Challenges and Opportunities in the Regional Energy Industry
There are two perspectives from which one can view the challenges and opportunities associated with the energy industry in the 3 Rivers Region (southwestern Pennsylvania and northern West Virginia).
One approach is to look at the challenges and opportunities for businesses in various stages of maturity. From this vantage point, there are at least four major areas of opportunity for the region:
- Capitalizing on the legislated marketplace for renewable energy that was created by the state Alternative Energy Portfolio Standard;
- Providing a support network for startups and a marketplace for energy company investors;
- Ensuring the success of existing energy-related businesses by providing the workforce and other forms of support that they require; and
- Bridging the competitiveness gap for energy intensive businesses that will be particularly intense in SWPA.
The second approach is to examine the opportunities within each broad technology area of the energy industry: coal, nuclear, wind, solar, etc. The opportunities in these technology areas are discussed in the second section below.
Opportunities by Business Stage
Assessment: According to the U.S. Department of Energy's National Renewable Energy Laboratory, Pennsylvania's alternative energy program could create an estimated 3,500 jobs and $2.5 billion in increased earnings. Because most of the state is still operating under a regulated energy environment, there is limited awareness on the part of entrepreneurs and businesses about the opportunity that has been created. To compound the problem, there is limited understanding of the unique aspects of the wind and solar industries. Service providers such as banks and accounting firms, unaccustomed to working in open energy markets, often do not provide the services needed to support new energy companies. At some point in the next five years, as more and more of Pennsylvania's utilities enter the open electricity market (the few counties that are currently operating under open market forces do not have enough demand to be attractive to larger brokerages, consultant firms, etc.), the size of the energy marketplace will reach a tipping point where it is attractive for businesses and institutions that are working successfully in other deregulated states to come in. If the region does not start to grow its skills in the alternative energy industry now, there will be much opportunity that will be lost.
As a specific example of the gaps in local business infrastructure, local banks do not provide Funds Transfer Agent Agreements that effectively function as a line of credit for energy brokerages, procurement consulting firms, or those trading renewable energy credits that do not have the credit necessary to handle the accounts of major clients. The tool, authorized by the North American Energy Standards Board during the 1990s, is an industry standard in other parts of the country. The lack of this service is preventing entry of smaller energy management firms into the local market.
Filling the gap: Educating entrepreneurs and businesses about the opportunities that are available is key. Service providers also have to be made aware of the tools and services that are available in other regions such as Texas that have strong energy marketplaces. An example of how to address this gap might be to organize a series of seminars for service providers, bringing in expert speakers from banks that offer energy industry services and then working with the local banks to send high level individuals to the seminars that can make decisions about offering the services. Similarly, seminars for accountants, attorneys, etc. could be held so that they also are well versed in supporting the free market energy businesses. Similarly, educational programs for potential entrepreneurs and business people in the specifics of wind and solar generation could be held to build interest and expertise in developing new energy-related businesses.
Assessment: Startup companies of nearly any kind suffer from the same challenges - good technology but poor business skills, lack of access to capital, etc. But there are also marketplace nuances that are specific to being successful in the energy industry that entrepreneurs need help understanding and addressing. In addition, small businesses in the region are not capturing their share of Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) funding, even through the National Energy Technology Laboratory (NETL) serves as the SBIR/STTR funding pipeline for DOE and there are two NETL facilities located in the region.
Filling the gap: A key service that the region could provide would be to create opportunities for startup companies to showcase their wares/services. For example, a mini-trade show for startup firms and new technologies could be held. Technical assistance specific to the energy industry (renewable energy credit trading, etc.) could be provided to supplement the business skill assistance provided by Innovation Works and others. Training courses could be held routinely on how to access SBIR/STTR funding, building on the infrequent but successful programs that have been presented in the past.
Assessment: Nearly every industry is suffering from a shortage of technical employees - both two-year program graduates and those with more advanced degrees. More detail on this issue is provided in the sections on specific energy technologies below.
There are also challenges facing the local industry specific to each business. For example, the 3 Rivers Region is a net exporter of energy, primarily to the East Coast. But its ability to transmit the power is limited by the carrying capacity of aging, low "volume" transmission lines. The new transmission lines that have been proposed are encountering significant public opposition. The ability to pump more power east means more jobs - jobs not only in the 10 plus years that it takes to build the lines, but jobs to maintain them, jobs to build and operate the new clean coal plants that will be coming on line to take advantage of the new marketplace, and jobs digging the coal to fuel the new plants. A competing company is poised to build new plants south of Washington, D.C. to capture this market. It will come down to a race to see which region gets there first and which region gets the jobs.
Filling the gap: Inventorying and aggregating information on workforce needs in the energy industry and providing that information to the local trade schools and community colleges would help to support recruitment and programming at local educational institutions. Expanding on local programs encouraging students to go into the needed fields would also help to strengthen the workforce pipeline.
