Archive for the 'Energy & Power Generation' Category

At the age of 21, Danielle Fong cofounded LightSail Energy, a venture focused on energy storage via compressed air, with heat generated by the compression recovered for later use. Investors include Peter Thiel, Khosla Ventures, and Bill Gates. (GE and RWE of Germany are also developing a compressed-air-based energy storage technology that they call ADELE…it will be interesting to see how these two alternative approaches play out.)

A New York University student has developed a new substance for wound closure, which may be able to replace bandages in many cases. Any comments, Michael K?

The utility industry in the United States has made a giant return to traditional rate-making in many parts of the country. For someone who is unfamiliar with the concept, here is a brief summary:

1. Utilities receive a “monopoly” on services in a particular region (a city or county) which means that they are the only company allowed to provide service (thus you don’t have 2 sets of power lines going to your house)
2. The utility submits their expenses and capital requirements to a state regulator, who approves the spending plan
3. For the portion of the utility funding that is provided by equity (shareholders), the company is allowed to earn a “rate of return” that gets included on rate-payers bills

When I was fully engaged in the industry in the 1990′s, there was massive talk of “de-regulation” and traditional “cost of service” regulation as described above was seen as an archaic relic to be disposed of as quickly as possible with newer, more innovative models. If you would have told someone in the mid 1990′s that here, 20 years later, utilities would be HAPPY to still be part of a guaranteed return on their regulated investments, you’d have been greeted with a blank look of incredulousness.

The most famous critique of this model was a CEO who was said to have stated that “this is the only industry where I can make more money by remodeling my office” which of course was technically a true concept. This sort of talk was endemic in the 1990′s.

To be fair, the entire energy business used to be run this way (except for the municipal entities which were completely owned by some part of the government), and now much of the generation and parts of customer services are run using other methods involving some sort of at least partial competition. The generation of power, for the most part, has been financed using alternate methods (auctions, price caps, etc…), but it is notable that the only utilities going forward with nuclear plants are those with the old-school rate of return regulation (Southern Company in Georgia and SCANA in South Carolina).

For those entities that are still primarily regulated (non-competitive) or whom have substantial portions of their business subject to this regulation, one item coming under fire is the “rate of return” that they receive on their equity capital. When I was in the industry this number was in the 12% – 14% range; per this WSJ article “Utilities’ Rates of Return Draw Flak”:

In 92 major rate decisions last year, regulators… granted gas and electric utilities returns of 10%, compared with 10.21% the prior year and 11% a decade ago.

These rates of returns, however, conflict with the type of risk profile and links to debt interest rates that traditionally anchor utility rates of return. Today interest rates are famously low, so why is it reasonable that utilities should earn 10% or more on returns when that sort of return is far out of reach in a 401(k) for investors, for example?

Further pressure on this model seems inevitable, although rate of return is rarely so simple because if a utility spends more than they plan, in most cases this essentially comes out of the return bucket, although their are exceptions like “pass through” increases for fuel which can be made depending on the jurisdiction. This sort of item should be watched by those who have utility investments, since a serious re-appraisal of this rate would likely push it down further.

As a long-time watcher of the industry, however, the continuing existence of this sort of rate of return regulation is astonishing, given how much it was ridiculed for so many years. It is sad that we haven’t come up with anything better in the interim. The issue with monopolies is not so much the rise in costs, but the lack of innovation, I once heard. This is the case with the rate of return model that continues to exist, today.

Cross posted at LITGM

Recently I was reading how a professor at the University of Illinois at Chicago was arrested for bringing an unloaded handgun to work, and that it made the news media. I reflected briefly on the fact that you can bring a loaded, concealed gun with you in most places in many states in the US and it wouldn’t be news, it would in fact be normal activity, for instance in the adjacent state of Indiana.

Meanwhile, in California, it is common for people to smoke marijuana openly as is discussed here. Needless to say, this behavior would get you immediately arrested in many states particularly in the south and midwest.

Taxation is also highly variable on a state and city basis. New York and California have some of the highest taxes, particularly on income beyond a particular level (progressive taxes). On the other hand, states like Florida and Texas have a much lower level of taxation and a much freer business climate in terms of regulation.

Without getting into the hottest of hot-button issues, clearly there are differences in the types of marriages and reproduction rights / right to life on a state by state basis. These differences are narrowing in some areas and getting wider in others.

Some states have “right to work” laws which massively limit union power, and have flourishing and expanding manufacturing economies as a result. Visit Alabama, South Carolina, and Texas to see where all the former manufacturing might in the midwest and Northeast and West Coast migrated to (if it didn’t go to China or overseas). The enacting of “right to work” laws obviously sends an important signal to business leaders whether or not a state is a friendly place to do business for incremental investment (along with taxation).

The “fracking” revolution has unleashed vast wealth in some states, and in other states it has been banned or severely curtailed. Meanwhile, California is going in on its own with carbon regulations and highly aggressive “green” energy targets, while other states are heavily reliant on traditional (and cost effective) technologies.

The differences on a state-by-state level on these different dimensions seem large and growing. They are much more subtle (though often correlated) with the Red / Blue analysis. An attempt to classify these vectors could be done as follows:
Energy Freedom – the ability to extract and use cost effective technologies (like natural gas, fracking, and coal) and a state’s willingness to invest more for reliability or the requirement to use expensive (green) technologies and curtail energy use even at the expense of industry competitiveness and reliability. California is likely on one end and Texas is on the other side, although many others have large freedom including Pennsylvania.
Safety Freedom – the right to defend yourself at home, in transit, at work and during study or whether that is assumed by the state. Sadly the most restrictive is Illinois and there are many candidates on the other side throughout the south and midwest (Indiana).
Personal Substance Freedom – the right to smoke, the right to drink, and the right to use various drugs or stimulants. Some odd states (like Colorado) are leading the way on this, it isn’t always the traditional Red / Blue divide.
Freedom to Work & Hire – the right to work and not be forced to join a union, and this is also tied with local laws and practices that limit the ability to hire and fire and direct hiring or limit firing in various dimensions.
Freedom to Build / Live / Rent – Houston is famous for having very limited zoning while other states and municipalities have highly restricted zoning practices. The New York co-op concept also severely limits new entrants along with rent control. These laws can also include whether you can work or have a business in your home. While subtle, these practices can have a large impact on prices and how the region functions.
Freedom From Excessive Taxation – Some level of taxation is necessary for government to function but high tax levels have severe intended and unintended consequences of under investment and evasion. Taxation includes state, local, city, sales, estate, property, and “sin” taxes. These vary significantly by area but are highest in California and the East Coast and likely the lowest in the South.
Freedom of Marriage Choice – A larger portion of states are recognizing marriages beyond the traditional marriage, and this varies by state
Freedom of Reproductive Rights – There are a wide variety of approaches and trends on a state level and then there are practical impacts, as well. This is highly variable by state in practice
Freedom on Medical Rights – an emerging model will be how each state approaches new medical practices and funding methodologies, along with the practical availability of doctors that subscribe to the state’s controls and funding methods. This area will grow exponentially in the near future

I believe that these sorts of analyses on a state by state level are much more useful than the traditional Red / Blue view (although they are often correlated) and when you start to dig in to the differences on a state and municipal level they are staggering, particularly when you view the extremes.

