Ponente en Foro Ficon 2012

Me han invitado a ser ponente en Foro Ficon 2012, que se celebró en Don Benito (Badajoz) los días 28 y 29 de Noviembre.


Hablé sobre el sector de las energías renovables, que continúa su crecimiento en Estados Unidos y muchas empresas españolas aprovechan su experiencia para ganar contratos e invertir en el país. Sin embargo, la organización del mercado eléctrico y las políticas de promoción de renovables son totalmente diferentes a las seguidas en España, por lo que las empresas tienen que adaptarse al modelo estadounidense y enfrentarse a un mercado muy competitivo y con importantes riesgos. En la ponencia se explicó la situación real del sector, oportunidades y dificultades en energías renovables, casos prácticos de empresas españolas y mecanismos de apoyo para la internacionalización. Estuve encantado de participar, si bien la afluencia de personas no fue abundante, aunque el nivel de ponentes fue excepcional, destacando el catedrático Valeriano Ruiz, o Eduardo Collado de UNEF.

La presentación realizada se puede ver aquí:

Energy Policies for US from a Public Health, Environmental & Economic viewpoint

1.     Introduction

The US faces important challengers for defining their energy policy. The US has a strong dependence on fossil fuels, and despite it is one of the biggest producers of them, they are, by far, the biggest consumer, so it relies greatly on imports. That implies geopolitical issues as well as security concerns. From the environmental and health point of view, a combination of economic liberalism, plenty availability of natural resources and ‘not-in-my-backyard’ policies have lead the young country to not concern about environment so much as European countries where these problems are perceived closer. That can be seen, for instance, in the high level of pollution of some places in the US, the lack of commitment with the Kyoto protocol or the individual car-based transportation system.

Nevertheless, the good availability of resources and the adequate economic situation (maybe not the best nowadays, but for sure better than the rest of the world) could facilitate the necessary change to a greener economy if the political will is strong enough.

In the graph bellow, the sources and sinks of the energy consumption of the US can be seen. Almost 80% of the energy comes from dirty and finite fossil fuels, mainly petroleum. The two main consumers sectors are Transportation (27%) and Electric Power (38.6%). 

Sources and Use of Primary Energy in the US

Transportation is a big contributor to the energy, environment and health issues in the country. There are many policies which can be implemented in this area but the dependence on liquid fuels and the spread US neighborhood development are two important obstacles for the development of a new transportation system.

The first difficulty is partially solved by current technology. There are available new types of fuels but all of them still have relevant difficulties to trigger a change in the market. Hydrogen is not produced in enough quantities yet, in addition of the security concerns related with the great inflammability of the gas. Biofuels are already introduced, but the competition with food markets and the difficulties for introduce biodiesel in the US market (lack of diesel fleet and gas stations network) are important issues yet. Natural Gas (NG) vehicles face the same problems; despite the low price of NG makes interesting this fuel for transportation, mainly feasible for trucks. Electric Vehicles (EV) are in the radar nowadays as the solution, but they will need a change in the electric sector first, to be a real environmental and energy solution (since an EV today is actually powered by coal, NG, nuclear and a little bit of renewables). In addition, the less autonomy issue is an obstacle for consumers, despite technology is improving it very fast.

The spread US neighborhood development is a great difficulty for setting up an efficient and economically feasible public transportation system in mostly cities within US. Some important programs are being implemented nowadays, as Los Angeles metro expansion, high-speed rail in California, and others, but it seems difficult that they will imply a great change in energy consumption in the whole picture. They are actually more focused on solve traffic congestion and local pollution problems.

So, despite Transportation has an important role in the US energy puzzle, it might be very difficult to produce important changes through policies in a short term. However, actions in Electric sector could be more effective and relevant in modifying the energy consumption pattern. Indeed, Electric sector is the biggest consumer with a 38.6% of the total energy usage. Electric sector consumption comes mainly from the activity of ‘Generation’, that is actually, the transformation of primary fuels into electric fuel or electricity, easier to transport and use for innumerable machines. Generation also is responsible for the majority of the air pollution and green house gases (GHG) emission in the sector. (Some emissions are produced in transportation due to SF6 gas used in switchgear, but we can avoid it in this whole picture).

Generation is an activity pursued mainly by electric utilities and some independent power producers (IPP) and, despite there are some thousand of power plants, it could be easier to regulate and address them than convince almost 200 million drivers to switch to brand new EVs or public transportation. In addition, technical solutions to deal with the problem are already plenty available.

This paper is going to be focused on it, trying to propose policies for the Electric power sector for addressing the energy issue in the US. First, the current situation of electric generation is going to be exposed, as start point for posing policies recommendations. In addition, forms of implementation are going to be suggested, extremely important in a huge country where federal, state and local administrations share the authority on the power sector.

2.     US Electric power sector

The U.S. electric power grid serves more than 143 million residential, commercial, and industrial customers, through more than 6 million miles of transmission and distribution lines owned by more than 3,000 highly diverse investor-owned, government-owned, and cooperative enterprises; resulting in probably the biggest and complex machine in the world.

Nevertheless, there is not a unified national policy on power sector, and the majority of the competences are held by States in a very heterogeneous way, and only some general interest and security issues are responsibility of the Federal government (through FERC and DOE). Important issues as the generation mix, rates, utilities regulation are State competences. (in many cases, even counties or cities competences).

The current market organization is the result of more than 100 years of evolution. The first electric system was set by Thomas Edison in New York in 1882 for serving 59 light consumers in Wall Street. The plant which powered that system was called Pearl Street Station and it generated DC current from a coal-fired steam generator. From that, the market was growing pushed by technology innovation. Regulations and laws were catching up when they were required for ordering the market and provide a scheme through clients and companies were protected, or when terrible blackouts occurred (for example in 1965 and 2003).

