Wall Street Journal discussion of peak oil

The Wall Street Journal Online today features a
discussion I had about peak oil with Robert
Kaufmann
, professor of geography at Boston University. Here are some excerpts.


Robert Kaufmann:

You will never wake to the headline, “Today, the world ran out of oil.” Rather, global oil
production will rise, reach one or more “peaks,” and decline. Forecasts for the peak vary between
Thanksgiving, 2005 and 2050. Personally, I think global oil production will peak between 2015 and
2025 and be a greater challenge than the “looming crisis” in social security.

The peak marks a fundamental change in oil supply. Prior to the peak, production can increase
with little or no increase in oil prices…. After the peak, production declines, regardless of
price increases….

Declining oil supplies will be a watershed in economic history of the twenty-first century.
Because oil readily comes from the ground and is easily refined, oil generates a large energy
surplus that powers the non-energy sectors of the economy, such as the transportation networks that
support international trade, living patterns, and modern agriculture….With twenty years till the
peak, no fuel now being researched generates a greater surplus or can be used more efficiently than
oil.

James Hamilton:

I agree strongly with most of what Robert said…. The one aspect of Robert’s analysis to which I
might add a qualification is the suggestion that oil prices need not rise much until after we’re
past the peak. While that might be true from an engineering cost point of view, it ignores the
opportunity cost. As I
noted here
, it makes no sense to sell oil for $60 today if you could get $200 by holding that
barrel back in order to sell it a few years later. What I instead expect to see is for oil prices
to rise gradually as we get closer to the peak, and start rising pretty quickly once it’s less than
five or ten years out. Those price rises are in fact critical for making this economic
transition.

Robert Kaufmann:

I am less sanguine than James in the market’s ability to anticipate the peak and price oil
accordingly. Statistical studies of future markets indicate that price of oil in the “outer months
(six months or a year ahead)” is not a very good “predictor”….

Large fields can maintain a steady rate of production for many years and then decline steeply.
The markets’ ability to anticipate the timing and rate of decline is limited by the lack of
transparency. Without SEC rules that define proven oil reserves, OPEC’s estimates are mix of
geology and politics.

James Hamilton:

Again, that’s all very much true. I would perhaps express it not so much as “markets are not a
very good predictor” as “nobody’s a very good predictor.” It’s very hard to know for sure exactly
when the peak is coming, for precisely the reasons that Robert gives.

But any such statement invites us to look at the underlying policy question…. I don’t see
uncertainty about the world as something that would give us a good reason to prefer government
intervention over market solutions; if the market is uncertain, then so should you be about what
the best government policy would be.

In fact, the more uncertainty we have about these matters, the more I am inclined to turn to
markets to assimilate that information for us. After watching the href="http://www.knowledgeproblem.com/archives/001350.html">sausage- href="http://www.env-econ.net/2005/07/3_of_energy_bil.html">creation of the current energy bill
before Congress, I have relatively little faith that Washington is going to figure out for us
exactly which technologies are most promising. But the entrepreneur who brings a workable hybrid
vehicle to the market will make himself or herself quite rich. The lure of earning such profits
is, in my mind, a much more powerful and effective incentive than anything that the world’s leaders
are likely to dream up and try to lead us to on their own.

Robert Kaufmann:

Sound policy should establish an economic environment that increases the economic returns and
reduces the risk to long-term research and development on alternative energies. Specifically,
policy should impose a large energy tax that is phased in over a long period, perhaps twenty years.
… Phasing in an energy tax would send a signal to entrepreneurs that there will be a market for
alternative energies. The tax does not pick technologies– that will be left to the market, which
is smarter than any Democrat, Republican, or even myself!

Why is such an approach needed? If the market does not anticipate the peak, the price signals
needed to stimulate research and development may not arrive until after the peak. By then, it
will be too late to avoid major disruptions. Think about the changes needed to replace motor
gasoline. Society will have to retool the auto industry, alter every gas station, and retrain
every auto mechanic. These changes need to start before the peak. If they start after, they will
add to the disruptions caused by the peak.

James Hamilton:

I am also very sympathetic to the idea of using taxes in this way. Usually economists look for a
justification for such a policy in terms of externalities, some reason why the true cost to society
of using another barrel of oil today is greater than the production plus opportunity cost perceived
by the owners who sell the oil.

I think one such externality is related to the geographic location of the remaining world’s
reserves. As the U.S. and North Sea reserves get depleted, the world is increasingly reliant on
places like Saudi Arabia, Iran, and Venezuela, whose governments are actively using the oil
revenues they receive from us in ways that are very fundamentally contrary to the interests of most
OECD nations….

There also is a classic economic externality that may lead to underfunding of basic research.
For something like fusion, it is clearly unreasonable to expect the private market to invest
adequate resources, because the benefits to society from a successful program exceed the private
returns to individual investors. On the other hand, as you get into more specific and near-term
technologies, the justification for government involvement becomes less clear.

Robert Kaufmann:

Government policy aimed at the next energy transition must strive for efficiency, which is a good
thing, but too much of a good thing is not good. Efficiency cannot and should not be the sole
criterion. One can think of important and successful policies that were not guided only by
principles of economic efficiency.

