Galactically Stupid

1 02 2011

Some weeks I struggle a little to decide on a topic.  It isn’t for lack of topics for they are like natural gas reserves – at one time I wondered whether I’d be able to find a topic every week.  But like natural gas reserves, as I “worry” about running out of topics, the topic list is vastly outstripping demand.  This week it was easy.

I watched the state of the union address last week, or I should say I started watching the state of the union.  It doesn’t matter who is president, from Reagan through Obama, I can only take about 20 minutes before I am forced to turn it off.  I either get nauseous from the rosy talk or disgusted with vague speak of wrong-headed policy.  Luckily, or maybe not so, President Obama talked about “clean energy” in the first twenty minutes – a topic I’m most interested in. 

As he spoke about “investing in” clean energy, something like 80% “clean” by 2035, I kept asking my TV, “what is he talking about?” over and over.  WHAT IS HE TALKING ABOUT?  As I’ve written many times in this blog, the federal government should get out of picking winners and losers.  Let’s examine an example of the federal government’s brilliance in promoting clean energy. 

Energy Policy Act (EPACT) 2005 issued under 100% Republican power, mandated that 7.5 billion gallons of biofuel – which is essentially 100% corn-based ethanol – be produced annually by 2012, next year.   Last year, the out-of-control EPA declared we should increase the ethanol content in gasoline from 10% to 15%. 

Note what has happened since EPACT 2005.  Due to a combination of easy money, Fannie and Freddie government-backed loans, wild-eyed psychotic institutional investors, hedge fund managers, home flippers, and crap like interest-only mortgages, we experienced a bubble and then a colossal collapse of the housing market but also commodities at the same time. 

The government has a solid track record of screwing up markets and then when the poo hits the fan, there they are, lecturing the private sector and pointing fingers at everyone but themselves, the chief culprits.  The housing collapse fits this model.

The commodity balloon including corn prices that grew in lock step with housing in 2007-2008 put a crushing load on dozens of new ethanol plants that sprouted on the heals of EPACT 2005.  Many bankruptcies ensued. 

As a result of the struggling ethanol industry, the government once again runs to the rescue.  But STOP THE MUSIC!  Think for just a minute.  Let’s establish that ethanol producers are manufacturers.  I think everyone agrees with this.  Manufacturers take commodities, or raw materials like plate steel, bar, ore, grain, sugar, plastic resin and turn them into fasteners, heavy equipment, dipsticks, cereal, Pop Tarts, and ice cream buckets.  They make scarce goods out of less scarce goods, a concept I learned in basic economics in college, or maybe in the third grade when I made cookies from scratch. 

A whopping 40% of our 12 billion bushel annual corn crop goes to ethanol production.  While The Wall Street Journal waxes about food inflation,  which is all too real, what they don’t discuss is this issue of manufacturing the less scarce goods into more scarce and thus more valuable products. 

For the love of Pete, wake up you dunces!  The value of the gasoline the 2.5 gallons of ethanol displaces is worth barely more than the bushel of corn that produced it!  HELLO!  So what’s the response, let’s use even more of the more valuable feedstock for the same old demand of the end product.  This is lunacy; monumentally, gallactically stupid! 

According to the ethanol industry itself,  a bushel of corn produces 2.8 gallons of ethanol, and I’m sure this is the latest, absolute greatest conversion to make ethanol look good.  Current commodity cash prices include $2.40 per gallon of gasoline and $6.25 per bushel of corn.  Do a little math.  The ethanol leaving in tankers is worth barely more than the corn coming in, raw!  This doesn’t include amortization of the plant itself, labor, or the massive amount of energy required to manufacture ethanol. 

The price of corn is elastic.  That is, it’s price changes a lot with demand, especially when the supply of the feedstock is tiny , teeny weeny, itty bitty, compared to the finished product it is displacing.  I.e., if all 12 billion bushels of corn were manufactured into ethanol it would displace four percent (4%) of our petroleum demand!  This is like feeding hogs fois gras so we can reduce our dependence on foreign lard. 

