Showing posts with label energy. Show all posts
Showing posts with label energy. Show all posts

Tuesday, July 19, 2011

Is Fiscal Policy Procyclical in Developing Oil-Producing Countries?

A new IMF working paper by Nese Erbil "examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures - government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group."

Excerpts (notes excluded):
Both the neoclassical and Keynesian theories support the idea that effective fiscal policy should smooth the volatility of output during the business cycle. Barro’s (1973) ―tax-smoothing‖ hypothesis of optimal fiscal policy suggests that, for a given path of government expenditure, tax rates should be held constant over the business cycle, and the budget surplus should move in a procyclical fashion. According to the Keynesian approach, however, if the economy is in recession, policy should increase government expenditure and lower taxes to help the economy out of the recession. During economic booms, the government should save the surpluses that emerge from the operation of automatic stabilizers and, if necessary, go further with discretionary tax increases or spending cuts. As a result, fiscal policies are expected to follow countercyclical patterns through automatic stabilizers and discretionary channels. In other words, one would expect a positive correlation between changes in output and changes in the fiscal balance or a negative correlation between changes in output and changes in government expenditure.

However, empirical studies show that fiscal policies are procyclical in developing countries and in OPCs.5 They increase spending with an increase in oil revenue during an oil price boom. They are forced to reduce spending because of a revenue decline as a result of a drop in oil prices. Since, in general, these countries are not able to accumulate savings in years with high oil revenues, they can only finance deficits by cutting expenditure during revenue shortfalls. Fouad and others (2007), Abdih and others (2010), and Villafuerte and Lopez-Murphy (2010) find that oil-producing countries followed procyclical fiscal policies during the recent oil price cycle. Baldini (2005) and De Cima (2003) also present evidence for the procyclicality of fiscal policies in two oil-producing countries, Venezuela and Mexico. More recent studies, e.g. Ilzetzki and Vegh (2008), find, using instrumental variable regression, strong evidence of procyclical fiscal policy in developing countries.

Two broad arguments that have been proposed as an explanation for procyclical policies in developing counties also apply to OPCs: constraints on financing (or limited access to credit markets) and factors related to the structure of the economy ( the budget, political, power, and social structure, and weak institutions). In general, these factors are presented separately but they go together and are likely to reinforce each other. For example, weak institutions, the budget structure, or a corrupt government may hinder prudent fiscal policies, which may, in turn, affect fiscal sustainability and creditworthiness by amplifying the financing constraints.

Liquidity and borrowing constraints emerge when a developing country needs financing the most--during a downturn--and that is when it is least likely to be able to obtain it. Many countries do not have significant foreign assets or developed domestic financial markets to raise funds. When these countries face large terms of trade shocks (i.e., a sharp fall in oil prices in the case of OPCs), investors may lose confidence and be less likely to lend, because they fear that the lack of policy credibility and discipline may force the government to run up large budget deficits and to default.6 Governments in this situation will also experience recurring credit constraints in world capital markets (―sudden stops,‖ as explained in Calvo and Reinhart (2000)), which hamper their ability to conduct countercyclical policies.

Oil stabilization funds have been increasingly used by OPCs as an instrument to cope with oil revenue volatility. These funds are aimed at stabilizing budgetary revenues: when oil revenues are high, some portion of the revenue would be channeled to the stabilization fund; when oil revenues are low, the stabilization fund would finance the shortfall. However, the creation of such funds is found to have no impact on the relationship between oil export earnings and government expenditure in countries where no sound and transparent fiscal and macroeconomic policies were implemented.7 Moreover, some oil funds have operated outside existing budget systems and are often accountable to only a few political appointees. This makes such funds especially susceptible to abuse and political interference. Therefore, stabilization funds should not be regarded as a substitute for sound fiscal management.

The other argument proposed to explain the difficulty in implementing countercyclical policy focuses on procyclical government spending due to three aspects of the economy and the government: the budget structure, the weak political structure and institutions, and corruption in government.

First, developing countries run procyclical fiscal policies because of their budget structure. These countries have a few automatic stabilizers built into their budgets. As a result, government spending in developing and emerging countries displays less of a countercyclical pattern than in industrial countries. For example, Gavin and Perotti (1997) note that Latin American countries spend much less on transfers and subsidies than do richer OECD economies (24 percent of total government spending, compared with 42 percent in the industrial countries). Furthermore, most developing countries and OPCs cannot raise revenue effectively through taxes since they usually suffer from inefficient tax collection systems, owing to the low level of compliance with tax laws, insufficient political commitment, and a lack of capacity, expertise, and resources.8 Additionally, non-oil tax bases in these countries are in general very low.9

Second, weak institutions and political structure encourage multiple powerful groups in a society to attempt to grab a greater share of national wealth by demanding higher public spending on their behalf. This behavior, called the ―voracity effect‖ by Tornell and Lane (1999), results in fiscal procyclicality arising from common pool problems, whereby a positive shock to income leads to a more than proportional increase in public spending, even if the shock is expected to be temporary. This is discussed extensively in ―resource curse‖ literature as a reason for low economic growth in resource-rich countries.10 Moreover, fiscal policies are more intense in countries with political systems having multiple fiscal veto points and higher output volatility (Stein, Talvi, and Grisanti, 1998;and Talvi and Végh, 2000). Similarly, Lane (2003) and Fatas and Mihov (2001) find that countries with power dispersion are likely to experience volatile output and procyclical fiscal behavior.

Lastly, Alesina and Tabellini (2005) argue that a more corrupt government displays more procyclical fiscal policies as voters, who do not trust the government, demand higher utility when they see aggregate output rising. This behavior would be more prevalent in democracies since a corrupt government is accountable to the voters, whereas, in a dictatorship, the government would not be accountable and, even if corruption were widespread, voters could not influence fiscal policy. Alesina and Tabellini conclude that corrupt governments in democracies, rather than credit market imperfections, are the underlying cause of procyclical fiscal policy.


[...]


The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

Despite their many differences, all the OPCs face volatile and unpredictable oil revenues, a situation that makes fiscal management challenging. For this reason, it is imperative for them to formulate effective countercyclical fiscal policies by which they can smooth government expenditure, decouple it from the volatile oil revenues, and prevent boom-and-bust cycles. Breaking away from a procyclical fiscal policy will enable them to sustain long-term growth and keep the safety net that the poor need. Sound fiscal policies and discipline require strong institutions, a higher-level bureaucracy, and more transparency. Strong institutions and transparency would also help reduce the ―voracity effect,‖ which, in turn, would facilitate the accumulation of financial assets and build up confidence among investors to raise funds when needed.

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Sunday, July 17, 2011

IMF working paper: Iran — The Chronicles of the Subsidy Reform

A recent IMF Working Paper by staff of the Middle East and Central Asia Department, "Iran — The Chronicles of the Subsidy Reform," [1] analyses the December 2010 changes in subsidies of domestic energy and agricultural prices, which increased about 20 times, making it the first major oil-exporting country to reduce substantially implicit energy subsidies.

Their paper reviews the economic and technical issues involved in the planning and early implementation of the reform, including the transfers to households and the public relations campaign that were critical to the success of the reform. It also looks at the reform from a chronological standpoint, in particular in the final phases of the preparation. The paper concludes by an overview of the main challenges for the second phase of the reform.