It would be interesting and useful to begin to put together the various data sets to analyze states and municipalities along these continuums, and others that I’ve likely missed.

Cross posted at LITGM

France and Nuclear Power – Losing Its Edge

France has long pioneered a tradition of being reliant on nuclear power. France has 59 nuclear reactors and delivers a very high percentage of their total power needs through nuclear power, as well as being a major exporter of electricity to adjacent nations. France chose nuclear power after WW2 because they lacked local energy resources and had a strong engineering capability.

The company that runs the nuclear industry is called EDF. EDF is 84% owned by the French government, so you could basically say that the French government owns by far the most significant portion of their own electricity industry (and 15 nuclear reactors in the UK, to boot). Currently EDF pays a very high dividend, yielding 7.7%, due to the fact that their market capitalization has declined precipitously while the company has tried to keep the dividend constant.

For many years EDF provided France low cost electricity, which provided a competitive advantage against their industrial neighbors such as Germany. Today, however, Germany has a cost advantage over France in terms of power, since the price of coal has dropped and Germany uses a significant amount of coal to burn their own electricity. One of the main reasons that the price of coal has dropped is the rise of natural gas in the USA, which in turn allows the US to export their surplus coal overseas to Europe. This article from Bloomberg provides a good overview of the competitive situation.

“French energy used to be competitive,” said Emmanuel Rodriguez, head of energy for the French unit of ArcelorMittal, the world’s biggest steelmaker, which also has operations in Germany. “This model is crumbling. Germany is now better than us whereas a decade ago they were much more expensive.” French power prices for big industrial users are projected to average as much as 25 percent higher next year than in Germany, according to Uniden, a lobby whose members consume 70 percent of electricity used by industry in France.

In another sign of the upside-down world we live in, EDF’s dividend at 7.7% is far higher than what they are paying in yield on debt of 4.375%, even debt that looks suspiciously like equity here in the US (a perpetual dated bond is debt without a maturity date).

France is also struggling as they try to build new nuclear reactors. The next generation plant being built for EDF by Areva has had cost overruns and schedule delays:

EDF has previously said France’s first EPR would cost €3.3 billion and start commercial operations in 2012, after construction lasting 54 months. The estimated cost has now increased to €8.5 billion ($11 billion) and the completion of construction is delayed to 2016.

Energy Futures Holdings

Energy Future Holdings took a major Texas utility (TXU) private in a 2007 deal that leveraged up the company with $45 billion in debt in 2007. 2007 was a horrible year for most deals across almost all sectors including real estate as it was the “height” of the bubble before it all came crashing down. TXU, one of their entities, has bonds trading as low as 15 cents on the dollar (for bonds that have an interest rate of 10.25%, to boot) per this Bloomberg article.

The company has struggled to be profitable ever since the LBO, as the shale revolution created a glut of natural gas, pushing U.S. prices to the lowest since 1999 last year

While EFH is not a public company, they do have publicly traded debt and thus they have an active investor relations department. If you read through one of their documents you can see their expectations for natural gas prices and how they have been able to keep the company going for as long as it has due to a strategy of hedging against low priced natural gas, as well as through what seems to be very effective management of costs. However, the large debt load likely has to be restructured since a company that was built to profit from a marginal cost of power based on $14 / unit priced natural gas cannot service that debt load with the cost of natural gas between $2 – $4 / unit.

Cross posted at LITGM

“It is so cold in here,” said Gretchen. “The fire is almost out.”

“I will go to our woodpile and bring more wood,” said Hans.

“There is none left, Hans,” replied Gretchen sadly. “We have used all our wood that we saved for the winter.”

“I will go into the great forest,” responded Hans, “and bring more.”

“Hans!” said Gretchen with alarm. “The forest wardens will take you! I have heard that there are more of them, and they are fiercer than ever toward wood thieves!”

“Nonetheless, I must try, dear Gretchen,” replied Hans firmly, “for you and for the little ones.” He put on his thin overcoat, opened the door, and stepped outside into the icy, howling blast.

A folk tale from the Middle Ages?

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While I am a big supporter of nuclear power, the insane regulatory framework in the US and our broken financial incentive mechanisms for utilities has doomed the promised nuclear “renaissance”. The only places where nuclear plants in the US are even being attempted have “old school” regulation with “cost of service” opportunities that basically mean that the utility will recover whatever they put into service and earn a return on that investment. These include 1) South Carolina, where SCANA (a relatively small utility) is building two 1,100 MW reactors and 2) Georgia, where Southern Company (and a variety of municipal entities) are building two 1,154 MW reactors. The oddest entity, the Tennessee Valley Authority (TVA), is a Federal entity, which allows it to move forward with completion of a unit that is 1,180MW.

No utility in a state with deregulation (partial regulation) can contemplate a nuclear plant, because of the high costs which must be recovered from an open market. The price of electricity is very volatile, driven by demand, weather, and the price of alternative fuels. The low price of natural gas today, not foreseen when these plants were considered back in the late 2000′s, would make high enough energy prices to recapture these costs (and earn a profit) on an open market impossible. The price of natural gas could rise and other factors (such as the impending retirement of much of the US’ coal fleet due to EPA strangulation) could also make them economically viable; but these factors are not present today.

Beyond the enormous (and likely fatal) financial risk that these mega-projects have, (SCANA’s market capitalization is $6B, and the 2 reactors are “planned” to cost $9B), these projects have historically been plagued with immense delays and catastrophic failures such as abandonment. When these projects started, optimistic dates and costs were trotted out, ignoring both the sad history of mega-overruns and the fact that today’s regulatory and legal climate are even MORE unfavorable than those in the 1970′s when the earlier failures occurred. I knew that delays were inevitable, and unfortunately, enough time has passed that the companies are starting to admit their failures (to date).

