Monthly Archives: November 2016

OPEC Approves First Deal to Cut Output in 8 Years – 11/30/16

OPEC successfully agreed to some crude oil production cuts for the first time since 2008 yet the effect it has on oil prices will likely be minimal.

Oil traders and investors may cheer the deal to curtail oil production, but history shows implementation of such agreements is often imperfect. In this case, exemptions have already been granted to Iran, Nigeria, and Libya making the collective target for the group all but unreachable if those nations boost output as planned. OPEC is also relying heavily on a reduction from producers outside the bloc of 600,000 barrels a day, half of that cut coming from Russia which has produced mixed results in the past.

Even with full compliance with the quotas by OPEC and non-OPEC, Goldman Sachs expects oil prices to only rise to about $60 a barrel. Other analysts from Morgan Stanley and Wood Mackenzie similarly see prices staying in the $50 to $60 a barrel range at best.

While 20% increase in oil prices would definitely improve the financial situation of oil drillers, it pales in comparison to 2014 prices that reached above $100 a barrel. It also risks reviving the competitors that OPEC hoped to force out of the market: U.S. shale drillers.

Fracking has changed the marginal economics of oil forever. Fracking shale deposits to get at tight oil is dramatically faster and less capital-intensive than traditional oil drilling, which is why output of U.S. oil spiked in recent years. And the U.S. is likely to only produce more tight oil in the coming years, according to the EIA.

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Shale oil drillers may have been devastated during the last two years of low prices, but a revival in their output is inevitable once prices start rising again. And renewed production in the U.S. would effectively cap oil prices even if OPEC’s deal goes perfectly and make efforts to keep prices above $55 “self-defeating”, according to Goldman Sachs.

Electric Vehicles and the President-Elect – 11/29/16

According analysis by Bloomberg New Energy Finance (BNEF), early 2020’s electric vehicles (EVs) should be cheaper than equivalent hybrid and even gas-powered models. It is likely that many of the campaign promises (cutting fuel efficiency standards, letting tax credits expire, etc.) of the president-elect would create speed bumps for EV adoption, but what impact could he really have on adoption?

The rise in EV adoption can be attributed to consumers concerned about climate change, falling EV prices, and government subsidization. Now consumers who get an EV for the sake of the environment won’t suddenly start buying gas guzzlers just because there’s a new president so this article will focus on the effect the administration could have on the other two factors.

Prices

The difference in price between electric vehicles and conventional ones comes down to how they store and use energy. Compared to most batteries, fossil fuel products like gasoline store more energy in less weight making them the cost-effective option even though electric vehicles lose weight by not needing a combustion engine. Batteries have just been too heavy and costly for electric cars to compete in essential areas like driving range and price. By 2020, that fatal flaw could be a thing of the past.

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Since 2010, the cost of EV battery packs has fallen over 50%. That trend will continue.

Tesla’s latest Lithium-ion battery already beat projections for energy density versus price by 7 years according to BNEF. Those numbers come before the company’s Gigafactory in Nevada comes online and let it really begin taking advantage of economies of scale.

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According to Tesla, battery cell production will start in 2017 with its mass production methods lowering the battery prices from $190 per kWh to an estimated $130 per kWh once complete.

Tesla’s latest car, the Model 3, currently starts at $35,000 with over a fourth of the price coming from the cost of the battery. A $190 to $130 per kWh cost change would mean a price reduction in the thousands. Since replacing battery packs also make up most of the operating costs associated with a Tesla EV, the lifetime cost of owning an EV would plummet relative to conventional vehicles.

A permanent reduction in battery costs isn’t something the federal government can change; however, what one thing can change could still work out in at least Tesla’s favor. That thing is trade agreements.

