Excuse Me, Can You Spare 20 Trillion Bucks?

Global Energy Infrastructure Demand
$20 trillion. That is how much in energy supply infrastructure that the world’s governments need to invest from 2005 through 2030 in order to meet the world’s growing hunger for energy, according to the International Energy Agency’s recently released report—World Energy Outlook 2006 (the “WEO”).

I had the pleasure of attending a presentation of the main findings of the WEO by Dr. Fatih Birol, IEA’s Chief Economist and Head of the Economic Analysis Division, at the Council for Foreign Relations on November 17. By the IEA’s analysis, production of non-OPEC oil will peak within the next decade. While acknowledging that are differing views on the peak oil debate, Dr. Birol rightly observes that the question of when oil production peaks—if it has already or if it will in 10, 20 or 50 years—is moot if the infrastructure to produce and distribute oil and other energy sources are not built.

The $20 trillion figure is a $3 trillion increase from last year’s estimates, driven by a “sharp increases in unit capital costs, especially in the oil and gas industry,” according to the executive summary of the WEO. I take this to mean, among other factors, the increase prices of metals (that are used to build the infrastructure) and, at least in the case of the U.S., hurricane-related damage to oil and gas infrastructure in the U.S. gulf region.

What accounts for this $20 trillion figure?

• China and India’s surging energy demand, especially for transportation fuel as their emerging middle classes drive demand for automobiles;
• Energy infrastructure in OECD countries built in the WWII era will be coming into retirement over the next decade, creating a huge need for replacement infrastructure.

[The gratuitous stock tip here would be to invest in global infrastructure contruction companies such as Bechtel and Fluor, which can best capitalize on this trend, especially in the Brazil-Russia-India-China (BRIC) markets]

The WEO warns that there is uncertainty as to whether the necessary investments will be made. It should be noted that the $20 trillion figure is based on a “Reference Scenario,” which assumes business-as-usual and current day energy policies. This is good news because it governments the opportunity to reassess their energy policies and induce their citizens to modify their patterns of energy consumption so as to bring that $20 trillion number down. In fact, the WEA points out that every $1 invested in efficiency in electrical appliances can offset the need of $2.20 in power infrastructure. For automobile efficiency, the ratio is $1:$2.40. The argument for demand-side management is thus very compelling; it is more than twice as cheap to reduce demand as it is to increase supply.

An Opportunity to Clean House
Dr. Birol emphasized, more than once, that the investment decisions over the next 10 years are extremely crucial because the infrastructure we build will be here to stay for the next 60 or so years; at least two generations will have to live with the consequences of our energy choices. This is a golden opportunity to reconfigure our fossil-fuel based economy into a more sustainable, renewable and cleaner one. The Stern Review, the landmark economic assessment of climate change released last month by the British government, offers its own warning of the importance of deceisve action over the next decade--in Chapter 8, we are told that greenhouse gas emissions must peak within the next 10 to 20 years, otherwise the stablization of CO2-eqvuivalents in the atmosphere will be highly costly and technically impossible with today's policies and technologies. (See Joel Makower’s post for more background to the Stern Review) Towards a solution, the Stern Review advocates for a well coordinated and financed technology policy is needed, covering the full panoply of research, development, demonsation and deployment (RD3). According to the executive summary:

“The private sector plays the major role in R&D and technology diffusion, but closer collaboration between government and industry will further stimulate the development of a broad portfolio of low carbon technologies and reduce costs.”

A Dire Need for Government R&D
I have previously written (see item #4 of previous post) that the clean energy sector is experiencing a venture capital boom, with some $3 billion projected by the end of the year. But the order of magnitude of clean energy technology development is of course just a component of, and a mere sliver compared to, the $20 trillion of energy infrastructure, which is really talking about the commercial scaling up of all energy technologies on a global basis. As a New York Times article points out, venture capital and private equity, while crucial, will not be a silver bullet:

“…there is a vital role for government spending, many experts agree, particularly on “enabling technologies”—innovations that would never be pursued by private industry because they mainly amount to a public good, not a potential source of profit…While private investors and entrepreneurs are jumping into alternative energy projects, they cannot be counted on to solve such problems [referring to nuclear waste and electricity storage], economist say, because event he most aggressive venture capitalists want a big payback within five years.”

