Orphaned Wells, Wind Farms and Net Present Value

Wells left behind by industry threaten to overwhelm Western states.

Source: ‘Orphaned’ oil and gas wells are on the rise (High Country News)

A good High Country News story about the problem of orphaned methane wells in Colorado & Wyoming. Well operators “become bankrupt” and walk away, leaving the public to cover cleanup costs. In theory, operators have to put a bond up to get a permit, but the bond isn’t enough to cover cleanup costs. One operator named Atom recently forfeited a $60K bond on 50 wells, which subsequently cost the public ~$600K to clean up.  The same problem exists with reclamation bonds covering coal mines on federal land in Wyoming, except the dollar values are three orders of magnitude larger.

If the bond amounts were much larger, the money vs. time curve of a methane well or coal mine would start to look much more like that of a wind or solar installation, from capital’s point of view. Big reclamation bonds would look like part of a big up front investment, which is then followed by a long trickle of income as the mine or well produces over its lifetime.

You can slosh the costs & profits around through PPAs and other arrangements, but at a basic level, that big up front cost + long trickle of income is the fundamental cashflow time series of renewables too. Even if these different energy investments all add up to the same dollar value, the time distribution matters, because capital often just cares about net present value. (See Dave Roberts’ famous Discount Rates: A Boring Thing You Should Know About With Otters!)
 
From an extractor’s point of view, pushing the reclamation costs into the future makes them unimportant, because they’re discounted to the present. By the time they loom large, the true remaining value of the well or mine is already negative, with cleanup costs included. And the only rational thing to do at that point is to walk away. That’s what bankruptcy is for. But in this case, the counterparty is the public, and we have no upside risk.
 
The public takes on the environmental or cleanup costs of the mine or well at the outset, rather than internalizing those costs within the business decision. To put energy investments without those environmental or cleanup costs on equal footing, you’d need to give them up front or ongoing subsidies. And here we’re just talking about the traditional “environmental” costs — not the climate costs.
 
Half of finance and capital markets is just smuggling money through time. We can pull piles of it back from the future. Or we can exile our debts to the future. From and to those people we don’t think are us. The other half of finance seems to do the same thing with risks, extracting certainty from others, pushing uncertainty onto others, moving uncertainty through time. Trying to keep upside uncertainty, and lose downside uncertainty.
 

2017 Planning Board Application

If you’re the type of person who finds these things entertaining, here’s my 2017 application to the City of Boulder’s Planning Board…


What technical/professional qualifications, skill sets and relevant experiences do you have for this position (such as educational degrees, specialized training, service on governing or decision-making boards, etc.)?

For the past five years I have served on Boulder’s Transportation Advisory Board (TAB). As a member of TAB, I have participated as a member of the city’s Form Based Code working group, the Greenways Advisory Commission, and the Transportation Maintenance Fee task force. As a private individual I also served on the Decision Analysis Working Group in support of the City of Boulder’s bid to create a municipal electric utility. Since 2012 I have been a member of the board of the Boulder Housing Coalition, a small local non-profit affordable housing provider. For the last 3 years I have served on the Executive Committee of Better Boulder, a local sustainable transportation and land-use policy advocacy organization. I’ve also served on several successful local ballot campaign committees, helping to secure funding for Open Space and transportation maintenance in the fall of 2013 with the passage of measures 2B, 2C, & 2D, and helping to defeat measures 300 & 301 in the fall of 2015. I have also spent many years living in housing cooperatives, participating in and facilitating consensus based governance at weekly meetings.

In the above roles I have performed staff oversight, organizational budgeting and strategic planning, public engagement and outreach, and facilitated countless meetings. My professional background is in the geosciences and energy policy. When appropriate I have used my data analysis skills to help inform the decisions made by the organizations I’ve been part of (e.g. this analysis of Boulder County property records in association with the cooperative housing ordinance). My policy analysis work has often involved communicating the implications of complex regulations to a broader public audience.

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Density or Exclusion: the Perils of Local Zoning

In my last post, I suggested that while we like to think of housing as an investment, it’s really more like a crappy savings plan, potentially redeemed by the fact that you can live inside the piggy bank. Land can be a profitable speculative investment, but allowing land to appreciate and drag the cost of housing upward in real terms is fundamentally incompatible with housing being affordable.

Economists (including Adam Smith, David Ricardo, Thomas Paine, Henry George, Thomas Friedman, Joseph Stiglitz, and Matt Yglesias) have highlighted the negative impacts of allowing land owners to collect monopolistic “ground rents” but nobody seems to care. So now tens of trillions of dollars worth of real estate in the US is predicated on the idea that landowners get to retain these speculative gains. Barring a glorious Georgist Revolution, this is probably the arrangement we have to work within.

Build, Baby Build!

Luckily, in a city with increasing land values, where property owners get to keep all of those unearned financial gains, there’s an All American Capitalist Solution™ of sorts, which can potentially keep housing affordable, even when land is expensive: build more housing on less land. By building densely, high land costs can be shared across more households, reducing the overall impacts of expensive land, and allowing home buyers & renters to pay primarily for housing instead of land.

