Oil Crisis calls for innovation

In previous articles of this series, I suggested that high oil prices are a significant danger to electrical rate stability and we need to take energy self-sufficiency seriously. A big tilt towards high efficiency, low emission wood burning is a start. There are many other ideas, some with little or no cost that can make a big difference. You may find some items a little boring and technical so just skip over any items that don’t interest you.

2) Institute a province wide changeout of Christmas lighting to LED technology. Based on the figures in my article of January 07 entitled “The value of thinking small”, NB Power could save up to 35,000 barrel of heavy fuel oil a year ($2.8 M @ 80 / barrel). In addition greenhouse gases are reduced by 18,000 tonnes a year (worth $450,000 @ $25 / ton)

The cost of a changeout program would be about $5 million with a payback of less than two years. Saint John Energy made a start in this direction in November 2007

3) Advance legislation on light efficiency from 2011 to 2008.
Going from incandescents to higher efficiency lighting isn’t rocket science. It doesn’t cost a lot to government either. The government of Shawn Graham has indicated that it will legislate the issue in 2011. Why wait for 2011? Ireland is implementing legislation in 2009.

The value of conversion to higher efficiency lights is probably in the range of 188,000 barrels of heavy oil but could be more or less. The annual fuel savings to NB Power could be as high as $15 million. Subtract lower kWh sales of $9.3 million and you have a net benefit to NB Power of $5.7 million.

4) Introduce Electric Thermal Storage (ETS) furnaces or heaters similar to those used in Nova Scotia or Quebec. Supplying electricity poses some difficulties because the demand changes greatly over the course of 24 hours. There is very little demand at night when people are sleeping and much higher when everyone showers or is getting ready for work in the morning. Peak load timing may vary depending on the components of commercial or industrial load.

Utilities meet the varying load curve with the lowest cost generation first, such as nuclear or hydro, followed by coal, with natural gas, oil and diesel being the last to run. The sequence may vary somewhat depending on the cost structure of each utility. Not surprisingly, flattening the load curve can pay big dividends. The ETS device turns on and stores heat in a ceramic brick core during the night when the electrical load is low and releases heat as required during the day. Nova Scotia has implemented a time of use scheme where the power rates are much lower at night facilitating these devices.

Not every building will be converted off electric heat. This technology has a place in the mix of solutions. This EUB may wish to investigate.

5) Revisions to demand charges on commercial and industrial customers.

Utilities like NB Power introduced a demand charge to certain classes of customers to entice customer to flatten their load. In most cases the result has been less than satisfactory. The demand meter records the monthly peak and a charge per kW is added on the bill. Although the customer cannot mathematically reduce his demand below the average demand he is charged between 0 kW and the average demand.

A better approach would be to charge demand on only the difference between the peak and average monthly demand because that is what the customer could actually affect. Done with a higher $ / kW and a revenue neutral approach, it would actually encourage more customers to invest in load control. This may interest the EUB.

6) Review the specifications for wind turbines supply contracts.
The use of wind turbines has the potential to reduce the use of heavy fuel oil in the province. However, there are some technical problems to overcome before more than 10 or 15% of the system load can be supplied by this technology.

First, most types of wind turbines are induction motors, which cannot supply “vars” to the system and create stability problems under certain conditions. One company at least, Enercon, builds a synchronous generator with no direct coupling to the power system. Power electronics simulate the attributes of a typical power generator including var supply. This might permit higher system participation assuming the other issue of scheduling of the wind can be resolved to some degree.

Not the last or the least of ideas is the use of combined heat and power (CHP), which will be the subject of an article soon. But the journey of a thousand kilometers begins with the first step. We are ready to take that first step but in what direction? The Department of Energy has, as its prime function, the security of supply and the reasonable cost of the energy supplied to the citizens of New Brunswick. There is little spare oil production capacity in the world according to some OPEC sources.

Our department seems to hold the belief that the near doubling of crude oil prices has little significance and that the market system will soon correct the temporary supply problems. From the outside, it appears that the principal departmental activity is marketing the energy hub concept – exporting of power or energy.
The recent appointment of Shelley Rinehart, whose expertise is in marketing, would seem to confirm that.

