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A Fresh Breeze

A GAO report tracks an emerging U.S industry.

By Ryan Wiser and Mark Bolinger

The wind power industry is in an era of substantial growth, both globally and in the United States.

With the market evolving at such a rapid pace, keeping up with trends in the marketplace has become increasingly difficult. The first in what is envisioned to be an ongoing annual series, this report attempts to provide a detailed overview of developments and trends in the U.S. wind power market, with a particular focus on 2006.

The U.S. wind power market contin- ued its rapid expansion in 2006, with 2,454 MW of new capacity added, for a cumulative total of 11,575 MW. This growth translates into more than $3.7 billion (real 2006 dollars) invested in wind project installation in 2006, for a cumulative total of more than $18 billion since the 1980s.

The yearly boom-and-bust cycle that characterized the U.S. wind market from 1999 through 2004—caused by periodic, short-term extensions of the federal production tax credit (PTC)

—ended in 2006, with two consecutive years of sizable growth. In fact, 2006 was the largest year on record in the

U.S. for wind capacity additions, barely edging out year-2005 additions. Federal tax incentives, state renewable energy standards and incentives, and continued uncertainty about the future cost and li- abilities of conventional natural gas and coal facilities helped spur this growth.

Also for the second consecutive year, wind power was the second-largest new resource added to the U.S. electrical grid in terms of nameplate capacity, well behind the more than 9,000 MW of new natural gas plants, but ahead of new coal, at 600 MW. New wind plants contributed roughly 19 percent of new nameplate capacity added to the U.S. electrical grid in 2006, compared to 13 percent in 2005.

U.S Leads in Annual Capacity Growth. On a worldwide basis, more than 15,000 MW of wind capacity was added in 2006, up from roughly 11,500 MW in 2005, for a cumulative total of more than 74,000 MW. For the second straight year, the United States led the world in wind capacity additions, with roughly 16 percent of the worldwide market. Germany, India, Spain, and China round out the top five. In terms of cumulative installed wind capacity, the

U.S. ended the year with 16 percent of worldwide capacity, in third place behind Germany and Spain. So far this century (i.e., over the past seven years), wind power capacity has grown on average by 24 percent per year in the U.S., compared to 27 percent worldwide.

Several countries have achieved high levels of wind power penetration in their electricity grids. End-of-2006 installed wind is projected to supply more than 20 percent of Denmark's electricity de- mand, roughly 9 percent of Spain's, and 7 percent of Portugal's and Germany's.

In the U.S., on the other hand, the cu- mulative wind capacity installed at the end of 2006 would, in an average year, be able to supply roughly 0.8 percent of the nation's electricity consumption—just below wind's estimated 0.9 percent con- tribution to electricity consumption on a worldwide basis.

Texas, Washington, and Cali- fornia Lead. New large-scale wind tur- bines were installed in 22 states in 2006. Leading states in terms of 2006 additions include Texas, Washington, California, New York, and Minnesota. As for cumu- lative totals, Texas surpassed California in 2006, and leads the nation with 2,739 MW, followed by California, Iowa, Min- nesota, and Washington. Twenty states had more than 50 MW of wind capacity as of the end of 2006, with 16 of these states achieving more than 100 MW and six topping 500 MW. Although all wind power development in the U.S. to date has been onshore, offshore development activities continued in 2006.

About the Author

Excerpted from the Dept. of Energy's Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006, by Ryan Wiser and Mark Bolinger, Lawrence Berkeley National Laboratory.

GE Wind Is the Dominant Tur- bine Manufacturer, with Siemens Gaining Market Share. GE Wind remained the dominant manufacturer of wind turbines supplying the U.S. market in 2006, with 47 percent of domestic installations (down from 60 percent in 2005, and similar to its 46 percent mar-

Altamount Pass wind farm in California, one of the oldest in the U.S., has been continuously updated since 1981.

ket share in 2004). Siemens and Vestas also had significant U.S. installations, with Mitsubishi, Suzlon, and Gamesa playing lesser roles. Siemens' move to the number two wind turbine supplier is particularly noteworthy, given that it delivered no turbines to the U.S. market the previous year, after its acquisition of Bonus in 2004. In part as a result, Vestas (along with GE Wind) lost market share between 2005 (29 percent) and 2006 (19 percent) in the U.S. market.

A new U.S.-based manufacturer—Clip- per Windpower—is in the process of sig- nificant expansion, and a growing list of foreign turbine manufacturers have begun to localize some of their manufacturing in the United States. In 2006, for example, new manufacturing plants sprung up in Iowa (Clipper), Minnesota (Suzlon), and Pennsylvania (Gamesa). GE has also maintained a significant, domestic wind turbine manufacturing presence, in addi- tion to its international facilities that serve both the U.S. and global markets.

Average Turbine Size Continues to Increase. The average size of wind turbines installed in the U.S. in 2006 in- creased to roughly 1.6 MW. Since 1998- 99, average turbine size has increased by 124 percent.

Industry Consolidation. Con- solidation on the development end of the business continued the strong trend that began in 2005, with a large number of significant acquisitions, mergers, and investments. 13 transactions totaling roughly 35,000 MW of in-development wind projects (also called the development "pipeline") were announced in 2006, up from nine transactions totaling nearly 12,000 MW in 2005, and only four transactions totaling less than 4,000 MW from 2002 through 2004.

A number of large companies have entered the wind development business in recent years, including AES, Goldman Sachs, Shell, BP, and John Deere, some through acquisitions and others though their own development activity, or through joint development agree- ments with others. Other active wind development companies include (but are not limited to) FPL Energy, PPM Energy, Iberdrola, Babcock & Brown, Airtric- ity, RES, UPC Wind, Invenergy, Edison Mission, enXco, Clipper, Acciona, Enel, NRG Energy (Padoma), Gamesa, Cielo, Noble Environmental Power, Exergy,

U.S. Wind Force, Wind Capital Group, Foresight, Western Wind, and Midwest Wind Energy.

A variety of innovative ownership and financing structures have been developed by the U.S. wind industry in recent years to serve the purpose of allowing equity capital to fully access federal tax incen- tives. The two most common structures employed in 2006 were corporate bal- ance-sheet finance (e.g., that used by FPL Energy) and so-called "flip" struc- tures involving institutional "tax equity" investors (e.g., the "Babcock & Brown model").

International Rankings of Wind Power Capacity

Cumulative Capacity (end of 2006, MW)

Incremental Capacity (2006, MW)

Germany

20,652

US

2,454

Spain

11,614

Germany

2,233

US

11,575

India

1,840

India

6,228

Spain

1,587

Denmark

3,101

China

1,334

China

2,588

France

810

Italy

2,118

Canada

776

UK

1,967

UK

631

Portugal

1,716

Portugal

629

France

1,585

Italy

417

Rest of World

11,102

Rest of World

15,016

Total

74,246

Total

15,016

Another sign of the increased maturity and acceptance of the wind sector is that electric utilities have begun to express greater interest in owning wind assets. Private independent power producers (IPPs) continued to dominate the wind industry in 2006, owning 71 percent of all new capacity.

Merchant Plants and Sales. Investor-owned utilities (IOUs) continue to be the dominant purchasers of wind power, with 47 percent of new 2006 capacity and 58 percent of cumulative capacity selling power to IOUs. Publicly owned utilities (POUs) have also taken an active role, purchasing the output of 14 percent of both new 2006 and cumulative capacity.

The role of power marketers in the wind power market has increased dra- matically since 2000. As of the end of 2006, power marketers were purchasing power from 16 percent of the installed wind power capacity in the U.S.

Wind Power Prices Are Up. Although the wind industry appears to be on solid footing, the weakness of the dollar, rising materials costs, a concerted movement towards increased manufacturer profitability, and a shortage of components and turbines continued to put upward pressure on wind turbine costs, and therefore wind power prices in 2006.

Utility Interest in Wind Asset Ownership Strengthens. Another sign of the increased maturity and ac- ceptance of the wind sector is that electric utilities have begun to express greater interest in owning wind assets with 25 percent of total wind additions in 2006 are owned by local electrical utilities, the vast majority of which are investor-owned utilities (IOUs), as opposed to publicly owned utilities (POUs). Community wind power projects – defined here as projects owned by towns, schools, commercial customers, and farmers, but excluding publicly owned utilities—constitute 4 percent of 2006 projects.

Merchant Plants and Sales to Power Marketers. Investor-owned utilities (IOUs) continue to be the domi- nant purchasers of wind power, with 47 percent of new 2006 capacity and 58 percent of cumulative capacity selling power to IOUs (see Figure 8). Publicly owned utilities (POUs) have also taken an active role, purchasing the output of 14 percent of both new 2006 and cumula- tive capacity.

Transmission Is an Increasingly Significant Barrier to Wind, but Solutions Are Emerging. Relatively little investment has been made in new transmission over the past 15 to 20 years, and in recent years it has become clear that lack of transmission access and investment are major barriers to wind development in the U.S. New transmis- sion facilities are particularly important for wind resource development because of wind's locational dependence and distance from load centers. In addition, there is a mismatch between the short lead times for developing wind projects and the lengthier time often needed to develop new transmission lines. Fur- thermore, wind's relatively low capac-

ity factor can lead to underutilization of new transmission lines that are intended to only serve wind. The ques- tion of "who pays?" for new transmission is also of critical importance to wind developers and investors.

United States Wind Power Rankings: The Top 20 States

Cumulative Capacity (end of 2006, MW)

Incremental Capacity (2006, MW)

Approximate Percentage of Retail Sales*

Texas

2,739

Texas

774

New Mexico

7.3%

California

2,376

Washington

428

Iowa

6.0%

Iowa

931

California

212

North Dakota

5.1%

Minnesota

895

New York

185

Wyoming

5.1%

Washington

818

Minnesota

150

Minnesota

3.8%

Oklahoma

535

Oregon

101

Oklahoma

3.5%

Oregon

438

Iowa

99

Kansas

3.1%

New York

370

New Mexico

90

Oregon

2.4%

Kansas

364

North Dakota

80

Texas

2.3%

Colorado

291

Oklahoma

60

Washington

2.3%

Wyoming

288

Colorado

60

California

2.1%

Pennsylvania

179

Pennsylvania

50

Colorado

1.7%

North Dakota

178

Hawaii

41

South Dakota

1.5%

Montana

146

Montana

9

Nebraska

1.0%

Illinois

107

Maine

9

Hawaii

1.0%

Idaho

75

Massachusetts

2

Idaho

0.7%

Nebraska

73

New Hampshire

1

New York

0.6%

West Virginia

66

Rhode Island

0.7

West Virginia

0.6%

Wisconsin

53

Ohio

0.2

Pennsylvania

0.3%

Rest of U.S.

156

Rest of U.S.

0.3

Rest of U.S.

0.02%

TOTAL

11,575

TOTAL

2,454

TOTAL

0.85%

*Assumes that wind installed in a state serves that state's electrical load; ignores tranesmission losses. Source: AWEA/GEC database and Berkeley Lab estimates.

A number of develop- ments occurred in 2006 that promise to help ease some of these bar- riers over time. The U.S. DOE issued a national transmission congestion study that designated southern California and the mid-Atlantic coastal area from New York City to northern Vir- ginia as "critical conges- tion areas." Under the Energy Policy Act of 2005 (EPAct 2005), the

U.S. DOE can nominate National Interest Electric Transmission Corridors, and the Federal Energy Regulatory Commission (FERC) can approve po-

tential new transmission facilities in these corridors if states do not act within one year, or do not have the authority to act, among other conditions. 33 Separately, FERC issued a rule allowing additional profit incentives for transmission owners on a case-by-case basis, also as required by EPAct 2005, and thereby potentially encouraging greater transmission invest- ment.

At the state level, several states are proactively developing the transmission infrastructure needed to accommodate increased wind development. In 2006, Texas began the process of identifying and creating Competitive Renewable Energy Zones: areas in which renew- able resource availability is significant and to which transmission infrastructure would be built in advance of installed generation, with costs recovered through transmission tariffs.

Meanwhile, in California, progress was made in developing elements of the

Tehachapi transmission plan to access more than 4,000 MW of wind power. In the Midwest, utilities continued preparing permit applications to the Minnesota PUC for the first group of proposed transmission lines under the Capital Expansion by 2020 (CapX 2020) plan, a plan that would facilitate increased ac- cess to wind resources. Finally, a large number of transmission projects that may include delivery of wind power are in various stages of planning, including TransWest Express, Frontier, Northern Lights, TOT3, Seabreeze West Coast Cable, SunPath, and SunZia.

A variety of policy drivers have been important to the recent expansion of the wind power market in the U.S. Perhaps most obviously, the continued availability of the federal production tax credit (PTC) has sustained industry growth. A number of other federal policies also support the wind industry.

Wind power property, for example, may be depreciated for tax purposes over an accelerated 5-year period. Because tax-exempt entities are unable to take direct advantage of tax incentives, the Energy Policy Act of 2005 created the Clean Renewable Energy Bond (CREB) program, effectively offering interest-free debt to eligible renewable projects.35 Finally, Section 9006 of the 2002 Farm Bill established the USDA's Renewable Energy and Energy Efficiency program to encourage agricultural producers and small rural businesses to use renewable and energy efficient systems.

Key policy developments in 2006 included:

  • In December, the Tax Relief and Health Care Act of 2006 extended the in-service deadline for the PTC by one year, allowing wind projects that come on line through 2008 full access to the 10-year credit.
  • In November, the IRS announced the distribution of the first $800 million in CREBs, including nearly $270 million for 112 wind power projects totaling roughly 200 MW. One month later, the Tax Relief and Health Care Act of 2006 added a second CREB allocation of $400 million, with applications due mid-2007.
  • In August, a total of more than $17 million in grant awards were announced

Merger and Acquisition Activity

Investor

Transaction Type

Developer

Announced

EDF (SIF Energies)

Acquisition

enXco

May-02

Gamesa

Investment

Navitas

Oct-02

AES

Investment

US Wind Force

Sep-04

PPM Energy

Acquisition

Atlantic Renewable Energy Corp.

Dec-04

AES

Acquisition

SeaWest

Jan-05

Goldman Sachs

Acquisition

Zikha (Horizon)

Mar-05

JP Morgan Partners

Investment

Noble Power

Mar-05

Arclight Capital

Investment

CPV Wind

Jul-05

Diamond Castle

Acquisition

Catamount

Oct-05

Pacific Hydro

Investment

Western Wind Energy

Oct-05

Greenlight

Acquisition

Coastal Wind Energy LLC

Nov-05

EIF U.S. Power Fund II

Investment

Tierra Energy, LLC

Dec-05

Airtricity

Acquisition

Renewable Genera- tion Inc.

Dec-05

Babcock & Brown

Acquisition

G3 Energy LLC

Jan-06

Iberdrola

Acquisition

Community Energy Inc.

Apr-06

Shaw/Madision Dearborn

Investment

UPC Wind

May-06

NRG

Acquisition

Padoma

Jun-06

CPV Wind

Acquisition

Disgen

Jul-06

BP

Investment

Clipper

Jul-06

BP

Acquisition

Greenlight

Aug-06

Babcock & Brown

Acquisition

Superior

Aug-06

Enel

Investment

TradeWind

Sep-06

Iberdrola

Acquisition

Midwest Renewable Energy Corp.

Oct-06

under the Section 9006 grant program, including $4.075 million for 14 wind projects totaling 28 MW in capacity.
  • One new state (Washington) enacted an RPS, bringing the total to 21 states and Washington D.C. at the end of 2006. Several states revised their RPS require- ments in 2006, in most cases making them more stringent.
  • State renewable energy funds (in ex- istence in more than 15 states), state tax incentives, utility resource planning requirements, green power markets, and growing interest in carbon regulations all helped contribute to wind expansion in 2006.

Coming Up in 2007

Though transmission availability, siting

and permitting conflicts, and other bar- riers remain, 2007 is, by all accounts, expected to be another excellent year for the U.S. wind industry. With the PTC now extended through 2008, the American Wind Energy Association and BTM Consult expect robust 25 to 30 percent growth in wind power capacity in 2007, and strong growth should extend at least through 2008. With backing from industry and government, new efforts to seriously explore ambitious long-term targets for wind power commenced in 2006: a joint DOE-AWEA report that explores the possible costs, benefits, challenges, and policy needs of meeting 20 percent of the nation's electricity supply with wind power is planned for completion in 2007.

Spain Leads the Way

Wind accounts for a third of Spain's energy

By Juan Paredes

I

n the northwest corner of Spain, staggeringly tall towers dot the lush landscape. Armed with rotors as big

as 180 feet in diameter they're designed to withstand the blustery winds that race in off the Atlantic and, more importantly, to harness that energy and make it avail- able to industry and consumers alike.

Few industries have grown as quickly as the wind energy market.

According to the Global Wind Energy Council (GWEC), worldwide wind energy markets grew by 32 percent in the last year. Today, wind energy is firmly en- trenched as one of the key players in the energy markets—and the value of new generating equipment installed in 2006 reached a whopping $23 billion.

And few places have been as central to that growth as Galicia, Spain.

Perhaps nowhere else in the world has such a concerted and dedicated effort been made to harness nature's bounty and turn it into valuable, fossil fuel-free energy. Best known for its medieval Cathedral of Santiago de Compostela, Galicia is now home to over 112 dis- tinctly operated wind farms, generating nearly a third (30 percent) of Spain's total output and powering as many as

1.5 million households.

So, how has it gotten there?

This exceptional situation comes, thanks in part, to Galicia's location and geographic features (which have long drawn comparisons to, and settlers from, Ireland). But it is also the result of a con- certed effort by the regional government and the Galician Institute of Economic Promotion (IGAPE) to attract investment

and create favorable tax and legal systems for qualified investors, including capital grants, low interest or "soft" loans and training assistance.

And Galicia has taken its commitment to wind energy, as well as other foreign direct investment, very seriously. In addi- tion to its competitive labor market, with a highly skilled, educated and dedicated workforce, it also has one of the most developed infrastructures in the nation, including 3 international airports, 127 ports, and is set to unveil its new high speed train system into the Galician network within the next two years.

But back to the wind…

The benefits of this renewable energy source could not be more obvious. It's clean, free and local. It combats climate change and helps provide energy secu- rity. And it generates jobs, sparks inno- vation and can spur regional growth. For example, in Spain the wind energy sector employs well over 30,000 people.

About the Author

Juan Paredes is Director of the Galician Institute of Economic Promotion (IGAPE USA). Previously he served as CEO of the Spanish Chamber of Commerce of Australia in Sydney, before coming to the U.S. to launch IGAPE's New York office. He is an expert in issues of international trade and economic develop- ment. Paredes graduated with a Law Degree from the University of Santiago de Compostela, before completing a Postgraduate Specialization in European Union studies.

Today, Galicia's wind production ca- pacity is over 2.6GW—about the same as Canada, Australia, Brazil and Mexico combined. But by the year 2010, the Galician government estimates that the region's output could reach as much

as 6.5GW (more than half of what is currently produced in the entire United States).

And thanks to Galicia's formidable presence in the sector, Spain has very quickly become recognized as a world- wide leader in the industry—the country trails only Germany in overall wind power capacity, and beats out not only its neighbors in the EU, but also much larger countries such as the United States. Spain is also home to Gamesa, the world's second largest turbine manufacturer, as well as over 500 other companies involved in the development, production and manufacture of turbine components, which has its largest wind energy operations in Galicia.

In fact, as a region, Galicia on its own matches—and often surpasses—entire nations, ranking sixth worldwide in wind energy production, after Germany, the U.S., the rest of Spain, Denmark and India.

Perhaps more impressively, this growth has happened in relatively short order. After all, it's been only about a decade since the federal Electricity Act of 1997 established the right for wind farm developers and operators to.

  • Connect renewable installations to the grid
  • Transfer output from these installations to the grid
  • Receive a premium payment in re- turn.

The establishment of this law— creating the legal framework that enabled wind farms to sell energy under either a regulated fixed tariff option or a market option that provides for a legislated premium as well as a bonus on top of the market price—has been critical to this development. And it has been a watershed for investors.

Spanish wind farms offer above- average returns for comparatively minimal risk. Estimates have shown that with just 2,000 hours of wind a year, wind farms in Spain could pro- duce an after-tax ROI of as much as 8 or 9 percent. According to the Galician Wind Energy Association, wind parks in Galicia get as many as 2,850 hours of wind per year.

It's no wonder then that Spain sits alone at the top of the Ernst & Young Renewable Energy Group's

Near Term Wind Index, as well as the Long-Term Renewables Index, the Renewables Infrastructure Index and more.

It should also come as no surprise that, according to E&Y's Renewable Energy Group, Spain (along with the United States) offers investors strong growth potential and attracts the bulk of the wind energy investment capital.

Windmills dot the landscape in Galicia, Spain.

