In Search of Moonbeams and Unicorn Breath

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Back in the day, one of our clients was Kfx, Inc., a company with an idea. As ideas go, it was one of the better ones. Kfx’s idea solved a real problem while making a lot of money. We were engineers, turning ideas into reality was what we did, or at least that was what we told our clients. Unlike many companies with bold innovative ideas, Kfx was somewhat unique. They had money. As our contribution to the partnership, we knew how to spend our clients’ money, perhaps not with the reckless abandon we were sometimes accused of, but we could spend it pretty fast.

Kfx’s idea involved making the coal business in the Powder River Basin more efficient. The Powder River Basin is the name given to a large section of Wyoming and SE Montana and home to some of the biggest and cleanest coal deposits in the world. If you live anywhere in the central United States you have probably seen long railroad trains, 110 to 150 cars long, hauling enormous quantities of embryonic carbon dioxide to distant power plants. The black gravel you can see on the tops of these cars is coal from the Powder River Basin, known in the market as PRB coal.

PRB coal has a number of compelling advantages. First of all, it is a clean coal with almost no sulfur or the other impurities that make burning other coals so dirty. It is a very clean burning fuel – for coal that is. It is cheap, far cheaper than other coals. It is cheap because it can be mined with draglines in pits instead of in underground mines. PRB coal has only a thin surface layer of dirt and soft rock covering it, easily bulldozed off exposing the coal seam beneath.

The big disadvantage of PRB coal is its distance from markets. To no one’s surprise except engineers familiar with thermodynamics, power plants are located where people use power, a long way from the empty prairies of the Powder River Basin. PRB coal must be transported in trains over long distances. When we began the project with Kfx, the market price for PRB coal purchased at the mine was $5-$6 per ton. That same ton of coal, delivered to a power plant in Kansas cost $20 and up. The Union Pacific and Burlington Northern Railroads were pocketing $3 for every $1 the mine was paid. Now you know why Warren Buffet likes to own railroads.

The other disadvantage of PRB coal is water. The coal itself is a black rock, dry to the touch, but that black gravel is actually 20-25% water. Non-engineers may be surprised to learn that burning water in a power plant does not generate power. In fact the water in the coal will be evaporated as it burns, subtracting even more energy from the boiler.

While the power plant paid the railroad for each ton of coal delivered, they only got ¾ of a ton worth of energy in their boilers. Since it “costs” $3 to transport $1 (actually 75 cents) worth of coal, electrical utilities are moving a lot of very expensive water from the arid high desert of NE Wyoming to the humid lowlands of Missouri and Arkansas.

Kfx’s idea was simplicity itself. In a bold departure from existing practice, Kfx proposed to remove the water from the coal before it was shipped on the train. Kfx would remove the water, not by clever chemical trickery, but by simply heating the coal. Perhaps the CEO of Kfx did the family’s laundry one day and happened to notice the clothes dryer. Not rocket science by any means, even the scientists at NREL could understand the idea! In any case the simplicity of the idea was a good thing, as my company was not qualified to engage in anything remotely resembling rocket science.

The reason that engineers don’t make good politicians is explained by their inability to ignore that old joke about reality, “the Devil is in the details”. Unlike politicians, engineers just can’t laugh at either the Devil or details. Kfx’s proposed plant was not rocket science, but it did have a lot of details and a number of devils, both obvious and not so obvious.

Budgets in the engineering and construction business are notoriously tricky things. The numbers don’t always mean what the inexperienced client thinks they mean, but we, i.e. Kfx, my company along with various and sundry other enterprises, spent well over $ 100 million turning Kfx’s idea into a steel and concrete reality.

I am sorry to say that the Kfx’s idea didn’t work out. As far as I know, the Kfx plant is still standing, a collection of gaunt steel skeletons on the bleak prairie north and east of Gillette, WY. Our work on the Kfx plant did not gain us the fame and fortune normally accorded engineers. On the other hand, I did get to spend many uncomfortable hours with various Kfx executives discussing the unfortunate realities of engineering and construction – a part of my job with which I was well practiced at that time in my career.