The totality of impacts may force policy makers to rely heavily on the precautionary principle,
which compares the costs of being correct against those of being incorrect. We know that oil
production will peak within our lifetime, we think market prices may not anticipate this peak, and
we know that not having alternatives in place at the time of the peak will have tremendous economic
and social consequences. So, if society does too much now, as opposed to later, there will be some
loss of efficiency. But if society does too little now, as opposed to later, the effects could be
disastrous. Under these conditions, doing too little now in the name of efficiency will appear in
hindsight as rearranging deck chairs on the Titanic.

James Hamilton:

To me, “economic inefficiency” refers not to paying a little more at the gas pump, but rather to
taking valuable resources and throwing them into the ocean to no one’s benefit. We only have so
much in the way of resources to cope with these great challenges– only so much capital to invest,
only so many geologists to figure out how to get at the oil that remains, only so many engineers to
develop alternatives. It is precisely because I agree with Robert about the importance of this
transition that I think it’s critical that we put all our resources to their best use.

And I honestly believe that the best way to ensure that happens is to count primarily on the
same system that has generated the fantastic improvements in global living standards over the last
few centuries, namely, individuals choosing to direct the resources they personally control to
those activities that yield the highest personal reward. Yes, the risks are great here, but so are
the private rewards to those who best figure out how to navigate our way through them.

In so saying, let me be clear that I distance myself from those who might claim that there is
nothing to worry about and markets will solve everything. I think there is plenty to worry about,
and markets may or may not solve the problems. But what I am saying is that I see private
incentives as our best hope.

There’s quite a bit more that each of us had to say. You can check out the complete discussion
at href="http://online.wsj.com/public/resources/documents/econoblog08032005.htm">Wall Street Journal Online. You’re also welcome to express your thoughts and comments on
these issues both at the href="http://discussions.wsj.com/n/mb/message.asp?webtag=wsjvoices&msg=3591.1&ctx=0 ">Wall Street
Journal site and right here.

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36 thoughts on “Wall Street Journal discussion of peak oil

  1. Joseph Somsel

    While I agree wholeheartedly with Prof. Hamilton’s approach here, I would caution that in an economic system facing declining EROEI (and therefore declining wealth), the overall profits available in the system will be less than in a growing system.
    Therefore the incentives to transform the energy system will take a slice of a declining pie of wealth.
    In addition, the price curve for energy is a hockey stick – once demand exceeds supply, the price increases rapidly since demand is relatively inelastic and substitutes for petroleum in transport are few. That would argue that the point of peak oil will soon see a sharp peak. Demand destruction will at first be first derivative – a lack of growth in new demand – ie China and India stymied.
    Also, natural gas prices will rapidly shot up as gas BTUs are underpriced relative to oil BTUs so non-transport oil demand will shift as rapidly as possible to gas.

  2. Hal

    It strikes me as absurd that Kaufmann proposes a government policy (phasing in an energy tax over 20 years) that is perfectly tuned to his own personal estimate of when the peak will occur (2015 to 2025). If available information about the peak is so poor (due to lack of transparency, etc; all good points) that markets can’t be expected to anticipate it, how can he support a government policy which could be either useless or counterproductive if his personal guess (which seems no better founded than anyone else’s) is wrong?
    People always do this, they say we need government because markets can’t do the job, then they just take their own personal prejudices and imagine that the government will implement policies on that basis.
    Well, you said it all a lot more clearly (and patiently!) than I would have.

  3. Marty Sereno

    JDH says: “For something like fusion, it is clearly unreasonable to expect the private market to invest adequate resources, because the benefits to society from a successful program exceed the private returns to individual investors.”

    The problem with some alternatives to fossil fuels is not just that the “lure of earning profits” is not currently big enough and therefore that these alternatives need to be subsidized instead by taxpayers. Physics itself can get in the way. The Maxwell equations are not negotiable at any price or subsidy. Furthermore, even seemingly high tech solutions like fusion are often critically dependent on non-renewable, fossil resources.

    For example, current approaches to fusion (ITER, JET) are based on magnetically-confined plasmas. The enormous confinement fields needed are generated by superconducting magnets that are similar to those found in high-field MRI machines, but even more powerful. All high-field superconducting magnets contain metal wires bathed in large amounts of liquid helium, the only substance that won’t freeze at the temperatures required for low temperature superconductivity to appear. Helium is only found in useful concentrations in the gases emitted by relatively a small number of oil and natural gas wells (many in Texas). Helium is on a similar depletion curve to oil and gas. After helium boils out of the huge refrigerated thermos bottles around a superconducting magnet, it escapes into the atmosphere and then diffuses into space where it is lost forever. Helium is an element and cannot be synthesized (the amount generated by a hypothetical working fusion reactor is negligible). After 20 years of high temperature superconductors, no one has come up with one that is both strong enough and capable of carrying enough current. Such a thing may not exist.

    At the current rate of helium depletion, in a few decades, when a pratical energy-generating fusion demo is supposed to finally work, there may be little helium left. The quip that “fusion is the energy source of the future — and it always will be” may turn out not to be a joke.

