Chapter 13
Alternative Energies
Environmental policy was Ken’s baby,” remembered Bruce Stram, Enron’s chief economist for many of his 17 years at the company. “Per Ken Lay, Enron was the only natural gas company that clearly understood that environmental regulations, if properly implemented, were good for gas—and acted on it.”
Enron turned natural gas into a clean-energy play. From Lay’s first annual report in 1984 to the annual reports of the mid-1990s, methane energy was the emphasis, reflecting the relatively small scale of petroleum operations at the company. And in terms of vision, “the premier integrated natural gas company in North America” (1987–90) became “the world’s first natural gas major, the most innovative and reliable provider of clean energy worldwide for a better environment” (1990–95).
Enron’s clean-energy differentiation, which included a foray into compressed gas for vehicles, was expanded to solar power in 1995 and to wind power in 1997 at modest cost (several tens of millions of dollars). In first-quarter 1997, these efforts were consolidated as Enron Renewable Energy Corp. (EREC), which nominally became the company’s fifth division despite its meager profits. Sales of both the division’s units—solar to BP in 1999 and wind to GE in 2002—would make for profitable endings despite operational struggles during five years and six years, respectively.
EREC, backed by Enron’s lobbying and messaging, was central to the political economy of energy in the formative era of climate-change policy. Ken Lay’s was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business,” an ex-Greenpeace executive recalled. Enron’s entry into solar came when the big oil companies were going the other way. Jump-starting Amoco’s lagging solar business gave new life to this sector, although Enron’s grand plan for utility-scale plants failed, leaving the rooftop market.
Enron’s next environmental energy play was bigger, financially and otherwise. As noted by Daniel Yergin, “the company that actually put wind back in business in the United States was Enron.” Small wonder, then, that this new energy major became the political establishment’s favorite in the 1990s, with fawning business features in major publications, a special relationship with the Clinton administration, and praise and awards from Left environmental groups.1
Enron’s push into renewables changed economics and politics in the natural gas industry too. Government-enabled wind and solar power reduced gas demand in electric generation, making the gas industry a natural opponent of such nonmarket favoritism. Had not Jeff Skilling once said: “Going back to more long-term [gas] contracts and relationships can only help our ability to outperform the alternative fuels of the future”? But when the Natural Gas Supply Association (NGSA) lobbied against renewable energy subsidies in 1997, particularly state-imposed quotas (aka Renewable Portfolio Standards), Ken Lay, chairman of the (Enron-founded) Business Council for Sustainable Energy (BCSE), urged NGSA to be part of “a cooperative effort to promote the economic and environmental advantages of clean fuels … as we address the critical issues of industry deregulation and climate change.”2
BCSE included not only natural gas and renewable companies but also firms profiting from mandates to reduce electricity usage. Nonmarket conservation (conservationism) came at the expense of the swing fuel in power generation, which typically was natural gas. Nevertheless, Enron Energy Services (EES), created in March 1997, touted conservation(ism) as part of its outsourcing services for large commercial and industrial customers. Ken Lay, in short, was playing three sides against the middle.
The birth of wind power as commercial energy began in California in the early 1980s. The winds were no stronger than before, but government largesse kicked in as a response to the energy crisis, a time when oil and gas shortages turned attention to renewables as the energy future.
On the demand side—very important, since wind electricity was expensive, intermittent, and unproven—were California’s “most cooperative utilities in the nation,” which entered into long-term purchase contracts pursuant to the Public Utility Regulatory Policies Act of 1978 (PURPA), as interpreted by state commissions under the eye of the Federal Energy Regulatory Commission (FERC). On the supply side, California—a “nation within a nation” by size and philosophy—”offered lucrative incentives to match those of the federal government,” virtually doubling the federal 25 percent tax credit.3
This confluence resulted in “an avalanche” of capital into California, “including wind and solar power plants as well as solar water heaters.” Eclipsing Denmark’s 30 percent tax credit, California “almost overnight” became the center of the world wind industry, with 50,000 investors pouring $2 billion into projects. Amid this government-created Spindletop (the 1901 oil gusher that launched the Texas oil industry), quick money was made. But a boom-bust cycle resulted from the end of tax subsidies in the mid-1980s, when a surplus of oil and gas dimmed the energy-crisis rationales for renewables: depletion and energy secutiry. (The global-warming issue was not yet in play.)
Major federal laws commercialized solar- and wind-generated electricity for the grid. Significant government research and development aid under President Carter, diminished under Reagan but resurrected by George H. W. Bush, was not enough. As intermittent resources with concentrated up-front capital costs, solar and wind needed contractually secure long-term sales and a known investor payback. The aforementioned PURPA (1978), enacted when the prevailing wisdom was that oil and natural gas were running out, as well as the Energy Policy Act of 1992 (EPAct), created that certainty as a reward to the renewable-energy lobby, consisting of involved businesses and environmental groups in the Bootleggers-and-Baptists tradition.4
Section 210 of PURPA, which made a market for independents to compete against hitherto monopolistic utility generators, was crucially shaped by a waste-to-energy firm, Wheelabrator-Frye Corporation, as well as its trade association, the 48,000-member Solar Lobby, representing not only solar-panel companies but also biomass, hydro, and wind enterprises. Electric utilities were required to buy power from “qualifying facilities” at a rate up to “the incremental cost to the electric utility of alternative electric energy.”
Importantly, incremental cost was not the marginal cost of operations; nor was it to be determined in a competitive least-cost bid process by the purchasing utility. Intended to promote renewables (and cogeneration, which became a whole business for Enron, run by John Wing and Robert Kelly), “total avoided cost” was determined by the state utility commission with blessing from FERC. The resulting avoided-cost determinations, at least as interpreted in the (gravy-train) 1980s, were a bonanza for independent (nonutility) generators such as Enron but a burden for ratepayers.5
The second law, EPAct of 1992, introduced the Renewable Electricity Production Tax Credit (PTC) of 1.5 cents per kWh, representing a good half of the going price of electricity at the power plant (busbar). The 10-year provision was inflation-adjusted, which in Enron’s lifetime would increase the price to 1.8 cents per kWh. Multiple extensions of the PTC, the first during Enron’s last year of solvent life, would keep the subsidy alive as of 2018, with its current inflation-adjusted amount at 2.4 cents per kWh.6
Big Thoughts, New Bets
“To develop long-term strategic alternatives for Enron and to thoroughly evaluate the many opportunities that come before us,” Ken Lay and Richard Kinder announced to employees in mid-1993, “we have created the new position of executive vice president and chief strategy officer for Enron Corp.” This position was created for Robert Kelly, a former economics professor and combat veteran who had just returned to Houston from London, where he oversaw the operation of Teesside I and was negotiating Teesside II as head of Enron International.7
“Bob brings the perfect mix of experience and intuitive knowledge to this new position,” Lay and Kinder noted. Working under John Wing, Kelly had negotiated gas contracts and other aspects of Enron’s cogeneration projects. The nuclear engineering undergraduate and Harvard PhD economist was a big thinker too.
The plan was for Kelly to join an operating unit in Houston. But the divisions “were well staffed internally,” he remembered, and “it was Ken’s idea to explore our options with renewable energy.” Kelly formed Enron Emerging Technologies Inc. (EET) to evaluate alternative-energy technologies with high-growth potential.
Kelly had two key advisors in his new role. On behalf of Ken Lay, John Urquhart, a former top GE executive who was vice-chairman at Enron, would oversee the venture from the office of the chairman.8 Corporate Strategy and Planning, headed by Bruce Stram, another PhD economist, would report to Kelly, with Stram’s new title soon to be senior vice president of EET.
From “day one,” renewables topped the list. “In particular,” remembered Kelly, “two of the things that we were going to look at were solar and wind power.” Biomass was only of cursory interest, and hydroelectricity was not considered an alternative technology. Stram was put on fuel cells, a distributed-generation technology using natural gas. Natural gas vehicles, another environmentally connected technology play, were already being pursued—but would soon be abandoned.9
Why invest in renewable energies when supply forecasts for conventional energies were robust, especially at Enron? Why bet on renewables when technology was reducing overall pollution despite growing use of oil, gas, and coal? Ken Lay himself considered natural gas as more akin to renewables than to the other fossil fuels, a theme underlying his September 1995 address, “The New Worlds of Natural Gas,” to the Pacific Coast Gas Association.
In that speech, Enron’s chairman opined that “the environmental preference of renewable energy over natural gas is getting somewhat blurred” and that “natural gas resources—just like renewable energy—are virtually unlimited.” He added: “In many cases, a state-of-the-art controlled-burn gas-fired combined cycle plant may be environmentally preferred to a wind farm in a heavy bird population center or a new hydroelectric facility located in a salmon spawning area.”
But Enron saw green in green energy. Wind and solar as primary energies had new public policy rationales and powerful political constituencies. Specifically, global warming from fossil-fuel usage via the enhanced greenhouse effect was the new neo-Malthusian scare, and post–Gulf War concerns over energy security put petroleum on the defensive. Even more than this, renewables had public cachet for an energy company, particularly one that prized publicity and promoted a momentum stock.
Environmentalists—habitually hostile toward oil and coal as depleting, polluting energies—looked to wind and solar first and natural gas as a “temporary buffer,” a “bridge” fuel, to that sustainable future. Nuclear power, once hailed as cost-effective and environmentally benign, was seen as neither after Three Mile Island in 1979 (and, later, Chernobyl).
“In the midst of the mounting energy-related difficulties confronting the United States,” the Union of Concerned Scientists concluded in 1980, “one clear solution emerges: an aggressive strategy emphasizing improvements in energy productivity and the implementation of a variety of attractive solar technologies that can lead us out of the morass and onto the road to a sage and sustainable energy future.” Several years earlier, Amory Lovins had popularized the idea of the soft energy path in contrast to the fossil-fueled central stations first championed by Thomas Edison and Samuel Insull a century earlier.
