Energy & Power Generation

The End of the Air Conditioning Age?

by

…and of the entire era of reliable and affordable electricity?

Is it hot where you are? Have you been enjoying your air conditioning? Appreciate it a little more after the power has come back on after an extended outage?

The American economy has made air conditioning broadly affordable, even by those whose incomes are fairly low. But how many people are going to be able to afford their A/C if electricity prices rise to the $.70 or $.80/kwh range?

Remember, Barack Obama said (in 2008) that under his plan, electricity rates would “necessarily skyrocket.” The only things that have prevented such skyrocketing from happening so far are (a) the unwillingness of Congress to pass a cap-and-trade bill, and (b) the vast expansion in supplies of natural gas–a key fuel for electricity generation–driven by advanced fracking technologies. In a second Obama term, neither of these factors would likely be operative. A court decision has now given the EPA the ability to do pretty much what it wants to do regarding regulation of CO2, and in an Obama administration, what it wants to do is to shut down America’s coal-based electricity generation. Also, the scale of the success of oil/gas fracking clearly took the Obama administration by surprise, and in a second Obama term there would be far more regulatory effort to tie the hands of this industry and limit the development of America’s natural gas resources.

Read more

CNG Vehicle

by

I recently took a cab ride in an unusual vehicle. I talked to the driver and he told me that it ran on compressed natural gas (CNG). You can see the blue CNG logo below the Ford logo on the right side. The driver said that the vehicle was assembled overseas in Turkey.

Compressed Natural Gas (CNG) Fuel Prices & Performance

Per the driver – he filled up with approximately 8 “gallons” of CNG. This is measured as a “gasoline gallon equivalent” or GGE to try to provide an understandable metric for typical car owners. He said that this took him around 200 miles and cost around $2 per GGE. In Chicago terms this is probably about 1/2 the costs of what a gasoline powered truck would cost per mile (ignoring the higher acquisition costs of this custom SUV). This site shows the range of costs that customers are seeing per GGE. Per this site there are 6 CNG stations in Chicago with costs between $2 and $2.50 per GGE (costs are sometimes out of date by station and it is not always clear if prices are up to date). The driver also said that the power that the engine put out declined as it got emptier; I believe that this is different than how gasoline or diesel engines behave. The city of Chicago has a program to open CNG filling stations and subsidize cab companies to pay the extra up front costs of purchasing these customized vehicles.

The competitiveness of the CNG vehicles depends on several factors, most notably the price of natural gas. Since the price of natural gas is around $2 / MCF, it is at an all-time low. The price of natural gas (pre-fracking) peaked at around $14 / MCF, more than 7x its current price. Assuming that CNG “at the pump” moves with the cost of the underlying commodity, then you would go from about 1/2 the cost of gasoline (today) to up to 3x+ higher, if we had another price swing like that again in the United States, OR if we were exposed to the “market clearing” price of natural gas around the world.

Per this article in Reuters, the gap between the US rates and what foreign buyers (particularly Japan and Korea) are willing to pay is very significant.

The surge in gas output has made companies such as Chesapeake and Exxon Mobil’s XTO victims of their own success, unleashing a surplus of supply that could keep prices — and therefore profits — depressed for decades. For them, selling gas to Japan or Europe — which buys imported LNG at five or six times the domestic price of $2.50 per million British thermal units — is essential to continue expanding their U.S. business, creating jobs in the process. The shale gas boom is on track to support 1.5 million jobs across the United States by 2015, according to an industry-funded study by IHS Global Insight. Export licenses will make big winners out of some firms such as Cheniere, which last year secured the first and, so far, only export permit from the Energy Department.

Read more

Britain Revives Central Planning… for Electricity

by

This is the second of a series of posts on recent events in the world electricity & energy market. Here is Spain.

Britain’s Energy Policy

Britain has a mostly de-regulated electricity market for generation. One item that must be considered with electricity is plain old geography; Britain is an island and must generate all their electricity locally. Thus they can have costs either significantly higher or lower than those found on mainland Europe, because it is difficult to use arbitrage (in the form of transmission) to resolve price imbalances. Correction – Britain imports 5% of her electricity from France in a cross-channel cable. Thanks to commenter Jim Miller for pointing this out.

Like most of Europe, Britain is in the thrall of the greens, and their favorite tool is to mandate a certain percentage of energy to come from “renewables” (wind and solar, for semi-practical purposes), while hounding coal on environmental grounds and nuclear on whatever grounds they tend to come up with at the time. Natural gas represents almost 50% of current energy today. This article from the Economist provides a good summary of the British market.

