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December 2015 EEnergy Informer
Page 1
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In this issue
All Eyes On Paris ..................................................................................................................................................................
Demand For Oil, Like Everything Else Is Falling ...................................................................................................................
Battle Over Fixed Fees Is Just Beginning .............................................................................................................................
Guess What: Integrated Wholesale Markets More Efficient ..............................................................................................
California’s Energy Vision: Bold And Daunting…… .............................................................................................................. ACEEE Ranks States For Energy Efficiency ...........................................................................................................................
Under Pressure Coal Losing Market Share ..........................................................................................................................
Renewables Are The Future ................................................................................................................................................
Ignore Risk of Demand Destruction At Own Peril ...............................................................................................................
American Nukes At Record Performance ............................................................................................................................
Future of Utilities: Utilities of the Future .............................................................................................................................
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6
13
15
20
21
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24
27
30
All Eyes On Paris After the recent terrorist attacks, a lot is at stake for a successful climate summit in Paris
s this newsletter goes to press, delegates from around the world are getting ready to camp out in
the French capital for an annual event that has had little to show for all the effort that has gone
into it for 20 years. Many, however, are optimistic that this year will be different and the City of
Light will finally shed some light on the thorny and controversial issue of how to limit carbon
emissions globally. United Nations Framework Convention on Climate Change (UNFCC), also
referred to as Conference of Parties 21 (COP21) designating the 21st such event organized by the UN, is
taking place in Paris from 30 Nov thru 11 Dec 2015.
Needless to say, both sides of the debate – those who wish to see a globally binding treaty and those who
believe that climate can wait another day – have
been frantically at work trying to influence the
outcome one way or another or to sabotage the
entire effort. There is the usual rancor among
the poor and the rich countries about who is to
blame and who should foot the bill. If anything
comes out of Paris, it will most likely be some
sort of a compromise that at least gets the ball
rolling in the right direction.
A lot is at stake for a lot of companies and
countries depending on what, if anything is
decided and how it will be enforced given UN’s
ambiguous mandate and history of not being
able to deliver on promises in the past.
A number of energy companies as well as those
who are major energy users have already made
pledges of various kinds, some of dubious value,
A
EEnergy Informer The International Energy Newsletter
December 2015
EEnergy Informer December 2015 Vol. 25, No. 12
ISSN: 1084-0419 http://www.eenergyinformer.com
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Climate getting warmer where you are? Despite skeptics’ claims, carbon and temperature are on the rise
Source: InfluenceMap
2 December 2015 EEnergy Informer
Page 2
others even less so. Many are merely trying to jockey for position, hoping to get favorable treatment or be
spared by agreeing to go with the flow. Others are sitting on the fence or on the sidelines, waiting to see
what comes out once the dust settles. And if past COPs are any indication, there will be plenty of drama,
last minute arm twisting, horse trading and grandstanding before it is over.
Among the virtually meaningless
pledges made in advance of the COP
was a statement by chief executives of
the world’s 10 largest oil and gas
companies, including Saudi Arabia’s
state oil company, vowing to ―do
more‖ to fight global warming by –
among other things – promoting gas
over coal, by flaring less gas at
wellheads and so on. America’s
ExxonMobil and Chevron did not
even bother to join the effort, making
the pledge even more nebulous.
The environmental lobby correctly
called it pure hypocrisy, which it is.
The coal lobby was not pleased either,
as coal is increasingly labeled as the
worst fossil fuel with the highest
carbon content, which it also is.
Benjamin Sporton, CEO of World
Coal Association, said the suggestion that natural gas could replace coal was ―unrealistic.‖ As far as he is
concerned, coal is abundant and cheap and that is all that matters. He said, ―The fossil fuel industry needs
to work together,‖ presumably against the climate.
Many in the fossil
fuel business appear
reluctant and/or
unable to step out of
the fossil fuel box to
conceive a different
energy future –
which makes
contrarian views
such as the one
espoused by
Carbon Tracker (article on page 24)
the more interesting.
This year’s COP has
been preceded with
the usual
interventions from a
number of non-
traditional parties,
including Pope
Francis and Dalai
Carbon humor
Source: The New Yorker
Will your fossil fuel assets become stranded? Environmental activists say much of known fossil fuel reserves are “unburnable”
Source: Carbon Tracker
3 December 2015 EEnergy Informer
Page 3
Lama, the spiritual leaders of Catholics and Buddhists, respectively, to mention a few.
More surprising, however, was a speech delivered by Mark Carney, head of the Bank of England at a
gathering of insurance companies organized by Lloyds of London in late September 2015. Instead of
talking about the usual – and one might add – boring topics such as economic growth, unemployment,
inflation or monetary policy – the stuff that usually concerns bankers and investors – Mr. Carney stunned
his audience by pointing out the obvious, that billions of dollars invested in fossil fuel assets could
conceivably become stranded as governments try to curb global warming.
Financial Times (1 Oct 2015) wondered if Mr. Carney was ―a far-sighted visionary or a dangerously
deluded fool.‖ Not surprisingly, Carney became an instant celebrity among proponents of climate change,
and a villain among climate skeptics. What he uttered was not particularly new or novel –
environmentalists have been
saying it for some time. What
made his comments
controversial and important
was that the words came from
the head of Bank of England,
an institution which oversees
1,700 banks, investment
companies, pension funds etc.
together holding vast sums of
private and public money.
Among his responsibilities is
to prevent another collapse of
the global financial systems as
occurred in 2008.
Those who praised him for his
blunt talk believe he did what
his job entails, namely to warn
investors about carbon’s
potential risks – which may be
substantial. The insurance
industry, his audience at
Lloyds of London gathering,
holds upwards of $2 trillion of
assets, much of which – perhaps as much as a third – may be invested in carbon-heavy assets.
Others believe he might have stepped out of bounds by speaking about a topic that people in his position
should stay away from. Philip Lambert, Founder of Lambert Energy Advisory, for example, was quoted
in the same FT article saying:
― How on earth can the governor of one of the most responsible institutions in the world think that
the thing that produces 85% of the current global energy mix (fossil fuels) can just suddenly
become stranded at a time of rising energy demand and the absence of an affordable alternative?‖
One can, of course, find flaws in Mr. Lambert’s remarks:
First, it can be argued that people like Mr. Carney in fact have a fiduciary duty to warn
investors of financial risks to investments and assets when and if they see them;
Second, Mr. Lambert has apparently not been following the news about sagging
demand for energy (following article);
What will it take the address climate change? Global greenhouse gas emissions must be cut by more than half by 2050 to avert climate change
Source: Carbon Tracker
4 December 2015 EEnergy Informer
Page 4
Third, Mr. Lambert also appears to be poorly informed about the relative affordability
of renewables – there are and will increasingly be affordable alternatives to fossil fuels;
and
Mr. Lambert, like many in the fossil fuel business, have always lived and thought
within the fossil fuel box. Indeed, they are trapped in the proverbial box. For them,
there are no alternatives to fossil fuels.
In an editorial on the subject in the same issue, FT opined, in part:
―Mitigating climate change will be expensive and contentious, creating technological winners and
losers along the way. Warning of the risks falls one side of the line, advocating concrete steps on
the other.‖
By this measure, Carney’s comments clearly fall on the appropriate side of the line. Not only were they
justified, but indeed timely and, one might add, courageous.
Demand For Oil, Like Everything Else, Is Falling Business models predicated on indefinite growth may need rethinking
any businesses – think of commodities, energy, mining, utilities – were built on the
assumption of ever growing demand, preferably predictable; the higher the rate of growth the
better. And many global giants have emerged over the years mastering the logistics of getting
more of whatever is demanded to the markets where the demand happens to be.
