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Opportunities in the New Energy Economy

Robbie Diamond, founder and CEO of Securing America’s Future Energy (SAFE), a nonpartisan organization urging energy reform, discussed potential solutions for the U.S.’s dependence on oil at Chief Executive’s CEO2GOV Summit. Here are excerpts from his remarks.

I’ll spend time speaking about three issues. One is the current oil problems we face and what the future holds based on forecasts and other types of predictions concerning energy, as well as oil. Two is one way to solve the problem, which is electrification of transportation. Three is the legislative/political environment in Washington and what we expect on climate change legislation and energy legislation in the U.S. Senate and beyond.

Oil consumption in the world has basically peaked in developed countries. But emerging countries will account for 100 percent of demand growth going forward. And that’s expected to grow about 25 percent in the next 20 years, with, as I say, 100 percent of that coming from developing countries, mostly India and China. Ninety-seven percent of this growth is for transportation, which is why transportation is such a big problem here.

If you look at why we do grow, one could look at car use in India and China. In 2009, China surpassed the U.S. to become the world’s largest auto market in annual sales. We still have more cars here, but if you look at the increase in the number of cars, that’s set to soar in China. So if you look at the light duty vehicle stock, right now look how low the U.S. is. A statistic from 2007 says that we have 1,140 cars in the U.S. per 1,000 licensed drivers. In China, they have nine. In India, they have 11. And France has about 700. That gives you an idea of how much more oil will be needed over time.

Then we look at the supply side of the equation. In the Gulf of Mexico, we see now what deep water drilling does. It’s a very complicated and expensive process.We’re not running out of oil, per se. What has peaked is easy oil. So, oil will progressively have to get more expensive, because it costs us more to extract as well as creates problems—as you move down the continuum the processes not only cost more but also are worse for the environment.

It’s important to note that there’s no free market in oil. Up to 90 percent of oil and natural gas reserves are owned by national oil companies. The 15th largest holder of reserves is Exxon Mobil. So what we typically call big oil is actually all those oil companies. So although oil is traded, the price is on a free market, we would argue that the market is created by people sitting in a room like this deciding how much oil will be on the market or off the market. It’s important to keep that in mind as you talk about the government’s role in energy.

The economic costs of oil dependence are staggering. In 2008, when prices spiked, the Department of Energy estimated that it cost the country $577 billion that year. And since 1970, the Department of Energy has estimated that the economic damage exceeds $5 trillion.

There are three metrics of oil dependence. First is just a plain old transfer of wealth. That’s the greatest cost. We’re taking money from the U.S., money that could be productive, and just sending it abroad. Some of it recycles back as petrodollars, but less and less is recycling back every year. The second one is economic dislocation. As price changes, businesses change their plans because of the higher oil price and that cost. And, finally, foregone GDP. People are spending more for energy and less on other goods.

It’s interesting to note that the oil price increase actually wiped out President Bush’s tax cut. People might have been getting a price cut, but they were just paying more for energy. The most staggering number is that in 2008, $386 billion, or 56 percent, of our trade deficit was actually to import oil.

Now let’s look at what we use oil for and generational electricity. Only 1 percent of electricity is generated by oil, most of that in Hawaii. Fifty percent is coal. Twenty-two percent is nuclear. Seventeen percent is natural gas. And eleven percent is renewables—8 percent of which is hydroelectric. So wind and solar are a really small component of what we use. And only 1 percent of the U.S. demand for electricity is for transportation. In fact, 94 percent of our transportation requires oil and there are no other substitutes. Which is why our oil dependence is fundamentally a transportation problem.

Electricity is diverse and domestic. Its prices are generally stable. Over the last 20 years, net aggregate electricity prices have actually gone down. The power sector has substantial spare capacity. As many of you may know, there’s no way to store electricity. You have enough generation to meet the most electricity needed in any one day, which is usually the hottest day of the year. So we have all this spare capacity that we’re just not using.

And, finally, the network exists for electricity in the entire country. Every home in America, every business has lights. You can’t say that about many other energy forms. There are really only two national infrastructures in the U.S.: gasoline and electricity.

That’s why we think we should electrify our transportation. What has made that possible is the lithium ion batteries in the cell phones we all carry. But while we have that ability, there are huge challenges. The question is, will the U.S. be able to do this? I’ve become more convinced that electrifying transportation is inevitable. The internal combustion engine is over 75 percent inefficient. We waste all that energy to heat. And electric motors are over 90 percent efficient and simple, with very few moving parts. So I think that’s an inevitable trend forward; and you see it with hybridization.

