Thursday, June 30, 2011

Cornflakes, ethanol, an ex-CIA boss & terrorists = innovation through a tube

Who knew that a box of cornflakes, an icon of the perfect American home, could become such an controversial symbol of misguided policymaking?

The Senate's vote earlier this month on stopping ethanol subsidies marked a rare moment of bispartisan consensus in Washington. The amendment will end three decades of subsidies to the corn ethanol industry, save taxpayers $6bn this year and end ethanol import tariffs.

Former investment banker turned policy adviser, Steven Rattner wrote a brilliant piece in the New York Times last weekend that brought home just how iniquitous ethanol subsidies had become. As a former journalist it's no surprise his piece is suffused with nuggets about the fool's gold farmers and some in government have been passing off as something useful to society and the environment:

Thanks to Washington, 4 of every 10 ears of corn grown in America — the source of 40 percent of the world’s production — are shunted into ethanol, a gasoline substitute that imperceptibly nicks our energy problem. Larded onto that are $11 billion a year of government subsidies to the corn complex.
Forty per cent of corn in the US is diverted to ethanol with "disagreeable consequences for food" such as a 24% increase in the price of bacon, he writes.

But that's not the worst of it. Ethanol packs less punch than gasoline and uses considerable energy in its production process. "All told, each gallon of gasoline that is displaced costs the Treasury $1.78 in subsidies and lost tax revenue."

To ease the pain, Congress threw in a 45-cents-a-gallon subsidy ($6 billion a year); to add another layer of protection, it imposed a tariff on imported ethanol of 54 cents a gallon. That successfully shut off cheap imports, produced more efficiently from sugar cane, principally from Brazil. 

That tariff has now been dropped - welcome news for the Brazilian Sugarcane Industry Association which can now introduce its less energy intensive and less environmentally controversial ethanol on to the American market.

Brazil's ethanol industry and the impact it has had on its motor fuel infrastructure was the subject of the keynote speech at last month's Ceres conference in Oakland. 

Jim Woolsey, former CIA chief turned venture capital investor, made the simple point that the reason why Brazilians had greater choice for fuels at the filling station was because of the type of plastic used in the fuel lines by Detroit manufacturers. Changing the fuel line in engines could be done simply and inexpensively he insisted, after all if Brazil can do it why can't the richest world in the country do it? 
It’s not we who are addicted to oil it’s our cars. Because of the type of plastic fuel line they cannot use anything other than gasoline – or with flex fuels they could use 85% ethanol.

But what if cars could pull into a gas station and pump either gasoline or methanol or ethanol. Methanol can be made out of biomass if you hate ethanol use methanol. Brazilians have a choice of fuels at filling stations. Why Brazilians so much smarter, shrewder and decisive than we? All that you need is the right kind of plastic in the fuel line so the cars can use alcohol fuels as well as gasoline. The alcohol fuels are readily made from green alcohol or wood alcohol for hundreds of years we have had a large methanol production capacity in the US, larger probably than natural gas.

We don’t have to have mandates, we don’t have to have mandates, we don’t have to have duties, we can get rid of all of the subsidies for oil, ethanol and the tariff barriers for ethanol and let them compete. It’s the worst thing that could possibly happen to oil because it depends on that lock in mandate which insisted upon buying cars with the wrong kind of plastic in the fuel line. 

He likened the shift in attitude towards transport fuels to that of salt as a strategic commodity, his implication being that oil could go the same way…
For 1,000s of years, salt strategic commodity – people had to have it to preserve meat and other food. When Ghandi went on his salt march in 1930 he was protesting about British taxes on salt. The reason why they were so burdensome was because everybody had to have salt. It wasn’t Ghandi that did it, it was electricity but electricity made salt boring because of refridgeration.

In relatively few years, salt was destroyed as a strategic commodity.
Energy, particularly transport fuels, is a matter of national security. And the only people at fault for funding terrorist in the Middle East were ourselves. This is how he reasoned this:
Between 1-2% of the world’s Muslims the Saudis control something of the order of 90% of the world’s Islamic institutions.

If you’re driving around and running out of gas, you need to stop at a gas station and you just happen to ask yourself as you’re listening to the radio why are these 8 year old boys in Pakistan or on the West Bank have their objective of becoming a suicide bomber? What’s going on? Who’s paying to teach them that?

Before you get out of your car to pump your gas, stop just for a minute and turn the rearview mirror just a couple of inches. So you’re looking into your own damned eyes - now you know who is paying well over $1bn for imported oil to teach those little boys to want to be suicide bombers. Moving off oil is a very high priority.
Innovation doesn't have to be bold, gamechanging or highly technical … although all those things are good too. Sometimes it comes down to innovating the way we look at things, finding new ways to apply old tools.