Buy a print copy at http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2011167 or request a PDF version from us for free.

Excerpts:

On Saturday, December 18, 2010, at 9:00 p.m. Tehran time, speaking in a televised “conversation with the nation”, President Ahmadinejad announced the start of what he termed the most sweeping economic “surgery” in Iran’s modern history. Just after midnight on December 19, Iranian media began releasing announcements detailing the new price structure for liquid fuels. Within twenty-four hours, new natural gas, electricity, and water tariffs were published, and allowable ceilings for the increase in taxi and public transport tariffs followed. At the time, close to 80 percent of Iran’s population was granted unrestricted access to compensatory payments that had been deposited in specially-created bank accounts starting in October 2010.

The reform, officially referred to as Targeted Subsidies Reform, made Iran the first major energy producing and exporting country to cut drastically massive indirect subsidies to energy products and replace them with across the board energy dividend transfers to the population. It is estimated that the price increases removed close to US$50–US$60 billion dollars in annual product subsidies. By December 2011, in the first 12 months following the price increase, Iranian households will have received at least US$30 billion in freely usable cash, and another $10–$15 billion will have been advanced to enterprises to finance investment in restructuring aimed at reducing energy intensity.

[...]

Although oil and gas production has accounted for an increasingly smaller share of real GDP, oil and gas revenues remain the main source of foreign exchange earnings and fiscal revenues. The share of oil in real GDP fell from an average of 40 percent of real GDP in the 1960s to about 10½ percent in the last decade, reflecting average annual non-oil GDP growth rate of 5.7 percent compared to only 4.4 percent for oil and gas GDP. Oil and gas receipts accounted for about 72 percent of export revenues in the last decade, despite rapid non-oil export growth.  Oil and gas revenues also account for 65 percent of fiscal revenues, and are likely to remain the main source of financing for development projects in the foreseeable future notwithstanding recent efforts to diversify fiscal revenues.

Iran’s high dependence on oil export revenues has had a profound impact on its business cycle. In the most recent business cycle during 2002-2008, fiscal spending and credit growth increased at the same time as export revenues and oil prices, resulting in an overheating of the economy and a surge in inflation. The subsequent tighter monetary and fiscal policies coincided with the sharp fall in oil exports caused by the international recession of 2008-2009. As a result, inflation and output declined sharply.

Domestic energy prices have historically been set administratively in Iran, as in the majority of oil exporting countries. They were set at a level high enough to cover production costs and have been changed only occasionally. This worked well when international oil prices were relatively stable and low, and close to production costs. However, when international prices began to rise after 2002, low domestic energy prices became increasingly out of line with the market value of oil. In addition, high domestic rates of inflation and subsequent exchange rate depreciations contributed to further erode domestic energy prices vis-à-vis their international benchmarks. The March 2002 unification of exchange rates and the resulting rial depreciation also accentuated a growing disparity between domestic and international energy prices.

Increasingly cheaper energy stimulated demand, making Iran the country with the highest level of energy subsidy. Not surprisingly, domestic energy use and energy intensity in Iran, as in many other energy producing countries, increased rapidly. Cheap domestic energy prices led to a rapid increase in domestic energy consumption. As a result, Iran became one of the most energy-intensive economies in the world. The high domestic absorption of crude oil distillates, natural gas, and electricity reduced the availability of these energy products for the export market. Iranian oil energy companies were also increasingly starved of funds needed for investment since domestic energy prices were set at barely cost recovery levels. Environmental pollution and its impact on human health, as well as the time lost due to traffic congestion on Iranian roads provided additional urgency for the reform. Not surprisingly, by 2007 some analysts started questioning not only Iran’s plans to increase its oil production capacity, but also its ability to stop a decline in oil production and exports.


[...]

The Iranian authorities were clear from the outset that the main reform objective was to reduce waste and rationalize consumption. By compensating households for the energy price increases, most consumers would be better off because the higher energy price would discourage some marginal gasoline consumption, while the cash compensation would allow consumers to buy more other goods and services.

[...]

The reform would also improve social equity in the distribution of Iran’s hydrocarbon wealth. For the poor who benefited little for cheap domestic energy price, the compensation would represent a large share of their income, lifting virtually every Iranian out of poverty.  This gave the government a powerful public relations and moral argument in support of the reform.

The likely large substitution effect triggered by large price increases could provide a significant stimulus to Iran’s domestic production and further diversification efforts, particularly given the slow growth in recent years, and relatively high, double-digit unemployment. The distribution of about $30 billion in annual compensatory payments directly to the population would support domestic demand and nonenergy sector growth.  The reform was not expected to contribute to fiscal consolidation. The reform legislation, and the political debate that preceded it, ruled out using the reduction of energy subsidies to improve the country’s fiscal balance. To the contrary, Iranian reforms, including the privatization program launched in 2006, aimed at reducing the size and the role of the public sector in the economy. However, potential large savings in domestic energy use could make significant quantities of crude oil and refined products available for exports (Box 2). The revenue from such exports could support a virtuous cycle of investment in the energy sector that would add production and refining capacity and further increase exports.


References

[1]  Dominique Guillaume, Roman Zytek, and Mohammad Reza Farzin: Iran — The Chronicles of the Subsidy Reform. July 2011.

Sunday, January 23, 2011

Four of every 10 rows of U.S. corn now go for fuel, not food



Please see commentary at TradeFlow21.com


Amber Waves of Ethanol. WSJ Editorial
Four of every 10 rows of U.S. corn now go for fuel, not food.
WSJ, Jan 22, 2011
http://online.wsj.com/article/SB10001424052748703396604576088010481315914.html

The global economy is getting back on its feet, but so too is an old enemy: food inflation. The United Nations benchmark index hit a record high last month, raising fears of shortages and higher prices that will hit poor countries hardest. So why is the United States, one of the world's biggest agricultural exporters, devoting more and more of its corn crop to . . . ethanol?

The nearby chart, based on data from the Department of Agriculture, shows the remarkable trend over a decade. In 2001, only 7% of U.S. corn went for ethanol, or about 707 million bushels. By 2010, the ethanol share was 39.4%, or nearly five billion bushels out of total U.S. production of 12.45 billion bushels. Four of every 10 rows of corn now go to produce fuel for American cars or trucks, not food or feed.

This trend is the deliberate result of policies designed to subsidize ethanol. Note the surge in the middle of the last decade when Congress began to legislate renewable fuel mandates and many states banned MTBE, which had competed with ethanol but ran afoul of the green and corn lobbies.

This carve out of nearly half of the U.S. corn corp to fuel is increasing even as global food supply is struggling to meet rising demand. U.S. farmers account for about 39% of global corn production and about 16% of that crop is exported, so U.S. corn stocks can influence the world price. Chicago Board of Trade corn March futures recently hit 30-month highs of $6.67 a bushel, up from $4 a bushel a year ago.

Demand from developing nations like China is also playing a role in rising prices, and in our view so is the loose monetary policy of the U.S. Federal Reserve that has increased the price of nearly all commodities traded in dollars.

