Monthly Archives: May 2016

Energy Future – 5/31/16

The U.S. Energy Information Administration recently released its International Energy Outlook 2016 (IEO2016) meant to project major changes in energy consumption. For the world’s energy future, the report predicts that world energy consumption will grow by 48% between 2012 and 2040 with non-OECD Asia, including China and India, accounting for more than half of the world’s total increase in energy consumption.

Renewables and nuclear power are forecast to be the fastest-growing energy sources at averages of 2.6% and 2.3% per year respectively through 2040. Natural gas is expected to be the fastest-growing fossil fuel with global consumption increasing by 1.9% per year thanks to supplies of tight gas and shale gas made more accessible by the fracking boom in the U.S.

The report cites concerns about energy security, pollution, climate change, and future high oil prices as reasons for the expanded use of renewable and nuclear power. Another reason they could have included is the falling cost of actual hardware involved in solar and wind power generation as costs have plummeted leading to massive shifts in capital towards renewables.

Screenshot 2016-06-01 at 12.25.21 PM

Or the rise of Tesla as both a purveyor of electric vehicles and relatively cheap energy storage options, both disruptive technologies. In fact, the liquid fossil fuel share of world marketed energy consumption is projected to fall from 33% in 2012 to 30% in 2040 even with the EIA conservatively ignoring new technologies. The EIA likely wanted to avoid addressing the elephant in the room that is electric vehicles. Electric cars will inevitably eat into revenues for oil companies given that a large majority of crude goes to the transportation sector.

rise of electric cars

The world’s slowest-growing energy source is coal. One of the dirtiest and most easily replaced fuels, coal consumption is expected to grow by only 0.6% per year through 2040. China currently consumes almost half of the world’s coal production, but a slowing economy, a shift to a consumer spending economy, air pollution, and commitments to reduce CO2 emissions are listed as reasons why Chinese coal demand will eventually decline.

The IEO2016 was based largely on analysis done before the release of the Clean Power Plan (CPP) which is expected to significant reduce U.S. coal consumption and increases in U.S. renewable consumption compared with the Reference case projection. More information how the CPP could affect U.S. energy consumption can be found in the EIA’s analysis of the preliminary CPP rule.

World energy consumption

Compared to its outlook for the U.S.:

EIA energy projections

Renewables and Coal, Japan and Poland – 5/30/16

Poland and Japan: Two very different countries and with very different approaches to coal and renewable energy.

Environmental groups urged the Japanese government to announce a shift away from fossil-fuel financing ahead of the G-7 meeting to no avail.

“As the President of the G7, Japan has an obligation to be a leader, not a laggard on climate,” the environmentalists said in a petition. “First, Japan must stop subsidizing fossil fuels overseas. On the home front, it is time for Japan to reject the fossil fuel and nuclear technologies of last century and instead embrace a clean and sustainable energy future.”

Japan’s energy policy is under close scrutiny from environmentalists because of its reliance on and support for coal. The country has plans for 49 new coal-fired power projects even as some developed countries are shifting away from coal to reduce emissions and health risks. While resource-poor Japan has been trying to diversify its energy sources, the country’s leadership have held fast to the idea that coal would make up 26% of the nation’s power output in 2030 due to the closure of Japan’s nuclear capacity following the Fukushima disaster.

Yet, Japan’s program to encourage more clean sources of energy is starting to show some promising results, with the latest government data showing that the nation produced 45% more electricity from renewables like solar and wind for the fiscal year ending in March compared with a year earlier. Clean energy output, excluding hydro power, increased to 39.2 TW-hours in the 12 months ended March 31, according to data released by the Ministry of Economy, Trade and Industry. Solar outpaced other renewable sources, increasing 61 % to 31.3 TW-hours while wind rose 7% to 5.4 TW-hours. The Fukushima nuclear plant produced 29.3 TW-hours in 2010 before the disaster, according to the International Atomic Energy Agency.

Japan derived 4.7% of its electricity from renewables last fiscal year when hydro isn’t included, according to the Federation of Electric Power Companies of Japan. The government aims bring that number up to 14% by 2030.

In contrast, Poland’s controversial parliament approved a bill that introduces extra requirements for building wind parks as it aims to curb its booming wind industry that is hastening the demise of its loss-making coal industry.

