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Obama's Energy Plan: Trying to Kill 3 Birds With 1 Stone

May 2nd, 2009 7:33 AM by Lehel Szucs

Obama's Energy Plan: Trying to Kill 3 Birds With 1 Stone

Stratfor Today -- February 17, 2009 | 2039 GMT


U.S. President Barack Obama's energy plan would be a $150 billion effort over 10 years to stimulate the economy, cut greenhouse gases and increase energy security, all in one fell swoop. It is an ambitious plan that, unlike the Depression-era recovery effort, could not only create jobs but also firmly establish a new "green building" industry and reinvent the American automotive sector. At this point, however, some of the numbers seem staggering while others appear insufficient, and much debate and lobbying remain — even on the international level.


As part of the overall $789 billion U.S. economic stimulus bill agreed upon by House and Senate leaders Feb. 11 (and to be signed by President Barack Obama Feb. 17), approximately $50 billion will be set aside for programs focusing on promoting efficient and renewable energy. This follows Obama's announcement on Jan. 26 that his energy plan would invest a total of $150 billion over the next 10 years on a variety of projects, including vehicle efficiency, electrical efficiency, clean-coal power plants, biofuels and domestic oil and gas production.

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Obama's intention, essentially, is to kill three birds with one stone, addressing what his administration perceives as the country's need for economic stimulus, greenhouse-gas reductions and greater energy security. His 10-year plan makes it clear that his administration will work to reduce greenhouse gas emissions 80 percent from 1990 levels by 2050, and he will start on that path by reviewing a Bush administration decision to deny California its own climate change-focused law. Obama also announced that he would ask the Environmental Protection Agency (EPA) to review California's stringent emission standards, which were struck down by then-EPA chief Stephen Johnson in December 2007.

The first stated goal of Obama's energy plan is to fuel job growth through the "green" sector to the tune of at least 460,000 new jobs over the next three years. The stimulus package, which includes a short-term $50 billion (roughly) in energy projects, currently provides about $14 billion in loans for renewable energy projects, $4.5 billion for "smart grid" electricity updates, $6.4 billion for cleaning up nuclear weapon production sites, $6.3 billion in state-level energy efficiency grants, $5 billion for home weatherization projects and $4.5 billion for making federal buildings more energy efficient. The stimulus also allows for $18.9 billion in "green transportation," essentially improving public transit and building high-speed rail. These expenses represent only the first step in the $150 billion investment over 10 years to secure energy efficiency and energy independence.

The idea behind these projects is to try and push America's construction industry away from traditional home-building and remodeling (in 2008, residential construction fell a record 27.2 percent from the year before) toward a more green approach, which would include installing solar panels and efficient insulation in homes, schools and government buildings. This effort is similar to that undertaken in the 1930s during the Great Depression, when the government employed out-of-work tradesmen, artists and other workers to build public parks, paint murals in post offices and engage in other public works that were intended mainly to keep people busy. The Obama plan is intended to have the added benefit of creating a fundamentally new business sector — a green building industry — while decreasing the country's energy bill and putting people back to work. The government would be providing a stimulus for private business by creating incentives and a consumer demand for energy-efficient features that otherwise would not exist.

The second stated goal of Obama's long-term energy plan is to eliminate the U.S. dependency on Middle Eastern and Venezuelan oil imports by 2019.The United States imported roughly 10 million barrels per day (bpd) of oil in 2007; of this, imports from Saudi Arabia, Libya, Iraq, Kuwait and Venezuela combined to a total of 3.3 million bpd. Removing the need for Middle East and Venezuelan oil would give the United States much greater room for maneuver in both regions.

US Energy Usage By Source

The 10-year energy plan also contains a climate-change portion. Obama's target (an 80 percent reduction in greenhouse gas emissions from 1990 levels by 2050) is softer than Europe's (80 percent from 1990 levels by 2020), but his 25 percent renewable energy goal surpasses Europe's 20-20-20 plan. The European plan seeks to increase the EU's use of renewable fuels to 20 percent of total energy demand and reduce total EU energy demand by 20 percent, all by 2020. It is by decreasing reliance on non-renewable energy that Obama hopes to wean the United States off of Middle Eastern and Venezuelan oil.

Cap and Trade Program

One of the most ambitious proposals of the Obama energy plan is a national cap and trade program. Under such a program, the government would set emissions standard for various industries, allowing companies that emit less carbon dioxide than their allotment to trade their excess "credits" to those who are emitting above the cap. The initial allotments of carbon credits will incite one of the more contentious domestic debates in the coming years, as will the steepness of the emissions reduction curve. In addition to a national goal of 80 percent by 2050, there are questions about what the goal will be in 2020 or 2035.

