It’s the Infrastructure, Stupid

Do We Really Want to Stop Global Warming?

There were a couple of stories yesterday about cities having small carbon footprints…  The San Diego Union Tribune carried one and so did The San Jose Mercury News – both good stories, but how do these cities fair when we keep hearing that the state will not achieve it’s 20% renewables target by 2010 (as is mandated under current law)?

 

Let’s assume that we could not only meet that target, but better yet, we exceeded that target…  How would these cities then be impacted (on a global scale) by events such as the eruption of the Chaiten volcano in Chile last month that spewed lava and blasted ash more than 12 miles (20 kilometers) into the sky or the devastating earthquake that rocked China this month?

Seems to me, that we will really need to step up efforts around the globe if we really hope to impact global warming…  But back to my question, and closer to home (at least as far as generation is concerned), how will we accomplish this without the infrastructure to allow us to deliver the low emission generation? 

California really needs to re-evaluate our views on this matter and allow for creative thinking.  Do we really want to have a lasting impact on global warming?  I mean in the positive sense…  Since the answer is a resounding "yes," I would submit that we had better allow for the infrastructure to be developed, including transmission, solar, wind, hydro, natural gas (we need the gas generation to run when the wind is not blowing) and yes, even rethink nuclear generation.  Admittedly, nuclear is not in the cards anytime soon, but we need to begin that dialogue today.  How can it be that France and Japan are doing so well with nuclear and we can barely even say the word? 

Last month I wrote about the comments that Governor Schwarzenegger made at the Yale Climate Change Conference .  He’s right – we all need to take a deep breath and get out of the way and allow the infrastructure that is needed to be built to actually be built.  Otherwise we should be honest and admit that we really don’t want anything to change.  The more we stand in the way of the infrastructure development that is needed, the harder it will be to turn global warming around.

Why is Gasoline So Expensive?

I will start from a vantage point of gasoline costs rising to $4 a gallon.  But how do we get to that number?  The numbers on the gas station sign hide a complex set of transactions.  Before gas can power your car, it must be discovered as crude oil, navigate three markets, and be refined from crude into gas.

The Three Markets: Contract, Spot and Futures

Both oil and gas are traded on three markets: the contract market, the spot market, and the futures market.  Each is influenced by different factors and impacts the price of gas at different stages of production.  Unlike the futures market, the contract and spot markets are not the kind of markets found on Wall Street; they are informal networks of businesspeople.

The Contract Market

Refiners plan their purchasing and refining activity to ensure that these contracts are fulfilled.  In exchanged for this privileged standing, refiners charge contract customers a premium.

The Spot Market

The best deals are often found on the spot market.  Since neither the buyer nor seller is locked into a prearranged deal, the laws of supply, demand, and free market are mostly in effect.

The Futures Market

The people buying and selling futures rarely, if ever, collect on their contracts; if we look at the most recent seven year period, you could note that 5 billion barrels traded, of which only 31,000 were ever delivered.

Refineries

In the early 80's, there were over 350 refineries, mostly owned by the oil companies. Today there are less than 150 refineries, and most of them no longer controlled by the oil companies. Refineries are now held privately and independently, and as with any independent businesses, profit is king. It is in the refiner's interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve.

Fixing the Price of Oil

Heard of OPEC?  Well, on the world market, the price of oil is really established by these countries first.  Then follows the trickle down I have described above.  And if you think that this above is complex, stay tuned for another write up about OPEC at a later date…

Taxes

State and federal taxes account for about 18% of the price of gas.  The cost is a constant and is factored into the baseline price of gas.

Eliminating those taxes would reduce the price of gas by a few cents, but would do nothing to otherwise address the underlying factors involved in pricing gas.

So why is gas so expensive? 

Now that we have a primer on the process, let’s get to the heart of the matter. 

When conflict arises in the Saudi desert, causing the State Department to release a warning of increased terrorist activity, the futures market reacts, sending the price of crude soaring.

The higher price on the futures market makes it more expensive for refiners to acquire crude to refine into gas.  When the refiner's work is done, the emerging gas will be priced accordingly higher.  This raises the rack price and the prices on the spot markets. Oil companies and independents with long-term contracts might be insulated from the higher price, depending on their contracts.  Because refining oil into gas isn't instantaneous, there can be a lag before the higher price of the oil is reflected in higher gas prices.  