The bill, put forward by the governing Law & Justice party, forces new turbines to be located further away from homes and would halt some new projects after a record expansion of wind energy last year. Poland, Europe’s top coal producer, notched up the continent’s second-highest number of wind-power installations last year with 1.26 GW of new capacity installed. The country now has 5.6 GW of installed wind capacity.

“We want to eliminate the import of used, outdated turbines from western countries,” Deputy Energy Minister Andrzej Piotrowski said in parliament on May 18.

The amended law, which now will be discussed in the Senate and has to be signed into law by the president, included a proposal envisaging potential jail terms for using wind farms without permission that was eventually scrapped.

The country’s six-month old cabinet says that Poland, which generates some 85% of its electricity from coal, has been too quick to support wind generation over its coal power plants. Prime Minister Beata Szydlo, a miner’s daughter from southern Poland, pledged to keep the country of 38 million dependent on coal for decades to come.

The ruling party surprised the industry in December when it suspended the introduction of a new law regulating subsidies for renewable energy. The government also plans to rework an earlier plan to introduce renewable energy auctions in an attempt to reduce support for wind and solar power.

The regulatory uncertainty “is spooking investors and banks,” according to Giles Dickson, chief executive officer of the European Wind Power Association, a lobby group. Investors eager to secure debt funding for wind investments at Polish banks are charged from 9% to 10%, compared with 4% in neighboring Germany, he said on May 18.

Green Energy News From Abroad – 5/27/16

In green energy news from abroad, a report warning about stranded asset risks associated with Japanese investment in coal and Norway’s sovereign wealth fund on track to divest heavily from coal-related holdings.

In Japan, utilities and other companies are pushing ahead with new investments in coal-power plants in spite of the risk of creating $57 billion of stranded assets amid shifts in energy policy and the economics of power generation, according to a study by Oxford University’s Smith School of Enterprise and the Environment.

The study claims that the amount of coal-fired generating capacity planned or under construction in Japan exceeds the capacity required to replace the nation’s retiring fleet by 191%.

“This may result in overcapacity and, combined with competition from other forms of generation capacity with lower marginal costs, lead to significant asset stranding of coal generation assets,” the authors said in the report titled Stranded Assets and Thermal Coal in Japan.

To put into context how odd Japan’s reliance on coal is, we can look at planned capacity additions for the United States.

Screenshot 2016-03-06 at 10.58.06 AM

For the U.S., no significant coal capacity is planned for 2016. Instead, solar, natural gas, and wind are scheduled to make up the bulk of new generating capacity additions.

Unlike most developed nations, Japan has continued to rely on coal power in the wake of the 2011 Fukushima nuclear disaster while pushing the development of “clean coal” and carbon capture technologies.

“Stranded coal assets would affect utility returns for investors; impair the ability of utilities to service outstanding debt obligations; and create stranded assets that have to be absorbed by taxpayers and ratepayers,” the authors said in the report.

In Scandinavia, Norway’s sovereign wealth fund may soon step up divestments of coal companies and other fossil fuels.

A majority of parties in Norway’s parliament are pushing for new guidelines that would prevent the fund from owning companies deriving than 30% revenues from thermal coal, according to a group lawmakers including opposition Labor, Norway’s biggest party.

The world’s biggest wealth fund, worth over $800 billion, has excluded more than 50 companies since February thanks to a ban agreed upon in 2015. It plans to announce more divestments later this year.

coal stocks falling

The fund is one of the biggest investors to restrict coal-related holdings amid escalating international efforts to limit global warming.

Torstein Tvedt Solberg, who represents Labor on the Finance Committee, said they’re satisfied also with the financial implications of the ban on coal.

“We’ve made money by not being so heavily invested in coal,” he said. “As opposed to tobacco, our divestment from coal is a success when you look at the bottom line. The companies we’ve exited have plunged in stock value.”

Green Energy News in the U.S. – 5/26/16

In green energy news, the American Wind Energy Association (AWEA) WINDPOWER 2016 tradeshow, Casino giants switching to clean power, and Silicon Valley energy activism.

A key theme at the AWEA-sponsored tradeshow was the transition of people, companies, and products from oil and gas into the wind industry.

