Energy Policy in the Electron Age

Mark P. Mills

Science Advisor to the Greening Earth Society

Senior Fellow, Competitive Enterprise Institute

President, Mills-McCarthy & Associates Inc.

Synopsis

With the cyclical return of higher oil prices, energy policy, or the lack thereof, returns to the front pages of the nation’s newspapers. Even though energy has been a central (yet seemingly invisible) element of policy proposals arising out of the debate about what to “do” about global climate change, media interest largely has focused on the ostensible consequences of speculative climate change (higher temperatures, melting ice caps, rising sea levels, the spread of tropical disease, etc.) rather than upon the consequences of today’s actions (higher fuel prices melting the Wall Street).

With the 30th anniversary of Earth Day, energy policy once again takes center stage. In anticipation of the annual event, President Clinton and Leonardo DiCaprio walked through the White House and visited about energy efficiency measures. DiCaprio chairs the April 22nd event, which has as its central theme “We can end dependence on the fossil fuels.”

What is one to make of energy policy in the 21st century_ For students of the subject, Yogi Berra’s immortal “It seems like déjà vu all over again” never has been more apt. The nostrums from the usual orbit of energy policy wonks and environmental organizations have this in common: They appear immune to changes in the 30 years since the first Earth Day.

The U.S has entered a new economic era driven, in significant measure, by the "new economy" industries of the Information Age. The Information Age is purely an electricity play, from top to bottom, from manufacturer to end-user. Electricity has never been more important to the economy. Yet energy policy ignores this reality and instead continues to be anchored in flawed premises and failed ideas formed 30 years ago – ideas dominated by oil, notions of scarcity, limits, and environmental apocalypse. It is time for a fundamental re-examination and re-structuring of U.S. energy policy, one that breaks with history and looks toward the future.

The central defining theme of American energy policies should be anchored in three core realties:

•  Electricity is, and will remain, the primary energy for the ascendant digital economy;
•  The economy will need more (not less) abundant, low-cost electricity; and
•  The economy will become even more reliant on electricity, thereby making “reliability” a critical criterion.

Contents

1. Introduction: It is a special time.

2. What Role Energy in Our Society_

3. What’s Changed Since the Dawn of Energy Policy_

4. What Do We Have Now For Energy Policy_

5. What Should We Do_ Energy Policy For the 21st Century

 

Energy Policy in the Electron Age

1. Introduction: It is a special time.

We may live in a special time. We may live in the strangest, most thoroughly different moment since human beings took up farming, 10,000 years ago.

:Bill McKibben, Atlantic Monthly, May 1998.

Changes, either in natural systems or human institutions rarely occur in an even, linear progression. Rather, change occurs in small episodic steps and, sometimes, large quantum leaps. Usually the leaps are not obvious without benefit of hindsight. The last ten years – the digital decade – mark the beginning of a quantum change in the energy arena. 

Five recent events epitomize the changes that have occurred as a new millenium opens.

- The U.S. and other western economies did not collapse in the face of a tripling in the price of oil.

- A Cabinet member shuttled among foreign oil producing nations asking on diplomatic bended knee that they lower oil prices.

- The National Academy of Engineering’s announced the top 20 engineering achievements of the 20th century, placing large-scale electrification at #1.- The U.S. Department of Energy released a study on the reliability of our electricity supply system.

- The U.S. Department of Commerce released its second study of the “digital economy.” 

These events are inter-related and illustrate the framework of the old and new energy economy. They outline the reason U.S. energy policy must now move forward to embrace the 21st century’s new realities. 

The failure of the U.S. and western economies to collapse in the face of the tripling of oil prices.

The seemingly staggering rise in oil prices in the six months from November 1999 to April 2000 bled more than $240 million a day in increased expenditures from the U.S. economy. The U.S. economy barely seemed to hiccup in swallowing this burden. Oil prices did not drive up inflation. When a comparable event – 1973’s OPEC oil embargo –occurred a few years after the first Earth day, oil prices tripled and triggered a cascade of negative economic effects. 

Obviously higher oil prices annoy affluent nations and damage poorer ones. But, from a macro-economic perspective, the $240 million in extra expense literally is a drop in the bucket. Consider this simple fact: The U.S. economy is $6,000 million per day bigger than it was just a decade ago. As a result, the additional expense for oil is equivalent to someone charging a $4 daily expense against a raise that pays out $100 each day. The share of the U.S. GDP that is consumed by energy purchases is 30% lower now than it was ten years ago if one assumes oil prices will be stable at $30 per barrel over the remainder of 2000. They won’t. 

