbs of the regulators. They are in Wisconsin too, but the regulators hand pick the administrators, and thus there is an inescapable bias – like what is the best car on the market – mine because I selected it and I’m smart. It’s human nature, man. That’s all I’m sayin’.
Utilities have relationships with customers, and those are very important to the utility. For state-run programs, not so much. This presents another round of challenges.
First, good account managers understand their customers’ businesses and needs. They are a tremendous resource and lever in a utility-run program. With utility-administered programs, money is budgeted for account managers to assist with energy efficiency projects, so they are deeply involved in many cases. For state run programs, not only is the budget absent, there is no carrot (goals) for saving customers’ energy. Account manager time is extremely taxed so if it isn’t part of their responsibilities, they simply will not / cannot help.
Another result of not understanding customer business and needs is a lack of deep, structural, and lasting energy efficiency planning. It is akin to the difference between long-term planning for a small business such as ours versus hitting quarterly earnings targets for a large corporation. There is a huge difference between twisting a customer’s arm to replace all their lighting and throwing some program money at them, versus digging in and solving problems, reducing maintenance costs, improving productivity, and increasing profits and operating income – and maintaining and in fact continuing down the road. Account managers live for this stuff. We live for this stuff. Persistence!
As alluded to in last week’s post, Wisconsin’s programs are low-cost and widget[1] based. The programs are very similar to those in Illinois and Michigan. Recall that while Wisconsin slipped from 8th to 17th since 1998, Michigan climbed from 46th to 12th (ouch). Michigan also has low-cost widget based programs, but Michigan is very new to energy efficiency (and programs are run by utilities). Conversely, Wisconsin represents a very mature market for EE.
Meanwhile, utilities in neighboring Minnesota and Iowa, two other mature markets, have moved on to successful industrial, process, retrocommissioning, and new construction programs for commercial and industrial customers. They have vibrant energy analysis programs to assist customers with identifying, planning, and prioritizing implementation of cost effective measures. Wisconsin point-blank shuns this sort of informational / road-map assistance to guide complex customers to higher profit and improved cash flow.
Furthermore, where utilities own the programs there is de facto competition among them to look good to their customers and to the regulators. There is vibrancy. Things change. Things improve. They have to keep pace. They want to be better. In absence of this: same old, same old, until the entire state is compared against others and then the results aren’t liked.
In my 17 years in the business, I can tell you the days of en masse studies and energy audits rotting on the shelf with no ensuing action; and customers not caring about energy cost and not viewing energy as a strategic resource have changed dramatically.
We were even told by one of our major utility clients in a neighboring state that their management sees energy efficiency as a source of income rather than a “red headed stepchild”[2] as it used to be viewed. Times have changed, dramatically. Like Dan York from ACEEE mentioned in his letter to the Cap Times, “neighboring states rank higher than Wisconsin because they continue to push for higher energy savings through increased investments in energy efficiency. Wisconsin, by contrast, is standing still and by doing so, is getting left behind”.
[1] Widget-based simply means standard option A versus more efficient, somewhat more expensive option B.
[2] I’ll trade gray hair for red if anyone is interested.
Delta Lambda Jamba Effect
I was recently pushed over the edge again by multiple opinion pieces declaring that energy efficiency is a waste of time and money because of rebound effect. Rebound basically means that if consumers buy an efficient appliance, car, or light bulb, they will simply use it more and therefore save less, or even use more energy at the proverbial “end of the day”.
First in this series was an opinion piece from a Cal State Fullerton professor published in The Wall Street Journal. Below is my response to the journal:
Robert J. Michaels’ commentary on August 20th suggests energy efficiency does not capture estimated savings from widgets (lights, air conditioners) because of rebound effect, which put simply is the theory/fact that lower operating costs of widgets results in more widget use. No one, including the fast growing energy efficiency industry, disagrees with rebound effect.
However, Mr. Michaels uses a Mexican refrigerator program example to demonstrate his point. Why not use an example of delivering subsidized Toyota Priuses to the rural Chinese? Certainly a Prius uses more gasoline than a moped or a rickshaw. He dismisses out of hand a recent rebound study performed by the American Council for an Energy Efficient Economy because it “examined only a minority of rebound findings…” [If only we could say with such ease that some of the stuff we review during program evaluations is totally bogus…]
Energy Efficiency Resource Standards produce real results. Standards in many states include targets that actually reduce total energy consumption, and they are being met as evidenced by independent third party evaluations. Energy efficiency, and its cousin demand response, are used as virtual power supplies to sell into forward capacity markets, including those on the east coast and northeast.
