China Energy Newsletter- February

CHINA ENERGY NEWSLETTER—FEBRUARY

China Outspends United States in Smart Grid Development

Federal and private investments in China’s smart grid projects are scheduled to surpass those of the United States in 2010. With $7.3 billion dollars in federal loans, grants, and tax credits targeted specifically at smart grid development, China hopes to upgrade and digitize its growing transmission system. Private sector initiatives like State Grid Corp’s (“SGC”) plans to develop a smart grid by 2020 also increase the chances for China’s smart grid success. As China’s leading power producer (SGC provides about 80 percent of China’s electricity), this transmission firm’s ambitious goal would increase transmission efficiency and connectivity to renewable power sources. Despite increased funding in both U.S. and China, and some factors that indicate that it will be easier to implement smart grid technology in China, both countries face the difficult question of how to achieve their smart grid targets.

SGC’s plan incorporates the typical list of smart grid characteristics: digital technology upgrades, bidirectional communication between supplier and consumer, and advanced sensors, computers, and transformers.^[1] Another key component of SGC’s smart grid plan involves the construction of ultra-high voltage ("UHV”) transmission lines. Indeed, for the first time in recent years, China’s investments in grid capacity have outpaced those in electricity generation.^[2] Notwithstanding, capital and technological constraints could extend the timeframe for implementation. China might spend $10 billion dollars a year through 2020 to reach a fully deployed smart grid.

These difficulties increase the need for cooperation between the U.S. and China. Also, that these nations share geographically similar demand (that is, they must send electricity over long distances) and uncharacteristically inefficient line losses makes sharing smart grid technology a logical collaboration.^[3] The global economic downturn has stifled some of the smart grid’s momentum in the U.S. ; nonetheless, the U.S. Government will invest $7.1 billion dollars in smart grid technology and development. In some regards, fully implementing smart grid technology will be easier in China than in the U. S.

For example, using the most advanced technology to build transmission lines will be easier in China where transmission construction is decades behind the U. S. Thus, China’s grid builders will have the opportunity to avoid some of the inherent inefficiencies of the American transmission system.^[4] While investments in China’s grid are definitely growing, there is some confusion about what role SGC will have in the projects. SGC, a private company partially owned by the government, has announced most of the lofty proposals for smart grid projects.

On the other hand, the Chinese government has promised most of the funds—it is still unclear how much SGC will receive to implement its plan. The confusion regarding who will pay for and who will develop China’s grid has not deterred American companies from providing additional investment. General Electric and Cisco Systems Inc. have agreed to launch pilot projects in both China and the United States.^[5] With such strong funding from governmental and private sources, it is undeniable that China’s grid will experience comprehensive upgrades. Still, completing a functioning smart grid by 2020 will be a formidable challenge requiring renewed collaboration with American political and technological interests.

Relying on cost sharing to advance more expensive technology could be the first step toward reaching dual smart grids in the U. S. and China. It is likely that private investors would cooperate with such initiatives, for their bottom line will expand faster if both nations are ready to implement the same technology. Additionally, a smart grid could mitigate some environmental concerns—especially those in China—created by using fossil fuels. By increasing efficiency and the reliability of renewable fuels, the smart grid could help limit emissions that cause global climate change.

^[1] http://www.shanghaidaily.com/sp/article/2009/200906/20090601/article_402643.htm

^[2]http://www.zpryme.com/reports/smart_grid_snapshot_global_and_china%20federal_stimulus_funding_zpryme_jan27_2010.pdf

^[3] http://solveclimate.com/blog/20090605/chinas-smart-grid-ambitions-could-open-door-us-china-cooperation

^[4] http://www.triplepundit.com/2010/02/china-now-world-leader-in-smart-grid-investment/

^[5] Id.

