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The electric utility industry has come a long way in the past year, abandoning its opposition to CO2 regulation in favor of campaigning for a seat at the table when such regulations are crafted. Hardly anyone in the industry seems to think that regulation will be a boon for the industry, but most, like the majority of the executives at the hearings, seem to have grudgingly accepted its inevitability.
Bleak as that prospect may seem now, even this challenge presents new opportunities for companies in the electric utility industry that are bold enough to pursue them. For example, CO2 regulation offers electric utilities a chance to gain market share in sectors where it has long been relegated to a minor role. These sectors include transportation, which is supplied virtually in its entirety by the oil companies, and space heating, which is dominated by the natural gas distribution companies. The electric utility industry could potentially gain competitive advantage because it has access to multiple technologies that might enable it to eventually deliver a nearly CO2-free product. Its competitors—oil and natural gas companies—have fewer and less attractive options.
Although the price of electricity would likely rise due to the cost of implementing these low-carbon technologies, the price of competing energy products, depending on the regulatory scheme ultimately enacted, would likely also rise. But the electric utility industry would be in the best position to take charge of its destiny. With the emergence of new technologies in the transportation and heating markets that will enable more practical, more efficient use of electricity, utilities would be able to offer economical low-carbon alternatives to a concerned public. Sure, this opportunity is fraught with all sorts of risk, especially given that several of these technologies are underdeveloped and may never achieve widespread market success. The electric utility industry, however, wasn’t founded by security-obsessed homebodies who fled from technological risk.
Turning Coal into Cool-Aid
In a CO2-regulated world, the electric power industry would be in an ideal position to package a nearly carbon-free product for consumers. There are three major technologies it could potentially draw on to make that a reality: carbon capture and storage, renewables (like wind and solar), and nuclear power. Certainly the industry can and will use efficiency and combined-heat-and-power technologies to manage the amounts of centrally generated power that customers demand. Even so, there will still be a demand for low-carbon electricity delivered over the grid, and consumers are likely to find that electricity highly attractive. Assuming the implementation of a regulatory scheme that gets the price signals right, once the wire that is already attached to a customer’s home delivers low-carbon electricity, consumers are going to find new ways to use it to displace fuels that are more carbon-intensive.
Among the technologies that could enable this opportunity, one of the least developed is carbon capture and storage, in which CO2 is extracted from the exhaust streams of coal and gas power plants, compressed, and piped to natural storage in geologic formations. Although this technology works best with new coal plant designs that gassify coal by reacting it with water and oxygen, it may eventually be retrofit to work with existing coal and gas plants. Geologic formations capable of storing carbon dioxide are not found everywhere, but they don’t have to be. With renewables and nuclear technologies at their disposal, electric utilities could choose the best combination of technologies for each geographic location. Furthermore, the utility industry could incorporate these technologies without making large changes to its essential infrastructure.
Oil companies have fewer and less attractive technological options. Oil is largely refined into transportation fuels, and it is extremely unlikely that carbon emissions from mobile sources will ever be captured and stored. Perhaps this industry could switch to liquid fuels derived from biological sources like corn, switchgrass, and organic wastes. When these materials are replanted and regrown, they absorb the carbon dioxide released into the atmosphere when they were burned. Biological fuels require energy for processing, however, and so the amount of CO2 emissions they offset varies widely depending on how much processing they require. For example, one study published in the Proceedings of the National Academy of Sciences concluded that switching from gasoline to contemporary ethanol fuel only reduces greenhouse gas emissions by about 12% but switching from diesel to biodiesel derived from soybeans would achieve a 41% reduction. It’s possible that better ways could be found to make biofuels that are less carbon-intensive, but even then the oil industry would face huge challenges to ramp up production without driving up the price of food and accelerating deforestation.
Another option that could be adopted by both oil and gas companies would be switching to hydrogen gas. When hydrogen gas is combusted in the presence of oxygen it forms pure water. Although several major auto manufacturers are developing hydrogen vehicles, switching to hydrogen would entail huge, expensive infrastructure upgrades for both industries. The natural gas industry can substitute landfill methane for mined gas, but this technique is unlikely to have a large impact.
To be fair, most of the low-carbon technologies and techniques described here will have to overcome numerous obstacles before they will be ready for widespread deployment. Additional research and development could be costly, and it is impossible to know which, if any, of these alternatives will prove to be sufficiently reliable and inexpensive enough to become major components of the U.S.’s energy mix. For example, only a few industrial plants worldwide currently incorporate carbon capture and storage technology, and no new nuclear plants have been ordered in the U.S. since the 1970s. It would also take a long time for these industries to incorporate such new technologies.
Bottom line: The electric power industry has three such technologies to choose from. Oil and gas companies have fewer options. Because technological evolution is so unpredictable, the more technologies you have to choose among, the better the odds that at least one will succeed. Thus the advantage of technological options goes to the electric utility industry.
Key Technologies Unlock Applications
Simply having the technological wherewithal to produce a low-carbon product is not enough to enable the electric industry to gain market share. There must also be new or improved technologies within the contested sectors that can take advantage of electricity.
For example, in the transportation sector, there are currently few electric vehicles on the market. All of the major car manufacturers pulled their products off the market several years ago, as was related in the recent documentary film Who Killed the Electric Car? Two of the biggest problems that held back the adoption of electric cars were their limited range (around 60 miles for electric vehicles versus 250 miles and up for gasoline cars) and the long charging time required (five or six hours versus just a few minutes for a refueling stop at a gas station). To a large extent, these problems have been mitigated by the advent of the plug-in hybrid vehicle.