Lobbying efforts are already under way regarding cap and trade. American businesses do not want to see states in charge of setting greenhouse gas emissions standards since that would increase the accounting and legal fees companies would have to incur to deal with the system on a state-by-state basis. Instead, they want to see a single national standard.

Establishing a national standard for a cap and trade system would allow utility companies to factor in future costs of emitting greenhouse gases, which currently is an unknown. Utility companies do not know whether it makes sense to build regular coal plants, clean coal plants, solar or wind installations or natural gas production facilities because the rules of the game are not set. Until that happens, energy expansion in the United States will be at a standstill.

However, the U.S. domestic climate-change policy must be negotiated at the global level, particularly with China. Obama, or any subsequent U.S. president, will be hard-pressed to adopt carbon emission rules without first getting some sort of a deal with China that would guarantee that Beijing would also address its own greenhouse emissions. Otherwise, U.S. greenhouse gas-emitting industries (chemicals, petrochemical, paper and pulp, steel, cement, etc.) could bolt for China and the developing world. Therefore, a conversation with Beijing about climate change is high on Obama's list of priorities; his energy envoy, Todd Stern, is accompanying Secretary of State Hillary Clinton on her current trip to East Asia, primarily to discuss some of Obama's energy ideas with the Chinese.

Improving Automobile Mileage

To reduce consumption of imported oil by approximately a third, Obama plans to force implementation of a congressional decision in 2007 to raise federal fuel economy requirements to 35 miles per gallon for cars by 2020, from their current level of 27.5 miles per gallon. (Today, about 60 percent of U.S. oil demand is used to power the American vehicle fleet.) The 2007 congressional decision was never put on a path for implementation by the Bush administration, which Obama will try to reverse by asking the Department of Transportation to come up with a plan by March to implement the mileage standard.

The problem with increasing the mileage of the current fleet (which has essentially averaged, on a fleet-wide basis, slightly above 20 miles per gallon since the early 1980s) is that it would necessitate replacing a substantial number of America's current fleet of over 250 million cars, small trucks and SUVs. In the Energy Independence and Security Act of 2007, Congress allocated $25 billion to "reequipping, expanding, or establishing manufacturing facilities in the United States to produce qualifying advanced technology vehicles or qualifying components." However, all of the $25 billion was subsequently relocated to provide bridge loans to the auto industry as part of their bailout announced on Nov. 20, 2008.

Therefore, it will be up to consumers to replace their old automobiles with hybrid vehicles, and Obama hopes to encourage them to do so by offering $7,000 in tax credits per vehicle for the purchase of an "advanced vehicle" (presumably these would include various types of hybrids) and putting 1 million plug-in hybrid cars on the road by 2015. This tax-credit program would have the U.S. government essentially spending a huge amount of money to buy new cars for people. Currently (figures are from December 2008), U.S. purchases of hybrids average 17,600 per month (down from about 30,000 during the first half of 2008), or approximately 3 percent of total purchases. At that rate, if Obama's $7,000-per-car system were adopted, the U.S. government would have to spend approximately $123 million in tax credits per month, or nearly $1.5 billion a year, just to sustain the current level of hybrid purchases.

Encouraging 'Plug-in' Hybrid Technology

The "plug-in" component of Obama's hybrid-vehicle plan is a direct plug for the domestic manufacturer General Motors Corporation (GM), which has essentially put all of its eggs in one basket with its flagship to-be Chevrolet Volt electric plug-in car. The Volt, which can go 40 miles purely on stored electricity before switching to its onboard gasoline engine, will have a price tag of more than $40,000, which means that even with the $7,000 tax credit for advanced vehicles (which presumably would also go for the cheaper Japanese hybrids), the Volt would cost essentially twice as much as its foreign competition. GM flatly stated in recent congressional hearings that the Volt would not be profitable in its first production run, that total costs of production would be around $750 million and that return on the investment could be expected only after 2016 — a risky strategy for a troubled manufacturer, to say the least.

At the moment, however, there is very little certainty that U.S. consumers would choose a U.S. made plug-in hybrid like the Volt over the (mostly Japanese) competition. Complicating calculations relating to the energy efficiency of the plug-in electric hybrid is the fact that the economics and ecological benefits of these vehicles depend on local electricity costs and the relative "greenness" of the consumer's power source. A traditional gasoline-electric hybrid contributes to less net greenhouse gas emissions than a plug-in hybrid in states that rely on coal for electricity generation. This calculation would change, of course, with changes in the electrical grid (see below).

