Saturday, July 26, 2014

Farmer Economics and the Cost of Energy

If you want to meet 500 macro economists who speak like normal people, attend a grain elevator's customer appreciation pork chop supper at the county park.  Seriously, there are farmers in every state, county, and township who are a heck of a lot sharper than the talking heads on CNN, MSNBC, or Fox News.  These farmers aren't president of organizations or have fancy NGO titles.  They are just ordinary farmers who realize how national and international policies can affect their Midwestern livelihood. 

Recently I was talking a neighbor, Bob, and he made an observation about the energy market that you just do not here from industry pundits.  Sure the pre-2008 energy market is gone.  Not only are people consuming less, but energy efficiency is also working.  The observation Bob made was the manufacturing industry declined and created the 2008 recession.  The manufacturing economy has not returned.  The service industry does not consume electricity at the rate of the manufacturing.  Energy demand is not going to return to 2008 levels until manufacturing returns to 2008 levels. 

Duh.  He's right.  It's the economy stupid.  

It's absurd Michael Skelly of Clean Line Energy and Economist David Loomis of Illinois State University to claim wind energy creates jobs.  High priced energy does not create jobs.   Low priced energy creates jobs.  The number one cost in manufacturing is labor.  The second highest cost in the manufacturing industry is energy.  For America to be competitive in manufacturing we utilize skilled labor better than any other country.  Another great asset of America is low priced energy.  We have an abundance of economically priced energy.  It wasn't too many years ago Warren Buffet was predicting America was going to be a net importer of natural gas. 

America did something even President Obama said was impossible.  We drilled our way out of this. 

Today corporations want to export America's natural gas.  This really makes no sense.  We have TransCanada wanting to export Natural Gas through the Keystone pipeline.  Williams Corporation wants to build a pipeline through Kentucky for the export market.  Dominion wants to build a liquified natural gas export facility through Cove Point Maryland.  Like Clean Line Energy with the Rock Island, Grain Belt Express and the Plains & Eastern, all of these companies are asking for eminent domain to export energy.

This energy economy is a weird one as this nation is in a state of transition.  We send natural gas from Texas through Illinois to Ohio.  We send natural gas south from North Dakota through Illinois to Ohio.  Natural gas production is exploding in Pennsylvania.  Yet, Boston lacks the infrastructure to supply it with enough natural gas to keep the lights on and heat homes in the winter.  Instead of building infrastructure to meet our own needs, corporations look at building export facilities.

Much like the stupidity of the government's grain policies in the 1980's, Eastern states have been paying people not to use energy in times of peak demand.  Perhaps it shouldn't be surprising the Federal Energy Regulatory Commission thinks this is a good idea.  It's classic governmental insanity.  New England generation capabilities is decreasing but the last thing they want is to build offshore wind turbines to help meet their own needs. 

 

This is the map Clean Line Energy hates so much.  While it shows the winds blowing in the center of the United States, this map also shows the potential of offshore winds.  Clean Line and the wind industry wants powerlines from Iowa, Kansas and Oklahoma to supply the eastern states with wind energy.  The Rock Island Clean Line desires to wheel Iowa electricity (wind maybe) and tap the PJM markets (Pennsylvania, Virginia, New Jersey ). 

While learning the energy markets during the past couple years, it is interesting the farther northeast you go, the more costly the electricity becomes. Beyond the PJM territory, the New York ISO and then there is the New England ISO.  Each of these are regional grid operators (Regional Transmission Operators).  The NYISO is a bit hotter of a market than PJM, and the New England market prices can be even higher.  Demands outpace supplies more than in the electricity Midwest energy markets. It would also appear local government policies possibly discourage new generations.


The opposition against offshore wind generation in the Cape Cod community is well known.

Here is another interesting map.  This shows the flow of natural gas and the magnitude of volumes. 

