Wednesday, June 29, 2011

The Bond Bill and Stoltz Real Estate Partners

Senate Bill 130, the Bond Bill, was formally introduced yesterday. Old Leg Hall hands will quickly review the numbers in the front of the bill and turn to what is called the epilog language, which provides instructions on how the funds shall and shall not be used.

Page 52 of this year's Bond Bill includes some specific instructions to DelDOT on how to handle permits for two high profile development projects in New Castle County:
Section 114. Buck Road. The Department of Transportation is requested to refrain from issuing any entrance permit, authorization, or approval for use of any entrance way from New Castle County Parcel Number 0702600094 onto Buck Road, until such time as it also certifies by letter to the New Castle County Department of Land Use that the developer’s proposed entrance design meets the Department’s standards, pursuant to its authority under Title 17 Del. C. §146 and its related regulations, intended to protect public safety and maintain smooth traffic flow. The government of New Castle County is also requested to solicit comments from and work with the residents of surrounding communities, community organizations, and State and local officials to address traffic safety and other legitimate land use concerns about the proposed development, after the receipt of the Department’s letter.

Section 115. Routes 141 and 48. The Department of Transportation is requested to refrain from issuing any permit, authorization, or approval for use of any new, additional, revised, or modified entrances for New Castle County Parcel Numbers 07-032.20-003, 07-032.20-048 through and including 07-032.20-055, 07-032.20-057 and 07-032.30-072 onto or from Route 141 or Route 48, until such time as the Department obtains, reviews, and comments upon a traffic operations analysis for the area, which among other elements addresses (1) the predicted levels of service on intersections, roadways, or the Tyler McConnell Bridge affected by the proposed development of these parcels, and (2) the roadway improvements necessary to accommodate the development of these parcels, based upon the exploratory development plans submitted to the New Castle County Department of Land Use by the developer, as required by the County’s Unified Development Code (UDC). To the extent that any submission of proposed development plans is substantially different than the original exploratory development plans submitted to the County, the Department is further requested to assess the impact of the new submission’s traffic generation upon the local transportation network. The scope of the assessment shall be at the reasonable discretion of the Department.
The projects in question, proposed by Stoltz Real Estate Partners, have been the subject of immense controversy. I don't know how much these two sections will affect consideration of the projects.

Tuesday, June 28, 2011

The Value of Public-Private Partnerships

The Caesar Rodney Institute's John Stapleford writes about Bill Wyer's tenure as chair of the Delaware State Chamber of Commerce in a News Journal op-ed critical of public-private partnerships:
Bill was a junkyard dog for business in Delaware. Under his leadership, the chamber fought against any tax increases and invasive regulations, and the encroachment of government into the marketplace.
Actually Bill Wyer makes a splendid poster child for the value of public-private partnerships. Those who remember their Wilmington business history will recall that he was the first managing director of Wilmington 2000, which was created by newly inaugurated mayor Jim Sills in 1993. Wilmington 2000 played a key role in the city's successful efforts to retain and boost downtown jobs by retaining DuPont and bringing MBNA and other financial companies to the city. As a result, Wilmington's wage economy grew by $1 billion during the 1990s, a 50 percent increase.

I worked in the mayor's office at the time, and can testify to what a strong partnership between business and government can achieve in promoting economic development. I've seen what works, and it doesn't resemble the doctrinaire prescriptions of the Tea Party movement. Governor Jack Markell likes to ask business leaders what he can do to make them more successful. This may be part of why Delaware has Fisker Automotive and Bloom Energy moving into sites recently abandoned by GM and Chrysler with funding from Kleiner Perkins, the world's most famous venture capital firm.

Tea Party conservatives and the Caesar Rodney Institute may believe that business and government are by definition adversaries, but my experience working with Bill Wyer taught me that when government and business pull together, great things can happen.

Monday, June 27, 2011

Shale Gas Reserve Projections and Price Forecasts

The New York Times has published several important articles questioning industry estimates of the amount of natural gas reserves in shale deposits. The first article, accompanied by extensive documentation, offers evidence that the industry has overestimated the size and productivity of shale gas reserves. Another article describes how a change in a rule promulgated by the Securities and Exchange Commission allows natural gas companies to use modeling techniques to claim larger reserves without disclosing their methods.