The government is 17 months into its mandate without an up to date energy policy. The issue of rising oil prices and particularly heavy oil cost for NB Power may become an albatross around the neck of Shawn Graham, his own “Hurricane Katrina” on a scale that will mark his legacy.

Build a wood-fired energy market

My previous article pointed out that a $2 billion dollar problem is developing at NB Power.  No, it’s not Orimulsion again but it’s related.  That previous $2 billion incident was the loss of long-term savings between low cost Orimulsion fuel and the world price of oil that evaporated when the agreement with Venezuela went sour.

Since then, the price of crude has gone through the roof.  Back in 2002, heavy oil was $15 a barrel and today it’s roughly $60.  It’s going considerably higher as the utility’s18-month hedging of prices moves along.  NB Power hedges to know well in advance what it will pay down the road.

The increasing price of heavy oil will cost $100 million extra this year and perhaps $175… or $200 million next year. NB Power has been pointing out that its oil costs are rising.   They have been working on displacing oil with a small percentage of petroleum coke and that could save $60 million.

The Energy department has not yet revised its energy policy but perhaps we will see some new ideas in the spring.  In the meantime, I have a suggestion today that will set us on the right direction for self-sufficiency.

Get a large number of NB Power’s electric heat customers off electric and onto wood or natural gas.  The essential elements are:
* A customer will buy or be leased a high efficiency, low emissions stove from an approved list.
* The kWh reduction between the months of October and March on the customer’s bills will be reimbursed at a rate to be determined, perhaps 3 cents.  For example, if the customer bills were reduced by 15,000 kWh, then the rebate would be $450.  This rebate would continue for four years.  The funds for the program might be split 50/50 between NB Power / Government.

The program would encourage customers to participate by effectively paying a substantial portion of the heating appliance over the time period.  NB Power would benefit over the long term by a lower oil bill.  The provincial government would benefit from the multiplier effect of the money staying and circulating in the province as opposed to being sent offshore to oil-rich countries.  As well, the reduction of greenhouse gases could be considerable.

Let’s look at an example to understand it better.  Supposing NB Power had 20,000 participating customers each of whom would save 15,000 kWh in year 1.  That becomes 300 million kWh / year savings.  It would reduce NB Power’s oil bill by 483,870 barrels a year (10% of oil burnt) or $38.7 Million dollars (at $80/barrel).   KWh sales would diminish by $24 million and the subsidy program would cost them $4.5 million for a net gain of $10.2 million.

The cost to government (year 1) would be $4.5 million.  The $38.7 million dollars formerly spent on imported oil now remains in New Brunswick mainly for labour and machinery to cut / split wood, and delivering the product to NB homes.  Refocusing the money back into the community brings enough income tax to the government to pay for the subsidy program.  Each year, the program grows by 20,000 until the fifth and final year when the subsidies begin to taper out.  It is conceivable that NB Power’s oil consumption could be cut in half.  The inclusion of commercial and industrial customers in this program will ensure these savings goals are reached.

The possibility of selling 20,000 stoves a year should be adequate incentive to install a manufacturing plant in NB. (20,000 @$2500 = $50 Million)

As increases in demand for wood fuel increase and this is not a small program, government may consider providing support for community-based pellet or briquette plants at a number of locations around the province.  This could take the form of loan guarantees or product purchases for a short time.

George Jenkins, a forest researcher, indicates that a significant number of local plants could be supported by the softwood biomass in the province.  It also appears that the economic damage due to the downturn in the lumber and paper industry could be alleviated by the relatively small investments in this plan.

New Brunswick is vulnerable to large increases in the cost of electricity in the near future.  A plan of this size could cut future power rate increases in half, put people back to work in the rural areas of the province, and reduce greenhouse gas by as much as 1.2 million tonnes per year.

NB Power’s total investment of $90 million, spread over 8 years, is totally paid for by reduced oil purchases.  The Province’s investment is also $90 million over the same period, plus investments ensuring the supply side is ready for the sharp increase in demand.