Oil is a unique and marvelous fuel. It will continue to play the central role in the world’s transportation systems for decades. However it already is clear that oil no longer plays the central and defining economic role it once did. 

This transforming reality is not unlike that one that took place a century ago when the Industrial Revolution unseated agricultural as the primary factor in national economic policy considerations. That transformation did not make food less important to survival. Likewise oil will not be less important to civilization. But things have changed. Neither agriculture nor oil is number one now.

A Cabinet officer shuttles among foreign oil producing nation’s asking on diplomatic bended knee that they lower oil prices. 

The drumbeat of media coverage afforded and unrealized forecasts of dire economic consequences from high oil prices has had at least this effect on oil consumption: Secretary of Energy Bill Richardson’s bill for aviation jet fuel went through the roof as he shuttled around the world looking for concessions on oil production and price. 

It is certainly understandable that the public and the politicians who represent them perceive ingratitude in a price run-up engineered by nations that the U.S. and our allies so recently defended during war along the Gulf of Oman. But a single statistic illustrates the markets insensitivity Secretary Richardson’s valiant effort. Sale of gas-guzzling trucks and SUVs (sport utility vehicles) hit record levels during the first quarter of 2000 despite high gasoline prices. 

The Secretary’s efforts have political relevance. But they are primarily humanitarian in seeking to alleviate the burden high oil prices place on less affluent citizens and nations. But overall, consumers voted oil’s relevance with their pocket books. People bought more SUVs and participation in the stock market continued at record levels. Businesses expanded productivity and growth. 

The National Academy of Engineering’s announcement of the top 20 engineering achievements of the 20th century. 

1999 closed out with a flood of turn-of-the-century reports and activities. Among them, the National Academy of Engineering collaborated with 28 professional engineering societies and conducted a survey of their members to identify the Top 20 Engineering Achievements Of The 20th Century. The principle criteria used in selection was identification of those engineering accomplishments that were the most important “in terms of impact on the quality of life during the 20th century.”[1] Large-scale electrification was #1. Of the remaining nineteen most important engineering achievements eleven were derivative of electrification. 

1. Electrification

2. Automobile

3. Airplane

4. Water Supply and Distribution

5. Electronics

6. Radio and Television

7. Agricultural Mechanization

8. Computers

9. Telephone

10. Air Conditioning Refrigeration

11. Highways

12. Spacecraft

13. Internet

14. Imaging

15. Household Appliances

16. Health Technologies

17. Petroleum and Petrochemical Technologies

18. Laser and Fiber Optics

19. Nuclear Technologies

20. High-performance Materials

This is the NAE’s succinct statement on the impact of electrification: 

In the 20th century, widespread electrification gave us power for our cities, factories, farms, and homes – and forever changed our lives. Thousands of engineers made it happen, with innovative work in fuel, power generating techniques, and transmission grids. From street lights to supercomputers, electric power makes our lives safer, healthier, and more convenient. 

Petroleum and petrochemical technologies are on the list. They are vital to be sure, but are ranked at #17. None of the technologies identified in the Top 20 face declining importance during the first decade of the 21st century. An important question arises in terms of an energy policy perspective. Does the #1 ranked technology achievement – electrification – represent a great, historical accomplishment or is electricity’s rank to be secure during the 21st Century’s first decade_ 

The release of the DOE study on the reliability of the U.S. electric supply system.

During the Summer of 1999, Americans experienced scattered and sometimes severe electricity outages that were exacerbated by astronomical swings in the short-term price of electric power. A blue-ribbon panel convened by the U.S. Department of Energy studied six major power outage events of the summer of 1999 and their report begins with a similar observation concerning the importance of electricity and, not surprisingly, cites the NAE’s view concerning the central importance of electricity to health, welfare, and the economy.[2] 

The report’s authors, while acknowledging the primacy of markets and industry to supply electricity, set forward a dozen policy proposals. Each is specific and in various ways addresses concerns about how best to ensure a more reliable electric system. There is this over-arching conclusion: The nation needs increased electricity reliability. What the authors imply – albeit delicately and with great tact – is that we are today without a relevant (energy/electric) policy. 

The release of the U.S. Department of Commerce “Digital Economy II” report. 

The U.S. Department of Commerce’s second report on the digital economy (“Digital Economy II”) estimates that one-third of U.S. GDP is derived directly from information technology and that two-thirds of all growth in capital investment in the U.S. is for information technology equipment. 

