A critical assessment of renewable energy usage in the USA$
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Energy Policy 31 (2003) 353–367
A critical assessment of renewable energy usage in the USA$
Donald L. Klass*
Entech International, Inc., 25543 West Scott Road, Barrington, IL 60010-2422, USA
Abstract
The displacement of non-renewable fossil fuels by renewable energy resources has occurred at a low rate in the USA. But a large
number of drivers is expected to cause significant expansion of the US renewable energy industry in the near future. Included among
the extrinsic drivers, or those that are not directly related to renewable energy resources, are reductions in natural gas and crude oil
supplies and the OPEC Effect. An assessment of petroleum crude oil and natural gas consumption and reserves supports the
position that supply problems and significant cost increases will start to occur in the first and second quarters of this century. Among
the intrinsic drivers, or those that are directly related to renewable energy resources, are global warming and specific government
incentives and mandates such as Renewable Portfolio and Fuel Standards that require the commercial use of renewable energy
resources. The increasing US dependence on imported crude oil and environmental and political issues will drive the growth of the
renewable energy industry and result in the gradual phase-out of what can be called the Fossil Fuel Era. By the end of this century,
the dominant commercial energy mix in the USA is projected to include major contributions by renewable energy resources to help
satisfy energy and fuel demands. Practical solutions to the problems of disposing of spent nuclear fuels and the development of clean
coal applications will enable these energy resources to afford major contributions also.
r 2002 Elsevier Science Ltd. All rights reserved.
Keywords: USA; Renewable energy; Petroleum crude oil; Natural gas; Electricity
Many industrialized countries started intensive re- necessity to import oil. Renewable energy utilization
search programs in the early 1970s to develop renewable would seem to address many of the security, environ-
energy resources. The technologies targeted were mental, and energy independence problems encountered
active and passive solar energy installations for residen- since the Fossil Fuel Era began near the end of the 19th
tial and commercial buildings; photovoltaic, wind, and century.
ocean systems for the generation of electricity; water The benefits of clean, renewable energy and fuels are
splitting for hydrogen fuel production; and biomass, evident, yet the displacement of fossil fuel usage in the
which consists of all energy-containing waste and virgin USA by renewable energy resources has occurred at a
forms of non-fossil carbon, for conversion to heat, very low rate over the last 30 years. An integrated, large-
steam, and electricity, and solid, liquid, and gaseous scale, renewable energy industry has not been realized in
fuels. Successful commercialization of these indigenous, modern times despite the major expenditures made to
non-fossil energy resources was expected to reduce non- develop and scale-up renewable energy technologies.
renewable fossil fuel usage, to stimulate regional The closest analog to this type of industry in the USA is
economic development and employment, to gradually the fuel ethanol business. The bulk of US fuel ethanol
eliminate adverse climate changes attributed to fossil capacity is currently based on corn feedstocks, but total
fuel consumption, to help achieve national energy production only satisfies a small fraction of the national
security, and to reduce a substantial portion of the motor fuel demand.
increasing trade deficits of some nations caused by the There are a number of reasons why commercial
renewable energy resources have not been widely
$
available—the stand-alone economics have usually been
This paper was presented in part at the online conference, ‘‘Energy
unfavorable, financing has been difficult to obtain for
Resource 2001’’ hosted by the World Energy Council, 21 May–1 June
2001. first-of-a-kind processing systems and plants, the infra-
*Tel./fax: +1-847-382-5595. structure for delivery and distribution is lacking, and the
E-mail address: bera1@excite.com (D.L. Klass). competition from fossil energy and fuel systems
0301-4215/03/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 0 6 9 - 1354 D.L. Klass / Energy Policy 31 (2003) 353–367
established over many years is strong. With the passage Table 2
of time, however, an unexpected business climate has Percent of net US electricity generation by energy source, 1992 and
1998
been created that should drive the growth of the
renewable energy industry. Unfortunately, the complex- Energy source 1992 1998
ity of the energy economy of the USA has tended to Coal 52.5 51.7
shroud the events that led to this situation. Nuclear 20.0 18.6
The objective of this paper, therefore, is to critically Natural gas 13.7 15.1
assess and discuss these events and their relationship to Hydropower 8.1 9.0
Petroleum 3.2 3.6
the future of US renewable energy resources and their
Other renewables 2.5 2.0
use. The energy economy of the USA is targeted because Other 0.1 0.1
although it has about 5 percent of the world’s
Source: Energy Information Administration (2000d).
population, it consumes about one-quarter of the
world’s total primary energy demand.
Table 3
Installed US non-utility electric generation capacity from renewable
1. Energy production and consumption
energy resources and purchases of electricity by utilities from non-
utilities by resource, 1995
A few selected renewable and total energy production
and consumption figures and shipment statistics for Renewable resource Capacity (GW) Purchases (TWh)
renewable energy hardware (Energy Information Ad- Wood and wood wastes 7.053 9.6
ministration, 1999, 2000a-c, 2001a) are presented in Conventional hydro 3.419 7.5
Tables 1–4. It will become apparent from this data that MSW and landfills 3.063 15.3
Wind 1.670 2.9
renewable energy resources have been small contribu- Geothermal 1.346 8.4
tors to US primary energy demand. Solar 0.354 0.8
Other Biomass 0.267 1.5
Total 17.172 46.0
Table 1
Source: Energy Information Administration (1999).
Total US energy consumption by resource, 1999a
Resource EJ % of total
Fossil
Petroleum 40.021 39.09 1.1. Total US energy consumption
Natural Gas 23.499 22.95
Coal 22.857 22.32 Total US energy consumption values in EJ by
Sub-total 86.377 84.39 resource and in percentages of total consumption in
Nuclear 8.156 7.97
1999 are shown in Table 1. According to this tabulation,
Pumped Hydro 0.067 0.07
Renewables the total consumption of US renewable energy resources
Wood and wood wastes 2.910 2.84 in 1999 was 7.89 EJ (7.483 quad), or about 7.7 percent of
Other wastes 0.639 0.62 total energy consumption. This is the largest energy
Geothermal 0.355 0.39 consumption value for renewable energy resources over
Conventional hydro 3.704 3.62
the period 1990–1999. The smallest value was 6.45 EJ
Fuel ethanol 0.129 0.13
Solar thermal and PV 0.066 0.06 (6.121 quad) in 1990, or 7.2 percent of total energy
Wind 0.048 0.05 consumption for that year. The percentage consumption
Sub-total 7.889 7.71 values are surprisingly close over this 10-year period.
