Saturday, September 07, 2013

Report on Kyoto — Enron wins — At what price?

"On the business front: During the next year there will be intense positioning of organizations to capture an early lead in a variety of carbon trading businesses.

"The endorsement of joint implementation within Annex-1 is exactly what I have been lobbying for and it seems like we won.

"The clean development will be a mechanism for funding renewable projects. Again, we won. (We need to push for natural gas firing to be included among the technologies that get preferential treatment from the fund.)

"The endorsement of emissions trading was another victory for us. ...

"Through our involvement with the climate change initiatives, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch. This position should be increasingly cultivated and capitalized on (monetized). ...

"This agreement will be good for Enron stock!!"

—John Palmisano, Senior Director for Environmental Policy and Compliance, Enron, Dec. 12, 2997  [see below]
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http://www.masterresource.org/2012/12/enron-kyoto-memo-15/

To: Terry Thorn, Joe Hillings, Cynthia Sandherr, Jeff Keeler, Fiona Grant, Hap Boyd, Bill Shoff, Dan Badger, Tom Kearney, Lynda Clemmons, Bruce Stram, Mike Terraso, Rob Bradley, Jim O’Neill, John Hardy
From: John Palmisano
Date: December 12, 1997
Subject: Implications of the Climate Change Agreement in Kyoto & What Transpired

This memo summarizes the implications of the agreement reached in Kyoto and also describes what I was doing and provides some observations.

Implications

If implemented, this agreement will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed. While the trading system will be implemented by 2008, I am sure that reductions will begin to trade with 1-2 years. Finally, Enron has immediate business opportunities which derive directly from this agreement.

On the policy-front: There will be a great number of country-specific and international meetings related to every aspect of this agreement. I do not think it is possible to overestimate the importance of this year in shaping every aspect of the agreement.

Three issues of specific importance to Enron are: (1) the rules governing emissions trading, (2) the rules governing joint implementation within Annex-1, and (3) the rules governing the proposed clean energy fund (which promises to dwarf the GEF as a fund for wind, solar, and power plant conversions.)

On the business front: During the next year there will be intense positioning of organizations to capture an early lead in a variety of carbon trading businesses.

The endorsement of joint implementation within Annex-1 is exactly what I have been lobbying for and it seems like we won.

The clean development will be a mechanism for funding renewable projects. Again, we won. (We need to push for natural gas firing to be included among the technologies that get preferential treatment from the fund.)

The endorsement of emissions trading was another victory for us.

Highlights of the Agreement

38 developed countries are required to reduce greenhouse gas emissions to or below 1990 levels by 2012.

The U.S. reduction objective is 7%, the European Union is 8%, and Japan is 6%; therefore, it is not possible (or at least credible) that Congress can say the United States is at a comparative disadvantage vis-à-vis its main trading partners or competitors since the EU and Japan have higher control targets and are more “carbon-lean” than are we.

Six gases are included (CO2, CH4, N2O, HFCs, PFCs, and SF6).

Emissions trading is included. Details of an international system are to be worked out in 1998.

A “clean development fund” is included. The fund would allow for emission offsets from projects in developing countries.

Joint implementation for Annex-1, developed countries and the transitional economies, is included. This means that Enron projects in Russia, Bulgaria, Romania or other eastern countries can be monetized, in part, by capturing carbon reductions for sale back in the US or other Western countries.

While I do not have the final version of the agreement, I do have the first and second versions. The latest version is not on the world-wide web.

What I Was Involved In

I gave three speeches and received an award on behalf of Enron. The speeches dealt with emissions trading, energy efficiency/renewable, and the role of business in promoting clean energy outcomes. The award came from the Climate Institute and was for Ken Lay and Enron for our work promoting clean-energy solutions to climate change. The other recipients were Sven Auken, MP and Minister for Energy and Environment in Denmark, and MP and former Environment Minister for the UK, John Gummer.

I have met Gummer and Auken several times before and it was nice for them to hear Enron praised so much. (I gave a speech with Gummer last Saturday and it was the third time we have been on the podium together. He is someone who still retains considerable influence in the UK and Europe and someone Enron might want to cultivate.)

I was also involved in a press conference.

Observations

I believe that it will be impossible to separate electricity restructuring from climate change as a domestic political issue. The administration has signaled its view that the two issues are intertwined.

