Friday, August 26, 2011

What is the purpose of a power plant?

Here's a little brain teaser for you all.

What is the purpose of a power plant?

Please send me your answers to this riddle via email or via the comment section below.

Incorrect answers include:
1) To generate electricity
2) To generate money
3) To look pretty

While answers #1&#2 seem correct, the electricity and the money generated at the power plant are mere means to an end. The question is: what is the end purpose of the power plant?

Here's the hint to the correct answer:   Replace the word 'bacteria' with the word 'power plant,'  and then see how you would answer that question.

Wednesday, August 24, 2011

Power & Paranoia: A Discussion of "Power Currency" by James Rogers

I recently read a book that discusses the idea of energy backed currency: "Power Currency" by James Rogers. [Note: this is not the James Rogers who is the CEO of Duke Energy.]
The book is a mix of interesting ideas along with good old fashion paranoia (and there's some real paranoia in this book that I'll discuss at the end of this post.) In general, the ideas in the book are extremely naive because the author occasionally assumes that all electricity can sell at the same price; he makes no mention of the 'time value of money' or the return on investment of any of the electricity generation or electricity storage concepts discussed in his book; and he often mistakes the units of power with the unit of energy. The only reason that I decided to read the whole book is that it covers a topic that I find interesting:  the connection between electricity generation and currency. It also does a good job of telling the history of various currencies that we've had in the US since the founding of the country. For example, I learned a lot about the gradual growth in the money supply, the gradual increase in debt-backed currency, the gradual decrease in gold-backed currency, and the evolution of the US central banks through US history.

So, I'd like to point out some of the interesting ideas in the book, then I'll point out some of the errors in the book, and finally, I'll discuss the shear level of paranoia and how we can avoid succumbing to paranoia. We can't solve our problems if we start with fear, especially fear of death. But I will save this discussion to the end of this post, and focus now on places where I agree with the author of "Power Currency."

As James Rogers states, Electricity meets the theoretical requirements of money:
1) Medium of exchange -- widely used by nearly everybody
2) Unit of account -- indisputable and recognized value
3) Standard value -- consistent over time in terms of other items

Saturday, August 20, 2011

On Symmetry and the Rate of Return on Investment: Economics using only physical units

I'd like to join together two of the major themes in my blog:  symmetry and the rate of return on investment.
In a prior post, I mentioned that there is connection between the two:   those projects that yield higher rates of return on electrical & mechanical work invested will produce more symmetry than those processes with low rates of return on work invested.  Let me be clear here. In this case, I'm not talking about reflection, rotation, or translation symmetries. I'm talking about permutation symmetries (i.e. entropy.) Follow this link to my previous post to see how high rates of return on investment leads to more (permutation) symmetries.

Now, I'd like to discuss why I prefer using the internal rate of return on investment rather than the levelized cost of electricity when calculating the comparative economic viability of different electricity generating power plants. One advantage of the IRR is that it's units are purely physical [%/yr] (whereas the LCOE has units of [$/MWh].) Another advantage is that the IRR is nearly-symmetry when calculated at different locations on the globe and at different times (a sort of near-symmetry in space-time translations.)

What I'm trying to do in my research is to reduce the amount of calculations required to determine which type of power plant to build and where. Is there any underlying order and structure? Or instead:  is everything local?
By this I mean,  does each location in the world have to do separate calculations to figure out what is the right type of power plant?
At each location, there will be different prices for natural gas, coal, oil, labor, materials, and taxes, as well as different wind speeds, water flow rates and geothermal resources. Then there's the problem that different countries use different currencies. And finally, you have the problem that not only are these prices changing in location, but they are also changing in time.

Wednesday, August 17, 2011

A Major Problem with the US Federal Reserve: The member banks are guaranteed by law a 6%/yr RROI

A recent US politician claimed that the US Federal Reserve Chairman would be a traitor if he allows the printing of money between now and the next election. This is an extreme statement. There is no need to threaten people with death (which is the punishment for treason) because you disagree with their political views. (There is no correct political system because there's no way to know that one system of governance works better than another system because you can't try both at the same time. All we have to go on is history, and history can only be a guide not a rule book for how act in the future.) While it's extreme to call the US Federal Reserve Chairman a traitor, there are a lot of people (myself included) who are very anger with the US Federal Reserve Chairman for printing money while there was already significant inflation. So, I wanted to discuss why people have so much angry towards the Federal Reserve system right now. The goal of this post is to discuss one of the little discussed secrets of the Federal Reserve: the member banks are guaranteed a 6%/yr rate of return, regardless of how the economy is doing, and can print money in order to raise the funds to pay themselves the 6%/yr rate of return. The reason this is a secret is that there is a lack of transparency in the Federal Reserve System.


