Energy Opportunities(and challenges, too)

Perry WongSenior Managing Economist,

Milken Institute

Carbon Emissions by Sector

Carbon dioxide emission (million metric tons)

0

500

1,000

1,500

2,000

2,500

Residential Commercial Industrial Transportation Electricitygeneration

Petroleum

Natural gas

Coal

Electricity

Source: Energy Information Administration, 2008 full report.

Relative Per Barrel Cost of Various Clean Fuel Technologies

Source: Newsweek, 2007

30

50 50

75

25

35

0

20

40

60

80

100

CTL Oil Shale Ethanol(Brazil)

Ethanol(US/Europe)

Biodiesel CellulosicEthanol

US$ Per Barrel

U.S. Renewable Energy ConsumptionOnly 6% of Consumption

Renewable Energy

6%

Petroleum40%

Coal23%Natural Gas

23%

Nuclear Power8%

Solar1%

Biomass47%

Geothermal6%

Hydro45%

Wind2%

Source: US Department of Energy

Commercial and residential

6%

Electric power1%

Transportation69%

Industrial 24%

Coal23%

Nuclear8%

Crude oil40%Natural

gas23%

Renewable energy

6%

Source: Energy Information Administration, 2006

U.S. reliance on energy sources Energy demand by sector

Transportation: Leading User of U.S. Crude Oil Supplies

Environmentalimpact(high)

Costs in 2007 $(low)

Costs in 2007 $(high)

Impact (low)

Oil

GOAL: Could be a combinationof different technologies

and fuels

Hydrogen

Financial innovationsand opportunitiesto address gaps

Trade-offs for Transportation Fuel Alternatives

Wind, Solar Real Estateand Electricity Grid

Source: National Renewable Energy Laboratory.

High capacitytransmissionlines

High capacitytransmissionlines

Wind belt

Solar belt

Solar Real Estate

Source: National Renewable Energy Laboratory.

Renewable Incentives Programsin the United States

• New Solar Homes Partnership - California Energy Commission– Provides incentives for solar production from PV installations applicable

to custom homes and small developments• California Solar Initiative – California Public Utilities Commission

– Performance based incentives focused on reaching 3000 MW Solar capacity by 2016 applicable to non-residential buildings and existing homes

• Wisconsin– Has four solar buy back programs offered by utilities to electricity

consumers to purchase renewable energy• Green Tag Purchase - Northwest Solar Cooperative

– An agreement by the NWSC to purchase solar and wind power at $0.02/kWh through December 31, 2009

• Alternative Energy Investment Tax Credit - Montana– Alternative energy investments greater than $5000 receive a tax credit

of 35% on corporate income tax

Principles for Energy Policy

Question: How do we best address risks from oil disruptions/volatilities and CO2 emissions?

1. Reduce exposure by reducing fuel consumption– CO2 price, oil or gas tax, CAFE standards, “fee-bate”

– remove policies that subsidize oil

2. Diversify supply sources and types– remove barriers to alternative fuel sources/types– RD&D on clean fuels and technologies

3. Buy insurance against disruptions– wise use of Strategic Petroleum Reserves

4. Technological flexibility in face of policy uncertainty

US dollars per barrel ($2007)

0

20

40

60

80

100

120

140

160

10/4

/85

10/4

/87

10/4

/89

10/4

/91

10/4

/93

10/4

/95

10/4

/97

10/4

/99

10/4

/01

10/4

/03

10/4

/05

10/4

/07

Oil Markets Are Volatile,Event Driven

Aug 90:Iraq’s

invasion of Kuwait and

Gulf WarMarch 03:

start of Iraq war

The current Wall Street shake up

bounces crude pricesJan 08: Oil reaches

$100 a barrel for first time

Fungibility Factor: Fuels don’t equal energy

It’s a Plug-in Future

Chevy Volt

Tesla

Plug-in Prius

Plug-ins can deliver 100 mpg. Hybrids can also run on “flex fuels” (gasoline, E85, CNG) to extend range

Engine Efficiency Comparison

Source: Electricauto.com, University of Washington

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Internal CombustionEngine

Hybrid Electric

The Grid Is Key

• The United States Electrical Grid provides power necessary to the operation of business and residential infrastructure.