And as current supply chain issues are overcome, and technology, location, site-ing and other operating risks become better understood, and more effectively

managed, there can be no doubt that wind energy growth will continue well into the next decade.

Perhaps the bottom line is this: in 2005, wind accounted for only about 1 percent of the total energy production on a global scale. But experts estimate

that it could, some day, be respon- sible for as much as 30-40 percent, if not more. And as innovators in wind energy technology find ways to overcome the variability of nature's bounty, the percentage could rise even higher.

With no end to increased energy consumption in sight, the growth opportunity for wind farms, and firms, is significant. Also, consider- ing that the American Wind Energy Association estimates that every megawatt (not gigawatt) of wind en- ergy produced generates $1 million in economic development, including planning construction and other rev- enues, it comes as no surprise that corporations, private equity firms and governments are all playing a game of catch up in a concerted effort to be part of the boom. Who can blame

them?

In Galicia, we are well ahead of the game and we still have plenty of room for growth.

In Defense of the Wind

Legal challenges facing wind power are a breeze with proper planning.

By Trey Cox

T

hey helped ninth century Persians draw water and grind corn while their broad utility and striking

silhouettes on the American West have made them national icons.

Now the simple ingenuity behind wind power is playing a front-and-center role as one remedy to pressing global problems of climate change and energy security.

Clean, reliable and increasingly af- fordable, the concept of wind-generated power enjoys near universal public sup- port. This broad goodwill is the envy of other utilities and cannot be overesti- mated. More importantly, it should not be taken for granted as development bounds ahead.

With the wind-power industry again on track to grow by more than 25 percent this year, work to draft a consistent regu- latory framework for development has not kept pace with the industry's rapid growth. Developers today encounter a frontier defined by spotty policy and absent or inconsistent regulation.

A little foresight at this stage creates an opportunity to positively shape any incipient policy debate. The wind energy industry must seize this chance and act proactively. Haphazard practices and a failure to consider likely changes in the playing field threaten to do just the op- posite, exhausting the widespread public goodwill that the industry now enjoys.

The purpose of this white paper is to describe the existing domestic wind farm development landscape and outline issues to consider before and during wind-en- ergy projects. As a second component,

this paper addresses ways to work proac- tively with communities to avoid conflict, as well as outline legal defense strategies should nuisance lawsuits arise.

Regulatory Environment

With 2,678 megawatts of electric- ity generated from turbines, Texas has become the largest producer of wind energy in a business climate that lacks any cohesive regulation or policy. In Texas and many other states, installing a wind-power farm is as simple as finding agreeable landowners and drafting lease agreements.

This regulatory vacuum can be a dou- ble-edged sword. Without the protection that consistent policy provides, subjective issues of setback, visual aesthetics and sound levels are left to be ironed out between the utility industry, property owners, local communities and, when all else fails, the courts. It's reasonable to as- sume that regulation will one day become necessary if investment continues at its current pace.

About the Author

Attorney Trey Cox, partner with the Dallas-based trial firm Lynn Tillotson & Pinker, LLP, has a passion for advocacy and courtroom excellence. He repre- sents clients in commercial litigation, securities and fraud matters, professional liability, energy litigation, real estate litigation, intellectual property and com- mercial arbitrations. For more information: lynnllp.com

Indeed, a May 2007 survey by the Na- tional Academy of Sciences revealed no significant concerns about wind energy's aggressive growth but concluded that the industry lacks coordinated planning and recommended more oversight in all

development stages. The report found that wind power developments can be "surprisingly controversial" among neigh- bors. Evaluating wind projects is difficult because the benefits of renewable energy are regional or even global while the perceived negative effects are centered immediately around the development.

The NAS report raised concerns about dangers to birds and bats, but it found no evidence of significant impacts to those populations. The study also suggested that policymakers consider aesthetic, cul- tural, human health and environmental impacts before approving wind power projects.

With regulation a possibility at some point in the future, serious consideration must be given regarding who might someday bear this oversight responsibil- ity. The wind industry must determine which forum is best for fighting our battles or one will be selected for us. In Texas, for example, the task could fall to the state Railroad Commission, the state legislature or the state Public Utilities Commission.

The wind-energy industry must un- derstand the dynamics at work and take an active role in this debate. Sources of future regulation should be analyzed in advance for costs and benefits, and a

reasoned and unified decision should be promoted.

Even with wind farm developments operating in areas without regulatory oversight, it's smart for developers to voluntarily embrace consistent aesthetic provisions such as installing power lines underground when possible, keeping turbines a uniform matte white color without lettering or ad- vertisements, avoiding the use of guy wires and positioning turbines with reasonable setbacks.

Conflict Avoidance

Sound created by turbines is one of the primary objections to wind farm developments. Wind turbines create sound in two ways: a hum- ming mechanical sound caused by moving parts within the turbine and an aerodynamic whooshing noise caused by wind passing over the blade airfoils. Aerodynamic sound rises with blade speed, but natural wind noise also increases in windier conditions. Mechanical noise has plummeted with modern design advances, and aerodynamic noise has also dropped because the larger blades on modern turbines operate at slower rotational speeds.

The difference between benign sound and noise lies squarely be- tween the ears of the individual listen- er. Noise control becomes an issue for communities when commercial or residential development moves into new areas. The Environmental Protection Agency recognizes noise

pollution as a serious health issue respon- sible for problems ranging from general stress to hearing loss.

But there's no reason why wind tur- bines can't be good neighbors. Properly maintained, modern turbines are quiet and operate well below established federal and international noise threshold guide- lines. With proper project planning, wind farm developers can ensure that noise complaints are not a problem.

Such planning starts with a prop- erly-written turbine purchase agreement, which should include a guarantee requir- ing that a turbine's sound output not exceed a predetermined "sound power

level." A turbine's sound power level is a measurement of the total amount of sound created by that model, calculated at its source. To determine a particular turbine model's sound power level, all major turbine manufacturers conduct

rigorous sound tests of their products using an internationally accepted indus- try standard wind turbine noise testing protocol promulgated by the International Electrotechnical Commission.

Purchase agreements should contain provisions for performing sound-level verification tests with a stipulation that the manufacturer is responsible for correcting problems if sound-level tests reveal that a turbine is operating above the specified sound power level threshold.

Acoustic engineers can use each tur- bine model's predicted sound power level to model or forecast the sound impact of a proposed turbine project on neighbor-

ing properties. The science of sound propagation teaches us that each time the distance from an object is doubled, the decibel level of the sound created by that object falls by 6 dB. Applying this formula in conjunction with the given sound power level of a turbine model allows wind farm developers

to determine in advance the sound levels that operating turbines will create at given distances.

This analysis can be further refined by wind project planning software like WindFarmer or Wind- Pro, which consider the effects of additional sound propagation fac- tors like site-specific topography. Using the information obtained from these analytical tools, wind- farm developers can ensure their turbines are sited in locations where sound impacts on neighboring properties are minimal.

Although most jurisdictions lack uniform regulations governing the sound levels of turbine operations, there are several general and widely-recognized, noise guidelines that developers can look to when deciding where to place turbines. For instance, the EPA recommends outdoor noise levels below 55 dB to avoid any interference with daily activities and sleeping. Source: EPA: Information on Levels of Environmental Noise Requisite to Protect Public Health and Welfare with an Adequate Margin of Safety. Similarly, the World Health Orga- nization recommends that noise

sources remain below 55 dB outdoors and 45 dB indoors to prevent annoyance from any steady, continuous noise. Source: World Health Organization, Guidelines for Community Noise.

A turbine operating under 45 dB with a reasonable property setback is well below all recognized community noise thresholds.

Moreover, 45 dB is a level of sound that nearly all would consider to be "quiet." Sound in the 45 dB range is equivalent to a quiet ambient sound inside a home or the outdoor noise levels on a quiet cul- de-sac street. At a distance of 700 feet, a turbine operating at 45 dB produces no

more noise than a modern refrigerator. Courts have consistently ruled that, standing alone, any perceived negative visual impact that a development has on neighboring property owners cannot by law be part of a legal nuisance lawsuit. Jurors in the only known nuisance case involving a wind farm development agreed that homeowners just 1,800 feet from a turbine were not negatively

impacted by sound from the structure.

As wind farms proliferate, developers in different regions face different geo- graphical challenges. In wide-open rural areas, a healthy setback of at least a half mile will go a long way to preventing aesthetic complaints. Such a setback is a luxury that is not available in regions with more population density. In those cases, the Abilene jury ruled that turbines as 1,800 feet are not a nuisance. In any case, developers should take a lesson from golf pros and focus on having feet firmly in place—be fully prepared and educated about potential issues that might arise—before taking a swing.

Sound becomes even less of a concern with distance. Also, an annoying visual strobe effect caused by sunlight passing through the moving turbine blades—com- monly called "flicker"—can be nullified with advance planning. Setbacks also make potential flicker complaints even less likely.

When development plans do approach too closely to homes, purchasing close- lying properties at a market-plus rate offers a solution. These purchases can be written off as capital expenses instead of settlement payments. Buying close-in properties and then reselling them on the open market is a good idea because it resets expectations about the property's market value. Anyone buying property after turbines are installed will take that into consideration.

Leases can be structured to benefit nearby property owners who don't ac- tually own the land where turbines are being installed. A broader use of royalties like these is more likely to limit predict- able rifts between neighbors who benefit from leases and those who do not. The practice in effect creates a sound ease- ment for the development.

Simple communication can also head

off many of the community conflicts that surface around wind farm developments. Distrust and misinformation fester in the absence of reliable information. Critics can be neutralized by operating in a forthcoming way, even during the sensitive lease-procurement stage of a development. Confidentiality agreements often have a role in the leasing stage of a development, but they also can create animosity and should be used sparingly. When confidential lease agreements must be used, the likelihood of conflict can be diminished by preparing land- owners receiving wind farm royalties for the kinds of questions they may receive from neighbors. A response such as, `I'm forbidden from talking about my royal- ties' is likely to stir resentment, while a reply of `The royalties I receive are my personal business and I'd rather not talk

about them' may not.

A proactive development plan includes regular and well-publicized town hall meetings to give residents the opportu- nity to receive accurate information first- hand and to let their concerns be heard. A toll-free phone line that is answered by a live voice is also an effective way to address noise complaints caused by rou- tine maintenance issues once a wind far is in operation. During construction and after a development is on-line, workers should perform regular maintenance and inspection routes and promptly resolve the mechanical problems when they're discovered.

Working with Opposition

The concept of wind energy enjoys overwhelming public and political sup- port. Recent focus group surveys in Texas found 100 percent agreement that wind turbines are "a good idea." Other focus group findings included:

  • 90 percent believe wind-turbine devel- opments are not a public nuisance.
  • 85 percent said wind-energy develop- ment is economically beneficial.
  • 95 percent believe property owners should have wide discretion to use their land as they see fit as long as no laws are broken.

Tax incentives for wind-generated elec- tricity make the industry competitive, and future growth is guaranteed by ambitious

mandates to boost energy production from renewable sources. But the sector is not without critics, and wind farm developments often face opposition.

As the industry matures, critics are learning from earlier defeats. Their mes- sage and delivery are also becoming more sophisticated. More opposition should be expected, and failure to do so is a risk to your investment.

In South Texas, the historic King Ranch has led a very public fight against a planned coastal wind farm on a neighbor- ing ranch. Opponents in this case have deep pockets to create an organized and vocal opposition, as well as to place the issue squarely before state lawmakers.

The ranch backed a proposed bill in the 2007 Texas Legislature that would have required wind energy developers to go through a lengthy permitting process. Under the proposed legislation, the Texas Commission on Environmental Quality would issue development permits after considering an environmental-impact assessment addressing a development's impact on wildlife and people, including subjective consideration of whether tur- bines visually spoil neighbors' views. This time, the bill failed to gain support.

In news accounts, the debate is often shaped by semantics, with critics recast- ing wind farms as "turbine industrial zones.'' Bloggers nimbly (and often inac- curately) spin complicated information to bolster their arguments against wind power.

The intermittent nature of wind, the variable output of turbines and the complexities of the electrical grid create many opportunities to confuse the debate. An example from a recent internet post: When the wind kicks in, a gas fired plant has to go into spinning reserve to accommodate it, and to be instantly available to replace it when the wind dies. Wind energy has to have an equivalent amount of conventional back- up generation shadowing it at all times, or brownouts and blackouts would result when the wind died. The lights would go out. Contrary to popular myth, wind energy can never replace a single fossil fuel or nuclear plant.

According to the American Wind En- ergy Association, there is no need to back

up every megawatt of wind energy with an equal amount of fossil fuel. Since no power-generation source is 100 percent reliable, the electric grid has multiple sources, and wind power is just one component in the mix.

Many criticisms are tied to turbine technology from the 1980s, such as claims that turbine blades are responsible for numerous bird deaths. The recent National Academy of Sciences report on wind-powered energy raised broad concerns about dangers posed to birds and bats, but noted that modern turbine designs pose far less risk.

A 2002 study found that turbines are responsible for less than 1 percent of hu- man-caused bird deaths. Modern turbine designs are far less likely to be danger- ous to birds because rotors now move at slower speeds than earlier designs and new turbines don't have areas that allow birds to perch.

Defending Lawsuits

In December 2006, a jury in Abilene, Texas, was the first to hear nuisance claims against a wind farm in a trial set- ting. The lawsuit targeted FPL Energy's Horse Hollow Wind Energy Center, the largest wind farm development in the world with more than 400 turbines. In the complaint, a group of residents near the development charged that the turbines created a visual and auditory nuisance.

Following Texas law, the judge in the case threw out plaintiffs' claims that the turbines were a visual nuisance. Texas case law states: "The law will not declare a thing a nuisance because it is unpleasant to the eye, because all the rules of propri- ety and good taste have been violated in its construction nor because the property of another is rendered less valuable, nor because its existence is a constant source of irritation and annoyance to others.'' The ruling left jurors to question only whether sound generated by the turbines amounted to a nuisance.

Jurors in the trial heard two signifi- cantly different stories. Plaintiffs' testi- mony contradicted claims in the lawsuit that the turbines caused "substantial interference" with the use and enjoyment of their property. Several plaintiffs testi-

fied that they felt no vibrations from the turbines and that noise was either mini- mal or non-existent. The plaintiffs also brought in a stereo with large speakers to replay inside the courtroom what was described as an accurate reproduction of the ambient sound generated by the turbines.

Attorneys for FPL Energy argued that the plaintiffs' reproduction of the sound inside the courtroom was inaccurate and misleading. They considered taking the jury panel to the wind farm site to personally hear the sound created by the turbines but ultimately declined on the belief that a site visit would not be effec- tive and jurors would likely just hear what they subjectively wanted to hear. Instead, the defense presented acoustics experts who put the sound produced by turbines in perspective.

For the wind farm to prevail in trial, jurors had to grasp complex theories about the nature of sound, how sound waves are amplified and how they travel. To do this, attorneys simplified scientific terminology. For example, the term "Leq sound" was explained to the jury as "total sound," and "L90 sound" became "wind turbine sound." The jury also learned about how the addition of sounds from multiple sources affects the total decibel level and how sound diminishes with distance.

Sound testing revealed that readings taken a half-mile from the wind farm found a sound level of 30 dB while the turbines were in full operation during the day. A sound reading taken at night with the turbines turned off found that nighttime ambient noise from crickets and other natural nighttime noises was actually louder at 35 dB than the sound of the turbines themselves. In contrast, a sound reading taken inside the empty courtroom was revealed to be 32 dB.

One key defense strategy centered on what not to argue. By law, plaintiffs could not attack broad industry issues such as tax credits, lobbying and value as long as the defense avoided arguments along the lines of "wind energy represents good public policy." Obviously, with gasoline creeping up once again over $3 a gallon, this argument becomes very tempting. However, the fact of the matter is that

jurors already believe in the value of al- ternative sources of energy such as wind energy. Therefore, such arguments are not only unnecessary, they "open the door" to allow the other side to being attacking the jurors' pro-wind energy perceptions.

Jurors deliberated two days before finding that the wind farm had not cre- ated a nuisance for the plaintiffs, even for two plaintiffs who lived 1,800 feet from turbines. After the trial, jurors indicated that their deliberations had not been not easy, and they had relied heavily on ex- pert testimony and less on the plaintiffs' claims.

The Horse Hollow ruling was a closely watched and important first victory for the industry as a whole, but it certainly won't be the last court challenge.

A Milestone Case

When attorneys squared off in an Abilene, Texas, courtroom in December 2006 over the future of the world's largest wind farm development, the case riveted the U.S. wind energy industry. For the first time in domestic wind power's brief but dynamic history, a jury of citizens was asked to rule on key issues affecting the industry's future as a whole.

With more than $1 billion already invested in Texas wind-power develop- ments, Juno Beach, Fla.-based FPL Energy turned to attorney John "Trey" Cox of Lynn Tillotson & Pinker, LLP, to be lead counsel on the case.

The trial unfolded at a time when wind- energy expansion was raising concerns about whether turbines can coexist with residential development, and the Horse Hollow Wind Energy Center lawsuit was viewed by many as a test case for the young industry. Attorneys hashed out and simplified the science of noise propaga- tion and staked out parameters of the courtroom playing field that will likely extend to future cases.

After two weeks of testimony, jurors sided with FPL Energy's position that the turbines at Horse Hollow do not pose a nuisance, awarding the plaintiffs noth- ing. The jury's verdict was described as a milestone for the whole industry, which is on track to grow by more than 25 percent this year alone.

Blowin' in the Wind

Sure, there are plenty of reasons to block wind. But its sails are set free.

By Seymour Garte

T

he search for energy sources that are sustainable and that allow human beings to live well and prosper in a clean environment has been long and hard. The burning of fossil fuels, including oil and coal is known to pro- duce many forms of pollution including greenhouse gases that help to generate global warming. Nuclear energy had been touted at one time as a clean alternative to oil, as well as one without the political problems associated with importation of fuel from abroad. However Chernobyl and Three Mile Island (although vastly different in scope of disaster) convinced most people that nuclear energy was just

too dangerous.

A variety of alternative energy sources have been making strong gains in recent years. These include hydroelectric power, solar and wind energy. While none of these have yet come close to replacing any large fraction of the fossil fuel use in the United States, the recent growth in solar and especially wind energy has been dramatic and astonishing.

These are positive developments. Wind and solar energy are renewable, non-pol- luting and reliable (even thought the sun doesn't always shine and the wind doesn't always blow). It is not likely that wind and solar will replace coal, gas and oil as the main energy source in the near future, or perhaps ever. But every wind turbine that comes on line reduces the amount of fossil fuel that would otherwise be burned, and reduces the emission of carbon dioxide, the major greenhouse gas.

In a seemingly odd turn of events, some environmentalists have begun

throwing some cold water on wind en- ergy as a viable large scale enterprise. The death of birds, especially raptors, caused by collisions with wind turbines, is one of the initially unseen and unex- pected drawbacks of wind energy that has been raised by some within the envi- ronmental movement. In addition, it has been pointed out that wind turbines are large and ugly, and no one wants to have a wind farm within sight of their home. Plans for a large wind farm off the coast of Nantucket have generated some fierce opposition from residents and others. Of course, similar problems can be found for other forms of energy. Dams, required for generation of hydroelectric power, are notorious destroyers of ecosystems, and of course the terrible destruction to land caused by coal mining is well known.

There appears to be a movement within the pro-sustainability movement to restrict wind energy to small, less damag- ing sizes, like backyard individual units, and to stop the encouragement of large industrial scale wind farms with tens or hundreds of turbines.

About the Author

Seymour Garte, Ph.D., is a professor of environmental and occupational health at the University of Pittsburgh School of Public Health and a working scientist with over 30 years of experience in the field. He is the author of the upcoming book, Where We Stand: A Surprising Look at the Real State of Our Planet (AMACOM Books). His articles have appeared in Nature and countless other scientific publications. He has been funded in his research by the National Institute of Environmental Health Science, the National Cancer Institute, and the American Cancer Society.

While this idea might save hundreds of birds, and reduce the problem of

landscape and seascape eyesores, it also would do very little to improve either our energy or pollution problems on a mea- surable scale. An alternative approach is to apply the concept of environmental impact to the issue. Environmental im- pact, an idea that originated with early US environmental law, can be applied to alternative energy systems as well as to new factories and housing units. That is in fact exactly what has been done with the siting of hydroelectric dams. Wind farms, whether off shore or on land, need to be sited in a way that causes the least harm and discomfort to humans and other creatures. Such decisions require (as they always do) input from many sources, including the residents most likely to be affected.

It might also be useful to look into the death of birds by wind energy a bit more closely. First it should be stated that raptors such as bald eagles have made a tremendous comeback from the point of extinction in the past decades, largely as a result of the efforts of conservationists and the provisions of the Endangered Species Act. When the law was passed in 1973 there were an estimated 500

bald eagles in the US, a number so low, that extinction seemed likely. In 2005, the estimate was around 8000.

