What I want most for 2008 is serious action on climate change -- not just in terms of policy, but in terms of action. Mathematically, this mandates serious and constructive engagement from the electric sector, which has thus far been not only absent, but hostile to any serious discussion of GHG reduction.
Given their relevance (42% of US GHG emissions) and tremendous inefficiency, they are a source of much of my personal quixotic quest. But ultimately, they must engage -- and so far, they have not even come close. So in case we have any utility executives in the Gristiverse, here is the speech I'd like to hear from one of you in 2008:
I come to you today seeking to be part of the solution. My industry is responsible for almost half of all our greenhouse-gas emissions, and yet we have no economic incentive to conserve. The 100-year old regulatory model under which we operate our business must change. I am almost certainly risking my job and the value of my shares by making this speech today. But that is a risk I'm willing to take on economic and environmental grounds. I don't want my kids to grow up in a world without glaciers, but I also don't want them to grow up in a country where they can't afford electricity. Giving my kids the kind of future I owe them mandates that we stop driving up electric rates so that we can warm the planet.
To understand the scale of this problem, let me first share a few statistics with you. In 2006, the nation's investor owned utilities -- my industry -- had total revenues of about $330 billion, generating $30 billion in net operating income. We're doing OK. But our profits are highly dependent on our ability to pay off our capital. Indeed, only $38 billion of our operating costs was from fuel. A big number to be sure, but relative to revenues, we spend more money servicing debt. This is, in part, because we are in a capital-intensive business. But we shouldn't lose sight of the fact that the way we make money is by deploying capital. And this gives me a strong incentive to deploy lots of capital. Most businesses make money by selling a better product at a better price. I make it by convincing utility commissions that my capital is prudent. Don't get me wrong: I am economically rational, and I respond rationally to this incentive. But it is not a rational incentive.
After all, if it made sense, I'd convert all my salaried employees over to a formula where I just pay them 120% of all their submitted expense reports. I don't kid myself about what would happen to expense reports if I actually did this -- but we shouldn't kid ourselves about how my industry responds to the same formulation.
So we spend a lot of time trying to convince utility regulators that our latest big capital project is prudent -- and we're pretty good at that. We get capital built into the rate base, we make money, and shareholders are happy. We also spend a lot of time trying to convince regulators that other people's capital is not prudent -- and we're pretty good at that too. So we get special rates designed to block competitive power, or impose exorbitant interconnection costs on customers who seek to install capital we cannot build into our rate base.
And the system has worked, in the sense that it has electrified our country, given us all cheap electricity, and generated stable and predictable dividends to my shareholders. But that's also unleashed a lot of nasty chickens, all of whom are coming home to roost. If I paid my employees based on expense reports, I would rapidly lose control of expenses, and spend lots of time managing fights between employees trying to figure out who got to put the rental-car receipt on their credit card. It might work for a while, but the system would rot from within -- and that's what we now face in the electric industry. From rising fuel costs to power-plant siting challenges, I simply don't have any cost-effective ways to serve future load growth other than efficiency and renewables. But I can't make any money off those. We need to change the paradigm.
I will confess that you would never know this to be true from reading our industry press releases, and for that thank our PR efforts. Thank you also to the ratepayers who fund our PR efforts. But I assure you that even those things that we have reason to trumpet are largely irrelevant.
Consider: we spend $3.7 billion as an industry every year on demand-side management to help our customers install more efficient light bulbs, motors, and other load sited measures. These programs have helped a lot of technologies get into market, and helped a lot of customers to save money. $3.7 billion is a big number -- but relative to the $38 billion we spent on fuel, it's peanuts! Worse still, even as we spent those billions helping our customers to become more efficient, we didn't spend a dime to improve our own efficiency -- or at least not a dime any of us are going to admit to, lest we draw uncomfortable attention to the fact that the fuel efficiency of our industry hasn't improved since 1957.
Our efficiency failures haven't come about because we're stupid. I'm proud to tell you that I employ some of the smartest people I know. But my shareholders won't let me keep my job if I don't focus on their dividends. And the rules say that I can't profit from efficiency -- and so I make sure that my smart employees focus their considerable efforts elsewhere: namely, on maximizing the amount of capital I can deploy.
But efficiency is only one of the many opportunities to lower energy costs that we squander. Burning less fuel to make a kWh lowers power costs -- and therefore, we don't focus on it. But focusing on lower-cost fuels also lowers costs, and we don't focus on that either. Here are some more telling statistics:
Try as we might to prevent it, many of our customers have elected to self-generate their own power, and since 1978's PURPA law, we have seen the slow creation of a competitive power-supply industry. Whether deployed by our customers or by unregulated third parties, those capital projects only get built if they can save money. And the differences between those projects and ours are striking.
