Lessons from California for Miliband and the Great British Energy Firesale

Since Ed Miliband announced that he would cap energy prices if his party won the election, hardly a day seems to go by without an announcement of a utility company price hike, warnings of rolling blackouts  or energy executives threatening to invest elsewhere.

On the face of it, the Labour leader was right to challenge UK utility companies over their price hikes, which are way above inflation and often above wholesale price rises. But the caps are too crude a tool to fix a failing market that was incompletely and even incompetently de-regulated.

The problem is that Miliband is right and so are the utility executives - but only to a limited extent. Caps will not protect consumers from rising prices, only robust regulatory oversight will. And investment is at risk . But the utility industry is partly to blame by not making those investments early enough to avert the looming capacity gap.

But can it really be their fault when the Great British Energy Firesale didn't mandate utility companies to plan for future procurement?

After the energy monopolies were sold off in the 1990s, power was not given to the British people, but power was taken away, as James Meek pointed out last year in  the London Review of Books.

"The electricity competition has now been held. It is over, and Britain lost."

Consequently, France, Germany, Spain all won a large and arguably unhealthy slice of the UK energy pie in a way that would be unthinkable in most other countries.

The UK's consumers, who now pay some of the highest rates and largest tariff increases in the world, were seriously short-changed. What the Great British Energy Firesale created was a cartel that was largely foreign-owned and regulated by Ofgem, a feckless organisation that does not seem able to put the brakes on excessive price increases. But it doesn't have to be this way.

Miliband's plans to cap retail energy prices when the wholesale market is completely free raises the spectre of California's energy crisis in 2000 and 2001. Regulators, politicians and utility executives in the UK would do well to look west and see what the Golden State learned from its own rolling power blackouts, 800% wholesale price increases and a political row that defined an election.

After three years of reporting on the energy industry from the US, I'm currently undergoing reverse culture shock that in the UK at the prospect that my annual utility bill will rise from around $500 to around £1,500 a year.

The US and UK electric utility systems differ from one another in five striking and fundamental ways on:

1) foreign ownership;

2) regulatory oversight;

3) monopoly structure;

4) retail and wholesale prices;

5) business model revenue.

First, among the 3,200 utility companies in the United States foreign ownership is a rarity. Even the country that epitomises the global free market recognises that some sectors of the economy are strategic and that selling electricity and natural gas is not the same as selling iPhones or Jimmy Choo shoes.

Although there are no legislative barriers to foreign ownership, it's certainly not the norm. Winning over the state-level regulators would be one expense too far for many companies.

During my three years of reporting on the energy industry from the US, I lost count of the number of times I had to explain that the UK only had two domestically owned utility companies, British Gas and SSE.

That situation would be an anathema in the US. Even Centrica, which owns British Gas, has a corporate history of diversification that reveals an identity crisis in its core business: the Goldfish credit card, OneTel and Dyno-Rod.

When deregulation was all the rage in the 1990s, US companies were often "burned" by overseas investments in generating assets. NRG Energy, the largest Independent Power Producer in the US, sold its minority stake in a coal-fired power plant in Germany only last year.

NRG Energy's chief executive David Crane told me last year that the attempt to procure merchant generating assets outside of the US from the 1990s did not work out well. Electric power systems are not a global commodity.

Although National Grid has made successful inroads in transmission in the US, Scottish Power, owned by Spanish utility Iberdrola, sold Pacificorp on the west coast to Warren Buffet's Berkshire Hathaway in 2005.

But full globalisation of the UK energy industry was sealed this week by the announcement from Chancellor George Osborne that China General Nuclear Power Corporation (CGNPC) would take a minority stake with the main operator, France's EDF, to build the new Hinkley Point C power station in Somerset.

No UK firms are involved in the construction phase of the plant, according to the Guardian.

Chinese wealth is welcome in the UK. But owning a strategic asset like a nuclear power plant is worlds away from owning say, a piece of real estate or art. What's in it for the Chinese? Well other than making money out of Britain's high energy rates, there's unlikely to be any tactical move here that would have an impact on competition.

The same cannot be said for France, Germany and Spain, whose utility companies EDF, EON, RWE and Iberdrola all own the majority of the UK's electricity generating capacity and retail sales. A real cynic might contend that it's in those countries interests to keep energy rates high in the UK so investment, for example in manufacturing, looks more attractive in other European countries.

Residential rates for natural gas and electricity are among the lowest in Europe. But the industrial tariffs for electricity are high compared with France which lists electricity as its 5th largest export.

Even a moderate critic would ask whether EDF would allow foreign ownership of strategic asset in France and wonder if foreign subsidiaries act in the public good to the same extent as they might in their country of origin. 

Second, investor-owned utilities, ie significantly sized monopoly utilities, are regulated by the state, rather than federal government. In California, regulators require investor-owned utilities to prepare a general rate case if they want to raise tariffs. The California Public Utilities Commission examines the real costs of supplying power. The process takes place in an open forum, almost all documentation and commentary is highly transparent with ample opportunity for public comment.

Anyone who has sat through hours of tedious rulemaking also appreciates that the public and advocates have an extremely vital role to play. I don't see the same level of public debate or stakeholder engagement over tariffs in the UK. Rate cases also take time, lawyers fees and often end in failure.

Many CPUC commissioners are former utility executives, but Mike Florio is a more recent appointment after serving as an attorney at The Utility Reform Network, which has often put a spanner in the works for rate increases at Pacific Gas & Electric. The CPUC also pays for an internal unit, the Office of Ratepayer Advocates, which advocates very effectively for low prices for consumers.