The question now is, are we about to lose our eagles (and many other species of birds) again, because of wind power. The answer appears to be no. The worst cases of bird deaths due to wind towers was at Altamont in California, but the number of bird deaths there was a tiny fraction of the number of bird deaths from other causes, such as collisions with build- ings, automobiles, electrical power lines, and encounters with cats. In fact it has been estimated that about 0.01 percent of all bird collision fatalities were caused by hitting wind turbines or towers. It is also clear that the Altamont facility was badly sited and that there are lessons to be learned from this incident. It appears that between 100 and 1000 raptors have died per year at the Altamont wind farm. This might be considered to be unaccept- able by some, and fortunately has not been repeated at other wind facilities that were better sited. Even so, compare this figure with estimates of over 100 million bird deaths per year (raptors being a small fraction, but still much more than at Altamont) from contact with power

lines, and similar very high numbers from building and other collisions.

In order to continue to move forward in developing safe, clean and renewable energy sources, all aspects of new tech- nologies must be considered and tested. High rates of raptor deaths such as those at Altamont may not be acceptable, and careful siting, as well as other means of protecting birds from a new source of human caused mortality should be sought and implemented. But arguments that wind energy should be scrapped, or severely curtailed, and that wind energy is not consistent with a sustainable environ- mental future seem strange when coming from environmentalists.

One might legitimately ask what sorts of motivations (other than the stated desire to protect birds or preserve nice views) are driving these new opponents of wind power. The answer is not clear, but an argument could be made from the fact that other technological solutions to environmental problems, such as the use of genetically modified crops to replace chemical pesticides, or the use of corn ethanol to replace gasoline, have also become environmental black sheep, once the technology came under the control of

large profitable corporations. The same thing could now be happening to wind energy. Perhaps solar energy is next on the list.

How do opponents of wind energy deal with the issue of reducing pollu- tion from fossil fuel use and greenhouse gases? Many suggest that the answer lies not in the application of new technol- ogy, but in a reduction of total energy consumption. The argument is that if we drove less, used less, threw away less, and lived different lives, then we wouldn't need alternative energy like wind power. The reduction of energy consumption is a very old argument dating back many decades, and it represents the definitive world view of one section of modern conservationist environmentalists. This argument has been labeled elitist, unre- alistic and regressive, and its potential for making real progress in meeting sustain- able energy needs in our growing world economy is dubious at best.

Wind energy is an important compo- nent of our sustainable future, and the problems associated with this still-new technology can and will be solved. This resolution has been the record of the past, and it is likely to be true in the future.

INDUSTRY NEWS: WIND

Babcock & Brown to Buy Bluewater Wind. Babcock & The installation of offshore wind power plants in the United Brown is buying Bluewater Wind, the developer of a proposed States is becoming less and less a question of "if" and more and 150-turbine, 450MW wind farm to be located 11 miles off more a question of "when and where?" as both New Jersey and the coast of Delaware. The acquisition by Babcock & Brown Texas are poised to install wind turbines off their coasts. In New addresses the last major hurdle in the effort to finance and Jersey, the Board of Public Utilities (BPU) approved a $19 mil- build Delaware Offshore Wind Park—potentially the first major lion solicitation on October 4th to support the development of a offshore wind park in the U.S.—which is how the $1.6 billion pilot offshore wind plant within 20 miles of the New Jersey coast. project would be funded. The BPU will help fund the needed studies and applications for Denmark's Vestas Group announced an order for 65 wind the facility, which could be located somewhere along a 72-mile turbines totaling 107 MW of the V82-1.65 MW from the stretch of coastline in southern New Jersey, running from Seaside Wind Energy unit of John Deere Credit, of Des Moines, Iowa, Park to Stone Harbor. The BPU hopes to spur the construction the financial services division of Deere & Company. Deere of as much as 350 megawatts of offshore wind power. Proposals

& Company, which built its reputation and business on farm are due by January 18th, 2008, and the grant is expected to be machinery and tractors, has increasingly been using its strong awarded by March 2008. See the BPU press release (PDF 30 reputation among farmers in the U.S. to bolster its wind KB) and the full solicitation (PDF 142 KB).

power business that targets projects in the American Mid-West.

Vestas will supply and commission the wind turbines, and the Conservationists Lose Wind Farm Ruling. A divided order also includes a five-year maintenance and service agree- Public Utility Commission shut the door Wednesday on con- ment. Shipment of the turbines will commence in December servationists' efforts to air concerns about the effect of planned 2006 and will continue until early 2007 with all turbines being Gulf Coast wind farms on migratory birds. The groups sought to commissioned before year-end 2007. intervene in an application for a 21-mile transmission line that would run through the sparsely populated Kenedy Ranch. It is

Texas Awards First Competitive Offshore Wind Leas- envisioned to bring power from hundreds of wind turbines that

es. The Texas General Land Office on October 2 awarded the eventually may be turning along the Gulf Coast.

first four competitively bid leases for offshore wind power in the The Coastal Habitat Alliance, a coalition that includes area United States. All the leases were awarded to Louisiana-based Audubon Societies and other groups working to preserve the

Wind Energy Systems Technology (W.E.S.T., LLC) and allow coast, along with the King Ranch and Armstrong Ranch, said the construction to begin immediately on meteorological testing east-west power lines would cross a major north-south migratory towers on each of the four tracts. flyway.

Thorium-Based Reactor Fuel

It could solve global proliferation concerns.

A

ccording to the 2006 Global Fissile Material Report, it would only take approximately eight

kilograms of weapons grade plutonium to build a nuclear bomb capable of de- stroying a major city in the United States. President Bush addressed this concern in his 2006 National Security Strategy, when he declared, "The proliferation of nuclear weapons poses the greatest threat to our national security. Nuclear weapons are unique in their capacity to inflict instant loss of life on a massive scale. For this reason, nuclear weapons hold special appeal to rogue states and terrorists. The best way to block aspiring nuclear states or nuclear terrorists is to deny them access to the essential ingredi- ent of fissile material." Not only are fissile materials from present and future nuclear reactors a potential threat, but so is exist- ing Russian weapons-grade plutonium left over from the Cold War.

The Carnegie Endowment for In- ternational Peace stated in 2004 that Russia had over 130 tons of weapons useable plutonium. Additionally, the United States General Accounting Office reported in 2004 that Russia continues to operate three nuclear reactors that produce an additional 1.3 metric tons of weapons-grade plutonium annually. Rus- sia stores a majority of its weapons-grade plutonium at two sites: Zheleznogorsk and Seversk. While these sites are secure, they are a half-century old, and fail to provide the level of security seen in the modern Russian Mayak Fissile Material Storage Facility. The protection, as well as disposal of these large stockpiles is a

major U.S. concern.

With this in mind, in September 2000, the United States and Russia signed an agreement on the management and disposition of weapons-grade plutonium no longer required for defense purposes. Under this agreement, both countries are to dispose of 34 metric tons of excess weapons-grade plutonium beginning in 2007 at a minimum rate of two metric tons per year using a mixed-oxide (MOX) fuel technology. Over six years have past and billions of dollars spent since the United States and Russia signed this agreement and no real steps have occurred to begin eliminating this pluto- nium.

Adding to the proliferation concern, developing countries like China and India continue growing economically, creating an increased demand for energy worldwide. With the global demand for energy on the rise, many governments (like China and India) are increasingly considering nuclear power as an alterna- tive to burning fossil fuels. Unlike fossil fuels, there are certain environmental and cost benefits to using nuclear energy;

however, the most serious concern about nuclear energy is the potential use of fis- sile material, created during the nuclear fuel cycle, for nuclear weapons.

Proliferation Challenge

Fossil fuels are the primary source of world energy consumption today, ac- counting for nearly 80% of the worlds energy supply. According to the 2006 International Energy Outlook (IEO), world energy consumption projects an increase of 71% from 2003 to 2030. A large portion of this increase occurs in developing countries such as China and India due to rising populations, ex- panding economies, and a quest for an improved quality of life.

About the Author

Colonel Jeff Koch is a command pilot who has served in the United States Air Force for 19 years. His last assignment was the Commander of the 557th Flying Training Squadron at the United States Air Force Academy. His has flown the A/OA-10 in peacetime and combat and was an instructor pilot in the T-38, T-41, and DA-20. He also worked on the Airstaff in A8 as the JSF Force Programmer and the Engine Room developing the POM and served as an Air Force Legislative Fellow for Congressman Jim Gibbons. He has an Undergradu- ate degree from Troy State University and a Masters degree from Embry-Riddle Aeronautical University.

Currently, China and India combine for 70 percent of the world's coal consump- tion, using this fossil fuel to produce elec- tricity. Based on projected consumption rates, both China and India will deplete their supply of coal by the end of the century. Therefore, alternate sources of electricity must be considered and nuclear energy is one way to provide long-term bulk electricity.

According to the International Atomic Energy Agency (IAEA), nuclear power currently generates 16% of the world's electricity. The IAEA reports that 22 of the last 31 nuclear power plants con- nected to the world's energy grid were built in Asia, with China having nine and India having 14. In addition, 18 of the 27 nuclear power plants currently under construction are in Asia, with China hav- ing two and India having eight.

However, only two percent of China's electricity and three percent of India's electricity is currently supplied by nuclear power. With a large increased demand for electricity forecasted, nuclear power is a viable option. As more nuclear reactors come on-line, the proliferation of the plutonium created during the nuclear fuel cycle becomes a greater challenge.

Today, all 440 nuclear power reac- tors worldwide produce plutonium and every year the amount of worldwide reactor-grade plutonium increases by approximately 70 tons. In 2004, over 1,700 tons of reactor-grade plutonium existed worldwide and it would take only a few kilograms of this plutonium to make a nuclear weapon. Adequately securing and monitoring this material is a non- proliferation challenge.

The President of Iran, Mahmud Ahma- dinezhad, stated that Iran's nuclear pro- gram is a peaceful program and not aimed at acquiring nuclear weapons, while at the same time stating Israel should be wiped off the face of the map. Clearly, nuclear weapons could accomplish his goal. Un- der the Non-Proliferation Treaty (NPT), Iran can pursue a peaceful nuclear energy program and while some of its facilities have legitimate civilian purposes, other facilities do not appear to have peaceful purposes.

The Natanz enrichment facility, for example, is completely underground, hardened, and shielded from an air at- tack. This facility could be used to enrich uranium high enough to make a nuclear device. According to Ashton Carter, former Assistant Secretary of Defense for International Security Policy, once a state enriches uranium to weapons-grade levels or reprocesses spent fuel to recover plutonium, the resulting fissile material remains vulnerable to terrorist acquisition

for thousands of years.

If Iran's nuclear aspirations were com- pletely peaceful, they could purchase low- enriched uranium fuel on the international market or have an open declared facility and allow IAEA inspectors to monitor operations inside, as required by the NPT. North Korea has already tested a nuclear device and as an extremely poor nation, they could sell fissile materials from its reactors to other nations or non-state actors on the black market.

Russia's Existing Plutonium

At the end of the Cold War, the United States and Russia faced massive surpluses of weapons-grade plutonium. In September 2000, President Clinton and President Putin signed an agreement called The United States and Rus- sian Plutonium Disposition Agree- ment. The Joint U.S.-Russian Working Group on Cost Analysis and Economics in Plutonium Disposition (for future refer- ence it is referred to as the Joint Working Group) reported that this agreement calls for both countries to dispose of 34 metric tons of excess weapons-grade plutonium by irradiating it as fuel in nuclear reac- tors.

The Joint Working Group analysis goes on to say the disposition rate should be at least two metric tons annually and Rus- sia will burn this plutonium in one of five VVER-1000 light water reactors using MOX fuel technology. Unfortunately, the plutonium disposition program has not actually eliminated any plutonium and using MOX technology for this program, no weapons-grade plutonium disposition is likely.

MOX Fuel

MOX fuel is a combination of uranium and reactor-grade plutonium and is com- mon in several countries; however, fab- ricating MOX fuel from weapons-grade plutonium has yet to occur. Additionally, no large-scale MOX production facilities exist in Russia that can store, reprocess plutonium, and fabricate MOX fuel. The lack of a MOX fuel fabrication facility as well as the need to modify existing Rus- sian nuclear reactors to enable them to burn MOX fuel will cost billions of dollars

to build and take years to complete. While the U.S. Government has se-

cured $800 million from G8 partners to construct a Russian MOX facility, the Russians are now demanding the G8 fund the entire program. At this pace, it could be several decades before all 34 tons, or more, of Russian weapons-grade pluto- nium is destroyed. Though things appear to be moving slowly, there is some excit- ing work taking place at the Kurchatov Institute in Moscow with Thorium Power, Ltd using the element thorium in nuclear fuel.

What is thorium?

Thorium is a naturally occurring, slightly radioactive metal discovered in 1828 by the Swedish chemist Jons Jakob Berzelius. Thorium is located in several countries with Australia and India having the largest reserves at 300,000 tons and 290,000 tons respectively. The Bellona Foundation reports that part of thorium's appeal is that unlike uranium, which is expected to last another 100 years at current usage rates, thorium supplies are expected to last for the next 500-600 years. In the 1960s, the U.S. investigated using thorium, but at that time, it did not achieve the level of efficiency scientists re- quired so they gravitated towards uranium fuel. In today's post 9/11 environment, concerns about worldwide increases in energy requirements and nuclear prolif- eration have attracted both policymakers and scientists back to thorium.

Thorium sits on the periodic table two spots to the left, making it lighter than uranium; however, thorium and uranium do share some characteristics. According to Reza Hashemi-Nezhad, a nuclear phys- icist studying the thorium fuel cycle, the most important characteristic they share is that both elements can absorb neutrons and transmute into fissile elements. This similarity is what makes thorium a viable alternative fuel for nuclear reactors. He goes on to say there are some unique differences between thorium and uranium that potentially make thorium a superior fuel.

Unlike U-235 and Pu-239, thorium (Th-232) is not fissile, so no matter how much thorium you pack together, it will not start splitting atoms and begin a chain

Figure 1 is from the American Scientist September/October 2003 article titled, Thorium Fuel for Nuclear Energy and clearly illustrates the dif- ference between uranium and thorium once inside a nuclear reactor.

U-233. The main challenge with thorium is thorium requires a source of neutrons to jump-start the reaction unlike uranium or plutonium that produce power on their own.

Once started, thorium cannot sustain a nuclear reaction, it does not produce enough neutrons when the U-233 is split to keep the reaction self-sustaining and eventually the reaction just fizzles out. Until now, the challenge with tho- rium has been how to keep the nuclear reaction going. A McLean, VA based company, Thorium Power Ltd., has a patented nuclear fuel technology that has proven itself capable of sustaining a nuclear reaction during some extremely successful initial testing at the Kurchatov Institute in Moscow.

Thorium Power and Kurchatov

Thorium Power, Ltd. is an up-and- coming U.S. company that has patented a nuclear fuel technology using the ele- ment thorium in addition to uranium in reactor fuel. The idea of recycling Rus- sian plutonium into electricity came from the late Edward Teller, the father of the hydrogen bomb. In 1983, Teller called his former student, Dr. Alvin Radkowsky,

reaction. This is because thorium cannot

undergo nuclear fission by itself and can- not sustain a nuclear chain reaction once one starts.

There are several reasons that make thorium more suitable as a nuclear fuel than uranium. Thorium is fertile, which means its nuclear isotopes are transmuted by neutron absorption and radioactive decay into fissile materials. When Th-232 absorbs a neutron, it is transmuted into U-233, which is fissile, just like U-235, making it suitable as nuclear fuel. Since thorium is lighter than uranium, it doesn't produce as many heavy and highly radioactive by-products and the absence of U-238 in the process means that no plutonium is bred in the reactor.

Consequently, the waste produced from a thorium-based fuel is much less radioactive than conventional uranium- based fuel. Currently, the waste from a reactor using uranium-based fuel stays toxic for ten thousand years. A reactor using a thorium-based fuel generates a

fraction of the waste and has a half-life

of only 500 years. Not only is there less waste generated, the waste generated only needs to be stored for five percent of the time compared to current nuclear waste. This shorter timeframe signifi- cantly reduces the technical challenges that currently face engineers in attempt- ing to secure highly radioactive material for over 10,000 years.

Conventional reactor fuel contains both a fissionable isotope, U-235 and a non-fissionable isotope, U-238. As a neutron collides with a U-235 atom, it splits, releasing energy and giving off heat. The fissioning of a U-235 atom releases two or three more neutrons. These neutrons can cause another U-235 atom to split or they can be absorbed by U-238, causing it to change into Pu-239, which itself being fissionable helps to power the reactor.

A thorium-based fuel operates in much the same fashion, except that instead of breeding plutonium from U-238, it breeds a fissionable isotope of uranium,

the first chief scientist of the US Naval Reactors program under Admiral HG Rickover, and asked him to design a safe way to destroy plutonium warheads. Radkowsky was convinced if the nuclear industry was to flourish; it needed a pro- liferation proof path. Thorium provides that path.

Radkowsky calculated that by wrap- ping a plutonium core in a blanket of thorium, uranium, and small amounts of other metals, he could create a controlled nuclear burn that would eliminate 90% of the plutonium at a fraction of the cost of other methods. In 1992, Tho- rium Power formed to use the nuclear fuel design developed by Radkowsky to eliminate existing plutonium stockpiles. In the mid-1990s, Thorium Power began working with the Kurchatov Institute, Russia's leading research and develop- ment institution in nuclear energy, on a fuel design for Russian VVER-1000 reac- tors that could eliminate weapons-grade plutonium while producing electricity.

Today, there are hundreds of Rus-

sian nuclear scientists and engineers working at the Kurchatov Institute on developing, testing, and demonstrating how to burn weapons-grade plutonium in VVER-1000 reactors using Thorium Power's fuel design. This fuel design has undergone ampoule irradiation test- ing for three years in the IR-8 research reactor at Kurchatov. Full-scale, lead test assemblies expect to begin testing in a VVER-1000 reactor by the first quarter of 2008. With the results from Kurchatov showing extreme promise, the U.S. Congress began to see thorium as a viable means to dispose of existing Russian weapons-grade plutonium.

After the September 2000 agreement, as the MOX program began having prob- lems, Congress began looking at the work accomplished at the Kurchatov Institute with thorium fuel. Several members of Congress, from both political parties, vis- ited the Kurchatov Institute to see the tho- rium project at work in the IR-8 research reactor. Congress was so impressed that in 2003 it authorized and appropriated

$4 million to test and evaluate the test results to confirm thorium-based fuel's plutonium disposition qualities in Russian VVER–1000 reactors.

In April 2005, the Department of Energy (DOE) hired the Westinghouse Electric Company, a worldwide expert in nuclear fuels, to validate the thorium test results from Kurchatov. The resulting Westinghouse report stated, "From the review that was performed, it appears that the technology is well founded and has a good prospect for success. True economics of this plutonium disposi- tion approach compared to the MOX approach are likely to be favorable if existing facilities can be used." Regis Metzie, chief technology officer at West- inghouse estimates the cost of building a thorium fuel manufacturing plant to be approximately $100 million verses over a billion dollars for a MOX fuel fabrication facility.

Thorium versus MOX

Russia is currently indicating that MOX fuel will be part of its weapons-grade plu- tonium disposition plan. In addition, the National Nuclear Security Administration (NNSA) has indicated a desire to move

forward with the MOX fuel program at the Savannah River Site to dispose of

U.S. weapons-grade plutonium. As a matter of national security, it becomes vital to compare the qualities of thorium and MOX fuels. This comparison will be between the Thorium Power Ltd., Rad- kowsky Thorium Plutonium Incinerator (RTPI) technology using the data gathered at the IR-8 research reactor and existing MOX technology.

One immediate advantage of using thorium fuel over MOX is that thorium- spent fuel contains no weapons-useable plutonium components. Seth Grae, CEO of Thorium Power states, "The plutonium in our fuel can't be reprocessed for any energy or weapons. Thorium fuel pro- duces over 80 percent less plutonium than MOX, and the small amount of plutonium produced is denatured and diluted with other isotopes making it unsuitable for use in weapons or for energy use." Accord- ing to Regis Matzie, thorium can destroy plutonium about three times faster at half to a third of the cost of MOX.

Using thorium fuel in VVER-1000 reactors generates cost savings in three areas. First, the fabrication of the thorium seed-and-blanket can be accomplished at existing, but modified, Russian fuel fabrication facilities. The estimated cost to modify these facilities is approximately

$100 million, much less than the $1.6 billion cost to build a MOX fuel fabrica- tion facility. Second, due to thorium's substantially higher rate of plutonium dis- position, its operating costs are reduced by a factor of three. Finally, there are no substantial costs involved in modifying ex- isting VVER-1000 reactors, according to Valery Rahkov, who heads up the Russian side of the thorium project, whereas with MOX, each VVER-1000 reactor will have to undergo a $200 million upgrade.