The downturn in oil prices prompted many to move from one energy industry to another since the stability of the wind industry contrasts sharply with the “boom and bust” nature of oil markets. With the Production Tax Credit (PTC) for wind power extended through 2021, wind companies need only to keep bringing down costs at current rates to ensure steady growth into 2030. It also doesn’t hurt that some states, like Texas, have rapidly growing wind energy sectors within spitting distance of large oil and gas regions.

by state

Meanwhile, Casino giants MGM Resorts International and Wynn Resorts Ltd. are moving forward with plans to stop buying electricity from the NV Energy utility in Nevada, according to filings with the Nevada Public Utilities Commission.

“It is our objective to reduce MGM’s environmental impact by decreasing the use of energy and aggressively pursuing renewable energy sources,” MGM Executive Vice President John McManus said in a letter included in the filing to state regulators.

Last year, three of Las Vegas’s largest casino operators including MGM, Las Vegas Sands Corp. and Wynn Las Vegas won approval from state regulators to stop buying power from NV Energy if they paid combined exit fees of almost $127 million.

The loss of electricity-hungry customers leaving the utility is damaging for the Nevada utility which has also been involved in a multi-year fight with rooftop solar developers over policies that allow homeowners who put panels on their roofs to sell power back to the grid.

And finally, Facebook Inc. and Microsoft Corp. are joining forces with environmental groups to promote the development of 60 GW of renewable energy by 2025.

The Renewable Energy Buyers Alliance, as they are calling themselves, was formed to break barriers to carbon emission reduction presented by utilities and regulators, the companies said on a conference call. Large energy consumers such as Facebook and Microsoft are able to buy power directly from renewable energy developers through power purchase agreements, but smaller firms can struggle to find similar agreements. Facebook, Microsoft and more than 60 companies hope to make it easier to access clean energy contracts.

For its own operations, Facebook wants to get half of its electricity from renewable sources by 2018 and eventually meet all of its needs from carbon-free sources, said Bill Weihl, company director of sustainability.

“Access to clean energy is one aspect we look for when we site data centers,” Weihl said. “We’re working together with utilities and regulators to design new products so we can all buy more clean energy.”

Green-minded Investor Activists – 5/25/16

Oil firms are finding it harder to ignore environmental activists nowadays, especially when they represent trillion dollar pension funds.

Recently, ExxonMobil and Chevron came under pressure from the California state pension fund to assess climate-change policy risks to their business plans. ExxonMobil has argued that cutting back on fossil fuels runs counter to economic growth while claiming that technology and carbon taxes are enough to negate the environmental impact of its operations. But shareholders have more than a few reasons to distrust and resent the managers giving those excuses. Many see the constant drive of companies to expand their oil reserves and tap new resources as wasteful spending. After all, in a world where affordable electric cars are coming out in less than five years, buying up new reserves looks more like a corporate governance failure benefiting the managers who want a bigger company rather than a good investment for shareholders who would prefer the safety of dividends.

Institutional investors in the U.K. successfully prodded Royal Dutch Shell and BP into revealing how stringent climate-change policies would affect their projects. In America, however, weaker shareholder rights make it harder to challenge boards. Managers will not be able to ignore those shareholders for long, even if investor activism is relatively weak in America. If times ahead are going to be as tough for oil and gas as expected, then they little sympathy from the people they ignored.

In a growing trend, large shareholders are seeking the right to nominate board members and install “climate-competent” boards at major companies like ExxonMobil. Though managers continue to reject such measures, trends in public opinion are not in their favor. American’s are as worried about climate change as they were before the 2008 financial crisis, an eight year high.

US worry

Yet even when firms are forced to disclose risks, the results are often unsatisfying if not purposely misleading. When Shell issued a report on its assessment of climate-change risks, shareholders found that the report was full of barely relevant pictures and revealed little about how climate policies would alter future plans for developing oil- and gas-fields. At best, the report is appeasement and, at worst, a distraction from the very real threats to the long-term value of the company.

The same day the report was published, Shell announced that it was creating a “New Energies” business to invest in green technologies.

