The Future of Energy Policy in 2017

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The economics worldview grounded in supply and demand for shale development is tempered by the salient question: Can we keep the current global financial system operating as we reach limits that are economic, geopolitical and price-driven in nature? This is a central question that the Trump Administration will face come January 20, 2017.

Also on the table:

  • Can the price of oil and other commodities be kept high enough?
  • Can the price of renewables provided by solar and wind trend low enough to replace or supplement the fossil fuel status quo?
  • Can we still keep the return on investment high enough to attract capital?
  • Can workers earn adequate wages to support higher energy prices and still buy necessary goods?
  • Will rising interest rates constrain debt access?
  • How will increasing inflation impact purchasing power and reconstruction of economic demand?

Often critical linkages are missed. Unless markets and companies remove barriers and offer near-term substitutes that replace energy products that are cheaper than currently available—without requiring a huge transition in machinery or infrastructure—the country is at risk for deep financial problems. Unbridled markets without socioeconomic balance or conscious and sustainable capitalism creatively destroy jobs via such innovations, increase debt burdens, and stretch the consumer’s ability to pay. This may also be part of the U.S. economic inequality and productivity decline in the past decade.

Global affluence seems to slow growth in OECD countries. Demographics and regulation fuel a lack of productivity (and increase costs) as more complexity with costs are shifted to the citizenry. Workers have less time to be productive in their jobs as shown since 2000. Monopoly and oligarchy concentrations in many U.S. industries foster suboptimal outcomes and inefficient rent transfers. These are reflected in predatory consumer pricing and price responses that exacerbate inflation and stranglehold economic principles.

Affluence can only be maintained with cheap energy—and it will likely not be from oil due to escalating production costs. And it will likely not be from coal because of environmental costs and other externalities. Nuclear is vulnerable to cost overruns of monumental risk and cost exposure. But time has shown that a strategy of cheap energy is short lived, and not based on values that endure.

Energy affluence can only be achieved with permanent value by efficiency, waste heat recovery, combined heat and power, demand-side management, building design efficiency, and/or increased supply diversity with renewables coexisting with nuclear. The role of natural gas will be to shape demand with an immediate supply of fuel for electricity. Government policy in the long-term is better served to cover the initial cost hurdles to facilitate the required energy transition.

Technology including energy storage, materials science, electrochemistry and IT solutions will optimize the end game and make a difference.

New business models and access to capital will be required to support this transition. This can only occur with regulatory reform and modernization that fuels market access to innovation and creative solutions that advance markets beyond the limits of the entrenched status quo.

The business opportunity is too great to not foster an all-of-the-above portfolio energy strategy that promotes innovation, technology, efficiency, and the value-added information delivered by it. These energy products and services have national value and export value that are not limited to the fuels themselves.

Otherwise, we will be stuck with 19th-century fuels, used in 20th-century infrastructure, wondering why we cannot compete and meet the escalating global challenges of the 21st century.

CE3 Blog by Michael J. Zimmer, Executive in Residence, Ohio University Russ College of Engineering and Voinovich School of Leadership and Public Affairs. Edited by Elissa E. Welch, CE3 Project Manager, Ohio University. January 2017.

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The Prospect for Alternative Energy in a Fossil-Fueled World

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In the month of July 2014 (an “average” month with peak summer electricity demand), the U.S. Energy Information Administration (EIA) estimated that the U.S. used 6.65 quadrillion BTUs of fossil fuel-generated energy (i.e., coal, gas and petroleum), 0.75 quads of nuclear, and 0.81 quads of renewables (i.e., photovoltaics, wind, geothermal, biomass and hydropower). That’s a total of 8.2 quads. That means 9.1% of the total energy consumption that month was from renewables and 80.5% was from fossil fuels. Compare this to five years ago: in July 2009, 8.3% of total energy consumption was from renewables and 81.9% was from fossil fuels.

Continued phasing-in of renewables is required as part of an overall supply mix. In spite of the fact that over the past several years, the cost of renewables has been declining faster than other fuel sources, renewables will not likely surpass fossil fuel resources until post-2050. A more plausible supply strategy goal is to strive for increases of 10% more renewables each decade coupled with the increased use of demand-side management, transmission & distribution (T&D) investment, energy efficiency and waste heat recovery. The challenges are numerous, but the rewards will be long-lasting. Here’s why.