All telecommunications (telecom) and computing equipment has one thing in common: They use electricity. Annual sale of electricity-consuming hardware by the telecom and the computer industries has grown from less than $100 billion in 1978 to nearly $500 billion per year, today. And that figure is climbing.

In addition to the information economy’s direct effect on jobs, GDP, and energy use, the deep penetration of microprocessor-enhanced intelligence into every facet of the “new” economy is inexorable and, some would argue, making a dramatic contribution to increased U.S. economic strength. As a result, there is a second-order effect of the digital economy: increased wealth brings greater affluence and increased use of electric power in non-telecom applications. 

It is a special time, but apparently not for energy policy.

What passes for U.S. energy policy today labors under a legacy of concepts, events, legislation, and ideas from 30 years ago. It is explicitly and implicitly rooted in a notion concerning the primacy of oil. The U.S. has changed. Our energy policies have not.

Energy – like food, water and air – is central to our survival. Policies that concern themselves with energy thus address a subject that is central to our civilization’s existence and survival. But energy – especially when delivered as electrons – has a unique characteristic that sets it apart from human society’s other resource anchors. Demand for food, water, and most materials track growth in human population in linear fashion, essentially. For a century, now, demand for energy has grown faster than population. In our new digital economy, electricity is the preferred form of energy. Demand for electricity will outpace the simple, population-derived metric that counts the number of people, buildings, and services.

2. What Role Energy in Our Society_

Energy is the only universal currency.

:Vaclav Smil, Energies, MIT Press, 1999.

Along with food and water, energy is a fundamental input to life and civilization. But energy is different. It is required to provide food, to provide water, and everything else. In short, energy is the central resource. With enough energy, all of the other resources are made abundant. The late Julian Simon summarized the role of energy brilliantly, yet simply, “Energy is the master resource, because energy enables us to convert one material into another.”[3] Through the use of energy, dirty or salty water becomes clean. Arid land yields food. Rocks yield cars. Sand yields silicon. 

Energy reaches the marketplace in only two forms. One is kilowatt-hours of electrons, the other BTUs of heat. We determine the preferred form of energy by the nature of the equipment we use to perform the multitude of tasks in the economy. Energy policies that are directed primarily at choosing an energy resource before identifying the end-use technology’s energy appetite run the risk of trying to put “square” energy “pegs” into “round” market “holes.” Energy resource imperatives emerge from the market’s economic and technology needs. 

Over the last decade of the 20th century, the “digital decade” if you will, U.S. GDP rose 35 percent while total consumption of all forms of energy grew only 12 percent. This reveals the continuous and a normal progression of engineering and technology toward improved efficiency. It resulted in a drop of 14 percent in the amount of energy consumed for each dollar of GDP. Divide this broad energy picture into its two components as they relate to the way the market uses energy and a vital underlying trend is revealed. It is a trend with profound implications for energy policy. 

The consumption of energy in the form of heat, or BTUs, by end-use equipment and technologies (planes, cars, furnaces, etc.) rose barely 9 percent during the digital decade. GDP up 35 percent – BTU use up 9 percent. This while consumption of kilowatt-hours jumped over 25%.[4] The technologies of the new economy are driving the GDP. They also happen to consume energy in only one form, kilowatt-hours (kWh). 

The technology-driven trends in energy use are clearly evident when the facts are considered within the context of the three basic categories of energy and economic activity; transportation, services and manufacturing.[5]

Transportation

Transportation technologies – airplanes, trains, automobiles, and ships – are required to move people and products. However, the share of resources allocated to transportation are now dramatically reduced from where they have been in previous eras. At the dawn of the 20th Century, almost one-fourth of all land devoted to agriculture was used to “fuel” that century’s primary transportation, horses. Today, oil fields in Texas and Oman fuel transportation. But what sets transportation apart from other sectors of the economy is that transportation energy relies almost entirely on oil. While electricity energizes subways in a few cities and light rail in a few others, electricity supplies less than 0.2 percent of the energy used in transportation. 

Even the transportation sector constitutes less than 10 percent of GDP. A larger percentage of GDP involves making and maintaining vehicles than in buying the gasoline to run them. Admittedly, at about $140 billion per year, purchases of gasoline and aviation fuel are important, but they’ve been overtaken by the economy’s $210 billion annual purchase of kWh. More important, expenditures on transportation energy comprise less than 2 percent of the economy –a proportion that has dropped over the decades. 