  4. Walt

    Drs. Hamilton and Kauffman made excellent points in their peak oil discussion. Alternatives to oil (as oil production ramps down after the peak) will take years and decades, in some cases, to bring on line. For instance, it takes more than 5 years to bring a new nuclear facility into production and solar cells may not be economically competitive for more than 10 years. There is no better time than today to start the R&D processes in motion & government “encouragement” is the best way to get that started.
    When you have strong reason to believe that a major cliff is found in the road 10-20 years ahead of you and it takes 10 years to come to a complete stop, you don’t wait for 19.5 years to begin breaking. You don’t even wait 9.5 years. You begin breaking (or altering course) now. I’m totally confounded that this type of thinking hasn’t made it into the so called energy bill.
    In 10-20 years, at the rate we’re going, we’ll be buying our dwindling oil supplies from overseas (because that’s where the oil is), our solar cells from overseas (guess where the largest PV production & research are) & we’ll wonder why we still have a terrible trading deficit.

  5. Joseph Somsel

    Mr. Sereno makes a good point – physics is offering us no energy bonanzas ripe for the picking. Most “alternative energy” schemes suffer from poor physics which, in my opinion, make them a waste of money and resources.
    Take solar power. While for hot water, solar rooftop panels are a good match, quality-wise, we should hold out little hope on improving on evolution’s multi-billion year experiment on capturing solar isolation through photosynthesis. According to Howard Odom, energy ecologist, ecologies seldom capture over 2 or 3% of incoming energy as excess biomass. Who are we to expect more?
    Hal points out a disconcerting tendancy of the Peak Oil crowd to embellish their doomsday scenarios for political effect. An undercurrent in the thoughts of many advocates is the need for a transfer of power to an elite who knows better than we commoners. No longer are a free people trading in free markets adequate – command and control schemes MUST be imposed for your own good. (Shades of Jimmy Carter and 55 mph, price controls, etc…)
    Prophets of “impending doom” have a history of seeking a change in power relationships.
    This is not to say that Peak Oil is a myth, just a word to the wise on checking for back stories.

  6. M1EK

    “According to Howard Odom, energy ecologist, ecologies seldom capture over 2 or 3% of incoming energy as excess biomass. Who are we to expect more?”
    That’s kind of ridiculous – we improve on organic systems in all sorts of ways. Photosynthesis is incredibly efficient for the small amount of land it covers, and given the conditions under which it must operate, but we can and already do much better than 2-3% energy conversion with solar cells. Heck, I think the 20-dollar novelty AA battery charger I have does better than that, and it’s the lowest-end photovoltaics imaginable.
    Consider all the land which gets really great amounts of sunlight but which is not suitable for large swaths of greenery due to weather or soil conditions (lack of rainfall; desert/rock; etc.)
    This is not to say that the energy economy (NOT the dollar economy) of a particular mode must be considered – but solar already is an energy positive even with the low-efficiency stuff we have in mass production. If you’re going to throw stones, throw it at the people who think hydrogen is effectively a drop-in replacement for gasoline.

  7. Joseph Somsel

    M1EK,
    I was a bit aghast at Odum’s statement too when I first heard it. But years of reflection shows that its basic premise holds. You have to consider ALL the energy inputs and functions including replication (ie reproduction), repair, and competition. In other words, overhead. For example, how much fire wood can one harvest from a given acrage a year as a percentage of incoming solar flux? No human planting, pruning, pest-control, or fertilzation allowed!
    It’s one of reasons I’m highly skeptical about photovoltaics – along with photon physics.
    Check out one of his books – the guy was (is?) a great thinker and one that deserves further study -
    http://www.amazon.com/exec/obidos/tg/detail/-/007047527X/qid=1123117509/sr=1-18/ref=sr_1_18/104-3493986-3215120?v=glance&s=books

  8. John

    I suspect the political risk in oil is greater than the extraction risk.
    ie the price mechanism can and will work well to the problem of scarcity BUT not against the sudden supply disruptions that are likely.
    There is a very good correlation between civil unrest and per cent. of the population under 25. Saudi Arabia, Iran, Iraq and Venezuala all are very highly scoring on that metric.
    The reason we need to crack on now on conservation (a la Japan, the only country to *lower* absolute oil consumption since the 1970s) is because politically-generated supply disruption is almost inevitable NOT because of ‘Peak Oil’.
    Peak Oil is out there but a great uncertainty. Attacks on the supply line of western civilisation are almost certain as the conflicts between the rent-extracting plutocracies of the oil states and their fast growing underemployed populations are exacerbated.
    The first line of defence will be natural gas: you can even use it as a transport fuel. Unfortunately a lot of it comes from places (almost) as unstable. But Qatar and Russia are better bets than Saudi Arabia.
    Regulation, like CAFE, is inherently inefficient but more politically acceptable than higher fuel taxes (which don’t work that well anyway: gasoline is almost entirely price inelastic in the long run). Similarly in situations like energy efficiency of homes or buildings or cities, where there is a time horizon problem (a builder wants to lower the headline price of a home, and a homeowner does *not* do a 30 year DCF of utility bills) then again government regulation has a role.
    Energy consumption in an economy is like turning a supertanker, it takes a *long* time to make structural improvements.