Investing in Coal

Obama's plan is to "develop and deploy clean coal technology" as part of relying more on domestic energy resources. If there is one non-renewable source of energy that the United States has plenty of it is coal. In 2006, U.S. proven reserves totaled 27.1 percent of total global coal reserves, the highest number in the world. Coal already accounts for roughly 51 percent of U.S. electricity generation (in 2007) and for 22.8 percent of total energy use in the United States.

Electricity Generation in the US By Source in 2007

At the center of the debate over coal in the United States is the question of "clean coal" technology, especially carbon capture and sequestration. As the term implies, this combination of techniques allows for a coal-fired power plant to produce power without spewing carbon dioxide emissions into the atmosphere. Instead, the carbon is captured and sent to deep underground repositories where it is sequestered. The technology could prove to be a panacea (should it ever become cost-effective): The United States has over a quarter of the world's coal; it wants to increase its domestic energy sources; and it needs to reduce carbon-dioxide emissions. The only problem is, while the technology exists, no one has figured out a way to employ it economically.

To retrofit an existing coal plant would cost approximately $1 billion to $2 billion (a 300 megawatt coal plant by itself costs about $1 billion and a 630 megawatt costs around $2.4 billion) and would require a doubling of the actual acreage on which the plant was built. An additional problem is that capture and sequestration would consume 30 percent of the plant output, substantially limiting the total energy output of the plant.

The elephant in the room is the potential cost of a complete overhaul of many of the current coal-burning plants, which would likely be necessary to make them economically viable under a future cap-and-trade system. The price tag for such an overhaul would be monstrous and definitely higher than the $150 billion currently earmarked for the next 10 years for all energy projects. The United States has 1,470 coal-burning plants, and if the cost of retrofitting for subterranean sequestration is factored in, the numbers would be astronomical and could measure in the trillions.

The final problem facing the coal industry is that the authority to regulate the building of new power plants in the United States rests with state governments, not the federal government. Some state governments have come under pressure from environmental groups to delay or cancel the building of coal power plants to avoid exacerbating climate change. In other states, environmental organizations have used lawsuits to tie up proposed coal plants for years. These lawsuits have added to the uncertainty surrounding the economics of building new coal plants. The economic uncertainty, legal uncertainty and litigation have resulted in a situation in which of the 151 coal plants proposed for construction in 2007, 109 were essentially scrapped or tied up in court, with only 28 actually under construction in 2008.

Promoting Ethanol

Encouraging a greater use of ethanol was one of Obama's primary electoral campaign messages, particularly to the corn-producing region in the Midwest where he picked up Iowa — the undisputed corn producing king — by a wide margin (Iowa voted Republican in 2004 and Democratic only by a slim margin in 2000). Derived mainly from corn, ethanol could be produced and mixed with refined petroleum to create enough gasoline to fulfill America's transportation energy needs (which account for 30 percent of total energy usage and over half of oil use in the U.S.). To fulfill Obama's pledge to wean the United States from Middle Eastern and Venezuelan oil, U.S. refineries would probably have to use six times as much ethanol in gasoline than they currently do.

The key problem with such a surge in ethanol use is that it would appreciate food prices. According to calculations by the University of Illinois economics department, with oil prices at $50 per barrel it is profitable to convert corn into ethanol if corn prices are lower than $4 per bushel. Corn prices currently stand at approximately $3.67 per bushel. If oil were to climb above $50 per barrel, it would be more profitable for farmers to sell corn to ethanol refineries than to sell it for food. As oil prices climb, the threshold for corn prices rises as well, giving farmers more incentive to convert corn into fuel and thus raise food prices.

One way to avoid raising food prices would be to produce ethanol from cellulosic material (essentially any sort of non-edible plant material, from grass to corn stalks). The problem with cellulosic material is that it requires expensive enzymes to break down the plant material before it can be refined — a recent study found that this process is competitive only with oil prices above $90 a barrel. The process would also require gathering massive amounts of low-value raw materials — itself a very energy-intensive process because these materials have to be transported from the farm to the refinery. Currently, cellulosic materials like chaff are simply ploughed into the soil as fertilizer, burned or used for animal feed. In order to use it as a main source of ethanol production, the material would have to be shipped to refineries from the farm.

