November/ December 2012 How We Could Blow the Energy Boom

America’s vast new surplus of natural gas could lead to great prosperity and a cleaner environment. But if we don’t fix our decrepit, blackout -prone electric grid, we could wind up sitting in the dark.

By Jeffrey Leonard

These days, companies like Amazon and Google are forced to rely on banks of backup diesel generators to keep their servers up and running, turning what would otherwise be a “clean” business into a major source of air pollution. Some years ago, when I was chairman of the Clean Technology Venture Network, I listened to Andy Grove, a founder of Intel, address a group in San Francisco. He said that for Intel, which has hundreds of millions of dollars invested in high-tech equipment and highly paid engineers, the cost of electricity isn’t the issue. It’s the dual risk of power outages and poor electrical quality that threatens devastation of the company’s bottom line.

For the government, the bottom line is this: we need to repair and maintain the entire infrastructure of the grid, and protect it against new threats that could cause catastrophic failure. Congress should give FERC an explicit mandate to set age and reliability standards for critical components of the grid, and make sure that there are sufficient inventories of such components. This is necessary to ensure that weak links in the entire transmission and distribution chain are not created by the failure of some utilities to replace badly antiquated equipment or undertake necessary maintenance. FERC also needs to have sufficient power to deal with a national emergency that might befall the entire bulk electricity system. Congress should clarify such authority and direct FERC to develop national emergency plans that require utilities, power companies, and others to prepare for cyber and physical attacks. And, with the right regulatory framework, the investments necessary to meet all these challenges will be made by the private sector, not the government.

To its credit, the Obama administration has, over the past four years, become increasingly aware of the problems facing our basic grid and taken some useful steps to address them. Recently, for example, FERC has issued a number of administrative rulings to promote more investment in new transmission lines in congested areas and to new renewable energy sources, like wind farms. In addition, the administration has funded a plethora of such renewable energy sources, including three of the world’s largest renewable power plants: a wind farm, a photovoltaic solar array, and a solar thermal plant. And in August 2012, President Obama signed an executive order titled “Accelerating Investment in Industrial Energy Efficiency,” which could help reduce transmission congestion and the need to build new power plants in the future. Steps like these are crucial. But they are not enough.

Thus far, the administration has neglected the basic infrastructure repairs necessary to keep the current grid up and running. It has also neglected the critical linkages between gas and grid. Instead, it has concentrated on adding what are in effect digital bells and whistles to a broken machine.

Take, for example, the American Recovery and Reinvestment Act of 2009, which allocated more than $90 billion in government investments and tax incentives “to lay the foundation for the clean energy economy of the future,” as a Department of Energy document states. Only $4.5 billion of this money went to what the DOE calls “grid modernization,” and $3.5 billion of that went to subsidize the installation of fifteen million “smart meters”—digital devices that automate the management of electricity for households and businesses. As Michael Grunwald notes in his new book on the effects of the stimulus bill, The New New Deal (see Ryan Cooper’s review in this issue), handing out smart meters without addressing the problems with the basic grid is like “handing out iPhones before there was a 3G network.” Replacing aging transformers may not be politically sexy, but just restoring the existing “dumb” grid to its condition in, say, 1974 has to come before adding smart grid features.

Once we’ve made adequate progress on that front, however, there is indeed the opportunity to take the grid to a whole new level of intelligence—one that will truly leverage our windfall of gas, while also vastly reducing the number of unsightly transmission lines and ugly generating plants that would otherwise need to be built. The smart grid involves the installation of sensors, digital controls, and analytical tools that can be used to automate, monitor, and control the two-way flow of electricity, from power plants to power lines to the electrical sockets in your kitchen. A reliable, secure grid, outfitted with smart components, would usher in a new era of electricity-demand management and end-user efficiency that could cut up to 22 percent of U.S. energy consumption.

With a smart grid, for example, it becomes possible to lower substantially the amount of electricity needed to run household appliances, from washing machines to refrigerators. Chips embedded within such appliances will communicate with the grid, taking advantage of when surplus electricity is available and thereby reducing spikes in usage.

In the renewable energy industry, utilities could use the intelligent networks to incorporate, in real time, the variable output of several renewable sources, such as solar and wind, and to dispatch backup natural gas turbines as needed. Existing digital technology could also enable utilities to remotely manage widely distributed power sources. This could even include drawing on the energy stored in the batteries of electric vehicles when they are plugged in and already fully charged.

Electrical infrastructure has typically been built to meet so-called peak load demands—the highest amount of electricity needed at peak times on peak days. Today, this leaves a large portion of the electricity industry’s capital stock vastly underutilized most of the time—the average natural gas power plant today is only running about 42 percent of the time. But with a smart grid enabled for real-time pricing of electricity, peak load demand could be smoothed out, and wasted generation reduced. Smart grid enhancements could also allow transmission lines to send 50 percent to 300 percent more electricity through existing energy corridors. These outcomes could reduce congestion on the now-overloaded parts of the grid, and reduce the number of expensive new high-voltage transmission lines that we need to build or replace.

Finally, a smart grid could facilitate the move toward more locally distributed electricity generation, like community cooperative solar farms, which are growing in popularity in states that require utilities to dispatch such local suppliers. By reducing the amount of electricity that has to travel from distant power plants to consumers, this in turn would also reduce the huge amount of energy that is lost in transmission and distribution, as well as the amount of pollution caused by generating the wasted energy in the first place.