An annual increases of the scale imposed by the Big Six in the UK would be unthinkable in California.

Third, most US utilities are natural monopolies. Competition is scarce and even when mergers do take place, regulators comb through the plans in great detail such as Duke Energy's acquisition of Progress Energy last year.

In most towns and cities if there's no municipal utility, you can only take power from the large incumbent utility. Shopping around on MoneySavingExpert.com is not an option. For customers to be told to use less gas to save money, as the head of residential energy at British Gas was reported as saying yesterday is so breathtakingly arrogant you wonder how the company maintains its social licence to operate. British Gas sells an essential commodity, not handbags.

Fourth, average US residential retail rates are 12.61 cents per kilowatt hour, versus a UK tariff of around 15 pence per kwh (23c/kWh). Americans tend to use more electricity than the average Brit, so their annual bills can sometimes be as high. But many people living in modest apartments in cities like San Francisco will only pay around $40 a month for both natural gas and electricity.  

Cheap natural gas prices are a result of the US shale gas boom - at $3.80 per mmBTU versus $11 in the UK. But that difference can only partially explain why consumers pay so much more for electricity in the UK.

In August 2011, wholesale power prices peaked at $2,500/MWh in Texas, a state where retail rates are around 11.42 cents per kWh. However, wholesale prices in the UK have never risen above £90MWh in the past decade.

Ofgem data indicate that costs for UK utility companies are from the price of wholesale power. But utilities are allowed and indeed expected to trade on the wholesale power markets so they can hedge fuel risk.

In California, utilities pass on the full cost of natural gas to their customers but rates are adjusted every month to align with the latest prices.

"However, gas cost incentive mechanisms are in place to give the utilities an incentive to procure supplies at low costs," said a spokeswoman from the CPUC. "If the gas utilities do a poor job purchasing natural gas relative to natural gas benchmark prices, they may have to absorb some of the costs, rather than pass on all of the costs to ratepayers."

When it comes to wholesale electricity volatility, customers are again protected. Electric energy costs (as opposed to 'wire costs' for distribution or transmission lines) are collected in an Energy Revenue Recovery Account (ERRA).

"Each year, each utility files an ERRA forecast that sets the rate to be charged and a true-up case that assesses the revenues versus the costs," she said. "Any difference is rolled over and used in calculating the next year’s rate."

Such transparency and openness is missing in the UK where utilities are allowed to profit from power trading and pass through increased wholesale power to consumers without real regulatory oversight.

The fifth, final and perhaps most important difference between the UK and California markets is one of retail revenue.

California is unique in the US energy industry in many respects, largely thanks to policies introduced by Jerry Brown when he was first governor in the 1970s. Energy decoupling, for example, prevents utility companies from making money from the retail sale of electricity, removing an incentive to sell as much power as possible. Utilities have since made a tidy profit (11% returns) on investments in transmission and distribution and have been incentivised to make California the most energy efficient state in the US.

Compared with California, UK utilities complain far too loudly about the implication of green mandates on prices for consumers.

California not only manages to keep a check on energy prices but it is also on track to achieving the most aggressive Renewable Portfolio Standard in the US, which means that by 2020 utilities will have to procure 33% of their electricity from green sources, excluding large hydro.

California's system may not be perfect but it is transparent and aims to a balance between reliability, affordability, the environment and the interests of consumers and business.

No single politician, regulator, consumer or energy executive will have all the answers but through engagement in dialogue, there can be a better system that we can all live with.

As a single energy market for Europe draws closer, it would be a good time to deal with these domestic issues, hopefully before the rolling blackouts start and investors head elsewhere.

British consumers could do much, much better, and Miliband's proposals fall short of what they deserve.

Daily Mail misleads over Met Office climate data a cabbie can understand

Long haul flights always make me feel like I'm doing my bit for climate change. Every time I board a plane, I hope for some acceleration to scale of aviation biofuels.

Last night, on the way back from London to San Francisco, I read the Daily Mail. It's not my usual choice of newspaper, but it always offers an insightful glimpse into Britain's unlikeable aspects.

One piece in particular caught my eye by David Rose, a controversial journalist who was discredited for his blind reporting in the run up to the Iraq war of Ahmed Chalabi's claims that Saddam Hussein had weapons of mass destruction. Even Chalabi later retracted his claims, according to George Monbiot, forcing Rose to admit he was wrong.

Monbiot has previously criticised Rose's reporting on climate change - something that Rose himself seems proud of, boasting in his column yesterday that Planet 3.0 had awarded him its Golden Horseshoe award for the "most brazenly damaging and malign bad science of 2013". Praise indeed. Perhaps he can hang his horseshoe over the mantelpiece where his award for his reporting on Iraq should have been.

Rose claims that Met Office data shows global warming stopped 16 years ago  because of a revision in its decadal forecast which is routinely updated every December. But this assertion looks almost like comedy. Even before it was published, attempts by Britain's right wing press to join the dots  with the most migraine-inducing logic were debunked by the Met Office itself:

8 January 2013 - There has been media coverage today about our experimental decadal global temperature prediction, which is routinely updated in December each year.

The latest decadal prediction suggests that global temperatures over the next five years are likely to be a little lower than predicted from the previous prediction issued in December 2011.

However, both versions are consistent in predicting that we will continue to see near-record levels of global temperatures in the next few years.

This means temperatures will remain well above the long-term average and we will continue to see temperatures like those which resulted in 2000-2009 being the warmest decade in the instrumental record dating back to 1850.

Why can't Rose be bothered to mention this?

