Peak Energy, Coal Reserves, and Climate Change

The blog The Oil Drum has posted a writing by Dave Rutledge, the Chair for the Division of Engineering and Applied Science at Caltech. In this post and in a YouTube video Rutledge makes a few basic claims or revelations, that if correct, should profoundly affect how we (the United States and the World) treat the issues of energy supply and climate change. Also see a webpage posted by Dave Rutledge where you can download his power point presentation and Excel files.

The three basic points he makes are:

1. Coal reserve estimates are inaccurate, outdated (derived and unchanged significantly since 1974), and in need of revision quite a bit downward. He references a National Academies report that discusses the need for new and accurate accounts of coal reserves and resources.

2. Hydrocarbon (oil and natural gas) and coal resources are well below those that are use by the IPCC climate models to estimate future global warming. The end result is that there is not enough mineable fossil fuels to cause the warming and sea level rises that are being predicted. For example, in some IPCC models, oil production is assumed larger in 2100 than today. Is this possible? Does this mean the use of tar sands and oil shale, or is using those resources even not enough? Rutledge's discussion of this concept makes it seem unlikely that new sources will take up the slack.

3. For climate change reasons, or fossil fuel depletion reasons, work on implementation and research and development into renewable energy systems is an imperative. I'll add not energy efficiency per se, but energy reductions that still enable us, as humans, to continue to be healthy and interact culturally as needed to have good lifestyles.

I will not further discuss this topic as one should refer to the links within this post for further information from the Dave Rutledge himself.

New Energy Bill

The US Congress passed an energy bill yesterday and Bush signed it into law. It is both a step backward and forward for energy policy. See this CS Monitor article for a synopsis.

Creating a higher CAFE standard to get to 35 mpg by 2020 is certainly a good step forward, and it has been a long time coming. The biofuels mandate is a marginally good idea. The emphasis on corn ethanol is not the greatest due to the environmentally unfriendly aspects of using a tremendous amount of irrigated water (200-2,500 gallons of water for every gallon of ethanol) consumed and fertilizer runoff into the Gulf of Mexico. To most engineers who study the problem, I would say they believe biofuels must be non-irrigated and farmed in a way that sustains the nitrogen cycle, and not only the carbon cycle we hear so much about.

The removal of the renewable energy production tax credits for wind, solar, etc. is disappointing, but it has lapsed and been restarted three times already in its brief history. What we really need is a PTC scheme that sets it at a medium to high level (note: it was 1.9 cents/kWh) and has it steadily decrease in a set manner which cannot be changed. This gives businesses the ability to know the future of this kind of incentive such that they can invest in infrastructure that must be amortized over several decades.

The CS monitor article mentioned above does point out one thing that I think is good: energy policy might now be, as it should, a perennial subject. That doesn't mean that energy policies should change every year, it just means they should be evaluated every year.

Deregulated vs. Regulated Energy Prices

In Texas in 1999, Senate Bill 7 created a deregulated electricity market within the Electric Reliability Council of Texas (ERCOT). Some areas opted not to join into the fun of a deregulated market, where consumers could choose their retail electricity provider of choice. Examples of these ares are the city of Austin (Austin Energy) and the city of San Antonio (CPS).

So since 1999, I wondered: if the economic 'free' market is supposed to be optimal and drive prices lower for the consumer, why aren't prices in the deregulated market lower than those at Austin Energy and CPS Energy?

Today, the winter charge for electricity within the Austin Energy domain is near 8.5 cents/kWh if using 1000 kWh per month. The summer rate this year was near 9.4 cents/kWh. If I look on the Texas Public Utility Commission's website for finding a retail electric provider (Power To Choose) in Round Rock, Texas (just north of Austin) in the Oncor region, I notice for the fixed rates (I will not consider variable rate electricity) the price varies between 10.2 - 14.1 cents/kWh. This is approximately 1.5 cents/kWh more than Austin Energy averaged over the year. Note that the price a consumer pays is due to costs for (1) electricity generation, (2) transmission, and (3) retail electric providers (REP) who administer the service. The ERCOT deregulated market makes it such that no one company can perform more than one of those functions.

One major reason for this discrepancy is how electricity is priced in the deregulated market.

Assume the following:
1. Company A is in the deregulated market in ERCOT, and Company B is a city municipality within ERCOT but not engaged in the deregulated market (like Austin Energy).

