Energy Prices

The Peculiar Economics of Falling Oil Prices

The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished.  The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week.  For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment.  So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan.  It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead.  After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over 6 percent.

The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU.  That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year.  The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices. 
The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too.  Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online.   Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas.  Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now.  Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower.  In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time:  The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023. 
Don’t count on a decade of cheap oil.  Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas.  But the economics of these new energy sources work best at prices higher than those prevailing today.  A long period of low oil prices would slow the growth of supply from those sources -- and so drive oil prices back up.  The Saudis are counting on it.  They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all of those alternatives sources.
The truth is, oil prices will rise again whether the Saudis’ tactic works or not.  While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa.   Stronger growth and energy demand will bring on line more alternative sources of energy -- so long as oil prices are high enough for the alternatives to be competitive.
This is an old story.  Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008-2009 financial upheavals.  Each time, oil prices marched up again after one, two, or at most three-to-four years.  Of course, that volatility also makes some people billionaires.  To join them, what you’ll need is patience and a hedge fund’s access to credit.  With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.
This post was originally published on Dr. Shapiro's blog

A New Way to Boost Job Creation -- and Help Save the Planet

U.S. growth slowed sharply in the spring of both 2010 and 2011; but it looks like this year, the economy may have fin ally shaken its good-weather jinx.  New home sales are up and foreclosures are down.  Housing prices are still falling, but at a progressively slower rate which may signal that home prices are bottoming out.   Businesses added only 130,000 new jobs last month, but the jobless rate and first-time jobless claims keep falling.  Perhaps, it’s a case of, “been down so long it looks like up to me.”  But it is a recovery.  Yet, it can still use a boost.  As the Financial Times wrote last week, “in the US, the case for fiscal stimulus is strong.”   

That case is based on what economists call the “output gap.”  An output gap is the difference between the value of everything the economy produces, and what it would produce if it operated at peak efficiency, making the best use of its available labor and productive capacity.   This output gap today is probably 5 to 6 percent of GDP, or a growth shortfall of $770 billion to $930 billion.   That’s why the Federal Reserve continues to keep short-term interest rates near zero, and why global investors have kept U.S. long-term rates at historical lows.

Such a large output gap also helps explain why job growth is so slow.  In the 34 months since U.S. growth first resumed in July 2009, private-sector jobs have increased by just 3 percent.  Compare that to nearly 12 percent gains in private sector jobs in the first 34 month following the deep recession which ended in November 1982.  Part of the reason for much slower job creation this time lies in the “batten down the hatches” response by most middle-class Americans to the destruction of much of their wealth in the housing crash.  However, another part of the reason lies in structural problems evident in the last expansion.  In the first 34 months following the 2001 recession, private sector employment grew by less than 1 percent -- and whatever caused such tepid job creation has not gone away.  

So, the American economy needs today a dose of short-term stimulus plus initiatives to help spur job creation on an on-going basis.  And whatever is done cannot make long-term deficits worse.  The candidate who can solve that puzzle would earn the White House.  

Here are some ideas as a start.  First, shift the tax burden off of job creation and work, with a big, permanent payroll tax cut.  That will reduce what employers pay when they create jobs and what workers and companies pay when people work.  Over the next 10 years, payroll tax revenues for Social Security retirement will average $770 billion per-year.  Cut that in half, and you reduce the tax burdens on job creation and work by some $385 billion per-year.  

The government can raise that kind of money in only three ways – higher income taxes, a new value-added tax, or a new energy tax.  Nobody has ever claimed that higher income taxes or a new VAT help create jobs – but the right energy tax just might do so.

The right energy tax here is a carbon-based fee.  It could be phased in over several years, which combined with lower payroll taxes would give the economy some short-term stimulus targeted to both job creation and consumption.  It could be phased up until it replaced all of the lost payroll tax revenues, ensuring that it wouldn’t make deficits worse over the long-term.  And most Americans would be no worse off with the higher energy prices, because their payroll tax payments would shrink by at least as much.  

Business, including big energy companies, also could come out ahead.  One of the few things that economists, energy experts and environmentalists generally agree on is that a carbon-based tax is the most efficient way to limit climate-warming, greenhouse gases.  That means a broad carbon tax program could preempt future EPA regulation of greenhouse gases – just like the cap-and-trade program that passed the House of Representatives in 2009 did.  

