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Wind-Generated Power: Why Midwest Wind Power Isn’t Blowing East

David Fessler — Mon, 13 Jul 2009 19:59:17 +0000

In the waning days of the Great Depression, FDR Signed the Rural Electrification Act of 1936 into law, heralding a new era of growth and prosperity for the nation’s heartland. While electricity was generally available in cities and towns, it was nearly unheard of on farms, ranches and other rural areas. The REA brought electric power to these sparsely populated Midwest farms and ranches. Today the shoe is on the other foot, so to speak.

President Obama is hoping that Midwest rural areas will return the favor, and provide much needed wind-generated power to densely populated cities and towns up and down both coasts of the country…

Wind turbines are huge, and not well suited to more densely populated areas. They are a natural fit in the vast open plains of the nation’s heartland, where the wind almost never stops blowing. But there’s a problem… it’s just not the one you might think.

Here’s why wind-generated power is still going to be the driving force for change in the way we use energy, and one of the biggest obstacles it has right now to getting us to where we need to be.

A Banner Year For The Wind Power Industry

2008 was a banner year for the wind power industry:

Previous installation records were blown away, with over 8,500 megawatts (MW) of new generating power installed in the United States alone. That’s enough to light over 2 million homes.
Wind power installations represented 42% of all the new power generation capacity added in 2008.
The 44 million tons of carbon emissions avoided equates to taking 7 million cars and trucks off the highways.

As a result of the current recession, the wind energy installation outlook for 2009 will be somewhat muted compared to last year, with about 5,000 MW expected to be installed. But despite the downturn, the industry is still in expansion mode.

And that’s a good thing.

A lot of the stuff is engineered and made right here: domestic “made in the USA” components now make up about 50% of the average system, up from 30% in 2005. And like any other burgeoning sector, when business is booming, companies expand and hire people.

In just the last two years, wind turbine, tower and component manufacturers announced new facilities, added or expanded 70 facilities, 55 of them in 2008 alone.

It’s creates lots of jobs as well. Today 85,000 people are employed in the wind industry. That’s a 70% increase from just one year ago. It’s all good news… well almost all of it.

Where Wind-Generated Power Is Needed The Most

You see, while plenty of wind farms dot the ranchlands of the Midwest, the bulk of the wind-generated power produced is needed in the dense urban areas on the east and west coasts.

And there’s the big problem: the existing power grids won’t cut it.

Just consider: 3,000 utilities generate power and send it to 500 transmission owners. They control over 164,000 miles of transmission lines divided into three major interconnection regions: East, West, and Texas.

As an electrical engineer, I may be one of the few who can appreciate the technology, but it’s truly amazing that it all plays together.

They’re fragmented, low power grids that aren’t capable of transmitting the hundreds of thousands of megawatts that will be needed thousands of miles away from the wind farms.

The bottom line is that in order for the estimated 300,000 MW of proposed wind-generated power to get to where its needed, $60 billion will need to be spent on grid upgrades and interconnects by 2030.

The Biggest Problem Facing Wind-Generated Power

But even assuming the $60 billion was available to be spent on this type of alternative energyright now, not a dime of it would be used to build wind-generated power transmission lines.

The problem? Red tape with a capital R:

Regulations that aren’t designed for power transmission between states.
Rules that burden the local ratepayers unfairly with the construction costs instead of distant beneficiaries.
Approval times measured in years, not months.

Here’s an example of how ridiculous it gets: American Electric Power (NYSE: AEP) is a public utility holding company in the business of generation, transmission and distribution of power at both the retail and wholesale level.

As part of an expansion of its network, the company erected a transmission line between West Virginia and Virginia. The construction time was two years. The approvals took 14.

Susan Tomasky, AEP Transmission President, explains the problem: “There are lots of people with authority to make pieces of the decision, and no single entity that can say ‘yes’ or ‘no’.”

Clearly what’s needed is federal permitting to locate cross-country transmission lines. The federal government has been doing it with natural gas pipelines since the 1960’s.

