Viewing posts tagged: "Policy"

China Blows by the UK on Strength of Wind Sector, Central Planning

Daniel Englander: August 20, 2008, 7:40 AM
Planners for the 2012 Summer Olympics in London must have looked on in horror as 2008 drummers banged their way in synchronicity through the opening minutes of the Beijing games two weeks ago. The ensuing four hours sent them searching for the long knives. An Ernst & Young report released this week probably had the same effect on the UK's renewables planners. The consulting group's periodic Renewable Energy Country Attractiveness Indices had China moving up from sixth place to fourth and into a tie with Spain, though still behind the U.S., Germany, and India. The UK dropped back to sixth place on the strength of China's growing renewables manufacturing base and its own inability to finalize a workable renewables policy. Though most of the news you read from Greentech Media talks about China in terms of its solar manufacturing capacity, wind is the real breakthrough sector there. The International Energy Agency projected China would reach 5 GW of installed capacity by 2010 - it got there in 2007. It's expected the CCP's target of 30 GW by 2020 will be shattered within seven years. Manufacturing capacity in the country is pegged at close to 9 GW, with few producers feeling the same input constraints that have hampered GE and Suzlon. The CCP is likely to increase its target well before that date. With the uncanny ability to direct large sums of money into virtually any project it sees fit, the CCP is on its way to becoming the largest renewables developer in the world. As an added benefit, if they run out of windy spots, you can bet the Chinese will figure out a way to make the wind blow elsewhere. The British, meanwhile, have been slow to implement a concerted renewables policy. Having a voting population makes consensus a sticky issue sometimes. The government launched its Renewable Energy Strategy in June with ambitious proposals to put the country on course to meets its 20% by 2020 EU obligations. However, the RES, which calls for 33 GW of installed wind capacity by 2020, also requires a two year consultation period. This means no significant projects will get off the ground before 2010, leaving the country only 10 years to deploy something close to 50 GW of renewables capacity. There have also been complaints that the UK renewables obligation program - its market deployment mechanism - costs too much and provides too little incentive for the British to deploy renewables at the required pace. A reworking of this incentive program may help reverse the UK's renewables fortunes. In general, however, the story of the UK renewables has been one of overpromising and underperforming. The UK should have much more going for it given its large wind and marine renewables resources. Building up these resources is even more pressing now since it looks like their grand nuclear plan is in meltdown. Perhaps the British should look to the Chinese for advice on getting it done - what they lack in representative democracy, they more than make up for in sheer will power.

RGGI: How Not to Design a Carbon Market

Daniel Englander: August 19, 2008, 5:39 AM
The Regional Greenhouse Gas Initiative marked the start of operations Friday, trading 70 futures and options contracts on the Chicago Climate Futures Exchange. The contracts, which represent 70,000 emissions credits, were the first traded in the U.S. under a regulated cap-and-trade scheme. Many believe RGGI, which comprises 10 Northeastern and Mid-Atlantic states, will set the tone for a future federal emissions reduction scheme that is likely to be implemented under the next presidential administration. Let's hope not. While investor interest in the pre-sale - RGGI opens officially on January 1, 2009 - is heartening, the market itself suffers from serious design flaws. Most of these are related to political compromise that will sink the market before it has to chance to make a significant difference. If the design flaws evident in RGGI are replicated on the federal level, we should give up hope for a thriving carbon market in the U.S. in the short- to mid-term. Emissions credits in RGGI are limited to the power sector, binding generators to cumulative emissions of 188 million tons per year from 2009 to 2014. This number is set to decrease by 2.5 percent annually between 2015 and 2018, at which point climatologists expect most of the RGGI states to have sloughed off into the Atlantic. The emissions caps are set at higher-than-historic levels, meaning power generators will be allowed to emit more, though probably at a slower rate, than what was previously planned. Slowing emissions in the natural gas-dominated Northeastern power sector won't be difficult, and an emissions credit surplus problem will probably emerge within the first few months of trading and last beyond 2014. The contracts ended their first day of action at $5.58 per short ton, far below the level required to illict credible behavior change. Trading yesterday wasn't too thrilling either, with a meager trading volume of 4 contracts sending prices for December 2009 deliver down to $5.56. The spread out to December 2012 is still below $6.00, meaning traders don't expect market conditions to become more competitive anytime in the near future. And this is exactly what the power producers want. Electricity prices among RGGI states are some of the highest in the country, with New York and Massachusetts regularly topping out above $0.15/kWh. Because of retail choice, wheeling and common carrier requirements in the PJM Interconnection, NYISO, and and the Mass ISO, RGGI power producers often steep price competition from coal burners in West Virginia and hydroelectric producers in Quebec. The power producers within RGGI lobbied hard for relaxed emissions requirements - more stringent caps would have forced them to alter the fundamentals underlying their retail rates, which are negotiated annually with state-level public utility and public service commissions. By keeping caps high and requirements low, the cap-and-trade scheme will have little impact on the planning decisions of power producers. This defeats the purpose of emissions reduction. The regularly cited figure for incentivizing behavior change is €35 per metric ton (U.S. emissions credits are traded on the short ton, equivalent to 907 kg - another market design flaw). Credits on the EU market trade around €24 per metric ton, below the line, but inclusive of emissions in both the power and industrial sectors. Because of the retail rate restrictions and public service obligations regulators place on power producers, including the industrial sector in the reduction scheme necessarily places pressure on power producers to make creative, often risky decisions, like building out renewable capacity. Fortunately, EU countries offer policy support for these projects. While not perfect, the integration of policy across both incentives and mandates makes conforming to emissions reduction regimes less painful. Perhaps American power producers wouldn't balk at carbon regulation if government bodies set about getting the incentives right. Whether this involves extending the production and investment tax credits, introducing a federal RPS or REFIT program, tax breaks, or merely directing subsidies to emitting companies for technological development and process innovation (kind of like how the government gives money away to oil companies), remains to be seen. To ask entrenched sectors like power, construction, or the industrials to cut emissions without support is ludicrious and leads to markets as potentially disfunctional as RGGI.

