Can the Navy Reform How the U.S. Uses Energy?

I had the opportunity Monday night to hear Secretary of the Navy Ray Mabus talk at the Council on Foreign Relations about the U.S. Navy’s efforts to transform how they use energy and their intention to become a catalyst for changes in overall energy consumption in the U.S.  The Navy has laid out some of the most ambitious goals in the nation regarding energy efficiency and alternative energy.  These include:

  • by 2012, creating a “Green Strike Group” composed of nuclear vessels and ships powered by biofuels and deploying that fleet by 2016;
  • by 2015, reducing petroleum use in its 50,000 commercial vehicle fleet by 50 percent by phasing in hybrid fuel and electric vehicles;
  • changing the way the Navy and Marine Corps award contracts during the acquisition process to consider the lifetime energy cost of the system
  • producing at least half the shore-based energy requirements from renewable sources, such as solar, wind and ocean generated by the base; and
  • by 2020, ensuring at least 50 percent of the Navy’s total energy consumption comes from alternative sources.

Secretary Mabus started off by talking about what motivates the Navy to take energy efficiency so seriously.  For every $1 increase in the price of oil the Navy pays an additional $31 million in fuel costs.  Ships are most vulnerable when they are refueling and it was during a refueling visit to Yemen that the USS Cole was attacked.  One Marine is killed on average for every 50 convoys in Afghanistan.  Convoys transporting fuel account for a significant portion of the total supply convoys in Afghanistan.

Much of the discussion focused on the Navy’s efforts to expand the use of bio-fuels.  Mabus said the right things about ensuring that organic matter grown for use in bio-fuels should not displace food production, something the EU has become concerned about as it tries to meet its own ambitious targets regarding members’ use of alternative energy.  Large Navy purchases and investment in new technologies helped cut the price of bio-fuels 50% last year and they are expected to go down another 50% this year.  However, although source diversity may be good from an overall national energy security perspective, it isn’t clear how expanding the use of bio-fuels would improve the security of the fleet or the Marines.  Any sort of liquid fuel whether it is derived from oil, algae, or composted unicorn tails needs to be transported to ports where ships will stop to refuel or through the same supply lines as oil based diesel to get to MRAPs that Marines are driving in Afghanistan.  Mabus also suggested that nuclear would remain steady as a portion of overall energy consumption by the fleet at about 17%.  A new generation of hybrid ships such as the USS Macon Island that can run entirely off an electric motor below certain speeds may have a significant impact on fuel use over the long term.

Although there was a lot of talk about new whiz bang technologies like electrofuels and flexible solar cells what struck me most about the discussion was the Secretary’s ambition to use the Navy’s policies to change how the country consumes energy.  He noted that “Although we defend democracy, we are not one ourselves.  We can set mandates (on energy use)… We can use technologies in ways that cannot initially be done by the private sector.”  The U.S. Government uses about 2% of energy consumed in the U.S.  The Department of Defense is responsible for 80% of government consumption and the Navy is responsible for about a third of that.  So even though the Navy is only responsible for .5% of U.S. energy consumption, they are still a big enough player to affect investment patterns and prices of different technologies.  Secretary Mabus’ statement that “We are going to create a market for alternative fuels,” sounds a lot to me like good old fashioned industrial policy.  The kind of thing that the Chinese continue to engage in with their recent announcement of a national five year plan that includes ambitious energy targets and also the kind of thing that is generally frowned upon by free-marketeers in the U.S.  In some ways the Department of Defense is one of the last bastions of explicit industrial policy in America.  It even has an Assistant Secretary of Defense for Manufacturing and Industrial Base Policy, something you would never see in a civilian agency like the Department of Commerce.  It will be interesting to see if the Navy is able to set the agenda for the entire country reforming the way we produce and consume energy.  They certainly seem off to a good start.

