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Energy-saving Stocking Stuffers?

The winter holidays are just around the corner!

Home Depot and Philips have announced that an LED replacement bulb for the standard 60-watt incandescent will be available in stores starting in December 2010.  Read a review of the product here.

New federal efficiency standards will phase out the homely incandescent during 2012 – 2014.  (The phase-out is going on world-wide.)  The U.S. Department of Energy has been working furiously with lighting manufacturers to develop a high-quality replacement bulb to avoid the consumer disappointment that squirreled-up the introduction of CFL bulbs.

Lower-quality LED’s can be purchased now.  However, consumers are best advised to keep their cash in their pockets until the DOE-approved bulbs hit the shelves.

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Is Petroleum A Barrier to U.S. Economic Growth?

We hear much discussion of U.S. oil imports.  Some of it is informative, some just scare-mongering but little of it focuses on the cold, hard economic reality.  With only a limited knowledge of a few simple macroeconomic concepts, the outlines of the oil-price noose on economic growth become plainly visible.

The basic Keynesian model divides up the aggregate flows of spending into four basic categories: Consumption — the biggest category; Investment — purchases of long-lived, real assets; Net Government Spending — spending minus taxes or the annual deficit; and Net Exports (exports minus imports).  These concepts all refer to spending for real goods and services, so set aside the financial sector for the moment.

If any category gets bigger, then there is more spending for goods and services and the economy grows.  Conversely, when any of these four categories shrinks, then the economy shrinks (recession).  Especially important are sudden changes.

Because our traded sector has historically been small, American economists tend to focus on the other three.  However, a sudden change in the value of net exports amounting to several percentage points of GDP can still have a substantial impact on the direction of the overall economy.

Net exports are the main channel through which the price of crude oil impacts the overall economy.  Depending on how households alter their driving and spending patterns, prices at the pump may or may not affect consumption spending.  However, the effect of price changes on net exports is entirely mechanical.  Let’s take a look at recent history.

On the left-hand axis, we measure the value of petroleum imports (price times quantity) as the share of GDP (data from the indispensable Economic Report of the President 2010).  Because our petroleum exports are minimal, the increase in the oil import bill has a direct, negative effect on net exports (which may be offset by other changes in the composition of foreign trade but let’s keep it simple).  An increase in oil prices, as we had during the decade of the “aughts” results in a significant decrease in net exports — rising from one percent to nearly four percent (price data from EIA).

Let’s take a closer look at the period of the recession, which began in December 2007 and ended in June 2009.

By 2006, when the economy was starting to slow, the petroleum import share had already doubled from the one percent level of the 1990s.  By the end of 2007, the import share had rise by half to three percent and during 2008, it nearly hit four percent.

Clearly, the U.S. economy cannot tolerate such a large and sudden negative hit.  Was it the chief factor in the recession?  Maybe, maybe not but it certainly didn’t help!

Of course, it’s not news that high oil prices are bad for the economy.  The critical point is to understand the transmission mechanism of net exports.  This helps us to understand the policy choices that lie ahead.

Oil imports as a share of total U.S. consumption will not change any time soon, staying close to two-thirds.  Global oil production seems to have reached a plateau.  Hence, any return to strong global growth that includes the United States (the world’s biggest oil consumer) will see oil prices move up accordingly.  Through the mechanism of net exports, this will have a negative impact on aggregate demand, in turn, slowing the U.S. economy.

We use more than a fifth of the world’s annual output but have only two percent of the world’s oil reserves.  Ignoring the BP oil spill, policy makers will press forward with weakening environmental protections to expand offshore oil drilling along all of our coasts but it won’t move the needle much as our once-great on-shore oil fields continue their steady depletion.

Even if policy makers could find a way to put their foot on the accelerator, they would be hitting the brake at the same time.

The United States is no longer the only economy that matters.  Petroleum demand in Asia has grown significantly since the 1990s.  This explains why the price of crude oil doesn’t “go all the way back down” during recessions.  There appears to be a ratchet effect in operation: two steps forward but only one step back.  You can see the ratchet working in the second chart where, even in the depths of the Great Recession, oil imports as a share of GDP did not drop back to one percent (compare with the first chart) and is already heading back towards the two percent level.

