Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

26 May 2008

Energy Policy: A Matter of Planning


Our Failure to Plan
Electric Power for Transportation
Why We Need National Planning
Conclusion

Energy is the central issue of our time. As summer approaches with gas prices over $ 4 per gallon, its importance has now dawned on the least informed consumer.

What may be less obvious (except to truckers) is the extraordinary cost of diesel fuel. That cost is now approaching $ 5 per gallon, making diesel much more expensive than gasoline for the first time in living memory. As this extraordinary cost filters through to the price of every product that we buy, use or eat, inflation will inevitably rise.

Nothing could demonstrate more graphically how the price of energy has become a drag on our economy. That drag will only increase as rising prices follow rising worldwide demand.

But energy is not just a domestic issue. As Tom Friedman recently pointed out, it is central to our foreign policy. Every day the most enlightened and progressive governments on the planet—ours, Europe’s and Japan’s—transfer obscene sums of money to the worst—including Saudi Arabia’s, Iran’s, Russia’s and Venezuela’s. This enormous, steady transfer of wealth may be the most massively destructive economic imbalance in human history. Tyrannical sheiks and gangsterish Russian oligarchs wallow in luxury while progressive forces languish, China and India struggle to modernize, and Africa and parts of Southern Asia starve.

Energy is also a military issue. Not for nothing do we call our vast repository of stored crude oil the Strategic Petroleum Reserve. If the foreign oil tap were to turn off due to war, sabotage or political manipulation, it would leave us with the Hobson’s choice of energizing consumers, industry, or our military. In the long run, something would have to give. Consumers now struggling with $ 4 per gallon gas and trading their cars in for motor scooters [subscription required] are beginning to understand how painfully consequential those adjustments would be.

So far, our national response to this long-term historic challenge has been abysmal. Two sets of statistics tell the story. Although Americans invented nuclear power, in 2006 our nuclear fraction of national electrical energy production was 19.4%. France’s was 78.1%, Japan’s 30%. Well over 50% of all our electricity comes from coal, the dirtiest fuel known to mankind and the one most responsible for global warming.

Second, we have fallen far behind our trading partners in both conservation and modern renewable energy. Europe’s and Japan’s auto fleets get nearly twice the mileage of ours. Germany, which receives far less sun than our South or West, is the world’s leader in operational solar panel production.

For a nation that once prided itself on superior science and technology—so-called “Yankee ingenuity”—our current innovative and industrial stagnation is staggering. If we don’t wake up quickly, we are likely to experience history’s most dramatic and rapid demotion to third-world status. No nation enjoys a guarantee of supremacy, least of all one whose citizens and government are lazy, greedy and stupid.

Our Failure to Plan

Our last “oil crisis” occurred over thirty years ago. In the interim we have done little or nothing to address a predictable problem now returning with a vengeance. Why? What held us back?

One answer is clear. Republicans have held the White House for all but twelve of the last forty years. During that time, they treated the free market as a kind of sacred cow, which could overrun gardens but no one could chastise. Anything that smacked of market intervention, from regulation of financial derivatives to (God forbid!) industrial policy they declared sin. At the same time, they caricatured intelligent national planning as the equivalent of Soviet central planning. Meanwhile, nations like France, Germany, and South Korea, with strong free-market systems backed by intelligent national planning and industrial policy, have stolen the lead from us. China is in the process of doing the same.

The irony is that we once were good at national planning. Between Einstein’s first letter to FDR warning of the risk of the Nazis developing nuclear weapons and our explosion of the first atomic weapon in July 1945, less than six years elapsed. Our federal government planned, executed and ran the entire Manhattan Project, and it did so in strict secrecy. FDR and his team appointed top-notch administrators, including the legendary General Green, to ride herd on the smartest physicists on the planet. They collected skilled and dedicated workers from all over the nation, commandeered a prodigious amount of energy and natural resources, and made sure that we Americans were the first to develop and possess mankind’s most dangerous weapons.

