For your convenience, the energy policy parts from last night’s State of the Union address. Be aware that I’ve dropped some non-energy words, phrases or even short sentences without indicating where such edits happened in order to make this extract relatively clean. In some cases I kept non-energy bits that seemed useful as context for the energy discussion.

Think about the America within our reach: A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world.

I want to speak about how we move forward, and lay out a blueprint for an economy that’s built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.

Innovation demands basic research. Don’t let other countries win the race for the future. Support the same kind of research and innovation that led to the computer chip and the Internet; to new American jobs and new American industries.

Nowhere is the promise of innovation greater than in American-made energy. Over the last three years, we’ve opened millions of new acres for oil and gas exploration, and tonight, I’m directing my Administration to open more than 75 percent of our potential offshore oil and gas resources. Right now, American oil production is the highest that it’s been in eight years. That’s right – eight years. Not only that – last year, we relied less on foreign oil than in any of the past sixteen years.

But with only 2 percent of the world’s oil reserves, oil isn’t enough. This country needs an all-out, all-of-the-above strategy that develops every available source of American energy – a strategy that’s cleaner, cheaper, and full of new jobs.

We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. And I’m requiring all companies that drill for gas on public lands to disclose the chemicals they use. America will develop this resource without putting the health and safety of our citizens at risk.

The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. And by the way, it was public research dollars, over the course of thirty years, that helped develop the technologies to extract all this natural gas out of shale rock – reminding us that Government support is critical in helping businesses get new energy ideas off the ground.

What’s true for natural gas is true for clean energy. In three years, our partnership with the private sector has already positioned America to be the world’s leading manufacturer of high-tech batteries. Because of federal investments, renewable energy use has nearly doubled. And thousands of Americans have jobs because of it.

When Bryan Ritterby was laid off from his job making furniture, he said he worried that at 55, no one would give him a second chance. But he found work at Energetx, a wind turbine manufacturer in Michigan. Before the recession, the factory only made luxury yachts.

Our experience with shale gas shows us that the payoffs on these public investments don’t always come right away. Some technologies don’t pan out; some companies fail. But I will not walk away from the promise of clean energy. I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here. We have subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that’s rarely been more profitable, and double-down on a clean energy industry that’s never been more promising. Pass clean energy tax credits and create these jobs.

We can also spur energy innovation with new incentives. The differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change. But there’s no reason why Congress shouldn’t at least set a clean energy standard that creates a market for innovation. So far, you haven’t acted. Well tonight, I will. I’m directing my Administration to allow the development of clean energy on enough public land to power three million homes. And I’m proud to announce that the Department of Defense, the world’s largest consumer of energy, will make one of the largest commitments to clean energy in history – with the Navy purchasing enough capacity to power a quarter of a million homes a year.

Of course, the easiest way to save money is to waste less energy. So here’s another proposal: Help manufacturers eliminate energy waste in their factories and give businesses incentives to upgrade their buildings. Their energy bills will be $100 billion lower over the next decade, and America will have less pollution, more manufacturing, and more jobs for construction workers who need them. Send me a bill that creates these jobs.

Building this new energy future should be just one part of a broader agenda to repair America’s infrastructure. So much of America needs to be rebuilt. We’ve got a power grid that wastes too much energy.

I recognize that people watching tonight have differing views about energy. But no matter what party they belong to, I bet most Americans are thinking the same thing right now: Nothing will get done this year, or next year, or maybe even the year after that, because Washington is broken.

I’m a Democrat. But I believe what Republican Abraham Lincoln believed: That Government should do for people only what they cannot do better by themselves, and no more.

On the other hand, even my Republican friends who complain the most about Government spending have supported clean energy projects for the folks back home.

The last four paragraphs fell outside the main energy portion of the speech, but since energy was mentioned I’ve included them here.

The full speech clocked in just under 7000 words, while this extract is a bit over 900 words. The word energy appeared 23 times in the speech.