The resultant model today, is a complex system where the vertically-integrated utility is the most usual model, but liberalized markets also exist. Vertically integrated means that the utility is a little monopoly in the zone where it serves, doing generation, transportation, distribution and supply of electricity. The oversee of this monopoly is assigned to state regulators, called Public Utility Commissions (PUC), or municipal governments (as the case of LADWP). These regulators set the rates and approve new plants and lines, among other functions. There are about 3,200 utilities, 2,200 Publicly-owned but only represent 17% of sales and 818 are cooperatives with 12% of sales. The 242 remaining are Investor-owned, and they are most important ones since they represent almost 60% of sales.

US Sources of Electricity Generation About power generation, currently the main source continues being coal (42%). Natural gas represents a 25% and nuclear plants the 19%. Renewable are the 13%, being 8% hydro power, 3% wind, 1,4% biomass, 0,4% geothermal and solar less than 0,1%. So, despite the great political and media coverage of new renewable technologies, they actually represent a little bit of the cake. Just to compare, in countries like Spain, around 20% of the electricity in a year is only produced by the variable wind.

The plenty availability of coal in the US (second producer after China) joined with its low price (comparing historically with gas) and ease of use (few operation risk than nuclear), have ended in being the most preferred technology. However, the implications of its use on emissions are important, since coal-firing is the worst air polluter, locally and globally. Due to its solid condition and chemical composition, burning coal produces bad gases as NOx, SO2 and particles. Some poisoned mercury is also liberated due to its minimal presence in coal. All of them provoke well-known air pollution and health issues in the plant surroundings, and even farther problems as acid rain. Those issues are partially hidden by locating coal plants in remote and low populated zones. Nevertheless, the global impact as a GHG (CO2) producer is even greater. Since coal formula is mainly carbon, when reacts with oxygen, CO2 is greatly produced. NG and petroleum formulas contain more hydrogen instead, so the combustion produces less CO2 and more H2O (which is not considered a problem in global-warming curse). Burning NG generates between 40-50% less CO2 emission than coal and 25-30% less than oil. (The real average data for the US are: NG 1,135 lbs CO2/MWh, coal 2,249 lbs CO2/MWh, oil 1,672 lbs CO2/MWh, from EPA).

It means that considering the current mix and making some simple calculations, for every 1% of coal generation which was switched for NG generation, a reduction of around 1% of GHG emission will be achieved in the electric power sector, caeteris paribus. In addition, burning NG is more efficient due to the higher temperatures which can be reached (the young genius Carnot demonstrated it in 1824 with his famous equations), so for the same electrical output, less fossil fuel will be needed. Switching to nuclear or renewable will be even better, since it will produce a reduction around 3.5% in emissions per 1% of coal taken out. Switching to oil makes no sense, since oil is more valuable for transportation as liquid fuel.

So, it seems that coal is a bad guy in the US energy and environmental problems. In next section, some policies will be posed to deal with it.

Another difficulties has to be considered in power polices definition. The current power market model of regional monopoly-supervision is probably not the most adequate for introducing strong reforms which try to solve a national problem (type of tragedy of the commons here). The main concern of the regulators (PUCs, municipalities) is to guarantee supply and keep rates lower in its area, since problems related with both of them are politically sensitive. That does not leave a big margin to make experiments or push for changes, despite the California market reform in 2000 was a pretty remarkable example but a sad fiasco. The system is destined to be conservative in the investments and the results are a problematic lack of capacity in transmission lines and an old and obsolete equipment. Difficulty in building new transmission lines (owned by utilities) is a big issue in developing renewables, since, unfortunately, the places where the resource exists, are not the same where consumption is. Transmission lines usually go through territory of different utilities, regulators and States, and it is not clear how to allocate the costs of the lines in such heterogeneous jurisdiction scheme, despite the Federal Energy Regulatory Commission (FERC) is trying to deal with it (Order 1000).

3.     Policy recommendations

So, with all the tough restrictions those have been presented before, the definition of the US energy policy should be cautious but smart, introducing mechanisms which allow easy and small changes every year but addressed in the right direction to produce a big change in next decades scope. Small steps in the right direction lead to destiny, as a good pilgrim knows.

The principles or restrictions which drive the policy definition have to be cost-effective, politically realistic and objective-oriented. The goal is clear: reduce fuel imports, reduce emissions and allow economic prosperity.

Taking into account this, the energy policy should be focused in one simple thing: Reduce generation from coal and replace it for a combination of NG and renewables.

Local and global range emissions would be obviously reduced, and the rest of goals would be achieved without exceed the restrictions. Coal is greatly mined in the country and is relatively cheap, so doing that change cost-effective and from autochthonous sources is the challenge. Nuclear is discarded due to the great investment costs, the growing opposition after Fukushima disaster and political issues. Moreover, it is not recommended despite it does not contribute to global-warming because of the greater health risks that implies, and the unsolved solution for the nuclear waste disposal. Only one nuclear plant is being built nowadays in the US, the Vogtle project in Georgia, which will need 10 years of development and it will be the sole new nuclear project to become online since Three Mile Island accident in 1979.

Promoting renewable technologies has obvious benefits to reach the target: they do not produce emissions, they do not need import energy, they do not jeopardize lives in case of failure, and they create jobs and industry. In this sense, there is much work to do, since the current percentage of renewables in the mix is lower. However, the cost of energy produced by renewables is still considerably higher than coal, in spite of technology innovation is lowering this price every day. Till grid parity was achieved (cost of renewable equal market reference), regulators, utilities and consumers probably will not be eager to pay more for electricity. Moreover, the grid upgrades and back-up generation that they need, pushes the balance against them.