Still, Shell insists that hydrocarbons will still account for at least 75% of the world’s energy for decades to come and, inexplicably, the report shows oil demand rising significantly between 2030 and 2060. That could have made sense in the context of rising demand from emerging markets, but 70% of crude oil consumption goes to transportation and Bloomberg expects hundreds of millions of electric vehicles will be on the road by 2040. Yet, Shell’s reports seem to come from a fantasy world where threats from technological change don’t exist.

rise of electric cars

Total SA is one of the few companies that has provided satisfactory plans to develop an energy mix consistent with Paris-style global-warming limits, including a pledge to invest $500m a year in renewables and to increase them from 3% to 20% of its portfolio by 2035. The company acquired SunPower, an American solar-energy company, in 2011, and launched an offer this month to acquire Saft, a battery company.

Wind and Solar on the East Coast – 5/24/16

Renewable energy is growing in popularity thanks to falling costs and increasing concern over the effects of climate change. As a result, legislators on the East Coast are tackling the issues of how to develop and integrate new sources of power while balancing the interests of constituents, utilities, and developers.

In New York, legislators had an easy pass on what has been a contentious issue in other states after utilities and solar companies worked together to shape net metering policy. The two industries often come into conflict over how owners of rooftop PV panel are compensated for the excess electricity they send back to the grid because of starkly opposing goals: Utilities want to avoid revenue losses from customers installing solar systems and solar companies want the incentive of lower electricity bills to help sell their product. The incompatibility of their interests has led to legislative battles in many states, which makes this show of cooperation all the more surprising.

Under the alternative to the existing net metering policy, utilities would pay less than the retail rate for solar energy, while the solar developers involved would get long-term certainty on compensation. The existing policy would stay in place until 2020 before falling periodically with solar systems guaranteed the payment rate in place at the time of installation for at least 15 years. Certainty with regard to rates is no small benefit since, in December, SolarCity left Nevada after legislators sided with utilities and payments to panel owners were cut.

Meanwhile, the offshore wind industry in the U.S. may see a boom on the Atlantic coast thanks to an energy bill requiring utilities to purchase power from offshore wind farms. The bill is expected to reach the floor of the Massachusetts legislature sometime this year, but there will plenty of debate as to how much power utilities would be forced to buy under the bill. A mandate would be the first of its kind in the U.S. and would give developers the security needed to finance large-scale farms. Of course, the issue of the state’s Republican governor, who has opposed offshore wind in the past, remains.

Offshore boom

Offshore wind energy has boomed in Europe and Asia; however, it has had less success in the U.S. where cheap natural gas and cheap land for traditional wind and solar farms make offshore wind less attractive. Despite falling costs, offshore wind energy remains one of the most expensive sources of electricity. Massachusetts is one of the few places in the U.S. with the right combination of high electricity prices, high ocean wind speeds, and densely packed populations that could make offshore wind viable.

With numerous oil, coal and nuclear power plants to close over the next four years, Massachusetts Governor Charlie Baker (R) has pushed for increased hydro electricity use over wind. The governor previously opposed the Cape Wind project, which is now stalled off of the coast of Cape Cod, as an uneconomical eyesore. The governor’s energy secretary said during a speech in March that any decision would depend on cost projections for Massachusetts offshore wind projects.

A recent study by the University of Delaware, concluded that building costs may decline as much as 55% by 2030, allowing developers to offer rates competitive with market prices if their projects are large enough for economies of scale to take effect. And, for their part, new developers plan to build further away from the coast to ensure the wind farms won’t be visible from land. Still, it’s anyone’s guess how the bill will fare in the end.

Obama Pushes Forward With Emission Rules – 5/23/16

In its latest attempt to meet environmental policy goals, the Obama administration has set forth limits on methane emissions from oil and gas wells. The emission rules would, in theory, reduce methane emissions by 40% to 45% from 2012 levels by 2025. The EPA estimates that the cost of the rules will come to $530 million in additional upgrades and “green completion” technology per year by 2025 with a net $160 million gain in value from avoided costs related to healthcare, pollution, and climate change.

Naturally, the oil and gas industry is unhappy with the changes. The regulation comes at a time when energy companies are already cutting back on investment in fossil fuel-related activities. Companies in opposition to new rules critique them by citing work already done to cut methane emissions, the way added burdens would exacerbate damage done by low oil and gas prices to jobs, and the disproportionate impact the rules would have on small, independent producers.

