The word on the street is that the Democrats just couldn’t tolerate the President getting three big wins in the same period, no matter what the issue was. The signing of the Medicare Bill was a big win for the President and the announcement that the economy was improving was a big win for the President.

The surprise trip to Iraq was a third big win for the President, but the Democrats did not see that one coming and it occurred after the Energy Bill was stopped.

The White House wants the Energy Bill for many reasons, but one of them is that it promotes renewable energy. Renewable energy has always been a Democratic issue and the Republicans want to split the environmental vote by getting the Energy Bill passed.

The Democrats have proclaimed that the Bill is a cave-in to the oil interests, but I believe that the “Law of unintended consequences” may say otherwise. In fact, the Energy Bill as it is currently written, could create major alterations in the electricity and transportation sectors of the economy while significantly reducing the Nation’s dependence on off-shore oil.

Current Law:

There are some existing renewable laws that may provide some incentive for development of renewable projects:

Geothermal projects currently receive a 10% Energy Tax Credit, 5-year MACRS depreciation and a modest resource depletion allowance. These incentives have not proven effective with very few projects under development. Certain States, such as Nevada and California, have passed Renewable Portfolio Standards that have created some marketplace but the impact has been minimal.

Closed-Loop Biomass projects have a 3-year Production Tax Credit of approximately $0.012/kwh along with a 5-year MACRS depreciation schedule. Again, this has proven inadequate to stimulate the market. There is one possible exception that could materialize however and that is the development of super-peaking projects that utilize bio-diesel as a fuel. These projects could be cost effective in certain markets and may find an opportunity for development.

Other renewable possibilities:

It would appear that the MTBE era is coming to a close. Ethanol is the obvious replacement for MTBE in gasoline. Ethanol is a domestically produced product that creates a significant amount of domestic expansion. California has dictated that ethanol will be used as a replacement for MTBE. This single action creates a market for nearly one billion gallons of ethanol.

The Energy Bill dictated an expansion of the ethanol industry from 2.5 billion gallons to 5 billion gallons/year. Clearly, this legislation would greatly enhance the market for corn based products and would benefit the corn producing States. But, it might do as much for other areas of the U.S. as it does for the corn producing States.

Most people don’t seem to understand that corn and other useable grain products are produced in almost every State in the Nation. These crops are not necessarily produced in very large quantities, but that is not the key point.

There are currently approximately 75 ethanol production facilities either in production or under construction in the mid-western States. All of these projects when combined might produce 3 billion gallons of ethanol each year. But, they also are capable of producing a large number of other products. So called, “Wet Milling” plants may produce as many as 19 different products including ethanol. These plants are expensive to build and operate and may saturate the market for the products other than ethanol. “Dry Milling” plants typically produce three products; ethanol (either food grade or fuel grade), Distillers Dried Grains (animal feeds), and CO2.

The “conventional logic” has been that all ethanol projects would be constructed in the mid-west. This logic is seriously flawed, however since the profitability for each project is significantly influenced by the market for the two major by-products (DDG and CO2)

The bottom line is that the plants ultimately will be widely distributed throughout the U.S. The ethanol demand will be influenced by individual States demanding that MTBE be replaced by Ethanol, by the market for DDGs and CO2 and by the availability of local grains to supplement supplies being brought from the mid-west.

The overall market saturation level should be over 200 plants distributed throughout the U.S. These plants would produce as much as 10 billion gallons of ethanol that would be used to replace approximately 227 million barrels of oil that would have been imported into the U.S. from other countries.

At the same time these plants would produce 30 million tons of animal feeds (DDGs) that would provide feed for fed cattle and dairy cattle, chickens, turkeys, hogs and possibly an emerging aquaculture industry. And 26 million tons of beverage and commercial grade CO2 that can be used in a large number of industrial applications.

The overall result of this domestic expansion would be more than $8 billion in plant construction with annual sales of corn of over $9 billion dollars/year (based on 200 plants), annual sales of DDG of $4 billion and annual sales of CO2 at wholesale prices of $650 million. All of these sales and construction dollars would create domestic jobs and economic growth in the U.S. At the same time these domestic benefits would displace approximately $7 billion in imported oil and could create thousands of direct and indirect jobs across the U.S.

What I can’t understand is how anyone can say that this displacement of imported oil with domestic production can create a cost to the Federal Government no matter what the tax breaks provided to the producers. The taxes paid by all of the job holders alone would more than compensate for any tax breaks provided to the manufacturers. The recently passed Medicare Prescription Drug program will cost billions of dollars to fund. This project may be both necessary and popular, but it must be paid for in some way.

