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Archive for August, 2011

A single third generation nuclear reactor could meet Delaware’s electricity generation shortfall with clean, reliable, affordable power for the next sixty years. New modular designs offer improved safety, faster construction, and lower initial cost than older power plant designs. Over 100 such plants, many to be built by U. S. companies, are planned worldwide. The Nuclear Regulatory Commission (NRC) is in the process of pre-approving several designs that would need no additional licensing. Delaware could benefit from selecting one or more 1000 to 2000 acre sites for classification as pre-approved Nuclear Energy Parks. A typical plant would employee several thousand construction workers for up to five years and would lead to a thousand permanent direct and indirect jobs.

As recently as 1995 electric generation plants in Delaware provided 82% of our electric power needs. Expanded demand and plant closings have dropped this to below 40%. The importation of power from out of state means we have exported good jobs but has also added to electric grid congestion. New electricity pricing models add premiums for this congestion and contribute to Delaware manufacturing companies paying 50% more for electricity than the average state. These premiums make it difficult to expand manufacturing in the state.

One modular nuclear plant, such as the Westinghouse AP1000 shown below, would bring the state back to providing 100% of its 2014 expected demand. The design shown would have a 6 acre footprint excluding cooling, would generate 9000 Gigawatt-hours a year, and might cost $3 or 4 billion to build. It would operate 91% of the time and has a design life of sixty years. The plant would emit no carbon dioxide or air pollution. The plant might produce electricity for as low as 3.5 cents/kilowatt-hour over the life of the plant, one tenth the cost of a solar farm. About one third of Delaware’s electric power comes from nuclear plants now.

Third generation plants store emergency coolant in gravity fed containers to allow flooding of the core without pumps or operator involvement in the case of an unexpected shutdown. They also have gravity fed coolant and natural ventilation features to cool the containment vessel. The operator control room is isolated and hardened to allow safe operation in an emergency. Results of the NRC Probabilistic Risk Assessment (PRA) show a very low core damage frequency (CDF) that is 1/100 of the CDF of currently operating plants and 1/20 of the maximum CDF deemed acceptable for new, advanced reactor designs. The plant has secure storage for spent fuel rods. A fee is paid to the NRC on every kilowatt-hour produced by nuclear plants for the eventual disposal of nuclear waste and this raises $750 million a year. By law, the federal government has responsibility for waste storage. The Yucca Mountain waste facility in Nevada is complete and a $25 billion waste disposal fund awaits use (interest adds $1 billion a year to the fund).

David T. Stevenson, Director
Center for Energy Competitiveness
Caesar Rodney Institute

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Friday August 5, 2011 will likely be remembered as “the NEW Black Friday” or “THE” Black Friday. On that day, after markets closed, Standard and Poor’s (S&P) fulfilled its previous warning and downgraded the sovereign credit rating of the USA to AA+ from the fifty-years-old AAA.

On Monday the 8th, the stock market took a tremendous dive in excess of 6% and all the pundits and talking heads blamed it on S&P’s downgrade. Clearly, the downgrade came in handy to justify the selloff of Monday, but doesn’t explain the drop in stock market indexes since late July.

An important point to keep in mind is that what is in doubt by S&P is the capacity of the U.S. to face its debt obligations given the high probabilities of increases in the stock of debt (the only way to fund the fiscal deficit, implemented so far.) That is what the sovereign credit rating means: evaluation of the government (sovereign authority) to pay interest and amortization of the bonds.

The selloff in the equity market created a flight-to-safety, which, paradoxically, helped US treasuries as bond traders consider them as the “safest” investment. Clearly, the reason for the equity selloff is not the downgrade per-se but the possibility that the downgrade could scare capital from investment and decelerate the economy even further. The risk assessment that traders attached to the “double-dip” has increased.

S&P’s Reasons for the Downgrade

Before releasing the report, S&P informed the US Treasury of its intentions. The Treasury questioned some numbers and calculations made by S&P, and accused the agency of basing its decision in a “$2 trillion mistake.”

In an initial report (shown to the Treasury) the rating agency seems to have overstated the increase in government debt (due to accumulative fiscal deficits) or to failed in the assessment of the savings set out by the Budget Control Act of 2011 (BCA) passed by Congress and signed by President Obama on August 2.