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What is Housing in the US?

Housing as an Investment

There’s a powerful cultural narrative in the US that says when you buy a home, you’re not only securing a place to live, you’re making an investment.

When I say “investment” I mean a thing that you can put some money into, and get more money out of later, in real inflation adjusted terms, net of the expenses associated with having the thing in the first place.  Houses — as in, physical structures that shelter human beings — are clearly not this kind of thing.  Anyone who has had to maintain an older home knows this. Roofs collapse. Pipes corrode. Walls need to be painted.  Like bicycles, laptops, and virtually all other durable goods, left to their own devices, houses are depreciating assets: they lose utilitarian value over time. However, we’ve done an incredibly good job of ignoring this as a society.  How do we fool ourselves?

We tend to ignore inflation. If you bought a house for $100,000 in the year 2000, and sold it in 2016 for $140,000, even if you didn’t put a single penny into maintenance, taxes, or insurance, you just barely broke even in terms of real purchasing power, if we’re talking about the house purely as an investment.

We tend to ignore the ongoing expenses of homeownership. In practice, you can’t avoid spending money on maintenance, taxes and insurance, but few homeowners record every property expense, and calculate whether they’ve come out ahead upon selling a home. Especially if the building is older “naturally occurring affordable housing”, maintenance costs can easily end up being a few percent of the building’s value each year. Property taxes and home insurance are also substantial expenses, typically less salient to homeowners than the purchase and sale prices of the home.

We can think of inflation and property expenses as cancelling out a fair chunk of any increase in the nominal value of a home. With 2% inflation, and spending 3% of the home’s value every year on maintenance, property taxes, and insurance, a home’s value needs to increase about 5% every year in nominal terms just to cover its own costs. In other words, if you bought a house for $100,000 in the year 2000, and sold it for $200,000 in 2016, you didn’t quite break even — again, if we’re looking at the house purely as an investment.

We tend to notice the accrual of home equity. Ideally, as you pay off a mortgage, the fraction of its value that is covered by your equity rather than the bank’s debt increases! Even if you just break even after accounting for inflation and ongoing expenses, you’ll hopefully have a larger chunk of change on hand to put into buying your next home. Continuing with the example purchase above (grabbing a mortgage calculator off the internet) if we assume a 20% ($20,000) down payment and an $80,000, 4%, 30 year fixed rate loan, after 16 years of payments, the remaining loan amount is about $49,000. So assuming you sell the home at the “break even” price, including expenses, of $200,000, you end up with $151,000 after paying off the loan. This is $131,000 more than you started with, which feels totally awesome!  You “invested” $20,000 and “earned” $131,000, more than a 650% increase!

Continue reading What is Housing in the US?

Overpopulation isn’t the Problem

Some folks in Boulder like to make analogies to exponential global population growth in discussions about our local land use decisions (see for example Frosty WoolridgeFrosty Woolridge again, Robert Baker, David Brandt, or the venerable Al Bartlett himself). These analogies are inappropriate in multiple ways.

First, steep declines in fertility worldwide have largely defused the population bomb. Second, even if the bomb were still ticking, the population changes we see in Boulder, and more generally the Front Range of Colorado, the US and the booming megacities of Asia aren’t about population growth per se, they’re about migration.  In the developing world, it’s migration from rural areas to cities. In the already rich countries, it’s mostly migration between cities, often from low-wage regions to areas with better jobs and higher quality of life. Or it would be anyway, if we actually let people build housing in those places.

How we choose to build and rebuild cities to accommodate these migrations and humanity’s peak population later this century will largely determine our ultimate impact on the Earth’s climate and biosphere, and the quality of life that humanity has access to.  Contrary to many “population bomb” narratives, the main problem here as it relates to climate isn’t the impact of large numbers of poor people, because small numbers of rich people are responsible for the overwhelming majority of current greenhouse gas emissions.  How we accommodate those wealthy, high emissions populations makes a big difference, both directly, and through the example it sets for the rapidly expanding global middle class.

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Twenty Four Questions About a Living Wage in Boulder

The Self Sufficiency 2016 campaign hosted by the League of Women Voters of Boulder County has been pushing for a living wage in Boulder, and City Council talked about it last week.  Employees of the University of Colorado have also been pushing for a $15 minimum wage. Unfortunately CRS 8-6-101 prohibits a city or county from setting a minimum wage, so we can’t simply pass a local minimum wage like Seattle, WA and Los Angeles, CA. Our state statue includes some kind of Orwellian justification for the prohibition.  It says that the welfare of Colorado depends on workers having adequate wages, and therefore cities and counties shall not be allowed to regulate wages.  Uh, what?  Here’s the code:

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Ownership vs. Stewardship, Companies vs. Co-ops

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After more than two decades of growth and success, Fort Collins based New Belgium Brewing became 100% employee owned three years ago, with the employee stock ownership plan buying out the 59% of the company previously held by its founders.  Today it sounds like they might be putting themselves on the auction block. With around 500 employees, and a potential valuation of a billion dollars, it’s not too hard to understand the temptation.  That’s $2 million worth of company value per employee.

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