This week my plan is to blow you away with the economic practicability of wind energy (ok I’m done with the puns).  In my personal opinion I feel that wind is a very solid alternative energy source for the future.  The one major point that the energy source has against it is the massive vendetta citizens have about having “eye sores” scattering their backyards.  However, this problem is becoming less and less of a problem as overall urbanization takes over the countryside where these turbines are normally placed.  This being said, public sentiment is shifting, and I feel that now is the time we will see a massive spike in wind energy.

If we look at the price of wind energy from a cost perspective, it clocks in at around 8.2 cents per kilowatt-hour.  In comparison, nuclear and coal costs around 11.3 cents, and natural gas comes in at about 6.2 (https://www.google.com/search?q=cost+of+wind+power+vs+solar&ie=utf-8&oe=utf-8#q=cost+of+wind+power+vs+coal).  While this cost of wind energy isn’t outdoing the best performing sources on the market, it is very competitive and due to this I see a massive shift in the future to wind energy.

In addition to this, the relative cost of capital equipment required in order to facilitate a “wind farm” is relatively small on a corporate scale.  The cost of a single wind turbine is $3.5 million, which in the grand scheme is chump change for what allows for a constant return on investment (http://ansnuclearcafe.org/2011/01/27/the-economics-of-wind-power/).  However, to build a massive facilitate, estimates state that the cost rivals that of a nuclear plant, however due to the economies of scale in place within the wind energy business, increased spending will ultimately result in increased profits.

Now, wind energy farms do provide a bit of risk to hopeful entrepreneurs.  According to reason scientific studies, wind energy turbines only end up spinning and average of 30% of the time (http://ansnuclearcafe.org/2011/01/27/the-economics-of-wind-power/).  This means that plants that utilize this form of energy could face downturn in times of relatively weak winds in the vicinity of the turbines.  While this is a relatively mild risk, it is still something that and investor must think of.  In addition to this, margins on the turbines are relatively low, coming in at around 10% (http://www.renewableenergyfocus.com/view/21108/siemens-aims-for-10-wind-business-profit-margin/).  If we look at similar businesses, oil and even solar energy blows this profit margin out of the water, so moving forward maintenance cost elimination will be a major goal of corporations utilizing this equipment and hoping to create a steady stream of future profits.

Don’t let that detract from investment however, as one key statistic I would like to point out is the weighted average cost of capital (WACC) that wind energy faces relative to similar energy groups.  WACC represents the amount the company must use as a portion of profits to pay off debt, shareholders, etc, and is typically in the 8-10% range.  However this graph states that wind energy comes in around 7% on the WACC scale (http://www.greenrhinoenergy.com/renewable/context/economics.php).

While lower WACC’s do exist, one would expect the WACC of wind energy to be higher seeing as the company will take out a lot of debt and utilize cash mostly for wind turbine purchases, but this graph illustrates that this is not the case.  This is a major boon for the wind energy industry as a whole.

Despite all of this however, wind energy is currently not the major focus on everyone’s mind.  Due to the massively decreased oil prices currently flooding the energy market, the cost of energy and electricity in general has been artificially low. In the present climate of low oil prices, this form of renewable energy is not the main focus of energy companies; the majority of these energy companies are being decimated by the currently low cost of energy driving down revenue growth and profits.  However, oil has start to increase, seeing a 10% increase over the past three weeks.  This being said, moving forward one should expect increased emphasis placed on these wind energy programs and corporations as oil begins to creep back to the levels we saw years ago at around $4.00 a gallon.

Overall, the future is very bright for this energy source; low capital costs mixed with steady streams of cash offset the relatively low risk present while simultaneously creating a business environment where profits can only go up due to the currently low margins.

A recent development over the past few years in the alternative energy field has been the idea of wave power.  That is, energy generated through waves in the ocean.  I would have rather had them call it moon power, but that’s besides the point.  The basic premise of this idea is that turbines are placed in the ocean off the shore, but close enough to feel the effect of waves, and the waves create energy through turning the turbines.  To describe it in a picture:

(http://large.stanford.edu/courses/2010/ph240/bonifacio1/)

That link also has a lot of mathematical implementations for all my fellow math majors out there!  In general this seems like a great idea; the waves always are happening and the generation is constant unlike wind energy, which requires wind, and solar energy, which requires no clouds.  However, as always, this is something that sounds too good to be true.