In the short to medium term, there appear to be no ready substitutes for all the petroleum we import.  Electric vehicles will take a long time to have much impact.  U.S. military operations are extremely petroleum-intensive.  And then there’s the cultural factor: We Americans strongly identify petroleum with power and prosperity — it’s what we have experienced for the past century.

Escaping petroleum addiction will be painful and protracted for our country.

For any state like Maryland that imports 100 percent of its petroleum consumption, the economic choking effect of oil prices is even greater.  Maryland’s leaders should put themselves in the shoes of a small nation like Denmark that produces no oil and no cars.  Because oil and cars must all be imported, they constitute a burden to the Danish economy and are heavily taxed.

Automobile use should be strongly discouraged in Maryland in order to reduce the economic risks of oil price increases.  This can be done through taxes on fuel, parking and automobile ownership, an end to wasteful new highway construction and changes in land-use policy to promote denser, transit-oriented development.

“Impossible!” politicians and voters will say, but offer no alternative other than keeping our collective head in the oil-price noose.

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Finding the Right Mix for Energy Efficiency in Maryland

In pursuit of the Holy Grail of energy efficiency, regulators, utilities and policy advocates have struggled to assemble the most effective strategy.  Finding the right combination and timing of costs and benefits while respecting societal norms of equity, environmental concern and economic burden-sharing is far from easy.

It’s important to remember that there are many different tools in the energy efficiency toolbox.  These tools can be used together or separately.  Maryland is currently trying them all.

Demand-Side Management (DSM): DSM programs assist homeowners and businesses to acquire more energy efficient equipment and renovations.  These efforts can be funded by utility ratepayers or taxpayers.  Maryland utilities mostly abandoned their DSM programs after deregulation in 1999.  A second wave of DSM — the EmPower Maryland initiative — aims to cut per capita energy use by fifteen percent by 2015.

Education: Governments, utilities and retailers can all provide information to consumers about more efficient equipment and practices.  Education is an important component of EmPower Maryland.

Standards: Government has an important role to play in setting energy efficiency standards for new equipment and buildings.  Suppliers lack the right incentives to improve standards on their own but can collaborate with government to find standards they can all implement together.  Learn more about Maryland’s appliance efficiency standards.

Utility Decoupling: Whether as traditional integrated power companies or restructured distribution providers, utilities have a built-in incentive to sell more power to increase their revenues.  This approach aims to break the rigid connection between distribution revenues and the amount of power sold, freeing distribution utilities to take a more active role in energy efficiency.  The Public Service Commission approved decoupling in 2007, making Maryland the fourth state to do so.

Research, Development and Deployment: The federal government takes the lead in supporting investment in basic research, technology development and market-scale deployment of more energy-efficient products.  The U.S. Department of Energy has a major effort under way to guide development of solid-state lighting.  Maryland has also made grants to support research on SSL.

Electricity Pricing Strategies: Coming with the installation of Smart Meters will be new rate structures designed to encourage consumers to reduce peak usage.  In Maryland and the District of Columbia, regulators continue to raise questions about the design of these new rate plans.

Today, Maryland is a leader in energy efficiency.  Will these efforts pay off for businesses and homeowners?  Only time will tell.

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RGGI Boosts Maryland Green Jobs

RGGI completed its ninth auction of CO2 emission allowances on September 8.  RGGI is the Regional Greenhouse Gas Initiative that includes ten states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Hampshire, New York, Rhode Island and Vermont).  RGGI, the first mandatory, market-based CO2 emissions control system in the United States, has been in full operation since 2007.

Prices for CO2 permits fell to their lowest level — $1.86 per ton — mainly because of electricity demand that has yet to rebound to pre-recession levels.  Prices hit a high of $3.51 per ton in March 2009.  Most of the permits are purchased by electric power generators.

Lower prices mean fewer funds are available to channel into energy efficiency and green jobs.

“RGGI state investments in efficiency and renewable energy sources provide triple benefits – to the environment, consumers and the economy,” said Shari Wilson, Secretary of the Maryland Department of the Environment. “By leveraging federal, state, and private investments, the investments made with RGGI proceeds in Maryland this year will save families and businesses more than $125 million, while creating 630 new green collar jobs.”

The next auction is scheduled for December 1.

