One can easily argue that it is up to industry to ensure that it is operating efficiently. This is the idea behind a market based economy. This works well under most circumstances, however, there are many industries where this is not the case. For example the power industry was initially started under the funding and guidance of the government because of the massive amount of investment involved, the long time frames, and because of it’s importance to the growth and security of the country. It eventually migrated into becoming for-profit businesses. The growth of TV and Radio had a similar lifecycle. My philosophy with this blog is that an Energy Policy (i.e. a type of Industrial Policy or business leaders getting together to discuss this critical topic) is critical to our country for reasons of economic growth, global competitiveness, and security.

However, this is unfortunately incompatible with my experiences. The deployment of smart grid and green technologies and infrastructure in the energy space is disorganized, efficient, ineffective, etc. We have no energy policy in Washington, largely due to the Oil Lobby and our fundamental philosophy around free markets. Federal and State governments understand very little about the key strategic issues in energy, and they have few resources to do anything about it anyway. Lobbyists are impacting choices that favor the wrong technologies, and there is evidence to support that many of these lobbyists are ultimately funded by overseas interests. I’m no fool, and I understand that this is the very nature of a market based economy, however, it comes as no surprise to people that there is some level at which it just doesn’t work well enough. I also have found a complete dearth of people who are interested in engaging in conversations about what’s important to this industry from the point of view of ensuring that we focus on the most critical issues, the best technologies, and ensuring that we can compete with countries like China, who by the way are extremely advanced in this industry across the board (technologies such as Wind, Solar, Transmissions, Electric Vehicles, Electric Vehicle infrastructure, effective deployment of the smart grid, etc.). I don’t blame people for basically focusing 99.9999% on what they need to do to sell their products and services in this industry. This is the very fundamental nature of this country and the stock market which drives everything. It is the very thing which has made us so successful. I was hoping to find more people who were willing to spend a little bit of time understanding this incredibly important, fascinating, and complex topic, but I realized that I’m virtually alone in this pursuit, and it’s gotten to the point where not only is it a waste of my time, it’s just not fun anymore. I’m now going to focus on the mobile and media/entertainment space. Now that is going to be fun, and plenty of people are interested in that. Too bad, I really cared about the future of energy and our country, but I just don’t have the energy to do it anymore.

I wish everybody good luck!

Regards,

Mark Schaeffer

So when it comes to determining how to best ensure that a public utility, for example, deploys smart grid technology to ensure we can go more green, use power efficiently, prepare for an infrastructure of Electric Vehicles (EV’s), have adequate security (using a wireless communications infrastructure), we broadly have 2 choices: Assume senior management will do what’s in the best interest of the public due to the market penalizing them for doing otherwise vs. government regulation. In this case, it actually makes sense to do both. Government compliance is clearly needed because the utilities are quasi-monopolies, there are long time frames involved, the utilities have special rights of way, etc. However, since government regulation is not perfect, these companies are for-profit (they usually split their profits with the ratepayers), to ensure management is reasonably efficient without expensive, stifling, and ineffective government meddling. So we are assuming that somewhere in the mix, is the intelligence, foresight, and incentive to what’s in the public’s interest. Considering that energy policy is one of the most complex topics on the planet, and looking at current activities, it’s reasonable to conclude that this is probably not the case. The CEO’s job of a for-profit corporation is simple: Maximize shareholder value and don’t do anything illegal. Since most utilities are public companies, and since the stock market is inherently a short-term focused “management system” (i.e. quarterly results is what virtually all investors want, including the average person like you and me), you can’t blame a CEO for not doing what’s in the public’s interest – it’s not his/her job, and he’ll get fired for doing otherwise. So it’s up to the regulators, who unfortunately have a similar problem. In this case, their boss is the state government, rate payer advocacy groups, etc. who also measure short term results; are there disruptions in service, what are the costs, and measure simple metrics like percentage of energy coming from green sources (which are constantly being adjusted because this is in conflict with one of the other objectives – cost). They need to manage conflicting objectives, all on extremely limited budgets. So it’s not clear who (if anybody) is really in charge of thinking deeply about this complex problem of doing what’s in the best interest of the public (e.g. reducing carbon emissions, energy independence, environmental impact – all very long term problems). This system is clearly inefficient and maybe also ineffective at doing what’s in the public’s best interest, but the real question is, can we do better?

So let’s broadly look at some options:

I certainly don’t have the answers, what do you think? This is a subject matter certainly worth of much more debate. The problem of course is, who has the incentive and resources to ensure that such a debate occurs and is efficient and effective, and results in action? People in this industry joke in various inner circles that China is much more effective and efficient than the US. You can see the results – China’s now dominance of renewable energy technologies, transmission lines for long haul transfer of power, etc. It would be interesting to compare the above table between the US and China. What does this mean for us? It’s anybody’s guess. For now we have to work within the system, and if we’re lucky we’ll eventually get to where we need to go, it’s just going to be a long and hard path as the battle between profits and doing what’s in the public’s best long term interest will continue unabated.

State of California’s Perspective

California has always been an innovator in environmental activities. The genesis of the smart grid activity in California occurred over a decade ago when frequent brownouts highlighted the need to better manage power. These brownouts were caused by lack of peak capacity not lack of energy, but this also highlighted the need for more green energy as peak power plants are typically inefficient and create more greenhouse gases per unit of power (KWH). This lead to the desire, at the highest levels of State Government, to be more green though smart technologies by managing peak loads, allowing more green energy to be delivered to customers, and providing an infrastructure for electric vehicles. Policy around electric vehicles (EV’s) is particularly important and complex, because the deployment of electric vehicles could make the capacity issues worse as they consume a massive amount of energy. Government officials were smart enough to realize that EV’s in particular required a smart grid to load balance the power better, for example creating time-of-day pricing (which requires a smart meter) to ensure most people charge off-peak. However, it’s difficult in a public forum to think carefully through, and continuously manage the complexities of how this affects greenhouses gases, the impact of these time-of-day rates on non-EV activities, the need for advanced communications networks, cyber security, the importance of infrastructure, etc.

California Public Utility Commission (CPUC) Perspective

The CPUC was tasked by the State of California with a political activity. Fund smart meter deployment and ensure the meters are deployed on time and cost effectively (factors that are easy to measure). The more broad complex issues of ensuring effective EV policies, infrastructure, security, services, etc. were less important simply because they are difficult to stipulate and measure. The vast majority of people involved in any project truly want to do a good job and do what’s right, but when you’re in a situation where it’s easy to measure simple factors like deploying equipment on schedule and cost effectively, and difficult to measure the actual utility and security of such deployments, what do you think is going to happen?

Utility’s Perspective

The Utilitys’ primary objective is to do what the CPUC tells them to do to ensure funding and adherence to regulatory requirements. The primary objective is that which is easily measurable: deploying meters on schedule and as inexpensively as possible. This is also a great opportunity for them to layoff meter readers to save money. So let’s compare the original objectives from the State of California’s perspective with that of the Utility:

Original Objectives

1. Time-of-day pricing to promote off peak usage and EV charging
2. Home solar initiatives such as special rates, feed-in tariffs (selling excess power back to the Grid)
3. Demand response services to allow the utility to control usage in real time (for a discount or other benefits) to better manage load
4. Promote green energy
5. Encourage the deployment of EV infrastructure
6. Ensure cyber security

Utility’s focus

1. Deploying smart meters as quickly and efficiently as possible
2. Laying off meter readers
3. Using inexpensive (low bandwidth, high latency) networks

The result is that some of the objectives are met (#1, #2) reasonably well, but most of the others have been compromised due to the focus on quick and low cost deployment. For example the deployment of inexpensive networks makes Demand Response services largely infeasible. The focus on easily measurable cost factors compromises cyber security, and actually compromises the EV charging objectives because a home actually needs 2 meters to ensure that the peak pricing rates don’t increase the cost of non-EV use (e.g. Air conditioning) during peak. In addition, ironically, laying off the meter readers reduces security and safety because physical inspection was a critical component of those objectives.