The Internet has a similar story. The Department of Defense created it, in university and government laboratories, under funding by DARPA, the Defense Advanced Research Projects Agency. Its original purpose was to provide a robust, “headless” communications system that could survive nuclear war. When its commercial potential became apparent, the government cut it loose for private commercial exploitation.

The Manhattan Project and the Internet are but two examples of the fruits of rational government planning. So were our successful voyages to the Moon in the 1960s.

If we need yet more proof that government can accomplish great things, we need only look to yesterday’s successful deployment of the Phoenix spacecraft on Mars. Government administrators designed and planned the spacecraft and its mission, and government and government-sponsored scientists and engineers built and tested the spacecraft and executed the mission. Their stunning success is a reminder what government can do when led by competent people not philosophically dedicated to proving that government can do nothing right.

Today we are emerging from four decades of Republican misrule based on that philosophy. For most of that time, we have had a pseudo-religious aversion to rational national planning, plus tens of billions of dollars of private venture capital looking for the next easy way to make a buck. So things like Facebook and MySpace got funded long before wind and solar energy, rational (i.e. efficient) ways to make ethanol, electric cars and nuclear energy. We have become a nation of hucksters addicted to glitz and quick money while neglecting the essentials of our economic survival.

Partly as a result, we now live in lamentable circumstances. Of all the world’s industrialized nations (plus some developing ones, whose options are still open) we have the worst energy infrastructure.

How is this so? First, our infrastructure is the least flexible. The overwhelming majority of our transportation runs on a single fuel: oil. Go to any other advanced nation—England, France, Germany, or Japan, for example—and you will see a very different energy infrastructure. You will see not only electric subways and buses, but comfortable and rapid intercity trains running on electricity. We have the like only in our Northeast Corridor, from Boston to Washington, D.C.

In France, which derives 78% of its electricity from nuclear power, the vast majority of public transportation depends on neither oil nor coal. If the Saudi oil tap turned off tomorrow, France would still run. The United States would not.

Electric Power for Transportation

Not only is our energy infrastructure the most vulnerable to political and market shocks. It is also the least efficient. For it fails to recognize electricity as the most efficient and flexible form of energy.

Electricity is the optimal energy source for four reasons. First, electric motors far exceed the physical efficiency of any internal combustion engine (ICE). The efficiency of large electric motors used in transportation is over 80% and often higher than 90%. The maximum efficiency of an ICE fueled by petroleum is about 34%. That means that about two-thirds of the energy of gasoline used in an ICE are lost as heat, doing no useful work.

Second, unlike fossil fuels, electricity costs nothing to transport. Once electric power lines are built, the marginal cost of transporting power is zero. (There are, of course, some variable costs for maintaining the power lines.) The only comparable fossil fuel is natural gas in its gaseous form. When conveyed by pipeline, its marginal cost of transportation is low. But even that cost is nonzero, due to the expense of supplying the power needed to maintain pipeline pressure. Coal, oil and liquefied natural gas all require energy to transport, and their marginal cost of transport is a significant fraction of the energy value they provide.

Third, electricity is the most flexible, universal form of energy. It can be used directly to run motors, power transport vehicles, heat homes or offices, or power electrical and electronic equipment. More important, electricity has maximally flexible sources. A variety of means—from nuclear fission to wind—can generate electricity. New means like fuel cells and nuclear fusion may be just around the corner. No other source of energy boasts the same advantages.

Finally, electricity can provide a distributed, decentralized power source. Not every home or office can have its own coal mine, oil well, or private source of natural gas. But every home or office in a windy area could have a windmill. Every home or office in a sunny clime could have a solar cell array or other source of solar power. Unlike fossil fuels, electricity offers the opportunity for a distributed, decentralized power system resistant to disruption, with little geographically extended infrastructure.

Our dependence on a single fuel for virtually all our transportation needs tells only half the story of our vulnerability. The other half is our inflexible transportation energy infrastructure.