By displacing $7 billion dollars in imported oil with more than $13 billion in domestic sales the Federal Government will create a source of revenues into the Federal structure. All of the jobs created by this endeavor will pay into both Social Security and Medicare. All of the employers will have to match the workers contribution to this effort. Therefore, this Bill would help to create revenues to cover some of the costs of the Prescription Drug payment program.

Bio-diesel production has the same impact as ethanol production. That is a direct displacement of a negative balance of trade (imported oil) with a domestic production of a substitute product that creates jobs with both State and Federal revenues.

The Federal government could mandate the use of ethanol in gasoline and bio-diesel in diesel fuel but individual States can, and do, dictate their motor fuel make-up. Therefore, it is within the power of individual States to create a positive stimulant for their economies. If each State mandated the use of ethanol as a replacement for MTBE and a minimum ethanol/bio-diesel content in their fuels of 5% to 10%, they would not only displace imported oil, but they would provide a direct stimulant to their economies.

The point has often been made that the Bill did not change CAFÉ standards for motor vehicles, but the fact is that requiring ethanol and bio-diesel in motor fuels will have a greater impact on the amount of oil that is imported than any change that has been promoted for the CAFÉ standards. In addition to reducing the amount of imported oil, the inclusion of ethanol and bio-diesel in fuels will reduce the overall environmental impact associated with CO2 and particulate emissions into the atmosphere.

The Energy Bill:

The Energy Bill provided additional stimuli for production of ethanol and bio-diesel for use as transportation fuels. As has been discussed above, this is a positive way to stimulate the economies of almost every State in the nation and reduce the nation’s dependence on imported oil. But, the Energy Bill could have provided much more. The Bill could have changed CAFÉ standards, but this has been very controversial and neither the Democrats or the Republicans, for different reasons, appear willing to make any substantial changes.

The Energy Bill also provided incentives for the production of energy from Wind, Geothermal, Solar and Biomass to reduce the dependence on natural gas and oil for electricity.

The Wind incentives have been tested and proved to be effective. The Bill provided both a rapid depreciation benefit and a 10-year Production Tax Credit of approximately $0.018/kwh produced for the first 10 years of project life. This benefit has resulted in a rapid expansion of the Wind industry. Without this incentive it is likely that all of the Wind projects will stop and the nation will return to production of peaking energy using natural gas.

NOTE: Domestic natural gas production continues to decline, therefore any increase in electric generation that is provided by natural gas will utilize imported fuel. By using imported fuel for this domestic requirement we will be further increasing the negative balance of trade.

The major complaint about Wind projects has been the lack of reliability of the energy. But as more and more projects are developed, the amount of project diversity increases and the percentage of reliable capacity increases.

Solar electrical production was provided a lower incentive than Wind. I see this as a major mistake in the legislation. Solar projects are going through the same scale of production issues that wind experienced before the 10-year PTC was provided. Solar projects have a similar “load factor” (that is the amount of hours that they can produce each year) as wind projects. Therefore, they should be given a similar tax position as Wind projects. Unfortunately, Solar projects were grouped with Geothermal and Biomass projects in the legislation. Therefore, it is unlikely that Solar projects will move forward except in places where the public provides a subsidy in their rate structure for Solar projects.

Geothermal projects have very high availability and do not require as aggressive a PTC as Wind and Solar. In the Energy Bill they were provided with a 5-year PTC of $0.018/kwh. This should be sufficient, along with the 5-year MACRS and depletion allowance to stimulate the development of as much as 20,000 MW of base load electric generation over the next 10 years.

Biomass projects were grouped with Geothermal projects. This appears to be an appropriate grouping since both of these technologies tend to be base load oriented and have high availabilities. Biomass projects were also provided with a 5-year PTC and a 5-year MACRS. The passage and signing of the recent healthy forest legislation should provide a significant amount of fuel for new biomass projects. Providing for funds for clearing the forests of built-up combustible materials is a good first step. But, without support legislation to provide for disposal facilities (biomass plants), the cost for disposal of the wood waste will simply increase significantly. Therefore, the healty forest initiatives will be reduced in impact without the Energy Bill to provide for the development of the disposal systems.