Vendor’s Perspective

The vendors are simply going to follow the Utility’s objectives. Let’s look at history: When electronic voting machine vendors deployed their equipment throughout the country, there was a major buzz about the lack of security. However, from the vendors perspective, they couldn’t deliver a more secure voting machine because the precincts wouldn’t pay for it. It’s not the precincts fault, measuring security and paying more for a more secure solution was not required by the regulators, and it’s a sufficiently complex subject matter where you could not reasonably expect them to take on this responsibility.

Customer’s Perspective

The customer largely doesn’t understand the reason for the smart grid, and are skeptical of anything the government or the utility does unless the benefits are clear and immediate.

Federal Perspective

The Federal government’s role is largely to set standards of common language and interoperability. They also provide funding for industry and research, for example the Sun Shot program to reduce the costs of solar energy generated by a Utility. However, it’s currently the States responsibility to provide mandates and incentives for enforcement of green objectives. For example, the Sun Shot program will reduce the cost of solar, but it will still be significantly more expensive than coal or natural gas. It’s up to the State to create mandates for green energy, and the Federal assistance will simply reduce the cost of doing so to a more feasible level.

Summary

The deployment of the smart grid is clearly less than efficient. We can’t blame the Utility, as they follow the lead of the PUC (Public Utility Commission). We can’t blame the PUC because they follow the lead of the State Government, all while being under funded. We can’t blame the State Government because they are struggling with funding issues, and they have to satisfy the voters who should not be expected to be experts in energy. Which leads to the next blog entry – “Regulatory Alternatives for solving complex problems like smart energy.”

1. To make money in a hot technology / market
2. To contribute to the development of effective technologies which are important to the future of our country and our planet (which of course can only be done if the market is economically viable for companies to do so)

The first objective is the most simple. If you are an entrepreneur, you can focus on those segments of the market which have already made a commitment to electric vehicles; for example fleets, various governments organizations, various corporations who want to be good citizens, and various wealthy individuals or enthusiasts. You don’t need to worry so much about their motivations, and the effectiveness of the technology.

However, if you are focused on the effectiveness of deploying this technology on a large enough scale to positively impact our country and the environment, you are dealing with a much more complicated problem. First you have to understand what really motivates the various customer segments. For example complying with government mandates, PR for being a good corporate citizen, the perception of reduced costs, the great acceleration characteristics of the car, the ability to use the carpool lane, etc. Then you need to consider a variety of reasons why one would want to promote electric vehicles at a national level:

1. Reduce greenhouse gases
2. Oil independence (national security, global security, economic growth)
3. Reduce energy costs
4. Promote new technologies to grow the economy (and jobs) and further develop the country’s global competitiveness

It would be great to be able to achieve all of these objectives, and perhaps one day we can, however today these objectives are in conflict with each other. If you were a policy maker and needed to focus our national efforts on key strategies what might some of those strategies be:

1. Focus on Oil Independence as a top priority: Promote all electric vehicles (vs. hybrids) and use coal and natural gas plants (which currently provide 70% of the US Power Grid) to keep the costs down. We will burn more greenhouse gases, but it’s the most economical way to work towards oil independence.Note: Electric vehicles are significantly more expensive than traditional cars even after tax benefits. They also produce more greenhouse gas emissions than hybrids in almost every state with a few exceptions like Vermont and Idaho which get most of their electricity from nuclear and hydroelectric.
2. Focus on reducing greenhouse gases with current technologies: Promote hybrids and plug-in charging infrastructure for metropolitan areas where the power grid is relatively clean (i.e. Uses no coal. Uses nuclear, solar, wind preferably vs. natural gas). Unfortunately, the power grid throughout most of the US is quite dirty, so plug-in charging options are limited. This is in contrast to France for example, where only about 10% of their power comes from fossil fuels (80% is nuclear).
3. Reducing costs, especially as gas prices go up: There is no simple solution to this other than building smaller economy cars. Both all electric vehicles and hybrids are more expensive than a traditional gas powered car when you take into account the premium cost of the vehicle net tax benefits and reduced operating cost per mile. (Most people purchase hybrids because they want to do their part in reducing greenhouses gases and to take advantage of using the car pool lanes. The perception of reduced costs helps to market these vehicles.)
4. Long term strategy to have everything (reduce costs, greenhouse gases, and achieve oil independence): Focus on a non fossil fuel power grid – nuclear fission, nuclear fusion, solar (both home and utility generated), wind, bio fuels, etc. Focus on hydrogen cars and fuels which can be cleanly produced with electricity and rapidly delivered to a vehicle as a liquid fuel (i.e. no charge time issue). Continue to invest in improved electric vehicle technologies with the critical focus to drive down charge times to acceptable levels if possible, or focus on segments of the market who do not require long and unpredictable drive distances (e.g. fleets, city vehicles). Improve the electric mass transit infrastructure. Improve the environment (technologies, tax incentives) for telecommuting. Secure funding for these activities at both a Federal and State level. Look for certain states such as California to be more proactive then the US Government, but which will likely require Federal assistance for developing the required technologies and securing investment for long term projects.

There are broadly 2 short term strategies: Focus on Oil Independence vs. Reducing Greenhouse Gases. These are very different strategies and at the moment are in conflict with each other. Which is more important? Less than half of Americans think that global warming is a real problem, but almost every American believes that Oil Independence is critical. So if you believe in the Wisdom of Crowds concept, or in the need to secure votes (or both), perhaps we should focus on the Oil Independence strategy? The strategy could broadly be to first ensure that an electric vehicle and infrastructure business is growing rapidly and profitably by providing the appropriate mandates, subsidies, and tax benefits and doing what we can to ensure that this industry deploys infrastructure intelligently so it is not overbuilt in the wrong places (due to the typical mad rush of uninformed investors) to avoid the industry from crashing. The next logical step is then to focus on the long term strategy over time.

How do we get from here to there? It will obviously involve a combination of Federal and State regulatory and subsidy / tax activities, electric and hybrid vehicle manufacturers, infrastructure vendors, parking lot / garage owners, the end customer vehicle owners (business and consumer) etc, all of whom have different objectives and incentives. The trickiest aspect of this complex problem is that now and into the foreseeable future, the end customer is driven by factors other than cost (i.e. these vehicles will be more expensive than traditional vehicles), such as compliance, tax benefits, side benefits such as carpool lane, etc. A small player can focus on the immediate opportunities (i.e. making money in a hot market), however a large player or one involved in policy must be involved in ensuring that we continue to incent consumers in this market despite the higher cost, while ensuring that we are continuing to work towards long term solutions of all of our critical, and conflicting objectives of oil independence, reducing greenhouse gases, and reducing costs. A formidable challenge, but one worthy of our careful consideration.

• Charge times do NOT lend themselves to a gas station model – it takes about 30 mins to charge a vehicle to go 100 miles. And this does NOT follow Moore’s law; this technology will improve by about 12% per year, but it’s not clear if this can all be applied to charge time per mile (vs. just cost)
• Initially, EV’s will grow in certain segments, and it’s critical to know how to effectively deploy infrastructure to address these segments to allow this fledgling industry to survive and not crash
• There are many different EV variations (See previous blog entry). A plug-in hybrid may be more viable than a pure electric vehicle. Long term a hydrogen vehicle may make the most sense if the appropriate infrastructure can be developed.
• EV’s will cost more money than a traditional vehicle or a hybrid into the foreseeable future, so the primary motivation for customers in this market will be any regulations, policies, or marketing efforts to be more green.

