Felix Salmon

Dan Ferber’s 3,500-word article on Vehicle-to-Grid is far too long for you to read, especially when Greece is busy imploding, but it’s a very important idea. So let me give you the shorter version, starting with four facts about the energy industry.

• The 146 million cars, SUVs, and pickup trucks in America, between them, produce seven times the power of all US power plants combined.
• The supply of energy is volatile, and will get more so as we move to renewables like wind and solar. Those sources only produce energy some of the time.
• The demand for energy is also volatile, going up during the day and when it’s hot outside.
• Storing energy, by doing things like pumping water uphills into reservoirs, is expensive and cumbersome. And those energy sources can’t provide the small bumps in power needed to ensure that AC electricity is running at 60 hertz at all times.

All of which opens up an amazing opportunity for owners of electric vehicles — be they electric, hybrid, or fuel cell. Those vehicle owners can basically become baby energy traders, fueling up their cars at night, when electricity is cheap, or at the pump. And then plugging their cars into the grid, where they can sell energy back to the grid for much more than they paid for it.

Willett Kempton of the University of Delaware has already set up his electric Scion to do just that; it’s been earning him $300 a month since 2009.

This is a fantastic idea, and it’s a no-brainer, really, that all electric cars should have the ability to power the grid, rather than just drawing power from it. The number and size of power plants is a function of peak electricity demand; if electric-car owners collectively can help meet peak demand, then that means we need fewer power plants. And, the revenue from selling that electricity would help offset the extra cost of buying an electric car in the first place.

The batteries in electric cars are expensive and valuable pieces of technology which go unused for most of the time. Let’s put those things to use, and make money doing so! The only real question is why this isn’t happening already.

NYU Law School’s Institute for Policy Integrity has an important paper out today, explaining that the US is using a crazy system to determine whether to allow offshore oil drilling.

Under something known as the Revised Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, the Bureau of Ocean Energy Management, Regulation and Enforcement does a very basic cost-benefit calculation when deciding whether or not to allow drilling in a certain spot: it looks at the costs, and then at the benefits, and then if the benefits outweigh the costs, it gives the go-ahead.

What this calculation misses is the significant option value of doing nothing. The oil is, after all, not going anywhere — and if you don’t drill for oil right now, there’s a good chance that the costs of drilling for oil in the future, both economic and environmental, will be lower than the costs of drilling for oil in the present:

Once the decision to drill has been made, it cannot easily be unmade. But that does not mean the only choices are either to drill now or never: waiting to decide is also an option. Because safer drilling techniques and more effective cleanup technologies continue to be developed, the costs associated with drilling should decline over time—perhaps in fits and starts, but following a generally downward trend. Meanwhile, future market prices for the extracted oil are uncertain, jumping one day and falling the next. Given this uncertainly, it only makes sense for the American public to wait to cash in the value of their finite oil reserves until the price is right: when the oil can be sold high, but environmental costs are low.

Unfortunately, the government’s analysis has consistently failed to take into account the option value associated with waiting to drill, even though the methodology to do so has existed for decades. Because of this analytical failure, the government risks the possibility of selling the American public short to the tune of hundreds of billions of dollars.

It’s entirely possible to run a cost-benefit analysis on the value of not drilling for oil — or, more precisely, of waiting until the value of drilling is higher than it is now. If you don’t calculate the benefit of not doing something, then you’re much more likely to do it. And as a result, there’s probably a lot more offshore drilling going on right now than makes rational economic sense:

Calculations that fail to take into account option value are overly simplistic to the point of being misleading. As Dixit and Pindyck stated in their early textbook on the subject, failing to account for option value “is not just wrong; it is often very wrong.” An economic analysis that ignores the option value of waiting overvalues the net benefits of immediate exploitation and will systematically lead to inefficient overexploitation.

The paper makes the case that the current state of affairs is not only economically irrational, but is also both illegal and dangerous:

More complete economic models may have helped prevent the BP Gulf Coast Oil Spill. The value of waiting is greater for relatively more risky drilling activities, like the deep sea operations at the center of the BP spill. Such techniques are relatively newer, and inexperience increases the uncertainty about the extent of risks, the robustness of safety technologies, and the ability of cleanup and containment efforts to reduce harm. If the agency had used an adequate model of costs and benefits when evaluating this kind of deep sea operation, the benefits of waiting for better technologies might have exceeded the short-term costs of delay, leading to smarter use of our offshore resources and fewer risks imposed on the public.

The science of drilling for oil is improving very rapidly — and as a result, a moratorium on offshore drilling might actually cost nothing, once the benefits of improved future drilling techniques are taken into account. Wonks like energy secretary Steven Chu can understand this easily enough. But will they do anything about it?

I was offline most of yesterday attending a high-intensity series of presentations hosted by Esquire magazine in the magnificent suite of rooms at the top of the new Hearst tower. GE’s Eric Loewen was there, talking about nuclear power, and specifically what he calls a PRISM reactor — a fourth-generation nuclear power station which runs on the nuclear waste generated by all the previous generations of nuclear power stations.

PRISM is GE’s name for an integral fast reactor, or IFR, and it’s a pretty great technology. The amount of fuel which already exists for such reactors would be enough to power the world for millennia — no new mining needed. Fast reactors also solve at a stroke the problem of what to do with the vast amounts of nuclear waste which are being stockpiled unhappily around the world. They’re super-safe: if they fail they just stop working, they don’t melt down. And they can even literally replace coal power stations:

One nice thing about the S-PRISM is that they’re modular units and of relatively low output (one power block of two will provide 760 MW). They could be emplaced in excavations at existing coal plants and utilize the same turbines, condensers (towers or others), and grid infrastructure as the coal plants currently use, and the proper number of reactor vessels could be used to match the capabilities of those facilities. Essentially all you’d be replacing is the burner (and you’d have to build a new control room, of course, or drastically modify the current one). Thus you avoid most of the stranded costs. If stranded costs can thus be kept to a minimum, both here and, more importantly, in China, we’ll be able to talk realistically not just about stopping to build new coal plants but replacing the existing ones, even the newest ones.

And best of all they’re eminently affordable: Loewen showed that they could be profitable selling energy at just 5 cents per KwH — which means that you don’t need to price carbon emissions at all to make these power stations economically attractive. With pricing on carbon emissions, of course, they become even economically compelling.

So what’s the problem? They’re untested, and the regulators in the US will take many years and many billions of dollars before they will approve such a project. And legislation is needed, too — including legislation allowing the use of nuclear waste as a fuel. But mainly all that’s needed is political will. It’s unclear the degree to which Steven Chu, the US energy secretary, supports this technology. But if he puts the weight of the Obama administration into supporting this technology and trying to make it a reality, then a lot of private capital will start flowing into the area. And it might be much, much easier to achieve ambitious carbon-emission reduction targets than many people currently think.