Distributed generation would be powered by a natural flow of energy, not resources that had to be mined and combusted. More-the-better conservation, or conservationism, was seen by Lovins as an energy source (negawatts, to join megawatts). Enron, too, jumped on the idea of mass energy savings via outsourcing by forming Enron Energy Services, a foray that would prove exaggerated (economical conservation proved to be significantly less than technical conservation).
Energy scholar Vaclav Smil found himself at odds with the energy romanticists, who saw an easy answer in the free, always-out-there flow of the sun. In the 1980s, he explained the “irremovable mismatch” between energy supply and demand of flow-versus-stock energy.
Industrial processes required energy flows of between 102 and 107 W/m2, and large cities consume energy at levels between 101 and 102 W/m2. Solar power came in densities of between 100 and 101 W/m2 and required costly “storage to overcome random flows.” Wind power, also needing storage to provide continuous service, was more dilute at 10-1 W/m2. Enter fossil fuels, whose 103 W/m2 power density, “matching much more easily the needs of industrial civilization,” was continuous—and came “without exorbitant land requirements.”
Smil was hardly the first to note the paradox. In 1878, inventor John Ericsson lamented the fact that “although the heat is obtained for nothing, so extensive, costly, and complex is the concentration apparatus that solar steam is many times more costly than steam produced by burning coal.” Practical attempts to harness the sun predated the fossil-fuel era, in fact, and it was fossil fuels that made utility-scale solar unnecessary by the late-nineteenth century.
Relative power density explained why solar ventures in population and industrial centers were few and in perpetual need of special government favor. But Ken Lay did not read Vaclav Smil. Enron’s CEO was more attuned to energy fads and public policies, although Lay’s PhD dissertation demonstrated a technical proficiency to comprehend energy physics.10 Lay preferred the energy and climate writings of Christopher Flavin of Worldwatch Institute. But Flavin, like Lay, was fixated on trends and policies rather than on the underlying technical fundamentals that explained why some energies were commercially viable and others government dependent.
Enron’s CEO saw where energy policy was going—and where energy activists were saying it should go. The large tax credit and accelerated depreciation for qualifying renewables in the Energy Policy Act of 1992, signed by George H. W. (“all things to all people”) Bush, restarted the push. And Bill Clinton was all-in with wind and solar, in addition to natural gas.
The Clinton administration’s Department of Energy appointed an Enron friend, Deputy Secretary William “Bill” White. As second in charge at DOE, this Houstonian and former trial lawyer would assist Enron on a variety of fronts. A reelected Bush would have offered Enron a lot (and maybe even a cabinet post acceptable to Lay), but Clinton certainly offered Enron the opportunity to expand its green image beyond gas, as Greenpeace and other environmental pressure groups wanted.
There was something else that Enron’s forward-looking chief might have grasped: that renewable energy would give Enron a powerful card to get what environmentalists did not want: the ability of rival power sellers, like Enron, to sell electricity to the retail customers of electric utilities, thereby driving down rates, increasing usage, and reducing self-interested conservation.11 Coupling a renewable mandate with mandated open access (MOA) power transmission would prove crucial to an Enron-driven 1999 Texas electricity restructuring law that would all but restart a stalled domestic wind industry.
Lay, Kelly, and Stram—all PhDs attracted to the climate issue and yearning to get beyond business-as-usual—were true activists for energy transformation. Under Lay’s direction, Enron would restart the solar industry, rescue the US wind industry, and help legitimize the climate issue. Stram’s 1995 essay for the Harvard Global Environmental Policy Project, “A Carbon Tax Strategy for Global Climate Change,” added to his in-house work. Post-Enron, Kelly would publish The Carbon Conundrum: Global Warming and Energy Policy in the Third Millennium (2002), siding with the market-failure/government-activism approach. Numerous other employees would also continue to labor in the energy-environmental area post-Enron, a legacy that had roots in Robert Kelly’s new policy directions of 1993–94.
Solar Power
The photovoltaic (PV) effect, discovered in 1839, used the energy of sunlight to eject electrons from simple materials and, much later, from semiconductor chips. In 1954, Bell Telephone Laboratories introduced the PV method of generating electricity from silicon. But capturing and concentrating dilute rays of energy was capital- and land-intensive, compared to using the energy stock from the sun’s work over the eons, embedded (stored) in oil, natural gas, and coal. Solar as flow energy is also intermittent (the sun is not always visible, and storage capability was limited) compared to the embedded energy of fossil fuels.
Nonetheless, solar had a niche far away from the reach of a utility’s wires. Putting PV panels in space was the opening application from which a new industry emerged. Offshore oil and gas platforms became the next market, offering an energy alternative to huge batteries that were transported to sea, used up, and tossed overboard.
Other uses emerged as costs dropped: navigation aids (buoys, call stations), remote military applications, and off-the-grid living where propane gas was unavailable. The major on-grid use for solar was water heating, which became common after World War II in California, Florida, and other sunny regions.
A Flashy Proposal
Robert Kelly had scoured the field to locate a partner to enter the solar business. But before this was completed, Enron went into full proposal mode in response to a solicitation by the Department of Energy for bids to build a solar farm in Nevada. Utility-level solar was just what Kelly had in mind to launch his business plan based on scale economies. Top experts were retained and quotations gathered from existing providers. When completed, it was an Enron PR moment heard around the political-energy world.
“Solar Power for Earthly Prices,” read a November 15, 1994, headline in the New York Times, replete with a photo of Kelly holding a panel to the bright sky. Subtitled “Enron Plans to Make the Sun Affordable,” the business feature described Enron’s proposal to deliver electricity to the federal government in two years at $0.055 per kWh, a year-one rate that would escalate 3 percent annually for 20 years. This quote was unheard of: it was only a fourth of the $0.20 per kWh estimate, give or take, quoted by Worldwatch Institute.
“Grand promises in the late 1970’s about the potential of virtually pollution-free, endlessly renewable energy sources like solar energy faded into an embarrassed hush,” the article allowed, but Enron’s optimistic goal was described as “probably reachable.” Unit costs had “quietly” declined by two-thirds, it was explained. What Enron was proposing—a $150 million, 100 MW manufacturing plant—would provide the scale economies that were hitherto missing.
“If a good group of people puts a plant of that scale in, it will have a real consequence on costs,” a Princeton electrical engineer opined. “It’s not going to go down by just a little bit, but by a factor of two.” Another endorsement came from DOE Deputy Secretary White. “I’m confident we can make some commitment for a Federal entity to purchase or at least broker some purchase of solar power.”
Tony Catalano, director of DOE’s PV division, stated: “This is going to be very competitive in the U.S. and lots of other places in the world.” Added DOE’s solar-energy director: “This establishes the benchmark we want and restarts a stalled solar industry.” In fact, Enron’s proposal might not even need “expensive federal aid.”
The article explained the new technology and referenced a solar manufacturer and a consultant working with Enron. “Yes, it can be done,” said one. “It’s the dream we’ve all had: that someone would take the risk of building a very large factory.” In fact, this new plant would be 12 times larger than anything then in existence.
A confident Robert Kelly explained how producing solar power followed from Enron’s experience with gas-fired generation. The article closed: “Asked how soon solar power could generate earnings, [Kelly] said: ‘Now. We’re a very impatient company in terms of profits’.”
It was as if Enron had written the article. But the author was Allen R. Myerson, the Times’s Dallas-based energy reporter. Enron was raking in what the trade called earned media (versus paid-for, or unearned, media). Myerson would continue to wax enthusiastic about Enron until the company’s demise in December 2001; in August 2002, he jumped from the Times building to his death.12
This project, situated at a nuclear test site in southeast Nevada, was highly speculative. The government had not decided to buy power from Enron or anyone else. The electricity would be available only during the day when the sun was visible. The price depended on a raft of special favors and obligations—local, state, and federal—and a 20-year fixed-priced commitment, something the electricity market was otherwise moving away from. And Enron had never built, installed, or owned a single solar panel. Kelly only revealed that Enron had an undisclosed partner that would produce the solar cells.
Two years later, DOE chose a scaled-down 10 MW proposal from Enron. But it was not an executed deal. The “award” was the right to “finalize a definitive power purchase agreement by mid-1997,” with construction of the would-be largest solar facility in the United States in the next year. The same Enron press release mentioned two other solar-farm deals that were in process. But none of the three would be undertaken.
An Unlikely Partner
Kelly and Urquhart’s mission to find a viable entry point into the new business of solar energy had been under way for about a year when they came up with a seemingly unlikely partner: the oil major Amoco, which had evolved out of the Standard Oil Company of Indiana, and ultimately out of John D. Rockefeller’s Standard Oil trust. Why had such an old-line oil company gotten into solar power? The story began in the early 1970s.
Like other cash-rich oil majors, Amoco had been whipsawed by oil and gas regulations that triggered and prolonged the 1970s energy crisis. Then, too, the executives of Amoco genuinely feared the depletion of oil and natural gas. Under the circumstances, this Chicago-based company began looking to nontraditional lines of business as a hedge.
“We believe a prudent management should seek out and develop alternative investments outside of the oil and gas business to hedge against proliferating government interference and controls which will inhibit our ability to operate profitably in the petroleum business,” Amoco informed industry analysts in 1976. Green bona fides were also prized for petroleum-marketing purposes; Amoco’s “quest for environmental leadership in its industry” went only so far with compressed natural gas as an alternative to gasoline and diesel at the pump.