In 1970, before the necessity of having an energy policy dawned on anyone, 25¢ would buy a gallon of gasoline. But, cheap as it was then, the purchase of gasoline constituted twice as large a share of the nation’s economy than it does today. In this context, the notion of an “oil price shock” in 1973 makes sense to those too young to recall it. The pre-telecom economy of the 1970s was vastly smaller than it is today. Gasoline and oil were hugely important and the nature of energy consumption was dominated by what we now call “old economy” technologies. 

Transportation is essential to the functioning of a modern economy. But transportation energy policies are transportation policies and, even then, are almost entirely oil policies.

Services & Manufacturing

“Services” include all of the residential and commercial uses of energy under a broad definition that encompasses everything involved in housing, office buildings, healthcare, business services, dot-coms, and all of the energy required to heat air and water, chill air and water, light lights, and power computers. “Manufacturing” is the economic sector where all goods are made, whether they be cars, cookies, or computers. 

The services and manufacturing sectors together consume 75 percent of the nation’s energy. They each consume very close to equivalent amounts of energy – about 33 quadrillion BTUs each. That’s the energy equivalent of 5.7 billion barrels of oil per year. While they share important similarities, they also have important differences. 

The differences: Service activities comprise 57 percent of GDP, and obtain two-thirds of all their energy as electricity. The balance of the energy in the services sectors is consumed in the form of BTUs from the combustion of natural gas or oil. Twenty years ago there was a nearly 50/50 split between use of electricity and combustible fuels in that sector. Manufacturing accounts for 27 percent of GDP, obtains one-third of all its energy from electricity. Two-thirds of that is from combustible fuels.

The similarities: In both sectors, which combined account for 85 percent of GDP, electricity dominated the growth in new energy supplied over during the last decade. In the services sector, use of electricity represented 99 percent of the net growth in energy consumed. For manufacturing, electricity represented nearly half of all growth in end-use energy. The only conclusion one can draw from these trends is that the addition of new technologies to the economy is dominated by electricity-consuming equipment both in manufacturing and in services.

Since services, which encompass the “e-conomy,” comprise 57 percent of GDP, electricity’s utter dominance in fueling economic growth is (or should be) of particular important in terms of energy policy. Such an important transformation in the energy-infrastructure of the U.S. economy means that having a low-cost, reliable supply of electricity now is more important than at any other time in history. 

Primary resources

The market’s appetite for energy creates a primary resource requirement. America’s energy needs and those of the world primarily are met by the use (combustion) of fossil fuels. Fossil fuels provide 88 percent of primary energy and 70 percent of electricity. This more than suggests fossil fuel resources are of importance in crafting energy policy. Fossil fuels resources’ central role in our economic vitality is further emphasized by the fact that 83 percent of all growth in energy use (and 80 percent of all growth in the electricity supply) came from use of fossil fuels during the last decade. Almost the all the rest came from use of nuclear power. Small-scale renewable sources (which do not include large hydroelectric dams) accounted for 0.3 percent of all the additions to the nation’s electricity supply over the course of the last decade. 

The bottom line

Electricity is the fuel-of-choice in the growth of the economy at the start of the 21st century. Fossil fuels anchor not only transportation, but also the growth of kWh demand that comprised the primary source of energy for the technologies and equipment driving the digital economy. Consideration and deliberation of energy policy must be anchored in this fundamental reality. To do or think otherwise threatens the sustainability of our remarkable economy.

3. What’s Changed Since the Dawn of Energy Policy_ 

“The rates of change in technology and public affairs are so great that imagination falls short.”

: John Rennie, Editor in Chief, Scientific
American, December 1999 

What has changed since the dawn of energy policy_ In a word, the Internet. The Internet is a pure electricity play. It impacts every sector of the economy, although some more than others, at the moment. But it will impact all of them, eventually. The Internet is too new to have its own economic classification. Thus its energy appetite shows up in the “services” sector, as discussed above. 

In 1990, at the beginning of the first digital decade, there were several thousand web sites on the Internet. Today the number is counted in the tens of millions and is rising geometrically. Only a decade ago, the Internet lexicon (e.g. web-hosting, B2B, dot-com, e-commerce, etc.) did not exist, nor did its sprawling physical infrastructure.

