Guest Blog

July 31, 2013

Offshore Drilling vs. Offshore Wind – Should the Revenue Model Differ?

By Brian O’Hara- briano@secoastalwind.org

This week, the U.S. government will hold the first ever commercial auction for a lease to develop offshore wind energy in the United States.  In addition to marking a significant step forward for this new industry, this first auction also provides us with a good opportunity to reflect on some of the key differences between leasing for offshore renewable energy and offshore oil and gas, especially when it comes to revenue collection.

Two Technologies, One Federal Agency

As U.S. taxpayers, we all collectively “own” our federal lands, which are managed on our behalf by the U.S. Department of Interior.  The offshore boundary between state and federal lands is three miles from the coast in most states (Texas, as usual, being an exception) and the leasing for energy development in federal waters is handled by the Bureau of Ocean Energy Management (BOEM) – an agency within the Department of Interior.

BOEM, which was previously called the Minerals Management Service, has decades of experience leasing to and collecting revenue from the oil & gas industry.  Not surprisingly, the agency’s new rules for revenue collection from offshore wind energy development have a similar structure to the older oil & gas revenue model.  In that model, revenue comesfrom up-front and annual lease payments for the rights to develop plus additional royalty payments based on the amount of resource produced.  While this lease and royalty revenue model works well for oil & gas development, there are some key technological differences that suggest a different approach may make sense for renewable energy.

Global Markets vs. Local Markets

When oil & gas are extracted from public lands offshore, they are sold into a global commodities market and the selling price for a barrel of oil is essentially determined by global supply and demand.  While the amount of lease and royalty payments collected on oil & gas leases does impact the profit margin of oil companies, it does not materially affect the global price of oil or the products we consume.

On the other hand, you can’t fill a giant tanker with electricity and ship it around the world, so wind energy developed off the coast of the U.S. will be sold in the U.S., not in global markets.  Utility companies typically sell electricity at a price based on investment cost plus an acceptable return on investment.  Since lease payments and royalties increase the total investment cost for development, those costs are passed directly on to us as ratepayers in the form of higher electricity prices.  Simply put, lease and royalty payments impact the price we pay for electricity.

Maximize Revenue or Minimize Cost

The issue of revenue collection for offshore energy development really boils down to this question – are we trying to maximize revenue or minimize cost?

In the case of oil & gas, we have a finite resource that is sold into a global commodities market, and thus the benefit of using that resource goes to whoever in the world is willing to pay for it.  For oil & gas, our aim as landowners and taxpayers should be to maximize the revenue we receive for the depletion of our resource and that royalty revenue should increase based on how much of the resource is being depleted.  States should also seek to receive a share of the revenue collected since they bear much of the infrastructure cost and environmental risks associated with extracting the resource.

In the case of offshore wind energy, we have a resource that is not being depleted, is being converted into a product (electricity) that is priced based primarily on cost, and is consumed locally rather than being sold into a global market.  In this case, our goal should be to minimize the cost of that product that we consume, and thus only charge lease payments sufficient to cover the administrative costs of leasing and development oversight.  Charging additional royalty payments based on how much electricity is generated makes little sense since it only serves to cycle money through the government while raising the price of the electricity that we end up using.

The Race to Jobs

There is a quiet but frenzied race taking place between states to become a “hub” of the emerging offshore wind industry in the U.S.  But there is an even more important race taking place on a global scale – a race to see which countries will become the technology and manufacturing leaders in a rapidly growing market for clean energy.  The U.S. can and should be a global leader in clean energy.  Ensuring our policies do not add unnecessary costs to domestic renewable energy deployment is an important step in getting us to that global leadership position.

Brian O’Hara is the President of the Southeastern Coastal Wind Coalition and was formerly Senior Project Engineer with ExxonMobil’s offshore drilling group.

May 21, 2012

by Dahl Winters, RTI International

This was inspired in part by an RTEC Breakfast Forum on Distributed Energy

We have long been discussing how to supply our country’s future energy needs in the cleanest, cheapest way given the regulatory hurdles, policy changes, lack of sufficient economic incentives, and inertia in changing the way energy is produced and used. Our global industrial complex is more massive and complicated than at any previous point in human history, with every country, state, and municipality having its own patchwork of differing regulations and economic drivers, and more people now than ever needing to use energy. Given this, where do we even start in addressing this problem? It would help if we had an example of a system we could emulate, but this problem is so massive and complex that it has never before been solved. Or has it?

This article maintains that a solution exists to our country’s energy problem, in the form of a system we could learn to emulate. Simply put, we need not look farther than the well-regulated, functioning distributed energy system sitting in the chair reading this article.

