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.

Facing the Risk in Fossil Fueled Electricity

I recently wrote about how our risk tolerance/aversion powerfully affects our estimation of the social cost of carbon, but obviously that’s not the only place that risk shows up in our energy systems.  Fossil fuel based electricity is also exposed to a much more prosaic kind of risk: the possibility that fuel prices will increase over time.

Building a new coal or gas plant is a wager that fuel will continue to be available at a reasonable price over the lifetime of the plant, a lifetime measured in decades.  Unfortunately, nobody has a particularly good record with long term energy system predictions so this is a fairly risky bet, unless you can get somebody to sign a long term fuel contract with a known price.  That doesn’t really get rid of the risk, it just shifts it onto your fuel supplier.  They take on the risk that they won’t make as much money as they could have, if they’d been able to sell the fuel at (higher) market rates.  If the consumer is worried about rising prices, and the producer is worried about falling prices, then sometimes this can be a mutually beneficial arrangement.  This is called “hedging”.

Continue reading Facing the Risk in Fossil Fueled Electricity

The Myth of Price

Our society’s prevailing economic zeitgeist assumes that everything has a price, and that both costs and prices can be objectively calculated, or at least agreed upon by parties involved in the transaction.  There are some big problems with this proposition.

Externalized costs are involuntary transactions — those on the receiving end of the externalities have not agreed to the deal.  Putting a price on carbon can theoretically remedy this failure in the context of climate change.  In practice it’s much more complicated, because our energy markets are not particularly efficient (as we pointed out in our Colorado carbon fee proposal, and as the ACEEE has documented well), and because there are many subsidies (some explicit, others structural) that confound the integration of externalized costs into our energy prices.

The global pricing of energy and climate externalities is obviously a huge challenge that we need to address, and despite our ongoing failure to reduce emissions, there’s been a pretty robust discussion about externalities.  As our understanding of climate change and its potentially catastrophic economic consequences have matured, our estimates of these costs have been revised, usually upwards.  We acknowledge the fact that these costs exist, even if we’re politically unwilling to do much about them.

Unfortunately — and surprisingly to most people — it turns out that understanding how the climate is going to change and what the economic impacts of those changes will be is not enough information to calculate the social cost of carbon. Continue reading The Myth of Price

In Good Company: A Look at Global Coal Reserve Revisions

In my last post, I recounted some of the indications that have surfaced over the last decade that US coal reserves might not be as large as we think.  The work done by the USGS assessing our reserves, and more recently comments from the coal industry themselves cast doubt on the common refrain that the US is “the Saudi Arabia of coal” and the idea that we have a couple of centuries worth of the fuel just laying around, waiting to be burned.  As it turns out, the US isn’t alone in having potentially unreliable reserve numbers.  Over the decades, many other major coal producing nations have also dramatically revised their reserve estimates.

Internationally the main reserve compilations are done by the UN’s World Energy Council (WEC) and to some degree also the German equivalent of the USGS, known as the BGR. Virtually all global (publicly viewable) statistics on fossil fuel reserves are traceable back to one of those two agencies. For instance, the coal reserve numbers in the International Energy Agency’s (IEA’s) 2011 World Energy Outlook came from the BGR; the numbers in BP’s most recent Statistical Review of Energy came from the WEC.

Of course, both the WEC and the BGR are largely dependent on numbers reported by national agencies (like the USGS, the EIA and the SEC in the case of the US), who compile data directly from state and regional geologic survey and mining agencies, fossil fuel consumers, producers, and the markets that they make up.

Looking back through the years at internationally reported coal reserve numbers, it’s surprisingly common to see big discontinuous revisions.  Below are a few examples from the WEC Resource Surveys going back to 1950, including some of the world’s largest supposed coal reserve holders.  In all cases, the magnitude of the large reserve revisions is much greater than annual coal production can explain.

Continue reading In Good Company: A Look at Global Coal Reserve Revisions

A Carbon Price for Colorado

In May of 2013 I gave a talk at Clean Energy Action’s Global Warming Solutions Speaker Series in Boulder, on how we might structure a carbon pricing scheme in Colorado.  You can also download a PDF of the slides and watch an edited version of that presentation via YouTube:

What follows is a more structured written exploration of the same ideas.

Continue reading A Carbon Price for Colorado

A profile of Freiburg, Germany

A good short profile of the city of Freiburg, Germany, and their many sustainability initiatives. Freiburg is a little more than double Boulder’s size — both in population and area, so it has a similar average population density. It’s also a university town with a strong tech sector locally. The whole city was re-built post WWII, but they chose to build it along the same lines as the old city, with a dense core, and well defined boundaries. Today about half of daily trips are done by foot or on bike, with another 20% on public transit. They have a local energy efficiency finance program, on top of the national one administered by KfW, and higher building efficiency standards than Germany as a whole. Half their electricity comes from combined heat and power facilities that also provide district heating and hot water. It seems like they’d be a good model city to compare Boulder to, and learn from.