Global Challenges – Page 8

China Manufacturing and Transport Cost Showing Sharp Rise – Trends and Implications for Business

Posted on 17 August 2010 | by Jay Kimball

Keywords: China, manufacturing cost, transport cost, Credit Suisse, jobs, per capita income

There is growing concern among U.S. and European companies that higher China manufacturing and transport cost, coupled with an inability to push through price increases due to the weak economy, will pressure profit margins in 2011. This according to a Credit Suisse report citing their survey of mostly private consumer, industrial and technology companies that source products from China. An article in Reuters provides details – highlights below.

This should not come as a surprise to anyone that is observing the trends in China around per capita income and consumption. China is becoming America – fast. Before we know it, we will be bringing jobs back here to the US. You might think that jobs would migrate to India or Southeast Asia next, and there will be some of that, but the inflation occurring in China will happen to those countries too as they move up the income and consumption curve. Using GapMinder’s Trendalyzer with energy consumption data from BP’s Statistical Review of World Energy 2010 and income data from the IMF, we can see some powerful trends unfolding (N.B. data presented for 1965 through 2008, 1 year steps, circle area proportional to population size, energy use in tonnes of oil equivalent):

Energy Consumption and Income for US, China, and India — Per Capita Income and Energy Consumption in China, India and the US

And with increasing resource scarcity (water, energy, food) and climate change, those regions will likely be challenged by social tensions or state instability (see National Intelligence Assessment on the National Security Implications of Global Climate Change to 2030 by US Director of National Intelligence in Recommended Reading). With all this to consider, we encourage companies to take the long view as they evolve their manufacturing strategy.

Highlights from China costs may surprise investors–Credit Suisse

Credit Suisse, which said it sees the risk of very limited pricing power for consumer companies next year amid tepid economic growth, found 40 percent of respondents are “very worried” or “extremely worried” about wage pressure in China; 29 percent are very or extremely worried about transport costs; and 18 percent are so about the rising yuan currency.

About 40 percent of executives said their costs on Chinese-sourced goods are up at least 6 percent from a year ago, with nearly a third reporting a double-digit increase. The survey polled 28 firms with annual sales of at least $500 million that rely on China for a portion of their goods sold.

Nearly half of respondents said it is “not easy at all” to relocate sourcing from China and two-thirds say they could increase prices somewhat, but would likely lose profit margin.

China’s explosive economic growth has pushed up manufacturing wages nearly fourfold over the past decade. The average worker earns about $3,900 a year, up from about $1,900 in 2005 and just over $1,000 a year in 2000. Wages are expected to rise further, reflecting emerging labor shortages.

The pace of wage increases, currently around 13 percent a year, could accelerate, Rochon said. With U.S. wages flat or down, the difference in costs is narrowing, especially as transport costs — and times — go up.

Containership fleets, eager to cut capacity, save fuel and raise prices, have slowed ships crossing the Pacific by about 50 percent. More inventory is sitting on the ocean.

Factoring in currency, wages and transport, the hit to earnings could be substantial for some companies, Rochon said.

Credit Suisse posits a worst-case scenario in which costs rise 20 percent with no ability to pass on higher prices. Under that scenario, 2011 earnings per share (EPS) would be reduced by about 60 percent at Maidenform Brands Inc and by some 70 percent at Jones Apparel Group Inc.

Giant retailers like Target Corp and Macy’s Inc would see about a 40-percent hit to 2011 earnings. On the other hand, a stronger currency and rising living standards in China could benefit companies that sell to Chinese consumers, such as Yum Brands Inc and McDonald’s Corp, the report said.

The biggest risks are not to makers of high-margin, easy-to-ship products like Apple Inc’s iPads, or to labor-intensive, high-volume manufacturers like clothing companies, which can move operations. Rather it is companies in the middle that are the most exposed, such as low-priced retailer Dollar Tree Inc with about 40 percent of goods sourced from China, according to Credit Suisse.

Current Wall Street estimates call for Dollar Tree to earn $3.35 per share in fiscal 2011, according to Thomson Reuters I/B/E/S. That would fall to $2.24 if costs rose 20 percent with some pricing power, and EPS would be only $1.67 without pricing power, the report estimates.

Some companies have already responded. General Electric Co, for example, has moved production of its hot water heaters to Kentucky from China, partly as a reaction to cost.

