Wednesday, September 30, 2009

"Alternative Energy Projects Stumble on a Need for Water"

From The New York Times
Published: September 29, 2009

AMARGOSA VALLEY, Nev. — In a rural corner of Nevada reeling from the recession, a bit of salvation seemed to arrive last year. A German developer, Solar Millennium, announced plans to build two large solar farms here that would harness the sun to generate electricity, creating hundreds of jobs.

But then things got messy. The company revealed that its preferred method of cooling the power plants would consume 1.3 billion gallons of water a year, about 20 percent of this desert valley’s available water.

Now Solar Millennium finds itself in the midst of a new-age version of a Western water war. The public is divided, pitting some people who hope to make money selling water rights to the company against others concerned about the project’s impact on the community and the environment.

“I’m worried about my well and the wells of my neighbors,” George Tucker, a retired chemical engineer, said on a blazing afternoon.

Here is an inconvenient truth about renewable energy: It can sometimes demand a huge amount of water. Many of the proposed solutions to the nation’s energy problems, from certain types of solar farms to biofuel refineries to cleaner coal plants, could consume billions of gallons of water every year.

“When push comes to shove, water could become the real throttle on renewable energy,” said Michael E. Webber, an assistant professor at the University of Texas in Austin who studies the relationship between energy and water.

Conflicts over water could shape the future of many energy technologies. The most water-efficient renewable technologies are not necessarily the most economical, but water shortages could give them a competitive edge.

In California, solar developers have already been forced to switch to less water-intensive technologies when local officials have refused to turn on the tap. Other big solar projects are mired in disputes with state regulators over water consumption.

To date, the flashpoint for such conflicts has been the Southwest, where dozens of multibillion-dollar solar power plants are planned for thousands of acres of desert. While most forms of energy production consume water, its availability is especially limited in the sunny areas that are otherwise well suited for solar farms.

At public hearings from Albuquerque to San Luis Obispo, Calif., local residents have sounded alarms over the impact that this industrialization will have on wildlife, their desert solitude and, most of all, their water.

Joni Eastley, chairwoman of the county commission in Nye County, Nev., which includes Amargosa Valley, said at one hearing that her area had been “inundated” with requests from renewable energy developers that “far exceed the amount of available water.”

Many projects involve building solar thermal plants, which use cheaper technology than the solar panels often seen on roofs. In such plants, mirrors heat a liquid to create steam that drives an electricity-generating turbine. As in a fossil fuel power plant, that steam must be condensed back to water and cooled for reuse.

The conventional method is called wet cooling. Hot water flows through a cooling tower where the excess heat evaporates along with some of the water, which must be replenished constantly. An alternative, dry cooling, uses fans and heat exchangers, much like a car’s radiator. Far less water is consumed, but dry cooling adds costs and reduces efficiency — and profits.

The efficiency problem is especially acute with the most tried-and-proven technique, using mirrors arrayed in long troughs. “Trough technology has been more financeable, but now trough presents a separate risk — water,” said Nathaniel Bullard, a solar analyst with New Energy Finance, a London research firm.

That could provide opportunities for developers of photovoltaic power plants, which take the type of solar panels found on residential rooftops and mount them on the ground in huge arrays. They are typically more expensive and less efficient than solar thermal farms but require a relatively small amount of water, mainly to wash the panels.

In California alone, plans are under way for 35 large-scale solar projects that, in bright sunshine, would generate 12,000 megawatts of electricity, equal to the output of about 10 nuclear power plants.

Their water use would vary widely. BrightSource Energy’s dry-cooled Ivanpah project in Southern California would consume an estimated 25 million gallons a year, mainly to wash mirrors. But a wet-cooled solar trough power plant barely half Ivanpah’s size proposed by the Spanish developer Abengoa Solar would draw 705 million gallons of water in an area of the Mojave Desert that receives scant rainfall.

The German developer Solar Millennium hopes land in the valley, above, can be home to solar plants. Public opinion, partly because of water issues, appears to be split. 

George Tucker opposes a water-cooled solar plant. “I’m worried about my well and the wells of my neighbors,” he said. 