Businesses and institutions in the region can also help encourage construction of the necessary transmission lines to provide access to East Coast markets. A broad-based constituency testifying at the Public Utility Commission hearings and proving support in the media would help to encourage their construction.
Assessment: Because most of the states to the west and south have not deregulated their electricity markets, Southwestern Pennsylvania is currently not competitive with other states in terms of electricity prices for industrial users. Moreover, until electricity market restructuring (deregulation) rolls out across all service areas of the state and free market forces are able to govern energy costs, southwestern Pennsylvania is not competitive with the rest of Pennsylvania.
Energy intensive industries (metals, glass, chemicals, etc.) that have historically received below-cost electricity subsidized by other rate classes of customers will no longer be subsidized under a free market. They are able to negotiate contracts with providers but cannot obtain the rates that they once did.
Filling the gap: Certain steps can be taken at the state level (e.g., have the Pennsylvania Public Utility Commission increase the frequency of the auctions that set rates) and at the regional level (e.g., organize a buyers consortium) to help reduce costs across the board, making all business more competitive.
Opportunities by Technology Area
Details on the opportunities and challenges that exist for specific types of energy and how the region would go about capitalizing on them or filling the gaps are outlined below.
Situation: Unless there are significant changes in the economics of other renewable sources, most of the new energy generation jobs that result from Pennsylvania's portfolio standard will be attributable to wind energy (including the energy packagers, credit traders, and others that will support the marketplace). Local opportunity will be derived from startup wind generation companies and new installation and maintenance firms. New companies will come into the region, lease property, perform the meteorological testing necessary, and then install wind farms or sell the opportunity to a bigger wind energy company.
Robert Morris University has received a University Innovation Grant from Innovation Works to prove out the commercial viability and advantages of a vertical axis windmill design potentially applicable to both large and small windmill farms.
Opportunity: One way to help facilitate new businesses starting up might be to use Pennsylvania Energy Development Authority funds to pre-qualify sites across the region by completing the meteorological testing, taking that burden away from the entrepreneurs. Another way to help build new businesses might be to construct a wind energy company incubator, built using green building practices, as a welcome sign to emerging companies in this field. Since southwestern Pennsylvania has the best wind resources in Pennsylvania, the wind generation market is the region's to take or lose.
Situation: One technology area where the region is particularly well positioned is coal conversion. The high sulfur coal in the region is a problem for coal-fired energy producers that do not have the necessary air scrubbers in place. As a result, local power plants are importing lower sulfur western coal to mix with the local coal to help reduce the plant sulfur output. A higher value use for the region's coal needs to be found to ensure the long term profitability and success of this important regional industry.
The federal Energy Information Agency reported that Pennsylvania produced 67 million tons of coal in 2005, while West Virginia produced another 154 million tons. At a price of $40 per ton, this combined production of 221 million tons translates into $9 billion of revenue. Converting this coal into electricity and selling it into the market at $50 per megawatt hour more than triples the value of our natural resource, generating revenue of more than $30 billion. If instead coal is converted into diesel fuel to be sold at $3 per gallon, that same coal production now generates more than $55 billion in revenue, an increase of more than 500 percent.
Although The Fischer-Tropsch coal to liquids process has been in use for 60 years, it is expensive and produces twice the greenhouse gases per unit of fuel energy. But the national need for energy independence, particularly from the perspective of homeland security, is driving the need to develop sources of fuel that are not derived from imported oil. Biomass to ethanol can provide some short term relief, but the only practical solution over the next decades is coal-sourced fuel. To incentivize development of these new sources, the Department of Defense recently released an RFP for 200 million gallons of synthetic jet fuel. NETL is leading the work on coal conversion and the carbon sequestration that is needed to minimize the environmental impacts of production.
West Virginia University (WVU) has identified coal conversion, particularly from the perspective of providing feedstock to the chemical industry, as a key program at its Charleston research campus and will be developing both the research initiative as well as managing tech transfer in partnership with the new Battelle office there. WVU also has identified fuel utilization and conversion (coal gasification and carbon sequestration) as one of its four program areas. Non-conventional transportation fuels and other products from fossil and renewable sources is another of the four.
Opportunity: Coal conversion with carbon management make sense as a signature industry for the 3 Rivers Region for a variety of reasons:
- The region has vast coal reserves and should derive the highest value possible from them
- The regional research strength in the field is also strong
- Coal is critical to the region's economy
- No other region has captured the brand (although Ohio is talking about it in light of its new coal-to-liquids facility)
- There are new higher efficiency technologies that are looking for demonstration sites that may come to replace the Fischer-Tropsch processes
- There is federal money available to support it
- Both Pennsylvania Governor Rendell and West Virginia Governor Manchin are investing heavily in new energy-related opportunities.
Coal conversion technology is likely one of the best opportunities to grow the energy industry in the 3 Rivers Region.