Today the Times reports that optimistic estimates of natural gas reserves could be affecting government energy projections:
In its annual forecasting reports, the United States Energy Information Administration, a division of the Energy Department, has steadily increased its estimates of domestic supplies of natural gas, and investors and the oil and gas industry have repeated them widely to make their case about a prosperous future.
But not everyone in the Energy Information Administration agrees. In scores of internal e-mails and documents, officials within the Energy Information Administration, or E.I.A., voice skepticism about the shale gas industry.
EIA projections are used to guide policy and planning in government and industry. If shale gas projections are too optimistic, then natural gas price projections will turn out to be too rosy as well. The EIA, in its Annual Energy Outlook 2011, estimates shale gas extraction to grow fourfold over the next 25 years, based on an estimate of 827 trillion cubic feet of technically recoverable reserves.

Natural gas price projections, which have dropped sharply specifically due to higher estimates of the supply, are used to calculate the estimated cost premiums of renewable energy. If the long term projection of natural gas prices goes down, then wind and solar power look more expensive by comparison. The EIA's projects that its most conservative shale gas recovery estimate would result in prices 30 percent higher than its reference case.

Friday, June 24, 2011

Bluewater Wind Contract Terms Extended

NRG Bluewater Wind yesterday announced that it had agreed with Delmarva Power to postpone payment of security deposits required as part of the power purchase agreement. NRG has cited uncertainty about the restoration of loan guarantees in delaying the construction of a meteorological tower until next year. The News Journal reports that NRG sees some hope that the loan guarantees would be restored:
But NRG officials have one small reason for optimism: The House Appropriations Committee recently voted to restore a fraction of the loan guarantee money for those projects that have already applied.
As the news website Delaware First reports, Governor Markell supports a short delay in the contractual timetable:
Governor Jack Markell’s office is pleased that the extension allows more time to work out the concerns that threaten the project, but spokesman Brian Selander also noted the limited nature of the extension, saying that the Governor did not want an “open ended” timetable.
An indefinite delay in the project could put Delaware at a competitive disadvantage in attracting the supply chain and assembly business that will need to be put in place to build offshore wind projects up and down the east coast. If NRG allows the timetable to slip back another year without a definitive start date, then suppliers would be less likely to set up shop in Delaware.

Thursday, June 23, 2011

Bloom Energy and Venture Capital

Senate Bill 124, which would help bring Bloom Energy to Delaware by including the company's fuel cells in the state's renewable porfolio standard, was released from the House Energy Committee yesterday. The News Journal reports that the Caesar Rodney Institute yesterday continued in its vocal opposition to the deal.

Writing in Town Square Delaware, John Moore of Acorn Energy reviews the deal and thinks it just might work. He also notes that Jack Markell is building ties to west coast venture capital firms:
On the whole I see it as a low cost option on a big opportunity. It seems that Governor Markell has credibility with Silicon Valley venture firms and he is successfully leveraging state and federal subsidies to create economic activity in Delaware.
Silicon Valley venture capital firm Kleiner Perkins has now funded two large industrial enterprises in Delaware: Fisker Automotive and Bloom Energy. Moore notes that Bloom could create spinoff firms as it builds a network of connections between academia and related companies. Bloom Energy will fill in the last link in a chain linking research and development with capitalization and commercial production. Ties to investors that previously never invested in Delaware could help build on the new industries that are locating here.

Friday, June 17, 2011

The Economics of Obesity in Three Charts

For those who wonder why we have an obesity problem in the U.S., this chart from I found on the Economix blog explains a lot:
Unhealthy foods are becoming cheaper, while healthy foods are getting more expensive. This chart at Lapham's Quarterly illustrates the stark difference in calories purchased for a dollar:
While people point to lifestyle issues, like the number of hours we spend in front of screens, as the cause of rising obesity, it may not be a matter of personal character, but of economically rational behavior on the part of consumers. Whether this represents rational behavior on the part of policy makers is another matter. This chart from the Consumerist, which uses the old food pyramid, provides a clear illustration of how badly skewed our food subsidies are:
I find it particularly distressing that some see obesity among the poor as evidence of their character shortcomings. Given the distorted economics of food in this country, they may be acting rationally in economic terms by buying the most calories for the dollar, even though their purchasing patterns don't optimize long term well being.

Thursday, June 16, 2011

How Will Bloom Energy Affect the RPS?

SB 124, a key part of the package to bring Bloom Energy to Delaware, would include the company's fuel cells in the state's renewable portfolio standard or RPS. The News Journal reports that there is some unease over broadening the renewable portfolio standard to include the fuel cells:
Some observers said lawmakers were creating a dangerous precedent by watering down the definition of a "renewable" energy resource, since the bill applies to fuel cells that use fossil fuels to operate.