However, this over-cost can be easily minored by increasing NG generation, which also contributes to reduce emissions from the current situation. Increasing NG generation would require almost nothing new investments. In the figure below, it is presented the current coal generation (the less efficient plants in green); and in blue the generation potential of NG combined cycles already online but currently not working at plenty capacity. (in fact, these plants are working much less hours than those for they were conceived).

Fully Dispatched NGCC potential

As it can be shown, there is a great potential of switching coal to NG, at very low cost. Underutilized NG combined cycles do not need infrastructure upgrades since they are already connected to the grid and the gas supply network is more than enough to deliver all the plants. The reason why they are not plenty utilized is because coal used to be cheaper and because, in reality, utilities decide their generation program regarding their own interest (many times not lowering the cost since they are going to recover it through the negotiated rates with PUCs).

US Natural Gas ProductionUS Natural Gas and Oil price evolution

The price of natural gas has been historically growing every decade, since it used to be tied to oil (so it is in the rest of the world). But the discovery of the new ways to make profitable natural gas from shales, have revolutionized the market. The great increasing in shale gas production has sunk the prices in the last few years, and the projections predict that the availability of NG will increase in US.

However, a warning has to be done here; this fortune’s gift can become a curse if it is used as a substitute for renewables instead of for replacing coal. That would be a strong temptation unless appropriate regulation and policies were set, since in absence of GHG control, cheap gas can be converted in cheap electricity, good for utilities’ revenue and politician’s image.

To conclude, the successful energy policy would be to change coal for renewables and natural gas, balancing this combination depending on the evolution of the generation cost of both technologies and the efforts that consumers were willing to assume.

4.     Policies Implementation

It is not only important to recommend energy policy, but to suggest how implement it. And that is crucial in a country with such complex and distributed jurisdiction in power markets. Here, some ideas are going to be given to address with the practical sense of the energy reform. They are directed to different administrations, federal, state and local:

  • The definition of the strategic energy plans are nowadays responsibility of the departments of energy of every State according with its PUC. It could be more convenient that these plans (where the switch from coal to NG/renewals can perfectly be included) were agreed with a federal agency as the Department of Energy (DOE) and FERC. It makes sense since the effects of the electricity production not only involve a sole State, but the whole country (regional and global emissions, imports of fuels…)
  • Since Federal agencies have a narrow margin to impose legislation to States (litigation can convert the planning process in a nightmare), the Federal agencies can try another strategy. They can offer conditioned funds (for example those from ARRA) to those States which achieve the objectives set by Federal, for example, to reach a certain level of renewables, to coordinate energy plans, to open market for transparency, to coordinate lines with neighbor States, etc. The State have the option, not the obligation, to do the things right and get the funds (politicians would love to win them). It is making and incentive and leave competition works.
  • Municipal and local utilities should be under control of State regulators of PUCs, and the municipality governments should endorse it. Despite we respect personal freedom, it is totally unfair and biased that municipal utilities (as LADWP) do not have the obligation of the State Renewable Portfolio Standard, and they can arrange their generation structure as they want. It is unfair that, for example, in Los Angeles, consumers pay less for their electricity than in Orange County, because LADWP generates more with coal and do not have the obligation of buying renewables as SCE. And it is unfair because emissions from this decision affect equal both consumers.
  • Maintain and update the tax incentives to renewables. Without cancelling all subsidies (including those oil, gas and coal have), that it is not a bad idea at all; it is better to maintain, at least, the current incentives for renewables, as Investment Tax Credit (ITC) and Production Tax Credit (PTC). Moreover, a long term strategy should be done, to avoid the stop and go in investments that the sector suffers. Wind power is a good example, and just this year we are seeing the same stop as 2004 because the PTC has not been renewed yet for 2013. These ups and downs do renewables more expensive because companies and banks need higher loan rates to compensate the variable regulation risks.

5.     Conclusions

As it has been explained, Transportation and Electric Power sector are the two main causes of the energy consumption in the US, and both of them rely so much on fossil fuels. Transportation is mainly dependant on petroleum (94%) because, however it could be hard to understand when you visit the gas station, it is actually the cheapest liquid fuel that can be found today, with the current logistic chain. For sure that there are alternatives, but it is difficult its introduction due to the great upfront investments they need. Even the EV will not be the solution unless Electric power sector changes before.

However, decisions taken in the Electric sector can be more effective and reduce emissions and consumption. Energy efficiency improvements has not been considered in the paper, despite they are totally recommendable, because they will be probably compensated with the increase in energy demand due to population and economic growth (forecasts say that the increasing on demand will be around 1% every year, and the energy per capita will decrease slowly till a 20% of current in 2035).

In Electric sector, the most obvious action seems to be reducing dirty coal and introducing renewables (zero emissions, zero imports but still expensive) with a combination of natural gas (less emissions, no imports thanks to shale gas and cost-effective). Achieving the changes is a challenge with the current market organization and regulation, so the political determination has to be strong enough to go together in the right direction and leave apart lobbies and particular interests in order to fulfill the general interest.


6.     References:

Artículo en la revista del COIIM: Situación de la energía eólica en Estados Unidos

He vuelto a conseguir publicar otro artículo en la revista de Colegio de Ingenieros de Madrid Nº57, esta vez sobre la situación del mercado eólico en Estados Unidos. Se repasa el estado del mercado y se comentan los retos a los que se enfrenta, a corto plazo la renovación del PTC y a largo plazo, la falta de capacidad de transporte eléctrico y la competencia del shale gas:

Articulo Situacion eolica Estados Unidos

Ver en pdf

I have published an article in 'Energias Renovables'

I am very glad to announce that an article by my workmate Victor Iglesias and me, have been published in the very famous Spanish magazine Energías Renovables.