But reduced corn food supply undoubtedly matters. About 40% of U.S. corn production is used to produce feed for animals. As corn prices rise, beef, poultry and other prices rise, too. The price squeeze has already contributed to the bankruptcy of companies like Texas-based Pilgrim's Pride Corp. and Delaware-based poultry maker Townsends Inc. over the past few years.

This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals. Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. But Cornell University scientist David Pimentel calculates that if the entire U.S. corn crop were devoted to ethanol production, it would satisfy only 4% of U.S. oil consumption.

The Environmental Protection Agency has found that ethanol production has a minimal to negative impact on the environment. Even Al Gore, once an ethanol evangelist, now says his support had more to do with Presidential politics in Iowa and admits the fuel provides little or no environmental gain.

Not that this has changed the politics of ethanol. When consumers didn't buy enough gas last year to meet previous ethanol mandates, the Obama Administration lifted the cap on how much ethanol may be mixed into gasoline to 15% from 10%. Presto! More ethanol "demand." On Friday the EPA greatly expanded the number of cars approved to use the 15% blend. Last month, Congressmen whose constituents benefit from this largesse tucked into the tax bill an extension of the $5 billion tax credit for blending ethanol into gasoline.

At a time when the world will need more corn and grains, it makes no sense to devote scarce farmland to make a fuel that exists only because of taxpayer subsidies and mandates. If food supplies tighten and prices keep rising, such a policy will soon become immoral.

Monday, June 14, 2010

Jordan's Nuclear Ambitions Pose Quandary for the U.S.

Jordan's Nuclear Ambitions Pose Quandary for the U.S. By Jay Solomon
WSJ, Jun 14, 2010

SAWAQA, Jordan—The Kingdom of Jordan is in a sprint to become the Arab world's next nuclear power. And America wants to help it succeed.

King Abdullah II says he wants to reduce Jordan's dependence on energy imports by developing nuclear energy.

U.S. and Jordanian officials are negotiating a nuclear-cooperation agreement that would allow American firms to export nuclear components and know-how to the Mideast country, America's closest Arab ally in the volatile region.

The Obama administration views Jordan as a key potential partner in its global program to promote the nonmilitary use of atomic energy—part of a broader plan to increase pressure on other Middle East countries, particularly Iran and Syria, to bring transparency to their own nuclear programs.

"I believe nuclear energy in Jordan will be done in such a way where it is a public-private partnership so everyone can see exactly what's going on," Jordan's King Abdullah II said in an interview. "If we can be the model of transparency, it will push others."

But it's a partnership that puts the Obama administration in a bind: It is trying to make good on its pledge to promote greater civilian use of atomic energy, without angering Israel and risking a Mideast arms race.

The deal has catches for the Jordanians, too: The U.S. is demanding that Amman not produce its own nuclear fuel. That's a right Jordan enjoys as a signatory to the United Nations key nonproliferation treaty—and is reluctant to surrender, thanks to its recent discoveries of big deposits of uranium ore.

The U.S. last week pushed through the United Nations a fourth round of economic sanctions against Iran in a bid to curtail its advancing nuclear work. Tehran says its program is purely for civilian purposes, a charge challenged by the U.N. and the West. U.S. officials worry the Arab states, fearing the Iranian threat, could one day seek to develop atomic weapons themselves.

Senior Jordanian officials say Amman can't renounce its right to produce nuclear fuel under the Nuclear Nonproliferation Treaty, both for strategic and economic reasons. They say that if Jordan cuts a side agreement with the U.S. on this point it would undermine the integrity of the treaty. They also say such an agreement would limit Jordan's ambition to become a "regional nuclear fuel supply and export center."

Failure to reach consensus on this point, U.S. and Jordanian officials acknowledge, could kill the cooperation deal.

"We believe in the universality of the NPT," said Khaled Toukan, the head of the Jordan Atomic Energy Commission. "We do not agree on applying conditions and restrictions outside of the NPT on a regional basis or a country-by-country basis."

[Known recoverable resources of uranium, 2008, in thousands or metric tons  http://sg.wsj.net/public/resources/images/P1-AV716_ARABNU_NS_20100613184437.gif]

Jordan is among a slew of Arab countries, including Egypt, the United Arab Emirates and Bahrain, that are seeking to become among the first Mideast countries to develop a civilian nuclear-power industry. Israel is the lone country in the region believed to possess atomic weapons, but it hasn't moved to build nuclear power plants.

Jordan's nuclear ambitions are driven by economics. Wedged between Israel and oil giants Saudi Arabia and Iraq, the kingdom is 95% dependent on imported oil and has among the world's smallest reserves of potable water.

But the discovery of at least 65,000 tons of uranium ore in the deserts outside Amman in 2007 has led King Abdullah to order a drastic reshaping of his nation's economic strategy.

French and Chinese geologists are combing southern, central and eastern Jordan in search of additional uranium deposits. In addition to fueling its own plants, Jordan hopes to use its projected four nuclear power plants to begin exporting electricity to neighbors including Iraq and Syria by 2030 and to commercially mine and export uranium. Even if it doesn't process any nuclear fuel itself, Jordan could still produce and export electricity by buying the fuel for its reactors on the international market.

"Now that we have a raw material, people are coming for the first time in our history and knocking on our door," King Abdullah said in the interview.

U.S. officials say they recognize Jordan's desire to achieve energy independence. They praise Jordan's early outreach to the U.N.'s nuclear watchdog, the International Atomic Energy Agency, and Amman's willingness to allow international inspectors unhindered access to its growing nuclear infrastructure.

But U.S. negotiators are unwavering in their insistence that Amman commit to purchasing its reactor fuel from the international market to guard against its potential internal diversion for military purposes. Iran's insistence on producing its own nuclear fuel stands at the center of its current conflict with the West.

U.S. officials argue if Jordan doesn't surrender its rights to produce fuel, it raises proliferation risks. Countries with the complete nuclear fuel cycle—from mining uranium to processing it into fuel—can convert their civilian plants for military applications. Under terms of the U.S. agreement, Jordan could mine the ore but not convert it into fuel for nuclear power.

Such fears could hamstring Washington's ability to win necessary Congressional approval for a nuclear cooperation agreement with Jordan. Last year, Congress approved a similar deal with the United Arab Emirates only after the country agreed to buy its nuclear fuel overseas.

Jordan could pursue its nuclear ambitions without the U.S., but would face steep diplomatic and financial hurdles. Still, Amman is aggressively pressing forward: In March, it purchased a research reactor for a northern Jordanian university and is in talks with four international consortia to buy its first nuclear power plant.

Those moves are stoking tensions with neighboring Israel.

In the interview, King Abdullah said Israel has been pressuring countries like South Korea and France not to sell nuclear technologies to Jordan. He said Israel's "underhanded" actions have helped bring Jordan-Israeli relations to their lowest point since a 1994 peace agreement.

"There are countries, Israel in particular, that are more worried about us being economically independent than the issue of nuclear energy, and have been voicing their concerns," King Abdullah said. "There are many such reactors in the world and a lot more coming, so [the Israelis must] go mind their own business."

Israeli officials denied any effort to undermine Amman's nuclear procurement efforts.