Charge time is the biggest challenge, because even if there are large groups of customers who are willing to pay a premium for EV’s, the charge times could be intolerable unless the infrastructure allows charging in a place where one would normally park the vehicle. There are three levels of chargers, and the benchmark is how long it takes to charge a typical 25KWH car battery which will allow you to drive 100 miles:

• Level 1 Home charger – about 8 hours
• Level 2 Home or parking garage charger – about 4 hours
• Level 3 public service station – about 30 minutes (400V, 125A – 50KW)

These numbers are not expected to improve significantly because the limits are matter of physics. Also fast charges are generally limited to about 80% of the battery capacity otherwise the battery life will be reduced below it’s roughly 3000 charge cycle limits. Plus when a battery charge gets low (e.g. 10% – 20% of capacity), it starts to affect performance. So these numbers may be worse than stated – e.g. 30 minutes for 70 miles instead of 100. There are various ways to deal with such problems:

1. The Tesla has a larger capacity (roughly double), but then the charge time doubles (for the fast chargers).
2. One can charge at home at night, or in a parking garage while shopping, or in the office. But this generally cannot be done during peak hours (12 – 7PM) otherwise it’s too expensive as rates are highest during peak hours.
3. One can use a plug-in hybrid like the Chevy Volt, or other EV variations (See previous blog entry), thus only using the electric charge option when it’s convenient, but otherwise using the gasoline engine

If we focus back to the EV infrastructure (issue #2 above), we start to see some possible solutions that are oriented around specific market segments. We’ll put these in descending order of likely adoption based on the concept that the primary motivation for purchasing electric vehicle is government mandates, marketing benefits to certain large corporations, and a small segment of the consumer market who want be green regardless of the cost and who might purchase such a vehicle so they can use the carpool lane, or because they like the acceleration of an EV, or they want to essentially wear a green badge:

• Fleets of Government and Utility vehicles who deploy charging stations on their premises or near government buildings
• Large corporations such as Google who will deploy such stations in their parking lots
• Green parking lots in certain cities and neighborhoods which will allow customers to charge while shopping
• A distant 4th place is home chargers for wealthy individuals and green enthusiasts. (E.g. a home charger is $2500 in addition to the premium cost of the vehicle)

It is clear that this is NOT a money saving proposition, so we won’t address the issue of how this will be financed, but a key challenge is how do we ensure that there are enough charging stations available and you can find one when you need it. Software has been developed on mobile phones for example, to allow people to find the nearest station, make a reservation, and have convenient billing options. This is especially challenging if we consider that charging will generally only be done in the morning before noon, and after 7PM to avoid peak hours because the cost is otherwise too high, even for those not focused on cost. This charging will generally take about 4 hours, as the level 3 chargers appear to only be available for special facilities. You can imagine the complications (and opportunities) of capital costs, real estate issues, throughput, scheduling, not to mention customer behavior which is the biggest challenge.

Information indicates an expected 3 Million EV’s by 2015, where today the numbers are in the thousands. China is very bullish on EV’s and is developing an industry of EV vehicles and infrastructure. So it’s clear that this is an important technology. It will no doubt evolve significantly, but what is not clear is in exactly what form and this will be driven by as yet unknown customer behavior. It appears unlikely that a pure EV will be the technology of choice. We will probably see plug-in Hybrids of various technologies in the near time. In the long term, 2050 and beyond, we will hopefully see more non-fossil fuel electricity generation on a massively larger scale. Then the challenge will be what is the best way to deliver this power to a vehicle with reasonable re-charge or re-fuel times. We may very well see hydrogen or other technologies as the best delivery mechanism. But for now, the challenge is to ensure that this industry remains economically viable to ensure the continued growth and evolution of this industry; it behooves all of us to think very carefully about segmenting the market and finding the right customers and the right infrastructure to serve them. This is an exciting time in this industry and it will be fascinating to watch the various State and Federal programs, vehicle manufacturers, infrastructure providers, and customers evolve over time.

On average, solar is about twice as expensive as the power you purchase from the utility. However, under certain circumstances solar makes economic sense. This is a complex topic, but please first read the previous blog entry on peak power for background. In order to get solar to pay off, you have to generally consume more energy than the average consumer. Electric power prices are tiered, so the more you use, the more expensive. For example, if you have a large house and you use a lot of air conditioning, you can get solar to pay off if your marginal cost goes above the cost to have your own solar panels. Another example is if you own an electric vehicle and elect a new smart grid feature which is time-of-day pricing, you can sell power back to the utility during peak hours when the prices are high, and charge your car at night when the prices are lower. Let’s get into some details (Note that these numbers are examples. This is a topic of considerable complexity and we are using the best information available at this time. The objective here is to provide a framework for thinking about this problem, not definitive numbers).

The average cost per KWH (Kilowatt Hour) of electric power in the US is $0.12 per KWH, $0.14 per KWH in California. Photovoltaic (PV) solar panels which generate electricity directly, currently cost around $0.24 per KWH in Central and Northern California ( approximately 80% of solar installations in the US are in California) based on the cost to install the solar panels, financing the solar panels, 20 – 25 year lifespan, and an average peak sunlight hours of 4.5 hours per day (based on a standard solar map). Cost have come down by about 50% in the past few years due to manufacturing advancements and due to a glut of products from China. The wholesale costs of a panel is about $2 per watt in volume (range is $1.70 – $2.80), but the total cost to a homeowner is around $7.50 which includes installation, an inverter to convert to power to AC, wiring, etc. Tax benefits which include a 30% Federal discount, and an approximate $0.30 per watt discount in California (this discount was closer to $1.5 for early adopters) brings the cost to just under $5 per watt. What does this mean in terms of cost to a homeowner? A typical home may consume an average of 25 – 40KWH per day, and a 4 KW (Kilowatt) unit would be approximately $5 per watt X 1000 X 4 = $20K and will generate approximately 18 KWH of energy per day (4KW x 4.5 hours per day). If you financed this over 20 years at 5% (or leased the unit from a company like Solar City) your cost would be approximately $131 per month with no money down. Of course there are other factors which affect efficiency and cost such as the direction of your roof, dust collection over time, shade on the roof, etc. You could easily lose 25% due to these factors. You also need to consider that if you have a pool, you might not be able to heat it with solar if you don’t have enough roof space. So does this pay off?

These costs come out to approximately $0.24 per KWH which is considerably more expensive than PG&E’s California rates of $0.14 per KWH so it appears to be a losing proposition. However, you can save money on the margin (i.e. for peak power, or keeping yourself out of the higher pricing tiers), thus you rarely want to power your entire home with solar (e.g. the above sizing is about half your average power). So in order to understand if you can save money on the margin, you need to look at your power consumption and the Utility’s pricing (i.e. tariffs). So let’s use an average home in San Jose, California as an example. If you are on a standard residential tariff (E1, EM, ES, ESR, ET) and you consume 40KWH per day during the summer and 25 in the winter, you’ll pay about $321 per month in electric bills during the summer and $137 in the winter. If you install a 4KW solar panel, your total costs will be approximately $262 in the summer (saving you $58 per month) and $157 in the winter (a loss of $20 per month). This takes into account the savings in your PG&E costs (taking you out of the higher pricing tiers) and the $131 per month you have to pay every month to the leasing or financing company for the solar panels. So on average, perhaps you’ll save $38 per month or $450 per year. These numbers will vary widely, but the concept here is that you can save money provided you consume a lot of power, you get a good deal on the installation costs, you live in California (vs. the North East), and the tax benefits don’t change significantly.