Aquanomics Update: UK Consumer Distress a Boon for Investors

Daniel Englander: August 12, 2008, 12:00 AM
British consumers may soon feel the pinch of higher water rates. Between 2010 and 2015, British water utilities claim they will need to make £27 billion in infrastructure investments to comply with the EU-wide Water Framework Directive, which requires water utilities to comply with new water conservation and pollution standards aimed at adapting to climate change-related water shortages. Ofwat, the UK's water regulator, received the proposals Monday amid criticism from British consumer groups who claim ratepayers are having trouble coping with similar rate increases for gas and electricity service. British Gas, for example, raised its service rate 44 percent this month. The rate increase will go to pay for efficiency improvements aimed at driving individual use down from 150 liters per day to 130 liters per day. The highest rate applications have come from Bristol Water and Southern Water, which collectively serve seven million customers. Bristol Water has proposed an infrastructure improvement plan that will raise average annual rates from £149 to £187 next year, representing a 26 percent increase over inflation. Southern Water's 23 percent rate increase will raise annual bills to £426 by 2015 to pay for investments worth £2.6 billion. United Utilities, another large water provider, has asked for a 2.7 percent annual increase over five years to fund a £4 billion investment plan aimed at creating annual efficiency gains of around 1.5 percent. All companies have said the rate increases are necessary to comply with the new EU conservation and pollution standards. While the rate increases understandably create distress for consumers, they represent an interesting opportunity for water-focused greentech companies and investors. The efficiency-focused infrastructure improvements will require water technology far more advanced that what is currently deployed. While some of this technology is deployed already in places like the water-conscious United Arab Emirates, much of it has yet to move from the prototype phase. Nothing will help that more than £27 billion worth of RFPs, especially when the issuers' other choice is to face a hefty EU fine. While Ofwater will probably accept rate increases smaller than those proposed, driving down the amount of total investments, the work required to meet this demand will drive further innovation in water technologies. As far I'm aware, the improvements to be made in Britain between now and 2015 represent the largest concerted effort to rebuild a water industry anywhere in the world. If done correctly, as with all things greentech, the high initial capital expenditures will result in long-term cost savings as resource efficiencies drive down operating costs and service rates. Greentech VCs would do well to get some of their water companies in front of the British utilities. This brings up a related point. Electricity and gas rates have increased in recent years as a result of constrained power supplies, demand levels rising above forecasts, and structural shifts in the natural gas industry. The proposed increase in water rates also stems from use and resource constraint issues. In the power, heat, and water supply industries, however, increasing rates have played a large role in moving green technologies further into the mainstream. But just who should bear the cost of this? Passing costs onto consumers is a common practice in regulated industries. Companies in these sectors are required to negotiate tariffs, and rates of return are strictly supervised by regulatory authorities. This helps (sometimes) to keep rates down and preventing utilities from taking advantage of their natural monopoly status. However, as markets move, utilities are forced to renegotiate, often with undesirable consequences for consumers. But if utilities were unregulated and rates were set to monopoly pricing, wouldn't this drive down demand (or drive up efficiency and conservation)? So maybe regulators should pay. After all, they're the ones who force utilities to keep costs down, though often with limited success. They also force utilities to keep the water on for people who can't or won't pay their bills. And the utilities themselves? Faced with a set of perverse regulation-based incentives, utilities do their best to keep investments and improvements at a minimum. Anything else would raise the ire of shareholders. The answer is a combination of all three. The EU follows the polluter pays principle, which means utilities should bear a considerable portion of the investment burden. Regulators, however, in sticking with their mission of public service should view the infrastructure improvements as a investment in future conservation and insurance against water shortages and drought. Consumers increasingly need to come to grips with their legacy of overuse. When water is in short supply, demand becomes relatively inelastic. Hang out in the desert for a bit with a box of Fiji Waters and you'll see what I mean. Or just ask the Gulf Arabs, who must desalinate more than 95 percent of their drinking water and still face a potentially devastating shortage. GE has found one of their biggest growth opportunities in that market. The UK's water situation represents a similarly significant opportunity for companies developing even newer, more innovative technologies. Perhaps the British Government will use this opportunity to build their own water tech industry. The demand is certainly there.

