EYE ON THE MARKET • ENERGY OUTLOOK 2019

Mountains and Molehills:

Mountains and Molehills.Mountains and Molehills. The Green New Deal mandates zero net emissions for the US by 2030 for the entire energy sector (not The Green New Deal mandates zero net emissions for the US by 2030 for the entire energy sector (not just from electricity generation), and does so while phasing out nuclear power and relying heavily on carbon sequestration by just from electricity generation), and does so while phasing out nuclear power and relying heavily on carbon sequestration by forests. This sets a goal that cannot be achieved. At best, the Green New Deal is a slogan to galvanize support for change; at worst, forests. This sets a goal that cannot be achieved. At best, the Green New Deal is a slogan to galvanize support for change; at worst, it’s a sign of how little work its proponents have done. This year’s paper gets into the details of where energy comes from, how it’s it’s a sign of how little work its proponents have done. This year’s paper gets into the details of where energy comes from, how it’s used, and the de-carbonization challenges facing the world’s industrialized and emerging economies. Additional topics include the used, and the de-carbonization challenges facing the world’s industrialized and emerging economies. Additional topics include the latest research on wildfi res, and Trump’s War on Science.latest research on wildfi res, and Trump’s War on Science.

Achievements and Distractions on the Road to Decarbonization

J.P. MORGAN ASSET MANAGEMENT

1

Preamble on the Green New Deal

There has been progress de-carbonizing electricity due to declining wind and solar power costs. However, de-carbonization of industry, transport, agriculture and buildings, the sectors which consume over 2/3 of fossil fuels, has been minimal given the technical, physical and practical challenges in the way. To assert that the US can reach zero net emissions by 2030, as the Green New Deal does, and for the entire energy sector (not just from electricity generation), and while phasing out nuclear power and relying heavily on carbon sequestration by forests1, sets a goal that cannot in our view be achieved. We agree with our science advisor Vaclav Smil that Green New Deal goals are not in the realm of the possible, that they do not appear grounded in existing scholarship on energy de-carbonization, and that they are not a useful foundation for a serious policy discussion.

Some on the right are accused of being “intellectually bankrupt” on climate issues, and I do see evidence of that. But being intellectually dishonest about the viability of the Green New Deal does no one any favors either2. At best, it’s a slogan to galvanize support for change; at worst, it’s a sign of how little work its proponents have done. This year’s paper gets into the details of where energy comes from, how it’s used, and the de-carbonization challenges facing the world’s industrialized and emerging economies.

Michael Cembalest JP Morgan Asset Management

1 Net vs Gross. The Green New Deal proposes removing CO2 from the atmosphere via afforestation, allowing for a small amount of gross CO2 emissions to remain. See page 12 for more on sequestration through forest management.

2 Keep in mind what happened to Stanford’s Mark Jacobson and his 100% US renewable electricity plan for 2050, which is magnitudes less ambitious than the Green New Deal. The Jacobson plan was thoroughly rebutted and rebuked in 2017 by a team of 21 energy scientists and policymakers in the Proceedings of the National Academy of Sciences. We went through the details last year, since so many media outlets report on the Jacobson plan as a viable, realistic solution (as the NY Times continues to do). A link to our discussion can be found on page 5.

0

1

2

3

4

5

1990 2000 2010 2020 2030

Historical (EPA)

IEA: Current Policies Scenario

IEA: New Policies Scenario

IEA: Sustainable Development Scenario

Green New Deal objective

Source: US EPA, IEA World Energy Outlook, JPMAM 2018. Net of land use, land-use change and forestry carbon sinks. The CO2 decline from 2007 to 2017 was due in roughly equal parts to declining energy use, the transition from coal to natural gas, and the increase in wind and other renewables.