Anything that can “scare” markets will always be significant at the pump.  Since the oil companies all move in lockstep, that “scare” can cause the price of gas to rise for several days as one oil company sees another raising prices and adjusts accordingly.

Eventually the markets will calm and the price will begin to fall.

Since the next natural question is “isn’t this price gouging?”

Sure, if the price is artificially bumped for an unreasonable amount of time – but how would we define that?  The hard part is proving that it is gouging.  So far, millions have been spent on this topic and nothing has ever really been proven.  Not a good path to go down in my opinion.

Bottom Line

The best signal to the market will be people driving less.  That will bump the supply and drop the price.  If this happens, DOE would then (at its next opportunity) report that “due to price increases, US drivers traveled less this summer, resulting in an unexpected supply increase in summer – a period which usually sees a supply draw.”  If DOE said this in a report, prices would fall off – not dramatically, but it would have an impact. 

But in my opinion, the best way to have a lasting effect is to move to the 35-45 MPG sooner rather than later.  How long do the auto makers really need to reconfigure MPG?  I would argue that it depends on the current inventory in the market --- but if you told them today to move sooner on the MPG and that those that get there faster will be awarded certain incentives (tax incentives?), then we can all be happy.  Labor will keep its workforce on the line, Detroit will be rescued, and the nation will be consuming less gasoline – so we can thumb our nose to OPEC.  Lest we forget – OPEC still prices the oil and that means that without the relaxing of price fixing there, nothing changes.

As is always the case, there will be no silver bullets to solving this problem.  I always come back to the simple realities.  Infrastructure.  We need to identify more supply – this means drilling domestically, but at the same time we need to be creative about how we improve MPG and or how we fundamentally change our approach to this problem.  If we need to drive less – why not institute or require major employers to institute telecommuting?  Offer incentives – maybe in the form of carbon credits to those companies?  See what I mean?  We need creativity and so far we have seen none.

FERC Says SoCal in Danger of Blackouts

Southern California faces a greater threat of power outages this summer, according to a statement by FERC due to shrinking power reserves.

“This remains a concern despite implementation of demand response of more than 1,400 MW” projected by the state grid operator in late April, said Charles Whitmore, FERC’s senior market advisor.  FERC staff pointed to supply risks arising from decreased power imports to the state, as well as possible generation and transmission outages and summer temperatures on par with last summer’s heat waves.

CAISO, however, does not predict blackouts in Southern California this summer.  They quickly pointed to measures to curb peak demand and new generation coming online, adding that demand response programs have grown, but stressing that “Southern California’s load continues to grow--and most of the new generation that has come on line in the state since 2001 has been in Northern California.”  

FERC also noted that wholesale power prices are rising.  The continuing increase is attributed to higher natural gas prices because of increased demand from the fleet of new gas-fueled power plants, lower imports of liquefied natural gas and lower gas storage.

 

Interestingly, CEC also issued their summer assessment on the heals of this comment from FERC, and in thier assessment, they said that Southern California has a 3.8% chance of a staged emergency this summer, but that it still remains "below target reliability standards."

 

If nothing else, this should be read as a warning that our infrastructure to deal with our current and future energy demand is not in place.  Will we get lucky and squeeze through a hot summer without blackouts, or will we have finger pointing when the lights go out in the middle of July, August or September?

Governor Schwarzenegger Says CA Will Be First to Clean Energy Independence

While touting the potential of renewable power but remaining silent with regard to --the “hydrogen highway”--(I still believe someone talked him into touting this early in his governorship) Governor Schwarzenegger said California will be the first state in the nation to reach energy independence while fighting global warming.

In a speech last week on May 13 at a meeting sponsored by the University of California, Irvine, and the Milken Institute, he called on business leaders and scientists to protect the state’s economic and environmental future.

He urged energy and other industry leaders to think about the long-term benefits of investing in renewable resources. The Governor touted AB 32, the Million Solar Roofs initiative, his executive order to create a low carbon fuels standard, and the state’s green building initiative.

Sounds great... But message to the Governor and his staff: PLEASE, take a moment to reach out to your own Administration -- particularly your appointees at the various energy agencies and environmental agencies. The only way that the energy industry will realize all the goals established to date, is if the industry is afforded a market with market signals and rules that will allow all of that to happen. Hate to say, this, but so far, so bad...