Jordan's fixation on nuclear power is rooted in its near total dependence on imported oil.

When global oil prices spiked above $100 a barrel in 2007, Amman was forced to spend the equivalent of 20% of its total economic output on energy. That bill could rise sharply over the next decade, say Jordanian officials, as electricity demand is projected to double.

Energy shortages have also threatened Amman's ability to address its severe water deficiency with power-hungry desalination plants near the Red Sea.

The oil-price shock led King Abdullah and his ministers in 2007 to fashion a new energy strategy. The project calls for Jordan to draw 10% of its energy from solar and wind by 2020; 30% from natural gas; and 14% from oil shale. The strategy foresees a special role for nuclear power: 30% of Jordan's overall energy needs by 2030.

The center of Jordan's uranium push is the desolate Bedouin village of Sawaqa, an hour south of Amman. Here the French nuclear-power giant, Areva SA, is partnering with Jordanian mining firms and geologists to try to transform the area into a major center for uranium production.

An encampment of rowed housing units, a cafeteria and sheds used to store and test mineral samples stands amid central Jordan's barren, gravely landscape. A lone camel occasionally meanders past the walled site.

Jordanian geologists have explored the Sawaqa area for decades, confirming sizable deposits of phosphates and oil shale. But the joint Areva-Jordanian camp's general manager, Gilles Recoche, has been tasked to ensure the uranium ore found here and nearby can be mined on a commercially viable scale. He then hopes to process the ore on-site into the powdery substance known as yellowcake, which can in turn be processed into the low-enriched uranium used to power nuclear reactors.

On a recent afternoon outside the Sawaqa camp, Mr. Recoche and his Jordanian colleague, Allam Saymeh, walked through a dug-out excavation trench with gamma-radiation guns.

Moving through the narrow sandy passage, they point out the yellow stains on the trench's rock walls that indicate uranium ore. They then pass their guns over the yellow markings to gauge the grade of the uranium—anything over 100 particles-per-million is judged to have commercial prospects.

"This project is my child," said the 52-year-old Mr. Saymeh, noting that he'd explored the areas around Sawaqa since the 1980s.

Jordan's government is also putting in place the bureaucracy and infrastructure to run its nuclear program. Parliament has passed laws establishing the country's first nuclear regulatory body and the Atomic Energy Commission.

Amman has signed nuclear-cooperation agreements with eight countries, including France, China and Russia. Negotiations have begun with such companies as Russia's Rosatom Corp. and Seoul's Korea Electric Power Corp. to construct Jordan's first power reactor.

The nuclear program's point man is Mr. Toukan, a Massachusetts Institute of Technology-trained nuclear scientist and a former education minister. As chairman of the country's Atomic Energy Commission, the 55-year-old has broad powers, overseeing everything from choosing the reactor's construction site to negotiating the cooperation agreement with the U.S. He views Jordan's nuclear program as providing the base for a scientific resurgence across the Middle East.

A focal point is the nuclear-engineering department at the Jordan University of Science and Technology in the northern city of Irbid. Here, Mr. Toukan's agency contracted in March with a South Korean consortium to build Jordan's first 5-megawatt research reactor, which could break ground later this year.

Students and teachers on the expansive palm-tree-lined campus talk excitedly of the research reactor's arrival. The nuclear-engineering department is only three years old, with just 100 students.

"Right now, we have nothing practical to work on here," says Abtihal Almalahim, a 21-year old junior and one of the program's female candidates. The reactor's arrival "will make our study a lot more real."

A key to achieving King Abdullah's ambitions, however, remains the cooperation agreement with the U.S., say Jordanian officials.

[Jordan's energy sources, 2007  http://sg.wsj.net/public/resources/images/P1-AV717_ARABNU_NS_20100613184448.gif]

They say it could prove difficult to secure some of the core technologies for their nuclear infrastructure without the Obama administration's seal of approval. The U.S. is a leading player in the Nuclear Suppliers Group, a Vienna-based body aimed at controlling the flow of nuclear technologies internationally. Many reactors from France, Japan and Canada contain significant U.S. components and would require Washington's approval for a sale.

Mr. Toukan nearly concluded a nuclear-cooperation pact with George W. Bush's administration in 2008, according to Jordanian and American officials. It got sidelined in the final months of Mr. Bush's term as Washington aggressively pushed forward and completed a separate nuclear deal with the United Arab Emirates, which does not have its own uranium reserves and agreed to purchase all its reactor fuel from international suppliers.

The Obama administration views the U.A.E. deal as a model for its nonproliferation drive. American experts say it would be virtually impossible for the Emirates or any other nation to develop atomic weapons without the ability to produce highly enriched uranium at home.

The White House has good reason to stick to its guns in its talks with Jordan: the U.A.E., in its agreement with the U.S., won the right to negotiate a new deal if another Mideast country concludes a nuclear pact with the U.S. on more favorable terms.

King Abdullah, is pushing ahead. He met one-on-one with President Obama during Washington's nuclear security summit in April to discuss regional peace and nonproliferation issues, according to Jordanian officials.

The king also instructed his foreign minister to formally reprimand Israel's ambassador to Jordan over the charges that Israel has been seeking to block the sale of the South Korean or French reactors to Jordan.

On the outskirts of the port city of Aqaba, just miles from the Israeli resort city of Eilat, international contractors have been conducting feasibility studies to gauge whether the site can house Jordan's first nuclear-power reactor. Aqaba also lies close to a seismic fault line. Israeli officials have publicly voiced concerns about a reactor being situated so close to the fault.

"We are way ahead of Israel" when it comes to securing new reactor technology, King Abdullah said. "And if you have the private sector involved in nuclear power, it's difficult to do anything sinister."

Friday, May 28, 2010

Obama's Blowout Preventer - In case you hadn't heard, Ken Salazar had a reform plan . . .

Obama's Blowout Preventer. WSJ Editorial
In case you hadn't heard, Ken Salazar had a reform plan . . .WSJ, May 28, 2010

BP and the Coast Guard yesterday were cautiously optimistic that the "top kill" maneuver could stanch the Gulf of Mexico oil leak, and let us hope this is the beginning of the end of the disaster. In Washington, meanwhile, the White House's panicked efforts to put a tourniquet on the political consequences were notably less successful.

"I take responsibility," President Obama said at his press conference yesterday—though responsibility for what? As he explained it, the Deepwater Horizon disaster was predominantly a failure of government, namely, the "scandalously close relationship between oil companies and the agency that regulates them." Mr. Obama is referring to the Minerals Management Service, or MMS, and he claims the Administration had a plan to end this putative regulatory capture.

Interior Secretary Ken Salazar "was in the process of making these reforms," Mr. Obama continued. "But the point that I'm making is, is that, obviously, they weren't happening fast enough. If they had been happening fast enough, this might have been caught." In other words, this is really the fault of the Bush Administration, like everything else.

It would certainly be interesting to hear more details about this no doubt ambitious and unprecedented reform that no one knew anything about until this oil disaster. Mr. Obama made no mention of it when he announced in late March that new offshore areas would be opened to oil and gas development.