The current collection-transportation networks in the Midwest are calibrated for food distribution, not gasoline delivery. Therefore the first problem is how to get the cellulosic material to the refineries. Chaff and agricultural by-products are usually less dense than corn, so it would take more trips to the local refinery to make it worthwhile, increasing transportation costs. Farms would either have to ship their agricultural waste for refinement to a centralized collection point (most likely right next to the grain elevator) or run rudimentary refineries right on their farms.

Either way, once the refining process is complete, the ethanol would have to be shipped to consumers around the country (most of who are on the coasts, far from the Midwest). There is no pipeline network ready to take the fuel-ready ethanol from refineries to the coasts, and such a network (one akin to the natural gas pipeline network in Europe may have to be developed) would be an extremely expensive project. Therefore, a switch to ethanol could work for the Midwest, leading to a bifurcated system where the coasts still use petroleum for transportation while the agricultural producing regions rely on ethanol.

The Alaska Natural Gas Pipeline

To boost domestic production of energy, Obama's plan would "prioritize the construction of the Alaska Natural Gas Pipeline," which would tap natural gas deposits in Prudhoe Bay on the banks of the Arctic Ocean. To get the pipeline to reach the U.S. lower 48 it would have to cross more than 1,500 miles, including the imposing Alaskan Brooks Mountain Range. The project is not new. It was proposed in the late 1960s, when the deposits were discovered, and became a popular idea during the oil shocks of the early 1970s. Today there are three competing pipeline projects being considered: ExxonMobil's Mackenzie Valley ($16.3 billion), the TransCanada project ($26 billion) and BP-ConocoPhillips' Denali project (somewhere between $30 billion and $40 billion). All three projects are financially daunting, comparable to the Soviet-style infrastructural development that aims to connect Russian natural gas fields on the Yamal Peninsula with consumers in Europe. As a point of comparison, the Yamal-Europe pipeline that ships natural gas from Russia to Germany via Poland and Belarus traverses over 4,000 miles of flat terrain and cost roughly $45 billion. As such, it is actually cheaper per mile of pipeline than either the TransCanada project or BP-ConocoPhillips's Denali project.

'Use it or Lose it' Lease Strategy

A U.S. congressional report, supported by Democrats on the House Natural Resources Committee, has highlighted 68 million acres "of leased but currently inactive federal land and waters" that could produce "an additional 4.8 million bpd of oil." Intrinsically, this production would decrease U.S. imports by 75 percent and eliminate the need for Middle Eastern and Venezuelan imports. The Obama energy plan would seek to boost domestic oil production by tapping this supposed wealth of untapped domestic wells that energy firms hold leases on but choose not to produce from.

The problem with this plan is that U.S. energy firms hold leases on potential wells and deposits that often require a long period of time to survey. Some underwater deposits are unable to be exploited, at least until technology is improved (which generally takes years and sometimes decades). By forcing energy companies to "use it or lose it," the government will discourage careful surveying and most likely run off the energy firms from the deposits by attempting to force them to develop currently uneconomical fields. Unless the U.S. government develops a state-owned energy company willing to tap and produce from fields for a loss, there is no point in taking leases away from energy firms.

The 'Smart Grid'

Ultimately the most significant change to America's energy usage and efficiency may be the retooling of the entire electricity grid and transforming it into a so-called "smart grid." This is essentially an amalgamation of modern technologies in the distribution and supply of electricity. It uses digital technology (such as digital electricity readers, which would replace manual readers) to coordinate supply and demand of electricity across the nation. It combines more efficient distribution of electricity to consumers with advanced long-distance transmission lines that would be able to take alternative energy sources (such as wind power) to electricity markets far away.

As such, a smart grid would introduce two-way communication between energy suppliers and consumers, allowing utilities to direct power more efficiently away from low-energy users to high-energy users depending on the time of day or need. It would also give consumers more room to create their own usage preferences by actually programming how (and when) their appliances use energy. The smart grid would also regulate electricity use of homes and businesses by being able to turn off appliances that are not being used during peak times.

The concept is simple enough and would update America's electricity infrastructure (currently running on technology not much different from its nascent stages in the 19th century) to a modern digital consumer/provider system. However, such a national grid would necessitate replacing all of America's electricity meters, as well as all transmission lines and all transformer stations, a project with a likely price tag of somewhere near $200 billion. The current stimulus package, however, commits only $4.5 billion to a smart-grid upgrading of some 3,000 miles of transmission lines and equipping about 40 million homes with "smart meters." This funding will not be enough to begin a serious overhaul of America's electricity transmission network. It is more an attempt to kick-start industry and private businesses and move them toward an eventual retooling.

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Posted by Lehel Szucs on May 2nd, 2009 7:33 AM



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