Large industrial companies like GE, Cummins Inc and Emerson Electric Co would see 2011 EPS reduced by 10 percent or more under the adverse scenario.

Electrical machinery and equipment were the top U.S. imports from China at $73 billion, though the report notes many industrial companies manufacture in China for the local market and are able to move production elsewhere.

Using Water Heaters to Store Excess Wind Energy

Posted on 13 August 2010 | by Jay Kimball | 14 Comments

Keywords: energy management, energy storage, smart grid, wind energy, renewable energy

The Bonneville Power Administration (BPA) is recruiting one hundred homeowners in Washington for an experiment on how to store surplus wind energy. The BPA is testing a promising smart-grid concept that would use residential water heaters to help manage the fluctuations of wind energy generation.

The project will address two problems experienced on the grid: shortage of power during peak times and surges of power during windy periods, when the energy isn’t needed.

The BPA, working with Mason County Public Utility District Number 3, will install special devices on water heaters that will communicate with the electrical grid and tell the water heaters to turn on or off, based on grid conditions and the amount of renewable energy that’s available.

While homeowners will be able to override the control device at any time, it’s unlikely that they would even notice a change in temperature.

The water heaters in effect become energy storage devices — turning on to absorb excess power and shutting down when demand ramps up —leveling out the peaks and valleys of energy use. Benefits include:

no need for expensive and toxic battery storage
no need for fossil fuel burning power plants to fill in low wind energy gaps
water heaters provide distributed storage, avoiding point loads on grid
smart water heaters can be manufactured economically, for just a few dollars more.

Wind power is the fastest growing source of renewable energy, accounting for about 3 percent of US electric generation. About 53 million homes in the United States, or 42 percent of the total, use electric hot water heaters. Added up, they account for 13 percent to 17 percent of nationwide residential electricity use.

In the Pacific Northwest, home of the BPA, it’s estimated that there are 4.3 million water heaters that can store 2,600 megawatt-hours by allowing the storage temperature to vary by five degrees. (NB: For a detailed analysis see the Northwest Power and Conservation Council report prepared by Ken Corum.)

The Northwest Energy Coalition does a nice job detailing the background, and benefits of this approach to storing excess wind energy. Highlights of their article, Using simple smart water heaters to integrate intermittent renewables, are below.

Highlights of Using simple smart water heaters to integrate intermittent renewables

Background

Wind-generated power is clean, relatively cheap and available in large quantities. But the wind itself is quite unpredictable, so much so that for each average megawatt (aMW) of wind power we need, we must erect about 3 megawatts of turbine capacity, since actual output could be anywhere from 0 to 3 megawatts at any instant.

Suppose our region, which consumes about 21,000 average MW of electricity each year, wants to get a third of its power from wind. We’d have to build about 21,000 megawatts (MW) of turbine capacity to get 7,000 average MW of electricity. Given weather variability and the geographical spacing of wind projects, over time the actual production of those 21,000 megawatts of turbines will vary from about 1,000 MW to 15,000 MW due to weather fronts and daily warming patterns. Problematic 3,000- to 4,000-megawatt swings can occur in as little as 10-30 minutes.

To deal with large variations in wind, grid operators use some expensive tools now at their disposal, generally limited to ramping natural gas-fired combustion turbines and/or hydro generation up and down. Ramping up is fairly easy; today’s grid has ample reserve capacity on which to draw.

Ramping down is another matter. When wind generation suddenly spikes during periods of low demand (at night or during mild weather hours), the system can have less flexible generation on-line (nuclear and coal plants) that cannot be cut back to make room for the wind. The region’s inflexible “baseload” coal plants and one nuclear plant, which together provide more than a quarter of our electricity, cannot be economically ramped up and down in response to wind variability.

Previous Transformers and NW Energy Coalition’s Bright Future report have addressed wind-integration issues, noting – in particular – that the problems will lessen as we progressively eliminate coal-fueled power from the Northwest grid, as renewable projects grow and become more diverse and geographical dispersed, and as “smart grid” deployment provides a new back-up resource.

Smart grid to the rescue

In a Feb. 10, 2009, presentation to the Northwest Power and Conservation Council, Council staff member Ken Corum provided a powerful example of how one relatively simple smart grid innovation – using electric water heaters as temporary storage devices — could help the grid integrate large amounts of wind power at very low cost. We expand on Corum’s example below.

