Climate Change and Alternative Energy Program - Part 3

Finally Denver is living up to its reputation as a 300 sunny days a year city – it’s a beautiful morning. Yesterday we had three great meetings, starting at the Governors’ Energy Office.

Colorado’s Governor, Bill Ritter, is a fan of renewable energy, and there are good reasons for him to be so in Colorado. The State has good wind and solar resources and is also a farming and forestry State. The presence of a number of national laboratories, including NREL, and a number of Universities, means that there is a highly educated and motivated workforce and good support for cleantech businesses. Colorado has a Climate Change Plan (20% GHG reduction by 2020 based on 2005 levels) and also a Renewable Energy Standard (RES, 20% renewable power by 2020). Interestingly the RES was then result of a populous movement – a bottom-up demand rather than a top-down one.

In case it’s not clear, Standards in America, like the RES, are targets that must be met. In the case of Colorado, consumers are protected from steep price hikes by a cap on the maximum increase on energy bills of 2%. If measures would take the price above this, the obligation on suppliers is removed.

Colorado, like all States, has received Recovery Funds. In this case the annual energy budget has risen from $10M to $90M. The majority of this fund is being deployed towards weatherisation of homes (insulation and the like). The increase means that up to $6K can be spent on homes (up from $2K) and the qualifying income bracket has been increased so that more homes can be refurbished. Also energy companies have schemes such as low-carbon design assistance for new buildings and also price reduction on best in class technologies for business such as fridges.

Colorado is aggressively promoting itself to companies and has had major success in attracting wind companies (including Vestas) and solar companies. Companies are offered tax incentives and help with staffing if they move to Colorado.

There is a forthcoming Renewable Energy Deployment Initiative which has mapped out Colorado’s energy priorities, which are essentially:

• More investment in wind and solar
• Greater emphasis on energy efficiency
• Improved HV transmission infrastructure
• Coal power (Colorado has significant coal resources)
• Natural gas development and its integration in a high RE grid

After the Governors’ office we moved a couple of blocks over to meet with the Western Governors’ Association (WGA). As you are probably aware, in the absence of National action on global warming, individual States, such have California, have taken it upon themselves to commit to action. Additionally, groups of States have cooperated, and the WGA is an example of this.

WGA represents 19 Western States, including Colorado, Washington (which we visit on Monday) and California. Such associations are a good way to “beat up on” Federal Government and are also a route to explore climate change measures such as GHG cap and trade schemes. Currently a number of Western States and also four Canadian Provinces (who have autonomy to set law) are exploring setting up such a system, although it’s unlikely to be operational until 2012. There are two other State collaborations in the US, a mid-West group (comprising 5 States) and a North East (comprising 13 States) how are active in developing cap and trade systems and in fact the NE market is active, although the carbon price is low (a couple of dollars per tonne).

The WGA noted the problems in building new transmission and distribution (T&D) infrastructure that we heard about in Washington DC; citing particular issues around habitats, water, NIMBYISM – all of which are typically dealt with by different authorities at both the State and Federal level. WGA are looking to carry out a project to examine the Western energy resources (and limits such as water availability) and then map out a potential transmission system to move the power around (at a size commensurate with the resource rather than the initial development). They are hoping to get around $20M to carry out this work. Once again the problems with bringing renewable electricity from the resource (i.e. the north for wind) to the demand (i.e. California) through numerous States was emphasised – there is no good model to work how pays/benefits.

We discussed the possibility of a National policy on Climate Change and once again it was apparent that this is still a ways off. One opinion was that it could be 3-5 years before there is such a policy, which means that the emphasis remains very much on State level initiatives. I should also say that WGA has an agreement on climate adaptation as a number of States, including Colorado are already seeing significant impacts, such as reduced water and forest degradation. It was noted that the rather conservative water utilities are already leading the way on adaptation measures.

Interestingly we also learned that there have been no new coal power stations built in the US since the 80’s, nor any nuclear new build. Most new power has been derived through natural gas, which there have recently been new finds nationally, improving security of supply.

I have to say that this was a really interesting meeting – lots of knowledge exchange and some opportunities for further discussions. Good luck to the WGA!

Out final meeting was with the Colorado Cleantech Industry Association (CCIA), which is a relatively new body (8 months old). The CCIA already has 115 members, 90% of which are SMEs, with clusters around smart grids, biofuels, transportation and solar. A key role of the CCIA is to keep track of policy at both the Federal level and State level, which is a pretty tough task considering so far there are only two employees!

A key priority for CCIA is investment in innovation, particularly for small companies; the State tends to prefer relationships with large companies. It was noted that the Waxman-Markey Bill contains a proposal for innovation hubs, one of which (solar, wind or energy efficiency) might well come to Colorado. It was also clear from the meeting that a there is a shortage in the executive workforce (e.g. business savvy directors etc) particularly for SMEs, which is a similar situation to the UK. There are some interesting programmes in the US to encourage skilled people into the sector, although the schemes are quite small currently.