The Hill‘s E2 Wire blogged the energy content of the speech. See:

• Bingaman preps ‘clean’ power plan after SOTU shout-out
• Obama speech steers clear of Keystone pipeline rejection, Solyndra failure
• Obama touts EPA effort to exempt milk from oil-spill rules
• Obama steers clear of climate change talk in speech
• Obama, in speech, touts natural gas while pledging ‘fracking’ rules
• Obama chides Congress for failing to pass ‘clean energy standard’
• Obama speech casts wide political net on domestic energy development plans

For another view, here is a report from CNN.

Can anyone name a major energy policy initiative that emerged from any prior State of the Union address? That is to say, any reason to expect any of this to matter beyond a week from now?

My natural inclination is to say these things don’t matter, but the 2006 State of the Union address lauded the promise of cellulosic ethanol and the following year the Renewable Fuels Standard was implemented.

Michael J. Graetz, "The End of Energy," MIT Press, 2011.

Michael Graetz’s The End of Energy is a fascinating run through 40 years of U.S. energy policy making. Engaging and at times even entertaining if you are at all interested in energy issues. In Graetz’s telling it is mostly a story of 40 years of failure, though he notes a few successes along the way.

I absolutely loved that the first chapter began with President Nixon’s decision to impose wage and price controls on August 15, 1971. If you think that wasn’t energy-policy relevant, then read that chapter (the publisher will let you read it free). Just note that the Arab oil embargo just over two years later caused barely a hiccup in U.S. oil imports; the gas lines and shortages were mostly due to the remaining Nixon oil price regulations. (Yet, 40 years later we still blame OPEC!)

Graetz proceeds to pull us through the swamp of 1970′s energy policy. President Ford joined Congress in giving us automobile fuel economy regulations. President Carter pushed an astounding range of proposals, succeeded on some but failed on others,  and lectured Americans for their supposed consumerist excesses. The book does a good job of surveying the problems created by interstate natural gas price regulation and the difficult politics of casting off that burden.

Reagan’s presidency doesn’t get much attention. Oil and gas price decontrol seemed to work, but these policies were initiated by Carter. After Reagan comes a decade and a half of relatively low energy prices, but for the spike around the Iraqi invasion of Kuwait in 1990. Not much to report, Graetz suggests, as the urge for new energy policy rises and falls with energy prices.

Energy prices pick up again in the mid-2000s, and after a few words on the Energy Policy Act of 1992 we find ourselves in the middle of climate change discussions and the massive difficulties that come with finding reasonable policy. Graetz devotes a late chapter to Congress and the attempted making of a cap-and-trade law. It is enough, perhaps, to turn the most die hard advocate of cap-and-trade into a carbon tax proponent (excepting that, had Waxman-Markey pushed a carbon tax, then a look into the sausage factory likely would have produced the opposite impulse). The book winds down contemplating the BP oil spill in the Gulf of Mexico and the Obama administration’s efforts in response.

The book mostly covers domestic federal coal, oil and gas, environmental and some nuclear power issues. Relatively little attention goes to electric power beyond nuclear or to  international issues, except when discussing climate change politics. Not much on ethanol and just a little on solar and wind power. Still – coal, oil and gas, the environment – these are where the big money is and so that is where the politics have focused. One lesson of the book seems to be that lobbying expenditure is a product of policymaker ambition and the size of government, and not the other way around.

The hazard of writing a current events-type book is that the book must end even as events continue. So Graetz laments that 40 years of energy policy making hasn’t put a dent in our “energy dependence,” and practically at the same time we have begun importing less oil for the first time in decades. Domestic oil and gas production is up in recent years, and what is more, it is a development that has come about mostly without the attention of federal energy policy makers. (Or perhaps in part due to their lack of attention, even admitting some federal R&D support for oil and gas drilling technology.)

Well, we can’t blame Graetz because history continued after his book ended. It is a strength of his book that is gives us some idea of what to expect of the next few years, as the politicians and regulators in Washington DC begin to take notice of this domestic energy development. I wouldn’t score all of the wins and losses quite the way he does, and I’m not sure where his interest in more grand energy policy comes from given the fairly damning assessment of the federal energy policy system. Still, the book offers its readers a fair view of and deeper insight into the last 40 years of federal energy policy.