Here is what is going to happen as a result of federal government brilliance pushing this renewable “clean” source of energy – I would say write it down and save it, but I’m doing that for you – the continued easy money, potentially devastating inflation (see Playing with Fire), and massive upward pressure on corn prices is going to ravage the ethanol industry.  It doesn’t take a genius to see this is going to happen, but apparently it takes somebody smarter than a U.S. Senator. 

Meanwhile, most people don’t realize it, but these completely government-induced artificial demands on commodities and resultant high prices are driving farmland prices to the stratosphere.  An acre of decent farmland in Iowa fetches $8,000 and in some places considerably higher.  Say hello to the same wild-eyed crazy speculation we had in the housing market two or three years ago.  Only this is a lot wilder, and the hangover?  It’s too serious to joke about.

The government’s intrusion into renewable fuels is going to bankrupt the ethanol industry.  Once that happens, the house of cards crashes along with grain prices.  Land prices will crash, and like the housing market, there will be a massive farm-country crisis that will make the mid-1980s crisis look like the failure of an eight-year old’s corner lemonade stand.  Land prices will plummet below the principal on outstanding loans, much more so than homes.  I estimate that land prices will crash by about two thirds or maybe only by half if we’re lucky, to somewhere near $3,000 per acre.  When will this happen? I would say for sure in the next 10 years, probably in the next 5 years. 

In a bitter case of irony, government “assistance” for states like Iowa is going to devastate the state.  Thank you Chuck Grassley and Tom Harkin, and here goes any shred of credibility I would give Newt Gingrich  (I actually wrote this whole thing before this last salvo went to press). 

And on the way to this pandemonium, livestock growers are going to go broke on exorbitantly priced feed.  Some already have per the above WSJ opinion piece.  We’re all paying for soaring food prices but food prices don’t matter to the Ben Bernanke.  It’s not part of “core inflation”, as though nobody eats! 

After the bomb hits, all kinds of suppliers of farm equipment, goods and services are going to get whacked and there will be a swath of bankruptcies again, making 1984 (the year) seem like Little House on the Prairie.  One “solution”, god forbid, is to throw more money at ethanol subsidies.  What’s it going to take? – $2/gallon of federal subsidy?  Is this the kind of “investment” we’re talking about? 

So think about it.  Do you really want the brilliant federal government driving us toward another cliff in renewable energy?  I can’t think of a more devastating outcome than will happen with ethanol, but then I also couldn’t think of a crazy scenario of how saving energy results in greater consumption in “Upside Down Consequence of EE” but then within a week in “The Delectable Light Bulb” a bizarre real example dropped in my lap.  The next government renewable energy drive may not be devastating, but I guarantee it will be a failure by any reasonable measure.  Has the federal government driven the breakthroughs in lighting and other technologies?  Not that I’m aware of.  The private sector has.  What happened to the Bush’s great government hydrogen solution for transportation? – and fuel cells cars?  How about the synthetic fuel godsend from the Carter days?  That was a winner, to be sure.

Renewable energy IS NOT like the development of space exploration leading to satellites for national defense then phones, TV, and GPS – or nuclear power.  In these cases, the features and requirements of the end product were well defined.  It was just a matter of physics and engineering to make it happen.  All known renewable energy today has significant physical barriers to success – like there are only so many acres of tillable soil on the continent.  The yet unknown successful, cost-effective, and plentiful source of renewable energy may be percolating in a lab somewhere or may only be a wild idea in someone’s mind or not even that yet.  I don’t know what it will be, but we aren’t going to ride solar and wind energy to the renewable sunset.

Feds – just defend us from enemies, foreign and domestic, and provide equal opportunity for all.  We will take care of the rest.  And, funny how things like satellites, GPS, internet, lasers, compact discs, DVDs, sonar, and stuff like that are spin offs of what the government is supposed to be doing – protecting us from enemies!

Tidbits

In reply to “Amber Waves of Ethanol” from The Wall Street Journal above, the CEO of the Renewable Fuels Association, (lobby) states there is no food-ethanol trade off.  Forty percent of the nation’s corn crop going through ethanol plants is no tradeoff?  Nevermind.  Put down your emotions and think about what he says.  The supply of crops (production) hasn’t changed and “remember, farmers in the U.S. see less than 20 cents on every dollar spent on food.”  What does either of these have to do with pouring 40% of the corn crop down the ethanol hole or changing supply or farmer’s share of the take?  In fact, it actually bolsters the fact that supply isn’t changing while demand is rising and will continue to do so.  You have to be smarter than that, man. 