The Green New Deal objective, in contextUS CO2 emissions (net), gigatonnes per year

Why the Green New Deal’s 2030 goal is unattainable

Consider the International Energy Agency’s “Sustainable Development” scenario for the US (blue dotted line), in which:

overall US primary energy use declines to 1988 levels

solar generation grows by a factor of 11x

wind generation grows by a factor of 5x

nuclear generation is unchanged (no decommissioning)

90% decline in coal use for power and heat (industrial sector switches to solar thermal and geothermal energy)

electric vehicles reach 40%-50% of the passenger fleet from today’s 1%-2% levels

oil use declines by 50% due to electric vehicles and 40% improvement in gasoline/diesel mileage per gallon

60% decline in truck CO2 emissions per tonne of freight

energy intensity of res./comm. buildings declines by 30%

In this highly transformational scenario, which would require a Herculean effort to accomplish, US CO2 net emissions decline by 40% by 2030, and not to zero as imagined by the Green New Deal

2

Mountains and Molehills: Achievements and Distractions on the Road to De-Carbonization

Executive Summary

Impressive global wind and solar milestones have been reached in the last few years: declining upfront capital costs, electricity auction prices comparable to natural gas, rising capacity factors and capacity additions which have exceeded coal and natural gas for the 5th year in a row. These trends, shown on page 6, are the by-product of scale, innovation and plenty of subsidies.

Here’s the “but”: electricity is less than 20% of global energy consumption. Unless progress is made reducing direct fossil fuel use by industry and transport, de-carbonization goals might not be met in the timeframes often cited. Let’s take a closer look.

The first chart shows primary energy used to generate electricity on a global basis, measured in “quads” (quadrillion BTUs). In 2017, the renewable share reached 25%. Hydroelectric power accounted for 16%, and wind and solar combined accounted for 5%, up from 0.5% in 2004.

The second chart shows how electricity gets generated: 225 quads of primary energy are required to generate 75 quads of electricity. Where did the rest go? 150 quads are lost to thermal conversion3, power plant consumption and transmission.

3 Thermal conversion losses vary by technology and age. Most US coal plants have thermal efficiency rates of 32%-38%, while natural gas combined cycle power plant efficiency rates are closer to 50%, with record ratings of about 60% for the latest additions. Of the factors mentioned above, thermal conversion is by far the biggest source of energy loss, accounting for 90% of the gap between primary energy and electricity consumed.

0

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100

150

200

250

Primary energy for electricity: 25% renewable, mostly from hydropower with growing shares from wind...quadrillion BTU, global

Source: Energy Information Administration, JPMAM. 2017.

Primary energyfor electricity

Renewable 25%

Nuclear 12%

Coal 40%

Nat gas 20%

Petroleum 3%

Hydro 16%

Wind 4% Geo/Biomass 2% Solar 1%

…thermal conversion and transmission losses reduce end-user electricity to 1/3 of its primary energy inputs…

Source: Energy Information Administration, JPMAM. 2017.

Petroleum

Coal

Nat gas

Renewable

Nuclear

0

50

100

150

200

250

Primary energyfor electricity

0

50

100

150

200

250

Global electricity consumption

Electricity

3

While fossil fuels are used to generate electricity, they’re also used to power combustion engines, for heating/smelting and as raw materials. In the third chart, we break down global energy consumption into the three major users of energy (industry, transportation and residential/commercial buildings), and their energy sources. These charts highlight the limits of just de-carbonizing the electricity grid.

Electricity is only 17% of global final energy consumption, and accounts for less than one third of global fossil fuel use

Globally, the industrial sector is the largest user of energy and is heavily reliant on direct fossil fuel use; transportation is almost 100% reliant on petroleum products

Fossil fuels accounted for ~85% of global primary energy in 2017. Starting in 2010, fossil fuel shares began to decline at the rate of 0.25% per year, mostly due to the rise in renewable power generation

Energy solutions need to be designed for increasingly urbanized societies, rendering discussions about “off-the-grid” approaches much less relevant

While these statistics are global, electricity shares of total energy use and fossil fuel shares are similar in the US, China and Europe4. Hence the challenges Germany faces as it aims for a 40% decline in emissions by 2030, and challenges the US faces with any plan that aims for zero net emissions by the same year.

