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the future of power

Ginsburg is a contributing writer for BusinessWeek who reports on science and technology.
The National Energy Policy spearheaded by Vice President Dick Cheney has sparked fierce debate on how to meet the country's future power needs. The administration says we're in a crisis, facing the most serious energy shortages since the oil shocks of the 1970s. To head off disaster, the Cheney team has charted an aggressive strategy to boost supplies of oil, gas, coal, and nuclear power over the next 20 years. But critics counter the "crisis" is a ploy. High prices have already led to increased gas and oil production. And sales of "negawatt" energy-saving technologies are up, too. Democrats charge that the Bush emphasis on greenhouse gas-emitting fossil fuels gives short shrift to environmental concerns. Their alternative proposal calls for increased funding for efficiency and renewable energy technologies.

This critique of the Bush energy policy focuses on two fundamental issues: How much energy will we need? And what is the best way to provide it? It also examines the most controversial recommendation in Cheney's report -- drilling in the Arctic National Wildlife Refuge (ANWR) -- from an economic perspective. And it takes a look at how renewables fit into the energy equation.

Every administration for the last 30 years has issued a national energy policy. Few, however, have been released against a backdrop as dramatic as a plague of power outages and wallet-emptying prices at the gas pump. But the new policy has much in common with earlier efforts, says Karl Rabago, a former U.S. Deputy Assistant Secretary of Energy and managing director at the Rocky Mountain Institute (RMI) in Snowmass, Colo. "To say that America's energy future requires a broad range of energy resources from conservation to nuclear power is itself nothing new. What's new is a much more direct emphasis on specific numbers," he says. But there seems to be some basic disagreement among experts over these numbers and about the nation's projected long-term energy needs.

Numbers Game

It comes down to supply and demand. The Cheney report is based on projections by the Energy Information Administration (EIA), an independent research agency within the Department of Energy. As is customary, the EIA has compiled data based on a variety of different scenarios, including high and low economic growth and high and low oil prices. The Bush administration, however, has chosen to focus only on a median scenario called the "reference case"in making its assessment. According to this scenario, electricity consumption in the U.S. will increase by 1.8 percent per year or 43% over the next 20 years. Oil consumption will rise 33 percent. But are these numbers accurate? And could they change?

Different scenarios present very different pictures of the future. Although the Cheney report predicts that total U.S. energy use -- electricity and fuel -- will climb to 127 quadrillion British thermal units (Btu) by 2020, the EIA's "high technology" scenario projects 119 quadrillion Btu, a significantly lower number.

Furthermore, the reference case used by the Cheney team assumes that "no new efficiency standards" will be adopted beyond the year 2000. Yet tough new standards have already been implemented for appliances such as air conditioners, which account for a high percentage of energy consumption in the U.S.

The Cheney report also bases projections for the next 20 years on production and consumption patterns from the past 10 years. But that may skew the picture. During most of the 1990s, energy prices were unusually low as a result of overbuilding in the 1980s. Low prices boosted demand. But as energy prices have spiked upward since 1999, demand has slowed, while production has once again increased. Consequently, the gap between supply and demand may not be as large as predicted in the report.

Also, while the EIA reference case assumes some efficiency improvements over the next 20 years in both power generation and use, higher prices and tougher standards could jump-start adoption of more advanced and -- at least initially -- more expensive technologies that would improve efficiency even further.

Many energy analysts believe that there's still plenty of efficiency yet to be harvested. They point out that energy use today is just 60 percent of 1970s-era predictions, mostly due to efficiency -- as well as a shift to a more service-based economy.

According to the numbers in the Cheney report, current efficiency could slow the increase in new demand by one-sixth, from 1.8 percent to 1.5 percent each year. But Kirk Yeager, CEO of EPRI, formerly known as the Electric Power Research Institute, an energy industry think tank, thinks that estimate is too conservative. "It depends on incentives and how far we can propagate the digital economy, but the potential is there for maybe as much as a third," he says.

And there are additional savings to be had in retrofitting."They're ignoring the potential for energy efficiency in existing stock," says RMI's Rabago. In fact, the "negawatt" industry, selling energy saving technology, has become a multibillion dollar business. According to Rabago, efficiency and conservation can more than make up the demand for new power.

James Davis, president of Chevron's Energy Solutions subsidiary, agrees. "The crisis in California and rising energy costs in markets across the country has really ... taken energy conservation and energy efficiency and brought it back in vogue."

Efficiency can also be improved in the transmission of power. Currently, about 7 percent of electricity is "lost" on its way from power plant to wall outlet. Upgrading power lines with electronic switches "can do quite a bit in terms of increasing the capacity of the system," says EPRI's Yeager. So can high-tech "super-conducting" wires.