But what happens when these giants are confronted with flat or declining demand? Ask Coca Cola,
M
You have been warned Fossil fuel divestment is gaining momentum under pressure from the greens
Source: Arabella Advisors
5 December 2015 EEnergy Informer
Page 5
McDonald’s, or the oil and gas giants – where demand for their product may have reached saturation
levels. Then what?
How many gallons of carbonated water can anyone possibly drink? How many hamburgers before you
get tired of eating the same? And now, there are signs that a similar fate may apply to commodities such
as oil, where demand growth has long been taken as a given.
As recently reported in
The Wall Street
Journal (22 Oct
2015) most analysts
now believe that
―After hitting a 5-year
high in 2015, the
global growth in
demand for oil is
expected to fall by
about a third next
year, adding further
strain to an already
oversupplied crude
market.‖
As illustrated in the
accompanying graph,
demand for oil within the OECD economies is down for some time and shows little sign of recovery
(black line on bottom left), while demand in non-OECD has continued to grow (green line on bottom
left). ―But the economic slowdown in China and elsewhere in Asia could sap that demand,‖ according to
the same article.
The WSJ article reports projections from 3 credible sources, all indicating a decline in the rate of growth
in global demand for oil:
The International Energy Agency (IEA) says global demand for oil will fall from 1.8
million barrels a day (mmbd) this year to 1.2 million next year;
The Organization of the Petroleum Exporting Countries (OPEC) says demand
growth will fall to 1.25 mmbd; and
The U.S. Energy Information Administration (IEA) pegs demand growth in 2016 at
1.41 mmbd.
The WSJ article says, ―But for most analysts, demand growth is expected to fall sharply, with worries
about the Chinese economy fueling that weak outlook.‖
Granted, nobody says total demand will fall anytime soon, but the rate of growth is definitely declining.
And in time, that will mean flat demand – as has already happened within the rich economies of the
world. And, who knows, perhaps followed by a gradual decline in global demand once a plateau is
reached.
This is already a reality within the OECD economies – how long before the same will apply to the rest of
the world? Since oil majors make investments with planning horizons of decades into the future, such
scenarios must be considered, and perhaps they already are. Additional concerns about climate change
may further reduce demand for oil as economies move towards renewables and energy efficiency.
Source: Global Demand Growth for Oil May Fall by a Third in 2016, by Georgi Kantchev and Margarita Papchenkova, WSJ, 22 Oct 2015
6 December 2015 EEnergy Informer
Page 6
Price of oil, now 40% below the 2014 high, does encourage increased consumption, but only up to a
point. Just as people are not likely to drink more carbonated drinks or McDonald’s hamburgers if the
price is lowered – there are other reasons for the shift away from such products – demand for oil is also
unlikely to rebound to its historical levels even if the price remains low, which is unlikely in the longer-
run.
Battle Over Fixed Fees Is Just Beginning Electricity tariffs are in need of overhaul as consumers buy less, generate more
t should come as no surprise to anyone that the cost of providing electric service to most customers –
notably residential consumers – is mostly fixed. Studies by the Electric Power Research Institute
(EPRI) and others put the fixed component of the cost at around 60% for typical residential user in
the US (graphs below). What is surprising, however, is that for over a century, for most consumers,
the bill is determined by the volume of electricity consumed, that is, a multiplier – cents/kWh – times the
number of kWhs consumed. Even today, most residential consumers in the US pay virtually all their
monthly bills based on volumetric consumption. Relatively little is collected through fixed fees or
connections charges. Not so in Europe, Australia, and some other countries.
The volumetric scheme did not make much sense when it started, but was a convenient way to measure
and bill consumers. For regulators, it was an easy way to adjust the ―multiplier‖ every so often to reflect
changes in fuel, operating or investment costs. For consumers, the concept made sense. Many still believe
that electricity should be billed based on volume, as in gasoline. If you don’t use much, you don’t pay
much.
It did not much matter throughout the
industry’s formative decades, when demand
continued to grow encouraging massive
investments in generation, transmission and
distribution infrastructure, which could be
financed through the simple volumetric
scheme. With average retail tariffs flat or
declining in real terms and rapid demand
growth, everyone was happy – the
consumers, the utilities and the regulators.
Conditions are different today. Electricity
demand in the US – and nearly all other
mature economies – is flat or declining. As
buildings and appliances become more
I
How much does it cost to supply a typical US residential customer? National level data shows the average consumer consuming 982kWh/month with an average bill of $110/month
National level data shows that the average bill can be broken down into roughly $59 for energy and $51 for capacity
Source: Capacity & energy in the integrated grid, EPRI, July 2015
Do markets pay enough for reliable capacity? New England Generating Plants’ Revenue Source by Technology
Source: Capacity & energy in the integrated grid, EPRI, July 2015
7 December 2015 EEnergy Informer
Page 7
efficient, less juice is needed to operate them. Moreover,
with the rapid fall of the cost of distributed generation
(DG), notably in rooftop solar PVs, consumers can
produce more of what they consume, which means less is
bought from the network, the grid (box on right).
Making matters worse is the massive cost of maintaining
and upgrading an aging infrastructure, upstream of the
meter – the poles and wires and everything else that
consumers rarely see or are barely aware of.
With consumption flat or barely growing – for example
note the projections for state of New York, around 0.16%
for the next decade or virtually zero (table below) – the
fixed costs must be spread among fewer kWhs. This leads
to higher retail tariffs, which encourages more investment
in energy efficiency (EE) and DG, which leads o even
higher tariffs – the so-called utility death spiral.
The problem has become noticeable in a number of
places where the concentration of solar PVs is significant
and growing, such as in sunny Hawaii, California, or
Queensland, Australia. But even in not so sunny
Denmark or Germany, the problem is growing because
the retail tariffs are so high that consumers, large and
small, find it cost-effective to self-generate while
investing in energy efficiency measures.
In many European countries, electricity is heavily taxed
and/or loaded with levies, sometimes comprising roughly
half of the retail tariff. With retail tariffs near 40
cents/kWh in some cases, it should come as no surprise
that consumers look for anything at their disposal to buy
less, which means using less and self-generating more when it is cost-effective to do so.
The debate on what to do with electricity tariffs is heating up in many parts of the world as regulators and
politicians grapple with finding ways to keep the incumbents solvent without necessarily crushing the
rapid growth of solar PVs, which are enormously popular among many consumers and the livelihood of a
proliferating global solar PV installation and leasing
industry.
Concurrently, the rapid growth of renewable
generation in many of the same areas means that the
generation component of cost in retail tariffs is
gradually declining because renewables do not burn
fuel and have zero marginal costs. Which suggest
that in places like Denmark, Germany, Portugal,
Spain, Italy, Ireland, Norway, or California, an
increasing component of typical retail tariff is fixed.
Growth of rooftop solar PVs: Hype or real? Trade press is full of stories about the rapid growth of rooftop solar PVs. The scheme makes good economic sense in areas where sun is plentiful, retail tariffs are high, and there are additional incentives such as generous feed-in-tariffs or net energy metering laws, tax credits, etc. Another big facilitator is the prevalence of solar leasing schemes, allowing customers to lease the panels from a third party such as SolarCity rather than making an upfront investment in them. But is it as serious as claimed? It depends. The rise of distributed generation is already noticeable in a few places such as Hawaii – 16% of residential consumers on the Island of Oahu already have solar panels – while barely felt elsewhere. Pacific Gas & Electric Company (PG&E), one the largest private utilities in the US reports 200,000 solar customers to date, more than any other utility in the country. That may sound like a lot until you realize that Energex, a much smaller distribution utility serving Brisbane metropolitan area in sunny Queensland, Australia has nearly 300,000 and counting, making it among the highest on a per capita basis.