A broad carbon-based tax would make all low-carbon fuels – solar, wind, biomass, and nuclear – more price competitive.  Embed those price changes in an economy as innovative as ours, and entrepreneurial resources and energy would quickly flow into ventures to improve those fuels and make them widely available.  All of those new ventures would create new jobs.   

Finally, we could give this whole process a turbo-charge.   Today, any family or small business can generate its own energy by installing solar panels, as can farmers and larger businesses with larger solar or wind facilities.  And when they generate more energy than they can use, they can sell the excess back to the local utility.  Few families, farmers or businesses do so today, because fossil fuels are still relatively cheap, and the alternatives require hefty initial investments.  

The carbon tax itself will make those fossil fuels less price-competitive, relative to the cleaner alternatives.  Moreover, as Germany and Britain have demonstrated, entrepreneurs will buy and install solar or wind energy for homes and businesses at no charge – so long as government guaranteesw that the utilities will pay a decent rate for the excess power, and the entrepreneurs can get a reasonable cut of those payments.

The mechanism to create those conditions is called a “feed-in tariff,” and Germany and Britain borrowed it from a U.S. program enacted under Jimmy Carter.  It didn’t work here last time, because alternative fuels weren’t sufficiently developed, and oil prices fell sharply in the 1980s and 1990s.  Both of those stumbling blocks no longer apply today.  

In a country as innovative and entrepreneurial as the United States, the combination of a carbon-based tax and a feed-in tariff should drive enormous new investments and advances in renewable energy, with unknown but possibly large-scale economic benefits.  And a widespread dose of decentralized, renewable energy production would create a lot of new jobs just to install and maintain the equipment.

Everybody wins.  The economy gets a short-term boost as taxes on job creation and work go down.  The revenues for social security are replaced with a new arrangement that reduces the risks of climate change, without restrictive new regulation.  Innovation accelerates in areas likely to generate lots of new jobs down the line.  In a sensible political environment, it could be the kind of idea that a smart politician might use to win the presidency. 

What's Next for Clean Energy

This past weekend, I attended the Aspen Institute's Clean Energy Roundtable, an annual gathering of business, political and policy leaders working in clean energy. Inspired by the many insights and ideas presented, here are my thoughts on the state of clean energy today and what lies ahead. 

First the good news.  Prices of key clean energy technologies are plummeting, bringing many technologies such as distributed solar and energy storage closer and closer to mass deployment.  The cost of solar panels today is about 20% below that of a year ago.  And it should continue dropping for the forseeable future. In other words, the performance/price ratio is improving exponentially, like computer chips if not quite as fast and for different reasons, cost economies for the most part as opposed to breakthrough technologies.  The main driver of the plummeting costs is volume and successful efforts by the Chinese government to vertically integrate the Chinese solar industry--that now supplies over half of the world's solar panels.  (In advanced thin films, costs per watt are also coming down.)  Even more dramatic price drops are occurring in battery storage across a range of chemistries with prices halving in the the last year.  Plummeting prices that translate to rising performance are good news for developers, electric car-makers and the global industry at large.

The story is more complicated, however, in the United States where we are in what might be described as the best and worst of times.  This past year saw torrid growth in solar deployment in the US with solar capacity doubling; Wind installations also grew and wind is now a very competitive source of power.  Solar--already competitive with subsidies and in some markets--will be very competitive in several years.  That is the good news.  The bad news is that solar generation still supplies only .2% of US electricity and, what's more, growth has been driven by the 1603 provision in the tax law that allows tax credits to be redeemed for cash.  This provision expires on December 31 this year. Since the financial crisis, tax credits deals to build everything from affordable housing to energy have exceeded the pool of capital from investors seeking to shelter profits.  That means tax credits absent the 1603 provision can be worthless.  With extension of Section 1603 uncertain , the solar industry may face significant challenges beginning this winter.

Similarly, on the wind side, the end of the 1603 credit would take a toll and the production tax credit for wind, itself, expires at the end of next year. While companies are scrambling to start projects before these deadlines pass, afterwards activity may fall of the proverbial cliff.  In short, while global fundamentals for clean energy remain strong, the sector remains quite sensitive to government subsidy.  In the US with subsidy likely to to change and-especially with gas prices likely to stay low as more shale gas comes onstream, we may see more clean energy activity shift overseas.  (One potential fix to this problem: moving clean energy off "subsidies" and giving them equal access to the master limited partnership tax break that extractive industries like oil and gas enjoy.)  Cheap American shale gas could nicely complement intermittent, renewable energy, but effortst to bring the technologies together have lagged.