Postscript:  As I am writing this, President Obama has announced in a speech at Georgetown University that he intends for the U.S. to reduce imports of foreign oil by 30% over the next decade.  Changing the consumption patterns of a nation is obviously harder than changing the course of a military service but let us hope that the President can lay out the kind of specifics that the U.S. Navy has been discussing for the past few years as it put forth its own vision of a green military force.

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China’s New Energy Policy has Global Implications

About three months ago I attended an event with Fatih Birol, the Chief Economist for the International Energy Agency, at the Council on Foreign Relations.  During his remarks, he said that there were five places he was concerned with regarding demand for energy and carbon emissions, “China, China, China, India, and the Middle East.”  Birol’s comments highlight the fact that China’s announcement last week that it is setting targets for energy intensity and CO2 emissions per unit of economic output and putting a cap total on total energy consumption by 2015 is not just important for China but has global implications for energy markets and the environment.

This announcement comes at a time when Chinese policy makers are demonstrating that they are increasingly willing to sacrifice some economic growth in exchange for meeting other goals.  The recently released five year economic program specifically calls for increasing household incomes and domestic consumption while setting lower targets for GDP expansion.  There is a healthy debate amongst analysts regarding the reasons for China’s energy targets.  Energy security is a major concern for China as 80% percent of China’s imported oil flows through the straits of Malacca, an area where the U.S. currently enjoys naval superiority.  China is also the world’s largest importer of coal, which like oil is vulnerable to price shocks such as occurred during recent floods in Australia.  Their economy’s reliance on coal and energy intensive heavy industry has serious environmental consequences including choking pollution and the degradation of water supplies.  Also, energy security and environmental damage are linked to concerns about social unrest in the eyes of the Chinese leadership.

China obviously does not have to deal with the kind of democratic debate that takes place in the U.S. regarding energy policy but it is interesting to compare the reasons mentioned for China’s policy with the discourse in the United States. China’s focus on energy security and non-climate change related environmental issues sounds very similar to former California Governor and long-shot candidate for Energy Secretary Arnold Schwarzenegger’s recommendation at the recent ARPA-E conference that the U.S. can best formulate an intelligent energy policy and meet ambitious greenhouse gas targets by re-framing the debate in  terms everyone can agree on.

Hopefully, China’s willingness to take energy policy and carbon emissions seriously will remove some of the excuses that other developed nations have used to avoid making hard choices.  The U.S. has tended to argue that without strong action from China and India global coordination on emission targets will not be meaningful.  Now China has taken an important first step in this direction.  Also, increasing China’s energy security through a reduction in demand or by any other means is good for the energy security of the rest of world.  Increasing transparency around expectations of China’s future consumption can help stabilize energy commodity prices which are set in a global marketplace.  Even though energy security is not a zero sum game, perhaps a sense of competition between nations will push some countries that have been sitting on the fence towards a race to the top in terms of developing meaningful energy policies.

Energy Geopolitics Roundup

 

At Ideas on Energy we love grappling with the most challenging questions about our shared energy future.  Over the past four months a number of excellent publications have come out regarding big picture energy security trends and geopolitics.  Falling under the “I read it so you don’t have to,” category of posts I am going to summarize some of the more interesting papers that have recently been released, although all of these papers are worth spending some time with.

Earlier this week Shell published the excellent “Shell Energy Scenarios to 2050: Signals and Signposts”.  This is a fascinating document in that it maps out future energy scenarios based not just on the usual supply and demand forecasts but also looks at broad geopolitical trends and actively advocates for countries to expand coordination of policies that will significantly reduce greenhouse gas production.  The forecasts for demand are based on relatively uncontroversial assumptions that global population growth will continue for the next 40 years and that emerging economies (read India and China) are entering the most energy intensive phase of their development.  Global energy demand will triple between 2000 and 2050 but increases in production and efficiency and not likely to keep pace.  This document looks at how will the world deal with both the significant gap between supply and demand as well as the environmental stresses created by increased energy demand.