But like war, this really is no laughing matter if you believe that columnists help readers form opinions that they are too busy to develop through their own research and that opinion can be converted into political power at the ballot box. Rose contrives an argument to get readers to believe there is really no urgent need to deal with climate change as he contrived an argument for the need for action on non-existent weapons of mass destruction. But the stakes are higher and if such "thought leadership" prevails, it could potentially lead us into a crisis much worse than even the disastrous tragedy of the Iraq war. 

To be fair to Rose, he does acknowledge the need to develop lower carbon energy sources. That's much more than you might expect from a US right-wing columnist. But he perniciously suggests that the Met Office data indicates that we have many more decades to act on climate change.

Rose isn't a moron. He knows exactly what he is doing: manipulating the reader. Unfortunately like too many journalists, he clearly writes from a perspective that shows contempt for his readers and that they are not intelligent as he.

And even worse, if you're not a member of the digerati, you have no hope in hell of finding out the truth. My mum reads the Mail, but she has no internet. But people like my mum never have the advantage of limitless information over the internet to scrape away the artifice of posturing columnists like Rose and uncover the simple fact that Rose and the Daily Mail had their knuckles rapped by the Met Office when it tried to get away with the same nonsense in October.

My taxi driver in London yesterday told me that he left school without any qualifications at 16. Alan, now 44, described himself as "uneducated". But in the 40 minutes to Heathrow, he talked informatively about climate change, extreme weather, the energy industry, colonisation of other planets if we screw this one up… not bad for someone without even a CSE to his name. Alan said he was a Sun reader, because the Guardian was "too deep". But if Alan can get his head around such complex concepts and issues of our time, surely there's hope they can see beyond this tit for tat willy waving that no one else cares about except expensively educated and highly paid columnists. 

The newspaper-buying and tax-paying public deserve better discourse about climate change.

In December, I went to see climate scientist Michael Mann in a panel discussion during which he spoke about the six stages of denial where Rose's argument fits squarely. In my next blog, I will explore the demands on scientists like Mann to defend their work in a way that scientists in no other disciplines are required to.

Mark Zuckerberg, Craigslist and energy efficiency - what do they have in common?

Flat hunting in San Francisco has in very recent months become a monstrously competitive experience. You can find a much more creative rendering of this story told by many here.

It's a rather nasty witches' brew that blends a variety of experiences which normal people avoid. It's a little bit like competing on Shark Tank (or Dragons' Den, depending on which side of the Atlantic you are reading this blog) and a beauty pageant. Landlords and agents want to know your assets, income and projected revenues; but they also have to like the way you look (are they planning to live there, too?). It's also a little like online dating blended with job hunting. "Candidate" tenants are required to submit a letter explaining who they are, why they like the flat and why they think they are ideal tenants backed up with "character" references, and oh, yes, mine were called!

There is nothing else in life that has taken this level of sustained effort and cross-checking of my veracity as a responsible adult who can pay the rent every month and on time. I have either paid rent or a mortgage - sometimes both simultaneously - for the best part of two decades. But that seems to matter little.

Some life experiences bestow knowledge upon you that you never wish you'd learned in the first place and will be of little or no use in future. But at least job hunting or mortgage applications will be a piece of cake by comparison.

So why all the hoopla? Well, it didn't help to look in the weeks leading up to the Facebook IPO when  landlords just assumed every prospective tenant was also soon to be a zillionaire Zuckerberg employee. Each week monthly rents seemed to jack up by $100.

Interestingly, properties advertised by agents seemed to be more reasonable than those privately advertised. One lady had a two bedroom flat advertised at $3,000 per month - across the road a very similar, if not in some ways nicer flat, was advertised for $650 less.

I'm sure she got what the ad was asking for: a disgruntled tenant impoverished by ridiculous rent. She even said that the laundry downstairs was coin-operated because she feared tenants might set up their own ad hoc laundry services. Surely tenants paying $3,000 a month have got better things to do and wouldn't need an income from washing other people's dirty clothes?

I know rents are high because housing stock inventories are low -  that's just simple supply and demand. But it in San Francisco, the rental "market" seems particularly sensitive to the fortunes and misfortunes of the economy.

Quality housing stock is hard to find and value for money even harder, especially for privately advertised flats. Oh, and all that genuine fleecing (at least you end up with a roof over your head, right?) while being robbed by Craiglist scams.

Out of the 100s of ads I viewed at least 10% were scams… some were very sophisticated confidence tricks. I was spared falling into one trap only because of an admin oversight. But I engaged with many posters, thinking they were genuine. Watch out Stacy or Stacey Low… we're watching you even if Craigslist doesn't deal responsibly with you and others like you …  one less sophisticated scammer who couldn't spell at all well even wanted money upfront before viewing a flat (that didn't exist, obviously).

Aside from the risk of being scammed or having my credit ID stolen, it was a dispiriting waste of time. Craigslist is a scammers dream.

This example has just appeared in the past hour:

$905 / 2br - 1670ft² - 2 Bedroom 2 Bathroom Single-Family Home For Rent In Cow Hollow -

The last time a 2 bedroom flat was available for $905 in Cow Hollow must have been way before anyone reading this was born.

After several weeks of clicking refresh on my Craigslist search 300 times an hour, I grew accustomed to the language and it appeared that the more adjectives used, the worse the flat.

Adjectives with a completely counter meaning include:

Remodelled = a broken sink has been replaced; or a genuine upgrade in 1984;
Bright = has windows, but otherwise featureless and charmless;
Cute = tiny, possibly with a bedroom without windows;
Charming = possibly pink kitchen and 20 year old carpet; almost certain to have an extraneous random room that you'll never be able to use because it has no windows;
2/3 bed = one bedroom could be a closet or there is most certainly a glass paned French window separating two "bedrooms".