(Sub-total ex hydro) 4.185 4.09 Fossil energy is clearly the largest US energy resource in
Grand Total 102.355 100.00
this recent compilation.
a
Pumped hydroelectric energy consumption is pumped storage
facility consumption minus the energy used for pumping. Wood 1.2. Electricity
consists of wood, wood wastes, black liquor, red liquor, spent sulfite
liquor, pitch, wood sludge, peat, railroad ties, and utility poles. Other
wastes consist of municipal solid waste, landfill gas, methane in Historically, coal has been the main fuel source for the
anaerobic digester gas, liquid acetonitrile waste, tall oil, waste alcohol, US electric power industry. This is still the case as
medical waste, paper pellets, sludge waste, solid byproducts, tires, illustrated by the percentages of net electricity generation
agricultural byproducts, closed-loop biomass, fish oil, and straw. Solar by energy source for 1992 and 1998 shown in Table 2.
thermal and PV consists of solar thermal and photovoltaic electricity
Note that the renewable energy resource hydropower
generation and solar thermal direct use energy. Wind includes only
grid-connected wind electricity generation. The totals may not equal contributed more to electricity demand than petroleum,
the sum of the components due to independent rounding. other renewables, and other resources combined in 1992
Source: Energy Information Administration (2000a). and 1998. It has been developed extensively over the lastD.L. Klass / Energy Policy 31 (2003) 353–367 355
Table 4
Total net electricity generated by utilities and non-utilities in USA by source, 1995 and 1999
Resource In 1995 (TWh) In 1999 (TWh)
Non-utilities Utilities Non-utilities Utilities
Renewables
Wood biomass 35.8 0.6 34.0 0.7
Waste biomass 19.3 1.0 25.2 1.3
Conventional hydro 14.6 296.4 19.6 300.0
Geothermal 9.6 4.7 15.1 1.7
Wind 3.2 0.01 4.5 0.02
Solar 0.8 0.004 N/A 0.003
Sub-sub-total 83.3 302.7 98.4 303.7
Sub-total 386.0 402.1
Non-renewables 280.0 2691.8 435.5 2870.0
Sub-total 363.3 2994.5 533.9 3173.7
Grand total 3358 3708
Source: Energy Information Administration (2000c).
century and is now considered to be a conventional generation. When hydroelectric generation is excluded,
source of electricity. More importantly, further growth 4.48 percent of the electricity from renewable resources
of hydropower, which has been relatively flat for many was generated by the utilities.
years, is limited because significant expansion of this
resource faces severe opposition based on environmental 1.3. Motor gasolines
concerns (McVeigh et al., 1999). Potential US sites for
new hydropower capacity have already been largely In 1999, the total production of petroleum-based
utilized (Energy Information Administration, 2001b). motor gasolines averaged 8.111 million barrels per day,
The installed US non-utility renewable power capa- or 477 billion liters (124 billion gallons) per year (Energy
city (in GW), and the utility purchases of electricity from Information Administration, 2001a). At an average
non-utilities generated from renewable energy resources energy content of 33.43 MJ/l (120 000 Btu per gallon),
(in TWh) in 1995 by source, capacity, and purchases are the annual energy consumption was about 15.7 EJ (14.9
shown in Table 3. quadrillion Btu, 14.9 quad). The total energy consump-
The installed non-utility capacity from renewable tion of the USA was 102.38 EJ (97.111 quad) in 1999.
resources was 17.172 GW and the total amount of Assuming that all of the US fuel ethanol production
electricity purchased by the utilities was 46.0 TWh. In from biomass feedstocks in 1999, about 6.09 billion
1995, the total net electricity generated by non-utilities liters (1.61 billion gallons), or 0.129 EJ (0.122 quad), was
from renewable energy resources was 83.3 TWh; so, blended with motor gasolines, its percentage contribu-
about 45 percent of the total was not sold to the utilities tions to total motor gasoline production and total
(Energy Information Administration, 2000c). energy consumption in 1999 were about 0.81 and 0.13
Total net electricity generation data in 1995 and 1999 percent.
are shown in Table 4. The total amount generated in
1995 was 3 358 TWh, and the amount generated from 1.4. Solar thermal collector, and photovoltaic cell and
renewable energy resources was 386.0 TWh, or 11.5 module shipments
percent of the total. Approximately 78.3 percent of the
electricity from renewable resources was generated by Low-, medium-, and high-temperature solar thermal
the utilities, the bulk of which was from conventional collector shipments in 1998 in square meters were
hydroelectric generation, and 21.6 percent was gener- 677 000, 41 200, and 2000, respectively; the total includ-
ated by the non-utilities. For comparison purposes, the ing all categories was 720 900 m2 (Energy Information
State of California produced about 25 percent of the Administration, 2000c). The largest end uses in square
electricity generated from renewable resources in 1995. meters were swimming pool heating, 669 000; water
In 1999, the total net electricity generated was heating, 43 000; and space heating, 6200. The largest
3708 TWh; the amount from renewable resources, market sectors were residential, 665 900 m2; and com-
402.1 TWh, was 10.8 percent of the total. Approxi- mercial, 48 000 m2.
mately 75.5 percent of the electricity from renewable In 1998, photovoltaic and module shipments in peak
resources was generated by the utilities, the bulk of kilowatts consisted of crystalline silicon, 47 186, and
which was again from conventional hydroelectric thin-film silicon, 3318; the total including all categories356 D.L. Klass / Energy Policy 31 (2003) 353–367
was 50 562 peak kW (Energy Information Administra- was $28.81 per barrel, while the average wellhead price
tion, 2000c). Interestingly, the peak kilowatts shipped of domestic crude oil was $28.09 per barrel (Energy
between 1989 and 1998 exhibited a significant continu- Information Administration, 2000a). These prices are 60
ing increase, 12 825–50 562 peak kW. The dominant and 47 percent greater than those 1 year earlier. In
market sectors in 1998 expressed as percentages of the August 2001, 1 year later, the corresponding prices were
total peak kilowatts shipped were: residential, 31.2 still above $20 per barrel, $23.77 and $25.44 (Energy
percent; industrial, 26.2 percent; commercial, 16.7 Information Administration, 2002). The trend toward
percent; electric utility, 7.8 percent; and transportation, more dependence on foreign oil in the USA is also
6.8 percent. However, it is important to note that continuing without any apparent abatement. On a daily
although 1931 peak kW photovoltaic and module average basis, the USA imported 6.9, 8.0, and 11.4
shipments were imported, the exports were 35 493 peak million barrels of crude oil and petroleum products in
kW, or more than 70 percent of the total shipments. 1980, 1990, and 2000, respectively (Energy Information
Administration, 2001a).