The most obvious difference is in cogen, which is typically twice as efficient or higher than our fleet -- and so we ignore it from our mix, even as we fight to block it elsewhere. Of the 3,200 cogeneration facilities in the country, just 72 are owned by utilities. To put that in perspective, 75 are owned by laundromats. In other words, we're about as focused on that particular efficiency play as we are on making sure that our customers get low-starch shirts. But look further:
Of all the hydroelectric generation in the country, 90% is run by traditional utilities. (Not surprising, since most of the big facilities were built prior to the advent of a competitive power market, but this is a stagnant business, since we don't have any more opportunities for big dams.) We're responsible for 74% of all the coal-fired generation in this country, and we'd like to have more. After all, it's expensive, and we love expensive capital. Speaking of expensive capital, we also like nuke: we're responsible for 54% of all the kWh from nuclear in the country, and we'd own more but for the fact that we divested so much in those states that went through restructuring.
We like the sex appeal of renewables, but we don't much like to own them -- remember, we don't have any financial incentive to prefer low-cost generation. Not surprisingly, then, we are only responsible for 7% of all the renewable electricity generated every year. There's a lot more renewable out there -- it's just that it got built in spite of my industry. That said, renewables are at least expensive -- and their sex appeal makes for great PR. The stuff we really don't like is opportunity fuels where you can recover waste energy in low-tech power plants. We're responsible for just 0.2% of that mix - we are essentially blind to this 40,000 MW opportunity.
So what fuels do we dominate? Coal (74%), big hydro (90%), nuclear (54%) and oil (63%). What fuels do we ignore? Natural gas (34%), non-hydro renewables (7%), opportunity fuels (5%) and process wastes (0.2%). Oddly enough, the cleaner the fuel stream, the less likely we are to have a "dog in the hunt." The idea that you can't have an electricity grid without coal and nuclear is a canard, belied by the data. What's not clear is whether we can support traditional utility shareholders with a grid that isn't dominated by coal and nuclear, under the current paradigm. We need to change that paradigm.
My Request
As you might imagine, I did not come here simply to point out the faults of my industry. Our world needs clean, low-cost electricity, and I believe that the electric industry ought to be up to the challenge to provide. But as the data shows, we simply are not meeting that challenge under the current rules. I will not direct my company towards a path that will cause it to lose value. But that narrow focus on shareholder responsibility has been used to justify too much inaction and outright hostility to good ideas by my colleagues. It is time for us to focus on embracing and encouraging the types of regulatory reform that are necessary to align the interests of my shareholders and my customers. So here is my request:
Sincerely,
- Let me keep a portion of the savings I can create through more efficient conversion of fossil fuel into electric power. Current rules that compel me to pass all savings to my customers ensure that I do not try to save money. Give me the financial incentive to conserve.
- Incentivize me to increase the overall efficiency of my entire service territory. Energy conservation ought not be the exclusive province of my competitors, but it also ought not be the exclusive province of my company. The pressure to keep big customers has driven all level of anti-efficiency behaviors by my employees, from overly expensive interconnections to special rates for those who promise never to cogenerate. This will continue so long as my profits are so heavily exposed to shifts in kWh sales. Give me an incentive to help my customers lower their energy costs, regardless of how kWh of conservation is achieved.
- Give me a way to buy clean power at a competitive price. Many of my customers could generate on-site power from opportunity fuels in excess of their needs, but do not do so because the pittance I have agreed to pay them under PURPA rates provides no incentive to do so. Give me a rate structure where I can buy that power at location-specific prices that are low enough to leave profit for my shareholders, but not so low to keep power from coming on line. All my other options for new power are much more expensive, and I'm going to need all the tools at my disposal to serve our growing load.
Joe Utility Executive
Comments View as Flat
GreenEngineer Posted 7:59 am
26 Dec 2007
capital costs
We like the sex appeal of renewables, but we don't much like to own them -- remember, we don't have any financial incentive to prefer low-cost generation.
OK, granted, but it sounds like they don't have any financial incentive to avoid low-cost generation either. From what you write, it sounds like they are largely indifferent to fuel prices.
So my question: Solar PV has a zero fuel price, but it also has one of the highest capital costs of any generation system. So by the logic you describe above, utility companies should be all over large-scale PV. But large-scale PV deployments are relatively few and far between. That's probably just as well IMO: PV makes most sense distributed in small-scale systems. But it still begs the question of why.