COAL

China’s First IGCC Power Plant (2-8-2010)

China was approved by the Asian Development Bank for a $135 million loan to build a coal-fired integrated gasification combined cycle (IGCC) power plant. An IGCC plant turns coal into synthetic gas that removes impurities before the gas is burned in a gas turbine. ADB is also lending money for a second and third phase of the program that will provide technical assistance for IGCC plants with carbon and storage technology to be built by 2013.

http://www.chinadaily.com.cn/m/tianjin/e/2010-02/08/content_9451196.htm.

ELECTRICITY

China’s Power Costs and Consumption Expected to Rise (2-4-2010)

Rising coal prices are expected to cause significant revenue declines for Chinese power generators. Additionally, China’s expected increase in energy demand, resulting primarily from increased industrial activities and a growing population, has spurred Chinese power generators to look for means to mitigate the escalating fuel prices.

http://www.chinadaily.com.cn/cndy/2010-02/04/content_9424867.htm

“China’s Power Consumption Grows 40 percent in January” (2-12-2010)

Electricity consumption in China grew at a rapid pace in the last year, up 40 percent from January of 2009. Residential and industrial consumption leaped by 26% and 24%, respectively.

http://www.chinadaily.com.cn/bizchina/2010-02/12/content_9467778.htm

INTERNATIONAL ENERGY POLITICS

Indian Government Boots Chinese Power Producers (2-10-2010)

In a move contrary to previous actions, the Indian government has decided to limit the number of foreign nationals working on any given energy project. Specifically targeting Chinese workers originally called in to construct facilities that would supply 25% of India’s generation capacity, India revoked the visas of 3,000 Chinese nationals. India’s private power producers have not voiced the same concerns about Chinese participation in Indian projects, and in fact, have relied on Chinese diligence and expertise to finish supercritical construction. Nonetheless, Rakesh Nath, chairman of the Central Electricity Authority, thinks it best that India take control of its generation capabilities.

http://online.wsj.com/article/SB10001424052748703630404575053173929691614.html?KEYWORDS=china+energy#articleTabs=article

Imports Surge as China Expands Into Global Energy Sector (2-14-2010)

Chinese imports of crude oil in December 2009 were up 48% year-on-year. Demand is expected to rise an additional 9.1% this year. This increase is due, in part, to China’s continued expansion into the global energy market. In addition to purchasing assets in Saudi Arabia and Iran, China has offered to provide loans to the crude-rich states of Africa in exchange for oil contracts. China worries that increased U.S. sanctions on Tehran will stifle oil trade, but so far China has proceeded in Iran with multi-year contracts and investments.

http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-newspaper/business/13+china-invests-heavily-in-energyrich-states-420-za-11

RENEWABLE ENERGY

Taiwan’s Green Energy Development (2-4-2010)

The Taiwanese government expects its green energy industry to reach a production value of $35.9 billion by 2015 as a result of the nation’s public and private investment and emphasis on economic development. Taiwan’s energy technology development and production will focus on industries such as solar, lighting, wind, bio-energy, fuel cells, electric vehicles and energy information communication technology.

http://www.chinadaily.com.cn/hkedition/2010-02/04/content_9424457.htm

China’s National Renewable Energy Center (2-10-2010)

With the help of Danish financial support and industry expertise, China is developing plans to build a national renewable energy center which will serve to promote renewable energy development and implementation in China. Chinese officials recognize that renewable energy is the solution to energy security. In 2009, renewable energy accounted for 7.5% of China’s energy consumption. Furthermore, China looks to renewable energy to meet its carbon emission reduction targets of a 40-45% reduction by 2020. Currently, China is the third largest producer of wind and produced about 40% of the world’s solar photovoltaics.

http://www.chinadaily.com.cn/bizchina/2010-02/10/content_9456628.htm.

Reflections on the 2010 Tuck Business and Society Conference

"There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man's lawful prey."--John Ruskin, Romantic, Critic, smart guy

I attended the 2010 Tuck Business and Society Conference (VLS is a contributing sponsor) this week. This year's BSC was built around a theme of "resource scarcity." A great conference with excellent panelists, including a panel moderated by the Institute for Energy and the Environment's Director, Michael Dworkin. Dan Reicher, the director of climate change and energy initiatives at Google (and a candidate for Obama's cabinet in a few years), was terrific. So was Bob Metcalfe (below), one of the original internet entrepreneurs (among other things, he co-invented the ethernet), who sought to present an admittedly "right-wing" perspective on how the successful development of the internet could serve as a blueprint for future energy development.

