Well, thank you, John. I was actually planning to make a long presentation, but I will, in real time, convert it to a short presentation. And it really is a pleasure to be here at CSIS. I also – as John said, it’s no joke, I asked the driver coming over, why aren’t we stopping here at K Street? But it’s really a pleasure now to be here in your inaugural – I guess, officially at least, inaugural week to make some remarks.
It’s actually an exciting time to be back at DOE. The president, in June, had these two policy speeches, the first in Berlin, where he revisited the Prague nuclear security agenda and then, of course, at Georgetown with the climate action plan discussion, and as this audience knows, both of those are very important elements of the DOE’s agenda. So it’s getting kind of exciting, and I might say, it also aligns, of course, as we also know, with the CSIS agenda, and that’s why I think this is a really great place to come and make a set of remarks, you know, somewhat stimulated by the 40th anniversary of the Arab oil embargo, which clearly led to so many profound changes in how we view the energy world, how we address energy problems, and of course, within a few years, to the Department of Energy being born to help address those problems.
So today, I think in my now short presentation, I’ll make a few remarks about some of the obvious changes since 1973, but then I want to move on to talk about, at least, how we are thinking about what are today’s energy-related security challenges? What are some of the policy directions we pursue for those? And in particular, I’ll say a little bit, at least, about some of the technology pathways to follow those policy directions and what we are doing and plan to do at the Department of Energy.
So in 1973 – I think there are, regrettably, too many of us in this room who remember 1973, and a few who are fortunately younger than that. But clearly geopolitically, obviously, there was a Soviet Union, no European Union.
Iran was a close ally, we might remember. In 1973 we had maybe cooling but not terribly chilly relations with Venezuela, et cetera. I mean, really a huge difference when we think back to that time. President Nixon had just come back from China, another watershed event – visiting China – with a GDP of just about a hundred billion dollars at that time.
Here at home, American households spent almost 20 percent more of their income on energy at that time than we do today. Energy, it’s a real changing dynamic. Obviously in the technology world, renewables were – other than hydro – largely, essentially nonexistent. And globalization was not really, I think, a word in the dictionary at that time.
So obviously, we all understand that there were all of these differences. There were responses, like the Department of Energy, like a petroleum reserve, CAFE standards in ’75 – the first round – so quite a few actions taken. But today the world, and really the conditions and the way I think we, at least, should be thinking about energy security issues are really quite different. And that’s really what I want to focus on.
Actually, another – just one other comment I’ll make is – or maybe two, in terms of this change – it’s also the case that – and partly in result,one might argue, of an overplayed hand at that time in terms of the embargos, a great diversification of supply in oil, starting with the North Sea and Alaska but then Mexico, Brazil, Canada, Africa, the U.S. Gulf of Mexico as really a new place to produce.
Also at that time in our energy security world, we were running out of natural gas, had essentially a ban on generation. That then led to the 1980s, huge focus on building up coal. So we kind of forget that this coal build-up was really very, very coupled to these security concerns, something that we’re struggling with, but something, frankly, we have to keep in our contexts now as we engage in the international debate on climate change. A lot of other countries are also focusing on coal, with, perhaps, not dissimilar conditions that we had then.
So let’s kind of move up to where we are today. And obviously the rise in domestic oil and gas production is a well-known part of that story. I think it’s not maybe focused on enough that just last year, I think, we had the greatest increase in oil production in our history – a million barrels a day increase. And that, driven to a very, very large extent, by the Bakken and Eagle Ford plays.
So again, very, very, very, very different situations, today we have, again, much diversified energy supply – besides oil, gas, nuclear, wind, solar, other renewables, biofuels – 10 percent of the supply – and now the issue is blend wall is a challenge, as opposed to building up this alternative – clearly, huge increase on the demand – huge advance on the demand side. Vehicles – 11 miles per gallon 1973, 25 now – 24.9, on the way to 50-plus in 2025. Two percent per year energy intensity decline, which means improvement, et cetera, et cetera.
So again, that’s a lot of the – a lot of the background for the change. Let me now move into, again, what I would put forward as four energy security – energy-related security challenges for the – for the path ahead and maybe I can figure out how this works. I mean, the geopolitics of natural resources and supply demand balance, you know, does remain an important security concern.
I think certainly it would be a misconception to think that because of our increased domestic production here that somehow we have become free of this question of the global oil market and the global oil price and the global oil price volatility, which can be there. In fact, one can argue whether today’s prices are high, are structural or not, but we are certainly in a situation where there are substantial, let’s call it, unplanned outages in terms of current oil supply, maybe a little bit tight on the reserve production capacity. And as we know, again, we are not independent of that global price.