But does the U.S. have the right structure to make this happen? The truth is we actually have the wrong structure to be the first in this new dynamic. You’ve got Europe with higher oil, gas and diesel prices, which makes the current electric cars more economically viable for the average consumer in comparison to an internal combustion engine. And you’ve got China with the ability for a little more command and control: “We’re just going to do this.” They also have a citizenry that has never really driven a car. So they’re much more willing to live with the iterative process of technological advance.

The concern we have for the country is, if this is an inevitable challenge and we don’t put that environment in place, we’ll ultimately be importing the technology from other countries in the world. So there are huge challenges for the U.S. and for electrification as a whole. We weighted them out into four categories: batteries/vehicles; charging infrastructure; the electric power interface and consumer acceptance.

1. Batteries and vehicles. The advent of the lithium ion battery [can] dramatically change the equation, but you’ll still need a huge amount of lithium and a huge battery. The battery-related costs make these cars much more expensive than internal combustion engines, at least right now. Costs will come down both with technology advances, but really it’s really about the scale of production. And there’s no commitment in the U.S. yet to get scaled production of batteries to the point where you see the benefits and the cost reduction. That’s a chicken-egg problem.

2. Charging infrastructure. There’s really no profitable business model to lay out a public charging infrastructure. So there are three types of charging we’ll do in this country. The first is called Level 1, or just plugging your car into the socket at 110 volts. Of course, that takes a longer time to fill up, because it’s only 110 volts.

The second is called Level 2, which is 220 volts. People will have chargers in their garages with 220 volts. So it will take half as long to fill up your car.

The third is Level 3 or direct current charging, which is like fast charging. That’s equivalent to a gas station. You drive up and they can do it in, depending on the type of battery and the type of charging, less than 10 minutes.

The fourth is battery swapping, which Israel and Denmark have sort of adopted. You drive into gas station, take out the battery, put in a new battery and you drive on in a matter of minutes.

But there’s really no business model to make that happen, to own that charging infrastructure. So the return on investment is way over 10 years, unless you really hike up the rates for the electricity, which, of course, changes the model and the total cost of ownership. So here the model is that you pay more upfront for the car because you’re paying for the battery and you have very little operating costs, both for fuel because you’re never buying gasoline or buying very little gasoline, or your maintenance costs go down dramatically.

So like I say, but there’s no business model to do that unless you really raise the rates of electricity and so the question is, what is that business model? Like I say, there’s a company in Israel called Better Place that sort of—they own the batteries. They do the swapping. And by owning the batteries, they see the value of basically providing a public infrastructure for free. I think that’s where the role of government at least is in the early years and we can talk about that, as well. How much infrastructure one would need.

3. Electric power sector interface. As I said before, there’s two ways to charge these vehicles, a smart way and a dumb way. You can just plug in and you get the electricity or you can maximize the great advantages of our utility sector, which is this peak extra power. With “time of day” pricing, people are encouraged to fill up at different times or you can sell energy back to the grid at peak times.

If everyone came home at 6 o’clock at night and we have millions of these vehicles and we didn’t have a way to deal with that, the lights would probably go out. But if we do this in a smart way, it’s actually a great advantage to the country.

4. Consumer acceptance. Besides price, I would put that as the number two issue. There are two models that people hear about now. The Chevy Volt and the Nissan Leaf. And they deal with charging in very different ways. The Chevy Volt has a battery has a gas tank alongside it. After you’ve run out of battery power at about 40 miles, the gas tank uses liquid fuel to basically run the electric motor and drive the car. That gives you what they call range extension.

The Nissan Leaf does not have the gas tank so once you run out of battery capacity, you can’t really go anywhere. They go about 100 miles at the moment.

It’s important to note that more than 80 percent of all trips in the U.S. are under 40 miles. Our sense of how we use our cars is very different. Your car mostly sits in your house or garage, you use it about 15-to-20 percent of its life. So I don’t perceive these as problems with the way most of use our cars, but they problems with the way we reflexively think about the way we use our cars.

There’s a new term called “range anxiety.” This notion that “I’m going to run out of battery and then what am I going to do?” Most people get over it fairly quickly. TEPCO, the Tokyo Electric Company, did a study in Tokyo to see how people would use electric cars. And they went about a 10-mile radius. People wouldn’t go further than that; they were nervous.

So they decided to put these fast-charge stations in strategic places around the city. And then people would go 50 miles, about five times the distance as before. But they actually never used any of those fast stations around the city. It was just that idea that they could go to those stations that changed the dynamics. So in the early years we’ll see a big push for infrastructure that will be less necessary over time.

So those are the four big challenges. The Electrification Coalition put out a roadmap for the U.S. calling for 75 percent of vehicle miles traveled to be electric by 2040. That lays out the required penetration.

