by jboullion | Mar 20, 2007 | Uncategorized
Fossil Fuel Watch
Vol. 6, Number 5, March 20, 2007
by Michael Vickerman, RENEW Wisconsin
Awhile back, I wrote a column which was highly critical of using payback analysis to figure out whether installing a solar hot water system on one’s house makes economic sense. In almost every example you can imagine, the payback period for today’s solar installations ranges between long and forever. For my system, which started operating in January 2006, payback will be achieved in a mere 19 years using today’s energy prices, though by the time 2025 rolls around, half of Florida might be under water and the rest of the country out of natural gas.
What message does payback analysis convey to the average household contemplating a solar installation? It can be boiled down to this harsh assessment: the chances that you will be living in the same house when the system is fully paid off are remote, so you’re better off leaving solar off the table.
Indeed, payback analysis reinforces the popular perception that solar energy is unaffordable, and that homeowners should wait for technological improvements or cost reductions before pursuing this energy option. But from the standpoint of energy security and climate protection, every day of inaction leaves us in a deeper hole. We no longer have the luxury of waiting for external triggers — be they painful market signals or nasty resource wars — to spur us into doing the right thing.
But there’s no reason to let payback length rule one’s ability to invest in sustainable energy for the home or business, especially if there are other approaches to valuing important economic decisions. One way to sidestep the gloomy verdicts of payback analysis is to do what most companies do when contemplating a long-term investment like solar energy — calculate the internal rate of return (IRR) on the invested capital. The definition of IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e. the yield on the investment.
By using this familiar capital budgeting method, I’m able to calculate an IRR of 6.1% for my solar water heater if natural gas prices rise a measly 3% per annum. That yield exceeds anything that a bank will offer you today. It will likely outperform the stock market this year, which is due for a substantial downward adjustment to reflect the slow-motion implosion of the housing market now underway. And, unless you live in a gold-rush community like Fort McMurray, Alberta, your house will do well just to hold onto its current valuation, let alone appreciate by six percent.
While all investments pose some degree of risk, the return on a solar energy system is about as safe and predictable as, well, the rising sun. Fortunately for the Earth and its varied inhabitants, the center of our solar system is situated well beyond the reach of humanity’s capacity to tamper with a good thing.
The collector system is simplicity itself; the panels just sit there gathering all that exogenous, renewable energy during daylight hours, unencumbered with moving parts that can wear out. The panels degrade slightly from one year to the next, but they shouldn’t lose more than 20% of their efficiency over a 30-year period. And, in the event of a violent weather event like a hailstorm, one’s homeowner insurance policy should cover the damage. All told, solar energy, whether used for electricity or heat, is about as close as it comes to a risk-free investment.
But what about solar’s contribution to the market value of the house it serves, which can be easily measured? A 10-year-old solar energy system should deliver 20 more years of electricity or heat, reducing that house’s energy overhead during that period. In the case of my installation, the 20 years of avoided energy purchases starting in Year 11 should exceed my entire out-of-pocket expense. One can infer from that calculation that houses that capture solar energy on-site will appreciate faster–or depreciate more slowly — than houses that don’t.
Granted, calculating the IRR of a solar installation doesn’t capture the full range of benefits that flow to the system owner. It doesn’t, for example, factor in the possibility that, before too long, natural gas will become a rationed energy source, but that’s a political outcome whose probability and impacts are, at this point, unquantifiable. True, environmental externalities can be modeled but it’s just an academic exercise until emission offset markets like the Chicago Climate Exchange become accessible to homeowners and small business owners as well as to utilities and multinational corporations. But calculating the installation’s IRR allows system owners to see something about solar energy that is not revealed in payback analysis, which is that obtaining electricity and/or heat from the sun is a sustainable and risk-free way of creating household wealth. And if the numbers support this conclusion, then why aren’t we reinvesting every last penny of profit from our fossil fuel-based economy into creating a renewable energy platform for the future?