Metcalfe was especially interesting because 1- he was saying new things and 2- he was ignoring large chunks of reality to have it fit his paradigm. One of Metcalfe's comments deserves special mention: he criticized the Department of energy for having a $25 billion dollar budget and not doing enough to solve the energy crisis; in the next breath, he emphasized that the government should direct energy funding towards research universities. Of course, the DOE spend the vast majority of its budget safeguarding the nuclear armory and monitoring nuclear facilities (would he like to make budget cuts there?) and the DOE doles out much of its budget to research, including in significant part, research universities.
Anyway, back to substance. Reicher, among other points, noted he was fond of offshore wind development (a research interest of mine). Metcalfe focused on nuclear and coal. As the last speaker wound down, a Tuck student suggested that Reicher was all "wrong" to favor wind farm development because it will never beat coal on price. And for the foreseeable future, that Tuck student is correct: the capital building a coal plant is vastly cheaper than constructing an equivalent wind farm off the Atlantic. But the operating costs are close and favor wind farms. And wind has none of the external costs, like the costs of pollution (such as coal ash or toxic particles) or greenhouse gas emissions. And if there is a price put on carbon, such as through cap-and-trade or a carbon tax, well, wind becomes an especially attractive option.

The costs are not as far apart as the Tuck student might suggest. And just because coal is cheap today doesn't mean it is what a government should want for its people, or what we want utilities to pursue. Wind has drawbacks, but outright dismissal ignores the environmental and long-term economic and security stakes in play.

[Photos from Tuck BSC and Wikipedia]

A Tough Week in New York for Enexus

Entergy’s quest to shed Vermont Yankee and the company’s five other nuclear power plants took something of a soap-operatic turn on Thursday in New York.

Regulators in New York and Vermont are all that stand between Entergy and its plan to spin off its nuclear fleet to a new company Entergy has created, called Enexus. The transaction as presently proposed would involve Enexus borrowing $3.5 billion from banks. Entergy would get $2.75 billion of that in cash and the nuclear plants would get a new owner that is much more leveraged, and thus much riskier a corporate entity, than the old one.

Just as the Vermont Public Service Board has the authority to reject the plan, so too is the Entergy-Enexus deal pending before the New York Public Service Commission. News reports from Albany on Thursday suggested that the New York regulators had rejected the Enexus proposal, at least in its present form.

In fact, all the Public Service Commission did on Thursday was issue a press release. And one might reasonably conclude that the issuance was merely a new episode in a political drama that appears to be unfolding with Entergy and New York Attorney General Andrew Cuomo as major characters.

The Public Service Commission’s press release was admittedly quite a substantive issuance, expressing doubts about whether the Entergy-Enexus proposal meets the standard for approval under New York law. According to the press release, the Enexus deal is “problematic” because “the amount of debt leverage employed to finance Enexus is excessive when the business risks of this new merchant nuclear plant enterprise are considered.”

The New York regulators’ press release went on to suggests some changes that would make the Enexus proposal less problematic. They included trimming the Enexus debt to roughly $3 billion, which presumably would mean $500 million less cash to Entergy in exchange for the nuclear plants.

Two other suggestions came from the New York Public Service Board. One was that Enexus should “assure [its] long-term financial capabilities through maintenance of a specified bond rating or ratio of debt-to-equity market value.” Another was to “provide New York ratepayers some of the potential hedging benefits of nuclear power in periods of rising commodity prices.”

That last suggestion strongly resembles the deal cut in Vermont eight years ago, when Entergy bought Vermont Yankee and agreed to a longterm deal to sell roughly half the plant’s output to the state’s two major utilities, which formerly owned the majority interest in Vermont Yankee. The deal expires in two years and Entergy wants to replace it with a much smaller contract that is less favorable to the Vermont utilities and thus their customers.