Termosolar en estados unidos

The title is ‘¿Cómo está la termosolar en los Estados Unidos?’ (How is the thermo-solar market in the US?) and in a few pages we explain to our Spanish compatriots what is going on in the American market:


Moreover, we have been cited in the paper version, on page 59



Spanish Feed-in Tariffs: Killing the Golden Goose

Spain had a struggling issue in energy supply at the beginning of the 90’s. More than 70% of its primary energy sources were hydrocarbons and almost all of them were imported because there are not autochthonous reserves of oil, natural gas and only one third of all needs of coal. They were imported from countries like Russia, Libya, Algeria, Nigeria or Egypt, not very trustable from a geopolitical point of view. Moreover, the electrical markets were dominated by two vertical integrated utilities which had not been invested in new transmission capacity or new generation plants. Due to the growth of the economy, it was forecasted a important growth in energy demand (actually the demand doubled in 15 years), so the Government had to deal with a big problem, also aggravated by the environmental compromises with European Union in using renewable energy and reduce CO2 emissions.

Spanish FiT have been called as the fable of the golden eggs goose

So, the Government made important decisions to address the issue, fighting with numerous personal and private interests from utilities and the old school guys. Probably, the period from 1990 to 2010 was the moment with more energy laws and legislation passed in all the Spanish history. Following the California and UK examples, the market was liberalized, a new Independent System Operator (ISO) and owner of all transmission lines was created, Independent Power Producers were allowed to access to the grid, and important laws in supporting renewable energy sources were passed.

Nowadays, Spain is well known for being a country who is leader in the world in renewable energy technologies. Despite to be the 12th country by GDP, it achieved the fourth place in wind capacity installed, second in solar PV and it remains first in solar thermal. In 2011, the 36% of the electricity comes from renewable energies, a remarkable fact since the US only achieved 13%. In others indicators related with infrastructure (as transmission lines average age, miles of high-speed rail or miles of freeways) or with human development (mortality, education, etc), it is on the top five. Nevertheless, currently is also infamous by the struggling economic situation, difficulties to pay back the national debt and high rates of unemployment. Both achievements and failures are consequences of the decisions made, some of them related with energy. In the particular case of renewable promotion, the Spanish feed-in tariffs program (FiT) is one of the most commented, discussed and disputed energy policies in the recent years, specially the program for solar photovoltaic, who has been called for many people as the fable of Killing The Goose That Laid the Golden Eggs.

The promotion of the renewable energy, as solar, wind or biomass, is an issue of how to internalize the positive externalities into the market. These benefits are well known. The clean or renewable energies, do not pollute, do not contribute to climate change, do not imply resources depletion, do generate local employment, do promote the national industry, do improve the energetic independence, and more. All of these benefits are not included in the Levelized Cost of Energy (LCOE) or the price of the electricity. Because of that, these technologies are not competing in the same conditions as the conventional generation. That makes that the price of them is above the average price of the electricity in wholesale market, and as a consequence, the utilities do not want to build this expensive plants or to purchase expensive energy from others. This is because the benefits of the renewable energy do not go to them, but to society. That is a market failure and that is because they need the regulation or the support from the Government.

In the market, it is a basic principle that nobody, even the Government, can control the quantity and the price of a product at the same time. If you fix the price for the renewable generation (as FiT does) you do not know what will be the amount of renewable generation that you will obtain. The same, if you fix the quantity you want (as Renewable Portfolio Standards does); you do not know what will be the price for this generation. The price multiplied by the quantity is the key point, because that will be the cost for the electricity customers who are also your voters. So you have to be careful with that because otherwise you can make your citizens to pay so much for the electricity if the price by the quantity is too high, but you can make them not to gain the benefits of renewals if the renewals were not developed due to low prices which do not make the investments profitable.

In the FiT option, the government decides what will be the price of the renewable generation. That has enormous advantages for developing the renewable market because it is very easy for developers, investors and financial institutions to know what will be their retribution and the Internal Rate of Return (IRR) for their investments. It is easy to calculate the IRR and if the FiT is also well determined -the price will be a bit more than the cost of capital- then the development of renewable is smoothly and a reasonable cost for ratepayers, being society awarded with the benefits of clean generation. See Exhibit 1, with the case of wind.

Spanish wind feed-in tariff as an example of sucess
Exhibit 1. Electricity market Price (black), FiT for Wind (yellow and red) and Estimated cost for Wind (blue). This FiT was well calculated to make the investor obtain a 5-9% IRR.

Spain has become a leader in renewals thanks to FiT. The government support has been very strong and determined. The country started to use FiTs in 2000, and ten year later, the 35% of the total electrical generation is using renewals (2010). Spain has been successful implementing some FiTs, for instance in the case of wind, but has made huge mistakes in solar PV. The law ‘RD661/2007’ in 2007 was the most important piece of legislation because the most important FiT prices were determined. Prior prices were not enough for launching the market.

The key point of FiT is to determine the price of the premium. But that is difficult for a pioneer Government (and more in 2007 without other experiences) because a civil servant is not usually a solar PV developer, he does not know what are the real cost of solar modules, wires racking, etc. So the Government decided to ask the local solar PV generators associations to estimate the right price for the premium. Obviously, as much price, much profitable for the companies in the association, so they finally convinced the Government to fix a solar PV FiT that was 10 times higher than the average electrical price, and almost twice that the LCOE for Solar PV (at that time it was not so clear what was the real LCOE for PV, that, in fact, it has been strongly decreasing in the past five years). The business was so profitable (IRR above 20%) that it attracted investors from all over the world, and because it was pay by the Government, it was secured by the country bond with used to have an AAA rating, so practically at no risk.

The Government objective was 400MW of solar PV, but in only two years they got more than 3000MW. See Exhibit 2. Only the over cost of the solar PV FiT for the ratepayers is more than 2 billion of Euros every year, and considering all renewable technologies more than 6 billion. The reason why the Government did not realized before what was happening, it is because they relied on local administrations (similar to counties) for granting the permits for the solar facilities. Since local governments earned a lot with solar PV installations (jobs, taxes, votes), they did not informed the Central Government about the number of projects in the cue. In fact, they was not going to pay for the FiT, so they tried to host and grant permits for as many projects as they could.