"This is not a decision that I've made lightly," the President said at the time. "It's one that Ken and I—as well as Carol Browner, my energy adviser, and others in my Administration—looked at closely for more than a year."

The ex post facto reform effort did get off to a start yesterday with Elizabeth Birnbaum's sacking as the head of MMS. The Administration wants Americans to believe that, finally, someone less corrupted by industry will run the joint—though it has been run for years, under Democratic and Republican Administrations, with rules established by Congress.

But is this the same Elizabeth Birnbaum who Mr. Salazar nominated to run MMS last June? Why yes, it is. "Her in-depth knowledge of energy issues, natural resource policy and environmental law as well as her managerial expertise and work in coalition building," Mr. Salazar said then, "will be especially important as we advance President Obama's new energy frontier and lay the foundation for a clean energy economy."

Mr. Obama's faith in government is so expansive that he thinks it can build a "new energy economy," so perhaps it's not surprising that he also thinks government could have averted the Gulf spill:

To wit, that a far-flung bureaucracy like MMS would have prevented a platform 40 miles offshore—using the planet's most advanced engineering technology to execute the undersea equivalent of landing on the moon—from suffering a massive explosion that killed 11 people and caused the rig to sink 4,993 feet to the ocean floor. Presumably, too, this oversight would have ensured that the cement around the wellhead's casing pipe sealed properly, and that the blowout preventer didn't malfunction, among other miracles.

Mr. Obama added yesterday, with his customary modesty, that "we're also moving quickly on steps to ensure that a catastrophe like this never happens again." This mainly seems to mean delaying or banning any offshore drilling leases in America.

The White House extended its moratorium on deep water drilling permits for another six months, suspended upcoming lease sales in the Gulf, suspended indefinitely 33 deep water exploratory wells, and delayed a drilling program in Alaska's Chukchi and Beaufort seas that was scheduled for next month. The green lobby has been obsessed with the last item for years; a crisis is a terrible thing to waste.

Drilling on the Outer Continental Shelf accounts for about 27% of U.S. domestic oil production, and overreacting politically to a genuine disaster isn't in anyone's interests. Senator Mary Landrieu (D., La.) noted in a recent letter to Mr. Salazar that the moratorium even on the 57 Gulf platforms drilling in shallow water, which is much safer and with fewer risks, will result in more than 5,000 lost jobs if work doesn't resume within six weeks.

More broadly, whatever Mr. Obama's ambitions for windmills and plug-in cars, the world is dependent on oil. Most of the demand growth is coming from China, India and the developing world, and if America doesn't produce its own energy it will merely import it from somewhere else.

Messrs. Obama and Salazar claim to believe that one more bureaucratic reshuffle can prevent oil spills. They would be more honest, and reduce cynicism about government, if they acknowledged that no human endeavor is without risk, and that government can't prevent every accident.

Wednesday, May 12, 2010

The Price of Wind - The 'clean energy revolution' is expensive

The Price of Wind. WSJ Editorial
The 'clean energy revolution' is expensive
WSJ, May 12, 2010

The ferocious opposition from Massachusetts liberals to the Cape Wind project has provided a useful education in green energy politics. And now that the Nantucket Sound wind farm has won federal approval, this decade-long saga may prove edifying in green energy economics too: Namely, the price of electricity from wind is more than twice what consumers now pay.

On Monday, Cape Wind asked state regulators to approve a 15-year purchasing contract with the utility company National Grid at 20.7 cents per kilowatt hour, starting in 2013 and rising at 3.5% annually thereafter. Consumers pay around nine cents for conventional power today. The companies expect average electric bills to jump by about $1.59 a month, because electricity is electricity no matter how it is generated, and Cape Wind's 130 turbines will generate so little of it in the scheme of the overall New England market.

Still, that works out to roughly $443 million in new energy costs, and that doesn't count the federal subsidies that Cape Wind will receive from national taxpayers. It does, however, include the extra 6.1 cents per kilowatt hour that Massachusetts utilities are mandated to pay for wind, solar and the like under a 2008 state law called the Green Communities Act. Also under that law, at least 15% of power company portfolios must come from renewable sources by 2020.

Two weeks ago, U.S. Interior Secretary Ken Salazar approved Cape Wind, placing it in the vanguard of "a clean energy revolution." A slew of environmental and political outfits have since filed multiple lawsuits for violations of the Endangered Species Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, certain tribal-protection laws, the Clean Water Act, the Migratory Bird Treaty Act and the Rivers and Harbors Act.

There's comic irony in this clean energy revolution getting devoured by the archaic regulations of previous clean energy revolutions. But given that taxpayers will be required to pay to build Cape Wind and then required to buy its product at prices twice normal rates, opponents might have more success if they simply pointed out what a lousy deal it is.

Monday, May 3, 2010

Drilling in Deep Water - A ban on offshore production won't mean fewer oil spills

Drilling in Deep Water. WSJ Editorial
A ban on offshore production won't mean fewer oil spills.WSJ, May 04, 2010

It could be months before we know what caused the explosion and oil spill below the drilling rig Deepwater Horizon. But as we add up the economic costs and environmental damage (and mourn the 11 oil workers who died), we should also put the disaster in some perspective.

Washington is, as usual, showing no such restraint. As the oil in the Gulf of Mexico moves toward the Louisiana and Florida coasts, the left is already demanding that President Obama reverse his baby steps toward more offshore drilling. The Administration has partly obliged, declaring a moratorium pending an investigation. The President has raised the political temperature himself, declaring yesterday that the spill is a "massive and potentially unprecedented environmental disaster."

The harm will be considerable, which is why it is fortunate that such spills are so rare. The most recent spill of this magnitude was the Exxon Valdez tanker accident in 1989. The largest before that was the Santa Barbara offshore oil well leak in 1969.

The infrequency of big spills is extraordinary considering the size of the offshore oil industry that provides Americans with affordable energy. According to the Interior Department's most recent data, in 2002 the Outer Continental Shelf had 4,000 oil and gas facilities, 80,000 workers in offshore and support activities, and 33,000 miles of pipeline. Between 1985 and 2001, these offshore facilities produced seven billion barrels of oil. The spill rate was a minuscule 0.001%.

According to the National Academy of Sciences—which in 2002 completed the third version of its "Oil in the Sea" report—only 1% of oil discharges in North Americas are related to petroleum extraction. Some 62% of oil in U.S. waters is due to natural seepage from the ocean floor, putting 47 million gallons of crude oil into North American water every year. The Gulf leak is estimated to have leaked between two million and three million gallons in two weeks.

Such an accident is still unacceptable, which is why the drilling industry has invested heavily to prevent them. The BP well had a blowout preventer, which contains several mechanisms designed to seal pipes in the event of a problem. These protections have worked in the past, and the reason for the failure this time is unknown. This was no routine safety failure but a surprising first.

One reason the industry has a good track record is precisely because of the financial consequences of accidents. The Exxon Valdez dumped 260,000 barrels of oil, and Exxon spent $3.14 billion on cleanup. Do the math, and Exxon spent nearly 600 times more on cleanup and litigation than what the oil was worth at that time.