The BCA will save $917 billion during the 10-year period. To reach the advertized $2.4 trillion, a bipartisan congressional committee of 12 members (half from each party) will be chosen by the leadership of each block in Congress and they have to agree on further savings for $1.2 trillion, of
course, over the 10-year period. If the commission fails to deliver automatic cuts between defense and non-defense spending will be introduced.

The initial projections used by S&P are part of an alternative scenario calculated and projected by the non-partisan Congressional Budget Office (CBO). The difference was that the CBO estimated the annual increase in discretionary spending by the government at 5% per annum, but the BCA forced the CBO to drop the increase in discretionary spending to 2.5% per annum. This amounts to $2 trillion reduction in spending after 10 years.

Consequently, S&P revised the report before releasing it and changed the assumption from 5% to 2.5% in discretionary spending annual growth as requested by the Treasury.

However, and in big blow to the US government and political system in general, S&P concluded that the “The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook.” .

In other words, the main reason supporting the downgrade is the lack of confidence in the savings delivery capacity of elected officials.

Projections on Projections

Some words have different meanings to different people beyond synonyms. For example, when Joe and Mary face some economic hardship, for instance a temporary suspension, layoff, etc. their immediate action (other than searching for another job) is to reduce spending in order to extend savings as long as possible and adjust to expected lower income.

Congress and the executive have a different approach: if they said “we will be saving $2.4 trillion during the next 10 years,” what they mean is not actual reductions in spending but reductions in “projected spending.” In other words, the cuts introduced by the BCA will not be calculated from the actual spending in 2010 but from the CBO’s projections.

I have high professional respect for economists working at the CBO. However, their forecasting or projection record is not brilliant. In fact it is bad. For instance, in 1999, the CBO was projecting that the federal government would run fiscal “surpluses.” Doesn’t look encouraging, right?

What’s Next?

For the next several weeks we are going to face market volatility, and further drops in the stock market cannot be ruled out. It will depend upon the congressional committee to calm the waters and sail us to a safe port. But considering that since the rejection of the budget proposed by President Obama during the first quarter of the year, Congressional leaders and the President only reached an agreement with few minutes to spare before falling into technical default, we should keep our hopes low.

The whole situation has reached such a nonsensical level that even Chinese and Russian economic and political authorities are pressuring the U.S. to put the house in order. Is like Hugh Heffner talking about family values.

Nevertheless the reality remains that the stewards of our national government are proliferate spenders that, in the opinion of financial markets, cannot recover from their addiction.

Omar J. Borla, Senior Economist
Center for Economic Policy and Analysis

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After two decades of stellar performance, Delaware’s economy moved in reverse during the most recent decade, and the near term outlook is subpar.

A DECADE OF DECLINE

The major measures of performance for the Delaware economy from 2000 through 2010 are grim. Compared to a median annual growth in total employment of 2.5% during the 1990s, Delaware crept along at 0.4% during 2000-10. If government jobs are excluded, total employment in Delaware actually retreated -5.4%. Similarly, with government transfer payments excluded (e.g., Social Security, Medicare, Medicaid), inflation-adjusted per capita personal income dropped -7.6% and output per capita declined.

WHAT ABOUT RIGHT NOW?

The recession is over, but Delaware remains in a deep hole. After this many months following the low point during the previous two recessions Delaware employment had regained its pre-recession peak levels. Currently, employment in Delaware is still 6% below the pre-recession peak, a shortfall of almost 31,000 jobs. Although initial claims for unemployment are slowly easing, Delaware’s unemployment rate is double its historical average.

Residential construction permits are down two-thirds from peak and are barely one-half of the ten year average. The median sales price of housing is down 28% from the peak and is driving up personal bankruptcies in the state. The inventory of foreclosures remains at record levels. Driven by rising fuel and food prices, inflation in the region is creeping up and pushing some households to return to credit card debt.

THE OUTLOOK

The prognosis for Delaware’s economy during the first half of this new decade is modest. While the Congressional Budget Office expects employment across the nation to rise 1% a year, the Delaware Department of Labor predicts an employment growth rate of 0.7% for the state.

