Since President Obama’s pseudo-state of the union speech earlier this week, green industry players have been singing hallelujahs. For example, a coalition of investors named Ceres (ceres.org) yesterday released a letter it sent to Congressional leaders signed by a group of investors with more than $3 trillion in assets.  Coal and natural gas producers are not sitting on the sidelines here on the issues.

The letter urged Congress to adopt strong energy efficiency standards, a national renewable portfolio standard, and other measures aimed at reducing greenhouse gas emissions. Signatories to the letter included the California Public Employees Retirement System, CalPERS, labor union pension funds, and investment firm BlackRock Inc. (NYSE:BLK).

The letter includes the following sentence: “Energy efficiency is the cheapest form of power we can produce and it is time for national policy to step in and tell electric utility companies that they need to shift their business practices to deliver a lot more of it.” That sort of talk won’t go down well with utilities. Indeed, in their view, utilities are being charged with assuming all the blame for greenhouse gas emissions, and with assuming the costs for reducing those emissions.

The industry is fighting back with public relations campaigns of its own. The American Coalition for Clean Coal Electricity (ACCCE) , which includes virtually every major investor-owned utility and coal miner in the US,  believes that technology development will lead to near-zero emission coal-fired power plants.

Now, natural gas producers have formed the American Natural Gas Alliance (ANGA) “to increase awareness and appreciation of America’s clean and abundant supply of natural gas among consumers and policy makers.” The group includes about 20 of the country’s largest producers of natural gas, accounting for about 8 trillion cubic feet of annual production. That’s about a third of US annual consumption. According to the announcement, the president’s omission of any reference to natural gas in his speech “is an indication … that there was a gap” between public knowledge and the capabilities of the natural gas industry.

Public relations wars often generate more heat than light, and this one is not likely to be any different. Growth in green technology depends on new investment, not government subsidies.  Subsidies can come and go with the political wind, and, even when they are substantial, they can cool private investment because rates of return usually fall.

Clean coal, which many in the environmental community dismiss as an oxymoron, depends on huge investment in a new technology that may work well for new coal-fired plants, but will be an expensive nightmare for existing plants. No matter what, clean coal on any significant scale is years away.

And natural gas producers, which are experiencing a production bonanza right now, are struggling to find a way to improve margins. Developments in horizontal drilling and fluid hydrocracking have enabled producers to pump more gas more quickly than ever. This has the result of depleting wells more quickly, which means that the capital expenses of new drilling become more critical to a producer’s long-term viability. Canaccord Adams has noted that on an unhedged basis, natural gas producers are barely breaking even.

Even if the president’s desire to double energy production from renewable sources by 2012 is met, renewables will still account for only about 10% of total US energy consumption. The US will depend on the old standbys of coal, oil, and natural gas for years, maybe decades, to come.

That’s why the Ceres group emphasizes energy efficiency. If US consumers can adjust their habits to use the energy we now generate more efficiently, that is equal to building new coal-fired power plants. Hydrocarbon producers, however, depend on increased demand for growth. Encouraging efficiency does not stimulate growth.

How can hydrocarbon producers make a profit when they have to compete with other government-subsidized energy producers? And the subsidies aren’t just cash. Renewable portfolio standards, energy efficiency standards, and carbon caps hit utilities and producers hard. The president needs to think about ways to help these folks stay in business and make a profit. Ignoring them is not a good start.

Paul Ausick
February 26, 2009

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