In 1979, President Jimmy Carter told the world: “There is no longer any question that solar energy is feasible and cost effective.” Whether or not they believed him, Amoco executives that year purchased 30 percent of a leading manufacturer and distributor of solar cells, Solarex, located in Rockville, Maryland. The balance was bought four years later for total ownership.
One of Amoco’s early initiatives was the nation’s first solar-powered gasoline service station. Formed in 1973, Solarex introduced the use of polycrystalline silicon in solar cells in 1976 and marketed thin-film amorphous silicon modules three years later. Still, a large cost premium remained for distributed solar, limiting its niche applications and obviating any role in a power grid.
Despite federal grants, more than 90 percent of which “ended up in the coffers of the largest corporations in the United States,” a graveyard of private efforts resulted from President Carter’s vision. In the 1970s and 1980s, failed solar investments were made by Texas Instruments, General Electric, IBM, Polaroid, RCA, and Westinghouse; Sanyo, Kyocera, and Sharp of Japan; and the energy majors Arco, Exxon, Mobil, and British Petroleum. Exxon exited the business in 1984 after 15 years and $30 million in losses. Arco Solar would be sold to Siemens in 1989 after 12 years and $200 million in deficits.13 Mobil Solar Energy Corporation was purchased by Applied Solar Energy (ASE) in 1994.
That left one major domestic player, Amoco’s Solarex, the largest US-owned manufacturer and distributor of PV modules and systems. In 1987, Solarex was placed within Amoco Technology Company with a mission to reduce costs in order to increase sales, as well as improve production economies. Its largest facility was increased to 5 MW (annual capacity of produced solar panels). But profits were inadequate for further expansion to utilize new-generation technology. Solarex needed fresh capital, better marketing, and a new business plan.
Amoco/Enron Solar (Solarex)
“Amoco Corporation and Enron Corp. have agreed to form a new general partnership to manufacture photovoltaic (solar electric) modules and develop solar power electric generation facilities,” an Amoco press release announced December 19, 1994. The 50–50 partnership, representing a $20 million Enron purchase, obligated each partner to contribute $15 million to complete construction of a thin-film manufacturing plant capable of annual production “in excess of 10 MW of large area, multijunction amorphous silicon modules.” This new technology, the press release noted, was developed in conjunction with the Department of Energy.14
“Amoco gained a partner that was a fast-growing leader in power generation and sales and had a hard-driving, entrepreneurial culture well-suited to the rapid expansion of Solarex,” explained a scholarly corporate history of Amoco offered by Joseph Pratt. “For its part, Enron gained a share of one of the largest solar cell manufacturers in the United States.”
Amoco/Enron Solar assumed the assets of Solarex effective the first day of 1995. Headquartered in Frederick, Maryland, Solarex would become the name for a unit of Amoco/Enron Solar that was responsible for production, research, development, and system design. With a manufacturing plant in Australia and an assembly facility in Hong Kong, Solarex was now building a second-generation PV plant outside Newport News, Virginia.
The partnership had a second subsidiary. In addition to Solarex, Houston-based Amoco/Enron Solar Power Development, headed by Robert Kelly, was responsible for marketing, financing, and subsequent operations. Kelly’s grand strategy was to build large grid-connected solar farms, creating scale economies for panels to capture the rooftop market.
“Our joint venture with Amoco builds on Enron’s strategy of providing clean energy to the world economy,” stated Enron’s vice-chairman Urquhart. “This is the technology that will allow us to provide solar electric power at competitive prices, both in the United States and in other areas around the world.” Amoco hailed the joint venture as providing “the missing link in PV—lower costs through high-volume production enabled by sales into grid-connected markets.”
Enron was now in a wholly new business. Ken Lay had added renewables to Enron’s list of “energy solutions worldwide.” Kelly was coupling the expertise of ECT and Enron International to rapidly improving technology that between 1986 and 1994 had reportedly tripled solar’s energy yield per dollar. High volume and big profits were envisioned by Enron in a carbon-constrained world.
Imaging versus Reality
The one-year anniversary of Enron’s Amoco partnership was marked by a cover story in Enron Business describing the work of the six-member Amoco/Enron Solar Power Development team under Robert Kelly, CEO and cochairman of the Amoco/Enron Solar Managing Board. The partnership was “right on track,” Kelly reported. “We’re currently number two worldwide in the production of photovoltaic cells.” Better yet: “We expect to be number one by the end of the century, and by a wide margin, because we have certain growth opportunities that our competitors don’t have.”
The most exciting development was “the go-ahead to build the world’s largest solar electric generating plant in northern India.” But the 25-year power contract to underwrite this $100 million project was not quite final. In the post-Dabhol environment, the Rajasthan State Electricity Board said that it needed to bid out the 50 MW solar-and-gas project. Facing stiff competition, Enron applied to the Indian Renewable Energy Development Agency for low-interest financing. (Turned down, Kelly’s project died in December 1997.)
In addition to the Nevada project, Enron was working on solar farms in southern California and in West Texas. Internationally, publicized project negotiations included China (150 MW), the aforementioned India (50 MW), Greece (50 MW, part of the Greenpeace Solar Campaign, described in the next section), and the Middle East. A $1.14 million DOE grant to build a 4 MW solar farm in Hawaii did not result in construction.
Figure 13.1 Enron’s partnership with Amoco was a quick entry into the international solar market. Robert Kelly (top right) oversaw a staff of five to market solar farms and to place large orders for rooftop panels. After troubled sales, Enron’s half-interest was profitably sold to BP (which purchased Amoco) in 1999.
Central arrays feeding the power grid was what Kelly saw as the main story, but Solarex was a big player in rooftop solar. Amoco/Enron Solar was the world’s second-largest manufacturer of panels and the largest US maker, with plants in Frederick, Maryland; near Newport News, Virginia; and in Australia, Hong Kong, and Japan.
Sales in 70 countries were a mix of “solar farms, rooftops, village electrification, water pumping, telecommunications, and other industrial and consumer products.” One venture in Japan, helped by $25,000 government grants, offered residents the world’s first “zero-energy house,” where solar and efficiency investments eliminated the monthly oil, gas, and electric bills.
Rooftop solar was profitable. But what hurt earnings were research and development expenses by Amoco/Enron in their attempt to commercialize solar farms. It was distributed generation or bust for now, a subsidy play helped by a raft of special government favors, capped by the Clinton administration’s Million Solar Roofs Initiative, which Solarex head Harvey Forest predicted would help “stimulate a domestic market here in the United States.”15
While sunshine produced little electricity, Enron’s effort generated warm feelings from environmentalists. To get beyond carbon-based energy, it was not enough for natural gas to take market share away from oil and coal. The green dream was wind and solar—and electricity from renewables to power motor vehicles. Enron was at least partly on their side.
“I needed to know more about Enron’s solar push,” recalled Jeremy Leggett, director of Greenpeace’s Solar Initiative, who visited at length with Robert Kelly in April 1995. “It seemed genuine, but I had to be sure.” Leggett explained:
Here was the biggest gas company in the world, with oil interests as well, joining up with Amoco, one of the Seven Sisters, to launch a venture which could provide the catalyst for the take-off of the solar-photovoltaic market. Was there something I was missing?
He recalled how Kelly saw solar as “the future,” not only for business reasons but also because of “the global warming threat.”16 Leggett left convinced, a story he recalled in his 1999 book, The Carbon War: Global Warming and the End of the Oil Era.
Enron was now establishing good relations with the far side of the environmental movement that was otherwise against natural gas. Greenpeace, which Ken Lay took to task in 1994 for rejecting natural gas as part of the environmental equation, finally has something good to say about a natural gas company.
Robert Kelly’s business plan for Enron’s $35 million investment centered on production economies, which solar engineers assured him lay on the other side of higher sales. The solar farm of thousands of aligned panels was key; large arrays would not only reduce unit costs (with fixed costs spread over more volume) but also capture the rooftop market for Solarex from better pricing. True, the Nevada proposal was languishing, as were the others. But one proposal seemed to be falling into place, and Enron was right there.
The Crete-Greenpeace Proposal
In October 1995, Greenpeace launched the Solar Crete campaign to halt the construction of a 50 MW diesel-fired power plant. With the island’s average and peak power demand increasing at twice the rate of Greece as a whole, Greenpeace demanded a completely new approach to supply. It was “the fight of oil versus the sun and wind,” an Athens magazine noted.
Solicitations were sought. One serious proposal emerged in mid-1996 from Amoco/Enron. An industrial facility would also be considered to manufacture an estimated 528,000 modules holding nearly 50 million solar cells generating the necessary 50 MW. Kelly opened a Greece subsidiary, IWECO Solar, to work toward a final agreement on what was (on paper) 15 times larger than any solar farm in the world.
The $120 million project, with $2 million per year in estimated operating costs, needed a lot of help even to be considered by the authorities. Although advertised to be substantially less than the global average of grid-connected solar, costs were still prohibitive. A phase-in of this capacity would be required in any case.
In mid-1997, Enron announced a $10 million grant from the European Union to build an $18 million, 5 MW solar farm in Crete, also helped by a tax break that reduced the cost by 30 percent. “This project will serve as the centerpiece for opportunities we are pursuing in a Mediterranean region that has excellent solar resources,” said Amoco/Enron’s area representative. The plan was to build the first 5 MW by year-end 1998 and add 9 MW per year to reach a total of 50 MW by 2003, a $180 million proposition.
The official news came in a Greenpeace press release dated June 12, 1997: “Solar power today enters a new era with Greek Government’s decision to begin the construction of the world’s largest photovoltaic (PV) power station on the island of Crete.” For $17.75 million, with 55 percent of the capital pledged by the European Union and the Greek government, Enron would build a 5 MW facility, eclipsing the then largest solar array of 3.3 MW in Italy.