Marc Gunther asks, “Should we worry about Chinese government subsidies to its solar industry? Or send the Chinese a thank-you note?“ The issue is a “dumping” complaint filed by several U.S. based manufacturers with the U.S. International Trade Commission alleging China so subsidizes its solar PV production that the PV panels are being sold here at a loss.

As Gunther notes, “it takes chutzpah (that’s a technical term in economics) for US solar manufacturers to complain about subsidies in China since they, too, benefit from … [long list of subsidies provided by U.S. federal and state policies].”

ASIDE: Elements of the wind power industry have taken inspiration, as a few weeks ago four U.S.-based manufacturers of wind turbine towers filed a complaint with the ITC against Chinese and Vietnamese wind turbine tower manufacturers.

[HT to AltEnergyStocks.com, where Gunther's column was republished.]

Yesterday I disputed the analysis by which the Breakthough Institute wanted to claim credit on behalf of the federal government for the shale gas boom; today I dispute their claimed broader implications for federal energy R&D policy.

Late in their op-ed, the Breakthrough folks shift emphasis from a narrow drilling technology story to a broader examination of energy R&D policy:

Giving the federal government credit where it is due takes nothing away from Mitchell, who was determined and tenacious. But the lesson of the shale gas revolution is that we should not be so quick to judge government investments in energy technology. Between 1978 and 2007, the Energy Department spent $24 billion on fossil energy research. Billions more were spent through the Gas Research Institute and non-conventional gas tax credits. Those investments were widely panned as a failure during the ’80s and early ’90s, when gas was plentiful and cheap.

Whatever one thinks about shale gas today — we worry about its environmental consequences — there’s no denying the extraordinary economic return on taxpayer investments.

This last point is interesting, but undeveloped in the article. If one were to calculate the “economic return on taxpayer investments,” would one have to conclude they were extraordinary?

The essay ultimately wants to argue against claims that the Solyndra episode proves governments can’t pick winners and the shale gas boom proves private enterprise can. Defenders of subsidies for solar power projects claim critics are too focused on a single failure, Solyndra, when reasonably critics should be assessing the overall portfolio of projects supported. It is a fair observation, but it may turn against their conclusion. If we are to consider the return on “taxpayer investments” in energy R&D, we’d reasonably need to survey the full portfolio of energy technology concepts funded by the federal government. We’d have to count the winners and losers both, based on the best current understanding, and again (as yesterday) we’d want to work out some idea of what would have happened in the energy technology space without federal government intervention. Further, we wouldn’t just worry about the environmental consequences, we’d have to compute some estimate of the costs and include it in the analysis.

The article goes nowhere close to presenting the relevant case. Near the end of the article they claim federal credit for “nuclear power, natural gas turbines, solar panels, and wind turbines — pretty much every significant energy technology since World War II.” Hmmm, notice they don’t mention the other big selectively-cited-by-critics failure: the Carter-era launch of an$88 billion effort to make oil from coal. Like the Solyndra and Synfuels Corp. complainers, the Breakthrough Institute wants to draw policy implications for an uncertain future based on a selective invocation of history.

It is further a kind of mistake to invoke Solyndra in an essay all about energy R&D policy. Much recent taxpayer-extracted support for energy shows up in the production tax credit, the investment tax credits, the Section 1603 Treasury grants and miscellaneous other subsidies that are directed to help promote the fortunes of companies building renewable power components or producing power via renewable sources. While some of these companies are pursuing technological developments, these subsidies are not tied to research in any substantial way and yield very little in the way of publicly available research results. Try gathering detailed data on production from a wind farm or solar power plant benefiting from millions of dollars in taxpayer-supported subsidies – their lawyers will likely tell you it is commercially-sensitive information and not publicly available. And by the way it isn’t just renewable energy, the lawyers for subsidized production from low-output oil and gas wells will likely say the same thing.