It astonished me that San Franciscans will fork out tonnes of cash for a drab and worn out San Francisco apartment that would not be tolerated by their fellow Americans, who are normally lovers of spacious interiors and large gardens. No laundry in the land that loves the tumble dryer and no parking in the land that loves the car strikes me as odd when such high standards are demanded from all other products and services.

I couldn't imagine paying half the equivalent of £2000 for something half as shabby in London. But then I joined the dots. In the US, even in California, where the record on energy efficiency is outstanding thanks to Gov Jerry Brown and his first term administration, there is little in the way of energy efficiency incentives for consumers, unless it comes through their utility company.

The price of natural gas in the UK alone is enough to make people switch to energy efficient boilers. But it's all burn, baby, burn in the US now, thanks to the low price of natural gas which quite possibly could be the only thing that has prevented the country from economic collapse.

What's more, in the UK, landlords are required by law to have boilers, gas stoves and any other gas appliances checked each year by a plumber - and not just any plumber, but one who is certified. Every five years, electric wiring systems are also required to be checked by approved electricians.

Perhaps building safety codes in the US were always better than those in the UK which is just now playing catch up. Once upon a time in the UK, students in particular seemed to poison themselves with carbon monoxide from gas fires all too regularly… I know I once had a near miss thanks to a gas fire installed without ventilation.

But in the hunt for a home, it concerned me when landlords either didn't know when the boiler was installed (I once asked if it had been checked - that was another alien from another planet moment).
Some didn't even know where the boiler was or wouldn't show us.

One elderly lady said her "furnace" was installed in 1923… when the building was constructed, I presume.

EU directives on energy labelling are not without their flaws. But at least it gives some reassurance that a) it won't cost you an arm and a leg to stay warm in San Francisco's winter that arrives around July; b) it won't cost you your life because it was installed 100 years ago.

But in the SF Fire Department's catalogue of mishaps that start fires that rip through the chimney-like wooden stud walls of San Francisco's "Victorians" I guess furnace fire can't be that high up.

One good unintended consequence of improved energy efficiency mandates for tenanted buildings would be general upgrades too - once you rip out a boiler/stove/fridge, etc you might as well remodel.

San Francisco tenants might then feel that they were getting at least something close to what they are paying for. 

While an intimate knowledge of every type of architectural style in San Francisco may be wasted overall, I did get to meet some diamonds in the Craigslist rough - some really very wonderful San Franciscans, and one who finally and refreshingly used nouns, rather than adjectives, to describe the qualities of their property.


 

What Nasa Launch talks about when it talks about waste

Nasa Launch earlier this month kicked started its Beyond Waste initiative designed to identify 10 “game changing” innovations "that have the potential to transform the current waste management systems and practices to ones focused on minimizing waste."

Also funded by USAID, the US State Department and Nike, the entries may well have a bias for developing world solutions as last year's list for energy innovations suggests.

There's nothing wrong with this overseas perspective - the financing for the initiative after all comes from departments with a foreign policy focus.

And let's face it, when it comes to making disruptive changes to energy infrastructure (or lack of), a high impact is most easily achieved outside of the United States, even if the overall impact on energy use/carbon emissions is small. In the developing world, simple solutions can have profoundly positive impacts and are worthwhile even if they will never mitigate resource profligacy and carbon emissions in rich or advanced developed countries.

This year's theme could look closer to home for innovations to deal with the 250m tonnes of junk, discarded clothes, food scraps and waste sewage - the annual byproducts of the daily lives of 312m million Americans.

But the waste industry seems as resistant to change than parts of the energy sector in the US. 

I'm told that Americans have a cultural aversion to closed loop life cycles that recover the nutrients from human waste. British people, it would seem, don't really care and the London Olympic park's greenery is fertilised in part by human waste recovered from a Thames Water anaerobic digestion plant.

Americans, however, are reluctant to talk rubbish when it comes to turning trash into cash, but they certainly don't want to talk crap.

In Europe, Asia and Canada, waste-to-energy (WTE) facilities have caught on in recent years using established technologies such as combustion, gasification, pyrolization, anaerobic digestion, and landfill gas (LFG) recovery. But in the US, the GWh produced by WTE from municipal solid waste has actually decreased over the last decade. No one wants to advocate for polluting old-school incinerators, but the US creates more municipal waste than any other country in the world and could do more to get more from its landfills.

Most of the 86 municipal solid waste (MSW) plants with energy recovery are located in the north-east, a region which already has serious issues over the criterion pollutants from coal fired power plants. But no new plants have been built in the US since 1995, as if the industry has been waiting for cleaner technologies to emerge.

There are also serious policy headwinds against WTE - surprisingly so in California where last month, the state's energy commissioners voted unanimously to suspend the Renewable Portfolio Standard (RPS) eligibility for power plants generating electricity using biomethane. Commissioners were concerned about the verification of biomethane injected into natural gas pipelines.

San Francisco City takes any chance it can get to show off its green credentials. But even its water authority, the San Francisco Public Utilities Commission, flushes out 65m gallons of wastewater into the SF Bay each day - much of that originating as pristine mountain water from Yosemite National Park.

SFPUC's post-treatment water is reportedly clean enough to drink, but as far as I can tell, the plant in Hunter's Point siphons off biogas to run the sewage works without recovering phosphates - in short supply around the world and used in fertilisers which are the most energy intensive aspect of the agribusiness.