This article describes how Southern Company has begun to waver from their cost and schedule estimates.

Southern Co. has had a simple message for the past few years: The effort to build the country’s first new nuclear power plant in a generation was on time and on budget. Now, that message is changing. The $14 billion project to build two reactors at Plant Vogtle is trending hundreds of millions of dollars over budget and trailing more than a year behind schedule, according to a report from a state-hired construction watchdog.

TVA recently has begun acknowledging their delays and cost overruns, too, per this article.

Unit 2 at the Watts Bar Nuclear Plant in Spring City, Tenn., is up to $2 billion over budget and three years behind, according to the Tennessee Valley Authority. TVA blames its own management oversight and planning. Instead of basing a plan and estimates on the twin reactor already running at Watts Bar, the utility used as a model the only other reactor work that had ever been deemed on time, close to budget and a success: Unit 1 at Browns Ferry. The trouble was that Browns Ferry and Watts Bar are completely different types of reactors with different work spaces and work needs.

Not only is the TVA admitting the cost and schedule delays, their official in charge of the plant just left the organization.

SCANA too has been acknowledging delays and cost overruns. Per the first article cited above:

In Jenkinsville, S.C., the Scana Corp.’s $9 billion expansion of its Virgil Summer nuclear power station began with work on two new reactors in late March. The Summer reactors already are reported to be at least $300 million over budget because components did not meet shifting safety standards.

Here is a SCANA presentation to EEI from their investor relations web site. Go to page 8, which shows the rising costs and tail of their planned nuclear investment. Frame this page and come back to it 3-4 years out and if it looks anything like this it will be a huge win for SCANA and the US nuclear power industry. Sadly enough, the odds are likelier that the Cubs will win the world series than that the “real” spend will look close to that graph. Note that SCANA is a 55% owner of this plant so it only represents their portion of the spend (other utilities and municipalities foot the rest).

Thus in conclusion:

1. The entities that are embarking on the nuclear construction adventure are either virtually immune to market forces (TVA) or are under “old school” regulation that lets them recover the cost in customer rates regardless of whether or not it makes economic sense

2. While these entities went into the projects with optimism despite the dismal track record of delays and outright abandonment common to nuclear construction, their exhortations and optimism are starting to fade early on in the projects

3. The US has far more to do in the form of favorable “one permit” regulation and removal of potential lawsuits and other barriers, as well as additional financial incentives, before the US nuclear industry really has a chance

Cross posted at LITGM

In the US, our energy policies have been transformed by fracking, which has led to an abundance of natural gas and re-invigorated our domestic oil industry, to boot. When I first worked in the energy business they still talked about how the natural gas industry was forced to curtail new hookups of houses in the 1970′s because we believed that we were about to run out of the fuel, and the costs in the 1990′s were about $2 / unit. After a spike up to $14 / unit (which contributed to the bankruptcy of California), economic forces and not government intervention led to the innovation and today’s low prices in the $2 – $4 / unit range.

When natural gas first fell into this low price range, industry participants were basically “waiting it out” to see if prices would rise. The price of natural gas plays a huge part of the overall energy pricing market, since natural gas “peaking” plants are turned on during spikes and they set the marginal cost of power during those peak events. During times of peak usage coal, nuclear and hydro plants reap a windfall since their costs are (comparatively) fixed if the price spikes are set by high natural gas prices. These price spikes have been significantly lessened and now natural gas is used not only for peak plants but for base-unit capacity. If the price of natural gas ever rose near those peaks in the $10+ / unit range all those investments would be un-economical, but price spikes in those ranges don’t seem to be coming in the near future.

Last Hurrah For Wind Subsidies

The wind industry is basically a creation of government incentives worldwide. The Spanish market collapsed completely instantly when incentives evaporated. The US turbine market is about to collapse as well as soon as a governmental program providing subsidies in the form of tax credits to all wind installations in service by year end, as described in this Bloomberg article.

Wind-turbine installations are exceeding natural gas plants in the U.S. for the first time this year as developers rush to complete projects before the expiration of a tax credit for renewable energy. New wind capacity reached 6,519 megawatts by Nov. 30, beating the 6,335 megawatts of natural gas additions and more than double those of coal.

It isn’t known whether or not this tax credit will be renewed; if it isn’t the US turbine industry will likely grind to a halt since wind isn’t competitive in the US without large subsidies. Unlike natural gas, which can be found in areas connected to the gas pipeline grid, most of the best wind locations are not connected to the electricity transmission grid and the costs and barriers to installing these transmission lines are insurmountable under the current regulatory regime, dooming wind to a niche tax subsidized role. Our existing wind infrastructure will sit in place, earning the tax credit, with little or nothing added going forward without new incentives.
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Peter Thiel put $300K into this company, which seeks to capture waste heat from power generation facilities (and other forms of low-grade heat) by artificially creating very tall vortices. The system works something like a very tall chimney, but without the expense of constructing such a chimney. Simple explanation here.

(When I wonder “will this work?”, I don’t mean at a technical level..sounds like experimentation has demonstrated that it will, at least at a small scale…I mean “work” in a commercial sense)

They cite 35% as a typical efficiency for a thermal power plant (which sounds about right) and estimate that their system could recover 20% of the now-wasted heat, resulting in an overall plant output increase of about 40% with no increase in fuel consumption. However, I’d make the point that new combined-cycle power plants are considerably more efficient–GE is claiming 60% for some of their “H” series machines…which is obviously a good thing but leaves less wasted heat to be recovered. Still, there is a lot of rejected heat even from combined-cycle turbines…and not all power plants are going to be combined-cycle..for one thing, I don’t think CC plants can use coal unless it is first gasified.

Lots of issues between development and large-scale deployment, of course..costs of large-scale systems are hard to estimate until you actually build one and operate it for a while, and I also wonder about public acceptance (and aviation safety/traffic implications, were these plants to be built out densely.) It’s a very creative concept, and I’m glad to see Thiel putting some money behind it…lots more will be needed to reach a commercial level.

I’ll be watching this with interest.

Since I spent a lot of time in the power generation business I am always interested in electricity systems. India is probably the first country I’ve ever been to where you can regularly witness electricity theft from the system on a large scale.