So we still need to address this issue of the global oil markets, and clearly we have a number of policy options and technology directions to address this. Number one – well, already mentioned; I won’t spend a lot of time on it – is the issue of increasing domestic production, and that’s something that, again, we all know is going on quite strongly right now.
But I want to emphasize that a key political and policy objective has to be continuing reduction in our oil dependence. So even as we produce more oil we still need to be focused on reducing our oil dependence. That has three principal thrusts:
Efficient vehicles – and we’ve already mentioned the 2025 CAFE standard goal. And again, we are already seeing today the impacts of this move in that direction with increased efficiency.
Secondly, alternative fuels, and there we continue to push on the technology pathway towards the next-generation biofuels. As an example, we believe that our Energy Efficiency and Renewable Energy Office projects, from basic research actually in our Office of Science to support for pilot and beyond pilot-scale biorefineries, we believe the technology in place today is on a path – with scale up, et cetera – to below $2, and maybe $2.15 per gallon of cellulosic ethanol perhaps towards the end of this decade.
Now, that’s $2.15 not gallon of gasoline equivalent. So with the energy density, you know, we still have a ways to go. But we’re getting into the ballpark, is the point, of being able to provide biofuels at a reasonably competitive cost.
Clearly there’s a lot of discussion about natural gas vehicles, and I think one of the important sets of announcements recently is the fact that we will be seeing production and sales of bi-fuel gasoline and natural gas vehicles. As a reminder, we have not had that in the United States, largely because of an unintended consequence of policy. That’s changing. That’s what the world does in terms of natural gas, principally bi-fuel vehicles, and this could open up that pathway substantially.
Finally, I’d just comment that, again, efficiency, alternative fuels, classification of vehicles remains something that we are strongly committed to, and, frankly, pretty bullish about. Here is a picture, if you can read it. Those blue bars are reduction in vehicle battery costs. Let’s call it, say, $500 per kilowatt hour of storage today, about a factor of 2 reduction in a relatively short time. The green curve on the right is the deployment. I would just note that this rate of increase is substantially higher than the analogous curve we would have shown over a decade ago for hybrid vehicles. First half of this year, 50,000. So this year, that total deployed number of 2012 of 75,000 or so, that’s probably going to go up by at least a hundred thousand in this year and continuing to increase.
Now, that cost obviously is still way too high for pure electric vehicles to have large market penetration, but with another reduction of about a factor of two, certainly for plug-in hybrids, this will be very, very interesting. But of course, today we also have examples of business models like the Tesla. The Tesla clearly is not at that scale yet in terms of deployment. But the Tesla is actually an example of something that more closely resembles the classic disruptive technology theory. The business model is not competing in what you might call the commodity market but having a business model in which the appeal is for extremely high-performance vehicles.
In fact, the Tesla, as I think many of you know, was named, consumer reports and others, as essentially the best or one of the very best cars it ever tested – not electric vehicles but cars – as a tremendous high-performance vehicle. And they did have a DOE loan of about a half a billion dollars. It’s paid back early. Premium to the taxpayer. Next year they will start an export strategy with the Tesla.
So again, we think that these technologies are not as far out as people think, in terms of becoming material. I will return to this point with some other slides of this nature with the theme that businesses are paying attention, and when they’re paying attention, you should figure something interesting is happening.
So OK, so number one is, again, on this resource issue. And I will just add that we focused here on oil and the continuing need to reduce oil dependence now that we are 40 years past that embargo. But I will also add a second issue in terms of resource concentration and supply and demand is that of energy-critical materials. Rare earths are those that have been most often discussed, and we know a couple years ago, there was a real issue with China controlling the supply and creating a little excitement in the market.
There are other energy-critical materials. Just this week I think Energy Daily, for example, had a story on lithium-7, an isotope that turns out to be used in nuclear reactors. But this is kind of new on the screen.
We have again responded as a department. We have established what’s called an innovation hub, roughly $25 million a year at our Ames laboratory in Iowa. And it is researching not the issue of so much of producing these energy-critical materials but more focusing on, what are technologies for effective recycling and reuse of these materials, and very importantly, what are substitutions? Where can we can find earth-abundant materials to functionally replace these energy-critical materials in energy technologies, such as renewables, wind turbines, et cetera?
So that’s really the first of these challenges that associated with natural resource distribution.
A second challenge that we would put into this category is in fact climate change and associated natural disasters and humanitarian crises that can result from climate stresses. I will be relatively brief again in trying to leave enough time for questions, but on my first day on the job, I believe, at DOE, I was quoted as saying that I’m not here to debate what’s not debatable, in particularwhat I consider not debatable is the need to respond prudently to the risks of climate change. That does not answer the debate about what you do about it, how much you do, how fast you do it, et cetera.