Indeed, despite intense focus by Silicon Valley and the support of the US government, the US is not catching up with Europe or China on clean energy and in many measures, we are falling further behind.  A few years ago, Germany adopted an export promotion plan that included factories as exports.  It exported gas turbine and solar panel factories to China which is how China has so rapidly come to dominate many areas of clean manufacturing.  The Germans have done well selling machine tools to the Chinese while creating demand (and green power) at home through an aggressive feed in tariff  The US, however, except for a few bright spots like Applied Materials that makes equipment to manufacture panels, First Solar, a thin film manufacturer, here and there innovators like Sun Edison and Tesla--and a few large companies such as GE and IBM, has yet to find its way.

Why?  Unlike Germany that has deep credentials in improving manufacturing incrementally, we have excelled through innovating and creating new industries. For example, France Telecom deployed the minitel years  before America  went online but US companies ultimately came to dominate online technology once we created the open Internet platform that allowed yankee entreprenurship to flourish.  Yet despite developing scores of breakthrough energy technologies in our national labs and robust funding of clean energy companies, as I have written before, clean tech innovators have run up against the brick wall of a regulatory system that funnels purchasing decisions to regulated utilities.  The latter are dis-incented by law to invest in new technologies.  Meanwhile, in many states, the consumer remains locked out of the action entirely behind the Iron Curtain of the electricity meter. The sector is still attracting capital but time is running out to upgrade the regulatory structure to what I have described as Electricity 2.0 to create large, gatekeeper-free platforms that reward innovation and investment.

If there is one strong positive on the clean energy front, it is that the consumer has been given a small seat at the table, notably through the introduction this year of the first two electric cars, the Chevy Volt and Nissan Leaf, and in the form of the proliferation of direct generation of electricity, primarily from solar.  The electric car is a technology that can engage the consumer on the ultimate playing field of new, more,  better.  However, if the the cars fail to thrill, clean tech will experience a potentially huge setback.  For that reason making electric cars and charging infrastructure work has to be a key priority for the industry.

More broadly, the once almighty American Consumer who has not only driven domestic growth in recent decades by controlling a huge chunk of GDP but also funded the development of the Pacific rim, has been the missing force in the clean energy sector.  Consumers are prohibited from directly buying clean energy by law in many states in contrast to communications or the Internet where consumer demand drives rapid product life cycles and profits at a speed in synch with venture capital.

Indeed, the write once, make money everywhere, model of the Internet is providing stiff competition for capital to clean tech where local regulations and the gate-keeping role of utilities can sap the energies of even the best funded, most visionary entrepreneurs.

Nonetheless, my final takeaway was that while challenges abound, clean energy remains one of the largest, most important and potentially, most transformative projects of the 21st Century.   Our job is to engage the consumer, sweep away barriers and play to America's strengths in innovation, entrepreneurship and out-of-the box thinking  in the face of obstacles.

Tapping the Strategic Petroleum Reserve

Yesterday, the United States announced it will release 30 million barrels of oil from the Strategic Petroleum Reserve as part of a coordinated effort by the International Energy Agency to place an additional 60 million barrels on the market to reduce oil prices.

The move comes at a crticial point in the global economic recovery: While oil prices have been trending downward, uncertainty over energy combined with problems in the Eurozone and the US housing market are threatening the global recovery.  The Federal Reserve acknowleded as much earlier this week when it lowered its growth forecasts.  The optimism of the fourth quarter of last year has given rise to pessimism as the recovery enters an unprecedented second soft patch and some have even raised fears of a double dip recession. 

In this context, the release of oil--though it equals only about 15 days consumption by the US--is timely.  It made sense to jump proactively on a downward drift already underway.  The announcement has already succeeded in taking a bite out of oil prices which dropped 7% yesterday. 

