contributor perspectives

Aug 2, 2007 | 20:21 GMT

The U.S. Energy Debate: Whether to Bet on Future Technology

Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.
By Bart Mongoven The U.S. House of Representatives is expected to vote this week on its version of a new energy bill. Although the measure calls for a dramatic shift in U.S. energy policy — it contains numerous subsidies for research into new technologies for electricity generation and energy conservation — it would hardly usher in a revolution in the U.S. approach to energy matters. In supporting slight shifts in energy use and energy sourcing, the bill sidesteps the most important emerging issue in the energy debate: whether to choose an approach that places great faith in future technology or one that does not. The faith-based path essentially is a gamble, though it also is the one that offers the greatest potential rewards, both for the U.S. economy and for global efforts to reduce greenhouse gas emissions. The problem, of course, is that while it is easy to anticipate future breakthroughs, it is difficult (and possibly irresponsible) to build policy on theoretical advances. It also might be a politically impossible path to take. To deal with this, policymakers are looking for "safety valves" — remedies they can use if promising technological improvements fail to materialize. Breakpoint One: Generation Demand for electricity in the United States is growing at roughly 1 percent per year. This figure is far below the rate of economic growth, which is averaging roughly 3 percent per year, and is less than the growth in demand for power just 10 years ago, which stood in the 2.5 percent per year range. This means the U.S. economy is becoming more energy efficient, but demand is still increasing — and that will require building additional power capacity. Over the next three years, this capacity will come mostly from natural gas facilities. In the following five years, however, new generation will be achieved mostly through construction of new coal-fired plants. The reason for this is simple: Clean air regulations and anticipated climate change policies make natural gas preferable, but the United States simply lacks the natural gas required to feed its growth over a long period of time. Meanwhile, the future of nuclear power, while looking better, is not assured. Coal, on the other hand, is the United States' most plentiful fuel, and power companies are betting that new technologies — such as integrated gasification combined cycle — will allow coal plants to pass regulatory hurdles. Experts in this technology contend that the coal plants of 2020 will be far less polluting than those of 2010. Industry and the U.S. government have invested billions of dollars over the past 15 years in new coal technologies, and development of "negligible emission" technology is showing promising results. Researchers anticipate that in 10 years utilities will be building coal facilities that have far lower carbon, nitrogen and sulfur emissions than today's natural gas facilities. If we can hold out, researchers argue, the emissions profile can be dramatically changed. This brings us back to that pesky 1 percent growth in power demand. The U.S. economy and its thirst for energy are staggeringly large. Given the combined effect of growing demand and the attrition of older facilities, U.S. utilities plan to build an additional 45,000 megawatts of capacity — more than 200 power plants — between now and 2012. Most of these new facilities are expected to still be generating power in 2050 — when they will be considered as crude and dirty as 40-year-old coal plants are today. However, given that technology is on the cusp of great advancement, each plant built in the next 10 years will be outdated in the relative blink of an eye. For air and climate activists, and those policymakers who support environmental causes, the next-generation technology is so promising that anything that can forestall a 40-year investment in a facility today is welcomed. This brings us to the question of the plug-in hybrid. Automakers, especially General Motors Corp., have put significant faith in the development of a next generation of electric cars — mostly hybrid vehicles that run on gasoline and on electricity drawn from both the gasoline engine and a power outlet (as opposed to the hybrids of today, whose electricity is generated only by the gasoline engine). Automakers promise these vehicles will soon be on the market, though, given the current electric grid, they acknowledge that plug-in hybrids will generate more greenhouse gas and other emissions than gasoline-only hybrids. Plug-in supporters, then, argue that we must change the grid — a change that might be better if it is put off for a decade. Infrastructure A similar question is emerging in the biofuels debate. Members of the Senate Energy and Natural Resources Committee took turns July 30 criticizing the oil industry for not investing in the infrastructure necessary for biofuels to become a significant element of the U.S. vehicle fuel supply. While senators also chastened the federal government for its miserly investments in transportation and storage, they focused on the oil industry. The lawmakers, however, ignored a natural question: Why would oil companies voluntarily invest in a competing product? They also ignored breakthroughs in biofuels that could make the development of a separate infrastructure moot. In the most high-profile example of a potential biofuel breakthrough, The