Monthly Archives: August 2016

Self-Driving Taxis – 8/31/16

Self-driving taxis are starting to hit the roads in America and abroad as Uber and others try to move first on the new technology.

Uber is set to begin testing a fleet of 100 self-driving taxis in Pittsburgh, a city of busy streets, bridges, and snowfall. Real customers will hail the taxis with smartphones as the ride-sharing company plans to perfect the technology and cut labor costs. Many companies are working on their own autonomous vehicle programs, but Uber’s push is particularly aggressive, even with two trained safety drivers on each ride. The project is sure to draw attention and give customers a chance to become familiar with the new technology while also exposing any flaws to public scrutiny.

Proponents of self-driving vehicle use say that human error causes a vast majority of traffic deaths; however, regulators will need more data to be sure that the technology is the solution. So far Google’s fleet of 50 cars has already logged over 1 million miles without a fatal accident, according to the company, but it will take more than 100 million miles in real-world conditions and plenty of debate before U.S. regulators can start making significant moves. Still, the technology already has a strong lobbying effort on its side.

The U.S. is not the only place where autonomous vehicles are in development. In Singapore, self-driving taxis are already picking up passengers as the startup nuTonomy sought to beat Uber to the chase though at only six cars to Uber’s 100.

For now, the taxis are only running in a 2.5-square-mile business and residential district called “one-north,” and pick-ups and drop-offs are limited to specified locations. The cars, like Uber’s, have a trained driver as well as a researcher to monitor the car’s computers. Singapore also makes for a less intense testing environment due to its good weather, infrastructure, drivers, and supportive government.

With testing reaching into cities, self-driving taxis are near ready for commercial use so all that’s left is to see how customers react.

China’s Power Plant Problem – 8/30/16

New coal power plant construction is exacerbating China’s power oversupply problem.

Even as China’s heads of state call for cuts in the nation’s bloated industrial sector, local officials are reluctant to follow through for fear of social unrest and loss of tax revenue. Beijing projects the need to layoff 1.8 million coal and steel sectors workers, but relies on regional and local officials to actually follow though on cuts.

Combined with the slow reforms and the ease of accessing cheap financing, the low price of coal has encouraged building of plants. China has already banned approvals for new coal-fired power projects in oversupplied regions, but many projects are still in progress thanks to the relative cheapness of their fuel. Many fear the plants will become stranded assets given plans to move towards a consumer spending and reigning pollution.

Without the industrial sector’s demand for electricity set to decline, the continued growth of China’s power capacity seems like a mismanagement of capital, favoring short-term stability over the long-term.

China Power excess

And the return on investment for all power plants will fall as more plants come online. Utilization rates at power plants are falling as they go idle for longer and struggle to make back the costs of construction. Officials have claimed that new plants are needed to replace older, less efficient ones. But those excuses are falling flat as capacity growth outpaces decommissioning of older units.

There are several ways that the party could end. Rising coal prices could kill the trend since low prices are the only thing keeping many projects profitable. Alternatively, competition from other power sources or a follow through on reform in power supply agreements could pressure coal developers into pulling out. Cleaner power sources are getting more and more preferential treatment as the Beijing seeks to meet environmental commitments making it likely that  coal plants will be forced to go offline to make room on the grid for various nuclear, hydro, and natural gas projects.

China energy mix

Shale Gas News and Future Expectations – 8/29/16

In the U.S. Energy Information Administration’s International Energy Outlook 2016 (IEO2016) and Annual Energy Outlook 2016 (AEO2016), shale gas is expected to account for 30% of world natural gas production by 2040.

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Natural gas production from shale gas plays accounted for 50% of total U.S. natural gas production in 2015 and it is expected to increase all the way through 2040, according to the EIA, before accounting for 70% of total U.S. natural gas production by 2040.

Shale gas is expected to continuing growing as a percentage of world natural gas production as well.

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Shale gas production is projected to account for almost 30% of Canada’s total natural gas production by 2040, more than 40% of China’s, almost 75% of Argentina’s, 33% of Algeria’s, and more than 75% of Mexico’s.

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Politics may prompt faster adoption of natural gas as a replacement for coal.