But the most noteworthy thing about the New York regulators’ press release is that it was just that: a press release, as opposed to a decision or even a recommended decision. The document references a “report” the agency received from unidentified “senior Staff.” But the report itself was not issued publicly and, indeed, the press release did not indicate whether the report was even delivered in writing.

This becomes more understandable when one considers last week’s submission to the commission by the office of New York Attorney General Andrew Cuomo. His office urged the regulators to require the two administrative law judges handling the case to issue a written recommended decision or some other kind of formal report. The idea would be to subject those recommendations to public comment prior to a final decision by the five members of the New York Public Service Commission themselves.

Cuomo’s office is unabashedly hostile to proposed spin-off, which would include two nuclear facilities in New York: Indian Point, on the Hudson River just north of New York City, and FitzPatrick on Lake Ontario. To get a feel for Cuomo’s take on the proposal, here’s how the February 3 submission from his office summarizes it: “Entergy seeks to spin off several aging nuclear power plants to a new and debt-laded corporation whose only assets would be the plants themselves. Not only would this new corporation be heavily-indebted, it would be unique; no other corporation is exclusively built around aging nuclear reactors that operate in a ‘merchant’ [i.e., non-utility] power system.”

In these circumstances, the press release from the Public Service Commission in Albany looks like an effort to steer a middle ground between Cuomo and Enexus. Cuomo didn’t get his recommended decision, but he did get a written document on which to comment. Enexus and its progenitor got a warning to sweeten the deal.

The progenitor in question may be disinclined to do that. In his quarterly conference call with investment analysts earlier this month, Entergy CEO Wayne Leonard warned that an unfavorable ruling on the spin-off in New York would trigger “decisive actions to eliminate disynergies.” That’s nothing if not cryptic – “disynergy” is not in the dictionary, after all. But Leonard gave a hint of one possibility in an interview with Bloomberg News back in November.

According to Bloomberg, Leonard said that one option would involve Entergy keeping the nuclear plants and spinning off its un-risky regulated utility subsidiaries in Arkansas, Louisiana, Mississippi and Texas. This would achieve much the same effect as the Enexus deal – but, according to Leonard, since the nuclear plants in New York would not change hands the regulators in New York would have no ability to stop the transaction. Entergy would presumably make a similar argument in Vermont.

The latest regulatory doings in New York point up the bind that such high-stakes proposals put state utility regulators. Leaving most electric and telephone companies in private hands reflects a policy choice to the effect that the private sector is better qualified than the government to run these systems. Thus regulators feel pressure not to veto the strategic business decisions those private actors propose. The regulators certainly have great leverage but their status as quasi-judicial decisionmakers precludes using that leverage behind closed doors where high-stakes business negotiations typically unfold.

The result is the kind of awkward public jockeying reflected in this week’s press release from the New York Public Service Board. Much the same dynamic applied two years ago when regulators in Vermont, New Hampshire and Maine considered, extracted changes to, and then approved, Verizon’s plan to sell its landline phone network to Fairpoint Communications.

Like the proposed Entergy-Enexus deal, Verizon-Fairpoint involved one company walking away with lots of of cash and the other walking away with new assets, new responsibilities, and lots of debt. Obviously, regulators do not want Enexus to end up in bankruptcy like Fairpoint did.

A Connecticut River Valley Story

Bad news for Vermont: 620 megawatts of generation capacity on the banks of the Connecticut River were blown to smithereens on Superbowl Sunday and at least five people are dead. The good news is that Vermont Yankee was not involved.

Still, the demise of the Kleen Energy facility in Middleton, Connecticut, which was 96 percent complete and scheduled to fire up its gas-fired turbines later this year, is an event of no small significance throughout New England. It raises profound questions of accountability and energy capacity.