Now, for the United States, of course, President Obama put forward, as I mentioned earlier, in June the Climate Action Plan. The Climate Action Plan, for those of you who have not looked at it in detail – though I encourage you to do so – that, so fundamentally start cutting down on greenhouse gas emissions. And, of course, in the United States, we are in fact at our lowest level of emissions in about two decades.
But the plan, given the realities that we are not likely to see anything like comprehensive legislation, at least in the near term, the plan is based upon existing authorities and executive action across the administration. Department of Energy clearly has a lot there.
But I’m going to say before moving on from that point that in my opinion – and this is a personal opinion – going back to this not debating what’s not debatable – I believe frankly we have turned the corner on that issue. Is it uniform, a hundred percent consensus? Of course not. But I believe that we are, including in our Congress, really past the issue of whether we need to respond, and then we will be focusing on the challenge of what is it that we can and will do ultimately in legislation, even as we carry out President Obama’s very aggressive Climate Action Plan in these next several years.
So in the mitigation, clearly efficiency is a major focus. And I will say here for the Department of Energy, in addition to advancing technology, we have with OMB and OIRA come together – unfortunately, with a little bit of an interruption – in what was called lapsed appropriations, but much more aggressively moving out our efficiency standards, our rulemaking on a whole set of technologies. And we intend to in particular as OMB gets fully staffed up, getting back into their activities. We will pick up that pace once again of pursuing a whole set of efficiency standards – we have said publicly on our next notice of proposed rulemaking we are targeting for next month on a very important issue of electric motors.
A second issue clearly is decarbonizing power generation. And let me again show a few of those slides. Actually, first, on efficiency, this is the story on LEDs. I think it is. I can’t see that far, but it’s the same general story as before. The blue bar’s cost’s falling really fast. In fact, when we did this like a month ago on our website, the 60-watt incandescent replacement LED was pegged at about $15. Last week, Walmart announced they’re selling LEDs from nine something to 11 something. And when you figure that the lifecycle – which is 25,000 hours projected – the lifecycle energy cost savings is somewhere in the $125, $135 range for U.S. retail prices, this is a tremendous lifecycle bargain, and the initial capital cost barrier is really coming down dramatically. Again, not surprisingly, deployment shooting up very, very dramatically.
If we turn to renewables, this is the story on onshore wind. There was that rise associated with market conditions, but fundamentally, once again, very, very rapid drop. And the increase is such that last year, the largest capacity addition in the United States was, in fact, wind.
And finally, photovoltaics. Once again, same story. Dramatic cost reduction, one can argue over this 75 cents per-watt cost, whether that’s a true market cost, given overcapacity in the market and Chinese production, but doesn’t change the story. This is dramatic cost reduction, again, dramatic deployment increases.
And earlier, as I said, without taking sides in the argument, but one indication that this quote, “revolution now” is – many of you have probably followed – in California, in Arizona, in Colorado, in many states there is now a real tension between utility business models with current rate structures, solar, rooftop solar systems, and net metering, because as we decrease demand – I mean, electricity demand is basically flat, and now we have generators on rooftops, net metering coming in, a tariff structure that as we all know does not reflect the physical realities of delivering electricity to homes. These things are coming into a clash and really challenging business models. That, to me, is a pretty good definition of these are technologies whose time is really here and now.
So that’s some of what we are doing with regard to the mitigation. But the second pillar of the president’s plan was adaptation or climate preparedness. And so this is, on the one hand, an acknowledgement that we are seeing the consequences already of global warming. We need to be prepared to respond even more strongly. And certainly if one goes back to the Copenhagen Accord – which many of you would like to forget about, but the Copenhagen Accord of 2009 – it was there already that the issue of adaptation and linkage to the international scene and especially the less-developed countries was put into place. And in fact the third pillar of the president’s plan is precisely that of international leadership, international cooperation, and these things come together quite strongly.
I will return to this briefly in terms of resilient energy infrastructure in a few minutes, because I’m trying to end soon.
Third challenge: nuclear. In principle the global expansion of nuclear power has, as we know, especially in this building, in CSIS, we know, has potential implications for nonproliferation.
As I mentioned, the president has made nuclear security, as well as climate, a major focus. I’ll just note five elements of the 2010 Nuclear Posture Review as key objectives: preventing nuclear proliferation, nuclear terrorism; secondly, reducing the role of U.S. nuclear weapons in U.S. national security strategy; third, maintaining deterrence and stability at reduced nuclear force levels; four, strengthening regional deterrence and reassuring U.S. allies and partners; and fifth, sustaining a safe, secure and effective nuclear arsenal.