• Each year, America’s 131 million energy customers pay $247 billion a year at an average of 7 cents per KwH.

Electricity Accounts for 40 Percentof Energy Used in US

Percentage

0

10

20

30

40

50

60

70

80

90

100

1940 1970 2008

Source: Department of Energy.

Electricity is Capital Intensive

Total value: $800B

Source: Department of Energy.

US$ billions

0

100

200

300

400

500

600

Power plants Distribution facilities Transmission facilities

Distribution Losses Increasingdue to Antiquated Technology

Source: Department of Energy.

Percentage

0

10

20

30

40

50

60

70

80

90

100

1970 2001

What’s Wrong with the Grid?

• Majority of electricity capacity infrastructure 30 years old or more, resulting in bottlenecks for transmission.

• Since 1990, demand for electricity up 25%, construction of transmission facilities down 30%.

• Renewable energy opportunities are limited due to the grid’s age and distance from consumers.

• The “deregulated” electricity market has given rise to a trend of energy brokers gaming the market, the most notable of which being Enron.

Source: Department of Energy.

To Meet Future Electricity Needs the US Must:

• “Federalize” grid with a single regulator like the highway system

• Adjust regulations to allow new investments in high-capacity transmission

• Expand transmission and distribution infrastructure (transformers, etc)

• Move from analog to digital energy management

• Focusing on “Smart Grid” technology

Market Based Solutions to a Global Issue

Optimum U.S. Policy

• The system that best incents developing world participation should win

• The system that best manages initial abatement cost volatility may win

• A hard cap on emissions and a global trading system is the most effective, and efficient, policy option.

Government Action: Create a Tax that Sets a Floor Price for Oil

• A tax that would only kick in if oil prices fell to a level that undercut viability of alternative fuels/other energy producing sources

• For example, tax would have to be paid when oil is $38-40/barrel but it would go away if oil prices rose

• The function of this tax is not revenue, rather, it would be to create a downward limit for oil prices thereby dampening volatility

Key Design Features of a Carbon Cap-and-Trade ProgramStark Investments, Baker & McKenzie, Milken Institute

• No price cap• Auctioning of permits• Early action credit• Long-term (until 2050)• Economy-wide and includes all greenhouse gases• Banking and borrowing allowed• Offsetting allowed• Linking/trading with other schemes

Market-based Approach

Limited supply of allowances

(emissions cap)

Economic value of allowances

Demand forallowances

Economic incentives to reduce emissions

Source: Burtraw 2006

• Artificial price caps are not “safety valves.” – This so-called “safety valve” is an artificial price cap. – Half a market is not a market.– Artificial price caps don’t support new technology development.– The NCEP’s computer model, with artificial price caps, only reduces

half of the emissions that other models, without price caps or “safety valves” do by the year 2020.

– Effective alternatives to price caps are rewarding creditable early action, linking to global markets to reduce price volatility, and allowing offsets.

• Absolute reduction targets is the key to stabilizing carbon dioxide concentrations– Absolute targets increase accountability to the public– Emissions are a global problem and an effective cap and trade

program must link to global markets

Effectively Reduce EmissionsCap and trade reduces emissions whenproperly designed

• New technologies are needed to smooth long-term adjustment to meet increasing emissions targets– The market, not the government, should pick the winners in

the evolution of new technologies

• U.S. depth in low-carbon technology R&D, with the right investment incentives, will help us maintain global competitiveness– China, the U.K., Denmark and Spain are beginning to

export clean technologies– New technology industries will minimize economic

dislocation and create and sustain high-value jobs here in the United States

Invest in New TechnologiesAn effective cap and trade program will foster American creativity

Conclusion

• The world is changing and America’s energy investment must take leaps forward

• An effective energy policy should work in concert with environmental needs and regulations

• In this transition, many opportunities will arise for the entrepreneur to find their place in renovating and building the foundation of America’s energy infrastructure