The long-term effects of higher oil prices caused by
2. Extrinsic drivers the ‘‘OPEC Effect’’ are continuing and are of great
concern to countries that must use imported oil. The
Several drivers discussed here are not directly related impacts of OPEC’s influence on the free market prices of
to renewable energy resources, but have been projected oil and the global business climate are at least partially
to result in higher fossil energy prices for consumers. reversible over relatively short time spans as shown by
This is expected to make renewable energy resources the corresponding changes in crude prices on successive
more competitive. relaxation and tightening of OPEC’s oil production. The
market prices of refined petroleum products normally
2.1. Policies of the organization of petroleum-exporting track crude oil prices with a short lag phase.
countries (OPEC) In the USA, the Bush Administration is now
establishing a new national energy policy to alleviate
OPEC began to make major changes in their policies the problems associated with oil imports (National
for producing and marketing crude oil in the early 1970s Energy Policy Development Group, 2001; Murkowski,
by limiting the oil production of its member countries. 2001). Basically, this policy proposes lowering oil
The economic Law of Supply and Demand was over- imports by expanding domestic oil exploration activities
ridden by what one might call its first derivative, the to bring new discoveries into production, and recom-
Law of Energy Availability and Cost. This resulted in mends a renewed emphasis on coal and nuclear power.
the so-called First Oil Shock in 1973–1974, and changed, The USA has about one-quarter of the world’s proved
probably forever, the business of the international oil coal reserves, and a long history of power generation
markets and the energy policies of most industrialized with coal-fired and nuclear plants. Vice President
nations. The immediate effects included crude oil price Cheney, who headed the National Energy Policy
increases to about $13 per barrel from a low of $2 per Development Group that developed the policy, stated
barrel, shortages and supply disruptions, and large in the report: ‘‘ ywe must modernize conservation,
increases in market prices for refined products and modernize our infrastructure, increase our energy
derived commodities. supplies, including renewables, accelerate protection
The OPEC members have carried a ‘‘big stick’’ since and improvement of our environment, and increase
then and have been able to manipulate the world’s our energy security’’.
energy markets and everything related thereto, almost
by choice. The countries most affected are the OPEC 2.2. Crude oil supplies
members that prospered because of their ability to
increase revenues from crude oil sales, in itself a By definition, petroleum crude oils and other fossil
perfectly legitimate business goal, and the industrialized fuels are natural resources that are destined to be in
countries that depend on oil imports to sustain their short supply and approach irreversible shortages at
economies and living standards. Those countries were different times in the future as long as they continue to
subjected to relatively large oil price increases for both be consumed as energy resources. To date, the
imported and domestically produced crude oil. abundance of crude oil and its intrinsic properties such
The USA is an example of an industrialized nation as high energy density, ease of transport, storage, and
that is adversely impacted because of its dependence on conversion to storable liquid fuels, and an existing
imported oil. In 2000, US oil imports were about 55 infrastructure that facilitates worldwide distribution to
percent of crude oil consumption, an increase of 9 refiners, have made it the energy resource of choice over
percent since 1992 (Murkowski, 2001). In August 2000, most of the last century. Concerns about proved
the average refiner acquisition cost of imported crude oil reserves and how long they can continue to meetD.L. Klass / Energy Policy 31 (2003) 353–367 357 demands because of the increase in global consumption of crude oil-based energy, fuels, and chemical feed- stocks, especially since World War II, are in order. With some degree of regularity, projections have been made over many years to predict global, regional, and national demands for petroleum crude oils. Although production gains are expected for both OPEC and non- OPEC producers, recent estimates indicate that more than two-thirds of the increase in petroleum demand over the next two decades will be met by an increase in production by OPEC member countries rather than by non-OPEC suppliers (Energy Information Administra- tion, 2001b). Up to 2020, the average annual growth rates in crude oil consumption are predicted to range Fig. 1. Global crude oil reserves remaining at annual growth rate in from a low of 1.4 to a high of 2.9 percent. This correlates consumption of 2.3 percent. with the prediction that crude oil will continue to provide the largest share of the world’s energy demands, which are projected to increase by 59 percent between tion of 167.2 EJ (27.34 billion barrels of oil) for 1999 1999 and 2020. The world’s dependence on petroleum (Energy Information Administration, 2001b), and an crude oils and petroleum products, especially by annual growth in crude oil consumption of 2.3 percent. industrialized countries, naturally raises questions about This growth rate is projected for the period 1997–2020 proved reserves and the sustainability of oil supplies. (Energy Information Administration, 2001b), and is Proved reserves are defined as the estimated portion of a assumed to continue after 2020. A multiple of five times natural fossil fuel deposit that is projected from analysis the proved reserves is again used to ensure inclusion of of geological and engineering data to be economically the ultimately recoverable reserves, and unconventional recoverable in future years under existing economic and oil resources such as heavy oils from tar sands. For operating conditions. comparison purposes, the US Geological Survey has In the mid-1950s, one of the assessments of crude oil developed low and high estimates