Sources:
http://en.wikipedia.org/wiki/Internal_rate_of_return
Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the supply demand equation for these fossil fuels, and analyzing its effects on prices, consumption levels, and the development of energy conservation strategies and renewable energy alternatives. 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. These commentaries also posted on RENEW’s blogand Madison Peak Oil Group’s blog.
by jboullion | Dec 29, 2006 | Uncategorized
by Michael Vickerman, RENEW Wisconsin
Vol. 5, Number 9, December 28, 2006
A year ago my wife was firmly in charge the household laundry. Now, not only am I washing and drying all our clothes, including the sheets, towels, and pillow cases, I find myself looking forward to doing it. What is going on here?
A divorce? Wrong answer. Anyway, that would only explain the shift in personnel, not the attitudinal change. A personality transfer à la “Freaky Friday”? Incorrect. This is not a case of life imitating a Disney movie.
Place the blame instead on our rooftop solar water heating system, which was installed in January 2006. That purchase challenged me to think about integrating our solar ration”the daily allotment of sunlight that falls on our house and yard”more effectively into our regular routines. And few routines are as unavoidable as doing the laundry.
It so happens that we share a clothesline with two neighboring households. In years past, my wife would hang the clothes out to dry during the warm summer months, but in the colder months she would simply transfer the wet clothes to the gas-fired dryer stacked above the washing machine.
One may wonder: why deviate from that routine? Using the washing machine and dryer in our decidedly unfinished basement would allow her to go through a week’s worth of dirty laundry and finish the job in three hours.
But some time this spring, a question started plaguing me: if it’s a good thing to use sunlight instead of natural gas to wash clothes, why isn’t it equally true for drying them? And if my solar panel can preheat up my water tank on a sunny day in March, why not rely on the same energy source to dry the wet clothes after they’ve been washed?
With these questions tumbling round and round inside my brain, I decided to take action by commandeering the laundry and doing it myself. So what did I learn?
First and foremost, weather conditions should be the deciding factor in selecting when to do the wash. On cold days, clothes dry much faster in breezy, sunny days than in slack days under overcast skies. If you’re depending on the weather to deliver the energy it takes to dry your laundry, you’ll need scheduling flexibility and an opportunistic attitude. And I can’t emphasize enough the value of periodically checking the Internet weather sites, particularly the radar images, to avoid being unpleasantly surprised by sun showers or swiftly moving thunderstorms.
Everything you hang on the solar dryer, as I like to call it, will become dry over time. The same is true for garments hung inside your house or apartment. But there will be occasions, especially around the winter solstice, when there isn’t enough solar energy outside to finish the job by sundown. If your goal is to avoid using a fossil-fueled dryer, then you’ll need to deploy a drying rack or two to take advantage of the low-humidity warmth inside your dwelling. In the dead of winter, your furnace or wood stove can deliver whatever supplemental heat is needed to dry a full load of laundry in a 24-hour cycle.
Since I’ve taken over laundry duties, the combination of our solar ration and the available indoor heat handles about 80% of what the gas dryer used to do. The only action the gas dryer sees these days is towels and heavy garments.
And how is my obsession with the solar ration affecting our bottom line? While it’s too soon to estimate an annual savings, we did use about 20% less natural gas this November versus the year-earlier period, even though November 2005 was a much warmer month.
The rewards of a well-used solar dryer are by no means limited to the energy and dollar savings reported on the monthly utility bill. The best part of the package is the time spent outside. There you can take the pulse of the day from the sunlight, clouds, air temperature, wind and humidity that make up this continuous flux of energy that we call the weather. Relying on solar energy in this way makes a person more attuned to the ebb and flow of weather conditions. Yes, forsaking the fossil-fueled dryer for the great outdoors does take more time and effort, but it’s a small price to pay for eliminating the drudgery that comes with doing the laundry on autopilot.