Shell sees two possible categories of scenarios to deal with these challenges.  The first is “scramble” whereby each country tries independently to secure as much supply for itself as possible.  Demand management and environmental concerns are shunted to the side as long as possible although eventually economic growth is constrained by access and environmental challenges which finally forces countries to take action.  The other possibility is “blueprint” whereby coalitions of countries, NGO, and citizens recognize that they have a collective interest in a proactive approach to energy and environmental management.  Private sector entities under this scenario at the same time realize that regulatory certainty will enable commercial investment and profit.

The paper then looks at which of these directions is more likely for the future based on the global economic reconfiguration of 2008 which Shell boldly proclaims has shifted political power from West to East, increased the involvement of states in both domestic and global economics, and decreased the trust between the governed and politicians in democracies making regulation more difficult.  Although it does not clearly state whether the authors think the world is heading more in a “scramble” direction or a “blueprint” direction, they do note that “global inaction, might lead people to shrug off the climate issue. Many are quick to doubt the science. Amid such ambiguity a discontinuity is building as expert and public opinion diverge. This divergence is not sustainable!”

The Center for Strategic and International Studies also looks at the drivers of energy geopolitics reaching out to 2035 in their publication “The Geopolitics of Energy”.  The authors point to the political centrality of energy in the developing world since economic growth is as important a justification for political power in authoritarian China as it is in democratic India.  They note that for those looking at new sources of energy such as natural gas to be primary drivers towards a lower carbon energy future, we still face a geographic concentration in a few countries that many do not want to politically empower.  Although gas allows for a diversification of supply in the U.S. and Canada, extraction from unconventional sources in the Western hemisphere is a high carbon process.  Low carbon extraction is possible mainly in Iran, Qatar, and Russia.  Also, most renewable sources of energy require rare earth elements which would create supply bottleneck risk from countries like China or Bolivia.  The paper concludes that “single issue advocacy, unbridled optimism, and blind reliance of technological innovation are woefully inadequate though they frequently masquerade as policy prescriptions.”

In the Chatham House publication “More for Asia: Rebalancing World Oil and Gas”, author John Mitchell focuses on the impact that a reorientation of oil and gas supply chains towards Asia will have.  Increasingly, state owned buyers in Asia will purchase supplies from state owned suppliers in the Middle East.  He sees this as decreasing the role of the private sector in both investment and trade globally.  Additionally, this will make the Middle East less reliable as a supplier to Europe and will increase European reliance on Russia for supply at a time when the EU is trying to decrease that dependence.

Pipeline Politics in Asia”, released as an edited volume after a conference conducted by the National Bureau of Asian Research, focuses on the implication of projections out to 2030 that China and India combined will account for 50% of global energy demand growth, 60% of oil demand growth, 20% of gas demand growth, and 85% of coal demand growth.  We are reminded of Winston Churchill’s speech to the British House of Commons in 1913 where he states, “On no one quality, on no one process, on no one country, on no one field must we be dependent.  Safety and certainty in oil lie in variety and variety alone.”  Energy security relies on diversity but diversity is expensive, which raises a fundamental question: who benefits and who pays?  This lays the groundwork for even more state involvement in creating supply networks when market forces alone are not enough to guarantee needed energy security.

One of the more interesting questions raised in this collection is the degree to which the search for secure energy supplies is and should be seen as a competition.  The different authors of each chapter offer different perspectives on this question.  The U.S. is trying desperately to direct gas pipelines away from Iran, even though an Iranian route makes the most sense from a purely economic perspective.  Some in the U.S. are concerned that Chinese attempts to secure supply from Central Asia may undermine the potential supply scale needed for U.S. favored, Western directed pipeline projects.   China clearly does see the U.S. as a threat to its energy supplies, especially given the fact that approximately 80% percent of China’s imported oil flows through the straits of Malacca, an area where the U.S. currently enjoys naval superiority.  On the other hand, secure supplies of energy for China are good for the stability of global energy markets overall.  As one author notes “It would be short-sighted for Western governments and companies to see Chinese pipelines out of Central Asia as a threat rather than a possible opportunity.  If China is willing to pay a premium for diversity of supply from Central Asia, it enhances rather than harms global energy security.”

