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Henry Hewitt

Henry Hewitt

Henry Hewitt is an investment strategist and portfolio manager with 36 years of experience in renewable energy. He is also a seasoned writer having published…

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Carbon Tax Could Be Fossil Fuel Industry Achilles’ Heel

Carbon Tax Could Be Fossil Fuel Industry Achilles’ Heel

PV checks every box on the list of imperatives. It is cheap, there are no problems getting it financed (SolarCity will install panels on your roof for no money down), it is massively scalable, from a calculator or lamp post to a square mile in the desert, and it produces very few harmful side effects, though the manufacturing process has a degree of toxicity, especially if you are making cells from Cadmium.

No other energy technology can make the same claims.

Wind comes close but it does not scale down (i.e. small, single-dwelling units are more expensive per Watt) the same way that PV can. Wind turbines are better off going big because the power output is directly proportional to the cube of the wind speed (V3), and the higher you get, and the further offshore you get, the better the resource.

V3 is an extraordinary advantage for turbines above the waves rather than below. Tidal currents are predictable, which is nice, but salt water and turbulence are engineering nightmares and so the cost goes up to deal with them, and the output from a body of water that moves at a few miles per hour is peanuts compared to steady offshore winds. Offshore wind is still much more expensive than onshore, but as the technology scales up, it promises to become a very important source, partly because it can be installed close to large urban areas where there is little room for onshore. Related: EIA Capitulates Under Cover Of Darkness

If someone tells you that wind isn’t a viable option, point them to a recent Guardian article with this headline: Wind power generates 140% of Denmark's electricity demand – “Unusually high winds allowed Denmark to meet all of its electricity needs – with plenty to spare for Germany, Norway and Sweden too.”

Hydro is often the cheapest source of power when it is available, but you need a river and most of the best ones are taken, so it is site specific and will not be able to scale like solar and wind. Hydro also presents questions over damages to the local environments where they are constructed. Geothermal is similar to hydro in that it is limited in scope, although it does have the virtue of producing power around the clock.

Ethanol seemed like a good idea to many prominent investors, including Vinod Khosla, several years ago, but it really does not measure up. An acre of corn in Iowa yields 500 gallons and pushes a reasonably efficient car about 10,000 miles per year. An acre of Warren Buffett’s PV arrays in Nevada will push 100 EVs that far in a year.

This is a losing battle; there are better ways to use corn, the net CO2 effects are neutral, at best, and the cost is too high. Even its supporters figure that in order to compete with gasoline the price of oil needs to be around $100, with hopes of getting costs down to compete with $75 oil (if that ever comes back). Related: Recession Risk Mounting For Canada

Biofuel enthusiasts point to fast growing trees, like Poplar, and claim that it is possible to get 800 gallons per acre. But this is still only a rounding error compared to the output from PV4EV. (Hopes for algae are based upon projects still in the science project phase, and unless they can produce 50,000 gallons per acre per year for $1 each, a very tall order, algae is not going to matter.)

On the fossil fuel front, it is clear that oil & gas can scale up or down. There are plenty of wells in the U.S. that produce 100 barrels or less per day. When natural gas scales down or when there is no cost-effective way to deliver the output (no pipeline), it is generally flared. Fossil fuels are still cheap. Even though some of us can remember paying 29 cents for a gallon, a liter of Coca-Cola costs more than the same amount of gasoline.

As mentioned, it is getting harder to finance business in the oil patch because the price collapsed after the industry borrowed a lot of money to get at the resource. The collapse was, in effect, the measure of their success. A recent Oilprice.com article explains that “driller’s debts increased to almost $235 billion by the end of the first quarter this year. Meanwhile, a recent S&P report says that oil and gas companies accounted for almost one third of the total global corporate debt defaults so far this year, the biggest reason being their inability to make interest payments.”

But, of course, the biggest hole in the fossil fuel game is carbon. Who can say when a carbon tax will take effect? What will the price be? What will the taxing authority do with the money? Coal’s recent woes have been discussed and a carbon tax will increase the headwinds to hurricane force.

The Dream (Source: Economist) The Nightmare (Fukushima – Source: Pacific Ocean)

The poster child for a technology or source that would not exist without massive and ongoing subsidies from governments around the world is nuclear power. In fact, nuclear is the one source that fails every test on the list of investment ‘imperatives’ mentioned previously. The Economist got it right not long after the Fukushima disaster with the cover story that read: Nuclear Energy: The Dream That Failed. Related:China Getting Serious About Solar Energy

It is too expensive, in part because it always takes longer to build than project developers’ claim, but mostly because it is extraordinarily risky and so the engineering requirements are formidable, as is the resistance from those who live nearby.

The just released Nuclear Industry Status Report paints a very grim picture. It is hard to see how anyone would want to invest in this technology for economic reasons. There are, however, hard-boiled ideological reasons for wanting nuclear energy to succeed, probably stemming from the stunning ending to World War II, the promise in the 1950s of generating power “too cheap to meter,” and seared memories of the Cold War, “a hard and bitter peace.”

Some very smart and well-funded advocates for nuclear power are now pushing for Small Modular Reactors (SMR). However, it should be noted that this technology is also still in the science project phase. It is decades away from mattering on a scale that can mitigate climate change, and does not measure up to the other non-carboniferous alternatives, i.e. solar and wind energy. It is also worth noting what the CEO of Westinghouse has said about the technology: “The problem I have with SMRs is not the technology, it’s not the deployment – it’s that there’s no [sic] customers.”

Now that is a problem. However, if and when a product or technology passes the four tests (Cost-effectiveness, Bankability, Scalability, Few hazardous side-effects ), that problem goes away.

The Atomic Energy Chief was right in 1954 when he said nuclear energy would be too cheap to meter. He was wrong about the technology. Terrestrial fission is expensive and deadly. (What is the present value of an infinite future liability?)

Celestial fusion (solar), on the other hand, is expected to carry on for several billion years more, and now that we have figured out how to capture it and put it to work for a reasonable price, the future looks bright. It would be imprudent not to invest in it.

By Henry Hewitt for Oilprice.com

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