Situation: With new orders from China and other international and domestic orders in the queue, Westinghouse will be building reactors for decades to come - and will likely be building them here. The decades of research that the corporation has invested in its new technology is paying off.
Opportunity: Beyond the thousands of engineers and technicians that Westinghouse is hiring, there are significant opportunities for the 3 Rivers Region in the supply chain - machine shops, materials suppliers, instrumentation, etc. - and the region is reasonably well positioned to deliver them, although it may be limited by workforce issues.
Situation: Analysis of the electricity transmission grid and, to some degree, manufacturing of transmission and distribution components are another area of strength. Lester Lave, Jay Apt, and their team at Carnegie Mellon University as well as others in engineering, computer science, etc. have created an international center of expertise on grid strategy and management. As the U.S. ultimately moves toward a distributed grid structure (locally sourced energy), there will be a need for new approaches to grid management, with a particular emphasis on software and the creation of the "smart grid."
Opportunity: Commercial vendors are already emerging with ways of managing the smart grid. There may be some opportunities for startup firms here. Greater near-term opportunities in the region will be, however, in the construction and maintenance of the new transmission lines, substations, controllers, etc. that are to be built over the next decades. There are very serious workforce challenges facing the companies that are preparing to build these lines. The companies would prefer to hire locally, especially since they currently have a shortage of linemen that will only worsen with more infrastructure to maintain.
Situation: Fuel cells will likely some day become more broadly applicable and practical, with major contributions from the research and development activities at NETL and its local partner universities. But the region faces stiff competition from other regions. Ohio is gaining much headway with its Ohio Fuel Cell Coalition (nearly 90 members) and its Fuel Cell Corridor as well as over $100 million in financing, research, development, demonstration and training for fuel cell projects at its disposal. As a representative from Rolls-Royce said when they sited their U.S. headquarters in Ohio, "In the end, Ohio's proximity to supply-chain partners, state support, and the region's emerging reputation as the 'fuel cell corridor' led us here."
Opportunity: There is some other emerging fuel cell business activity in the region. Media and Process Technology, Inc., an Alcoa spinoff and a manufacturer of ceramic membranes, is working on a membrane-based "one box" process to generate low-cost hydrogen from coal and has been very successful at attracting DOE SBIR funds. Nearby, Kuchera Defense Systems in Somerset County was the recent recipient of a nearly $400,000 state grant to develop a Center for Excellence for Advanced Energy Systems Manufacturing and a pilot manufacturing facility for fuel cell assembly. Separation Design Group, a three-year-old research and development company in Waynesburg, PA, is a recent recipient of an Innovation Works Innovation Adoption Grant. The company is developing a technology that produces oxygen and nitrogen from air in a more energy efficient manner than other methods, which has application to fuel cells. Congressmen Mike Doyle and Tim Murphy, among others, sit on the federal House Fuel Cell Caucus. More federal resources may become available to this region if that initiative realizes its requested funding.
Situation: By 2021, when the solar share of the state's Alternative Energy Portfolio Standard is in full effect, utilities will be required to purchase 700 megawatts of solar-produced electricity - the second largest solar requirement in the nation. But solar technologies are simply not strong here, and with a lack of the kinds of direct financial incentives that companies in Europe and other countries enjoy, the market will have a hard time growing. Solar Power Industries is a bright spot of growth in the region. It holds the Westinghouse solar cell technology, but although the company continues to invest in that technology, they are emphasizing the far more profitable silicon wafer based photovoltaics and solar panel components. Their market is nearly all international.
Opportunity: The opportunities to create a significant solar power industry in this region are limited, unless there are changes in the economics of the industry.
Situation: Most ethanol is currently produced from corn - a low efficiency use of a major food crop. Other processes are coming online that make use of other bio feedstocks, and at some point, the technology will be in place to convert the available plant matter in the state to what is estimated to be in excess of 500 million gallons of cellulosic ethanol per year.
Opportunity: Conversion of oils to diesel fuel is garnering some local interest. Union Oil Company (United Biodiesel) on the North Side is converting waste restaurant oil into diesel fuel and has captured a city fuel contract (among others). Also, Carnegie Mellon has developed a new microwave-based technology that holds promise. Steel City Biofuels is driving a number of initiatives designed to attract and growth a strong local biofuels industry.
There are low hanging fruit that could create significant jobs and investment in the region, particularly:
- Growing the local clean coal industry;
- Supporting the development of services for new businesses emerging around renewable energy sources;
- Providing opportunities to match businesses with investors and customers;
- Inventorying workforce needs and placing that information in the hands of educators;
- Instituting a training and education program for service providers about working with the energy industry and startups in particular as well as sessions for entrepreneurs on wind and solar energy businesses;
- Expanding on the local training programs on how to access SBIR/STTR funding, especially in outer counties.
Other initiatives, such as establishing a regional brand, will take longer to accomplish.
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