Electric utilities are more or less regulated monopolies, and as such regulators need to, and do a good job of balancing the needs of consumers (low energy cost) and the needs of utilities and their shareholders (return on investment). The regulatory model to date has relied on ever growing sales and profit. However, with energy efficiency slowing, and even reversing revenues and profits, this model will need changing in coming years. One of our recommendations is to allow utilities to invest in energy efficiency on the customer side of the meter and earn the same weighted cost of capital as they would with new power plants. Another is “decoupling”, which allows utilities to maintain return on fixed costs of power plants and distribution systems while sales decline.
Energy efficiency is no longer a hobby for geeks and hippies. Large multi-national corporations including food processors, auto, appliance, high technology, household products, and diversified product manufacturers are investing heavily in energy efficiency to be competitive, reduce risk of energy price volatility, and of course immediately hit the bottom line. Even commercial real estate and multi-family housing owners are wising up to the capital generating capacity of energy efficiency in their facilities. This wouldn’t be happening if Mr. Michaels’ theories were accurate.
As mentioned on this blog one time recently, who buys a dinky car with good mileage to drive it more? Nobody. Dinky cars are tools to get from A to B. They are not recreational vehicles. When people buy efficient air conditioners they don’t get the urge to keep their house at 57 degrees in July. A new refrigerator isn’t going to be set to 30 degrees or have its door held open to view the contents for long periods of time.
One effect of having more money left in consumers’ pockets is they may buy more stuff, which takes energy to produce, transport and use. I’m sure there is some of this, but parents may also decide to send their kid to Columbia rather than the local community college with the savings generated from their new clothes washer. Does that consume more energy? No. The kid flies to New York and back a couple times a year rather than driving to the community college every day, thirty miles round trip, with dad’s 14 year old gas guzzler.
Or, did they ever think of this? Savings from new windows result in enough free cash flow to replace the energy guzzling TV with a new efficient one. I.e., the opposite of rebound is also true in many cases. Earnings generated from the first wave of energy efficiency measures finance the next round. In fact, I’ve actually demonstrated before that energy guzzling buildings have an easier path to real energy independence (net zero) because they have an enormous flow of cash going out the door each month to pay the electric and gas bills. Redirecting this hemorrhage to energy efficiency accumulates so much cash that eventually the money that used to flow to the utility can be used to purchase on-site renewable energy AFTER the much more cost effective EE measures have been implemented and paid off.
What is the opposite of rebound? How about slam dunk? Let’s call it the “delta lambda ja
Free Riding Poachers
A couple weeks ago, I wrote about nationalizing pieces of energy efficiency programs, namely technical resource manuals from which energy impacts (savings) and measure costs are derived. The post explained why this is a bad idea for a number of reasons. This week features chaos at the state level.
It seems states with their energy efficiency policies are parallel to people who go to Washington DC and operate in the alternate universe inside the beltway. The longer they exist, the more schizophrenic and/or demented and/or dysfunctional they become.
Utilities are forced, for lack of a better term, by regulators to meet savings goals with their energy efficiency portfolios. They also need to spread it around so segments that are difficult to cost-effectively serve, such as small business and low income, essentially get their money back. Regulatory agencies are, as far as I know, all state-run organizations. Now, imagine if the state itself runs an enormous energy efficiency program that competes with the utility-mandated programs for the same customers.
Competition is normally good as it promotes better products and services more cost effectively, generally advances society, and makes life better in many ways. However, this sort of competition would be like forcing Coke to advertise and sell a certain number of twelve packs from the grocery store, but when shoppers get to the checkout line they are offered free Pepsi from the state. Coke: back to the grocery isle. Pepsi: thank you very much.
It gets even worse for energy efficiency; in particular for service-oriented programs where information, knowledge, and technical expertise are needed to sell energy efficiency. Energy Service Companies, or ESCOs, are a perfect example. ESCOs deliver performance contracts, which are huge energy efficiency projects that may include everything from new control systems to window replacements. For a nauseating example, Google “Empire State Building” and after weeding out the Wikipedia hits, the next 5000 hits will be about the performance contract with Johnson Controls, where they say it’s saving energy, but they never prove it to me or the rest of us with billing data.
In general, the ESCO invests a lot of time and money on the front end to generate a contract. For the 100,000th time, buildings are not like cars, trucks, mopeds, and chocolates. They are all very different, and you never know what you are going to get. First, there is benchmarking the facilities against similar ones to determine energy intensity and savings potential. This can cost thousands because the ESCO has to build rapport and trust with the customer just to get to the point of looking in their underwear drawer (energy records, building square footage, and so forth). Then, there is the actual benchmarking.
Supposing the facility, or facilities, pass the benchmarking test, or fail it, depending on how you look at it, the buildings are clearly wasting a lot of energy. The ESCO must establish a more defined project. They must identify actual measures that save gobs of energy cost effectively and put relatively accurate cost and savings estimates together. If this sounds like some sort of energy assessment or feasibility study, it is.