Has Green Building Found its White Knight in Ikea?

Michael Kanellos: August 7, 2008, 11:04 AM
Green homes represent one of the most promising markets in green tech today, in my opinion. The modular homes coming from companies such as Michelle Kaufmann Design (see snazzy video here) and Living Homes can be built at close to the same cost as regular homes but save their owners massive amounts of money over time in lower electricity and water bills. More importantly, they are cool. (see picture of a Living Homes home here. A Kaufmann home is pictured below). They are open, airy and nostalgically modern. If you grew up in Northern California, it's like living in the birdhouse at the Nut Tree. That's a stark contrast to most green products. Bioplastic cups pretty much work like plastic cups. Solar panels, once the thrill of putting them up goes away, pretty much just deliver electrons. It doesn't change your life. Electric cars and green homes are the only two products in green that I know of that give you that "gotta have it" feeling that has animated the PC and consumer electronics market for 30 years. The problem? It's a real tough business. You need a factory, deals and relationships with land developers like Shea Homes and Lennar, and lots of employees. Plus, protectable intellectual property is almost nonexistent. A lot of VCs have told me they have shied away from this market for those reasons. (Kaufmann just got some money, though, said sources. Don't know if that's public, but if not, there you have it.). VC have shown more interest in building components like drywall that can be sold to any contractor. Enter Ikea. The Swedish retailing giant said it is going to invest around 50 million Euros in clean technology start ups and start to market clean products, according to a story in Ikea execs speculated that they might invest in lights, solar panel companies or water purification systems, etc. But these investments will probably never really fly. Why does Ikea need to invest in an LED lamp company? There ar 75 people in Taiwan or more that will make 10,000 LED lamps for them a month. Ikea can rename them Snarvik or Liikplatt. Solar panels? Easy. Buy some BP panels, call them Zurbis and make technicians from SolarCity get dressed up in blue and yellow outfits. (Side note: naming stuff at Ikea is on my top ten dream jobs list, right below teaching chimps how to ride bikes.) Ikea, though, builds prefab homes in Europe. It knows the market and the economics of it. And, unlike LEDs and water purification, the number of large, well-oiled partners to work with is relatively small. Mark my words. This is really what this deal is about. In five years, you could be living in a Schnuuri.