The first major setback of the application of wave energy from an economic perspective is that the capital cost of implementing the technology is unimaginably high.  This isn’t surprising though, because it basically requires the company to build the ridiculous platform pictured above that goes relatively deeply underwater in order to even think about getting energy from the ocean.  The cost of a single turbine system is $26.9 million (http://www.surfpower.ca/systemcost.html).  In reality, the amount of energy that a single system generates is negligible.  Furthermore, considering the destructive, unrelenting force of waves hitting the shell of the turbine system, there is a high risk of failure, destruction, or similar catastrophic meltdowns of the energy generating system.  The day to day costs would, I imagine, be absurd.  Furthermore, a single hurricane system would most likely destroy the entire turbine, considering how proximity to an ocean amplifies the effects of natural disasters.

Another major current problem facing wave energy is the incredible difficulty that electric companies have to go through in order to convert the energy into useable sources (http://www.economist.com/node/11482565).  Wave energy as it is cannot be simply channeled into electricity like solar and wind.  It has to go through additional processes in order to reach consumer households and markets.  To put this in perspective, the cost of wave energy is estimated to be on average $1 per kilowatt hour.  That’s more than nuclear energy, the current most expensive form of energy from a relative capital investment perspective.

In addition to this, the limited locations that exist and are viable for these types of systems are severely limited.  The ideal area would face little to no major storms, have enough waves to generate power but not damage the system, and then finally the area would have to approve the production of that property.  Furthermore, the relative land costs of a long stretch of beach would be absurd.  Beach-side property is among the most expensive in the world.  While those attempting to develop a wave energy system would most likely choose somewhere that doesn’t have high property costs, the input costs for land (not even thinking about the capital costs of equipment that I mentioned earlier) would still be much higher than purchasing a field for solar/wind production.

Now, while there a massive amounts of con’s that I listed throughout this post, wave energy definitely has a future.  For example, if technology was created that placed the overall systems underwater, and solved the current issues of being an eyesore and facing damage risks, the investing opportunity would be tremendous.  The biggest issue currently is the amount of risk associated with the wave energy systems; the chance that the entire system washes away because of a storm after millions in input capital costs unsettles the stomachs of even the most risk adverse.  One interesting idea I do have for the pursuit of this energy would be to utilize waves created in non-ocean systems.  For example, waves created in the great lakes would provide a much safer investment opportunity for aspiring entrepreneurs attempting to enter the energy industry.  If these waves in lakes could be utilized cheaply to their full potential in the future, a massive amount of the world’s energy focus would most definitely shift to wave energy, and we would ride the wave to a new energy future free of fossil fuels.

With the completion of my team’s deliberation (Which couldn’t have gone better) it is now time to look back on my peer’s deliberations, or more notably the one I attended, which was a a deliberation on the role of college in today’s society.  I chose to attend this deliberation due to both the fact that I am a college student, and naturally I want to get a return on my investment, and also that it seemed very interesting.

The way the deliberation team approached their topic was to split the role of college into three main categories.  These three categories were knowledge, socializing, and career development.  I have to say that these three approaches were the quintessential reasons people attend college, but due to the controversy of the differing opinions about this, I feel that the deliberation went in the wrong direction and could have been moderated better to stay on topic.

For instance, approach one went smoothly and as expected, but then the second and third topic melded together into a debate between career-oriented majors and passion-oriented majors.  One example of this was the overall opinion of general education classes being a waste for career development.  It turned into a debate over whether these should be required or removed.  It even reached a point where one of the deliberaters (Just accept that fact I made a new word) called out another deliberater because of the differing opinions.  The deliberation basically polarized everyone to either be all about career development or not about career development at all.

It even moved to the point where people began to simply express frustration over the way the system was set up.  There was an almost 10 minute segment of the deliberation where the conversation turned to trying to decide if guidance counselors really care about their students.  This came up after multiple students quoted their counselor’s on saying that the student “Will never get a job” with only their current intended major.

Now, I feel like I have been overly critical up to this point, but the deliberation did have a couple bright spots.  For instance, we did come to the conclusion that Gen-eds are a little over emphasized, and that the school needs to make exceptions for people who already have their career goals and aspirations in sight.  Furthermore however, we did decide that gen-ed’s are necessary evils for most, as they do expose students to subjects they could love, but simply don’t know it yet.

Another bright spot, for the most part, was the overall backgrounds of students who came.  We had multiple foreign students, and people across all majors.  It would have been nice for more non-RCL students to come, but it was understandable considering the deliberation was at 6 on a thursday, a night people traditionally are busy.

In retrospect, I have to say that while I enjoyed the deliberation, it really taught me what not to do with ours, and I feel that was reflected in our moderation.  For example, before we personally started, we practiced for a few hours and stressed that any debate must be avoided at all costs.  We did this quite well.  By attending this other deliberation it also allowed me to be able to tell when conversations were going off track.  I tried to moderate this in my deliberation by trying to make a comment that drew the conversation back to the topic, even if I was not in charge of the idea.