  9. John

    Add to that. In the UK we pay c. $6/ gal for gasoline. But we burn plenty of it, in a much smaller country with a mild climate, about 60% as much per head as the US.
    So strip out geographic factors (say they account for half of all differences in use) and a 3 times higher gasoline price only reduces consumption by 20%.
    Of course GDP/ head here is only 70% or so of US level. So a UK with a US GDP/capita would probably burn 80% of the oil/head that the US does.

  10. Hal

    One point I made on the Macroblog is that if the point of this 20 year fuel tax is to assure alt-energy entrepreneurs that there will be a market for their products over 20 years, it won’t work. Government cannot credibly commit to any policy over such a long period. That’s one reason companies have trouble planning past a 5 year horizon or so, because the regulatory regime can become unrecognizable in that time frame. If you really want a policy to promote alternative energy, you need something with more short-term impact, like tax credits for present-day R&D in those areas.
    And I’m not sure that the externalities you list offer good support for Kaufmann’s proposed 20 year energy tax. Nuclear fusion???? That’s in a whole other world that would not be affected in the slightest by such a tax. Worries about geopolitical instability are valid, but that issue is so complex and tied into such a myriad of policy questions that a blunt instrument like Kaufmann’s tax hardly seems like the most appropriate or effective response.
    My reading of the debate was that you really didn’t think much of this idea but were being polite and gently emphasizing the need to rely on market mechanisms. Macroblog seemed to think you were pretty well on board with the 20 year tax. It might be helpful if you would clarify your position on this particular tax proposal, a phased in 20 year energy tax.

  11. M1EK

    Joseph,
    Sorry, I’m not buying it. The internet is replete with analyses of the energy budget of photovoltaics, and nobody is anywhere nearly as pessimistic as this one guy you like.
    (one here: http://en.wikipedia.org/wiki/Photovoltaic#Solar_cells_and_energy_payback)
    Also, you might want to address the point about biomass comparisons – there are large swaths of this country where solar-to-biomass-energy conversion efficiency is effectively zero, while photovoltaic potential is very high.

  12. JDH

    Hal, I think you make an excellent point that the government can not make a credible commitment to do something 20 years from now, and that promising to do so, given the uncertainty about the government keeping its commitments, can add even more uncertainty.
    The sort of tax that I would be more in favor of would be one that might place an effective floor under the price, say $60 a barrel. For example, we could tax the difference between the current import price and $60 any time that imports fall below $60 in price.
    Or, if that sounds too complicated to administer, maybe something like this– if oil prices fall back to $50 a barrel, at that point advocate a $10/barrel tax on imports, where changing the $10 tax after it’s imposed would require a new act of Congress.
    There are a number of important other details that need to be worked out for such a tax, namely which energy sources we want to discourage (and therefore should tax) and which we want to encourage. I admit that, not seeing completely clearly at this point how to resolve these details, I am not specifically endorsing a particular tax plan. But I’m willing to consider any ideas along these lines very carefully and openly.
    As for fusion, I was thinking of that as an example where direct government assistance in the R&D effort might be justified.

  13. RayJ

    JDH,
    You say “I don’t see uncertainty about the world as something that would give us a good reason to prefer government intervention over market solutions; if the market is uncertain, then so should you be about what the best government policy would be”.
    We should not underestimate the ability goverment policies to impact the future of the economy for better or for worse. Visonary govvernments/leaders win over those who do not get “the vision thing”. In the face of uncertainty, individuals, companies and indeed, goverments should take a risk management approach. A prudent approach will be to assign some probability to the likelihood of oil peaking in the next 5-20 years and initiate some low cost steps to mitigate its effect such as improved CAFE standards, modest tax increases to encourage conservation, etc. as recommended in the Hirsch report. Such steps are notoriously absent from the recent Energy Bill. Tax cuts for oil companies when Exxon alone had a Q2 profit of over $7B is a triumph of lobbying over reason.
    One of the most distressing aspects of the current administration’s policy-making approach is their denigration of science (e.g. on issues such as global warming, health issues, etc.) in favor of ideology when science provides unpalatable answers. As such it is unlikely that this adminstration will acknowledge Peak Oil even in the face of mounting evidence. We now have to wait until a crisis hits or for a future government with a better vision.

  14. Joseph Somsel

    M1EK,
    Determining net energy payback or EROEI for any human endevour is a difficult task. I remember trying to use Input/Output tables for the task and becoming quite frustrated.
    Your Wikipedia link is interesting but, as with all Wikipedia articles, not authoritative. I would offer another Wikipedia article linked from yours that claims a nuclear power plant has a 0.7 MONTH energy payback, 1.25% of PV cells, ie nukes are 80 times more productive.
    http://en.wikipedia.org/wiki/Net_energy_gain
    Using plain old dollars as a metric, solar is 10 times as expensive with little technical prospect of the order of magnitude decrease in cost. Even with the hoped for manufacturing scale-up, I just don’t see it based on my professional power engineering experience.
    Back to ecology, I would point out as an analog that even an oil-fueled human ecology (US capitalism) is hard pressed to reliably and repeatedly yield 3% excess energy (ie macroeconomic growth rate.) Please don’t confuse biomass yield with net ecological yield.
    All that said, I would stop no one from buying and installing photovoltaic systems WITH THEIR OWN MONEY. Maybe there is potential there; I’d just rather place MY bets elsewhere.
    Again, I think Odum is a very worthwhile read for anyone interested in energy systems.