If the president-elect throws out NAFTA or starts a trade war with Mexico, then it will be electric car maker Tesla Motors that benefits. Automakers like Ford Motor Co., GM and Fiat Chrysler have invested billions in Mexican plants that produce parts for their vehicles. By contrast, Tesla’s manufacturing and assembly are done almost entirely in California and Nevada. Any tariffs on outsourced production would only raise the prices of conventional cars relative to Tesla’s EVs.

Subsidies

Technically, the president-elect could eliminate a $7,500 federal tax break for electric cars, but that would be harder than it sounds. Since subsidies were designed to phase out after each automaker reaches its 200,000th domestic EV sale, Tesla is much closer to that threshold. Removing the tax break now would only hurt automakers hoping to develop their own competing EV models. It’s not hard to see how car makers already invested in developing EV’s, like Nissan Motor Co. or General Motors Co, would likely fight tooth and nail to keep the subsidy.

Each state also has authority over its own electric-car subsidies that the Federal government has no control over. For example, Louisiana residents can get an additional tax credit of almost $10,000 for buying a long-range electric car. In Colorado, it’s an extra $5,000. Remember the price of Tesla’s Model 3 is about $35,000 before subsidies so those tax credits are a pretty substantial chunk of the EV’s total cost.

Conclusion

Between falling battery costs, interest of traditional automakers in keeping federal subsidies, and state level subsidies, the usage of electric vehicles will rise regardless of guidance or lack thereof from the White House.

Oil and Tech Companies Invest in Low-Carbon Technologies – 11/28/16

As more governments and customers begin to worry about climate change, companies are stepping up investment in low-carbon technologies. Around 60% of Fortune 100 companies have renewable-electricity or climate change policies, according to Bloomberg New Energy Finance (BNEF).

Companies tend to invest in renewable energy in one of three ways: long-term agreements with wind and solar projects; buying stakes in green power projects; or buying renewable-energy credits. Long-term agreements have become the preferred way to invest in clean energy. By locking in electricity prices for up to 15 years, the deals let companies hedge against natural gas and coal price volatility by reserving renewable power.

Since 2008, U.S. companies have signed agreements to purchase 10GW of solar and wind power. BNEF expects that pace to increase over the next decade, with an additional 22GW in long-term agreements. For these sorts of deals, the largest buyers tend to be technology companies like Amazon.

Oil companies are also investing in low-carbon technologies, though in a very different way.

As part of the Oil and Gas Climate Initiative, ten of the world’s biggest oil companies, including Saudi Arabian Oil Co., Royal Dutch Shell PLC and BP PLC, plan to invest an average of $100 million annually over the next 10 years as part of an initiative to boost low-carbon technologies.

The announcement came on the same day that a climate treaty negotiated in Paris to cap emissions and curb global warming comes into force.

The investments will focus on carbon capture and storage technology and efforts to reduce methane emissions from the oil-and-gas industry. The consortium said the joint fund will come in addition to individual investments in alternative energy and lower-emission technology.

French oil super major, Total SA, owns one of the largest solar companies in the world and earlier this year bought French battery maker Saft Group SA. Shell Oil has created a “new energies” division to invest in renewables and low carbon power, and Saudi Arabia is developing solar power within the Kingdom.

The Initiative was created in 2014 with UN backing to find ways the industry can support efforts to tackle climate change without abandoning their oil reserves.

Coal Use in Asia Set to Rise – 11/25/16

China has said it will take over as an environmental leader should the U.S. pull back from the role, but the country will have enough trouble meeting its own targets. China’s utilities would have to phase out coal use by 2040 to meet its emissions goals, according to Climate Analytics, a Berlin-based non-profit that is studying the Paris Climate talks.

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Unfortunately, China, and Asia as a whole, is more likely to see demand for coal is increase than decrease for years to come.

