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.

ALEC attacking renewable energy standards nationwide

The American Legislative Exchange Council (ALEC) is at it again, trying to roll back state renewable energy standards nationwide.  The argument behind their model bill, entitled the Electricity Freedom Act, is that renewable energy is simply too expensive.  The Skeptical Science blog offers a good short debunking of this claim, based on the cost of electricity in states with aggressive renewable energy goals, and how those costs have changed over the last decade.  And this is before any social cost of carbon or other more traditional pollutants is incorporated into the price of fossil fuel based electricity.

US States with renewable portfolio standards or binding goals.

Their summary:

  • States with a larger proportion of renewable electricity generation do not have detectably higher electric rates.
  • Deploying renewable energy sources has not caused electricity prices to increase in those states any faster than in states which continue to rely on fossil fuels.
  • Although renewable sources receive larger direct government subsidies per unit of electricity generation, fossil fuels receive larger net subsidies, and have received far higher total historical subsidies.
  • When including indirect subsidies such as the social cost of carbon via climate change, fossil fuels are far more heavily subsidized than renewable energy.
  • Therefore, transitioning to renewable energy sources, including with renewable electricity standards, has not caused significant electricity rate increases, and overall will likely save money as compared to continuing to rely on fossil fuels, particularly expensive coal.

But really, go read the entire post for more detail.

Minneapolis eyes way to push utilities to be greener

Minneapolis is Xcel’s home town, and a much bigger market than Boulder. The city is now talking about allowing their franchise agreement to lapse, in order to pursue more aggressive renewable energy policies than state law will allow if they’re served by the monopoly utility.  The article gives a nod to Boulder’s votes over the last two years to explore the alternatives to franchise agreements, including the formation of a municipal utility.  It’s great to see another much larger city looking at its options, and as far as pushing the overall utility business model to change, it’s great to see this happening within Xcel’s service territory.  There’s a threshold out there somewhere, beyond which the current arrangement is no longer stable, and even the utility will start begging for something different.  The faster we can get there, the better.

Designing Feed-in Tariffs

NREL took a nice long look at different ways to design feed-in tariffs (PDF) in July of 2010, based on the past decade’s worth of experience, both in the EU and several US states.  It’s 144 pages long and aimed at policymakers… so, not exactly light reading.  But if you really want to know how these things work (or fail), it’s great.

Renewable Energy Policy by Paul Komor

I just finished reading Renewable Energy Policy by Paul Komor (2004).  It’s a little book, giving a simplified overview of the electricity industry in the US and Europe, and the ways in which various jurisdictions have attempted to incentivize the development of renewable electricity generation.  The book’s not that old, but the renewable energy industry has changed dramatically in the last decade, so it seems due for an update.  There’s an order of magnitude more capacity built out now than ten years ago.  Costs have dropped significantly for PV, but not for wind (according to this LBNL report and the associated slides).  We’ve got a much longer baseline on which to evaluate the feed-in tariffs and renewable portfolio standards being used in EU member countries and US states.  I wonder if any of his conclusions or preferences have been altered as a result?  In particular, Komor is clearly not a fan of feed-in tariffs, suggesting that while they are effective, they are not efficient — i.e. you end up paying a higher than necessary price for the renewable capacity that gets built.   This German report suggests otherwise, based on the costs of wind capacity built across Europe.  Are the Germans just biased toward feed-in tariffs because they’ve committed so many resources to them?  NREL also seems to be relatively supportive of feed-in tariff based policies, but maybe this is because the design of such policies has advanced in the last decade, better accounting for declines in the cost of renewables over time, and differentiating between resources of different quality and utility.

Continue reading Renewable Energy Policy by Paul Komor

Hot Air About Cheap Natural Gas

When people compare the cost of gas-fired electricity and renewables, they usually don’t price fuel cost risks, and at this point that’s really just not intellectually honest.  Risk-adjusted price comparisons are very difficult because nobody will sell a 30 year fixed price gas supply contract, and that’s what you’d need to buy to actually know how much your gas-fired electricity will cost.  Even a 10 year futures contract doubles or triples the cost of gas.  You can’t buy renewables without their intrinsic fuel-price hedge, and that hedge is valuable.  The question shouldn’t be “Is wind the absolute cheapest option right now?” it should be “Given that wind will cost $60/MWh, are we willing to live with that energy cost in order not to have to worry about future price fluctuations?”  And I think the answer should clearly be yes, even before you start pricing carbon.

Cost Effectiveness of Renewable Energy in Michigan

In the 2011 annual report to the state legislature on the cost effectiveness of Michigan’s Renewable Energy standard, it was revealed that wind bids have been coming in far cheaper than anyone expected they would.  In fact, even without the federal production tax credits, they’re far cheaper than new coal fired generation ($61/MWh for wind vs. $107-133/MWh for new coal).  Interestingly, Xcel’s 2011 resource plan lists the cheapest new generation option in Colorado as being natural gas combustion turbines… at $60/MWh.  So wind is cheap.  It’s also very low risk.  So how do we get more of it?