Spanish Solar PV boom
Exhibit 2. Solar PV Objective (red) versus Solar PV actual development (blue).

Moreover, the Government decided not to increase the electrical rates, because the benefits of renewable should be paid not only for the current consumers but also by the future consumers, since renewals benefits are for different generations. So the electrical system generates every year a huge deficit that has the creative name of ‘rate deficit’, and which is accumulated as public debt (and accounted as more public debt for rating and country risk). Basically it is a debt from the ratepayers (aka citizens) to generation owners (generating companies). That debt was by the end of 2011 of more than 25 billions of Euros.

So, as the model was unsustainable, the Government finally decided, in January 2012, to cut off or suspend the FiT program, with a lot of complaints from investors and generators with projects on the way. So, since some of the causers of the over costs of the FiT model and the final breakdown of it were the own solar PV generators (trough the associations), they have been accused of killing the golden goose.

The renewable program has had additional benefits as 100,000 new employees, total contribution to GDP around 8 billion €, total exports: 3 billion €, reduction in 10,7Mtep in fuel imports (2 billion €) and savings over 370 million of € in CO2 emissions. Nevertheless the excessive cost finally collapsed the system. Now the renewable sector is accused of contributing to the tough situation of the Spanish economy. That is a good example as how careful has to be a Government when they decide the energy strategies and policies.

Meeting with Arkansas Governor Mike Beebe

We had the opportunity to met with the Arkansas Governor Mike Beebe during WindPower trade show. He was the opening speaker in the conferences and was so kind to meet with a Spanish delegation formed by CEOs of the top renewable companies and the Trade Commission of Spain. (Actually my friend Lenka from EDC and me have been working in this meeting for almost a year).

Meeting Arkansas Governor Mike Beebe and the Spanish delegation

The Governor explained to us the possibilities and opportunities of Arkansas for the foreign investment. It is a little State (no more than 3million of population) but very well located just in the middle of the the wind belt region. Despite they have not established a Renewable Portfolio Standard yet, they are working on it. The problem is that they want to make the renewable support cost-effective, which it sounds very difficult considering that Arkansas has a great reserves of Shale Gas which they are drilling now. Nevertheless they have some concerns about the explotation, since a curious fact that Mr Beebe told us, the biggest earthquake in US happened in AK, decades before the infamous disaster in San Francisco. It was not metered then but some historians have described that the waters of the Missippi river go back due to this earthquake.

From the side of the companies, Iberdrola, Acciona, Idom and Dragados were present. All of them showed its interest and appreciated the meeting.

Meeting Arkansas Governor Mike Beebe and the Spanish delegation

A monopsony is also a market failure: WalMart

Wal-Mart is one of the biggest companies in the world and the first one company in retail sales in the US. It is so big that it could be the 20th country comparing sales with GDP. So, the power and the influence of this company is measure in a world basis scale. Their sustainability policies are under discussion because it is not clear if they are really concerned about the problem or only they are washing its image with ‘green’ water.

WalMart monopsony is a market failure

Wal-Mart has been pointed as the responsible of many laid-offs of American workers because its suppliers have had to outsource their production overseas. The reason is because Wal-Mart squeezes the suppliers’ margins till insane levels.

From my point of view, it is a clear case of monopsony, which is a market form in which only one buyer (Wal-Mart) faces many sellers (suppliers). Probably is more a case of oligopsony, where few buyers faces many sellers, but the power of Wal-Mart is so big, that we can be considered a monopsony in many cases. (Remember that the rest of retail marketers are so far from Wal-Mart than it can push the price of many products in the wholesale market)

Monoposy is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only or majority purchaser of a good or service, the ‘monopsonist’ may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.

The figure below shows the effect of a monopsony in a market. The price and quantity of a competitive market are tagged as Pc and Qc respectively, being the cross between the suppliers curve (S) and the demand curve (blue). Without entering in more theoretical details, the monopsonist can force the market to move according its Average Expenditure curve (Ae). Doing that, they reduce the amount of product that they buy (Qm) but, most important, they can shrink the price to Pm. The result is that they win the green area in terms of savings however they lose the red area because they buy less, but it is not a problem since red area is smaller than the green one. The suppliers lose the blue area because the sell cheaper and less quantity than the optimum. The general result is a social loss of the red and blue areas, marked with stripes. The social loss means that the society, as a whole, is away from the optimum, so it is losing welfare due to the greedy action of the buyer.

Monopsony is a market failure
Monopsony is a market failure

In the real world, this social loss is the unemployment generated by the bankruptcy of many US companies that Wal-Mart is causing. Obviously, Wal-Mart knows that, and I think they are trying to use some of the extra income they obtain with the monopsony to wash its public image with sustainability strategies, in many cases, impossible to satisfy. (For example 100% consumption from renewable, it sounds pretty ambitious in a country where the 45% of the electricity comes from coal)

Due to Wal-Mart is pushing continuously the suppliers to reduce their prices; many of them have to outsource the production to other countries, as China or India. That is not bad by itself. In fact, it is really good from an ideal framework. David Ricardo, a world famous economist, demonstrated in the XIX century that the international trade is always beneficial for both countries, since each one specializes in the products it makes better. This is called the Comparative Advantage theory. In this case, it is clear that all Americans have taken advantage of low prices that Wal-Mart offers. The inflation has maintained low thanks in part, to the big retailer strategy. That is ok in an ideal world, but the problem is that these low prices in China are not caused they are better manufacturing products, it is because they generate enormous externalities that are not reflected in the price: pollution, unfair labor conditions, etc.