Lastly, I want to make it clear I am not ranting against the ethanol industry.  As I’ve said before, everyone has to play the game by the rules government puts on us.  However, once this bust happens, everyone involved should have to live with the consequences without bailout.  People need to take responsibility for their own decisions.  I chose not to pursue government ARRA handouts because I considered the red tape, competition for the money, types of clients that would use it, and that it’s a one-time deal, would make for a miserable ROI for us.  If others want to land the money, and then hire us, I may consider it. 

All is not lost for farmers and ethanol-plant owners.  Sell!  Farmers can sell their obscenely overpriced land and lease it back with long term contracts.  When prices crash, take it off the hands of the sucker that bought it from you – at that point it will probably be the bank, but the bank will also be broke – maybe you can take it from bankruptcy court.

P.S.  ACEEE wasn’t fond of the President’s omission of energy efficiency either

written by Jeffrey L. Ihnen, P.E., LEED AP
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Law of Gravity, Repealed

18 05 2010

Yay!  I’m outside working on my computer for the first time this year.  Alright, who cares?

Every week I plow through news-clipping services to see what is going on, to build my topic list, which is piling up faster than the weeks pass.  This week I had to shelve 4-5 great topics to again take on the recently arisen climate bill.

Many huge utilities and other giant energy users and associations are lauding the Kerry-Lieberman-Graham bill.  These institutions include the American Wind Association, Duke Energy, Dow Chemical, Florida Power and Light, T. Boone Pickens, National Resources Defense Council, Steelworkers Union, Shell Oil, and Westinghouse. 

Support from some of these groups is obvious.  What stinks to high heaven though is the for-profit giants who support this bill.  Company motives are driven by profit.  Per news accounts, I’ve read Dow has done a fantastic job at reducing energy consumption.  My guess is they are stockpiling carbon credits, like AEP has been doing.  Buy low and sell high.  A climate bill will greatly increase the value of carbon credits.  Rest assured, I would say these companies are positioning themselves to make a killing, not save the planet.

Florida Power and Light is a major wind power company.  You may not realize it, but a huge portion of the wind energy generation in Iowa, Texas and all over the place is owned by FPL – probably by their unregulated arm.  They aren’t building wind farms in Iowa and Texas at a loss so they are jockeying for more of the same.

Westinghouse is poised to tee off on the nuclear power business.  I support nuclear power as it is the only realistic ultra-low carbon source of electricity.  Did you know Westinghouse is 77% owned by Toshiba of Japan?  I didn’t think so.

General Electric ditto both FPL and Westinghouse.  T. Boone’s mind changes direction with the wind.  I’m not sure whether he thinks or talks first.  He was going to invest a bazillion dollars in wind power and then reneged for some reason.  Perhaps it was because it costs more to produce than it costs from conventional plants and he realized there aren’t enough Volvo/Subaru/Prius driving boutique energy buyers.  I.e., not enough demand.  Or maybe he thinks cap and trade isn’t going to happen anytime soon.

I have no idea what the steelworkers are thinking.  Actually, most likely it isn’t the steelworkers that are behind this.  The union bosses are probably peddling this and it looks like a pure political play.  Like many environmental groups, unions are political first, and serve their members second.  Why in the world would they want to raise the cost of making steel in the U.S.?  It’s not good for the steelworker.  It IS good for crony politics.

The common thread in all this is: if we just enact this federal bill it will generate millions of jobs and the land will flow with milk and honey.  I can see water running uphill again.  Washington now has power to repeal the laws of gravity.  I was always skeptical of Mr. Newton.  He is Gordon Gekko with long hair.  Just look at them.

I can’t disagree that it will create jobs.  We would have thousands of workers building and installing wind turbines and a bunch of other junk.  But on the macro level, capital will be pouring into these projects rather than real wealth-generating enterprises.