Other additional advantages of using thorium fuel are: First, with the blanket part of the fuel assembly staying in the reactor for nine years (three times lon- ger than the seed), the amount of spent fuel is reduced by 50 percent in volume and 70 percent in weight compared to MOX. Second, the radio-toxicity of spent thorium fuel is lower than MOX. Finally, the blanket fuel, which is discharged ev- ery nine years, contains approximately

693 kg of U-233, less than half of the amount of fissile material produced by reactors using standard uranium fuel. Some nuclear experts express concerns over this amount of U-233, stating it is a major proliferation concern; however, the fissile U-233 that is created when thorium absorbs a neutron is burned in situ through fission in the reactor core. Mixed with other uranium isotopes, the remaining U-233 becomes unusable for a nuclear weapon.

U.S. and Thorium Fuels

Once the President signed the 2004 federal budget, appropriating $4 million for the testing and evaluation of thorium at the Kurchatov Institute, some members of Congress accused the DOE of delaying the implementation of the program and misrepresenting the results.

Congressional language directed the DOE to continue the thorium-based fuel cycle program at Kurchatov with Thorium Power being the only company involved in thorium testing there. Three weeks after the President signed the budget, CM Jim Gibbons, one of many thorium supporters on Capitol Hill, sent a letter to Secretary of Energy Spencer Abraham concerned that the NNSA Of- fice of Fissile Materials Disposition (MD) was attempting to delay funding the thorium fuel project.

Through Congressional pressure from CM Gibbons, CM Curt Weldon, and oth- er members of the House of Representa- tives and U.S. Senate in both parties, the DOE entered into a government contract with the Kurchatov Institute. This directly led to the start of demonstration work on Thorium Power's RTPI technology in Russia. The DOE hired Westinghouse Electric Company to evaluate the results produced at Kurchatov. Westinghouse has designed 80 percent of the reactors in the U.S. and nearly half of the reactors in the world. In addition to construc- tion, Westinghouse makes over a third of the nuclear fuel worldwide. Without a doubt, they are qualified to make this assessment and are independent by not being involved in the plutonium disposi- tion program in any way. Westinghouse published a report that was favorable towards the RTPI.

A month after the Westinghouse published the report, several members of Congress sent a letter to Paul Long- sworth, NNSA Deputy Director, stating that Congress was encouraged by the Westinghouse evaluation and felt it is now prudent to proceed with the lead test as- sembly phase, as recommended by West- inghouse. Deputy Director Longsworth responded in June 2005 stating, "For almost a year we have worked closely with the Kurchatov Institute to evaluate the feasibility of using thorium fuel for plutonium disposition in Russia. Our as- sessment has shown that this technology can't be successfully implemented in the near future."

Almost seven years have passed since both countries signed the UnitedStates and Russian Plutonium Disposition Agreement , and not one gram of Russian excess weapons-grade plutonium has been destroyed despite bil- lions of dollars spent by the government. Yet the NNSA refuses to take an honest look at emerging technologies, and to select one or several of those technolo- gies based on the facts that are in our nation's best interest.

Conclusion

President Bush declared in our cur- rent national security strategy, "The use of nuclear weapons poses the greatest threat to the national security of our nation. The best way to block aspiring nuclear states or nuclear terrorists is to deny them access to the essential ingredi- ent of fissile material."

There is a great deal of fissile material in the world today. Currently, there are 440 nuclear reactors worldwide and every year their uranium-based fuel creates additional plutonium. The agreement the U.S. and Russia signed almost seven years ago has not yet destroy one gram of U.S. or Russian weapons-grade pluto- nium, nor does it seem likely in the next decade any plutonium will be destroyed using MOX.

Meanwhile some exciting work is going on at the Kurchatov Institute using a tho- rium-based fuel. This technology could be the jump-start needed to begin disposing weapons-grade plutonium. Westinghouse has stated that the thorium technology is

well founded and has a high probability of success. Additionally, they state that thorium is preferable to MOX if Russia uses their existing facilities.

With this in mind, I propose the follow- ing four recommendations.

  • First, fully fund the Thorium Powers Radkowsky Thorium Plutonium Incinera- tor technology in Russia. This technol- ogy appears to be the quickest, safest and most efficient means to dispose of Russia's 130 tons of weapons-grade plu- tonium. Eliminating this material greatly reduces the risk of terrorists gaining ac- cess to fissile material.
  • Second, as part of the disposition plan for U.S. weapons-grade plutonium, the DOE should invest in a thorium-based nuclear fuel technology. This investment should include gathering data on the costs to develop thorium fuel fabrication plants, on the required reactor modifications to existing U.S. nuclear reactors to accept a thorium-based fuel, and on a timeline for destruction of our weapons-grade plutonium using thorium. There must be a fair evaluation between thorium and MOX technology. Once all the data is gathered, an honest debate can occur on the best way to disposing of U.S. weapons-grade plutonium.
  • Third, update our countries national security strategy to include designing a new (non-proliferative) nuclear fuel for the emerging worldwide energy crunch. The

U.S. must take the lead in developing a new nuclear fuel with the vision being to develop, test, and deploy a nuclear fuel capable of powering a nuclear power plant without providing plutonium as a by-product. A nuclear fuel design that does not create plutonium as a by-product has global implications. As more coun- tries move towards nuclear power as a means of electricity, a non-proliferative nuclear fuel will ease the world's security concerns. With a non-proliferative fuel, countries such as Iran or North Korea will have the means to provide electricity for their people while keeping their nuclear aspirations completely peaceful.

  • Finally, as a nation, a debate needs to occur on the future of the U.S. nuclear energy program for electricity. Yucca Mountain nuclear repository, originally scheduled to open in 1998 has been

pushed back until 2017 due to funding shortfalls, lawsuits, and scientific con- troversies. In 2002, the DOE estimated it would cost $58 billion to build and operate Yucca Mountain for the next 100 years. Now, the DOE is reworking its projected cost and it appears the cost will increase to over $70 billion for the next 100 years. As previously mentioned, reactor-grade plutonium remains radio- active for 10,000 years and there are no estimates on the resources required to maintain Yucca Mountain over the next ten millenniums. Before the U.S. continues to invest billions of dollars in a project that may never work, they must consider other disposal alternatives.

There are hundreds of tons of reactor- grade plutonium currently in temporary storage at 65 different U.S. power plants. Reprocessing spent fuel plutonium with a thorium-based fuel could dispose a majority of this nation's excess reactor- grade plutonium. If the nation looks at using thorium as an option for disposi- tion of U.S. weapons-grade plutonium, the additional cost to study disposing of

U.S. reactor-grade plutonium would be minimal.

The average age of the 103 U.S. com- mercial nuclear reactors is 24 years and these reactors are licensed to operate 40 years with an option to renew for an additional 20 years. The nuclear power industry is the second largest provider of electricity in this country, responsible for 20 percent of the total electricity usage. If this country continues to use nuclear power, new reactors must be designed and built. If there is a nuclear fuel that is free of fissile material in its spent fuel, that technology should be incorporated into the design of the next generation of nuclear reactors.

With national security concerns over fissile material getting into the hands of those who want to do our country harm, the United States must develop a long-term strategy to dispose of fissile materials. The worldwide abundance of thorium compared to uranium, the results at Kurchatov, and the positive outlook from nuclear engineers around the world have shown that thorium can solve the United States global nuclear proliferation concerns.

Sustainable Solar

Making greater use of solar energy through viable, sustainable design.

By Luis Roges

W

hat happens when you flip on a light switch? Like all of us, you expect a light to come on

somewhere in the room. Sounds simple, doesn't it? But few of us think about it unless nothing happens.

In the United States, electrical power is used by just about everyone alive today. Electrical utilities have expanded their networks to cover a huge amount of needs — from the simple process of turning on a light bulb to powering complex manufacturing processes. The power distributed through this apparently seamless and quiet process originates at generating stations that are neither quiet nor simple. Electricity provides the most economical way to transport energy over long distances and to remote locations where it has brought progress and a better quality of life to every community it has reached.

Electrical-generating facilities are in- stallations — plants — that produce elec- trical power from other forms or sources of power, the most common being fossil fuel (oil, coal and natural gas), nuclear power, dammed rivers or other bodies of water, geothermal, solar thermal, wind (eolian) and chemical energy (from fuel cells and batteries).

Fuel Selections

Fossil fuels are being consumed faster than they regenerate because their reserves are finite. Additionally, the generating process from fossil fuels (the kind most commonly used in the United States and throughout the world) produces emissions that contribute to

the greenhouse effect and to global warming. For years, engineers and scientists have been seeking alternate sources of power to generate electricity in a quest for sustainable, natural and clean fuels.

Hydraulic power is the conversion of the potential energy from falling water through a hydroelectric facility into elec- trical power. These widely-used systems provide a clean and fairly inexpensive source of energy, but they are predeter- mined by geographical conditions so are not universally available.

Wind energy continues to be devel- oped, providing another clean source of fuel, but it is limited to areas where there are high winds, usually distant from urban developments. Wind farms require large areas for the installation of the turbines, and many communities oppose their use because of aesthetics. One example, which has been delayed for years, is the Cape Wind project in Nantucket Sound, RI, that will have more than 130 wind turbines.

About the Author

Luis Roges is a vice president at Meridian Design Associates, Architects, P.C., (www.meridiandesign.com), a global architectural firm dedicated to green issues and sustainable commercial and residential designs.

At its inception, nuclear power brought great hope to the engineering community that it had found "the solution" to the ever-growing electrical power needs of the world. Beginning in the 1960s here and in Europe, many nuclear plants were designed and built. Later, in the 1980s,

Asia began to build nuclear plants to meet its incipient power needs. However, this "great solution" brought a new problem: nuclear waste.

We in the AEC community are gener- ally aware of the great problem that waste disposal presents, the NIMBY syndrome and other societal concerns about nuclear waste management and disposal. When the issue of radioactivity is added to the issue of waste, the problem becomes almost insurmountable. The U.S. Nuclear Regulatory Commission 2006-2007 Information Digest reports that in 2004, ten percent of the U.S. electrical-power- generating capability was from nuclear energy. The growth of nuclear power has been impaired by the enormously difficult social and political problem that nuclear waste represents — a problem that, to date, remains unsustainable and unresolved.

Harnessing the Sun.

Without the sun, life as we understand it on our planet would not be possible. We all take for granted that there will be a sunrise the next day, and it has been so since life first appeared on Earth. What if we were to harness and harvest the sun's almost-infinite source of clean, sustainable and perceivably inexpensive power? Architects, as form- -givers

and designers, bear great responsibility

—even, I would venture, bear the duty

—to integrate design, sustainability, power availability/consumption and con- servation together in a continuum toward a clean and efficient way of life. Sunlight and its power renew life every day. This basic concept has driven my approach to design since day one: We must use it. Solar power offers feasible solutions (at the residential level) to both heating water (SWH) and to local generation of electrical power.

Solar energy offers an alternative to carbon-based energy sources by using photovoltaic (PV) cells to power homes

— the single, most valuable opportunity for sustainable design. Today, there are PV cell units of up to nearly 200 watts per panel. And this concept is not limited to residential use only. Boulder City, Colorado is the site of the most recent, large-scale, renewable-power-source project known as Nevada Solar One. This 64-megawatt, solar-power plant is a 300-acre facility; and its most remark- able feature is the influence it will have on other power utilities across the nation's Sun Belt.

Using solar power, PV cells would become our rooftops and parts of our windows on buildings that are designed seriously to take on solar-power gen- eration. Environmentally-conscious architects will integrate PV use through appropriate building shapes and orienta- tions, including the proper treatment of areas of south glass.

we anticipate that smart and environ- mentally-conscious entrepreneurs will become more interested in this segment of power-generation and distribution, helping the public to become aware of and take advantage of these technolo- gies.

Some states offer income tax credits for passive solar residential de- sign and have issued design guidelines that define the requirements for earning the tax credit. The guidelines include specifications that detail things such as the building layout; the directions that the windows face and the angles of the windows; the percentage of south-facing windows to total floor-area; the average U-factor (U factor measures heat-loss prevention of a product; rate of heat loss is indicated in terms of the U-factor of a window assembly, expressed in Btu/hr ft2 oF), which may not be greater than 0.35 (area-weighted); the south window solar heat gain coefficient, which measures how well a window blocks heat from sunlight; thermal storage; overhangs and skylights, to name a few.

Sunlight should be looked at as a kind of "Dr. Jekyll & Mr. Hyde," because while the heat can be used for solar water heaters, it is desirable to restrict the heat component through windows facing directions other than south; and even windows facing south need summer shading. This opens opportunities to use PVs as electricity-generating shades. In colder climates zones, however, south glass should embrace winter sun as it is

a major contributor to the heating of the building.

Advanced Lighting

In this context of sustainable, energy- efficient design, the lighting industry is offering increasingly better technologies. Compact fluorescent bulbs, as substitutes for incandescent bulbs, have decreased the lighting heat-load in buildings, and LED lighting is the next big move. For the same light emission (lumens), LED bulbs use 2-10 watts of electricity (1/3 to 1/30 of incandescent or compact fluorescent), emit little heat compared to standard bulbs, work in cold weather and are dimmable. The electrical load from lighting will decrease with designs using these technologies, making the use of PV to service smaller power loads even more feasible.

Architects are knowledgeable about the interconnections that link solar heat- ing, use of daylight, passive cooling and conservation. Allowing daylight inside for illumination and passive heating during winter months favors bigger windows. At the same time, passive cooling calls for smaller windows that minimize direct sun- light without sacrificing natural ventilation or requiring lights during daytime. Smart analysis and design with a combination of building orientation, window open- ings and sizes, proper insulation, use of sustainable materials and integrated use of solar power are not only socially and environmentally responsible, but they are concepts that we all ought to embrace.

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One trend in the U.S. is that of power utilities allowing users to "sell power back to the grid." Through renewable energy credits, which are part of a program in many states where electric utilities are required by law to invest in renewable energy, utilities buy tradable certificates from consumers who have green/renew- able power-generating systems (mostly solar) so that they can sell power back to the grid. By way of net-metering, a customer (consumer) produces energy and feeds it back into the grid to get credit for the amount of energy produced. This complex process requires simplification. Parallel to an ever-increasing cost of oil,

Energy End-Use Efficiency

U.S. energy intensity has lately fallen by ~2.5 percent per year. Efficienty improvements take the credit.

By Amory B. Lovins

I

ncreasing energy end-use efficien- cy—technologically providing more desired service per unit of delivered energy consumed—is generally the larg- est, least expensive, most benign, most quickly deployable, least visible, least understood, and most neglected way to

provide energy services.

The 46 percent drop in U.S. energy intensity (primary energy consumption per dollar of real GDP) during 1975– 2005 represented by 2005 an effective energy "source" 2.1x as big as U.S. oil consumption, 3.4 net oil imports, 6x domestic oil output or net oil imports from OPEC countries, and 13x net im- ports from Persian Gulf countries.

U.S. energy intensity has lately fallen by ~2.5 percent per year, apparently due much more to improved efficiency than to changes in behavior or in the mix of goods and services provided, and outpac- ing the growth of any fossil or nuclear source. Yet energy efficiency has gained little attention or respect. Indeed, since official statistics focus ~99 percent on physical energy supply, only the fifth of the 1996–2005 increase in U.S. energy services that came from supply was vis- ible to investors and policymakers; the four-fifths saved was not.

The last time this incomplete picture led to strongly supply-boosting national policies, in the early 1980s, it caused a trainwreck within a few years—glutted markets, crashed prices, bankrupt suppli- ers—because the market had meanwhile invisibly produced a gusher of efficiency. Savings were deployed faster than the big, slow, lumpy supply expansions,

whose forecast revenues disappeared. Today we have two fast competitors:

efficiency and micropower. Physical scientists find that despite energy efficien- cy's leading role in providing new energy services today, it has barely begun to tap its profitable potential. In contrast, many engineers tend to be limited by adherence to past practice, and most economists by their assumption that any profitable savings must already have occurred.

Increasing Efficiency

The potential of energy efficiency is also increasing faster through innova- tive designs, technologies, policies, and marketing methods than it is being used up through gradual implementation. The uncaptured "efficiency resource" is becoming bigger and cheaper even faster than oil reserves have lately done through stunning advances in exploration and production. The expansion of the "efficiency resource" is also accelerating, as designers realize that whole-system design integration can often make very large (one- or two-order-of-magnitude) energy savings cost less than small or no savings, and as energy-saving technolo- gies evolve discontinuously rather than incrementally.

About the Author

Amory B. Lovins, CEO and founder of the Rocky Mountain Institute, 1739 Snowmass Creek Road, Snowmass CO 81654-9115, USA (www.rmi.org, ablovins@rmi.org). is a pioneer and expert in energy conservation.

Moreover, similarly rapid evolution and enormous potential apply also to

marketing and delivering energy saving technologies and designs; R&D can ac- celerate both.

Terminology

"Efficiency" means different things to the two professions most engaged in achieving it. To engineers, "efficiency" means a physical output/input ratio. This paper uses only physical output/input ratios.

Wringing more work from energy via smarter technologies is often, and sometimes deliberately, confused with a pejorative usage of the ambiguous term "energy conservation." Energy efficiency means doing more (and often better) with less—the opposite of simply doing less or worse or without.

Deliberately reducing the amount or quality of energy services remains a legiti- mate, though completely separate, op- tion for those who prefer it or are forced by emergency to accept it. The 2000–01 California electricity crisis ended abruptly when customers, exhorted to curtail their use of electricity, cut their peak load per dollar of weather-adjusted real GDP by 14 percent in the first half of 2001. Most of that dramatic reduction, undoing the previous 5–10 years' demand growth, was temporary and behavioral, but later became permanent and technological.

Efficiency saves energy whenever an energy service is being delivered, whereas load management (sometimes called demand response to emphasize reliance on customer choice) only changes the time when that energy is used—either by shifting the timing of the service delivery or by, for example, storing heat or cool- ing so energy consumption and service delivery can occur at different times.

Many subtleties of defining and measur- ing energy efficiency merit but seldom get rigorous treatment, such as:

  • distribution losses downstream of end- use devices (an efficient furnace feeding leaky ducts or poorly distributing the heated air yields costlier delivered com- fort);
  • undesired or useless services, such as leaving equipment on all the time (as many factories do) even when it serves no useful purpose;
  • misused services, such as space-con- ditioning rooms that are open to the outdoors;
  • conflicting services, such as heating and cooling the same space simultane- ously (wasteful even if both services are provided efficiently);
  • parasitic loads, as when the inefficien- cies of a central cooling system reappear as additional fed-back cooling loads that make the system less efficient than the sum of its parts;
  • misplaced efficiency, such as doing with energy-using equipment, however efficiently, a task that doesn't need the equipment—such as cooling with a mechanical chiller when groundwater or ambient conditions can more cheaply do the same thing; and
  • incorrect metrics, such as measuring lighting by raw quantity (lux) unadjusted for its visual effectiveness (Equivalent Sphere Illuminance), which may actually decrease if greater illuminance is improp- erly delivered, causing veiling reflections and uncomfortable glare.

To forestall a few other semantic quibbles:

Physicists (including the author) know that energy is not "consumed," as econo- mists' term "consumption" implies, nor "lost," as engineers refer to unwanted conversions into less useful forms. En- ergy is only converted from one form to

another; yet the common metaphors are clear, common, and adopted here. Thus an 80 percent-efficient motor converts 4eg its electricity input into 80 percent torque and 20 percent heat, noise, vibra- tion, and stray electromagnetic fields; the total equals 100 percent of the electricity input, or roughly 30 percent of the fuel input at a classical thermal power station. (Note that this definition of efficiency combines engineering metrics with hu- man preference. The motor's efficiency

Efficiency leads in providing new energy services but is barely tapping its potential.

may change, with no change in the mo- tor, if changing intention alters which of the outputs are desired and which are unwanted: the definition of "waste" is as much social or contextual as physical. An incandescent floodlamp used to keep plates of food warm in a restaurant may be effective for that purpose even though it is an inefficient source of visible light.) More productive use of energy is not, strictly speaking, a physical "source" of energy but is only a way to displace physi- cal sources. This distinction is rhetorical, since the displacement or substitution is real and makes supply fully fungible with

efficiency.

The 46 percent drop in U.S. energy intensity and the 52 percent drop in oil intensity during 1975–2004 reflect mainly better technical efficiency. Joseph Romm has also shown that an important compositional shift of U.S. GDP—the information economy emerging in the late 1990s—has significantly decreased energy and probably electrical energy intensity, as bytes substituted for (or in- creased the capacity utilization of) travel, freight transport, lit and conditioned floor- space, paper, and other energy-intensive goods and services.