The electrical systems seemed to be reliable during the time I was there, although it was likely “low season” since it wasn’t very hot out (November) which I assume sets the peak demand for India.

The power routinely turned on and off in one of the hotels I stayed at. The lights would go out completely for a moment until the “hum” of the backup generator kicked in. Likely the inclusion of backup power is an absolute requirement for the type of higher level tourist hotels that I stayed in.

High quality hotels in India had the European model where you had to put your key card in the slot when you entered the room in order to turn the power on or keep it running for more than a few minutes. This model power down the room when you are out.

The newer office parks where the IT service industry was located had what appeared to be modern electrical systems with many of the lines buried underground. The transmission lines along the highway often appeared new, even if they ran right by huts and houses that obviously had no power since they weren’t connected to the local distribution system.

India also appeared to be air conditioned in the major tourist areas for hotels and shopping as well as the newer office parks. The buildings were designed as if to rely on central air conditioning and the backup power was there to provide electricity when the power goes out (although I don’t think they could run A/C indefinitely).

Cross posted at LITGM

One of the most depressing things about the last several years is the degree to which many Americans have come to believe that our best years are behind us. Surveys show that a high percentage of people believe their children will live less-well than themselves. The belief is pervasive that our current economic problems are not a mere cyclic downturn, but rather that we have entered an era of sustained decline.

I assert that American decline is by no means inevitable…and if we do wind up in long-term decline, it will be driven not by any sort of automatic economic process, but rather by our own choices–especially our own political choices.

We talk a lot, here and elsewhere, about our problems as a society–and properly so–but let’s change focus for a few minutes and think about our assets.

America has vast energy resources. For oil and gas, fracking really is a game changer. We have vast reserves of coal, and plenty of opportunities to employ nuclear energy safely and responsibly. (Solar and wind can also play a role, but these will be niche sources only for a long time.) And low-cost and widely-available energy greatly improves the economics of many manufacturing businesses, as I’ve pointed out in other posts. European manufacturers, for example, wish their countries had direct access to large supplies of low-cost natural gas.

America has wide swaths of fine agricultural land, and many excellent farmers. These are not trivial factors in a world which is becoming increasingly wealthy, filled with billions of people who want and need to improve their diets. And agriculture’s impact is not limited to those who are actually on farms–agriculture also drives activity in transportation, in equipment manufacturing, in fertilizer production.

And speaking of transportation: while there have been many concerns about “America’s decaying infrastructure,” America also has infrastructure elements which are very strong. America’s freight railroads are probably the best in the world, and represent a powerful economic asset. The country is cris-crossed by thousands of miles of pipelines which carry oil, natural gas, jet fuel, ammonia, CO2, and many other commodities, efficiently, silently, and safely. Our airports, air carriers, and air traffic control system combine to enable the transportation of vast numbers of passengers and considerable quantities of freight, reliably and safely. The Internet has emerged, in only 20 years, from being a limited experimental network to being a large-scale enabler of commerce and of new businesses.

America has millions of people with entrepreneurial spirit–people who want to do new things, to put their personal stamp on the world, to make a contribution in ways that are not necessarily predefined by tradition or edicted by higher authority. Some will start the next Intel or Apple; for some, their scope will be limited to a well-loved local restaurant or to a home-based craft business. All are important.

Our venture capital industry is an important enabler of high-growth new businesses, and our private equity industry plays a key role as well. “Crony capitalism,” while it has grown unhealthily, has not reached the levels it has in many other countries, and badly-managed or ill-thought-out enterprises can still go broke and be restructured (or disappear) without being bailed out by political pals, leaving the field clear for the new and better–and for talented people who are not among society’s “insiders.”

Credentialism in the U.S. has indeed reached unhealthy levels, but it is still quite possible for people to succeed–and succeed in a big way–without the imprimatur of an “elite” college or an accent indicating an “appropriate” class position.

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Pity the UK government. Like most, they have had a great deal of trouble closing the gap between money spent and tax revenue. And, like most, they have scrambled to raise taxes in order to increase the amount of money coming in.

One of the items hardest hit with rising tax rates in Great Britain is beer.

The powers-that-be have enacted a “beer duty escalator“, which automatically raises the tax on beer by 2% over inflation every single year. According to the article behind the last link, the average beer drinker in the UK now pays £177 every year just in taxes alone. The average pub owner must shell out £66,000 per year in beer taxes, above and beyond the overhead costs that come from running any small business. And, thanks to the automatic increases, every year is going to be worse than the last.

As any economist who hasn’t drunk deep of the Liberal kool-aide will tell you in a heartbeat, adding frivolous costs to any commodity will result in limiting demand. Beer sales in the UK have plummeted, while close to a score of pubs across the island nation have been going out of business every week.

Just think of all those people who were dependent on the family business, now out of work and on the dole. I don’t have the numbers to tell for sure, but it wouldn’t surprise me in the least to find out that any jump in revenues realized by the beer duty have been more than offset by the increased number of people who now rely on public assistance.

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There is still considerable talk about global warming, or as it is now termed, “climate change.” California is about to destroy a large part of what is left of its economy by initiating a new “Cap and Trade” program that will spike energy costs and drive more employers from the state. New reports are casting more doubt on the reality of “climate change” and now there is more information that warming ended in 1997. The past two years have shown a definite cooling trend.

The world stopped getting warmer almost 16 years ago, according to new data released last week.

This means that the ‘plateau’ or ‘pause’ in global warming has now lasted for about the same time as the previous period when temperatures rose, 1980 to 1996. Before that, temperatures had been stable or declining for about 40 years.

There is even new debate among climate scientists.

Some climate scientists, such as Professor Phil Jones, director of the Climatic Research Unit at the University of East Anglia, last week dismissed the significance of the plateau, saying that 15 or 16 years is too short a period from which to draw conclusions.

Even Prof Jones admitted that he and his colleagues did not understand the impact of ‘natural variability’ – factors such as long-term ocean temperature cycles and changes in the output of the sun. However, he said he was still convinced that the current decade would end up significantly warmer than the previous two.

California, of course, is not going to wait to see if the trend continues with cooling.

Oct 2 (Reuters Point Carbon) – California Governor Jerry Brown has signed two bills related to the use of revenue raised through the sale of carbon allowances, although details of how the money will be spent won’t be determined until next year.

That plan, expected to be released in the spring of 2013, will be submitted for approval to the legislature as part of the governor’s budget and will be reviewed and updated on an annual basis.