Alternative energy costs more than conventional energy sources, but an electron is an electron.  It doesn’t taste better, look better, do more work, last longer, or drive better.  People will be paying more for energy, which takes spending money out of their pockets.  Artificially making a commodity more expensive cannot increase net prosperity.  Why don’t we just turn off all the aqueducts and canals that feed California and drain the reservoirs?  Instead, build desalination plants to make fresh water.  Creates jobs right?  Just ask the pecan and almond farmer in the valley.

At least with energy efficiency, even lousy projects, consumers pay less, not more.  And the same “benefits” of “creating jobs” exist because somebody somewhere is making stuff for and implementing these projects.

Here is something 99% of the populous probably doesn’t know: the free market has done an amazing job with energy efficiency.  From 1990 through 2005, the U.S. economy has increased energy efficiency to produce an equal quantity of goods and services using 44% less energy!  Energy intensity in Btu per dollar of gross domestic product dropped 44%.  You may be thinking, “Well duh, half our manufacturing has moved overseas and we’ve become a service economy.” Moved where overseas?  China, you may be thinking?  China’s economic energy  efficiency has increased by 66%!  Of about 150 countries reporting, only 4 became less efficient over the period: Congo, Haiti, Saudi Arabia and someplace I can’t pronounce.

The world as a whole has increased economic energy efficiency by 39%, in just 15 years.  That’s about 2.2% per year.  Real demand for power isn’t rising that fast (in the US).  I don’t think there’s an energy efficiency program in the country that saves that much.  There’s no question programs contributed to this, but I know of no programs driving savings in China.

Competition with some nudging from utility programs seems to be doing a fine job driving energy efficiency.  We don’t need a bunch of clueless Washington bureaucratic hacks who wouldn’t survive in the private sector for 6 months telling us what is good for us.





Wind Energy and the Utility Business Model

20 04 2010

The masses want power on demand without interruption or failure.  They want it at a practically negligible cost and more so every year, they want it without emissions or other unpleasant byproducts.

In the upper Midwest, energy without emissions means wind energy.  Wind energy sounds great.  It’s “free”.  No emissions.  But it comes with a load of drawbacks compared to conventional sources of coal, nuclear, and natural gas.

First, utilities can’t count on it for peak load generation.  I searched a while for this and found nothing but the bottom line is there is no guarantee there will be any generating capacity from wind on a peak summer day.  Therefore, wind generation offsets zero conventional generating capacity.  It is essentially like buying an electric car for lower emissions but you have to keep your conventional gasoline-powered car for longer trips.

Second, wind generation is expensive.  At a cost of about $2,000 per kW nameplate generating capacity it is very similar to a coal-fired plant.  However, a quick analysis with a reliable online calculator indicates that the capacity factor, which is the average percent output of the turbine, is only about 30%.  (the wind doesn’t always blow 48 miles per hour)  This puts the installed cost of wind generation near triple the cost of conventional coal generation.

Third, the cost of wind energy doesn’t end with the fifty by seven foot deep wad of concrete supporting each turbine.  Wind farms are far from Midwest population centers because that’s where the wind blows and this puts them out of site of the people who want it but don’t want to look at it (or pay for it).  This requires substantial transmission costs with substations to step up voltage and transmission lines that run a minimum of $1 million per mile of transport – and this is for building transmission lines on farmland where it’s physically easy to do and there are no lawsuits because people in these areas have better things to do than file lawsuits to stop transmission construction.

Fourth, on average the wind blows the least when it is needed the most, in July and August.  On average, turbines deliver roughly half the energy in July and August compared to the winter months.

When these unpleasant facts are factored in, wind generation benefits boil down to eliminating fuel costs, which are a tiny fraction of conventional generation, and no emissions or other waste products.

What brings this to mind is this article recently published by the Cedar Rapids Gazette.  Alliant Energy / Interstate Power and Light has a rate case pending for a 14% rate increase to pay for the added wind generation capacity and the installation of a $188 million nitrogen oxides and mercury scrubbing system for their old Lansing plant.

One guy comments, “but I just don’t understand why you expect us as customers to pay for all these upgrades — the wind farm, all your safety upgrades and so on.”  Well who else is going to pay for them?  It isn’t going to come out of shareholders’ hides.  Utilities don’t build this stuff to make more money!