But I along with my brothers and sisters of the art, i.e. engineers caught up in the uncomfortable embrace of budget & schedule responsibilities, know that the practice of engineering is exactly that, practice. And we know very well that engineering is a profession best practiced when paid by the hour.

Two separate problems doomed the Kfx plant outside Gillette. The first problem was a fiery one. Once the water was removed from the PRB coal, the now dry coal exerted a magnetic attraction on moisture in the environment, seeking to reunite with its missing water. Since the reunion of processed PRB coal and water gave off a large amount of heat, known to the cognoscenti as an exothermic process, the coal would catch on fire if there was enough water around. The prospect of long coal trains moving through the Midwest, flames raging along the top during a rainstorm, met with strong opposition by various special interest groups opposed to progress. However the simple but expensively messy expedient of spraying molasses on the coal, insulating the coal’s surface from moisture, showed promise in finally solving this problem

The other problem was less visible, but ultimately more intractable. All the water removed from the coal had to be disposed of and the water was, how shall I put this, dirty. Cleaning up the water for disposal cost so much that the plant became uneconomic. It was simply too expensive to run. Sometimes it is not a devil in the details, but a knife to the jugular.

But the special thing about Kfx was not its idea, but something mentioned earlier. The leader of an engineering company soon learns that companies with ideas are a dime a dozen. Company’s with an idea and the money to turn that idea into reality are a rare breed indeed. There is something special about them. Over time, one learns that they almost always have something in common, lawyers in the executive suite.

Lawyers are unique among the “learned professions”. They are “street smart” and they are creative. Lawyers are “street smart” in the sense of Willie Sutton, the famous bank robber. When a reporter asked Willie Sutton why he robbed banks, Willie replied; “because that’s where the money is”.

Sometimes, companies with an idea are managed by engineers or scientists. Usually these companies have well developed ideas, but don’t have any money. But putting lawyers in control is the first step in solving the problem of money. Lawyers almost always know that money comes first. The ideas of companies run by lawyers may not be as good as the ones run by engineers and scientists, but the companies run by lawyers usually have money.

The practice of law teaches lawyers to be shrewd. A shrewd lawyer knows that nobody has more money than the federal government. For the same reason that Willie Sutton hung around banks, lawyers hang around the government. And so this brings us to the second unique characteristic of entrepreneurial members of the legal profession, creativity. Contrary to popular belief, the federal government doesn’t just hand out money to anybody. And this is where creativity comes in.

As they say, “where there’s a will there’s a way”. Kfx had a will and found a way. It is the practice in the swamp to award politically favored enterprises something called a “tax credit”. A tax credit is a magic wand; it makes taxes disappear. A tax credit is a government freebie, not costing anything. A sometimes stubborn Congress need appropriate no funds.

Sponsors of the credits can stand up to thunderous applause at their next fundraiser. Those favored with the credits can now raise investment funds based on supercharged revenues. Lucrative consulting opportunities are created for the regulatory/congressional staffers who wrote the legislation creating the tax credit. Future tax revenues will be reduced, but that is in the future and in the fog of governmental accounting systems – who will ever know?

So in the time honored way of Washington and the legal profession, Kfx went in search of political favor and to find gold in the rich ore of the tax code. Kfx found both. The Kfx idea was enshrined within a section of the tax code written especially for it. For each ton of coal processed by Kfx, Kfx would receive “tax credits” for this “enhanced coal” trademarked as “K-Fuel”. In their filings to investors, Kfx stated that they would receive $ 5.35 in “tax credits” for each ton of K-Fuel produced. Given that coal was selling at the time for $5 per ton, this was a very substantial government incentive.

While the foundations for success had been well laid, it didn’t work out well for Kfx. One of the downsides to tax credits is that you have to do what you said you were going to do to get the money. Since the Kfx plant went bust, the revenue stream from tax credits went bust as well. Sometimes it rains on the parade. Not only did the Kfx plant fail, the brother of the Kfx CEO, the man who found favor in Washington and struck gold in the tax code, was found guilty by the SEC of manipulating Kfx stock. Sometimes when it rains, it pours.