The aim here is not to get mired in word games, but to offer a clear overview of what kinds of energy efficiency are avail- able, what they can do, and how best to consider and adopt them.

Even modest improvements in efficien- cy at each step of the conversion chain can multiply to large collective values. For example, suppose that during 2000–50, world population and economic growth increased economic activity by 6–8x, in line with conventional projections. But meanwhile, the carbon intensity of primary fuel, following a two-century trend, is likely to fall by at least 2–4x as coal gives way to gas, renewables, and carbon offsets or sequestration. Conver- sion efficiency is likely to increase by at least 1.5x with modernized, better-run, combined-cycle, and cogenerating power stations.

Distribution efficiency should improve modestly. End-use efficiency could im- prove by 4–6x. If the intensity reductions sustained by many industrial countries when they were paying attention were sustained for 50 years (e.g., the U.S. de- creased its primary energy/GDP intensity at an average rate of 3.4 percent/y dur- ing 1979–86 and 3.0 percent/y during 1996–2001). And the least-understood term, hedonic efficiency, might remain constant or might perhaps double as better business models and customer choice systematically improve the quality of services delivered and their match to what customers want.

On these plausible assumptions, global carbon emissions from burning fossil fuel could decrease by 1.5–12x despite the assumed 6–8x grosser World Product. The most important assumption is sus- tained success with end-use efficiency, but the decarbonization and conversion- efficiency terms also appear able to take up some slack if needed.

Historic Summaries of Potential

People have been saving energy for centuries, even millennia; this is the es- sence of engineering. Most savings were initially in conversion and end-use: pre- industrial households often used more primary energy than modern ones do, because fuelwood-to-charcoal conver- sion, inefficient open fires, and crude stoves burned much fuel to deliver sparse cooking and warmth.

Lighting, materials processing, and transport end-uses were also very inef- ficient. Billions of human beings still

suffer such primitive conditions today. Developing countries' primary energy/ GDP intensities average ~3x those of industrialized countries.

Corrected for purchasing power, China's energy intensity is ~3x that of the U.S., ~5x of the E.U., and ~9x of Ja- pan. Fastgrowing economies like China's have the greatest need and the greatest opportunity to leapfrog to efficiency. But even the most energy-efficient societies still have enormous and expanding room for further efficiency gains. Less than one-fourth of the energy delivered to a typical European cookstove ends up in food; less than one percent of the fuel delivered to a standard car actually moves the driver; U.S. power plants discard waste heat equivalent to 1.2x

Japan's total energy use; and even Japan's economy doesn't approach one-tenth the efficiency that the laws of physics permit. Nor is energy efficiency the end of the story: e.g., not only are Chinese shaft kilns an extremely energy- wasteful way to make cement, but the cement is of such poor and uncertain quality that manyfold more of it must be used to make each m3 of concrete with a certain strength, so the energy leverage of a modern cement plant is these terms' product—and the carbon leverage is then multiplied by switching to any no- or low- carbon fuel.

Saving energy is like eating an Atlantic lobster: there are big, obvious chunks of meat in the tail and the front claws, but there's also a similar total quantity of tasty morsels hidden in crevices and requiring some skill and persistence to extract.

The whole-lobster potential is best, though still not fully, seen in bottom-up technological analyses comparing the quantity of potential energy savings with their marginal cost. it with the avoided cost of the energy saved. (As Part 2 notes, this conventional engineering/ economic approach materially under- states the benefits of energy efficiency.) On this basis, the author's analyses in the late 1980s found, from measured cost and performance data for more than 1,000 electricity-saving end-use tech- nologies, that their full practical retrofit could save about three-fourths of U.S. electricity at an average CSE ~0.9¢/kWh

(2004 $)—roughly consistent with a 1990 Electric Power Research Institute analysis whose differences were mainly methodological rather than substantive. So many key technologies, now in Asian mass production, are now far cheaper yet more effective that today's potential is even larger and cheaper.

The author's team's uncontested analysis in the Pentagon-cosponsored independent study Winning the Oil Endgame, published in September

Making even modest improvements often multiplies to large collective values.

2004, found that 52 percent of the of- ficially forecast U.S. 2025 oil use could be saved (half by then, half later as vehicle stocks turn over), at an average cost of just $12/bbl (2000 $). The remaining oil use could be displaced by saved natural gas and advanced biofuels at an average cost of $18/bbl. Thus, by the 2040s, the

U.S. could use no oil and revitalize its economy, led by business for profit, and encouraged by public policies not requir- ing mandates, fuel taxes, subsidies, or new national laws. Rather, the transition would be driven by competitive strategy in the car, truck, plane, and oil indus- tries, plus military needs. These findings surprised many, yet a year later, remain unchallenged. Early sectoral progress with implementation has been encourag- ing.

Discontinuous Progress

This engineering/economics diver- gence about the potential to save en- ergy also reflects a tacit assumption that technological evolution is smooth and incremental, as mathematical modelers prefer. In fact, while much progress is as incremental as technology diffusion, discontinuous technological leaps, more like "punctuated equilibrium" in evolu- tionary biology, can propel innovation and speed its adoption, as perhaps with Hypercar® vehicles (Part 4A). Techno-

logical discontinuities can even burst the traditional boundaries of possibility by redefining the design space:

Generations of engineers learned that big supercritical-steam power plants were as efficient as possible—40-odd percent from fuel in to electricity out. But through slopp learning or teaching, they'd overlooked the possibility of stack- ing two Carnot cycles atop each other. Such combined-cycle (gas-then-steam) turbines, based on mass-produced jet en- gines, can exceed 60 percent efficiency and are cheaper and faster to build, so in the 1990s,they quickly displaced the big steam plants. Fuel cells, the next in- novation, avoid Carnot limits altogether by being an electrochemical device, not a heat engine. Combining both may soon achieve 80–90 percent fuel-to-electric efficiency. Even inefficient distributed generators can already exceed 90 per- cent system efficiency by artfully using recaptured heat.

Pumps, fans, and other turbomachin- ery (the main uses of electricity) seemed a mature art until a novel biomimetic rotor (www.paxscientific.com), using laminar vortex flow instead of turbulent flow, proved substantially more efficient.

The canonical theoretical efficiency limit for converting sunlight into electrici- ty usingsingle-layer photovoltaic (PV) cells is normally stated as 33 percent–50+ percent using multicolor stacked layers, vs. lab values around 24 percent and 39 percent (lower in volume production). That's because semiconductor bandgaps were believed too big to capture any but the highenergy wavelengths of sunlight. But those standard data are wrong. A Russian-basedteam suspected in 2001, and Lawrence Berkeley National Labora- tory proved in 2002, that indium nitride's bandgap is only 0.7 eV, matching near- infrared (1.77 micrommeters) light and hence able to harvest almost the whole solar spectrum. This may raise the theoretical limit to 50 percent for two- layer and to ~70 percent for many-layer thin-film PVs. Perhaps opticaldimension lithographed antenna arrays or quantum- dot PVs can do even better.

Why does energy efficiency, in most countries and at most times, command so little attention and such lackadaisical

pursuit? Several explanations come to mind. Saved energy is invisible. En- ergy-saving technologies may look and outwardly act just like inefficient ones, so they're invisible too. They're also highly dispersed—unlike central supply technologies that are among the most impressive human creations, inspiring pride and attracting ribbon-cutters and rent- and bribe-seekers. Many users believe energy efficiency is binary— you either have it or lack it—and that they al- ready did it in the 1970s, so they can't do it again. Energy efficiency has relatively weak and scattered constituencies. And major energy efficiency opportunities are disdained or disbelieved by policymakers indoctrinated in a theoretical economic paradigm that claims big untapped op- portunities simply cannot exist.

Benefits

Energy efficiency avoids the direct eco- nomic costs and the direct environmen- tal, security, and other costs of the energy supply and delivery that it displaces. Yet most literature neglects several key side-benefits (economists call them "joint products") of saving energy.

Indirect benefits from qualita- tively superior services. Improved energy efficiency, especially end-use efficiency, often delivers better services. Efficient houses are more comfortable; efficient lighting systems can look bet- ter and help you see better; efficient motors can be more quiet, reliable, and controllable; efficient refrigerators can keep food fresher for longer; efficient cleanrooms can improve the yield, flexibility, throughput, and setup time of microchip fabrication plants; aerody- namically efficient chemical fume hoods can improve safety; airtight houses with constant controlled ventilation (typi- cally through heat exchangers to recover warmth or coolth) have more healthful air than leaky houses that are ventilated only when wind or some other forcing function fortuitously blows air through cracks; efficient supermarkets can im- prove food safety and merchandising; retail sales pressure can rise 40 percent in well-daylit stores; students' test scores imply ~20–26 percent faster learning in welldaylit schools.

Such side-benefits can be one or even two more orders of magnitude more valuable than the energy directly saved. For example, careful measurements show that in efficient buildings—where workers can see what they're doing, hear themselves think, breathe cleaner air, and feel more comfortable—labor productiv- ity typically rises by about 6–16 percent. Since office workers in industrialized countries cost ~100 more than office energy, a 1 percent increase in labor productivity has the same bottom-line effect as eliminating the energy bill—and the actual gain in labor productivity is

~6–16x bigger than that.

Leverage in global fuel markets. Much has been written about the increas- ing pricing power of major oil-exporting countries, especially Saudi Arabia with its important swing production capac- ity. Yet the market power of the United States—the Saudi Arabia of energy waste—is even greater on the demand side. The U.S. can save oil faster than OPEC can conveniently sell less oil. This was illustrated during 1977–85, when

U.S. GDP rose 27 percent while total

U.S. oil use fell 17 percent, oil imports fell 50 percent, and imports from the Persian Gulf fell 87 percent. At the same time OPEC's exports fell 48 percent (one-fourth of this fall was due to U.S. action), breaking its pricing power for a decade.

The most important single cause of the

U.S. 5.2 percent/y gain in oil productiv- ity was more-efficient cars, each driving 1 percent fewer km on 20 percent less gasoline—a 7-mi/USgal gain in six years for new American-made cars—and 96 percent of those savings came from smarter design, only 4 percent from smaller size.

Buying time. Energy efficiency buys time. Time is the more precious asset in energy policy, because it permits the fuller and more graceful development and deployment of still better techniques for energy efficiency and supply. This pushes supply curves down towards the lower right (larger quantities at lower prices), postpones economic depletion, and buys even more time. The more time is available, the more information will emerge to support wiser and more

robust choices, and the more fruitfully new technologies and policy options can meld and breed new ones. Conversely, hasty choices driven by supply exigencies almost always turn out badly, waste re- sources, and foreclose important options. Of course, once bought, time should be used wisely. Instead, the decade of respite bought by the U.S. efficiency spurt of 1977–85 was almost entirely wasted as attention waned, efficiency and alterna- tive-supply efforts stalled, R&D teams were disbanded, and political problems festered. We all pay today the heavy price of that stagnation.

Integrating efficiency with sup- ply. To first order, energy efficiency makes supply cheaper. But second- order effects reinforce this first-order benefit, most obviously when efficiency is combined with onsite renewable sup- plies, making them nonlinearly smaller, simpler, and cheaper. For example: A hot-water-saving house can achieve a very high solar-water-heat fraction (e.g., 99 percent in the author's home high in the Rocky Mountains) with only a small collector, so it needs little or no backup, partly because the efficiency of collec- tors increases as stratified-tank storage temperature decreases.

An electricity-saving house (the au- thor's saves ~90 percent, using only

~110–120 average W for 372 m2) needs only a few m2 of PVs and a simple bal- ance-of-system (storage, inverter, etc.). This can cost less than connecting to the grid a few meters away.

A passive-solar, daylit building needs little electricity, and can pay for even costly forms of onsite generation (such as PVs) by eliminating or downsizing mechanical systems.

Such mutually reinforcing options can be bundled: e.g., 1.18 peak MW of pho- tovoltaics retrofitted onto the Santa Rita Jail in Alameda County, California, was combined with efficiency and load man- agement, so at peak periods when the power was most valuable, less was used by the jail and more sold back to the grid. This bundling yielded an internal rate of return over 10 percent including state subsidies, and a present-valued customer benefit/ cost ratio of 1.7 without or 3.8 with those subsidies.

Gaps in engineering economics. Both engineers and economists conven- tionally calculate the cost of supplying or saving energy using a rough-and-ready toolkit called "engineering economics." Its methods are easy-to use but flawed, ignoring such basic tenets of financial economics as risk-adjusted discount rates.

End-use efficiency is also the most effective way to make energy supply systems more resilient against mishap or malice, because it increases the du- ration of buffer stocks, buying time to mend damage or arrange new supplies, and it increases the share of service that curtailed or improvised supplies can de- liver. Efficiency's high "bounce per buck" makes it the cornerstone of any energy system design for secure service provision in a dangerous world.

Two Perspectives

Engineering practitioners and eco- nomic theorists view energy efficiency through profoundly different lenses, yet both disciplines are hard pressed to explain such phenomena as: During 1996–2001, U.S. aggregate energy in- tensity fell at a near-record pace despite record- low and falling energy prices. (It fell faster only once in modern his- tory, during the record-high and rising energy prices of 1979–85.) Apparently something other than price was getting Americans' attention.

During 1990–96, when a kW-h of electricity cost only half as much in Seattle as in Chicago, people in Seattle, on average, reduced their peak electric load 12 as fast, and their use of elec- tricity ~3,640 as fast, as did people in Chicago—probably because the utility encouraged efficiency in Seattle but dis- couraged it in Chicago.

In the 1990s, DuPont found that its Eu- ropean chemical plants were no more en- ergy efficient than its corresponding U.S. plants, despite long having paid twice the energy price—probably because all plants were designed by the same people in the same ways with the same equipment, and there's little room for behavior change in a chemical plant.

In Dow Chemical Co.'s Louisiana Division during 1981–93, nearly 1,000

projects to save energy and reduce waste added $110 million/y to the bottom line and yielded returns on investment averag- ing over 200 percent/y—yet in the latter years, both the returns and the savings were trending upwards as the engineers discovered new tricks faster than they used up the old ones. (Economic theory would deny the possibility of so much "lowhanging fruit" that has fallen down and is mushing up around the ankles: such enormous returns, if real, would long ago have been captured. This be- lief was the main obstacle to engineers' seeking such savings. Then after their discovery, the engineers persisted to save even more.)

By 1990, the United States had misallocated $1 trillion of investments to ~200 million refrigerative tons of air conditioners, and ~200 peak GW (2/5 of total peak load) of power supply to run them, that would not have been bought if the buildings had been optimally designed to produce best comfort at least cost. This seems explicable by the perfectly perverse incentives seen by each of the twenty-odd actors in the commercial-real- estate value chain, each systematically rewarded for inefficiency and penalized for efficiency.

Each of these market failures is both a potential show-stopper and a business opportunity. Not just individuals but also most firms, even large and sophisticated ones, routinely fail to make essentially riskless efficiency investments yield- ing many times their normal business returns: most require energy efficiency investments to yield ~6 their marginal cost of capital, which typically applies to far riskier investments. This too is a huge business opportunity that smart firms are starting to exploit.

Many economists would posit some unknown error or omission in these de- scriptions, not in their theories. Indeed, energy engineers and energy economists seem not to agree about what is an hy- pothesis and what is a fact. Engineers take their facts from tools of physical observation. Three decades' conversa- tions with noted energy economists suggest to the author that most think facts come only from observed flows of dollars, interpreted through indisputable

theoretical constructs, and hence con- sider any contrary physical observations aberrant.

This divergence makes most energy economists suppose that buying energy efficiency faster than the "spontaneous" rate of observed intensity reduction (for 1997–2001, 2.7 percent/y in the U.S.,

1.4 percent/y E.U., 1.3 percent/y world, and 5.3 percent/y China) would require considerably higher energy prices, be- cause if greater savings were profitable at prevailing prices, they'd already have been bought; thus engineers' bottom- up analyses of potential energy savings must be unrealistically high. Economists' estimates of potential savings at current prices are "top-down" and very small, based on historic price elasticities that confine potential interventions to chang- ing prices and savings to modest size and diminishing returns (otherwise the economists' simulation models would inconveniently explode). Engineers retort that high energy prices aren't necessary for very large energy savings (because they're so lucrative even at historically low prices, as at Dow Louisiana) but aren't sufficient either (because higher prices do little without enlarged ability to respond to them, as in the Seattle vs. Chicago example).

Of course, engineering-based prac- titioners agree that human behavior is influenced by price, as well as by conve- nience, familiarity, fashion, transparency, competing claims on attention, and many other marketing and social-sci- ence factors—missing from any purely technological perspective but central to day-to-day fieldwork. The main difference is that practitioners think these obstacles are "market failures" and dominate be- havior in buying energy efficiency. Most economists deny this, and say efficiency's relatively slow adoption must be due to gross errors in the engineers' claims of how large, cheap, and available its po- tential really is.

Excerpted from Energy End-Use Ef- ficiency, a study commissioned by the InterAcademy Council, Amsterdam, (www.interacademycouncil.net), as part of its 2005–06 study Transitions to Sustainable Energy Systems.

The Potential of Solid Waste

Energy-from-Waste offers a significant energy contribution.

By John G. Waffenschmidt

A

growing population and expand- ing economics around the world have fueled our demand for

energy. As depicted in Figure 1, we are currently using about 500 quadrillion (15 zeros) BTUs of energy worldwide, not counting the solar radiation that makes our planet habitable. That energy use has grown at a compounded annual rate of about 2 percent for the last 25 years with an expectation of 1.7 percent com- pounding on an ongoing basis. Assuming that compounding continues through 2030, we would expect to be consuming about 702 quadrillion BTUs. With cur- rent day production dominated by fossil fuels to the tune of 80-85 percent, if that 2030 mix is to be substantially lower in its fossil fuel component, a significant shifting to alternative fuels would be required.

The dominant economic system on the planet is capitalism, in one form or another. One of the principles of capital- ism is that economies need to keep grow- ing. More goods and services need to be created as elements of commerce for economic expansion to continue. Tied directly to each economic unit of growth is the consumption of BTUs.

Figure 2 illustrates the amount of pe- troleum and natural gas BTUs needed for each dollar of Gross Domestic Product (GDP) over the period 1973 – 2003 in the U.S. While we are becoming more energy efficient in delivering each dollar of GDP, on net, we continue to need more energy on a year over year basis; the change in efficiency is insufficient to overcome the energy demand associated

with an expanding economy.

The U.S. is the dominant economic power on the planet, with China and India both noted for the growth of their econo- mies. Table 1 presents GDP and Btu data for these three nations, as well as growth data.

Chinaand India, with a p p r o x i - mately 37 percent of the world's population a r e c u r - rently go- ing through significant expansions o f t h e i r economies resulting in i n c re a s e d consump-

About the Author

John Waffenschmidt is vice president at Covanta Energy Corporation and has 25 years of experience in the environmental and waste management fields with regulatory, consulting and facility owner experience. He is currently responsible for new business development for Covanta Energy Corporation, the largest waste-to-energy (WTE) facility owner-operator in the United States. Covanta operates three of the four WTE plants on Long Island (in Hempstead, Babylon and Huntington). Previously, he was responsible for environmental compliance for American Ref-Fuel, which was purchased by Covanta in 2005. He routinely provides testimony, commentary and technical presentations to entities con- cerned with the impacts associated with solid waste management.

tion of energy to fuel that expansion. As these economies expand, we will see a net increase in energy consumption, even

with a continuation in the improvements in energy efficiency relative to GDP. This leads us to the same conclusion as for a simple review of compounding growth rates for energy consumption: our energy demand in 2030 will be substan-

tially higher than today due to these expanding economies around the world. Since capitalism d o e s n o t work well with con- t r a c t i o n s (loss of jobs, income), a future as- s u m p t i o n of less eco- nomic activ-

ity would mean dislocations in those economies that experience contraction. The popular press is replete with

examples of our attempts to offset our fossil fuel use with alternative sources of energy. In addition to the perennial favorites of solar and wind, ethanol has received widespread coverage, both as a source of future energy and also due to its effect on crop prices and shifting of agricultural priorities. Ethanol, as a densified fuel (high energy content in liquid form), is ideal

for transportation, a critical component in providing goods and services in any economy. Table 2 presents a review of some common densified alternative fuels from an en- ergy-in/energy-out basis.

Corn-based etha- nol, at a ratio of 1.4 to 1, appears to suffer from a funda- mental inefficiency

if it is to offset a significant portion of our energy demand. Brazilian sugar cane and the potential for cellulosic production of- fer significantly better renewable outputs. As we look to a shift in energy from fossil fuels to alternatives, the energy-in/en- ergy-out attributes will be important to ensure we are able to achieve sufficient quantities of alternative fuels at reason- able energy cost. In considering biofuels, we need to also consider the land area required for such production. Using 2.75 gallons of ethanol per bushel of corn, a current crop yield of 151 bushels per acre and an energy value of 0.67 compared to gasoline, we would need 490 million acres to produce sufficient ethanol to

offset the 137 billion gallons of gasoline consumed in 2004. This compares to the 434 million acres of cropland in the lower 48 states. Even with an assumed quadrupling in ethanol production per acre with cellulosic ethanol, we would use 28 percent of the available arable acres to meet our 2004 gasoline needs.

