Fix This

O.K., Smart Guys: Fix the Energy Problem


The U.S. first became a net importer of oil in 1948. The intervening decades have led Americans down a steady path of price spikes, shortages, and compromised foreign policy decisions. Imported fuel means expensive gasoline, lost jobs, and hobbled industries, while climate change poses risks as dramatic as they are difficult to assess. So how do we fix our fuel and energy problems? To answer that question—the first in a quarterly series called Fix This—Bloomberg Businessweek Chairman Norman Pearlstine gathered BP Capital Management’s T. Boone Pickens; Bob Shapard, chairman and chief executive officer of Oncor Electric Delivery and chairman of GridWise Alliance; Carol Browner, former director of the White House Office of Energy and Climate Change Policy for President Obama and EPA administrator for President Clinton; Jigar Shah, CEO of the Carbon War Room; and Thomas Kuhn, president of Edison Electric Institute. Their conversation has been condensed and edited.

 
What do we mean when we talk about an energy crisis? Is that an appropriate term for framing this discussion?
 
Shah: The word energy is very confusing. Energy includes both transportation fuel—which I think people are very concerned about—and coal, solar, wind, and other things that produce electricity. People confuse the two, and while we have fast-rising prices of electricity—5 percent rate increases per year since 2000—the fourfold increase in oil prices since 1999 is a much bigger problem in terms of economics than our electricity problem.
 
Shapard: People perceive there to be a crisis in this country environmentally with carbon and other emissions. I think transportation is the place you go for the biggest impact, and I think it’s a combination of natural gas and electricity that can solve our transportation problem. You can convert a significant portion of our fleet to natural gas and/or electricity. It addresses our dependence on foreign oil, but just as importantly it addresses the environmental issues. While coal plants and power plants are viewed as the villain when it comes to carbon, [giving off] 39 percent of the emissions, 31 percent of the emissions are [from] cars, and the important point is we know the solution on cars.
 
Kuhn: Never in the history of the world have we been so dependent upon one commodity as we are on oil right now, and every recession has been preceded by a spike in the price of oil. A $10 increase in oil causes $75 billion to come out of this economy. There are a lot of electric cars that are going on the road all over the world, in India, China, and elsewhere. I drive a Chevy Volt. I haven’t visited a gas station in three months. I plug in, I drive at 2¢ a mile compared with 10¢ to 12¢ a mile—that’s about $1 a gallon equivalent.
 
Browner: One of the first things we did when [President] Obama came to office was set the first fuel-efficiency standards in almost 20 years. We said we can make cars more efficient, and that’s been making our automotive industry stronger.
 
Pickens: If you remember, President Obama, when he got the nomination, said in 10 years we will not import any oil from the Mideast. I was impressed with that. It’s different than all the other people that ran for President. They said elect me, and we’ll be energy independent. So I thought he’s got a plan, and I hope that he does have a plan.
 
If there’s a consensus here that we don’t have to be reliant on imported oil, why are we?
 
Browner: Some of these changes will require congressional action, because what we need to do is give the private sector the certainty and the predictability so that they’ll make the large-scale investments in these changes. They don’t want to start making investments where they think I’m going to build something but I’m not able to sell it.
 
Shah: Just to be slightly argumentative, I think we were in exactly the same place for both electricity and transportation in the 1970s. For electricity, we opened up that market. I started one of the largest solar companies in the U.S. We had that opportunity because we had net metering, we had streamlined interconnection standards, we had all sorts of ways for us to connect to the grid and actually provide [a new service to] customers who were dissatisfied with the services they were already being provided. Today if you own a gas station, you’re most likely under a franchise agreement with a large oil company that doesn’t allow you to add an alternative fuel station without their permission.
 
You talk to people in Washington all the time, Boone. Does anybody understand the problem well enough to know how to address it?
 
Pickens: Get yourself a crisis, and then something will come out of Congress. But we’re sitting here with a bill ready to go in the house, HR1380. [Editor’s note: HR1380 would amend the tax code to encourage investment in alternative energy.] There are 250 million vehicles in America: All I’m trying to address is 8 million 18-wheelers. Go to the past 10 years, and look at our costs with OPEC—$1 trillion in 10 years. The largest transfer of wealth from one group to another. Now go forward 10 years and take [the price of] $100 a barrel forward, which I think is being extremely conservative. That’s $2.2 trillion. Just take the 18-wheelers, that’s 2.5 million barrels a day. Now the $2.2 trillion that we’re going to pay 10 years in the future. … You cut OPEC in half with 8 million vehicles.
 