Get used to it: No growth in utility business – New York or elsewhere Average electric sales growth in New York, 1966 to 2013 and projections to 2024, in %
Period Avg. sales growth for period
1966-76 3.8%
1976-86 1.5%
1986-96 1.4%
1996-2006 0.9%
2003-2013 0.3%
2014-2024 0.16%
Source: NY Pub Service Commission, 26 Feb 2015
8 December 2015 EEnergy Informer
Page 8
As the percentage of renewables rises to
50% and beyond, as is the target in many
places, the energy component of the typical
consumers’ bill becomes insignificant. In
fact, many believe that in countries with
ambitious renewable targets, the commodity
cost of electricity will eventually approach
zero. This suggests that virtually all costs
will eventually be fixed, as is the case for a
cable TV company. Under such a scenario,
customers should pay a fixed monthly fee
for being connected to the network, and
little for the volume consumed.
A recent article in The Wall Street Journal
(20 Oct 2015), titled As Conservation Cuts
Electricity Use, Utilities Turn to Fees,
described the dilemma faced by utilities and
regulators in the US as they try to adjust
consumer tariffs by shifting more of the
costs of service to fixed fees – which is how
it should have been in the first place. It said,
―Electric utilities across the country are trying to change the way they charge customers, shifting
more of their fixed costs to monthly fees, raising the hackles of consumer watchdogs and
conservation advocates.
Traditionally, charges for generating, transporting and maintaining the grid have been wrapped
together into a monthly cost based on the amount of electricity consumers use each month. Some
utilities also charge a basic service fee of $5 or so a month to cover the costs of reading meters
and sending out bills.
Now, many utility companies are seeking to increase their monthly fees by double-digit
percentages, raising them to $25 or more a month regardless of the amount of power consumers
use. The utilities argue that the fees should cover a bigger proportion of the fixed costs of the
electric grid, including maintenance and repairs.‖
The basic logic of what the utilities are trying to do makes sense – but changing utility tariff structures is
complicated, slow and convoluted.
Making matters worse, it is highly
political. Any change in current tariffs
means shifting costs to other
customers, who do not like paying
more.
Many believe that the electricity grid is
essentially a public good, such as
libraries, roads or 911 emergency call
service. Everyone benefits from such
services and a way must be found to
pay for them – regardless of how much
we use them as individuals.
Universal challenge: Flat consumption, growing peak demand US el consumption vs. peak demand
Source: Capacity & energy in the integrated grid, EPRI, July 2015
Source: Rebecca Smith, As Conservation Cuts Electricity Use, Utilities Turn to Fees, Wall Street Journal, 20 Oct 2015
9 December 2015 EEnergy Informer
Page 9
Quoted in the same WSJ article, Lisa Wood, a vice president of the nonprofit Edison Foundation, which
is affiliated with the Edison Electric Institute (EEI), the lobbying arm of the US investor owned utilities,
said, ―The [electricity] grid is becoming a more complex machine, and there needs to be an equitable
sharing of its costs,‖ pointing out that a typical American household pays $110 a month for electricity,
more than half of it goes to cover industry’s fixed costs.
The WSJ article reported that
―Utilities in at least 24 states have requested higher fees, according to the Environmental Law &
Policy Center in Chicago, which opposes some of these increases. If regulators allow the fee
increases, ―the result is that low-use customers pay more than in the past, and high-use customers
pay less,‖ said Bradley Klein, a senior attorney for the group.
According to the Energy Information Administration (EIA), ―even though US homes are getting
bigger, energy consumption per square foot is going down,‖ adding, ―The rise of rooftop solar power in
some parts of the
country also is chipping
away at power sales.‖
Confronted with the
facts, regulators in a
number of states are
becoming ―sympathetic
to the plight of utilities
but don’t want them to
raise fees too
aggressively,‖ it said.
The WSJ refers to the
case of Eversource
Energy in Connecticut,
which had asked regulatory permission last year to raise its fixed connection fee 59% to $25.50 a month
from $16, but was allowed a 20% rise to $19.25 a month.
Small and large battles such as these are being fought across the country as illustrated on the map on page
8. At issue is how much of a typical consumers’ bill should be recovered through fixed fees that do not
depend on volume of consumption.
As explained by William Dornbos, of Acadia Center, a public interest group, in the WSJ article,
―Fixed fees are unpopular because they disempower the customer and discourage investments in rooftop
solar and energy efficiency,‖ pointing out that ―high monthly fees reduce the proportion of the total bill
that a customer can lower by conserving energy, reducing the incentive to embrace solar and cut usage.‖
Utilities counter by statements such as the one below in the WSJ article:
―Eversource said Connecticut Light & Power’s cost of providing service, excluding the cost of
the electricity itself, is about $35 a month per home. ―We proposed what we believed to be a
more reasonable charge,‖ said Mitch Gross, an Eversource spokesman.‖
Similar arguments are being made in Pennsylvania, where PPL Corp, parent of Pennsylvania Power &
Light, wants to raise its customer-service charge by about 42% to $20 from $14.13, according to the WSJ
article. Under its rate proposal, about 60% of the utility’s added revenues would come from a higher
monthly charge.
More capacity installed than needed
Country Installed capacity Peak demand
Compound annual growth rate, 2003-13, %
Germany 5.72% 0.74%
Spain 5.24% 0.97%
Italy 4.41% 0.45%
Brazil 3.70% 2.52%
Belgium 2.52% 0.39%
US 1.85% 1.00%
France 2.08% 1.32%
Japan 0.60% -.046% Source: Capacity & energy in the integrated grid, EPRI, July 2015
10 December 2015 EEnergy Informer
Page 10
―PPL spokesman Paul Wirth said the utility figures it costs about $38 a month to provide service
to a typical home, including the cost of meter reading and billing, but excluding the cost of
electricity. ―Since our cost to provide service is mostly fixed, we think our rate design ought to
reflect that more accurately,‖ he said.
Pennsylvania’s Office of Consumer Advocate, which represents electricity customers, has
generally opposed fee increases. Tanya McCloskey, the acting head of the agency, said she
knows that for utilities, ―the more dollars they collect through a fixed monthly charge, the less
their revenue fluctuates from weather or recession or other things.‖ But she says she thinks
utilities sometimes exaggerate the proportion of their costs that are truly fixed.‖
Who is telling the truth? According to many
consumer advocates raising fixed fees hurts
―the elderly, the poor, and conservation-
minded consumers,‖ as reported in the WSJ
article.
There are, of course, many sophisticated
approaches to rate design than simply raising
fixed monthly fees. At the core, the issue is
to come up with tariffs that reflect cost-
causality so consumers get charged for how
much costs they impose on the network
while raising sufficient revenues for the
maintenance and upgrading of the grid and
the reliability that it offers.
Under such a scheme, inefficient bypass, further described in a blog by Prof. Severin Borenstein and
reported in the June 2015 issue of this newsletter, can be avoided. Only consumers who truly are better
off self-generating will choose to do so, rather than the case today, where many are virtually driven off
the network because of excessively high tariffs – as in Denmark or Germany – rising tiered rates – as in
California – or simply high tariffs due to costly network and /or poor choice of fuels – as in Hawaii.
A glimpse at graphs on page 6 illustrates why. The average US residential consumer uses roughly 1,000
kWhs a month – it varies from state to state – and pays roughly $110 for service, virtually all collected
through volumetric consumption today.
Breakdown of the costs to its 3 main components suggests that generation accounts for roughly 64%, a
figure that is expected to decline as the renewable proportion of total generation rises while kWh
consumption declines over time for the reasons already discussed.