4 Some significant differences: the US uses more energy for transport than for industry, and industrial/power sectors are more reliant on natural gas than coal. In China, these patterns are reversed. In both countries, the electricity share of energy use is less than 20%, and fossil fuels account for more than 80% of primary energy use.

Electricity Electricity

PetroleumPetroleum

Petroleum

Coal

Coal

Nat gas

Nat gas

Renewable

Industrial Transport Resid/Comm

...at which point electricity only represents 17% of total energy consumed, the remainder being direct energy use quadrillion BTU, global

Source: Energy Information Administration, JPMAM. 2017.

Global energy consumed by end-user

Petroleum

Coal

Nat Gas

Renewable

Nuclear

0

50

100

150

200

250

Primary energyfor electricity

Fossil fuels used to

generate electricity (indirect),

141

Fossil fuels used

for all other

purposes (direct),

341

Source: EIA, JPMAM. 2017.

Electricity accounts for less than one third of global fossil fuel consumptionQuadrillion BTU, global

76%

78%

80%

82%

84%

86%

88%

90%

92%

94%

96%

'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 '25 '30 '35 '40

Source: BP Statistical Review of World Energy. 2018.

The world uses fossil fuels for ~85% of its energy% of global primary energy consumption from coal, oil and nat gas

Nuclearadoption

era

Solar/windera begins

IEA estimates0

10

20

30

40

50

60

70

80

90

100

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Source: UN World Urbanization Prospects. 2018, forecast to 2050.

Living for the city: global urbanization trends% of total population

China

India

Japan

USA

Europe

S. AmericaAfrica

4

Where does that leave us? With hard-to-reach de-carbonization targets, for two main reasons:

The energy mix doesn’t change that fast. Over 125 countries have renewable energy regulations in place for the power sector, up from 50 a decade ago. But even if renewable sources rose to 50% of electricity generation, fossil fuels could still represent ~70% of total energy use unless transport and industry decarbonize as well. On transportation, the IEA has one of the most optimistic EV forecasts. However, its New Policies Scenario for 2040 does not show substantial de-carbonization of global energy use: while coal plateaus and renewable energy doubles, natural gas meets most of the world’s growing energy demand. Petroleum use doesn’t decline either, despite the anticipated rise of EVs.

Even when including bioenergy5, the IEA renewable share forecast expands from 14% in 2016 to just

20% by 2040. While CO2 emissions grow more slowly in this scenario, they still rise.

Increased energy use. The IEA projects global energy demand to rise by ~25% from 2017 to 2040 as emerging economy increases dwarf energy use reductions forecast for Europe and Japan.

Hard to reach de-carbonization targets argue in our view for significant funds spent on flood prevention/ remediation projects, which we discussed in detail last year (see link on page 5).

5 Bioenergy provides 10% of the world’s primary energy. It may sound “green”, but ~50% of bioenergy is consumed in developing countries for cooking and heating, using open fires or cookstoves with considerable negative impact on health (smoke pollution) and environment (deforestation). The remainder represents modern bioenergy used for heat, and smaller amounts used for transportation and electricity. Even modern biomass is not as green as you might think; we wrote about this in 2017. As a result, bioenergy is different from hydro, wind and solar, which is why we show it separately in the chart.

PetroleumPetroleum Petroleum

Coal Coal Coal

Natural gas Natural gasNatural gas

NuclearNuclear

NuclearRenewables

Renewables

Renewables

BioenergyBioenergy

Bioenergy

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2017 2025 2040

IEA projections only show modest renewable increase by 2040, Global primary energy use, Mtoe

Source: International Energy Agency New Policies Scenario. 2018.

EU

Ja

pa

n

US

La

tin

Am

eri

ca

So

uth

ea

st A

sia

Mid

dle

Ea

st

Afr

ica

Ch

ina

Ind

ia

-400

-200

0

200

400

600

800

1,000

Source: International Energy Agency World Energy Outlook. 2018.