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Connecting Two Networks: Electricity and the Internet

The engineers who built it proudly describe the electricity grid as man’s biggest machine.  And the Internet — well, it’s changing everything, or so it sometimes seems.

What happens when these two networks are brought together, say by putting in place a control system for the grid that can be accessed from the Internet?  We may be about to find out.

According to counter-terrorism expert Richard A. Clarke, we are conducting a huge experiment that could have huge consequences.  Earlier this year, Clarke released Cyber War: The Next Threat to National Security and What to Do About It that provoked quite a reaction.  Some loved it.  Glenn Harlan Reynolds wrote in the Wall Street Journal:

In some intelligence circles the threat of cyber attacks is scoffed at, but I think that Messrs. Clarke and Knake are right to sound the alarm. (Mr. Clarke, we should recall, was the head of counterterrorism security in the Clinton and George W. Bush administrations.) As Henry Fielding remarked long ago, those who lay the foundation of their own ruin find that others are apt to build upon it. By constructing, and then relying on, vulnerable systems that are now entwined with almost every aspect of American life, we have laid just such a foundation. The time has come to fix it or at least to refine the systems to avoid catastrophic failure.

Others hated it.  Ryan Singel wrote in Wired:

Clarke returns over and over to the security of the power grid, focusing on the systems known as SCADA that allow utilities to remotely monitor and control electric generation and transmission equipment. Here, he starts reasonably enough: Good security practices dictate that these systems should be unreachable from the public net, and, unfortunately, that’s not always the case. But from there, he quickly moves back to fantasy. He suggests darkly throughout the book that the nation’s power and chemical plants are all shot through with secret backdoors implanted by the Russian, North Korean and Chinese governments, even though there’s never been a single publicly documented case, outside of a vague and anonymously sourced article in the Wall Street Journal.

Singel’s criticism focuses on Clarke’s hyperbole and certain of his proposals for mandating security measures by Internet service providers.  Clarke himself acknowledges that Internet businesses, like most other businesses, are opposed to mandatory anything.

Singel seems to agree that the power grid is vulnerable.

More persuasively, Clarke argues the feds need to set some real, auditable and binding rules for companies that run critical infrastructure, such as the electrical grid. The current policy is driven by the rationale that private-sector companies have enough financial incentive to protect their network, and the government’s role should be limited to helping share information about threats among the stakeholders. That policy works well when it comes to companies like Google and Chase, which could lose customers if their networks are routinely hacked, but isn’t as effective for your energy company, which likely has no real competition.

As befits a long-time Washington insider, Clarke’s complaint boils down to a critique of the policy process.  His core prescription probably has wide support:

The only way to secure the grid is to require encryption of commands to the devices running the system, along with authentication of the sender, and a series of completely out-of-band channels that are not connected to the companies’ intranets or the public Internet. (See page 266.)

Why isn’t it happening?

The FERC has not required that, but it did finally issue some regulations in 2008.  It has not yet started to enforce them.  When it does, do not expect much. That commission completely lacks the skills and personnel needed to ensure that power companies disconnect their controls from any pathway that a hacker could use. (See page 266.)

Clarke proposes a “Cyber Defense Administration” that would be charged with securing critical portions of the civilian Internet, including power grid controls.

The mission of auditing the electric companies’ compliance should also be given to the Cyber Defense Administration, where the expertise could be built and where the overly chummy relationship with the industry exhibited by the FERC would not get in the way. (See page 266.)

Clarke’s critique of “grid governance” does not go past the FERC (for which he clearly has little respect.)  He would have become even grumpier had he discovered how balkanized the grid is, with important — and overlapping — roles played by NERC, state utility commissions, several federal entities (like TVA) and regional transmission organizations.  Clarke is a security guy — he wants to know the chain of command — who’s in charge of what and who’s responsible for which.

Smart Grid also comes under scrutiny.  The Obama Administration’s Smart Grid initiative promotes the installation of digitized and networked meters in homes and businesses to provide utilities and their customers with vastly more information about — and control over — energy use.  The promises of the Smart Grid are great — cost savings for consumers, reductions in power usage and more efficient use of existing transmission and distribution assets.