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apsmith Posted 8:25 am
26 Dec 2007
Specifics
Sean, you keep implying that there are ways to dramatically improve the fuel efficiency of traditional fossil-fuel power plants. Please provide some specific examples and how much improvement in efficiency they would give!
The only things I'm aware of that could at all improve the efficiency of fossil fuel generation are:
(1) Combined cycle gas turbine technology - that works for natural gas, but does it greatly improve the efficiency of coal to electricity?
(2) Fuel cells - but none of the current fossil fuels are in a form that can be readily fed into fuel cells.
Both of those involve capital spending too, but according to you that's not a problem. I really don't understand your argument Sean, and it would be nice to have some more specifics (with numbers) on why you think there's a lot of room for improvement here (and why it would be a better buy than investing in wind and solar).
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GreenEngineer Posted 8:45 am
26 Dec 2007
apsmith
The biggest opportunity is capturing (otherwise wasted) heat for space or process heating. This is hard to do with the traditional large central plant, unless there happens to be a big industrial user nearby. But if the regulations were changed to incentivize efficient generation, then the utilities would be encouraged to look at distributed generation options, and would also work toe encourage large industrial users to locate near their already-existing large power plants.
Fuel cells are in fact one of the best ways to do medium-scale distributed generation. And the types you would use in that application (e.g. molten carbonate) can eat natural gas (or biogas, or coal gas) directly -- they reform them to hydrogen internally, using their own operating heat.
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apsmith Posted 9:52 am
26 Dec 2007
But that wouldn't reduce fuel use
One of your statements was "Burning less fuel to make a kWh lowers power costs -- and therefore, we don't focus on it."
Can you state a specific example where a utility could literally "burn less fuel" in a way that actually "lowers power costs", with numbers? co-gen may have niche applications, but it's not going to significantly change power plant efficiency, especially when you account for all the thermodynamic components of efficiency correctly (heat, by itself, is a poor use of fuel energy because of the randomization of thermal processes).
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GreenEngineer Posted 10:17 am
26 Dec 2007
what?
co-gen may have niche applications, but it's not going to significantly change power plant efficiency, especially when you account for all the thermodynamic components of efficiency correctly
Please explain what you mean here. Space heating uses water at 150-180 F and domestic hot water runs around 120F -- well below the exhaust temperatures of most generation systems. Between electricity generation and heat recovery, you can usually get 75-85% of the fuel heat energy, of which 30% - 60% is electricity. So your comments don't make a lot of sense to me.
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Sean Casten Posted 11:28 am
26 Dec 2007
AP responses
AP:
There are massive opportunities, but none of any significance involving existing power plants. It's sort of like saying that you could boost fuel efficiency if you made lighter cars: the statement is true, even though it isn't practical to boost the fuel economy of the existing fleet. The difference in the power sector though is that the existing fleet exists largely because of existing regs, and therefore in spite of economic incentives to conserve that exist in unregulated sectors.
Thus, while one could argue that the economic dislocation of shifting to more fuel efficient cars might be unacceptably painful, the same logic doesn't apply to the power sector - just because a plant was built not to conserve doesn't mean it should be given a perpetual license to operate. After all, any other factory that was built without consideration of long-term operating costs might find it difficult to remain competitive, and no one would argue that it is societally disadvantageous for it to do so. The difference on the power side is that we've built these plants under the guaranteed-equity-return rubric that is really bad societally in terms of both economic and environmental consequences. In a different paradigm, those plants never would have been built. So change the paradigm. What we would actually then build is a fleet that looks much different from the current fleet, and much more like the one we had in 1910, before we passed all those guaranteed equity recovery laws.
Specifically:
The DOE estimates that there is a technical potential for 135,000 MW of cogen in the country, all of which would - if deployed - cause other, less efficient plants to be idled. This analysis is based upon calculations of thermal loads at existing industrial and commercial facilities. As a practical matter, it isn't possible to convert existing central stations to cogen of any consequence because (a) they're too remote and (b) they make way too much heat. (Remember that it's a heck of a lot easier to transport electricity than heat. As a result, the economically rational power that has been built in this country was sized to the thermal load and is considerably smaller than the current central, power-only fleet.)
In addition to that, the EPA has estimated that there is another 65,000 GW of potential power generation from waste energy (heat, opportunity fuels, etc.) at industrial facilities.
