Big Shifts, Tough Tradeoffs

WattzOn was started to bring attention to the consumer’s role in energy use. Saul Griffith, one of the founders, has minutely analyzed his life and shown us where the average American can easily cut down on energy use…. and where the stumbling blocks are. With all of his best intentions, he finds it hard to bring the energy use in his San Francisco lifestyle down to the world average. The American economy is hard-wired for extra energy consumption, and thus extra emissions.

Four trends are dramatically shifting the landscape for energy and carbon emissions, and set the stage for the consumer market in 2012 and beyond.

First, national security concerns and world oil prices are prompting a growth in oil recovered from Canadian tar sands. Oil prices remain above $100 per barrel, and the tar sands recovery makes business sense at $60 per barrel and above. So tar sands are here to stay. (If the U.S. does not build the XL pipeline from Canada to the Gulf of Mexico to transport the oil, the Canadians will build a pipeline to a west coast port, and ship the oil to China. Heck -- they may do both pipelines. )

The problem? It takes an enormous amount of energy, and thus emissions, to recover the oil from the tar sands. Currently the average car emits 20 pounds of CO2 equivalents (CO2e) per gallon. Gasoline from tar sands raises this to about 26 pounds CO2e per gallon. If an alternate synfuel approach is used to convert oil shale into oil, emissions jump to 34 pounds of CO2e per gallon. (Both technologies are used in Canada.)

So, we have our first tough tradeoff: National Security and More Emissions? Or Imported Oil and Less Emissions?

We expect emissions to take a back seat to the strong economic and national security motivations for tar sands.

Second, recent technology improvements, aka fracking, have opened up a huge natural gas reserve in the U.S. There may be environmental damage with fracking that raise costs, but experts expect natural gas prices to be stable at current levels for years to come. Utilities can gradually retire coal plants and replace them with gas-fired generation. This is a cleaner substitution, but without price increases there is no incentive to save energy.

So the problem with fracking is that it is too good – it keeps natural gas prices at their current modest levels for years to come. The lack of rising prices makes it more difficult to justify investments for their energy savings.

The second tradeoff: More Energy and Lower Prices? Or Higher Prices and Energy Efficiency?

Third, more than 60% of U.S. energy use is for consumption of products and services. These include the clothes we wear, the computers we use, the tables we sit at and so on. It also includes banking, insurance and other services, but these are not the bulk of energy use.


The problem? With flat oil and natural gas price trajectories, the only way to reduce this energy use is by reducing consumption. Producers don’t have an incentive to do much more than business-as-usual in regard to energy savings. Our economy is sputtering – with painful joblessness -- due to lack of consumer demand, so asking people to reduce energy use and emissions by reducing consumption has the sound of being un-American.


The third tradeoff: Economic growth with Associated Emisisons? Or Reduced Consumption to Save Energy and Emissions?


Fourth, renewable portfolio standards and an aging grid will push up electricity prices. Industry projections are for a 30% rise in capital spending per year over current levels to maintain infrastructure, leading to rate steep rate hikes. Renewable portfolio standards start biting in this decade, pushing 10 - 20% of most states' energy to the more expensive cleaner types.


The problem? Rising costs decreases regulators' interest in energy saving policies. For most utilities, the only way to make more money is to sell more energy. Certainly, with rising costs utilities don't want customers to leave their system or to lower volumes, as either outcome will increase rates sharply for those that remain. So look for utilities and their regulators to slow down their interest in alternate regulatory schemes, such as those that reward utilities for energy savings.


This map from the Pew Center on Climate Change shows that only 8 states currently have a regulatory scheme in place to break the link between volume and revenue in electricity markets -- known as decoupling. In other words, utilities in 42 states are still have incentives to sell more energy. Going forward, we expect energy savings to take a backseat to cost recovery.



Source: Center for Climate and Energy Solutions


The fourth tradeoff: Invest in clean fuels and a grid upgrade and keep prices low by spreading the costs out over a larger volume? Or save energy and face increased electricity prices?


So let's sum up:


* Increased national security from using Canadian energy resources at the expense of increase emissions.

* Increased natural gas supply and lower prices at the expense of energy savings.

* Federal and state policies to increase consumption to create jobs at the expense of reducing energy use and emissions

* Increased incentives for utilities to recover rising costs at the expense of energy savings


These are big shifts in our landscape, breaking the alignment between national security and energy savings, and economic development and energy savings. The green jobs -- reduce emissions - save energy agenda faces some touch challenges.









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