Monthly Archives: October 2016

Saudi Arabia and the OPEC Deal – 10/17/16

To make production cuts work, Saudi Arabia was always going to need to pick up the slack from its “partners” in and out of OPEC. The real question is how much of a burden is Saudi Arabia willing to take on for the sake of the deal.

It is possible for Saudi officials to reach the 32.5 million to 33 million-barrel range they agreed to with the rest of OPEC using only the usual seasonal reductions, but only in the unlikely event that other countries don’t increase output. Add to the equation surprisingly tenacious and quick-to-recover U.S. shale drillers and the deal could get very raw very quickly for the Saudis.

With OPEC pumping just over 33.5 million barrels a day in August, reducing volumes to the upper end of the range set in Algiers would involve a reduction of 500,000 barrels. But if Nigeria and Libya both meet expected additions to their output, they could add a million barrels a day. Making up for that cut could be a bigger sacrifice than Saudi Arabia is prepared to make, especially given its reluctance to give up market share and its own economic struggles.

Low oil prices have devastated the world’s largest oil exporter. Austerity measures aimed at reducing a budget deficit of 16% of GDP in 2015 are already hurting consumption as the government had raised the prices of fuel and utilities. Such reforms will have long-term benefits, but in the near term will be undoubtedly unpopular and difficult to implement.

Saudi officials are also considering canceling more than $20 billion of oil projects to reduce capital spending. If capital spending this year is cut by 71% as expected, then the economy which has long relied on oil projects to drive non-oil economic activity will slow if not contract. Growth will likely slow to 0.6 percent this year from 3.4 percent in 2015, according to HSBC Holdings Plc.

So far, Saudi Arabia has said it will make the deal work, but it remains to be seen how dedicated the nation will be if others aren’t playing along.

Iran and the OPEC Deal – 10/14/16

In oil news, few events stir up more volatility than OPEC deal talks so the next few articles will be taking a look at the effects of such talks on some major stakeholders in the oil industry. This series will start with Iran.

Iran has essentially won an exemption from the production controls most other countries agreed to at the recent OPEC meeting. The nation will continue to increase its oil output after successfully arguing that it should be allowed to return production to levels achieved before US-led sanctions devastated its energy industry.

Although OPEC agreed on a new overall range for production and will set up a committee to decide on output quotas for individual members, the probability of a cap on Iran’s production is insignificant for a reason. Iranian officials have repeatedly said they will up production to regain the nation’s pre-sanctions share of the market. Relative to other OPEC members, Iran has little to lose by boosting production and undermining the price support. If anything, Iran welcomes the opportunity to win back some market share.

Iranian officials are seeking to increase output to about 4 million barrels of crude a day. Iran produced 3.62 million barrels a day in August, according to data compiled by Bloomberg.

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Yet, the country’s withered energy infrastructure and investment base will make the official goal difficult to reach. Without a larger influx of foreign capital and technology, something that could take years to happen in earnest, Iran is not recover this year.

Iran has begun the process of attracting foreign investors. National Iranian Oil Co. agreed to the framework of a $2.2 billion deal with Persia Oil & Gas Industry Development Co. aimed at increasing crude oil exports. Moderate forces in Iran, which need to show that easing tensions with the West is paying off, will continue pushing such agreements as they seek higher oil revenues. The oilfield development accord combined with rising crude exports suggests a positive trend for Iran’s oil industry.

Of course, a positive for Iran is often a negative for its regional rival, Saudi Arabia. Because Saudi Arabia is the largest producer in OPEC it is expected to make up for make cuts where others cannot or will not to keep overall production within the range the group agreed upon. Meeting that expectation means conceding market share.

Adding to the deal’s troubles are few other issues: Nigeria has also claimed exemption from any cap on its output as it recovers from militant attacks on its oil assets, Iraq has said it doesn’t accept OPEC’s estimates of its production levels, Libyan output is rising substantially, and Russia, with its history of not following through on similar deals, boosted output last month to a post-Soviet record. None of those issues will help the deal but, like Iran, those countries may be expecting Saudi Arabia to pick up the slack anyway.

How Clean Can An Electric Car Actually Get? – 10/13/16

How much cleaner can an electric car get compared to one running on conventional fuels? The answer is important, especially when controversies like a study finding that a Prius could be dirtier than a Hummer add to the confusion. To answer the question you have to look at the life cycle of the product from manufacturing to usage to disposal.

Starting with disposal, there is no significant difference in emissions between electric and non-electric cars at this stage, which sees minimal emissions relative to making and driving the car. The main environmental problem in disposal comes from the battery. Part of the issue with older electric hybrids like the Prius from the study was their reliance on lead acid batteries rather than the lithium-ion batteries used in newer electric car models like the Tesla Model 3 or 2017 Chevrolet Bolt. In addition to not dealing with the toxicity of lead, the rarity of components in the newer batteries has prompted extensive recycling programs to avoid shortages of cobalt, nickel, and lithium.