Governments will have to take the lead in investing in “enabling technologies,” but as the several reports show (Joint Global Change Research Institute, Pacific Northwest National Laboratory, UC Berekely), governmental (and private) investment in R&D has declined in the U.S. and many other industrial countries. In the U.S., energy R&D, which accounts for $3 billion this year, is completely dwarfed by healthcare/biotech (almost $30 billion) and military (upwards of $75 billion) R&D (See this chart courtesy of the New York Times). Clearly, a “Manhattan Project” or “Apollo Project” for energy research is needed.

One way to make funds available for energy R&D is to eradicate the billions of dollars of energy subsidies and channel these funds to energy research. According to the WEO, subsidies on all energy sources in non-OECD countries amount to some $250 billion per year (almost all of it on fossil fuels and nuclear)—an amount equal to all investments needed in the power sector each year, in those countries. A reform of subsidies is needed, as a joint UNEP / IEA report “Reforming Energy Subsidies” argues. The report is also careful to distinguish between good subsidies and bad subsidies, but he evidence in the report suggests the majority of existing energy subsidies have net negative effects.

Whatever strategy is pursued, it is clear that strong global political will is needed to meet the formidable challenge of creating a sustainable energy future. International institutions and frameworks, such as the G8, G20, UNFCCC / Kyoto Protocol and Energy Charter Treaty can play important roles, but it is imperative that action starts sooner rather than later.

Related:
Last week’s issue of The Economist highlights in its cover story "Green Dreams":

“[c]lean energy fever is being fuelled by three things: high oil prices, fears over energy security and a growing concern about global warming…Analysts confidently predict that the clean-energy business will grow by 20%-30% a year for a decade.”

While it is good news that clean energy investments are all the rage with venture capitalists and investors, the bad news is that the 20%-30% growth rate comes off a tiny base as a proportion of all energy sources, so that in a decade’s time, clean energy will still only make up maybe 15% of the world’s energy sources, assuming the very high range of the growth rate. Given that our energy infrastructure built over the next decade has a 60 year shelf life, and short of any technological break through in the clean energy realm, conventional fossil fuel and nuclear infrastructure will likely continue to dominate.

All the more reason for a ramp up in energy R&D.

Blue Congress, Green Energy

What a Democratic Congress means for Energy and the Environment
President Bush has acknowledged the political "thumping" that has been inflicted on his Republican Party the day after Tuesdays mid-term elections as the Democratic Party seized power in both houses of Congress. He has extended an invitation to the Democrats to work with him for the final two years of his presidency. and the Democrats have accepted that invitation for a new phase of bipartisonship. Environmental and clean energy causes are a very likely beneficiary of this new pact. New York Senator Chuck Schumer, credited as the architect of the Dem takeover of Congress, identified energy as an avenue of cooperation (Wall Street Journal):

"There are some of us who are willing to entertain -- I think 12 or 13 Democrats were willing to drill in a portion of the East Gulf. I think in exchange there should be an increase in [automotive fuel efficiency] standards. In other words, on energy, the right says increase supply, the left says decrease demand. They aren't mutually exclusive and there is room for a real compromise to do both. There are intrinsic forces on each side to block it, but together you could retain a critical majority to do it."

Senator Schumer's measured response reflects the delicate balance of power that prevails despite the convincing Democratic victory; with only a 51-49 Dems to Republicans advantage in the Senate and a 229-196 (with 10 seats still undetermined) in the House, margins are relatively thin, and the space to make sweeping changes remains limited.