Let’s look at one more scenario. If you own an electric car, you’ll typically charge it at night, because you use it during the day. You can’t efficiently store solar energy, but you can sell the power back to PG&E during the day when the prices are high, and purchase the power from PG&E to charge the car when the prices are low. In order to do this, you’ll need a smart meter (which PG&E is installing in all the homes they service) and elect to go on a time-of-day pricing plan. The concept is that the prices are considerably higher during the day (for example an E7 or E9 tariff starts at $0.30 per KWH and goes up beyond $0.55 in the higher tiers) and lower at night ($0.10 – $0.35). You can save money with this scheme only if you shift a considerable amount of power off-peak (peak during the summer is 1PM – 7PM), otherwise such a tariff could actually cost you more money. So if you run these numbers, you could save money for example if you use the solar during the day to power your air conditioning, sold any excess back to PG&E, and charged your car at night. However, with the current tariffs, you would need to ensure that your peak power usage dropped to less than 20% of your total power usage in order for this to make sense. This of course depends on your power usage patterns, how often you charge your electric car, whether this car is a full electric car or a hybrid with plug-in options, etc.

So how do you make a decision if you should go with Solar considering that it will cost you around $20K or $131 per month for 20 years? One solution is to go with a leasing company like Solar City. So I called Solar City to see what the deal is. Solar city has installations all over California, about 10K in total, and they appear to be a pretty good operation. They even have a partnership with Tesla Motors (who makes electric cars). They will come to your home for a consultation, look at your bills, your roof, trees, etc. But ultimately, you need to make a 20 year commitment without really knowing for sure if you’ll save money. So you can purchase the solar panels yourself (financing them for example), or lease them from Solar City for 20 years, which includes a 20 year commitment to PG&E for a special meter and a special rate. Purchasing or leasing is not all that much different, the bottom line is that you need to make a commitment on faith that you’ll save money.

However, there are several factors to consider that will improve this situation. Smart Meter and Home Energy Management Systems technology is improving, and technologies will likely come out that will measure your actual usage over time, compare this with actual sunlight hours, adjust for the particulars of your roof, and tell you how much money you’ll save before you make a commitment. Costs have come down significantly in the past 2 years, perhaps they’ll come down further? The solar market is growing at 40% in the US, China has excess capacity, and the Obama administration has recently announced a commitment to solar energy with their Sunshot program. The Sunshot program is focused on solar power generation by utilities. The stated objective is to reduce costs by 75% (from $0.24 per KWH to $0.06 per KWH). But it’s important to note that $0.06 per KWH for a utility is considerably more expensive than a coal plant. It may appear less expensive than the average cost of $0.12 per KWH, but this $0.06 per KWH does not take into account the cost of transmission, distribution, and the utility’s operations and profit margins.  So alone, this policy doesn’t appear to get us to where we need to be to stimulate this industry in volume.  State initiatives may be required, for example recent California requirements for a certain percentage of the power grid to be clean will benefit from this Federal money.

Clean energy is generally more expensive than dirty energy. However, it’s important that we invest in it, for it’s critical for our future. But we must be smart about it and understand that there are ways to segment the market that are critical to the growth of alternative energy. Some customers will save money on the margin, other customers may receive government subsidies, and there might even be some customers who are willing to pay more for it (especially if they get a tax benefit). Solar is very popular in Germany. Are German’s more eco-minded? Yes and No. Firstly, the reason why solar is so popular is Germany is simply because the costs of electric power in Germany is the second highest in Europe, in the $0.25 per KWH range! This then begs the question, why are the rates so high in Germany? One of the reasons is that the government has done this on purpose to encourage clean energy. So how do we encourage a government policy that is sensible and trickles down to the average consumer? Can we argue that it stimulates the economy and will ultimately save us money in the long run. Are the savings due to reducing direct costs, or do they also include the cost of a dirty environment? This is an extremely complex, and fascinating topic, that requires us to be smart.

Electric Power delivery is generally divided into the following components:

• Generation
• Transmission (the big high voltage towers that transmit power from the plant to a substation in your town/community)
• Distribution (the wires on the street that transmit power from the substation to your home/business)

We tend to think of electric power in terms of just generation, but much is driven by distribution and transmission. On average, distribution is more than half the cost. Generation is somewhere between 30% – 40% of costs. Transmission is a small fraction of total costs – when power is generated locally or near locally and comes from plants with a high capacity vs. those with a lower capacity such as solar or wind. Much of this distribution and transmission infrastructure was built decades ago and is at capacity. Understanding peak power is similar to understanding how a highway is built for peak traffic – there is plenty of capacity except during rush hour. The cost of the highway is driven mostly by rush hour traffic, not average traffic. In the power grid, the highest peaks are during the summer, in the middle of the day in hot and/or humid climates. If one is out of capacity, there are generally 2 ways to reduce the stress on the system – add more capacity, or have a mechanism to drive demand off the peak by charging more during peak hours. The latter is simpler, quicker, and takes less capital/risk – but of course, there are limits. You could charge more for electricity overall which will allow you to squeeze a little more blood out of that one, but that has obvious limits.

Power generation is also driven by peak power and is also at capacity. Fuel is not necessarily the biggest driver of costs – for nuclear plants it’s approximately 15% – 25% of costs, for coal and natural gas it’s 40% – 75%. Much of the cost is driven by capital costs and the amount of time it takes to build a plant (for example 2 years for coal, 20 years for nuclear). And by the way, the cheapest power is also generally the dirtiest unless you’re lucky enough to live in Switzerland. So we’re trading off capital costs, fuel costs, lead times to add capacity, utilization, and cleanliness, all while managing peak power loads. Woe, what does all this mean?

There are several ways to look at the relationship between the power grid and our environmental concerns:

1. At a macro level – what technologies are best for the environment
2. At a regulatory level – how should prices be set to cover costs, encourage investment and efficiency, encourage clean technologies, and move peak usage to off-peak as much as possible. (Keep in mind that prices are set every 3 years for example and require a regulatory review).
3. Cost to the consumer and how this affects their behavior to optimize their costs, and if we’re lucky, have this drive efficiencies to deal with our environmental concerns (i.e. if our regulators have set the prices correctly to bridge the gap between #1 and #3 – all while considering that deploying any new technology/infrastructure takes years)

Where do we being to boil this down? Well, this is not a book, so let’s go for the jugular – peak power & pricing/tariffs, and let’s focus on generation. When a utility runs out of generation capacity they become less efficient – they have to fire up low efficiency “peaker plants” and/or purchase power on the spot market (i.e. buying power on demand and paying a higher rate). This is reflected in average costs and greenhouse gas emissions. Why don’t they build more capacity using efficient plants? Well that costs money and takes time; for example 20 years for Nuclear, 6 years for Wind in California. Coal plants are 1-2 years, but you need critical items like permits, and you’ll have to build transmission lines at $1.5M per mile if you want to locate it in nobody’s back yard. So it’s cheaper and politically easier in the short run to mange peak power with peaker plants (which don’t require the time and capital) and relying on the spot market, etc.

OK, so we have narrowed our focus here to dealing with managing our requirements for cheap & clean energy within the context of the infrastructure that is currently available and will not change significantly in the next few years. This is where we get started to build markets for clean energy and hope that long term we will nudge the industry in the right direction for our future. Smart Meters have arrived in our homes to promise energy efficiency through a variety of mechanisms. In order to use our biggest short term leverage point peak power, one needs a smart meter to allow for time-of-day pricing to drive usage off-peak, but more importantly to allow solar energy and other technologies to get a foothold. The biggest impact of smart meters to date has been to reduce the utility’s operating costs and increase profits; using rate payer’s money to fund the meters which allows them to layoff their meter readers, and these savings are split with the rate payers. But in order to realize a true return on this investment, we need to make time-of-day pricing matter.