Citing Shrinking Margins, ADM Ships Off for Brazil

Daniel Englander: August 6, 2008, 2:37 AM
Archer Daniels Midland will begin work on sugarcane ethanol production in Brazil, a company spokesman said this week. The world's largest grain producer cited margin compressing corn prices and construction costs as the main driver, though the slowly shifting U.S. policy climate has given a number of the major ethanol players reason to look elsewhere. An unconfirmed report has ADM taking stakes in two joint ventures to open mills capable of crushing 3 million to 4 millions tons of sugarcane annually. Though ADM has looked for years to enter the Brazilian market, the collapse of the company's fundamentals in the U.S. are likely the primary driver. That and the growing demand for Brazilian ethanol in the U.S. ADM posted extremely disappointing earnings this quarter. The company's earnings fell 61 percent year-over-year from $954.8 million in 2007 to $372 million in the fourth quarter. The profit loss on top of a 78 percent jump in revenues points to some severe margin compression. ADM probably had an easier time selling off its raw goods while watching markets for its finished goods - ethanol, for example - shrivel up and blow away like so many corn husks on a late fall evening. The same high corn prices ADM benefited from on one side of its business caused another side of its business to take a pretty bad shellacking. ADM VP John Rice said that as corn prices went through the roof, "the cost to build plans these days - with stainless steel, labour costs and everything else - is going up. [Producers] don't see the margins out there right now and finding capital is also very tough." Also, aside from increasing blending requirements, when's the last time you bought ethanol outright? Anyone? The growing success of Cosan, Brazil's largest ethanol company, may provide a key to understanding ADM's move. Ethanol exports are moving upwards for Brazilian producers. Cosan, for example, believes exports will account for 25 percent of its output in 2008 and 2009, compared with around 20 percent in 2006 and 2007. For the industry generally, exports will be up in this period to 5 billion liters from 3.1 billion liters in the previous period. High sugar prices trumped up by some textbook import protection for American 'producers' has driven more sugarcane into ethanol production. That, combined with a record harvest this, year has sent sugarcane ethanol prices down compared with ethanol produced in the U.S. Some analysts now believe Brazilian producers will be able to sell profitably into the U.S. market this year despite the $0.54 per gallon tariff. But what if you could produce in Brazil at those lower costs without having to worry about the tariff at all? As part of the Caribbean Basin Initiative trade agreement, producers in that region are exempt from the tariff. Cosan, a subsidiary of a Bermuda-registered company, has signed a number of partnership agreements with Caribbean companies to ship them hydrate ethanol to have processed into anhydrous ethanol for shipment into the U.S Though this sounds a little like the pump-and-dump scheme European biodiesel producers were screaming bloody murder about a few months ago, the fact that Brazilian producers are doing this to thwart a tariff and not take advantage of a subsidy is, in my book, completely redeeming. ADM, which I imagine has a far more extensive network of agriculture processing plants, may be looking to produce in Brazil so it can follow a similar scheme.

A Huge Day for the U.S. Energy Future

Michael Kanellos: August 2, 2008, 5:12 AM
The end of the week probably set the stage for U.S. energy policy for the coming decades. Here's the summary: While Congress partisans fought bitterly over oil drilling, a group of ten moderates in the Senate (five Dems, five Republicans) came up with compromise plan. It would allow more drilling on the East Coast. In turn, oil companies would lose about $30 billion in tax breaks. Those breaks would go to fun investment tax credits for the renewable industry. The plan also includes tax breaks for electric cars. So almost everyone gets something. The Republicans claim a victory on drilling and the Democrats and ethanol and solar state representatives get money for new industries. Detroit, the bumbling boneheads of the U.S. economy, get incentives for people to buy new cars. (Granted, Japanese manufacturers will probably benefit more because of the cars they sell, but Detroit will get some benefit.). It's not perfect, but compromises rarely are. The compromise even prompted Barack Obama to state that he would support limited drilling if it meant getting renewable bills passed. But not everyone is happy. Under the drilling plan, Virginia, the Carolinas and Georgia state governments would have the option to allow drilling or not. Florida would not. Drilling goes forward in the plan. State Democrats and Republicans aren't happy. (Drilling crosses partisan lines when it is in your backyard.) And in other notes, California utilities may not make their goal of getting 20 percent of power through renewables by 2010. Growth in demand and tax credit uncertainty to blame. Oh, and Andy Karstner, the friend of the renewable industry in the White House, earlier in the week resigned. Well, it will be an new administration soon anyway.

Senate Republicans (Mostly) Vote Against ITC

Daniel Englander: July 30, 2008, 6:46 AM
Shame on you, Harry Reid. At 11:50 a.m. today the bill containing extensions for the production and investment tax credits was voted down in the Senate. Democrats failed to gain the 60 votes necessary to invoke cloture and start floor debate on S. 3335, the Jobs, Energy, Family, and Disaster Relief Act of 2008, picking up only 51 votes in favor compared to 43 against the motion. Senators McCain and Obama abstained, while Senate Majority Leader Harry Reid (D-NV) voted against the motion. This is the fourth time this summer the Senate has failed to move ahead with debate on production and investment tax credits, dampening hopes that the tax credits will be extended past 2008. The bill included $18 billion in tax credits for the renewable energy industry, as well as $8 billion for infrastructure repair and improvement, and a short-term fix for the alternative minimum tax. To pay for the tax credits, Sen. Max Baucus (D-MT) again moved with the proposal of eliminating the $54 billion tax loophole for offshore profits earned by multinational corporations and hedge fund managers. But why would Harry Reid vote against the tax credits? His state, which he's referred to numerous times as the 'Saudi Arabia of solar', is a hotbed of renewables activity. It might have something to a deal he's offered to Senate Republicans on amendments to an energy bill that includes provisions for lifting the moratorium on offshore drilling. His nay vote good be a sign of good faith to Republicans, or maybe he just sat on the wrong buzzer.