Perspective by The Townsend Company
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| RPS policies as of March 2011. Source: DSIRE. Click to enlarge. |
On May 25, 1961 President John F Kennedy, in a special joint session of Congress, declared, “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth.” A very clear, time-bound, one nation goal. Fifty years later, the USA is faced with a similar challenge, energy independency and climatic change.
On December 16, 2010 the US DOE Energy Information Agency (EIA) published a report projecting that renewable energy will still only constitute 12 percent of the USA’s energy sources by 2035. In contrast, the Renewable Portfolio Standards (RPS) program adopted by 29 states has varying goals from 10-40 percent renewable energy generation, deployed anywhere from 2013 to 2030. There is no one goal to rally around. Instead there is a state-by-state voluntary program, influenced by private sector interests, with differing goals, means of execution and time frames.
Imagine if JFK had proposed this as a solution for landing a man on the moon to American and the probability of the results of that effort. In contrast,
- China’s 12th five-year plan, March 5, 2011, requires 11.4 percent of energy consumption to come from non fossil fuels [earlier post]
- In France, renewable energy consumption will be 20 percent by 2020
- In Germany, renewable electricity generation will be 35 percent by 2020, and 50 percent by 2050
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| EIA projections of renewables penetration. Source: EIA. Click to enlarge. |
These three leading international energy markets illustrate how progress is being made in other major energy-intensive nations, but they are not alone. Globally, more than 100 nations have established renewable energy targets.
Closer to home, the federal fuel economy standards require the average fleet fuel economy of OEMs that sell vehicles in the USA to be 35.5 mpg by 2016. Why then do we not have the same clarity of goal for the electricity generating industry here in the USA?
Would a CAFE-type standard for renewable energy generation companies in the USA not also be appropriate? Or an RPS program that is non-voluntary with a common goal and timing objective such as those found in China, Germany or France?
The automotive industry is living proof that private companies will rarely change their behaviors without a significant stimulus to that change, and furthermore one that needs to be mandated. The 70’s oil crisis came and went; the loss of USA domestic market share occurred and a recent bankruptcy wave that hit the industry. None of these have led to a fundamental shift to the industry’s approach to propulsion. As private companies, automobile manufacturers look for the lowest cost means of getting from A to B and the premiums that they can charge for getting from A to B faster.
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| Power plant capital costs. Source: EIA. Click to enlarge. |
Without the CAFE standard and stimulus monies to promote green vehicle tech, the industry would not be headed toward a greener horizon. The same can be said for the electricity companies that generate power in the USA. Their business model dictates that they pursue the lowest-cost power source and charge the highest premiums they can for the product in an open, but federally controlled, market. These companies have sunk costs invested in coal, gas and oil plants and are content in maximizing the return on these investments. Besides the RPS program that only has individual state influence, there is no motive to change and pursue renewable energy sources.
Imagine the change to this outlook if these companies were required to provide 20 percent of the power they generated from an alternative energy source in order to provide any power to the grid. The market would focus, consolidate and find some very innovative ways to produce low-cost clean energy.
Another misconception is that the USA public will not tolerate a premium for clean electricity. In examining the latest EIA data for average retail prices of electricity, it shows the average retail price in the USA is 9.74 cents/kWh, with a range from 29.20 cents/ kWh in Hawaii to 5.61 cents/kWh in West Virginia—a 23.59 cents/ kWh or 240% swing between states. Even ruling Hawaii out as an outlier, the cost of electricity in Connecticut was 17.79 cents/ kWh, still supporting a 104 percent swing in the price of electricity per state.
It could be argued that free market mechanisms to lower electricity prices are not optimal and are very state dependent, which in turn raises the question of the efficiency of the current free market mechanism when a national grid exists. Even with the implementation of the smart grid it seems unlikely that we will all be able to buy our power from West Virginia. In contrast, imagine the public outcry if the cost of gasoline varied from $3.00 in West Virginia to $6.12 in Connecticut. (Gasoline prices varied for the week of 3/14 from $3.95 in California to $3.43 in Texas, a 15% swing.) The USA consumer pays premiums for its electricity today, dependent on where they live, making the notion of paying a premium for clean electricity not that far of a stretch for the market. However, what sort of premium would be acceptable?
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| US energy consumption by energy source. Source: EIA. Click to enlarge. |
If we consider the leading sources of renewable energy; hydro, wood, biofuels, wind, biomass, geothermal and solar, four sources fall into the clean energy category of non-emissions-generating: hydro, wind, geothermal and solar. Two are geographically constrained (hydro and geothermal), placing wind and solar as the front running mass renewable energy choices.
Per the EIA, only natural gas is now more competitive than wind generated electricity in terms of cost competitiveness based on capital cost per kilowatt. So is the notion of a premium for clean electricity misrepresented? Hard economics plays a part here as we do not have a clean sheet of paper from which to construct and implement a new electricity generator infrastructure from. The existing capital deployed in power plants is still required to generate a return on its investment and the existing power plants will, under current deregulated market rules, continue to remain as more attractive commercial option than that of funding new investment to generate clean electricity from.
This problem represents another cross over point between the automotive and electricity generation markets, the requirement to generate a financial return on existing capital and the problem of doing so during a technology change over. Hybridization of vehicles engines have been one interim step and is also starting to be seen at power plants in the electrical generation industry. Biofuels offer another—and probably greater—opportunity to this problem, and are a greener alternative to fossil fuels and can potentially be used in the same capital equipment (power plants and combustion engines) with less disruption. Surely these crossover technologies and the lessons learned in the automotive industry have a role to play in any national renewable energy deployment plan.
The concept of a federal mandated alternative energy goal is not new. In 2007 a federal level RPS program was proposed to congress requiring 15 percent of energy to be produced from renewable means by 2020, but did not pass. Today, several federal RPS programs are under consideration and are making their way through congress. Let’s hope the right one makes it through and the USA ends up with a focused renewable energy generation program. One with a clear, common and time bound goal and that places the USA back at the forefront of the renewable energy race.
About The Townsend Company
The Townsend Company LLC is a consultation and business development practice to help companies wanting to enter, grow or become more profitable in the alternative energy market. Prior to founding the company Glynne Townsend, President and CEO, led the revenue growth for A123 Systems in the automotive and grid markets and is a leading commercial authority.
For additional information, please contact: info@thetownsendco.com