The majority of the information pre-

sented above is available from govern- ment websites. Given the widespread availability of this information, it is surpris- ing that there are not equally widespread discussions about the gross quantities of consumption and the magnitude of the effort to shift us from those fossil fuels to alternative energy sources. It would appear that the task before us mandates consideration of all sources of alternative energy if we are going to bridge over from fossil fuels. Biofuels will play a role, but will not supplant fossil fuel derived gaso- line. The ultimate solutions will entail improved efficiency and a multitude of energy sources. Sources of energy that are easily convertible to electricity offer

advantages in that distribution mecha- nisms (poles and wires) already exist.

Solid waste management in the U.S. and throughout the developed world is based on a hierarchy of reduce, recycle/ compost, combust with heat recovery, and finally landfilling. Once we have reduced, recycled, and composted, the remaining waste is either landfilled

or combusted at an Energy-from-Waste facility (also known as Waste-to-Energy). Both are considered end disposal, though they have consider- ably different envi- ronmental footprints and different energy use and creation at- tributes.

Landfills es- sentially entomb the waste that is depos- ited in them. The putrescible organic

fraction decomposes and gives off a large variety of off-gases, some of which are valuable as a biogas that can be used to run a small reciprocating engine (or turbine) for electrical production or sent to a pipeline for distribution. Unfortu- nately, it is not possible to capture all of the gases and since one of the principle gases emitted is methane, the release of these off-gases to the atmosphere leads to an increase in global warming. Methane is 21 times more potent than CO2 as a

greenhouse gas.

Since Energy-from-Waste uses com- plete combustion, the organic fraction from both biomass and fossil fuels (in the form of non-recycled plastics) is fully com- busted with only a small residual

Table 1

2004 Estimated Energy Use and Gross Domestic Product for the United States, China and India

GDP

$Trillions

GDP

Current Growth Rate

Energy Use Quadrillion Btus

Energy Use

*CAGR 2000-2004

BTU/$GDP

United States

11.71

3.2%

100.4

0.4%

8,573

China

7.26

10.7%

59.6

3.8%

4,643

India

3.32

9.2%

15.4

3.8%

4,643

Sources: United States GDP from Bureau of Economic Analysis, U.S. Dept. of Commerce. China and India GDP from CIA World Factbook via Yahoo.com. Current Economic Growth rates from www.CIA.gov. Energy data from Energy Information Administration. *CAGR--Compounded Annual Growth Rate

carbon component remaining. The biomass fraction of solid waste has been tested to be in the vicinity of 67 percent and is considered carbon neutral when evaluated from a greenhouse gas perspective. The fossil fuel, or anthropogenic component, is generally viewed as being of fos- sil origin from a greenhouse gas perspective; an alternative view is to treat those plastics as what

one industry observer called "white coal." The fossil fuel component is recognized for its energy contribution. Since the environmental footprint due to extrac- tion had already occurred, there is some validity to this argument. There is even more validity if you accept the argument made above that the sheer magnitude of fossil fuel energy which must be replaced argues that all available alternates must be considered and utilized.

From a planning perspective, each ton of solid waste has the energy value of about one barrel of oil, or enough to produce about 600 kWh of renewable energy. This compares with landfills which, assuming good capture rates, can recover about 20 percent of the energy which can be captured with Energy-from- Waste.

We can evaluate the alternative energy produced from Energy-from-Waste. En- ergy-from-Waste facilities use fossil fuel to start up and shut down for environmental control reasons, as well as to maintain combustion temperature during malfunc- tion conditions. Since most of the fossil fuels used in these plants are specified by permit, some facilities will be required to use more fossil fuel than others. A review of the energy-in/energy-out aspects of Covanta Energy's 32 Energy-from-Waste facilities (Covanta's facilities process 15 million tons of solid waste per year) yields a value of about 45. For every barrel of fossil fuel equivalents used in the opera- tion of these facilities, 45 barrels of fossil fuel equivalents of energy in the form of electricity or steam are produced.

Today there are 89 Waste-to-Energy facilities in the U.S. disposing of about 29 million tons of waste per year, while producing about 17 million megawatt hours. Given that Energy-from-Waste only contributes to the disposal of 13 per- cent of the nation's solid waste, the 54 percent that goes to landfills, 132 million tons, offer the theoretical potential for an additional 80 million megawatt hours of capacity. The actual potential is likely to be in the 50-60 million megawatt hour/ year range since some of the landfilled waste is converted to renewable energy via landfill gas recovery and some of the waste that is produced is located in areas where population density is not sufficient to justify the added cost of Energy-from- Waste.

Impacts of Waste-to-Energy

  • Generates electricity and heat
  • Reduces fossil fuel imports and use
  • Eliminates costly transport to distant landfills
  • Cuts methane emissions from landfills
  • Exceeds EPA emission standards
  • Recovers ferrous and non-ferrous metals
  • Produces saleable products from ash residue
  • Requires fewer transfer stations
  • Cleaner local environment
  • Creates jobs
  • Encourages recycling

Source: Waste-to-Energy Research and Technology Council (WTERT).

An important benefit of Energy-from-

Waste compared to landfilling is the reduction in greenhouse gases when waste is combust- ed in an Energy-from-Waste facility, as opposed to being landfilled. Barring site specific information, each ton of waste combusted leads to the reduc- tion in about a ton of CO2 equivalent greenhouse gas emissions. The existing green- house gas (GHG) reduction by Energy-from-Waste is in the vicinity of 29 million tons per year, with the potential for an additional 80 million tons per year reduction possible. Based on the GHG potential, Europe

Table 2

Ethanol Costs and Energy Balances.

Feedstock

Cost (US$ per gallon)

Energy

balance (renewable output to fossil input

Sugarcane, Brazil

0.81

10.2

2006, without import tax

2006, with U.S. import tax

1.35

Sugar beat, Europe, 2003

2.89

2.1

Corn, U.S., 2006

1.03

1.4

Cellulose ethanol, U.S.

2.25

Achieved in 2006

Target for 2012

1.07

Source: Goldenberg, Jose "Ethanol for a Sustainable Future", Science V315, February 9, 2007, p. 808-810.

has taken the perspective to reduce land- filling of solid waste by taxing it up to as high as $100/ton.

Our worldwide energy use is grow- ing along with the worldwide economy. Alternative energy initiatives have a long way to go to offset sufficient quantities of fossil fuels. The quantity to offset is so great that all available alternative energy sources must be utilized. Each ton of Municipal Solid Waste has the potential to offset a barrel equivalent of oil. In addition to the 29 million barrels of oil offset each year by Energy-from-Waste, there is the potential for 80 million ad- ditional barrels of offset. In addition to its energy-saving value, Energy-from-Waste offers the additional benefit of reducing greenhouse gas emissions.

Finding Land for Energy Crops

Land finite and most

of it is already being used.

By F. Mack Shelor

W

hen we look out across the

U.S. we see a lot of unused land but we also see a lot of it

that is currently being used for a purpose. For example, farm acreage growing food and fuel; land used for pasture for raising cattle, sheep and other animals to meet food and other human requirements; forests used to provide the building materials for our homes, furniture and other necessities.

But we also see land that cannot be used such as acreage protected for en- vironmental reasons and parks and open spaces set aside for natural habitat for animals and also for human recreation; wetlands designated to protect our water supplies and large tracks that are used as grazing lands with minimal productivity. Of course we also see land that is covered with housing areas, roads, ur- ban centers, electric lines, railroad lines and all of the other signs of our modern

society.

My point is that land is a finite entity and most of it is already being used for some purpose. Supply and demand of our land is becoming an ever increas- ing issue. As we move from an energy supply that largely is taken out of the ground to one that attempts to use the land to generate its energy with minimal environmental impact, it is becoming increasingly important to use our land in the optimum way possible. Land avail- ability is a major issue and water demand follows very closely.

Today, we are just beginning to pro- duce more corn as a result of a drive towards ethanol as a transportation fuel.

The result will be more land dedicated to corn production. The other users of corn such as livestock farmers are already saying that we are making fuel at the expense of food. While there is little validity to this argument, there are still many off-setting forces and special interests at work on this issue.

Corporations such as Monsanto and DuPont are talking about possible new products that will be developed to reduce the demand for oil and increase the demand for corn. At the same time, these companies are very involved in the development of ways to improve the yield of corn. It is estimated that corn yields can be increased by 40 percent over the next 10 years. If this is true, the profit- ability for farmers and the value of farm land will increase dramatically.

About the Author

F. Mack Shelor of South River Consulting, LLC, is a Baltimore, MD-based energy consultant. He has been in the power and industrial engineering field for more than 35 years. Shelor has extensive experience in development of complex proj- ectsincluding coal-fired power plants, waste to energy plants, anthracite culm fired power plants, renewable power projects, engine and combustion turbine based power plants and CHP projects. He has authored and delivered numerous technical papers in conferences around the world and has been widely published in the fields of power, industrial processes and industrial infrastructure. He has received two design awards from ASHRAE for early designs of building automation systems and is holder of five, power industry related, registered patents. He is a frequent contributor to Energy.

For example, it was only a couple of years ago that farmers raised about 83 million acres of corn with an average yield of around 150 bushels per acre or approximately 12,450,000,000 bushels of corn. During this same time

period, ethanol production was about

4.5 billion gallons which means that it used 1,562,500,000 bushels of corn or a little more than 10 percent of the corn that was produced. An estimated 10,887,500,000 bushels of corn re- mained for other uses such as animal feeds.

This year farmers have planted 93 mil- lion acres of corn which are expected to produce about 14,000,000,000 bushels of corn. If we subtract 10,887,500,000 bushels needed for other uses, there will be approximately 3,062,500,000 bushels remaining for ethanol produc- tion. In other words, at the current level of corn production, we could produce

8.8 billion gallons of ethanol. However, we anticipate producing only about 7.5 billion gallons. This means that farmers will likely be over producing and the result could be that the price of corn will decline.

Currently, we are asking farmers to produce as much as 35 billion gallons of ethanol. With the corn seed companies

forecasting yield increases of as much as 40 percent, it could mean that we would be averaging as much as 210 bushels per acre of production. Based on 93 million acres of corn, this would give us 19,500,000,000 bushels of corn.

Again, we should subtract the other uses for corn at 10.9 billion bushels, leaving 9 billion bushels for ethanol. Based on modest gains in productivity to 3 gallons per bushel, it should be possible to produce 27 billion gallons of corn-based ethanol per year without disturbing corn's other uses.

Shouldn't we question the wisdom of building approximately 500 corn-based ethanol plants over the next 10 years as a strategy to absorb the increased corn production? If corn production increases at the rates indicated and ethanol does not, the price of corn will

collapse.

Clearly, farmers will devote more of their avail- able land to the produc- tion of corn as long as the corn price supports that position. Since the amount of available and vi- able land is finite, this shift could be at the expense of other crops. From a farming perspective, we are already seeing price increases in the other sec- tors that would be indica-

become enamored with the potential of switch grass and other cellulose based materials as a raw feedstock for the pro- duction of ethanol. It has been said that technology is almost ready to convert switch grass into ethanol and that this is much more efficient that the corn based product.

I am not sure that converting to switch grass is necessarily more beneficial con- sidering the additional products that may be produced from corn, but I also don't feel that this is an either/or situation. We need to produce a reasonable amount of domestic fuel from agricultural resources including corn, switch grass and other available products.

I believe the important question is where will all of the switch grass or other fuel producing crops be grown? Since

The farmers might lower their re- sistance if they can harvest the switch grass in a profitable use such as ethanol. Fortunately for the farmers, the profit balance for the cultivated land would not be altered substantially if the switch grass could be profitably utilized.

Information appears to indicate that one acre of switch grass produces five tons of material. There are projections that this could eventually become 10 tons per acre but that could defeat the benefits of stream buffering etc, because of increased fertilizer use. On an acre basis it could be possible to produce a similar amount of ethanol with switch grass as with corn.

It has been said that switch grass is very hardy and can be grown on mar- ginal lands. If this is true, then there are

semi-productive land areas that might convert from grazing lands to switch grass production. The negative side of this is that it will reduce the amount of grazing lands that are available for meeting the meat needs of the public.

For the most part, we are faced with a trade off from one commodity to another. Yet, is that not al- ways the case? Are there lands that are available that could be changed in

tive of this shift.

There are many posi- tive benefits to all of this.

Switchgrass is great for making biofuels. But where do we grow it?

their use without sacrific- ing some other valuable commodity?

First, the need for farm subsidies by the taxpayers could be reduced. Second, the preservation of agriculture and its efficiency should increase dramatically. This country was built by farmers and their value will be preserved. Third, we will move toward a more environmentally friendly country where we are not as dependent on the mining of fossil fuels to push our economy forward. Finally, we will create new jobs as we become more self-reliant in our energy needs.

What is the point of all of this informa- tion?

Considering Switchgrass

Recently, the federal government has

most of our land is already being used for something, where do we find the ad- ditional land to devote to this purpose?

Where Do We Find the Additional Land to Grow Switch Grass or Other Crops? Environmentalists tell us that switch grass creates good wildlife habitat and protects the rivers and streams from pollution. For many years they have promoted the concept of buffering urban areas and farm fields from run off into the water sheds by planting an area of switch grass along the water ways. Unfortunately, this means reducing the amount of crop lands and pushing urban development away from the water. Farmers and developers resist this approach.

For example, the proposed farm bill has some specific language associated with the protection of the Chesapeake Bay watershed. If farmers can plant the stream buffers with switch grass that can then be periodically harvested at a profit, the resistance to the concept could be reduced significantly. This concept also removes the need to pay the farmer for making the change.

Crop Options

The other day I was riding down an interstate highway and saw a number of tractors with mowing attachments working to cut the grass along the road. I first thought of the amount of time and

money that must be dedicated to that purpose.

Then I remembered that the Federal Highway Administration had opposed increased mileage standards for automobiles based on the fact that

their gasoline tax revenues would be reduced and they wouldn't have sufficient funding to maintain their roads, including the right of ways. The problem is that people want the right of ways maintained in

some form.

Then the thought occurred to me that there must be at least 1,000,000 acres of interstate right-of-way that is being constantly maintained. I wondered what the cost of this maintenance must be,

and how much of our fuel tax is dedicated to that purpose?

What if all of those right-of-ways were growing switch grass?

How much fuel could be produced by one million acres of switch grass?

How much revenue would the Federal Highway Administration gain by the sale of this commodity to ethanol production facilities?

Could this create a need for an ethanol plant about every 200 miles across the U.S.?

  • How much economic expansion would be created across the U.S. as a result of these ethanol plants?
  • How many jobs would be created?
  • How much crude oil from the Middle East would we not have to purchase?
  • Could this reduce the fuel tax on gasoline and reduce the cost of gasoline to consumers?

The key to this approach is that it uses land that we are paying a cost to maintain. We could be substituting a crop revenue for a maintenance expense.

The next question to pop into my mind was how much other land might have the same characteristic? The interstate sys- tem creates broad ribbons of right-of-way across the nation. Some of it would not work for one reason or another but much of it would be viable for this purpose. Each state has non-interstate highways that also have maintained right-of-ways. If you add these properties to the equa- tion, the amount of available and viable

land would be increased significantly. The highways are not the only possi-

bilities. The public utilities maintain many miles of cleared right-of-ways. They also

The miles of shoulders and median strips on Interstate Highways could be "energy farms."

spend money every year to maintain these lands. Could these properties be converted to switch grass or other crop production? The railroads also have broad right-of-ways that could be con- verted to switch grass production.

When we look at all of the acres of land that are being maintained by public and semi-public entities at a cost to the users and then come to understand that they could be maintained in a revenue produc- ing crop, we must wonder how much money we are spending needlessly?

When we factor in the concept of a finite amount of land, and the highest value use of this land, it would appear that this is an easy decision. Addition- ally, when we factor in the amount of economic expansion that could occur in the U.S. as a result of this expansion related activity, the decision becomes increasingly relevant. Finally, when we also add the environmental benefits that are derived from this approach, the deci- sion becomes compelling for responsible governments at all levels.

Celulose from Ethanol

While ethanol from cellulose is not at this point proven, the potential has been recognized and the technology is close. Corn, wheat and sugar cane-based ethanol are technically proven and it appears that sufficient land is dedicated to their produc- tion. It appears to me that the federal government holds the key to a significant reduction in imported crude oil and an

improved U.S. economy. Use the right of ways to grow switch grass and reduce the cost of highway maintenance while increasing the production of ethanol.

The new farm bill should pro- vide incentives for this direction. Overall, the result will be to in- crease tax revenues rather than increase deficit spending; reduce the U.S. trade balance that is caused by the purchase of crude oil; reduce our reliance on foreign oil imports; clean up our rivers and streams through the reduction in run off; significantly expand the

U.S. economy.

The Federal Highway Admin- istration could bid out the sections of highway to qualified farmers

for planting and maintenance. This alone changes a cost into a revenue for many miles of right of way. Farmers are accustomed to leasing property so this would not be an unusual transaction for them. The utilities and state highways could do the same thing with their lands. In total, this could provide up to as much as several million acres of land that are currently costly and unproductive into income producing property.

Keep the corn growing

In the meantime, let's continue to build corn-based ethanol plants that use the increased productivity that is expected in corn.

Since much of the U.S. is in temperate areas, why not expand the use of other grain crops such as wheat and barley for ethanol production? It would take about 15 billion gallons of ethanol to replace the amount of crude oil coming from Venezuela alone but it looks like a target of 42 billion gallons could be achieved. This translates in to one billion barrels of crude oil at a trade deficit cost of

$70 billion per year. The combination of reduced trade deficit spending and increased economic expansion would create a federal budget surplus rather than a deficit.

Let us hope that people begin to look for ways to improve economic efficiency in the U.S. The concepts expressed above are there to stir innovation and thought not to provide big solutions.

The Price at the Pump

How mergers and other factors influence gasoline prices.

By Thomas McCool

M

r. Chairman and Members of the Committee:

We are pleased to participate in the Joint Economic Committee's hearing to discuss the factors that influence the price of gasoline, including oil industry mergers. Few issues generate more at- tention and anxiety among American consumers than the price of gasoline. Periods of price increases are accom- panied by high levels of media attention and consumers questioning the causes of higher prices. The most current upsurge in prices is no exception. Anybody who has filled up lately has felt the pinch of rising gasoline prices. Over the last few years, our nation has seen a significant run up in the prices that consumers pay for gasoline. According to data from the Energy Information Administration (EIA), the average retail price of regular unleaded gasoline in the United States reached $3.21 per gallon the week of May 21, 2007, breaking the previous record of $3.06 in September of 2005 following Hurricane Katrina.

This year, from January 29th to the present, gasoline prices have increased almost every week, and during this time the average U.S. price for regular un- leaded gasoline jumped $1.05 per gallon, adding about $23 billion to consumers' total gasoline bill, or about $167 for each passenger car in the United States. Spending billions more on gasoline con- strains consumers' budgets, leaving less money available for other purchases.

However, for the average person understanding the complex interactions of the oil industry, consumers and the

government can be daunting. For ex- ample, gasoline prices are affected by the decisions of the industry regarding refining capacity and utilization, gaso- line inventories, as well as changes in industry structure such as consolidations; by consumers' decisions regarding the kinds of automobiles they purchase; and by government's regulatory standards. These are some of the key factors affect- ing gasoline prices that we will discuss today.

Given the importance of gasoline for our economy, it is essential to understand the market for gasoline and what factors influence the prices that consumers pay. You expressed particular interest in the role consolidation in the U.S. petroleum industry may have played. In this context, this testimony addresses the following questions: (1) what key factors affect the prices of gasoline? (2) What effects have mergers had on market concentration and wholesale gasoline prices?

In summary, we make the following observations:

  • The price of crude oil is a major determinant of gasoline prices. A num- ber of other factors also affect gasoline prices including (1) increasing demand for gasoline; (2) refinery capacity in the United States that has not expanded at the same pace as demand for gasoline in recent years, which coupled with high

    refinery capacity utilization rates, reduces refiners' ability to sufficiently respond to supply disruptions; (3) gasoline invento- ries maintained by refiners or marketers of gasoline that have seen a general downward trend in recent years; and

    (4) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends that have been linked to higher gasoline prices. Finally, consolidation in the petroleum industry plays a role in de- termining gasoline prices. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase and sustain prices above competitive levels; on the other hand, these mergers could lead to efficiency effects enabling the merged companies to lower prices.