Browner: Between what Mr. Pickens has been talking about in terms of the long-haul vehicles and the commitment on electric cars, it would be a huge change in our fleet in this country.
 
Pickens: Don’t call me Mr. Pickens, O.K.? It makes me feel old when you do that.
 
Browner: Well, it’s respectful.
 
Is technology a place that can give us clean or cleaner coal or allow us to do more aggressive fracking for natural gas?
 
Browner: I personally think the natural gas industry needs to be fully transparent. What scares people is what they don’t know. Right now [fracking] is regulated differently in different states, and I think if the industry would join together and say we’re going to disclose exactly what we’re doing, we’re going to take a giant step forward.
 
On energy, we certainly know a lot of things that we could do very, very quickly. Energy efficiency is not complicated. There’s a nice little company in Washington, Opower, that works with utilities to send the customer an explanation of how much electricity they’re using in comparison to their neighbors, and you know what the effect of that is? People stop using as much electricity. They don’t want to be less efficient than their neighbors are, and they’re able to achieve a 1 percent to 3.5 percent reduction.
 
Shapard: If we could reduce electricity consumption by 10 percent, you’d save $25 billion a year in energy costs, you’d reduce CO₂ by about what you get in 10 percent electric vehicle penetration. The problem is people don’t know how to do it. Think about the way you buy electricity today. It’s like going to the grocery store, throwing groceries in your bag, walking out the front door, and once a month the grocer sends you a bill for $800. You didn’t break down eggs from milk from bacon. That’s the way you get electricity, just a big lump bill. If we can give you real-time feedback, studies have shown you’ll use less, you’ll use it smarter.
 
Shah: I love Opower, but ultimately energy efficiency through individual action is just people spending money out of their own pocket. [It] hasn’t worked for 35 years. I really don’t believe it.
 
Browner: People make wise decisions when they have access to information. Do you know what percentage of people now use a seat belt? It’s over 90 percent.
 
Shah: But it’s mandated. There’s a law.
 
Browner: We got there by educating people.
 
When we talk about the automotive industry, is the change going to come out of Detroit?
 
Browner: It’s going to come through the regulators. What regulations do is they create market opportunities for the capital investments, because they create predictability and certainty. When the President said all cars are going to be 35 miles per gallon for the average fleet by 2017, the automotive industry knew what kind of investments they needed to make.
 
Shah: Here’s one thing that we don’t have in transportation, which I think is critical: There is almost no way in hell that you’re going to get an entrepreneur into transportation. There’s at least 15 different engine technologies that have been invented since the 1960s, but only someone with 50 full-time regulatory affairs people can actually get through the National Transportation Safety Board, through all the EPA regulations, and all of the other things to actually bring a new car to market. Like the group that won the X Prize, right? That’s an actual gasoline-powered vehicle that goes 120 miles to the gallon, and it’s an extraordinary engineering feat. I guarantee you that thing is never going to come to market.
 
What can we look to that can change the equation in terms of electric vehicles?
 
Kuhn: Battery technology is making major advancements. Lithium ion batteries [are] coming from a lot of government-supported research with the automobile companies and other companies around the world.
 
Pickens: Well, don’t end up on a Chinese battery.
 
Shapard: Even the auto companies are telling us that within five years the price of these batteries could drop in half and the functionality grow.
 
Shah: But the beauty of the electric vehicle is the business model innovation. There [are] 17 things that you can do that I’ve counted, and you might be able to do more, with an electric battery as an electric utility. The grid’s got to stay at 60 hertz to keep everything running well, and you can use batteries to do this instead of spending reserves with natural gas, which is far more expensive.
 
Browner: So what you’re saying is when I’m not driving, my car would become part of the electric utility system?
 
Shah: In California their peak demand for electricity is roughly 60,000 megawatts. If you have 250,000 electric cars, just 250,000 out of 30 million cars they probably have over there, at 20 kilowatts a piece, which is what a lot of these full electric cars are, that’s 5,000Mw. So you now have one-twelfth of the entire grid of storage.
 
The problem is people go to the dealership and will never buy an electric vehicle. So what you have to do, and entrepreneurs are doing this now, is convert these into vehicle services contracts. You say here’s a free car, just pay me $400 a month, which is what you would have paid for your lease payment, and I’ll get the $4,000 a year out of the utility because you don’t want to deal with the paperwork.
 
Shapard: And the grid that we can build today will support this. The grid 10 years ago could not.

For more on Fix This/Energy, visit: www.businessweek.com/fix-this/energy.html.


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