Looking To The Future Of Wind Turbines

So what are the chances of the fed’s saving us, and getting it done in the near future?

Better than you might think: Jeff Bingaman – Chairman of the Senate Energy Committee – has a proposal that will require comprehensive plans for grid interconnections.

More importantly, it will greatly expand the FERC’s powers to locate big new transmission lines at the federal level (bypassing the myriad of local regulations) and the authority to properly allocate their costs.

And firms like AEP and ITC Holdings Corp. (NYSE: ITC), another power generation and transmission company, are both eager to invest and build lines from the Midwest to cities in the east.

Even if all goes according to plan – which isn’t ever the case in Washington – these lines wouldn’t be in service until 2020 or so. Clearly a more streamlined approach is needed. The refreshing news is that it appears politicians are actually working on the problem.

We’ll be watching and reporting on it here and in my Energy and Infrastructure newsletter soon to be published by the Oxford Club.

Next week, I’ll be traveling with my colleagues to Vancouver, British Columbia, and speaking at the Oxford Club’s Victoria Chapter Meeting. I’ll return here the following week.

Source: Wind-Generated Power: Why Midwest Wind Power Isn’t Blowing East

The iShares Barclays TIPS Bond Fund is a Good Way to Brace for Imminent Inflation

Horacio Marquez — Mon, 06 Jul 2009 17:30:48 +0000

It is high time for our political leaders to make some key decisions. And that translates into large uncertainties for investors that have held the market in a range and with low volume. We do not know whether “Cap and Trade” legislation will pass the Senate and we do not know whether and any healthcare bill will pass through Congress, or what that bill might entail. And these two issues are paramount for the future of America.

As we discussed earlier, cap and trade could cause incremental costs in energy for all of the United States, particularly in all carbon-based generation of electricity. Increasing these costs will make carbon-based energy less competitive with alternative sources, like solar and nuclear. The benefits of this legislation will be less carbon emissions, cleaner air, less dependence on imported oil and the creation of new jobs in the alternative energy sector.

However, this all comes at the expense of jobs in the traditional energy sector, which is currently the backbone of our energy policy. It also means higher job losses in the rest of the economy due to higher energy costs. Remember that the United States is the “Saudi Arabia of coal,” given its abundance here.

All of these uncertainties are huge, as are the stakes for a multitude of sectors. I have been surprised by the unpredictable decisions of our legislators many times. In addition, legislative add-ons that tack hundreds of pages onto a bill right before it comes to a vote make prior analysis nearly impossible. Therefore, unless the outcome is almost a foregone conclusion and the details are clearly spelled out well beforehand, making strong bets on their legislative outcomes is just plain gambling.

The unemployment rate rose to 9.5% in June as the economy shed 467,00 jobs. That’s up from 322,000 in May. Jobs are a lagging indicator and tend to peak well after the economy has peaked. But they are the best coincident indicator of economic activity.

Warren Buffet recently said that he has not yet seen any green shoots in the economy. Conversely, General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt said that all the pieces are in place for a recovery in the United States. Yet the only areas of strength he mentioned were abroad: China, some areas of the Middle East and other emerging economies.

But what we can all agree on right now is that there is no inflation in sight, despite the massive amounts of quantitative easing from the U.S. Federal Reserve. But it won’t be long before inflation does rear its ugly head.

Like the people in Germany who were deeply affected by hyperinflation, I remember living and analyzing companies in Argentina in the 80s with inflation rising at a rate of 1% a day. It was not fun, and the distortions to economic activity and financial statements were amazing.

Although the Fed has repeatedly indicated that it is ready to remove the monetary stimuli at the appropriate moment in an aggressive-enough fashion so as to preclude an inflationary spike, neither we can be sure that the central bank’s actions will meet with immediate success.

Federal Reserve Chairman Ben S. Bernanke is very capable and his resolve gives me comfort, but as former Fed Chairman Alan Greenspan told us when he was running the central bank, there are important variables in monetary policy that the Fed cannot know for sure: Among them are the lags between the Fed’s actions and the response in the economy and the precise sensitivity of the economy’s response to the Fed’s actions. It is like steering a large transatlantic ship while watching in the rearview mirror. By the time you see an iceberg, the ability to reverse or alter the course is very limited.