The Caesar Rodney Institute concurs with the DDOL for the reasons below.

• Demographics – Slower growth in the economy will cause net in-migration to Delaware to fall off by 25%. Further, while the aging baby-boomers will drive a 41% increase in the 65+
• cohorts over the decade, the number of persons in the age 20 to 29 cohort will remain unchanged. This means a constrained supply of labor.

• Transfer payments – The surge in Delaware’s senior population has caused government transfer payments to jump from 10% to 20% of personal income over the past two decades. Transfer payments will never outperform the sources of income tied to market productivity (i.e., wages, dividends, proprietors’ income). This means slower growth in purchasing power and the continued decline of Delaware personal income per capita relative to the nation.

• Industry structure – The industries projected to grow in Delaware have below average wages and productivity (e.g., leisure and hospitality, food services, retail). The industries projected to barely grow or even decline in Delaware have above average wages and productivity (e.g., finance services, manufacturing). The major projected Delaware growth industry, healthcare, is going to be constrained by caps on Medicaid and Medicare spending. The population of working poor in Delaware will expand.

• Government corruption – According to U.S. Department of Justice data, Delaware has jumped from 17th to 9th among all the states in the convictions of state and local public officials per capita. Corruption distorts and constrains markets.

• Regulations – Delaware’s high economic growth years were a result of the deregulation of credit markets. State and local government in Delaware is now fixated on additional layers of environmental, energy (electricity), and land use regulations that drive up the direct and indirect (transactions) costs of business.

• Unions – Over the past decade right to work states have out-performed states like Delaware in terms of employment, income and output growth. State government in Delaware appears to be strongly influenced by unions. The flawed prevailing wage law takes tens of millions of dollars away from school capital improvements each year. The current head of the Delaware teachers union will soon slide into a non-merit position in the Department of Education. The Governor is willing to stack the membership of the State Health Resources Board to appease the building trades union.

• Miscellaneous – A variety of other realities will constrain Delaware’s economic growth. The public education system test scores are mediocre. Delaware has the 11th highest marginal income tax rate in the nation, the 9th highest corporate income tax rate, and the 7th highest workman compensation rate per $100 of payroll. Delaware ranks 5th among all states in state and local government debt per capita and 14th in public employees per capita. Delaware now has the 5th highest violent crime rate and the 4th highest out of wedlock birth rate.

The reality is that individuals and businesses are rational and self-interested, and can vote with their feet. Like many states in the Northeast and the Midwest, Delaware has institutions, interest group relationships, and habits in place that guarantee below average economy performance in the coming years.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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Environmental groups have run into a wall of legislative resistance to tougher controls on greenhouse gas and air pollution emissions. Air pollution levels have been drastically reduced, climate change claims have lost their charm, and Americans are simply not convinced expensive new controls are necessary. Now environmental groups hope they can use the regulatory process instead and one of their key tools is the supposed health cost of air pollution. Close examination shows the claims are exaggerated.

The U.S Environmental Protection Agency has launched an all out attack on the coal industry primarily using concerns about mercury emission. The EPA set exposure limits just below the rates found in a 2001 national survey of mercury exposure and less than one one-hundreth previously allowed levels. EPA Administrator Lisa Jackson claimed new guidelines would save $140 billion in health costs by 2016 and used that to justify the cost to upgrade electric generation equipment. In Delaware, NRG is shutting down three older boilers at their Millsboro electric generation plant cutting electricity output about 40%. They are also investing $360 million on scrubbers for a fourth boiler which will lead to higher electricity prices. The U.S. gets about 50% of its electricity from coal so this effort will be repeated around the country.

Exposure surveys conducted since 2001 have all come in significantly below the proposed limits but the EPA ignores the results and has based decisions on the 2001 report. If the newer survey results were used the power plant changes would not be needed. The EPA also ignores the fact electric generation accounts for only one-half of one percent of airborne mercury with most of the rest coming from natural sources. The regulations will have no measureable impact on mercury exposure.