It doesn’t matter that the state is going broke. Left wing pieties still rule California.

Around a decade or so ago a lot of things began to change in the world of residential HVAC (Heating, Ventilation and Air Conditioning). What I am going to discuss here is HVAC centric, but can apply across any industry where the government can (and does) make rules that on the surface mean “well” but in reality, just end up costing the consumer bucks$$$.

About five years or so, the manufacture of central air conditioners was mandated to be no less than thirteen SEER (Seasonal Energy Efficiency Rating). The previous minimum was ten SEER.

On the surface, this doesn’t appear to cause too many problems, besides cost the consumers more money on their initial installation, since the 13 SEER product cost more money (more raw materials to get that energy savings). Sadly, the engineering and physics (which can’t be mandated) told us different.

From an article by Michael Prokup (sorry can’t find the link):

Older evaporator coils operate at lower temperatures and pressures than modern evaporator coils.

Without getting into too heavy of an engineering discussion, this means that basically, the new 13 SEER units won’t work well with the old evaporator coils that sit on top of the furnace. The air conditioning cycle uses condensation and evaporation of a chemical (at this time, it was R-22) to move the heat from inside the house to the outside. Moving from 10 SEER to 13 SEER changed the whole game. No longer could a contractor come to your house and simply replace the outside condensing unit – now the evaporator had to be replaced, adding a lot of cost to the job – especially if the inside unit was sheetrocked into a closet, or was in some other type of area that was difficult to access. Apartment building owners were also affected by this.
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This post is an intersection of my research on the power industry around the world and a lack of understanding of the power of capitalism that I see reflected around me in Chicago and in many news outlets.

India’s Power Industry

The NY Times recently had an article titled “Scandal Posts a Question: Will India Ever Be Able to Tackle Corruption?“. The article described a scandal about India’s coal mining industry, a critical element of their power generation since India has heavy reliance on locally sourced coal.

Coalgate, as the scandal is now known here, is centered on the opaque government allotment process that enabled well-connected businessmen and politicians to obtain rights to undeveloped coal fields.

Why is this important? Per the article, 57% of India’s power is generated by coal. The industry is hobbled for lack of coal. 300 million Indians are without electricity, and a recent blackout effected huge areas of the country.

The Indian government used a bureaucratic process to assign out rights to these coal fields, instead of an overt capitalistic auction process (a fact that the NY Times article fails to mention), and many politicians and their cronies of course received the rights, likely due to overt or covert bribery and connections.

(the) $34 billion coal mining scandal that has exposed the ugly underside of Indian politics and economic life: a brazen style of crony capitalism that has enabled politicians and their friends to reap huge profits by gaining control of vast swaths of the country’s natural resources, often for nothing.

Why does this matter? When property rights are doled out in this manner, the people who receive them aren’t the BEST POSITIONED to develop the assets. If a profit seeking company paid for an asset in a public auction, they would be paying cash from investors (or out of their own pocket) and would need to “monetize” the asset in order to achieve a proper return back to investors. You don’t go into the auction without a plan to develop the asset, since you would be bidding against actual competitors who were motivated to do so and they’d likely pay more than you would. Per the article on India, this is the type of behavior that you see, instead:

Investigators now say that some of the favored applicants, having acquired the coal fields free, quickly sold them for tens of millions of dollars to steel or power companies. Others simply kept them as an asset and have not yet developed them, even as the country faces blackouts and coal shortages.

The NY Times treats this as some sort of “scandal” rather than as a FEATURE of socialistic systems. Politicians in these systems are exactly like capitalists in a capitalist society, using their role to obtain power and riches rather than for some sort of utopian “betterment of mankind” which the NY Times would likely expect them to do. In fact, these sorts of behaviors are modeled as successful and drive out would-be capitalists since the politicians in socialist societies hold the cards in terms of laws and processes and will use them against those trying to open up the process to a fair and transparent capitalist alternative.

India has no power for 300 million people, an unreliable system with rolling blackouts, and is crippling growth BECAUSE IT RUNS POWER AS A SOCIALIST SYSTEM RATHER THAN A CAPITALIST ONE. The answer is absolutely as simple as that. The scandal and the failures are product of a socialist system as doomed to fail as the USSR’s five year plans.

The answers to this problem of inadequate power are simple and can be found in any text from Smith to Hayek.

1. Sell state owned coal fields to qualified bidders (have the capital and means to develop the fields) in an open and transparent auction process
2. Protect the property rights of power developers by ensuring that they are able to build and site transmission lines and power stations appropriately
3. Protect the property rights of power companies by ensuring that they are able to charge and collect from customers and eliminate illegal connections to their systems
4. For areas that are a local monopoly (distribution), the state should ensure that performance and reliability are monitored via clear criteria and that entities that don’t comply should be fined or the franchise put up for auction to another qualified entity

Since the NY Times fundamentally doesn’t understand how capitalism works and that it is a BETTER solution that top down central planning or socialistic bureaucratic “queuing” models” (of which this is a primitive variant) they don’t make any of these recommendations. Scandals aren’t a problem – they are a direct result of the SYSTEM and will always be present in these sorts of political environments.

Cross posted at LITGM

Well the apocalypse may be near. But our generation has been lucky. Maybe we’ve taken from the next – but time and space aren’t zero sum either – we can explore both, fill both.

I haven’t digested Robert William Fogel’s Escape from Hunger and Premature Death, 1700-2100 (his tables alone are beyond me – besides much else). Still, reading him, I pause in delight and gratitude. The very concepts of “premature death,” “wasting,” and “stunting” open windows – time becomes different much as Amerians in the mid-nineeenth century saw their horizons recede & enlarge. It stretched their limbs & imaginations: leaving from St. Louis, they knew some of that land would be theirs – earned by sweat as it never could be in the still feudal worlds some came from. Space liberated them. Fogel describes an enlargement of time – time for us, time with and for our children. He also describes productivity, consciousness – the energy to live fully in that time we’re given (the image of French peasants hibernating in the winters to save food doesn’t leave my mind).

Time is a recurrent literary theme, its fleeting nature the tension of carpe diem. Man’s time countered by redeemed time permeates Eliot’s Quartet, is a mystery in Wallace Stevens and an ache in Frost. Foolishly, we think we can endlessly revise, all is revocable – this permeates Prufrock’s rather inadequate approach. Franklin tells us time is the stuff life is made of – use it. Well, yes, but did he mean what we do? Is it that disconnect that leads us to fragmented training? Dalrymple notes a shallow approach to time (and history) creates a different art.

