Category Archives: Alternative Energy

A Few Notes on Biofuels

The use of biofuels is a controversial subject these days due the combination of food inflation and growing energy needs.   The 2008 Farm Bill, which expires in June, 2013, contains subsidies for the ethanol industry as the U.S. government looks to decrease carbon dioxide emissions and encourage the use of renewable energy in light of rising fuel costs.  Due to rising food prices, caused in part by the use of corn-based ethanol, the 2008 Farm Bill emphasized the use of “advanced ethanol” or ethanol created from non-corn based feedstocks, while de-emphasizing/reducing subsidies for corn based feedstocks.

Cellulosic ethanol, or ethanol which doesn’t use the food portion of plants, was popular in the 2008 Farm Bill, because it doesn’t have as large of an effect on food prices, it has shown the ability to grow on sub-standard farm land, and it needs very little maintenance (water/fertilizer/pesticide).  I would assume its main effect on food prices is that it will take up a certain amount of land that would otherwise be used to grow food.  Cellulosic ethanol is derived from prairie grasses (switchgrass), hybride poplar and willow trees, and biomass waste.

A House Committee recently passed a $500 billion farm and nutrition bill, but the House appears to have little desire to take this bill up anytime soon.  The Energy Policy Act of 2005 created the Renewable Fuels Standard, which capped production of corn-based ethanol feedstocks at 15 billion gallons per year, with advanced biofuels expected to fuel the balance of a 36 billion gallon biofuels mandate by 2022.  It will be interesting to see how the finalized bill supports the different types of ethanol feedstocks, as advanced and cellulosic ethanol production has failed to meet expectations after the 2008 bill due to issues with commerciality.  What does this mean? In order for the government’s biofuels goals to be reached, we are going to need to use more corn which will increase food prices.

The U.S., who is the global leader in biofuels production, is clearly pushing to make them a significant component of its future energy needs.  Biofuels production has increased 7.5x during the past decade to 207 million barrels (8.7 billion gallons) in 2011 (see graph below).  The U.S. Navy is onboard with the idea, with plans to allocate $170 million of the $420 million government budget to build refineries capable of producing ten million gallons of biofuel annually to fuel navy jets and ships.  Continental Airlines became the first U.S. passenger plane company to use biofuels in November, 2011, when it flew a flight powered by a jet fuel blend of conventional fuel and biofuels (algae and plant waste).  Air Canada is currently testing biofuels in flights (that’s how some of its Olympic athletes got to the London games), claiming its blend will reduce emissions by 40%.

Source: BP Statistical Review of World Energy 2012

The next step with my blog with respect to biofuels is a price per gallon comparison with gasoline.  That piece will hopefully give us a little more perspective on the cost differences between not only biofuels and gasoline, but corn-based ethanol versus say cellulosic-based ethanol.  The government doesn’t want to use corn, and for good reason, but that appears to be the only source of biofuel that is commercially viable at this point.

Ps:

Do biofuels really decrease carbon dioxide emissions? Several scientists think we may be double counting certain emissions reductions.  There is also belief that ethanol is corrosive by nature which could hurt engine durability.

Pps:

The summer Olympics has quite the advantage over winter with respect to number of sports categories.  We got table tennis for the summer, why no air hockey for winter?

Global Energy Consumption Trends

Top 10 Energy Consumers by Country

Source: BP Statistical Review of World Energy June 2012

From 2001 to 2011, annual global energy use increased 30% to 487 quadrillion British thermal units (BTUs).  China started the 21st century consuming less than half the energy the U.S. consumed, but surpassed the world’s previous leading energy chomper before the decade ended.  Other countries that contributed to the global energy consumption increase are China’s fellow BRIC members, India and Brazil, who saw increases of 88% and 46%, respectively.  Canada aside, the leading Western energy consumption states saw either stagnation (U.S.) or contraction (Germany, France).  This isn’t all that surprising, as the developing world should be leading the way in energy consumption growth, which tells budding entrepreneurs and investors where to start thinking about putting their capital.