In many of my posts, I discuss ways to improve the Federal Reserve by forcing it maintain a constant level of inflation (preferable 0% inflation.) While I have no ability to predict the future of the economy, I can claim the following:  if we adopted an electricity-backed currency (i.e. maintained a 0% inflation in the average price of electricity), then there would be transparency in the US Federal Reserve. "And no funny stuff!"  Right now, there is no transparency in the US Federal Reserve. The system is a mess. There is no certainty. For example, can you tell me whether the Federal Reserve is going to print money again? Is it aiming for a certain inflation rate?

Instead, we have created a system in which the few profit at the expense of the many. And because of this, we need to improve the US Federal Reserve operates. The relation between the people and central banks has evolved throughout US history; and the system we have currently will not, should not, and can not last. I suggest forcing the Federal Reserve to maintain a constant inflation rate (preferable 0% inflation in the price of electricity...but I'm open to other suggestions) and to adjust how much money they are able to pay themselves (see below) depending on how well the economy is doing.
We, the people, have a healthy fear of the Federal Reserve, and it's a healthy fear because we have created a system in which the largest banks in the US can print money pretty much whenever they want.

Here's the dirty, little secret that isn't discussed often. The banks that make up the Federal Reserve are guaranteed by law a 6% annual rate of return on investment.

Sunday, August 14, 2011

Thomas Edison on Electricity-Backed Currency in 1921

I found this lengthy quote from Thomas Edison in a recent book by James Rogers called "Power Currency."  I will be reviewing his book in a future post. In this post, I'd like to quote Edison as he was responding to an interviewer about Henry Ford's idea in 1921 of having the government build power plants (like hydroelectric dams) by issuing currency against the power plant instead of getting people to invest into interest-bearing bonds. (Note: this is an idea that James Rogers totes throughout his book, so I'd like to present the argument before I point out the problems with this idea of having the government issue currency to build power plants rather than having the private sector build power plants via issuing bonds and stocks. Note also that there is a general level of paranoia that runs throughout this Edison quote and which echoes in Roger's book. For those of you have read my previous posts, I have a severe distrust of our current fiat currency, but that doesn't mean that I have a severe distrust of making money. I think that the decision on where and what type of project to invest in should come from those people who are investing their own money...not by politicians who use taxpayer money to invest in projects, and certainly not by politicians that can create money out of nothing to invest in projects, even power plants as suggested by Ford & Edison.) And now, I present to you Edison's stance on allowing government to issue currency (rather than bonds) to build power plants:

"Make it perfectly clear that I'm not advocating any changes in banks and banking," said Mr. Edison (in 1921). "Banks are a mighty good thing. They are essential to the commerce of the country. It is the money broker, the money profiteer, the private banker that I oppose. They gain their power through a fictitious and false value give to gold.
"Gold is a relic of Julius Caesar and interest is an invention of Satan," Mr. Edison continued. "Gold is intrinsically of less utility than most metals. The probable reason why it is retained  as the basis of money is that it is easy to control. And it is the control of money that constitutes the money question. It is the control of money that is the root of all evil.
"Then there is another way--the method my friend Ford proposed the other day. He proposes just to go along and forget about gold. He says that the government can finance Muscle Shoals without applying to money brokers for permission, and I think that he is absolutely right about it."

Saturday, August 6, 2011

Grand Challenges of the 21st Century in the Field of Electricity Generation, Transmission & Use

Here's what I see are some of the grand challenges for the 21st century, as related to the field of electricity generation, transmission & use. After I list the challenges, I'll list possible ways of meeting these challenges:

1) Returning the USA, Canada, Europe & Japan to a positive rate of return of investment, i.e. growth in real GDP.

2) Including environmental externalities into the price of electricity and transmission in all countries. This includes deforestation, greenhouse gas emissions, acid gas emissions, ozone forming emissions, particulates, etc...

3) Accomplishing electricity deregulation in such a way that the average price of electricity decreases with time while encouraging efficient investment in electricity generation, transmission and distribution.

4) Implementing demand-response into the electricity market, i.e. allowing residential electricity customers to lower their electricity bills by giving them or their appliances information on the minute-to-minute price of electricity. This requires knowledge of the price of electricity and the ability to raise the temperature of one's house in the summer when the price of electricity is high. (This will lower the price of electricity you pay and help prevent a black out.)