When intervening in markets there are normally several steps that governments employ.  First they talk.  A statement from the Secretary of the Treasury that the US favors a strong dollar for example, is usually sufficient to quiet fluctuations in the dollar.  The IEA did the equivalent of this when it said in May it would release oil if OPEC failed to raise production.  If mild talk doesn't workthe next step is to speak more forcefully.  Because financial markets can be unforgiving once they smell weakness, this may not work and can even have the opposite effect.  The next step for those with the resources is actual intervention in markets.  When intervening, the element of surprise is useful as it catches speculators off guard--ideally stemming their appetite for risk.  Yesterday's intervention seems to have been a success insofar as it has brought prices down but they are still above $100 per barrel. 

While I do not quarrel with yesterday's action, I think the Administration and the oil consuming nations need to go far beyond countering OPEC--or in this case making up for its failure to raise production to offset Libyan disruptions.  They need to end the oil cartel.

The IEA, created in 1974 in the wake of the first oil shock within the OECD framework to counter OPEC, has done a good job in its history of fostering cooperation on energy matters among consuming nations.  It requires its members to maintain large stockpiles of oil as a counterweight to OPEC.  However, just as the IEA has evolved, so too, has the world geopolitical situation.  The Western powers are now involved militarily in the Middle East--the geographic heart of the OPEC cartel--to a larger degree than at any time since colonial mandates wound down after World War II.  The convulsions in the region that have placed the West in the role of supporting some OPEC governments such as Saudi Arabia and Iraq while championing rebellion in others such as Libya gives us more leverage than we have employed to date to break up OPEC.

Specifically, as I argued earlier this month, the US and NATO should make as a condition of military aid that receiving governments agree to a timetable to withdraw from OPEC.

Second, the US has other tools.  The Justice Department has broken up hundreds of international cartels over the last two decades.  All it needs to take on OPEC is clarification of the Foreign Sovereign Immunity Act act, legislation both houses of Congress have at one time passed.

Third, eight OPEC countries are also WTO members or observers and the WTO forbids cartels.  As argued compellingly by Senator Frank Lautenberg, the oil consuming nations, led by the US should file trade actions in the WTO against OPEC.

Over a century of economic thought and case examples have shown that cartels are bad.  When the cartel deals with something as vital as oil, it is not only bad but dangerous.  OPEC--an organization that has done nothing good for the world and much ill--is vulnerable right now.  The global economy may be even more vulnerable.  The US and, indeed, all the oil consuming nations, should use every tool at their disposal to end the OPEC oligopoly.

End Opec Now

The OPEC cartel that meets in Vienna today has thrived in its 50-year history. First ignored, then despised for using the "oil weapon" on the West, and ultimately granted a strange legitimacy due to age, it has assumed all the trappings of an international organization. This week's meeting of Mahmoud Ahmadinejad 's Iran, Muammar Gaddafi's Libya and Hugo Chavez' Venezuela to fix quotas, for example, will take place not in Gaddafi's tent but in a sumptuous building on the Helferstorferstrase in Vienna. Press is likely to report not on why oil prices are set by a cartel of the world's worst leaders but rather on whether oil quotas are modestly adjusted to cover wells out of order since the Libyan revolt

Unfortunately, the cartel's victims have not fared as well. OPEC has over the last century engineered a massive transfer of wealth from the rest of the world to its rulers. At key junctures, it has used the "oil weapon" to destabilize the global economy as with the 1970s oil shocks, the 1980s debt crisis triggered by soaring oil bills and the 2008 financial collapse (when it cut quotas with prices over $100). Less well known is the role of oil price spikes in stoking misery and instability in developing countries. The final victims have been the people of the oil states themselves who have not shared in the wealth enjoyed by a few while seeing democracy pushed indefinitely into the future.

Adam Smith famously observed "Seldom do businessmen of the same trade get together but that it results in some detriment to the general public." Based on a long history of economic study, today cartels are illegal in virtually all developed countries. The question with OPEC, therefore, is not why it is bad but why has it survived. During the first Gulf war in 1991, the US and its allies saved Saudi Arabia, liberated Kuwait and dictated peace terms to Iraq. Yet after the war, all three countries continued as prominent OPEC members. In 2002 we invaded Iraq again, this time overthrowing Saddam Hussein. But rather than insisting that Iraq leave OPEC, the United States actually became a de facto OPEC member through the provisional Iraq authority.