of world oil reserves supplies and their ultimate production reported for the of about 9290 EJ (1.52 trillion barrels of oil) and United States suggested that US production would peak 19 380 EJ (3.17 trillion barrels of oil), excluding the in 1970 and then decline steadily thereafter (Hubbert, cumulative production of crude oil (cf. Energy Informa- 1956). There were many skeptics at the time, but this tion Administration, 2001b). These surveys include the projection turned out to be correct. Recent projections remaining reserves, growth in reserves, and undiscov- using basically the same methodology to estimate global ered resources. crude oil supplies support the position that the peak It is evident from Fig. 1, presuming the model has year for worldwide production of petroleum crude oils some validity, that global shortages of adequate crude should occur between 2004 and 2008 or possibly 2010, oil supplies to meet demand should start to occur and more importantly, that there will be a permanent relatively soon. It is noteworthy that a multiple of five decline in production of the world’s oil supplies there- times the proved reserves does not extend the theoretical after (Deffeyes, 2001). Other projections based on the depletion time of petroleum crude oils by five; the factor global proved reserves for 1990, five times the proved is about three. The reason for this is as oil consumption reserves, which is estimated to be about 2.5 times more continues, the remaining reserves are disproportionately than the ultimate recoverable crude oil reserves world- reduced by the fixed compound consumption. The wide, and an assumed constant annual growth rate in compound consumption model used here can of course consumption of 1.2 percent, or about one-half of what it be fine-tuned such as by incorporating actual percentage is today, suggest that crude oil supply disruptions can be rates in consumption change by year and by adjusting expected near the end of the first quarter of the 21st the curves to include updated reserves. More sophisti- century (Klass, 1998). cated models have also been employed that use the An assessment of the remaining reserves of crude oil historical records of accumulated consumption and versus year starting in 2000 using this model and current incremental changes (Hubbert, 1982). conditions is shown in Fig. 1. The conditions assumed When these results are considered in conjunction with for this treatment are global proved crude oil reserves of the predictions that future oil demand will continue to 6 218 EJ (1.017 trillion barrels of oil at 5.8 million Btu increase at a significant rate, and the fact that global per barrel) as of January 1, 2000 (Oil and Gas Journal, consumption has increased steadily since 1983, it is 1999) and five times the proved reserves as of January 1, concluded that shortages, supply disruptions, and 2000, or 31 090 EJ, a baseline global crude oil consump- unavoidable cost increases for crude oil and refined
358 D.L. Klass / Energy Policy 31 (2003) 353–367
100-year period before and after ‘‘Hubbert’s Peak’’
when most of the world’s oil is produced seems to tail
off after 2000 and approach a theoretical depletion time
near 2060–2070 (cf. Fig. 1; Deffeyes, 2001; Klass, 1998).
It is highly probable that long before this happens,
large-scale commercialization of major renewable en-
ergy and other energy resources will be essential to
sustain the energy economies of industrialized nations
and to conserve an increasingly more costly, irreplace-
able energy resource.
2.3. Natural gas
Fig. 2. Average monthly domestic cost at the wellhead of US crude oil It was not too many years ago that associated natural
in nominal US dollars, 1999–2001. gas was often flared as a waste product when transmis-
sion lines were not available nearby to move it to
market, and wells that produced sub-quality natural gas
were simply abandoned as unusable. The cost of
upgrading this gas was generally considered to be
unacceptable because so much cheap gas could be
purchased on the open market. This is not the case
today, particularly in the US energy markets. Even
unconventional natural gas deposits such as those
trapped in tight coal seem to have become valuable
resources. Coalbed methane production is rapidly
coming on line and has created a new industry in
several states that were not gas producers in the past.
The demand for natural gas is also expected to continue
to increase, not just because of population growth. The
fuel is the cleanest burning fossil fuel known, is widely
Fig. 3. US City average monthly cost of all motor gasolines including available, and up until recently, has been marketed at
all taxes in nominal US dollars, 1999–2001. acceptable prices.
The importance of natural gas as a residential fuel in
the USA, where over 50 percent of US households use
products are highly probable. The other factor, namely natural gas for space heating (Energy Information
the OPEC member’s control of a large percentage of the Administration, 2000a), is illustrated by what happened
world’s oil reserves cannot be ignored. Over the next to the markets during the winter of 2000–2001. For the
two decades, increases in crude oil production are first time in the author’s memory, the average price of
expected to be met mainly by OPEC members rather natural gas for residential customers exceeded the
than by non-OPEC suppliers. If the current owners of average market price of crude oil on an energy content
the majority of the world’s proved crude oil reserves basis in many areas of the country. Significant price
continue to maintain control of these reserves, the differentials up to 200 percent were reported. Although
OPEC Effect can become much larger than it is today. about 15 percent of US natural gas consumption is
Fluctuations in the average monthly domestic well- purchased via pipeline from Canada, some is obtained
head price of US crude oil over the last three years via pipeline from Mexico, and some is imported into the
(Fig. 2) and the corresponding average US city retail country as liquefied natural gas in cryogenic tankers, the
prices of all motor gasolines (Fig. 3) illustrate the price spikes were not a direct result of the OPEC Effect.