If we are able to generate a large portion of our electricity using cheap natural gas and then distribute that electricity through efficient and cost-saving smart grid technologies, today’s children may well grow up to enjoy a higher standard of living than their parents, and the planet will benefit as well. But that’s a big “if,” especially if we don’t have even a basic plan for how gas and grid will work together.

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.


  • A.Oscar Antonio Oscar on November 12, 2012 10:56 AM:

    The way we have the world with the Earth real sick; donít going to the first, not even the last one. And worse ones will be around again soon; Iím not to the point be negative, just the reality in the account to my studdingís. A.Oscar

  • Eric on November 12, 2012 1:18 PM:

    When burning gas at a plant to generate electricity, a large amount of energy from the gas is emitted as heat and wasted. When burning gas in my furnace to heat my home, the heat given off is actually used. I'm skeptical that electricity generation is the "optimal use" for natural gas (despite some justifications given in the article).

  • Dave on November 12, 2012 1:56 PM:

    Eric, heat is one of the lowest forms of energy, so although the efficiency of a gas furnace can be very high, the use of natural gas in a modern gas combined cycle generator produces high quality energy in the form of electricity, a much more flexible and powerful tool than the low level heat you get from burning gas. An additional factor is that modern heat pumps powered by electricity can be more efficient than gas furnaces while also providing air conditioning. The bigger picture here is that any long term thinking about national energy use will have to pay attention to issues like the one you raised while also thinking about the impact of a major effort to retrofit buildings to be more efficient overall. Energy not-used is just as valuable as finding more.

  • Ed on November 13, 2012 6:29 PM:

    We could blow the energy boom by paying any attention at all to editorials from manipulative con artists from crooked hedge funds.

  • M. Report on November 13, 2012 6:57 PM:

    Backup generators are popular in areas hit by Frankenstorm.
    Standby generators, their big brothers, are also being
    ordered at a good clip.

    Downsize, standardize, modularize, modernize;
    Build a bullet-proof Grid !

  • Corky Boyd on November 13, 2012 8:58 PM:

    The availabilty of inexpensive gas will have profound effects, well beyond its substition for coal in electric power generation.

    The largest item in our balance of payments defecit is energy. The world gas price outside of the US is $10 to 12 compared to under $4 in the US. The fact shale formation gas is generally profitable at around $2 gives the US a tremendous advantage in the world market. Russia, which has a near monopoly in Europe, has proven to be an unreliable source. And it pegs its price to the btu content of oil. This supply and priceing monoply can be broken, but only if the US can build a liquifaction and port facilities to market it. And do it quickly. Regulatory hurdles could make us miss this golden moment.

  • Fred Z on November 13, 2012 11:22 PM:

    Obama's gonna prevent it from being produced and what is produced he's gonna steal to pay for Sandra Fluke's condoms and Obama-phones for pond-scum.

    You Americans are so screwed.

  • Sam Hall on November 14, 2012 6:38 AM:

    Ed, you got it.

    I have never heard that transformers had a lifetime. With proper maintenance and protection, they should last hundreds of years.

    A "smart Grid" is all about control of your energy use - no thanks.

    More government is the last thing we need. Look at what is happening on Long Island with a government run power system.

  • Michael on November 15, 2012 7:41 PM:

    If the administration hadn't squandered the bulk of that $90B stimulus fund marked for energy efficiency on failed solar companies linked to his campaign contributors, we could have some of that smart grid technology.

    But that would have been marked for other campaign contributors and probably squandered as well.

    Why don't we create real competition, unfreeze electrical rates and reduce regulation in the utility industry? If the smart grid has all the advantages claimed, smart utilities will tap capital markets and build it. Nah...government and all you "experts" know best.

  • Andrew on November 16, 2012 7:33 PM:

    If we are going to stick with the problematic concept of heavily regulated utilities, said utilities won't have much interest in investing in smart grids and infrastructure (read: capital) if prices can't be manipulated to produce the returns necessary to justify the upfront expense. We'd be better off with unregulated utilities that actually have to compete with each other for customers. Broadband and cable customers suffer the same problem of a highly regulated industry leaving multiple providers, but conveniently usually just one to choose from where they live.

  • N.Wells on November 18, 2012 6:06 PM:

    Not only has humanity has never failed to screw up an energy boom, but it has also never avoided screwing up the environment at the same time, whether we are talking about firewood, charcoal, whale oil, coal, nuclear, or petroleum, so the chance of getting this one right is infinitesimally small. What will happen is that we will collectively rush to produce, therefore ensuring overproduction combined with deleterious environmental effects, a temporary glut with cheap prices that leads to a crunch with high prices later, rapid depletion of an invaluable but finite resource, and abandonment of research into sustainable alternatives. The Republicans controlling my state (Ohio) are pushing to produce as much as possible as soon as possible lest we miss out on the boom, and with minimal regulation of and payments from energy companies (lest they pursue their part of the boom somewhere else), all without thinking that whatever we don't produce in the next decade is no less usable and valuable in subsequent decades. We really aren't thinking long-term. There's no reason we couldn't exploit the resource slowly, expanding drilling areas over the next 100 years to ensure a slow and steady boost to the economy, but our capitalist system doesn't readily allow that degree of planning and control. Hydrocarbons actually have many more valuable uses than cheap fuel (fertilizer, plastics), so humanity will be much worse off once it starts getting scarce. Quite clearly, our view toward far-distant generations is, screw 'em.

    There used to be a story about a prayer in Texas: Dear God, just give us one more boom, and we promise not to piss it away like all the others.