More interesting, however, is the breakdown of costs to energy and capacity, (graph on page 6, right)
which suggests that the capacity component of cost represents roughly 46% of total cost of service for the
average US residential consumer. And for the reasons mentioned, this component is on the rise.
It is not difficult to see why. Consider the case of a zero net energy home. If total consumption over a
year drops to zero, as it would, so does the customer’s bill, assuming it is entirely based on volume – as it
is in many parts of the US. In such a case, ―utility‖ revenues would evaporate while the costs of providing
capacity will significantly increase.
Once the nature and severity of the problem become clear, it is easy to look for solutions. They all boil
down to new ways to get customers to pay for services they need and value as with any essential service.
Will TOUs flatten California’s duck curve? Residential TOU rates proposed for 2021 under study by CPUC
Weekday Super-off Off-pk Peak Super-Pk
Winter
$ 0.132 $ 0.160 Spring $ 0.075 $ 0.121 $ 0.307 Outer Summer
$ 0.136 $ 0.373
Inner Summer
$ 0.132 $ 0.279 $ 0.600
Weekend Super-off Off-pk Peak Winter $ 0.075 $ 0.136 $ 0.159 Spring $ 0.075 $ 0.123 $ 0.146 Outer Summer $ 0.075 $ 0.130 $ 0.187 Inner Summer
$ 0.137 $ 0.226
Fixed Charge $ 11.33 per month (In 2021) Source: CPUC
11 December 2015 EEnergy Informer
Page 11
And that is where things get complicated because prices, rates and service quality are heavily regulated
and incredibly political nearly everywhere, even in so-called competitive retail markets.
EPRI report tactfully dances around the thorny rate design issues, partly because it is a research institute,
and its tax-exempt charter prohibits it from getting into lobbying and advocacy positions. Yet the
solutions to the problem are obvious for anyone interested. In a section discussing retail rates, EPRI refers
to several well-known tariff options including:
Time-of-use (TOU) rates;
Increased fixed charges;
3-part tariffs; and
Demand subscription.
While each offers some advantages, all take time and effort to implement and to educate consumers –
many of whom do not trust or believe their ―utilities‖ even though they rely on them, until the lights go
out.
Economists and tariff experts are broadly supportive of TOU rates since they are deemed to be more cost-
reflective compared to flat tariffs, especially as overall consumption levels flatten or fall while peak
demand continues to rise (graph on bottom of page 6).
Regulators in California, for example, are considering a number of proposals to introduce TOU rates to
tame the state’s so-called duck curve. The intention is to encourage consumers to use more juice when it
is in excess supply – including storing it in any form or shape they can, electric vehicle batteries included
– while cutting back when the reverse is true.
The table on page 10 illustrate an example of what future TOU tariffs in California may look like,
assuming the California Public Utilities Commission (CPUC) approves the proposal. The table shows
proposed rates that may be adopted as default tariffs for all residential consumers except low income who
will have their own subsidized rates.
In this example, customers may see super-peak rates as high as 60 cents/kWh during summer weekdays.
On the other extreme, they will be offered rates as low as 7.5 cents/kWh during super-off peak periods,
generally during spring months. The super-off peak rate will incent consumers not only to use all they can
but to store as much as they can. Electric vehicles with their on-board storage batteries will become even
more attractive if super-off peak rates become prevalent.
Three-part tariffs are also getting some traction as they purport to closely follow costs attributed to
serving customers in the emerging business environment. EPRI report provides an example of one such
tariff introduced by Salt River Project (SRP), a non-regulated utility operating in Arizona. The rate in
place starting Feb 2015 consists of:
A fixed charge of $18-20 regardless of usage level, peak demand or anything else. It may be
considered a connection or network fee;
An energy charge, slightly lower than prior volumetric charge, to recover the variable cost of
fuel and/or purchased power; and
A demand charge, which varies based on how customers’ peak demand coincides with the
network’s peak demand.
For a customer with a 8.5 kW solar panel, for example, the demand charge varies from $41/mo in the
winter to $126/mo in the summer for SRP’s customers.
EPRI, of course, does not endorse SRP’s rates or anyone else’s, but points out that new ways must be
12 December 2015 EEnergy Informer
Page 12
found to align costs of serving customers with revenues collected from them. This, as any regulator will
tell you, is easier said than done.
Other states examining 3-part tariffs include Nevada, among others. Describing the merits of its recent
application for solar customers filed with Public Utilities Commission of Nevada (PUCN) in early
August 2015, Kevin Geraghty, NV Energy’s vice president of Energy Supply said,
"A three-part rate design better reflects the unique costs of serving our net metering customers
and eliminates the unreasonable shifting of costs between those that can access rooftop solar and
net metering and those that don't," adding,
"This is a proven rate structure that has been in use by our commercial customers for more than
50 years. Under the proposal, net metering customers still have the opportunity to reduce their bill
from NV Energy if they reduce the impact they have on the grid.‖
As further described in the following article, the
debate about the future of distributed generation and
net energy metering is far from over.
There are indications, however, that regulators in
states where rooftop PVs are prominent, are moving
in the direction of allowing utilities to raise fixed
fees, impose special fees on new solar customers or
modifying or terminating favorable net energy
metering (NEM) laws.
In case of Hawaii, the regulator Hawaii Public
Utilities Commission (HPUC), under intense
pressure from the local utility, abruptly ended the
state’s net energy metering (NEM) law in October
2015 for new solar customers. Henceforth, new
customers will have to choose between two new tariffs: a grid-supply or a self-supply scheme further
described below. Neither is as favorable to solar PVs as the net energy metering tariff that is being phased
out.
The critics of HPUC say the move
will seriously hamper if not kill
rooftop solar PVs, now on 1 out of
11 customers’ roofs. Under the new
tariff, rooftop panels will be less
valuable than they currently are,
earning a mere 15-28 cent/kWh for
the juice fed into the grid rather than
the full retail tariff, which is as high
as 40 cents/kWh in some parts of
Hawaii for residential consumers.
Hawaii’s main utility, Hawaiian
Electric Co. (HECO), has been
vocal about the problems associated
with solar PVs affecting the
distribution network – some real,
others not – leading to onerous new
Source: REBECCA SMITH and LYNN COOK, Hawaii Wrestles With Vagaries of Solar Power, The Wall Street Journal, 29 June 2015
Number of states have limits on net metering, which puts a cap on how much solar can be generated on customers’ roofs
13 December 2015 EEnergy Informer
Page 13
interconnection policies in the past that dramatically reduced the rate of new installations and resulted in
widespread customer complaints. These plus the revenue erosion on HECO led to HPUC decision to
finally intervene.
The new Hawaiian tariffs replacing the existing NEM scheme are as follows:
Grid-supply option is similar to existing NEM tariff except that it pays customers a reduced
credit for any energy exported to the grid – between $0.15–0.28/kWh, compared to the state’s
average residential rate of around $0.38/kWh; and
Self-supply option does not allow customers to export any rooftop PV energy back to the grid.
This option appeals to those who do not have excess generation and/or have storage devices.
The solar lobby is not pleased.
HECO’s solar customers
currently consume about half of
the energy that their PV systems
produce, exporting the rest to the
grid.
NEM laws and fixed charges are
being reconsidered in a number
of jurisdictions across the US
despite the former’s popularity
with solar consumers and solar
installers.
The regulators do not wish to
anger the solar customers but are
becoming sensitive to the plight
of the utilities who are suffering
from revenue erosion while
higher costs are being shifted to
non-solar customers. The battle is just beginning.