But no matter the fate of Kfx, the turn of the century was the dawning of a magical age for government money and the “energy” business. Of course the people and companies actually delivering real energy into homes, transportation and industry were vilified for the failure of the real world to live up to the Disney ideal. But for companies with ideals, as well as for Al Gore, it was a time of magic. The creative juices flowed.

Before this time, ethanol had a lot going for it, but it just couldn’t get over the hump. The corn growing farm states had always loved ethanol. How could they not? That part of the foreign policy establishment concerned with American dependence on the volatile Mid-East for oil loved it as well. American Energy Independence was a political slogan that tested well, both with the common folk and the urban elite.

Many thought the carbon monoxide crisis of the late 20th Century would be the ticket for ethanol to hit the big time. The government’s passion for vehicle fuel efficiency standards had caused carbon monoxide levels in cities to rise during thermal inversions in the atmosphere. The government’s fuel efficiency requirements had forced engineers to either use pixie dust or to limit the amount of air used in gasoline engines.

Engineers being dull and stubborn people with no appreciation for magic avoided the use of pixie dust and instead starved gasoline engines for air. The unavoidable downside to this choice was that as the engine was starved for air, carbon monoxide was formed during combustion. While carbon monoxide is an unstable molecule, quickly reacting with free oxygen in the atmosphere to create carbon dioxide, in a thermal inversion the carbon monoxide might persist for a time. The degree to which carbon monoxide was actually a problem rather than a lever for regulatory engineering was a contentious issue. The theology was murky but it provided the means for government to back the ethanol industry in a more direct way.

Fuel efficiency standards are Holy Writ and cannot be touched, while air quality is a Holy Grail. Thus when they work at cross purposes, something Must Be Done. Since the engineering community had failed humanity by not using pixie dust to meet fuel efficiency standards, the government stepped in to force the wide spread use of oxygenated fuels. If engineers would not allow sufficient oxygen in the air supplied to the engine, the surplus oxygen needed to stop the creation of carbon monoxide would be supplied in the fuel. Ethanol is not only an oxygenated fuel, it is a renewable oxygenated fuel. The Millennium was here! The use of oxygenated fuels, even renewable oxygenated fuels, caused vehicle MPG to drop appreciably, but who cares??? The Millennium was here!!!

But then the oil & gas business did what they always do. They solved the problem without consulting with Washington. They started making something called MTBE, another form of oxygenated fuel, and mixing it into the gasoline they sold.

Another roadblock loomed for the ethanol business. MTBE was cheaper, less corrosive and required minimal modification of existing fuel distribution networks. And then some ambitious staffer in Washington discovered that MTBE is actually something called Methyl-Tert-Butyl-Ether.

Whew!! Something called Methyl-Tert-Butyl-Ether has got to be a clear and present danger to Mother Earth. Cancer scare alert! While ethanol is proven safe, so safe you can drink it. Proving his political savvy, that anonymous staffer didn’t mention that ethanol is actually 1-Hydroxyethyl, but still the future of ethanol teetered on the brink.

Enough of this! Leaving engineers and the market to work things out is not the path to a successful career in Washington or the lobbying industry. I can see regulators in the EPA sneering as they laugh at a hapless Congress unable to help its friends or reward its supporters; “Never send a Congressman to do a regulator’s job”! Federal regulators stepped in and solved the problem as well as breaking new ground by simply requiring the use of a minimum quantity of ethanol per year in the nation’s gasoline supply. Job done.

And so we now had a federal regulation requiring twelve billion gallons of ethanol per year to be used in the nation’s gasoline supply. Of course it doesn’t matter today. Given the complexities of federal regulation compliance and actual fuel distribution, virtually all gasoline sold in the United States is 10% ethanol, whether in prairie or city. The actual ill effects of carbon dioxide continue to be a matter of theological dispute, but we are now blessed with universally oxygenated fuels, renewable oxygenated fuels – an important distinction that.