To get to 75 percent by 2040, we would need about 700,000 vehicles by 2016, which is more than the current production schedules of the major car companies. Because there are about 250 million vehicles in the U.S. and we keep our cars on average about 15 years—not as individuals, but they’re resold again—so you need a lot of time to change over the U.S. fleet.

So the only way we thought that this was possible was to create what we call electrification ecosystems or what the U.S. Senate and the U.S. House and the legislation that was introduced two weeks ago called “deployment communities.” Instead of scattering these cars across the country, we would have a race-to-the- top-type of competitive bid process for communities across the country. Those that put forward the best plans would be awarded temporary strategic incentives for both the vehicles and the infrastructure.

That is important because you want to move beyond early adopters right away. There are actually only 1.6 million hybrids—out of 250 million—in the U.S. That took 11 years. So the problem is getting beyond the niche market, the environmental enthusiasts and techno geeks. The way to get around that is to get both the benefits of wide-scale deployment and mass-scale production by focusing on these areas, so that the benefits are very clear, both to the utility and to the driver. Once we get these cities online, you can expand at a much quicker rate.

So there’s sort of a Phase I/Phase II deployment. On the Phase I deployment, it was about six to eight communities that would be chosen. In 2016, another 20 communities would be chosen. And you’d have about 50,000 to 100,000 cars per community with the requisite charging.

A Senate bill and a House bill were introduced based on the Electrification Roadmap. The bills are slightly different, but they both have the philosophical idea of having this race to the top process. We look forward to working on that legislation. I’m very excited about it.

Q&A Session

Isn’t one of the big problems with the electrical car the amount of energy that’s required to manufacture particularly the batteries and things of that sort?

Robbie Diamond: There is the same problem in manufacturing any vehicle, as well as with getting oil from the well up and to the car. The challenge people talk about the most is the dependence on lithium and the dependence on rare earth metals. I’ve rarely gotten into the debate on the manufacturing process.

A lot of problems with infrastructure seem manageable when they’re small but become a big deal when they scale up. So 75 years from now will we look at the same charts and instead of the word “oil,” see “lithium” and instead of the name “Saudi Arabia,” see the name “Bolivia”?

Robbie Diamond: So, in the Electrification Roadmap, which I’m happy to provide and you can also download it at Electrificationcoalition.org. we have a chapter that addresses rare earth metals and lithium. We don’t see it as a risk. There’s a lot of lithium in the world. Right now, it’s mostly produced in Chile and China and in the U.S. As you need more lithium, they’ll extract it in different ways than they do today. And there is a lot in the U.S. and in other countries.

Second, lithium is actually recyclable. So we don’t need that much lithium. So the dependence on lithium is different than oil for two reasons. One is, like I say, once you have the cars and the lithium in the cars, they’ll just recycle it, just like we recycle car batteries today, 100 percent of your car battery is essentially recycled.

And two, the oil dependence problem we have today is that, if someone cuts off the oil in the world or there’s a problem, cars just don’t go. With electric cars, that’s not the problem. Once you have the lithium in the car, the car can go as much as you want. You can solve the problem while cars are still going around. You might stop producing cars for a while. So it’s a fundamentally different dependence.

I think you drastically underestimate the challenges of rare earth metals and drastically underestimate the dependence on coal. Are we substituting one fossil fuel problem or one limited resource problem for another?

Robbie Diamond: We haven’t focused on the generation component of this. I would say a few things. The national labs in the U.S. believe that you could fill up half the cars in the U.S. with the current generation capacity we have today, assuming you fill up at night, when most people will be doing this. So I don’t think that the generation side is our biggest challenge at the moment. We have a lot of spare capacity.

From a coal perspective, we produce 50 percent of our electricity using coal and filling up our cars on coal increases the amount of time that we are firing up those generators. But at the same time, the internal combustion engine is actually dirtier than filling up an electric car on the oldest coal-fired power plant in the U.S., according to the National Resource Defense Council.

So it is marginally better. It’s not going to solve your oil problem, your climate carbon issue, if you just use coal-fired power plants. But it is slightly better and that is a good thing.

But the idea here is that as you transition over your fleet to electric cars you no longer have to worry about those years where you’re transitioning the fleet and changing your car park. Once you’ve changed it, you’ve pushed your problem upstream and you have thousands of power plants as opposed to millions or hundreds of millions of power plants, per se, to regulate.

So you simplify the regulatory environment from a climate perspective, as well, and every time you put on the new wind plant or solar plant, you are now in essence also fixing your transportation sector at the same time. That’s the way we see it.

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