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The fact that some environmental groups want to destroy existing dams, in the name of returning rivers to their natural states, is of course old news. Now, though, they have moved beyond the tearing down of dams and want to destroy bridges as well.

And, in the case of the historic Stoneman Bridge in Yosemite National Park, it appears that they may well get their way.

Environmentalists claim to have great respect for the works of nature. (Though–given the number of cars I see with environmentalist bumper stickers and the windows rolled up tight on beautiful days–it seems that quite a few of them want to minimize their actual contact with the natural environment.) But, all too often, they seems to have no respect at all for the work of human minds and hands.

Related: Frankly, my dear, I do need a dam

George Will writes about the the attack that Obama’s EPA is conducting against the Navajo Generating Station, which together with the coal mine that feeds it represents an important factor in Arizona’s economy and an important source of employment for members of the Navajo tribe.

Will notes that the NGS provides 95 percent of the power for the pumps of the Central Arizona Project, which routes water from the Colorado River and which made Phoenix and most of modern Arizona possible. A study sponsored by the Interior Department estimates that the EPA’s mandate might increase the cost of water by as much as 32 percent, hitting agriculture users especially hard.

Read the whole thing.

For Whole Foods, “environmentalism” means supporting wind power, and saying that their stores are “100% powered by wind”. What this likely means is that they buy power from renewable suppliers, paying an additional fee since that sort of energy is more expensive (unless massively subsidized by the government).

Power, however, cannot be economically stored. Thus the real time when you want power is when it is brutally hot outside, which in the Midwest often means little breeze and an overhead haze (which makes solar less economical). This means relying on traditional “base load” resources like coal, nuclear, or natural gas fired fleets.

When I walked into that Whole Foods it was a cold as a meat locker, and the flags hung limply in the breeze. Wind power wasn’t supporting Whole Foods when it was most needed; wind power blows whenever the wind blows, unreliably.

My suggestion to environmentalists is to just move their support of causes to the next level; the same way that vegetarians don’t eat meat, those that do not support reliable base load power (coal, nuclear, gas) along with the necessary (unsightly) transmission infrastructure to bring the power into your city (since having a plant near the city is usually out of the question due to noise and emissions), should TURN OFF THEIR AIR CONDITIONING AND THEIR ELECTRONIC DEVICES during times of extreme heat. After all, this is what that hated infrastructure is buying – reliability and power during peak loads.

Like those that pine for a diverse society yet move to far flung mono-cultural suburbs, those that value their environmentalist credentials above all should start “living the sweat lifestyle” that they believe in. Turn off that air conditioner, and don’t be part of that peak consumption, which in turn justifies the base load power in the first place.

Cross posted at LITGM

…and of the entire era of reliable and affordable electricity?

Is it hot where you are? Have you been enjoying your air conditioning? Appreciate it a little more after the power has come back on after an extended outage?

The American economy has made air conditioning broadly affordable, even by those whose incomes are fairly low. But how many people are going to be able to afford their A/C if electricity prices rise to the $.70 or $.80/kwh range?

Remember, Barack Obama said (in 2008) that under his plan, electricity rates would “necessarily skyrocket.” The only things that have prevented such skyrocketing from happening so far are (a) the unwillingness of Congress to pass a cap-and-trade bill, and (b) the vast expansion in supplies of natural gas–a key fuel for electricity generation–driven by advanced fracking technologies. In a second Obama term, neither of these factors would likely be operative. A court decision has now given the EPA the ability to do pretty much what it wants to do regarding regulation of CO2, and in an Obama administration, what it wants to do is to shut down America’s coal-based electricity generation. Also, the scale of the success of oil/gas fracking clearly took the Obama administration by surprise, and in a second Obama term there would be far more regulatory effort to tie the hands of this industry and limit the development of America’s natural gas resources.

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I recently took a cab ride in an unusual vehicle. I talked to the driver and he told me that it ran on compressed natural gas (CNG). You can see the blue CNG logo below the Ford logo on the right side. The driver said that the vehicle was assembled overseas in Turkey.

Compressed Natural Gas (CNG) Fuel Prices & Performance

Per the driver – he filled up with approximately 8 “gallons” of CNG. This is measured as a “gasoline gallon equivalent” or GGE to try to provide an understandable metric for typical car owners. He said that this took him around 200 miles and cost around $2 per GGE. In Chicago terms this is probably about 1/2 the costs of what a gasoline powered truck would cost per mile (ignoring the higher acquisition costs of this custom SUV). This site shows the range of costs that customers are seeing per GGE. Per this site there are 6 CNG stations in Chicago with costs between $2 and $2.50 per GGE (costs are sometimes out of date by station and it is not always clear if prices are up to date). The driver also said that the power that the engine put out declined as it got emptier; I believe that this is different than how gasoline or diesel engines behave. The city of Chicago has a program to open CNG filling stations and subsidize cab companies to pay the extra up front costs of purchasing these customized vehicles.

The competitiveness of the CNG vehicles depends on several factors, most notably the price of natural gas. Since the price of natural gas is around $2 / MCF, it is at an all-time low. The price of natural gas (pre-fracking) peaked at around $14 / MCF, more than 7x its current price. Assuming that CNG “at the pump” moves with the cost of the underlying commodity, then you would go from about 1/2 the cost of gasoline (today) to up to 3x+ higher, if we had another price swing like that again in the United States, OR if we were exposed to the “market clearing” price of natural gas around the world.

Per this article in Reuters, the gap between the US rates and what foreign buyers (particularly Japan and Korea) are willing to pay is very significant.

The surge in gas output has made companies such as Chesapeake and Exxon Mobil’s XTO victims of their own success, unleashing a surplus of supply that could keep prices — and therefore profits — depressed for decades. For them, selling gas to Japan or Europe — which buys imported LNG at five or six times the domestic price of $2.50 per million British thermal units — is essential to continue expanding their U.S. business, creating jobs in the process. The shale gas boom is on track to support 1.5 million jobs across the United States by 2015, according to an industry-funded study by IHS Global Insight. Export licenses will make big winners out of some firms such as Cheniere, which last year secured the first and, so far, only export permit from the Energy Department.

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This is the second of a series of posts on recent events in the world electricity & energy market. Here is Spain.