In the EU, the European parliament is already taking steps to enable faster carbon reductions in Europe’s emissions market. A environment committee panel is scheduled to vote on Dec. 8 on a package of legislation that could, among other things such as restructuring overlapping policies and allowances, mean a cut in emission permits. Should such a cut occur, natural gas is the cheapest “clean” alternative to the coal that currently powers much of Europe as it gives off roughly half the emissions per unit of power produced.

Meanwhile, the stance the U.S. government takes on carbon emissions and, by extension, coal.

The two presidential candidates have energy policies on opposite ends of the spectrum of climate change argument. On one hand, the Democratic nominee would continue the Obama administration’s current policies including the Clean Power Plan that would have the EPA limit carbon emissions from power plants. On the other hand, the Republican nominee would attempt to end those policies. The latter scenario would certainly be less harsh for coal companies. That said, natural gas usage would certainly increase under both, just much more so under the Democrat than the Republican.

Coal’s Hazy Future – 8/26/16

Coal’s future in the Western world is looking bleak, though the fossil fuel is going down fighting. To give some idea of what I mean, I summarize coal’s precarious situation in Germany, Poland, and the United States below.

Germany has been one of the most ardent supporters of climate change action, but even it still has trouble cutting CO2 emissions via policy. After backlash from labor unions and governments in coal regions, Berlin was forced to abandon a levy on the nations most carbon-intensive power generators and replace it with a subsidy of 1.6 billion euros to gradually eliminate eight coal-fired power plants by 2023. The environment minister was also forced to postpone establishing a coal phaseout plan until after national elections in 2017.

Resistance to levy illustrates the difficulty of reducing fossil fuel use when many workers and pensioners, local economies and communities still rely on them to pay the bills. The levy would have all but smothered the already low burning coal industry in Germany, so it unsurprising that it would face fierce resistance. It appears that it is only unions standing between the coal industry and further declines.

A more extreme example of coal finding political support is Poland. The Polish Law and Justice Party, after promising to preserve the country’s more than 100,000 coal mining jobs, is subsidizing coal as heavily as Germany once subsidized solar power.

Yet, even as the influential coal unions push the political party to deny permits for wind farms and prevent job cuts, it is clear that market forces are overwhelming their attempts to revitalize coal. Bloomberg data shows that profits in the Polish coal industry have fallen with the price of coal and, regardless of union strength, no industry losing money for years in a row can avoid job cuts forever.

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For now, the Polish Law and Justice Party is banking on a return to higher coal prices, but between international commitments to reduce emissions, the rise of American shale gas, falling renewable energy costs, and reduced demand from China, maybe they shouldn’t hold their breath.

American coal companies have already seen their value drop precipitously since the shale gas boom began forcing Peabody Energy, the world’s largest private-sector coal company, and others into bankruptcy.

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And unlike German and Polish coal miners who can use their powerful unions to fight off political threats, U.S. miners have next to no real political power. A weak voice on Capitol Hill has left U.S. coal susceptible not only to market forces like competition from natural gas, but also to increased regulatory burdens like the Clean Power Plan. Coal regions have been hit particularly hard in recent years; they’ve seen the loss of tens of thousands of jobs in the U.S. over the last decade alone.

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Future job cuts also seem unavoidable.

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The speed of coal’s decline illustrated in the EIA data shows that coal has lost and will continue to lose market share to natural gas regardless of who controls the White House and Congress.

Tight Oil Choking Out Its Competition – 8/25/16

World tight oil production is expected to more than double between 2015 and 2040, increasing from 4.98 million barrels per day (b/d) in 2015 to 10.36 million b/d in 2040, according to the U.S. Energy Information Administration’s International Energy Outlook 2016 (IEO2016) and Annual Energy Outlook 2016 (AEO2016).

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The EIA projects that most of the projected increase will come from United States production, which currently stands at about 4.1 million b/d or roughly 80% of total world output of tight oil. Canada, Russia, and Argentina are also expected to see large gains in their tight oil output as they adopt hydraulic fracturing techniques and other technologies to improve drilling efficiency.

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Production from tight oil in 2015 was 52% of total U.S. crude oil production and that share is expected to rise as oil prices recover to the point where shale drillers return to their rigs.