CCIA will also be active in networking its members and encouraging technology transfer between them.

Climate Change and Alternative Energy Program Part II

Our last meeting in Washington was with the Federal Energy Regulation Commission (FERC). FERC is essentially responsible for regulating the following industries:

• Electric power
• Natural gas
• Oil pipeline
• Hydroelectric

In a jam packed meeting, we learned a huge amount. Firstly, the American energy system is completely and utterly different to the UKs. Nowhere is this more apparent than in electricity, but let me start with the simple example of natural gas. FERC tend to own and regulate the national infrastructure, such as gas stores, LNG stores and the pipelines that take these into the different States. They don’t own the infrastructure for extracting and processing the gas nor do they own or regulate the infrastructure within the State; that is regulated by the State itself. The price of gas used to be set be FERC, but is now deregulated as there is sufficient competition in the system. So the lesson here is that it’s up to individual States to distribute the gas, once it’s been delivered. This lessons, crudely, applies to most energy services – they are managed and regulated at the State level.

So, gas is fairly simple, electricity, however, is not. In fact it’s so complicated I’m going to really struggle to explain it. The role of FERC is to regulate sales from generators to distributors. Distributers then sell power to customers (which might be other distributors, in which case FERC regulates again), which is regulated by the individual States. Electricity price has never been deregulated, so the role of FERC is to ensure a “just and reasonable price” to consumers, which I think means agreeing a reasonable price for sale from the generator (and assuming that mark-ups down the chain aren’t too high).

In the whole electricity system, FERC owns virtually nothing. Almost all power plants and transmission and distribution infrastructure is either privately or State owned, and there are literally thousands of companies involved. There are basically three sorts of arrangements:

• Investor owned utilities – these date back to the days of Edison where the Federal Government allowed monopolies in return for a guarantee of universal, safe, reliable service. Curiously, the power companies did not receive payment per unit electricity, but rather had a profit based on sunk capital meaning they were encouraged to build. Apparently the rate of return was set at a rather healthy 10-11%!
• Cooperatives – These formed in low-population areas, such as farming States, where it would be expensive to lay power lines. Essentially the Federal Government offers a low cost loan (the “Rural Utilities Service”, which is paid back over time by the co-ops. The co-ops are run by a board of directors, which has in some instances lead to corruption.
• Municipal/Public Authorities – is where the State has invested in the supply and transmission and distribution infrastructure. These bodies are essentially self-regulating.

I should also mention that there are a number of Regional Transmission Organisations, where the States or private owners have pooled resources to service a number of States (so that the mnost efficient system can be developed).

Overall, the infrastructure in America is as old as it is in the UK, and it’s very difficult (because of the number of different players) to incentivise new build. Also the private/State ownership of land and T&D networks means that it is extremely difficult to put new power lines down that cross through different States as each one will want to negotiate and have the power to block progress. This means it is difficult to move wind power down from where the resource is, in the North of America, to the demand (typically on the coasts).

The market for electricity is somewhat complicated. It’s regional/local and is typically divided into 24 1-hourly slots per day (where people bid for the next day). Both supply and demand sides bid for power (e.g. supply says I have 200MW available at 13.00 for $X, demand wants 200MW at 13.00 for $Y). Bids are matched, with cheapest dealt with first. This process continues until the gas power is reached (the most expensive/volatile) and at this point the price is set for the next day’s generation at that hour (which can make it very profitable for cheaper technologies). This sort of made my head spin!

The way the market works means that certain areas, such as New York City, which have high demand, little supply and suffer transmission congestion, can face very high spot prices. This is dealt with to a certain extent through demand management. Big users of power will get paid by suppliers if they cut back their demand within 30 minutes of a reliability warning. FERC would like to roll this out more broadly whereby users could get the market price per unit of power not used during crunch times.

It follows that there great interest in smart grids. We saw a strategy that estimated up to 20% of peak demand could be avoided through active demand management of technologies including air conditioners, fridges and electric vehicles. There are some very big plans for smart grids and FERC is currently writing a Strategy paper for Congress. NIST is currently consulting on standards for smart meters, and are open to international collaboration so if this is something you are interested in I can probably get you a contact.

Microgeneration, such as PV, have to be accepted back into the grid with the consumer typically being credited for the power exported (i.e. the meter runs backwards). I didn’t get a feel for whether there is any incentive other than this for consumers to invest in microgeneration (for example capital loans). I think probably not.

So, I’ve mainly learned that the electricity system is hugely complicated. It's a mix of state and private level companies with some cross-State relationships. Federal Government has little power over the system, other than in protecting consumers from excessive prices. If new capacity is required States have to demand and incentivise the producers to do this. Nimbyism is potent in America and is a real problem for upgrading T&D infrastructure. There are extremely ambitious plans for smart grids but it is unclear how these would be deployed.