The Body and the Global Industrial Complex

The global industrial complex can be described as a super-organism which takes in energy and resources, builds things with them, generates waste in the process, and reproduces itself to ensure it can continue doing all these things and more. Naturally, such a system begs comparison with the body, which is a smaller scale version of the above but just as complex.

The most notable point of this comparison is that all the different cell types in the body get the energy and resources they need to perform their activities. This is more than can be said for the global industrial complex, which has left 1.3 billion people without access to basic electricity and even more people without access to clean water and a reliable food supply. The body is able to meet the needs of all its cells by operating a robust, reliable distributed energy system that is ultimately carbon-neutral. Impressively it is able to do this with a balance between free enterprise amongst its cells, and regulation.

How the Body’s Energy System Works

1.       Distributed Energy

Most of us are familiar with the petroleum industry, which produces the fuel necessary for transportation, heating, and even electricity. Instead of drilling for oil and gas, we chew up food to place in our stomach, our body’s refinery. Crude food is converted into refined sugars, proteins, and fats, which get distributed through the pipelines of the body – the blood vessels – to every cell, in similar fashion to natural gas getting piped to every house in a community. There, through a cellular version of the combined heat-and-power recuperated microturbine system called mitochondria, the cell is able to obtain all its energy needs.

The body favors distributed energy since it would be too easy for an event the equivalent of a natural disaster or terrorist attack to take out a few centralized power plants and shut down power to millions of cells. Distributed energy offers robustness and resiliency from these types of events by giving every cell the freedom to make its own power.

2.       Renewable Energy

Food is crucial for the body to run. Of all the sources of conventional energy available, notably it is solar energy that powers the whole food web and fuels the cells of the body. The sun is also the source of all the energy in fossil fuels and biomass; wind energy and hydropower ultimately come from solar heating of the atmosphere and oceans. Indeed all sources of conventional energy besides nuclear, renewable or not, are solar-based.

Solar energy may be considered expensive, but it is cheaper than nuclear according to Dr. John Blackburn, Professor Emeritus of Economics and former chancellor at Duke University.  Given the importance of renewable solar energy to almost all organisms on Earth, it is surprising that the global super-organism does not make more use of it. It is even more surprising considering that one hour’s worth of sun on the Earth’s surface is enough to satisfy the entire world’s energy needs for a year.

3.       Energy Storage

We don’t eat all the time, yet still there is a constant level of refined products that get shipped to our cells where energy is continuously made. The key is energy storage in the form of specialized fat cells. Regardless of what food comes in, it gets converted to fat for storage. Of course, if this is not used in timely fashion adipose tissue is created, and we get fat!  Regardless of whether the electricity gets generated by solar, wind, natural gas, or other sources, it ought to get stored somewhere for downtime use. However, in comparison to energy supply, energy storage has historically not received as much attention from those involved in research and development. As a result, today’s batteries are expensive in comparison to the relatively cheap energy they are meant to store. That will soon change, with the further commercialization of advanced batteries such as the sodium-ion batteries.

4.       Carbon Neutrality

The body, like the global industrial complex, exhausts CO2 from all its energy production activities. For carbon neutrality, green plants are necessary to convert the CO2 back into a useful molecule, glucose, which can power the body further. The analogous condition would be if we were to build our own “plants” that capture CO2 and turn it back into methane, in order to power those microturbines  even further. Electrified copper has long been shown to act as a catalyst that reduces CO2 to methane or methanol, and recently (April 11, 2012) MIT researchers have developed copper-gold nanoparticles with enhanced stability.

The Importance of Regulation to Growth

In the current political climate where regulation is almost a dirty word, it’s important to establish the necessary role of regulation in maintaining – and even growing – the global industrial complex. Let us begin with a cell. Every cell needs to take in resources in order to perform its activities. Likewise, every person has social activities, hobbies, a lifestyle to upkeep that requires a healthy economy. Most cells also need to reproduce; a person might also like to have sufficient resources to raise a family. These activities require resources, and the more a person can get, the more a person can do.

A free-living bacterial cell will take in all the resources it can and produce all the waste it wants to, with disregard for all its neighbors. Indeed, bacteria in a jar full of food will quickly use up all the available resources and inundate other bacteria with waste products in the process that, collectively, the system will die off. However, this does not happen in the body for one important reason – regulation.

Regulations are written into every cell’s nuclear material like a master regulatory document that specifies how the cell is to handle its resource inputs and outputs. Take away this regulation, and disease can result as cells pollute one another with waste products. Cancer can result as a few businesses experience unfettered growth at the expense of the rest of society.   Regulation is so important to the body that the body has its very own enforcement branch. Its immune system cells go around and stop anyone with the wrong ID (bacteria, viruses, cancer cells) that, if left to roam, would carry on activities to the detriment of others.