As for the environmental damage in the Gulf, much will depend on the weather that has made it more difficult to plug the leak and contain the spill before it reaches shore. The winds could push oil over the emergency containment barriers, or they could keep the oil swirling offshore, where it may sink and thus do less damage.

It is worth noting that this could have been worse. The Exxon Valdez caused so much damage in part because the state of Alaska dithered over an emergency spill response. Congress then passed the 1990 Oil Pollution Act that mandated more safety measures, and it gave the Coast Guard new powers during spill emergencies. We have seen the benefits in the last two weeks as the Coast Guard has deployed several containment techniques—from burning and chemical dispersants to physical barriers. America sometimes learns from its mistakes.

On the other hand, Washington's aversion to drilling closer to shore has pushed the industry into deeper, more difficult, waters farther out to sea. BP's well is 5,000 feet down, at a depth and pressure that test the most advanced engineering and technology. The depth complicates containment efforts when there is a disaster.

As for a drilling moratorium, it is no guarantee against oil spills. It may even lead to more of them. Political fantasies about ending our oil addiction notwithstanding, the U.S. economy will need oil and other fossil fuels for decades to come. If we don't drill for it at home, the oil will have to arrive by tanker and barges. Tankers are responsible for more spills than offshore wells, and those spills tend to be bigger and closer to shore—which usually means more environmental harm.

The larger reality is that energy production is never going to be accident free. No difficult human endeavor is, whether space travel or using giant cranes to build skyscrapers. The rest of the world is working to exploit its offshore oil and gas reserves despite the risk of spills. We need to be mindful of such risks, and to include prevention and clean up in the cost of doing business, but a modern economy can't run without oil.

Friday, April 23, 2010

China and the US, Two Energy Giants: A Contrast In Approach

Two Energy Giants: A contrast in approach
IER, Apr 22, 2010

China’s economy is growing with dizzying speed, and the government is fueling the growth with plentiful energy. In fact, China’s electrification program and its ability to secure future oil supplies are second to none. By contrast, the U.S. economy is growing more slowly and its energy strategy is limiting that growth. The United States has slowed its electrification, adding only select forms of generating capacity, and has taken steps to reduce its flexibility in securing safe oil supplies.

China Setting Records: China Oil Demand, Coal Production and Vehicle Sales Up in 2010

During January, February, and March of this year, China was again setting records with huge year-over-year increases in oil demand.  In February, China’s oil demand rose 19.4 percent over a year earlier, the second fastest rise on record. According to Reuters, China is the world’s second largest oil user (second to the United States) and consumed 8.65 million barrels of oil per day in February, an increase of 9.4 percent or 604,000 barrels per day over January’s consumption.[i] Oil imports were up 13.8 percent in March over February, reaching 4.95 million barrels per day, according to preliminary data from China’s General Administration of Customs.[ii] In part, these large oil increases are fueling China’s passenger car fleet. New passenger car sales rose 55 percent in February from a year earlier, following a 116 percent increase in January, most likely aided by the extension of government incentives to boost purchases of smaller vehicles and spur rural demand for cars.  [iii]

China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries —including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela and Brazil— and paying for exploration, production, infrastructure construction, as well as “loans for energy” deals.[iv] Recently, China’s Sinopec International Petroleum Exploration and Production Company agreed to buy, for $4.65 billion, the 9 percent interest that ConocoPhillips holds in Syncrude,[v] a Canadian business involved in the production of oil sands (an asphalt-like heavy oil).[vi] Approval from the Canadian and Chinese governments is expected in the third quarter of this year.

Along with China’s Canadian oil pursuits, long thought to be a safe and secure supply for U.S. oil demand, the state-owned China Development Bank has promised to lend $20 billion to Venezuela to build new power plants, highways, and other projects, which will be repaid with Venezuelan crude oil. Venezuela’s President Hugo Chavez has long complained about the United States’ standing as the largest buyer of Venezuelan oil, and so he is more than pleased to offer his country’s oil to China instead.[vii] Both the Canadian crude and the Venezuelan crude are heavy oils, and the United States owns most of the refineries that can process heavy crude oils. So, to prepare itself for future heavy oil supplies, China has approved plans for construction of such a refinery. As the United States loses neighboring oil supplies to China, one wonders how the U.S. will meet future oil demand, especially as the Obama Administration has been slow to open new offshore areas to oil development (claiming further study is needed) but speedy at advocating climate legislation and a low-carbon fuel standard, both policies aimed at reducing the demand for fossil fuels without providing comparable energy substitutes.

china oil demand

Oil resources are not the only target on China’s energy wish-list. It also plans to increase its consumption of natural gas; last year, its liquefied natural gas imports rose by two-thirds, to 5.53 million tons or 7.7 billion cubic meters.[viii] China also continues to consume large quantities of its primary fuel, coal, in its industrial and electric generation sectors. According to China’s National Bureau of Statistics, the country’s coal output grew more than 28 percent, to well over 751 million tons in the first quarter of 2010. A report by China’s National Coal Association estimates China’s total coal production capacity exceeds 3.6 billion tons.[ix] This is in sharp contrast to coal mining in the United States, where the Environmental Protection Agency (EPA) has issued a new policy aimed at curbing mountain top removal mining[x] and is scrutinizing surface coal mine permits.  EPA is revoking or blocking Clean Water Act permits for mountain top mining citing irreversible damage to the environment. Some of the permits were awarded years ago.[xi]

Seventy percent of China’s energy comes from coal,[xii] the most carbon-intensive fossil fuel. China already consumes more than twice the coal as  the United States, and by 2030, China is expected to consume 3.7 times as much coal.[xiii] As a result, China emits more carbon dioxide than any other country in the world including the United States, and by 2030, it is expected to release 82 percent more carbon dioxide emissions than the United States.[xiv]

china co2 emissions

China’s Race to Electrification; U.S. Stagnation

Between 2004 and 2008, China added 346 gigawatts of generating capacity, of which 272 gigawatts were conventional thermal power (mostly coal) and 66 gigawatts were hydroelectric power. This compares to a total installed US hydroelectric capacity of 77 gigawatts.  China is estimated to have added an additional 85 gigawatts in 2009, reaching a total of 874 gigawatts,[xv] about 15 percent less than the total capacity in the United States. Of the 85 gigawatts added in 2009, 51 gigawatts were conventional thermal, again mostly coal, 25 gigawatts were hydroelectric, and 9 gigawatts were wind power.[xvi] Many of China’s wind turbines were funded by the U.N.’s Clean Development Mechanism,   under which wealthy countries fund projects in developing countries and receive carbon credits so long as those projects would not have been accomplished otherwise.[xvii]

In contrast, the United States added only 47 gigawatts of generating capacity from 2004 to 2008 (14 percent of the capacity China added), of which 26 gigawatts were natural gas-fired units and 18 gigawatts were wind turbines. New coal-fired capacity additions are practically non-existent in the United States primarily owing to objections regarding emissions of carbon dioxide. Coal-fired projects in the United States have either been cancelled or delayed because of permitting problems, reviews and re-reviews by EPA and resulting financing problems. While the United States has more coal than any other country in the world, with over 200 years of reserves at current usage rates, coal’s share of new U.S. generating markets has been replaced by natural gas and renewable units that are  more politically in vogue.