American energy companies have so far shown resilience to low prices beyond what most analysts expected. After cutting costs to the point of turning a profit at $50 a barrel, many shale companies are already preparing for a return to their fields even at the risk of putting a ceiling on oil prices that would stymie investment in other forms of oil extraction. Existing, conventionally-drilled wells can still make a profit at price levels far below the break-even points for shale oil wells for as long as they last, but offshore drilling and other oil megaprojects will struggle to survive a $50 a barrel price ceiling created by tight oil.

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Oil Markets Update – 8/24/16

A quick oil markets update.

Crude oil prices are holding around $45 per barrel.

According to the IEA Oil Market Report (OMR) for August, global oil demand growth is expected to slow from 1.4 mb/d in 2016 to 1.2 mb/d in 2017.

OPEC crude oil output is at an eight-year high on increased production from Saudi Arabia and Iraq. The group of oil producing countries has again suggested that it is open to freezing output at current levels; however, the collapse of previous talks due to conflict between Iran and Saudi Arabia is keeping expectations low.

With stockpiles still high and Chinese demand still flagging, it seems as though more supply distributions are the only way markets are going to see balance anytime soon.

Thus far everything from strikes to wildfires to militant activity have forced significant amounts of output offline so it is hard to say what will happen next. Venezuela seems the best bet for the next big production decline. Since the nation is failing to pay debts as its embattled president cracks down on dissidents instead of making economic reforms, many companies that provided critical support functions are withdrawing their operations.

Still, so long as the stronger shale drillers stand ready to drill when prices rebound, it may take a while for the $60 a barrel break companies are waiting for. Reflecting market pessimism, the 10 large publicly listed oil producers have already cut planned investments for this year by 40% compared with their plans two years ago, according to analyst consensus on FactSet. The cuts mean less new output in the years to come and possible trouble for oil markets in the long-run.

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The Problem with Our Power Grids – 8/23/16

Scotland recently experienced a day of gusts so strong the winds met all of the needs of its power grids for the day.

Yet, the unusual weather highlights the variable nature of wind power and the difficulties it can cause for power grid operators. The IEA in its Next Generation Wind and Solar Power gives some idea of the technical problems that will only grow as the share of electricity provided by wind and solar grows and integration becomes a critical issue.

Wind and solar power use is set to expand rapidly over the next 25 years, according to Bloomberg New Energy Finance (BNEF).

solar to dominate

Falling costs of hardware, concern over emissions of greenhouse gases, and a desire for energy security have all but assured the rise of the variable power sources; however, they are not without problems. Higher costs of backup power plants, the disruption of communities with economies tied to conventional fuels, and the need for an upgrade to an outdated, inflexible grid infrastructure all come to mind.

Power grids will need to take on an unprecedented level of flexibility to deal with an influx of renewable energy capacity. That flexibility will have to come from a variety of technological and operational innovations such as renewable energy forecasting, careful scheduling, enhanced electricity storage options, and a more robust, farther reaching transmission infrastructure.

As the grid stands today, it simply isn’t ready.

Forecasting and scheduling are better than ever with advances in computing, but batteries are still relatively expensive and the grid is woefully outdated. With 70% of high-voltage transmission lines and power transformers over 25 years old and the majority of our grid was built more than 30 years ago. The grid is too poorly equipped to manage the steadily increasing demand from electric cars, let alone a substantial rise in intermittent supply.

Adding to the confusion is distributed generation. Though it would seem that making and using power on site would eliminate the problem of infrastructure, unless the user is completely independent from the grid – unlikely for most unless energy storage options improve significantly – power companies will have to understand the needs of a new breed of consumer. A home with solar panels would still need some infrastructure and a back up power supply. Also, the decreased system load would only benefit the power companies so long as the lost revenue outweighs the cost of upgrading the grid to handle excess demand.

Mankind’s appetite for electricity is only growing so these problems are best addressed sooner rather than later.

Social Costs and Carbon – 8/22/16

The issue of social costs versus private costs comes up often in economics. When measuring the costs and benefits of policies, economists do not just total up expenses and revenues of all affected firms to get an idea of how a policy would affect the economy because they recognize that in the best interest for businesses may not be best for society as a whole.

For example, free trade introduces competition that can cost domestic firms business while bringing the benefits of greater specialization of labor and lower prices for consumers. There are always costs and benefits to any action, but part of the government’s purpose is to curb the worst excesses of markets to see that certain “bad” outcomes don’t arise. Anti-dumping tariffs keep cheap Chinese steel from drowning out domestic suppliers, watchdog agencies keep an eye out for fraud.