So, at the end, the fail in the wholesale market is creating a social loss that compromise the long term for wining in the short term. That is the opposite definition of sustainability. Wal-Mart has not much to say or to do in sustainability without solving its ‘little’ problem with competition before.

That is market failure, and as well as the monopolies, should be regulated. The cases of monopsony are not so well-known by regulators as monopolies, but there are Acts against them. The famous Sherman Antitrust Act (1890) says in the Section 2 ‘Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony’. The subsequent Clayton Act (1914) declares illegal: sales on the condition that the buyer or lessee not deal with the competitors of the seller or lessor or the buyer also purchase another different product but only when these acts substantially lessen competition (Act Section 3, codified at 15 U.S.C. § 14).

So the problem is known and the laws are already prepared to deal with this, so why is not being solved yet? It might be because the money that Wal-Mart uses doing lobby. According to www.opensecrets.org,  in the last four year they have expended more than 25 millions of dollars in lobbying.


To sum up, I think that in the case of Wal-Mart we are not facing a problem of believing or not in the good promises of a big company about sustainability, we are facing a market failure, that it will not be solved only with some unhappy customers quitting from Wal-Mart, and launching a sustainable strategy to become ‘the most competitive and innovative company in the world’.

Campo base 40.805

Vamos a verlo por el lado positivo y lógico. Esta claro que no podíamos seguir ascendiendo, la falta de fans (demanda) y los altos costes de la expedición y las deudas contraídas nos estaban ahogando (déficit tarifario). Ahora, encima, otros métodos de escalada tradicionales y más baratos se estaban imponiendo (gas natural).

Pero valoremos donde hemos llegado: a 40805 MW de generación renovable. Un buen campo base para esperar unos años (tres según la CNE) y seguir progresando. Está claro que hemos llegado más lejos que otros paises, pero subir tan rápido nos ha dado mal de altura. La cima de las renovables nos espera, y a no mucha distancia.

Ver mas info

Evolución de la potencia instalada renovable
Evolución de la potencia instalada renovable

Vuelvo a Arizona…

La pasada semana tuve la oportunidad de conocer como un VIP una de las ciudades que más está creciendo en los EEUU, Phoenix.

Ya estuve allí el año pasado con un viaje oficial, pero esta vez la gente de GPEC nos invitó a ‘verlo a lo grande’. Y cuando digo a lo grande es que porque nos subieron a un helicóptero para que nos diéramos cuenta de lo inmensa que es la ciudad. Estuvimos más de una hora circundandola y no llegamos a abarcarla toda.

El desarrollo urbanístico peca por todos lados de insostenible, barrios y barrios residenciales, de casas unifamiliares tipo american dream: front yard, casaza de 4 o 5 habitaciones de un piso y backyard con piscina exclusiva. Multiplica eso por millones y el sumatorio es Phoenix.

Aun así se jactan de no tener ni con mucho el tráfico de LA… esperar unos años creciendo a tasas del 6% como estais haciendo y podreis decir que el hombre tropieza dos veces (y muchas más) con la misma piedra.

Curioso es también las zonas que son reservas indias, y donde este desarrollo viral no ha podido entrar…

Como una frontera, a la izquierda american-dream barrios, a la derecha desierto indio (con algun casino dentro). Y no es photoshop¡

También fue interesante el evento en Sky Song de la universidad de Arizona, donde pude comentar mis impresiones junto con compañeros de otras Oficinas Comerciales.

David Gomez at International Forum (Phoenix) ArizonaEnhorabuena por el crecimiento de la región, en estos días tristes de pesimismo económico es de agradecer un rayo de sol en el desierto de Arizona… pero por favor, estáis a tiempo de hacerlo sostenible.

Shale Gas: The Black Revolution


In the last 40 years, important changes were occurred in the traditional scenario of the energy sources. First, the crisis of petroleum in 1973 was the first warning about the problems of fossil fuels. More closely, the important economic development prior to 2008 pushed the markets of energy resources due to the growing demand. With traditional sources of energy as oil, gas and coal raising prices, alternatives sources which were unprofitable before, started to seem more attractive. Also, the dependency of the developed countries on the resources of foreign countries, many of them not very trustable, converted the issue in terms of national security.

Among these alternative sources, renewables, especially wind and solar, have been the main character of the play. Not absolutely new, since they had a little bright in the 80’s, now they have experienced a very strong development worldwide. A new industry has been created only five years ago. The benefits of the renewables are tremendously obvious. They do not consume fuels susceptible to expire to get energy from nature, and they almost do not affect the environment, do not pumping CO2 or other gases into the atmosphere or compromise any region with nuclear risks. On the other hand, these technologies are still not cheap enough to compete with the conventional sources. The price of energy is a key variable in the economic growth and any country try to keep it low for achieving more competitiveness and more economic expansion.

But these efforts in finding alternatives to traditional sources, also has applied to investigation in fossil fuels. Since the end of the 19th century, it is known that there are fuels buried into the ground which are not in the conventional geologic formations. These fuels are in structures which permeability is very poor to make the normal drilling process profitable. They are called non-conventional fossil fuels. Many research resources have been expended in investigating new techniques or technologies to get these fuels from earth in a profitable way. Now, it seems that it has been achieved.

These difficult geologic formations, which until very recent years were unprofitable, have different names as shales, tights or sands. From them, currently gas natural and oil are being obtained, and because of its origin, they receive the nickname of shale gas, tight gas or shale oil. At present, the most important one is the Shale Gas, because there are huge reserves of natural gas in shales and because this last 5 years the production of Shale Gas has shooted up. The raise of these new sources of fossil fuels is being named for some people as, ‘The Black Revolution’.

In this paper, it is going to analyze why the Shale Gas is so important in the new era of energy, what are the important environmental and social issues of its production and what can we expect in the evolution of the energy mix in the US and worldwide.