2. Both Company A and B have identical power generation capacity and mix at: 33% natural gas combined cycle, 33% pulverized coal, and 33% nuclear.

The deregulated market prices electricity at the 'marginal price' (i.e. the cost to generate the last bit of electricity). Also, all coal and nuclear power runs almost continuously with the natural gas units cranking up and down to follow the rise and fall of electric demand. Assume the case now with high natural gas prices, it is the most expensive.

Say nuclear power costs 1.7 cents/kWh, coal costs 3.5 cents/kWh, and natural gas generation costs 5.0 cents/kWh.

For 1000 kWh of generation the deregulated cost of energy is:

= (nuclear electricity)*price + (coal electricity)*price + (natural gas electricity)*price
= 333 kWh*5.0 cents/kWh +333 kWh*5.0 cents/kWh + 333 kWh*5.0 cents/kWh
= $50.00

For 1000 kWh of generation the municipality cost of energy is:

= (nuclear electricity)*price + (coal electricity)*price + (natural gas electricity)*price
= 333 kWh*1.7 cents/kWh +333 kWh*3.5 cents/kWh + 333 kWh*5.0 cents/kWh
= $34.00

So using THE EXACT SAME GENERATION units, the municipality is inherently cheaper. Of course, municipalities can be less efficient running their organization than competitive companies and end up charging more. But, competitive REPs also need to pay for marketing their product, which incurs costs. Thus, municipalities can afford to be less efficient in their general operation and organization up to the point that they make up for marginal price differences and marketing costs from REPs. There are also other factors, but the basic price structure for charging for generated electricity is perhaps the most influential.

Of course, since the deregulated market was created after lots of infrastructure existed already, it is not truly a 'free' market system since some companies started with a tremendous amount of assets. But that is a discussion for another day ...

An oil scare story from the past ...

“It is the Summer [two years from now]. Violent uprisings have shaken Saudi Arabia, and the House of Saud has fallen. For months, the nation has been kept in turmoil by dissidents with strong religious and anti-Western feelings: ultraconservative Muslims of the Wahhabi sect, angered by corruption among some of the ruling princes and embittered by the erosion of family and tribal values; and disaffected foreign workers, many of them Palestinians, stirred up by radical forces in other lands.

Oil no longer flows from rich Saudi fields. Critical elements of the oil distribution system, systematically wrecked, lie in ruins. The giant terminal at Ras Tanura, which once sent half a dozen tankers a day down the Persian Gulf and out to the global oil routes, rusts silently under a scorching sun.

The free world has lost a fifth of its oil supply – some ten million barrels a day.

For a brief time, the United States seemed not to feel the loss; its daily share from Saudi Arabia was less than a million and a half barrels, and there were stockpiles and a small strategic reserve to draw on.”

Does this projection sound believable? It did in 1981, because that is when it was written in National Geographic magazine along with comments about projections that oil could be at $80 per barrel in 1985. It turned out that the cost of a barrel of oil in 1985 was about $27, and only $14 in 1986 (which is roughly $52 and $27 in early 2007 dollars). How wrong was that oil price projection?

See http://www.wtrg.com/prices.htm and http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp for discussion and charts of oil prices.

What this look into the recent past indicates, is that projecting energy prices and uses into the future is pretty much as good as looking into a crystal ball. The reason that oil prices dropped is due to efficiency improvements and adjustments in the world economy that reduced demand. These adjustments were caused by people, just as the price increase and embargo was also caused by people.

And a large part of the reason it has taken approximately 25 years for us to have the same conversation again about the future of oil supplies and Wahabbi sects in the Middle East, is because people had the ability to act and change the future. Thus, in the 1970s and 1980s, people were the major influence in energy consumption and energy prices. Today, people are still the major influence as we still have room to become more energy efficient to choose the goal for oil consumption for the next few decades.

The question is: how long can people’s choices and adjustments remain the most influential factor in energy consumption and prices? Because, if people are not the most influential factor, then that means nature’s limitations in resources is the most influential factor. At no point yet in history has per capita energy consumption declined. Human choices can possible maintain high standards of living even if and when energy per capita begins to decline, sometime in the future. Our goal should be to maintain the world and society such that humans always have the most control over energy consumption, because otherwise, it means, by definition, we are not in control.