Clarke does not challenge these potential benefits but his concerned about proceeding with Smart Grid absent more effective cyber security.  Clarke asserts that, when it comes to Department of Energy cyber-security review of Smart Grid grant applications:

There are no publicly available standards. One idea for a standard might be that the taxpayers don’t give any of the $3.4 billion in Smart Grid money to companies that haven’t secured their current systems.

Clarke does not question the potential benefits of the Smart Grid.  What he worries about it is further digitization of grid controls without putting in place what he would consider to be adequate cyber security safeguards.  Gumming up the works with new federal regulations and telling businesses what to do hasn’t been the flavor of the month in Washington for quite a while, as the pessimistic Clarke acknowledges.

The author of Cyber War probably won’t take much comfort in the release of Smart Grid security guidelines by the National Institute of Standards and Technology.  Some critics have already panned it as closing the barn door after the horse has left.  And the question remains of who enforces any standards as well as how knowledgeably and aggressively they do so.

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Will Independent Audit Cool California Smart Meter Controversy?

The caution displayed by the Maryland Public Service Commission over BG&E’s smart meter proposal can be explained, in part, by the debate over Advanced Metering Infrastructure (AMI) installation in California.

Some Californians are even taking to the streets:

Thursday morning, about a dozen people launched a demonstration against the SmartMeters at a Pleasure Point vehicle yard where a contractor for PG&E has been staging for the installations. The demonstrators claimed success in keeping installation trucks from leaving the facility and vowed to return daily until the county’s SmartMeter moratorium becomes official.

Elected officials in Santa Cruz County have taken up the challenge and are confronting the state’s Public Utilities Commission:

“It’s hard to feel like we can wait and let the PUC do its job,” county Supervisor John Leopold told PUC supervisor Marzia Zafar. “We’re going to take any action we can to ensure citizens of this community have protection.”

Health concerns have grabbed the public’s attention.  The smart meters being installed by PG&E send data by emitting the same kind of radiation as cell phones do.

San Francisco petitioned the PUC to halt installations pending an independent review of the accuracy of the meters.  PG&E has installed over six million smart meters (both gas and electric) and is on target to install 10 million by 2012.  The utility is struggling to overcome a major lack of public trust.  The Mercury News continues:

But after months of insisting that there were no problems with the meters and that high bills could be traced to rate increases or air conditioning use during hot summer months, PG&E acknowledged some technical glitches with the program in April, including 23,000 gas meters that were installed improperly, 11,376 electric meters that failed to retain consumer usage information, and 9,000 electric meters that had trouble connecting with the wireless network.

The results of an independent review are now in and support the position of the utilities and the PUC.  The report can be found here.  USA Today reports:

The Structure Consulting Group of Houston, selected by the California Public Utilities Commission to review PG&E’s meters, found the meters more accurate than old ones. It also backed up PG&E’s claims that a 2009 heat wave and rate increases, one up to 23%, combined to radically boost bills.

According to the Mercury News, the reported noted the bad relations between the utility and its customers:

The 400-page report, released Thursday, blasted PG&E’s customer service culture, finding that customers were “consistently treated by PG&E as wrong, until the customer proved to PG&E that they were right.”

The dispute is centered in northern California — the state PUC has received many fewer complaints in the southern half of the state where a different utility operates.  The report did not address the health concerns about EMF radiation that is the latest topic to take off.

Smart meter deployment across the country is fueled by federal funding and involves major corporate players:

The SmartMeters are made by General Electric and the Swiss company Landis+Gyr. Redwood City-based Silver Spring Networks, a venture-backed company that counts several of the nation’s leading utility companies as clients, provides the communications software.

One can only hope that Maryland’s utilities will take advantage of the opportunity to learn from California’s mistakes.

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BP’s High Wire Act Continues — Why Marylanders Should Worry

While the jockeying was under way in June over the proposed BP victims’ compensation fund, Maryland Energy Report identified President Obama’s dilemma:

Here is President Obama’s balancing act.  On the one hand, BP may fall into crisis if its liability for damages is not somehow limited and made predictable — the swift and cruel judgement of the financial markets.  On the other hand, if BP’s liability cap is set too low, then we taxpayers will be on the hook for ballooning damage costs in the future.  President Obama does not want to let the company collapse nor does he want to let BP off too easily and face the wrath of the voters.