From regressive policy initiatives at the SWRCB to protracted permitting at the CEC and CPUC... in some cases, the process has turned from stumbling blocks to snares. Trust me, if these were to see improvements, the industry would respond and the infrastructure to deliver that green independent future would be closer to reality. And sooner than we all might otherwise expect. To do nothing, will mean that we will get nothing. Markets and industry need meaningful signals -- we don't have them today. We need tose market signals so that the infrastructure can secure the financing to get this stuff built.

As the Dust Settles in Borrego Springs… What Now for the Sunrise Powerlink?

The CPUC held two back-to-back public participation hearings in Borrego Springs on Monday (5/12). The most notable difference from all of the previous hearings held thus far was that almost all of the commissioners were in attendance. CPUC President Peevey and Commissioners Bohn, Simon and Grueneich were present for over eight hours of public comment on the project.

What did we see or learn from the testimony? Nothing new, in fact, it was very similar to the five previous hearings that were held in the last few months in various San Diego communities. If I closed my eyes and listened – the song remains the same.

What we did see – were numbers. The opposition really did show up and this time they brought a few folks that are no strangers to spotlights. And if I have learned nothing else about Mike Aguirre, he never met a camera he didn’t want to jump in front of, and now as City Attorney, the next word you can always expect is “lawsuit.” He may have a case, but having watched him on energy matters (ever since the energy crisis of 2000-2001) before, this is likely to be more spotlight than action.

I was a bit surprised by Supervisor Diane Jacob, she raised points about the firefighting hazards that she had not raised before – or maybe I had just missed that before. Senator Christine Kehoe (also Chair of the Energy Committee) did not attend, but did have a representative read a letter into the record. Other than making it clear that she opposes any route through the State Park, she stressed that distributed generation is being overlooked as part of the solution to San Diego's energy needs.

What does all this mean? I think that the opposition scored one for their side – and the CPUC will now have to sharpen the pencil to draft an alternate proposed decision that outlines a clear path to construction for this project if it is going to get built. I still believe it will get built, and I further believe that the Commission will find a way to secure the right formula to getting this project approved. The big question now is what will the route be and when will the line be energized? Every year of delay, will mean one more year of tighter energy reserve margins for the region. And while no one wants to hear the word “blackout” – the CAISO will tell you that delays may really pinch system reliability.

Arizona Critical of SCE Devers Transmission Line in Letter to FERC

The Arizona Corporation Commission (ACC) has responded to the Federal Energy Regulatory Commission (FERC) concerning Southern California Edison’s (SCE) appeal on the proposed Devers-Palo Verde No. 2 transmission line.

The ACC defended its June 2007 decision to deny an application for the 230-mile, 500 kV line that would run from the Palo Verde hub area in Arizona to the Devers substation in Southern California.

In their letter to FERC, the ACC complained about higher levels of nitrogen oxide pollution from Arizona power plants and loss of water used in generating power that will be sold to SCE. The project also “raised concern about its negative impact on the environment, particularly in and around the Kofa National Wildlife Refuge.” The ACC went on to say that SCE has other options to satisfy its needs, which include building new power plants and using renewable energy.

SCE has appealed the Arizona denial to FERC because the DPV2 line falls within the U.S. Department of Energy’s Southwest Area National Interest Electric Corridor, as authorized under the Energy Policy Act of 2005. This is a very interesting test to the Federal Corridors portion of the act – and will prove interesting as the Sunrise Powerlink continues its path to construction.

Schwarzenegger Administration Holds Meeting on RPS/Senate Asks About Costs

The Administration is growing more concerned over the high probability of missing the Renewable Portfolio Standard mandate of utilities securing 20% renewable generation by 2010.

Though unpublicized, the Administration met last week with several stakeholder groups to discuss what might be done. I am told that the Governor had several pointed questions and that the staff did as well. How might we get to 20% renewables, and why will we miss the mark?

It is highly likely that we will see an Executive Order that will address how to get to the 20% -- and beyond -- the 33% that is being kicked around.

Why is this important now? Because of the initiative that has qualified for the ballot that would take us to 50% renewables by 2020. Is it doable? Sure, if we eliminate all of the barriers to building the infrastructure that would be needed. Will we do that? Even if it were done through regulation, the legal side will always slow the process down.

