Fresh Heat for Energy Policy


Thanks to an unhappy combination of war and natural disaster, energy policy is once again at the top of the national agenda. Even before the war in Iraq, plenty of people were uncomfortable with the idea of driving themselves to the office in an eight-seat all-terrain vehicle that has a towing capacity of 4,000 pounds and gets a lousy 10 or 12 miles to the gallon. Although in much of the nation, SUVs rule the road, a growing number of Americans would prefer to drive a hybrid-powered Toyota (TM) Prius to a nearby Whole Foods supermarket, stock up on Amy's organic burritos, and lug them home in reusable hemp bags. Prius sales are up 126% through August, to 73,000 units, while gas guzzlers like the Hummer H2 and Chevrolet Tahoe continue to fall.

The alternative-energy crowd, once considered a political fringe, is moving closer to becoming the mainstream of American life. The ranks of the energy-conscious have been growing since September 11, when U.S. reliance on Persian Gulf oil became more than just an issue of economics and the environment. American awareness of energy as a national security issue has intensified.

If that isn't enough, the pocketbook case for energy conservation is getting stronger every day. Global demand for oil has pushed prices at the gas pump ever higher. When Hurricane Katrina lifted them over $3.50 a gallon, the shock was felt across the country. Even as gas prices recede from their peak, the memory of the spike remains burned into many minds.

QUESTION OF SCALE. Yet the U.S. is still in the early stages of what's likely to be a very long and difficult move to alternative forms of energy. In this special report, BusinessWeek Online takes a look at how alternative energy is slowly but steadily coming of age. Some progress has been made since 1970, when the first Earth Day was celebrated and President Nixon created the Environmental Protection Agency. But it may be another generation before the economy begins to wean itself off fossil fuels.

At the current rate of funding and development, it will be at least 15 years until solar-powered homes or hydrogen-powered cars are ready for the mass market, according to U.S. Energy Dept. Under Secretary David K. Garman. "We have not begun to the turn the corner. We are utterly dependent upon oil," Garman says.

The big challenge is figuring out how alternative fuels can be brought to scale. At the moment, they can't. Wind power sounds great, but you'd have to blanket the entire country with wind mills to make it feasible, and that just wouldn't work.

FEW PROVISIONS. Despite energy's strategic nature, the U.S. has done little to wean itself off oil. At the current rate, it will take decades to reduce energy reliance on the Gulf, let alone achieve independence. The U.S. still falls short of having an effective means of conservation, and not much money is going into the development of alternative energy. The Energy Dept. has a research and development budget of $14 billion a year, of which only $75 million goes to develop solar energy.

Even Garman admits more could be done. "We have a strong program, but it could be stronger," says the Under Secretary, who bought the first Toyota Prius available in the U.S. in 2001. Indeed, the $14.5 billion energy bill that President Bush signed into law last month had relatively few provisions for alternative energy. And while Hurricane Katrina has led to calls in Congress for more oil drilling and refining capacity, it hasn't sparked an alternative-energy revival.

Would spending more money make a difference? R&D can be pushed only so fast, but increased investment would probably help. "Could we accelerate the development of photovoltaic panels [used to produce solar energy] if we spent more? Possibly we could," Garman says.

COSTLY ALTERNATIVES. The U.S. consumes about 98 quadrillion BTUs of energy a year, of which 40%, comes from oil. Coal and natural gas each account for about 23%. Nuclear power accounts for 8%, and renewable sources of energy generate the remaining 6%.

It's easy to understand why that's so. Fossil fuels are much cheaper than the alternatives. Solar energy costs about 25 cents per kilowatt hour. That's way down from a few decades ago, when it cost $2.50. But energy from the local utility company can be purchased for 8 or 9 cents per kwh. Solar energy won't become competitive until it falls below 20 cents an hour, analysts say. That's bound to happen someday, but the timing is a function of R&D, which costs money.

At the current rate of funding, solar panels won't be truly competitive until at least 2020. "But eventually, you won't think of building a new house without one," Garman says.