One of the most contentious disputes is over a proposed wet-cooled trough plant that NextEra Energy Resources, a subsidiary of the utility giant FPL Group, plans to build in a dry area east of Bakersfield, Calif.

NextEra wants to tap freshwater wells to supply the 521 million gallons of cooling water the plant, the Beacon Solar Energy Project, would consume in a year, despite a state policy against the use of drinking-quality water for power plant cooling. 

Mike Edminston, a city council member from nearby California City, warned at a hearing that groundwater recharge was already “not keeping up with the utilization we have.” 

The fight over water has moved into the California Legislature, where a bill has been introduced to allow renewable energy power plants to use drinking water for cooling if certain conditions are met.

“By allowing projects to use fresh water, the bill would remove any incentives that developers have to use technologies that minimize water use,” said Terry O’Brien, a California Energy Commission deputy director.

NextEra has resisted using dry cooling but is considering the feasibility of piping in reclaimed water. “At some point if costs are just layered on, a project becomes uncompetitive,” said Michael O’Sullivan, a senior vice president at NextEra.

Water disputes forced Solar Millennium to abandon wet cooling for a proposed solar trough power plant in Ridgecrest, Calif., after the water district refused to supply the 815 million gallons of water a year the project would need. The company subsequently proposed to dry cool two other massive Southern California solar trough farms it wants to build in the Mojave Desert.

“We will not do any wet cooling in California,” said Rainer Aringhoff, president of Solar Millennium’s American operations. “There are simply no plants being permitted here with wet cooling.”

One solar developer, BrightSource Energy, hopes to capitalize on the water problem with a technology that focuses mirrors on a tower, producing higher-temperature steam than trough systems. The system can use dry cooling without suffering a prohibitive decline in power output, said Tom Doyle, an executive vice president at BrightSource.

The greater water efficiency was one factor that led VantagePoint Venture Partners, a Silicon Valley venture capital firm, to invest in BrightSource. “Our approach is high sensitivity to water use,” said Alan E. Salzman, VantagePoint’s chief executive. “We thought that was going to be huge differentiator.”

Even solar projects with low water consumption face hurdles, however. Tessera Solar is planning a large project in the California desert that would use only 12 million gallons annually, mostly to wash mirrors. But because it would draw upon a severely depleted aquifer, Tessera may have to buy rights to 10 times that amount of water and then retire the pumping rights to the water it does not use. For a second big solar farm, Tessera has agreed to fund improvements to a local irrigation district in exchange for access to reclaimed water. 

“We have a challenge in finding water even though we’re low water use,” said Sean Gallagher, a Tessera executive. “It forces you to do some creative deals.”

In the Amargosa Valley, Solar Millennium may have to negotiate access to water with scores of individuals and companies who own the right to stick a straw in the aquifer, so to speak, and withdraw a prescribed amount of water each year.

“There are a lot of people out here for whom their water rights are their life savings, their retirement,” said Ed Goedhart, a local farmer and state legislator, as he drove past pockets of sun-beaten mobile homes and luminescent patches of irrigated alfalfa. Farmers will be growing less of the crop, he said, if they decide to sell their water rights to Solar Millennium. 

“We’ll be growing megawatts instead of alfalfa,” Mr. Goedhart said.

While water is particularly scarce in the West, it is becoming a problem all over the country as the population grows. Daniel M. Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, predicted that as intensive renewable energy development spreads, water issues will follow.

“When we start getting 20 percent, 30 percent or 40 percent of our power from renewables,” Mr. Kammen said, “water will be a key issue.”

Sunday, September 27, 2009

DBS Focus on the Family redux II

As I expected, Josie Lau has surreptitiously, if not exactly quietly, made her exit from DBS.

It would be naive to believe that she made the exit completely willingly and on her own terms.

DBS could not have sacked her outright for insubordination or "conduct unbecoming of a leader". Certainly not right after the AWARE saga. Christians everywhere, and not just the fundies, would have been up in arms. That would have been layering disaster atop disaster. There would have been another boycott of DBS's products and services, this time by the larger and more ungulate-like of the Christian Singaporean demographic.