Energy policy however remains trapped in the remnants of a decades-old intellectual framework. Energy policy has not yet to come to grips with the profound changes that are underway because of the information technology revolution. Nor have energy policy analysts adjusted their worldview, even given the utter failure of nearly every forecast they made a decade or two ago. For those who have forgotten: 25 years ago, forecasters confidently asserted (and drove policy responses with their forecasts) that, before the year 2000, the world would see oil priced at more than $100/bbl. They forecast wholesale abandonment of fossil fuel resources because we would have exhausted the supply. They foresaw depleted critical minerals, world starvation, economic chaos, plague caused by food shortages, and massive droughts because there would be insufficient energy to pump water. They foretold the end of growth in electric demand.[6] How much more wrong could such forecasts be_

The belief that the century-long growth in electric demand would soon end was a central tenet of energy forecasting and energy policy in the old economy. It evidently remains central to policy proposals and much legislation proposed, today. Let’s review some fairly typical electricity forecasts that ostensibly were based on the expert technology vision: 

Because saturation levels for most major appliances are achieved, only minor increases in electricity consumption [will] occur.

(Energy Strategy, Union of Concerned Scientists, 1980)

It appears that the demand for electricity is unlikely to increase significantly during the next two decades.”

A New Prosperity: Building a Sustainable Energy Future,Solar Energy Research Institute, 1981 (today’s National Renewable Energy Lab) 

What has happened since 1980_ Electricity demand has grown nearly 60 percent, 35 percent alone in the last decade. What at their core made such forecasts go wrong_ They completely misunderstood the fundamental technology trend, a trend that points toward ever-increasing applications of electricity, uses that more than offset improved efficiency in old uses.

Prognostication didn’t fare much better even as recently as five years ago when researchers at Lawrence Berkeley Laboratory concluded (in 1995): 

While total energy use for office equipment has grown rapidly in recent years, this growth is likely to slow in the next decade because the US commercial sector market is becoming saturated (especially for PC CPUs and monitors).” [Emphasis added]

Efficiency Improvements in U.S. Office Equipment,

Lawrence Berkeley Laboratory, December 1995

Saturation_ In use of personal computers_ There were some 40 million computers in use in 1995. As 2000 began, that number soared past 200 million. Even beyond getting the number wrong, such a prediction fails to grhtml that in this new economy, computers comprise only one, and an increasingly minor, application of electron-consuming microprocessors.

But let’s be charitable. No one could have forecast five years ago, much less two decades ago, the growth we have seen in electricity-consuming information technology equipment. But now that we know differently, isn’t it vital that the energy and electricity implications of information technology be taken into account in forming energy policy_ 

The electric appetite of the Internet and information technology

The energy cost of cyberspace is redeemed in electrons. The “engine” of the Digital Age is the microprocessor. Its fuel is electricity. Digital “bits” are bundles of electrons. The billions (even trillions) of bits of data created and routed across the Internet are supported and energized by billions of watts of electricity. Cyberspace, far from being “virtual,” is very real and is anchored in electrons. Thus, the Internet – the driving force of the Digital Age – is driving and reshaping our electricity infrastructure. 

During the last decade – the Digital Decade – consumption of electricity rose by 650 billion kilowatt-hours. This kind of growth required more new electricity supply in the U.S. than exists in all of Central and South America. This increase in kilowatt-hour demand occurred despite billions of dollars spent by federal and state governments, and utilities, to reduce electricity growth and despite dramatic improvements in efficiency of electric appliances, lights, and motors. It occurred, in large part, because of the new tools used in the Digital Age.  

The story of the telecom energy infrastructure is embodied in the fact that it takes electricity to make, process, route, and package bits. Somewhere in America, a lump of coal, a dekatherm of gas, or a gram or uranium is “burned” to make electricity every time someone downloads an MP3 file. Like everything else in the real world, even the cyber world has a fuel-economy. The Internet’s fuel economy is something like 500 pounds of coal (the equivalent of a barrel-of-oil) in order to create, package, store, and move 1,000 megabytes of data. The Internet’s fuel economy quickly is getting better. Each new generation of computer, router, and storage system handles more bits using the same power supply as its predecessor, but the economy’s appetite for bit-using machines is growing at an even faster rate. 

The Internet’s need for electricity has created a stealth revolution in electricity demand. It is a stealthy not because it is invisible, but because it has been ignored. Microprocessors are penetrating ever more deeply into every walk of life and every htmlect of business. At what I would describe as a hyperbolic growth rate, the interconnection of the economy via the Internet has a direct bearing on future demand for natural gas, oil, and coal. It is also impacts the nature of the businesses that use those fuels to make electric power – the utilities. 

There is abundant evidence for this stealth revolution in the macro-economic trends of the “new” economy. Annual sales in the telecommunications and computer industries have mushroomed from under $200 billion per year in 1978 to nearly $1 trillion/year today – and rising. 