Somewhere along the line the owner and the ESCO agree to a contract, and the project is locked in. The ESCO performs all this front end stuff at a cost of tens of thousands of dollars with the contractual obligation of the customer moving forward with the implementation, to be provided by the ESCO for a lot of money – a story for another day.
Competition for the entire package from rapport building through project implementation is fine, but you cannot start competition half way through the process, and this is what some states do. For example, in the above case, suppose Johnson Controls, Honeywell, Siemens, Ameresco, or another ginormous performance contractor invests a quarter million dollars in project development and the state says, “Wup, wup, wup, wup, wup.” You have to bid out project implementation (construction) to ensure the customer gets the best deal at the lowest price. There goes performance contracting – the end of the world as we know it, and I don’t feel fine (if I’m a performance contractor). Nobody will spend all this front end development cost to have it handed to someone else for the payoff.
In some unnamed states where we work, this is pretty much exactly what happens. The utilities have to meet their goals. They already have the rapport with the customer. Their programs lead the horse to water and then the state pulls up a trough next to it with apple juice in it. The horse suddenly loses its appetite for water and takes the apple juice instead, provided by the state[1]. Thank you very much, sucker utility. Now get back out there and get your goals, and I’ll swipe the next one from you too. By the way, I’ll stick you in the eye with a sharp stick too if you don’t meet your goals, loser.
Actually, what happens is, the state offers greater monetary incentives, in many cases, than the utility. The state does hardly any marketing, provides no intellectual value, and brings nothing to the table to speak of. In another uh, environment, I have another term for the state: parasite, free rider, poacher.
Speaking of nationalizing EE, Omaha/Lincoln report that $3.5 million of a $10 million EE stimulus project has been spent. Results: 1/3 of the spent amount is on marketing alone, not including administration. The grant was to “create” 300 jobs. A reported 13 have been created, which means it’s probably closer to 3, but even at 13, that’s $270,000 per job. Congratulations!
[1] The payer of the incentive gets full credit for the savings.
Tea Party On, Dudes
Jeff Erickson of Navigant Consulting presented an interesting paper at last week’s American Council for an Energy Efficient Economy (ACEEE) Summer Study for Buildings. The title was, “Occupy Wall Street and the Tea Party Battle over Energy Efficiency.” I thought it was just clever (aka bait and switch) advertising, but the presentation featured, almost exclusively, how the free market, small government tea party and the profit-bad, regulation-good occupiers might view energy efficiency.
The tea party would favor consumer choice for incandescent light bulbs and gas guzzlers over government regulation of these common, and other uncommon for that matter, consumer goods. They would also advocate free markets for energy supply. The problem with this notion, however, is that the utilities were developed on a regulated monopoly business model, I would guess for economies of scale reasons. Also, natural gas and electricity are more like public benefits, as are roads, water, and sewage systems.
Free enterprise exists where barriers to entering a market are reasonably affordable, where access to consumers is vast, and/or where the product or service is pretty much optional. In my case as an electricity consumer, for example, the street transformer, the wires feeding it, and the wires going to my house from the transformer up to and including the meter, are owned by Xcel Energy. I can only guess where the electrical supply actually comes from, but it is safe to say Wal-Mart is not an option for buying electricity at this point.
Consumer choice for electricity, for me, realistically includes: (1) Xcel Energy, (2) a natural-gas-fired generator, (3) photovoltaic / batteries, or (4) other options that are even less cost effective. At the current bargain basement cost of about 70 cents per therm of natural gas delivered to my house, I could generate electricity for roughly 12 cents per kWh. This, of course, does not include the $4,000 (or whatever) cost for the electrical generator churning out electricity with a stunning 20% efficiency.
Switching gears for a moment, I’ve overheard discussions of how the deregulations of the telecom and airline industries have been failures – how? Apparently because many carriers filed for bankruptcy. These are failures of adaptation, not failures of market changes. Nearly all, if not all the legacy airlines have filed for bankruptcy and others like Eastern and PanAm were essentially liquidated. These legacy carriers were saddled with unsustainable contracts with unions. The “solutions” included crippling strikes and/or eventual bankruptcy to put these doomed-to-fail contracts through the shredder and start over.
I was just explaining to my friend how Delta Airlines had retrofitted their planes to have skinnier chair cushions to shoe-horn another row or two of seats into their cattle-class cabins. His response: “Dude, but you can still fly practically anywhere for $400.” True. In twenty years of business travel, plane tickets haven’t budged much at all, EVEN with much higher fuel costs. I bet that non-fuel cost per passenger mile has actually declined over the same period because new low-cost carriers like Southwest, Frontier, and Jet Blue have joined the market. I call this a huge victory for consumers. Telecom, the costs for which I know much less about, has been a similar smashing success. Long distance is so cheap at any time of the day, it isn’t worth tracking – better than the buck a minute for “collect calls” from the 1970s. Half the readers probably don’t know what a collect call is. Again, a few bankruptcies of cement-shoed companies later, consumers have benefited hugely.