Britain’s Energy Policy

Britain has a mostly de-regulated electricity market for generation. One item that must be considered with electricity is plain old geography; Britain is an island and must generate all their electricity locally. Thus they can have costs either significantly higher or lower than those found on mainland Europe, because it is difficult to use arbitrage (in the form of transmission) to resolve price imbalances. Correction – Britain imports 5% of her electricity from France in a cross-channel cable. Thanks to commenter Jim Miller for pointing this out.

Like most of Europe, Britain is in the thrall of the greens, and their favorite tool is to mandate a certain percentage of energy to come from “renewables” (wind and solar, for semi-practical purposes), while hounding coal on environmental grounds and nuclear on whatever grounds they tend to come up with at the time. Natural gas represents almost 50% of current energy today. This article from the Economist provides a good summary of the British market.

While Britain traditionally has gotten much of its natural gas from local drilling, LNG imports from overseas provide a higher percentage today. According to this article, LNG imports represent 25% of British usage, while locally drilled gas has fallen by 10% from the prior year. Britain traditionally has relied on the North Sea for its natural gas and oil production, but these fields are in long term decline.

In 2011, the UK initiated a surprise tax increase on North Sea oil and gas producers. The percentage of tax on profits increased from 68% to 80%, an increase of 12%, per this article. This sharp rise in taxation was a surprise under the supposedly Tory administration, because it is typical of more of a labor “carve up the pie” view of the world than one I would typically expect under the Tories that “incentives drive behavior”.

This article discusses the impact of ever changing tax policies in the UK on investment in oil and gas rigs.

The hike prompted furious reaction from the industry. Mark Hanafin, director of Centrica Energy, told the Telegraph: “the North Sea is the second-largest oil-producing region in the world after Saudi Arabia. It’s a national treasure for the UK. The government is utterly destroying that. I wish people would step up and say you just can’t do this. Capital is leaving the country and going elsewhere”.

Who could have predicted what would happen next? Oil and gas produced since the tax hike has dropped by the most since records have been kept, per this article:

UK natural gas production in the third quarter of 2011 slumped to the lowest level since records began in 1996, at 103TWh (terawatt hours), Department of Energy and Climate Change (DECC) data show. This also represented the largest year-on-year quarterly decrease ever seen, down 29.4pc on the same period last year.

Now that the British government has dis-incented investment and damaged their oil and gas industry through erratic and socialistic behavior, what’s next? A central-planning, top down new “plan” for the electricity sector, of course.

As summarized in the Economist article (which failed to mention the negative impact of tax incentives on natural gas’ decline, a serious oversight):

Renewable technologies account for a mere 7% of current supplies… government pledges to cut planet-heating (ed – their words) emissions and get 15% of energy from renewable sources by 2020… the industry regulator reckons that around $315 billion USD needs to be spent by 2020. Investment currently amounts to $6-9B USD / year. But the move to greener power in Britain must be achieved without infuriating voters already upset at high bills.

The government expects the private sector to finance the renewables (wind, solar and new nuclear) that they plan to have in place to meet the 15% target, while shutting down older nuclear plants and coal plants, as well. It is very difficult to entice the private sector to make these sorts of investments, however, unless they know in advance that they can recover the high and otherwise un-economical costs for these renewable power through the life of the facility (30 years or more). These costs, obviously, must in the end be borne by either residents or corporations (the business sector).

I would love to be a “fly on the wall” if you tried to convince any rational financial institution to invest in these sorts of projects, knowing that Spain just abandoned all their subsidies midway through (decimating their industry) and that the UK has a history of changing tax regimes with gas and oil extraction (see above).

Even the economist, which unfortunately is a cheerleader in this sort of central planning, sums it up dimly:

It is doubtful that the draft bill has enough detail to break the current hiatus in energy investments. It is still unclear how prices will be determined, how often they will be reviewed, and how contracts will be implemented. Uncertainty about the form of the contracts compounds existing investor fears about the durability of government price guarantees on energy.

While these government fantasies about supposedly rational private sector investors ploughing funds into un-economical renewables continues, a backup plan of sorts is occurring because they are extending the life of existing, older nuclear plants that they were planning to close. Keeping these plants alive defers the enormous (and likely significantly under-estimated) costs of building new nuclear plants, which are summarized here at wikipedia. From my perspective I would be willing to bet that none or perhaps 1-2 at best nuclear plants would ever be built going forward in the UK post the disaster in Japan; the greens are too strong and they will protest and drag the process out for an eternity. Other than one plant that came on line in the mid 1990′s, all the plants are from the 1980′s and 1970′s and dreams of a nuclear renaissance in the UK ring just as hollow as they do in the US. Here is an article about re-licensing British reactors. Britain’s ageing nuclear reactors, which were due to close in the next decade, are set to be kept open under a plan approved by the industry’s regulator.

In a move that could have far-reaching implications for the government’s energy policy, the Office for Nuclear Regulation has told the Guardian it is working with the country’s dominant nuclear operator, the French-owned company EDF, to extend the life of its eight nuclear power stations in the UK, and that it is “content for the plants to continue to operate”, as long as they pass regular safety tests.

Well there you go. Before the ink on the plans are dry, they’ve already backed down on one of the key tenets of their mad plan. I guess that is progress. But there is no way that their math can work as far as bringing new investment into the system since utilities and power generators won’t ‘add’ to their investment in this climate at the level needed to mothball such critical elements of their power generating infrastructure.

It is quite sad to see that the UK, which had once been a leader in electricity de-regulation, with lower prices to show for it than most of their European counterparts, to propose to effectively nationalize or central plan out an entire industry. All this under a Tory government, too. It seems that cooler heads have prevailed by keeping the nuclear stations open longer, and the collapse of the renewables market in Europe will likewise be a precedent that the UK will not want to follow.

Cross posted at LITGM

There have been some major events in the world energy market lately. For the first update let’s start with Spain.

Spain and Renewables:

Spain under-took a massive effort to embrace renewable energy technologies. Per Bloomberg:

The country generated 23 percent of its electricity from renewable sources in 2010… wind power in April covered 25 percent of electricity demand, a record that saved 270 million euros in fossil fuel imports. At one point on April 19, wind covered 61 percent of power demand.

How did Spain become a pioneer in wind and solar? Simple. Massive tax breaks for these sorts of installations.