"This is sort of a stretch of what is supposed to be renewable energy," said John Austin, a retired environmental scientist living in Rehoboth Beach.
How much of the RPS would be given over to Bloom Energy fuel cells? The bill would cap the allotment for fuel cells under the RPS at 1,152 megawatt hours per day, which would be 3.58 percent of Delaware’s total electricity sales in 2009. The RPS is programmed to grow to 25 percent by 2025, so the bulk of the portfolio would still go to traditional renewables like wind and solar.

The RPS provides for a portfolio of energy sources to meet our needs for cost effective clean energy and help promote new business opportunities in the green tech sector, and no single source can meet all of our policy objectives. Managing a portfolio of renewable energy sources requires tradeoffs among different interests to make the whole thing work. While this is an awkward and somewhat artificial use of the RPS, I have decided I can support the measure.

Deployment of the Bloom Energy Servers will have benefits for the environment and the grid. To the extent that these fuel cells replace coal generation (which provides about one half of our electricity) they will contribute to reductions in air emissions. Bloom Energy’s fuel cells are reportedly more efficient than conventional natural gas turbines, and their ability to be located onsite enhances their efficiency by eliminating the loss of power over transmission lines. By providing distributed baseload power, this technology will alleviate congestion on the grid and reduce our reliance on out of state power. In considering the tradeoffs, I have concluded that the benefits are worth the stretching of the RPS in this case.

Tuesday, June 14, 2011

Upgrading the Grid

I sometimes hear the criticism that the upgrades to the grid required to accommodate renewable energy will be too expensive. But the grid is like any complex infrastructure system; it would need to be upgraded even if we didn't bring new energy sources online. The Washington Post reports that the Obama administration is proposing ways to move the electrical grid into the 21st century:
Power utilities spend only 0.2 percent of their revenues on research and development, less than any other industry except papermaking, said Massoud Amin, a University of Minnesota professor who has long promoted upgrading the power system.

One consequence is increased power outages. From 2000 to 2004, the United States experienced 149 blackouts, each of which affected at least 50,000 people. From 2005 to 2009, that figure more than doubled, to 349, according to Energy Department data.
A smarter grid that would more efficiently dispatch renewable energy would also help reduce the number of outages. It would particularly benefit customers on the east coast, where population density and congestion force us to pay higher prices than much of the rest of the country. By the way, one appealing feature of the Bloom Energy fuel cells is that they can provide reliable, on site generation for large energy users, reducing the need to dispatch power over the grid.

Friday, June 10, 2011

Bloom Energy Coming to Delaware

A decade into the 21st century, Delaware is placing a big bet on clean, high tech energy. Bloom Energy, which makes sleek, highly efficient fuel cells, announced yesterday that it is setting up a manufacturing facility on the old Chrysler site in Newark. The company will eventually employ 900 workers, and its suppliers may add another 600 jobs on the site.

The fuel cells, called Bloom Energy Servers or Bloom Boxes, combine fuel such as methane with air to directly generate electricity. These fuel cells are already online providing power to customers such as Google, Adobe and CalTech.

I spoke to a session of Leadership Delaware yesterday on the economics of renewable energy. The fellows, who had been listening to speakers on energy all day, had not heard the news when I stood up around 4:30. Two minutes into my talk, I could make the point that clean energy is not a dream, but a reality, which will bring jobs and other economic benefits to Delaware.

This is what a clean energy future looks like. Delaware has no energy resources other than sunlight and wind, and thus has no economic interest in relying on coal power from out of state. Coal burned here or to our west produces pollutants like SOx, NOx and particulate matter that degrades our health.

I'm sitting on a panel on green energy as part of today's Governor's Entrepreneurial Business Conference in Wilmington. (It's a great panel that includes Dr. Michael T. Klein and Dan Rich of the University of Delaware and John Moore of Acorn Energy.) The discussion won't just be theoretical; we will be able to talk about real opportunities in the very near future. In the effort to replace 19th energy with 21st century technology, it make sense for Delaware to place its bet on clean energy.

Wednesday, June 08, 2011

Why Maintain the Tax Breaks for Big Oil?

Writing for Fortune, columnist Dan Primack says it's time to end the tax breaks for oil companies:
For too long we've heard petroleum advocates say that solar, wind, and biofuel are failed experiments. They've had their chance, but have been unable to demonstrate cost-effectiveness.