But whether ethanol is or isn’t a blessing to the farmers and Mother Earth, it was a new road opening onto the Promised Land for people with the right connections. Even more than tax credits, mandates offered breathtaking new opportunities to the political class. And to be sure, they were quick to catch on. No one has ever accused politicians of thinking small. After their success at changing the nation’s gasoline supplies, they took on the electrical supply.

In the new century, the political class has come down from Mt. Sinai and given us the Energy Pentateuch. We will henceforth run our civilization on moonbeams and unicorn breath. Their work done, the political class left it to the engineers to make it work. No jiggling around with air/fuel ratios this time. Our politicians have decreed that nothing less than pixie dust must be used.

Two little children running out on the playground stumble onto a steaming pile of horse manure, the one excitedly tells all the other children on the playground that this horse manure is proof that they are all going to get a pony if they give him their lunch money. The other child goes off in search of the janitor. One becomes an engineer and the other a politician. Guess which is which? And so we come to the present day.

A friend of mine is deeply engaged in another company with an idea. As a country we have come to the time when pixie dust must be used. If pixie dust cannot be found, then it must be manufactured. Our political class did what came naturally and convinced all the other children in the country that they are going to get a pony. The engineers waited for the janitor to clean up the mess only to find that they are the janitor, and not only that, they are expected to provide the promised ponies.

The thing about engineers is that we are an eclectic bunch, some might even accuse us of being amoral. Asked to build a better mousetrap or nuclear bomb, we will do it. We lose ourselves in the technical challenge, even if what we do is useless or evil. We will do it for an evil dictator, a fatuous CEO, a cynical politician promising ponies. But given the apparent shortage of momentum carrying moonbeams and breathing unicorns, we can only use what we have.

My friend’s company has an idea. Unlike Kfx, their idea is not so sensible, but they do have money – lots of money. Again unlike Kfx, their idea solves no real problem and the only money to be made is pulled out of the taxpayer and refiner’s pocket. My friend’s company is part of a venture that will turn wood into jet fuel on the West Coast. Of course the project is on the West Coast, if you needed to find moonbeams and unicorns where else would you look?

There once was a man named Rube Goldberg who had a talent for drawing cartoons of complicated contraptions doing trivial tasks. Consider the project now being funded by our government, that is by us and given our feckless fiscal responsibility, our children and grandchildren. This plant will take 500 tons per day of wood and wood wastes (?) and a substantial amount of natural gas, converting it into 40,000 gallons of jet fuel per day. For the sake of the mildly curious, 40,000 gallons of jet fuel will allow Southwest Airlines to fly one of their 737’s for between 50-60 hours. For the sake of the even less interested, Southwest Airlines has over 700 737’s, while the world fleet numbers close to 10,000.

Imagine if you will, the infrastructure necessary to move 500 tons of wood and wood wastes (?) per day, 365 days per year. One would imagine that roads must be built in the forest, raptor nests with their delicate chicks subjected to noise, bugs and bunnies have their naps disturbed and unicorns forced into hiding. One wonders whether the Spotted Owl has been consulted?

Once the wood is delivered from the sacrosanct forests to the plant, the real complexity takes over. First of all, 500 tons of wood per day must be turned into sawdust or at the least, very small chips. Imagine lots of scary big choppers, saws and grinders with very big electric motors. Then the sawdust is fed into a process plant that turns the sawdust into a gas. Lots of natural gas is required to heat the sawdust enough to turn it into a gas. From there the wooden gas goes into something resembling a dirty old refinery where it is made into a liquid – jet fuel. This refinery look alike is called a F-T plant, known in the old days as a Fischer-Tropsch plant. As Fischer-Tropsch plants were an invention of the Germans, notably used by Nazi Germany to fuel the Wehrmacht during WWII, the name change helps to keep Portland’s social justice hipsters from marching outside the gates protesting. Even though the plant is a unicorn breeding facility, the hipsters fighting for social justice and reasonably priced weed have no tolerance for any connection to the swastika.