So. What probably happened was that she must have been sidelined for a considerable length of time in DBS, while still nominally remaining Head of Marketing. It would have been the politic move to make for the powers that be in DBS. Now that several months have passed and the fires have died down, they must have made it clear to her in no uncertain terms to "please leave".

The funny thing here is that, as the article makes clear, Josie Lau has been hired by OUE through personal connections. After all, what are feminist mentos for? Not just for freshmaking or coke eruptions, apparently.

Seriously though, it's unlikely she will ever be hired by another large company in Singapore again, other than through personal connections. Her resume is now, how shall we put it, radioactive.

Another funny tidbit. As one of the commentors in the news article pointed out, a fair number of the tenants in Mandarin Gallery are gay friendly, which isn't exactly a surprise since the fashion industry is stuffed to the rafters with people who swing that way. That might make any working relationship between Mizz Lau and her tenants ... difficult.

So as for our dear Josie looking forward to working in fashion, well, she might love fashion, but I doubt fashion loves her, dahling.

Sunday, September 20, 2009

On CPF Life

[Warning: this is a fairly technical post, although the gist should be understandable by everyone.]

By now, everyone should have heard of the government's new mandatory retirement initiative, a life annuity scheme dubbed CPF Life. 

Ordinarily, I would not have an interest in something like CPF Life. After all, I am not anywhere near retirement age, which means current policy is likely to change by the time it affects me. Also, the Singapore government has the irritating habit of making things mandatory without public consultation or agreement. Bottomline, if it's policy that doesn't directly affect me in the near future and that I have no say in how it's implemented anyway, I'm not likely to pay any attention to it.

My mother, however, is near retirement age, and she asked me to explain to her how CPF Life works. Well, actually her question was more along the lines of "Should I sign up for CPF Life now so I can get the $4000 L-bonus?"

[Figures, dangle a financial incentive and awaken the kiasu instinct in the older generation of Singaporeans to get them to climb onboard the CPF Life bandwagon.] 

So after my mother asked, I decided to dig deeper into CPF Life and take a hard look at this retirement policy. It doesn't hurt that I also have a much better knowledge of actuarial science than the average person (better even than the typical finance professional I suspect). 

The main questions I wanted to ask were, what's the L-bonus, how much is it actually worth, and more broadly, is CPF Life a worthwhile investment, because make no mistake, a life annuity is a form of investment, and not just insurance against longevity risk.

In the remainder of my post, I will assume that the reader already understands how CPF Life works. If not, I refer the reader to Guide A and Guide B from the CPF Board. I will be referencing information in these 2 guides as well in my discussion below, so even if you're thoroughly familiar with Guides A and B, if you're interested in reading further, you should open these 2 guides now in your browser (in separate tabs of course).

First up, an annuity is properly defined as a series of payments, while CPF Life is more correctly called a life annuity. However, the link I have provided to Wikipedia's entry on "annuity" is still a useful read for those unfamiliar with the concept of the present value of money

Throughout this post, where I have written "annuity", I mean "life annuity". Also, this post will deal only with the Life Income Plan in CPF Life. The reason for this is that the presence of a bequest in the other CPF Life plans complicates calculations.

The first question we need to ask is, how does one value an annuity, because this will decide whether CPF Life is worth joining. The problem with valuing annuities is that payments are uncertain over time, since for most of us, we are blessed/cursed with not knowing the moment of our deaths. Hence, it is uncertain how many monthly payments each annuitant will receive over his/her lifetime.

Therefore, for the purpose of valuing annuities, actuaries speak of an expected present value, rather than just the present value that other finance professionals use. The EPV of an annuity is a function of monthly payments, interest rate and the probability distribution of human lifespan. The formula for calculating the EPV of a life annuity is:

This is a rather intimidating formula, so I will go through it slowly.