“This smashed conventional assumptions on solar power in terms of scale and costs,” a solar enthusiast stated in Greenpeace’s press release. It was Robert Kelly’s virtuous circle of market-pull and technology-push, where higher demand lowered cost to increase demand, ad infinitum.
Greenpeace’s Mediterranean Campaign saw Crete as the “show case” for a regional move to “the solar power revolution,” which would help provide “the solution to global warming.” It was all so simple (but postmodernist): “All we need is that governments believe in the region’s potential and have the will to seriously consider their renewable energy future after coal, oil, and gas are over.”
The project was not to be. Greece’s Public Power Corporation could not afford the power, much less plan around solar’s intermittency, which made the array’s real dispatch a fraction of its nameplate capacity. The Association of Industries and Commerce was against even the starting tranche of the grand experiment. The “lowest price on record” was cost-prohibitive—and for an inferior product compared to 99 percent of the island’s other (fossil fuel) sources. Adding storage to allow solar to achieve grid-parity, not part of the project, would have doubled its cost.
A Graceful Exit
Enron’s public relations bonanza from solar would not be matched by executed projects or profitability. The Virginia thin-film plant was behind schedule and over budget, leading to a management shakeup by Amoco. Declining sales meant that Enron’s investment was not making money, just garnering earned media. Enron Wind Corporation would soon become the center of attention for Kelly and Enron, but a fortuitous ending for Enron’s solar effort was just ahead.
Effective January 1, 1999, British Petroleum, now just BP, purchased Amoco for $48 billion to form BP Amoco. The year before, BP CEO John Browne was the first major oil company executive to declare carbon dioxide emissions from burning fossil fuel to be a climate threat. Invoking the precautionary principle, Browne cited the scientific work of the Intergovernmental Panel on Climate Change (IPCC) to conclude that “to be sustainable, companies need a sustainable world,” a carbon-constrained world.
Regarding Browne’s speech, Stanford climate scientist and activist Stephen Schneider said: “They’re out of climate denial.” But even while Browne endorsed climate action, he noted the essential role of fossil fuels in modern life and the continuing need for profit-driven oil and gas enterprise. “Real sustainability is about simultaneously being profitable and responding to the reality and the concerns of the world in which you operate,” he opined. “We’re not separate from the world. It’s our world as well.” Still, Browne pushed back against the end-fossil-fuels-now movement.
I disagree with some members of the environmental movement who say we have to abandon the use of oil and gas [because] … that view underestimates the potential for creative and positive action. But that disagreement doesn’t mean that we can ignore the mounting evidence and concern about climate change. As businessmen, when our customers are concerned, we had better take notice.
Ken Lay’s decade-old interest in climate action was a play of natural gas against the higher CO2 emissions of oil and coal. Browne’s climate strategy flew in the face of his company’s producing, transporting, refining, and marketing of petroleum. Still, BP with Amoco added was natural gas heavy, offering benefits for climate-policy activism. There was also a petro sales strategy (“greenwashing” to its critics) in being environmentally preferred at the service station to Lee Raymond’s Exxon, if not other rivals.
Enron’s half-ownership in Solarex created a conflict of interest for Amoco’s new owner, given that BP Solar (established 1981) was bigger than the unit it was buying. Redundancies could be eliminated, and BP’s new branding was to be the world’s green petroleum marketer, not unlike Amoco’s aspiration a decade before. Thus BP (now standing for “beyond petroleum”) became the largest solar-panel manufacturer in the world, effective March 31, 1999, by purchasing Enron’s half of Solarex for $45 million, a rich sum for a money-losing unit. Enron happily recorded an after-tax gain of $6.5 million for its otherwise unsuccessful foray.
Enron’s exit came with a discouraging report card. “None of the proposed solar farms ever got built,” Sarah Howell of Solarex told the press, referring to a dozen projects touted by Kelly and Enron. “We are concentrating on the more viable grid-tied [that is, urban rooftop] systems.” This was the business that everyone else was after too.
“All the world’s energy could be achieved by solar many thousands of times over,” Shell’s renewable-energy chief opined in 1995. “Amoco/Enron Solar aims to power the earth by harnessing the energy of the sun—at a price that is competitive with fossil fuels,” Enron Business stated in 1996. And Greenpeace said: “1997 is being viewed as a turning point in the fortunes of solar photovoltaics as global demand is ‘poised to soar.’”
But was scalable solar achievable in the real world?
In the mid-1990s, Solar Two, a $55 million, 10 MW solar thermal demonstration project in the Mojave Desert, led by Southern California Edison, began producing (intermittent) power at between $0.18 and $0.22 per kWh. (Solar One, a 10 MW project built in 1981, had been destroyed by fire in 1986.)
“Solar Two looks good on paper, and it is expected to provide steady baseload electricity as well as late afternoon peaking capacity, but the future of all the central solar generators is in doubt,” opined Christopher Flavin and Nicolas Lenssen in 1994. “They are expensive to build, their very scale escalates financial risks—as with nuclear power—and their massive height (in excess of 200 meters) may attract opposition.” They were right. Solar Two’s 130-acre computer-controlled mirrors, reflecting sunlight to a central tower, ceased operation in 1999 and were demolished a decade later.
Solar Two was “a technological success, but not economically ready for prime time,” the editors of the Electricity Journal concluded. BP’s John Browne was correct; solar energy produced peak-demand power at about double the competitive rate.
But, just perhaps, direct solar was less the energy answer than indirect solar from wind, itself the result of differential heating of the earth and the atmosphere.
Wind Power
Enron’s expansion into wind-turbine manufacturing and sales—and the designation of renewable energy as the company’s fifth core division—reflected a government-created opportunity. Wind turbines, like solar panels for grid electricity, were generously subsidized at the federal level and in California, with other states to follow. Wind and solar were politically correct to the powerful environmental establishment. Hydroelectricity and biomass were less so, and nuclear power (the largest emission-free energy source) was not. Enron did not invest in these latter areas.
The new US leader in renewable energy had taken a leap beyond natural gas. Enron was differentiating itself in its quest to become the world’s leading energy company. It was good timing, too, with Bill Clinton and Al Gore ensconced in the White House.
Ken Lay became the progressive energy leader to politicians and environmentalists. He was a new friend of Bill’s despite having done many years of work for the Republicans. Was not this the CEO who helped persuade President George H. W. Bush to attend the United Nation’s Earth Summit in Rio de Janeiro to advance the global-warming, social-justice cause? Now Enron’s chief was speaking Greenpeace’s language of a post-fossil-fuel world, although for the distant future.17
Still, wind power was barely viable. There was competition for projects and warranty issues with new technology. For Enron Renewable Energy Corporation, losses were registered. But tax credits for the parent were utilized, and the green theme helped keep ENE a momentum stock in the mid-1990s.
Wind Energy in History
Windmills represented an early use of mechanical energy, predating the fossil-fuel era by centuries. Turning wind into electricity had an 1887 beginning in Thomas Edison’s neighborhood and a business push in Denmark a decade later.18 American companies picked up the pace in the 1920s. During World War II, the 1.25 MW Grandpa’s Knob wind turbine distributed electricity to Central Vermont Public Service Corporation, an experiment that led the Federal Power Commission to estimate the potential of domestic wind power in 1945.
The energy crisis, which began with natural gas shortages in the winter of 1971–72 and oil shortages two years later, revitalized interest in wind power in the United States. The American Wind Energy Association (AWEA) was formed in 1974; six years later the nation’s first wind farm was constructed in Vermont, consisting of 20 turbines generating 600 kilowatts (0.6 megawatts) at its peak.19
“Wind power may be a breath of fresh air on the world energy scene during the eighties,” wrote Christopher Flavin in Wind Power: A Turning Point (1981). “Pacific Gas & Electric and Southern California Edison seem to be playing a game of leapfrog as each attempts to one-up the other in a fight for leadership and public recognition in wind-energy development.” In fact, via PURPA-qualifying sales contracts, captive (utility) ratepayers joined unwitting taxpayers in launching a new domestic industry.
Zond Systems was founded in 1981 by Jim Dehlsen in a mountain town with whistling winds, Tehachapi, California, located between the San Joaquin Valley and the Mojave Desert. “One of the most important and committed pioneers” of his industry, Dehlsen spent that New Year’s Eve on a dangerous ridge in Tehachapi Pass, struggling to get his turbines operating to qualify for an expiring state tax credit. Humbled by the unrelenting winds, he began importing turbines from the Danish wind company Vestas, itself helped by a government-funded research institute near Copenhagen.20
Zond would prove to be the major survivor of “California’s extraordinary wind rush,” which produced “an eyesore of broken and twisted blades,” “PURPA machines,” and “tax farms” in return for little electricity. To break out of the pack, Zond in 1993 hired a Danish turbine designer, Finn Hansen, to remake its technology. A million-dollar grant from US Department of Energy helped this effort. Major projects, such as the 342-turbine Sky River Project in California, made Zond a US leader.
Times turned tough by mid-decade. Lower gas prices dropped the avoided-cost assignment from regulators pursuant to PURPA. Some in-state subsidies expired. A revenue stream from a small ownership interest in each project proved just enough for Zond to, in the words of Dehlsen, “survive until the next stage.”
Major Issues
Wind-generated electricity was not for the rooftop or yard. At scale, it was not a distributed energy, as was a solar panel away from a utility grid. But power from large wind turbines was far cheaper than power from a large array of solar panels. Still, for new, on-grid capacity, wind power was uneconomical and less reliable than conventional sources. Further, the huge turbines with blades larger than a 747’s wing were a hazard to avian wildlife and a nuisance to neighbors prizing tranquility.