What is the Shale Gas?

As it has been introduced, Shale Gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich sources of petroleum and natural gas and whose porosity and structure does not permit to get the fuels with the traditional ways.

The advent of large-scale Shale Gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep Shale Gas production a commercial reality in the Barnett Shale in North-Central Texas. They used a combination of techniques invented for other purposes, the horizontal drilling in conjunction with hydraulic fracturing.

 Extraccion del Shale Gas

As it can be viewed in the figure, natural gas is incorporated into the Shale Gas formation, not is in a bag as conventional gas. Moreover, shales are ordered in horizontal layers. Conventional drilling is totally useless in these formations. The new drilling technique consists of:

  1. A vertical well is drilled
  2. The drill turns to continue horizontally. In this manner, the horizontal drilling permits to make a hole along the shale
  3. Water, lots of chemicals and sand are pumped into the well to unlock the hydrocarbons trapped in shale formations by opening cracks (fractures) in the rock and allowing natural gas to flow from the shale into the well.

As the success of Mitchell Energy and Development became apparent, other companies aggressively entered the play, so that by 2005, the Barnett Shale alone was producing nearly 0.5 trillion cubic feet of natural gas per year. As producers gained confidence in the ability to produce natural gas profitably in the Barnett Shale, with confirmation provided by results from the Fayetteville Shale in Arkansas, they began pursuing other shale plays, including Haynesville, Marcellus, Woodford, Eagle Ford, and others.

Economic vitality

Although Shale Gas production started ten years ago, only in the past 5 years has been recognized as a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased dry shale gas production in the United States from 1.0 trillion cubic feet in 2006 to 4.8 trillion cubic feet, or 23 percent of total U.S. dry natural gas production, in 2010. Wet shale gas reserves increased to about 60.64 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971. Oil production from shale plays, notably the Bakken Shale in North Dakota and Montana, has also grown rapidly in recent years.

Something is considered as a ‘game changer’ if it has the ability to change the price of good. That has happened in the case of the Shale Gas.

As you can see in the figure on the left, due to the more offer of gas natural in the market, and also the contraction of the demand, the price of natural gas has dramatically fallen down between 2005 and 2010. Moreover, the projection shows that thanks to the influence of the Shale Gas, the evolution of the prices (blue line) will be below the prior projections which did not considered the new gas. That has huge implications in energy markets. For example, less natural gas prices imply less electricity prices and more difficulties to renewables to achieve grid parity.

To better understand the importance of this new source of gas, let compare it with the actual figures of the natural gas market in the US. Of the total natural gas consumed in the United States in 2009, 87% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil (only 51% domestic), and the delivery system is less subject to interruption. The availability of large quantities of Shale Gas will further allow the United States to consume a predominantly domestic supply of gas.

According to the EIA Annual Energy Outlook 2011, the United States possesses 2,543 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 862 Tcf of this resource estimate, more than double the estimate published last year. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,543 Tcf of natural gas is enough to supply over 100 years of use. Shale Gas resource and production estimates increased significantly between the 2010 and 2011 Outlook reports and are likely to increase further in the future. The Shale Gas represents about 37 years of supply considering the US consumption of 2009.

Reservas de Shale Gas de EEUU

The US plays of Shale Gas are spread around the country but there are some formation especially important located in Barnett shale (Texas), Bakken Shale (North Dakota and Montana), and the most important is Marcellus Shale (Pensilvania, New York and others).

The Shale Gas is being extracted in rural zones, and that is causing important changes in these villages. There are some important environmental implications, due to the extraction of Shale Gas is not perfect and can affect aquifers. Moreover, the social equity in the villages is changing since the owners of the lands where the gas is extracted are earning much money for royalties they had imagined feeding cows and growing plants.

Ecological Health

Local effects

The extraction of Shale Gas is not as simple as it was presented above. As many industrial activities, important bad externalities are generated. The amounts of water and chemicals pumped for the hydraulic fracturing are huge. Drilling a typical deep shale natural gas and oil well requires between 65,000 and 600,000 gallons of water. Not only the consumption of tons of water is something to be considered from an environmental position, also the composition of the chemicals is important. The problem is that the actual composition has not been revealed because is considered an industrial secret. About a 2% of the mixture is chemicals. They are crucial for the Shale Gas extraction and include acids, anti-bacterial agents, breakers, clay stabilizers, corrosion inhibitor, crosslinker, friction reducers, gelling agents, iron controls, pH adjusting agents, and scale inhibitors, between others.

The huge amount waste water of the process, full of chemicals, sand and muddy has to be treated. Analysis performed to this waste water shows that it contains some components that are carcinogenic and even nuclear radioactive. The treatment of this water is done in the States with the more lax regulation. Many of them do not have equipment to remove these chemicals out of the water, which is pumped in rivers. Nobody knows what will be the effects of these chemicals in the environment in a long term, because this new type of extraction is almost new.

But maybe, this is not the worst problem. When the drill punches the land, in many cases, some of the layers crossed are aquifers. In some places of Pennsylvania and other States, the tap water has been contaminated by the waste water and even by the gas. The problem was shown in the documentary ‘Gasland’ by Josh Fox, where it is possible to see incredible images of taps running with flammable water. Also, it presents some cases of people living near the drills with terrible and strange diseases, animals dead, bad water contamination and other health issues. A ‘silent law’ seems to be happening because many people of these farms are earning lots of money with the royalties of the gas and also they have disclosure contracts with the drilling companies.

As named above, the Shale Gas production started in Texas ten years ago. I had the opportunity to speak in October 2010 with Keith Sheedy, Chief Engineer’s Office from the Texas Commission on Environmental Quality. He basically explained that in Texas, no water contamination have occurred in this ten years of commercial exploitation. The cases of Pennsylvania are due to bad practises in the drilling process. When the hole is not properly cemented, then some of the gas running through the hole can pass to aquifers and contaminate the tap water.