Having seen the other deliberation group in class discussing nuclear fuel as another source of fuel, I thought that I would discuss what the current financial situation is for the nuclear energy industry right now.  That is to say whether the expansion of nuclear energy is practical at this point in time.  It is my belief, that while nuclear energy does and will have it’s place in society, it does not have potential to be expanded upon in the near future based on current public perception, liabilities, and technology.

Before we move to the three main points that detract from the practicability of implementing nuclear energy in the US currently, we first have to discuss the entrepreneurs who would be able to begin a nuclear plant project.  Based on current trends, the capital cost for creating a nuclear power plant is enormous.  Looking simply at the construction, the construction of a plant costs somewhere in the ball park of 8-12 billion dollars (http://www.synapse-energy.com/sites/default/files/SynapsePaper.2008-07.0.Nuclear-Plant-Construction-Costs.A0022_0.pdf).  This does not even factor in the cost of land, which based on location could increase this price by a significant amount.  Furthermore, such a project tends to be delayed due to the long period of construction and unforeseen delays caused by the environment or other factors.  This price is projected at 1.2 million dollars a day (http://www.world-nuclear.org/info/Economic-Aspects/Economics-of-Nuclear-Power/).  As one can see, the capital costs of undertaking the construction of one of these plants is a significant hump to overcome.

Assuming one is able to find the financing to create a project, one has to then deal with the liabilities of owning a nuclear plant.  In most scenarios this is the equivalent of playing with fire… Except fire that can get out of control in a moments notice and kill all like within a few miles.  We’ll touch on the technological advancements later, but for now, one must assume that based on current, tested technology, there is a significant portion of risk associated with explosions.  Now the question then turns to who is liable for these damages if a meltdown does occur.  Based on current legislation, nuclear damage responsibility comes down to the following main points (http://www.world-nuclear.org/info/Safety-and-Security/Safety-of-Plants/Liability-for-Nuclear-Damage/):

• Strict liability of the nuclear operator
• Exclusive liability of the operator of a nuclear installation
• Compensation without discrimination based on nationality, domicile or residence
• Mandatory financial coverage of the operator’s liability
• Exclusive jurisdiction (only courts of the State in which the nuclear accident occurs have jurisdiction)
• Limitation of liability in amount and in time

Strict liability, the first point, means that no matter what occurred, even if the plant was sabotaged, whoever operates/owns the plant is completely 100% responsible for the incident, no proof needed, end of story.

Exclusive liability then means that everyone who was possibly effected by any accident the plant caused can bring any legal claim or prosecution against the operator/owner of the nuclear plant.  So in the event of an accident you’re going to be sued…a lot.

Mandatory financial coverage means that a nuclear plant is required to have insurance at all times and also set aside a fund in the event of an accident to cover damages (Normally around 10 billion, based on national treaties, laws, etc) but this money probably won’t cover everything in the event of a meltdown.

Exclusive jurisdiction simply means the operator can only be legally charged within the country of residence.

Limitation of liability, the only pro-operator law in place, says the liability the operator has to pay for accident coverage is capped, and that the state or other organization will help pay for the rest.  This makes sense as there is no possible way a single operator could every pay back the total price of everything within 6ish square miles.  And no, even if you do manage to make it out of the accident still financially well off, the rest of your money is probably going to be lost within court due to that exclusive liability clause!

So basically the amount of risk tolerance an entrepreneur has to have in order to begin to invest in this undertaking is ridiculously high; this presents an enigma.  Entrepreneurs who manage to make billions, aka those who could start a nuclear plant, are risk adverse.  This is not to say that they didn’t take calculated risks, but the risk they would take on building a nuclear plant, given the liabilities, means that they would most likely not support the construction of a nuclear plant easily.

Now, if the risk was removed on the other hand, this would be a ripe opportunity for these entrepreneurs to invest.  Given the relatively cheap runtime cost of a nuclear plant after the capital costs and infrastructure have been implemented, they are actually fairly profitable; the current drain on funds is the massive insurance policies they must take out in order to hedge against risk of upscale accidents.  If this risk was removed, and these insurance policies could be scaled back, these would be very profitable ventures.

This brings up the idea of technology, like the liquid thorium focused plant and similar newer nuclear methods, which have relatively little danger.  However, this technology is in its infancy, and giving the immense glut of technical knowledge required in the understanding of these new plants juxtaposed against the entrepreneurs business focused, do what works based on the past mindset, one can see why investors are not flocking to expedite the development of these newer technologies.

In addition, the current public perception of nuclear power plants following chernobyl and similar nuclear incidents, and the massive amount of legislature these events have sparked also detract from the attractiveness of entrepreneurs investing in nuclear plants.  However, when technology does reach a point where the massive liability associated with a nuclear plant can be eliminated or limited, and the social stigma subsides as nuclear devices become more mainstream, resulting the the repeal of overly critical legislature, it is at that time when entrepeneurs acrosse the country will flock to the nuclear sector, resulting in a relatively seamless transition of much of our nation’s energy to nuclear reactions.