Deregulating utilities, electricity in particular, has never been successful to my knowledge because it meets none of the criteria above. Consider water and sewer, which, like electricity, are necessary for modern life. It is less expensive (and hassle) to hook up to a central municipal system that uses vast economy of scale to provide these critical services at a virtually negligible “startup” cost, and very low operating cost. It also provides environmental benefits of lower risk by poking fewer holes into the water table and better containment of nutrient-rich sewage. I’ve seen lakes go from green algae bombs to nice clear water in just a few years with the installation of municipal sewage systems for homes that lined the lake shore.
Regulated monopolies that exist with large centralized providers of “the necessities of life” will continue to be the best option for consumers – for as far as the eye can see. Policies to minimize cost with reasonable environmental regulation are necessary, while consumer choice is preferred.
This is why, in my opinion, our industry needs to lay off mandates for “unequal” alternatives. Unequal alternatives include standard and halogen incandescent light bulbs, CFLs and LEDs. Each has one or more substantial differences in cost and output, including color rendering and full startup time. Conversely, standards for some consumer appliances have demonstrated in numerous cases to be huge successes. One example is the lowly refrigerator. Energy consumption for refrigerators has fallen by almost three quarters since the early 1970s while inflation adjusted cost has barely budged at all. More importantly, cold is cold. The beer, ice cream, and lettuce don’t know the difference.
Other success, of course, includes cost effective lead-by-carrot programs that incentivize cost effective, efficient alternatives – and no, I am not repeating myself. The programs AND the products and/or services shall be cost effective for consumers. Energy efficiency shall be the lower cost resource alternative to more power plants, fuel, poles and wires. This is something the tea partiers should get behind with some well-presented market information.
GHG and NG
E Source reported last week that green house gas (GHG) emissions are falling fast in this country, as shown in the chart nearby. Emissions tanked with the economy in 2009, and as I recall, the summer of 2009 was also cool, resulting in lower electricity sales. Even so, when adjusted for economic output, GHGs are falling fast.
The reason for this is rather obvious if one follows the electricity market. It is much easier to get a natural gas power plant approved for construction as compared to a coal-fired plant. I have not done the analysis myself, but it is reported that natural gas has results in half the GHG emissions compared to coal. This is first because natural gas is primarily methane combustion, which produces one molecule of CO2 and two molecules of water. Coal has a higher ratio of carbon to hydrogen, and I’m just going to leave the stoichiometry at that. The second reason natural gas produces less GHG emissions is because base-load plants are combined cycle (story for another day) with nearly double the thermal efficiency of a coal plant’s Rankine cycle.
A local example of a coal-to-natural-gas switcheroo is at Marshalltown, Iowa, where Alliant Energy proposed a coal-fired plant several years ago. That was shot down and instead plans for a combined-cycle natural gas fired plant were recently announced. You can bet this has happened in dozens of other instances throughout the country.
Generation from natural gas pulled even with generation from coal this year for the first time. This second plot was provided with the same E Source piece. E Source asks, “Where is the hullabaloo? Where is the celebration?” From the utility perspective, I don’t know. Probably because no one utility can claim huge credit?? Maybe customers don’t care?? Again, everyone is for reduced emissions, until they have to pay for it. Natural gas plants aren’t free, and so that may be a reason for keeping quiet from the utility perspective.
What about the activist attack dog groups? They caught the car, now what? Pee on the tires, of course. Like politics for many people, it is no longer about the issues, it is us versus them and beating the tar out of the other side. Like sports for many people, it’s as much fun to see the bitter enemy lose as it is to see the home team win, but only if the bitter enemy is good. If the bitter enemy is lousy, who cares? Then they are not bitter enemies. People need bitter enemies, and this is why attack dog silence is deafening.
Another reason utilities may not be crowing is because they know they are doing what they have to do in the short term – which is add more capacity or replace old generation that has reached the end of its useful life. Natural gas is the easy way to go and no one objects, much.
The other obvious factor feeding this is hydraulic fracturing and the resultant glut of natural gas coming onto the market. At one time, petroleum and natural gas were alternatives to one another, and at times, fuel oil was even less expensive than natural gas for certain end uses like those for manufacturing, water, and space heating. This is no longer the case. The ratio of petroleum prices to natural gas prices has blown off the chart. You can see in the nearby chart that on a Btu basis, natural gas and petroleum prices, as well as liquefied natural gas and European natural gas prices, tracked one another very closely as recently as the middle of last decade.