And so we have something resembling a misshapen child of Optimus Prime and a refinery taking shape in Smallville, OR. As noted before, budgets in the engineering & construction business aren’t always what they seem, but this assemblage of concrete and steel is estimated to cost around $ 300 million dollars. The good folks in Smallville, OR are excited about this new plant. It seems Smallville used to have 7 sawmills in town with plentiful jobs. Now they only have one sawmill and jobs, even barista jobs, are hard to find. You know, the Spotted Owl must be protected.

Wow, that seems like a lot of money and effort to make enough fuel to keep 5 or 6 737’s flying. Where did the money all come from? Well, the folks that own this plant have a long history in the ethanol business, so they are practiced at facilitating the transfer of funds from taxpayer and refiner pockets.

The good State of Oregon issued $ 245 million dollars in “industrial” revenue bonds. The folks in Oregon are doing their part, understanding that pixie dust costs money. The US Air Force contributed some tens of millions of dollars as well. The US Air Force believes that the F-35 will finally meet its performance specifications if it uses renewable jet fuel. Various other governmental entities, such as DOE and NREL, have done their part as well. The amount of actual private money at risk is laughably small.

It is the proud boast of the owners of this plant that they will sell their jet fuel on the open market at market prices. It is indeed true that they will sell their product on the market. Left unsaid is the fact that somewhere between 50 – 75% of the plant’s revenue will come from the sale of renewable energy credits to the people that actually make jet fuel, diesel fuel and gasoline. You see you can’t sell real jet fuel/diesel/gasoline unless you chip in to the production of pixie dust.

No good government program ever goes away. The federal regulations requiring 12 billion gallons of ethanol per year never went away. Politicians, regulators and activists realized what a good deal this innovation was. Ponies for everybody, yay!! Even if you don’t use pixie dust, you have to buy pixie dust. Given the scarcity of moonbeams and unicorns, the market price for pixie dust just keeps going higher all the time. Fuels made from wood are extra super special pixie dust and command very high prices.

To delve into the government’s relationship with the renewable energy business is to be saddened. I love my country, warts and all. I spent my career in the energy business, a business filled with fine people and reputable companies. Like everything human, there were some people not so fine and some companies not so reputable. But I felt good every day knowing that what I did made the world a better place, giving everyday people a chance at a better life.

But, at least in my experience, limited as it is, the renewable energy business reminds me of lifting a rock and watching the slimy wigglers scurry into their wet holes. It is reminiscent of coming upon a rotting piece of meat covered with maggots. In my experience, renewable energy is corrupt and it corrupts those it touches.

Windmills, solar power, jet fuel made from wood. Ideas are ideas and there are good people, good Americans, working there. But there is no escaping the fact that green energy is a boutique item for the hobbyist. It has only a marginal place in our energy infrastructure and the accommodations required to make it workable make us all poorer.

That the business of green energy is counterproductive is the least of its sins. It is a ghoul eating at the soul of our country and culture. Green energy requires almost unlimited governmental intervention. The government has to subsidize, penalize and mandate. We are drawn into a world of artificial and political distinctions. A rancher will spend time in jail for killing a raptor attacking his livestock, but a wind farm can kill thousands of raptors – legally. Protections for “endangered species” destroy thousands of American forestry jobs, unless of course, those jobs involve making pixie dust.

The power of government and fashionable political ideas attract the fanatic, the slime merchant, the quick buck artist, the opportunist and the moon child. The human race has been here so many times before you think we would learn.

And so we come to the poster child of America’s faire l’amour’ with moonbeams and unicorns. Elon Musk has seduced us, not that we were unwilling to be seduced. And in his favor and our relief, we can at least be glad that he was not Bruce Jenner or Jay Z. The Tesla Model S is stylish, sporty and innovative. The Tesla S is the car for the cool kids. But is it fair for old deplorable Joe Six Pack, stuck in rush hour traffic, to be subsidizing all those adorable hipsters zipping along in the HOV lanes in their Tesla S, the $100,000 t-shirt?