influence of the OPEC Effect. The wellhead price of To cite one example of the price spikes that occurred,
domestic crude oil normally tracks the price of imported in January 2001, the average refiner acquisition costs for
oil. Since the end of 2001, crude oil prices have returned imported oil and the average wellhead price for domestic
to the 20–$25 per barrel range resulting in correspond- crude oil were almost the same, $24.49 and $24.58 per
ing motor gasoline price increases. barrel ($4.00 and $4.02 per GJ, or $4.22 and $4.24 per
It is concluded that the combined impacts of the million Btu) (Energy Information Administration,
OPEC Effect and diminishing crude oil supplies will be 2002). At that time, local distribution companies
very large and adversely affect the economies of (LDCs) in Northern Illinois billed residential customers
developed countries over most of the 21st century. The over $8.54 per GJ ($9 per million Btu, or $52.20 perD.L. Klass / Energy Policy 31 (2003) 353–367 359 barrel of oil equivalent) for natural gas, excluding taxes common because the fuel’s emissions on combustion are and local delivery charges (Garza, 2001). The basic gas less than those of other fossil fuels and smaller plants charges were approximately three times those billed 1 can be built rapidly in locations that are not suitable for year earlier in an area that uses aquifers for under- large central utility stations. The allegation that natural ground storage of large volumes of natural gas gas-fired peaking plants caused these shortages, how- purchased during the summer months when gas prices ever, is not supported by the facts. Only a small amount are lower. of Illinois’ power needs are generated from natural gas. The price spikes caused numerous problems and During the 12-month period ending on December 31, complaints among residential natural gas customers 2000, the sources of electricity supplied to a large area of accustomed to prices in the $1.42–2.85 per GJ ($1.50–3 Northern Illinois, where the bulk of the state’s gas per million Btu) range. The demand for residential fuel markets and population are located, were nuclear in December 2000, one of the coldest on record in the power, 75 percent; coal-fired power, 22 percent; US Midwest, coupled with the natural gas price purchases from other companies, 1 percent; and only 2 increases resulted in severe suffering by many residents percent from natural gas-fired plants (Commonwealth of Northern Illinois. Many could not pay their bills, and Edison Company, 2001). some did not heat their homes. Some industrial gas The business climate created by natural gas shortages, customers that manufacture steel and chemical fertili- price deregulation, and the unbundling of services from zers shut down their plants because they could not wellhead to the consumer, are undoubtedly partially afford to operate with high-priced natural gas as a responsible for the price spikes. Deregulation of the process fuel or feedstock (Garza, 2001). Notable among natural gas business in Illinois to encourage competition the industrial users is a company in Decatur, IL in the and lower energy costs has not yet been fully imple- heart of the US Cornbelt, the Archer Daniels Midland mented, but gas pricing trends are following those of the Company. ADM is reported to have converted from telephone industry when it was restructured several natural gas to corn oil fuel to dry its corn feedstock for years ago for the entire country. Unexpectedly large the production of bioproducts. It is the largest increases in telephone communications costs occurred manufacturer in the USA of fermentation ethanol from instead of lower costs. corn for use as an oxygenate and an octane enhancer in motor gasolines. 2.4. Natural gas supplies A few energy analysts predicted that the price of natural gas would not return to $2.85 per GJ ($3 per An important aspect of the natural gas industry million Btu) levels. It did about 1 year after the price presents a sizable barrier to its projected growth—the spikes occurred, but large regional price differences still availability of sufficient natural gas to meet increasing occur. In January 2002 in the same area of Northern demands. For example, despite the volatility of natural Illinois, which turned out to have one of the warmest gas prices, it is currently the fuel of choice for the heating seasons on record, the residential price for majority of US power plants that have been completed natural gas billed by the LDCs, excluding taxes and over the last few years and that are under construction local delivery charges, was about $2.56 per GJ ($2.70 per or planned (cf. Powerplant Construction, 2002). Essen- million Btu). Natural gas prices have been projected to tially all of these plants have been built or proposed by remain in this price range throughout 2002 and are not independent merchant developers and not by utilities. forecast to decrease significantly during the summer due The market share for electric power generation with to the large amounts of gas required for power natural gas is projected to undergo substantial increases generation (cf. Gelber, 2001). from the percentage range shown in Table 2, 14–15 The main causes of the natural gas price spikes in the percent. State of Illinois have been debated in the popular press, Nearly 90 percent of the recent power-generating and local politicians have played the blame-game. A capacity additions in the USA, 67 GW built since 1999, common complaint was that the LDCs were gouging and 70 GW of added new capacity expected by the end their customers. The LDCs responded by stating that of 2002, will be fueled by natural gas (Gelber, 2001). the customers were charged only what they paid for Another study indicates that the bulk of the 300– natural gas plus the taxes and controlled local distribu- 400 GW in new capacity will use natural gas (Kemezis, tion costs. It was claimed that there was no mark-up on 2002). However, the natural gas required to fuel an the gas itself, even though some LDCs are owned by additional 300 GW of natural gas-fired generation corporations involved in natural gas production and capacity will require 14.8 EJ (14 trillion cubic feet at 1 transmission. Some attributed the price increases to 000 Btu per cubic foot) per year of natural gas by 2005, shortages caused by excessive consumption of natural an increase of more than 50 percent of current total gas in modern peaking plants and distributed generation consumption, while at best, the gas industry is expected facilities. These applications are becoming much more to increase supplies by 1–3 percent annually in the
360 D.L. Klass / Energy Policy 31 (2003) 353–367 coming years (cf. Kemezis, 2002). Since the USA is reported to have produced more than 40 percent of its total estimated natural gas endowment (Energy Infor- mation Administration, 2001b), shortages and cost increases are highly probable if this scenario is devel- oped. As of January 1, 2000, the proved and estimated unproved reserves of natural gas were 176 EJ (167 trillion cubic feet) and 1079 EJ (1023 trillion cubic feet) for the USA (Energy Information Administration, 2001d); consumption was 22.79 EJ (21.62 trillion cubic feet) in 1999 (Energy Information Administration, 2001e). The proved reserves-to-annual consumption ratio is 7.7, indicating that substantial additions to Fig. 4. Global natural gas reserves remaining at annual growth rate in proved reserves must be brought on line in the very near consumption of 3.2 percent. future to meet demand. This also suggests that natural gas prices in a free market will increase as US demand begins to impact fuel availability. and other potentially larger resources such as methane The status of global natural gas markets is similar. hydrates that may ultimately afford natural gas. The World demand for natural gas is expected to cause results of this assessment are shown graphically in shortages and price increases because it is the fastest Fig. 4. growing component of world energy consumption. Presuming the model provides results that are more Global natural gas consumption is projected to almost valid over the long term than reserves-to-consumption double to 171 EJ (162 trillion cubic feet) in 2020 from ratios, the trend in the curves indicates that shortages of 89 EJ (84 trillion cubic feet) in 1999 (Energy Information natural gas would be expected to occur in this decade Administration, 2001b). The average growth rate in and then begin to cause serious supply problems in the natural gas consumption worldwide over this period is next 20–30 years. Surprisingly, the shapes of the curves projected to be 3.2 percent per year. Further analysis of in Fig. 4 and the theoretical depletion times are close to data for proved and undiscovered natural gas reserves those for crude oil shown in Fig. 1. The combined supports the position that large price increases will baseline consumption and annual growth rate chosen occur. The world’s proved natural gas reserves were for each fossil fuel result in similar curves. The trend in estimated to be 5430 EJ (5150 trillion cubic feet) as of the reduction of producible natural gas reserves January 1, 2000 (Petzet, 1999). The undiscovered remaining with the passage of time is essentially natural gas reserves worldwide were estimated to be analogous to the reduction in producible crude oil 5478 EJ (5196 trillion cubic feet) as of January 1, 2000 reserves. This suggests that continuation of natural gas for a total reserve of 10 908 EJ (10 346 trillion cubic feet). and crude oil consumption under approximately the The same model used for projecting the global conditions assumed here for each assessment will result reserves of crude oil remaining versus year starting in in supply problems for each fuel in the same timeframe. 2000 is used here for natural gas. This assessment In terms of domestic US natural gas costs at the employs the proved global reserves of 5430 EJ (5150 wellhead, the OPEC Effect is small because OPEC has trillion cubic feet) reported for January 1, 2000 (Petzet, little or no control over natural gas prices. There is some 1999), and a baseline natural gas consumption of 88.8 EJ effect, however, because natural gas prices usually track (84.2 trillion cubic feet) reported for 1999 (Energy crude oil prices. The severity of winter during the space Information Administration, 2001b). The average an- heating season has much more of an impact on the cost nual worldwide growth rate in consumption of natural of natural gas as illustrated by Fig. 5. The winter of gas, 3.2 percent from 1997 to 2020, is used (Energy 2000–2001 was quite severe in much of the country Information Administration, 2001b). The model is compared to the previous winter and the winter of 2001– applied assuming that the same growth rate is constant 2002. But as time passes and natural gas reserves are and will continue after 2020. Note that instead of the consumed, a point should be reached when shortages sum total of the estimated proved and undiscovered cause price increases, possibly of the same magnitude as reserves, five times the proved reserves is also employed severe winters or larger. in this assessment. The reason for this is that the US Geological Survey does not include unconventional 2.5. Deregulation resources such as coalbed methane, most of which is reported to be located in the United States, Canada, and To gain additional understanding of US electric China (Energy Information Administration, 2001b), power markets, further assessment of this sector is in
D.L. Klass / Energy Policy 31 (2003) 353–367 361
power industries (Energy Information Administration,
2001c).