A six-fold differential in the cost of natural gas and petroleum is not going to stand. At somewhere in the $1.50 per gallon equivalent, natural gas will not be ignored as a serious transportation fuel. Truckers are paying something in the neighborhood of 70 cents per mile for diesel fuel. How would their margins look if they chopped this to about a quarter dollar per mile? Huge, but of course those margins won’t hold up. Competition among companies will bring those margins back down at the expense of much higher natural gas costs.
According to a Wall Street Journal interview with Tom Fanning, Southern Company’s CEO, coal plants accounted for 6% of the new generating capacity since 1990, while natural gas has taken 77% of new capacity over the same period. Southern Company’s coal fired generation plummeted from 70% to 35% in just the past five years. Meanwhile, coal exports to energy-starved China and India have doubled.
The valleys (market demand) will be filled and the gaps (prices) will be shrunk. That’s what markets do. That’s all I’m saying here.
Natural gas is a fantastic fuel. Extract it, compress it, pipe it somewhere and burn it in everything from a stove in your kitchen to a steel plant. It doesn’t need refining. It doesn’t need train tracks. Using it as a fuel for power generation seems great now, but it is a very highly valuable fuel because it is so flexible. The price is depressed at this moment because the supply is huge while demand hasn’t caught up – but it will.
A few years down the line people will be asking, “Whose in the hell idea was it to convert all of our generation to natural gas?” The dogs will have their cars to chase and everything will be normal again. It would also follow that the Minnesota Vikings will be a threat to the Green Bay Packers at about the same time. Write it down. You saw it here first.
Nationalize EE – Boooo!
The widget world of energy efficiency is governed by the Technical Resource Manual, or TRM. A technical resource manual includes energy calculations requiring baselines and efficient equipment specifications, hours of use, and duty cycles. It also includes cost differences for baseline and efficient equipment. Costs and savings from TRMs are used across the board for mass market, and even in some cases large, far too large in my opinion, equipment.
Technical resource manuals may be held at the state level, which may apply to all programs/utilities in the state, or at the utility level. Some in our industry are advocating for a national TRM and developing a repository of TRMs from throughout the country. This is a self-serving waste of time and a bad idea for consumers/customers. It is self serving because some companies lobby for things so they can get a massive project to make it happen, but this rant is about why this is a waste of time and a bad idea.
In a nutshell, it is a waste of time because Vermont is not Texas. Vermont is not Texas politically, climatically, economically, demographically, and a couple dozen other lorem ipsumicallies. Nor is the market in Texas the same as Vermont. Utilities within certain states don’t even want to use a statewide TRM from their state. Why? Reasons might include the utility doesn’t like the state TRM because it is technically inferior or it doesn’t match even their relatively localized customer base. Possibly the utility has been implementing programs for a couple decades while maybe the munis and rural electric cooperatives have been at it for only a few years. The demographics and markets are much different.
Federalism may sound like centralizing power and control, but it is the opposite. It involves decentralized power and states rights and this is the way EE programs and associated TRMs should be controlled and maintained. One reason is simply one size does not fit all, whatsoever. The other is turning any of this over to the woeful DOE is terrifying as it should be for any state, utility or ratepayer.
Even with state-administered programs, program administration, implementation, and evaluation become politically motivated, consciously or subconsciously. There is a theoretical oversight mechanism, but the truth of the matter is, all parties have a vested interest in declaring the program portfolio as wonderful and the citizens should be so lucky to be endowed with such greatness of the state. The state is responsible for everything – implementation, evaluation and oversight. If during honest and accurate evaluation, substantial flaws and unsavory findings are uncovered, is the state going to want to allow these findings to show the state’s implementation side of things sucks? I don’t think so. Go along to get along.
Conversely, private sector implementation (utilities) with public sector evaluation or public sector oversight of evaluation is going to result in more brutally honest assessment. For about the 36th time, the role of government is to help ensure people don’t get ripped off, but if government is the rip-off, who do you turn to? SOL, buddy.
Turning over TRMs to the feds would be a disaster for several reasons, the first of which is it will become subject to political pressure by manufacturers, their lobbyists and federal hacks. Believing otherwise is naïve. Secondly, it’s like everything else, the further the decision making is from where the money is collected and spent, the more wasteful it becomes. Money collected from people in your hometown is more carefully spent than money collected from fools in another time zone.
Regarding EE, states and markets are about as unique as buildings. Consider motives behind the push to nationalize TRMs or even maintenance policy, the hilarious-if-it-weren’t-true terrible track record of the DOE, and loss of control states would have for their unique situations. Like many other things, only Washington will like it.