The superficial answer to this question of why OPEC has persisted is it has successfully claimed sovereign immunity. Unlike a private cartel -- hundreds of which have been prosecuted by the Justice Department since 1990, OPEC is comprised of governments that happen to set quotas for oil. But this argument is weak. The 1976 Foreign Sovereign Immunity Act contains an exception to immunity in the case of governments engaging in commercial activities. The real reason that OPEC has survived is a lack of US resolve to break it up. In 2007 and 2008, the House and Senate passed legislation that would have forced the Justice Department to go after OPEC. However, a veto threat from President Bush prevented final passage of the legislation.

There is an equally strong case for trade action against OPEC, made compelling by Senator Frank Lautenberg. The WTO unequivocally prohibits quota-based cartels except in the rare case of conserving resources or national security and of the 12 OPEC members, five are WTO members and 3, observers. Yet to date, the US Trade Representative has not filed an action.

These tools alone might suffice to end OPEC. But the ratcheting up of US engagement in the region recently creates a new opportunity to break the cartel.

The Middle East -- the geographic center of OPEC -- is clearly undergoing fundamental change. Not only, of course, did the US midwife democracy in Iraq, we remain the guarantor of security of Saudi Arabia, Kuwait and the UAE, and are now also supporting the rebels in Libya. The expanded US and EU role in the region provides an opportunity to make a simple case to all parties. US and more broadly EU support must be contingent on a timeline for withdrawal from OPEC.

In short, the conditions exist to end OPEC. We only need resolve. Here is a plan forward. By July 4th, Congress should pass legislation revising the FSIA to strip OPEC of any hint of sovereign immunity. The US Trade Representative should immediately begin studying action against the OPEC countries in the WTO. The Obama Administration should make it clear to parties we aid in the Middle East they need to plan to transition out of OPEC. We can end OPEC but only if we act. Time is of the essence due to the tenuous state of the global recovery.

Running on Empty: The Economics and Politics of Gasoline Prices

Mother Nature is intervening again in U.S. energy markets.  Just as falling oil prices are puncturing upward pressures on gasoline prices, prospects of serious flooding in areas of the Gulf states where refineries are concentrated has sent gas future prices soaring again.  With the economy sputtering a bit again, it’s not welcome news for the President, or for the rest of us.  But it shines a light on what actually drives the gasoline market in the United States and, by the way, refutes the energy policies of the President’s critics. And the reason it matters so much politically lies not so much in the actual price of gas, which Washington can do little to affect, as in the economy’s underlying problems with jobs and incomes.  

While speculators place bets that Mississippi Valley flooding will interrupt gasoline supplies, those supplies have played no role at all in rising gas prices over the last several months. Partisans can cry, “drill, baby, drill” all they want, but Energy Department data show that the United States has been a net exporter of gasoline since the beginning of 2010.  In short, America produces more gasoline than it consumes. From January of last year through this past February – the most current data on energy trade -- the United States exported an average of 5.5 million more barrels per-month than it imported.  And from last November through February, as prices at the pump marched up from $2.86 per-gallon to $3.20, the net trade surplus in gasoline jumped to an average of 9.8 million barrels per-month.

U.S. demand for the oil that goes into making gasoline also can’t explain rising gas prices, since our oil consumption is still about 2 million barrels per-day below the levels in late-2007, just before the onset of the 2008-2009 recession.  Yet, gasoline prices in April averaged $3.42 per-gallon, 22 percent above the 2007 average of $2.80 per-gallon.

The answer to this painful riddle does not lie in supply and demand.  Rather, most of the explanation lies in the Saudi Arabian’s government’s dogged determination to keep worldwide oil prices high even as worldwide demand eases, as it has with the recent stumbles in the American, European and Japanese economies.  And the rest of the answer can be traced to the increasing ability of large financial institutions to wield enormous leverage in order to dominate futures markets in oil and gas.  

The consequent high prices are understandably frustrating to Americans who have taken steps to reduce their energy demand, assuming like all good free marketeers that lower demand will translate into lower prices.  The share of U.S. vehicle sales going to light cars is up to nearly 60 percent, and hybrids’ share has doubled in the last five years (to about 6 percent).  But for most drivers, the recent increases in gasoline prices swamp any gains in miles-per-gallon. The administration’s critics whine all of this could have been avoided, if the Administration approved more permits for offshore drilling in deep water.  But permits for shallow-water drilling are up; and in any case, the Energy Information Agency says that opening up the outer continental shelf would probably reduce gas prices by no more than 3-cents per-gallon twenty years from now. 