Interesting thing here, like transmission, pipelines flow from the Midwest to the East then the Northeast.  That intersection in Northern Illinois is largely LaSalle County.  The Northern Borders Pipeline comes down from North Dakota and Kinder Morgan pipelines come up from West Texas and Houston, converging and utilizing the Troy Grove underground storage.  As best as I understand, these pipelines do not cross the Appalachian Mountains.

Like electricity, the natural gas market can be a bit starved in the New England area. Remember, this last winter natural gas had to be diverted from electricity generation to heat. The next map shows just how starved New England is for natural gas from a logistic view.


Again, notice how starved eastern New York and New England is.  Logistically, very little natural gas can get into the Boston market (the red lines).  This map doesn't show it well, but there is a pipeline coming down from Canada and another pipeline comes through Maine. Liquid Natural Gas ships can be offloaded into the  Maine pipeline for the New England market.  Unfortunately for Massachusetts, New England, like the European natural gas markets,  can be affected by export reductions from Putin in Russia.  

While the Midwest has the coal, natural gas, nuclear and wind there are other options for the Northeast.  Pennsylvania is having a natural gas boom as fracking is developing new supplies.  Coal is also available in more nearby states.  Nuclear energy is still an option for eastern states as nuclear energy is not bound to regional natural resources.  The is no logistical reason why so much of the nation's nuclear generators are in the Midwest. 

Oddly, here we are in America with some great turmoil created by low cost natural gas.  (It sure put the screws to Clean Line's business plan, but we also are faced with the TransCanada purposing the Keystone Pipeline to ship natural gas from Canada to Texas, while Texas natural gas is sent north and east. Williams Corporation wants to build the Bluegrass Pipeline through Ohio and Kentucky and farther southeast to export markets. In another project Dominion wants to export liquified natural gas in Virginia. 


So we send natural gas from Texas up through Iowa and Illinois to eastern states.  We build nuclear plants in Illinois and wheel the electricity eastward.  While New England is starved for natural gas,  companies want to ship Pennsyvania natural gas south to export. This is nuts.

On top of all this, Clean Line wants to ship wind energy to eastern states.  There again, New England states are short on electricity.  Wouldn't make more sense to build generation near populations centers, like Boston?  Wouldn't it make more sense to build more natural gas infrastructure to domestic markets that need it than to build towards export markets? 

Then again, Farmer Economics says you don't build infrastructure to the northeast from the Gulf of Mexico only to turn around and build more pipelines from Pennsylvania to the the Gulf of Mexico.  Farmer Economics  also says you don't build infrastructure to promote one type of a generic commodity.  In the end, that is what wind energy is.  It's a generic commodity marketed as an Identity Preserved commodity.  Electrons are electrons. 

Recently Amy Kurt said at a recent Grundy County workshop; "It makes no economical sense to put any other kind of generation out in O'Brien County Iowa where there is nothing except great wind energy resource and then PAY to ship that power over our line to connect to the grid.  If I were to develop another type of energy generation resource, I'd put it where the population centers are and I'd put it right where the grid is.  I wouldn't pay to have it shipped over our lines."

In the end electrons are electrons.  Transmission wires don't care about the source.  Wind energy is not the thing to create more jobs.  High cost wind energy actually discourages economic growth as it makes foriegn manufacturing more competitive.  Just as wind energy is not the thing, HVDC Merchant Transmission Lines are not the thing to get us to the thing.  Wheeling electrons needlessly does not create economic growth. It discourages it.

Farmer Economics says the least cost alternative and nearest option is the best option.  The least cost energy regardless of the source is what will generate jobs and make the economy grow.  Paying a premium for another form is as dumb as shipping natural gas northeast then shipping it back southwest. You would think FERC would recognize the futility of such proposed lines.  That's what we, the people, pay these bureaucrats to do and prevent corporations to do projects that are not in the best interest of the nation.

You would like to think FERC Commissioner John Norris would understand this and have more common sense, as he originates from Iowa.  Then again, Illinois Governor Pat Quinn has no economic sense and neither does Kansas Governor Sam Brownback.  FERC and a few Governor offices could use a little more Farmer Economics on their team. 

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