Sunday, April 30, 2006

It's a stalemate guys!

I keep waiting for someone to explain to Bush, Rummy and the gang that a stalemate doesn't count as a win--when you are the superpower.

Clarification of previous post

In the previous post I suggest that wind and solar farms sell calls to generate thousands per MW/yr.

To clarify, I mean that each megawatt of capacity can generate thousands for each year (between 2016-2036) that call options are sold. A MW of capacity can (and usually does) generate thousands of MWh of electricity in a year, depending on how many hours a day the system generates energy. I just want to be clear that each MWh would only cost/generate a few $ in call premium. Electricity today costs on the order of $50/MWh to generate so the premium is a fraction of today's cost not 20 times today's cost.

Still those few $ a MWh, times thousands of MWh/yr, times the number of MW of capacity, times a decade or two gets one to the millions I claim renewable energy farms could be reaping today. In the future they will still sell their energy either to the call owner at the arranged call price, or the then market rate if it is lower than the call price.

Saturday, April 29, 2006

Call options would benefit renewable producers

Wind and Solar farm operators should sell call options (today) on their electricity production for the years 2016-2035. Since both types of renewables have no fuel cost, they know (approximately) how much it will cost to produce electricity in that period. They can select a future electric price that will be profitable. Because of the long time horizon, the theoretical value of the options would be tens of thousands of $/MW/yr. Even if they could only capture 10% of this theoretical value, they would generate (right now) millions of $ by selling the options. This call premium could be used to pay off debt early, further boosting the profitability of the venture.
Meanwhile the call purchasers (utility or end consumer) would be in effect buying "electricity price insurance". The buyers would effectively cap future electricity prices for several decades. At the same time the buyer will not be "locked-in" to some arbitrary high future rate because if the market rate were lower than the option rate, the buyer could simply buy at the market rate.

I have written a journal ready article explaining this concept in more detail. Please contact me if you'd like a copy.

In the past 20 years electricity rates have not been very volatile, but as fossil fuel prices rise they will cause ripple effects that will lead to higher electric rates. For example, sustained or increasing high oil prices will raise the cost of mining and transporting coal. This will in turn raise the cost of electricity about 50% of is coal generated in the US.

Friday, April 28, 2006

Options groundwork

This post explains how a financial call option works. If you already understand call options skip this post. I plan to use the concept extensively in later posts.

A call option is a type of derivative that grants the owner the right, but not the obligation to purchase an asset at a fixed price and at a fixed time in the future (the expiration date). A put option works the same for selling an asset. The value of the option depends on the price of the asset, the volatility of the asset and the time until the option expires. Volatility measures how likely the asset is to fluctuate in price.

A textbook example of a call option has XYZ Corp stock (the asset) selling for $50 a share today. Lets say you think XYZ stock is going to rise significantly in the next six months. You could buy XYZ corp stock for $50 today and hold it for 6 months, or you could buy a 6 month call option.
Consider two cases: 1) a call to buy the stock at $50 in 6 months that costs $7, and 2) a call to buy the stock at $60 in 6 months that costs $3. Here is where your predictive powers come into play.
  • If you think the stock will get over $57 ($50 strike + $7 call price) but not over $63, buy the call in 1).
  • If you think the stock will rise to over $63 either call will be profitable.
  • If you think the price will rise above $67.5 the call in 2) will produce a higher return.

Let's say you buy a call option and the stock rises to $70 in 6 months. The option from 1) is worth $20. [The option lets you buy a $70 asset for $50.] Since you paid $7, your return is $13 or 186%. The option from 2) is worth $10, but you only paid $3 so your return is $7 or 233%. Compared to the buy and hold strategy which saw the $50 investment rise to $70 for a 40% return, the options really outperform when things go your way (people call this phenomena leverage).
Be aware that things can go wrong. If in 6 months time the stock only rises to $55 (+10 return for buy and hold), the call in 1) is only worth $5 which represents a loss of $2 or 29% and the call in 2) is a total loss.

Thursday, April 27, 2006

Oops I wanted to remove that photo after I got it into my profile. It was hard to find a picture that I could crop down to 50kb. Sorry for the extreme blurry close-up. Anyone know if I can delete that post now that I have it linked to my profile?
Well, if you look closely you can see a sliver of the invention I've been working on for a couple years.

testing photo function

Steady high gas prices can be a good thing

High gas prices seem to have gotten America's attention, now what are we going to do about it?

Perhaps the most cynical proposal was suggested by Senator Frist, send everyone a $100 check to "ease the pain" and return to business as usual. How dumb does he think we are? More constructively, President Bush actually requested authority to increase average car fleet mileage standards. Wow, the president is asking for something? Normally Bush just does whatever he wants. Maybe he hopes Congress won't let him. I am unsure what the president would do if he received such authority considering the modest increase he has proposed for SUVs and light trucks (an improvement of less than 0.5 mpg/year starting in 2008). Nevertheless raising fuel standards is actually one good thing the government can do, especially considering how unlikely car makers are to do so on their own (based on the last 20 years track record).

There is very little that can be done in the short term to reduce fuel prices. Although I'm sympathetic with those experiencing economic hardship due to high fuel prices (I'm unemployed and believe me I feel your pain) in the long run, high fuel prices are good if they cause us to use gasoline more efficiently.