In the long-run, technology will have a much larger impact on future oil and gasoline prices than today’s squabbles over drilling rights or tax breaks for U.S. energy companies – that is, so long as prices remain near their current levels.  For example, the United States has enormous natural reserves in oil shale and tar sands.  If oil prices stay near where they are today, oil from shale and sands will compete quite nicely with Saudi crude – and leave little room for the rulers in Riyadh to push up prices much further.  And with another five to ten years of development, the Administration’s favored clean-energy alternatives also will likely become competitive, again if current oil prices stick.

None of this can affect the current U.S. politics of high oil and gas prices.  But what matters most politically about those prices is actually not their level at all, but how much those prices crimp spending by Americans on everything else.  In short, the politics of oil and gasoline prices depends in the end on whether people’s incomes are going up or down.  The 1990s saw a happy convergence of rising incomes and falling energy prices, underwriting a boom in both consumption and business investments to meet the increased demand.  But the Saudi dictatorship swore that they would never let that happen again, which is why we now have to live with high energy prices in the face of weakening demand.

In an industry that doesn’t much follow the laws of supply and demand, a genuine fix for gasoline prices is simply beyond the power of the President and Congress.  The only course left is the harder work of getting incomes moving up again.  And that will require, just to begin, some serious steps to stabilize housing prices, jumpstart business and job creation, and provide opportunities for adult Americans to upgrade their skills with information technologies.

Media Round-Up: Green Project Director Michael Moynihan at COMPETE Coalition Forum

Yesterday, Michael Moynihan spoke alongside energy experts Bill Massey, Dan Munson, and Kurt Yeager at an event hosted by the COMPETE Coalition. Here are a couple of the accounts of the event from trade press:

From Restructuring Today:

Compete Coalition conference reminded why innovation is key 

The current system of power industry regulation is ill-suited for driving innovation in the very significant ways needed to address climate change, experts said at a Compete Coalition event yesterday in Washington. Innovation in the industry has been declining, notwithstanding the work at EPRI, with low R&D budgets and little incentive to try new things, said think tank NDN's Green Project Director Michael Moynihan.

Moynihan's report titled "Electricity 2.0" advocates opening up the grid or "network" to two-way communication between customers and suppliers.

More here (subscription required).

From Electric Power Daily:

Experts decry antiquated nature of grid, regulations 

The current regulatory structure "has created the grid it was designed to create" but is extremely ill-suited to meet the needs of a 21st century electric industry, an official with a Washington think tank said Wednesday.

US consumers can "buy flowers from Ecuador but can't get electricity, moving at the speed of light, from one coast to the other," Michael Moynihan, director of NDN's Green Project, said at a panel discussion hosted by the Compete Coalition.

With a structure that offers no incentive to conduct innovative research and development, or even to deploy innovations by others, the electric utility industry cannot be expected to lead the way to a clean energy future, he asserted. Moynihan avoided laying blame entirely at the feet of the power industry, observing that "we absolutely do not have the policies in place" to encourage innovation; to the 

contrary, they work against it.

Sharing the view that industry is not to blame, Dick Munson, senior vice president at Recycled Energy Development, agreed it is a policy problem. "Without competition, we are going to limit ourselves to expensive and dirty power," he asserted. The current regulatory regime "is byzantine at best."

But that does not mean there is no role for government, Munson continued. "Government needs to set the goals for where we are headed," and open up the markets to "a flood of innovators and entrepreneurs," he said.

Decrying a "bipartisan habit" on Capitol Hill of trying to pick winners, Munson suggested Congress should "set the standards and let the market figure out how to get there." And whatever the standards, added Kurt Yeager, executive director of the Galvin Electricity Initiative, the government must hold all companies to them.

One thing that is desperately needed is a standard for putting power onto the electric grid, Moynihan said. While there is a standard outlet for a consumer to plug into to draw electricity from the system, there is no standard inlet for getting power onto the system, he continued.

"That is precisely what you have in the organized markets," said William Massey, counsel for Compete. Competitive markets provide a standard "plug-and-play" feature and will "enable the innovation" advocated by the panelists, he added.