According to an analysis by Bloomberg New Energy Finance using International Energy Agency data, China’s coal consumption is set to rise substantially. Despite efforts by Chinese policymakers to reduce coal use, the largest Asian nation continues to build roughly two new coal plants a week.screenshot-2016-11-22-at-9-36-24-am

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The BNEF’s outlook has China’s rate of building coal-fired power stations slowing to one a week in the next five years, though it indicates that even with no new construction the nation could meet all its power demands. If you are wondering why the coal plants are still being constructed then see “China’s Power Plant Problem” for more information. The short version is reluctance to follow-through on cutbacks at the local level for fear of social unrest and loss of tax revenue.

The report also showed Japan is pushing ahead with new coal-fired plants in response to the Fukushima disaster in 2011. Concerns about nuclear plants following the incident appear to have soured the country on nuclear power.

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Renewable Energy and the President-elect – 11/24/16

The president-elect will not alter U.S. utilities’ shift toward renewable energy because the tipping point for the industry has already passed.

In many parts of the U.S., basic economics and profit-seeking have replaced environmental rules and government subsidies as the drivers of renewable energy investment. In West Texas, new wind farms can be built for just $22/MW-hour while solar projects in the deserts of Nevada and Arizona are built for less than $40/MW-hour. If you compare those figures with the average lifetime cost of natural gas plants ($52/MW-hour) and coal ($65/MW-hour) in the U.S. then you can see why utilities hesitate to embrace fossil fuels based on a handful of vague campaign promises.

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Companies such as Duke Energy Corp. that invest billions in power plants are already moving forward with long-term plans to focus on cleaner alternatives.

“We said before the election that whoever is elected president, we would be continuing our efforts to go to a low-carbon fleet and also pursue renewables,” said Tom Williams, a spokesman for Duke, the second-largest U.S. utility owner.

Wind, solar, and natural gas have dominated new additions to U.S. grids for years as utilities closed a record number of aging coal-fired generators, according to the Energy Information Administration.

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Utilities have announced plans to close 12GW worth of coal plants over the next four years, largely because cheap natural gas has made them uneconomical.

Cost isn’t the only thing that makes clean energy appealing to utilities. A solar farm can go up panel-by-panel in a matter of months to quickly meet new demand. By comparison, it takes years to just permit, finance, and build a coal plant, and then it has to last decades to really turn a profit, making one or two four-year presidential terms seem like hardly any time at all.

Killing the Clean Power Plan, which would require states to reduce emissions from power plants, would only slow the transition. As would a repeal of two federal subsidies — the investment tax credit and the production tax credit — that help to make solar and wind affordable.

Yet, taking away the subsidies, which were extended for five years at the end of 2015 with bipartisan support, could be very difficult and unpopular. And the Clean Power Plan, which was suspended pending a Supreme Court ruling, isn’t scheduled to take effect until 2022 anyway making it more of a general threat that it could occur rather than a concrete one. Utilities, meanwhile, are planning for the far future where follow-through on that threat is still possible.

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“We are moving forward with plans that call for replacing some of our coal generation with natural gas, low-cost wind energy and expanding solar options for customers,” said Frank Prager, vice president of policy and federal affairs for Xcel Energy Inc., which owns utilities in eight states.

Even without the Clean Power Plan, Bloomberg New Energy Finance forecasts that wind and solar energy will grow 33% over the next two years, adding 40GW, mostly driven by state, rather than federal, policies.

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More than half of U.S. states require utilities to incorporate renewable energy into their generation mix, including Republican strongholds like Texas, Arizona and Montana. Large blue states like California and New York have set goals to source half of their power from clean energy by 2030.

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Between economic reality and state-level policies favoring more renewable energy installations, it is hard to see how the president-elect could convince utilities that a move back into fossil fuels is in their best interest.

Climate Action and the President-Elect – 11/23/16

The president-elect has expressed doubts about the potential impact of climate change, but what steps will he actually take once he’s in office?

In 2009, he signed a public letter calling for a reduction in greenhouse-gas emissions. In 2012, he dismissed climate change as a Chinese hoax. As a candidate, he said he would “cancel” the Paris Climate pact and “focus on real environmental challenges.” But in a recent interview with the New York Times, he said he would “keep an open mind” about the climate change accord. Such disparate opinions make it difficult to guess what position he will eventually settle on.