Guess What: Integrated Wholesale Markets Are More Efficient Combining PacifiCorp and CAISO networks will produce benefits to both
ven before California Governor Jerry Brown signed SB 350 into law in early October, the
writing was already on the
wall that California
Independent System
Operator (CAISO) would be better
off operating within an expanded
footprint and by combining
California’s domestic generation
resources with those of the
neighboring states, who have a
different mix of resources, different
patterns of peak and generation, and a
transmission network that is already
in place to facilitate wholesale
E
One by one they go solar in Aloha State, and who can blame them
Source: REBECCA SMITH and LYNN COOK, Hawaii Wrestles With Vagaries of Solar Power, The Wall Street Journal, 29 June 2015
Total annual incremental cost savings (million 2015$) to PacifiCorp and ISO customers by benefit category, low and high scenarios, 2024 and 2030
Source: Regional Coordination in the West: Benefits of PacifiCorp. and CAISO Integration, for PacifiCorp. & CAISO by Energy & Environmental Economics, Oct 2015
14 December 2015 EEnergy Informer
Page 14
electricity trading in the West.
And even before Energy & Environmental Economics (E3), a San Francisco-based consultancy
specializing in simulating future market scenarios and outcomes, did the number crunching in a report
released in Oct 2015, anyone who knew anything about wholesale markets would intuitively say that
integrating CAISO market with those of its neighbors would be beneficial.
We, however, no longer have to rely on intuition since E3 has quantified the potential cost savings under
a number of scenarios. The E3 study looks at the integration of two systems, that of CAISO and
PacifiCorp (map on page 18). Moreover, it estimates the benefits of only 4 of many items to be gained
from integration, namely:
More efficient unit commitment & dispatch;
More efficient over-generation management;
Lower peak capacity needs for the combined system; and
Renewable procurement savings.
The other benefits, E3 says, are ―important
potential sources of additional value … but
are more difficult to accurately quantify.‖
E3 concludes, ―Over its first full 20 years,
assumed here to be 2020 to 2039, we
estimate that PacifiCorp and ISO integration
would yield $1.6 to $2.3 billion (2015$) in
total present value incremental savings for
PacifiCorp, and $1.8 to $6.8 billion for ISO
customers.‖
Needless to say, lots of assumptions go into
the analysis in quantifying each of the 4
major categories of benefits, taking into
account all manner of constraints –
geographical, transmission related,
operational, political, you name it. For
example, procurement of renewable
resources – a major and ambitious target for
California – can be achieved more efficiently
in a combined system than
individually (graph above and).
Ditto for all other benefits
estimated. The same for taking
advantage of differences in the
incidence of peak demand on
each network (graph on left).
Simply put, there are synergies
in combining the two systems.
With the gradual expansion of
CAISO’s energy imbalance
market (EIM), there is now
interest in forming a western
Illustrative renewable resource supply curves for the ISO, PacifiCorp, and combined across the PacifiCorp-ISO footprint
Source: Regional Coordination in the West: Benefits of PacifiCorp. and CAISO Integration, for PacifiCorp. & CAISO by Energy & Environmental Economics, Oct 2015
Illustration of peak capacity savings from PacifiCorp’s integration with the ISO
Source: Regional Coordination in the West: Benefits of PacifiCorp. and CAISO Integration, for PacifiCorp. & CAISO by Energy & Environmental Economics, Oct 2015
15 December 2015 EEnergy Informer
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regional ISO. Without doubt, the benefits of coordination among multiple entities in the West could result
in much bigger savings for the customers of the region, as determined by the E3 study.
How long would it take? After the passage of SB 350 (following article), there are far more pressing
reasons to move forward and far less uncertainty about its eventual de facto formation. What shape and
form it will take, however, remains to be seen.
CAISO Report
California’s Energy Vision: Bold And Daunting Governor Brown is pushing state agencies to fire on multiple cylinders
overnor Jerry Brown is an impatient man. In late April 2015, he signed an executive order to
reduce statewide greenhouse gas emissions to 40% below 1990 level by 2030. In 2006, the state
passed a law to reduce its emissions 20% below 1990 level by 2020, and 80% below 1990 level
by 2050 (graph below). But that was not enough. In early Oct 2015 he signed Senate Bill 350
(SB 350) to increase the percentage of new renewables in the electricity to 50% also by 2030 – the current
law requires 33% by 2020 – which the state is on target to achieve or possibly exceed.
These and a number of other ambitious
initiatives passed over the past few years
are overlapping and occasionally
duplicating, with deadlines that are not
necessarily coordinated.
Moreover, different agencies are
responsible for meeting the targets –
without specific provisions on
coordination, collaboration or liaison
among them. The California Air
Resource Board (CARB), for example,
is in charge of the climate bill; the
California Public Utilities Commission (CPUC) is directly or indirectly
responsible for other programs such as
meting energy efficiency and renewable targets; the California Energy Commission (CEC) is
responsible for longer term planning and
forecasting while California Independent
System Operator (CAISO) is mandated to keep
the grid reliable and the lights on, no matter what
else does or does not happen.
If it weren’t for the fact that there are so many
targets and mandates and so little time to achieve
them, the individual agencies might have been
able to cope. But as is, it is impossible for
anyone to meet the target without the assistance
of the others – and the state’s multiples of
utilities, which includes 3 large vertically
integrated ones serving roughly 80% of the
G
California's GHG Emission Reduction Goals
Source: 2015 Draft Integrated Energy Policy Report, California Energy Commission, Oct 2015
California’s GHG Emissions by Sector (Million Metric Tonnes of CO2 Equivalent- MMTCO2e)
Source: IEPR, CEC, Oct 2015
16 December 2015 EEnergy Informer
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customers plus two large municipal utilities and a number of smaller ones that are not directly regulated
by CPUC, makes the task even more complicated.
To address these issues, in October 2015, the CEC released a massive report, the Integrated Energy
Policy Report (IEPR) looking at many of the challenges facing the state. It offers a glimpse of how
difficult it will be for the various agencies to meet the targets, and for the state to keep its economy
humming along.
The Governor, however, believes that not only can the multiples of targets be met but it will actually be
good for the state’s economy at the end, making it more vibrant and dynamic. Referring to his ambitious
green and clean vision during his second inaugural address he famously said,
―Taking significant amounts of carbon our of our economy without harming its vibrancy is
exactly the sort of challenge at which California excels,‖
adding,
―This is exciting, it is bold, and it is absolutely necessary if we are to have any chance of stopping
potentially catastrophic changes in our climate system.‖
The governor clearly believes in what he says, and more or less says what he believes. Now in his 4th and
most probably last term in office – he was the youngest governor during his first term and is now the
oldest – Brown dismisses his critics as mere naysayers. How are the targets to be achieved is left to the
technocrats and bureaucrats. As far as he is concerned, those are the mere details.
CEC’s IEPR, on the other hand, is focused on the details: how to reach the targets now that they are in
place. The starting point – the first chapter of the report – is energy efficiency. There will be less GHG
emissions if less energy is used (Figure above).
To make it happen, all sorts of measures, regulations, building codes and appliance energy efficiency
standards must be set and enforced. Energy efficiency does not simply happen.
A central component of energy efficiency policy is to encourage the state’s energy utilities, both electric
and gas, to meet targets set by the CPUC. But more will be needed, including zero net energy buildings
(ZNE), starting 2020 for new residential and 2030 for new commercial buildings.
Reduced Energy Consumption by Doubling Energy Efficiency
Source: IEPR, CEC, Oct 2015
17 December 2015 EEnergy Informer
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Considerable space in the report is devoted to decarbonizing the electricity sector, starting with phasing
virtually all imported coal generated electricity by 2025 as illustrated in figure below. California has no
coal-fired plants within its own borders but historically imported a lot of coal-generated power from its
neighbors, a hypocritical practice known as coal-by-wire, which is being phased out over time.
