Earth, Wind and Fire — Beautiful Music for a National Energy Policy

Posted February 19, 2009 at 9:59am

In framing an effective policy to meet our current and future energy needs, the 111th Congress should consider Earth Wind and Fire — words made famous by the 1970s R&B band — as guideposts for America to step up as a leader in green energy. [IMGCAP(1)]

America’s energy policy must be based on a mix of energy sources that reflect the laws of science and economics and will create a huge opportunity to improve our environment, provide funding for renewable energy sources and, of paramount importance, create millions of good jobs.

Earth

The U.S. has won the natural gas lottery. We have lots of it and it is economical without subsidies. In addition, compared with coal-fired electricity generation and gasoline-powered vehicles, natural gas is environmentally advantageous. Some say natural gas is a hydrocarbon and should not be included in a green agenda. However, the reality is that renewables do not yet provide the critical mass or economic viability necessary to make a significant impact. Natural gas does.

There are three reasons natural gas should be our No. 1 priority. First, availability. The emerging shale deposits — Barnett, Haynesville, Marcellus and others — will result in the United States having access to virtually unlimited supply. Estimates range as high as 800 trillion cubic feet of recoverable gas. We currently consume just 23 trillion cubic feet per year. Second is cost. Given the positive supply outlook, natural gas could trade in a range of $5-$7 per million cubic feet. This is equivalent to $1.50 per gallon of gasoline. Third, environment. Natural gas produces 30 percent to 45 percent less CO2 emissions than gasoline or coal, respectively.

How do we take advantage of this? First, mandate the use of compressed natural gas in the 620,000 vehicles used by federal agencies, and “encourage” the use of CNG vehicles by states and cities (3.2 million vehicles). This government initiative could jump-start private CNG use, which could result in an additional 20 million to 25 million natural gas vehicles over 5 to 10 years.

Assuming the number of CNG vehicles is in the ballpark, what are the benefits? Reduction in oil imports would save $50 billion a year of wealth transfer to other countries, CO2 emissions would be reduced by 14 percent, and 180,000 direct and 730,000 indirect/supplier jobs at high wages will be created in the field and in the factory.

The second way we can take advantage of our natural gas good fortune is through increased gas-fired electricity generation. The Environmental Protection Agency should mandate that the existing “dirty dozen” coal-fired plants be converted to natural gas and, more broadly, through a direct tax on CO2 emissions from coal-fired plants, encourage other conversions and new builds of gas-fired plants.

Let’s assume 35 power plants are either converted from coal or are built as gas-fired plants over the next ten years. CO2 emissions savings could average 70 million metric tons a year, and as many as 37,000 high-paying direct construction and operating jobs could be created.

Wind

For wind to evolve from potential to reality the government needs to do three things: take ownership of resolving the transmission and siting issues, clarify subsidies on a long-term basis, and near term, jump-start access to debt and equity capital.

What would be the positive outcomes? Currently there is 25,000 megawatts of installed wind capacity in the U.S. (2.5 percent of total electricity capacity) and 3,000 megawatts of additional capacity in late-stage development. If we could create 25,000 megawatts of new capacity over four years, we could save 160 million metric tons of CO2 emissions. Based on estimates that require 2,500 jobs per 1,000 megawatts of installed capacity, we could create 62,500 good jobs. The government should link subsidies to a requirement that turbines, blades and steel be made in America, thereby creating additional jobs.

Fire

Electric cars are here. GM plans to have production models in the showroom in 2010. The manufacture of electric cars will be a lifeline to auto companies and will save some jobs. Government subsidies should be granted to encourage the purchase of electric vehicles as well as U.S.-based research and development, and manufacturing.

The environmental benefits are compelling. Besides reducing emissions, electric cars can be charged when power is most available and from the most emissions-efficient plants. If electric cars prove to be half as prolific as hybrids, we could expect 125,000 new electric cars a year, resulting in 92,200 direct manufacturing jobs.

Solar alternatives will require higher subsidies to offset current costs and stimulate improvements in technology. Subsidies that are long term and predictable work best. Subsidies should be linked to “Buy American” mandates for plants and equipment. Up to 1 million jobs could be created just from the long-term extension of existing solar tax credits.

Initially, job creation will be installation-related, but over time significant high-paying R&D and manufacturing jobs will be created. Recent developments in nanotechnology, such as Innovalight’s nanosilicon powder, will pave the way for solar collectors imbedded in ink and paint. Your car’s body or the shingles of your roof could be their own source of solar power.

We also need a change in attitude about nuclear power. We have more nuclear reactors in service than any other country — it’s just that many of ours are in submarines and aircraft carriers. Still, nuclear reactors currently produce about 20 percent of the electricity generated in the U.S. and create zero emissions. By employing a standardized design and construction approach similar to that used by other countries and the U.S. military, we can reduce costs, speed up construction and improve safety. Thirty new plants (approximately half of the number currently in America) would bring capacity up to 30 percent. The operation of a single nuclear power plant requires 400 to 700 permanent high-paying jobs and construction adds another 1,800 jobs per facility. Benefits of Earth, Wind and Fire

Once you do the math, the benefits really add up: Direct creation of almost 1 million high-paying research, manufacturing and construction jobs, and approximately twice that number of jobs created indirectly; CO2 emissions reduced by 15 percent per year; and $50 billion kept at home to fund future innovation for renewables.

“Earth, wind and fire” is not only the answer to our energy questions, but it is the path to a national energy policy that creates a healthier environment and a stronger economy.

Mike McMahon is a managing director of Pine Brook Road Partners, a private equity firm focused on energy and financial services.