Ok. I can’t let this pass, because it explains almost exactly what I said about two years ago in Playing with Fire. The Wall Street Journal opinion writers just penned this: which states the Federal Reserve’s “quantitative easing” (buying US debt with freshly printed money), doesn’t fool anyone, raises commodity costs, takes onus off drunken binge spending in Washington, and is building a debt bomb which sooner or later needs to be financed with real people’s money – oh, and does absolutely nothing to spur the economy with any persistence. The cycle goes like this:
- Print money flooding the bond market with cash which drives down interest rates.
- Banks have no incentive to lend money because it’s all risk (of rising interest rates) and no reward (low interest earnings).
- Investors, particularly retired people, have no low-risk decent-return place to put short term cash.
- Economy ticks up driving commodity prices higher and inflationary pressure, with dime a dozen dollars.
- Rising commodity prices and inflationary pressure pull the economy down.
- Repeat.
To be successful, one has to recognize what failure looks like. Getting off this merry-go-round will be painful. We’re deadening the agony of a hangover with a few shots of booze and doing it again and again.
A Radical Idea
This week I was gleeful to find American Council for an Energy Efficient Economy released a study on my two favorite subjects on which to rant: taxes and energy efficiency! Yeah!
I blogged about tax-distorting effects of EE about a year ago in EE V IRS,with many of the same arguments noted in the recent ACEEE paper. The ACEEE paper points out that:
- Since the cost of energy is a business expense, it is tax deductible and therefore, the tax code penalizes to the tune of 35% the bottom line improvement from saving energy. As I mentioned in EE V IRS, the United States had the second highest corporate tax in the electrified world and this week; congratulations (!), we’re number one as Japan has dropped theirs below ours.
- On the flip side, when companies invest in EE, 35% goes to the government.
- The EE investment is depreciated over time. This I discussed last week in Petroloons .
First, one sharp criticism of the above logic: not taking is not giving. In other words, avoiding tax payments to the government is not the same as getting something from the government. This drives me crazy. It’s the same as saying I give our company a case of soda every day because I haven’t been shoveling the contents of our soda cooler into my bag every night (steeling it) for myself. Do murderers save the lives of everyone they don’t kill? Ok.
Jack Kennedy was absolutely correct stating that cutting and simplifying the tax code results in efficient allocation of capital. Today, the tax code is corrupting with carve outs, societal engineering, and tax breaks for all kinds of crap that ties capital up in stupid stuff.
The feds tax repatriated capital, that is, money earned by US companies overseas and already taxed overseas by countries in which they operate. This is insane. Bring cash back home for investment and it first gets a 35% whack taken by Uncle Son of Sam? Washington likes to bash these companies for doing stuff overseas and the “tax breaks” they get for moving jobs overseas. The “tax break” is not getting slapped with a double tax. Not murdering is not the same as saving lives. Ok.
Another distortion is tax on capital gains and dividends. Trillions of dollars are parked in stupid stuff, like Apple’s $100 billion stash of cash. Why such a ginormous pile of cash? A major reason is shareholders don’t want to pay tax on dividends. Likewise, capital in equity in mature companies and starving the next generation of wealth creators. When an investor considers a 15% loss right out of the gate by divesting one place to invest in a better place, 15% is a huge barrier.
Any tax reform must lower barriers between capital and where it is best invested. This is what JFK meant by efficient allocation of capital. Now, on with the three ACEEE recommendations:
- Tax revenue, not earnings – a “radical” idea. Actually, this would be a sales tax or value added tax. Eliminating the current abomination and switching to a revenue neutral sales tax would be fantastic for the economy (and ¾ of Washington DC lobbyists would find themselves out of work). Capital would flood into the country and be cut loose from unproductive proverbial stuffed mattresses.
- The second is a “more surgical” approach that puts a cap on tax deductable energy costs. Bad idea. This would penalize energy intensive companies and distort the market again, nudging companies that produce jobs overseas.
- The third is a “more complex but perhaps more elegant approach”. Complex to me is butt opposite of elegant, but ok. This option would develop a standard deduction for energy costs that varies with the type of business. Screeeeeeeeeeaaaaaaaaach! Needle across the record. This again would be a market-distorting, game-the-system, screw-the-system approach akin to Rick Santorum’s proposal for zero income tax for manufacturers. Suddenly, everyone is a manufacturer. How does one define manufacturing? Is a brew pub a manufacturer (hardly) or a service company? Is printing manufacturing? We print stuff for sale. You get the point. Just imagine if we set this tempest loose. We should be generating wealth and not playing games to avoid the taxman.