Our company has looked at both sets of data pretty closely and concluded qualitatively that they both almost certainly understate the total, for reasons that largely have to do with the fact that it is difficult for DOE/EPA types without industry expertise to really understand the opportunity. We are working on getting this published, but in the meantime, just look at those ~ 200 GW worth of potential.
That's 20% of the power fleet, but closer to 40% of the total MWh since these are all plants that will tend to operate baseloaded (as compared to the large portion of the existing power fleet that runs as peakers). Run that math, and that works out to something on the order of a 20% reduction in all US GHG emissions (including those from transportation), all of which could be built just based on economic self-interest. And to your point, it would not enhance the efficiency of the existing fleet, but shut it down. To the benefit of everyone except the investors in those plants. And before we shed a tear for them, let's not lose sight of the fact that that would impose a discipline on those investors that utility investors have never had - but which has been shown to be pretty effective at preferentially targeting capital investments towards societally-beneficial activities in every other sector.
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Sean Casten Posted 11:46 am
26 Dec 2007
AP - comment number two
Your comment that "heat, by itself, is a poor use of fuel energy because of the randomization of thermal processes" makes an all too common mistake that confuses basic thermodynamics with economics. (Indeed, one of the things that I tell all new engineers is that they will not be productive until they learn to get over the idea that the laws of thermodynamics are inviolable.)
Which I realize is a rather fiesty thing to say, so let me explain. Thermodynamics is inviolable. But when building a power plant, it is economics that trumps. And specifically, the economics of fuel use. And those economics know nothing of the second law.
Let's take a very simple cogen plant as an example. Suppose I have a 10,000 Btu/kWh heat rate on the power side, meaning that I release 10,000 - 3,413 = 6,587 Btu/kWh of heat. Let's say I can recover 70% of that heat in a useful form as steam (pretty typical for a heat recovery steam generator), so I get a total of 6,587 x 70% = 4,611 Btu/kWh of steam out of that cogen plant.
What's the net economic and environmental consequence of that plant? Thermodynamics-trained engineers will lean (too heavily) on the first law to say that I have a heat rate of 10,000 - 4,611 = 5,389 Btu/kWh actual heat rate, or (3413/5389) = 63% overall efficiency. But here's the catch: that calculation is irrelevant. Irrelevant economically, irrelevant energetically, and irrelevant environmentally. Here's why:
Whichever E (econ, env, energy) lens through which I view the world, what matters to me is the net change in raw energy use per kWh. And that number is not a function of how much steam I recover, but how much fuel I displace. Invariably, that steam was previously being produced in a steam boiler that was burning fuel to make (low grade, high entropy) heat. The fact that that's a shi*&y use of fuel is not my issue: what is at stake here is how much of an improvement I can make in the prior situation. So now let's factor in the fact that the 4,611 Btu/kWh of heat I am recovering as steam would have otherwise been produced in an ~80% efficient boiler. That means that my recovery of these 4,611 Btu's as steam allows me to eliminate 4,611/80% = 5,763 Btus/kWh of fossil fuel.
Now let's walk through the math: before the cogen plant was installed, the plant was burning fuel and buying power. After it was installed, they have to burn an additional 10,000 Btu/kWh of fuel, but they avoid the need to burn 5,763 Btu/kWh for heat, giving them a net economic heat rate of (10,000 - 5,763) = 4,236 Btu/kWh, or what is in effect a (3413/4236) = 81% efficient power plant.
This is not simply an academic calculation. If I build that plant, it is in my economic interest to keep it running so long as the electric price is greater than my fuel cost divided by 0.81. The fact that I am converting some fuel to heat and some to power doesn't matter: only that the net change in my fuel purchase and power generation (solely as a function of the cogen facility) enables me to realize effective economics of an 81% efficient power plant. Same deal from an environmental side, or energy use side - and all result from the fact that the first mistake is to convert high-value fuel into low-value heat. But having made that mistake, there is nothing "wrong" with fixing it, and in so doing for the corrective investment to take credit for the fix.
An analogy I like to use is the guy who's been hitting himself on the brick for 5 years, and keeps buying bigger helmets. If he suddenly decides to stop hitting himself in the head with a brick, he is going to realize a real economic gain in avoided helmet purchase & maintenance costs. Does helmet purchase have anything to do with bricks? It shouldn't - but if that's your alternative, it's a legitimate benefit. Similarly, the fact that we've been throwing away heat in cooling towers and then recreating it in boilers may be a bad idea - but it doesn't mean that the guy investing in cogen doesn't realize a benefit from both.