Reading through all of these papers, I am struck by the consist trends which all of them note regarding the significance of increased demand from Asia, the need to diversify supply to ensure security, and the challenges of collective action.  What is less clear is how we can address these collective action problems given the global political trends we face.  What do you think is the best way to turn what many view as a competition for resources and influence into an opportunity for us to cooperate towards our shared goals of economic prosperity and environmental balance?

Cleantech Hacked!

It’s always fun when two of our favorite things come together.  Peanut butter and chocolate.  Mohammed Ali and George Foreman.  Pizza and beer.  This week saw a combination of two of my favorite topics to follow, cleantech and cybersecurity, with exciting stories worthy of a John LeCarre novel.

The Government Accountability Office (GAO), Congress’ watchdog agency that monitors the rest of the government, published an important report about the vulnerability of the smart grid to cyber-attack.  At the same time we rework our electrical grid making it more networked in order to improve energy efficiency we are also increasing the points of entry for those who would seek to do damage our energy infrastructure either for money, ideology, or to engage in warfare.  Perhaps the most significant demonstration of the damage a cyber-attack can inflict on energy infrastructure comes from what is reported to be a combined U.S.-Israeli attack on Iran that physically destroyed uranium enriching centrifuges by exploiting a vulnerability in the Siemens Process Control System 7, a system that is used in energy systems around the world.

The GAO report noted a number of significant challenges.  Many parts of the IT infrastructure being put into the smart grid lack even basic security features such as event logging, which would allow utilities to see when they are being probed or analyze an attack.  The National Institute of Standards and Technology (NIST), which was charged by Congress with developing cyber-security standards for the smart grid, failed to look at ways to safeguard against a combined physical and cyber-attack.  In many cases utilities are merely seeking to meet regulatory standards rather than think through ways to establish a comprehensive security system.  Part of the problem is that government entities often control whether utilities can seek to recoup investments in smart grid technology which leads to underinvestment in cyber security features.

In response to these challenges the GAO recommends that the NIST finalize its cyber-security standards and make sure they include issues that were not previously addressed.  They also recommended that the Federal Energy Regulatory Commission coordinate with state regulators “to periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cyber-security standards and develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation.”  Both agencies agreed with the recommendations.  Retrofitting infrastructure with improved cyber-security features is obviously more difficult and expensive than building it right the first time so hopefully utilities and the government regulators can get their act together as soon as possible before much more smart grid build out takes place without the needed features.

In a creative heist that sounds like something out of Ocean’s Eleven cyber thieves have stolen about $38 million worth of carbon emission credits from the online EU Emissions Trading Scheme (ETS) platform.  The ETS, which traded around $122 billion worth of credits in 2010, was temporarily shut down in response to the thefts.  Member states were urged to improve security of the trading platform last year after a series of smaller frauds but a number of governments failed to do so citing a lack of money for the upgrades.  Analysts have pointed out that one silver lining to all of this is that it demonstrates that people understand that carbon credits are something with real value, at least in Europe.  Pike research in a report about Electric Vehicle Cyber Security shows how similar fraud could potentially be perpetrated through electric vehicle charging infrastructure.

The common theme through all of these reports is that as our energy infrastructure becomes more networked and more high value transactions related to energy take place online we are going to see more criminal activity and perhaps cyber-warfare taking place through our energy systems.  And unless we start taking the design and implementation of security standards throughout this infrastructure seriously we are going to be reading a lot more about spectacular energy related hi-jinks in newspapers and in blogs just like this one.

Russia Gets Serious About Energy Security

Russian President Dmitry Medvedev recently announced plans for Russia to develop an energy security doctrine.  Speaking at a Security Council meeting at the Kremlin, the President articulated a surprisingly progressive vision regarding how Russia should approach both its internal energy issues and the role its energy sector should play in the global economy.  Although it is sometimes unclear whether the President is defining policy in Russia or if other centers of power such as Prime Minister Putin are actually calling the shots, it is worth looking in some detail at how Medvedev sees the future of energy in Russia.