If we observe that the level of both monetary and fiscal intervention in the economy is at historic highs, then we have to understand that applying the just doses of intervention and reducing those doses as the economy gains a “self-sustaining” pace is a very tricky exercise. Even allowing for the best of intentions and the immaculate professional abilities of the Fed, this will be a very difficult task to pull off. And what is self-sustaining growth, anyhow?

We also need to understand that the current reflationary policy, which was employed to prevent the country from falling into a deflationary spiral, is actually seeking to create a little inflation. And it would be unpardonable to see the country fall back into a double-dip recession after all this intervention, should the Fed pull on the reins too soon.

In fact, the Fed and the Treasury Secretary Timothy F. Geithner have repeatedly led us to believe that they intend to see the recovery ingrained before withdrawing significant amounts of stimuli. It makes all the sense in the world. The logical implication is that they would rather see an unpleasant reading or two on the inflation front than see an unpleasant reading on the growth side. It is a very difficult situation to manage and they are not perfect.

So right now, when inflation expectations are well subdued, it is a good idea to add a position in Treasury Inflation-Protected Securities (TIPS). The easy way of doing this is by buying the iShares Barclays TIPS Bond Fund (NYSE: TIP).

All of these pending uncertainties that I mentioned are adding to the traditional summer doldrums and we are seeing very low stock trading volumes. So we are going to take advantage of the situation to get a good valuation on these bonds well before inflation expectations pick up.

Also, adding bonds to the portfolio has a stabilizing effect. And the two traditional worries with bonds: A drop in the value of the U.S. Dollar and an increase in inflation are actually hedged, at least in part, with TIPS. Because inflation is fully hedged as the principal is indexed by the consumer price index (CPI) index.

Recommendation: iShares Barclays TIPS Bond Fund (NYSE: TIP)at market (**).
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays TIPS Bond Fund.

Obama or McCain, U.S. May Suffer Either Way

Martin Hutchinson — Fri, 06 Jun 2008 12:58:05 +0000

As Barack Obama closes in on the Democratic presidential nomination, investors should focus their minds around one uncomfortable fact: Whether it’s Obama or Republican John McCain who wins the White House, expect some policy changes that won’t sit well with investors – or with the U.S. economy.

This could make for several rough years for U.S. investments, underscoring yet again the importance of searching out profit plays overseas.

That’s why it’s crucial that we understand just what each candidate is likely to do should he reach office. Interestingly, there are three areas where the two presidential hopefuls seem to be in agreement. Indeed, no matter which candidate reaches the White House, investors can expect there to be:

An introduction of a “cap-and-trade” carbon-emissions-control system.
Higher taxes.
And stepped-up regulation of the U.S. financial-services sector.

Warming Worries Will Spawn Emissions Regs

Of all the anticipated changes, the most widely publicized is the expected introduction of a so-called “cap-and-trade” carbon-emissions-control system. Both Obama and McCain favor such a system and Congress is currently drafting legislation that is not expected to pass this year (while George W. Bush is still president), but to form a template for legislation from a Democrat-controlled Congress to be signed by either Obama or McCain in 2009.

The most economically efficient way to curb carbon emissions is by means of a carbon tax. Such a tax would penalize emissions by polluters at a flat rate per ton, and could be offset by reductions in other taxes – a decrease in the corporate tax rate, for example – thus neutralizing its overall economic effect.

Provided the tax was set at a moderate rate, it would provide incentives to shift from carbon-based fuels to other energy generation systems, while the market itself would determine which carbon uses would be discontinued and which were too expensive to change. It wouldn’t matter too much at what level the tax was initially set, since a moderate error in setting the level would produce only moderately suboptimal polluter behavior, as the incentives produced either a little too much clean-up and consequent economic damage, or not quite enough.