At yesterday’s White House press conference, this connection was underlined by the comments from Tom Kasten, President of Trigen Corporation who spoke in favor of the climate change agreement and its linkage to restructuring. His remarks had to be cleared by the White House.

These remarks are entirely consistent with every other signal from the Administration’s climate change team.

Through our involvement with the climate change initiatives, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch. This position should be increasingly cultivated and capitalized on (monetized).

(Parenthetically, I heard many times people refer to Enron in glowing terms. Such praise went like this: “Other companies should be like Enron, seeking out 21st century business opportunities” or “Progressive companies like Enron are….” Or “Proof of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 trading.”)

Developing countries have acquired substantial negotiating power. The shift in negotiating power to India, Brazil, China, and the G-77 has been gradual and pronounced.

The EU negotiated as a group. Until two years ago, they negotiated as individual countries. While there are still individual country interests, the EU retains substantial power when working together. It was this cohesiveness that lead to a more stringent agreement.

EU delegates asked for my input into the agreement to oppose some of the positions espoused by some US delegates. In particular, the US was advocating no rules governing the trading of carbon emissions because rules would “inhibit trading.” My position is that rules defining who owns what reductions, how reductions are traded, how they are tracked, and liability rules will help promote trading since rules give both buyers and sellers more confidence in the commodity.

While some companies and trade associations continue to criticize developing countries for not doing more, no company wants to be specific on this issue. To the extent any company does, they will hide under the shield of a trade association. I think that shield will soon be pierced. I believe that some companies will soon break from the line that developing countries should do more. It is a weak position in terms of equity and suicidal in terms of their commercial interests in these countries.

An increasingly ugly trend has become evident to the environmental NGO community and the delegates from developing countries. They see the argument about developing country participation as a thinly disguised recycling of the early twentieth century fear-mongering characterized by the so-called “yellow-peril” or invasion of the US by Asian peoples.

The developing country delegates see the argument of the carbon lobby that the US will lose markets to developing countries as empty and racist — they see energy-intensive imports to the US coming from Japan and Germany in terms of automobiles (and these are high cost energy areas), while economic growth in developing countries is fueled by local growth or Western industries requiring low cost of labor, low cost for land, or permitting flexibility for new plants.

Enron should not participate in any argument like this because it hurts our credibility with developing countries, NGOs, and developed country governments.

I should have a copy of the agreement today.

The next year will be very intensive because the structure of the agreement exists, business opportunities are being defined, the rules governing emissions trading will be developed, and identifying, financing, and managing JI projects will be important.

One final point, Terry, if you remember, I predicted an agreement that would yield a 5% reduction by 2010; we got 7% by 2012. I now predict ratification within 3 years. I predict business opportunities within 18 months. I predict this agreement will have very significant influences on the energy sector within OECD and transitional economies and will accelerate renewable markets in developing countries.

This agreement will be good for Enron stock!!

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Enron’s Ken Lay asks for Texas Gov. Bush’s help in securing tax credits for wind [letter, Aug. 10, 1998]

How the White House Energy Plan Benefitted Enron [U.S. House of Representatives report, Jan. 16, 2001]

"The gap between wind and combined-cycle gas is substantial when subtle factors such as tax preferences, reliability/dispatchability, and transmission are taken into account.

"My estimate is that the all-in economic cost of wind is double the cost of gas and triple the cost of surplus power. Accelerated depreciation may be an even bigger component of this underlying competitive gap than the federal tax credit. Gas would have to stop improving or get worse as wind gets better to reach near-parity – not a likely scenario.

"Wind needs storage if not another fuel backup, yet storage is estimated to cost between $400 and $1,000 per kilowatt (DOE/EPRI, 1997). If wind can’t compete today with the double tax benefit and upstream DOE subsidies that have averaged over 3 cents per produced kWh in the last 20 years, when will it compete?"

—Robert Bradley, Corporate Director of Public Policy Analysis, Enron, Oct. 28, 1998  [see below]

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http://www.masterresource.org/2013/08/enron-wind-memo-1998/

Author: Rob Bradley at CORP_1_PO
Date: 10/28/98 4:13 PM
Priority: Normal
TO: Kenneth Lay at ENRON
Subject: Enron Wind Decision

Please see the attached on reasons to sell the wind subsidiary. I hope this memo contributes to the right decision.