Firstly, there is a limit to how much time-of-day pricing alone will change consumer behavior enough to make a difference. If you analyze the usage patterns for a home, there isn’t all that much that can be moved to off-peak (e.g. peak power is typically 2PM – 9PM). You “need to” run your AC during the day, your refrigerator runs on and off throughout the day, you do your laundry at night often anyway, etc. It turns out the pool motor (if you have one) is the only no brainer. But it’s worse than that. If you switch to a time-of-day tariff you might move some power off-peak to take advantage of those lower rates, but now all your peak power is more expensive, and in most cases your total costs will go up! This has already happened, for example PG&E’s embarrassing rollout of smart meters in Bakersfield – they didn’t notify their customers of the change in tariffs and require them to opt-in. This has been corrected by keeping them on the old flat rate pricing plan.

So we need to generate more power during peak. And this is where alternative technologies like solar come in. Solar is a good example because it naturally produces more power during the peak hours, but what if you don’t use all of it (for example if you’re not home often during the day). The economics of technologies like wind and solar are all about capital costs and utilization – you must use it as much as possible to get it to pay off. It’s not economical at the moment to store power you generate at home, but you can get the same effect with a form of arbitrage. If you have a time-of-day pricing plan, you could sell the power to the utility during the day when they need it and you don’t (and the price is high), and purchase power off-peak (when the price is lower). There are various ways to accomplish this. One is to move as much power to off-peak as you can, for example that pool motor, or do your laundry at night. Another example is use the power grid at night to charge your electric vehicle when the prices are low, and use your solar panels to sell power back to the grid, instead of charging the car with the solar panels. This may sound counterintuitive, but it’s actually very efficient from both a market point of view and from the electric car/home owner’s point of view. In order for this work, the utility must purchase power in this manner. If the State utility commission has mandated a “feed-in tariff“, the utility is required to purchase power from you (typically a credit on your bill) at rates that vary depending on the jurisdiction. Doing this on a large scale is referred to as “Distributed Power Generation” and can be effective at providing for peak power needs efficiently and more cleanly than firing up low efficiency plants. This of course requires that policy and feed-in tariffs are designed properly to take into account the kind of power that is being generated (e.g. is it clean), the time-of-day, how to best distribute it and encourage investment on a grid that was not designed for distributed power generation, etc.

Many people (myself included) are split between wanting to take part in a sensible way to make a difference (e.g. saving our environment) while at the same time earning a decent living – i.e. an entrepreneur. So we can first assume that regulators are smart enough to develop rate plans and tax incentives to take all of this into account – i.e. creating an efficient market. For example, the peak pricing is set just right to encourage people to move power off-peak and/or generate clean power during peak. We could assume that this takes into account the actual costs of various forms of energy production, and maybe even the amount of greenhouse gases they emit. And this has already happened to some extent. In addition to increased prices during peak, many states have tiered pricing, where as you use more power, you pay a higher rate (the opposite of volume discounts) to encourage conservation. And this is often justified by viewing it as a subsidy – heavy power users pay more to allow the lite power users which may include those in lower income brackets to have a lower rate.

So as an entrepreneur and a consumer, there are opportunities to deploy clean alternative power generation technologies economically within this framework. But as a policy maker (i.e. one who is concerned about efficiency on a more broad scale), can we assume that regulators are smart enough to do this properly? Which really means that they have the resources, incentives, and information at their disposal to analyze this problem at a broad level and essentially create an energy policy through their power of regulation and taxes. This is a complex topic beyond the scope of this particular blog entry, but the first question that comes to mind is: does this belong at a Federal or State level. As we have already seen, ideally it may belong at a Federal level, but often it’s up to the States to step up to the plate because the States often have more power than the Federal government because they have less lobbyists to deal with and often more clear mandates from their more limited electorate.

If you’re in the business of providing clean (and competitive) alternative energy technologies, you have to view things in terms of both how to market within the context of the existing regulatory/policy framework, and the future of that framework. You might even decide to go to the State or Federal government to encourage changes in regulations and policy. And you might be able to contribute towards providing that balance between our desire to have (true) clean power and requiring an economic incentive and environment to do so.

However, before doing that we need to briefly put electric vehicles in perspective relative to gasoline and diesel powered vehicles. Gasoline and diesel are very efficient and inexpensive (relative to other technologies) at powering vehicles. These fuels have collected sunlight over millions of years and have a very high density, and are are in a form which can quickly be delivered to vehicles. It’s hard to beat cheap and dirty energy unless you’re willing to make a compromise. As a result, many alternative technologies which are currently being delivered into the market use smoke and mirrors to hide the fact that they are both more expensive and more dirty than gas/diesel-powered vehicles, while giving the impression that they are exactly the opposite. It’s not unreasonable to use a technology which is more expensive if it’s more clean, but unfortunately we’re paying a premium for something that is also more dirty, without realizing it…sigh. The power grid is dirty. With the current power mix of 70% fossil fuels (50% coal, 20% natural gas, 20% nuclear, 6% hydro, 2% wind, 1% oil, 1% misc) electric vehicles make no sense. However, it makes sense to build up this industry, provided that there is an energy policy to change this mix. Energy policy is the purpose of this blog, but not the purpose of this particular blog entry. This blog entry is focused on understanding the different kinds of vehicles and how they compare relative to each other. What motivated me to write this particular entry, was I attended yet another talk on electric vehicles, and this time I was sold on the feasibility of a hydrogen based vehicle, whereas before I was very skeptical, but I was sold on it for reasons that I didn’t fully understand until just recently. I realized, I’ve run across many different variations on electric vehicles…..time for a blog entry.

Hybrids

Hybrids don’t use the power grid to power the vehicle, but a critical point that is almost universally overlooked is that electric cars must be compared to hybrids, NOT traditional cars. A hybrid already has batteries and an electric motor in addition to the gas motor and has already been demonstrated to be about 2x more efficient than a traditional gas vehicle. The question is whether the electric vehicle is better (i.e. getting rid of the gasoline and the gasoline engine).  Hybrids are already a big success despite their increase total cost relative to an equivalent traditional car and the impact of the batteries for a variety of reasons – some people think they’re less expensive because they get higher mpg and they get tax breaks, they are sexy, the environmental impact of batteries is not clearly known and has been largely kept out of the press, and here’s a critical factor: you can use the car pool lane. So is an electric vehicle better?

Pure Electric Vehicle

A pure electric vehicle is currently horrible compared to a hybrid. It’s more expensive, generates more greenhouse gas emissions, and “refueling it” is a pain. In the best case scenario it takes 30 minutes to charge your car to go 100 miles (i.e. at a level 3, high voltage, high current public charging station). That is, if you can find a public charging station, which there are essentially none. You can charge it at home, but this takes 4 – 8 hours, and you’ll have to pay approximately $2K for such a station. But this is a moving target, and some of this will change over time as this industry develops. There will be more public charging stations, and some will be in public garages so you can charge your car while you’re shopping, while at work, and while you’re parked in your parking garage at home if you live in an apartment. The costs will come down as well, but it’s not clear how much. The car will continue to be very dirty unless there is an energy policy at the State or Federal level – and this is possible in the long term. But there is one critical factor that appears to not have the potential to change very much and that is charge time. There is no indication that there is a significant potential to reduce charge times from 30 minutes per 100 miles significantly. There are indications that at best this will improve by about 5% per year. It’s a matter of physics – heat generation, safety, EMF effects, batteries efficiency and life drops with smaller charge times, etc. It’s also not clear how fast the Utility can deploy additional feeds to deliver this kind of power, but let’s assume this can be done.