"A poorly designed market will perform poorly," Massey said, while a well-designed competitive market that encourages innovation can perform "exceedingly well."

A centralized organization, be it a utility or regulatory body, cannot do what the competitive market can, Moynihan agreed. You are "not going to get the diversity of ideas."

He recalled that AT&T's idea for advancing the old black rotary phone was to introduce the Princess phone. It was only after the telecommunications industry was pried open to competition that real innovation began. Likewise, a major obstacle faced by new technology in the electric industry is the "absence of the correct regulatory framework," Moynihan said.

More here (subscription required).

For more on Electricity 2.0, please visit

Electricity 2.0 Featured in SF Chronicle, Paper Release Today

UPDATE: Michael Moynihan's new policy paper, Electricity 2.0: Unlocking the Power of the Open Energy Network, is now available online. 

This morning, readers of the San Francisco Chronicle opened to page A-10 and saw this op-ed from NDN Green Project Director Michael Moynihan:

To get clean energy, upgrade to Electricity 2.0

While clean energy has captured the imagination of everyone from Silicon Valley venture capitalists to President Obama, it has yet to fulfill its job-creation promise. Non-hydro renewable power accounts for just 3.5 percent of electricity in the United States, compared with 28 percent in Denmark, a leader in the transition to renewable energy. In a study released today, I examine why progress has been so slow in the electricity industry - the network at the center of the wider energy network. The answer turns out to be that our highly regulated system, uniquely complex by global standards, is blocking progress.

Put simply, only by upgrading from Electricity 1.0 - the closed, highly regulated network created a century ago - to Electricity 2.0 - an open, distributed network - can America unlock the potential of clean technology and experience a renewable energy revolution.

It is often said that an inadequate electric grid is slowing the rollout of clean renewable energy. But why is the grid inadequate? Because the regulatory regime of Electricity 1.0 guarantees the current state of affairs. While the industry research consortium, Electric Power Research Institute, has done an outstanding job in improving the reliability of the network, utilities do virtually no research and development. Laws bar them from trying new business models, innovating and taking risks. This bias against innovation prevents utilities from purchasing technologies developed by others. Thus, entrepreneurs find the gates of the network closed. It should not be surprising that a highly regulated industry cannot lead a revolution.

So, how can America upgrade to Electricity 2.0? As with telecom reform, Electricity 2.0 will require nothing less than a Big Bang that includes federal legislation as well as close cooperation with the states to harmonize rules of the road. Partial reform, such as has taken place in Texas and California, is a start, but it is not enough. What's needed is an entirely new plug-and-play architecture that opens the grid to everyone, making connection the norm not the exception.

Read the full piece.

For more on Moynihan's compelling vision for Electricity 2.0, join NDN at 12pm today for a presentation of the paper. Copies of the paper, entitled "Electricity 2.0: Unlocking the Power of the Open Energy Network," will be available for distribution. 

Electricity 2.0: Unlocking the Power of the Open Energy Network
Thursday, February 4, 12 p.m.
NDN: 729 15th St. NW, 1st Floor

If you are unable to join us in person, a live webcast will begin at 12:15 p.m. ET.

Nissan Leaf Gets Electric Vehicle Cost Structure Right

The New York Times "Wheels" blog delivers some interesting news on the Nissan “Leaf” (not sure about that name), the company’s new electric vehicle that is being introduced in Los Angeles today. 

The Leaf, an all-electric five-door hatchback, will have a 100-mile range, Nissan said.

Mr. Ghosn said last month, in introducing the Leaf at the Tokyo Motor Show, that the vehicle would be priced “competitively” compared with other cars its size. This has been estimated at $25,000 to $33,000. But the price won’t include the lithium-ion battery packs; those will be available for lease separately. The spent battery packs will be recycled by Nissan and reused.

The Times writes those last two sentences (emphasis added) as if leasing the battery packs is some kind of "catch" in the pricing. It's not. Rather, the battery pack and the electricity to charge it are analogs to gasoline in conventional vehicles, which is never sold with the car.