The Bush Administration's National Energy Policy includes several recommendations promoting efficiency, from a weatherization assistance program to help the poor insulate their homes, to research in transmission technologies. There is even a proposal for a public awareness campaign for the government's "Energy Star" labeling program that identifies energy-efficient consumer products. But while the report notes that Energy Star certified products can save a "typical homeowner" 30 percent off their annual energy bill, the Energy Star program itself has been cut 9.3 percent in the administration's budget.

Another section of the report addresses automobile fuel efficiency, but holds off on making any recommendations until a National Academy of Sciences report is released in July. The Cheney team is mindful of "negatively impacting the U.S. auto industry." However, a suggested tax credit on fuel-miser electric-hybrid cars will, at least in the short term, primarily benefit foreign manufacturers. Currently the only models on the market are Toyotas and Hondas, and the waiting list to get one is several months long.

The ramifications of fuel efficiency -- however it's achieved -- extend beyond savings at the pump and reduced air emissions. While it would take several years for efficiency gains to work their way into the American fleet, lowered demand for gasoline would free up capacity at refineries, deferring the need to build new ones. And, of course, reducing the demand for oil increases energy independence, while lessening the urgency to open up federal lands for drilling.

Generation Gap

You can only save what you've got to begin with. "To speak exclusively of conservation is to duck the tough issues," said the Vice President in a recent speech. Even if demand holds steady, old power plants would still need to be replaced. The question is, with what?

Based on the EIA reference case, the Cheney report recommends building between 1,300 and 1,900 new central power plants over the next 20 years. While part of the Clinton strategy to reduce air pollution and greenhouse gas emissions was to replace old coal plants with comparatively clean, cheaper-to-build and more efficient natural gas-fired plants, the Cheney report calls for investing $2 billion to develop "clean coal." Nuclear power, long tarnished by a reputation for construction cost overruns and the unsolved problem of long-term nuclear waste storage, is back on the table as well.

But, "distributed energy," a fundamentally new way to deliver energy, could change dramatically the number of central plants needed. Any system that generates power near where it's going to be used -- whether it's a windmill, solar panel, gas-fired turbine, diesel generator or fuel cell -- is considered distributed energy. The advantages outlined in the report are considerable. Not only can these systems be brought online faster and at far less cost than central power plants, but they can deliver electricity more reliably and efficiently.

Since over 95 percent of power outages are due to problems in transmission, onsite systems have an automatic advantage. Reliable power has become critical to computer-dependent high-tech companies where a single outage can cost millions in lost business. "We will guarantee, or underwrite or provide liquidated damages to customers who use our service," says Jeff Byron, director of business development for Calpine spin-off c*Power, which builds distributed systems for data centers. "Can you imagine a utility saying they'll guarantee a level of service and if not, they'll pay damages?"

While a typical coal plant loses about two-thirds of the energy it generates as "waste" heat, distributed systems using gas turbines or fuel cells can harness the heat for heating, or even cooling. This is a particularly nice advantage for internet server "farms" where air conditioning ranks as a major cost of operation.

The Cheney report characterizes the situation in California as "at heart a supply crisis," pointing out the state "did not add a single new major electric power plant during the 1990s." However, according to a recent survey by RMI, at least 3,000MW of distributed energy systems were installed in California during the 1990s -- or the equivalent of three large Calpine gas plants' worth of power.

Although the report details two potential barriers to widespread adoption of distributed energy -- the need for interconnection standards and net metering which allows for the sale of power back to the grid -- the report makes no specific recommendations to address them.

Drilling Question

The administration's energy plan places substantial emphasis on increased natural gas and oil exploration and drilling in order to increase domestic supply and reduce dependence on foreign suppliers. In order to reach these goals, the report makes recommendations to relax restrictions on gas and oil drilling on federal lands. But will increased domestic production make a difference? Will it bring down prices at the pump?

Opening up Alaska's Arctic National Wildlife Refuge (ANWR) for oil drilling is the report's most controversial and publicized proposal. Its vast reserves could yield anywhere from 5.7 billion to 16 billion barrels of oil, according to the U.S. Geological Service study. But the study also concludes that "the technically recoverable oil is commercially developable at an oil price of $25 per barrel." In other words, it only pays to develop ANWR when oil prices are high. But EIA projects that oil prices will fall to $20.50 per barrel by 2003, but then slowly rise to $22.41 by 2020. At those levels, ANWR simply doesn't make sense.

If oil prices stay high -- either through OPEC market manipulations or increased competition for Middle East oil -- then ANWR and other expensive-to-develop sites in the U.S. become feasible. But don't look for any relief at the pump.

