Business consumers must have reliable, available, and affordable energy in sufficient quantities to ensure the uninterrupted operation of the enterprise at full capacity. The innovation, growth, financial health, and success of American companies – large and small – has been sustained by the virtually unrestricted consumption of low cost energy. That’s our history. And most business investors, owners, managers, employees, and customers assume the continuing availability of low cost energy resources. But change is coming.
Despite a growing recognition of escalating energy costs, most of us would rather ignore the fact that supplier reliability and resource availability are deteriorating. Although many business consumers have developed plans to deal with the increasing cost of energy, few have calculated the impact of increased energy costs on the purchasing behavior of their customers.
If traditional energy resources are going to become increasingly expensive, and sporadically unavailable, then business consumers will be forced to deal with these challenges in a traditional way: curtail operations and lay off employees. Hunker down until things (somehow) get better. If we are lucky, our economy will only experience a mild (though annoyingly chronic) decline in GDP with increasing rates of unemployment and inflation. Under certain economic and cultural conditions, however, we could be in for a deflationary depression with plummeting GDP and employment.
Is that what we want?
In order to avoid the economic and cultural consequences of a deteriorating energy resource scenario, we have to take a serious look at America’s energy policies. We have to merge our environmental concerns with energy reality. We have to work together.
AES (Alternative Energy Systems) Evaluation Criteria and Methodology.
Rational energy project management methodology requires the evaluation of alternative energy programs against a set of defined criteria. This is the essence of disciplined project management. We have a set of criteria, and a methodology for evaluation. Each program has its own set of objectives and a timeline for completion. Comparative analysis forms the basis of our judgments. Successful programs can be encouraged with the infusion of additional labor and capital. Failing programs can be weaned or redirected. In my previous article: “Alternative Energy, It’s Time To Evaluate Our Options”, we took a look at the evaluation of alternative energy proposals versus a set of defined criteria. Although the definitions attached to these criteria can be refined, they do provide the basis of our evaluation effort. As discussed in the referenced article, our evaluation criteria should include:
- Basic Economics. The price of energy supplied to the consumer must be affordable within the constraint of measuring the amount of money spent on energy as a percentage of income. Long term producer costs must be less than consumer prices.
- EROEI: Energy Returned On Energy Invested. That is to say, the amount of energy we get from a production process must be substantially greater than the energy consumed by that process. Otherwise, each successive cycle of production will theoretically reduce the energy available for consumption.
- Labor Efficiency. We need to start thinking in terms of the hours of labor it takes to produce a given level of energy. We also need to examine the additional hours of labor it will take to perform energy intensive tasks if we can not rely on the high energy content of oil.
- Process. The energy production process must be scaleable, repeatable, reliable, and available for mass production, distribution, and consumption in sufficient volume to become a mainstream energy solution.
- Infrastructure. The best alternative energy solutions will be compatible with (or adaptable to) the existing distribution and consumption infrastructure. We have to consider fuel handling, transportation, safety, security, availability, and reliability. We can not ignore our existing vehicle and power generation technologies.
- Use of conventional fuels. Some alternative energy proposals will ultimately fail because they assume the availability of low cost oil and natural gas. Such proposals are not a solution. If oil and natural gas are in short supply, or only available at a sharply higher price, they have to be removed from the energy equation.
- Benefits. We need to find someway to quantify, qualify and measure the benefits of the proposed alternative energy solution versus potentially more efficient or desirable uses of the resources employed. The energy solutions we chose can not displace the alternative benefits derived from the resources we consume in the process. Else – on a net basis – we have accomplished nothing.
- Subsidies. Governments love to hand out subsidies. But in the long term, subsidies are not economically sustainable. They bury the real cost of energy, artificially encourage consumption, and increase the cost of government (thereby increasing the risk of financial failure).
- Credits. Credits are used to inflate the benefits of certain alternative energy solutions by including the indirect (non energy) co-products in the cost benefit analysis. Credit should only be given for energy efficiency or conservation.
- Unintended Consequences. If the energy supply chain is really a system, and all of its component parts are interrelated, then we have to follow the impact of each alternative energy proposal from research and development through production and distribution to the act of consumption.
- Waste. Every energy process creates waste. We need a way to quantify and qualify the type and amount of waste from each energy resource so that we can make comparisons of the resulting waste disposal challenges.
- Ecosystem. We all hope the mobile and stationary application energy solutions we chose will yield a net reduction of undesirable emissions and waste material.
Since it is likely that government has neither the will, nor the capability, to implement a rational, science based evaluation methodology, one has to wonder if American enterprise can step into the breach to save the day.
We start with the obvious. American business organizations – large and small – are energy consumers. In order to assure their financial success, provide continuing employment, and meet their commercial obligations, these organizations must be assured adequate energy resources will be available at a price they can afford to pay in a competitive market environment. American businesses need mobile and stationary fuels. They need electric power. They can not survive on failed promises, and equally important – they know the price and availability of energy will have a pronounced impact on the welfare and productivity of their employees. As energy consumers, all businesses have a stake in the outcome.
So. What can American business enterprises do?
The first step is to find an existing organization that is ready, willing and able to create and execute a plan of action. This is a management process. Required capabilities include public relations, marketing, sales, research, development, manufacturing engineering, production, distribution, financing, and enterprise support. This organization must be have a positive attitude, have sharp technical skills in multiple disciplines, be assertively proactive and politically astute. It will create, launch and execute a strategic plan with achievable objectives, strict timelines and a crisp definition of management responsibilities.
The second step includes the characterization of the AES criteria against which alternative energy technologies can be evaluated, and a disciplined methodology for conducting the evaluation. There are two basic energy applications. We need high energy content mobile fuels for our vehicles, ships and airplanes. We need bulk quantities of stationary fuels to generate heat and electricity. Each application will have its own set of evaluation criteria. A key concept of the evaluation process is the recognition that any energy resource -oil, coal, wind, biomass or whatever, is an element of a complex supply chain. Evaluation criteria must view energy as a system. All of the elements of the system are interrelated and interdependent. All energy solutions include some level of risk. No proposed energy solution is useful unless it will be economically and structurally viable without government support. And finally, all alternative energy system technologies must be evaluated by a third party using the AES criteria and methodology.
Our political leaders must be encouraged to endorse science based energy technology, the use of the AES evaluation criteria, and the conclusions of a disciplined evaluation methodology. The Federal government will need to establish a comprehensive energy policy covering R&D, interagency coordination, partnership programs with private industry, grant programs for academia, and the funding of promising technology. State and local governments will participate in the alternative energy system implementation process through legislative support and consumer education.
On the other hand, if our political system fails to deliver a viable energy policy, then business consumers will be forced to take matters into their own hands. Let’s hope this comes in the form of pre-emptive strategic initiatives, rather than destructive decisions made in an environment of economic panic.
Ronald R. Cooke
The Cultural Economist