M is the monthly payment (hence there is a coefficient of 12 in front), the funny "a" symbol with the 2 dots, subscript x and superscript (12) is an annuity term used only in actuarial science, and x is the age of the annuitant at the time of the first payment. The superscript denotes the number of times payments are made in a year, hence the 12 in the parentheses.

On the right-hand side, breaking up the annuity term into its components, kpx denotes the probability that someone alive at age x will still be alive at age x+k, v^k is the discount term involving the prevailing interest rate, and the product of these terms is summed from k=0 to k=omega, where omega is usually the maximum age human beings live to. Typical values of omega range from 100-120. The subtraction of 11/24 is an adjustment made for monthly rather than annual payments. 

Values of M and v are available from page 6 of CPF Guide A . However, where does one get values for kpx for k=1 to k=omega to value the annuity? (by definition, 0px=1).

Answer: Actuaries whose professional job is to calculate these things rely on figures from life tables, which are data tables from which one derives these life probabilities.

Published life tables for Singapore's resident population may be found here.

From the life tables, for a given value of k,

kpx = (number of lives alive at age x+k)/(number of lives alive at age x)

From here, it's quick work on an Excel spreadsheet to calculate the EPV of an annuity. Note that I used the 2006 male life tables for my calculations. 

From page 6 of CPF Guide A, we have 4 examples of the Life Income Plan, 2 for an RA balance of $20,000, and another 2 for an RA balance of $40,000. Each pair is further divided up into one with an interest rate of 3.75% and one with an interest rate of 4.25%, for a total of 4 plans as mentioned above.

My calculations indicate that:

EPV $20,000 RA, 3.75% = $17,279

EPV $20,000 RA, 4.25% = $17,217

EPV $40,000 RA, 3.75% = $34,222

EPV $40,000 RA, 4.25% = $34,126

The first thing you would notice is that an RA balance always purchases less than the EPV of the corresponding annuity. This is perfectly normal. The reason for this is that administrative costs are incurred in setting up annuity policies, and annuity managers, out of prudence, typically provide for some kind of buffer or contingency in the funding of the annuity scheme (after all, there is a wide variation in when exactly people drop dead).

The EPV of an annuity, in actuarial parlance, is termed the risk premium. It is the expected cost of claims under an insurance policy (which in this case, is an annuity policy). Private insurers selling annuities will typically charge considerably more than the risk premium as they need to cover administrative costs, commissions as well as provide for a profit margin.

In contrast, the CPF board is a government entity, which obviates the need for profit, and since it already manages CPF accounts for all Singaporeans, additional administrative overhead would presumably be negligible. The small difference in risk premiums for the CPF Life Income Plans, as calculated above, relative to the cost of purchasing the annuities, is a reflection of these considerations.

So as far as annuities go, the CPF Life is actually a good deal [it is so rare that I have something good to say about a government policy!]. It is a much better deal than private annuity plans which are more expensive from a valuation standpoint. Also, CPF Life, unlike a private plan, is unlikely to go insolvent.

However, some caveats:

The main problem I have with CPF Life is the lack of transparency and guarantee. The footnotes on page 6 of Guide A states "The payout range ... does not represent the lower and upper limits of the payout ... monthly payout may be adjusted every year to take into account factors such as CPF interest rate and mortality experience."

Great, this basically defeats the purpose of buying an annuity. The whole point of buying insurance is to pass on the longevity risk to the insurance company at an expense which represents profit to the company. People buy insurance for certainty and peace of mind in an uncertain world. All the fine print here in Guide A provides an escape valve for the CPF Board to reduce payments to retirees who would otherwise expect to be on a fixed income. I do not use the word "reduce" here frivolously. Central bank response around the world to the ongoing financial crisis is to slash interest rates close to 0, which would tend to reduce monthly annuity payments. Improving mortality experience in the future (that is, people living longer) is almost certain due to advances in medicine over time. That is a second reason why annuity payments are likely to be reduced.

Next, the lack of transparency and guarantee brings me to the reason why I calculated risk premiums only for the Life Income Plans. With the pitiful amount of information available in Guides A and B on how bequests are calculated, there is no way I can accurately calculate the risk premia for all the other CPF Life plans which involve bequests. Based on the monthly payouts given on page 6, I can only guesstimate that the other CPF Life plans also represent fairly good deals from a valuation standpoint. But I cannot stand by this assertion as I have no hard figures to back me up.