CRI had a close look at the health issue as an intervener in the Public Service Commission bi-annual review of Delmarva Power’s Integrated Resource Plan. The IRP looks out ten years at how to match demand and supply, and to meet regulatory requirements. One part of the study compared a new135 megawatt natural gas plant to a new 150 megawatt wind farm. Environmental groups were ecstatic external costs of air pollution and greenhouse gas were included for the first time. They were not as ecstatic about the results. The study showed no significant health impacts with either scenario but the conventional natural gas plant actually had a lower impact on health costs than the wind farm. The results got worse when CRI noted the natural gas plant results were hampered by using a capacity factor about one tenth of the actual expected rate. The higher output means the natural gas plant would lower air pollution and greenhouse gas emissions more than five times the wind farm. Health costs have not been recalculated yet with the revised output.

The primary factors of the health impacts are assumptions coal plant emissions increase ozone and a certain type of airborne particle designated PM2.5. These two pollutants are thought to contribute to pulmonary diseases such as asthma and chronic bronchitis. The costs are a combination of medical treatment costs and lost work day costs. Prevalence of asthma has doubled since 1980 and chronic bronchitis is up about 70% although there are a dozen theories as to the cause. The problem with linking coal plants to these health problems is both ozone and PM2.5 levels have fallen 30% at the same time disease prevalence has increased showing a negative correlation! While these pollutants no doubt impact health to some degree, something else is the primary driver of increased pulmonary disease prevalence.

A second health impact is from deaths caused by cardiac problems. The primary problem with this part of the study is the cost basis. There is ample legal precedence for determining the value of life with legal settlements often in the range of $1 million. However, the health impact study uses a survey of what people would be willing to spend for one additional year of life. The survey result was over $6 million which leads to exaggerated cost estimates.

A third cost impact is for the surmised health impacts of global warming from carbon dioxide emissions. There is no scientific basis for an estimate so an arbitrary $30/ton of CO2 was used. Again, this leads to exaggerated cost estimates.

No offsetting health benefits of lower cost fossil fuel based energy were used. Higher unemployment and lower incomes caused by higher than necessary electric prices can lead to thousands of deaths a year. A Johns Hopkins study1 showed a 1% increase in unemployment leads to a 2% increase in age adjusted mortality rates. Study author Dr. M. Harvey Brenner concluded, “economic growth is fundamental in meeting basic population needs, such as nutrition, housing, health insurance, medical care, sanitation, electricity, transportation, and climate control”.

Millions die from poor sanitation alone in third world countries from the lack of clean water and adequate sewage treatment that cannot be achieved without electricity. A USAID study2 shows a direct and dramatic correlation between energy use and life expectancy, infant mortality, child birth per woman, Gross Domestic Product, and literacy rates with benefits continuing throughout the income scale to even the richest countries.

For example, an increase in per capita energy use from 30 KWh/yr to 3000 KWh/yr drops infant mortality rates from about 120/1000 live births to 20/1000, increases life expectancy from 45 years to over 70, and increases GDP from $200/year to $3000/year. These improvements lead to political stability and a better quality of life. This is what will lead poor countries in Africa from poverty and despair. Also as energy use increases child birth per woman drops from over seven to under three. When per capita electric usage rises to 10,000 KWh a year birth rate falls below the replacement rate, 2.1 births per woman. Demographers now estimate world population will peak at 9 billion by mid century from the present 7 billion for exactly these reasons.

David T. Stevenson
Director, Center for Energy Competitiveness

Notes;
1) “Health Benefits of Low Cost Energy”, Dr. M. Harvey Brenner, Ph.D, John Hopkins University, School of Public Health, Baltimore, MD available from the British Library
2) “Energy and Country Instability Project Report”, U.S. Agency for International Development, USAID Contract # OUT-LAG-I-1-00-98-0004-00 Work Order 178, Gurneeta Vasudeva & Steve Siegel Energy and Security Group, and Olga Mandrugina Advanced Engineering Associates International.

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Delaware Lt. Governor Matt Denn released a report recognizing the wide variance in administrative costs among school districts in the state. Dr. Tony Marchio, superintendent of the Appoquinimink school district, has labeled this data “misleading and deceptive” based upon a report from the Center for American Progress (“Return on Education Investment”). This discussion is simply continuing to spin the wheels rather than putting the vehicle in gear.