There is a respectable public good argument that can be made in support of subsidizing at least some research. The “extraordinary economic return” that the Breakthrough Institute wants to claim on behalf of government subsidized research into oil and gas drilling technology is this kind of an argument. If Breakthrough wants to drag Solyndra and the full range of energy production subsidies into this argument, an economist looking for a respectable public good argument has got to ask: where is the public good in subsidizing private energy production from projects that hide publicly useful information from public review?

Russel Smith thinks we should use government power to limit natural gas production in order to boost gas prices. Why? Because he is the executive director of the Texas Renewable Energy Industries Association and cheap and plentiful gas is cutting into the business opportunities of renewable energy companies.

“The price is so low, there’s so much being produced, and it’s perverting the effort to move renewables into the marketplace,” he said.

He continued:

With the addition of shale gas to the marketplace and continuing low gas and power prices, Smith said renewables have been unable to gain the traction that was anticipated a few years ago.

“Because prices are so low, the momentum to bring large-scale solar and wind, especially solar, to the market has been somewhat stymied,” he said. “The differential in the price of natural gas and solar wasn’t there five years ago as momentum was building.”

The article said Smith initially suggested the idea of regulating gas production to spark discussion during a conference panel. (Reminds me of the Adam Smith quote on business gatherings: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”)

If he can’t convince regulators to limit gas production, Russel Smith suggested that government could do more to boost demand for natural gas: exports, LNG for long-distance trucking, anything that might help boost the price of the competition. Such moves would, said Smith, “improve the situation for natural gas and everyone else.”

Not quite everyone else, right?

Let’s just say when the best example of a success story is a long-term contract signed by a utility and the Cape Wind project, you haven’t exactly resolved concerns about the practicality or cost-effectiveness of the law.

From the Boston Herald, “AG: Energy costs rising under Mass. renewables law“:

The Green Communities Act, signed in 2008 by Gov. Deval Patrick, was intended to help Massachusetts wean itself off fossil fuels and reduce emissions that lead to global warming.

In remarks prepared for a legislative oversight hearing, [Massachusetts Attorney General Martha] Coakley indicated that a review by her office found plenty to like about the three-year-old law, along with some concerns.

“In short, we have found a number of benefits — including increased energy efficiency programs that lead to savings for many consumers,” Coakley said. “But we also have found that the (law’s) programs have escalating costs that will cause an increase in electricity rates.”

The cost of implementing the law will exceed $4 billion over the next four years, Coakley said, resulting in the estimated 7 percent increase in the total delivered costs of electricity to consumers and businesses. She noted that Massachusetts electric customers already pay some of the highest rates in the nation and that the state is “likely to remain at the top of that list.”

Okay, so they’ve identified the costs at over $4 billion for the next four years. The article doesn’t mention any estimate of the benefits created.

(Note that it wasn’t Coakley that cited the Cape Wind deal, but rather the state’s Secretary of Energy and Environmental Affairs and the chairwoman of the Department of Public Utilities.

“A long-term contract provides the certainty that can be critical in making financing available,” [DPU chairwoman Ann] Berwick said.

Of course she is right! A long-term contract can transfer a substantial portion of the riskiness from the private investors to the utility’s locked-in ratepayers. It can be a great deal for the investor, and I’m sure the investors are quite happy to have government policy and state policymakers helping to ensure a good return on their private investments.

Uh, and by the way ratepayers, your already high rates are going higher.)

Brief notes about other energy stories in the news.