Jeff Ihnen’s solution: Create revenue neutral tax cut by eliminating all market distorting tax breaks and carve outs, and eliminate the double taxation on repatriated greenbacks (I believe this was in the Simpson-Bowles committee that was/is entirely ignored). Here is a “radical” idea: let utilities invest on the customer’s side of the meter. Energy efficiency is a resource. There is concern about the old utility business model based on a forever growing market that doesn’t work anymore (because the market isn’t growing). So let’s allow utilities to invest in energy efficiency on the customer side of meter and let them earn their weighted cost of capital as they do selling energy. This fixes the problem of losing revenue and profit to EE and greatly reduces the tax-distortion and hassle of EE by making EE an operating expense rather than purchased assets.
Amen. Where do we start?
Petroloons
A few weeks back in Evil v Clueless, I attempted to clarify populist, rhetorical BS that crops up in times of rising gasoline prices. True to form, a couple really stupid death-spiral proposals have surfaced: ending “tax breaks” for oil companies and reigning in speculators.
Bashing big oil has surfaced this gem again: we need to end tax breaks/subsidies for big oil. The angry mob of medieval grunts raise their clubs and swords to the air and roar approval.
The “tax breaks” they are talking about are the same ones every company in the US uses and rightly so: depreciation of assets. Oil companies buy access or mineral rights to extract oil and natural gas. It’s obviously a cost of doing business that can, and rightfully is deducted from earnings for tax purposes. Removing this deduction from tax filings essentially turns the 35% corporate income tax into a de facto 35% sales tax, and who pays for sales taxes, and all taxes for that matter? Consumers.
For example, assume the mineral rights for a parcel of drilling costs $1 million and the profit after all expenses is 5% or $50,000. If the oil company can’t get their “subsidy”, they have a new $350,000 tax bill on top of the $17,500 they would otherwise owe on their net income. Not only would the cost flow directly to consumers, there would also be a squeeze on earnings and supply would drop compounding the problem. But of course political hacks love to make policy that attacks the providers of necessities of life – utilities, oil companies and refineries, insurance, pharmaceuticals, and banks. It raises prices and as a result, companies are bashed again by the same dupes who are actually responsible.
The second one is less obvious but still a doozer. Bernie Sanders, Vermont’s self-proclaimed socialist senator wants to make it more difficult for the evil speculator to participate in the market. This brilliant policy would raise the capital investment requirements for hedging with commodities futures. Presently, the capital requirement is something like 10%. In other words, you can buy a futures contract for a $100 barrel of oil for December delivery for $10. The rest is due when you take delivery. Speculators don’t take delivery. They sell the rights to a company that will. Sanders, I believe wants to raise the capital requirement to something in the 50% range so the former online professional poker player can’t have a substantial position in the futures markets; but neither can bona fides.
Consider Southwest Airlines would like to lock in 5 million gallons of $3.00 jet fuel for October delivery to hedge against volatility. Their capital requirement to do so would rise to $7.5 million from $1.5 million. Because capital is scarce, the result is LESS hedging and MORE volatility. Once again the result is directly opposite the desired outcome – but it sounds good! To cap off how totally ignorant and stupid this is, speculators do not drive up the cost of the underlying commodity anyway. If one speculator is buying, one is selling. One guy is betting that Iran will blockade the Straight of Hormuz and another bets the Keystone pipeline will get the thumbs up in the next year. And BTW, when news of a new oil supply that will hit the market five years out breaks, it has an immediate impact on prices. Why? Because the gosh darn speculators know prices will drop and so output increases right away to sell at the higher prices, all else equal. Increasing supply lowers prices today.
Lastly, recall Bill O’Reilly, who incidentally agrees with Bernie Sanders, wants to force oil companies to only sell their refined products to the US to drive down prices. This only works in the world of the small mind. Recall the California experiment that deregulated wholesale electricity but not retail to consumers. Suddenly Enron, NRG Energy et al could raise prices as they wanted for their utility customers but utilities were stuck with their retail prices. Result: bankruptcy. Same thing for O’Reilly’s plan.
Oil is a global commodity. Forcing down prices here at home is good for consumers until all the refineries shut down. It would be like forcing McDonalds to stop serving females to drive down prices while letting Burger King sell to everyone. DUH! Refineries are already shutting down on the east coast because they do not have access to cheaper oil.
With new technologies, the US has under its control massive stores of energy for 100+ years. Prices can come down easily by increasing supply. The cartel in control is the legislative and administrative arms of the US government. You can contact them with your request in either direction and wait for a form letter sent by an intern that screams, you don’t matter.
Evil V Clueless
This week I have an I-can’t-take-it-anymore topic: gasoline prices. It is not the gasoline prices that chap me, but the pouting, mud throwing, food fights, whining and probably worst of all the stupid solutions to the so-called problems.
Gasoline is like any other product or service that is a must-have in society and therefore, like electricity and natural gas, consumers feel entitled to all they want at a negligible price. And by the way, why all the hype right now? It’s around $3.50 per gallon. Being an election year obviously feeds the flames and I guess there just isn’t enough other bad news in the world for the 24/7 cable news and internet news world to hype up for ratings.