For the State of California, implementation of its
deregulation plan was an unmitigated disaster. Con-
sumer prices increased dramatically. The average on-
peak price per MWh in the Palo Verde hub in June of
1998, 1999, and 2000 was $15.74, $28.32, and $182.48,
respectively (Falk, 2001). The corresponding prices for
August of 1998, 1999, and 2000 were $51.50, $35.06, and
$219.96. These extraordinary price increases were only
part of the problem. Some of the largest investor-owned
utilities were forced to purchase electricity from outside
sources at high spot market prices to meet demand, but
Fig. 5. Average monthly domestic cost at the wellhead of US natural they were not permitted to recover their costs because of
gas in nominal US dollars, 1999–2001. rate agreements entered into in 1997 during the
restructuring process (Falk, 2001). Some utilities were
unable to pay for outside purchases because their cash
order, particularly regarding government policies and reserves were depleted, and they were unable to meet all
the interactions of governments and power producers. demands for electricity. Periodic rolling blackouts
The generation and marketing of electricity has become occurred. Declarations of bankruptcy and takeovers
much more problematic over the last decade, when by the State may still be in their future. For example,
deregulation of the industry was allowed, compared to one of the largest electric utilities in California, Pacific
its performance when regional monopolies guaranteed Gas and Electric Company, has filed for Chapter 11
the delivery of electricity to all customers at controlled bankruptcy (Anderson, 2001). A return to regulated
prices. The Federal Energy Regulatory Commission prices may be the end result of California’s experience.
(FERC) implemented the legislation that permitted Interestingly, while FERC has maintained that dereg-
deregulation in 1996—the Public Utility Regulatory ulation is preferable to cost-based regulation, it has been
Policies Act of 1978 and the Energy Policy Act of severely criticized for not imposing price ceilings earlier
1992—by issuing orders to make access to utility on California’s electricity markets. In December 2000,
transmission lines available to all power producers FERC reluctantly ordered a ‘‘soft’’ cap of $150 per
thereby increasing electricity supplies and competition. MWh on market bids (cf. Angle, 2001). In May 2001,
This made it possible for independent power producers FERC’s chairman and other FERC members agreed to
(IPPs) and distributed power generators to supply impose additional price caps on electricity for California
customers, and to reduce the need for large central and other western states (cf. Energy User News, 2001).
utility stations. A related issue that is at least as important to the
A deregulated industry, however, has not been deregulation of the energy and power industries in
immune to market upsets and supply disruptions, California, and without any doubt for the entire USA, is
witness the recent events in the State of California, with the historic bankruptcy of one of the largest US energy
an economy that some claim would be the sixth largest traders, Houston-based Enron Corporation. Some
in the world if the State were not part of the USA. members of the US Congress have charged that Enron
Legislation to deregulate the industry was enacted in has manipulated the prices of energy sold in the western
California in 1996 and implemented in April 1998 under states. FERC is investigating these allegations, and the
the overall jurisdiction of the State Government. In US Department of Justice is investigating whether
theory, deregulation is designed by state officials and criminal acts have been committed by Enron and its
legislators to lower prices, stimulate competition, and independent Chicago-based auditor and consulting
increase supplies. Restructuring of the electric power advisor, Arthur Andersen LLP. In the first criminal
industry was expected to give individual consumers the indictment resulting from this scandal, a federal grand
right to choose their electricity supplier on the basis of jury has charged Arthur Andersen with ‘‘knowingly,
price. The states have jurisdiction over the retail rates intentionally and corruptly’’ shredding thousands of
for electricity and distribution service areas, while documents related to its audits of Enron (cf. Alexander
FERC’s jurisdiction includes transmission and whole- and Hedges, 2002). A few energy analysts have stated
sale electric rates in interstate commerce, and approving that the bankruptcy of Enron has had almost no impact
the mergers of investor-owned electric utilities, most of on natural gas and electricity prices (cf. Chemical &
which are caused by competitive pressures brought on Engineering News, 2002). But from the standpoint of
by deregulation. The majority of the states have enacted deregulation, many states have delayed their plans to
or are planning legislation to restructure their electric restructure the energy industry, while some feel that it is362 D.L. Klass / Energy Policy 31 (2003) 353–367
difficult to achieve that goal in a high marginal cost (9) the public perception that energy conservation is
environment (Share, 2002). The State of Texas began ineffective;
deregulation of its electric power industry on January 2, (10) the apparent indifference of the public to the need
2000, 2002 (Graham, 2002). Restructuring under Texas’ for higher efficiency appliances, lighting systems,
plan and the possible effects of Enron’s plight on motors, other energy-consuming hardware, and
deregulation in Texas remain to be established. vehicles;
(11) the high local, state, and federal energy and fuel
taxes and the refusal of governments to reduce or
2.6. Other extrinsic drivers
remove them because of the windfall revenues
realized by the price spikes;
A wide variety of additional reasons has been
(12) the exponential rate of population growth which
reported to be the cause of the unusually large spikes
results in continually increasing demands for
in energy and fuel prices in the USA, a country where
energy and fuels;
even small increases in heating bills and the price of
(13) the national and urban highway systems that
gasoline at the pump upset many residents. The prices
cannot easily accommodate steadily increasing
have been low for many years compared, for example, to
vehicular traffic thereby causing additional fuel
those in Europe. The price of unleaded regular gasoline
consumption;
at the pump was about $0.20 per liter in the spring of
(14) the national air traffic jams created by the growth
1998 in certain areas of the country and then began to
in the number of passengers and on-runway delays
track crude oil prices.