The Re-Arrival of John Dingell
Representative John Dingell's (Dem-Mich.) return to the chairmanship of the House's Energy and Commerce Committee (he lost the position in 1994) has been highly anticipated by greens. The Washington Post reports that "Dingell said he would back measures to promote new energy technologies, diesel fuel and cars, electric vehicles, and conservation in buildings." But as a Michigan man who has to look after his constituents, Dingell is known as a the automobile industry's protector against CAFE (Corporate Average Fuel Efficiency) standards. According to USA Today:

" Dingell is not eager to force automakers to improve fuel economy by boosting what's known as CAFE, for corporate average fuel economy. In an interview, he said, "The committee only has so much time," and noted that the CAFE standards recently were boosted. Fuel economy standards, he said, "can be addressed very well, automobile or light trucks, within the framework of existing law," which "gives an awful lot of freedom to the administration" to adjust the standards to keep up with improving technology."If you're talking about straight CAFE, you can't regard the arrival of John Dingell in that position as good news," said Therese Langer, transportation program director for the American Council for an Energy-Efficient Economy."

Climate Change
Dingell does care about Climate Change, though. The Wall Street Journal reports that "Dingell warned the utility industry that legislation on climate change will be one of his high-priority items and his committee aides say they plan a series of hearings to help Congress determine which approaches toward regulation of "greenhouse gases" may be the most cost-effective." Indeed, a number of climate change bills have been floating in Congress the past few years may just start to gain traction, but experts believe that it will take a new President for anything solid to pass.

Biofuels
Perhaps the one energy issue that both sides can find most common ground on is the development of biofuels and ethanol. A Democrat Congress means that "Corn Belt Democrats" will replace southern Republicans at the helm of the powerful agricultural committees of Congress. Representative Collin Peterson (Dem-Minn) and Senator Tom Harkin (Dem-Iowa) will take the chairmanships of the House and Senate agriculture Committees, respectively. Harkin was the architect of the environmentally friendly Conservation Security Program that was part of the 2002 farm bill. Says Mark McMinimy of the Stanford Washington Research Group:

"You're putting people in key positions who would be supportive of the ethanol industry's agenda. Put it this way, even more supportive than in the 109th Congress -- and that was relatively supportive ... A good situation gets better for ethanol is the way I see it."

Big Oil is a Target
One of the other things John Dingell is interested in is repealing some of the lavish tax subsidies that the Republican Congress gifted the oil and gas industry under the Energy Policy Act of 2005. As this piece explains, there is much suspicion behind the way Vice President's Energy Task Force operated and how it dealt with oil and gas companies, and during the oil price peaks of the past two summers, there have been noise made by members of both parties that the market practices of Big Oil companies should be investigated for any evidence of price gouging. Expect some Congressional hearings on this front.

California Dreaming
The Democratic takeover puts California, a state considered the last bastion of liberalism and which has been marginalized in the Republican era through reduced federal funding . But with its Democractic base is gaining new access to Washington:

• the new speaker of the House will be California's Nancy Pelosi (Dem-Calif), who has promised to tackle energy issues in her first 100 hours of office;
  
• Senator Barbara Boxer (Dem-Calif), a believer in aggressive climate change policies, will replace Senator James Inhofe (Rep-Okl), a climate change skeptic, on the Senate's Environmental Committee;
  
• Senator Richard Pombo (Rep-Calif), long time attacker of the Endangered Species Act and advocate of aggressive oil drilling in the Gulf region, was handily defeated by newcomer, Jerry McNerney , a wind energy entrepreneur.

California a long-time national leader in environmental politics. California Governor Arnold Schwarzenegger, who should be dubbed the 'Green Governator', recently signed into state law mandatory caps on carbon emissions, linked up its climate change initiatives with the efforts of the northeast states (RGGI), and signed an agreement with Tony Blair and the UK to collaborate on clean tech research.

Outside of the policy arena, California is also important because of the Silicon Valley and the new wave of clean technology investment fever that has swept the biggest names in the VC industry. The ability of the private sector to influence clean energy policy should not be underestimated; the narrowly defeated Proposition 87 in California is a testament of how effectively the heavy hitters of the investment community can raise awareness of clean energy issues (See also this commentary on Prop. 87 in Red Herring).

As such, California will have a new influence in national green politics, reports the New York Times (Nov 13, 2006):

"We will have a voice again on environmental oversight," said Art Torres, chairman of the California Democratic Party. "Over the last six years, funding has stopped for enforcement of environmental laws, and those issues are important to California."