china electricity generating capacity
us electricity generating capacity



China’s Economic Growth and Export Market

China’s economy, the second-largest in the world in terms of purchasing power, is currently about half the size of the U.S. gross domestic product. According to China’s central bank, the country’s economy grew at an annual rate of 10.7 percent in the fourth quarter of 2009,[xviii] a rate almost twice the U.S. rate of 5.6 percent for the same time period.[xix] And in the first quarter of 2010, China’s economy grew by 11.9 percent. Forecasters predict that China’s economy will exceed that of the United States in 10 to 15 years.[xx]

China became the world’s largest exporter last year, edging out Germany and the United States. Despite a decline in total world trade, China’s exports fell less than those of other big powers. A report by the World Trade Organization calculates that the total value of merchandise exports fell by 23 percent in 2009. Among the top ten exporters, Japan’s shipments were the worst affected, falling by 26 percent. Because China’s exports fell by only 16 percent, it is now the single largest exporter. The World Trade Organization expects trade to rebound by nearly 10 percent this year.[xxi]

leading exporters world

Lessons to Be Learned

Many environmentalists and politicians seem to believe that China is winning the green energy race, but nothing could be further from reality.[xxii] China is in a race for energy—all forms of energy—to fuel its growing economy. The size and scope of its investments in conventional forms of energy dwarf their commitment to “green energy.” It is providing loans around the world to invest in future oil projects, and it cares not that the oil is less than the lightest and sweetest. Canadian oil sands and Venezuelan heavy crude are perfectly fine. China is building a coal-fired generating plant each and every week on average, and increasing its coal mining capacity to fuel them. This belies any stated concerns about increasing their carbon dioxide emissions, already the highest of any country in the world. China is building wind turbines too, but if wealthy countries are willing to pay—why not? It matters not at all that the transmission capacity is not yet there to operate almost a third of these wind turbines. And China’s large-scale hydroelectric projects are engineering feats par excellence, built regardless of environmental concerns.
China is ensuring energy supplies will be available to fuel its growing economy. The United States should take note.

 References
[i] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true [ii] Reuters, Oil falls as demand, inventories weigh, April 12, 2010, http://www.reuters.com/article/idUSTRE6142V820100412
[iii] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true
[iv] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[v] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413 and www.conocophillips.com
[vi] Syncrude, http://www.syncrude.ca/users/folder.asp?FolderID=5753
[vii] The Wall Street Journal, China’s $20 Billion Bolsters Chavez, April 18, 2010, http://online.wsj.com/article/SB10001424052748703594404575191671972897694.html
[viii] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413
[ix] China Daily, China’s coal output up 28.1% in Q1, April 15, 2010, http://www.chinadaily.com.cn/bizchina/2010-04/15/content_9736151.htm
[x] Environmental protection Agency, New Releases, EPA issues comprehensive guidance to protect Appalachian communities from harmful environmental impacts of mountaintop mining, April 1, 2010, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/4145c96189a17239852576f8005867bd!OpenDocument
[xi] Associated Press, Arch Coal sues EPA over veto of W.Va. mine permit, April 2, 2010, http://news.yahoo.com/s/ap/20100402/ap_on_bi_ge/wv_epa_coal_lawsuit
[xii] Energy Information Administration, China, http://www.eia.doe.gov/emeu/cabs/China/Background.html
[xiii] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xv] http://en.wikipedia.org/wiki/Energy_policy_of_China
[xvi] China’s power generation goes greener with total capacity up 10%, January 7, 2010, http://news.xinhuanet.com/english/2010-01/07/content_12771880.htm
[xvii] http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/
[xviii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010,  http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[xix] http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
[xx] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xxi] China overtakes Germany to become the biggest exporter of all, March 31, 2010, http://www.economist.com/daily/news/displaystory.cfm?story_id=15836406&fsrc=nwl
[xxii] http://www.instituteforenergyresearch.org/2010/03/15/the-u-s-in-the-world-race-for-clean-electric-generating-capacity/

Tuesday, March 16, 2010

The U.S. in the World Race for Clean Electric Generating Capacity

The U.S. in the World Race for Clean Electric Generating Capacity

IER, March 15, 2010

China has already made its choice.  China is spending about $9 billion a month on clean energy.  It is also investing $44 billion by 2012 and $88 billion by 2020 in Ultra High Voltage transmission lines.  These lines will allow China to transmit power from huge wind and solar farms far from its cities.  While every country’s transmission needs are different, this is a clear sign of China’s commitment to developing renewable energy.

The United States, meanwhile, has fallen behind.
U.S. Secretary of Energy, Steven Chu

In an attempt to generate support for implementing a cap on carbon dioxide, Energy Secretary Steven Chu and others paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping us in that race.[i] However, all the facts are not on the table. In both 2008 and 2009, the U.S. added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[ii] At the end of 2009, the U.S. ranked first in wind capacity in the world with China’s wind capacity about 30 percent less than the U.S. level. At the end of 2008 (the most recent data available), the U.S. ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount. Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Because of U.S. legal and regulatory red tape, it is much harder to build these energy technologies in the U.S. than in China.

What Does the Capacity Data Show for Wind and Solar Power?

According to the Solar Energy Industries Association, the U.S. ranks fourth in the world in solar capacity with 8,800 megawatts at the end of 2008.[iii] Germany, Spain, and Japan, in that order, had larger amounts of solar power at the end of 2008 than the U.S.[iv] China had just 0.3 megawatts of installed solar PV capacity at the end of 2009[v] or 0.003 percent of the solar capacity of the U.S.

According to the Global Wind Energy Council, the U.S. leads the world in wind generating capacity, with 35.2 gigawatts at the end of 2009; Germany is second with 25.8 gigawatts, and China is third with 25.1 gigawatts.[vi] In 2009, the U.S. installed almost 10 gigawatts of wind capacity, a record,[vii] and China installed 13 gigawatts.[viii]

Why is China Building Wind and Solar Capacity?

China builds wind and solar because ratepayers in other countries are paying them to do so. China has been taking advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[ix] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where 30 percent of its wind capacity is not operable because it is not connected to the grid.[x] However, in mid 2009, the U.N. started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[xi] That is, China was reducing its own government’s support in order to get international subsidies.

How Do the U.S. and China Electric Construction Programs Compare?

While China is building non-hydro renewable slightly faster than the United States, overall it is building new electrical generation much, much faster than the United States. The most comparable international database on electric generating capacity is found on the Energy Information Administration (EIA) website.[xii] Comparing the electric generating capacity data by technology type for the two countries, at the end of 2007 (the last year of comparable data), the Chinese had a total of 716 gigawatts of generating capacity, about 280 gigawatts less than the 995 gigawatts of capacity in the U.S.

The U.S. has been building generating capacity at a very slow rate, adding between 8 and 15 gigawatts a year since 2004. The Chinese in contrast, to fuel their bulging economy, have added between 75 and 106 gigawatts a year, from 2004 to 2007. Based on Secretary Chu’s comments, one might think that the additional capacity that China was adding was all non-hydroelectric renewable and nuclear capacity. However, that has not been the case. Between 2004 and 2007, the Chinese have added 226 gigawatts of fossil fuel generating capacity, 40 gigawatts of hydroelectric capacity, 2 gigawatts of nuclear capacity, and only 6 gigawatts of non-hydro renewable capacity.

non hydro renewable electricity china vs united states
electricity installed china vs united states

What are China’s Electric Construction Plans?