Critics maintain that the Cheney report relies too heavily on solutions that are locked into long-term capital investments. Pipelines "are fixed assets that cannot be adjusted to changes in supply and demand," the report notes. If you build one, you need to know upfront that you'll be pumping product through it for several years in order to pay back investors. Likewise, refineries are at their most profitable running near capacity, so investors must be assured that the demand for petroleum products remains strong.

New Ideas

In an interview with the London Telegraph earlier this year, OPEC architect Sheik Yamani noted that the Stone Age didn't end because they ran out of stones. And the oil age won't end because we run out of oil. Twenty-five years of research in renewable technologies such as solar, wind, geothermal, hydrogen and biofuels at the National Renewable Energy Laboratory (NREL) in Golden, Colo., have yielded commercially viable alternatives. In fact, Sir John Brown, CEO of energy giant BP, predicts that half of the world's energy needs will come from renewable sources by the middle of the century.

Petroleum refineries may give way to biorefineries, producing ethanol and biochemicals. Ethanol production costs per gallon have dropped from $4.80 in 1980 to $1.25 today, with a goal of 75 cents in a few more years. And soon they'll be able to make the stuff out of cornstalks, creating a second "bonus" crop for farmers.

But the big interest lately is in biochemicals. The first major commercial product, a corn-based polymer packaging material called Natureworks PLA, is about to hit the market. It was developed at NREL in partnership with Cargill Dow, a joint venture of the agriculture giant and the chemical company. And it is the opening volley in what could be a chemical revolution.

If the biochemical industry can capture even a small part of this highly profitable market, the impact would be significant. "This is going to be a $10 billion market segment involving many companies," predicts Peter Gruber, vice president and chief technology officer at Cargill Dow. Anything made from petroleum-based polymers, from carpeting to film, can be made from biochemicals.

Although non-hydropower renewables generate only about 5 percent of the nation's energy, proponents like to point out that oil was about 5 percent of the mix 100 years ago. "And 150 years ago you would have bet on wood," says NREL director and former shuttle commander Richard Truly.

Truly believes that as production costs continue to come down, the market for renewables is set to takeoff. Wind is now a $4 billion global industry that is doubling every few years. More than 1000MW of wind power will be installed in the U.S. in 2001, and the cost of generation has dropped 80 percent since 1980, to about 4 cents per kilowatt-hour. Meanwhile, solar power has grown into a $2 billion industry, and the cost of producing solar panels has been halved in the last five years.

Besides alternative sources of power, efficiency research has also produced some hefty benefits. Buildings account for 68 percent of U.S. electricity usage. Work at NREL's Center for Buildings and Thermal Systems helps architects design buildings that are 40 percent to 70 percent more efficient -- with little or no increase in design cost.

"The real issue for renewables is really the translation to commercial uses," says EPRI's Yeager. The Cheney plan includes several tax incentives for renewables, including credits for solar installation and wind production. But critics say more research is needed to bring down production costs, work through manufacturing scale-up logistics, and improve systems integration.

Despite glowing prose in the report for renewables, the proposed Bush budget includes significant research funding cutbacks. Many programs, particularly in solar, wind, and building efficiency, have seen budgets sliced 40 percent to 60 percent. Unless funding is restored during Congressional budget negotiations -- and there is considerable support for it on the Hill -- renewables and efficiency R&D budgets stand to lose $100 million.

If renewables are not made a priority, critics foresee a significant impact on the environment from increased reliance on oil, coal, and nuclear power. Fossil fuels -- even the cleanest "clean coal" -- generate carbon dioxide, a greenhouse gas linked to global warming. And while nuclear power may be smokestack-clean, there's still the matter of radioactive waste. According to an Energy Department study released in May, cost estimates for storing nuclear waste at a repository -- yet to be approved -- at Yucca Mountain in Nevada have shot up 26 percent since 1998. The clean up tab is now pegged at $57.5 billion through 2119.

President Bush has already signed several executive orders based on recommendations in the Cheney report. But he will need the approval of Congress to enact some of the more controversial policies, including opening up the Arctic National Wildlife Refuge to oil drilling and relaxing regulatory restrictions on new power plants and refineries. It promises to be a difficult battle, especially now that Republicans no longer hold a majority in the Senate.

Indeed, newly independent Senator James Jeffords of Vermont is among those leading the fight to restore funding for renewables research that was cut in the administration's budget. There is a national consensus for the goal of "dependable, affordable, and environmentally sound energy for the future." It is a matter of how best to balance those priorities. "If we are in an energy crisis," asks Solar Energy Industries Association Executive Director Glenn Hamer, "why would you do anything but accelerate the development of clean, abundant fuel sources?"

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