If trade is tricky, then climate change is trickier. Though public opinion is moving towards a broad acceptance that climate change exists, there is still a lot of conflict over the issue. Pumping toxic sludge into a river has obvious social costs as that kind of pollution kills off downstream activities that require clean water. On the other hand, pumping CO2 into the air is not so noticeable nor so obviously disruptive in the U.S. that most people are willing to reduce usage of the relatively cheap fossil fuels that keep the economy humming along sans some sort of government intervention. And that intervention may soon become a reality.

A federal appeals court in Chicago recently approved a regulatory practice that would help account for projected costs of climate change following a White House issued guidance to Federal agencies. The regulation would have every level of government adding a new line to their balance sheets to consider the social cost of carbon when making decisions. Soon government agencies may decide that current fossil fuel prices do not reflect social costs which would prompt actions such as the increased taxes on fuels or restrictions on pollution for power plants.

The Obama administration has estimated the cost of carbon emissions to be about $36 a ton in 2015. Companies involved in the debate have generally accepted that there is an unspoken social cost greater than $0 that governments consult when drafting climate policy. Even so, the change in accounting comes as hard-fought and will likely continue to make its way through the courts on the urging of critics who know that once the cost gets an explicit line on balance sheets, it will be much harder to take it off.

A Changing U.S. Energy Mix – 8/19/16

The U.S. energy mix is changing.

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A decline in coal use exceeded the combined increases in natural gas, petroleum, and renewables use from 2014 to 2015 reflecting a long-term decline in usage of the fuel.

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Natural gas consumption increased most out of all sources on record domestic production levels that have kept natural gas prices low. The existence of a cheap substitute like natural gas has precipitated the fall in coal usage in the electric power sector, the primary consumer of coal. In 2015, demand for coal in the power sector reached its lowest level since 1987

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A vast majority of the gains in natural gas production come from shale gas and tight oil plays from deposits unlocked by hydraulic fracturing (fracking).

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The EIA estimates that natural gas production from shale and tight oil will increase steadily at the expense of traditional sources for decades to come.

Both wind and solar generation expanded significantly, growing by 31% and 5%, respectively, in 2015.

Wind additions were focused primarily in the Great Plains region with Texas installing a majority of new capacity. Solar additions were concentrated in California and North Carolina though only California saw a relatively significant increase in distributed solar capacity.

by state

Coal’s Future: Play Defense, Promote Carbon Capture – 8/18/16

For the coal industry, survival would be victory enough at this point and they seem to be looking to the tobacco industry as a guide.

Though it seems an odd comparison, parallels between the two faltering industries were made a year ago at an annual meeting of the Rocky Mountain Coal Mining Institute, an industry group representing coal interests in Western states, in a slideshow entitled “Survival Is Victory.” The slides did not accept climate change as fact, but stated that public opinion was such that it no longer mattered. The recommendation ultimately made in the slides was to prepare for more stringent regulation, while promoting research into reducing the carbon footprint of coal power plants.

In an interview, the developer of the presentation, said it simply recognized “political reality” and that the message was well received, though the two industries are “completely different,” he added. “At the end of the day, energy is something that we, as a society, require. Tobacco is not.”

But there are plenty of substitutes for coal as source of energy as a string of bankruptcy filings by coal companies can attest.

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The hopes of the industry now seem to lay with developing carbon capture technology cheap enough to bring coal in line with regulations without decimating its cost competitiveness relative to natural gas or renewables.

So far clean-coal has had a rocky start. The Texas Clean Energy Project that was meant to demonstrate the viability of the clean-coal concept is under pressure from the Department of Energy as it has failed to secure financing. Developers have bought time using an informal dispute resolution process, but the plant is running low on options as government support wanes amid criticisms of carbon capture technology’s commercial viability. Other projects such as Southern Co.’s Kemper coal plant in Mississippi and NRG Energy Inc.’s addition of carbon capture to a Houston coal plant are also facing scrutiny as the recent energy glut drove profitability into the dirt.

Still, carbon capture technology has a lot to offer and both Republican and Democratic lawmakers can agree, albeit for different reasons, that funding CO2 sequestration projects is worthwhile.

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