The carbon tax is unpopular with politicians, because of the word “tax.” From bitter experience, they have found that raising taxes leads to unpopularity and, ultimately, to electoral defeat. Even if other taxes are lowered, the squawks of the complaints and protest of the losers are always much louder than the contented purring of the winners. That explains their preference for a “cap-and-trade” emissions policy, under which politicians pretend to give something away, providing licenses to pollute, which can then be traded among users.

The main difference between the cap-and-trade schemes of McCain and Obama is this: McCain would allow the government to give out permits to polluters while Obama would auction off permits.

At first glance, McCain’s approach appears more pro-business, but consider this: If the government gives out the permits, it gets to choose which companies get what permits. That creates a huge new playing field for lobbyists and opens the door to all sorts of new opportunities for corruption, as polluters “compete” to gain the political favor of an emission permit allowance. Already in the draft Congressional legislation provision is being made for favored groups to be given special allowances of emission permits – essentially the same as the government giving them cash, as the permits will have value.

Under Obama’s proposal, however, the government will auction off the permits. That will ensure that their price is set by a market process, and that companies neither gain nor lose by their special access to legislators. It’s a much more honest process, and a much-better representation of the “free market.” And the extra revenue it generates can be returned to the taxpayers via tax reductions in other areas.

Indeed, the only disadvantage of Obama’s proposal compared to a carbon tax is that the government has to determine initially how much carbon should be emitted. That is a very difficult parameter to determine, and an error of 1%-2% in either direction can have a huge effect – as shown by the 2004-07 European Union emission permits, where too many were given out. As a result, the prices in the permit trading market dropped 98% in a couple of weeks, as companies discovered there were ample permits for all. A market with that degree of uncertainty is far more likely to result in corporate-finance game playing than in any serious reduction in emissions.

McCain’s proposal contains a number of additional potentially detrimental features. Under it, reducing emissions in emerging markets can satisfy emissions requirements. But as the European Union has discovered, one spin-off effect has been the creation of a thriving market in Chinese environmental-cleanup scams. Further complicating the scene is the fact that some industries would be partially exempted in order to allow for transitional difficulties – providing another fertile field for government meddling and corruption. Still, even with Obama’s proposal, a “cap-and-trade” system is likely to do significant economic damage, and given the fact that legislation would need to be drafted by Congress, the chance of huge economic distortions must be considerable.

The Taxman’s Bigger Bite

A second area where both candidates essentially agree is that taxes will be higher. McCain obfuscates this, because he needs to preserve his relations with the Republican “base.” But he has made it very clear that fiscal discipline in terms of balancing the U.S. federal budget is his most important economic objective. And he favors further activity in the Middle East, a fact that’s likely to involve an expansion of defense spending. Since, even without a recession, the federal deficit in the years to September 2008 and 2009 will be close to $500 billion, McCain’s balance-budget objectives cannot be achieved without tax increases, both reversal of most of the 2001 and 2003 tax cuts and increases beyond that.

Obama has been more up-front about his desire to reverse the 2001 and 2003 tax cuts, and to impose Social Security contributions on incomes above $200,000. Since he also favored U.S. Rep. Charles B. Rangel’s bill, which increases income taxes on higher incomes, an Obama administration could potentially increase the top marginal rate of income taxes increase from 35% to 52%.

Obama also favors an increase in the capital gains tax rate from its current 15% to at least 20%. On the positive side of the budget, an Obama administration would presumably save money in the Middle East. And his health-care plan, which mandates coverage for children but not for adults, would presumably be somewhat cheaper than Hillary Clinton’s plan.

Nevertheless, tax increases are inevitable no matter who wins in November. And if Obama were to win those new levies might include a supercharged capital-gains tax and even dividend-tax increases – either of which could hammer U.S. stock prices.

Financial Services Scrutiny

A third area of agreement between the candidates is in greater regulation of the financial-services business. From the viewpoint of a retail investor, this may be a good thing: After all, who could object to fewer scams and rip-offs, or-less-egregiously overpaid investment bankers?