Features

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

For the first time in four decades, spanning the last eight presidents, America is poised to break free of its energy crisis. The country finds itself suddenly awash in domestic energy, especially new supplies of natural gas extracted from shale rock. The economic windfall is already enormous. According to a recent study by energy analysts, consumers saved more than $100 billion in 2010 alone as a direct result of the natural gas boom. Economists at Bank of America calculate that the boom contributes nearly $1 billion per day to the economy, equal to 2.2 percent of GDP—roughly the same as the economy’s rate of growth in recent years.

The environmental windfall is also substantial. Relatively clean-burning natural gas is rapidly replacing coal as our primary source of electricity, leading to reductions in greenhouse gas emissions. Gas-fired power plants are also more easily integrated with renewable energy sources such as wind or solar, giving that industry a boost. The potential benefits of the gas boom also include the promise of a manufacturing revival in the U.S. based on the comparative advantage of lower energy costs, and the opportunity for the country to overcome its chronic trade deficits. This “energy dividend” could be, in other words, the biggest game changer in global politics and economics in a generation.

Yet this bright shiny future is hardly assured. While natural gas deposits could very well yield enough to sustain our energy needs for another century, there are many reasons to fear that we won’t succeed in maintaining adequate supplies of economically available natural gas, or in putting enough of it to optimal use—generating electricity.

More fundamentally, in order to capitalize on today’s energy dividend, we need to meet a second essential precondition: repairing, expanding, and modernizing our overstrained electrical grid. As it stands, the grid—an interconnected network of 360,000 miles of transmission lines and substations linking more than 6,000 power plants to customers nationwide—is an inefficient and increasingly blackout-prone tangle of 1950s technology. In its present dilapidated state, it is not only imposing unacceptable and avoidable environmental costs due to its inefficiency, it is also making us vulnerable to an array of threats that could dramatically impair the U.S. economy tomorrow—regardless of how much surplus energy we have in the ground.

The gas boom could bring us nearly limitless potential for building a greener and more prosperous future. Yet without long-term planning and bold political leadership to fight for the right policies, America may wind up awash in cheap energy, while American homes and businesses are stuck in the dark.

Many people will come to this subject concerned about the environmental consequences of “fracking”—that is, hydraulic fracturing—of natural gas, and it’s certainly an important issue. But as this magazine has argued (see Jesse Zwick, “Clean, Cheap, and Out of Control,” May/June 2011), with the right regulations we can reduce the adverse environmental consequences without fundamentally altering the total volume of natural gas produced.

Properly deployed, natural gas has the potential to enable America to overcome our dependence on coal, an extremely dirty fuel, as our primary source of electricity. The result will be profoundly positive for the environment simply because natural gas is substantially cleaner than coal. When used to generate electricity, natural gas emits about half as much carbon dioxide, produces some 80 percent less nitrous oxide pollution, and releases negligible sulfur dioxide, particulate matter, and mercury compared to coal. Electricity generation accounts for 40 percent of all carbon dioxide emissions in the United States, so this transition alone provides us with a clear path over the next several decades to make dramatic reductions in greenhouse gas emissions.

Another, often overlooked, environmental benefit of using natural gas to produce electricity is that it facilitates the development of other energy sources that cause no emissions. Unlike coal-fired plants, those fueled by natural gas are easy to “turn up” and “turn down.” This means that they work well in concert with wind or solar power—when winds are calm or the sun isn’t shining, natural gas turbines can ensure that electricity generation remains constant. In 2010, Florida Power and Light brought online a new breed of hybrid power plant connecting one of the country’s largest solar thermal power plants with an existing natural gas complex.

Utilities nationwide are already accelerating the shift toward natural gas. So far this year, gas-fired generating plants have accounted for about 45 percent of national electricity production, up from 30 percent in 2008. Old coal-fired power plants have been decommissioned this year at a record pace. Much of the electricity supply that we’ve lost in the process of decommissioning coal plants is being replaced by increased usage of existing natural gas plants, which run at a much higher level of efficiency than coal plants, and currently run less than half of the time. America is therefore presented with a golden opportunity to accelerate the transition away from coal and achieve major greenhouse gas emission reductions, without needing to build all new power plants.