at major urban airports;
Some of the other reasons stated for the price spikes
(15) legislation that prohibits oil and natural gas
are politically motivated or are connected to govern-
exploration and drilling in protected land and
ment legislation. Some are connected to conservation
off-shore areas, and the strong lobbying efforts by
efforts and environmental problems. Some are directly
environmentalists to sustain these laws;
related to specific weaknesses or planned strategies of
(16) new discoveries of oil and natural gas not being
the private sector. Among the generic reasons, several of
found at sufficient rates to at least replace what is
which have already been alluded to, that have been
being consumed;
reported by energy specialists and the popular press, not
(17) insufficient refinery capacity to meet energy and
necessarily in order of their impact, are:
fuel demands because new refineries have not been
(1) withholding refined petroleum products, natural built over the last 15 years;
gas, and/or electricity by the suppliers and/or (18) more frequent upsets of existing refinery opera-
distributors from the market to reduce supplies tions due to the breakdown of older plants;
and manipulate market prices; (19) scheduling refinery downtimes for maintenance
(2) price gouging by energy and fuel producers; purposes during peak driving periods;
(3) the US Clean Air Act Amendments of 1990 and (20) the limiting capacities of petroleum and natural
other environmental legislation that reportedly gas pipelines and the lack of new pipelines;
cause excessive implementation costs, such as the (21) the alleged absence of a comprehensive US energy
higher refining and blending costs of producing the policy over the last decade notwithstanding the
bouquet of reformulated gasolines needed to meet extremely large expenditures made to develop
the rules and regulations promulgated in different solutions to regional and national energy and fuel
areas by the US Environmental Protection shortages.
Agency;
(4) the failure of state and federal legislation aimed at Presuming that the population grows at projected
restructuring the utility industries to try to rates, serious natural gas and crude oil shortages are
stimulate competition and promote lower consu- predicted to occur during the first and second quarters
mer costs; of this century. Given the age and state of the US energy
(5) the banning of the construction of new fossil-fired transport and transmission infrastructure, and of US
power plants in many areas due to perceived planning for a future that involves continued increases
environmental problems; in energy and fuel demands, particularly for imported
(6) the banning of the construction of new nuclear crude oil, price increases will not be a short-term event.
power plants because of spent-fuel disposal It is not intended to continue this litany of extrinsic
difficulties; drivers essentially all of which improve the competitive-
(7) the limiting capacity of existing power transmis- ness of renewable energy resources, or to comment
sion lines and the lack of new lines; further as to why this whole raft of energy and fuel
(8) unnecessary electricity consumption for day and shortages and price increases have occurred in the USA.
night lighting and advertising in large urban areas; The interactions of so many parameters are sufficientlyD.L. Klass / Energy Policy 31 (2003) 353–367 363
complicated for modern industrial economies to require atmospheric concentrations of greenhouse gases. So
voluminous commentary and data for adequate assess- presuming that the emissions from fossil fuel usage are
ment. But the external factors mentioned here are one of the primary causes of global warming, the
basically all strong drivers for large-scale renewable gradual displacement of fossil fuels by renewable energy
energy consumption in the USA. resources should lead to lower atmospheric concentra-
tions of greenhouse gases and less climate change. In the
case of large-scale virgin biomass resources grown
3. Intrinsic drivers specifically for energy applications, they would of course
have to be replaced at the same or higher rate than their
There are several drivers that are directly related to rate of removal. In related biomass energy applications,
renewable energy usage. a few systems have already been built in which certain
species of trees are purposely grown to sequester
3.1. Global warming and the greenhouse effect sufficient ambient carbon dioxide from the atmosphere
to offset the carbon emissions from coal-fired power
The first comprehensive report since 1995 by the plants. The tree plantations are in tropical or semi-
United Nations Intergovernmental Panel on Climate tropical climates thousands of miles from the power
Change was published in 2001 (United Nations, 2001). plants in the USA.
One hundred and twenty-three leading authors wrote One of the drivers that is eventually expected to
this report with contributions by 516 experts. It projects stimulate renewable energy usage in the USA is the
that the earth’s average surface temperature will rise Kyoto Protocol first negotiated in December 1997 by
1.4–5.81C between 1990 and 2100 if greenhouse gas more than 160 nations to reduce greenhouse gas
emissions are not reduced. This is a significantly higher emissions (cf. Energy Information Administration,
temperature increase than the panel’s predictions in 1998). The delegates from approximately 180 nations
their report 6 years ago. The adverse consequences of met in Bonn, Germany in mid-2001 to delineate the
this increase are reported to include rising sea levels details of the Protocol and set mandatory emissions
between 9 and 88 cm over the same period, major limits, which would reduce emissions on an average of
flooding, storms, and losses of certain ecosystems, large about 5.3 percent under the 1990 levels by 2012
land losses, damage to agriculture and water supplies, (Cameron et al., 2001). The delegates were expected to
global health problems, increased mortality, and large meet again in Marrakech, Morocco to translate the
reductions in the gross national product of many Bonn Agreements into a fully operational Protocol
countries. (Cogeneration and On-Site Power Production, 2001).