Amazingly enough, community prohibition of clotheslines is not uncommon in the United States. Ironically, this inane belief that the sight of gym trunks and sweat socks hanging in a yard will drive property values lower is strongest in the Sun Belt, a region where solar drying”and water heating–should be the norm and not the exception. What can you say about a mindset that thinks nothing of wasting a precious fossil fuel on doing the laundry just to keep up appearances? Given how prevalent this silly and self-destructive behavior is in our land, is the imminent arrival of the oil peak and terminally declining natural gas stocks necessarily a bad thing?
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Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the supply demand equation for these fossil fuels, and analyzing its effects on prices,
consumption levels, and the development of energy conservation strategies and renewable energy alternatives. 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://www.zmetro.com/community/us/wi/madison/renew
and Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com
by jboullion | Nov 16, 2006 | Uncategorized
by Michael Vickerman, RENEW Wisconsin
November 16, 2006
The gale-force winds that reshaped the political landscape this November augur well for new initiatives to substitute fossil fuel use with renewable energy.
To a degree unmatched in previous elections, candidates articulated an energy agenda that emphasized greater reliance on bioenergy, wind, solar, and conservation—and won, often by convincing margins. The renewable energy tide swept through not only both chambers of Congress but also many statehouses across the country. Only the Southeastern states seemed to escape its impact.
For example, the incoming governor of Massachusetts, Deval Patrick, distinguished himself by endorsing the controversial Cape Wind project in Nantucket Sound. Patrick’s sensible support for what could be the nation’s first offshore windpower plant is a welcome departure from the unremitting hostility that his predecessor, Mitt Romney, directed toward it.
In Patrick’s eyes, Cape Wind is the only large-scale generating option that does not add to the load of greenhouse gases emanating from Massachusetts sources. Contrast that understanding with Romney’s decision to pull Massachusetts out of a New England-wide greenhouse gas reduction initiative and you’ll begin to appreciate just how much more friendly towards renewable energy the Bay State will be.
Here in Wisconsin, Governor Jim Doyle repeatedly pointed to his leadership on energy policy, highlighted by the recently adopted Efficiency and Renewables Law, as a compelling reason to return him to office.
This law, which will increase the renewable energy content of the state’s electricity to 10% by 2015, was the culmination of a bipartisan, deliberative, consensus-building process that took more than two years to complete.
By contrast, Doyle’s challenger, Congressman Mark Green, was unable to persuade voters that he, too, staunchly supports renewables. Moreover, voter perceptions of Green were colored by his long association with the “drill ‘em dry” camp in the House of Representatives, as exemplified by Tom DeLay and Richard Pombo. The disparity in their respective energy agendas contributed to Doyle’s surprisingly easy reelection.
There were a few Republicans, like California Governor Arnold Schwarzenegger, who chose effective governance over the strident partisanship that characterized the 109th Congress. This summer, Schwarzenegger and the Democratic-controlled state legislature worked cooperatively to pass a landmark law that seeks to cut California’s greenhouse gas emissions by 25 percent, dropping them to 1990 levels by 2020. This initiative will undoubtedly increase renewable energy’s market share in the Golden State.
For clean energy supporters, the sweetest moment came when voters in California’s 11th District handed the aforementioned Richard Pombo a stinging defeat. Pombo, who has never met an environmental law he didn’t try to repeal, is the architect of a House bill that would open up the entire Outer Continental Shelf to oil and gas drilling. In a symbolic twist, Pombo lost to a challenger, Jerry McNerney, who has worked in the wind energy industry for over two decades.
The campaigns of Patrick, Doyle, Schwarzenegger and McNerney succeeded in framing renewable energy as an economic development strategy that also happens to prevent pollution and address national security. And, as happened during Doyle’s and Schwarzenegger’s first terms, it is possible to mobilize strong bipartisan backing for pro-renewable energy initiatives even in the teeth of an election year.