Lastly, just because CPF Life seems like a wonderful annuity scheme doesn't mean that annuities are the right investment for everyone. Annuities may not be suitable for those in ill-health, or for those (including myself) who are concerned with that ever-present scourge called inflation. Bottomline, if you like annuities, you could do a lot worse than CPF Life, but that doesn't mean annuities are an ideal choice for you. Every person will need to consider their own financial and personal situation before purchasing an annuity. 

Personally, I think longevity risk is a real problem and the government is right to consider it at the policy level. However, I also suspect that CPF Life is not meant as a solution to longevity risk per se in our population, but is a manifestation of policy tokenism.

Simply put, the government must do something about our rapidly aging population, and CPF Life, just like Eldershield, is a token effort to show that the government is doing something. But the monthly payouts are pitifully low (particularly if we factor in the effects of inflation over time) and the very fact that all these schemes and policies are both mandatory and self-funded are indicative that the government has no desire to own the problems. Despite us paying our taxes and the government running huge budget surpluses (even after paying our ministers million-dollar salaries, and throwing money at "investments"), the government is still fearful of draining its abundantly filled coffers on something like healthcare and retirement care. Instead, it discriminatingly spends on education and economic development, which while worthy causes in their own right, more obviously provide a return on investment (which is why the government has no problem spending there).

PS: the L-bonus is a top-up of the RA that the government makes to eligible citizens for the purchase of an annuity plan. Simply substitute an amount of L-bonus in the EPV term on the LHS of the equation I have provided, and you will be able to calculate the M term instead. In practice, an L-bonus of $4,000 increases the monthly payout by approximately an additional $20 per month.  

Friday, September 18, 2009

"Temasek made big gains"

A cheery article courtesy of the Straits Times vindicating one of our sovereign weath funds. Coincidentally, I went to school with the reporter who wrote this; he used to crib shamelessly from my notes for literature class (funny, he's the one who ended up in journalism!).

Ah, but time to inject some anti-spin, here and here. The wizards of Temasek aren't as smart as they like to think they are. 

Wednesday, September 16, 2009

"New Japanese Government Means Old Bureaucrats Afflict Hatoyama"

This is interesting. Given how our own government is a revolving door of senior officials, scholar "mandarins" and other entrenched interests, it begs a similar question of how well any political party (other than the PAP) could function (much less rule effectively) were they actually to take power in Singapore.

Winning elections is one thing. Governing effectively despite the bureaucracy is another. We shall see how robust Japan's democracy actually is.

From Bloomberg News
By Stuart Biggs and Sachiko Sakamaki

Sept. 16 (Bloomberg) -- Incoming Japanese Prime Minister Yukio Hatoyama plans to wrest power from Japan’s bureaucracy starting when his parliament convenes today. His own party, which has never governed, may prove his biggest obstacle. 

Novice lawmakers will be up against civil servants who control much of policymaking, from approving construction projects to bestowing government aid, said Steven R. Reed, a political science professor at Chuo University in Tokyo. During 50 years of single-party rule, the opposition wasn’t given information that would allow effective oversight, he said. 

“Opposition politicians haven’t known what’s going on,” Reed said in an interview. “Even for an American congressman there are things like, where is the bathroom, what’s the first step for submitting a bill. Those kinds of things are real, but there are more of them in Japan. Bureaucratic power comes from expertise, secrecy and time.” 

The freshman legislators’ inexperience will make it harder to create a government that is more independent of what Hatoyama has called Japan’s triangle of special-interest groups: bureaucrats, politicians and industries such as construction. He says he will send 100 lawmakers into the ministries to cut personnel expenses by 20 percent and free up cash for policies including raising child benefits and eliminating highway tolls. 