  15. gillies

    “As such it is unlikely that this adminstration will acknowledge Peak Oil even in the face of mounting evidence”
    maybe not the administration – but dick cheney acknowledged it in 1999. ( google for ‘national energy policy development group.’ ) that was before the current administration took office. he was only an oil man, then.

  16. M1EK

    Yes, the net energy payback of nuclear is quite impressive, if you can manage to get a plant built. Of course, they aren’t factoring in security, waste disposal, etc.
    From the wikipedia page, you can get to a dozen or so authoritative studies which show the energy payback of current PV technology to be about 2 years. And that’s with marketplace technology; not the stuff in the labs, some of which is far more efficient.
    That’s far from what you originally implied, and I think you owe the readers a retraction.

  17. Joseph Somsel

    M1EK,
    I don’t think you see the distinction between a calculation of payback time and my original reference to an ecologist making a point about the limits of systems with a solar energy source.
    Likewise, Wikipedia, whatever its utility, is not an authoritative source. As we both noted, energy payback calcs are slippery things, with no agreed-to methodology. I noted as much when I expressed skepticism about the nuclear payback period – your criticisms about it are well-taken. I also gave an example of the difficulties I’ve seen in my own attempts using I/O tables.
    If current state-of-the-art PV installations are producing power at ten times the market price, they must be highly subsidized by energy flows in the society that produced them. As a thought experiment, consider a society that was powered ONLY with PV. The power to produce PV would then cost ten times as much, leaving little or no resources to re-invest in PV. Also, is PV competitive with biomass? No.
    No retraction offered, but I’m glad to continue our discussion to further BOTH our understanding of this ambiguous issue.
    Email me at [email protected].
    Joe

  18. Dan

    If a solar cell can “pay for itself” in 2 years, then it should be able to generate enough money to totally return all capital in 4 years, or return -twice- all the capital in 6 years.
    If you had an investment that was so sure of doubling in 6 years, people would be lining up to invest in it.

  19. Walt

    Solar cells payback the energy used to produce the cells in roughly 2 years (http://www.nrel.gov/ncpv/energy_payback.html). For a “grid tie” system (where the power grid becomes your “battery”), the solar cells (PV modules) are roughly 1/3 of the total cost of the entire system (http://www.solarbuzz.com). The economics of a system vary depending on what the “net metering” rules of the local utility are (do they buy your surplus power back at retail, or wholesale), however I’ve seen articles that say that grid-tie systems compete very well with retail electricity prices in CA where the tax rebates help bring down the purchase & install cost of a system (not 10x KW/hr costs). There are also articles out there where hobbiests installed their own systems, outside of california, and were able to have the monthly loan costs of the new system match their previous monthly energy bills.
    Solar is not 10x out of wack. Most of the articles say that the cost of the cells need to come down by a factor of 3 or so to be kw/hr cost competitive with retail energy prices. The cost curves on solarbuzz show that prices haven’t changed much in the past 5 years, but they dropped dramatically in the years before that. There are new upcoming technologies that are expected to drop prices significantly and it has also been observed that there are economies of scale that drive prices downward as volumes increase. To some degree the same things can be said about the other components of a PV installation– e.g., the power inverters.
    Home power magazine is a good source for the practical aspects of home solar.

  20. odograph

    I tend to think we should have started the 20-year tax phase-in 20 years ago … but hindsight has its benefits. Looking back, I can see us lulled by low prices, and now entering a period of high fuel prices with a mis-matched private automobile fleet (in my opinion, nothing more).
    Geez, if we’d even avoided the “SUV loophole” we’d be 5-10 MPG higher in fleet average.
    So what happens next? If the market is only going to (seriously) respond to future-peaks 10-15 years from now, we don’t have problem. The folks who “learned” to trust cheap gas in the 80′s and 90′s will be right, and no worries.
    On the other hand, if I’m right and today’s prices are “trend” and not “volitility” it may be a rougher ride.