The election results are indicative of two positive developments: that Americans are taking energy issues more seriously, and that renewable energy’s appeal now transcends partisan affiliations. We now have, for the first time in many years, a window of opportunity to establish a responsible national energy policy instead of the smorgasbord of subsidies we now have.
Indeed, the message from the voters could not be clearer: let conservation and renewables lead the way to a cleaner, healthier, more secure energy future.
Vickerman is executive director of RENEW Wisconsin, an independent, nonprofit organization that acts as a catalyst to advance a sustainable energy future through public policy and private sector initiatives. For more information on RENEW’s work, visit our web site: www.renewwisconsin.org. These commentaries also posted on RENEW’s weblog.
by jboullion | Nov 2, 2006 | Uncategorized
Petroleum and Natural Gas Watch, Vol. 5, Number 8
by Michael Vickerman, RENEW Wisconsin
November 2, 2006
Sating America’s prodigious energy appetite depends on the continued availability of Canadian energy sources. About 25% of the crude oil and 80% of the natural gas imported into the United States come from our very accommodating neighbor to the north. More than half of the fuel pumped out of Canadian wells heads south to keep us Yankees warm and happily tooling about on our highways.
Even though the Canadian economy is no less dependent on hydrocarbon energy than ours, Canada has been drilling as many wells as necessary to keep the high-maintenance American economy humming. If this pedal-to-the-metal production policy were applied to a non-strategic product like, say, maple syrup, few people would care about the consequences. But there is nothing on the horizon to replace the nonrenewable high-density energy sources that Canada so generously sends our way.
This begs the question: how long can Canada go on behaving like America’s most compliant energy colony?
Not very long, according to David Hughes, a petroleum geologist with the Geological Survey of Canada. Speaking before the World Peak Oil Conference held in Boston last week, Hughes painted a remarkably pessimistic picture of Canada’s energy future, especially regarding natural gas.
Despite record drilling activity, natural gas extraction volumes have slipped from the peak set in 2002, and output per well is now declining at an annual rate of 28%. Put another way, just to keep the output from declining this decade, producers must complete nearly one-third more wells in 2007 than in this year, and then repeat that achievement in 2008, 2009 and 2010.
That would be a daunting challenge even if there were rigs and drilling crews standing by. As it now stands, there is no spare capacity of this sort anywhere in North America.
With only eight years of proven reserves left in Canada, Hughes suspects that natural gas output is about to fall off a cliff. Barring a miracle or two, Canada will soon experience challenges in providing for its own citizens, let alone producing surplus volumes bound for American furnaces.
A potentially wrenching resource conflict is now brewing on our continent, thanks to the North American Free Trade Agreement (NAFTA), under which Canada effectively gave up sovereignty over its fossil energy inheritance. As a signatory, Canada is prohibited from cutting back energy exports, even in the event of a domestic supply crunch. But how long would Canada honor its obligations under NAFTA if doing so resulted in its citizens freezing to death? American policymakers would be wise to explore how that scenario might play out.
If that weren’t enough, natural gas is also the key to expanding the production of oil from the tar sands of northern Alberta, the only oil-producing region left in North America that can increase output. It is the only available fuel for producing the pressurized steam needed to separate bitumen, a low-grade oil, from sand. Shrinking natural gas supplies would quickly reduce the flow of bitumen into the U.S., further complicating Canada’s energy dilemma.
The irony of sacrificing a premium energy source to make more low-grade fuel for export was not lost on Hughes, who closed with a quote from a Canadian energy executive. “Using natural gas to produce oil from tar sands is akin to turning gold into lead.”
Vickerman is executive director of RENEW Wisconsin, a nonprofit organization promoting conservation and renewable energy sources.
Sources:
Energy Information Agency, October 2006 Monthly Energy Review http://www.eia.doe.gov/emeu/mer/contents.html.com.