The US water delivery and sanitation industry is still dominated by public ownership and hampered with all the usual legacy drag of industrial sectors  dominated by unchallenged monopolies. That the waste industry is a sector bursting to be privatised is not lost on investors in the US, either.

Trevor Hill, CEO and president of Global Water Resources noted at last month's Cleantech Forum in San Francisco that only around 15% of water & sewage treatment companies were privately owned in the US.

Unfortunately, there were no representatives from the SFPUC at the roundtable ahead of the Beyond Waste Big Think session last month held in San Francisco where there's no shortage of waste of human life - much of it resorting to scavenging discarded bottles, cans and food.

But I asked a representative of San Francisco's leading refuse collection company to give some perspective on why established technologies such as WTE had failed to gain momentum in the US.

Low prices of electricity made the costs of technologies like anaerobic digestion on sewage plants or landfill sites uneconomical unlike in Europe, he said. That's true. In the UK, for example, some 66% of sewage sludge is treated with AD which can also recover nutrients for use in agriculture. But electricity prices are high - probably the equivalent of 25c/kwh.

But that economic argument only holds true in states like Arizona where the price of electricity is 8c/kwh. Many other states that have much higher electricity rates.

He said that he gets calls every week from European companies wanting to offer their services. I'll bet he does. Even from Europe, the steaming heap of waste in the US glistens like a gold mine across the Atlantic.

He also added that the US didn't really need to worry about finding land to fill with garbage…

To overlook municipal and sewage as resources is a wasted opportunity.

But thankfully there are other drivers for innovations in "waste" and nowhere more so than in the biofuels sector.

Enerkem is one such company taking bold steps to capture the potential energy sitting idle in north American landfills. It has three plants under construction in Canada, and another in Mississippi. Enerkem has a 25-year feedstock supply agreement with the City of Edmonton to produce around 38m litres of ethanol annually.

But the company was given significant assistance with $20m from the City of Edmonton and Alberta Innovates as part of the city's municipal waste-to-biofuels initiative.

Last week I went to visit Nasa's OMEGA project based at a sewage treatment works in south San Francisco. The OMEGA project siphons off some of its treated water for a pilot demonstration and uses it as feedstock to produce algal biofuels.

Dr Jonathan Trent's project was derived from closed loop systems required in space. Sending a single pound of coffee to the space station costs around $10,000, after all.

OMEGA is a neat concept and unlike the many advanced biofuels startups, it uses a non-genetically modified freshwater algae with the intention that the technology they develop can be used as an "open source platform" for private companies to develop.

It's also a shrewd move to look to feedstocks that are readily available and don't depend on land, food crops or even any other biomass waste.

Not too far from Nasa's OMEGA project, Solazyme runs its R&D facilities on Brazilian sugar cane. The company plays down concerns about using a land-based feedstock but to scale to any significant level to compete with traditional petrochemicals it's difficult to see how their technology wouldn't become a landuse issue at some point.

After the use of corn to produce ethanol resulted in food riots in 2007, it's all too easy to imagine a developing world landgrab as cheap commodities become more valuable through emerging "waste markets".

There are other policy drivers in the US, which could help accelerate the use of waste. Advanced biofuels producers are also being incentivised by the Renewable Fuel Standard 2 which requires 36bn gallons of advanced biofuels by 2022. Many of the feedstocks are expected come from biomass "waste", eg woodchips.

The downside is that in the commodification of waste, there will always be and winners and losers… something that is cheaply or freely available now will rapidly acquire a price that reflects its value.

For those who argue that such federally funded initiatives to find over-engineered solution are a waste of space - after all Nasa's zillion-dollar, zero-gravity space pen may not have made the world a better place - should be reassured that the agency is turning to more earthly missions.

US utilities urged not to bet the trillion-dollar farm on natural gas

Natural gas prices are predicted to remain low over the next two decades, albeit not as low as today's price just under $2MMBtu, while the only way is up for electricity retail prices. 

You'd think that gas-fired power plants would be a no-brainer for investors looking to put long-term dollars to work in the power generation sector - even if the US introduces a price on carbon by the 12th of never, natural gas is far cleaner and less of a risk than coal.

But betting on natural gas as a non-volatile commodity is a high-risk strategy, according to a new report published this week by Ceres, which did a lot of work last year to lobby for even more stringent CAFE standards for vehicle fuel economy.

Practicing risk-aware electricity generation: what every state regulator needs to know sets out the challenges facing the energy industry in the US. Unlike other sectors, it is regulated to balance the needs of investors who want returns, utilities who want to make money for their shareholders and consumers who need to be protected from price shocks in electricity prices.

 These interests compete with each other in a context where the US has huge imbalances in the power sector: the country already has a legacy of overcapacity in gas-fired power generation in some regions thanks to a build-out campaign in the last decade (see figure above); coal-fired power plants in the rustbelt east are already likely to be phased out in favour of more gas generation thanks to EPA regulations; nuclear power plants around the country are approaching the end of their licence periods; and renewables are becoming disproportionately expensive compared with cheap natural gas-generated electricity.

"These challenges call for new utility business models and new regulatory paradigms. Both regulators and utilities need to evolve beyond historical practice," says the report. "About 70 percent of US electric generating capacity is at least 30 years old," says the report. "Much of this older capacity is coal-based generation subject to significant pressure from the Clean Air Act (CAA) because of its emissions of traditional pollutants such as nitrous oxides, sulfur dioxides, mercury and particulates."

Investment in transmission has also failed to keep pace with demand and technology, with some U.S. transmission facilities approaching 100 years old, it says.