All of these events are predicated on the assumption For a variety of reasons, the US Government has not
that the atmospheric concentrations of the greenhouse agreed to the binding targets accepted by most other
gases will rise from a current level of about 360 to countries to reduce greenhouse gas emissions. But
550 ppmv by 2050. The most important ones are carbon several US states have adopted so-called Renewable
dioxide, methane, and nitrous oxide. According to the Portfolio Standards that require retail power providers
US Environmental Protection Agency, atmospheric to operate specified percentages of generating capacity
concentrations of these gases have increased 30, 145, with renewable energy resources (cf. Cameron et al.,
and 15 percent, respectively, since preindustrial times 2001).
because of human-controlled fossil fuel combustion and
deforestation (US Environmental Protection Agency, 3.2. Government incentives
2000). Anthropological activities emit about 7 billion
tonnes of carbon to the atmosphere annually, which is In the recent past, a number of federal tax credits, tax
only about 3–4 percent of the amount exchanged subsidies, and renewable energy equipment purchase
naturally. The majority of climatologists believe that grants and loans were available in the USA to encourage
this is sufficient to cause an imbalance in the system, the marketing and use of renewable energy resources
thereby surpassing nature’s ability to remove carbon and to defray the purchase costs of hardware and
dioxide emissions from the atmosphere. There is by no equipment operated with renewable energy and fuels.
means universal acceptance of these predictions. There Examples include solar heating units for residential use
are contrary views as to the causes of increasing as swimming pool heaters, hot water heaters, and home
greenhouse gas concentrations (cf. Klass, 1993), that heating plants; vehicles operated completely or partly
the climate has not changed, and that any future climate with non-fossil-based liquid or gaseous fuels; alternative
changes will be barely perceptible (cf. Chemical & fuels for vehicles such as fuel ethanol made from
Engineering News, 2001). biomass; electricity generated by conversion of renew-
Renewable energy resources are by definition envir- able resources such as landfill gas and municipal solid
onmentally clean because they do not increase the wastes; electricity generated by wind turbines and solar364 D.L. Klass / Energy Policy 31 (2003) 353–367 energy converters such as photovoltaic devices; dedi- in the USA (National Energy Policy Development cated tree crops used only as fuel for the generation of Group, 2001). Several recommendations proposed in electricity; and gaseous fuels produced in biomass the policy are focused on renewable energy: increasing gasifiers. Many of the federal tax incentives have since support for research and development, funding selected been lost because of twilight provisions incorporated in programs that are performance-based and are modeled the legislation. Some have been extended, such as the as public–private partnerships, developing next-genera- fuel ethanol excise tax reduction, and efforts are tion technology—including hydrogen and fusion, con- underway to reinstate a few of the renewable energy tinuing and expanding several existing tax incentives, tax incentives that were terminated in the past, and to developing legislation to provide temporary income tax provide new tax incentives (cf. Lazzari, 2001). In credits for the purchase of new hybrid or fuel-cell addition, individual US states often provide tax vehicles between 2001 and 2007, and reevaluating access incentives to encourage the use of renewable energy limitations to federal lands in order to increase renew- resources (cf. Sanderson, 1994). able energy production such as biomass. Whether these Some of the tax incentives provided by federal incentives are included in the new energy bill should be legislation could not be used at all by project developers determined when it is enacted into law. because of stringent qualifying conditions. An example Other types of federal legislation that are not tax is the so-called closed-loop growth of trees for the incentives can present business opportunities as well. generation of electricity. To the author’s knowledge, not One example is the US Public Utility Regulatory a single tree farm, orchard, or plantation was ever Policies Act of 1978 (PURPA), which is part of the qualified by the US Internal Revenue Service because it National Energy Act of 1978. PURPA required utilities has not been economically feasible to plant, grow, and to buy electricity generated from renewable energy harvest trees for use only as fuel to generate electricity. resources or by cogeneration from an independent Electricity generation combined with other wood uses power producer’s facility qualified by FERC at the such as the manufacture of lumber was not eligible. utility’s avoided cost, or the incremental cost to the Also, waste biomass was precluded from consideration utility of electricity that the utility would have generated as a qualifying fuel. Legislation has recently been or purchased from another source (cf. Energy Informa- introduced in the US Congress to eliminate these tion Administration, 1999). Many small IPPs took barriers by expanding the list of qualifying fuels, by advantage of this legislation. PURPA was initially quite extending the time limits for qualification, and by successful because the utilities were obligated to broadening the scope of existing legislation. purchase power at a price determined by the states Federal legislation that requires Renewable Portfolio and their utility commissions. The avoided cost agree- Standards and Renewable Fuel Standards nationwide is ments were profitable to most IPPs who operated currently under discussion and is part of the Energy qualified facilities. To cite the State of California again, Policy Act of 2002 placed on the Calendar of the US its PURPA program was so successful that a morator- Senate (S.1766) on December 5, 2001. This legislation ium on new agreements was finally allowed. The state’s was introduced by Senate Democrats. If enacted into utilities were swamped with so many power offers from law as submitted, it would include tax incentives and IPPs, it was argued by environmental groups that new usage mandates for renewables as well as several other central station utility plants would never be needed to requirements for development of renewable energy increase future capacity. This was one of the underlying resources. Its passage could have large stimulatory causes of the situation that developed on the West effects on the growth of industry’s involvement in Coast. No new central station electric utility plants have renewable energy resources. Senate Republicans placed been built in California for the last 20 years. After the a different energy bill on the Senate’s Calendar on initial success of PURPA, the avoided cost of electricity August 3, 2001, that had already been ratified by the US had decreased to such a low level that many of the IPPs House of Representatives, Securing America’s Future could not operate at a profit. Those IPPs moth-balled, Energy (SAFE) Act of 2001 (H.R.4). It contains some dismantled, or sold their plants. Interestingly, the incentives for renewable energy usage, but does not situation changed so much in 2000 that the IPP’s plants contain Renewable Portfolio or Fuel Standards. The that are still operable are being brought back on-line at primary goal of this legislation is to reduce US a high rate because of extremely favorable economics. dependence on foreign energy sources from 56 to 45 Waste biomass is the primary fuel for these plants. percent by January 1, 2012, and to reduce US The difficulty of financing renewable energy projects dependence on Iraqi crude oil from 700 000 barrels per has already been alluded to. The US Federal Govern- day to 250 000 barrels per day by January 1, 2012. ment has many funding programs available to attempt The national energy policy referred to earlier being to overcome these barriers. The Government offers established by the Bush Administration is expected to loans to small businesses for renewable energy projects, provide new stimuli to increase renewable energy usage provides guaranteed subsidies for certain kinds of
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