Next, usage. An electric car is only ever going to pollute indirectly i.e. charging the battery using electricity from a power plant that burns coal. In the past and in certain areas that still rely heavily on coal, the emissions from those plants were hardly better than those put out by burning gasoline. Nowadays, however, the US grid is being inundated with electricity from natural gas (at about 50% the pollution than traditional coal plants) and renewables.

That switch to cleaner power sources means a lot for electric vehicle (EV) emissions, as the graph from Bloomberg New Energy Finance (BNEF) shows.

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  • for context, emissions free nuclear power supplies most of France’s electricity as opposed to heavy coal use in China.

Those cars may run twice as clean when they’re charged in a place that gets a lot of power from green energy, but the same car driving in a coal-burning region may yield a gain of just 20%, according to the Union of Concerned Scientists, based in Cambridge, Massachusetts.

Of course, fuel-efficiency standards are also pushing car makers to make engines that use less fuel.

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What this means for their emissions relative to EVs is depends heavily on the state or country you’re in.

In France, the gap has to narrow in the coming decade because regular engines are getting cleaner and the energy mix can’t get much cleaner.

In Japan, emissions from driving electric vehicles may actually rise as nuclear power plants are replaced with natural gas and coal in the wake of the Fukushima Daiichi nuclear disaster.

For the US, the state you live in matters a lot for this discussion as shown in the BNEF map of the carbon intensity of power for each state.

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Note the difference between coal state Wyoming and hydroelectric powerhouse Oregon.

For an idea how that map might change, look at what energy sources each state was installing in 2015.

by state

Finally, manufacturing.

A study done by the Union of Concerned Scientists found that making an EV results in 15% greater emissions than in manufacturing a similar gasoline vehicle. However, the same study was optimistic even this could be reduced and paled in comparison to the savings gained in the usage stage.

Assuming a grid composed of 80% clean electricity — France currently derives about 75% of its electricity from nuclear energy and about 14% from hydropower — the analysis would have a EV see at least a 25% reduction in emissions from manufacturing and an 84% reduction in emissions from driving. That combination would result in an overall reduction of more than 60% compared to today’s EVs, which are already about 40-50% cleaner than those running on gasoline or diesel.

So, basically, an electric car can get pretty darn clean, especially when the power grid that fuels it is running on renewable energy.

Washington Voters Consider Carbon Tax – 10/12/16

While the rest of the country is deciding who will become the next president, Washington state will also be voting on the country’s first revenue-neutral carbon tax.

Long held in esteem by economists, a carbon tax is seen by many as the most efficient means of embedding the environmental cost of carbon dioxide emissions into the price consumers and businesses pay for energy. By making emissions more expensive the tax is intended to be a market-based solution that lets businesses decide the best approach to reductions. And because the revenue is used to cut other taxes, the market distortions caused by government intervention are minimized.

And yet, the carbon tax is finding middling support. A poll of support for Initiative 732, as the Washington initiative is known, has found voters roughly split on the issue with resistance coming from both the right and left. Besides the usual opposition to any emissions regulation, some environmentalists believe the measure doesn’t go far enough.

After Democratic Governor Jay Inslee’s proposed a cap-and-trade plan modeled on California’s failed the Democratic-controlled state House or the Republican-controlled Senate, I-732 was supposed to be a compromise to satisfy both sides.

The measure would impose a $15 tax per ton of CO2 in the first year, rising to $25 in the second, and by 3.5% after inflation annually to $100 in current dollars. It would also add 25 cents to the price of a gallon of gasoline.

The measure is projected to add about $8 to the average monthly electric bill. The revenue from the tax would be returned to taxpayers via a cut in the state sales tax, elimination of a business tax, and a tax rebate of up to $1,500 a year to 460,000 low-income workers.

The main reason some environmentalists oppose the measure is its being revenue-neutral. Those people want the revenue I-732 collects to go towards other programs even if it means cutting its appeal and chances of succeeding.

Since more businesses are seeing carbon taxes as the least harmful means of accomplishing emissions reductions, it will be interesting to see how the vote in Washington will go and whether other states will follow its example.

Clean Power: Slow 2016 Obscures Strong Potential – 10/11/16

Following the surprise extension of tax credits for wind and solar last December, growth in the clean power industry appears to be stalling… until you look past the surface.

In 2015, the number of long-term power-purchase agreements (PPAs) signed by corporations reached a record high for wind and solar.

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Now prices agreed on in such agreements have fallen to all-time lows, according to Bloomberg New Energy Finance (BNEF).

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But the clean power being slightly cheaper in 2015 than in 2013 doesn’t explain why the number of agreements spikes so violently in 2015. For that explanation we return to the tax credits and way that companies and developers handle such incentives.