The price Joe Six Pack paid for his Ford F-150 stuck in traffic contained a significant subsidy to Elon Musk for the sporty Tesla. For each Tesla Model S sold in California, General Motors, Ford and the other bad boys had to pay Mr. Musk approximately $20,000 in “renewable energy credits”. In one year, GM/Ford/Toyota/etc. sent checks totaling over $100 million to Tesla. Do you suppose that had any impact on F-150 prices?

The gasoline Joe Six Pack puts in his F-150. In 2016, US refiners paid out $ 2.2 billion for renewable energy credits from the good citizens making pixie dust, i.e. ethanol, collecting used fry oil from McDonalds and someday soon, jet fuel from wood in Smallville. Do you suppose that $ 2.2 billion cost has any impact on Joe Six Pack’s gasoline prices?

That doesn’t matter much to the guy driving a Tesla. In most cases he/she is getting free electricity somewhere from free charging stations, which Joe Six Pack pays for as well. This doesn’t even count the $30-40,000 in state and federal subsidies that go into each Tesla sold.

Interestingly enough, Tesla and General Motors both make cars and have the same market value, GM is worth $ 52 billion and Tesla is worth $ 54 billion. GM sold 10 million vehicles last year, while Tesla sold 103,000. GM made a profit of almost $ 12 billion on revenues of $ 145 billion. Tesla lost $ 2 billion on revenues of $ 12 billion. Are you seeing something a little out of whack here?

The market caught on to the fact that Elon Musk, even though not a lawyer, is a government gold digger extraordinaire. Elon Musk and Tesla are the love children of the federal government and Adorable America They have showered him with love, throwing money at him with abandon. Governments, national, state, local – even international, have done everything they can to stack the deck in favor of Tesla. That is the reason that Tesla is valued so highly by investors.

But even so, Tesla is running out of money and the sharks are starting to circle. Elon Musk is trying everything, tactics that would soon land any other public company CEO in jail. Tesla wants, needs, even larger subsidies and tax advantages. In his negotiations with politicians and regulators, Mr. Musk is threatening to take his company private, with Saudi money providing the means.

The thing about a con game is that a successful one keeps getting bigger. It needs to keep getting bigger. As it gets bigger, it becomes harder and harder to hide the swindle. As Abe Lincoln once said:

“You can fool all of the people some of the time and some of the people all of the time, but you can’t fool all of the people all of the time”

Will Elon Musk find happiness with the sheiks of Saudi Arabia? Will he continue to have permission to pick the pockets of Joe Six Pack. Will he continue his love affair with politicians and regulators? Will he continue to receive “special” subsidized loans from banks seeking brownie points with federal and state regulators? Who knows?

 

 

2 Responses to “In Search of Moonbeams and Unicorn Breath”

  1. Jeffrey N Esbenshade says:

    Every business needs a plan and to be successful you must execute the plan.

    Calif is not a state to manufacture anything.

    The Federal Govt allows electric car customers a $7500 tax credit to purchase

    EV, electric vehicles.Once the manufacture produces 200,000 models

    the EV is no longer able to get a tax credit. Tesla is close to the numbers.

    Lets hope Elon’s manufacturing battery plant in Reno Nevada is better at

    producing things than Calif, or Tesla could fail.

  2. Steve Wurst says:

    Not sure who said it, but I believe someone told Barrack Hussien Obama that when it comes to picking winners and losers in the renewable energy field was that all he could do was pick losers…almost a trillion dollars to solar energy companies with nothing to show.
    The solar panel bank project at the federal center will never provide enough energy to pay back the cost of the panels and install. In fact the panels will need to be replaced before the project could break even. Federal, State and Local governments should never be in the “business” of handing out tax credits to any company! PERIOD!
    If the project cannot stand on it’s own as a viable money making project, then it should not be tried unless somebody like Jerod Polis wants to spend their own money. Love the subtle dig at the brilliant people at NREL.

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