Today’s plug-in hybrid vehicle is simply a stock hybrid car (the Toyota Prius is currently the most popular model for this purpose), into which a large battery pack has been retrofit, along with additional controls and an electrical cord. Some designs feature aftermarket battery packs containing as many as 18 batteries. Many plug-in hybrids will travel about 30 miles on a charge, after which they may be plugged in to any ordinary 110-volt electrical outlet. Although 30 miles is sufficient for many daily routines, if drivers wish to go farther without taking the time to recharge, the car automatically switches over to gasoline power. Should the gasoline tank run low, it can be refilled in minutes at any gas station. Currently, the plug-in hybrid vehicle is a novelty, held back by high prices (adding plug-in capability to a hybrid car can cost $15,000 or more) and the limitations of contemporary battery technology. It’s widely anticipated that mass production and additional research and development could address both of these barriers.
The space-heating sector presents similar challenges and opportunities for the electric industry. Natural gas furnaces, which cost about half as much to operate as electric resistance furnaces, currently dominate this market. But in many areas, electrically powered heat pumps, which work like refrigerators in reverse to harvest heat from cold outdoor air and pump it into homes, now cost less than gas furnaces to operate. Even so, heat pumps have achieved only negligible market penetration in Northern climates. Why? Largely because as it gets colder outside, heat pumps tend to put out less heat and do so less efficiently. At some point, usually just a bit below freezing, the heat pump is simply turned off, and a backup electric-resistance heater is activated. Long hours in this operating mode can offset any savings achieved during the time the heat pump operates.
The low-temperature heat pump, recently reintroduced into the market, has the potential to enable heat-pump heating to gain market share in northern climates. It’s able to operate near rated capacity and efficiency at temperatures well below 0° Fahrenheit (F). That performance is enabled not only by an additional compressor and more heat exchangers, but also by far more sophisticated microprocessor control than has been available in earlier residential heating products. In tests conducted in the Pacific Northwest, several low-temperature heat pumps successfully heated homes through an entire winter while using little or no backup electric-resistance heat. Some of these homes even experienced outdoor temperatures below –10°F.
Currently, the volume of plug-in hybrid vehicles and low-temperature heat pumps being sold is negligible compared to sales of their well-established conventional counterparts. Although they are very different in their function, these two technologies face similar obstacles to gaining wider market acceptance. Both are relatively unproven and expensive, and both are being manufactured and marketed by small little-known organizations. In a future market in which electric utilities are offering an energy stream that is much lower in carbon than those offered by their oil and gas industry competitors, a lot of people are going to want to use that low carbon power to run their cars and heat their homes. Their dollars will undoubtedly drive a lot of innovation and development as these manufacturers improve their products to capture those revenues. In such an environment, better products and bigger organizations may well emerge to serve those customers.
Of Course It’s Risky
It is by no means a sure bet that CO2 regulation will result in the outcome described above. The chief risks are that the legislative process will produce regulations that deny the electric utility industry an opportunity to compete on a level playing field and that the enabling technologies will fail to materialize. Though these are not trivial risks, what made it possible for the U.S. electric utility industry to emerge as one of the chief enablers of the world’s largest economy was its willingness to master challenging technologies and engage in the political process.
With over a half-dozen proposed bills circulating in Washington, the politics of CO2 regulation are already in motion. Some proposed legislation could erect barriers to competition across fuels by imposing different regulatory schemes on the electric utility industry than on the oil and gas industries. For example, one proposed bill would regulate only the electric utility sector. Another proposes to cap CO2 emissions from large sources like electric generators while imposing different caps for the upstream energy flows produced by the oil and gas companies. We would all depend on the wisdom of the program administrator to fairly allocate caps among the different sectors of the energy industry.
Given the complexity of the industry and the potential interactions across its different sectors, the fairest and most transparent regulatory scheme would simply tax all fuels equally at the point where they enter the economy. Then energy users could decide for themselves how best to reduce their carbon footprint by combining green electricity with other fuels and by avoiding energy purchases through the use of more-efficient technologies. U.S. Representative Pete Stark (D-CA) recently introduced a bill that would impose such a tax.
To some extent, the challenges that the electric power industry faces with CO2 regulation are analogous to the problems the industry had to resolve in its earliest days. When Samuel Insull became president of Chicago Edison (later to become Commonwealth Edison), the industry was in a primitive state. Under Insull’s leadership, Edison built what was at the time the world’s largest power plant, driving down costs and ushering in the era of the mega-electric-utility. Insull pioneered the use of the demand meter and marketed innovative rates differentiated by sector. When his expansion plans were frustrated by local governments that instituted a patchwork of differing regulations, Insull became a proponent of the regulated monopoly model, which he successfully lobbied for.
The time has come for the industry to rediscover the entrepreneurial spirit of Samuel Insull as it formulates strategies for operating in this new regulatory environment. One step it could take would be to lobby for widespread carbon taxes that would create a level playing field for all energy companies and consumers. Another would be investing in the development of a new generation of technologies, including renewables, carbon capture and storage, nuclear power, plug-in hybrid vehicles, and better heat pumps. Sure, risk will be involved, but as the old saying goes, “With every opportunity comes challenge.”
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