And, re: your niche comment, see my prior response about the 135 GW. Compare this to the present installed cogen base of 83 GW, and then compare that aggregate (135 + 83 = 218 GW) to the ~100 GW of installed nuke capacity. Hardly niche!
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JohnMashey Posted 12:42 pm
26 Dec 2007
Sean is really right on
I heard Peter Darbee, CEO of CA's PG&E utility, give a talk a few months ago that included some key elements of Sean's wish.
He said not to expect anything useful to happen until other state PUCs changed to incentivize efficiency, and even then, getting PG&E to change wasn't easy, although replacing 28 of 35 key executives helped.
-John Mashey
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apsmith Posted 12:43 pm
26 Dec 2007
cogen
The cogen percentage in the US has gone down, not up, in recent decades, as major industrial production has left the country. I don't see it as a long-term solution at all. Are you seriously saying that 100% of that 200GW is 30+-year 100% capacity-factor heating need? That seems very unlikely.
The usual definition of cogen (the 135 GW piece) does not in any way reduce the quantity of fuel needed to produce electricity - in fact it typically has lower electric power output relative to what you get from combined-cycle natural gas systems, for instance. Cogen does reduce the quantity of fuel used for heating, but then we should talk about it as a way to improve the efficiency of commercial/industrial heat in the nation, not as a way of improving the efficiency of electricity production. It has no effect on the efficiency of electricity production.
Now what you're doing (the 65 GW piece) does reduce fuel input to electricity by pulling electric power out of industrial process heat. That's fine.
But your calculation that 200 GW of potential results in 20% reduction in GHG emissions is just wrong because you're claiming it's an efficiency improvement for electric power, when it's not.
You might at best get a 5-7% reduction in GHG emissions going the route of replacing 20% of our electric generating infrastructure. But spending the same amount of money (something like $500 billion) on solar or wind would result in at least a 15% reduction in GHG emissions for the US - 2 to 3 times the benefit for the same cost.
But we've had this cogen argument before.
Do you have anything else specific, besides cogen, to offer on improving the efficiency of electric production, as any kind of proof that utilities really are dragging their heels due to the current regulatory environment?
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GreenEngineer Posted 5:13 pm
26 Dec 2007
so?
The usual definition of cogen (the 135 GW piece) does not in any way reduce the quantity of fuel needed to produce electricity - in fact it typically has lower electric power output relative to what you get from combined-cycle natural gas systems, for instance. Cogen does reduce the quantity of fuel used for heating, but then we should talk about it as a way to improve the efficiency of commercial/industrial heat in the nation, not as a way of improving the efficiency of electricity production. It has no effect on the efficiency of electricity production.
What we're really talking about here, if you want to be excruciatingly precise, is improving the efficiency of fuel utilization in the electricity generation sector.
If you insist that we "talk about it as a way to improve the efficiency of commercial/industrial heat in the nation", then what we're talking about is restructuring the electrical generation infrastructure to do double duty, to satisfy a need using a resource/waste stream that is currently untapped.
Whatever. If recovered heat offsets the need to burn additional fuel, then that's a win.
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GreenEngineer Posted 5:17 pm
26 Dec 2007
Also
You're focussed on commercial/industrial applications. Don't underestimate residential applications, particularly in high-density urban contexts. Individual water heaters are a silly way to supply domestic hot water in an apartment complex. Same for individual furnaces, for that matter. A unified, building-level heating and domestic HW system using heat recovered from onsite cogen can save a hell of a lot of heating gas.
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JMG Posted 1:55 am
27 Dec 2007
And don't overlook cooling
Similarly, don't overlook the importance of heat recovery for COOLING apartments/malls/industrial/ office spaces -- low pressure steam can be just dandy for supplying the heat needed to drive chillers ...
Save the world: Reduce greenhouse gas emissions 5% annually.
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Michael Hoexter Posted 4:31 am
27 Dec 2007
"Revolution in Power Engineering"
I have written a think piece on my blog about where power engineering might need to go to fully embrace renewables which I called "Revolution in Power Engineering":
www.greenthoughts.us
My focus was on the production side but you are right to emphasize that the low hanging fruit for many utilities is the demand side given the example of California's state laws/regulatory culture. Most states and regions of the world have not yet developed a similar system and they should, as Peter Darbee has pointed out.
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Sean Casten Posted 5:43 am
27 Dec 2007
AP responses
AP:
You raise some good questions, but make some common errors with response to the impact and opportunity for cogen. Allow me to respond.
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