First and foremost, the extension of the tax credits was unexpected. Without action by a Congress known for partisan deadlock, the tax credits were set to expire. Yet, a strong lobbying effort and support from red states benefiting from clean power like Texas made it possible. Developers and their clients had no idea that would happen; they treated 2015 as their last chance to get in at the full subsidy level.

“Many companies that signed those deals in 2015 were afraid that there wouldn’t be a tax credit again,” said Jacob Susman, vice president at EDF Renewable Energy. “That’s a big reason why 2015 was so big.”

It is not unusual for people to act at the last minute when it comes to spending money. Sometimes its procrastination, sometimes they want to hold onto their money as long as possible, and sometimes they just want to see if maybe prices will go down further.

Whatever the reason, the tax credit expiration date created a dam where demand could build up at the expense of later years. Without that blockage, the flow of orders would have spread out more evenly over time instead of coming out in force during 2015 and, to a lesser extent, 2014. Now the more sustainable flow looks slow in comparison as developers and customers pace themselves again.

“There was such a flurry that people may be taking a breather,” said Pete Dignan, CEO of Renewable Choice Energy. “But there’s significant activity ahead.”

Mr. Dignan was referring the fact that, even with the slowdown, demand for clean power is still relatively high. That demand is reflected in the scheduled electric generating capacity additions for 2016, illustrated by the EIA graph below that shows new wind and solar capacity will rival or surpass that of natural gas this year.

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And, as the chart from BNEF suggests, the trend towards favoring renewables is expected to continue.

solar to dominate

So the clean power industry will continue to grow based on strong fundamentals though likely not at the frenzied rate of 2015. Of course, with the tax credits extended another 5 years, a repeat of the current situation may be not be too far off.

Paris Climate Agreement On Track for Final Ratification – 10/10/16

With a greenlight from the EU, a global climate deal struck last year in Paris among 195 countries aimed at limiting climate change is set to go into effect.

The condition for the climate deal going into force was having 55 countries representing 55% of the world’s greenhouse gas emissions have ratify it. After the US and China accepted the deal, 60 countries representing 47.7% of global greenhouse gas emissions had signed on. Since the EU represents about 12% of global emissions their entry will undoubtedly push the deal into effect.

India, which is responsible for 4.1% of emissions, also formally adopted the Paris agreement on Oct. 2.

The deal will be enacted 30 days after its ratification requirements have been met. The first meeting of the parties to the agreement, the CMA, will take place during the next annual United Nations climate conference, scheduled November 7, 2016.

Under the agreement, countries will be expected to act individually to keep average global temperatures from rising more than 2 degrees Celsius above preindustrial levels. Since a legally binding resolution would have required ratification by the Senate, which the Obama administration acknowledged was unlikely, no country can be forced to adhere to the deal. However, it does require countries to release targets and report emissions as a means to shame nations into compliance.

Once the agreement enters into force this year, the U.S. is prevented from pulling out for 4 years.

OPEC’s Preliminary Output Cut Deal: Hype and Skepticism – 10/7/16

The Organization of Petroleum Exporting Countries (OPEC) has agreed to outline a deal that could mean cutting production for the first time in eight years. Whether or not OPEC’s deal will impact oil prices in a meaningful way remains to be seen.

A global glut and price collapse in oil caused by a boom in U.S. shale drilling devastated economies of oil-dependent countries such as Russia and Saudi Arabia. But even as they instituted unprecedented austerity measures, OPEC nations shied away from output cuts in hopes that low prices would force high cost producers in the US to leave the market. The strategy has arguably been successful as US output has dropped, according to the EIA.

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That said, the relative cheapness and quick turnaround time for shale drilling, as well as the unexpected tenacity of surviving drillers, has led many to believe that shale will recover quickly. If OPEC attempts to prop prices with output cuts, then those drillers may return fast enough to put an effective ceiling on prices. The number of rigs targeting oil in the U.S. climbed to its highest level since February in the week ending on September 23, according to data from Baker Hughes Inc.

Also tempering expectations is the fact that the agreement was only possible because Iran will be exempt from capping production. Iran is one of the few OPEC countries not already pumping near record rates so their absence is notable. Previous talks have fallen through as Saudi Arabia, Iran’s rival in the Middle East and the largest oil producer in OPEC, refused to accept a deal that did not include concessions from Iran. Saudi Arabia’s change of heart demonstrates pain lower oil prices has brought to the nation as it faces a record budget deficit this year.

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Still, OPEC won’t decide on targets for each country until its next meeting at the end of November and must also convince others, especially Russia which has cheated in past deals with OPEC, to cap their own output. Russia was pumping at an all time high of 11.1 million barrels a day in September. With over 60% of world production outside OPEC member countries, concerns about maintaining market share could sink the final deal before it has a chance to float.