  21. Joseph Somsel

    Walt,
    You asserted that “Solar is not 10x out of wack.”
    I’ve done some close analysis of a recent 1.2 MWe PV system built for California State University – Hayward. This was a fifth of a kind installation so should be state-of-the-art and represents a all-in system connected to the campus power grid.
    The university first presented their plant as you did, comparing the retail price against their wholesale cost but AFTER a hidden subsidy from the other ratepayers on the grid. That made it look like a wash for their investment. However SOMEBODY pays – in this case, the ratepayers, the taxpayers, or the students through tuition.
    A discussion of my analysis and a link for a spreadsheet is here:
    http://www.energypulse.net/centers/article/article_display.cfm?a_id=623
    Using real world numbers, it is indeed 10X out-of-whack. Note that this is busbar costs, not just cell costs. And the analysis excludes land rents in the San Francisco Bay Area of an estimated $4.4 million and future O&M costs.
    One could rebut that this was government work but I see no indication that the costs are out of line with a for-profit installation.
    I did some consulting during the Cal energy crisis (the first one) for the chairman of a leading solar cell company. He wanted to know if he could build a solar power plant and sell the power for 25 cent a kW-hr. I told him that I thought we could do that, given the political climate. His president refused to commit to being able to build such a plant, even in the Mohave Desert!
    For a home hobbyist using net metering, his installation pushes the costs of reliability of the grid and distribution costs on to other rate payers. That’s a distorted economic analysis, distorted by government policy.
    One thing that gripes me is to see all the McMansions here in Silicon Valley with PV panels on their roofs, knowing that their status symbols are being paid for by the apartment dwellers who clean their houses and mow their lawns (and me, of course.)

  22. Walt

    Joseph,
    Great job on a well written article.
    I would certainly be willing to agree that as an “alternative” energy source, nuclear is closer than PV, in the cost competitive sense. Looking at the cost figures in the referenced article, however, I would say that it doesn’t *appear* that Cal State Hayward made a bad decision. They offset $200K of their annual electrical bill for $3.55M out of their pocket– equivalent to getting 5.6% on their money. Granted, the California Public Utilities Commission paid an equal amount (which I assume comes out of taxpayers’ pockets). But as a private decision maker, that only puts it 2x out of wack.
    I hear your argument about net-metering customers getting a free ride, in terms of grid and distribution costs & that would certainly be the case if nearly everyone became a net-metering customer– unlikely. On the other hand, distributed power generation has advantages to the power grid as well, especially when the power is generated during peak demand periods as it is with solar. I won’t belabor the issue, it’s been discussed elsewhere many times, but I would point out that it’s not all black and white.
    I would argue though, also from an engineer’s viewpoint, that we shouldn’t as a nation close the door on solar, simply because nuclear is nearer at hand (any more than we should close the door on nuclear because hydrocarbons are nearer at hand).
    If we woke up tomorrow and discovered that PV systems were suddenly able to produce power at 5 cents/KWH, our nation’s dependence on oil producers would greatly reduced. Perhaps you believe that such a thing could never happen. I’m an optimist, however; I think it will happen– it will just take some time, and effort.

  23. Joseph Somsel

    Walt,
    Thanks for the compliment.
    I will agree that PV can displace fuel, ie is worth an energy payment. It might have some capacity value too in that insolation curve overlaps peak load curves although it will seldom shave a peak in most, if not all, real world grids. (Summer peaks are usually 6 or 7 pm but do differ due to industrial loads and local weather patterns.) Likewise, a distributed source might help defer distribution system capital expansion costs.
    But, sorry, in today’s market, no way that PV is worth 55 cents a kW-hr. At 5 cents, it might be useful if it displaced expensive gas or oil.
    Now, tell me how you’re going to achieve an order of magnitude reduction in cost? EPRI did a study a few years back that concluded that PV would not be worthwhile if the solar CELLS were FREE – the kicker is the support gear and power conversion. That might be dated but it can’t be too far from today’s truth.
    OK, PV guys are encouraged to keep at it – just I think there are better places to put public (ie MY) R&D moneys. Use VC money, just not from MY pension fund.
    Granted, from the CSU-Hayward perspective, it wasn’t too bad an investment. But as a matter of public policy, it was almost CRIMINAL. (Do I sound indignant? Good.) What really burns me is the dishonesty of the policy and the press releases for the project. As I said, SOMEBODY pays – there is no free lunch.
    Distributed generation sounds like a great idea – I know, I invested 6 months on a startup trying to get some power out, quick, back in 2001. The reality is that the only fuel allowed by air quality regulations is natural gas. When you compare the heat rate of a distributed generator vs a 600 MWe combined cycle gas turbine plant, you find you’re wasting gas and creating MORE air pollution and GHG with the former.
    Net metering is one of those government policies that, if it really worked (everyone did it), it wouldn’t work. Like using bridge tolls to subsidize public transit. With a small penetration, the bulk of customers subsidizes the few. With total penetration, it would just cause rates increase elsewhere and would need to net out (less a handling fee, of course.)
    My next house will have SOLAR HOT WATER and maybe some passive solar architecture. These can be good deals and are about as supportive of POLITICALLY CORRECT solar power as I can go. I might also have a ground source heat pump – the best way to heat and cool using nuclear power.
    As to Mr. Odograph’s point about the SUV “loophole”, I would rebut that CAFE standards drove American families to vehicles that offered the room needed. Remember a ’69 Chevy Impala? Room for 6 corn-feed farm boys. Without the draconian regulation of passenger car milage, a modern passenger car could offer better milage than a comparable SUV (little need for 4 wheel drive and its increased friction and weight) while still meeting family needs. This is not to say that many SUVs are not just stupid fashion accessories. Squeeze one place and we squirt out someplace else.
    Joe