Some Reasons for Enron to Sell the Wind Subsidiary


On the presumption that you are mulling over the sale of the wind subsidiary and are getting lobbied to not do so within the company, allow me to make some arguments in favor of exiting.

I do not know the economics of our wind investment or its potential selling price. There are also issues of core competency that I defer on. I do know that the purchase was more of an image play for our mass retail electricity effort than natural marketplace economics. Natural gas technology has made wind (and solar outside of its distributed uses) unnecessary for the foreseeable future in the U.S. and other methane-rich areas of the world.

With Enron’s niche as a “green” energy provider for the masses in doubt, the image component is less compelling. Otherwise, our image is helped and hurt by the investment. We get accolades from the environmental community but criticism from the free-market and conservative community for our subsidy appetite and Kyoto leadership.

Here are my reasons to exit:

1. You mentioned in our December meeting that if I could prove that wind could not compete with gas in the long run, you would sell the subsidiary. The gap between wind and combined-cycle gas is substantial when subtle factors such as tax preferences, reliability/dispatchability, and transmission are taken into account.

My estimate is that the all-in economic cost of wind is double the cost of gas and triple the cost of surplus power. Accelerated depreciation may be an even bigger component of this underlying competitive gap than the federal tax credit. Gas would have to stop improving or get worse as wind gets better to reach near-parity – not a likely scenario.

Wind needs storage if not another fuel backup, yet storage is estimated to cost between $400 and $1,000 per kilowatt (DOE/EPRI, 1997). If wind can’t compete today with the double tax benefit and upstream DOE subsidies that have averaged over 3 cents per produced kWh in the last 20 years, when will it compete?

2. Enron with wind is really competing against Enron with natural gas. New wind capacity displaces output from existing gas-fired plants in locals such as California where gas is the marginal fuel most of the time. Wind also (incrementally) postpones the need for new gas-fired capacity. Renewable mandates will hurt the gas market in this regard.

3. Wind is almost a pure subsidy play, which means that Enron will be at odds with the market and must continually intervene into the political processes to extend subsides and/or create new ones. This is an expensive process and may trade away what we are lobbying for elsewhere.

4. Fundamental tax reform would severely limit wind by removing the federal tax credit and accelerated depreciation. Fundamental tax reform will have political life with a Republican president in the post-2000 period. Green pricing could collapse with the end of tax preferences since the “green” premium would be too high. (This is why quotas are the only solution to make uneconomic renewable really stick.) It would be opportune to sell out before this “political risk” gets factored into the equation.

5. Wind has a negative dynamic at work. The more wind construction, the more prime sites are utilized and the more its economic and environmental drawbacks will become transparent. The Energy Information Administration is finding that its cost estimates for wind are too optimistic given that the best wind sites often have higher up-front and operating costs.

6. Wind as a Kyoto play will be burdened by all the Kyoto controversies – the growing questions about the science, the economics of meeting just one Kyoto, and political forces that will work to cheapen compliance in a Kyoto case (early-credit inflation). Even with subsidies, increased profitability is not assured given that competition grows with the subsidies.

7. With the sale of our solar and wind businesses, Enron can get off of a hardcore Kyoto line. This issue is turning our government affairs department into rent seekers. (Latest example: how do we fashion an early crediting program where it helps us at the expense of other businesses.) The more Enron pushes early implementation to give Kyoto life, the more we will be setting up a regulatory regime (“climatism”) with a life of its own that will cut both ways for our many business interests.

8. With uneconomic renewables off of Enron’s plate, your speeches can get away from spin and more toward underlying energy economics to maximize your credibility. For example, instead of showing the slide about the falling cost of renewables (which begs the question of how much the cost of other technologies including gas have fallen), you can get into the relative economics of different renewables versus natural gas.

As an economics Ph.D. and visionary, you have a leadership responsibility to promote good thinking and economic energy strategies in place of energy faddism (such as wind). The corporation should be positioned to reflect sound underlying economics (consumer demand) and not short-term political plays as much as possible – or at least the corporation should be taken out of political plays as soon as changing conditions permit.

9. Good corporate citizenship should include not only an environmental ethic but a market ethic of not seeking discretionary government subsidies. Enron can set an example that could result in accolades from the other side of the political spectrum.

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