Free energy spun the turbines, but electricity conversion was material- and capital-intensive. Like solar, wind power was intermittent. An 1883 article in Scientific American noted wind’s unpredictable, unsteady flow and asked how the output could be stored from “gathering it at the time we do not need it and preserving it till we do.”
The first opus on energy, published in 1865, did not consider wind a substitute for “our cheap supplies of coal,” because of the former’s “irregular” availability and siting limited to “open and elevated situations.” In contrast, explained W. S. Jevons, coal was plentiful, portable, storable, and dependable—attributes that would carry over from its industrial use to the generation of electricity.
“Even energy from wind—seemingly the freest, most renewable energy source imaginable—isn’t environmentally perfect,” a 1978 Wall Street Journal story reported. “Giant windmills interfere with television and radio signals, and their spinning blades can kill unwary birds.” Furthermore, “the biggest problem is where to put the things: people in windy places like Cape Cod aren’t eager to strew their picturesque landscape with immense metal structures.” (A quarter-century later, a proposal to erect wind turbines off Cape Cod would encounter lawsuits from area residents.)
“Avian mortality” would become a notable issue, as Zond found out firsthand in 1989 with its rejected application to build a wind farm just outside Gorman, California.21 A range of opponents, including the local chapter of the Sierra Club and the National Audubon Society, left Zond “to nurse $1 million in fruitless expenses.”
Other issues—such as long transmission lines to get wind power from the wilds to urban areas—added to the challenge. But these drawbacks did not prove decisive to the industry as a whole. The environmental community, having little supply-side strategy otherwise, accepted wind power’s shortcomings. The political will to subsidize wind power into commercial use would emerge by the early 1990s and not disappear in Enron’s lifetime—or after.
The rumor inside Enron was that a second foray into renewables was imminent, the lack of profitability of solar notwithstanding. The company’s director of public policy analysis (this writer) responded with a memo urging Enron to stay with its natural gas knitting. “Given Enron’s consideration of entering the central-station windpower business, I must express my concerns from a public policy perspective as well as a pragmatic business perspective,” began a November 1996 missive to Terry Thorn, Enron’s Senior Vice President, Government Affairs and Public Policy. As a rule of thumb, the memo stated, the cost of electricity from new wind capacity was double that from gas-fired generation and triple the cost of spot electricity (surplus power available for immediate purchase). Wind was not economic even if natural gas was assigned a carbon tax, as recommended by environmental groups and Robert Kelly himself.22
“Wind has raised a number of environmental concerns, led by the ‘avian mortality’ problem that has led the National Audubon Society to call for a moratorium on new projects in bird sensitive areas,” the memo added. “The Sierra Club has also been very mixed toward wind power.” (In fact, during a dispute over a Zond project, Sierra’s Los Angeles director coined a term that would be used against an Enron wind project a few years later: “Cuisinarts of the air.”)
“It cannot be emphasized enough how both economically and environmentally, natural gas has changed the renewable equation.” This writer’s memo concluded:
Fuel oil, coal, and nuclear are no longer relevant to the debate over renewables. Common sense dictates that renewables have no future in the U.S. without massive government subsidy, and renewable energy is a controversial investment internationally where natural gas is present, even accounting for environmental externalities.
This memo was written too late and at the wrong company. The Big Thought was that a diversified renewable-energy play could grow and be spun off (monetized) with an initial public offering, even with some biomass and hydro added. And, in fact, Robert Kelly had heady thoughts about just this.
Ken Lay was eager to go where the energy majors, including his old company Exxon, did not go. A lucrative tax credit for every sold kWh of wind-generated electricity could lower the parent’s taxes now that EOG’s tight-sands credit was running its course. And so-called green energy could help differentiate Enron from the traditional utility sellers to be a power retailer of choice to a mass market, producing the revenue and margins to achieve Enron 2000.
Robert Kelly’s vision of Enron as the global renewables leader included pushing public policy at the highest national and international levels. In late 1996, with the purchase of a major wind power company forthcoming, Kelly unveiled a master business plan to restructure China’s energy economy with a 25 percent shift away from planned coal generation by 2005 (10 years) and 50 percent by 2015. Half of the substitution would come from natural gas, with the other half from renewables: 25 percent hydro, 15 percent wind, and 10 percent solar.
Kelly’s self-described “aggressive but feasible action plan” would be “available and competitively priced for the Chinese consumer” to “not dampen Chinese growth aspirations.” His presentation noted “barriers to implementation of the gas/renewable strategy,” including the absence of long-term financing mechanisms and a “lack of understanding about the costs, benefits, and efficiency of renewable energy alternatives,” as well as integrating renewables into the electricity grid.
Turning to public policy, Kelly proposed a “China Greenhouse Gas Marshall Plan” whereby the US government would loan or guarantee 75 percent of the capital costs of the conversion, estimated at $9 billion per year for 20 years, a total of $180 billion. The remaining 25 percent would come from Enron and other private sponsors. Such United States–to–developing-country projects, called Joint Implementation, was a negotiating item for the upcoming international climate negotiations in Kyoto, Japan.
Purchasing Zond Corporation
“Enron Forms Enron Renewable Energy Corp.; Acquires Zond Corporation, Leading Developer of Wind Energy Power.” The January 6, 1997, news release announced that Robert Kelly would head the new Enron Renewable Energy Corp. and join Enron’s 25-member management committee. Zond’s then-CEO Kenneth Karas and Richard Barsky, CEO and chairman of Amoco/Enron Solar, would report to Kelly, who would be CEO and chairman of EREC. (In EREC’s solar division, at this time, the big hope was still the Rajasthan State project, while Crete lay six months in the future.)
“Renewable energy will capture a significant share of the world energy market over the next 20 years, and Enron intends to be a world leader in this very important market,” Ken Lay stated. The big news was Enron’s purchase of Zond Corporation of Tehachapi, California. “We believe wind energy is one of the most competitive renewable energy resources, and we believe this acquisition clearly positions Enron as a leader in this business,” Lay added.
The release described 15-year-old Zond as “developing, building, and operating wind power stations,” with its Z-class turbines being “among the world’s most competitively priced” and “capable of producing electricity at competitive prices.” With 2,400 sited turbines rated at 260 megawatts, Zond’s 1995 output of 600 million kWh earned a federal tax credit approaching $10 million. Unused tax credits, or so-called carry-forwards, were valued in Enron’s purchase price of $80 million: $60 million in cash and the rest in debt.
“Enron Corp. is looking for EREC to provide a significant contribution towards Enron’s growth over the next 5 years,” Robert Kelly stated in a memo to the unit’s employees. “During this period, we have an opportunity to emerge from the pack as the world leader in renewable energy and to lead the transition towards a sustainable energy future.” After describing the organization and responsibilities, Kelly hinted at more ventures. “Other renewable energy interests pursued by EREC will include activities jointly coordinated with Enron Capital and Trade (“ECT”) and Enron International (“EI”) in hydroelectric power and the sale, through ECT’s power marketing activities, of green power, or electricity produced from sources which do not directly generate CO2, SOX, NOX, or other air pollutants.” (No such joint ventures would materialize.)
“This action by Enron underscores the enormous worldwide potential for wind energy,” stated Randall Swisher, head of AWEA, adding: “Clearly, Enron sees renewable energy as a necessary component of their operations—a component that will give them a competitive advantage in tomorrow’s electricity market where consumers will be able to choose their power suppliers.”
“We believe that utility restructuring holds tremendous promise for companies with ‘green’ energy sources, like renewables,” stated Norm Terreri of Green Mountain Power Company, “because environmentally-conscious customers will prefer to buy their power from a clean source.” Terreri mentioned opinion-polling research from New Hampshire where households were choosing their electricity provider in a pilot program led by Enron, discussed in chapter 15.
An Enron Business feature was nothing but bullish. A projected 50 percent increase in energy demand in the next 20 years “will put considerable pressure on conventional fuel supplies, like oil, coal, and natural gas,” Robert Kelly opined. “That’s why we believe that renewable energy sources, such as wind (and solar), will capture a significant share of the global energy market over the next quarter century and certainly a large portion by the year 2000.”
Declines in cost, with more to come, were prominently cited. Compared to 13 cents per kWh in 1985, Zond’s new technology (the Z-46 turbine) could generate power at 4.5 cents—and 3 cents with tax credits, Ken Karas stated.23 This estimate was below the common range of between 5 and 7 cents per kWh. But grid parity with fossil-fuel-fired electricity could not be claimed given wind’s intermittency, only that wind power was becoming “more competitive.” In fact, Ken Lay gave a higher estimate at a Harvard University–sponsored conference the next year: “Wind energy today can be produced in the right location without any tax credits for 5–5.5 cents per kWh, attractive compared to coal-fired plants but not to IGCC generation, which has a cost of about 3 cents.” (IGCC, or integrated gasification combined cycle, processes coal into a gas to fuel a combustion turbine to run a generator.) Cost aside, wind as an intermittent resource was unattractive when compared to power generated from coal, oil, gas, and nuclear—the dispatchable energies.
Electric industry restructuring—allowing Enron to sell electricity to households—presented an upside for wind, Kelly noted. Market studies purportedly showed that consumers would pay a premium for “green power,” a niche that EREC was exploring with Enron Energy Services, the new electricity retailer. Global-warming concerns and energy independence made the quest a social cause, the article explained, given the absence of a social cost assigned by regulators to fossil-fuel’s emissions.