For its part, Russia will assume an average price of $40 a barrel in the next three years even after the preliminary agreement by OPEC, according to Finance Minister Anton Siluanov.

“You think it’s stabilized?” Siluanov said. “We need to see how realistically the decisions will be implemented.”

Goldman Sachs Group Inc. and Morgan Stanley have also expressed skepticism that the deal can be completed.

The deal may have already moved the price of oil by 5%, but such movement has been common in this unusually volatile year so it would best to not get too excited.

Energy Storage: The New Cost Cutter – 10/6/16

Businesses and state governments are starting to embrace energy storage as a way to cut costs, increase efficiency, and meet regulatory mandates.

In Southern California, J.C. Penney has used lithium-ion batteries, made by Panasonic, to cut its electric bills in 6 stores by drawing power from the grid at night. By charging up at off-hours and using the stored energy during peak hours, Penney is avoids competing — and paying extra — for electricity needed to run AC units and avoids fees like demand charges. The batteries are expected to save each store at least $6,000 a year and Penney plans to install batteries at 3 additional stores this year and 14 more next year.

While still relatively expensive, energy storage installations in the form of lithium-ion battery packs has soared as costs have dropped dramatically. In 2015, more than 64.1 MW-hours of capacity were installed, up from 12.2 MW-hours in 2014, according to GTM Research. Installations are expected to reach 140 MW-hours in 2016.

Tesla Motors has played a major role in the drop in battery prices.

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Since batteries make up a large portion of the cost of an electric car, Tesla has been making aggressive moves to reduce the cost of its electric vehicles through economies of scale, including the opening of its Gigafactory in Nevada. The output of the battery factory is projected to be 35 GW-hours by 2018, equivalent to the entire world’s production in 2014 with battery costs cut as much as 50%.

Leveraging its successful opening of the factory, Tesla will supply 80 MW-hours of energy storage to Southern California Edison, the car maker said in a blog post on Thursday. The contract comes in the wake of a natural gas leak at Aliso Canyon that released thousands of tons of methane into the surrounding area. In the backlash from the incident, grid-storage projects are being fast-tracked.

“The storage is being procured in a record time frame,” months instead of years, according to Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance.

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Providing further proof that states are taking an interest in energy storage, a study co-funded by the Massachusetts Department of Energy Resources (DOER) and Massachusetts Clean Energy Center (MassCEC)Massachusetts titled “State of Chargewas recently released.

The 200-page report lays out a road map for the state to expand energy storage deployment to save money, integrate intermittent power sources, and address climate change.

DOER will decide by the end of this year whether to establish an energy storage procurement mandate. In the case they do, Massachusetts would become the third state to create a storage mandate following California and Oregon.

The study focuses heavily on inefficiencies in the states electricity consumption citing two major issues including: the grid must be balanced by the ramping up and down of fossil fuel generators that only run 2-7% of the time and grid infrastructure issues resulting in “highly variable” electricity prices where the top 10% of hours during 2013-2015, on average, “accounted for 40 percent of annual electricity spend, over $3 billion.”

The study recommendations include grant and rebate programs, adding storage as an eligible technology within the existing incentive programs, and having the state clarify the regulatory treatment of utility storage.

IEA Finds Positives in Clean Energy Investment – 10/5/16

The cost of installations and financing for renewable energy declined significantly in 2015 reshaping the direction of the energy industry for decades to come, according to the International Energy Agency (IEA), which found that the capacity of new renewable-energy installations rose 40% in five years even as investment fell 2%.

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While investment in fossil fuels also fell, reflecting a drop in prices during the shale boom and subsequent glut, the decline in renewable energy investment has been attributed to falling technology costs creating permanent cost savings.

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Investment in the energy industry as a whole fell 8% in 2015, primarily due to cuts in oil and gas exploration, even as investment in electricity rose by 4%. Renewables took 70% of new expenditures in electricity generation in 2015.

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Project finance loans surpassed company balance sheets as the biggest source of capital for renewables last year, the IEA data show.

“This trend towards project finance partly reflects the constrained cash flows of a relatively new industry, with limited earnings from an already operating asset base,” the organization’s report said. “It is also because projects that are largely based on regulated cash flows are better able to increase leverage and tap into larger pools of bank financing.”

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On the equity side, the promise of steady long-term payments from electricity sales over the lifetime of renewable assets, is attracting pension funds to the industry. Project bonds have also gained traction, as did green bond issuance, which reached a record at $48 billion in 2015, the IEA said.

Rooftop Solar Gets a Shield in Nevada – 10/4/16

In a deal between Berkshire Hathaway Inc.’s NV Energy utility and SolarCity Corp., the Nevada Public Utilities Commission voted 3-0 on Friday in favor of a settlement that will shield more than 32,000 rooftop solar customers in the state from increased fees resulting from a January decision.

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