Innovation through a plastic tube that could also bring peace to the Middle East… now that's something I would like to see.

Monday, June 27, 2011

The Economist drives a truck through America's transport policy gap

I knew something was amiss. It's a bit like those spot the difference or what's wrong with this picture puzzles you find in newspapers.

As a journalist, transport had never been my patch until I arrived in the US and found "transportation" to be a huge issue here - fastest growing source of US emissions, creaking mass transit systems and partisan bickering over High Speed Rail are now subjects I've written about before.

As a European, trying to explain my disquiet at the American attitude to public transport has been met with a disappointing lack of meeting of minds from a diversity of people.

When I marvelled at how there was no way of getting from Mill Valley, a pleasant middle-class settlement, into San Francisco at the weekends, a local businessman who would could fairly be described as a "progressive" said that it was because no one (ie commuters) from Mill Valley needed to use the bus at the weekend (the corollary being that everyone who matters has a car).

When I asked Google's green energy czar, Bill Weihl, why the company chose to ferry 2,400 workers to and from its Mountain View site on private shuttle buses every day, rather than advocate for more resources for the beleaguered CalTrain service, he said it was perhaps more in the European culture to travel by public transport.

While Spain's building spree reported in the New York Times at the weekend was a timely reminder that all capital projects need to be designed with demand and discipline as priorities, it remains to be see whether its infrastructure strategy will be part of that nation's recovery. 

Mass transit is a blind spot even for Americans who take a moderately liberal approach to taxation and public spending.

Michael Scanlon, Caltrain chief executive and chairman of the American Public Transport Association, last week made good point at the Commonwealth Club meeting which I have addressed in this blog before.

He said: "What if (earlier generations) had said we can't afford to build the New York subway or the Golden Gate Bridge or the interstate highway system?"

But even one of the suggestions of how to pay for it is flawed - a national sales tax that depends on how much consumers spend, and therefore overly sensitive to economic downturns, is not a viable long term approach, as the supporters of the SMART train north of San Francisco will tell you.

Still, useful comments in the transport debate such as Scanlon's end up buried on the inside pages of the San Francisco Chronicle. Its op-ed pages carry some good comment from the likes of Rod Diridon a past member and chair of the California High Speed Rail Authority.

But HSR in California is in serious trouble, particularly if it loses the battle for positive publicity. Complaints that the project will cost too much at around $43bn are worsened by the reality that this estimate is way too low for 600 or so miles of track. But yet the state is prepared to spend $7.2bn on replacing 2 miles of the Bay Bridge, controversially with Chinese steel and engineering.

I had almost given up on trying to explain why I thought the US was in trouble over transport in a personal capacity, for fear of seeming like I was moaning for no reason. All that really matters in the debate is the price of gas, it seems…

But thankfully, the Economist has managed to frame the problem of transport in the US in a brilliant piece - the type that I do not yet have the resources to explore on this blog. It's a bit old now in terms of journalism, published at the end of April, but policymaking in the US, particularly on the issues that really matter, is as agonisingly slow as the Amtrak services it describes. That a federal transportation spending bill has been languishing in Washington for two years has not helped either.

The Economist, never one to sit on the editorial fence, surpasses its usual levels of criticism:
 America, despite its wealth and strength, often seems to be falling apart… America’s civil engineers routinely give its transport structures poor marks, rating roads, rails and bridges as deficient or functionally obsolete. And according to a World Economic Forum study America’s infrastructure has got worse, by comparison with other countries, over the past decade. In the WEF 2010 league table America now ranks 23rd for overall infrastructure quality, between Spain and Chile. Its roads, railways, ports and air-transport infrastructure are all judged mediocre against networks in northern Europe.
Americans, the article goes on to say, spend more time commuting than Europeans. And its roads are often poorly maintained:
More time on lower quality roads also makes for a deadlier transport network. With some 15 deaths a year for every 100,000 people, the road fatality rate in America is 60% above the OECD average; 33,000 Americans were killed on roads in 2010.
In 2006 America spent more than twice as much per person as Britain on new construction; but Britain spent 23% more per person maintaining its roads.  

But worse is yet to come, the Economist warns, as population growth is expected to increase 40% by 2050, equivalent to the population of Japan.
Total public spending on transport and water infrastructure has fallen steadily since the 1960s and now stands at 2.4% of GDP. Europe, by contrast, invests 5% of GDP in its infrastructure, while China is racing into the future at 9%. America’s spending as a share of GDP has not come close to European levels for over 50 years.
The article notes that cars in Germany cost 50% more to buy than in the US, which has resulted in sustainably funded transport system that benefits everyone, and America low level of fuel duty - 18.4 cents a gallon - has not increased since 1993.