So in order to analyze this further, imagine that we have an energy policy which brings us to power Utopia; sometime in the future most electric power going to these vehicles is clean and inexpensive. (e.g. Nuclear, Solar Thermal, Wind, maybe Biodiesel power plants). In other words, let’s forget about electric power generation and just focus on the best way to distribute electric power to a vehicle. We still have a problem with charge time. There are several ways to solve this problem:

1. Market these vehicles primarily to people who stay mostly in the city or in their local suburb and they can charge these cars at home at night (i.e. they drive less than 30 miles a day).
2. Have an infrastructure of public charge stations in shopping malls and at work facilities
3. Focus on fleets
4. Look into other technologies

Plug-In Hybrid

One way to solve this problem of “range anxiety” – i.e. not finding a public charging station, or not having the time to wait 30 minutes to charge your car, is to have a hybrid vehicle which you can plug in. So when would you plug it in vs. use the gasoline? In today’s environment, an electric car is less expensive per mile under certain conditions – you charge during off-peak hours, and you already have made the decision to spend the extra money on a hybrid and if a plug-in option is not much more expensive it would make sense. However you would be polluting more if you plugged it in unless we have a clean energy policy, but of course, you might not know that because you think it’s clean, and you might even plug it in even if it’s more expensive and inconvenient because you think it’s clean. Again an energy policy is critical to this equation. But if we have power Utopia, and the electricity actually is clean does this make sense? It would make sense to charge it when at home and at a public charging station and use the gas when you don’t have charging options available. But how many people will do this? Unknown. There is another alternative which I recently found interesting.

Hydrogen-based cars

This is a confusing topic. Using hydrogen to power cars makes no sense if you view hydrogen as a power source. The same is true of hydrogen fuel cells. Despite what you might hear in the press, hydrogen is not readily available as a power source unless you live on Jupiter or Saturn. It takes energy to get hydrogen out of water – best case scenario, you get out what you put in. Hydrogen is available in natural gas, but this is a fossil fuel. It is also available in various biofuels, but it’s wouldn’t make sense to extract it. However, hydrogen makes sense as an efficient carrier of energy, i.e. a highly efficient and effective alternative to traditional batteries and electric power delivery. So you could use the electricity from our Utopian grid to extract hydrogen out of water, then you could deliver that hydrogen to a car as a liquid much the same as gasoline, and presto you can deliver electric power (indirectly) to your vehicle without the hassle of the 30 minute per 100 mile charge time. Now hydrogen is dangerous, but there are ways to solve this problem which are out of the scope of this blog. Sounds clean, and could actually be very clean, even more so than using batteries – if we had an energy policy.

Electric Car with fuel to power a backup generator

The Chevy Volt does this, and it’s very similar to the way Diesel trains have operated for decades. You run a gasoline or diesel powered engine at optimal RPM’s and generate electricity. It turns out with trains it’s more efficient and easier to control the train to do just this. From a carbon emissions point of view, in the best case scenario (i.e. with technology improvements), you would get about the same efficiency and carbon emissions as a regular hybrid car. So why bother with this technology? In certain conditions it makes sense. If you travel less than 30 miles a day and want a pure electric car, but you have “range anxiety”, you would use the gasoline only when you run out of charge. So why not do the opposite and purchase a plug-in hybrid instead and keep it plugged in, using the gas only as a backup. Well, this kind of car might be less expensive because it doesn’t have a gas engine, but has a gas generator which is arguably less expensive. How this plays out has yet to be determined.

Other technologies

There are other car technologies which are out of scope because they don’t use the power grid. For example Biodiesels, and natural gas powered cars. However, we do need to keep these in mind because they compete with electric vehicles. Natural gas is an interesting story because there is something we can learn from them. They are quite efficient and clean compared to gas powered cars, and are actually relatively safe. Many fleets use these vehicles, so we have evidence that they are effective. Why don’t we see more of them in a consumer market? One of the major reasons is that creating a big enough natural gas infrastructure (e.g. having enough service stations to carry natural gas) carries a significant cost. The economic benefits of natural gas are not significant enough to warrant such a large scale change. There are environmental benefits as they are approximately 50% more clean than gasoline, but that’s not good enough. But it makes sense to apply them to fleets because they typically fuel back at the home base, and there has been much success there because you don’t need to deploy a huge public infrastructure to roll it out, you just need to focus on getting enough fleet customers to justify the cost keeping in mind that they have a benefit to wearing a green badge (because they are in the public’s eye) and in many cases these fleets are government or quasi-government fleets (e.g. Utilities) who can get funding for any extra cost.

Summary

This industry is going to evolve dramatically over the next decade with or without an energy policy. An energy policy will make more sense and provide better options. But it depends on the consumer’s true objectives – is it to be green, to feel green, to save money, to contribute towards energy independence, to feel sexy, etc. Each of the above technologies has major drawbacks. For example, Hydrogen is very promising in power Utopia, but requires an enormous investment in infrastructure. The industry will likely evolve from what is practical today. Today hybrids are a big success, so expect plug-in hybrid options to be the next step in the consumer market. Other options are Biodiesels which can be delivered via the diesel fuel infrastructure. Emerging technology with fleets will see a lot of diversity, perhaps hydrogen, perhaps pure electric vehicles, perhaps Biodiesels.

It’s anybody’s guess as to how this will evolve. But if we set our sights on energy policy, the electric power grid has a major role in these technologies, and the sooner we have a volume of vehicles relying on this infrastructure, the sooner we will see more attention paid to energy policy, even if that path is not quite as efficient as we would like it to be.

You see the crane to give you perspective

As I approached the wind farm I thought of 2 questions on my mind. Firstly, each of the largest wind turbines are about 2 Megawatts (MW), enough to power somewhere around 200 – 750 homes depending on who you talk to. Can a single turbine power that many homes? Secondly I thought of the BIG question: Can clean electricity only be generated at a premium cost over fossil fuel (coal and natural gas) and nuclear energy and thus be a difficult sell to the public, and if so, what can be done to make it competitive. Upon entering the facility, all I could think about was the first question. I thought to myself, “Woe, these things are huge, who’s job is it to put these up and maintain them? I’m glad it’s not me!” I walked up to the base of one of the windmills and first noticed that not only was it huge, it was pretty loud – wind sound loud. And as I stood under it, of course the first thing I thought was, do these blades ever come flying off? My host assured me that this had never happened, except for occasional damage during lightening storms. As I stared at the blades swooshing around just above me, I could feel and hear the power. These things were huge! I could image that this single turbine could maybe power several hundred homes. I tried to imagine this huge spinning blade physically spinning hundreds of air conditioner compressors. As I settled past the shock of just being near these things, the real questions finally started. First I noticed that they were not spinning as fast as I thought they would. My host explained that they spin at a constant speed (I think it was 18 RPM) much like a high performance airplane prop engine. Constant speed RPM is optimal, so the blade twists to maintain a constant speed, and this also allows it to easily generate a 60Hz output, ready to go to the transformers for distribution. I said to my host, too bad you can’t turn the whole thing to always be facing exactly into the wind. I was surprised to find out that the whole assembly moves to always face into the wind! Wow, these are impressive, I immediately followed up with my first technical question – “How much do these cost?”. He responded $4M installed for a 1.8MW turbine with a 25 year life. That comes out to about $2500 per Kilowatt (KW) of installed capacity (that is $2500 to power ten 100-watt light bulbs for 25 years – if you assume the windmill runs at full capacity 24 x 7 which it doesn’t and doesn’t take into account capital, maintenance and distribution/transmission costs). Once he threw a number out at me, I was pulled back into remembering why I was here, and put my financial thinking cap back on. The real tour was about to begin. I thought of the key question I wanted answered; is wind energy economical against traditional coal, natural gas, and nuclear plants, or will wind and other forms of clean energy require the government to get involved in a big way. And of course the other question in the back of my mind which I didn’t expect the wind expert to answer is, can the US be competitive in a global economy if the government mandates a certain percentage of clean energy and competing economies do not. But that’s a question for another day. Let’s focus on wind energy first.