Yet the more our electricity supply comes to depend on natural gas, the more that fears about the long-term price and supply of gas could begin to retard the rate at which power companies convert from coal. Investors and industry executives remember the first big “dash to gas” by the electricity industry during the 1990s, when they invested billions of dollars in new natural gas-fired power plants. By the end of the decade, surplus natural gas supplies were gone, and many utilities and electricity generators were sent reeling by skyrocketing gas prices.

One reason for those fears is that gas drilling has historically been a boom-and-bust business. When the price of gas is adequate, wildcatters heed the call to “drill, baby, drill” and supply is assured. When the price is low, however, huge reserves of gas effectively disappear because it costs more to get this gas out of the ground than the market will pay. Today’s new drilling technologies make the cost of producing gas inherently cheaper, but they do not ensure that enough gas will always be economically available to serve as a reliable replacement for coal, nor do they change the long-term boom-and-bust nature of natural gas supplies and prices.

Shortsighted business practices or government subsidies could also end up squeezing the amount of gas available for the generation of electricity. Unlike coal, which is almost exclusively used for electricity generation, natural gas has many economic applications. Almost one-third of America’s natural gas supply today is used for industrial feedstock in chemical plants and in fertilizer and other industries, and another 36 percent is used in commercial and residential spaces for heating and cooking. New England is increasingly using natural gas in place of home heating oil, and countries like Canada and Mexico are driving increased demand for exports of American natural gas. Electricity generators, which now account for a third of natural gas use, will have to compete in the marketplace with these and other uses for secure long-term supplies.

Our supply of natural gas currently outstrips demand and will continue to in the immediate future. While the best long-term outcome for the country is to maximize the amount of gas available to natural gas power plants for electricity generation, the natural gas industry is at the moment looking for ways to expand into new markets—perhaps analogous to the aluminum industry’s invention of the need for aluminum siding on brick houses in the 1950s. Congress and the administration should be wary of proposals to subsidize potentially large diversions of natural gas to stimulate demand. For example, a bipartisan bill Congress considered this year would provide billions of dollars in tax credits to boost deployment of natural gas-powered cars and trucks, and to subsidize a program to build out natural gas fueling infrastructure across the nation. While there is a place for feet and certain heavy-duty trucking vehicles powered by compressed natural gas, the relative inefficiency of natural gas engines—and the federal government’s long history of failed energy boondoggles—would argue against making natural gas the government-backed fuel of choice for passenger vehicles.

The important point is this: the opportunity for the electricity industry to lock in maximum amounts of long-term gas supply at a time of low prices is like the opportunity for American consumers to refinance their thirty-year mortgages when interest rates are low. Policymakers should favor this outcome, because it will benefit American electricity consumers with lower prices for decades to come.

Policymakers should also make sure that our existing regulatory apparatus is updated to reflect the growing interdependence of the natural gas and electricity industries. Currently, the Federal Energy Regulatory Commission (FERC) regulates both industries separately. Congress should direct FERC to develop a long-term integrated resource plan for the two industries together. The plan should be updated every five years and include a twenty-year outlook for supply and regulatory issues, to ensure that no natural gas supply shocks disrupt the American bulk electricity system due to a lack of foresight. FERC must be empowered, for instance, to ensure that both the gas and electricity industries take precautions to prevent short-term pipeline service interruptions resulting from severe storms, terrorist attacks, or other events. With an increasing dependence on natural gas for electricity, such pipeline disruptions could mean blackouts and power shortages for an entire region for days on end.

This brings us to the second, and much more menacing, precondition for capturing the full potential benefits of the current natural gas supply boom: we must fix our decrepit, vulnerable, and long-neglected electrical grid. Today, the average substation transformer in the U.S. is forty-two years old—two years older than its expected life span. A recent Department of Energy report warned that 70 percent of the largest high-voltage power transformers—each weighing up to 800,000 pounds—are more than twenty-five years old, and subject to an increased risk of failure. As of now, replacing one of these enormous transformers, should it be attacked, or simply break down, can take twenty months or longer. Even without any major attacks or breakages, most of the equipment on the grid is already so antiquated that roughly 500,000 Americans lose electricity for at least two hours every single day.