Acting with an “America First” mentality probably won’t mean favoring or rejecting globally-minded climate agreements so much as leaving other nations to lead them instead while taking each on its benefits for the U.S.

Should the U.S. ignore the agreement’s goals or renounce the treaty that established the talks, it would certainly be a blow to climate change mitigation efforts. However, the loss of the U.S. wouldn’t necessarily change much in the grand scheme of things. The Paris Agreement is already criticized as being not nearly enough to prevent cataclysmic climate change and many experts believe it would have fallen short one way or another.

With over 170 countries already signed on to the agreement, it is unlikely to fall apart completely anyway. The other signatories seem committed to lowering carbon emissions with or without U.S. leadership. Envoys from Europe to China have called the shift to a low-carbon economy inevitable and warned that to ignore it could mean missing out on business opportunities in clean power and energy-efficient technologies. Ironically, China has also vowed to step up as an environmental leader if the U.S. abandons the role.

China, India, and other developing nations have strong incentives to embrace cleaner technologies. Unlike rich countries, where energy demand is stagnant and efficiency is rising, many poorer countries still have many citizens whose lives would be vastly improved with access to cheap energy. To minimize environmental and health costs associated with extreme weather and air pollution from fossil fuels, these nations are seeking out any alternatives they can.

Even just in the U.S., there are limits to what a presidential embrace of fossil fuels could actually do.

Opening up federal lands to fracking means nothing if it is unprofitable to do so under oil prices that are stubbornly close to half of what they were at their 2014 peak. Coal, too, has been displaced by cheap shale gas, which burns with roughly half the CO2 emissions of coal. Besides, energy investments like oil rigs or coal power plants last for decades so firms may hesitate to risk their money turning into stranded assets as soon as the next president takes office.

In the end, there is no telling what the president-elect will do once he takes office or how the world will react.

Oil’s Future – 11/22/16

OPEC has raised its forecast for global oil demand through the end of the decade on oil’s lower for longer prices spurring consumption.

The group put crude at about $40 a barrel in 2016, increasing by $5 a barrel through 2020.

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As far as the future for oil prices, the IEA has suggested that an oil price surge triggered by a successful OPEC agreement could start faltering again within nine months to a year on revived U.S. drilling.

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U.S. crude output peaked in June last year, when the country produced an average of 9.61 million barrels a day. It’s fallen about 10 percent to 8.69 million barrels since then, according to Bloomberg.

Exploration for new crude deposits has declined substantially on low prices raising concerns about future supplies not meeting demand; however, many companies are predicting the opposite. Royal Dutch Shell Plc, the world’s second-biggest energy company by market value, predicts demand for oil could peak in as little as five years.

“We’ve long been of the opinion that demand will peak before supply,” Shell Chief Financial Officer Simon Henry said on a conference call on Nov. 1.

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Oil output is most at risk of a shift in investment away from discovery to finding alternatives to it. Fuel efficiency standards are already putting downward pressure on demand as air pollution concerns push developing countries to get stricter and even favor alternative fuels. In addition, most major car makers have plans for mass producing more affordable $30,000 electric cars.

Fueling the pressure on oil, shareholders in both America and Europe are putting pressure on oil companies to explain how climate-change regulation could affect their business models. Shifts in public opinion and agreements to fight climate change only serve to discourage long-term investment in fossil fuels, oil included. Should oil use in transportation lose its price advantage over electricity and natural gas as the costs of batteries and gas fall, such a transition would accelerate rapidly.

OPEC Deal: Problems for Before and After – 11/21/16

Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.

Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.screenshot-2016-11-25-at-7-19-54-pm

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The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.

Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.

If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.

No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.