Oil-and-gas producers do have some financial incentive capture methane and cap leaks since the gas itself is worth something, but the new rules come at a painful time: Oil hovers around $50 a barrel and natural gas fairs about the same. With a shift away from heavy industry in China, renewable energy reaching competitive cost levels, fuel efficiency standards rising, and the prospect of affordable electric cars, many companies are already facing existential crises without help from the government.

The significance of the methane rules pale in comparison to the carbon dioxide rules in the Clean Power Plan (CPP). EIA’s Annual Energy Outlook 2016 (AEO2016) shows that trends in carbon dioxide (CO2) emissions from electricity generation through 2040 depend significantly on whether or not the CPP rules are ultimately enforced. The EIA provides two AEO2016 cases: a Reference case assuming implementation of EPA’s final CPP rule and a No CPP case assuming it never comes into effect as shown below.

Co2 and clean power plan

In the Reference case, power-sector emissions are projected to be 28% lower in 2022 than in 2005 with a further falls to 35% lower overtime. Under the plan, the power sector’s share of total energy-related CO2 emissions would fall to 31% from 36% by 2030, accomplished via switching to natural gas and renewables like solar and wind, as well as increased efficiency.

Significant coal retirements are expected regardless of the CPP’s fate due to pressure from other environmental regulations and low-priced natural gas.

Clean power effects

The Reference case also assumes remaining coal power plants are used less intensively resulting in a decline of 34% from 2015 to 2040 in coal consumption by the electric power sector.

US coal production w clean power

Natural Gas Extraction – 5/20/16

The United States was the world’s top producer of petroleum and natural gas hydrocarbons in 2015, producing far more new output than comparable producers Russia and Saudi Arabia, according to U.S. Energy Information Administration estimates. The agency attributed the rise in U.S. production to the fracking of tight oil and shale gas formations.

US gas and oil production

In the EIA’s May Short-Term Energy Outlook (STEO), U.S. petroleum and other liquid fuels production is expected to decline by 500,000 barrels per day (b/d) in 2015 to about 14.5 million b/d through 2016 and 2017 due to low prices. Russia and Saudi Arabia are expected to maintain current levels of production.

Hydraulic fracturing a.k.a. fracking has fueled the rise of American hydrocarbon output and even as low prices devastate drillers the technique is set to make the U.S. a major natural gas producer for the foreseeable future. The EIA estimates that hydraulically fractured wells now provide over 60% of total U.S. marketed gas production. This share of production is even greater than the share of crude oil produced using the method as it accounts about 50% of current U.S. crude oil production. Most natural gas from fracked wells comes from onshore tight rock formations though it is also possible to use in more conventional drilling operations.

marketed natural gas

nat gas from fracking

The shale drilling industry will recover more efficient than ever when the oil-price collapse ends.

Surviving companies are finding ways to get more with less. Average well drilling and completion costs have fallen nearly 30% across all major U.S. shale plays from 2012 levels, while time needed to frack a well has been cut by half and then some. Richer, more diversified companies are even benefiting from the downturn as they see an opportunity to snap up distressed assets in preparation for the inevitable price rebound. As mergers and acquisitions sweep through, shale drilling is likely to come out a more mature and stable industry.

“If we make the right calls in 2016, it’s going to define the next decade,” said Torgrim Reitan, Statoil’s Houston-based executive vice president for U.S. operations. Mr. Reitan said expects that even with higher prices, growth will remain subdued as the industry has learned to do more with fewer rigs and workers. “We will not go back to the activity levels we used to have,” he said.

Natural Gas Use – 5/19/16

The mix of energy sources used in U.S. electricity generation has changed dramatically over the past few years as natural gas use has risen significantly at coal’s expense. Last year, the average capacity factor of natural gas combined-cycle plants exceeded that of coal steam plants for the first time. The capacity factor of the U.S. natural gas combined-cycle fleet averaged 56% in 2015, compared with 55% for coal steam power plants. A capacity factor close to 100% would mean near continuous operation at maximum output.