Utility investment in transmission facilities slowed significantly from 1975 to 1998. In recent years, especially after the creation of deregulated generation markets in about half of the U.S., it has become clear that the transmission deficit will have to be filled.

One of the questions posed by Ceres in this report is: does the US want to bet the farm on yet more gas-fired generation? Clearly the answer is no.

Ron Binz, report co-author, president of Public Policy Consulting and former Chairman of the Colorado Public Utilities Commission, said: "Utilities, regulators and customers are entering what's going to be the most uncertain, complex and risky period in the history of the electric power industry.

"We have relatively flat load growth and that's predicted to continue for quite a while that makes capital to the utility system a lot more important to rates there's going to be a lot of upward pressure on rates and all of the intended effects that that creates in the economy and the politics around regulation."

The report estimates that the net asset value of the plant in service for all U.S. electric utilities in 2010 was about $1.1 trillion, broken down as $765 billion for IOUs, about $200 billion for municipal (publicly-owned) utilities (or “munis”), and $112 billion for rural electric cooperatives (or “co-ops”).

It cites the Brattle Group report in 2009 which predicted that total industry-wide capital expenditures from 2010 to 2030 would amount to between $1.5 trillion and $2.0 trillion.

"If the U.S. utility industry adds $100 billion each year between 2010 and 2030, the net value of utility plant in service will grow from today’s $1.1 trillion to more than $2.0 trillion— a doubling of net invested capital," the report says.

But utilities will struggle to raise large volumes of capital required as their balance sheets droop because of flat demand and the erosion of their creditworthiness since the 1970s and 1980s - there are now no triple A rated utilities in the USA.

"The financial metrics of the utilities going into this build cycle are much weaker than they were when the last build cycle occurred," said Binz. "We had some triple A rated utilities and a lot of double A and single A utilities back in the 70s and 80s the average rating was in the range of a this time around it's around the B triple B range, two or three clicks lower than it was before. That puts the utilities much closer to the boundary of non-investment grade ratings."

Denise Furey, report co-author, and principal of Regent Square Advisors, said that a diversified fuel mix is a credit positive for a utility.

"A sizeable negative event will have an impact on the utilities credit ratings and the market appetite for its bonds which will result in turn in an increase in the cost of capital.

"The problem with natural gas and anything that is commodity based like this is that the price of it is a short-term price and we can't hedge very far out.

"A portfolio with diversified fuel mix reduces risk the sector is looking to build new generation assets currently the price of natural gas makes gas-fired generation look optimal. However, gas power plants have long lives and conversely the price of natural gas used constantly relying on current natural gas prices as predicted in long-term trends is pure folly. A mix of asset types including renewables is really optimal.

But beyond the regulators attempts to rein in rates for consumers, the social contract in the energy industry extends much further. Some 65% of utility equities and fixed income securities are owned by institutional investors such as insurance companies, mutual funds and pension plans while most retail investors own utility stock and bonds indirectly through mutual funds and 401k plans.

More than any other industrial sector, if utilities do well, everyone is a winner from the investment fund managers to the pensioners who have the potential to win twice on regulated rates and a comfortable retirement.

The utility industry is not yet being dismantled one residential rooftop solar panel at a time, but managers, utilities and regulators know that business models cannot stay the same over the next 20 years.

Regulators will play an essential role in playing referee in the long game to come in the energy sector.

Sue Tierney, managing principal at the Analysis Group and former Massachusetts Public Utilities Commissioner, said:

"What signals do regulators and policy makers send to private decision makers about what matters? Regulators often inject other measures of what matters in utility investment decisions.

"As we look across the US there are parts of the country that are in competitive markets where investors in new power generation technology are merging or competitive players and they are not making decisions based on guidance from regulators about what they may or may not invest in. In those markets we're highly likely to see gas generation dominate.

But west of the Rocky Mountains the regulated energy markets could look very different, she said: "Those are the parts of the country that are being addressed in this report where regulators can put a different non-market orientation onto the decisions at utilities managers where to invest."

"There is likely to be a different role for diversification, hedging for fuel risk … so those decisions are being made by shareholders and managers of merchant companies."

Awesome and fired-up: has cleantech come of age after forum's 10th year?

Saul Griffith opened with "awesome" and Amory Lovins ended by "firing-up" jaded delegates. 

Griffith, the huggable hirsute MacArthur "genius", told the audience: "The future we are going to create can be spectacularly beautiful and interesting."

He then proceeded to show off a few of his inventions - by turns brilliant and bizarre - from his Makani Power company.

A carbon fibre wind turbine aeroplane that takes off autonomously and generates 6-8kw by doing 200mph barrel rolls at 5,000 feet.

It's certainly innovation, and there's certainly room for such blue sky thinking that may never be practical enough to reach commercial scale. But Griffith, a great fan of robotic technology, is chasing MWs with this technology.

"This is pretty radical," Griffith admitted. "You need a good reason to do this. We're projecting about 3c/kwh subsidised. Twice the capacity factor of existing wind tech. This looks like a fabulous technology for offshore. We originally had Google funding. We've since got ARPA-E funding to prove out all of the remaining things."

He wasn't clear on now much money he is chasing to fund the next stage of development, but the money spent on this project so far made the VCs in the room inhale sharply.

"This sounds wild, this is expensive. You don't get much change from $20m to get where we are here today. You're still a lot of money away from the MW machines.

"I'm not sure this is something you can do with venture financing," he admitted, sending a wave of relaxation through the audience.