For this reason, Nissan is on to something with the battery leasing. Like Better Place, which is building infrastructure for electric vehicles (and is teamed up with Renault-Nissan), Nissan knows that the key is not to build a car with a battery for the same price as a conventional gasoline car. Rather, the key is building a battery-less car for the same price as a conventional car. And once that happens, because electricity is far cheaper than gasoline, all one has to do to beat conventional cars is make the lease cost of a battery plus the electricity costs competitive with the cost of gasoline over the same period (which is already a reality in many countries). Incorporating the battery and its cost into the vehicle is likely not the right way to go for so many reasons, but on the financing side the cost of actually making a car go is always an addition to the purchase cost. 

Fully electric cars have some way to go – charging infrastructure needs to be built out and standardized, battery costs still have to come down, and capacity should go up – but getting the cost structure right is crucial in creating this piece of the low-carbon economy. Electric vehicles will ultimately offer tremendous benefits to consumers, from price stability to never having to go to the gas station, and to the electricity system, as the aggregate storage capacity in batteries will provide a demand response capability. And while I might prefer a name that connotes a bit more strength, the Leaf is a nice step forward.

Scoping Out Plan B for Climate Change

Beyond the public’s view, major players in the climate change debate are reassessing their options.  In fact, as the prospects of Congress approving a cap-and-trade system fade, discussion is shifting to “Plan B.”

One reason is that the version of cap-and-trade which just barely passed the House of Representatives a few months ago, the Waxman-Markey bill, made so many concessions to polluting interests that its support among environmentalists has eroded badly.   Here’s one indicator of just how weak the bill is:  When it passed the House, bond ratings for coal companies improved – a remarkable development given that coal-generated electricity is the single largest source of greenhouse gas (GHG) emissions.   In the Senate, progressives are said to be determined to oppose any legislation that ends up as weak as Waxman-Markey.   And the moderates and conservatives who make up a majority of the Senate remain wary of climate-change engineering in a cap-and-trade form, since it would both raise energy prices for average Americans and make those prices more volatile for business.   The upshot is that the prospects of corralling 60 votes for the Kerry-Boxer cap-and-trade bill in the Senate have faded to nearly zero.  

In truth, the support for a cap-and-trade system always has been limited largely to a handful of sources. There are two large environmental groups – the Natural Resources Defense Council (NRDC) and the Environmental Defense Fund (EDF) – wedded to the notion of dressing up a regulatory cap on emissions with market-based trading in the emissions permits, and the Wall Street institutions eager to get a piece of all that trading and the speculation and derivatives it would throw off.  In addition, a few large energy companies with major business lines in trading energy futures have been active supporters, as have some other companies confident they can exact the kinds of special exemptions for themselves that ultimately hobbled Waxman-Markey.   Even that limited base has been shrinking:  Wall Street support has become a big negative in the current political context, and there are reports that in the wake of Waxman-Markey, NRDC is now internally divided over the basic strategy.

With the fate of cap-and-trade in the Senate pretty much sealed – in effect, cap-and-trade’s third successive rejection by the Senate -- the debate behind the scenes is moving to the alternatives.   The two leading options are direct EPA regulation of GHG emissions or a revenue-neutral carbon tax.  The courts recently held that EPA already has the authority to regulate GHG emissions, and the eclipse of cap-and-trade will shine a new spotlight on this approach.  The alternative is one which a good share of the environmental community, most economists, and climate-change leaders like Al Gore have all supported:  Apply a tax to energy based on its carbon content, and recycle the revenues as cuts in payroll or other taxes.  Given how economically costly direct regulation can be – and the uncertainties about what such regulation would look like under the next conservative president, compared to our present liberal one -- its prospect could quickly expand support for a carbon tax program.  That approach also has the virtue of a successful record:  While Europe’s cap-and-trade system has yet to reduce European GHG emissions, Sweden’s 15-year experiment with carbon-based taxes cut the country’s emissions sharply even as its economy grew 50 percent larger. 

For its supporters, a carbon tax is simple, transparent, and produces a steady price for carbon which businesses can use to plan large investments in developing and adopting more climate-friendly fuels and technologies.  To its opponents, it’s just another tax.  That objection should be at least partly neutralized by recycling the revenues through other tax cuts – if the debate remains reasonable.  In the end, environmental and business leaders, and ultimately the White House, will have to defend a carbon-based tax against the forces of politics as usual, which in this time seem dominated by the power of entrenched interests and the partisan politics of just-say-no-to-everything.  If we can’t manage that, we may well lose the best chance in a generation to take serious action to defend he climate our children and grandchildren will inherit. 

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