  24. Walt

    Joseph,
    I’m still puzzled by one point you make:
    >>But, sorry, in today’s market, no way that PV is worth 55 cents a kW-hr. At 5 cents, it might be useful if it displaced expensive gas or oil.<<
    http://www.solarbuzz.com, which seems to be pretty reliable in its numbers, shows for instance that PV currently nets out to 37.30 cents/kWh for residential, and 20.93 cents/kWh for industrial (they assume 5% financing costs). Their numbers include full installed system costs, don’t include rebates & they also make the point that the residential numbers would drop closer to the industrial numbers if there was a large scale push towards residential solar.
    So assume 20-38 cents per kWh currently. My electricity costs me 8.6 cents/kWh. Thus by my calculations solar is currently 2.3 to 4.4 times more expensive than what the utility charges, at the residence.
    Installed system prices halved (roughly) between 1993 & 1994 (which is startup stuff, so I don’t really count that) but they halved again from 1994-1998 and halved again from 1998 until now. So, with increased production volume and modest technology advances, it’s not hard to imagine another 2-5x price improvement. PVs are still at the early part of their ‘S-curve’. Just look what happened to prices for fax machines, dvd players, cell phones, etc. once price & demand finally reached their sweet spots.
    I agree that net metering at retail rates wouldn’t work if everyone did it. Perhaps by the time PV is at 10% of the residences and net metering begins to break down, the costs will drop further, to the point where either net metering is not required or systems with batteries become cost effective.

    Back to the broader topic with a question:
    I’ve seen a couple of references to bumping into a limited supply of uranium, if nuclear plants were to become much more common in the US. Is this really an issue?

  25. Joseph Somsel

    Walt,
    Don’t know about your other source of numbers, but CSU Hayward cost what it costs – and then some. Remember, there’s lots more to a PV installation than just cell device costs – racks, supports, cable, breakers, inverters, relays, etc. None of the latter stuff is going to half in price anytime soon. Maybe they should change their name to “Solar RahRah”.
    As to uranium, the best ore bodies in the US have been exploited to make bombs. Right now, 10% of US electricity is fueled by Russian uranium warheads and we have several years more on contract. Yet, 100 tonnes of plutonium fuels $55 billion dollars of electricity at wholesale. Between the US and Russia, we’ve maybe 400 tonnes to burn.
    If we reprocessed what is planned for burial at Yucca Mountain, we’d have 10 times the electricity than if we burned the Strategic Petroleum Reserve for electricity. What would be left could be burned in a couple of “actinide burners” so that the final ashes have 100th of the toxicity and a tenth of the half life.
    For longer term, Australia is the Saudi Arabia of Uranium. They banned exploration several years ago in fear of knocking the price of yellowcake down any further. Bring a new mine or two on line and the price will drop.
    If we run out of ore, we can extract uranium from seawater.
    If that looks unappealing, we can build thorium breeders to make U-233 as an alternate to U-235 or Pu-239. Thorium is 10X more plentiful than uranium in the earth’s crust (I’ve heard.) Thorium breeders, however, ain’t easy, but give us 50 years.
    No, fuel for nuclear power plants will not be a problem with proper planning.

  26. Deinonychus antirrhopus

    James D. Hamilton on Peak Oil

    James Hamilton has a very good comment about peak oil, I agree strongly with most of what Robert said…. The one aspect of Robert’s analysis to which I might add a qualification is the suggestion that oil prices need not rise much until after we’re pa…

  27. Walt

    Joseph,
    Thanks for all the great information– I learned something– several somethings, in fact!
    Walt C.

  28. Joseph Somsel

    Boy! We sure digressed from the original posting by Professor Hamilton! Sorry to lead all astray! Still, a good exchange. Thanks!

  29. M1EK

    “but AFTER a hidden subsidy from the other ratepayers on the grid”
    The thing you keep forgetting when you bring this up is that there’s a reason the utility would logically subsidize net metering — these solar systems generate their best power at the time when California pays the most for imported spot generation. Thus, comparing against California’s average rate is not an honest way to do this.
    (A more rational solution would be to vary the price of power by the time of day as a proxy for demand, but of course we don’t have the guts to do that yet).

  30. Joseph Somsel

    M1EK,
    Sorry, I didn’t forget. My discussion of this factor is buried in my longer posts.
    Please compare today’s (Monday 8/8/05) projected load profile for California here:
    http://www.caiso.com/outlook/outlook.html
    against a usual solar insolation curve or expected PV output curve here:
    http://www.solarexpert.com/grid-tie/system-performance-factors.html
    Note that they are not co-incident. PV is going to peak around solar noon and is off-line by 2 or 3 PM while load peaks today around 4 pm, about when PV is almost exhausted. Other climates and time of the year will differ, of course but these two are generally reflective of most of the year. Winter peaking utilities in the North are of course VERY different.
    I’m not trying to rain on anyone’s parade, just a responsible adult with responsibilities. PV is at a point where we need fact, not hopes. Again, I’d put my money elsewhere.
    Time of day metering does look like the wave of the future but expect residential pushback. Most people will consider it a rip-off unless their bill decreases with current usage patterns and will be considered an unnecessary complication to their lives. I wouldn’t expect much peak savings as the pennies someone saves is seldom adequate incentive – but that’s my guess looking at the housewives I know.