The Northwest power system serves about 4.3 million electric water heaters. If all were running at once, their loads would total more than 19,000 MW. Of course, they don’t all run at the same time. Actual demand might be just a few hundred megawatts in the middle of the night, surging to more than 5,000 MW around 8 a.m. when people take their showers. Use drops during the day, and then peaks again at about 3,500 MW around 8 p.m. as people come home and wash dishes, clothes, etc.

Now imagine that as part of the smart grid, each water heater contains a chip that can receive signals from grid operators to raise or lower the water temperature by a few degrees. As wind generation picks up, the grid operator slightly raises the temperature set points on millions of water heater thermostats, thus “storing” the wind power for later use. Should the wind suddenly drop, the operator lowers the temperature points, causing many water heater elements to click off for a time.

Most people won’t even notice the small temperature changes. But spread over millions of water heaters, those few degrees of difference are enough to avoid ramping fossil-fuel and hydro generation up and down, thus improving system-wide fuel efficiency and leaving more water in the river for migrating salmon.

Once the infrastructure — smart meters that can communicate with both the utility and home appliances — is in place, manufacturers could start installing computer chips, adding perhaps $5-10 to the cost of a water heater, Given the system savings the water heater controls would generate, utilities could afford to cover the additional cost, and/or offer customers a rate discount or other incentive in exchange for limited control of their water heaters.

Currently, for example, Idaho Power pays residential customers $7 per month to participate in its A/C Cool Credit Program, which slightly backs down air conditioning power during peak demand periods.

Water heaters are a great choice for smart grid applications because of their relatively short life spans. Over about 12 years, the current stock could be totally replaced with smart water heaters.

Shifting peaks – and keeping the lights on

Aside from facilitating the integration of thousands of megawatts of wind power, controllable water heaters (and other appliances and equipment that draw electricity 24/7) provide two other benefits:

1. Reliability. Major power lines and generating plants occasionally suffer sudden outages due to fires, ice, wind or equipment failure. Turning down a few million water heaters could quickly shave demand enough to cover the power loss and avoid a major blackout. In fact, the chips discussed above can be made to automatically and instantaneously detect frequency changes in the electricity they use without any operator intervention. The chip reacts to a sudden change from the standard 60 cycles per second by instantly turning the heater on or off to keep the grid stable.

2. Money. Utilities spend a lot of money following the daily peaks and valleys of human activity. Thirty to 40% of their generation capacity sits idle for much of each 24-hour day. Another 5-10% come on only during very extreme weather — the hottest or coldest days. But utilities must cover the capital and maintenance costs of all these resources, no matter how little used.

Controllable water heaters would rarely go on during system peaks and could help utilities respond to system emergencies … at huge cost savings. Utilities would be able to spread demand more evenly throughout the day, increasing power line and substation efficiency and avoiding the costs of some mostly idle generation resources. These actions could lower bills substantially and/or provide savings to fund additional smart grid investment.

And that’s just one example

Though this article has focused on electric water heaters, similar controls can be installed in freezers, air conditioners and electric furnaces. Electric and hybrid-electric vehicles are other examples. Their charging rates can be altered while the vehicles are plugged into the grid. The opportunities are only starting to reveal themselves.

Allowing grid operators access to our appliance controls raises issues of cybersecurity, privacy and the potential for short-circuiting due process (e.g., automatic shutoff for non-payment of bills). Those issues must be adequately addressed. But the smart grid can help move the Northwest quickly and affordably to a bright energy future.

Google: Implications of California’s Proposition 23

Posted on 12 August 2010 | by Jay Kimball | 4 Comments

Keywords: Google, California Proposition 23, Vinod Khosla, William Wiehl, cleantech, A.B. 32

Google convened an event at their Silicon Valley campus to discuss the implications of California’s Proposition 23, an attempt to rollback the state’s ambitious climate legislation (A.B. 32). In an article at Greentech Media, panelists, including venture capitalist Vinod Khosla, sounded upbeat on contributions California cleantech ventures will make toward solving US energy and climate challenges.

Highlights from Google’s Implications for California Proposition 23 Event

Khosla stole the show with his outlook for the clean-tech innovation and energy use. “In 10 to 15 years, we will be shutting down (power) plants” because of an excess of electricity in this country, Khosla said. There is an “infinite” opportunity for technological innovation.