The picture does not give the size justice. That box at the top - several maintenance people can stand inside of it.

Taking all the information about electrical energy generation/distribution and wind power that I had collected from so many sources, and making sense of it in order to answer the big question is a daunting task. But after my visit, I had enough pieces of the puzzle collected to finally put together a reasonable hypothesis. I should mention that one of the pieces of the puzzle was getting acknowledgement from a prominent person in Washington who works in the energy field that serious discussion of energy policy is not happening; i.e. there doesn’t appear to be a readily obvious and reliable source that can answer the big question. So through a combination of powering up the spreadsheet and thinking through the information I had collected from people and various Internet sources here’s what I came up with.

The key to this question is converting all this information to the bottom line which is cost per Kilowatt Hour (KWH), and understanding what factors affect it (the amount of wind, time of year, utilization, market dynamics, transmission/distribution, etc.). The average cost of electric power in the US is $0.12 per KWH. There are lots of variations by state and time-of-day, but here we are going to focus mostly on averages in order to put wind power into perspective; we will deal with de-averages at another time. Firstly, how do you convert Megawatts of capacity into KWH? You use the load factor which is basically the amount of power generated on average throughout the year relative to the maximum capacity (i.e. how often does the wind blow, and by how much). The load factor of Solano is around 30% – you could actually only power three (not ten) 100-watt bulbs for 25 years for $2500. You can put a wind farm anywhere there is wind and real estate to do so, but you clearly want the load factor to be greater than some minimum amount to make it economical. I believe load factors for wind facilities are in the 20% – 40% range. So a 1.8MW turbine generates an average of 0.54MW, which comes out to almost 400,000 KWH per month. Sounds like a lot, what does this mean? Well the rest is pretty simple, if it costs $4M for a turbine, and it lasts 25 years, this comes out to approximately $0.09 per KWH (assuming a capital cost of 10%). Cool, less expensive than $0.12…… But we’re not done yet.

What about operating costs? Each of these turbines requires maintenance twice a year, plus an oil change every 2 years. Each of these activities takes about 2 skill technicians 2 days. Plus you have all the operations people, leases, property taxes (which in Solano’s case was the biggest operating cost of all!…), etc. This comes out to about another $0.01 per KWH, so we’re at $0.10 per KWH. This facility has 90 turbines, so if we had a larger facility would we save much? At the level of 90 turbines, it turns out most of the costs are variable (i.e. driven by the number of turbines), so let’s say this cost is pretty reasonable for large scale facilities.

What about transmission costs (i.e. the big towers transmitting power across long distances). These numbers are hard to come by, but averages in the US appear to be around $0.004 / KWH, and power losses of around 7%. But it’s not that simple because wind facilities are often located in remote locations relative to power plants, and the amount of power generated is less than a typical power plant, so the costs will be higher. By how much? Transmission lines are about $1.5M per mile, but the cost is driven much by whether you can exercise eminent domain (i.e. an unregulated private company may have higher costs than a Utility). Transmission losses appear to be around 6% plus 5% per thousand miles, but this number in particular is very difficult to come by because there are a variety of technologies and no single source appears to clearly indicated what this number is. Finally, a nuclear power plant for example, is around 1000 MW, whereas this facility I visited was around 700 MW – The Nextera facility was only around 162 MW, but there were other wind farms in this “wind location” which total 700 MW. But if you apply a load factor of 30% you are only at 210MW – i.e. less KWH to spread costs across, thus higher transmission costs. A nuclear plant’s equivalent “load factor” (referred to as capacity factor) appears to be around 90%. If you take all of this into account, you come up with a costs of somewhere around $0.004 – $0.02. But this is driven largely by whether there are already transmission lines there (e.g. A wind facility near a pre-existing power plant) and how far those transmission lines are. If you’re near a pre-existing power plant, $0.004 is a good number. If you have to build transmission lines for a facility similar to Solano (700MW with a 30% load factor), but you need 200 miles of transmission lines, it’s around $0.02. If you need 400 miles, it would be double. If you only had 350MW, it would be double again, etc. In Solano’s case, they are in a great location, near PG&E’s transmission lines, so maybe their costs are around $0.005, so we’re up to around $0.105 per KWH total costs, whereas a remote location in Texas which needs a 200 mile line, would be around $0.12, just about the same as the average power grid costs.

But there is one more very important and significant cost left – Distribution. Transmission lines go from the power source to a town or city for example. Distribution are all the wires you see connecting up to homes and businesses plus the local utility’s operations in maintenance, meter reading / smart meter installations, billing, legal, operations, profit margins, etc. This number is not easy to come by, but it appears to be around $0.06 per KWH; the single biggest component of cost, more than traditional power generation which runs around $0.018 – $0.05. So for Solano, we’re at around $0.165 / KWH, whereas a remote location with dedicated transmission lines of 200 miles would be around $0.18. Numbers from the department of energy indicate around $0.17 per KWH for wind onshore (and $0.19 offshore), so we’re pretty close. It turns out there are other costs like dealing with planning, avian/critter studies, and zoning at a County, State, and Federal level over a 5 – 7 year period in California (about 2 years in Texas) which is required to build a facility, but it turns out if you have a large enough facility and company which operates many wind facilities, this does not contribute significantly to total costs. There is one element of cost which I did not quantize which are the roads that need to be built at the facility, but let’s assume for the moment these costs are already built in, or are small relative to everything else. In the case of Solano, the facility is located on farms and the farm owners love having the roads, so perhaps the wind facility got a deal on their lease that offset the cost of the roads.

Best case, wind appears to be $0.165 / KWH and the US average is $0.12 / KWH. If you compare an optimal wind facility (a lot of wind, and near transmission lines) with traditional, dirty power, it is significantly more expensive. Cheap power is most often the dirtiest, you can’t get around that. Let’s compare just power generation (not transmission and distribution), costs:

Increasing order of costs (% indicate percentage of total US power generation):

• Hydro: $0.01 (6%) – Ideal, but limited unless you live in Switzerland
• Nuclear $0.018 (20%) – How dirty this is depends on your view of nuclear waste issues
• Coal: $0.023 (50%) – The most popular fuel throughout the world, plenty of cheap supply for many decades
• Natural Gas: $0.05 (20%) – About half the CO2 emissions relative to coal
• Wind: $0.05 – $0.09 (2%), the $0.05 seems low, but these may be older wind facilities in ideal locations
• Fuel Cells: $0.10 – $0.20?? – Very experimental
• Large scale Solar Thermal: $0.15 – $0.20 – Experimental, but very promising. Key issue is transmission costs.
• Solar Photovoltaic (Solar panels): $0.20 – $0.40 (< 1%?)