  • We have the technology to increase renewables, but it won’t be easy, quick or cheap. An inordinate focus on supply ignores the necessary infrastructure investment required to support renewables within the current investment framework for fossil fuel development.
  • Renewables cannot replace fossil fuels in the near term because the cost of capital, rate shocks and costs to end users. Energy investment will continue to compete with similar investments in new technology, water infrastructure, urban growth in our cities, housing stock upgrades, railroads, highways and tunnels and bridges. But renewables cannot be ignored or postponed because of their lower operating costs, efficiencies, reduced emissions and sustainability benefits.
  • Increasing renewables capacity will require huge amounts of capital outlay and technical expertise which could consequently boost business development, workforce training and infrastructure upgrades. These investments will create a 21st-century power grid that is distributed, diverse and more resistant to the effects of a changing climate and/or security attacks.
  • The status quo, consisting of resource extraction, fuels, transportation infrastructure, generation, T&D, manufacturing, etc., has taken countless investment dollars and more than a century to build. It will not be radically altered but will be modernized for the future with competitive manufacturing, global trade and tax reform pressures incentivizing more accelerated decisions than regulatory fiats or mandates.
  • The sheer magnitude of energy required to be generated on a 24/7/365 basis is impossible to recreate using existing technology, land transfers, materials (i.e., rare-earth minerals) and infrastructure. New technologies such as those being developed by our colleagues at Ohio University related to algae- based fuels, waste-to-energy and electrochemical technologies are the way of the future. Bringing them to market on a commercial scale is the next order of business.
  • The intermittency, lack of storage, and relatively high up-front costs of renewables make them less attractive for energy-intensive and trade-exposed (i.e., “EITE” and internationally competitive) industries such as steel, aluminum, paper and cement. These challenges will need to be addressed with reliable solutions so that these industries—the building blocks for infrastructure, manufacturing and product development necessary for competition in future global markets—can continue to grow.
  • The resurgence of oil and gas has led to a quiet revival of manufacturing, supply and logistics, and associated industries in and around the Ohio River Valley that has become a major driver in the post-recession economic recovery. North Dakota led the nation in job retention and growth over the last five years due solely to the growth in the unconventional oil and gas from the Bakken shale play.
  • The shale resources appear driven for global export value rather than indigenous national use. Similar development and trade incentives for clean technology and renewables for export value are equally important for advancing U.S. manufacturing and export product goals.
  • Experience in coal emissions controls has shown that the costs of mitigation are so high using existing technology, that it is not currently economically feasible. If mitigation follows a scheduled phase-in over a reasonable time frame and is coupled with significant legislative action (e.g., cap and trade, carbon tax, etc.), the adoption of low-carbon strategies such as renewables, nuclear, and carbon sequestration can be incentivized.
  • Electric generation technology, policy and market factors have reduced the cost to install renewables to the point that they are at parity with the cost of installing electricity from fossil fuel sources in many applications such as rural/remote areas, military installations and microgrids. Over the next five years, grid parity will escalate and could be accelerated by a market clearing price for carbon, a fuller inclusion of the negative externalities of fossil fuels, and the game-changing issue of electricity storage.

Fossil fuels enjoy 400-500% more national benefits and incentives than renewables—better balance in this mix is required moving forward. This necessary balance is already recognized by our military, intelligence and international energy agencies. Cities and countries where 70% plus of future global populations will reside also endorse a more balanced approach. Recognition is similarly advancing in global financial communities as investments in non-fossil projects are advancing rapidly. Aside from supply, the focus on network modernization, efficiency, materials science, and energy storage will impact the timing and depth of a global market acceptance of non-fossil alternatives.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University with Scott Miller, Director, CE3; Edited by Elissa E. Welch, Project Manager, CE3

Microgrids: An Integrated 21st-Century Solution

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In 2012, Pike Research estimated that the global microgrid market would grow to US $17.3 billion by 2017. An impressive figure for certain. Even more impressive is the updated estimate released in early November by Navigant Research: by 2020, revenue from deployments of microgrids will be more than US $40 billion. They attribute this upward estimate in part to a recognition that the projects (new and retrofits) require a greater level of investment than previously thought.

North America continues to be a hotbed for microgrid development. The Navigant report finds that North America has a total planned, proposed and deployed microgrid capacity of 2.7 megawatts, a little more than half of which is currently online. This figure represents 65% of microgrid capacity worldwide. Commercial and industrial applications, currently estimated at 30 across the U.S., could climb to 300 in the next two years as the high-profile likes of Oracle Corp., EBay, University of California at San Diego, Lockheed Martin Corp., the U.S. Department of Defense and others champion their use. Green Energy Corp., a U.S. builder of commercial-scale microgrids, estimates that 24,000 U.S. commercial and industrial sites could be developed with large-scale microgrid conversions. And that doesn’t even include the other types of microgrids such as institutional/campus, community/utility, military and remote applications. For example, New York City and other East Coast communities are quickly reviewing microgrids to increase grid resiliency against extreme weather events. As we see time and time again, having power in times of crisis is invaluable for emergency response, healthcare facilities and rapid recovery.

So then, just how do we go from 300 to 24,000? Or even more?