The direct economic development impact of this plan is $820 million.  Would these dollars contribute to self-sufficiency in Dalhousie and Miramichi where the mills are closing as well as other small communities that have lost their sawmill?   The alternative is to sit and watch an extra $2 billion dollars in fuel costs fly out the window to Saudi Arabia or Venezuela between now and 2016.

The next article will provide other suggestions.

What’s on New Brunswick energy horizon

We hear about people making choices between food and heat and that is not good. NB Power recently advised that December’s colder weather would generate higher bills.  But what about the long-term outlook for energy prices?  Will it get better or worse in the coming years?  It’s important that we all stay warm during these cold winter nights this winter and into the future.

Recently, I’ve been helping a Sussex based community group working on getting a wood briquette plant organized.  There are many of us who have a “warm” spot for wood heating with its link with our primeval past, and of course, its low cost.  It takes a little more work because of the physical weight of it. My domicile is heated with natural gas but in the past I have lived with electric, some wood, and oil heat.

Efficiency NB has been promoting the use of central heating systems that can use oil, natural gas or wood as the home heating source.  This policy related to oil has some serious negatives but is not entirely wrong.  On the positive side, oil burned at NB Power’s generating plants has a 35 to 40% efficiency rating, so using an oil furnace at home with an 80% rating burns less oil overall and is relatively good for the environment. However, in the past year, the price of oil has gone up from $55 to $100 a barrel, an increase of 81%.

Is this a significant event?  Yes, it signals a turning point in the world supply of oil.  Demand in China, India and the rest of the world is growing and the supply appears to be plateauing.  Typical economic theory would suggest that higher prices would bring additional supplies to market that would collapse prices.  After several years of higher prices, no supply relief is evident.  Analysts also see no combination of projects under construction that would provide abundant supply.  So the trend to higher oil prices appears very strong.  We are likely to see oil price increases making heating homes or generating electricity for heat prohibitively expensive.

Roughly 60% of New Brunswickers use electric heat, which has lower initial cost of installation, low maintenance, and relatively low cost of product – three important reasons for its success.   Government policy from the 1970’s until recently was to get Canadians off oil heat.  NB Power spent billions on a robust generation, transmission and distribution system capable of furnishing our electric heating needs.  The only problem was that a part of the generation was oil based.

Coleson Cove uses heavy fuel oil, which is also known as #6 heavy oil, or residual oil, or bunker C.  It is the leftover of the refining process.  NB Power uses roughly 5 million barrels a year that generates approximately 3.1 billion kWh’s, which is 17% of total sales.  In the current fiscal year they expect $60 a barrel and a total oil cost of slightly over $300 million.(up a hundred million)  Next year (08/09) could be $400 million as the hedging of lower prices ends and a barrel of heavy oil is closer to $80.

Electric heat comes on in the winter and it is necessary to use higher priced generation (Coleson Cove) to meet that extra demand when the power requirements goes from 1600 megawatts in summer to 3200 megawatt peak in winter.  So there is a correlation between the higher cost power and electric heat.  It’s not 100% but let’s take the worst case for an example.

Supposing a customer uses 15000 kWh of electric heat a year and this is mostly on the lower second block at roughly 8 cents per kWh.  This customer pays $1200 for the kWh’s. It takes 24 barrels of oil to provide these kWh’s, which at $60 is $1440 and at $80 is $1920.   NB Power does not even recover fuel cost.  Although an oversimplified case, we can see that $100 heavy oil would give 16-cent kWh’s just for the fuel without considering O&M or debt repayments on the plant.

It appears that NB Power will be spending $200 Million more each year on heavy oil.  Note that a $10 million increase in costs is 1% rate increase.  So we are looking at a twenty to thirty per increase in rates in the next two or three years.

We have a problem.  We spent $750 million to rebuild Coleson Cove with the expectation of cheap fuel.  Now, we can only get expensive fuel and it’s getting worse very quickly.  Pet coke will help a bit but a nuclear plant won’t be available until 2016 because all the workers will be tied up on the refinery project first.  It looks like we’ll be spending at least $2 billion extra on oil before 2016.  And maybe a lot more than that.