In the 2000s, Spain copied the German clean-power aid model, as did nations from Portugal to Israel and Japan, increasing subsidies to a pinnacle in 2007. That’s when a law granted 444 euros ($556) a megawatt-hour for home rooftop solar panels feeding the power grid, compared with an average 39 euros paid to competing coal- or gas-fired power plants. By 2009, the consumer bill for clean-energy aid had risen to 6 billion euros a year, ahead of the 5.6 billion euros in Germany, whose economy is almost four times bigger, according to the Council of European Energy Regulators… Solar energy was the biggest drag on the system, accounting for almost half of the annual 6 billion euros of liabilities and producing just above 2 percent of the power

Let’s do the math there again. Through state subsidies, the government was paying 444/39 = more than 11x the rate for solar panels. This understates the disparity because that 39 Euro per MWH on the other sides includes a much longer term investment horizon, while rooftop solar panels would have a correspondingly lower life span. To be fair, much of their renewable subsidies went to wind power, which while un-economic was less disastrously so than rooftop solar (with this level of subsidies). In addition to overpaying, the government was doing this on a massive scale, as noted above since the government largess was larger than Germany in absolute terms while their economy is much, much smaller.

The scale of over-building in these technologies was incredible. Per the article:

With peak electricity demand at less than half of capacity, the country doesn’t need more power plants, he said. Spain has a capacity of 99 gigawatts, and peak demand of 44 gigawatts.

This level of surplus power, (123%, or (99-44)/44)) is unprecedented. By contrast, in the United States in 2010, our surplus (summer) capacity is 19.2%, per the EIA document summarized here.

Recently Spain has undergone an austerity crisis and the government stopped subsidizing new energy installations. What happened? The industry immediately evaporated.

Saddled with a budget deficit more than twice the European Union limit and a ballooning gap between income and costs in its power system, Spain halted subsidies for new renewable-energy projects in January. The surprise move by Prime Minister Mariano Rajoy one month after taking office helped pierce investor confidence in stable aid for clean energy across Europe. “They destroyed the Spanish market overnight with the moratorium,” European Wind Energy Association Chief Executive Officer Christian Kjaer said in an interview. “The wider implication of this is that if Spanish politicians can do that, probably most European politicians can do that.”

In addition to halting the bleeding of government finances caused by the end to these massive subsidies for new installations, the “green jobs” immediately melted away.

The 75,466 renewable energy jobs that existed in Spain at the industry’s peak in 2008 shrank to 54,925 in 2010, according to the Renewable Energy Producers Association’s most recent data.

Likely this job loss will further accelerate since in 2010 there still were some subsidies available; now the subsidies have been completely eliminated, thus de-facto decimating the industry in Spain.

It is important to note that this Spanish “investment” in renewable technologies often can’t be leveraged by industrial producers because wind power is intermittent (and expensive) and much of the solar was implemented for individual households. By contrast, the US shale gas boom, tied with expansion of gas-fired plants making up a larger percentage of the total capacity base (and in particular the “base load” capacity base), has made America more competitive for industrial producers and led to economic growth (or a slowdown in relative decline) in energy-intensive industries. This document (by an industry source, but likely directionally correct) states the following:

The lower natural gas prices achieved with shale gas production will result in an average reduction of 10% in electricity costs nationwide over the forecast period. By 2017, lower prices will result in an initial impact of 2.9% higher industrial production. By 2035, industrial production will be 4.7% higher.

On a larger scale, Spanish “investment” in renewable energy didn’t make the country more competitive from a manufacturing perspective nor did it reduce the cost of energy to the average homeowner. It created a class of economic parasites that evaporated as soon as the subsidies went away. The Spanish companies that thrived off the boom are now moving overseas to attempt to compete with local entities in other countries where subsidies still exist that could make renewables viable.
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The hot energy story of the last few years has been the vast expansion in the available supplies of natural gas, and the very significant economic implications thereof. I though it might be interesting to take a look at the past, present, and future of this commodity.
The first known use of natural gas was by the Chinese, circa 500 BC…they captured gas from places where it was seeping to the surface, transported it in bamboo pipelines, and burned it for a heat source to distill seawater and capture the resulting salt and fresh water. The modern gas era began circa 1800 with the use of gas for lighting–initially of streets and later of homes and other buildings. Since there was no network of gas wells and long-distance pipelines, the gas used for these applications was usually not true natural gas, but rather “town gas,” made by heating coal. (Gas stoves seem to have become popular circa 1880, and apparently had quite an impact….I’ve read that the term “gas-stove wife” was enviously applied to women who were so fortunate as to have one of these appliances and were thereby spared the labor of tending a wood or coal stove, and hence had some leisure time available.)


The transition from coal gas to true natural gas had to wait on the build-out of a long-haul pipeline network, which took place mainly from 1920 to 1960. Although electricity became the glamor “fuel” and displaced gas in many cases for cooking and heating, the generation of electricity itself has in recent years become a major source of gas demand. Natural gas is also important as a feedstock for the production of fertilizer and of various plastics. By the early 2000s, there were serious concerns that the US was running out of natural gas–see for example this 2003 TIME Magazine story. The article cites Alan Greenspan’s concerns that high nat gas prices would make us uncompetitive in many industries, as well as citing direct economic pain inflicted on consumers. The only solution seemed to be large-scale imports of natural gas via LNG (liquified natural gas) ships. (Gas is far more difficult to transport than oil, because it needs to be liquified in order to make the volumes manageable, which in turn requires refrigerating it to very low temperatures.) In late 2005, US natural gas prices hit an inflation-adjusted level of almost $16 per million BTUs.


The price is now about $2.50 per million BTUs. What happened?

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In Britain, an 83-year-old woman has been told that she must find a new medical practice, because travel to the one she has been attending for the last 30 years involves an unacceptable carbon footprint.

President Obama’s decision to support a southern section of Keystone XL is a commitment to build a pipeline to nowhere. Until extra oil supply hits Cushing, OK from Canada, there is no purpose to building a pipeline from the Gulf of Mexico to there. And that’s the kind of economic development, President Obama apparently likes, the dig a hole then fill it in variety.

Keynesians see nothing wrong with this sort of useless development that doesn’t actually meaningfully enhance an economy’s productive capacity. The actual construction project is a stimulus and that’s fine with them. But those that follow the Austrian school find such development a key factor in setting up future economic trouble because it’s malinvestment, siphoning off investment money to little useful purpose other than to shorten the tanker car runs Warren Buffet is making profits off of.