HATCHING HYBRIDS. The outlook for hydrogen fuel-cell cars is similar. It'll take 15 years to bring them to mass market, but they would effectively eliminate all harmful emissions from cars since they release only water vapor as exhaust. Major hurdles remain, however. Hydrogen fuel would require an entirely new infrastructure of gas stations across the U.S. Fuel cells are still expensive to make. And some environmentalists contend that fuel cells could create an indirect environmental risk by boosting demand for electricity needed to obtain hydrogen. That would hurt since electricity comes from utility plants that burn carbon fuels.

Still, auto makers believe hydrogen is the most important new technology in cars. "From Ford's perspective, we view the hydrogen fuel cell as the most efficient powertrain with zero tailpipe emissions" says Vance Zanardelli, Ford's (F) chief engineer for hydrogen engines.

In the meantime, carmakers are working on hybrid vehicles that combine gas engines and electric batteries. Once just used in tiny, futuristic-looking compacts like the Toyota Prius, this year auto makers are introducing hybrid systems in a wide range of vehicles, from luxury cars to sport utilities. Honda (HMC) already offers hybrid versions of its Civic and Accord, and the hybrid-only Insight.

MORE OIL, TOO. As the technology continues to advance, car companies are finding hybrid technology can boost performance as well as energy efficiency. "Batteries [for hybrid engines] are becoming increasingly lighter in weight, convert energy more efficiently, and can be produced at lower cost" says Mary Nickerson, national manager of Advanced Technology Vehicles at Toyota, "We're working to cut hybrid premiums in half."

Even oil companies are trying to develop alternative forms of energy. People may assume that they're simply intransigent when it comes to developing alternatives. But Don Paul, chief technology officer at ChevronTexaco (CVX), says that isn't the case. The company's solar energy research budget is $75 million, just as large as the federal government's. "But energy is an infrastructure business, and it takes a long time to evolve," Paul says. He's in charge of several pilot programs, such as a fleet of municipal buses in Chino, Calif., that's powered by hydrogen fuel cells.

Instead of putting the bulk of their effort into developing alternative energy, many oil researchers are trying to figure out ways to drill deeper and refine grades of crude that were once unusable. No one really knows how much oil is left, or how long it will last. But it is clear that demand is rising, thanks to global growth in markets from India and China to the U.S. And oil companies don't expect to find huge new oil fields.

EARTH IN PERIL? The ability to extract and refine oil is getting better, however. Paul says when he started working in the Gulf of Mexico 25 years ago, a well in 500 feet of water was considered deep. Oil companies now operate in 10,000 feet of water, drilling wells that run five miles deep below the ocean bottom. In time, as robotics become more sophisticated, drillers will be able to operate in water 15,000-feet deep, tapping reserves that are inaccessible now. And Paul says long-standing efforts to refine Canadian tar sands into oil may succeed as well.

The biggest impetus for alternative energy may be environmental. As the global population races toward 9 billion people, "it won't be possible to raise the standard of living for everyone without intolerable environmental consequences," says Klaus Lackner, a professor of earth and environmental engineering at Columbia University, where he's affiliated with the Earth Institute, which promotes sustainable energy through scientific and public policy research.

Gases such as carbon dioxide emitted by burning fossil fuels are gathering in the atmosphere, trapping heat and raising the risk of global warming. Lackner is working on ways to control the problem with technology that would capture such greenhouse gases at the source of emission and store them in the ground. But he says conservation and alternative energy are necessary, too.

INTENSIVE EFFORT. That's why he thinks greenhouse gas emissions ought to be regulated, just as other pollutants such as sulphur dioxide are taxed. Such regulations already are in place in Europe, although the process has been run into a wall of opposition. Coal plants have been forced to shut down, and prices have increased, leading to complaints from industry and consumers. The Bush Administration has avoided such rules, refusing to sign the Kyoto Protocol, which binds signatory nations to reduce emissions of CO2 and other greenhouse gases. Officials in several Eastern states have talked about implementing it locally, but there's little broad based support.

Alternative energy isn't likely to solve all of America's energy and environmental problems. As Lackner notes, that will take an intensive effort that includes conservation and cleaner, more efficient use of fossil fuels. But given the pressures of geopolitical confict, rising energy prices, and long-term environmental threats, more and more people are thinking seriously about alternatives. That Prius you see looming in the rear-view mirror is just the beginning.

By Steve Rosenbush, with Burt Helm, in New York


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