It also describes perverse incentives in the allocation of transport funds, including:
A state using road-pricing to limit travel and congestion would be punished for its efforts with reduced funding, whereas one that built highways it could not afford to maintain would receive a larger allocation.

A National Infrastructure Bank along the lines of the European Investment Bank which uses its $300 billion in capital to provide loans for projects, would be one solution, suggests the Economist.

But the prospects aren't good, it concludes, because of the partisan bickering in Congress over everything from teaspoons in the cafeteria to the Environmental Protection Agency.
Roads, bridges and railways used to be neutral ground on which the parties could come together to support the country’s growth. But as politics has become more bitter, public works have been neglected. If the gridlock choking Washington finds its way to America’s statehouses too, then the American economy risks grinding to a standstill.
It's time for the bickering to stop and for the business community to stand up and count the cost publicly of ignoring the needs of the country's crumbling transport system. In the same way that the business community has hitched its wagon to notions of "sustainability" and "corporate social responsibility" in the absence of federal energy or climate policy, in the absence of a transport policy, it needs to climb on board the transport issue.

Those behind High Speed Rail need to do more to promote the economic benefits of a mass transit system that go beyond the profit potential for those contracted to deliver it.

Friday, June 24, 2011

California's energy regulators make UK counterparts seem powerless

Energy prices in the UK, and the rest of Europe, are much higher than those in the US.

Residential rates from my energy supplier PG&E average $0.18549 per kWh. Business rates are equally low - I've even heard businessmen report that they tell factory owners in China to start manufacturing in the US because the price of energy is so cheap. But in the UK, my electricity tariff would be according to this comparison site between 8.7675p per kWh (Npower) and 23.6355p per kWh (British Gas).

In the US, these kinds of prices would spark a revolution.

The UK government is currently struggling with utilities to keep prices in check. But it appears to be failing.

Britain's energy secretary, Chris Huhne, recently tried aggressive tactics in urging customers to exercise their right to vote with their wallets in the "free market" energy sector by changing supplier.

Huhne is as free-thinking a politician as you'll see in the current British government. Last week he attacked his Conservative colleagues for placing environmental regulations on a list of red tape to be considered for scrapping. Regulation he argued, isn't always bad and often creates vigorous markets, citing the difference between the boom in European mobile telecomms that far exceeded the industry in the US:
"At one point the USA had no less than 16 separate and incompatible networks. In contrast, the EU adopted a single standard, GSM, which established global roaming. This was so effective that today, of the world's largest 20 mobile networks, six are European and only two are American – and they're in 19th and 20th places."
But Huhne's complaints against the UK's electric utilities suggests that the regulations aren't quite set right yet.

The Guardian reported earlier this month that Scottish Power announced it would raise gas prices by 19% and electricity tariffs by 10% from August this year, adding 48p a day, or £175 a year, to the average daily combined gas and electricity bill of its 2.4 million customers.

It is all very well for Huhne to publicly attack the "Big Six" - Scottish Power, nPower, EDF, Scottish and Southern, E.ON and British Gas - and urge consumers to go elsewhere. But where do energy customers go? The electric utilities in the UK appear to act like a cartel and all raise their tariffs after the first power company has broken ranks. Profits may have "slumped" last year at Scottish Power, but profits at its Spanish owner Iberdrola were a bouyant €2.87bn last year.

It is unthinkable that California's utilities would be able to act in this way without reference to the state's Public Utilities Commission, or its consumer watchdog, the DRA. Consumers in the UK by comparison appear remarkably unprotected and the country's defences against price hikes seem toothless - its energy minister and regulator Ofgem expose weaknesses in the system.

Michael Peevey and other commissioners at the CPUC would be able to put the brakes on …

But the UK energy industry's regulatory issues do not end there. Despite having the world's only legally binding targets on reductions in CO2 emissions and reasonably aggressive targets on renewable energy something really is amiss in the integration of policy and regulation across the energy industry when the National Grid has got itself into a power purchase agreement that means it had to pay wind farm operators £2.4m to switch off its turbines during a low period of demand thanks to an unusually warm May.

Perhaps coal-burning power stations are also compensated in this way, but I doubt it since they carry the UK's baseload. And I am still searching for an example in the US of a utility being compensated in this way.

But it raises serious questions about the UK government's strategy when it comes to integrating renewables into the grid. Premiums for renewable energy is an acceptable part of trying to bring the market to maturity and will eventually lead to price parity with fossil fuel energy.

But when Scottish Power receives £720,000 for not producing electricity and raises prices without reasonable explanation, then the UK consumer has every right to ask questions about the effectiveness of the government and the regulators to protect them - whether from oil shocks in the Middle East or unseasonally warm springs.

These snags in the UK's renewables sector really need fixing if it is serious about clean energy. Perhaps it's time Peevey shared some tips with his UK counterparts…