• Flywheel energy storage company Beacon Power has filed for bankruptcy. News stories have highlighted the point that Beacon was a recipient of federal energy technology loan guarantees, which will give an additional boost to Solyndra critics, but I predict the apparent lack of high-level political involvement will prevent Beacon from turning into a second scandal. I hope the problem wasn’t skepticism about the value of their flywheel patents.
• In Boulder, Colorado, citizens are contemplating creation of a municipal power utility to displace Xcel in the city. Xcel’s problem is, apparently, not moving fast enough on renewable power and other environmental issues for some residents of the famously eco-aware college town. Boulder’s problem may be that their affinity for renewable power has heretofore been subsidized by less-enthusiastic Xcel customers elsewhere in the state.
• Cheniere Energy, owner of an expensive and not too useful facility to import LNG into the gas saturated U.S. market (the modern natural gas equivalent of “carrying coal to Newcastle“) has entered into a long-term contract to export LNG, a seemingly more sensible goal at the moment. More sensible because currently world LNG prices are much higher than U.S. domestic gas prices, but I wonder whether that price difference will persist long enough to justify the time and expense of retooling the import facility?
• In a related matter, Daniel Yergin sums up some changes in the world energy market for the folks that read the Washington Post. Readers here should be familiar with the pieces of his story: Improving drilling technologies and better data analysis have conspired to yield increasing oil production in Alberta, oil production growth in Texas and a real boom in North Dakota, and significant off-shore oil discoveries off of Brazil.
• The wind power lobby is becoming concerned about the the forthcoming 12-31-2012 apocalypse (i.e., expiration of the production tax credit for new wind power projects), especially in a political environment in which some politicians are willing to pull the plug on all energy subsidies. Maybe it is just the issues that the reporter focuses on, but all of the wind lobby arguments in favor of the subsidy sound like no more than the obvious claim that the industry would grow more with the subsidy than without it. Of course existing projects with a PTC would continue to enjoy the subsidy for their first 10 years of operation, and the growing wind-on-wind competition in some of the better wind resource locations may tip existing wind project owners toward not being in favor of continued subsidies for new competitors.

We talk a bit about the economics of electric power transmission and wind power here, but there is more to understanding the world than economics. Previously we have noted Virginia Postrel writing on the techno-glamour of, among other things, wind turbines. Now we take note of the Pylon Design Competition and its recently announced winning design, a transmission tower design intended to “be both grounded in reality and be beautiful” as per the competition guidelines, the Bystrup T-Pylon (I liked short-listed entry 3 as well).

And if you like integrating artistic insights into your thinking about power transmission and wind turbines, you just might want to support a planned performance art piece intending to promote exactly that kind of integration. The piece will be based on recordings in the wind energy oral history project housed in Texas Tech University’s Southwest Collection.

This special energy section in today’s New York Times has a lot of interesting articles, especially if you are curious about the business aspects of renewable energy. I particularly learned a lot from the article about control room operators, how they do their jobs, and how they and reliability standards have had to evolve to adapt to the changing wholesale power market environment. I think the article underplays (or does not acknowledge) the coordination and reliability benefits that can come from distributed, decentralized digital intelligence and using prices and transactions to coordinate and balance flows along with the control room operations. But the window into those windowless rooms is informative.

Hat tip to Ron Bailey, who writes further about the article on the disappointment of green jobs in the special energy section.

Here’s an interesting juxtaposition of two prominent executives performing sound public choice analyses, and I think they complement each other, at least in my work! This weekend’s Wall Street Journal featured an interview with Exelon’s John Rowe, A Life in Energy and (Therefore) Politics. Exelon is the third largest investor-owned utility/generation owner in the country, with one of the largest nuclear generation fleets outside of France. Between the growth of Exelon through mergers and the provenance of Commonwealth Edison (a substantial chunk of Exelon) as Samuel Insull’s pioneering origins of the electricity industry, Rowe has experienced many of the crucial business and policy aspects that have characterized this industry for the past century.

And for my part he pretty much nails the public choice analysis. In discussing the politics of electricity in general, and in particular Exelon’s support of active federal carbon policy:

In a visit to The Wall Street Journal’s offices recently, Mr. Rowe was eager to strip the altar of green jobs—and the many other political pieties that distort the energy industry, even a few that he says belong to the Journal editorial page.

“The utility business is a funny business and almost no one in any political authority in either party really believes in orderly markets in electricity,” Mr. Rowe says. …

The reason for this seeming contradiction—between simultaneously supporting free markets and interventions like an economy-wide CO2-reduction plan—is that “we’re always being asked to do things that are in our view bleeding crazy,” as he’ll go on to explain.

For starters, the anti-market demands made on Mr. Rowe are bipartisan.