In my next articles, I make some suggestions on how we could work towards real energy self-sufficiency right now.

Jevons Paradox and the value of conservation

William Stanley Jevons made an observation about the usage of coal in England in 1865, when the increased efficiency of the Watts steam engine actually caused the use of coal to increase rather than decrease, as he would have expected.  The use of the improved steam engine in a wide spectrum of industries increased coal usage as a direct result of the cost-effectiveness of coal.

Today, a number of people use the paradox to argue that increases of energy efficiency only leads to more use of energy and that attempts at conservation are doomed to fail. For example, “if cars double their gas mileage, then people will drive more.”  They’re mainly wrong for the following reasons.  First, when fuel costs are rising rapidly, such as hitting a resource production ceiling in the past several years, any increase in the efficiency of passenger cars and trucks will reduce the litres burnt, not the actual cost of a tank of fuel.  Airline fares have been increasing even though the efficiency of jet engines increase with newer technology.   Reason: fuel prices are rising faster than airlines can upgrade their fleets.  Westjet is an example of a company that invested heavily in newer efficient planes and it shows in their profits.

On the home front, adding extra insulation will reduce the amount of oil, natural gas, wood, or electricity used to heat your house.  You are unlikely to change the setting on your thermostat far from its normal level.  In a rapidly rising cost of energy environment, all categories of conservation will produce good results.

Secondly, some categories of usage, like transportation of goods are relatively fixed.  For example, the amount of produce transported from California to Canada each week is unlikely to change greatly based on a decrease in the cost of transportation.  We can only eat so much lettuce.

In the infinitely slow path to energy efficiency, our friends south of the border recently passed an energy bill mandating an increase from 25 to 35 mpg, a 40% increase in vehicle fuel standards by 2020.  The increases start in 2011, but there are a number of loopholes related to alternative fuel, trucks and swapping of credits.  The entire bill is 1055 pages and deals with a huge variety of topics from incandescent lamps to biofuel.   Was the legislation partially a pre-emptive strike to ward off more severe legislation on car mileage from California and 12 other states who wanted SUV’s and light trucks treated the same as cars and higher mileage implemented sooner than later?

Around the world, there are countries with higher standards than North America. China has already a 35-mpg standard in place.  Europe and Japan standards are over 40 mpg.
Here in Canada, our energy policies are guided by American legislation. The automotive companies are integrated across North America and have driven the agenda.  Perhaps Stephen Harper will now feel comfortable raising our mileage standards to meet those of his friend George.  Don’t expect to see anything different or better.  The auto industry will have to invest billions of dollars in retooling factories to meet the requirements of lighter, more aerodynamic vehicles.  The aluminum and carbon fibre industries are big winners and steel, being heavy, will be replaced where possible.

Canada’s “new” government has been interested in clean emission technology.  This follows the American lead on misdirecting the public.  Common sense alone makes it clear that burning less fuel reduces emissions of all types, whether CO2 or other varieties, less expensively than technology alone.    The auto industry has wanted to keep its high profit margin SUV and trucks at all costs, even at the risk of its long-term demise.

It is unfortunate that politics is an averaging process where you give a little bit in each direction and end up often in the same location with the same problem.  The American legislation is too little, too late and we will soon see the California’s of this world forcing deeper changes.

What most people don’t realise is that we are starting on the second half of our oil reserves.  This is the tough expensive oil to recover, and the worst part of it will be the gradual decline of world production.   $100 oil will seem cheap in the near future and the resulting economic catastrophe will be unprecedented.

Jevons was concerned that the supply of coal would run out in his time.  He couldn’t foresee that coal use would be partially displaced by the rise of oil for 150 years and that other reserves would be found.  Likewise today, we are concerned that oil is starting a decline very soon.  There is a small chance that we will find technological solutions to our energy needs in time.  There is also a small chance that we will find additional reserves of significant size.

However, there is a much larger chance that we will not solve the problem and we will suffer greatly.  In 1865, there were 1.2 billion people on this planet in a mostly agricultural lifestyle using little energy.  Today, we are 6.6 billion people who use a great deal of energy.

