Wednesday, July 08, 2009

My Response to the New York Times

Here's a link to the New York Times article "Combative Start to Senate Climate Hearings".

And, here's my response:

I’m a Californian, I vote, and I want more nukes in my state. I’m fed up with the high cost of electricity. I’m pissed off that we switched from making plastics with our natural gas to making electricity — and shipped our plastics industry to China. That’s not environmentalism, it’s offshoring, as a direct result of public policy that my representatives voted in.

My power company is not incented to make good decisions about the power mix: when natural gas prices rise, they pass along the cost. When they look at natural gas they see a lower capital cost, and so they get the same return on less capital. Fine for them, but we get stuck with power prices that whipsaw our producers out of business. Ever noticed how inflation is quoted without the volatile food and energy component? We chose to make our energy prices volatile!

What we need right now are projects like the Hoover and Grand Coulee Dams: big, expensive government-funded projects that get lots of people working in well-paying jobs and deliver locked-in low priced power for a century or more. Nuclear plants are way better than hydro plants since they don’t kill fish (or anything else, for that matter).

I want to vote for a future in which energy prices are not volatile, and where the aluminum smelters and plastic plants come back to where we can regulate them and work in them. But I seem to be stuck between a choice between Green folks, who want to build temporary windmills which will kill our economy, and Conservatives who want to stick with imported fuels, which will kill our economy. Give me a third choice!


  1. Concise and makes several excellent points. Very nicely written.

  2. I'm with you on the nukes. Everything else I'm not so sure about. Unless you assume that we're going to make a wholesale policy decision to build a zillion MWs of nuclear capacity (and if you do, why not wish for a pony too while you're at it), gas is not at all a bad way to go, and not just for capital return reasons. Gas generators are quick, easy and cheap to build. Not much risk associated with construction, technology, environment. Supply is reliable. Fuel is cleaner and cheaper than many alternatives. The output price might be a bit more volatile, but I don't think the effects have been as bad as you say, and anyway what's wrong with price signals?

    By the way, I think you are looking at ROR return regulation in the wrong way. Utilities earn a fixed rate of return on invested capital, so the built-in incentive is to spend *as much* capital as they can, to pump up the absolute value of the return. The savings from building cheaper gas plants is ultimately passed on to consumers (assuming the regulator is on the ball).

    China, incidentally, doesn't seem to use much of its gas for plastics, so not sure how they make it. I also note that they are using more of their gas (of which they have a lot less than we do) to generate electricity these days. I'm not an expert on the Chinese power sector, but it's essentially run by the state, so the decision to use more (and scarcer) gas as a feedstock presumably has less to do with corporate finance and more to do with its operational advantages.

    PS: I presume you saw that Pickens has abandoned his wind idea? Apparently the transmission tech is not where he thought it was. This after already ordering $2bb of turbines from GE.


  3. Pickens is a very smart businessman, and he was not surprised by the transmission line thing. He is making a long-term bet that electric prices will be high and that his turbines will make a profit. Wind requires transmission, but he's pretty sure he can talk the feds into building his transmission system for him, thus reducing his capital outlay. His negotiation tactic is to build public support for wind, and drive the public meme that transmission should be provided to wind turbines, thus driving a political impetus to build that transmission.

    It looks like he's had a setback, but the negotiation is not over and he's done very well at this sort of thing in the past. I don't know how he structured his contracts with GE... perhaps he can cancel if he doesn't like the feds response, or perhaps he has alternate siting in mind.

    As for what is wrong with price signals: the prices to the generators do not incorporate the cost of systemic risk. If natural gas prices spike, they still make money. So the generators choose which kind of investment to make, but their customers bear the risk of that decision. It's an externalized cost. When those are small, prices work well. In this case the externalized costs are large (Iraq I & II).

    Thanks for correcting me on the return regulation. I don't think my mistake changes my point, though.

    We are now importing 16% of our natural gas consumption. NG imports are $27 billion, which is 8.1% of the $333 billion we spent on oil imports and rising fast. The swing players in natural gas are Russia, Iran, Venezuela, and so on. Gas is becoming a fungible global commodity as more LNG tankers are built. This is hardly a secure supply, instead, it's making us even more dependent on foreign countries.

    I don't know what China is doing with their gas. I do know that our industrial gas demand is dropping like a rock. It fell 22% from 1997 to 2006, during which time our economy expanded 30% in constant dollars. That's not efficiency, it's a combination of offshoring the plastics industry and burning the gas in turbines instead.

    We made policy decisions in the 1930s to build 10s of gigawatts of hydro capacity in the midst of a depression which presumably reduced demand. I suppose a fair number of ponies got handed out too, but those dams have performed well, both when viewed on their own, and also in terms of their stabilization of energy costs for the rest of the economy, which led to lots of aluminum production in the Pacific Northwest, which certainly helped Boeing and the other west coast airframe manufacturers. I think now is an excellent time to queue up a bunch of PWR nukes, with the very same expectation.

  4. Perfectly agree with your last point. Where I disagree, as you know, is on the value of gas as a generation feedstock. But hey, what's the internet for if not for rehashing deadlocked arguments? ;)

    On Tuesday, A and the boys are heading to California for the summer. I'm not sure whether I'll be able to join them for any of that, but I bet they'd like to see you guys either way.