What this ignores, of course, is that American oil and gas companies have had a century of built-in advantages. For example, they are allowed to deduct "intangible drilling costs" -- including labor and drilling fluids -- the moment a well is tapped (even if it proves to be dry). And then there's the "depletion allowance," which allows certain extractors to shelter around 15% of a well's production from the IRS. And deductions for royalties paid to foreign governments. And the oil and gas liability cap that remains at just $75 million, more than a year after the BP (BP) rig explosion. Then there's Section 199, which allows profitable oil and gas companies to deduct 6% of net income.
Yes there are incentives for renewable energy, but these are dwarfed by federal subsidies for fossil fuels.
Primack also points out that renewable energy incentives tend to be short lived, like the loan guarantees for wind power that were yanked earlier this year. In contrast, similar loan guarantees for nuclear power have gone begging for six years. He makes the case that renewable energy advocates should embrace the elimination of all energy subsidies.

I don't agree. Even if all federal subsidies for fossil fuels were to disappear, the enormous negative externalities of coal would still not be priced into the market. But Primack does make a persuasive case for making the playing field more level.

Monday, June 06, 2011

The Economic Impact of the High Line

I first wrote about the elevated park in New York City called the High Line in 2005, and described my first visit to the park in 2009.

The New York Times reports on the economic impact of the still unfinished High Line, which has become a classic example of how investment in public amenities can spur private investment:
A decade ago, so many moneyed interests were united against saving the elevated freight tracks that cut through the West Side of Manhattan that the idea appeared to be doomed. Owners of land and buildings throughout Chelsea wanted the decaying High Line viaduct razed, and the administration of Mayor Rudolph W. Giuliani supported their feelings.

But on Friday afternoon, there was Mr. Giuliani’s successor, Michael R. Bloomberg, proclaiming that preserving the High Line as a public park revitalized a swath of the city and generated $2 billion in private investment surrounding the park.

The mayor pointed to the deluxe apartment buildings whose glass walls press up against the High Line and the hundreds of art galleries, restaurants and boutiques it overlooks. All of that commerce more than makes up for the $115 million the city has spent on the park and the deals it has made to encourage developers to build along the High Line without blocking out the sun, Mr. Bloomberg said. On top of the 8,000 construction jobs those projects required, the redevelopment has added about 12,000 jobs in the area, the mayor said.
I've been up on the High Line twice, and found the park crowded with neighborhood residents and tourists. Gleaming residential towers and revived brick tenements flank the park. It's one of most unusual and most successful parks I've ever seen.

Thursday, June 02, 2011

Why Not Use Unclaimed Nuclear Loan Guarantees for Wind Power?

Last week NRG cited the end of loan guarantees for wind power as a reason for delaying the construction of a meteorological tower for the Bluewater Wind project. In response, Tom Carper and Chris Coons signed a letter announcing their intention to restore the loan program:
If there was $8 billion available in loan guarantees, which would require an appropriation of $80 million, the Department of Energy would be able to facilitate the financing of the first substantial tranche of offshore wind projects in this country.
Having thought about where the funding could be found, I fired off this letter to our congressional delegation:
Dear Senator Carper, Senator Coons and Congressman Carney:
I propose that unclaimed nuclear power loan guarantees be repurposed for wind power. As you know, NRG cited the lack of funding for loan guarantees as a reason to delay the Bluewater Wind project, specifically the meteorological tower, which was scheduled to be erected this year.
According to the New York Times, half of the funds for nuclear loan guarantees have not been claimed six years after the program was created:
WASHINGTON — In an effort to encourage nuclear power, Congress voted in 2005 to authorize $17.5 billion in loan guarantees for new reactors. Now, six years later, with the industry stalled by poor market conditions and the Fukushima disaster, nearly half of the fund remains unclaimed. And yet Congress, at the request of the Obama administration, is preparing to add $36 billion in nuclear loan guarantees to next year’s budget.

Even supporters of the technology doubt that new projects will surface any time soon to replace those that have been all but abandoned.
I propose that some of these funds be repurposed to support offshore wind power. In contrast to the nuclear industry, wind power projects are moving ahead despite the lack of a long-term commitment from the federal government. Only one nuclear power project has progressed far enough in the last six years to make a successful application for an $8.8 billion loan guarantee. The same amount would help finance wind power projects up and down the east coast.

By shifting a portion of the loan guarantee program from nuclear to wind power, the federal government could offer meaningful support to this promising industry at no new cost to taxpayers.


Thomas Noyes