And, of course, the disruptions are often far worse than that. Many readers no doubt suffered through the latest major system failure: the blackout this past June, catalyzed by a freak “derecho” storm, left a million Americans from Indiana though central Appalachia to the toniest suburbs of D.C. without power during 100-plus degree weather. In the immediate aftermath of such storms, the press and angry customers see downed wires and (sometimes rightly) blame utilities for failing to respond quickly enough. But the culprit that causes such blackouts to linger for days is often a system-wide problem—the poorly maintained and overstrained local electric grid. In many places, the local grid is in such bad shape that even a minor disruption—a single downed power line, for example—can create a domino effect well beyond the damaged area. For example, in the aftermath of the derecho, several areas of suburban Maryland remained dark for days longer than other areas, not because they were hit harder, but because the storm damaged antiquated equipment in many substations, including hundreds of transformers, which triggered multiple failures down the line.

Similar problems extend into the bulk transmission segment of the grid. For example, in August 2003, a series of line failures in northeastern Ohio set off a cascade of power outages across the United States and Canada. The lack of adequate redundancy in transmission lines meant that those initial failures rippled through the system, knocking a total of 265 power plants offline, darkening an area of more than 9,000 square miles, contributing to almost 100 deaths, costing an estimated $6 billion, and leaving roughly fifty million people in the dark for up to four days. It was the largest blackout in North American history. Although utilities and regulators have since added new “fail-safe” procedures to reduce the domino effect of such outages across wide geographies, the root causes—grid congestion, old transformers, poor interconnections—remain an endemic problem throughout the entire U.S. electrical supply chain, from bulk transmission centers to local distribution lines.

Even beyond basic maintenance, the grid has also become increasingly vulnerable to software viruses and cyber attacks. A new unit within the National Security Agency, the U.S. Cyber Command, found that cyber attacks on the electric grid and other strategic infrastructure increased by a factor of 17 from 2009 to 2011. Terry Boston, president and chief executive officer of PJM Interconnection, a regional energy transmission consortium covering the mid-Atlantic and mid-western areas, wrote recently that while a calamitous cyber attack on the grid is not inevitable, we should never “trust the security of our energy infrastructure to luck.” A Homeland Security official said the department had constructed a scenario under which a successful terrorist attack on just six critical substations could cause blackouts in most of the country east of the Mississippi River. In September of this year, Congress also held hearings to determine the degree to which the entire national electricity grid is vulnerable to electromagnetic pulses from high-altitude thermonuclear devices and from the sun.

Mass power outages don’t just disrupt our day-to-day lives. Blackouts are estimated to cost the American economy about $150 billion each year in interrupted production, destroyed or lost products (like computers fried during power surges), and other costs—an average of more than $500 per person. The increasing dependence of the economy on high-quality, uninterrupted electricity is underscored by the fact that fully 40 percent of all electricity used in the U.S. now goes to power computer chips and automated manufacturing, and applications ranging from personal computers and “Cloud” storage to so-called mission-critical machines, which are used in manufacturing, health care, and air traffic control. Experts predict that by 2015, nearly 60 percent of our electricity will go to such uses.

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.

The United States is at the cusp of what very well could be the biggest political and economic windfall in a generation. But to realize this windfall, we must ensure that natural gas is maximized as a source of electricity generation, and we must commit to a modern regulatory structure that mobilizes major investments in a reliable, secure—and, yes, “smart”—grid. While relatively straightforward, this is not an easy path. It will require presidential leadership to explain to the public what’s at stake and to provide a broad vision of a national energy strategy. The president will also have to face down an army of entrenched special interests to avoid squandering America’s energy dividend. If too many priorities and hare-brained schemes divert our political resolve, we may find that we have blown the energy boom.

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.

Comments

  • 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.