    • The 1990s saw a wave of merger activity in which over 2,600 mergers occurred in all segments of the U.S. petroleum industry. Almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for 13 percent, and the midstream (trans- portation) accounted for about 2 percent. This wave of mergers contributed to increases in market concentration in

the refining and marketing segments of the U.S. petroleum industry. Anecdotal evidence suggests that mergers may also have affected other factors that impact competition, such as vertical integra- tion and barriers to entry. Econometric modeling we performed of eight mergers involving major integrated oil companies that occurred in the 1990s showed that, after controlling for other factors including crude oil prices, the major- ity resulted in wholesale gasoline price increases—generally between about 1 and 7 cents per gallon. While these price increases seem small, they are not trivial because according to FTC's standards for merger review in the petroleum in- dustry, a 1-cent increase is considered to be significant. Additional mergers since 2000 are expected to increase the level of industry concentration. However, be- cause we have not performed modeling on these mergers, we cannot comment on any potential effect on gasoline prices at this time. Crude oil prices are a major determinant of gasoline prices.

Also, as is the case for most goods and services, changes in the demand for gasoline relative to changes in supply affect the price that consumers pay. In other words, if the demand for gasoline increases faster than the ability to supply it, the price of gasoline will most likely increase. In 2006, the United States con- sumed an average of 387 million gallons of gasoline per day. This consumption is 59 percent more than the 1970 average per day consumption of 243 million gal- lons—an average increase of about 1.6 percent per year for the last 36 years. As we have shown in a previous GAO re- port, most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preference for larger, less-fuel efficient vehicles such as vans, pickups, and SUVs, which have become a growing part of the automotive fleet.

Refining Rates

Refining capacity and utilization rates also play a role in determining gasoline prices. Refinery capacity in the United States has not expanded at the same pace as demand for gasoline and other petroleum products in recent years. U.S.

refineries have been running at very high rates of utilization averaging 92 percent since the 1990s, compared to about an average of 78 percent in the 1980s.

Since 1970 utilization has been ap- proaching the limits of U.S. refining ca- pacity. Although the average capacity of existing refineries has increased, refiners have limited ability to increase production as demand increases. While the lack of spare refinery capacity may contribute to higher refinery margins, it also increases the vulnerability of gasoline markets to short-term supply disruptions that could result in price spikes for consumers at the pump. Although imported gasoline could mitigate short-term disruptions in domestic supply, the fact that imported gasoline comes from farther away than domestic supply means that when supply disruptions occur in the United States it might take longer to get replacement gasoline than if we had spare refining capacity in the United States. This could mean that gasoline prices remain high until the imported supplies can reach the market.

Further, gasoline inventories main- tained by refiners or marketers of gasoline can also have an impact on prices. As have a number of other industries, the petroleum industry has adopted so-called "just-in-time" delivery processes to reduce costs leading to a downward trend in the level of gasoline inventories in the United States. For example, in the early 1980s

U.S. oil companies held stocks of gasoline of about 40 days of average U.S. con- sumption, while in 2006 these stocks had decreased to 23 days of consumption. While lower costs of holding inventories may reduce gasoline prices, lower levels of inventories may also cause prices to be more volatile because when a supply disruption occurs, there are fewer stocks of readily available gasoline to draw from, putting upward pressure on prices.

Regulatory factors play a role as well. For example, in order to meet national air quality standards under the Clean Air Act, as amended, many states have adopted the use of special gasoline blends—so- called "boutique fuels." As we reported in a recent study, there is a general consen- sus that higher costs associated with sup- plying special gasoline blends contribute

to higher gasoline prices, either because of more frequent or more severe supply disruptions, or because higher costs are likely passed on, at least in part, to consumers. Furthermore, changes in regulatory standards generally make it difficult for firms to arbitrage across markets because gasoline produced ac- cording to one set of specifications may not meet another area's specifications.

Finally, market consolidation in the

U.S. petroleum industry through merg- ers can influence the prices of gasoline. Mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, either through unilateral actions of the merged com- panies or coordinated interaction with other companies, potentially allowing them to increase and maintain prices above competitive levels.

Merger Mania

On the other hand, mergers could also yield cost savings and efficiency gains, which could be passed on to consumers through lower prices. Ultimately, the impact depends on whether the market power or the efficiency effects dominate. During the 1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other for the sale of petroleum products.

More than 2,600 merger transactions occurred from 1991to 2000 involving all segments of the U.S. petroleum industry. These mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. pe- troleum industry. Econometric modeling we performed of eight mergers involv- ing major integrated oil companies that occurred in the 1990s showed that the majority resulted in small but significant increases in wholesale gasoline prices. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. These mergers would further increase market concentration nationwide since there are now fewer oil companies.

Some of the mergers involved large

partially or fully vertically integrated companies that previously competed with each other. For example, in 1998 Brit- ish Petroleum (BP) and Amoco merged to form BPAmoco, which

later merged with ARCO, and in 1999 Exxon, the largest U.S. oil company merged with Mobil, the sec- ond largest. Since 2000, we found that at least 8 large mergers have occurred. Some of these mergers have involved major integrated oil companies, such as the Chevron-Texaco merger, announced in 2000, to form ChevronTexaco, which went on to acquire Unocal in 2005. In addition, Phil- lips and Tosco announced a merger in 2001 and the

impact on market competition and con- sumer prices.

According to FTC officials, FTC gener- ally reviews proposed mergers involving

entry. However, we could not quantify the extent of these changes because of a lack of relevant data and lack of con- sensus on how to appropriately measure

them.

Vertical integration can conceptually have both pro- and anticompetitive effects. Based on anecdotal evidence and economic analyses by some industry experts, we determined that a number of mergers that have occurred since the 1990s have led to greater vertical integra- tion in the U.S. petroleum industry, especially in the refining and marketing segment. For example, we identified eight merg- ers that occurred between

resulting company, Phillips, then merged with Conoco to become ConocoPhillips. To illustrate the extent of

Price Record. The average retail price of regular un- leaded gasoline reached $3.21 per gallon the week of May 21, 2007.

1995 and 2001 that might have enhanced the degree of vertical integration, par- ticularly in the downstream

consolidations in the U.S. oil industry, figure 3 shows that there were 12 inte- grated and 9 non-integrated oil compa- nies, but these companies have dwindled to only 8.

Independent oil companies have also been involved in mergers. For example, Devon Energy and Ocean Energy, two independent oil producers, announced a merger in 2003 to become the largest independent oil and gas producer in the United States at that time. Petroleum in- dustry officials and experts we contacted cited several reasons for the industry's wave of mergers since the 1990s, includ- ing increasing growth, diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers, which could reduce competition and lead to higher prices. Ultimately, these rea- sons mostly relate to companies' desire to maximize profits or stock values.

Anti-trust Scrutiny

Proposed mergers in all industries are generally reviewed by federal antitrust authorities—including the Federal Trade Commission (FTC) and the Department of Justice (DOJ)—to assess the potential

the petroleum industry because of the agency's expertise in that industry. To help determine the potential effect of a merger on market competition, FTC evaluates, among other factors, how the merger would change the level of market concentration. Conceptually, when mar- ket concentration is higher, the market is less competitive and it is more likely that firms can exert control over prices.

Dept. of Justice and FTC have jointly issued guidelines to measure market con- centration. The index of market concen- tration in refining increased all over the country during the 1990s, and changed from moderately to highly concentrated on the East Coast. In wholesale gasoline markets, market concentration increased throughout the United States between 1994 and 2002. Specifically, 46 states and the District of Columbia had moder- ately or highly concentrated markets by 2002, compared to 27 in 1994.

Evidence from various sources in- dicates that, in addition to increasing market concentration, mergers also contributed to changes in other aspects of market structure in the U.S. petroleum industry that affect competition—specifi- cally, vertical integration and barriers to

segment. Furthermore, mergers involv- ing integrated companies are likely to result in increased vertical integration because FTC review, which is based on horizontal merger guidelines, does not focus on vertical integration.

Entry Barriers

Concerning barriers to entry, our interviews with petroleum industry of- ficials and experts at the time we did our study provided evidence that mergers had some impact on the U.S. petroleum in- dustry. Barriers to entry could have impli- cations for market competition because companies that operate in concentrated industries with high barriers to entry are more likely to possess market power. Industry officials pointed out that large capital requirements and environmental regulations constitute barriers for poten- tial new entrants into the U.S. refining business.

For example, the officials indicated that a typical refinery could cost billions of dollars to build and that it may be difficult to obtain the necessary permits from the relevant state or local authori- ties. Furthermore, The FTC has recently indicated that barriers to entry in the form

of high sunk costs and environmental regulations have become more formi- dable since the 1980s, as refineries have become more capital-intensive and the regulations more restrictive. According to FTC, no new refinery still in operation has been built in the U.S. since 1976.

To estimate the effect of mergers on wholesale gasoline prices, we performed econometric modeling on eight mergers that occurred during the 1990s: Ultramar Diamond Shamrock (UDS)-Total, Tosco- Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP- Amoco, Exxon-Mobil, and Marathon

Ashland Petroleum (MAP)-UDS.

During the 1990s, mergers decreased the number of oil companies and refin- ers and our findings suggest that these changes in the state of competition in the industry caused wholesale prices to rise. The impact of more recent mergers is unknown. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential effect on wholesale gasoline prices at this time, these mergers would further increase market concentration nationwide since there are now fewer oil companies.

We are currently in the process of studying the effects of the mergers that have occurred since 2000 on gasoline prices as a follow up to our previous report on mergers in the 1990s. Also, we are working on a separate study on issues related to petroleum inventories, refining, and fuel prices. With these and other related work, we will continue to provide Congress the information needed to make informed decisions on gasoline prices that will have far-reaching effects on our economy and our way of life.

  • For the seven mergers that we modeled for conventional gasoline, five led to in- creased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average.
  • For the four mergers that we modeled for reformulated gasoline, two—Exxon- Mobil and Marathon-Ashland—led to in- creased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only.
  • For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and were about 7 cents per gallon, on average.

Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models, including gasoline inventories relative to demand, supply disruptions in some parts of the Midwest and the West Coast, and refinery capacity utilization rates. Our past work has shown that, the price of crude oil is a major determinant of gasoline prices along with changes in demand for gasoline. Limited refinery ca- pacity and the lack of spare capacity due to high refinery capacity utilization rates, decreasing gasoline inventory levels and the high cost and changes in regulatory standards also play important roles. In addition, merger activity can influence gasoline prices.

Wildcaters and Wall St.

The culture gap between the double-breasted suits on Wall Street and the oil-soaked uniforms on oil rigs has always been too large to bridge.

And while these two audiences may never fully understand each other, the current merger and acquisition boom is ready to spill over into the energy markets, creating potential big gains for those positioned properly. So don't be surprised if Wall Street makes efforts to understand this unique industry in the coming years.

Today, we're seeing significant action among private equity firms in many sectors. Dealogic, a national research firm, announced that through May 21 of this year there has been $2.3 trillion in announced deals. This puts the M&A pace on track for $4.7 trillion in 2007, a 20 percent increase over the record set in 2000 at an inflation-adjusted $3.9 trillion. One major difference between today and earlier M&A eras, however, is that many of these takeovers do not involve the absorption of troubled companies.

In earlier times, troubled companies were purchased, cleaned up, made profitable, and then went public, often resulting in significant gains for shareholders. But the process was time-consuming. Today's strategy is to acquire healthy companies which can immediately contribute to the bottom line and shareholder value.

Historical Profitability

The other major benefit to this process is that it is profitable. Over the last 20 years, private equity firms have averaged a 14.2 percent return as compared to the S&P's 9.8 percent. These factors are contributing to vibrant activity by private equity firms.

A few years back, a major M&A trend swept through the energy industry. Exxon merged with Mobil. British Petroleum merged with Amoco, and then bought Arco. Chevron and Texaco merged. Conoco and Phillips consolidated. The French companies Total, Fina, and Elf also joined forces.

But that trend is over. It was driven by unique circumstances; the plummeting oil prices of the late 1990s had taken a huge toll on energy companies. Plus, the big companies needed the scale and size necessary for their massive projects in Asia and Africa. Now that they have it, there's little incentive for more mergers on that level. Frankly, even if they did merge, we wouldn't care anyway. Stocks are too big now, and there's little profit to be made from future M&A activity.

In the coming years, the interesting action will be in small oil companies. When one of the giants devours one of the small fries, there are big profits to be made. And that's where we want to be!

Now is the time to keep an eye on this sector and recognize opportunities and the crite- ria that could result in significant gains. Keep in mind that stock prices go up following an acquisition. So the message here is to hold on to your stocks in the right energy companies and look for opportunities with others which we'll discuss in this column.

But we feel that the process will not originate with private equity firms; they will avoid oil stocks because they are regarded as too risky. Wall Street "suits" don't understand this sector. One major problem has been evaluating political risks in countries throughout the Middle East. Private equity firms don't understand the heavy crude market. They fear the possibility of alternative energy programs. Many are too impatient to deal with long-term exploration activities that may or may not result in finding new reserves. For these and other reasons, M&A activity will be somewhat incestuous, again with the big fish feeding on smaller ones.

By James DiGeorgia, editor and publisher of the Gold and Energy Advisor newsletter (www.goldandenergyadvisor.com) and the author of the popular books, The New Bull Market in Gold and The Global War for Oil.

Greening Energy Loads

A percentage of renewable energy can improve the corporate image and bottom line.

By Christian Blattenberger

T

he United States is the Saudi Arabia of coal.

It has some of the largest coal reserves on Earth, and is using them to power U.S. businesses, industries, and communities—everything from hundreds of office buildings to kitchen light bulbs. But coal is an extremely dirty form of energy, which adds to the world's carbon footprint and greenhouse gas emis- sions.

In fact, it's a big part of the reason the

U.S. spews more greenhouse gases than any other country in the world, which has given the country a coal black eye on the world stage, and created negative public opinion about America's social responsibility, or lack thereof.

As Americans become more educated about carbon footprints and greenhouse gas emissions, they are trying to buy more products from environmentally friendly companies. This puts more public pressure on businesses, including Fortune 500 firms, to start answering investor's questions regarding their company's environmental stewardship. CEO's are asking their energy managers to start tracking and reporting the com- pany carbon footprint. This in turn, has forced energy manager's in the U.S. to begin to reassess their energy procure- ment and they have begun to at least consider, or switch to alternative energy sources.

It's clearly time for companies to start using renewable energy resources. But how do they get to there from here? It's actually not as hard as it appears. By following what are becoming standard

business practices, companies can con- vert part of their load to clean energy and do some good for the environment, while polishing their public image into a sparkling diamond.

Good Business Sense

Incorporating a percentage of renew- able energy sources into a company's electricity load makes good business sense on two levels.

  • First, economically. To illustrate, a much more volatile energy market over the past three years has created supply and demand issues for oil. As oil prices increase, so have natural gas prices. Indeed, natural gas is found in oil and gas fields, and is a commodity that can influence electricity costs. And as the price of natural gas fluctuates, so does the price of electricity.
  • Second, public perception. As the public becomes increasingly aware of Middle East turmoil and its impact on supply, demand, and cost, companies that make renewable resources part of their energy strategy can become favor- able because they are seen as weaning the United States off its dependency of foreign oil.

About the Author

Christian Blattenberger is Manager of Procurement for Electric, Natural Gas, and Renewable Energy for Cadence Network Inc., a leading utility, lease and telecom expense management firm, headquartered in Cincinnati, Ohio.

Consumers are becoming more discerning about where they shop and often buy from companies that practice

social responsibility. It also helps reduce

U.S. dependence on foreign oil. Clearly, jumping on the renewable energy band- wagon now is a way for organizations to differentiate themselves from the competition.

For example, an office supply company that wants to practice social responsibility when buying paper goods may need or want to have the same philosophy when they procure energy. One company that has made major strides in this direction is Office Depot. With help from Cadence Network, it replaced 12 percent of its dirty energy with 51 percent wind and 49 percent biomass of recycled vegeta- tive material at 1,019 stores last year.

While Office Depot chose to imple- ment alternative energy in all its stores, companies can also choose to implement renewable energy in specific regions of the country. For instance, organizations that have more locations on the East and West coasts might want to concentrate efforts there to reach more consumers and generate more public awareness.

The Options

Before Office Depot decided to roll out a renewable energy effort in all stores, it looked at how it would benefit from using renewable resources. It's not something that's completely new to the company.

The fact that it deals with paper goods made from recycled sources, shows that Office Depot already has an awareness of green practices. As a result, Office De- pot employs an Environmental Strategy Advisor, as well as an Energy Manager, to handle renewable resources. The two departments collaborate when making energy procurement decisions.

While most companies have energy managers that are involved with or man- age the company's energy procure- ment, many don't consider renewable energy because of the added costs. This is when businesses might want to hire an outside energy manager to help. These consultants can explain to businesses the feasibility of incorporating a portion of renewable energy into their load, while considering the optimal quality of the product at the most cost efficient price.

To start, companies should decide how much of their load they want to come from renewable sources. That percentage, as well as the type of renew- able product will impact the cost. For example, if a customer is paying 8 cents a kilowatt for "dirty" power, it might cost 8.2 cents or 8.4 cents a kilowatt to include renewable energy, and possibly more if that product is all solar, all wind, or a mix of the two. The cost may also vary if the product is a generic one, or a highly certified product.

When those additional costs are multiplied over the number of kilowatt hours used, it might cost a company an additional $10,000 or $20,000 annually. But any amount of renewable energy resources, whether it be 5, 10, or 15 percent, is a start. Once the company settles on the amount, it can speak with an energy consultant to find cost savings in its current load and maximize electricity use to offset or cover the additional cost of renewable energy.

Reviewing History

This is easily done by capturing at least a year's worth of historical data from past utility invoices. A thorough examination of these invoices can determine if the rate the utility charges suits the business.

To illustrate, a commercial building may not be on the most optimal rate it could be on with the electric utility

company. That may be due to being placed on the incorrect rate from the start, or, never having evaluated the rate over many years. Contacting a profes- sional company like Cadence Network Inc, who can review the tariff options and coordinate with the utility to switch your company to the correct rate may save organizations hundreds, or in some cases thousands annually on utilities. Invoice auditing will also determine if the organization is being overcharged, even if it is on the correct rate. Those savings can then be used to assist in the purchase of renewable energy.

Organizations can also procure energy from a third-party supplier in a deregulated market. In these markets, the price of energy isn't tied to the rate the utility sets. Businesses can aggregate their load and find a lower rate on the open market than what they paid in the previous year.

Save Now or Pay Later

The savings can be as much as one penny per kilowatt hour, and when mul- tiplied over the amount of kilowatt hours used in a year, it adds up substantially. There are several deregulated markets out there including—Delaware, Connecticut, Illinois, Texas, Maryland, Massachusetts, Michigan, New York, New Jersey, Ohio, Pennsylvania, just to name a few—and organizations not in these markets need to rely on historical data to make sure they are on the right rate.

The final piece for organizations that don't control their meters is to make sure building owners are charging them correctly for their energy, which can easily be confirmed through an energy management consultant via a review of the landlord bill, and a review of the lease agreement.

How quickly an organization becomes "green" depends on the goals and the amount of capital available. For example, an organization should consider now to decide whether they want their load to be 5 or 10 percent renewable within the next year, or 25 percent renewable within the next three years. Due to the most recent attention paid to renewable energy in the news and in the political arena, many companies are beginning to realize that they need, at the very least, to

have a strategic plan in place regarding renewable energy, if they are not already out there making renewable purchases in the market place.

At any rate, organizations may want to act on a renewable energy plan now, before the state or federal government mandate it, ( as several states such as CA, CT, NJ, NY, PA, MA are currently considering and leading the way on this issue). Currently, the cost of renew- able energy credits (RECs) are relatively inexpensive because the demand has not outweighed the supply. However, if mandates are passed, the demand for renewable energy will quickly outpace the available supply, thus, causing the cost to rise dramatically. Organizations greening their electricity load can choose from a variety of sources—wind, solar, or biomass—or from a mix of these resources to help lessen those costs.

But when a new administration takes over in 2009, it might take a more proactive role and require companies to use a percentage of renewable energy (as European nations require as part of the Kyoto Treaty). The demand for renewable sources could tighten supply and increase the price.

It might be in the best interest for organizations to consider purchasing RECs now and hedge themselves against eventual cost increases. Also known as "Green tags," they ensure the rights to the environmental benefits from generat- ing electricity from renewable sources.

These RECs can be for wind, solar, or biomass. They can also be sold, traded, or used later. For example, if RECs cost about $4, it might make economic sense to buy a few years out in anticipation of its price doubling or tripling. Should the price increase to $10 in two or three years, organizations that bought energy credits can sell the REC for more than twice the amount it paid.