With a sufficient level of regulation to keep cells from impeding each other’s activities, all the cells in the body can be free to thrive and grow. Not just the high-status brain cells or the working muscle cells, but all the cells regardless of their type or status. Economic growth is thus not only possible with regulation, but regulation is essential to economic growth.  However, too much regulation causes growth to get stifled, as what occurs with autoimmune diseases where the immune system targets the body’s own cells. If a healthy body can find a balance between free enterprise and regulation, the global body should be able to as well.

Reaching the Energy Future

This article has posited that the body is a working example of the energy future we are trying to reach. Yes, it took nearly 5 billion years for the body to evolve, but it took only 200 years for the global super-organism built upon 7 billion bodies to evolve. It took only 10 years for that global super-organism to put one of these bodies on the Moon, using the power of human ingenuity to solve engineering problems never before encountered. Solving our energy problems in a reasonable timeframe should not be that complicated an undertaking since we do not have to newly figure out how to build a rocket. We are already our own working examples. We already have the blueprints for building our energy future. We just need to think creatively and then act.   In many ways the critical first step is effective utilization of distributed energy systems.

§ 2 Responses to Guest Blog

  • john cambier says:

    Nicely done analogy. Let’s hope we can indeed move faster than the evolutionary timeline of homo sapiens…

  • Vik,
    Consider this for a guest blog:

    FracNews
    9/17/13

    Just Keep Moving Along, Nothing to See Here…

    On the 27th of September, the IPCC (intergovernmental Panel on Climate Change) will release its fifth global assessment. Leaks from the report are ominous. It appears that all the fracas over global warming has been slightly overstated. The likelihood of a planet wide meltdown resulting from too many humans raping and pillaging this fragile planet has been slightly overstated. Rather, the significant reduction in the estimated impact of much lower potential temperature increases means crops will grow better, more rain will fall on the right areas, more people will create greater wealth using fewer natural resources than ever before.
    What a shock. The lower range of assumed temperature increases is apparently not low enough. All the computing power of the past two decades has been for naught. Seems a fellow by the name of Callendar figured the math out in 1938 – on a slide rule. The assumptions built into the present day computer models were really a reflection of the folks inputting the data, rather than the observable facts on the ground.

    The overall effect of climate change during the next century is beneficial to all parties to the planetary communion. The IPCC is calling this a ‘pause’, according to the chairman Rajendra Pachauri, a pause that has lasted for 17 years now. The models have overestimated the effect of CO2 by 100%. The story during the following months will be less about the facts than about rescuing reputations in tatters because of this nonsense. Thank you Matt Ridley for foreseeing this years ago, as well as Heartland Institute and dozens of meteorologist and a few climatologists who simply couldn’t swallow the banter.

    The EPA is acknowledging that leaks from fraced natural gas wells are far less than originally thought. A new study from UT at Austin published in the Proceedings of the National Academy of Sciences found less ‘fugitive methane’ than the EPA had pronounced. In fact, far less than is emitted by coal mining and burning for power generation. Another ice pick in the heart for those who want to ‘stop fracking now’. ‘Green completions’ reduce methane escape by 99%. They are becoming pro forma at all large gas producers, while independents are adopting the technique quickly. The reason? The gas is replaced into the pipelines and sold, profitably. Funny how the market works.

    Since we are on the subject of GGEs (greenhouse gas emissions), it is interesting to note that 49% of all the capital investment in controlling GGEs came from – the oil and gas industry. According to the API (American Petroleum Industry), 2000-2012 saw investments of $165.4B from the energy industry, out of a total of $336.3B in GGE reduction approaches. Investments also included combined heat and power, advanced vehicle technology, wind, biofuels and solar from the industry. The oil and gas industry leads the way for the federal government, state and local as well as other private investors in GGE reduction investments. Bet you wont hear or see this on the evening news…

    At the well site, as many as a dozen wellheads drop down from a single pad today, compared to one just a decade ago. Tight parallel bore runs allow more efficient extraction. As these techniques become industry standard over the next decade, water use will be reduced significantly. Recycling is becoming common today at frac sites. Green solutions to biocides, tension reducers, scale preventers and lubricants are coming on line. Operators that initiate such techniques tend to be both first adapters of the technology and first acceptors in the local community. Local labor pools are the first choice for many operators as they further penetrate the shale fields of Revolutionary America.

    Common sense and corporate responsibility are key motivators of profits, community acceptance, more efficient completions and extractions and environmental stewardship.

    Roll on America!

    John Graves, CLU, ChFC

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