I am writing this blog on my iPhone as we hurtle west towards Denver. I think the whole group is really looking forward to this part as not only are we visiting national laboratories but we are also going to be celebrating Halloween with American families. I'm glad I bought the Harrods chocolate with me now! We are also looking forward to a visit to the rocky mountain national park on Sunday.

UPDATE

Snowed in!

Denver is under a foot of snow! It's a real shame as it means that we can't visit NREL or indeed the Smart Grid house that we had planned.

Am currently sat in a coffee shop inside a giant sports store writing this after a chilly and slushy walk through a rather beautiful Denver.

Our hotel, the Brown Palace is magnificent, it's 120 years old (which is old over here) and features a superb cigar bar (not that I've been in there, honestly) and a superb, but jaw droppingly expensive breakfast.

Hopefully the weather will clear tomorrow so that we can visit the State energy team at the state.

UPDATE 2

Weather looks much better today (Friday), so the visits are on. This should be really interesting to see how the individual State deals with energy policy. More to follow...

Climate Change and Alternative Energy Program Part I

Wednesday 27th October

Greetings from Washington DC!

I’ve been here since Sunday 25th, but thanks to a rather busy business and social programme I am only just able to commit some text to this blog I promised to deliver. My brain is a bit fried so I apologise if this doesn’t make perfect sense (not that I often make perfect sense…). If you remember, I am here on the Climate Change and Energy Program, which is sponsored by the US State Department. Our intrepid band of travellers comprises seven people representing DECC, UKERC (that’s me by the way), Edinburgh University, Sustainable Development Commission, the Welsh Assembly, the Nuclear Industry Association and House of Commons ECC Select Committee. We’re here, as reasonably early career people, to learn about how things get done here in America. The Washington DC programme is focussing on Capitol Hill and on the passage of the various Climate Change Bills through the two Houses and also to some extent on how the recovery funds are being deployed.

So far we have met with policy think tanks, the Department of Energy, staff for a Republican Senator and the Environment Protection Agency. I haven’t got time to delve into the details, and I don’t want to get in trouble for attributing comments, so I’m going to keep this extremely high level and make just a few observations. The fact that it’s 30 minutes until dinner has nothing to do with it at all…

1) Don’t get your hopes up about Copenhagen. The strong message is that there won’t be a global deal at Copenhagen – I’m sure that this isn’t a massive surprise to most. There are a number of reasons, but key is that no domestic US Climate Change Bills will be ready in time. Currently, there appear to be three documents circulating:

• The Waxman-Markley Bill, which has been passed by the House of Representatives (you need to get through both Houses before something can become law, like in the UK).
• The Boxer-Kerry Bill, which is the new Bill, which is currently being discussed at the Senate.
• The Bingaman Bill, which is also being discussed in the Senate

I daren’t get into details on these as they are all extremely complicated (the first runs to 1400 pages or so), but in essence most rely on a cap and trade system with permits (to emit GHGs) either allocated (e.g. current EU ETS) or 100% auctioned (e.g. future EU ETS). At the moment, allocation is favoured in the Bills, but many people we have talked with would prefer 100% auctioning. In the meantime, EPA is starting to collect data on GHGs from the relevant industries (those emitting more than 25,000 tonnes per year), which is compliant with Kyoto reporting. The main point is that there isn’t any hope of any of these Bills getting through the system before December, and without a domestic policy there isn’t a hope of signing up to a global agreement.

It’s not wholly negative as there is optimism that some of the really tricky elements that could lead to a global agreement could be cracked in Copenhagen, paving the way for agreement.

2) There is a lot of recovery money sloshing around. For example we have learned that the DoE budget for low carbon technologies in 2009 was $5.5bn – that is some serious cash. I did a back of an envelope calculation and I reckon that this (on a per capita basis) is the equivalent of an injection of £611M into the UK. Remember that the budget of the ETI is around £600M over 10 years; so this, for example, would represent a 10-fold increase for a given year, and likely the same again the following year.

There are some interesting issues over how the money can be spent, since it all needs to be spent (or committed) over 2-years. From what I’ve seen, there will be numerous big projects, kind of similar to ETI projects, with a focus on delivering products to market within 3-5 years. I think we’ll find out more about these when we visit the National Renewable Energy Laboratory (NREL) in Denver on Thursday.

3) There is a Plan B. If none of the Climate Change Bills pass the Houses, then the EPA does have the power to regulate GHGs under the Clean Air Act, because they represent a hazard to human health. Because this approach would be clunky, bureaucratic and prone to legal challenges, it is far from ideal, but there is work ongoing to set it up as a fall back.

I do hope in a later post to touch upon a “Green Bank” proposal and also the way in which things seem to get done in the Senate, but haven’t the time right now.

We fly out to Denver today where we will see some of the national research laboratories and also learn about State level policy and politics.