"You do need public private partnerships to do this. Government funding in the early hard R&D stages and large corporates to help this through to commercial technology. Conceptually this is proven out but there is still a long way to go from 20kw wind that fly 24 hours to MW [machines] that fly 20,000 hours."

Then he showed one of his more recent designs in a "my job is more fun than your job video" - a robotic tracking heliostat for concentrated solar applications that performed at better than .1% precision and would reduce costs by 20% compared with traditional heliostats and increase performance by 30%.

It's a compelling technology proposition when heliostats accounting for roughly one-third of solar thermal costs.

But although ARPA-E's EnergyInnovation Summit in DC last month  may have been ready for Otherlab's fluidic heliostat arrays, the forum's audience less so.

Griffith said they were pursuing the "typical R&D financing" with the DOE and ARPA-E, but also working with corporate partners on developing this technology.

"The cost models are excellent so I call up a friend in a top tier VC firm and say I've got this killer technology and he says, well there's a serious turd in the punchbowl this year, come back in a couple of years. This was about two weeks after Solyndra happened."

But just as investors were beginning to slouch in their seats again, Griffith gave them a shot in the arm with cost projections for his solar technology.

"It needs $3-$4m to get it to the stage where you're doing small real world rooftop tests. And then $20m plus to make this into a commercial technology. These numbers are larger than traditional VCs are ready for. I still don't think we've solved the funding problem for early stage energy technologies."

Griffith buoyed the audience, finally by telling them to be "awesome".

"Attack the customer at points of infrastructure change and let's make the world awesome again," he said. "Can everyone think that what we're doing is awesome? You are awesome! If your 10 year old doesn't think what you're doing is awesome, you're telling them the wrong story. As a group we've got to make it more exciting again."

Amory Lovins, just as awesome, also bearded but a bit less huggable, closed the two days of shop talk with an introduction to the new book from the Rocky Mountain Institute, Reinventing Fire.

Lovins said: "America's public energy conversation boils down to this, would you rather die of a) oil wars, b) climate change or c) nuclear holocaust, or d) all of the above or e) none of the above. What if we could make energy do our work without working our own undoing? What if we could have fuel without fear? Could we reinvent fire? Fire made us human; fossil fuels made us modern. Now we need a new fire that makes us safe secure healthy and durable.

"This has now been made possible. We humans are creating a new fire, not dug from below but flowing from above."

But the real message for the Cleantech Group's 10th anniversary forum in San Francisco arrived early in the proceedings from Wal van Lierop, co-founder of Chrysalix ventures in Vancouver.

He addressed the launch party with a gentle slap in the face. Cleantech, he said, was merely a marketing exercise and we are now witnessing a mainstreaming of clean energy.

He said that the 2008 global economic crisis had caused a shakeout in cleantech, which was a good thing. And since then, we've seen the rise of cleantech in China.

We've also seen the switch almost overnight to the prospect of cheap natural gas prices in the US for the foreseeable future.

What does this mean for cleantech 5.0, he asked? Cleantech will become less visible, creating a new club of green elephants (incumbents). He also said that there was a convergence between the hydrocarbon energy industry and the clean energy industry, as the oil and gas companies seek technology solutions to mitigate the impact of shale gas, overcome environmental barriers and produce more sustainably.

Technology will be used to clean up the hydrocarbon industry, he said.

It might not be the end of cleantech as we know it yet, but perhaps next year's forum will be all about convergence, marking a critical stage in the maturation clean energy.

Osborne's budget misses a golden opportunity for clean energy

It may sound a little odd, but Budget day in the UK has always provoked in me rather more excitement than it should. Not because I have deep concerns about the Chancellor's impact on my taxes to HMRC.

But since reporting on clean energy policy and finance in the US, where the fiendishly complex tax system is even more loathed, I've had a renewed appreciation of tax codes as an expression of a nation's deepest values in the same way that a nation's music or cuisine reflect the spirit of its people and resources. 

Osborne called his Budget one that "rewards work" but Labour leader Ed Miliband described it as a  "millionaire's Budget".

Beyond the usual Punch & Judy script between the Tories and Labour, what is George Osborne really saying in this budget about the British psyche and the needs of its people - or perhaps in this budget he was speaking more of the sensibilities of a politician born to privilege with no real appreciation of what motivates people to work hard.

Osborne knows that what comes out of his red box will go straight to royal assent without parliamentary debate. In the US, the president's budget is thrown to the congressional wolves who tear it apart and piece it slowly back together again with compromises on both sides.

I don't know which system is better, but given the apparent lack of intellectual rigor, Osborne's third budget could only be improved by parliamentary interrogation.

Shale gas

It's clear that the UK is in danger of an energy crunch  - a fifth of its capacity will drop from the grid by 2020.

The UK government plans to introduce a package of oil and gas tax measures to secure billions of pounds of additional investment in the UK Continental Shelf and will publish a strategy for gas generation in autumn 2012, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.

To avoid catastrophe, Osborne wants to encourage the oil and gas industry to unlock the potential remaining in the North Sea. I get that. 

But what I don't get is the £3bn in tax credits to tempt an industry which has balance sheets bursting with idle investment £££s and $$$s. It's naive to think that this will make a huge difference to gas exploration companies - it's a bit like giving Warren Buffet $3m. It would be more than most individuals could ever hope to earn in a lifetime, but yet for Buffet, it's pin money he doesn't need and neither do the oil and gas companies. 

Global companies would probably have been happy enough with the reduction in corporation tax - 26% to 24% in April 2012, down to 22% in 2014 - one of the lowest in the world. As the US shows, a high corporate rate is no bar to corporate success.