At the moment, that infrastructure has three components: oil refineries, tanker fleets, and service stations. All require additional energy, not otherwise productive, to operate. As global demand for the single fuel they offer inflates its price relative to alternatives, these elements of infrastructure will become devalued or obsolete.

This point is not just theoretical. General Motors’ own projections for the performance of its Chevy Volt—whose availability GM projects in 2010—suggest a cost of operation per mile about one-tenth the cost of gasoline at $3 per gallon. At that price, Volt purchasers will never go the their local service stations. Instead, they will “fill up” their batteries by charging them, at home, from the electric power grid.

Of course the price of electricity will rise with increasing demand if GM’s sales of the Volt explode. But the basic point remains. At present prices an electric car like the Volt would cost less than one-tenth to run (from the electric grid) what current gasoline-propelled vehicles cost. If the Volt succeeds, it will make a large fraction of the refineries, tanker fleets and service station that comprise our nation’s transportation infrastructure obsolete.

The Volt’s advent does not depend on new forms of battery technology. The energy calculations GM has made rely upon current technology, which batteries now can deliver. What remains uncertain is whether GM’s suppliers can make batteries reliable enough to withstand thousands of charge-discharge cycles without breaking down or causing fires. That is a matter of engineering, not physics or energy economics.

Reportedly Honda’s chairman is betting [subscription required] against GM. He is putting his company’s resources into fuel-cell cars, prototypes of which Honda will soon provide for limited testing in Southern California. GM is betting that its battery suppliers will be able to solve their engineering problems within two years.

Whoever is right, one thing is certain. At more than ten times the current price of electricity, gasoline has a limited future as a transportation fuel. If storage batteries cannot reliably power cars with electricity, then fuel cells or ICEs using electricity-derived hydrogen will. Car producers need only provide buyers with simple devices to produce hydrogen by electrolyzing water (at efficiencies well in excess of 50%) and pumping it into holding tanks. Whether their cars use fuel cells or hydrogen ICEs, these consumers won’t be going to the gas station to buy gas at ten times the price.

Electrically generated hydrogen also can serve as a fuel for long-range transportation, including trucking. We will have to modify current ICEs to burn hydrogen and provide service stations with hydrogen-filling capability. But these tasks are all well within the ambit of current technology. Hydrogen stations for trucks could even generate their own hydrogen from on-site electrolysis plants, using electricity transported at zero marginal cost. That would save the additional expense of moving diesel fuel around the country.

Why We Need National Planning

As the foregoing analysis shows, our national energy future need not be grim. By converting our transportation infrastructure to electricity (with or without the mediation of hydrogen), we can achieve four important goals. First, we can lower the cost of transportation by about a factor of ten, back to where it was when gasoline cost 40 cents per gallon. Second, we can achieve energy independence by diversifying our power generation to escape dependence on oil. Third, depending on the fuels we use, we can reduce or eliminate our contribution to global warming. To the extent we use nuclear, wind, solar, ethanol or other renewable sources of power to generate our electricity, our carbon footprint will be neutral. Finally, since hydrogen ICEs produce only water vapor as exhaust, while batteries or fuel cells produce no air pollution at all, we can clean up the particulate and hydrocarbon pollution that has plagued our cities for the past century.

Reaching these desirable goals will require tremendous effort. We will have to convert our existing near-obsolete energy infrastructure to an entirely new form. The conversion will entail tremendous social, economic and industrial change, plus some economic dislocation. But it will not require any fundamental scientific or engineering advances, only elaboration of current technology.

The chances are slim that the unassisted marketplace can handle all these massive changes smoothly and quickly. Rational energy planning would jump-start the process, insure its smoothness and fairness, avoid severe economic dislocation, and insure an earlier and more successful completion of the transformation than would otherwise be possible.

Let me be clear. When I say “planning,” I mean nothing like the central planning of economic production which the Soviets and Red Chinese so dismally undertook during the last century. Under the planning I propose, government bureaucrats will not design, build, buy, sell, own or control anything. Nor will they pick winners, for example, as between GM’s battery operated Chevy Volt and Honda’s fuel-cell car. They won’t have to, because both ultimately will run on electricity.