While Britain traditionally has gotten much of its natural gas from local drilling, LNG imports from overseas provide a higher percentage today. According to this article, LNG imports represent 25% of British usage, while locally drilled gas has fallen by 10% from the prior year. Britain traditionally has relied on the North Sea for its natural gas and oil production, but these fields are in long term decline.

In 2011, the UK initiated a surprise tax increase on North Sea oil and gas producers. The percentage of tax on profits increased from 68% to 80%, an increase of 12%, per this article. This sharp rise in taxation was a surprise under the supposedly Tory administration, because it is typical of more of a labor “carve up the pie” view of the world than one I would typically expect under the Tories that “incentives drive behavior”.

This article discusses the impact of ever changing tax policies in the UK on investment in oil and gas rigs.

The hike prompted furious reaction from the industry. Mark Hanafin, director of Centrica Energy, told the Telegraph: “the North Sea is the second-largest oil-producing region in the world after Saudi Arabia. It’s a national treasure for the UK. The government is utterly destroying that. I wish people would step up and say you just can’t do this. Capital is leaving the country and going elsewhere”.

Who could have predicted what would happen next? Oil and gas produced since the tax hike has dropped by the most since records have been kept, per this article:

UK natural gas production in the third quarter of 2011 slumped to the lowest level since records began in 1996, at 103TWh (terawatt hours), Department of Energy and Climate Change (DECC) data show. This also represented the largest year-on-year quarterly decrease ever seen, down 29.4pc on the same period last year.

Now that the British government has dis-incented investment and damaged their oil and gas industry through erratic and socialistic behavior, what’s next? A central-planning, top down new “plan” for the electricity sector, of course.

As summarized in the Economist article (which failed to mention the negative impact of tax incentives on natural gas’ decline, a serious oversight):

Renewable technologies account for a mere 7% of current supplies… government pledges to cut planet-heating (ed – their words) emissions and get 15% of energy from renewable sources by 2020… the industry regulator reckons that around $315 billion USD needs to be spent by 2020. Investment currently amounts to $6-9B USD / year. But the move to greener power in Britain must be achieved without infuriating voters already upset at high bills.

The government expects the private sector to finance the renewables (wind, solar and new nuclear) that they plan to have in place to meet the 15% target, while shutting down older nuclear plants and coal plants, as well. It is very difficult to entice the private sector to make these sorts of investments, however, unless they know in advance that they can recover the high and otherwise un-economical costs for these renewable power through the life of the facility (30 years or more). These costs, obviously, must in the end be borne by either residents or corporations (the business sector).

I would love to be a “fly on the wall” if you tried to convince any rational financial institution to invest in these sorts of projects, knowing that Spain just abandoned all their subsidies midway through (decimating their industry) and that the UK has a history of changing tax regimes with gas and oil extraction (see above).

Even the economist, which unfortunately is a cheerleader in this sort of central planning, sums it up dimly:

It is doubtful that the draft bill has enough detail to break the current hiatus in energy investments. It is still unclear how prices will be determined, how often they will be reviewed, and how contracts will be implemented. Uncertainty about the form of the contracts compounds existing investor fears about the durability of government price guarantees on energy.

While these government fantasies about supposedly rational private sector investors ploughing funds into un-economical renewables continues, a backup plan of sorts is occurring because they are extending the life of existing, older nuclear plants that they were planning to close. Keeping these plants alive defers the enormous (and likely significantly under-estimated) costs of building new nuclear plants, which are summarized here at wikipedia. From my perspective I would be willing to bet that none or perhaps 1-2 at best nuclear plants would ever be built going forward in the UK post the disaster in Japan; the greens are too strong and they will protest and drag the process out for an eternity. Other than one plant that came on line in the mid 1990’s, all the plants are from the 1980’s and 1970’s and dreams of a nuclear renaissance in the UK ring just as hollow as they do in the US. Here is an article about re-licensing British reactors. Britain’s ageing nuclear reactors, which were due to close in the next decade, are set to be kept open under a plan approved by the industry’s regulator.

In a move that could have far-reaching implications for the government’s energy policy, the Office for Nuclear Regulation has told the Guardian it is working with the country’s dominant nuclear operator, the French-owned company EDF, to extend the life of its eight nuclear power stations in the UK, and that it is “content for the plants to continue to operate”, as long as they pass regular safety tests.