The capacity factor of the U.S. natural gas combined-cycle fleet has risen from an average of 35% to more than 56% in the last decade. In comparison, the percentage of coal plants running at capacity factors above 70% fell from 50% in 2005 to less than 20% in 2015.

gas beats coal

Natural gas-fired power generation increased 19% in 2015, and the U.S. EIA’s May 2016 Short-Term Energy Outlook forecasts that natural gas-fired generation will surpass coal generation for the year.

Many of the natural gas capacity additions are concentrated around the Marcellus and Utica shale regions, located mainly in Pennsylvania, West Virginia, and Ohio, which have been leading the growth in U.S. natural gas use and production for several years. New natural gas infrastructure additions in two regions now allow transport of natural gas to major population centers along the Atlantic Coast.

Significant levels of natural gas-fired capacity are also under construction in Texas, the largest gas producer, as well as Florida. Although Florida has no shale gas production instate, the retirement of numerous coal power plants has necessitated the building of regional pipeline networks to bring more shale gas to serve gas-fired generation.

nat gas additions

Growth in natural gas-fired generation capacity is expected to continue over the next several years, as 18.7 gigawatts (GW) of new capacity comes online between 2016 and 2018.

Low natural gas prices rooted in a mismatch between weak Asian demand and surging supplies from the U.S. and Australia are expected to keep usage high. The global gas glut may take years to clear since, over the next five years, Australia and the U.S. will add more than 120 million metric tons of annual capacity in natural gas, or an addition equivalent to more than a third of current total capacity. Many energy companies are counting on anti-pollution efforts to boost natural gas use, hoping that it will find greater demand in power generation and as an alternative fuel for shipping vehicles.

OPEC Inaction Analysis – Politics and Misc – 5/18/16

The reasons behind the Saudi Arabia keeping OPEC policy aimed at minimal market interference are not all economic. Recently removed oil minister, Mr. al-Naimi set a policy of seperation between politics and oil. Such a policy deeply conflicts with the vision of Crown Prince Mohammed bin Salman, now seen as the power behind the Saudi throne. The Prince appears much more open to using oil policy as a tool in conflicts with regional rival Iran as he reportedly made a last minute call to Saudi officials in Doha that ultimately scuttled the expected freeze agreement. His demand that any agreement on a production freeze include a similar commitment from Iran, which it openly opposed from the outset as it is trying to recover from recently lifted sanctions, illustrates his confrontational nature when it comes to the rival nation and willingness to use oil policy for political ends. Such actions only increase internal discord and inaction by OPEC as a whole.

Saudi Arabia and Iran’s adversarial relationship in the marketplace and in regional proxy battles contributes greatly to OPEC inaction. The two largest producers of the group, neither feels obligated to comply with obviously self-serving demands of the other, so Iran is likely to continue its drive to increase oil exports. The newly released IEA Oil Market Report  (OMR), showed a 300,000 barrel a day jump in Iranian oil output in April, while Saudi output remains steady near 10.2 mb/d. The two countries compete for market share in Europe and Asia, and both are in need of cash to fund their competition for influence over neighboring regions in the Middle East.

Still, the global oil surplus in the first half of this year will probably be smaller than previously estimated because of robust demand in India and other emerging nations, according to the IEA. Although a rebound to prices above $50 a barrel is unlikely since stockpiles are full to bursting with crude oil and refined products, the global supply surplus of oil is expected to fall substantially by the end of the year. The report also had OPEC reaching its highest output since 2008 as Iran increased production.

An end to the glut would validate the OPEC/Saudi Arabia policy of letting market forces re-balance world markets, a move pushed by the Saudi Crown Prince who pressed his country’s oil ministry to back out of a freeze deal at Doha and who publicly plans for his country to move beyond oil.

OPEC itself has kept forecasts for global oil supply and demand unchanged before members meet to review the market. Oil prices are up 75% from February lows as U.S. shale driller bankruptcies have increased, making it unlikely that the group will change tactics. OPEC members have announced no plans ahead of the June 2 meeting so the group is likely to continue with its strategy of inaction.

“We shouldn’t expect any freeze and definitely not any cut because OPEC sees things are improving from a fundamental point of view,” said Torbjoern Kjus, an analyst at DNB ASA in Oslo. “The structural decline based on lower investment is starting to show up in numbers for non-OPEC. That damage is done, even if prices recover in the second half.”

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