Analysis: Crisis? What crisis?
There's a lot of hand-wringing going on about the state of the North American gas industry, but current conditions also offer an opportunity for gas players to show leadership and support demand side management (DSM) initiatives.
Supporting efforts to curtail consumption might seem heretical to oilpatch executives and employees. However, DSM could go a long way to prevent vote-conscious politicians from imposing controls on price and supply.
Washington's sensitivity about the gas industry was demonstrated this week by a special meeting of the National Petroleum Council. The one-day event, requested by Energy Secretary Spencer Abraham, was supposed to recommend solutions to high prices and low inventory levels.
Abraham told reporters on Thursday that conservation is a key way to stretch supplies this summer and rebuild storage inventories. However, President George W. Bush has been a lot keener on pushing supply solutions, evidenced by his 2001 energy plan that urged opening up more federal lands to drilling, than on promoting DSM.
In contrast to the Bush administration's position, energy conservation and efficiency played important roles in a report released last week by an organization called the Energy Coalition Foundation (which, as of this writing, does not appear to have a web presence).
The ECF is a creation of business mogul Ted Turner, whose charitable foundations help fund the group. A close look at the report shows some pretty powerful people from both sides of the U.S. political fence spent a lot of their considerable gray matter and time in analyzing American energy policy and suggesting changes.
Members of the coalition include the following: C. Boyden Gray, a counselor to former President George H.W. Bush; John Podesta, chief of staff to former President Bill Clinton; and Tim Wirth, a former senator from Colorado and an advisor to Clinton on climate change.
Using a number of working groups that involved business, environmental, and labor representatives, the ECF tried to come up with politically feasible ways to cut U.S. oil consumption and carbon emissions by one-third over 25 years.
The ECF recommended incentives for both car manufacturers and buyers to spur faster adoption of fuel-efficient vehicles. It also encouraged more funding by state and federal governments to enhance the efficiency of electricity transmission and consumption. Unfortunately, attention given to the ECF's report faded fast.
The emphasis on new energy technology, such as President Bush's commitment in January to spend more than $1 billion to develop fuel cells over the next few years, is a positive step. Other proposed expenditures, such as a Senate pledge of $1 billion for an experimental nuclear plant in Idaho to produce hydrogen, might be better employed in curbing demand by boosting energy conservation.
BC Hydro, a Canadian provincial government-owned utility that serves British Columbia and exports power to Pacific Northwest states and California, recently provided insight into why the best power plants might be the ones they never build.
The firm, which has a generating capacity of around 11,500 megawatts, estimated energy audits of buildings, installation of highly efficient lightbulbs, and other DSM initiatives cost about 2.5 Canadian cents per kilowatt hour (kWh). The firm's cost of acquiring new power supply is now set at 5.5 Canadian cents per kWh. The benchmark will likely rise after the utility goes through its first rate review in years later in 2003 or early 2004.
It's no wonder BC Hydro says it could save about C$255 million ($190 million) per year over the next decade. The company says DSM in Canada's most western province could cut demand by 5,800 gigawatt hours, equal to not building a power plant capable of generating 840 megawatts.
If the benefits of DSM seem so evident, why do such programs appear to have such a such a low priority with politicians and regulators?
A possible reason may be the result of intensive lobbying and large contributions, disbursed through political action committees, by the oil, coal, automotive, and other industries. However, that may be too simplistic and cynical a view, as evidenced by a rate case presented before the province of Ontario's Energy Board.
Enbridge Gas Distribution, a large distribution company owned by Enbridge Inc., has been accused by critics of exaggerating DSM savings to fatten its bottom line. During service calls, EGD staff turned down the heat on consumers' hot water tanks; then the company claimed savings as if the tanks were brand new and had more than a decade of useful life ahead.
EGD has agreed to change the way it calculates the savings to reflect the age of the tanks. The hearing underscores the need to look critically at DSM claims, but it does not invalidate such programs.
Regulatory regimes that do not adequately reward utilities for DSM investments are another problem. Provincial governments in both BC and Ontario, for instance, intend to knock down this hurdle, showing some Canadian politicians are starting to recognize the potential impact of DSM. Uneven results from previous government endeavors also raise questions about DSM. Canada, for example, launched a home insulation program in the late 1970s, but poor record-keeping made it tough to determine whether the improvements actually cut energy use.
The Canadian federal government in Ottawa is considering spending about C$75 million ($56 million), spread over several years, to help its citizens retrofit their homes to boost energy efficiency. (The money will come from roughly C$300 million [$223 million] being allocated to energy conservation measures from a total of C$1.7 billion [$1.2 billion] set aside to implement the Kyoto Protocol.)
The rebates would depend on how much the renovations, such as adding insulation or upgrading windows, reduce consumption. The money would be awarded only after an audit of the work. The federal plan is based on a similar program in Toronto, where the rebate averages C$850 ($631).
Tiny steps in Canada will have only a small effect on its and the U.S.'s entrenched and burgeoning dependence on imports of gas and oil.
It would be wise if U.S. state and federal politicians took a close look at the Energy Coalition Foundation's report with a keener eye to implementing its recommendations.
With oil and gas prices remaining high, DSM is a practical and cost-effective means of enhancing energy security. Persuading consumers hurt by high utility bills may not be the difficult task politicians and regulators appear to think it is.
Besides creating jobs in the renovation business, DSM would help the steel, automotive, fertilizer, and other industries hard hit by rising energy prices. Anything that helps the delicate U.S. economy, which prompted the Federal Reserve Board on Wednesday to drop interest rates to their lowest level in 45 years, is worth supporting.
A report this week by Global Insight, a respected economics firm, estimated lower gas prices in the U.S. could create around 100,000 new jobs. The report, commissioned by the American Chemistry Council, also said a five percent reduction in electricity consumption by consumers could free up another 384 billion cubic feet for storage, or almost 13 percent of the 3 trillion cubic feet target mentioned by Abraham.
Producers typically have been reluctant to back efforts to curtail consumption, fearing such moves will depress prices, profits, and stock values. Despite Thursday's price drop of 8 percent to $5.29 per million British thermal units because of record injections of 127 billion cubic feet, it seems apparent that the pendulum has swung in favor of exploration and production firms.
The maturity of gas-producing basins in Canada and the United States means producers need not fear DSM efforts because there is no going back to the days of $2 per mmBtu gas.
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