Zond had a backlog of projects well beyond California that Enron would continue. Purchase-power agreements had been signed with Minnesota’s Northern States Power (100 MW) and Iowa’s MidAmerican Energy Company (112.5 MW). (Both projects were part of state legislative mandates requiring these utilities to buy wind in return for storing part of their nuclear waste.) A 5 MW Zond project in Vermont for Green Mountain Power was nearly complete.
In Crete, where Amoco/Enron Solar’s proposal would become stuck, two wind projects totaling 15 MW were under way. Planned projects or turbine orders in Zond’s book of business were reported for Ireland, Wales, China, and Korea, with active negotiations from Texas to Spain.
“We brought Zond back from the brink,” recalled Robert Kelly. Zond was running low on cash and unable to monetize its huge tax credits. “We were hanging by a thread,” Zond’s James Dehlsen remembered. “It was a really grim story.”
The domestic wind industry was in even worse shape. Kenetech Windpower, experiencing technical difficulties with its turbines, among other problems, had entered bankruptcy in June 1996, six months prior to Enron’s January 1997 purchase of Zond.24 A lack of competitiveness versus conventional sources was the reason, although wind advocates emphasized another culprit. “Managing a growing company in the renewable energy business [is] far more difficult than it should be,” complained AWEA, which blamed “our government’s inconsistent policies and its overwhelming emphasis on short-term fixes to problems at the expense of long-term policies.”
Figure 13.2 Enron turned to wind power, a more economical (but still problematic) form of renewable energy than solar farms. The purchase of Zond Energy Systems to begin 1997 had Ken Karas (pictured) reporting to Robert Kelly of Enron Renewable Energy Corp.
The company to be renamed Enron Wind Corporation would struggle to help Enron’s bottom line in its first years. Lessons were learned about new technology on the fly. Kenetech’s blade failures were avoided. Zond had done the proper testing and worked with a world-leading turbine manufacturer, Vestas, to address life-cycle blade integrity. The extra work paid off. Enron Wind, which the parent put up for sale in 1998, would fetch top dollar when it was sold to GE in 2002, the year after Enron’s bankruptcy. By that time, Thomas White was heading EREC, Robert Kelly having exited Enron in mid-1997 for medical reasons with a nice severance agreement to give him time to, among other things, write a book about the alleged CO2 threat.25
Zond entered Enron folklore for another reason. Under federal regulation, Enron’s purchase of Portland General Electric made it a public utility. And public utilities could not be a “qualifying facility” for PURPA’s avoided-cost pricing, which would strip three Zond wind farms of their lucrative sales rates.
The first response was to seek outside buyers for Zond Windsystems, Victory Garden, and Sky River. But Andrew Fastow, senior vice president of finance, offered another plan akin to what he had recently done with Cactus, a special-purpose entity (SPE) for volumetric production payments.26
Under accounting rules, SPEs allowed Enron to control but not own assets, if at least 3 percent of equity was external and at-risk. Thus, a special-purpose entity with a minimum of outside involvement could own Zond and receive the bureaucratic designation “qualifying facility,” so long as the FERC agreed (which it did). Fastow and his lieutenant Michael Kopper set up two SPEs, called RADR, to buy 50 percent of Enron’s wind farms for approximately $17 million, 97 percent of which was an Enron loan with the balance coming from Fastow, his wife Lea (an heiress and Enron employee), and a few others, collectively called the Alpine investors.
Enron’s internal audit concluded that this arrangement headed by an Enron employee did not meet the independence test under the SEC’s rule. In response, Fastow and Kopper surreptitiously arranged to provide money to nonemployees and have them supposedly put up the external 3 percent. “With a little money laundering,” concluded one writer, “Fastow had pulled off the very deal that the accountants had said couldn’t be done—at least not legally.”
This off-book partnership was reported but not forthrightly explained to, much less scrutinized by, Enron’s vaunted board of directors. In fact, as Fastow would later testify, Jeff Skilling himself knew nothing of the deception. Neither did Fastow and his co-conspirators declare their high earnings for personal income-tax purposes.
EREC’s Zond had unwittingly inspired Fastow’s most pronounced move from philosophic fraud toward prosecutable fraud—and had become the opening act in a series of Fastow machinations that would be instrumental in bringing down Enron four years later.
Fastow must have felt confident about his subterfuge. Perhaps, as one learned interpreter posited, the government (in the form of FERC) was not schooled or really interested in arcane financial rules, only in ensuring that the PURPA-qualifying technologies were being used. Had Enron not fallen, little critical thought would have been trained on the sins of Zond’s SPE ownership.
A Try at Fuel Cells
Bruce Stram earned his spurs working on a gas-supply model for Enron’s Outlook for Natural Gas, first published in 1989, which accurately upped the existing forecasts of future supply. He worked on Ken Lay’s early pipeline acquisitions, as well as evaluating HNG’s oil and gas exploration and production subsidiary that indicated areas of concern that would culminate with the hiring of Forrest Hoglund in 1987. Now, at the request of Robert Kelly (then of Enron Emerging Technologies), Stram was to investigate fuel cells based on natural gas.
Although not a renewable resource, natural gas fuel cells generated continuous direct current via a quiet plant with no moving parts, only a chemical conversion. The battery-like designs could be sited almost anywhere, even providing “power from the basement.” Potentially, heat created in the fuel cell’s secondary processes could be recovered for either water or space heating.
This technology was not new. The underlying principle—combining hydrogen and oxygen to create electric current and water—had been proven in 1839, and the modern version was developed at Cambridge University in the mid-twentieth century. Fuel cells were first used in space vehicles, with Pratt & Whitney producing the modules for NASA. “Early fuel cells built for the space program cost from $100,000 to $400,000 per kilowatt; those used in military applications cost about $30,000.”
By the early 1970s, nearly 50 companies, mostly in the United States, had invested north of $50 million (several hundred million in today’s dollars) to commercialize the technology. Major firms were involved, including Exxon, Arco, and Westinghouse.
Fuel cells became popular discourse as part of the environmentalist dream of a postcarbon energy future. In this scenario, renewables would create hydrogen (via electrolysis of water) for the home or business or industry. Distributed generation would supplant the power grid.
“In the United States,” Christopher Flavin reported in 1996, “the race is on.” The leader was ONSI Corporation, a United Technologies unit that had just completed the world’s first fuel-cell manufacturing facility to produce dozens of units annually at half the cost of earlier models. (Pratt & Whitney was a division of United Technologies.) Allied Signal, IBM, Dow Chemical, and Ballard Power Systems were also in the fuel-cell market, leading Flavin to predict that “a commercial takeoff for fuel cells is likely within the next decade.”
United Technologies inspired confidence regarding reliability and warranty work. But it was selling a new technology, not electricity. Enter Enron: In 1995, Bruce Stram, running Enron Emerging Technologies within Enron Capital & Trade Resources (ECT), changed the equation to offer set-price, long-term electricity, with Enron-ONSI installing and servicing the equipment at no capital cost to the buyer. Enron would supply the natural gas that produced hydrogen in the outsourcing, as well as market and finance the deals.
ECT offered customers 20-year fixed power at around $0.08/kWh from the 10-foot high by 10-foot-wide by 18-foot-long cells. But minimum-purchase requirements made this premium-priced baseload power compared to what industrials could buy from their utility, even in a high-rate state such as California. Enron marketed the fuel as backup power, which would allow the user to switch from continuous flow for normal use to fuel cells for critical use, for example, in case of a blackout. Diesel backup, little used, had start-up risks for the user. Power from fuel cells, on the other hand, was continuous and reached full power within seconds of start.
An Enron Business cover story was bullish—and more. As with rooftop solar, Enron envisioned a niche market ready to explode via better technology and scale economies. “We’re on the leading edge of a huge growth market,” Stram believed, with as much as 50 percent of the power-generation market available for competitively priced distributed generation.
Enron was marketing ONSI’s PC25C, a third-generation technology that had 60 purchases to its credit since 1992. In what was seen as an “entrée to a large national account,” Enron was in advanced negotiation to place two units supplying 400 kilowatts to a California Health Maintenance Organization, the article reported.
But a decline in cost was necessary to truly commercialize electrochemical energy, estimated by Enron to be around $0.06/kWh. (The average US retail rate for industrial power was less than $0.05/kWh and falling.) But ONSI was not willing to take the technology risk to guarantee a decline in cost that would make even the $0.08/kWh doable.
Enron’s five-member team was not able to bring any deals to fruition. The partnership with ONSI was dissolved, and EET disbanded in early 1996. Stram’s idea to sell a service rather than a fuel or a technology, however, would soon reappear in Enron Energy Services’s total energy outsourcing concept.
There was an undisclosed emission issue with fuel cells, too. Although fuel cells produce virtually no nitrogen oxides (NOX) or sulfur dioxide (SO2), the use of natural gas to produce hydrogen yielded carbon monoxide (CO) and carbon dioxide (CO2).
“In fact, if CO2 becomes a regulated ‘pollutant,’ as environmentalists are demanding,” one expert noted, “a 40% efficient fuel cell would look less appealing than a 55% efficient combined-cycle plant.” Recapturing heat from the creation of CO2 could raise the fuel cell’s efficiency level, but that was a promise that Enron never put to a market test.
Enron’s exit did not prove premature. “Fuel cells continue to face major challenges,” summarized Daniel Yergin in 2011. “The fuel cells themselves—the device that converts hydrogen or another chemical feedstock into electricity—are expensive and will require substantial investment and breakthroughs for commercialization.” As it was back in the 1970s, cost-effective chemical conversion competed against the improving efficiency of gas-fired combined cycle.
Figure 13.3 Enron’s fuel-cell marketing began with high expectations and ended with no executed contracts, as ONSI Corp. was unable to install the units at a cost that allowed Enron to sell long-term electricity. Bruce Stram (left) led the 2/-year effort, assisted by marketing director Malcolm Jacobson (right).