So wind is not quite cost competitive, but perhaps with tax benefits, subsidies, etc we can make it competitive? Well, there is one important factor we need to consider before we ponder our conclusions. Wind is not getting cheaper, it’s getting more expensive; the cheapest wind has already been deployed. The best wind locations have already been taken – lots of wind, large acreage with minimal zoning issues, near transmission lines. There are a lot of great wind locations left with 1 major issue, most of the ones that are left are nowhere near transmission lines – think remote areas of Texas, the Midwest etc. Well according to our calculations, there is a premium of somewhere in the $0.015 – $0.04 range or even greater if your facility is more than 400 miles from existing available distribution available. The costs would be even greater still if we are talking about transmitting a great deal of power from the Midwest to the coasts. How much more? Hard to say because I can’t find enough data about very long haul distribution. There are similar issues with generating solar power in areas like Arizona and shipping it throughout the country. In addition, the cost of wind turbines is going up, as my contacts have told me, it’s a sellers market. Perhaps this will change over time, but for the moment we must assume that wind has a premium of approximately 40%, best case.

The economics of clean power generation (e.g. solar, wind tides, etc.) vary significantly by location, the best locations being less expensive. So there are several ways to look at these economics:

1. How much of a premium is clean power in volume?
2. How much subsidies or tax benefits do we need from the government to reach grid parity (the same price as the power grid) and must these subsidies be sustained, or will the economics eventually drive down the actual costs to grid party?
3. How much clean power can we generate at grid parity? Wind seems to have already reached past its peak at 2%, but I’ve heard figures indicating that this number could be as high as 10%, although I’m not clear what in particular will drive down the costs. Wind turbines have been around for a long time and they represent approximately 90% of the total power generation costs and around 56% of total costs – and their costs are going up.

One more thing to consider – who currently purchases wind power and why? Are they doing it because it’s clean, because it’s economical, or both? At Solono, they are privately financed (i.e. no government subsidies or tax benefits) and they sell 100% of their capacity, and their customers are roughly equally split 3 ways:

1. Utilities – long term contracts
2. To wholesalers through long term contracts who deliver the power to municipalities. These often have the name “renewables” or “clean” in their name, but it’s not clear if small municipalities are purchasing this power because it’s clean, or simply because they get a good deal on the price. I’m told, it’s mostly the price, and that it being clean or renwable is a minor benefit.
3. Selling to the spot market (customers who need to purchase power on demand when they run out of capacity).

So that’s the data that I have. Let’s zoom out, and think about what does this mean in term of addressing our big question: Can clean electricity only be generated at a premium cost over fossil fuel (coal and natural gas) and nuclear energy and thus be a difficult sell to the public, and if so, what can be done to make it competitive.

There is NO evidence that people will pay more for green energy coming from the power grid in any non-trivial volume, and more importantly that they can. On the demand side, the smart power grid theoretically will allow customers to choose green energy through interfaces with their smart meter and the new smart grid infrastructure. For example, they may choose to have 20% of their power come from green sources at a maximum price of a $0.05 premium, or $20 a month maximum premium, or they may want the charger for their new electric car to only charge from clean energy sources. But this is problematic from many perspectives. Most people don’t understand that electric cars actually pollute more than a hybrid, as 70% of power in the US comes from fossil fuels. The focus is mostly on the belief that electricity is clean, and the cost. On the supply side, there is no evidence that individual municipalities will choose green power unless the cost is at or pretty close to grid parity. There are no plans to allow customers to choose where their electricity comes from in the same way for example, that you can choose your long distance carrier, even though the smart grid allows for that option through accounting mechanisms. The power grid infrastructure is just too complicated, and the way that bulk deals are made is the primary driver of consumption, and that is about cost, supply and demand of a commodity; electric power. In order to understand the primary driver of demand for clean power, you need to understand how electricity is bought and sold, regardless of whether it is coal, nuclear, wind, solar, etc. And this is complicated, but let’s take a shot at summarizing all of this.

The average cost of power is $0.12 per KWH. But it varies significantly by the time of day, the location/state, the time of year, etc. Also many locations throughout the US are at capacity, so they will pay a premium for excess power on the spot market (on demand), and they may choose a long term contract for extra capacity so they don’t have to purchase it on the spot market. The task of ensuring that you don’t run out of capacity and the costs are manageable, eclipses any concern about green energy. Green energy will be chosen over dirty energy only if it’s a tie breaker – i.e. it’s at the same cost as other power, and it’s available. So wind has to compete with coal, nuclear, natural gas, etc – on the same terms as dirty energy. And wind is less predictable, thus harder to use as base power. So in summary, since the demand for power is growing, and the costs are going up for traditional power, and we are running out of capacity, wind is simply another alternative power source and it must be competitive. That it’s green is mostly irrelevant. Perhaps a large corporation will step up and be willing to make a wholesale deal for wind power and pay a premium for it to be a good citizen, but there is no evidence that this is happening and that this will not significantly hurt a company’s competitive position.

I went into this wanting to believe that a case could be made for large scale wind power without government involvement – i.e. that the markets could deliver clean wind power in substantial volume. In the process of working with utilities, regulators at the State and Federal level, electric vehicle and infrastructure vendors, etc, I have been fighting for technology (for example in the smart grid and electric vehicle infrastructure) to allow this, and I have chosen to believe all the data I could to support this position. However, as I dug in further, I saw more and more evidence that indicated that this was not the case. Power is simply a commodity, and the trend towards green technologies like electric vehicles is missing an essential component – the appreciation of the importance of the impact of our electric power infrastructure.

So the final missing piece of the puzzle is why do companies invest in and purchase wind power when it would be cheaper to just build a coal plant.  I can think of several possibilities, and perhaps the truth is a combination of all of them:

1. Coal plants require approvals, zoning issues, etc.  Since power demand is constantly rising, wind facilities might be more readily built in some locations
2. Many facilities were built years ago when the belief was that certain segments of the market would pay more for green energy.  Maybe a small portion are, or maybe this capacity is being sold below cost.
3. Maybe some facilities were built with the expectation that regulations, subsidies, tax benefits will eventually favor wind or mandate a certain minimum amount of alternative, clean energy.  Maybe in some locations this is a key driver.
4. Maybe some were subsidized by the government – For example the Altamont Pass Wind Farm outside San Francisco was deployed in response to the 1970′s energy crisis via tax incentives for investors.
5. Maybe some are subsidized by the wind industry
6. Maybe in some markets (e.g. California), there is a higher propensity to pay a premium for green energy and/or electric power rates are higher. California has the highest rates in the nation (around $0.014) so the premium for wind is less than average.
7. Wind is somewhat scalable – you have to build the entire coal plant to generate a single Megawatt, whereas you can deploy the wind turbines over time.  This only makes sense if you have an ideal facility near transmission lines (e.g. a pre-existing wind farm).

Maybe things will change in the future. Peak power demand will continue to stress the supply. Maybe turbine costs will come down (but it would have to be at least by at least 45% to compete with natural gas which is still more expensive than coal). Maybe we will finally have a significant carbon tax initiative. Maybe the advent of electric vehicles will raise the awareness of this issue. But without an energy policy at the Federal level, it appears that this will be unlikely in the foreseeable future. Additional wind facilities require a lot of capital, especially if you have to build a 200 mile transmission line. There are the economic costs, then the risk considering that there is much uncertainly about the status of green energy regulations, subsidies, etc. How this will play out is up to the way the wind blows. However, if we are serious about green energy, for example if we are serious about electric vehicles, we ought to be smart and be just as serious about energy policy at the Federal Level to continue this kind of conversation. Why isn’t this happening? Well that’s another fascinating story, for another time.

Me standing at the base

Windmills everywhere, along with farm animals. Very efficient. I smudged the other guy's face out, didn't want to get into any potential legal troubles if he was supposed to be someplace else.