Over 40 percent of that $1 trillion is in the form of hardware. The balance is in services and software. Eighty percent the sales are in the U.S. Every dollar spent on telecom and computing hardware involves the use of electricity. At some point, this cumulative $1 trillion (and growing) investment in new electron-consuming equipment constituted a significant electric demand. The electric industry had quietly (and perhaps unwittingly) become part of the Internet’s supply side story. 

Unlike other historic driving forces for electric demand (such as the air conditioning, electric motors, and light bulbs), the Internet introduced a profoundly new element because it changes the character of demand. Devices on a network create demand for other devices along the network. A refrigerator does not create demand for another refrigerator. But an interconnected personal computer, by its nature, creates demand for another, and demand for all that interconnects them. Then, too, there is the traditional indirect electricity demand impact of the long-studied second-order effect of economic growth. A booming economy pulls along electricity demand.

Setting aside the second-order effect (what might be called “the wealth effect” as a bigger economy gives rise to demand for bigger houses more expensive cars, etc.), the evidence of electricity demand bound up in the hardware of the Internet is relatively easy to see. It has long been know that the proliferation of PCs in commercial buildings started using measurable amounts of electricity. A U.S. Department of Energy commercial survey of PC use in 1992 found 30 million PCs in businesses. That number grew to 43 million by 1995. The now five-year-old estimate of the impact of that many PCs was about 3 percent of total U.S. electric supply. Much has happened in the five years since then: 

- Use of PCs in businesses has exploded since 1995.

- PCs came into use in many other venues than businesses.

- There are a growing number of other types of computer-type devices in use that are not classified as PCs.

- Once a PC is connected to the Internet, the network drives demand for other PC-type devices. This is perhaps the most important development. A computer on a network is the visible manifestation of many other devices in the network. And networks, like the World Wide Web in particular, are the driving force behind increasing electricity demand, and the number and types of PCs and PC-type devices.

A reasonable estimate of the amount of electricity that this universe of devices requires can be obtained by considering the four general categories of electron-consuming equipment.

• End-use devices accessing the Internet (PCs)
• Network devices enabling the Internet (routers)
• Devices for the Internet’s information source (servers)
• Manufacturing all of the above (building the Internet) 

In estimating the collective electric use for these four categories, one finds that the approximately 100 million “boxes” that comprise the Internet probably consume 8 percent of the total U.S. electricity supply. By itself, the Internet already is one of the biggest, albeit widely dispersed, parts of the electricity-consuming infrastructure of the U.S. economy.[7] 

Ignore the question of where the Internet starts and ends. Count instead all the electric power used to manufacture all the “chips” and computers in today’s economy. It should be clear that the share of the U.S. electricity supply system supporting the information economy is at least 13 percent of the total.

The information economy will, for the foreseeable future, create a ‘net’ increase in electric demand.[8] It will do so both directly and indirectly. 

This “new age of electricity,” which began a decade ago and is only in its infancy, is being driven by the electricity appetite of the microprocessors and integrated circuits housed in hundreds of millions of different kinds of boxes that constitute the Information Age toolbox. Just as the use of light bulbs and motors once drove electric demand upward at the dawn of the last century, so too will electricity demand follow the market’s appetite for Information Age devices. 

Energy saving value of the Internet

Does all this digital intelligence reduce energy demand in other ways_ Telecommuting and e-mail, for example, reduce transportation. The Internet may someday save us bricks, mortar, and air miles. But right now, it’s driving a net increase in the demand and supply of everything from warehouses, to delivery trucks, and airplane-based overnight delivery systems. The data show that auto and air travel have rose during the last ten years, even accounting for a parallel rise in telecommuting. The reasons are complex, but even the Internet’s co-inventor concludes: “The Internet has the funny effect of increasing the amount of travel.”[9] 

To be sure, the Internet helps drive down costs and energy consumption per unit of dollar spent. But the growth in consumption so far is outpacing efficiency gains. But this is beside the point.

Whether more or less net energy is used to order a book from Amazon.com as compared with driving to the bookstore does not change the fact that the former employs something that is new, significant, and electric-intensive. More important, despite the increased utilization of equipment that is dramatically more efficient for lighting and for cooling and heating, there has been no reduction in total electricity used in the last decade. In fact, the commercial sectors’ use of electricity has risen 35 percent since 1990. 

The Energy Information Administration’s most recent forecast concludes that electric demand will continue to roughly follow GDP growth through 2020. Given the enormous quantity of electricity already consumed, this constitutes an astounding growth forecast. Three percent annual growth in US electric supply requires adding electricity-generating capacity equal to the total electric capacity of Taiwan – each year. 