Global Energy Consumption by Region

Source: BP Statistical Review of World Energy June 2012

The above graph gives us a macro perspective on who’s consuming energy on this planet.  Energy hogs China, Japan, India and South Korea have Asia Pacific leading the way, responsible for 39% of global energy consumption in 2011.  Europe and North America are next in line; however you can tell by looking at consumption changes over the period studied that those regions are not the growth stories in this analysis.  Iran, Qatar and Saudi Arabia are driving growth in the Middle East, while Israel is beginning to stagnate.  Argentina, Brazil and Peru lead the way in Central and South America; energy consumption in most of Africa is on the move, with Algeria, Egypt and South Africa spearheading growth.

Which of the Top Energy Consumers are Using Renewables?

Most would be surprised to learn that Brazil and Canada are two of the top renewable energy countries in the world, with renewables responsible for 39% and 27% of their total energy consumption, respectively.  Hydroelectricity is responsible for most of their renewables, and while most people think of wind/solar/biofuels when they think of renewables, hydro shouldn’t be forgotten as a renewable energy source.  Germany, China and the U.S. produce more of what we all think of when we think renewables, but renewables still represent a small, yet growing, portion of energy use.

Federal Incentives for Alternative Energy

In this post I’m going to discuss the purpose and extent of the government’s involvement in the alternative energy sector.  I believe the U.S. government is encouraging the use of alternative/clean energy for two primary reasons:

1) To decrease dependency on foreign oil: In 2011, the U.S. imported on average 11.4 million barrels of petroleum per day (MMBPPD), while consuming 18.8 MMBPPD.  Note: The U.S. exported 2.9 MMBPPD in 2011. Source: www.eia.gov.

2) The U.S. government, and many Western governments in general, believe the earth will not be able to sustain expected population growth which will increase the consumption of fossil fuels such as oil and coal.  They believe fossil fuels release significant amounts of carbon dioxide and other emissions which are harmful to our ecosystems, and that we are reaching a threshold where we might be doing permanent damage to them.  Because governments believe the free market has been slow to react to this impending problem (it’s arguably already a problem), they have decided to encourage businesses to develop cleaner forms of energy, thus decreasing fossil fuel emissions.

To encourage the development of clean energy in the U.S., federal and state governments have begun many programs to make production of clean energy artificially cheaper than it otherwise would be.  Proponents of these programs argue that they are needed to help clean energy companies compete with companies who produce energy in established industries (oil and gas, coal, nuclear, etc) until clean energy production becomes more efficient and competitive.  Efficiency is important for clean energy, because the established industries have 50+ years of experience and technological development which has made production efficient and scalable.  (I’m not trying to say that wind and solar energy haven’t been around for a while, but they haven’t been produced on a large scale)

The main tools governments are using to encourage investment in clean energy are tax credits and other forms of subsidies.  The following are the main federal programs alternative or clean energy companies can apply for when they build turbines/solar panels/power plants/etc.

Business Energy Investment Tax Credit

What is it? Companies are eligible to receive this tax credit for investing in solar, wind, fuel cells, geothermal, microturbines and combined heat and power.

When does it expire? December 31, 2016

How much does it cover?

Solar: 30% of expenditures (no cap)

Wind (small turbines): 30% of expenditures (no cap)

For information on other forms of energy that qualify click here.

How does it work? If a solar company builds $1 million worth of solar panels, the government will give the company $300,000 in tax credits to pay down current or future income taxes.

Renewable Energy Production Tax Credit

What is it? Companies are eligible to receive this tax credit for investing in wind, biomass, landfill gas, hydroelectric and several other forms of renewable energy.

When does it expire? December 31, 2012 for wind; December 31, 2013 for most others.

How much does it cover?

Wind: 2.2 cents per kWh sold.

For information on other forms of energy that qualify click here.

How does it work? The government gives Company A a certain amount of money per kWh produced for a duration of ten years.