Fossil fuel producers and generators are most attracted to the UK because of the economics of high electricity prices. Does Osborne perhaps think that the toothless Ofgem will force utilities to pass through the reduced cost of electricity generation from lower gas prices once drilling into the UK's shale has begun?

If he'd wanted this particular tax break to be warmly received, he should have connected the dots here for the electorate, probably because according to a shale gas report in 2010: "It is expected that it will take about two to five years to firmly establish the potential of shale plays in Europe and it is only after 2020 that the production will have any considerable affect on the supply of natural gas."

In any case, most of Europe's shale gas is going to come from Poland, where ExxonMobil, Chevron, ConocoPhillips, Marathon Oil, Talisman Energy and Chevron are elbowing each other out of the way. Osborne is taking a huge risk with taxpayer money by trying to attract this kind of investment: aside from the environmental downsides of hydrofracking, open land is scarce and expensive in the UK, unlike Poland where the population density isn't anything like as great.

Streamlining redtape and permitting can also have the same impact as tax breaks for large exploration companies - without having to make spending cuts elsewhere from the most vulnerable. Let's hope Osborne's gamble works - so that tax receipts from oil companies will be worth more than the £3bn lost by the taxpayer.

There is additional uncertainty over reserves of oil and gas remaining in the North Sea - forecasts were not included in the budget. I spoke with a geologist working for a small company hoping to explore small reserves in the North Sea that the oil majors wouldn't even consider because of their relatively tiny size. The geologist told me that calculating estimated reserves at such small scales increased uncertainty about what could be recovered: it was really more about pot luck than seismic surveys.

Does Osborne really think he will spark a miniature oil & gas rush back to the North Sea? Some figures would be helpful but I doubt the chancellor will rush to publish such de minimis numbers.

Alan McCrae, energy tax partner, PwC, said: "Overall, the package is to be welcomed as a boost for investment in the oil and gas industry in the UK.

"The proposals to extend field allowances for oil and gas projects will help mitigate against the very high rates of tax suffered by oil and gas companies and will allow some projects to proceed that would otherwise not be viable. By careful targeting of the incentives, these projects should now be able to go ahead and, by doing so, will enable them to make a significant contribution to future Government revenues from the oil and gas industry.

"The plans to give oil and gas companies greater certainty regarding tax relief for their decommissioning costs will also help the investment climate. This will give them significant reassurance over this area of uncertainty which has been blocking potential transactions in the North Sea. These transactions are important to the future of the UK oil and gas sector as the region matures and further significant investment is required to maintain production."

Reduced tax credits

Taking away tax credits for parttime workers speaks volumes about Osborne's attitudes to those on a low income. It's a hypocrisy that he wants to reduce benefits for low income or no income households without provision of an encouraging alternative. He is saying loud and clear: I'm going to reduce benefits, but provide no alternative for growth.

For many, part-time work is a stepping-stone to other things: a step down from full time work; a step up from unemployment; a step into the unknown to support a new venture dreamt up by someone with entrepreneurial flare.

But to claim that reducing the top rate of tax will encourage "competitiveness, encourage entrepreneurship and support growth" entirely misses out a demographic willing to take risk with little or no capital or little or no income. I would encourage Osborne to read the US tax code on independent contractors and make contact with the Kauffman Foundation if he a) wants to encourage growth as the Kauffman Foundation clearly shows that entrepreneurs are the real drivers behind economic growth and jobs; b) encourage British people to take a different path from claiming benefits.

Renewable energy 

Wind industry players who were hoping for market signals and signs of encouragement from Osborne will be bitterly disappointed - UK energy ministers should also be disappointed with their chancellor, CharlesHendry in particular.

Osborne's budget simply doesn't play to the UK's strengths: the offshore wind potential is huge and with the European mainland still in financial crisis, the chancellor has missed a golden opportunity to attract investment from companies like Vestas, Gamesa and the countless wind developers looking to other markets. 

Osborne could have offered the UK as a safe haven investment opportunity amid the headwinds of the European debt crisis.

As Europe's common energy market approaches in 2014, the UK could have positioned itself as a major electricity exporter as Spain is already doing. But the 2012 budget was probably the last chance to send a clear market signal and allow the industry to mature.

Tax breaks for clean energy investments also would have been very welcome to attract inward investment and unlock the huge amounts of capital washing around the City of London, but always seem to end up being spent in another country.

Osborne would do well to read up in US tax credit incentives such as the Production Tax Credit for wind and the Investment Tax Credit for solar which drives the clean energy industry.

Osborne says he wants to make the UK the technology hub of Europe. Well, the UK is pretty good at this already, but Osborne's Wallace and Gromit film tax credit will be extended to video games, animation and TV programmes. 

That's a good thing. But a focus on digital services and products will hardly turn the UK into a technology hub and it's a tiny industry that could never grow to the scale or potential of the clean energy industry. Scant mentions and context of innovation indicate that Osborne hasn't really grasped the potential of technology to drive the growth so badly needed in the UK. 

Strong liquor over lunch at the Ivy and a topped up expense account for Soho media executives could have something to do with the direction of Osborne's fiscal affections when clean energy should have been a strategic focus for export markets that will only continue to grow.

I would prefer to be proved wrong with my reading of the 2012 budget, but if taxes are expression of the values of a nation (and its government), then George Osborne seems to be saying: I want to encourage established businesses to earn more by doing less, but everyone else has to do more for less in return. 

Osborne's unpopular budget might cost his party the next election because so little of it plants seeds for real growth - we'll have to wait and see how the economy responds. But those he was elected to serve could end up paying a much higher price for his oversights.