Projected change in primary energy use by regionMtoe, IEA New Policies Scenario 2017-2040

15

20

25

30

35

40

45

1990 2000 2010 2020 2030 2040

Source: International Energy Agency World Energy Outlook. 2018.

Current Policies Scenario

SustainableDevelopment Scenario

New Policies Scenario

Global CO2 emissions from primary energy demand Gigatonnes per year

0

1

2

3

4

5

6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

IPCC(2014)Median

IPCC(2014)95th p

Leverm(2016)Median

Leverm(2016)95th p

Kopp(2017)

Median

Kopp(2017) 95th p

Le Bars(2017)Median

Le Bars(2017)95th p

Breakdown unspecified

Antarctica

Greenland

Mountain glaciers

Thermal expansion

Source: IPCC, Levermann et al, Kopp et al, Le Bars et al assuming RCP 4.5

Sea level rise forecast for the year 2100 under IPCC scenario closest to IEA Current Policies Scenario Meters Feet

5

With this backdrop, we look this year at “Mountains vs Molehills”: what could provide substantial pathways for de-carbonization, and what might end up being distractions along the way. While renewable penetration of the grid will continue to rise, the charts on page 3 cast considerable doubt on the viability of German (Energiewende) and US “Green New Deal” de-carbonization timetables, particularly if nuclear power is not considered a permanent part of the solution. Table of Contents

Click here to read the full document, or select a link below to read a specific section

Renewable energy milestones Page 6

Comments from our technical advisor Vaclav Smil Page 7

[1] De-carbonization of Industry Page 8 Electrification of industrial heat and pressure is technically possible, but costs of such

a transition could be prohibitive given the cost of electricity vs direct use of gas. New electrochemical means of chemical production are promising but in their infancy

[2] Mountains vs Molehills Page 11 The media has reported with great excitement on CO2 sequestration through both forests and underground geological storage; cellulosic ethanol; lithium ion batteries and supercapacitors for distributed energy storage; and new ways to create aluminum. But how impactful will they really be?

[3] Germany and Energiewende Page 18 A dispassionate assessment of the world’s most ambitious de-carbonization policy

[4] Wildfires Page 24 Anthropogenic climate change has roughly doubled the number of US hectares burned

[5] Trump’s War on Science Page 27 Making America’s government scientifically illiterate again

Sources Page 28 __________________________________________________________________________________________

Links to select topics from prior Eye on the Market energy editions

Electric vehicles: a 2% or a 20% solution? (2018)

High voltage direct current lines: China leads, US lags (2018)

The Dream Team rebuttal of the Jacobson “100% renewable electricity by 2050” plan

Better safe than sorry: sea level rise, coastal exposure and flood mitigation (2018)

Hydraulic fracturing: the latest from the EPA and some conflicting views from its Advisory Board (2017)

Forest biomass: not as green as you might think (2017)

The myth of carbon-free college campuses (2017)

Distributed solar power and utility billing changes which increase the cost (2016)

US hydropower: how much potential for expansion? (2016)

Nuclear power: skyrocketing costs in the developed world (2014 and 2015)

6

Executive Summary supplementary materials: renewable energy milestones

The last decade has seen impressive declines in capital costs of solar/wind power and energy storage. While improvements in storage costs have slowed over the last couple of years, our contacts at the Electric Power Research Institute believe that cell engineering and scale improvements will continue in the years ahead, with battery pack storage costs possibly reaching $100 per kWh by 2025.

In the US, onshore wind auction prices have declined to 2 cents per kWh (mostly for projects in the Midwest wind corridor), and even offshore wind prices have fallen to new lows, reaching 6.5 cents per kWh in a 2018 Massachusetts project

Rising US wind capacity factors reflect larger rotor diameters, higher hub heights and locations with better wind speeds

Modest increases in US solar capacity factors reflect increasing use of tracking rather than fixed tilt panels, and greater inverter loading ratios to maximize AC generation. Capacity factors have reached 30% in California and the Southwest

10

20

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50

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: EIA, NREL, Lazard, UCS, BNEF, JPMAM. December 2018.