Solar’s Future: Probably Brighter Than You’d Think – 11/18/16

In his only major energy speech, the president-elect said he would rescind environmental regulations and revive U.S. coal, but the impact of his presidency on renewable energy may be limited. Solar’s position in particular is better than one might expect.

Rooftop solar in the U.S. is largely safe for two reasons: net metering policies are decided at the state-level and the federal tax credit to offset the cost of installations, first signed into law under George W. Bush in 2005, were extended by a Republican Congress last year. Nowadays, some of the most powerful GOP voices in Congress come from states like Texas that have benefited immensely from the rise of solar power. It would not be surprising to see more red states with economic incentive stand with blue states in support of solar.

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Texas’s economy has already benefited greatly from wind power development in the state and solar appears poised to make a similar performance in the state. According to Bloomberg New Energy Finance, Texas is one of the few states for which solar power is competitive with both coal and natural gas.

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With a combination of cheap land leases and abundant sunlight, the state has the potential to match even California for raw quantity of solar power capacity.

With a major powerhouse behind them, solar incentives should at least have enough support to keep current programs in place for their current duration. For the solar investment tax credit that duration extends slightly past the 2020 presidential election.

Solar panel prices have also dropped, on average, more than 15% a year since 2013. Even if all of the incentives and subsidies that support solar were suddenly removed, the industry would eventually recover as prices continue to fall. Economies of scale and other factors that have driven the price of solar panels down for decades, but only recently has solar power begun competing with fossil fuels, in major markets, purely on price.

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All in all, solar’s position is more stable than most would think with a GOP Congress and White House thanks to the fact that, for the first time in modern history, it has both environmentalist and capitalist support in both red and blue states.

The Difficulty of Bringing Back Coal Jobs – 11/17/16

Promising to resuscitate the U.S. coal industry and bring back coal jobs is easier said than done.

According to data collected by the EIA, almost all new electricity generation capacity in 2015 came from non-coal sources as wind, natural gas, and solar power dominated.

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And the trend away from coal looks like it will continue.

American Electric Power Co. (AEP), one of the nation’s biggest utility companies, has already sold or retired half its fleet of coal-burning power plants in the last few years.

No matter who occupies the White House, “it’s not coming back,” said Nick Akins, AEP’s chief executive. “We’re moving to a cleaner-energy economy and we’re still getting pressure from investors to reduce carbon emissions… I don’t see that changing.”

Overall, the electric utilities that buy more than 95% of the coal mined in America have already retired about a third of the total capacity of coal power plants since 2010. They have done so in part because regulatory costs for mercury and other pollutants fall heavily on older coal plants, but mostly because there are cheaper, cleaner alternatives in many parts of the country. Natural gas alone makes for an insurmountable competitor so long as shale drilling keeps prices low and its cleaner burn makes it more palatable for those with environmental concerns.

A coal power plant is a monumentally expensive asset; its construction is a fixed cost requiring decades in service to provide a good return on investment. With so much uncertainty surrounding the future of climate policy at all levels of government, power companies are reluctant to invest heavily in coal when gas-burning power plants can be built faster, operated at lower costs, and run with putting off fewer emissions.

If Obama administration projects like the Clean Power Plan are abandoned, then some states may keep some coal plants running for longer. However, markets still expect a move toward a lower carbon energy mix for the foreseeable future.

The biggest economic incentives for clean energy — federal tax credits for solar and wind projects — are already in place. Both were set to expire at the end of last year, only to have Congress unexpectedly extend both credits. And given the success of wind power in many red states and renewables in general with Democrats, the political will needed to repeal the extensions doesn’t seem to exist.

Without new regulations, companies will keep existing coal power plants online longer; however, they will have no incentive to build new ones when they have a number of better options.

To make new coal jobs, you need to have an actual use for coal. Beyond burning in power plants, coal doesn’t have many other uses where it is needed in bulk. So long as the government doesn’t control the markets, utilities will use whatever fuel they see as the best fit for shareholders and so far coal seems to get further and further from fitting that role.

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