Hatoyama’s Democratic Party of Japan won 308 seats in Aug. 30 elections. Almost half went to first-time legislators and only 12 to lawmakers who have served in a cabinet. Their average age is 48, compared with 55 for the Liberal Democratic Party, which has four ex-prime ministers and four former finance chiefs among its 119 lower-house members. 

More Bonds 

London-based Barclays Plc and New York-based Morgan Stanley say that DPJ plans to increase spending on child care and employment while lowering corporate and gasoline taxes and eliminating tolls may force the government to issue more bonds. 

Yields on Japan’s benchmark 10-year bond are likely to rise to 1.39 percent by the end of the year from 1.31 percent, according to a Bloomberg News survey of economists and analysts that puts a heavier weighting on more recent forecasts. 

The elections brought to the Diet such new faces as Hirotaka Matsuoka, 27, the body’s youngest member. His experience is as a “company employee,” according to the DPJ Web site. The next-youngest, Katsuhito Yokokume, 28, worked as a lawyer for two years. 

“Not having experience also means that the ruling party is free of constraints, and that is a strength,” Yokokume said in a telephone interview. 

Matsuoka declined an interview request, citing time limitations while preparing to take office. 

Only on Winning 

“These young people don’t know anything about parliament,” said Hirohisa Fujii, a DPJ lawmaker asked by Hatoyama, 62, to postpone retirement and run again, at the age of 77, to add experience to the ticket. “Many of them only focused on winning the race.” 

The DPJ is pitting itself against Japan’s main source of stimulus since its bubble economy burst two decades ago. Government spending on dams, roads and bridges was 4.4 percent of gross domestic product last year as the LDP drove public debt to almost twice GDP or $175,000 for every Japanese household. 

“It’s going to be an enormous challenge,” said Takako Ebata, 49, a DPJ freshman who defeated former Defense Minister Yuriko Koike. “It’s not something politicians can accomplish on their own. The question is how many bureaucrats agree and cooperate with us.” 

Democratic Party leaders know they need experienced people in key positions, said Fujii, a former LDP lawmaker who was finance minister in 1993. The Nikkei newspaper reported yesterday that he will get the post again. 

Budget Decisions 

The DPJ’s Naoto Kan, 62, a former health minister, will head a new National Strategy Bureau responsible for budget decisions. Ichiro Ozawa, 67, who formerly held the No. 2 position in the LDP, is the party’s secretary general. Makiko Tanaka is an ex-foreign minister. 

The DPJ’s coalition partner chiefs are also getting cabinet posts. People’s New Party leader Shizuka Kamei, 72, a former construction minister for the LDP, is the minister for financial services. Social Democrat leader Mizuho Fukushima, 53, will be the consumer affairs minister, the Nikkei newspaper said. 

The LDP pushed the inexperience theme before the election, arguing the DPJ’s campaign pledges would cost more than forecast. Former prime minister Junichiro Koizumi, who led the LDP to a landslide victory in 2005, said during an Aug. 17 rally that he looked forward to watching the DPJ fail. 

The DPJ’s lawmakers have focused on specific areas of policy as professionals or in opposition more than their LDP counterparts, helping offset any disadvantage they may face negotiating with bureaucrats, Chuo University’s Reed said. 

Shinsuke Amiya, 51, is a former Merrill Lynch & Co. vice chairman in Japan. Takatane Kiuchi, 43, worked at Merrill and the brokerage units of Deutsche Bank AG and UBS AG. 

Still, many lawmakers will be in a similar position to Ebata this week. She will walk into the Diet building for only the third time in her life, after a sixth-grade school visit and last year with other DPJ candidates. 

“There are so many old customs and I’m honestly wondering how much I can achieve as a newcomer,” she said. “But people elected me out of their strong desire for me to change things.”

Sunday, September 6, 2009

Kawagoe, Reinventing Lego, Design Thinking

In a departure from reproducing stories in full (which I think actually contravenes fair use policy, shame on me!), I'm only providing the links to 3 interesting stories I read today.

Kawagoe - The vanished Edo

Reinventing Lego - An inspiring business turnaround (and one of the few toys NOT made in China)

Design Thinking - relevant to my job today