Despite the fact that the Russian energy sector accounts for approximately 12% of global oil and coal supply and nearly 25% of global gas supply, the President was concerned with poor management of energy resources for Russian consumers and industry.  In particular, he noted that natural gas is being used in places where coal or oil could be used just as efficiently leading to rapid depletion of gas resources.  He gave as an example gas pipelines being built to villages in remote areas with just a few houses.  He also complained of low levels of energy efficiency in machines used by both consumers and industry.

The President envisions alternative energy being a big part of Russia’s energy future.  He singled out hydropower as having a particularly important role to play.  Also key are upgrades to existing electrical generation and distribution networks that could be made compatible with the networks of other countries which he noted, “may be to our advantage and profit.”  Setting up smart grids, utilizing nanomaterials, and investing more in research and development were important parts of the vision.

Medvedev knows that this speech will be read by people in countries that are current or future customers for Russian gas.  He reassuringly stated that “We have repeatedly said that Russia is not interested in a high monopolistic energy price; what we want is price stability and fluctuation predictability, in other words, reasonable price,” although consumers in countries such as Belarus and Georgia might be a bit skeptical of these sentiments.  Russia has in the past been very willing to use gas supplies as an instrument of power and that seems unlikely to change anytime in the new future.  He also noted that Russia would be deepening its relationship with gas customers in Asia.  “New forms of international energy cooperation should be developed. This does not apply only to Europe, where we have trodden all the paths and know the situation inside out, but also to a large extent to the Asia-Pacific region.”

All of these ideas sound like a sensible approach to energy issues in Russia although the devil is always in the details.  The energy sector is responsible for over 30% of Russian GDP so getting energy policy right is hugely important for Russia domestically as well as more broadly for Europe and Asia.  Ideas on Energy will be following the development of this doctrine and whether we see any actually changes in the energy sector as a response to what is developed.  I would be interested to hear from readers what other major issues you would want to see Russia address in its energy security doctrine?

 

Are Biofuels Really Better for the Environment?

The final weeks of 2010 have seen a flood of attention directed towards biofuels.  NPR had a three part series highlighting some of the challenges of ethanol including how it raises food prices, although many people would describe U.S. support for ethanol as more about agricultural policy than energy policy.  Biofuel company LS9 raised about $30 million in new funding and Pike Research released a report predicting a 20% increase over the next six years in biomass related capital investment, which includes biofuel and energy products.

Probably the most significant announcement however was that the European Commission (EC) is looking at reevaluating the environmental benefits of biofuels over conventional sources of energy for transportation.  In a report issued last week the Commission took a close look at what it refers to as the effects of indirect land use change.  The basic concept is that as agricultural land in some areas is converted to fuel oriented crops new land will be needed for food production.  The clearing of new land has a carbon impact and depending on where the new land comes from, for example if someone cuts down rainforest in Indonesia in order to create new agricultural areas, the negative carbon impact of opening food production in new areas could substantially offset the positive effects of using biodiesel.

The EC adopted two connected goals in 2009 of a 10% share for renewable energy in the transport sector and a 6% reduction in the greenhouse gas intensity of fuels used in transport.  This study throws into question the degree to which biofuels should be the renewable energy source of choice to help meet the greenhouse gas reduction goal for the transport sector.  Surprisingly, the report makes no mention of third generation biofuels from algae, which are supposed to be able to generate 30 times as much energy per acre as land crops, as a possible way to minimize these land use challenges.  Perhaps this will be addressed in the six month impact assessment the EC is planning as a follow on to this study in order to figure out whether it needs to change its renewable energy and fuel quality directives.  It will be interesting to see whether this report or any follow on assessments have an impact on how other countries incorporate biofuels into their energy policy planning.