What rational government planning will do is insure that our electrical infrastructure is developed quickly and is safe and adequate to meet skyrocketing demand as electricity becomes our transportation fuel of choice.

In that respect, government planning has four key roles to play. First and foremost, it could restore the stature and effectiveness of our nuclear power industry. It could do so by reviewing, testing and approving plans for meltdown-proof and terrorism-resistant nuclear power plants—a task for which our national laboratories at Los Alamos and Livermore are eminently well qualified. It could provide stringent and uncompromising regulation of safety, using elite and highly trained personnel independent of political and economic influences. It could also provide or manage national insurance against unanticipated plant shutdowns, in order to motivate private nuclear-power producers to put safety before profit. Then it could create a realistic and efficient system for storing nuclear waste, using the power of eminent domain to remove and compensate any private person or firm that stood in the way.

Government planning’s second role should be to support nascent electrical industries with research subsidies, tax credits, and, if necessary, temporary price supports for a start-up period. Government could provide money for basic and applied research in such things as practical nuclear fusion, cellulosic ethanol, coal carbon sequestration, and safer generation and storage of hydrogen. To avoid a feeding frenzy or co-option by private firms, this research support should be limited to universities, government laboratories, and nonprofit research institutions and conditioned upon making research results available to anyone at a standard, nondiscriminatory royalty rate. The model here should be DARPA, whose funding developed the Internet under conditions that ultimately led to universal public use.

Government planning’s third role should be to avoid economic and social dislocation. For example, it could provide loans, advice and technical assistance to owners of independent service stations seeking to convert from gasoline to hydrogen pumps. If electricity at home turns out to be the fuel of choice (either for battery driven cars or fuel-cells cars filled at home by electrolysis machines), it could provide loans and technical assistance for service stations destined for conversion to general business use, as well as for municipalities seeking to assist that conversion. The assistance could include advice and help in correcting the groundwater pollution that has so plagued service stations.

Government planning’s final role should be rationalizing electrical energy production and transmission nationwide, under federal regulation based upon local input. If we are to convert our transportation infrastructure to one based on electricity, our total national electrical capacity will have to roughly double. The federal government must control the permitting and development process under uniform federal standards so that development can proceed rapidly and investors in the industry can know what to expect. As a last resort, government planners should have the power of eminent domain to manage private owners resisting electrical developments that benefit everyone.

There is one other important role for government—one of which no presidential candidate can dare to speak. We need to eliminate all taxes and import duties on foreign cane-produced ethanol, which is eight times more energy efficient than our corn-produced ethanol. That single step would open much of the Earth’s southern hemisphere to green energy production and provide a path to economic success for small cane farmers worldwide. You won’t hear any candidate propose this change, for fear of losing the farm-state vote. But it should be part of any rational energy policy, and we should all look for hints.

Conclusion

If we are serious about energy independence, reducing global warming, and keeping up with our competitors in energy and “green” technologies, we are going to have to match our competitors’ rational national planning. This doesn’t mean accepting Soviet-style central planning of energy research, let alone business or industry. It does mean giving up our scatterbrained, me-first allergy to national planning and guidance.

We can guide, manage, regulate and superintend markets without destroying their invaluable incentives for voluntary investment and effort. We learned how to do that during FDR’s New Deal. If we hope to convert our energy infrastructure to something secure and sensible before the Saudis, Iranians and Venezuelans drive us into bankruptcy, we are going to have to learn that skill again.

Somehow, we must collectively rediscover how to trust our government and how to elect officials whose competence, judgment and honesty is worthy of our trust. It will be interesting to see which candidate—McCain or Obama—first provides a comprehensive, credible energy plan adequate to the scope of our past failures and the problems we now face. Neither has done so yet, but McCain’s inveterate belief in Republican economic religion suggests he will be the last to see the need for intelligent planning.

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