With coal virtually
out of the picture,
California is focused
on increasing its
share of renewables,
eventually making
natural gas as a
backup to
intermittent
renewable
generation.
The progress to date
has been impressive
and SB 350 will
guarantee the
continued rise of
renewables over
time. As shown in
graph below, a series of successively rising renewable portfolio standards (RPS) passed since 2002,
reinforced in 2006, and 2011, culminating with SB 350 in 2015, will increase the share of new renewables
to 50% by 2030.
That plus the
existing large
hydro, geothermal
and biomass
(components on the
bottom of graph on
right) means that by
2030 roughly 70%
of California’s
electricity will be
generated from
renewables – an
impressive feat for
the world’s 8th
largest economy.
The 3 large IOUs in
California already
have contracts in
place to nearly meet
or in some cases
beat the 33% RPS
target by 2020 as
illustrated in table
on page 18.
Annual and Expected Energy From Coal Used to Serve California (1996-2026)
Source: IEPR, CEC, Oct 2015
California Renewable Energy Generation From 1983-2014 by Resource Type (In-State and Out-of-State); does not include existing large hydro generation
Source: IEPR, CEC, Oct 2015
18 December 2015 EEnergy Informer
Page 18
As described in Nov 2015
issue of this newsletter,
the most pressing
challenge to meet the 50%
RPS by 2030 is not lack
of renewable generation
options – California is
blessed with plenty of
solar, wind, geothermal,
biomass, and other forms
of renewable energy – but how to handle the intermittency of large volumes of renewables.
That is why CAISO is looking at a variety of strategies to expand its footprint (map below), one way or
another, by relying more on its neighbors to export or import energy as required to keep the grid reliable
while absorbing as much as the available renewable generation without resorting to curtailment.
CAISO has already embarked on an
expanded energy imbalance market
(EIM), which allows some of the
state’s excess generation to be shipped
elsewhere – and the reverse depending
on supply and demand conditions.
Some of California’s neighbors to the
East are coal-heavy and do not appear
to be concerned about climate change.
Governor of coal-rich Wyoming, for
example, is a strict non-believer. You
would expect that much from the
governor of a state that produces more
coal than the other 6 major coal-
mining states combined.
In this context, California has to find a
way to transmit its excess renewable
generation and import energy when its
own resources fall short without
becoming reliant on out-of-state coal-
fired generation – which it is trying to
get rid of. This is a sensitive – and
controversial – issue as the Golden
State is essentially forced to embrace its neighbors to balance its increasingly unmanageable intermittent
resources, further described in the E3 article (page 13).
De-carbonizing the electric power sector, as difficult as it may seem, is actually the trivial part. The real
challenge is what to do with the transportation sector, which currently is overwhelmingly dependent on
liquid petroleum products.
On this and other challenges, there is more than plenty to chew on in the latest IPER including revised
estimates on the potential impact of self-generation on utility sales. CEC figures customer self-generation,
mostly through solar rooftop PVs, will reduce state-wise utility retail sales by more than 35,000 GWhs by
2025, an increase of 12,000 GWHs since the 2014 projections (graphs next page). That represents roughly
RPS Progress by California’s Investor-Owned Utilities as of Oct 2015
Source: IEPR, CEC, Oct 2015
Existing and future Energy Imbalance Market (EIM) players
Source: IEPR, CEC, Oct 2015
19 December 2015 EEnergy Informer
Page 19
12% of statewide retail sales by 2025, depending on which scenario is assumed.
As described in related article on page 6, there are mounting pressures to modify California’s retail tariffs
not only in response to the growth of intermittent renewables, but also to deal with the potential death
spiral scenario.
Governor Brown, like many others in the arid Southwest, is seriously concerned about the impact of a
changing climate on the state’s meager water resources. As recently as 1950, California’s massive
hydroelectric system generated 60% of the total consumption. But there are few places left to dam, plus
the fact that the state’s
population and demand have
more than quadrupled since
1950.That plus the dwindling
rain and snowfall have
reduced the hydro’s share to
around 14% today.
That suggests that water,
more than power, will
become the dominant theme
in arid California and
neighboring Southwest in the
coming decades. A changing
climate, especially one that is
drier, warmer, and drops less
snow in the mountains, will
not be good for California’s
power system or its critical
agriculture sector.
Which explains why
Governor Brown is so passionate about climate change. Not only is California getting gradually warmer
and drier, there are more weather anomalies over time, as reflected in the records going back to 1920s
(graph above). Brown is expected to attend the Paris conference, determined to convince others to do
what California is attempting to achieve. It will be a tough message for many US governors.
IPER
Statewide Self-Generation Peak Reduction Impact Statewide Baseline Retail Electricity Sales
Source: IEPR, CEC, Oct 2015
Global and California Temperature Anomalies
Source: IEPR, CEC, Oct 2015
20 December 2015 EEnergy Informer
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ACEEE Ranks States For Energy Efficiency Leaders get better, the laggards simply don’t give a damn
ike an annual beauty contest, the American Council for an Energy Efficient Economy (ACEEE)
ranks states on their energy efficiency programs using a rather complicated scoring system. The latest
findings puts MA, CA, VT, RI and OR on top and MS, LA, SD, WY, and ND as ―most in need of
improvement‖ – a polite way of saying they barely make it on the bottom of the rankings (map below).
In its latest report, ACEEE says,
―Total (US) spending for electricity efficiency programs in 2014 reached $5.9 billion. Adding this
to natural gas program spending of $1.4 billion, we estimate total efficiency program spending of
more than $7.3 billion in 2014. Reported state budgets were again slightly higher than actual
spending. In 2014 budgets totaled $8.2 billion, a significant increase over the $7.7 billion we
reported last year.‖
Adding,
―Savings from electricity efficiency programs in 2014 totaled approximately 25.7million
megawatt-hours (MWh), a 5.8% increase over last year. These savings are equivalent to about
0.7% of total retail electricity sales across the nation in 2014. Gas savings for 2014 were reported
at 374 million therms (MMTherms), a 35% increase over 2013.‖
There are many reasons why some states excel and others barely bother when it comes to energy
efficiency. Politics, regulations, incentives, retail prices, climate, the composition of the economy and a
number of other factors are at play. The scoring system used in the ACEEE rankings and other details of
the study may be found at URL below.
ACEEE Report
L Who is efficient and who is not
Source: 2015 state energy efficiency scoreboard, ACEEE, Oct 2015
21 December 2015 EEnergy Informer
Page 21
Under Pressure Coal Losing Market Share Coal mining, never glamorous or hugely profitable, will become even less so
hile delegates from around the world begin negotiating in Paris on how to cut down
greenhouse gas emissions over time this month, executives at many coal mining companies
and coal burning utilities are debating how to make the most of a dire future and a potentially
losing battle with the momentum to avert climate change. It is not a pretty picture.
In the US, where coal has been the dominant source of electricity generation for more than a century, the
prospects are not looking good. According to the Energy Information Administration (EIA), in July
2015 coal generated less electricity than natural gas (graph below). That may not sound like a big deal,
but it shows that the gradual decline of coal is taking its toll – and there are no signs of reversal.
The gradual decline of coal is reflected in the prospects of coal mining companies – at least 26 have gone
bankrupt since 2009 while the rest are suffering from dramatic decline of share value. Not surprisingly,
the number of operating US coal mines has fallen to its lowest level since 1923, according to the Energy
Information Administration.