The future

In order to forecast the likely path for electricity demand over the next decade or two, one needs to consider two questions:

• Will there be continued growth in the hardware deployed in the digital economy_ 
• Is the Digital Age fully formed_ Has IT appliance invention, production, and utilization become fully saturated_ 

The answer to both the questions is obvious: “We’ve Only Just Begun.” The number of applications and the range of microprocessor-based devices – and the magnitude and extent of the communication networks needed to integrate all the devices – is still at what would have to be described as “the knee” in the hockey-stick curve that represents the forecast of electricity demand. 

Two hundred million computers today will become a billion in a few short years. Globally there will be billions more. As the Internet moves into an increasingly “ wireless” mode, power use will grow disproportionately because it is inherently less efficient to broadcast than it is to “pipe” information. The Palm™ VII and similar handheld devices and their wireless access to the Internet mark only the beginning of an explosive electron-consuming wireless trend. Add to this the ever-expanding appetite for faster Internet access, and more broadband service and it’s easy to see, “It’s only the beginning; only just a start.” 

The facts point to nothing other than a conclusion that the Information Economy will continue to drive electricity demand. For the foreseeable future, the market’s use of new electric devices will not reach saturation. But conventional wisdom suggests that PCs and their kin will follow the same efficiency trend as other electric appliances. Each generation will use a little less electricity. This is already happening. But unlike light bulbs, chillers, and refrigerators, the number of PCs and PC-type devices grows geometrically and is rapidly outpacing the comparatively modest linear improvements in efficiency. 

Clearly energy policy and the digital economy are, or should be, tightly linked. The future is electric. And the lion’s share of all electricity, both now and in the future, comes from fossil fuels. 

4. What Do We Have Now For Energy Policy_

We can end dependence on the fossil fuels.

There is no factor of greater influence in energy policy today than proposals emerging from the global climate change debate and the Kyoto Protocol, in particular. The 30th anniversary of Earth Day in 2000 and its explicit goal epitomize the emerging conflict. It is notable that the goals of Earth Day organizers and the Kyoto Protocol are both implicitly and explicitly endorsed by the Clinton/Gore Administration.

The Digital Economy and the Kyoto Protocol are on policy collision course. Energy, electricity demand, and fossil fuel use have been rising for a century. The Kyoto Protocol seeks to achieve in the immediate future an absolute reduction in the use of energy, electricity, and fossil fuels.[10] The central tenets of the debate about the nation’s energy policy are thus antithetical to the growth of the digital economy. 

When faced with this stark reality, the Administration’s energy policy begins to move closer to economic reality. Responding to the recent oil price spike, DOE Secretary Bill Richardson clearly summarized his view of the nation’s energy policy: 

Our energy policies are based on market forces; diversity of supply and strong diplomatic relations with energy producing nations; improving the production and use of traditional fuels through new technology development; diversity of energy sources with long-term investment in alternative fuels and energy sources; increasing efficiency in the way we use energy; maintaining and strengthening our insurance policy against supply disruptions – the Strategic Petroleum Reserve. Our diplomatic efforts will help alleviate the current shortage, and these energy policies will help assure that in the long-term Americans have affordable and diverse supplies of energy.[11] 

Secretary Richardson’s articulation of energy policy calls for a continued and strong role for traditional (a/k/a. fossil) fuels. As for “diversity of sources,” the U.S. has an abundance of coal, oil, natural gas, and uranium. And it is appropriate that there be “long-term investment” in alternatives, recognizing the reality of the immediate energy needs of the economy. While the Secretary’s statement is comforting, it does not square with the central policy objectives of the provisions called for in the Kyoto Protocol. Perhaps, as the imperatives of the new, digital economy are thrown into stark relief against the background of the Kyoto Protocol, perhaps the role of oil in transportation and federal electricity policy will converge with reality. 

Many of today’s electric energy policy proposals are driven by wishful thinking (“I wish solar panels could replace power plants”), by unrealistic goals (“dial coal out of the energy equation”), and by resource ignorance (“the hydrogen economy frees us from fossil fuels”).[12] Electric energy policy is also driven by environmental regulations and by federal and state environmental agency interpretation of those regulations. There is an extensive body of literature addressing the regulatory constraints imposed on resource utilization. The challenge is to ensure that regulation does not dictate nor emasculate fundamental energy policy objectives, and that electric energy policy starts from and supports the economy’s needs. 

5. What Should We Do_ Energy Policy For the 21st Century

It is possible to identify and prepare for the future that has already happened.