Both China’s generating sector and its industrial sector rely heavily on coal, with 79 percent of its electric generation being coal-fired.[xiii] According to the National Energy Technology Laboratory (NETL), from 2004 through 2007, China has been building 30 to 70 gigawatts of coal-fired power a year, and has about 70 gigawatts more under construction. NETL sees China building over 185 gigawatts of coal-fired plants in the future.[xiv] (See figure below.)
coal plants china united states
According to Australia, China is planning to build 500 coal-fired plants over the next ten years.[xv] That means: every week or so, for the next decade, China will open another large coal-fired power plant.[xvi] Australia has just signed a $60 billion deal with China to build a coal mine in Queensland and a 311-mile rail way for transporting the coal to the coast for export to China’s power plants.[xvii]

While China has been slow in adding nuclear power plants, it currently has 20 nuclear reactors under construction and more starting construction this year.[xviii] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xix] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements before they can be constructed in the U.S.[xx] China expects to achieve a total nuclear capacity of 60 gigawatts by 2020, and 120 to 160 gigawatts by 2030,[xxi] surpassing the total nuclear capacity of the United States.

China has a goal to produce 15 percent of its energy from renewables by 2020.[xxii] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan is for 5 gigawatts in 2010, expanding to 20 gigawatts in 2020, at a cost of $1 million per megawatt,[xxiii] or $1,000 per kilowatt, about half the cost of an onshore wind unit in the U.S., according to the Energy Information Administration.[xxiv]

What about the U.S.?

The U.S. has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eight coal-fired plants totaling 3,218 megawatts became operational in the U.S. in 2009, the largest increase in coal-fired capacity additions in one year since 1991.[xxv] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio standards in many states, competition from wind power, and lawsuits have slowed the construction of new coal-fired plants.[xxvi] As of late February, activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. According to the Sierra Club, 126 coal plants have been stopped since 2001.  And, for the first time in more than 6 years, not one new coal plant broke ground in 2009. The graph above compares the coal-plant additions in the U.S. to that of China, showing only a handful of coal plants under construction in the U.S.  With new coal-fired plants extremely limited by the above, some are purporting that the current direction for activists may be to phase out the existing fleet of coal-fired power plants.[xxvii] Because the capital cost of most of our coal-fired plants has been paid, that fleet produces almost 50 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2008 were only 2.75 cents per kilowatt hour, second to our nuclear plants at 1.87 cents per kilowatt hour.[xxviii]

No nuclear plant has started up in the U.S. since 1996,[xxix] and no construction permits have been issued since 1979.[xxx]NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced last month that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors are to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. The two new nuclear generating units are expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license.[xxxi] (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” Further, Obama’s budget cutbacks for Yucca Mountain, the proposed nuclear waste repository, are yet another signal that President Obama may not “walk the talk.”[xxxii]

Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational. In 2008, the U.S. added over 15,000 megawatts of electric generating capacity, of which 4,556 megawatts was natural gas-fired and 8,136 megawatts was wind power.[xxxiii] However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) issues, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[xxxiv]

The Energy information Administration projects that the U.S. will need 200 gigawatts of additional generating capacity by 2035 to replace capacity that will be retired and to meet new electricity demand.[xxxv] Of that amount, EIA expects that 13 percent will be coal-fired, 53 percent natural gas-fired, 4 percent will be from nuclear power, and 29 percent from renewable power (23 percent is expected to be wind power), assuming that no changes would be made to current laws and regulations.[xxxvi]

Conclusion

China realizes that it needs affordable energy to fuel its economic growth, and is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, and legal problems. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the U.S., and industry will move offshore where energy is more affordable. Will Secretary Chu’s policies get us to affordable energy, or will the administration’s policies divert us from obtaining the energy that we need to fuel our economy?


[i] Climate Wire, Energy policy: U.S. clean tech outpaced by China—Chu, March 9, 2010, http://www.eenews.net/climatewire/2010/03/09/3 [ii] Renewable Energy Policy Network for the 21st Century, Renewables Global Status Report 2009 Update, May 13, 2009, http://www.ren21.net/pdf/RE_GSR_2009_Update.pdf
[iii] http://www.seia.org/cs/about_solar_energy/industry_data
[iv] Ibid.
[v] Center for American Progress, Out of the Running, March 2010, http://www.eenews.net/public/25/14571/features/documents/2010/03/04/document_cw_01.pdf
[vi] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[vii] American Wind Energy Association, U.S. Wind Energy breaks all records, January 26, 2010, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html
[viii] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[ix] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[x] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html
[xi] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[xii]http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=2&pid=34&aid=7&cid=r1,&syid=2004&eyid=2008&unit=MK
[xiii] Energy information Administration, International Energy Outlook 2009,  http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xv] http://windfarms.wordpress.com/2009/01/29/china-building-500-coal-plants/
[xvi] The New York Times, “Pollution From Chinese Coal Casts a Global Shadow”, http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html?_r=1
[xvii] Australia Signs Huge China Coal Deal, http://windfarms.wordpress.com/2010/02/06/australia-signs-huge-china-coal-deal/
[xviii] Nuclear Power in China”, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xix] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200
[xx] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203
[xxi] Nuclear Power in China, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xxii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm
[xxiii] The Wall Street Journal, “Wind Power: China’s Massive and Cheap Bet on Wind Farms”, July 6, 2009, http://blogs.wsj.com/environmentalcapital/2009/07/06/wind-power-chinas-massive-and-cheap-bet-on-wind-farms/
[xxiv] Energy information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, Electricity Market Module, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
[xxv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xxvi] A messy but practical strategy for phasing out the U.S. coal fleet, http://www.grist.org/article/death-of-a-thousand-cuts/
[xxvii]Ibid.
[xxviii]http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffordableenergy/graphicsandcharts/uselectricityproductioncosts
[xxix] “Nuclear Power: Outlook for new U.S. Reactors”, Congressional Research Service, March 9, 2007, www.fas.org/sgp/crs/misc/RL33442.pdf
[xxx] Energy Information Administration, Annual Energy Review 2008, Table 9.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec9_3.pdf
[xxxi] Environment News Service, Obama Backs First New U.S. Nuclear Plant with $8.3 Billion, February 16, 2010, http://www.ens-newswire.com/ens/feb2010/2010-02-16-091.html
[xxxii] The Wall Street Journal, An Energy Head Fake, March 11,2010, http://online.wsj.com/article/SB10001424052748704784904575112144130306052.html?mod=WSJ_Opinion_AboveLEFTTop
[xxxiii] Energy Information Administration, Electric Power Annual, Tables 1.1 and 1.1.A, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html
[xxxiv] For a repository of stalled and stopped energy projects, see U.S. Chamber of Commerce, “Project No Project Energy-Back On Track”, http://pnp.uschamber.com/
[xxxv] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Table A9, http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf
[xxxvi] Ibid.