Khosla’s firm is backing companies that hope to cut energy use in lighting and data center server racks by 80 percent.

Regarding China’s serious investment in cleantech, Khosla said “I won’t say China is winning the cleantech race,” he says. “But they are clearly paying a lot more attention to the race.”

Asked if there was an advantage to creating companies in Silicon Valley rather than China, Khosla was emphatic. “No question about it. The people are here. The markets are here.”

According to Khosla, nuclear power no longer has an advantage over renewables. There hasn’t been a nuclear plant build in recent years that can beat $7,000 a kilowatt. That makes wind and solar (in some parts of the world) competitive, he says.

Proposition 23 is a threat because it will kill the clean-energy markets that California’s A.B. 32 created. Both Khosla and Google Green Energy Czar William Wiehl concur on this point. Proposition 23, which will go to the ballot in November, would suspend A.B. 32 [see note below for background on A.B 32] until the state’s unemployment rate drops to 5.5 percent or less for four consecutive quarters. Texas oil companies Valero and Tesoro back the measure. A.B. 32 sets reporting guidelines for polluters, establishes a statewide limit for carbon, and guides emissions back to 1990 levels by 2020.

A.B. 32 has helped create 500,000 cleantech jobs in California, Wiehl says.

Google, adds Wiehl, has made strides with energy efficiency. The company builds its own data centers and servers. As a result, data center energy use is half of what it would be if the company followed industry-standard best practices, he said.

As to the next Google — “There is no doubt in my mind we will see 10 of these” in cleantech, says Khosla. “Today, California has the pole position to win that race.”

Note:

California’s major initiatives for reducing climate change or greenhouse gas (GHG) emissions are outlined in Assembly Bill 32 (signed into law 2006), 2005 Executive Order and a 2004 ARB regulation to reduce passenger car GHG emissions. These efforts aim at reducing GHG emissions to 1990 levels by 2020 – a reduction of approximately 30 percent, and then an 80 percent reduction below 1990 levels by 2050. The main strategies for making these reductions are outlined in the Scoping Plan. Also provided here are links to state agencies and other groups working on climate issues which are being coordinated by the state’s Climate Action Team.

More on the California’s Prop 23 initiative here:

California’s Prop 23 Morphing into Prop 26

Chew On This

Posted on 10 August 2010 | by Gabrielle | 1 Comment

Keywords: chew on this, Eric Schlosser, Charles Wilson, fast food nation, fast food, food for kids, school food programs

Dear reader,

My name is Gabrielle. I’m eleven.

I recently read a book called Chew On This, by Eric Schlosser (author of Fast Food Nation) and Charles Wilson.

The saying ‘Don’t judge a book by its cover‘ applies here. The cover shows pretty nasty fast food, but as you go further into the book it doesn’t just tell you all this bad stuff about fast food, it gives you information – about the employees and how they treat them; about what’s in the food you’re eating; about junk food, about how they treat the animals they process into the food; about people who are overweight and want to change; and mostly about change – how much we have changed and how much we need to change.

And one of the things we need to change is our schools. Many of our nations schools sell junk food and items off many of the menus of McDonalds, KFC, etc. Kids of all ages are losing protein and vitamins and need to get them back. Kids used to drink twice as much milk as soda, now kids drink twice as much soda as milk (fact from book).

Parents are giving toddlers and babies soda which, as you can guess, is not good. I recommend this book to everyone – kids and adults (but if you are squeamish, I would highly recommend skipping the meat chapter). If you eat at McDonalds, KFC, Burger King, Taco Bell, Pizza Hut, and other fast food joints regularly, please do yourself a favor and read this book before you go there again. I may only be eleven, but after reading this I’ll think twice before eating any fast food burger ever again. It changed my life. It could change yours.

Thank you for reading my blog and please take my advice – read this book: )

Atlantic Hotter Than Before Katrina, Boosting Storm Forecasts

Posted on 10 August 2010 | by Jay Kimball | 4 Comments

Keywords: hurricane, climate change, global warming, impact of climate change, cost of climate change

As the world gets warmer, weather forecasters and insurance companies expect increased storm activity, more severe storms, and increased storm-related damage. In an article in Bloomberg, meteorologists at the US National Hurricane Center are predicting Katrina sized storms, saying “The storms we will be talking about in the next few weeks will be the real deal. These will be big-sized hurricanes.”