The balancing act continues.  The New York Times’ headline says it all: BP Says Limits on Drilling Imperil Oil Spill Payouts.  BP is alarmed at the prospect that it could be excluded from the Gulf of Mexico which is currently the source of 11 percent of the company’s total output.  Congress is attempting to do just that:

BP is particularly concerned about a drilling overhaul bill passed by the House on July 30. The bill includes an amendment that would bar any company from receiving permits to drill on the Outer Continental Shelf if more than 10 fatalities had occurred at its offshore or onshore facilities. It would also bar permits if the company had been penalized with fines of $10 million or more under the Clean Air or Clean Water Acts within a seven-year period.

Only one company fits that description — BP (formerly known as British Petroleum).

BP is pushing back by suggesting that its exclusion from the Gulf would threaten funding for the $20 billion victims’ compensation fund.

“If we are unable to keep those fields going, that is going to have a substantial impact on our cash flow,” said David Nagle, BP’s executive vice president for BP America, in an interview. That, he added, “makes it harder for us to fund things, fund these programs.”

According to an analysis by Tyson Slocum at Public Citizen, the linkage between the two things — the $20 billion fund and BP’s continued access to the Gulf — is actually quite direct and tight.

The Deepwater Horizon Oil Spill Trust Agreement is between “BP Exploration & Production Inc.” (“BPEP”) and Citicorp acting as corporate trustees (along with two individual trustees).  Executed on August 6, the Trust exists to supply funds for the “Gulf Coast Claims Facility” (GCCF) that is administered by Kenneth Feinberg.  These are the operational guts of the $20 billion deal announced by President Obama after his June 16 meeting with BP executives.

If the House legislation cited by the NY Times becomes law, then “BPEP” would lose its legal right to operate in the Gulf.  It’s not clear what would happen to BPEP’s licenses (could they sell or transfer them?) but clearly the operating revenues intended to fund the Trust and the GCCF would go away.  There would be no money for the GCCF other than the $3 billion deposited with Citicorp in early August.

Many Americans suffered real economic losses as a result of the Deepwater Horizon disaster that killed eleven workers.  These include losses from lost business, lost jobs and lost tax revenue.  They will never simply vanish but will be “compensated” by some combination of the following: (1) Uncompensated individuals might simply absorb the losses, some portion of which will come back to the rest of society in the form of indirect costs like food stamps, lower economic activity, Medicaid costs and so on; (2) Individuals can get compensation from BP and other responsible parties, either via the victim fund or through the courts; (3) Finally, the federal government could, in theory, compensate victims and spread the costs over all taxpayers.

It makes sense to put as much of the burden as possible on BP shareholders — without putting the corporation out of business.  However, if BP is allowed to limit its liability too much for past as well as future disasters, then the rest of us are at risk for the burden of BP’s mistakes.  It’s a high-wire balancing act in an increasingly windy political environment.

The Deepwater Horizon disaster raises several major issues that we as a society are grappling with: (a) How much should the responsible parties pay and to whom?; (b) Should BP be allowed to continue deepwater drilling in view of its safety record, if yes, under what conditions?; (c) What are the real risks of deepwater drilling, under what conditions should any company be doing it, if at all?

One would like to be able to discuss these issues calmly, rationally and separately.  Executing the Trust agreement with BPEP means that questions (a) and (b) are mixed up together.  While this was clever on BP’s part, it puts the Obama administration in an uncomfortable position — a very risky move.  BP not only needs to face down restrictions emanating from Congress but also from the Executive Branch.

BP’s gambit will more likely succeed if the Obama administration is crippled by the loss of Democratic Party control in one or both houses of Congresses in the November elections.

What does all this have to do with Maryland? It can’t happen here, right?  Immediately after the Gulf spill, Senators Cardin and Mikulski joined other East Coast Senators in a letter to the president opposing drilling near their states.  Governor O’Malley has repeated his opposition.

Marylanders need to take the long view and not be complacent about risks to the Chesapeake Bay from offshore drilling.  Governors change and federal laws also change, including the one that currently gives states a veto over drilling off their coasts.  The global oil situation is such that pressure to produce more oil from U.S. territory will grow more and more intense in the not-too-distant future.

Here is a link to a 2009 Department of Energy presentation that shows in stark detail the tightening global oil outlook.

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