Exxon Losing Its Shirt on Natural Gas

Today’s WSJ: Rex Tillerson says Exxon is making no money on natural gas because prices have fallen below their cost of production.  Increased fracking, together with a supply glut coming off a mild winter and reduced business demand have left prices are at their lowest levels in a decade.

There was some increase in demand from electric utilities that switched from more expensive coal to natural gas, but because most of the generating stations that can convert have done so, we should expect to see that demand curve flatten out.

Not everybody is happy with low natural gas prices. In markets such as Illinois that are open to retail competition and where natural gas sets electricity prices at the margin, suppliers are getting squeezed.  And before putting iron in the ground, renewable energy developers have to figure the price at which they’ll be able to sell their juice. A lot of ground will probably remain undisturbed until prices start to tick up.

Electricity end-users in open access states should be looking at locking in long-term electricity supply contracts. Prices won’t stay low forever.

Read Full Post »

The Case of the Wrecked RECs

The AP reported today that Rodney Hailey of Maryland was convicted on 42 counts of wire fraud, money laundering and Clean Air Act violations for selling fake renewable energy credits, or RECs.  His company, Clean Green Fuel, was supposedly making biodiesel from used fryer oil. Hailey raked in $9.1 million in illicit gains from the fraudulent REC sales.

Talk about having his fat in the fire.

His defense to the charges was nothing if not obtuse: He claimed he didn’t defraud anyone because the traders and brokers to whom he was selling the RECs had to have known they were fakes because his operation wasn’t big enough to generate that kind of volume. Perhaps the defense lawyers neglected to consider that their argument presupposes that each customer knew how much other traders and brokers were buying from Clean Green Fuels.

While he was raking in the proceeds from his phony REC operation, Hailey bought himself, among other trinkets, two dozen luxury cars. He even bought a Cadillac Escalade for an employee. From this latter fact we may reasonably infer either that he’s a big Elvis Presley fan, or that he’s got a new spin on John 15:13. (“Greater love hath no man than this, that he lay down cold cash for an Escalade for his friend…”). One wonders if he put in a bid on Bernie Madoff’s yacht (the one named  “Bull”).

There is more than a trivial probability that something like this will occur in Illinois under the new distributed generation (DG) carve-out in the ComEd bill that the General Assembly passed last fall. Third-party aggregators are to be used to put together blocks of RECs produced by DG devices with nameplate capacities of less than 2 megawatts, with half of that to come from DG devices of less than 25 kilowatts.

At a recent meeting on making this program concrete, this author’s recommendation was that the DG devices be registered with PJM Interconnection (no charge at last check). This won’t prevent all fraud, but it may deter its more common forms such as double-counting and imaginary DG installations. This recommendation was not well received. Rather, the majority view was that self-attestation would suffice  for RECs sold to the utilities.

My counter-argument? Rodney Hailey.

Read Full Post »

Nukes in Our Future

After Fukushima, people are legitimately worried about whether electricity can be generated safely from nuclear power stations. In Japan, in fact, regulators have just recently approved restarting some of the nuclear plants that were switched off after the worst nuclear disaster since Chernobyl.

Over the long term, nukes should be a part of a balanced generation portfolio that also includes renewables, natural gas, and, assuming that emissions can be brought within environmental standards, coal. But before the nation goes charging down the path of building new nuclear plants, the public has to be convinced that nuclear power is safe. This will require addressing two major issues that the government and the industry have utterly failed to solve, and they’re the same issues that contributed heavily to the situation at Fukushima spiraling out of control: Spent fuel and regulatory capture.

Spent Fuel. The cloud of radioactive material that required the evacuation of everyone within a 10 mile radius of Fukushima (or a 50 mile radius if you were an employee of the United States government) did not come from an explosion in the reactor’s core. Rather, the spent fuel was the problem. The explosions were caused by the loss of the heat sink in which spent fuel was stored on-site, which in turn was the result of an inability to pump water into the spent fuel storage reservoir. The tsunami flooded and incapacitated the backup diesel generators.

This same risk is present with every nuclear reactor in the United States. There are about 65,000 metric tons of highly radioactive spent nuclear fuel sitting in pools of water in dozens of nuke plants all over the country. Illinois is by far the largest storage locker for spent nuclear fuel with more than 10,000 metric tons, a consequence of Illinois being home to Exelon Generation, operator of the second largest fleet of nuclear reactors in the world. Why does this storage situation, worthy of Homer Simpson, noted nuclear engineer, exist?

The original idea was that Yucca Mountain would be the storage site for all this waste. The federal government promised decades ago that it would dispose of this waste, and the feds said they would manage it so that taxpayers would not be on the hook. Nuclear generators started paying to the federal government an annual fee which, of course, was passed through to you, me, and everyone else as ratepayers (as distinguished from taxpayers). But for various political reasons Yucca Mountain never got started, and now it’s been canceled with no replacement solution on the horizon. Consequently, those 65,000 tons of spent nuclear fuel are just waiting around for another Fukushima-like chain of events to cause an explosion that would render large swathes of surrounding territory uninhabitable for generations.

We have to solve the spent nuclear fuel disposal problem.

Regulatory Capture. The second and equally critical problem is regulatory capture, a phenomenon in which the industry to be regulated takes effective control of the government agency that is supposed to be regulating it. The officers and attorneys of regulated entities interact daily with the regulator’s staff, creating a culture of coziness that impairs the objectivity and effectiveness of the regulator.

Remember the Deepwater Horizon catastrophe? It later turned out that regulatory inspectors turned their inspection reports over to the drill rig operators themselves to fill out on their own. Talk about self-reporting. Worse, some of the regulators were sleeping – not metaphorically, but literally – with oil industry executives.

Now, I might ask you to conduct a thought experiment of transposing the Deepwater Horizon pattern to a nuclear generating station. But I won’t ask you to do that because it does not bear thinking about. It’s too scary.

Sadly, this is precisely the type of coziness that existed between Tokyo Electric Power Company and the Japanese ministry that regulated it. The nuclear industry and its regulators were likened to a small Japanese village in which the like-minded prospered by rewarding one another with lucrative positions (if you were a regulator looking at future career paths) or regulatory support (if you were with Tepco). People who dared to criticize either Tepco or its regulator were ostracized from the little nuclear village, forever shut off from promotions within the bureaucracy, much less high-paying positions at Tepco.

If you think that such things happen only in far-off Japan, then you need to learn much more about how things really work over here. Take Illinois, for example, a state that goes beyond the phenomenon of regulatory capture; Illinois has regulatory Stockholm Syndrome.

Perhaps a more rigorous enforcement of Japan’s nuclear regulations would have made Tepco place its backup diesel generators somewhere well above sea level so that they would be less likely to be impacted by flooding.

In any event, until the regulatory authorities change from lapdog to watchdog, and until concrete steps are taken to safely dispose of spent nuclear fuel, proponents of nuclear power will have given their opponents strong arguments to use against them.

Read Full Post »