Products and services for which consumers feel entitled are sold and manipulated by blood thirsty, evil, corrupt, large corporations. A little sarcasm? Not so ironically, the evil and most hated industries are the most heavily regulated: utilities, oil companies, insurance companies, and pharmaceuticals. If oil companies were able to drill willy nilly wherever they want, prices would come down. But Americans don’t want that. If health insurance would be decoupled from employment and people were able to shop for it anywhere in the country and if the tax subsidy were removed, prices would come down. But it has become a right that employers provide it. You’re probably thinking I’m crazy on this because individuals pay way more than large groups. That’s because large groups exist. If insurers had to fight for individuals one by one and there were no large groups the “gouging” of individuals would go away.
We are not hostage to oil companies. We can drive less and people can buy more efficient vehicles. If your vehicle today doesn’t get at least 30 mpg, your rights for complaining about gasoline prices are rescinded. If you have to haul a hockey team, soccer team, or squad of ballerinas I’m quite certain there are minivans that can do the job at 30 mpg. Suck it up.
Politicians, as usual, are more concerned about making political hay from the issue than doing anything about it. The left piles on the populist evil big oil and a few evil individuals like the Koch brothers. The right beats on the President even though domestic production is up. When Bush was in office, high oil prices were the result of his connections to big oil. With Obama in office, the narrative is he wants high oil and gasoline prices.
Then there are completely ignorant talking heads like Bill O’Reilly. As I mentioned in Electric Bills and Waldo a couple months ago, the United States had become a net exporter of refined petroleum products and I said that was a good thing. Oh no! O’Reilly just found this out a couple weeks ago and he is completely incensed. Oil refineries selling their product in markets that have the greatest demand and selling to the highest bidder is a crime, apparently. Exports should be taxed to the gills! Are you kidding me? Nothing makes smoke pour out of my ears more than the political class talking as though the only reason companies exist is to fund the government. They want to set the rules so the private sector company doesn’t make what the politicians think is too much profit, doesn’t move manufacturing overseas, builds factories in the right state, pays the right wages, provides the right benefits and so on, and of course pays enough taxes to the emperor. Ditto O’Reilly.
Next is the narrative of the evil “speculator”. “Speculators” view the market, world events, current prices and futures prices. Most speculators are companies that buy a lot of petroleum products – like airlines. It’s called a hedge against risk. They may believe locking in $3 jet fuel for the next year is a good thing to do in case all hell breaks loose in the Middle East. By the way, this is one of the major reasons prices are high now – because AquaVelvejiad threatens Israel on a daily basis and is thumping his chest over the straight of Hormuz.
Sure there are gamblers in the futures market but they too serve a purpose. They provide liquidity and capital to help the markets work. However, they DO NOT make a lot of money just because oil prices are high as O’Reilly believes. They buy and sell futures and futures options. They can bet the price will rise by buying long or buying call options or bet the price will fall selling short or buying put options. For every winner there is a loser. In whole, it all stabilizes the market although once in a while a house of cards develops and the market collapses and many of those evil speculators get torched badly.
Then there is this dopey accusation: gasoline companies are price fixing. This has been disproven a thousand times. And it is simple common sense – if they are conspiring to fix prices, why not price gasoline at $8? Why does the price go down? Why does it fluctuate at all Mr. Conspiracy?
Causes of rising prices include the aforementioned tensions in the Middle East, and demand from the developing world. But also, many folks don’t realize that the weakness of the US dollar plays a significant role. A year and a half ago in Playing with Fire, I railed against the Federal Reserve’s “Quantitative Easing” (money printing) because it floods the world with dollars and with rising supply there is falling demand and value. This occurred last spring and the dollar scraped along at interim lows as gasoline prices peaked in May and fell into the summer. Gas prices otherwise never fall in the summer, except when somebody is messing with the value of the dollar in a big way. The dollar peaked in December 2011 as gasoline prices hit the lowest prices in a couple years. The dollar has since fallen off and gasoline prices are up. Get it?
The US isn’t going to go bankrupt and it won’t default on its debt. The government will either get the deficit and debt under control or we will inflate our way out of debt. We can effectively lop a couple zeros off our 16 trillion debt and voila, our debt is suddenly only 160 billion old dollars. The downside: a loaf of bread and gallon milk cost $700. A gallon of gasoline: $350. I feel the start of a credit card commercial coming on but I won’t go there.
The fact is, there are many factors that push prices up or down. Like any complex model, it is extremely difficult if not naïve to isolate the effect of one actor. Cleary though, rising world demand, limiting supply, tension in the Middle East, and a weak dollar and a dozen other factors put upward pressure on prices.
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