Once upon a time, generation facilities of this size were developed only by regulated utilities subject to the jurisdiction of both the Federal Energy Regulatory Commission (FERC) and state commissions like the Vermont Public Service Board. Today, in Connecticut, Vermont and many other states, utilities own little or no generation capacity themselves and buy their power from so-called merchant generators like Vermont Yankee and Kleen Energy.

New England has one big regional market for wholesale electricity, which got under way in the late 1990s and quickly proved itself inadequate. The key flaw was an inability to attract developers interested in building new generation facilities to serve future growth in electricity demand. In the old days, utilities were simply required by regulators to meet those needs and to do so prudently.

Several years of hotly contested litigation later, the FERC approved something called the Forward Capacity Market – essentially an auction-based mechanism for compensating developers now in exchange for their promise to be available later. Utilities and other companies with retail electric customers are required to buy capacity credits from these generation owners.

At least until Sunday, the biggest winner in this capacity game has been Kleen Energy, which has (or had) a 15-year deal brokered by state officials to sell its capacity to Connecticut Light & Power (CL&P). A key fact, usually overlooked in coverage of the explosion, is that CL&P did not buy Kleen Energy’s actual electric output – just the right to claim Kleen Energy’s capacity credits.

Meanwhile, when the Forward Capacity Market began holding auctions in 2008, Kleen Energy’s 15-year capacity deal, and three others like it in Connecticut, were blamed (or credited) for driving down the auction price of capacity credits. This meant that other developers of new capacity throughout New England, some of which will never be built, and none of which have since exploded, could not get the same deal-sweetening subsidies that Kleen Energy had locked into place by contracting with CL&P.

As far as the actual energy is concerned, Kleen Energy has (or had) a sales agreement with Constellation Energy Commodities Group, a big wholesale energy trading firm. Kleen Energy had filed a request with the FERC for so-called market-based wholesale rates. This is essentially a request that FERC simply assume that Kleen Energy’s deal with Constellation is just and reasonable. Under this hands-off theory of regulation, the FERC is powerless to help consumer advocates or anyone else who pops up later to complain. That’s what the U.S. Supreme Court decided less than a month ago in a case called NRG Power Marketing LLC v. Maine Public Utilities Commission.

The upshot is that, starting later this year, 620 megawatts of power that was supposed to be there for New England will not be available for purchase or use by customers. Those who favor closing Vermont Yankee can call it a dress rehearsal for not renewing the plant’s license, which expires in two years.

An interesting question is who owns Kleen Energy. A private equity firm, Energy Investors Funds, pumped nearly a billion dollars into Kleen Energy two years ago and thereby acquired 80 percent of the facility. The project’s original backer was Philip Armetta, proprietor of the local Dainty Rubbish Service, who bought the Kleen Energy site in the late 1990s. In April 2007, in connection with a federal investigation of Connecticut’s trash hauling business, Armetta pleaded guilty to withholding information on a crime. He spent three months in prison and three months on house arrest. His minority interest in Kleen Energy is now in a trust, according to the New York Times.

In other words, the future of New England’s electricity supply is no longer in the hands of publicly traded corporations whose every move is scrutinized by federal and state regulators. Today it is frequently consigned to operators who avoid the limelight when possible.
Merchant generators can rightly claim that electric customers are no longer directly on the hook if plants are shuttered because of tritium leaks or never open because of explosions. But ratepayers do not get off scot-free. The loss of Kleen Energy’s power will alter the equilibrium between supply and demand by raising the wholesale price of electricity throughout New England. Meanwhile, Vermont ratepayers helped subsidize massive transmission upgrades in Connecticut.

Electricity customers at all points along the Connecticut River want clean and reliable energy at the lowest possible cost. Developers of projects like Kleen Energy never claim that their energy will be ultimately be cheaper than facilities built by utilities working under full public scrutiny. Apart from what it buys from Hydro-Quebec, Vermont gets nearly all of its electricity from non-utility merchant generators around New England. They’re not promising cheaper power, and apparently they cannot deliver safety either.

[The above appeared, under a different headline, on vt.digger.org yesterday.]