We need the infrastructure to get us to that green future – and to echo what the Governor said in his speech at Yale last month: "There's no two ways about it. Neither business nor environmentalists nor Republicans nor Democrats can be set in their ways. I suggest to them: Relax, exhale, just exhale and relax and let things move forward.”

In a hearing yesterday, the Senate Energy Committee had sharp questions about costs for the President of the CPUC, Michael Peevey: "How much is all of this, GHG reduction, RPS and other mandates going to cost?"

Great question!!! But we have no answers because we have not really looked at it...

I expect that a possible Executive Order on RPS will ignore the cost question, but maybe someone in the legislature will ask for an informational hearing to discuss the numbers that are out there already (EPRI calls it somewhere between $100 billion to $500 billion between 2020 and 2050 -- the smaller number to reduce GHGs by 25% and the larger number to reduce GHGs by 80%).

As I have stated before, going green is going to cost a lot of green... the better questions is who will pay for it? Will it be all ratepayer classes, or will we single out a few groups? The popular theme will be to make the wealthy pay for it... but how do we define that? Oh, get ready for that fun discussion that we will need to have at some point -- assuming we really do want to go green.

Republican Legislators and CMTA Call on Governor to Delay AB 32 Implementation by One Year

Republican legislators and the California Manufacturers & Technology Association (CMTA) called on the governor to delay implementation of AB 32, given the slumping economy, to help California’s businesses – state operating costs are 23 percent more than the national average.

With a price tag of between at least $100 billion by 2020 and $511 billion by 2050, according to the Electric Power Research Institute, AB 32 will raise business costs and further erode the state’s economy, according to CMTA.

At issue is whether the CARB, which is charged with developing a plan and rules to carry out AB 32, should begin enforcing emissions cuts in two steps, the first in 2010 and the next in 2012, or delay each milestone by a year.

CMTA and some legislators urged the state to take an extra year to study how to achieve the law’s objectives at the lowest possible cost. A one-year delay also might give the federal government time to move on climate change after the Presidential election next fall.

Two Observations: First, I don’t expect that this will be the end of this story, we may hear more on this given the growing budget shortfall (on May 14, the Governor is scheduled to speak on the budget -- some are calling it a $14 to $20 billion shortfall). Second, even with that, I doubt that the Governor will slow down AB 32 -- since this is the political issue that put him on a world stage, I think the Administration will politely thank everyone for being creative, but say no.

Is ANWR Really the Answer to Lower Oil Prices?

If you heard President Bush or any of the media talking heads make pronouncements about drilling in ANWR to bring oil prices off of their historic highs, and you believed the rhetoric, you are not alone. If you have heard this debate over the past few years (President Bush actually raised this as a proposal 7 years ago), you are likely one of the few who might also remember that federal legislators quickly shot down the idea every time it came up.

So, could ANWR save the day on oil prices? Not immediately. Similar to the regulatory problems we face in California, even if you could drill in ANWR or anywhere off the West Coast of the United States, assuming no significant delays from the regulatory side or from environmental lawsuits, the conservative estimate of that oil actually hitting the market would be in roughly 7 to 10 years. Pretty sobering, eh?

There is plenty of blame to go around. Presidential candidates have talked about their views, but none have actually articulated a path to true independence from the body that actually has the strangle-hold on the world oil prices: OPEC.

Another parallel to California here in my humble opinion (think of the California effort to move to a green energy future). If we really want to build a bridge to a world of energy independence, we need to employ all the technologies that are working in other parts of the world. From bio-fuels that could come from sugar to nuclear power. If we are really going put our money where our mouth is, we are going to have to engage an Apollo like “race to the moon” type of effort to get us to the independence we claim to want. Are we serious about all of this? I hope so, but so far not one of the candidates is offering such a vision.

What would it take? New infrastructure on a massive scale. The kind that would revolutionize R&D for new fuels, the kind that would re-invent our entire transportation system, from our cars to public transportation. Failure to do so will soon result in only the very wealthy being able to afford something we take for granted today – like jumping on a flight to wherever for bargain prices.

The signs are there – the collapse of some major airlines around the world are due to the cost of fuel – that pass-through cost will soon result in a diminishing travel pool – and more airline collapses. I think this is just the thing that could dislocate world economies. I hope I am totally wrong.

In the meantime, remember that you read it here first: only a new way of thinking and new infrastructure will save the day.