Renewable Energy Grant

What is it? Companies are eligible to receive a grant for investing in wind, biomass, landfill gas, hydroelectric and several other forms of renewable energy.

When does it expire? Unless it was extended, this program expired on December 31, 2011.

How much does it cover?

Solar: 30% of expenditures (no cap)

Wind (small turbines): 30% of expenditures (no cap)

For information on other forms of energy that qualify click here.

How does it work? The government gives Company A a grant equal to 30% of the amount it invested in a clean energy facility or project.

Loan Guarantee Program

What is it? The Department of Energy (DOE) may guarantee loans for companies who create products that will effectively reduce harmful emissions.  The DOE has the authority to issue more than $10 billion in loan guarantees.

How does it work? If a company engages a bank or other commercial lender for a loan, the DOE may guarantee an amount of the loan.  If the company subsequently goes out of business before repaying the loan, the DOE will pay the balance of the loan, allowing the company to liquidate its remaining assets to at least partially repay investors.  This decreases the risk of investing in renewable energy.

To date, several renewable energy companies have defaulted on loans guaranteed by the DOE, including Solyndra and Abound Solar.

Which program should I choose?

I’m not a corporate tax expert, but a little common sense says the following:

1) If I’m going to produce a lot of energy from the project within ten years and don’t have any near-term financing issues, I should choose the production tax credit.

2) If I have near-term funding issues I should take either the grant (which is probably expired) or the investment tax credit which probably functions very similar to the grant and is probably replacing the grant.

3) If I needed immediate financing for either existing facilities or to build a facility and have the ability to obtain a reasonable rate on a loan I might apply for the loan guarantee program.

Ps: Is solar energy really that clean?

Energy Consumption Overview; Renewable Energy on the Rise?

I would like to start introducing some alternative energy topics to this blog, but before I do that, I think it’s important to take a macro-view of where we are at as a country in the energy industry.  As pundits and politicians continue to debate the future of the energy industry, keep in mind that from 2001 to 2010, not much changed.  Use of renewables increased approximately 3%, which when viewed through even the most optimistic of lenses, can’t be considered much of a victory.

Source: www.EIA.gov

I’m not going to try to use this blog as a soapbox to advocate my positions on the future of the energy industry; however with the population of the world swelling I think it’s common sense that we, first as citizens of this planet and second as investors, need to be forward thinking.  With that in mind, the graph below will show you the growth in renewable energy sources over the past decade.

Source: www.EIA.gov

1Includes fuels created from wood and waste (landfill gas, sludge, agricultural byproducts and biomass, municipal waste, tire-derived fuels, etc)

2Consumption of ethanol and biodiesel

From the above graph we see that most of the growth in the renewable energy sector has come from biofuels and wind energy.  Biofeuels are an energy sector that includes ethanol and biodiesel.  Ethanol is created by fermenting a carbohydrate, such as sugar, while biodiesel is created by combining an alcohol with animal fats or vegetable oil.  Both of these fuel sources are currently used as additives to gasoline for the purpose of reducing harmful emissions, not as standalone fuels themselves.

Adam Monroe, president of Novozymes North America (CopenhagenSX: NZYM B), a company which creates cellulosic ethanol sees “rapid adoption” of biofuels in the transportation sector.

What sectors are potential sources of growth for renewables?  Petroleum fuels 97% of the transportation sector, with natural gas making up the balance.  Fossil fuels (oil, natural gas, coal) dominate the residential, commercial and industrial sectors.  Fuel sources for the electricity sector is summarized in this graph:

Source: www.EIA.gov

Regarding fossil fuels in the electricity sector: use of petroleum has declined significantly, while natural gas has increased.  Nuclear has  been constant, while coal has declined slightly.

Regarding renewable fuels in the electricity sector: use of wind and solar has increased 12x and 1x, respectively; however they still make-up a relatively small portion of overall energy consumption in the electricity sector.  This sector is where renewables should see most of their growth over the next decade.