Peter Drucker, Harvard Business Review, Sept/Oct 1997

With nearly three decades of experience in forging and debating energy policies – and with clear evidence of the new direction of the U.S. economy during the digital decade – policy makers now should revisit the policy process and forge rational, useful, and responsive energy policies for the 21st century. In the words of management guru Peter Drucker, the energy future (at least for the next decade) “already has happened.” We know the following facts about our future, and each has clear implications for energy policy:[13]·

• Technology growth will continue
• Wealth will increase
• Fossil fuels will anchor economic growth

Technology growth will continue (and it will be biased toward electricity as a fuel)

Few doubt that technology growth will continue, if not accelerate. Over the periods of time in which energy forecasts frequently are made, the magnitude of change can be daunting. Consider the pace of change over the past two to three decades in this single example: The first pocket calculator was introduced at a price of $1,000 (in inflation-adjusted dollars). The same $1,000 would today buy a Sony “Abio” – a microprocessor-driven, autonomous, robotic dog (a toy) with a million times more processing power than a calculator! 

If anything, the pace of technology change over the coming decade or two well may be greater. Today’s forecasts rarely account for or embrace the real pace of change. While we cannot easily anticipate what specific products and devices will be invented and deployed, energy policy can anticipate two things: All technologies, everything, require energy. So, with the single exception of biotechnology, new technologies will be biased toward the use of electricity. 

Wealth will increase (and the wealth effect will drive electric demand preferentially)

The usually conservative forecasts issued by the Energy Information Administration anticipate U.S. GDP growing by $6 trillion by 2020 and yielding a 35 percent increase in per capita wealth. Beyond that, forecasts not inspired by the Internet predict that before the year 2030, the U.S. will have over 400 million citizens in a nation that will have a GDP greater than the today’s world’s economy. By 2050, urbanization and population growth will yield as many as 60 mega-cities across the U.S., each with a population over 10 million. What are the technology and energy use implications of such trends_ Electricity is the preferred and primary form of energy that fuels cities, a digital economy, and an affluent population. 

Fossil fuels will anchor economic growth

After three decades and billions invested in alternative energy R&D, it should finally be clear that the primary electric supply for the nation will come from fossil fuels.[14] Whatever alternatives ultimately arise from continued, long-term R&D programs and technology serendipity, they will not be significant enough, nor soon enough, to supply the digital economy’s enormous and growing appetite for electricity. A clear policy division is required between the market’s need for electricity and long-term R&D programs. 

 

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[2] “Report of the U.S. DOE’s Power Outage Study Team,” March 2000

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[3] The Ultimate Resource II, Julian Simon, p. 162

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[4] Data from DOE/EIA Annual Energy Review

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[5] Omitted here is the energy for agriculture. While slim margins for farming mean fuel price swings can be devastating, the fact is farms use less than 1% of the nation’s gasoline and 10% of all diesel fuel, and 2% of all electricity. The energy needs of the food-processing sector are incorporated under the manufacturing category.

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[6] See CEI, “Energy Forecasts and the End of Technology Mindset,” Mark Mills, “Junk Forcasts,” M. Mills at and in particular “Julian Simon and the Triumph of Energy Sustainability,” Robert Bradley, Institute for Energy Research (to-be-published)

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[7] For details on the calculations, see the “The Internet Begins with Coal: A Preliminary Exploration of the Impact of the Internet on Electric Consumption,” .

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[8] See also, “Kyoto and the Internet: The Energy Implications of the Digital Economy,” Testimony of Mark P. Mills before the Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs U.S. House of Representatives, February 2, 2000

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[9] Vinton Cerf, Senior VP of Internet Architecture, MCI WorldCom, actual co-inventor of the Internet, Engineering Tomorrow, IEEE Press, 2000, p.10.)

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[10] The energy implications of the Kyoto Protocol have been extensively covered in dozens if not hundreds of analyses.

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[11] March 28, 2000, Statement by U.S. Energy Secretary Bill Richardson On OPEC's Decision to Increase Oil Production

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[12] Scientific American, January 1998, p. 22 “For most of the next century, I think that hydrogen will be produced from carbonaceous feedstocks … In effect what they [Dutch gasification plant] were doing was making hydrogen out of coal.” Robert Williams, Princeton University Center for Energy and Environmental Studies.

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[13] Obviously, absent geopolitical conflagrations, wars, natural disasters, etc.

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[14] Robert Bradley, “The Increasing Sustainability of Conventional Energy,” Cato Institute Policy Analysis.

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