First, let’s review the basics. A “microgrid” is defined as an integrated energy system of distributed energy resources and multiple electrical loads operating a signaled, autonomous grid – either in parallel to or islanded from the existing utility power grid. The types of technologies that can be integrated into a microgrid system are even more numerous than the applications themselves: distributed generation (DG), renewable energy and storage, energy infrastructure, demand-side management (DSM), and other energy-efficiency strategies. This bodes well for manufacturers of these applied technologies at home and abroad, such as Siemens, General Electric, ABB and more.

With increasing customer-owned distributed energy resource loads, it is essential to consider how these new resources will operate within the current wholesale market. Certainly, the entire notion of microgrids challenges the traditional business model of utility-based infrastructure and the system in use today. But considering that power outages cost business and government an estimated US $104 to $164 billion annually, there is ample reason for change. Other reasons are more application specific: the military seeks more reliability in the electric grid to circumvent vulnerabilities in their missions. Threats of cyber-attacks on critical infrastructure are partially driving the U.S. military interest. Disturbances in electric supply also impact industry and commerce causing significant losses of information, efficiency and productivity. If the trend for microgrid deployment continues, utilities will have to adapt to a new model of generation, transmission and distribution, and be open to the benefits that can result. Kevin Sullivan, business director at DNV KEMA, finds the following benefits for microgrid deployment:

  • Improves energy reliability and security of supply especially critical in healthcare and military operations
  • Net excess energy revenues and efficiencies (in the near future) will support funding of new grid investments
  • Ability to self-optimize assets with full self-control of energy operations where the microgrid operator has both supply and demand control and responsibility
  • Defers infrastructure investments to better match a visible and controllable load profile making peak load choices and longer-term investments more accurate
  • Enables emissions reductions that support sustainability targets when renewable energy assets are deployed and balanced
  • Supports a net zero strategy and the Microgrid Optimization Model
  • Increases reliability and back-up capability when storage options are deployed  
  • Allows management of generation variability with renewable energy sources

But 24,000? Rethinking the policies and promoting a supportive market environment are still necessary.

The Policies
Understanding how and when microgrids draw from and sell back to the grid is essential to the evolving energy paradigm in the U.S. Policies that tackle interconnection, pricing, net metering and standby rates will help microgrids to succeed in integrating into the existing business model and move it forward. Public policy leadership for successful grid modernization must provide:

  1. External funding from both public and private sources to promote realistic and cost-effective solutions, starting with pilot projects as necessary.
  2. Utility rate design that takes into account avoided costs for generation, transmission and distribution which are avoided by the microgrid and DG choice. The rate subsidies now in place subsidize the utility, and not the customer, through net metering.
  3. Tougher air conditioning, TV and appliance standards to ease summer peak challenges, and state-based policies that promote on-site power technologies and storage, increased energy-efficiency standards, cost-effective renewable resources, merchant transmission and enhanced building codes.
  4. Updated standby/back-up power rates that consider alternative rate designs without gouging customers.
  5. Amended franchise laws and “public utility” definitions that exempt DG and microgrids.
  6. Assurance that microgrids qualify for incentives in grant, tax code and public policy systems along with traditional generation, fuels and T&D to receive equal rewards and avoided cost recognition.
  7. Updated infrastructure considerations for utilizing public rights of way for grid connections.
  8. Ending state regulation as a “public utility” which is no longer necessary for steam, cooling and hot water sales from a microgrid or DG project.
  9. Ways to promote and leverage microgrid development partnerships between utilities, financiers, vendors, IT and telecom companies.
  10. Model rules and standards for shared energy and community development programs in rural and/or underdeveloped areas where density and customers offer a different scale and value proposition.

The Market Environment
Understanding the detailed economics of developing and operating a microgrid is critical for its success—all aspects must be considered. Different sizes, classes and locations of microgrid development targets will respond to different price signals—diversity in a microgrid portfolio optimizes its potential to effectively price products and offer services to its customers. Sophisticated tools can assess the economic, operational and emissions impacts of particular microgrid developments across various investment and deployment scenarios for the end-user’s benefit. For more on this topic, check out this IEEE report. Wholesale and retail electricity markets will need to adapt and harness the opportunities that microgrids represent for improved reliability, power quality, less price volatility, better control and smarter forecasts.

A thorough review and understanding of these issues by policymakers and project developers will help position microgrids as the “missing link” in leveraging energy security, state-based renewable portfolio standards and energy efficiency standards (such as Ohio’s Senate Bill 221 and those across the U.S.)—and could pave the way for the creation of a modernized, integrated North American grid based on electric stability, reliability, resiliency and security. For now at least, the piecemeal approach is gaining traction that cannot be ignored.

By Michael J. Zimmer, Executive in Residence, Energy and the Environment with Elissa E. Welch, Project Manager, CE3