What should be our resolutions for 2008?  Certainly, we should plan for higher efficiency in all of the products that we purchase.

Resolve to live differently

A New Year naturally brings New Year’s resolutions. It’s a subtle admission that all wasn’t perfect in our lives in 2007 and we could benefit from setting a new course based on lessons learned. Yes, I gained a few pounds and I don’t exercise enough. That’s going to be on my list. I wonder if the testimony of Brian Mulroney and KarlHeinz Schreiber before the Commons committee will generate any resolutions on their part.

Now, Brian Mulroney has many likeable qualities as a person. His testimony does raise some questions though. What I didn’t understand is the shrinkage factor than affects money placed in safety deposit boxes. Karlheinz says he gave $300,000 to Brian who only found $225,000 by the time he reported the amount to the Canada Revenue Agency five years later. Perhaps Mila did some shopping and accidentally took the money out of the wrong envelope in the safe. But that wouldn’t explain how Karl also gave $30,000 to Jean Charest’s brother as a campaign contribution but Premier Charest only found $10,000. Obviously, somebody just can’t count and who would that be?

We shouldn’t be surprised that money is paid to influence politicians. Politicians spend large sums of our money and if a contract happens to be directed in a contributor’s direction, who would ever know? In fact, it is amazing when an incident is actually made public.

Another lesson I’ve learned from the former PM’s testimony that it is possible to call income in cash a retainer or an expense account and not report it for tax purposes. The letters I’ve gotten from the Canada Revenue Agency are borderline nasty at times. Maybe I’m just too sensitive and they really won’t waterboard me if I’m slow in paying. Canada’s tax regime may be a kinder and gentler place than I imagined.

It appears that the PC party was giving Mr. Mulroney a $4,000 a month salary in addition to his other government income and expenses. Many other premiers and prime ministers have taken this route. The problem with receiving money from sources other than your job is that loyalties may conflict.
Wouldn’t it be better to double or triple our leader’s salaries and prohibit all payments from other sources? Would you prefer to pay our political leaders very well and punish ethics non-compliance with severe penalties or continue on the present course of government by corporate agenda?

This brings us to the old pork barrel politics here at home. The latest New Brunswick capital budget is the largest ever according to spin. Should we believe this is a good thing? Given the approaching decline of our oil-based economy, one would think that our policy makers would be making investments in items that have a payback, reduce costs of operation or promote sustainability. New highways are just corporate welfare for road builders. Once route 1 is twinned to Saint Stephen at a cost of $80 million, the focus will likely turn to twinning route 7 to Fredericton. Will we get to our driving destination any sooner? Not appreciably. The minister indicates that this is a real requirement of our self-sufficiency agenda. Any return on investment here? Not really.

So the capital budget is mostly road expenditures (67%) and buildings (22%). Any transformational change here? Not really, it just the same old path.

They’ve brought back the public-private partnerships of McKenna. We’re now into renting rather than owning courthouses and psychiatric facilities. With the new courthouses, are we going to put more bad guys in jail? Not likely.

If the capital budget is any indication, it looks like the self-sufficiency agenda is definitely postponed a year.

Shawn Graham has set a major goal of reducing dependence on the federal government, yet will direct major capital spending into the same poor investments such as highways. Naturally, he wants the federal government to give him extra money to become self-sufficient. Should Stephen Harper contribute to the plan before Shawn applies his own provincial money in a creative way? Transformational change begins with transformational thinking.

There isn’t anything wrong with renewing facilities that are antiquated or grossly inadequate, but if we are truly embarking on a transformational change exercise, then we should ask ourselves the following questions: The amount of world oil production in 2026 is likely to be 50% of today’s levels. Are you going to be able to live with 25% of your present fuel because essential services will have 100%? How are the public investments, particularly on highways, going to improve the likelihood of a sustainable society when the private car may be no more? And more importantly, why do we continue to invest huge amounts of money in highways?

What has the government learned in 2007? Shall we make a New Year resolution to ask our representatives about their plan for 2008?