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Monday, April 6, 2009

The Importance of Doing the Math

Commentary
by Michael Vickerman, RENEW Wisconsin
April 6, 2009

The average American adult exhibits some proficiency with basic arithmetic--the adding, subtracting, multiplying and dividing of numbers. With these tools we are able to calculate a baseball player’s batting average, the amount of interest income earned on a three-month certificate of deposit, the service tip on a $50 dinner, and the duration of a driving trip from Madison to Minneapolis. Very few motorists need a calculator to figure out the total cost of a fill-up when the per-gallon price of gasoline goes up by a dime.

Yet, when the subject turns to America’s energy future, a subject where some facility with number-crunching is essential for understanding the issues at stake, our native competence seems to desert us. How else to explain the preponderance of newspaper articles, radio and television programs and Internet sites that either fumble the numbers that represent reality, or simply ignore them altogether.

If, as participants in a democratic process, we believe in the concept of informed consent, it is incumbent on ourselves to acquire some familiarity with the numbers that matter. Absent a grounding in the realm of quantities, durations and physical properties, public discussions on energy cannot help but devolve into exercises in magical thinking.

Consider a recent article in The New York Times titled “Cost Works Against Alternative and Renewable Energy Sources in Time of Recession.” In that article, reporter Matthew Wald states that solar and wind electric generating capacity sources are more expensive than new coal, natural gas or nuclear power plants. The yardstick Wald uses to compare the cost-effectiveness of different energy sources is their estimated kilowatt-hour cost, which is the same measure used to calculate the monthly electric bill.

However, Wald makes no mention of the size of the generating stations that are being compared, a critical omission. Coal and gas are relatively inexpensive fuels if an electric utility is looking to build one large power plant, say, 500 megawatts (MW). But what if the utility only needs 100 MW of additional capacity? In those situations, the large size of a typical coal plant becomes an economic liability, unlike a wind power plant, which can be easily adjusted to fill any gap up to 200 MW.

This isn’t rocket science, just simple math. Even if a kilowatt-hour (kWh) generated at new wind power plant costs 40% more than one produced by a new coal plant four times the size, the wind project will put less pressure on electric rates because the utility spent less money overall to build it. This is an important benefit from relying on a resource that comes in multiples of 2 MW increments instead of one 500 MW unit.

In this era of trillion-dollar bailouts, it is impossible to overstate the risk of building too much capacity that’s not needed. Utility loads have leveled off in the last nine months, caused by the economic contraction that has wreaked havoc in the industrial sector. In some utility territories with large industrial loads, the demand for electricity is falling. Indeed, the recent shutdowns of the General Motors plant in Janesville and the Domtar paper mill in Wisconsin Rapids are certain to depress this year’s sales at Alliant Energy’s Wisconsin utility below last year’s totals.

Given the above, one has to wonder if Alliant is still disappointed with the Public Service Commission’s decision in late 2008 not to let it build a new coal-fired plant in southwest Wisconsin. I dare say it would not have been possible to amortize the $2 billion project over a shrinking revenue base without asking for permission to raise rates. Perhaps Alliant will thank the agency later for stopping this undertaking before ground was broken. But perhaps I have too rich a fantasy life.

The Commission’s rejection of Alliant’s Nelson Dewey 3 project demonstrated the value of asking questions and burrowing into the quantitative details of a particular issue. Instead of simply accepting Alliant’s representations at face value, the agency challenged the underlying assumptions and studied alternative resource acquisition scenarios that were at least as plausible and certainly less expensive than what the utility wanted to pursue. As a result of the agency’s inquiries and the decision it reached, it’s fair to say that adding new central station generators is the furthest thing from a Wisconsin utility’s mind right now.

That Alliant’s ratepayers would be vulnerable to a carbon tax or a ceiling on carbon dioxide emissions also figured prominently in the Commission’s decision-making calculus. Though electric utilities can legally discharge CO2 into the atmosphere and not suffer any economic penalty for it, the agency was not willing to assume that such an arrangement will last in perpetuity. Avoiding a substantial downstream liability is a cost individuals and companies routinely absorb today as long as it is labeled “insurance.”

In contrast, Wald’s article assumes that the future will follow the trajectory of the immediate past. The reporter never tested his assumptions on future load growth, environmental regulation, financial risks and fuel prices, nor did he present any other arguments for increasing renewable energy production besides the environmental ones.

For example, one searches in vain for any reference to the financial risks avoided by pursuing zero-fuel cost resources that do not deplete over time. Compared with coal, nuclear and even natural gas, solar and wind energy are the energy world’s equivalent of Treasury bills—a safe haven offering steady and reliable returns. Much recent economic carnage would have been avoided if the trillions of dollars that were heedlessly plowed into McMansions and zero-interest car loans had been redirected instead into renewable energy production.

Another issue unaddressed in Wald’s article is job creation. Part of the reason renewable energy costs more is that the labor comprises a larger share of the expense. The economies of scale that come with central station generation results in fewer job-hours per kWh generated. Nations like Germany, however, have deliberately tailored their energy policies to support solar electric, community-scale wind power and on-farm methane digesters. For what reason, one may ask? To build up a renewable energy economy employing hundreds of thousands of people.

Last week, over 600 people, many of them small manufacturers and commodity suppliers, crowded into a hotel ballroom in Appleton to take part in a one-day seminar on the wind energy supply chain. The turnout surpassed the seminar organizers’ most optimistic expectations. What were the attendees looking for? A chance to establish a business relationship with an industry with reasonable prospects for long-term vitality, in contrast to the automobile sector.

All these lines of inquiry and avenues of research could have been explored in the course of writing this article. Instead of digging into the details and doing the math, Wald chose to skim along the surface and frame this story around the talking points that were prevalent 10 years ago. The result is stale journalism that neither enlightens or edifies. No wonder the print journalism industry is losing money hand over fist—they can’t seem to do the math.

Sources:

“Cost Works Against Alternative and Renewable Energy Sources in Time of Recession.”
http://www.nytimes.com/2009/03/29/business/energy-environment/29renew.html?_r=3&ref=business

“The Gray Lady Stumbles Over Wind Facts”
http://www.awea.org/blog/?mode=viewdate&date_no=1&month_no=4&year=2009

“Wisconsin Gov. Doyle Talks Up Wind at Workshop”
http://www.awea.org/blog/?mode=viewdate&date_no=31&month_no=3&year=2009

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Michael Vickerman is executive director of RENEW Wisconsin, a sustainable energy advocacy organization. For more information on the global and national petroleum and natural gas supply picture, visit "The End of Cheap Oil" section in RENEW Wisconsin's web site: www.renewwisconsin.org. These commentaries also posted on RENEW’s blog: http://renewenergyblog.wordpress.com and Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com

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