Hughes, David: “North American Natural Gas Production Trend and Implications for Canadian Tar Sands Production,” 2006 Boston World Oil Conference, Boston University, October 2006. http://www.aspousa.org
Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the
supply demand equation for these fossil fuels, and analyzing its effects on prices,
consumption levels, and the development of energy conservation strategies and renewable energy alternatives. 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.
by jboullion | Jan 2, 2006 | Uncategorized
A presentation prepared by Michael Vickerman, RENEW Wisconsin’s executive director, from two presentations at the first ever ASPO-USA conference held in Denver, November 2005, and slides that he’s been using since 2002.
Complete presentation here.
by jboullion | Sep 21, 2005 | Uncategorized
by Michael Vickerman, RENEW Wisconsin
Petroleum and Natural Gas Watch, Vol. 4, Number 1
September 21, 2005
On its way toward the Gulf Coast states of Louisiana and Mississippi, Hurricane Katrina cut a swath through a hydrocarbon-rich zone of the Gulf of Mexico, the largest domestic source of petroleum and natural gas. When fully operational, this offshore oil and natural gas complex accounts for about 30% of domestic oil supplies and 20% of domestic natural gas supplies.
Fueled by exceptionally warm waters, this Category 4 storm KO’ed nearly 50 production platforms and four drilling rigs. Extensive damage was reported at 20 platforms and nine drillings rigs. The force of the winds and the waves tore six rigs loose from their moorings and sent them adrift; one rig in Plaquemines Parish was found beached on Alabama’s Dauphin Island. At the storm’s peak, on August 29, more than 90% of the Gulf’s oil extraction capacity and nearly 90% of its natural gas extraction capacity was off-line.
The storm’s devastation extended beyond structures protruding above the water’s surface. Parts of the underwater piping network that collect the raw fuel and carry it to onshore processing facilities need to be rebuilt. Mobilizing all the boats, helicopters, divers, and steel needed to repair this infrastructure will be a monumental undertaking. However, until these pipelines become operational again, many of the undamaged wells will remain idle, with no place to pump the oil to.
Onshore facilities like shipyards and refineries were also hit hard. The Mineral Management Service, which issues daily bulletins tracking Katrina’s impact on the Gulf of Mexico’s hydrocarbon complex, estimates that “35% of shut-in oil is due to onshore infrastructure problems.” The rebuilding effort is bound to be slow and costly, but absolutely necessary as this region is one of the few remaining centers of (real) wealth-production in the nation.
Three weeks have now passed since Katrina landed her roundhouse blows to our energy underbelly, and more than 55% of the region’s oil capacity and about one-third of the natural gas capacity still remain off-line. So far, the reduction in output amounts to about 1.5% of expected U.S. crude oil production this year. Also off-line are four refineries with a combined daily capacity of nearly one million barrels, about 4% of total U.S. refining capacity. Expectations are that these facilities, especially the 400,000 barrel per day Pascagoula unit, are three to six months away from being restarted. In an industry where production volumes lately have averaged between 90 and 95 per cent of capacity, making up a 4% loss shapes up to be an impossible challenge. This is very bad news indeed to a country that was, before Hurricane Katrina, not producing enough gasoline to keep pace with this summer’s driving demands.
In an effort to calm panicky oil markets, the Bush Administration has pledged to tap the Strategic Petroleum Reserve for as much as 30 million barrels of crude oil, an amount the Unites States consumes in 36 hours. Though gasoline prices have fallen 10% from the Labor Day weekend, releasing reserve oil is nothing more than a symbolic gesture when there is no spare capacity available to crack the crude into jet fuel, gasoline and diesel fuel. The nation has no choice but to import greater volumes of gasoline for the duration of this year. Even so, the supply-demand equation looks precarious. Only a nationwide slowdown in driving will keep fuel prices from heading higher. Nothing short of that will suffice.