At 31%, coal-fired generation was the largest source of greenhouse gas emissions in the US in 2013 and
coal was responsible for 77% of CO2 emissions in the power sector. No wonder the Environmental
Protection Agency (EPA) has proposed to cut carbon emissions by 32% by 2030 under Clean Power
Plan. If successful, it will further increase pressure on coal.
Of course, the pressure on coal is not limited to the EPA. Environmental activists are exerting increased
pressure on the investment community to divest of fossil fuel assets in general, and carbon-heavy coal in
particular. These efforts are beginning to be felt in some circles.
W
Coal losing market share to gas – and renewables Gas-fired generation made significant gains across all regions of the US in July 2015, while coal fell
Source: Energy Information Administration
22 December 2015 EEnergy Informer
Page 22
In early October, Citigroup announced a new policy to cut its lending to the global coal mining industry.
The bank said it had begun to cut its
credit exposure to coal mining and that
―going forward, we commit to continue
this trend of reducing our global credit
exposure to coal mining companies.‖ A
wise move, especially in view of the
recent remarks by the head of Bank of
England (lead article).
Citigroup is the second major bank to cut
financing for coal mining in 2015 after
Bank of America announced a similar
policy in May, following years of
campaigning by Rainforest Action
Network (RAN) and allied groups.
Europe’s third largest bank Crédit
Agricole also made a similar
commitment earlier this year, under
pressure from European environmental
activists.
Citigroup’s move follows the launch of the Paris Pledge this summer, a global coalition of over 130
organizations calling on
the banking sector to end
its support for coal
mining and coal-fired
power prior to the Paris
Climate Conference in
December.
―We are encouraged to
see Citigroup begin to
move away from lending
to coal mining,‖ said
Lindsey Allen,
Executive Director of
RAN. ―But reducing
credit exposure is only a
partial step forward. We
urge Citigroup and Wall
Street laggards such as
Morgan Stanley to cut all financing ties to both coal mining and coal-fired power.‖
Renewables Are The Future Renewables will gradually squeeze fossil fuels out of power generation sector, and possibly more
Renewable power generation capacity accounted for 1,828 gigawatts (GW) in 2014,
compared to around 1,500 GW of gas-fired power station and 1,880 GW of coal-fired power
station globally. The majority of power generation comes from hydropower (1,172 GW), ―
US coal is dying of natural causes – that is natural gas
Source: Arch coal’s future looks darker, Spence Jakab, The Wall Street Journal 27 Jul 2015
Leave the carbon in the ground
Source: Carbon Tracker
23 December 2015 EEnergy Informer
Page 23
followed by wind power (370 GW), and solar photovoltaics (175 GW). In particular, the share of
variable renewable energy from solar photovoltaics and wind power is expected to increase from
3% of annual generation production in 2014 to around 20% by 2030.This development will have
profound impacts on how our power systems are operated, managed, financed and governed.‖
That is the first paragraph in the
Executive Summary of a report
released by the International
Renewable Energy Agency (IRENA), appropriately titled
The Age of Renewable Power:
Designing national roadmaps
for a successful
transformation. Coming from
IRENA, the mission to transform
the power sector should come as
no surprise. That, after all, is the
mission of the agency.
What strikes one about the
dramatic rise of renewables is:
First, there are already big – at least in terms of installed global capacity as illustrated in
graph above – while enjoying continued rapid growth;
Second, with the exception of a few countries, they have a long way to go – assuming
the momentum of the past decade can be maintained, or possibly accelerated as a result
of what may be decided in Paris this month.
India, for example, has pledged to add 175 GW of new renewable capacity to its network by 2022 – a 5-
fold increase from the current 36 GW; roughly 100 GW of which are to be solar. In addition, India has
announced a significant new target: it wants renewables to account for 40% of installed capacity by 2030
from the current 13%.
These are impressive targets
for a developing country. It
puts many advanced
economies to shame.
India’s mercurial Prime
Minister Modi believes
that a tenfold increase in
India’s renewable base will
drive technology innovation
and cost reduction not just
in India, but globally. He
has reasons to be optimistic:
There has already been a
70% drop in the installed
cost of solar in the past five
years.
China and other countries
have also announced
ambitious plans. The fossil
Renewables already prominent in global installed electricity landscape Global installed capacity in 2014, in GW
* These subtotals are included in renewable total
Source: The Age of Renewable Power: Designing national roadmaps for a successful transformation, International Renewable Energy Agency, 2015
More to follow the current leaders Current and future VRE share in annual generation for G20 countries between 2014 and 2030
Source: The Age of Renewable Power: IRENA, 2015
24 December 2015 EEnergy Informer
Page 24
fuel industry – especially coal – will gradually be squeezed out of the power generation sector. It is only a
matter of time as already evident in the US (preceding article).
The continued rise of
renewables is virtually
inevitable if current
trends continue.
Renewables are
abundant everywhere,
and they are
increasingly cost-
competitive with
conventional
technologies.
The main obstacles are
financing and
integration into the
existing grids in
developed counties –
and non-existing grids
in many developing
countries.
IRENA’s report is
focused on the integration issues. It is a challenge to be sure, but so is the challenge of averting climate
change.
IRENA
Ignore The Risks Of Demand Destruction At Own Peril Challenging the business as usual worth further examination
nvironmental organizations
have been operating on
overdrive in anticipation for
some sort of a breakthrough at Paris
this month. London-based Carbon
Tracker is no exception. In a report
released in October 2015, it said
―Rapid advances in technology,
increasingly cheaper renewable
energy, slower economic growth and
lower than expected population rise
could all dampen fossil fuel demand
significantly by 2040.‖
If you are looking for a contrarian
view of the future, this is a must read
since it challenges the business–as-
E
Integration of intermittent resources main challenge Comparison of electricity production and spot prices in Germany between 2011 and 2015
Source: The Age of Renewable Power: IRENA, 2015
IEA and others consistently missing the mark on growth of renewables
Source: Lost in Transition: How the energy industry is missing potential demand destruction, Carbon Tracker, Oct 2015
25 December 2015 EEnergy Informer
Page 25
usual (BAU) assumptions made by most large energy companies and the likes of the International
Energy Agency (IEA) or the Energy Information Administration (EIA) as never before.
Carbon Tracker’s analysis, described in Lost in Transition: How the energy industry is missing
potential demand destruction, challenges 9 common BAU assumptions made by the big energy
companies when calculating that fossil use will continue to grow for the next few decades. It says,
―Typical industry scenarios see coal, oil and gas use growing by 30%-50%
and still making up 75% of the energy supply mix in 2040. These scenarios do not reflect the
huge potential for reducing fossil fuel demand in accordance with de-carbonization pathways.‖
Adding,
―The in-depth analysis exposes that fossil fuel industry thinking is skewed to the upside, and
relies too heavily on high demand assumptions to justify new and costly capital investments to
shareholders. Reviewing previous industry, EIA and IEA projections, shows them to be too
conservative in their expectations for renewables growth. This raises questions over the likely
accuracy of their future projections.‖
In describing the report’s contrarian view, Carbon Tracker’s head of research, James Leaton, said:
―We have seen in recent weeks how the fossil fuel sector has misled consumers and investors
about emissions – the Volkswagen scandal being a case in point – and deliberately acted against
climate science for decades, judging from the recent Exxon expose. Why should investors accept
their claims about future coal and oil demand when they clearly don’t stack up with technology
and policy developments?‖
―Investors need to challenge companies who are ignoring the demand destruction that the market
sees coming through much sooner than the business as usual scenarios being cited by the
industry. Otherwise they will be on the wrong side of the energy revolution.‖
The study finds that conventional fossil fuel company business models could be woefully behind the
curve due to, for example, underestimating changes in emissions policy, technological advances or energy
efficiency gains that can cause dramatic changes in demand trends. This is the first time a wide-range of
fossil fuel industry demand scenarios has been compared with alternative and credible financial market
views.