The chart at right shows the trend. There have been four times as many weather-related disasters in the last 30 years than in the previous 75 years. (NB: Data comes from Center for Research on the Epidemiology of Disasters)

According to the National Hurricane Center, 10 of the 30 costliest American hurricanes have struck since 2000, even after adjusting the figures for inflation and the cost of construction.

Highlights of Article: Atlantic Hotter Than Before Katrina, Boosting Storm Forecasts

If all the storms forecast by Colorado State materialize, 2010 will be tied with 1969, the fifth-busiest season on record.

Energy companies are reacting to the first signs of danger. They halted 26 percent of oil production and 14 percent of natural-gas output in June, when Hurricane Alex churned through the Gulf into Mexico, according to the Bureau of Ocean Energy Management, Regulation and Enforcement. The operators idled 52 percent of oil and 24 percent of gas output the following month before Tropical Storm Bonnie dissolved south of Louisiana.

Five years ago, in the most-active hurricane season on record, Hurricanes Katrina and Rita killed more than 1,800 people, caused $91 billion in damage, destroyed 115 energy platforms in the Gulf, and shut down 95 percent of Gulf oil production and almost 30 percent of U.S. refining capacity, according to government reports. Gasoline prices soared to as much as $5 a gallon and shortages were reported across the South.

The Gulf of Mexico is home to about 31 percent of U.S. oil output and about 10 percent of gas production, according to the Energy Department. It’s also the site of the worst oil spill in U.S. history, caused by the April 20 explosion at BP Plc’s leased rig. The spill is still being cleaned up.

If all Gulf platforms were closed, the daily production loss would be $160 million to $170 million, based on current prices, according to AIR Worldwide, a catastrophe risk-modeling firm.

A repeat of Katrina also would cause $6 billion to $9 billion in damage to offshore platforms, rigs and wells, according to models created by Risk Management Solutions Inc. of Newark, California.

Since 1995, when a cyclical increase in Atlantic hurricanes began, 89 percent of all storms have formed after Aug. 1, according to the hurricane center. The hurricanes that do about 85 percent of the damage when they hit land typically form between Aug. 20 and Oct. 20, Gray said.

Sea surface temperatures in the mid-Atlantic between the Lesser Antilles and the African coast averaged 1.2 degrees Celsius (about 2.2 degrees Fahrenheit) above normal from March to June, warmer than the 0.92 degrees in 2005, said Richard Pasch, a senior specialist at the Miami hurricane center. “That’s the fuel for tropical cyclones, the water vapor that’s evaporated from warm ocean surface,” he said.

Colorado State, in Fort Collins, forecast 18 storms for 2010, and the National Oceanic and Atmospheric Administration predicts 14 to 20 from June 1 through Nov. 30.

Climate Change, Food, and Wildfires

Posted on 06 August 2010 | by Jay Kimball

An article in the New York Times (Russia, Crippled by Drought, Bans Grain Exports) details Russia’s struggle with severe drought. Though any particular instance of drought can’t be directly linked to climate change and global warming, the world is warming, and instances of drought and associated wildfires, water shortages and crop loss are trending up.

The article highlights the tight coupling between food, water, and a warming world. It also shows how one countries problem affects us all, for example, Russia’s ban on grain exports has doubled the price of wheat worldwide.

For more on climate change and impact on food, see:

NOAA: June, April to June, and Year-to-Date Global Temperatures are Warmest on Record

State of the Climate: Hottest Decade on Record

Water Scarcity in the US

Climate Change May Reduce Protein in Crops

Highlights of the article – Russia, Crippled by Drought, Bans Grain Exports

Prime Minister Vladimir V. Putin on Thursday banned all exports of grain after millions of acres of Russian wheat withered in a severe drought, driving up prices around the world and pushing them to their highest level in two years in the United States.

Russia is suffering from the worst heat wave since record-keeping began here more than 130 years ago.

The export ban was widely seen as one of a series of populist moves by Mr. Putin to address rising resentment over the calamitous heat wave and the fires it has spawned.

Wheat prices have soared by about 90 percent since June because of the drought in Russia and parts of the European Union, as well as floods in Canada, and the ban pushed prices even higher. Exports from Ukraine, another major exporter, are down sharply this year.