Enron Environmental Services
In 1996, Enron created a profit center within Enron Capital & Trade Resources, Enron Environmental Services, to offer fully integrated environmental services to electric utilities seeking to minimize costs or maximize profits under regulatory constraints. (In Enron’s words: “monetize Clean Air Act and electricity deregulation opportunities.”) EES’s mission statement read: “Optimizing environmental compliance through innovative technology, fuels, power, risk management, and finance.” The next year, Enron Environmental Services was renamed Clean Energy Solutions Group (CES) to avoid confusion with the new EES, Enron Energy Services.
Under Chris Holmes, CES’s staff of 13 stood ready to quantify and certify emissions reductions; offer insurance protection for international deal making (under Joint Implementation guidelines); place forward, put, call, and spot transactions with any traded emission; and finance projects. Emissions trading for SO2 and NOX (as well as the potential regulation of CO2, whereby firms could receive credit for preregulation reductions), presented opportunities for a national market maker such as Enron, which had been in this business since 1993.27
With solar projects and wind facilities, Enron envisioned itself with a bank of emission credits to back a trading operation and to help utilities run their plants under emissions caps. Enron would also bring to the table its propriety technology, such as that from its $30 million, 15 percent investment in an emission-reduction technology for gas turbines.28
Figure 13.4 A schematic presented to electric utilities and others explained the range and interaction of services offered by Enron Environmental Services (later renamed Clean Energy Solutions). Growing regulatory complexity suggested a role for a specialized aggregator and outsourcer, but Enron was not able to execute outsourcing arrangements.
Central to Enron’s new service was a prospective regulatory program for developed countries to plan and subsidize the greenhouse-gas reductions in developing countries: Joint Implementation (JI). The United Nations Framework Convention on Climate Change, created in 1992, proposed a JI pilot program through the year 2000 at the first Conference of the Parties in 1995. Enron, lobbying for what would become the Kyoto Protocol of 1997, saw synergies for its business units from the program.
“The endorsement of joint implementation within Annex-1 is exactly what I have been lobbying for and it seems like we won,” wrote Enron lobbyist John Palmisano in late 1997 from Kyoto, Japan. “A ‘clean development fund’ is included [to] … allow for emission offsets from projects in developing countries.” With JI for “Annex-1, developed countries and the transitional economies,” he continued, “Enron projects in Russia, Bulgaria, Romania or other eastern countries can be monetized, in part, by capturing carbon reductions for sale back in the US or other Western countries.”
Clean Energy Solutions, one of seven profit centers tied to the global-warming issue (in the specific form of priced and rationed CO2 emissions) never got off the ground. On one level, CO2 regulation was slow in coming at home. And facing certain if not unanimous defeat, the Kyoto Protocol would never be submitted to the Senate for ratification.
As important, or even more important, utilities maximized their profits by keeping their environmental activities inside the company, where expenses could be passed through and pollution-control investment could create rate base for profit making. And why do business with Enron? The vitriolic electric-restructuring debate, described in chapter 15, put Enron on the utilities’ black list. The environmental-outsourcing initiative of Chris Holmes would disband in 1998.
President’s Council on Sustainable Development
Ken Lay coveted a second term for George H. W. Bush, who might ask Enron’s chairman to join the administration as chief of staff, Secretary of State, or Secretary of Treasury. (Lesser plums, such as heading the Department of Energy or the Department of Commerce, were not of interest to Lay.) With a cache of ENE stock in excess of $20 million, and Rich Kinder poised to become CEO, Lay could leave on top.
At age 50, with his unique combination of smarts, people skills, and credentials, in addition to his storybook past, a new political chapter might lead to bigger things, even consideration for a Republican presidential ticket. But it was not to be. Ross Perot’s third-party candidacy, plus some Bush stumbles, gave the election to Bill Clinton and Al Gore with 43 percent of the popular vote.
Enron was hardly deflated by the change of administration. Terry Thorn positioned Enron well during the campaign by being all things to Democrats. Natural gas was in favor across the aisle, and, as Enron’s newsletter explained, “there probably will be a great deal of attention devoted to global warming and a stronger push for limitations or reductions in CO2 emissions.” In fact, the new vice president’s environmental manifesto, Earth in the Balance, published just the year before, declared that the world must search “for substitutes for coal and oil.” Natural gas would be a bridge fuel to that new energy future.29
“With the Clinton Administration,” the INGAA Foundation wrote, “the natural gas industry has its best opportunity in years to promote its fuel and stimulate gas consumption to breach 1972 levels.” It had been a long 20 years, and now a Democrat would help get them there. In fact, 1972’s gas consumption of 22.1 Tcf, which had fallen 25 percent to 16.2 Tcf by 1986, had fully rebounded by 1995.
The 1992 Rio Summit had produced a 180-nation voluntary pact to pursue “sustainable development,” which the UN-sponsored World Commission on Environment and Development (meeting from 1984 to 1987) had defined as development that satisfies the needs of the present generation without compromising the ability of future generations to do likewise. Environmentalists had wanted more from Rio in terms of targets and mandates, but this was as much as President Bush would do. The United States was a laggard to some, but it had been a close call to get Bush involved at all, as Ken Lay knew.
Agenda 21, a broad blueprint, also known as the Rio accords, became the responsibility of the 53-nation, UN-sanctioned Commission on Sustainable Development. At its first meeting in June 1993, Al Gore, promising “real leadership” from the US side, announced the creation of the President’s Council on Sustainable Development (PCSD), a 25-member commission of government officials, friendly industrialists, environmental activists, and civil rights groups.30
Free-market groups active on energy and environmental issues, such as the Competitive Enterprise Institute (CEI), were not invited. PCSD was another front to get beyond Bush policy in the wake of Rio, joining Clinton’s recently declared goal for the United States to reduce its greenhouse-gas emissions to 1990 levels by the year 2000, a pledge his predecessor would not make.
Established by executive order, PCSD was chartered to “develop and recommend to the President a national sustainable development action strategy that will foster economic vitality.” Purely advisory, the intent was to reach consensus on contentious issues and conduct “a public awareness and participation campaign” to further the new paradigm.
“It may not be a sustainable resource,” one gas industry publication reported, “but natural gas nonetheless has been given a prominent voice on the [Council] established last week by President Clinton to advise him on economic and environmental policy.” Ken Lay was one of the selected, along with the CEOs of two California-based energy companies: Chevron and Pacific Gas and Electric (PG&E).31
“America can set an example” for sustainability, Clinton said in a Rose Garden speech announcing PCSD, flanked by Lay and the other members. Al Gore challenged the group to “look long, be creative, and think big.” From the private side, optimism abounded. “If we are to solve some of these environmental problems and do it in ways that are economically efficient,” Ken Lay stated, “there has to be an increased dialogue between the private sector, environmentalists, and the government.” Best of all, he noted, PCSD was empowered by Clinton “to come up with meaningful policy.”
It was supposed to be a grand consensus, a collaboration, between environmentalists and industry. But there were no members who might define sustainable development differently, such as dialing back climate alarmism in favor of energy affordability and reliability, and looking to private ownership to better employ publically owned resources—a wealth-is-health approach.32 As it was, PCSD’s principles of sustainability and social justice were joined by a third: economic growth—insisted upon by the business side, and Chevron and Enron in particular.
“To achieve our vision of sustainable development, some things must grow—jobs, productivity, wages, capital and savings, profits, information, knowledge, and education—but others—pollution, waste, and poverty—must not,” began the “We Believe” foreword of the final report, released in February 1996. “Economic growth based on technological innovation, improved efficiency, and expanding global markets,” it added, “is essential for progress toward greater prosperity, equity, and environmental quality.” But economic growth had to have the proper linkage with the other two ends. “A growing economy and healthy environment are essential to national and global security,” read another principal point.
This (minimal) business-side victory was joined by calls for “reducing disparities in education, opportunity, and environmental risk” pursuant to PCSD’s three pillars of “economic growth, environmental health, and social justice.”
Despite Enron’s efforts, natural gas was not differentiated as a means for CO2 emission reduction. (“If the risks of global warming are judged to be too great,” the report stated, “then nothing less than a drastic reduction in the burning of coal, oil, and natural gas would be necessary.”) Mandatory or tax-directed electricity conservation(ism), a major push, came at the expense of natural gas too, an internal Enron memorandum by this author pointed out.
Existing government subsidies for coal and nuclear were not specifically targeted for elimination. “Reading the final report,” the present writer wrote to Terry Thorn, “I can only conclude that our energy input fell victim to the lowest common denominator, while the rest of the document was written by the environmental left.”
Sustainable America: A New Consensus, the glossy final product published in February 1996, was portrayed by the mainstream media as a collaborative breakthrough between government, environmentalists, and industry. “After a year in which industry and environmental groups have been at war over Republican-led efforts to roll back Federal environmental regulation,” the New York Times reported, “a Presidential panel with adversaries from both sides has reached a rare consensus that while the existing system can be improved, it must not be weakened.” The report, “destined to serve as the environmental platform for Mr. Clinton’s reelection campaign,” was depicted as a rebuke against Republican-aligned business.
To be sure, the final report contained such buzzwords and phrases as “decentralized decision-making,” “regulatory flexibility,” “best available science,” “market pricing,” “market-based regulatory framework,” “new market-based approaches,” and “the use of market mechanisms.” Homage was paid to “a free society,” “unlimited human capacity,” “technological progress,” and “entrepreneurship, innovation, and small business.” “Competitive advantage,” “efficiency,” and the “polluter pays principle” were other locutions in the high-sounding report.