He discusses the cost differential between, in this instance, wind power and other lower-carbon means of generation, such as natural gas, and the bipartisan political support for wind despite the reality that we get more carbon reduction “bang for the buck” from natural gas. Interestingly, in this interview he does not tout nuclear as the be-all-end-all carbon-free energy approach, given construction costs; he also dismisses clean coal.

Rowe is also an enthusiastic amateur historian, so is very well-versed in the origins of the politicization of the electricity industry:

This political economy is an artifact of the historical electricity market—which, through most of the 20th century, was not really a market at all. Until recently, almost all consumers bought electricity from a monopoly supplier at rates set by the government, with a guaranteed return for utilities. That model eroded amid deregulation in the 1980s and ’90s, and the rise of more efficient wholesale electricity markets and independent generators. Commercial and now even some residential consumers are no longer captive, but the political habits persist. …

Mr. Rowe continues that “Somebody else wants clean coal; it’s a non sequitur and it’s not economic either. Somebody else wants wind or solar, and meanwhile . . . the market says the only thing that makes sense for a decade, maybe two, is for new generation to be gas-fired. Natural gas is cheaper than everything else,” thanks to domestic shale finds via fracking and other factors. “It’s likely to stay that way for a long time—but it isn’t what politicians want.”

I encourage you to read the entire interview; I’ve omitted a very interesting discussion of the debate over the extent to which EPA rules would shut down sufficient coal-fired generation to cause reliability problems, which has been asserted in, for example, Texas (but I don’t see how that makes sense, given the loooooong portion of the generation supply stack that is natural gas).

Rowe’s public choice analysis of his industry is complementary to one offered by Eric Schmidt of Google in this Washington Post interview in early October, on the heels of his first-ever Senate testimony experience (Gordon Crovitz analyzes Schmidt’s interview in today’s WSJ, Google Speaks Truth to Power). It’s an absolute must-read in its entirety, but here’s one piece of sound public choice analysis:

Washington—having spent a lot of time there, I grew up there and have spent a lot of time there recently—is largely defined by detailed analytical views and policy choices that are not very good. You know, each policy choice has a winner and a loser, right? Somebody’s ox is getting gored. They’re complex arguments: They’re economic and political and social, and everyone has an opinion on those. Here, the arguments are, how do we make something that affects a million people? How do we change the economics of an industry?

And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome. …

Come on. Give me a break. The press is so young, they don’t understand the history here. We’re still a small component of what a whole bunch of other companies have done, and certainly most other industries. So I reject all such charges [about the magnitude of Google's lobbying]. And I’m very clear on that because people can’t do math. Take the numbers of the amounts of money that go into the regulated industries of all sorts—and then compare high tech, and compare Google in specific, and it’s miniscule.

And privately the politicians will say, “Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.” We, after some debate, set up a PAC, as other companies have. And it’s basically in the interest of our customers to do this, because the government can make mistakes. And for every one of these Internet-savvy senators, there’s another senator who doesn’t get it at all. And it’s not a partisan issue. It’s true in both parties.

This excerpt highlights two timely insights. First, note the “you need to participate in our system” dynamic that defines the corporatist political system. Companies like Google feel compelled to engage in lobbying to rectify what they see as ill-informed political decisions (a reasonable stance, given the lack of technological sophistication in Congress) that would impair their ability to create value for consumers and profit from doing so. Add this incentive to the more cynical and craven one of manipulating the political process and ensuing legislation to favor your company, and you have a range of high-powered and low-powered incentives that drive toward increasing corporatism in politics.

Second, note his observation that “… one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.” This is the clearest articulation I’ve seen of a hypothesis that I’m currently working on with respect to electricity regulation (here’s the complementarity between the two analyses). Regardless of industry, regulation does specify a path to follow, and it’s a backward-looking definition. Combine Schmidt’s observation with the summary of the history of electricity regulation from the Rowe article, and you get a potent combination leading to technological inertia … which, when you’re talking about an industry that enables and is the driving force of a lot of our productivity and lifestyle, is a costly impediment to economic growth.

Combining these two interviews shows the breadth and depth, and costliness, of today’s corporatist regulatory and political environment.