Geothermal projects are generally possible in the western U.S. including Alaska and Hawaii. But, Biomass projects may be developed in every State in the U.S. If the combination of Geothermal and Biomass projects could provide as much as 10% of the nations base load electricity it would create a construction expansion of about 40,000 MW of generation at an average cost of $1,500/KW or $60 billion in new construction. These projects are generally small in size and create jobs at a rate of about one job for each MW of generation. Therefore, this development could create as many as 40,000 new domestic, high quality, direct jobs. As in all manufacturing operations, for each direct job at a production facility, these projects should create at least 2.5 indirect jobs in the service and public industries that support the manufacturing. Therefore, it is easy to see how the combination of geothermal and biomass industries could create as many as 140,000 total new jobs for the U.S.

Other Energy Bill benefits:

The Bill did not provide either a national Renewable Portfolio Standard or a change in CAFÉ standards. This does not mean that the bill would not have a significant impact on oil imports or air emissions. In fact, the Hydrogen, Ethanol and Bio-diesel sections of the bill have the potential for rapidly reducing the amount of oil that is imported while significantly reducing key air emissions.

RPS requirements can be created and passed by individual States. Twelve States have seen fit to create requirements for the use of renewable energy. These same States can take the next step of requiring ethanol and bio-diesel in their fuels. Other States can pass RPS standards and can require the use of ethanol and bio-diesel. We must remember that the Federal Government does not need to do everything.

The Bill also included tax breaks for individuals that purchase alternative fueled vehicles including hybrid cars and trucks. Individuals define the marketplace for cars and trucks. The tax breaks that were indicated were sufficient to make the production of hybrid vehicles very cost competitive with standard automobiles.

It has been shown that hybrid vehicles get as much as 50% better fuel economy when compared to their normal cousins. It is now time for individuals to step forward and demand that the automobile producers provide the same size products using hybrid technology. If people want to improve the economy and reduce the balance of trade deficit they can help by purchasing hybrid cars and trucks.

Summary:

The “Almost” Energy Bill may have provided lots of tax benefits to the oil companies, but it also provided the basis for the development of a vibrant economic expansion based on renewable energy, ethanol, bio-diesel and hybrid automobiles and trucks.

The potential for these products has a positive impact on every State in the Nation by creating jobs and reducing imports. It is time to inform our representatives in Congress that no matter the imperfections in the Energy Bill, it is an excellent first step toward energy independence.

The “Law of unintended consequences” may make the Energy Bill far better than anyone has been willing to admit. It is not just the responsibility of the Federal Government to create energy opportunities. Each State can mandate the use of ethanol and bio-diesel in the transportation fuels. Each individual can chose to purchase a higher mileage automobile. With the tax incentives in the Bill, each individual can help to create a demand for alternative fueled vehicles including Hybrid cars and trucks.

Individual States could take the following actions:

1. They could mandate that their commercial automobile and light truck purchases use alternative fuels including the purchase of hybrid automobiles and light trucks. If several States took this action it would provide the production scale necessary for the manufactures to become cost effective.
2. They could mandate that ethanol and bio-diesel be used in all transportation fuels, including those purchased by the State itself. This would provide the basic market structure to increase the production of these fuels and displace imported oil.
3. They could pass a meaningful Renewable Portfolio Standard that encouraged the development of renewable energy electricity production.

The Federal Government could take the following actions:

1. It could mandate the use of ethanol and bio-diesel in all transportation fuels purchased by Federal Agencies including the military.
2. It could purchase both alternative fuel vehicles and hybrid vehicles for its own fleet. Again, as production of these vehicles increases the cost will decline.
3. It could mandate the use of a percentage of renewable energy by all of its agencies including military installations. Currently, the Federal Government only encourages the use of renewable energy.

Individuals could take the following actions:

1. They can demand that automobile manufacturers provide mid and full sized automobiles/SUVs/light trucks that utilize hybrid technology.
2. They can insist that their State Governments use renewable energy and pass Renewable Portfolio Standards.
3. They can tell their representatives that they want to substitute domestic products such as ethanol and bio-diesel for imported products such as petroleum. This can be done without creating trade barriers and it creates thousands of meaningful jobs.

Finally, the implementation of the Energy Bill would provide a positive step towards environmental improvement through the reduction in the use of imported fossil fuels.. If States set a requirement for replacement of MTBE with Ethanol and set minimum ethanol and bio-diesel percentage standards, they could create a significant reduction in imported oil along with a tremendous boost in jobs and economic expansion for their own States.

The “Almost” Energy Bill had great potential. It is not good policy to let it die.