But the document assumed rather than analyzed what was good and bad. Environmental ends were given; the science was settled; neo-Malthusianism was a fact; consumption trends and business-as-usual were therefore not sustainable. Carbon dioxide was viewed as bad, despite its well-known positive benefits for ecosystems and plant life. Market failure was seen as pervasive, but the other side of the coin, government failure, went unremarked.
The uncritical use of the precautionary principle, which sees stasis as safety in situations of scientific uncertainty, ignored the costs of inaction. Cost-benefit analysis was hardly mentioned in the report, and the historical correlation of wealth and health was ignored.
Market pricing, as used in the report, meant adding a government-determined social cost to the market price. The institutions behind true sustainability—private-property rights and contracts enforced by the rule of law—went unrecognized. To CEI head Fred Smith, Sustainable America was “a thinly veiled excuse for extensive government intervention into the market.”
Chapter 6 of the report, “Population and Sustainability,” harkened back to the limits to growth, the old I = P·A·T equation of Paul Ehrlich and John Holdren, which maintained that negative environmental Impact was positively correlated to Population, Affluence, and Technology. “In an agricultural or technological society,” Ehrlich and Holdren had written, “each human individual has a negative impact on his environment.” PCSD’s final report, consequently, mentioned the “overarching issue of consumption” and “changes in lifestyles.”
The PCSD-friendly New York Times cited no sincere opponents who might dare to disagree. Quite the opposite. Disagreement was declared unpatriotic and un-American. “The environment is something that brings us together as a nation,” the Times quoted Kathleen McGinty as saying. “It is a deplorable idea to use it to polarize the nation.”
The report attempted to reposition the United States to engage and even lead on international climate-change activism—and just in time. The second conference of parties from the 1992 Rio Framework Convention on Climate Change was coming up in December 1997, in Kyoto, Japan.
After the final report, and with PCSD extended for a second term, news surfaced about a working group focused on the “deeply political” subject of fiscal issues, and none greater than pricing carbon dioxide through a tax or a cap-and-trade program. President Clinton’s Btu tax proposal had gone off the rails just two years before,33 and Democratic seats were lost in the 1994 midterm elections, explaining why Sustainable America left out specifics when advocating fiscal and subsidy reform, including revenue-neutral tax reform.
One member from the private side, Ken Lay, particularly wanted to regulate and/or tax CO2. The result was the WRI [World Resources Institute]/Enron Working Group on a Fiscal Policy and Subsidy Commission. Teaming with Enterprise for the Environment, chaired by former EPA administrator William Ruckelshaus, the group explored what criteria a new commission could use to recommend concrete policy. It suggested eliminating subsidies and shifting taxes to promote sustainable development. “Environmental taxes” and (auctioned) “tradable emissions permits” were identified as key. “The [Working] Group feels further that a bipartisan, multi-stakeholder forum is a useful mechanism to further the discussion of ideas that are difficult to discuss in other more partisan settings.”34
In December 1996, a major PCSD meeting, in which Al Gore made a guest presentation, shared the efforts of the Working Group. While commending the effort, the Clinton administration, not wanting to inflame Congress and put Democrats on the defensive with an unpopular issue (new taxes), declined to establish a new commission.
Enron, meanwhile, was ready to disengage. Without cover from the Clinton administration, Enron feared that any sponsorship of CO2 pricing could jeopardize the lobbying message for the corporation’s number-one priority: restructuring the electricity market to allow it to enter at the retail level.
“We need to think hard about whether Enron continues to front an effort that does not have as much political cover as we would like or whether we work—just as hard—behind the scenes,” a memo to Ken Lay from this writer stated. “The last thing we want is for [the Edison Electric Institute, representing investor-owned utilities] to accuse Enron of wanting to reduce electric prices through open-access and raise them with a carbon abatement program—all to make trading dollars.” (In fact, CO2 trading was in Enron’s sights to join electricity trading.) A calculation followed in the memo: “A $20/ton or $30/ton carbon cost would probably undo the gains of [electricity] restructuring rate-wise (the rule of thumb is 1 cent/kWh for every $10/ton CO2 cost).”
“You’re raising all the right issues,” Lay wrote back to Bradley. “Although we want to be helpful, we probably should try not to be too public.”
As it turned out, a post-WRI/Enron task force within PCSD, the Climate Task Force (not joined by Enron) came out in late 1998 for a “voluntary … incentive-based early action program” to reduce greenhouse-gas emissions that “encourages broad-based participation, learning, innovation, flexibility, and experimentation; grants formal credit for legitimate and verifiable measures to protect the climate; ensures accountability; is compatible with other climate protection strategies and environmental goals; and includes local, state, and federal government leadership.” Al Gore stated in a PCSD press release: “I am pleased that this broad coalition of business, government and environmental leaders is calling for … common-sense action to protect our environment and our economy from the effects of global warming.”
The PCSD was extended in 1996 for a second three-year term. Ken Lay resigned by letter on March 5, 1997, although his name was kept on the membership list. At that point, it was not worth insisting upon formalities. Enron as a company continued as a member, unlike PG&E, Chevron, Georgia Pacific, and others from the corporate side. PCSD continued with outreach and educational effort until its expiration in June 1999, six years after its creation.
What had been wrought? Although PCSD held no enforcement powers or grant-making ability, it was part of the Clinton administration’s pushback against a Republican Congress. The collaborative effort elevated US support for climate action in the international community. It was an educational opportunity for neo-Malthusianism pushing against a Julian Simon view of the world.35 For Enron, it was another step down the political road to promote natural gas, solar power, and wind power at the expense of oil and coal. For Ken Lay, it meant he was now a Friend of Bill.36
Conclusion
“As the energy revolution gains momentum, some of the largest gas and oil companies are beginning to support it,” commented Lester Brown and Jennifer Mitchell of the Worldwatch Institute. “Enron, originally a large Texas-based natural gas company,” in particular, “has made a strong move in the renewables field with its acquisition of Zond, the largest wind power company in the United States, and its investment in Solarex, the second largest U. S. manufacturer of photovoltaic cells.”
Enron was the favorite energy company of many environmentalists who otherwise disdained fossil-fuel enterprises. Even so, Enron was in the crosshairs of environmental regulation and the US Environmental Protection Agency for its day-to-day pipeline activity. “Existing environmental regulations are sufficiently extreme to the point of nearly paralyzing the natural gas industry,” complained one Enron environmental officer to Terry Thorn, “especially with respect to the construction of new facilities, additions and improvements to existing facilities, and operations in general.”
But Enron could not do much to change that, and rival pipelines had the same problem. So, as long as FERC’s public-utility regulation blessed environmental costs for ratepayer passthrough or allowed environmental infrastructure to be added to the rate base, Enron’s profits were unaffected or even enhanced.
Enron’s initiatives were not only about rent-seeking but also about favor-trading. With Enron’s purchase of Portland General Electric hanging in the political balance (see chapter 15), Ralph Cavanagh of the Natural Resources Defense Council (NRDC) brokered a deal whereby environmentalists got projects funded by Enron (“a robust assortment of public benefits for the citizens of Oregon”) in exchange for supporting the merger.
Cavanagh’s testimony before the Oregon Public Utility Commission included a story about Enron’s help in blocking the 104th Congress’s attempt to undo some of the Clinton administration’s environmental laws. “We appealed for help from the corporate community,” he recalled, only to meet conspicuous silence. But not so with the “extraordinarily honorable—and initially lonely” Ken Lay, whose activism was “part of the reason why the bad guys ultimately failed at most of what they attempted.”
“Can you trust Enron?” NRDC’s energy expert asked rhetorically. “On stewardship issues and public benefit issues I’ve dealt with this company for a decade, often in the most contentious circumstances, and the answer is, yes.”
Undoubtedly, not all of Enron’s ventures in renewables were based on Bootleggers-and-Baptists cynicism. There was a bit of smarter-than-thou intellectual arrogance too. Robert Kelly saw the world’s energy eras going from coal to oil to natural gas—and then, in the twenty-first century, to renewables. In his pronouncements, he even questioned, if not reversed, Bruce Stram’s Enron Outlook for plentiful natural gas in the decades ahead.
History tells another story, however politically incorrect. The energy world had gone from renewables (before the industrial age) to a carbon-based energy era, with an expanding, changing mix of coal, oil, and natural gas. New technology and scale economics were making solar and wind power more economical, but the fossil fuels were improving too, in extraction, combustion, and steps between. The basic facts remained: Wind and solar were dilute, intermittent energies—and adding battery storage for reliability was prohibitively expensive.
Enron hardly profited from its solar and wind investments on an operating basis.37 But lucrative sales of both units made for successful endings, and Enron got a green card to become the most politically correct energy major in the United States. Taxpayers and captive ratepayers were the ones to thank for Enron’s years in renewable energy.
Enron’s grand hopes that economies of scale and economies of scope would make viable so-called clean fuels—vehicular compressed natural gas, solar power, wind power, and fuel cells—greatly exceeded the eventual reality. (Enron’s bet on MTBE for reformulated gasoline fell short too.) Although politically opportune, each of the four ventures was economically incorrect. There was simply too much cost and sacrificed quality in circumventing petroleum as a transportation fuel and in eliminating fossil fuels for electrical generation. And Enron’s suite of environmental services anchored by a national and global CO2 control program was, at best, ahead of its time.
Playing the environmental game for competitive advantage was a natural for Ken Lay’s pliable means and ends, his contra-capitalism. Bootlegger Enron was enabled by Baptist environmentalists, who went beyond cleaner air and cleaner water to an agenda-driven, anti-industrial initiative (climate change in particular). Politicians, some reluctant and others committed, welcomed a new frontier of activism to give alternative energies a foothold. These beginnings would define energy policy for decades to come.