Now that’s a much broader agenda in security than we are here to discuss today, but there is a linkage in the all things nuclear world to nuclear power, nuclear fuel cycles and nuclear materials, and there the president has also said – and I’ll quote – “When we enhance nuclear security, we’re in a stronger position to harness safe, clean nuclear energy, and when we develop new safer approaches to nuclear energy, we reduce the risk of nuclear terrorism and proliferation.”
So this linked agenda is another one that we are very, very focused on, and I’ll just mention two points.
One is, nuclear waste disposal remains a challenge and is important in this context. For example, our inability to manage nuclear waste right now precludes certain policy options, such as so-called fuel leasing with other countries, which could be a very, very strong position. So nuclear waste disposal is really critical in the context that we are talking about today: energy and security.
The administration’s position is that we believe that we will really make progress only when we have a real consent-based approach, as recommended by the Blue Ribbon Commission on America’s Nuclear Future, which I had the pleasure of serving on under Brent Scowcroft and Lee Hamilton’s chairmanship a few years ago. So we are advancing that agenda. Key elements are, again, consent-based and a parallel track of consolidated storage of nuclear fuel even as we pursue geological repositories. And one thing, I think, of interest in this context is the blue-ribbon commission recommendations, and we are in the middle of carrying out a reexamination of the 1985 decision to mingle defense waste and commercial spent fuel. And this can have, we believe, potentially important implications on both sides of that discussion, both commercial and defense waste.
And then, of course, we are also pursuing nuclear technologies, and in the interest of time, I’ll just say for example we think small modular reactors are an interesting possibility. We have made one award for moving a technology to licensing, and, again, there was a lapse in appropriations, called the shutdown, but we will relatively soon be anticipating making awards from our second solicitation for small modular reactors.
And finally, in terms of the fourth challenge, which we think needs to be looked at much more today, is that of energy infrastructure and the vulnerability of energy infrastructure. That vulnerability has many facets. We’ve already talked about one, and that is the vulnerability to extreme weather, which can be climate-associated. Hurricane Sandy is the most recent major lesson we received on that.
Secondly, cyber. And I’ll just say here that for example we have created a new cybercouncil at the department that spans across four different offices as we believe this is an area of increasing focus. You all know that our energy infrastructures are coming under increasing and more sophisticated cyberattacks. We have to stay ahead of that and working with industry.
Third is the risk of physical attacks on our isolated and often unprotected energy infrastructure. There is, regrettably, an uptick in that, as well.
And fourth, there is the question of the interdependencies of our different infrastructures. Once again, Hurricane Sandy brought that out in spades, particularly with the interdependency of the electricity and the transportation fuels delivery infrastructures creating, frankly, quite a mess for several weeks.
So in this regard at the department I would say we have two major thrusts. Part of it is on the technical side, and the most prominent of which is looking at our significant efforts and increasing efforts on 21st century grid development to make sure resilience of that grid is as important a criterion in what we do as is the economic benefit of that grid buildout.
And we have projects – I’ll mention one, for example, in New Jersey, where our labs are designing a micro or mini-grid, a 50 to 80-megawatt microgrid – if that’s micro in your lexicon – that would use distributed energy to protect a major transportation corridor even if something Sandy-like happens again, while also providing new service opportunities for consumers in that region.
And the second direction that we are pursuing is putting together an integrated resilient strategy that addresses those four drivers I mentioned earlier and includes an emergency response capability.
Some of you know we have responsibilities under a presidential directive and working under FEMA to respond to emergencies involving the energy infrastructure, ESF-12, or something like that. And we are looking to do that. The only point I’ll make here – and again, it’s relevant in the CSIS context, is we have had historically at the Department of Energy a major emergency response capability in the nuclear arena for nuclear materials, nuclear devices, et cetera, drawing upon the technical capacity that we have in the department and our laboratories.
Now the issue is to do a similar thing, we’re at a much earlier stage – based upon our technical capacity in the energy arena and energy infrastructure area – building up a similar response capability but addressing it in a more complex way because in contrast to nuclear devices and nuclear materials, this obviously – the energy sector is principally in the private sector, and that poses additional challenges in terms of how we can exercise authorities with them, provide them waivers for acting together in an emergency.
So I will end basically there, again repeating that we think the energy security landscape is certainly no less interesting than it was in 1973. It is somewhat different. The natural resource concentration issues are different, including energy critical materials. Climate is a real threat multiplier, particularly in unstable societies. It’s a security issue as well as an environmental issue.
The nuclear issues we need to work at home in terms of things like waste management as well as working internationally. And, I won’t go into this, but CSIS has done a major study in terms of the way in which our U.S. role in international nuclear commerce is critical for our nonproliferation aims. And fourth, we need to work in a coherent way to increase resilience of our energy infrastructure.
So as I said, it’s an exciting time to be at the Department of Energy. And thank you for your attention.