Declining upfront capital costs of wind, solar & storageIndex of upfront capital costs, 2010 prices = 100

Storage

Wind

Solar

Current capital costsWind $1,350-$1,500 per kWSolar $1,100 - $1,400 per kW ACStorage $190 - $200 per kWh (lithium ion battery packs)

$0

$30

$60

$90

$120

$150

$180

2012 2013 2014 2015 2016 2017

Source: International Energy Agency. 2017.

Average global solar photovoltaic and wind auction pricesUS$ per MWh

Solar PV

Onshore wind

19

89

-99

20

00

-01

20

02

-03

20

04

-05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

15%

20%

25%

30%

35%

40%

45%

Source: Lawrence Berkeley National Laboratory. 2018.

US wind capacity factors by project vintage yearWeighted-average capacity factor measured in 2017

14

% tra

ckin

g

50

% tra

ckin

g

47

% tra

ckin

g

57

% tra

ckin

g

63

% tra

ckin

g

66

% tra

ckin

g

78

% tra

ckin

g

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015 2016

Source: Lawrence Berkeley National Laboratory. 2018.

US solar capacity factors by project vintage yearMean net AC capacity factor, from project inception to 2017

7

Why all the focus on de-carbonization?

I asked Vaclav to articulate for our clients why de-carbonization is so important. His response is useful for those who are convinced by consensus views on climate science, and for those still on the fence:

“Underlying all of the recent moves toward renewable energy is the conviction that such a transition should be accelerated in order to avoid some of the worst consequences of rapid anthropogenic global warming. Combustion of fossil fuels is the single largest contributor to man-made emissions of CO2 which, in turn, is the most important greenhouse gas released by human activities. While our computer models are not good enough to offer reliable predictions of many possible environmental, health, economic and political effects of global warming by 2050 (and even less so by 2100), we know that energy transitions are inherently protracted affairs and hence, acting as risk minimizers, we should proceed with the de-carbonization of our overwhelmingly carbon-based electricity supply – but we must also appraise the real costs of this shift. This report is a small contribution toward that goal.” Acknowledgements: our technical advisor Vaclav Smil

As always, our energy Eye on the Market was overseen by Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the University of Manitoba and a Fellow of the Royal Society of Canada. His inter-disciplinary research includes studies of energy systems (resources, conversions, and impacts), environmental change (particularly global biogeochemical cycles), and the history of technical advances and interactions among energy, environment, food, economy, and population. He is the author of more than 40 books (the latest one, Growth, will be published by the MIT Press in September) and more than 400 papers on these subjects and has lectured widely in North America, Europe, and Asia. In 2010, Foreign Policy magazine listed him among the 100 most influential global thinkers. In 2015, he received the OPEC award for research, and is described by Bill Gates as his favorite author. Acronyms used in this paper

AC alternating current; BTU British thermal unit; BTX benzene/toluene/xylene; CCS carbon capture and storage; CO2 carbon dioxide; DC direct current; EIA Energy Information Agency; EPA Environmental Protection Agency; ERCOT Electric Reliability Council of Texas; EV electric vehicle; GHG greenhouse gas emissions; GW gigawatt; GWh gigawatt-hour; IEA International Energy Agency; IPCC Intergovernmental Panel on Climate Change; IRENA International Renewable Energy Agency; ISO independent system operator; kg kilogram; km kilometer; kW kilowatt; kWh kilowatt-hour; L liter; MJ megajoule; MMT million metric tons; Mt metric tonnes; Mtoe million tons of oil equivalent; MW megawatt; MWh megawatt-hour; NREL National Renewable Energy Lab; TWh terawatt hour; VAT value added tax; Wh watt-hour

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