Anyway, drilling has been doing for decades in similar industries, so regulations should have existed about water uses and disposal, but why is not the Shale Gas drilling regulated by environmental rules as the rest of industrial activity? Because, The Congress, pushed by Vice President Dick Cheney, exempted gas drilling from EPA Clean Water Act regulations in 2005. It is something curious that Cheney was former CEO of the Halliburton Company, one of the biggest driller and Shale Gas extractor in the US. After 2005, Shale Gas drilling boomed.

There are other collateral effects in Shale Gas extraction. Fracturing is changing the structure of the geologic formations. In the drilling zones some earthquakes has been occurred in recent years, and the seismic activity is above the average. In addition, the great amount of water used, generates large truck traffic to this normally quiet populations.

Global effects

The global effects of the boom of Shale Gas are similar to the rest of fossil fuels usage. As fossil fuel, CO2 are generated in its combustion. The CO2 is a greenhouse gas that contributes to the global warming, which diverse effects in the environment. Even, during the Shale Gas extraction, many other greenhouse gases, more powerful, as CH4, are liberated due to bad practises in the drills and the lack of regulation.

Moreover, it is an exhaustible fuel. That means that there will be a day when there will not be more.

The usage of fossil fuels generates strong externalities for the rest of the world, and they are not incorporated in the cost of its use. As indirect effect, the boom of the natural gas or the reduction of its price is bad for renewable energy because is a substitutive product. As lower is the price of fossil fuel generation, more difficult is for renewables to achieve grid parity and be competitive by their own.

At the end, the more usage of natural gas, despite is greener as other fossil fuels as coal or oil, address our world to a very tough scenario, with a society dependant of scarce fuels and an earth that had suffered non-return changes in its ecosystem.

Social Equity

In the past five years, many drills have been done. In the next figure it is possible to see the evolution of the Shale Gas drills (red spots) in the Barnett shale during the last decade.


The economic benefits for the owners of the land have been important. Signing its gas lease about $1,000 per acre and a royalties of 12.5% for the gas produced, can make them to earn between $1,500 and more than $500,000 per year during the term of the extraction, which can last some years. This is much money for people used to feeding cows and growing plants for fringe benefits.

This disparity of earnings is generating some social equity problems within farmers but more between ‘county folk and city people’. The city people are not earning anything with the drilling but they suffer the problems of water contamination, truck traffic and risks from the unknown effects of the activity. They are against drilling but farmers, in general, are in favor of it. Disputes are increasing in these, up to now, calm and little populations.

A good impact of the drilling activity is the job creation. According to a recent study by Pennsylvania State University, the industry has created 23,000 jobs, including employment for roustabouts, construction workers, helicopter pilots, sign makers, Laundromat workers, electricians, caterers, chambermaids, office workers, water haulers and land surveyors.

Another controversial topic is the unequal tax policies to the drilling activity. Currently, companies operating in Pennsylvania pay no tax to extract gas. (Governor Tom Corbett reportedly received at least $1 million in campaign donations from gas interests). Corbett recently introduced legislation that would levy fees that critics say would amount to a tax of 1% per well on gas extraction, significantly lower than Arkansas (3.45%) and Texas (5.4%). It is not very fair to tax differently the activity between States, since the basins extends along vast territories of different States and the problems of the activity are affecting people in the same way.

Conclusions: my personal vision

An important change in the energy world is happening. The important economic implications of the availability of domestic natural gas are something to be considered for any country. The US has been the first country to exploit the benefits of the Shale Gas, but it is expanding through the world. You can see in the next figure the worldwide reserves.


The new distribution of the sources of energy changes the game of power. No dependency from Middle East could be a fact that changes the course of international policy.

Apart of the good benefits from the economic point of view, there are other aspects in the sustainability analysis that have to be considered. The local effects on the environment are not trivial. Public health and environment ecosystem is endangered. Nobody knows what will be the effects of the chemicals used for extraction in the long term but, my impression is that many companies are working as fast as they can to get the maximum amount of gas before the effects will be public. Responsibility from the Government must be priority to avoid this, but as another market failure, the current democracy system permits the regulator be supported by the companies which he has to regulate.

At a local scale, the social problems of inequity will convert stronger in future years. Ronald Coase, a famous economist, states that if trade in an externality is possible and there are no transactions costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, this bargaining is not happening and that will push unfortunate people to fight for its rights.

From a global sustainability point of view, the raise of the fossil fuels has huge impact on the world. If the fossil fuels come to be cheap again, the efforts in renewables will stop and we will experience something similar to the 80’s, when the first renewable plants were built and no more were set up until 20 years later. At the end, it is to delay the inevitable, but in a worse scenario. We will have a warmer earth, more population and more bubble, because we have been growing with more energy than we can produce in our present time.

In a more practical way, the implications for the US energy mix or the electricity energy mix are obvious. The current 45% of coal will be substitute by gas, cleaner and not much more expensive now. If you see the predictions of new electrical capacity added from EIA, you can figure out:


 After knowing more about the Shale Gas, I understand better the words by President Obama during the State of the Union discuss in 2011, when he claims for a new goal for America’s energy future, saying 80 percent of electricity should come from clean energy sources by 2035. He considers clean, among others, wind, solar, nuclear and natural gas. 



Energy Information Administration (EIA): www.eia.gov

Josh Fox, Gasland, the movie: www.gaslandthemovie.com

The Economist, ‘We will frack you’ November 22, 2011: www.economist.com

Chesapeake, Hydraulic Fracturing Facts: www.hydraulicfracturing.com

New York Times, ‘The Fracturing of Pennsylvania’ November 17, 2011: www.nytimes.com