The analysis shows how the industry is assuming very slow incremental changes in the energy supply mix
going forward. This ignores the potential downside risk explored in the research. Across all factors
Challenging the business as usual: Future may evolve on a different trajectory than assumed
Source: Lost in Transition, Carbon Tracker, Oct 2015
26 December 2015 EEnergy Informer
Page 26
contributing to energy demand there is scope for reducing future emissions levels and staying within the
2˚C threshold. This includes considering different fundamental market conditions relating to population
rise and GDP growth as well as more obvious advances in energy efficiency and clean technology.
Carbon Tracker’s senior analyst and co-author, Luke Sussams, said:
―The incumbents are taking the easy way out by exclusively looking at incremental changes to
the energy mix which they can adapt to slowly. The real threat lies in the potential for low-carbon
technologies to combine and transform society’s relationship with energy. This is currently being
overlooked by Big oil, coal and gas.‖
Lost in Transition examines 9 key flaws in energy companies’ assumptions that together understate the
risk of demand destruction (visual on page 25). It says, in part:
Global population growth may not rise to 9 billion by 2040 – the UN’s 2015 median-
variant forecast applied by all fossil fuel companies - but may only climb to 8.3 billion
according to climatic and socioeconomic modeling.
GDP growth could be lower than expected in major markets, including China and the
US For example, the OECD sees global GDP grow at 3.1% to 2040 rather than the
3.4% assumed by the IEA – a key industry reference point. This difference equates to
roughly a drop in demand equivalent to half a year’s global energy demand in 2012.
The world is increasing its ability to decouple energy demand from economic
growth. For example, we find that if global energy intensity of GDP falls by 2.8% per
annum as opposed to 2.2% in the IEA’s New Policy Scenario, demand is drastically
lower.
Incumbents generally expect carbon fuels to make up 75% of energy demand by 2040.
This is inconsistent with the de-carbonization plans of Intended Nationally Determined
Contributions (INDCs). We calculate that fossil fuel company scenarios see cumulative
CO2 emissions to 2030 being up to 100GtCO2 higher than in an INDC scenario. This
higher carbon intensity assumptions overlooks the fact that huge shifts are occurring in
the energy sector
The speed and scale of advancements in the competitiveness of renewable energy
technologies is exceeding expectations. We show the extent to which the IEA in
particular have been hugely conservative in the past and remain so compared to other
industry forecasts (graph on page 24).
Cost reductions of energy (battery) storage are seven years ahead of average forecasts
made last year, meaning the technology could be cost-competitive with power grids by
2025. The synergy between energy storage and renewable energy technologies has the
potential to transform energy markets, but is not being factored into fossil fuel
scenarios.
Global coal demand is structurally declining. China has shifted its energy system to
such a degree that peak coal demand could occur in the very near-term. India has an
ambitious short-term solar PV plan (160 GW of solar and wind by 2022) that, by our
calculations, could displace 158 million tonnes – roughly India’s total coal imports in
2012.
Companies expect oil demand to grow between 0.4% and 0.8% a year to 2040, much
from the road transport sector, oil’s biggest market. However, efficiency regulations of
combustion engine cars will hit oil demand in the short-term. Longer-term, oil industry
scenarios see negligible take-up of electric vehicles (EVs) by 2040 but EVs could be
cost-competitive with combustion engines by 2025 according to alternative forecasts,
resulting in exponential growth.
All scenarios see future growth in gas demand. But as energy markets change, the
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levels of gas demand will be lower if the fuel loses its base-load role and switches to
being a backup for renewables.
One can, of course, agree or
disagree with one or more of
these alternative assumptions.
But even if some of the 9
assumptions materialize, they
will put the global energy
system on a different trajectory
that those envisioned by the
mainstream incumbents, who
may have strong incentives to
prolong the status quo for as
long as they can for obvious
reasons.
The implied challenge to the
status quo fossil fuel growth
scenarios deserves further
examination. Plus, it is more
fun to imagine futures that are
different than those we are
familiar with, and possibly
radically so. One scenario, not included in Carbon Tracker report may be additional pressures brought on
fund investors to divest of fossil fuel assets as described elsewhere in this issue.
Carbontracker
American Nukes At Record Performance Not many new nukes in the pipelines, but existing ones running at full throttle
he nuclear news in the West has not been good lately. While several countries are phasing out
their nukes, few are building new ones, and those who dare, are confronting construction delays
and cost over-runs, which scares away many potential investors. Moreover, with sluggish demand
growth, a flood of renewables and depressed wholesale electricity prices,
who needs a big chunk of baseload capacity anyway?
All that notwithstanding, existing American nukes are performing at
impressive record performance. They are, you might say, literally fighting
for their survival in a tough financial market.
According to the latest data from Energy Information Administration
(EIA) nuclear reliability and performance in the US has consistently
improved since the 1970s. For example, improvement in average plant
capacity factor – the ratio of actual generation to maximum potential
generation – has increased substantially (Table on right) to new highs.
On the other end, plant outages averaged less than 3% of total US nuclear
capacity during the all-important peak summer season this year—from
T
What if demand for oil peaks and falls? The energy industry foresees oil demand growth (% CAGR)
Source: Lost in Transition, Carbon Tracker, Oct 2015
Running at full throttle
Source: EIA
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June through August. The result is far better than even the lowest range of data from any of the past five
years. Impressive.
And it hasn’t just been a summer
success story. During the spring
maintenance season—a time when
many plants conduct planned
shutdowns for refueling and to get
units in top condition for summer—
outages averaged less than 15% of
total US nuclear capacity, also
better than any other period from
2010 through 2014.
Moreover, in October 2015, the
Nuclear Regulatory Commission (NRC) gave a new operating license
to Tennessee Valley Authority
(TVA) to operate the just
completed Watts Bar Unit 2
reactor – the first ―new‖ reactor to
begin operation in the US in over
20 years.
It sounds like good news until one
realizes that TVA started
construction of Watts Bar 2 in early
1970s – you need to consult the
company’s historian for the details
– and the plant has been delayed,
canceled, restarted, and has sat dormant for roughly 40 years. It is a living dinosaur in the sense that its
design and much of its hardware is rather old even before the reactor starts ramping up to full production
within the next few months, according to TVA’s CEO, Bill Johnson. The plant, mothballed in 1985, is
expected to cost $4.5 billion – cheap by today’s standards.
Watt Bar 2, plus 4 other reactors currently under construction by Southern Company and Scana Corp.
are the only others expected to be added to the fleet of 99 existing reactors in the US. Few companies are
even considering the nuclear option for all the reasons mentioned. High performance records are certainly
good to have but not enough to attract new investors.
Location of nukes in US
Source: The nuclear industry’s contribution to the US economy, prepared for Nuclear Matters by The Brattle Group, 7 Jul 2015
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EEnergy Informer
Copyright © 2015 December 2015, Vol. 25, No. 12 ISSN: 1084-0419 http://www.eenergyinformer.com
EEnergy Informer is an independent newsletter providing news, analysis, and commentary on the global electric power sector. For all inquiries contact Fereidoon P. Sioshansi, PhD Editor and Publisher 1925 Nero Court Walnut Creek, CA 94598, USA Tel: +1-925-256-1484 Mobile: +1-650-207-4902 e-mail: [email protected] Published monthly in electronic format. Annual subscription rates in USD: Regular $450 Discounted $300 Limited site license $900 Unlimited site license $1,800 Student/special rate $150
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