Wall Street Journal reported the morning of the Senate committee's hearing that California company LS9 claims to have developed a microbe that replaces traditional yeasts in ethanol fermentation. This microbe produces an ethanol that is more energy efficient and that does not have the corrosive qualities of traditional ethanol. If LS9's system works, its ethanol can use the existing infrastructure and be burned in gasoline engines (rather than relying on flex-fuel engines). The LS9 technology is the most prominent so far in an approaching wave of energy-related technologies. Three years ago, the California venture capital community began to recognize that green technologies (dubbed "cleantech") held promise as a growth industry. As a result, the capital they invested in 2005 and 2006 is beginning to show results. The most famous of the high-tech venture capital firms, Kleiner Perkins Caufield & Byers, which provided seed money to Google, Yahoo, Genentech, Sun Microsystems and others, has invested more than $1 billion in green initiatives. Even the California Public Employees' Retirement System, the world's largest pension fund, has established a cleantech investment fund. LS9, for instance, was largely capitalized by Khosla Ventures, a venture capital firm founded by Vinod Khosla, a founder of Sun and a former Kleiner Perkins executive. Industry is banking on this venture capital. For instance, GE CEO Jeff Immelt said July 30 that the company is counting on cleantech venture capital to provide the solutions to today's dilemmas. GE, he said, will then become the "second-tier investor." In effect, GE will buy the pioneering companies. Rationality vs. Politics As cleantech investments begin to show results, the infrastructure debate takes on many of the same characteristics as the plug-in hybrid debate: Is it better to wait for the technological breakthroughs — an issue of patience and faith — or to act now to make things as clean and efficient as they can be using current technologies? The question seems perfect for a logical analysis of cost and benefit. Analysts can assess the chances that certain new technologies (new yeasts, negligible-emissions coal plants) will indeed succeed and chart the ecological benefits of using these technologies when they become available versus 40-year investments in the best available technology today. There are two problems with this approach. The first is that tomorrow's technology will always be better than today's, so someone eventually must decide to invest in a direction. This can be overcome with a second level of analysis, one that is less mathematical but still based on balancing the relative benefits of the next generation with current needs. The second problem is that policy is not made based on technical criteria and dispassionate analysis. The math is intriguing, but this discussion coincides with an unprecedented confluence of sentiment: Americans feel dependent on expensive supplies from hostile countries, while they also are growing more concerned about climate change. As a result, political pressure is mounting on Washington to act on energy-related issues. Spurred by the war in Iraq, fears of climate change and high gasoline prices, the public is demanding that the government do something — anything — to "fix" the energy problems the country is facing. One outcome of the rush to regulate is that policymakers have narrowed their focus to a few issues, led by biofuels, cellulosic ethanol and flex-fuel vehicles. Not only are policymakers excluding obvious current issues such as nuclear waste disposal, they also are missing the larger picture of total energy supply, demand and next-generation technologies. The Senate has passed a sweeping energy bill that reflects the rushed decision-making, and the House will likely follow suit by Aug. 4. These bills offer a mix of quick-fix solutions and funding for research, but they also are incomplete even in the areas of focus. For instance, they call for massive increases in ethanol production but provide no funding for ethanol infrastructure. This sets up a larger and more politicized energy and climate debate for 2008. The current crop of energy bills build in some assumptions that technological improvements will come — and a few include safety valves in case the improvements do not pan out. For example, under the climate bill offered by Sen. Jeff Bingaman, D-N.M., the pace of greenhouse gas emissions reductions would be slowed if the price of complying with the law becomes too expensive for business — which is to say, the requirements will be loosened if the technology is not developed to address crucial energy problems. In theory, the reliance on safety valves could be the most rational way to build a policy that incorporates future technology but does not depend on it. This approach, however, remains highly controversial. Not only are such measures prone to political tampering, but many critics also argue that they essentially provide too easy of an out when the requirements get tough. However, there also is another way to look at it: As requirements begin to force a crisis, the premium for technological improvement will increase and, theoretically, so will cleantech investment. The alternative is to pass laws whose requirements are currently impossible to meet. In going that route, lawmakers would be relying on the belief that technology will improve — or that another generation of politicians will fix the mistakes.

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