Katrina’s path took it through the oil-heavy eastern half of the Gulf’s hydrocarbon complex. The natural gas production platforms that populate the western half were spared the flattening winds and 20-foot storm surges visited upon Bay St. Louis and Biloxi. Even so, the accumulated reduction in output so far represents 0.7% of U.S. extraction volumes expected this year. This deceptively puny number spells real trouble for Americans residing in colder climates, for unlike crude oil and its refined products, natural gas cannot be easily shipped across oceans. There are only four operating terminals in the United States where specialized tankers bearing liquefied natural gas (LNG) can offload their contents, and they are operating pretty much at full capacity right now.
Unless natural gas output from the Gulf of Mexico can be revved up to pre-Katrina levels in the next week or two, the likelihood that the United States can scramble its way out of a slow-motion supply squeeze this winter is poor. Earlier this year, several investment banking services that track energy supply-demand trends projected lower output from domestic sources this year. If the monthly production results reported by the Texas Railroad Commission are reliable guides, extraction volumes are already tailing off, compared with previous years’ results. The injection rate of gas into storage for winter use has slowed as well.
When one stops to consider all the factors at play here—a still booming housing sector, more gas-fired power stations on-line (including four new ones in Wisconsin this year), a declining resource base in North America (including Canada and Mexico), and insufficient infrastructure for importing more than 5% of domestic consumption through 2008—it’s not difficult to imagine natural gas prices, now at $12/MMBtu, ratcheting up towards the $20/MMBtu level this winter. And to think that only six months ago one could have bought a January 2006 gas contract for under $7/MMBtu.
The prospects for a rapid recovery became dimmer when a storm named Rita crossed the Florida Keys heading west toward Texas. The abnormally warm waters on which Katrina fed can easily transform Rita into a tempest of similar intensity. For the moment the very best outcome one can expect from Rita’s menacing presence in the gulf is a production interruption that lasts five to seven days followed by a full resumption of extraction activity. But if it strengthens as Katrina did, it is likely to cause even greater damage than Katrina wrought, due to its more westerly track. Texas and its coastal waters, it should be remembered, account for fully one-third of domestic natural gas output. Another hit to Gulf of Mexico hydrocarbon complex and natural gas futures will warp out of orbit.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Even more amazing than the destructive capacity of these hurricanes is the degree to which we as a nation are totally unprepared for dealing with their aftermath. The default assumption among policymakers is that the U.S. economy will grow in an uninterrupted fashion, and that high quality energy sources will magically appear in time to sustain this expansion. But how can this outcome be guaranteed when the U.S. government cannot control either the actions of foreign countries or the weather? In fact, the country does not appear able to exercise even the slightest hint of discipline or restraint over its own appetite for energy. As the nation’s energy infrastructure contracted relative to the domestic economy, the federal government’s ability to shape our energy future atrophied along with it. All of the planning functions that a healthy government is typically responsible for have been ceded to the marketplace. And the marketplace has one very powerful mechanism for allocating scarce but essential resources to a society’s constituents. It’s called price.
Author’s note: Given Hurricane Rita’s potential to add to the devastation caused by Katrina, I plan to update this article in one to two weeks.
Sources:
Center for Energy Efficiency and Resource Efficiency (CEERT), Risky Diet 2005: Global Energy Resource Adequacy. http://www.ceert.org
Minerals Management Service (U.S. Department of the Interior)
http://www.mms.gov/ooc/press/2005/press0916a.htm. See MMS web site also for daily shut-in statistics reports.
Simmons and Company: Outlook for Natural Gas: 2005 and Beyond
http://www.simmonsco-intl.com/research.aspx?Type=researchreports)
“Texas Monthly Oil and Gas Production by Year,” Texas Railroad Commission
http://www.rrc.state.tx.us/divisions/og/information-data/stats/ogismcon.html),
The Oil Drum: A Community Discussion About Peak Oil. Numerous postings on the web site from August 29 – September 21, 2005.. http://www.theoildrum.com/
Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the
supply demand equation for these fossil fuels, and analyzing its effects on prices,
consumption levels, and the development of energy conservation strategies and renewable energy alternatives. 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