*Preface: Sorry if some links don’t work; most of the citations are Wall Street Journal articles, some of which require a subscription.

In this week’s civic issues blog I’m going to discuss how practical electric cars are given the current financial climate.  Let us not kid ourselves, electric cars are the way of the future, and there will be a critical point over the next 20 years when the shift is made and the crude powered car will be an artifact left behind in the pre-21st century era.  Yet, despite this certainty, the shift will not be made today.  It will not be made this year.  It may not even be made for years.  This is essentially due to the massive effect the shift in oil prices has had on the long term (which I will define as the next 5-10 years) outlook.

There was a time mid-last year when the shift was beginning to be made.  Oil had reached it’s peak price in history, and consumers were paying upwards of 4 dollars per gallon at the pump.  But then something happened…Europe hit a recession…Then Chinese industrial growth stalled…And most importantly US entrepreneurs began to expand the shale oil industry at a massive rate.

What this meant for oil was significant.  If one thinks back to the basis of economics, supply and demand, this can be envisioned as supply increasing dramatically (US shale boom) while simultaneously demand decreasing (European economic and Chinese industrial stagnation) which resulted in:

(Image from http://www.investing.com/commodities/crude-oil-streaming-chart)

So…uh…that escalated quickly. The chart above begins in august 2014 and ends as of today (2/4/2015), showing a net loss of 56% since it peaked at $110.70.  While as a consumer, you’re probably loving this (sub $2.oo a gallon gas anyone?) it basically makes electric car demand hit rock bottom.  Why?  Because bottom line people care about money.  When gas was $4 a gallon, the average consumer was thinking “Hey, this is pretty expensive!  Where those electric cars at?”.  When gas is sub $2 a gallon shortly after that however, the average consumer is thinking “Hey, gas is cheap!  Where those massive trucks and sports cars at?” (Major auto sales up 14%, especially trucks and sport cars http://www.wsj.com/articles/chrysler-sales-jump-in-january-1422968401).  This picture pretty much sums it up…

(Image: http://www.wsj.com/articles/chrysler-sales-jump-in-january-1422968401)

Depressing to say, but I feel that this chart pretty much illustrates my previous statement…Consumers pretty much only care about how things are going to affect their wallet.  The average consumer for the most part does not care about the environment from a fiscal perspective, despite what they might otherwise say.  And this is in essence why the electric car in the current climate is going to see major stagnation in terms of growth and demand.  As a proxy I’ll use Tesla as representative of the entire electric car industry.  Let’s take a look at their stock:

(Image: http://stockcharts.com/h-sc/ui)

The chart above represents the stock price of Tesla for the same period as the crude oil price chart I posted earlier (Price is the middle chart, volume is the bottom).  Tesla stock peaks at $286.04 in early September, which is right where oil starts to go up after the initial slight drop, but then the overall change is a massive decrease.  A 24% decrease in stock price in a period of about 5 months. Yikes.  This is due to the massive decrease in sales of their electric cars as a result of the plunging oil prices.  This correlation between Tesla’s stock price (and therefore the electric car industry) and the price of crude oil is undeniable in this circumstance; people just do not buy electric vehicles when there is no benefit to the consumer from a financial perspective.

However, despite this massive punch to the electric car industry, I feel that Elon Musk sums up the outlook quite well in his recent statement at the Detroit auto show which said “The need for sustainable transport is incredibly high.  Even in the face of massively declining oil prices I think it only becomes more urgent that the industry advance its development of electric vehicles. It’s really just a question of when it goes fully electric, and if it goes sooner that will be good for the world.” (Linky: http://www.wsj.com/articles/tesla-china-sales-declined-significantly-ceo-says-1421186754).  He however then goes on to state in the same address that Tesla should not expect to be profitable till 2020 in the face of the current economic climate (Same link as the last quote).

Looking forward for the period after the next 5 to 10 years, the passing of the torch from gas-powered to electric-run cars looks brighter than ever before.  One can easily expect the demand to rise once again when gas begins to reach and surpass the $100 mark.  Looking back at the stock price of Tesla chart, the major upward trend prior to the steep drop was when the price of oil was above $100, and demand for electric vehicles was at an all time high.  Expect to see a boom even more the next time oil reaches this level, as Ford and GM will be coming out with more affordable consumer electric cars over the coming years (Price tag of 20k to 40k going online in 2017 if my memory serves me correctly).  But for now, America loves its trucks, but electric cars are only a stone’s throw away.