  31. odograph

    Joe – just noticed your “SUV loophole” comment above. Consider this story of “unintended consequences” for the SUV laws:
    “A friend of my wife’s recently replaced her Ford Explorer with a new Volvo SUV. She really wanted a small car, like a wagon, but her husband wanted to take advantage of the SUV tax break for his personal business, so they got the Volvo. Funny thing is, he doesnt drive the new Volvo SUV for business. She drives it all over town running errands and hanging out with her girlfriends. Swell.” – (a comment posted on my blog)
    … I know I lump the SUV “loopholes” together (mpg and “business” use) but together they are a mess.

  32. Joseph Somsel

    Odograph,
    Yep, that’s a fair example of a tax loophole causing unintended and undesired behavior!
    I’m with you on this one but it does fit correctly with the concepts and structure of our Tax Code. The problem here is the difficulty in enforcing “business use” by the IRS.
    Joe

  33. M1EK

    “PV is going to peak around solar noon and is off-line by 2 or 3 PM while load peaks today around 4 pm,”
    Around these parts (Texas), properly sited solar panels can get nearly full-on sunlight well into the late afternoon. Even with your figures, however, it’s still close enough to ‘peak’ that you’re providing a chunk of energy back to the electric utility which would be towards the expensive end of its bucket. Thus, net metering is actually still a benefit to most of these strapped utilities (since their fixed retail rates are usually a lot less than the peak charge THEY pay for spot power).
    And if you think solar’s being subsidized unnaturally, your pet nuclear plants are the mountain next to the molehill. GMAFB.

  34. odograph

    They didn’t have to go out and check up on “business use” … if they’d just reserved the “truck” designation for the most spartan fleet vehicles.
    That it actually applied to Porsches shows how degenerate our values have become:
    “Forty-one domestic and 15 foreign SUVs qualify for this tax break. The Porsche Cayenne, a notably businesslike vehicle, is among them. As a consequence, while the depreciation write-off for any passenger car used for business is limited to only $2,960 in 2005, down from $10,610 in 2004, those claiming 100 percent business use of these SUVs could deduct 100 percent of the $89,665 price of the Porsche Cayenne Turbo during 2003 and until late October 2004.”
    http://www.chron.com/cs/CDA/ssistory.mpl/business/mym/3137818

  35. Nancy Peters

    Does the market and pursuit of profit and growth take us where we want to go?
    I am new to Economics, and I love it, but reading this gave me pause for thought about some of its guiding principles in terms of that ‘strange combination of rationality and madness’….
    ‘Monsanto has something important in common with both Captain Ahab (from Herman Melvilles 1851 novel, Moby-Dick) and the Nazi regime. Each represents a strange combination of rationality and madness. As Ive written elsewhere, Melvilles captain has an utterly irrational obsession with the White Whale, but his suicidal pursuit of that creature draws upon years of technical expertise and deliberate planning. He and his men on the ship Pequod were supposed to be hunting as many sperm whales as possible, in order to harvest oil but the whales, and therefore the oil, were being depleted at a rate far faster than their natural replenishment. And just when the commercial rationale for hunting the whales became untenable, along comes Ahab the damaged genius on his hunt for Moby-Dick, this time for revenge, not oil. Ring a bell?
    Like Ahab, the Nazis were bent on death in a way that failed to distinguish between their own murderous ambitions and the cultic yearning for suicide that helped to draw them into an unwinnable war one which the Nazis lost because they failed to secure Russian oil reserves in Baku. Scarce resources were still being diverted to the strategically useless death camps long after it became unmistakably clear, even to the stupidest Nazis on the team, that the war would end in defeat. The avowed motive for Hitlers genocidal expansion into the territory of the Slavs and others was Lebensraum room for living, not totally different from the American Manifest Destiny with its smallpox blankets. But the big difference was the Nazis cool efficiency the bizarre prominence of rational calculation in the midst of the most irrational depravity. What Himmler had, that Custer did not, was the combination of bureaucracy, technology, and an ideology of transgressive, taboo-breaking,hubristic scientism . Theres that tolling bell, again.
    Monsanto is pursuing a rational policy of the maximization of profit. Like all bureaucracies, its internal organization works by conducting ethical responsibility away from individual actors. You can sell your own mother to perdition, provided your uniform (with a pay-stub in the pocket) shows that the person responsible is not really you: its the corporate person. Left to work its designs, Monsanto will extend and maintain its control over the worlds food supply just at the moment when grain stocks and yields are falling farther short of demand, and Peak Oil and Gas begin to close in on the kitchen table. Large scale famine would be difficult to avoid. How can they permit themselves this behavior? By narrowing their focus on the wrong object (profit), and keeping it there no matter what

  36. The Oil Drum

    Oil depletions are not created equal

    The comments, at Ianqui’s post re Senator Schumer, led me to Econbrowser’s discussion in the Wall Street Journal Online. In it he makes the comment…

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