5) Implementing a currency that maintains a zero percent inflation on the average price of mechanical and electrical work. I like to call this an electricity-backed currency. It provides feedback as to which parts of the economy need to grow and which parts need to shrink. Your dollar would have constant purchasing power over time. The government wouldn't be able to take away your purchasing power by inflating its currency.

Wednesday, August 3, 2011

What is the economic impact of greenhouse gas emissions?

Discussing the topic of global warming is bound end any polite dinner conversation. It's like discussing politics at a wedding...it's bound to get people really angry.

With that being said, check your ego before reading on, and only leave a comment if you've thoroughly digested everything below. I don't want to turn this into a 'he said, she said' or 'Red vs. Blue' dispute that I see in a lot of blogs (CNN for example).

What I'm about to say will probably annoy both the climate change alarmists and the climate change deniers. But those of you who have some training in economics (i.e. the science/skill/art of making a cost-benefit analysis under uncertainty) will find what I have to say to be pretty middle of road and boring.

1) Human emissions from the exhaust products of burning fossil fuels are causing an increase in the concentration of greenhouse gases: CO2, CH4 and CFC's.

2) You can prove that the increased concentrations are increasing the radiative forcing function on the Earth by looking at the the amount of IR radiation leaving the atmosphere at the frequencies where CO2, CH4 & CFCs absorb. There is plenty of satellite data showing there have been decreases in the amount of infrared light leaving the Earth at the frequencies where these gases absorbs. And the decrease in the amount of IR leaving at these frequencies is as expected from the rise in GHG concentrations. For example, see the link below:
http://www.nature.com/nature/journal/v410/n6826/abs/410355a0.html

3) Particulate emissions from coal power plants (in the 50's/60's in the US), and now in China, have a negative effect on the radiative forcing function. This is part of the reason why global temperatures have only slightly increased over the last decade, and actually decreased somewhat in the 50s.

4) There is still some amount of uncertainty in going from a change in the radiative forcing function and an increase in global temperatures. Models are getting better with time, and this uncertainty is decreasing with time as we collect more data and add more details to the global climate models.

5) The largest area of uncertain (as far as making public policy decisions) is the economic impact of increased temperatures. There needs to be a lot more work in this field. As I've mentioned before, it would be a good idea for an independent agency like RAND Corp or the US DOE to estimate the economic impact of increased temperatures. As of 2009, there have only been 14 studies that calculate the impact on global GDP as a function the Earth's mean global temperature. That's not a lot of studies, given the amount of money that has already gone into trying to solve what people assume is a problem, but without having actually done their homework to see if it really is a problem. I've plotted the data from the 14 studies below: (the data point can be found at the following site. Along with the much prettier graph made by Tol, which includes error bars.)

Monday, August 1, 2011

Selling Government Assets: How much money could we get? What's the advantage?

By almost any measure (such as deficit to GDP or debt to GDP),  the US is faced with a major problem. Our current yearly deficit is on the order of 10% of the GDP. Our federal government is spending roughly 30% of the GDP and only bringing in tax (or other) revenues at roughly 20% of GDP. The yearly deficit is roughly 1.3 trillion dollars, i.e. 10% of our roughly 14 trillion yearly GDP, and roughly 10% of gross federal debt. This is unacceptable, and most people recognize this fact. Hoping that the problem will go away is no longer an option for politicians because the voters are starting to become knowledgeable about the size of the debt and the inflationary methods that the government has tried so far to fix it (such as QE2...i.e. printing money while the commodity price index was rapidly increasing.)

As a society, we need to be producing more things of actual value and spending less until we bring the deficit and the debt back into a manageable size.

The general options available:  cut spending, raise taxes, print money, or sell government assets. Some of these options are better than others.

For me personally, I tend to favor the following options in this general order:
1) Sell government assets  (gold, silver, Postal Service, TVA power plant, Amtrak, and Federal Reserve owned assets)

2) Increase the retirement age and link the retirement age to life-expectancy. (There should of course be exceptions made for hazardous professions, such as fire-fighting or steel mill laborers.)

3) Tax pollution   (municipal solid waste going to landfills, acid gas emissions, and perhaps greenhouse gas emissions.) Ideally, we would lower income tax by however much we raise taxes on pollution, but we are so far in debt that we need to get back into fiscal sanity before we seriously discuss lowering income tax levels. I hate the idea of income taxes, but I hate the idea of borrowing money from China even more.

4) At the state level, increase luxury/sin taxes...but probably not at the federal level, or else we might cut into the tax that could be raised at the state level.