October 30, 2015

America’s Accidental Energy Policy: Small Is Doable

Henry Kissinger is said to have observed that “The Energy Policy of the United States is not to have an Energy Policy.” That is (and was) only partly true, since many observers feel we actually have too many, often competing/contradictory energy “policies”—whether it be developing peaceful uses for nukes, energy independence, avoiding GHGs, or “drill, baby, drill.” (The only common denominator of such policies is that they all end up qualified or modified beyond recognition when they meet the real energy market.) But another energy “policy” has emerged completely by accident that is truly shaping America’s energy future and has profound climate implications: business—and government—is increasingly unable to deliver big energy projects, even when society as a whole wants them to.

Big is Problematic because of (a) the scale and unpredictability of the cost, (b) regulatory hurdles—both in and of themselves and as handles for opposition—and (c) political opposition. In contrast, Small is Doable because it has (a) lower and more predictable costs, (b) far fewer regulatory hurdles, and (c) limited or less effective political opposition.

Several recent news stories illustrate this. On January 1, the U.S. will add its first new nuclear plant in 20 years, TVA’s 1,150MW reactor at Watts Bar in Tennessee. Incredibly, it has taken 43 years to build and, with its partner reactor—completed those 20 years ago—will ultimately cost 16 times its original budget. There have been many stories recently (here’s an example) about the problem of replacing nuclear capacity as existing plants reach the end of their lives. The Keystone XL pipeline remains notoriously unapproved and may never be built, despite majority voter and union support. We’ve written recently about the ever-diminishing list of U.S. CCS projects. Even the renewable guys have their own problems. The tale of woe that is the Palen solar project in California, and the big delayed wind projects in Ohio or Pennsylvania are just some recent examples. Contrast this with two of the bigger success stories in the energy field: the spread of shale gas and tight oil production, and the rise of rooftop solar companies, notably Solar City. It is worth exploring some of the issues behind this state of affairs.

Most important, lack of societal consensus on what’s required to meet our energy demand at prices we can afford. That allows local or factional objections—legitimate concerns, NIMBYism, or interest group pandering, depending on your point of view—to block and, more importantly, delay and so increase the costs of large projects with wider benefits. The larger NGOs are adept at enhancing local concerns by building on a base of genuine anxiety. So the few coal-fired power plants that have been proposed since the shale gas era arrived have been impossible to build because grassroots concerns about local pollution issues are married to national opposition on GHG grounds. Seven years after it was proposed, Keystone XL remains in limbo. The Obama Administration is afraid to upset either its environmentalist supporters who oppose the project or the labor unions who support it, and so will not come down on one side or the other until there is a minimal political price, probably after the 2016 election. We still seem to want nuclear electricity but won’t address the waste issue and don’t seem to be able to license or build them quickly or to budget. The Palen solar plant is in regulatory hell because local concerns about wildlife impacts combine with unproven technology and dubious economics.

Federal land development is just too difficult. Logically, if local opposition is the problem, siting such projects on Federal lands might be an answer. No dice. The Federal permitting process for the proportion of public lands technically open for development is glacially slow compared to private lands, litigious, and deeply hostile to development of almost any sort, especially (but not exclusively) fossil energy. Given that these lands comprise 28% of all the U.S. land area—and 47% of 11 coterminous western states—plus all offshore areas beyond 14 miles, this is a big problem.

X-inefficiency—this is an economics concept to explain why, in the real world, companies don’t act to maximize their profits as they theoretically should. One example is that large organizations are less efficient than smaller ones, in part because of the overhead cost of the required bureaucracy and slower decision making. Major energy projects are now so expensive that only a relatively small number of large companies can build them with or without government help. When it gets to the point where the cost of a new nuclear plant is comparable to the entire market cap of the company building it, X-inefficency gets legs and cost estimates go out the window. Large projects often necessitate, and large organizations breed, “preferential engineering”—the temptation to build one-off, non-standard components and approaches into the projects. Invariably these are more expensive than the off-the-shelf alternative, and often don’t quite work out as expected. Watts Bar 2 and Palen are both examples of this, but there are many others in every field of construction, not just energy.

The last factor is endearingly referred to in the project construction industry as “cost creep.” In part this is a reflection of the other issues—delayed permits, limited site options and non-standard designs. More importantly, projects around the world are competing for limited project management resources, design skills, specialist machinery and raw materials like steel and cement. When economies globally are booming, as in the 2000s, these can make budget estimates look ridiculous. For example, the unit cost of building LNG liquefaction plants rose from $300 per ton of annual capacity in 2000 to over $1,200 in 2013, mostly driven by Australia’s overheating construction market.

In contrast, shale gas and the rooftop solar are small, cheap, and standardized and take place on sites with willing participants, or at least with enough local support to make it through the permitting process. Shale gas projects are usually small—an individual well will cost around $8 million (compared to a typical $1 billion plus offshore conventional project), the wells are largely standardized—almost commoditized in some areas. And if there is too much local opposition in one place, there are plenty of other places to go. The projects are at a human enough scale, and so widely dispersed that it is hard to stop them, particularly when there are significant economic benefits to the person most impacted—the private land (and royalty) owner. Where the royalty owner or State is uninterested in economic benefits (or insulated from any political fallout of the missed opportunity), then you get the Federal land exception to the shale boom, and New York State’s ban on shale gas development. And, happily for gas, it gets the “small” prize for generation capacity too. Gas plants are smaller and much cheaper than coal or nuclear to build and, at current prices, are often cheaper to operate.

Solar City has a sympathetic federal government, healthy tax breaks, and historically low interest rates. But in addition (and we think more importantly), materials and designs are standardized, permit hurdles are generally minimal, private landowners are (by definition, as customers) willing, and the stakes in any one location, or any one state, are small for the company. So they can overcome the utilities’ anger over net metering (the favorable price for selling surplus electricity back to the grid) and ignore concerns about long term impacts on transmission requirements and even ultimate power system viability.

What about wind? Mostly you’d have to call it the Goldilocks of the energy field. Smaller and even medium-sized wind projects seem to be able to get along just fine, the technology is well known, the construction costs are predictable, and the demand for power and the renewable mandates overcome the visual intrusion, noise and wildlife concerns. The much bigger wind projects, of which there are comparatively few, compared to the smaller (20MW or less) ones—think offshore Massachusetts, or Oregon’s Summit Ridge—seem just as prone to the big project disease as fossil or nuclear projects.

Why does this matter? Because it is the truth of today’s energy market and has to be factored into energy policy thinking. It is hard to see it changing absent a herculean reform effort in Congress and root-and-branch reform in both the machinery of government and the structure of the energy market. A good first step would be to focus R&D and venture capital on making key technologies feasible at small scale, rather than, for example, chasing the unicorn of nuclear fusion. The implications for climate change are profound if retaining current nuclear capacity (let alone growing it) and CCS, both of which are dependent on large-scale, expensive projects that test the limits of public consensus, are off the table. It means that U.S. ability to meet its announced emission goals becomes suspect, and our ability to move beyond those goals even less likely.

(Image credit: official White House photo by Pete Souza.)