Before buying any form of renewable energy, companies should ensure it is a Green-e certifiable product. Green-e is a not-for-profit organization that certi- fies renewable energy programs and companies that adopt them. The certi- fication validates that the percentage of renewable energy an organization uses is coming from a trusted source. We rec-

ommend companies purchase "Green-e certifiable" products now, so that if they decide to certify it down the road, they can easily do so for an additional cost.

The Green-e certification benefits organizations because it tells customers they are serious about using renewable resources. Using a generic source, how- ever, can possibly damage credibility and cause the consumer or public to question how serious the company is about going green.

Called green-washing, companies claim to be green for the public relations spin, but can potentially open themselves

to criticism. Once organizations step to- ward using renewable sources, customers often expect it to become part of their ideology. So if a company intends to make a big public relations "splash" with their renewable purchase, it would be a good idea to make sure that the renew- able sources they are using can stand up to public scrutiny and review. This is where having a professionally designed, renewable energy strategic plan in place may come in handy.

Whatever renewable energy source organizations use, there's no better time than the present to incorporate green en-

ergy. It may improve public perception; RECs are currently relatively inexpensive; and eventually, legislation may be passed that could require all companies to use some amount of renewable energy as part of their overall procurement plan for future years.

That's when renewable energy prices could skyrocket, and organizations that waited will pay the price—in their bud- gets, with investors, and in the public's eye. Conversely, companies that "think green" can move and plan ahead finan- cially, and politically, when renewable energy prices are inevitably driven up.

In France, Biodiesel Is 'Black Gold'

In contrast to the general preference for gasoline-powered passenger vehicles in the United States, the great majority of passenger cars in France run on diesel which results in a very large consumer market. Not surprisingly, France is a front-runner for Western Europe in biofuels.

Being the largest agricultural county in Europe in terms of the amount land dedicated to agriculture, the country's move to producing biofuels was a natural one that started more than ten years ago. Today in the European market, France is second only to Germany in total production of biodiesel and is in the process of increasing its overall bioethanol production. Tax incentives, ramped-up national biofuels objectives, and an industry with more than fifteen years of experience producing biofuels have given France a natural advantage in the field.

In 1992, the European Union (EU) approved several re- forms to its Common Agricultural Policy attempting to put previously unbalanced agricultural crops back into a fair price market position. Within the package of reforms was a system of "set-aside" payments designed to reward farmers for withdrawing part of their land from production, thereby reducing the supply of certain crops. To avoid leaving agri- cultural lands unused, a clause was written into the reforms to allow the use of these "set aside" lands for the production of non-food goods.

The French Government looked to the biofuels industry as a way to minimize the economic impact of these reforms to its agricultural economy and began its promotion by offering a 100-percent tax exemption for biodiesel and 80-percent exemption for bioethanol. By the end of the 1990s, France had the largest biofuels market in Europe, (about 420,000 metric tons in 2000). Eventually the EU found that the French

Government was over-subsidizing its biofuels industry, leading to an EU directive requiring the French to tax the industry. There was an initial slump in the industry (seen just after 2000), however the slump was reversed after 2003 when new EU directives promoting the biofuels industries came out. One such directive required two-percent replacement of diesel and gasoline by 2005 and 5.75 percent by 2010 in all of Europe.

Beyond European Union objectives, France has consistently set its own goals for biofuels production. In a series of national plans, the French Government set out to work toward sustain- able transportation systems through the "Clean Vehicles Plan" as well as full compliance with the Kyoto Protocol through the "Climate Plan." To reach these goals, the Government announced the "Biofuels Plan" in 2004, which authorized a three-fold increase in biofuels production between 2004 and 2007. The Biofuels Plan was an effort to meet the EU direc- tive goals of 5.75 percent biofuels by 2010.

The French Government promotes biofuels production by es- tablishing a quota every year for the amount of biofuels eligible for reduced taxes. For this year, the French Government will allow tax relief for over 1,900,000 metric tons of biofuels. The taxes for diesel and gasoline at the pump in France currently represent approximately 75 percent of the total sales price. Biodiesel and bioethanol are charged a low tax rate, which is 40 percent of the usual tax charged to fossil fuels. These tax cuts on the internal tax on petroleum products (TIPP) for biofuels have stimulated huge growth in the industry, allowing French projections to surpass the 5.75 percent incorporation required by the EU with an expected 7-percent incorporation rate by 2010 and eventually 10 percent by 2015.

Source: The Economic Department of the French Embassy

Clean Tech Opportunities

Important new services are available to owners and investors.

By Thomas R. Burton and Richard A. Kanoff

V

olatile markets, a growing envi- ronmental awareness and regula- tory trends have fueled interest in

clean and renewable energy technologies and drawn unparalleled attention to the Clean Tech sector. The industry has ex- ploded with creative enterprises focused on developing cutting edge technologies to reduce energy use and improve efficien- cies, in turn creating exciting opportuni- ties in such diverse sectors as biofuels, solar, wind and ocean power, transporta- tion, clean coal and demand response. The combined synergy of these activities will continue to promote a cycle of inno- vation and transform the alternative fuel and energy industries. The legal sector will serve the important demands of this market by advocating for governmental policies to encourage sector growth, and by offering full service legal expertise to government, emerging and developed enterprises, and financiers.

It is impossible to single out a policy initiative, piece of legislation, global event, or economic reality that is pre- dominantly responsible for the $10-15 billion increase in Clean Tech spending in the past two years, and the projected four-fold increase (over $200 billion) expected by 2016. Certainly, in the United States, concerns about the oil sup- ply and national security have deepened the country's commitment to reducing carbon consumption. Moreover, a likely global oil supply shortage will almost certainly sustain the high cost of carbon fuels. Frequent spikes in oil prices, com- bined with the falling cost of alternatives, will create incentives for broadening the

scope and impact of innovative technolo- gies and eco-friendly industry practices.

Investment Opportunities

About the Author

Tom Burton is a Member in Mintz Levin's Boston office and Chair of the Firm's Energy and Clean Technology Practice Group, which he established in 2005. Mr. Burton's practice focuses on financing and corporate issues facing companies in the clean technology sector. Richard Kanoff is Of Counsel in the Boston office in the Energy and Clean Tech Practice and specializes in energy, project development, and clean technology issues.

The significant combined impact of national security, high oil prices, envi- ronmental degradation and resource depletion have galvanized governments, entrepreneurs, venture funds and in- vestment banks to create regulatory incentives, advance technologies, and raise capital necessary to accelerate the development and implementation of carbon alternatives. Indeed, these macro- and microeconomic factors have created unprecedented governmental activity and business opportunities in the Clean Tech sector over the past five to six years. For example, government officials have encouraged capital investment in Clean Tech projects through loan and grant programs, assessed carbon taxes and usage caps, and launched tax credits for promoting renewable energy produc- tion. In Massachusetts, officials have adopted Renewable Portfolio Standards, and agreed to participate in programs such as Emissions Standards for Power Plants, the Regional Greenhouse Gas Initiative, and the Climate Protection Plan. More initiatives are planned as

policymakers debate how best to reduce oil consumption, promote carbon alter- natives, increase energy efficiencies and reduce energy demand.

In addition, major business initiatives are underway. Specifically, the ethanol industry continues to expand, and will raise the current output of corn and cellu- losic ethanol from 6.3 billion gallons per year (bngpy) to over 12 bngpy by 2015. Notably as well, consumer demand and developing solar technologies have al- lowed the U.S. to capture 10 percent of

the burgeoning world market. Similarly, the U.S. is responsible for 22 percent of newly installed wind power generation

capacity, which reached 74,223 MWs globally in 2006. Moreover, on the lo- cal scene, innovative start-up EnerNOC

recently completed a successful IPO and established a demand response net- work, effectively creating clean electric capacity with zero net emissions. And just as exciting, GreatPoint Energy has developed a process to convert coal into clean gas. In turn, the legal community has responded to provide a vast range of important services to Clean Tech busi- nesses in such diverse areas as corporate and finance, energy/environmental law and tax.

Climate Change and the Law

The upside of regulated emissions is a market for credits.

By George B. Murr

I

magine a world without abundant and readily available power. Imagine—if you can—conducting business, com- muting to and from work—even simple living—without ready access to as much power as you want. Although prices have increased for electricity and gasoline, we have not yet experienced regulation of actual supply. Such a world might not be so difficult to imagine, however, given what scientists (and even a grow- ing number of energy companies) have to say about the impact our unabated use of electricity and hydrocarbons has in the form of carbon emissions. If the current policy trend on the state and local level toward limiting carbon emis- sions by businesses continues, it may not be surprising eventually to see federal regulations. Such regulations may reach not only business use, but consumer and personal use as well.

Although the federal government has not yet implemented mandatory limitations on carbon emissions, the Environmental Protection Agency tracks the efforts made nationwide at the state and local government levels. Given the trend towards legislation regulating carbon emissions, and that the absence of regulation has generated litigation to address the issue, it may be inevitable that such emissions controls eventually become law throughout the nation. If regulation is on the horizon, it may be more successful in allocating the social costs associated with restricting carbon emissions by being rooted in economic incentives and by being market-driven. Additionally, to minimize the size of the bureaucracy needed to enforce the regulations, legislatures and Congress can provide for private causes of action as a viable enforcement mechanism. This article examines the increasing trend in regulating carbon emissions, how carbon emission markets work, and the impli- cations and potential problems arising from operation of a carbon emissions market.

Trend of Legislation

While the federal government has not set carbon emission limits for industry, it did pass the Clean Air Act, 42 U.S.C.

About the Author

George B.Murr has national and international clients as defendants and plaintiffs in all aspects of complex commercial, energy, and real estate litigation.

§§ 7401, et seq., in 1977 and its subse- quent amendments. This act does specifi- cally seek "to protect and enhance the quality of the Nation's air resources so as to promote the public health and welfare and the productive capacity of its popu- lation," "provide technical and financial assistance to state and local governments in connection with the development and execution of their air pollution prevention and control programs," and "encourage and assist the development and operation

of regional air pollution prevention and control programs." Taking advantage of the private cause of action under the Clean Air Act, private litigants have used the act as a means of challenging vari- ous types of emissions by industry. For example, citizens have recently sued a power company under the Clean Air Act seeking injunctive relief to prevent the construction of a coal-fired electric plant in Texas. Additionally, various states have also sued industry in an attempt to restrict carbon emissions based on the common law cause of action for nuisance as well as other claims.

Currently, there are no carbon emis- sion limitations in effect on the federal level and in many states. However, the trend at the state and local level through- out the country is to regulate carbon emissions. One traditional means of regulating carbon emissions is through the use of permits and caps or limits on the volume of emissions allowed per year. For example, just last year, California Governor Arnold Schwarzenegger signed California legislation imposing a first-in-

the-nation emissions cap on utilities, re- fineries and manufacturing plants, with a goal of cutting greenhouse gases to 1990 levels by 2020. Another emerging means of regulating carbon emissions is through the increasingly popular use of a market in which carbon emissions "credits" are bought and sold by those that generate carbon emissions.

The European Union has operated a market for the trade of carbon emission credits since January 1, 2005. Also in 2005, a group of seven Northeastern states—Delaware, Connecticut, Maine, New Hampshire, New Jersey, New York, and Vermont—agreed to enter into a market-based system to curtail harmful carbon dioxide emissions and, in the words of New York Governor George Pataki, to "take meaningful steps in the fight against climate change."

In the U.S., at least one voluntary carbon emissions market has been estab- lished. The Chicago Climate Exchange claims to be "the world's first and North America's only voluntary, legally binding rules-based greenhouse gas emission reduction and trading system."

In addition to passing regulation providing for carbon emission caps, California has been active in the forma- tion of carbon emission trading markets. Governor Schwarzenegger and British Prime Minister Tony Blair announced plans to work toward a possible joint emissions-trading market.

Further, on February 26, 2007, Gov- ernor Schwarzenegger was one of five governors of Western states who agreed to create the Western Regional Climate Action Initiative, forming a consortium to allow companies to buy and sell carbon "credits" on a carbon emissions market. Meanwhile, in a different vein, market "greenhouse gas credits" have been issued to farmers in the hopes of imple- menting an efficient means of allocating the atmosphere as a limited resource.

More and more, nascent carbon emis- sions policy at the state and local level is impacting the law and economics of the energy industry, and how it goes about its business. As experience has shown under existing laws and regulations restricting atmospheric emissions, litigation will likely be a companion of any new regula-

tions or laws restricting carbon emissions, impacting and ultimately shaping the underlying emissions policy of such laws and regulations.

Carbon Emissions Markets

The Trend Towards Carbon Emission Markets. As noted above, the overwhelm- ing trend in regulating carbon emissions has been in the form of carbon emission markets. Under the California Health and Safety Code, the California Legislature has stated that:

"While traditional command and control air quality regulatory programs are effective in cleaning up the air, other options for improvement in air quality, such as market-based incentive programs, should be explored, provided that those programs result in equivalent emission re- ductions while expending fewer resources and while maintaining or enhancing the state's economy. . . ."

The program will result in an equiva- lent or greater reduction in emissions at equivalent or less cost compared with current command and control regulations and future air quality measures that would otherwise have been adopted as part of the district's plan for attainment.

In concluding that markets may more efficiently implement the emissions limita- tion, California seeks with its emissions market to set an example for the rest to follow.3 Given the activity in the United States and the European Union, the es- tablishment of carbon emission markets appears to be a forgone conclusion,4 rais- ing the question as to how these markets will function.

How Emissions Markets Work

In a carbon emission market, the regu- lating body sets a cap on overall carbon emissions by all participants. The cap is based on scientific analyses and policy considerations regarding the acceptable amount of carbon emissions, and can be established by agreement among the participants or mandated by government. In addition, the market may impose fees or taxes to pay for its own operation.

Once the overall cap is in place, the regulating body issues a permit and allocates an amount of acceptable emis- sions to each participant in the form of

"credits." A participant is limited in the amount of carbon exhaust it may emit to the amount of its registered credits, and violating that limit subjects the participant to a penalty. Once the permits and credits are issued to the participants, each may buy or sell them on the market to other participants. Any credits purchased allow the participant to increase its carbon emissions in direct proportion to its in- crease in credits. Conversely, any credits sold decrease the allowable emissions for that participant.

The operation of the market should result in the allocation of the credits in such a way as to maximize the use of the carbon emissions in the manner that society values most. For example, the price that a carbon emitter can command for its product or service, in part, is a reflection of the value that society places on it. That is, generally, the higher or more inelastic the price, the greater the demand relative to supply.

Therefore, carbon emitters that com- mand high prices or that can easily pass on the costs of buying emissions credits will be more likely to aggregate credits and supply those goods or services that society prefers. Conversely, those car- bon emitters that do not command high prices or have products or services that have high price elasticity are less likely to aggregate credits and will be forced to reduce emissions either by reducing production or becoming more efficient. Further, the market would also reward carbon emitters that generate less carbon on a per unit basis than their competitors by requiring them to purchase fewer cred- its or providing them a surplus of credits to sell. This would simultaneously require their competitors to become more ef- ficient in their carbon emissions so that

they can remain competitive.

Thus, allowing participants to compete with each other for the emissions credits ensures that the emissions are used to generate those products and services that have the highest and best use from society's point of view. This results in the market efficiently allocating the cost to the environment.

Enforcing, Exchanging Credits

As noted above, each participant is

limited to emitting the amount of carbon for which it has credits. In the event a participant exceeds that limit (without obtaining additional credits) from the market, it will be assessed a penalty. In addition, other market participants may have a cause of action against that market participant. In this way, the market may be regulated without the high cost of having an administrative body engaging in enforcement. In the event a participant breaches its agreement to sell credits, it may also be subject to liability in breach of contract. The aggrieved participant may assert a cause of action against the breaching participant.

Carbon market credits may qualify as intangible interests under the property law. As intangible property interests, such credits may be exchanged for other property. If two market participants are engaged in an unrelated transaction

—for example, the purchase of rights to explore for and develop oil and gas on real property, or the purchase of elec- tricity or natural gas—those two market participants may seek to include, as consideration for the deal, carbon credits on the carbon emissions market. Carbon market credits may be traded for other

things and become part of the economy independent of the carbon emissions trading market itself. Buying and selling such intangible rights will integrate the value of the carbon emission credits into the larger economy. In this way, it will obtain a more accurate value and the market will more efficiently allocate it as a resource.

Potential Problems

Establishing and enforcing a carbon emissions market may significantly im- pact the energy industry. The allocation, regulation and trading of what was once a free resource, i.e., use of the atmo- sphere to receive carbon emissions, will be assigned a price. Questions regard- ing whether to charge such a price, as well as the need to charge it, are largely questions of policy. Nevertheless, the increase in costs of operation will burden the energy industry and may lead to cost cutting elsewhere, even the possible loss of jobs.

If indeed there is a limit placed on the overall emissions allowable, the market would most likely be the most efficient means of implementing such a limit. The market ensures that the resource is most

efficiently allocated among its potential users. In addition, to the extent the overall limit of carbon emissions is too oppressive to the market participants, it may be adjusted. The market may be adjusted by the regulating body to increase (or decrease) the overall carbon emissions limit. The market may also be adjusted by allocating the carbon credits to participants unequally, based on external factors or for other policy reasons. Whether to increase the overall carbon emissions limit becomes part of the political process.

Conclusion

As markets are called upon to regulate carbon emissions in the energy industry, and as markets become a tool to regulate other industries as well, a world where personal or consumer use of electricity or gasoline is subject to such markets becomes quite conceivable. Most im- portant, however, as the legislative and industry trend toward carbon markets escalates, businesses and their legal coun- sel must be aware of possible dramatic changes in the energy industry and be prepared to adjust the operation of their businesses accordingly.

Catalyst May Revolutionize Biodiesel Production

Line up 250 billion of Victor Lin's nanospheres and you've traveled a meter. But those particles—and just the right chemistry filling the channels that run through them—could make a big difference in biodiesel production.

They could make production cheaper, faster and less toxic. They could produce a cleaner fuel and a cleaner glycerol co-product. And they could be used in existing biodiesel plants.

"This technology could change how biodiesel is produced," said Victor Lin, an Iowa State University professor of chemistry, a program director for the U.S. Department of Energy's Ames Laboratory and the inventor of a nanosphere-based catalyst that reacts vegetable oils and animal fats with methanol to produce biodiesel.

"This could make production more economical and more environ- mentally friendly." Lin is working with Mohr Davidow Ventures, an early stage venture capital firm based in Menlo Park, Calif., the Iowa State University Research Foundation and three members of his research team to establish a startup company to produce, develop and market the biodiesel technology he invented at Iowa State.

The company, Catilin Inc., is just getting started in Ames. Catilin employees are now working out of two labs and a small office in the Roy

J. Carver Co-Laboratory on the Iowa State campus. The company will also build a biodiesel pilot plant at the Iowa Energy Center's Biomass Energy Conversion Facility in Nevada.

Lin said the company's goal over the next 18 months is to produce enough of the nanosphere catalysts to increase biodiesel production from a lab scale to a pilot-plant scale of 300 gallons per day.

Lin will work with three company researchers and co-founders to de- velop and demonstrate the biodiesel technology and production process. They are Project Manager Jennifer Nieweg, who will earn a doctorate in chemistry from Iowa State this summer; Research Scientist Yang Cai, who

earned a doctorate in chemistry from Iowa State in 2004 and worked on campus as a post-doctoral research associate; and Research Scientist Carla Wilkinson, a former Iowa State post-doctoral research associate and a former faculty member at Centro Universitario UNIVATES in Brazil. Larry Lenhart, the president and chief executive officer of Catilin, said the company is now up and running. It has a research history. It has employees. It has facilities. It has money in the bank.

And he said the company has proven technology to work with. The technology allows efficient conversion of vegetable oils or animal fats into fuel by using Lin's nanospheres with acidic catalysts to react with the free fatty acids and basic catalysts for the oils.

All that makes biodiesel production "dramatically better, cheaper, faster," Lenhart said. The technology replaces sodium methoxide—a toxic, corrosive and flammable catalyst—in biodiesel production. And that eliminates several production steps including acid neutralization, water washes and separations. All those steps dissolve the toxic catalyst so it can't be used again.

Catilin's nanospheres are solid and that makes them easier to handle, Lenhart said. They can also be recovered from the chemical mixture and recycled. And they can be used in existing biodiesel plants without major equipment changes. Lin said the catalyst has been under development for the past four years. The company will market the third generation of the catalyst—a version that's much cheaper to produce than earlier, more uniform versions. The technology was developed with the support of grants from the U.S. Department of Agriculture, the U.S. Department of Energy's Office of Basic Energy Sciences and the state's Grow Iowa Values Fund. Patents for the technology are pending. Catilin has signed licensing agreements with Iowa State's research foundation that allows the company to commercialize Lin's invention.