Utilities are fully regulated monopolies in Iowa and many other states.  Their ability to grow revenue and earnings is very limited.  Essentially, it is limited to load growth within service territory by existing buildings and by attracting new business with new facilities to their service territory.  In exchange for having a captive customer base, regulators, in this case the Iowa Utilities Board must approve changes in rates, which essentially translates directly to regulating profit.

Wind power and pollution controls cost the company hundreds of millions of dollars but add virtually no revenue or profit.  These upgrades wouldn’t occur but for public pressure and policy coming out of Des Moines and other state and federal capitols.

These expenses can’t come out of earnings because utilities need to raise capital to pay for this stuff.  To raise capital, they have to offer a competitive rate of return commensurate with the risk involved; thus, the rate case for higher prices.

Like Tom Aller, President of Interstate Power and Light, I am not denigrating or advocating green power and moratoriums on building conventional generating facilities.  The public just needs to know this stuff adds a lot of operating cost and the business model of utilities requires rate increases to fund these things.  If customers don’t like it, they better get involved in the political process and not let the Sierra Club have a monopoly of political ears.

By the way, the reason environmental organizations like Sierra Club are a big turn off to me is they are often political first and environmentalists second.  They are opposed to this rate increase.  Why?  Their mission is “To explore, enjoy, and protect the wild places of the earth; To practice and promote the responsible use of the earth’s ecosystems and resources; To educate and enlist humanity to protect and restore the quality of the natural and human environment; and to use all lawful means to carry out these objectives.”  I don’t see anything in there about controlling income in the private sector.  Moreover, the guy’s statement flies in the face of their mission statement anyway.  Higher prices mean less energy consumption, so why is he opposed?  Could it be… politics?  Or is he a “do as I say, not as I do” greenie?





Renewable NIMBY

13 10 2009

“There should be a place for these — someplace that isn’t going to impact families quite so much.”  This was a quote regarding wind turbines from a woman in the Wall Street Journal article Renewable Energy, Meet the New Nimby. I laughed out loud for a while when I read this.

California has a mandate for 33% renewable energy consumption by 2020.  New York: 25% by 2013.  Oregon: 25% by 2025.  These states and similar ones have meager interim targets and/or have meager portfolios today.  Some serious ramp up is required.

However, it seems people claim to want it but not bad enough to have to look at it.  They don’t want to look at transmission lines piping renewable energy in from Colorado, Arizona, Nevada, offshore, or from the other side of the mountains.  They certainly don’t want to pay for it.  Did I mention everyone in America also demands 100% reliable energy supplies and at a price that is almost negligible.  Something’s got to give.

Guess where the wind-energy potential is by far the greatest – right off coasts surrounding the country, overlooked by patio-decks of thousands of multi-million dollar homes where 90% of the most vociferous loud mouths are carping that we must have more, if not all renewable energy.  But not in their vistas!  See NREL link below.

Certain celebrities fly about the country on their personal jets from one green junket to the next telling us trolls how we ought to live and what we ought to put up with, but not “me”.  I want to go sailing and not look at that hulking machinery messing the vista from my serene compound.

I grew up in the pink area of Southwest Minnesota and I can tell you that the wind always seems to be blasting there whenever I return for a visit.  When I was a kid, we had ground blizzards (no need for snow to fall from the sky – the powder keg is already laying about) in the winter and dust storms in the spring.  The western half of Iowa is packed with wind farms.  But yet, the potential for wind energy off much of the coastline is 50% greater, and steady.  And by the way, I’ve never heard anyone in the Midwest whine about the sight of hundreds of windmills and the supporting transmission lines.

I have an idea.  Let’s take everybody in flyover country and pack them into the Dakotas maybe using Kansas and the Texas panhandle for overflow.  They can all live under a sea of egg beaters.  “I’ll” just buy my own large photovoltaic system with battery storage, because I can.  It will look great on the roof of my 8,000 square foot home.  It will impress the friends even!

http://online.wsj.com/article/SB125201834987684787.html

http://www.nrel.gov/gis/wind.html

written by Jeffrey L. Ihnen, P.E., LEED AP