Data from the National Center for Education Statistics has long shown Delaware to be first in the nation in administrative overhead spending per public school student (most recently reported by the Caesar Rodney Institute last year). The excellent and comprehensive LEAD report on Delaware public education by the Boston Consulting Group demonstrated that after exempting public schools from the state’s prevailing wage, the largest area where money could readily be saved in Delaware public education would be through consolidation and scale benefits in administration and central support.

The CAP report cited by Dr. Marchio concludes, among other things, that “the nation’s least-productive districts spend more on administration” and that “without controls on how additional school dollars are spent, more education spending will not automatically improve student outcomes.” The report acknowledges that there is no research literature that shows a positive and statistically significant relationship between school performance and spending per pupil.

As an example of effective administrative spending, Dr. Marchio also mentions Appoquinimink’s early childhood centers. While such centers may benefit already advanced youngsters, the summary research on programs such as Head Start shows clearly that the positive effectives of early education unfortunately dissipate by the end of first grade.

The Caesar Rodney Institute welcomes the Lt. Governor’s efforts to redirect scarce public education funds from administrative overhead back into the classroom.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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The default response to criticism of solar subsidies is that the oil industry receives subsidies. So, for the record, accelerated depreciation on drilling equipment and oil depletion allowances that made sense to encourage drilling when oil was at $30 a barrel do not make sense at $100 a barrel and they should end. But some perspective is needed. Oil industry subsidies amount to about six tenths of a cent a gallon. Solar subsidies are the equivalent of stopping for gasoline and instead of paying $4 a gallon for gas the station pays you sixty cents. Solar subsidies have problems including the sheer size of them, the way they transfer money from people with modest incomes to the relatively wealthy, the door they opened for China to steal an industry we developed, and their never ending nature.

Solar power is five times as expensive as conventional power. A typical solar installation can cost $40,000. Buyers must have that cash as they might wait a year for federal and state tax credits so the market is limited to the more affluent. However, it is lower income people who pay for those tax credits and Solar Renewable Energy Credits (SREC) in higher taxes and higher electric bills.

The mono-crystalline solar cell that powers 90% of today’s solar panels was developed in New Jersey and efficiency was improved in our national labs. Those labs worked with the Dupont Company in Wilmington to develop practical materials and manufacturing processes, and to test durability. Solar companies do not use subsidies to do basic research and the technology has stalled. From 1980 to 1996 solar panels had modest subsidies and global volume increased 18 times while price dropped 60%. In the late 1990’s governments around the world began offering massive subsidies. From 1996 to 2007 volume increased another 41 times but price only dropped 4% because the subsidies were so large. Why should panel manufacturers and installers lower the price when the apparent product price is less than zero?

The increased volume combined with artificially high prices created a fat target market for China. Six years ago China produced 1% of the world’s solar panels, last year 50%, and they will be at 90% within three years. They achieved this success by combining labor cost advantages with production subsidies such as low cost land, low cost loans, and currency manipulation to keep the price of Chinese products low. Had U.S. industry been forced to compete on price we would have built a more robust industry and held onto a larger share of the market.

Lessons learned? No, the solar industry continues to cling to consumption subsidies after 25 years. The upfront state and federal grants just about pay for those Chinese solar modules and aren’t going away until 2016. One bright spot is solar module prices have begun to drop. Governments around the world have begun cutting subsidies and so much new solar manufacturing capacity has been built in China the world’s plants are operating at 25% of capacity. Over 60 % of the subsidy value is in the SREC’s which, until recently, have cost Delaware power companies about $270 each. The price dropped to about $100 in March, a boon to electricity customers who eventually have to pay for them. Don’t count those savings just yet. Industry representatives, environmental groups, and Delmarva Power are working on a plan to fix the price at $270 for the next ten years.

Someday a high efficiency solar cell combined with a viable storage device will be invented and it will revolutionize power production. Until then solar will remain expensive and of limited use. In the meantime, onshore wind power has become a mature industry and now is cost competitive with most conventional forms of power. Subsidies for wind power are scheduled to end in 2012.

David T. Stevenson, Director
Center for Energy Competitiveness

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