The good news is that we can make massive improvements in efficiency with little or no reduction in GDP. About 1% of the energy content in gasoline actually moves the driver to their destination.

Making cars (& trucks) lighter is one simple way to significantly improve fuel efficiency. I don't buy the nonsense that lighter cars are less safe. If mass = safety, we would all wear cast iron bicycle helmets. In the middle ages, perhaps heavy = safe reasoning fit the might-makes-right world view. In the last half millennia we developed a subject called "E-N-G-I-N-E-E-R-I-N-G" that lets us do light and safe simultaneously.

Battery innovation needed

What/when was the last major advance in battery technology? How do they even measure advances in battery tech? Capacity/lb? Capacity/$? Charge/Discharge rate? Are there innovation cost curves for battery Moore's Law for semiconductors, magnetic storage density, wind power etc.? Is there a physical limit? Are we close to it?
It strikes me that significant improvement in energy storage would boost a whole host of renewables energy sources. Can anyone point me to resources that look at this problem?

Civil disobedience

What would happen if people all turned on their air conditioners at the same time? How many people would it take to cause conniptions at the electric company?
1000 would cause a demand surge of several megawatts (AC units draw twice as much power for startup as normal running). 100,000 would cause nearly a gigawatt demand surge. Is that kind of surge easy or difficult for a utility to manage? What if they then cycled their AC units on and off like an annoying kid playing with the light switch? Coordinating the timing would be difficult but could be accomplished by cuing from a TV signal. I'm just curious...not advocating that anyone try this :)

What can I do about global warming?

I was over at the Energy Outlook when I saw a link to Terra Pass. This is totally cool, for about $30, I offset the CO2 emissions I'll create by driving this year. (I've already cut back on the driving I do.)

A lapse counting laps

I like to swim for exercise, about 1 mile 3 times a week. This means swimming back and forth about 40 times. The problem I have is that after about 5 minutes of swimming my mind starts to wander and I lose count. This happens a lot and it is frustrating. I could just swim for a set length of time I suppose, but when I try that, I believe that I swim at a slower speed. I wish there were an easy to use (& inexpensive) counter that I could use. A simple digital counter (waterproof of course) with a button I could tap every time I complete a lap. I would swim more if I had a counter b/c it is fun to let one's mind wander...I find some really good ideas bubble up.

Update 5/9/06: I just discovered a potential lap counting solution thanks to Steve's Inventing... blog called getswimming. I ordered one up and will report back how it works. This problem has been bugging me for years.

relative cost of energy

I was amazed to wake up this morning and discover that my computer (XP) had crashed overnight. Gasp! But I'm guessing that it has been weeks (possibly months) since it last crashed. Only five years ago my then computer crashed weekly if not daily. Isn't progress grand?

As I drifted off to sleep last night I was thinking about the relative "cost" of energy. (I'll just note that I disagree strongly with many of the assumptions that underlie the "cost" of energy.) Energy today is insanely cheap (laugh if you like, but only because 5 years ago energy was even cheaper). If you could see where energy prices will be in 25-50 years I'm sure you'd be choking.

I'm not an expert, but the widely accepted "cost" of coal, natural gas and nuclear generated power is somewhere around $0.04 kWh. Of course this number is rising due to fossil fuel volatility and the associated ripple effects. (And yes as a consumer in the US you are probably paying $0.08 or more "at the meter".) For wind and solar widely accepted "costs" are about $0.06 kWh (megawind) and $0.20 kWh (Solar PV), although each of these technologies has dropped by a factor of 10 or more in cost over the last ten or so years. I'd be very interested to see what the "cost" of solar thermal (using sunlight to heat water directly) is penciled out as, since that technology is widely viewed as the most competitive (and has been for decades). Has anyone done/seen this calculation?

In any event, for the last 20 years and continuing on today, everybody with an economic bone in their body "knows" that solar energy is WAY too expensive to solve our energy problems. Still, how many people would pay 100 times the cost of solar for a specific application? how about 1000 times? how about 10,000 times? The question is not rhetorical, if you have ever used disposable AA batteries, you've paid the rough equivalent of $2,000 kWh (assuming $0.55 per AA). [I picked this concept up at last year's Solar World Congress.]
There is a huge amount of value in delivering energy where and when it is needed, a value that quite literally, swamps by a factor of 10,000 the quibbling over which technology is cheapest.

PS I do hope (and expect) renewables to get cheaper, I just don't believe their "cost" is why they cannot be widely adopted.

Wednesday, April 26, 2006

Newbie thought

Lights! Camera! Keypad!
And thus the blog-o-sphere grows by 1.

Readers may find this blog slightly eclectic, I'm not yet certain where it will take me/us. Hopefully I can engage both of my readers on a wide range of topical topics. Favorite subjects include energy, clean water, leadership, swimming, humor, behaviorial economics, optics, efficiency, science fiction, misplaced priorities, options markets, thermodynamics and perverse incentives.
Perhaps that list is a bit broad making it unlikely I'll hit each subject everyday.

Let me simply observe that the solar industry made a mistake from the start: it should have given away the solar equipment and charged for the sunlight. Just imagine how different things might be now...