Offshoring Energy and Emissions - Coming back from Developing to Developed Countries

A recent study in the journal in Environmental Science and Technology discusses the 'embodied carbon' in global trade. The concept of embodied effects in global trade has been noted by scientists and engineers by estimating such aspects as the energy embodied in a product when it is made in one place and shipped to another.

Somewhat by definition, making a product in China (say a Barbie doll) and shipping it to the United States takes more energy than making it in the United States and keeping it here. Just think of the energy used to create the infrastructure (tankers) and fuel the cargo ships (low grade petroleum used in ships). You don't need these if you don't travel the globe, but both systems require intra-continental infrastructure.

As peak oil and gas come on, businesses will be forced (albeit in some views 'rightly so') to better account for the energy used to make a particular product or provide a particular service. Products from China don't cost less in the U.S. because it actually costs less to make from an engineering sense; it just costs less based upon how much you value a person's time and labor. Essentially the time of farmer converted to factory worker in China has less value than the average Joe/Jane in the U.S. The 100s of millions of workers in China available to work cheap is the main reason why products have gotten cheaper in the U.S.

Essentially, the CO2 being shipped from abroad to the U.S. (and generally from developing to developed countries) is a proxy measure for energy. As suggested in the synopsis (linked above), the solution is likely to factor the cost into the consumer of the product and not necessarily its producer.

And we should quit shipping electronic 'waste' to China, as someday we'll likely wish we kept it to make use of it via recycling, but that's another story ...

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 ...

Google's Energy Ventures - Can Computer/Programming Companies Tackle the Commanding Heights?

The "Commanding Heights" of the economy were what Vladimir Lenin referred to as the segments and industries in an economy that effectively control and support the others: energy, banking, and transportation/shipping. Google and other so-called 'tech' companies (note: it is a misnomer to call technology only concepts that involved computers and programming) are aiming at solving both their own and others' energy cost problems.

In all likelihood, companies venturing in this space see their future growth limited if energy does not stay cheap and abundant. Venture capitalists see the large amount of dollars possible for finding the next major contributor to the energy mix. But tackling the Commanding Heights takes a lot of physical capital - the steel, silicon, wires, etc. that actually exist on the ground somewhere - and the paybacks times are historically slower than what Google and others are used to.

In the case of Google, their servers have grown at such a rate that they likely see limitations in their ability to continually increase their offers for free hosting services. Since providing the energy to power servers is critical to many of Google's business aspects, they Google executives have decided it is worth their while to try to solve the problem for themselves. They likely can do that, but making a new renewable energy technology (besides wind power) go mainstream will be tough, but I'm glad they are taking this challenge.

The fact is, that for almost any building in the United States, putting photovoltaic panels (for example) at the facility to offset electricity purchases will provide a payback on the investment within the lifetime of the building, and likely in less than 15 years, and possibly in less than 10 years depending upon location and incentives. The reason why this is typically not done (except on government buildings) is that there are other investments to be made with the same money that have higher paybacks in shorter time frames: this is the crux of the issue.

As long as the paybacks in energy investments take longer than other investments, companies will fulfill their fiduciary duty to make the non-energy investments. Energy simply does not cost enough to change the economics. Making renewable energy generation cost less than coal can be done by two ways: (1) cheaper renewable energy and/or (2) more expensive coal energy. The latter is not likely to happen anytime soon, even with a possible future carbon, or carbon dioxide, price. One way for the former to occur is to allocate semiconductor factories toward building solar cells instead of microchips. But then this means more expensive servers (because of less supply of chips and processors) for Google ... a catch 22.