Well there you go. Before the ink on the plans are dry, they’ve already backed down on one of the key tenets of their mad plan. I guess that is progress. But there is no way that their math can work as far as bringing new investment into the system since utilities and power generators won’t ‘add’ to their investment in this climate at the level needed to mothball such critical elements of their power generating infrastructure.

It is quite sad to see that the UK, which had once been a leader in electricity de-regulation, with lower prices to show for it than most of their European counterparts, to propose to effectively nationalize or central plan out an entire industry. All this under a Tory government, too. It seems that cooler heads have prevailed by keeping the nuclear stations open longer, and the collapse of the renewables market in Europe will likewise be a precedent that the UK will not want to follow.

Cross posted at LITGM

Spain Renewables Market Collapses

by

There have been some major events in the world energy market lately. For the first update let’s start with Spain.

Spain and Renewables:

Spain under-took a massive effort to embrace renewable energy technologies. Per Bloomberg:

The country generated 23 percent of its electricity from renewable sources in 2010… wind power in April covered 25 percent of electricity demand, a record that saved 270 million euros in fossil fuel imports. At one point on April 19, wind covered 61 percent of power demand.

How did Spain become a pioneer in wind and solar? Simple. Massive tax breaks for these sorts of installations.

In the 2000s, Spain copied the German clean-power aid model, as did nations from Portugal to Israel and Japan, increasing subsidies to a pinnacle in 2007. That’s when a law granted 444 euros ($556) a megawatt-hour for home rooftop solar panels feeding the power grid, compared with an average 39 euros paid to competing coal- or gas-fired power plants. By 2009, the consumer bill for clean-energy aid had risen to 6 billion euros a year, ahead of the 5.6 billion euros in Germany, whose economy is almost four times bigger, according to the Council of European Energy Regulators… Solar energy was the biggest drag on the system, accounting for almost half of the annual 6 billion euros of liabilities and producing just above 2 percent of the power

Let’s do the math there again. Through state subsidies, the government was paying 444/39 = more than 11x the rate for solar panels. This understates the disparity because that 39 Euro per MWH on the other sides includes a much longer term investment horizon, while rooftop solar panels would have a correspondingly lower life span. To be fair, much of their renewable subsidies went to wind power, which while un-economic was less disastrously so than rooftop solar (with this level of subsidies). In addition to overpaying, the government was doing this on a massive scale, as noted above since the government largess was larger than Germany in absolute terms while their economy is much, much smaller.

The scale of over-building in these technologies was incredible. Per the article:

With peak electricity demand at less than half of capacity, the country doesn’t need more power plants, he said. Spain has a capacity of 99 gigawatts, and peak demand of 44 gigawatts.

This level of surplus power, (123%, or (99-44)/44)) is unprecedented. By contrast, in the United States in 2010, our surplus (summer) capacity is 19.2%, per the EIA document summarized here.

Recently Spain has undergone an austerity crisis and the government stopped subsidizing new energy installations. What happened? The industry immediately evaporated.

Saddled with a budget deficit more than twice the European Union limit and a ballooning gap between income and costs in its power system, Spain halted subsidies for new renewable-energy projects in January. The surprise move by Prime Minister Mariano Rajoy one month after taking office helped pierce investor confidence in stable aid for clean energy across Europe. “They destroyed the Spanish market overnight with the moratorium,” European Wind Energy Association Chief Executive Officer Christian Kjaer said in an interview. “The wider implication of this is that if Spanish politicians can do that, probably most European politicians can do that.”

In addition to halting the bleeding of government finances caused by the end to these massive subsidies for new installations, the “green jobs” immediately melted away.

The 75,466 renewable energy jobs that existed in Spain at the industry’s peak in 2008 shrank to 54,925 in 2010, according to the Renewable Energy Producers Association’s most recent data.

Likely this job loss will further accelerate since in 2010 there still were some subsidies available; now the subsidies have been completely eliminated, thus de-facto decimating the industry in Spain.

It is important to note that this Spanish “investment” in renewable technologies often can’t be leveraged by industrial producers because wind power is intermittent (and expensive) and much of the solar was implemented for individual households. By contrast, the US shale gas boom, tied with expansion of gas-fired plants making up a larger percentage of the total capacity base (and in particular the “base load” capacity base), has made America more competitive for industrial producers and led to economic growth (or a slowdown in relative decline) in energy-intensive industries. This document (by an industry source, but likely directionally correct) states the following:

The lower natural gas prices achieved with shale gas production will result in an average reduction of 10% in electricity costs nationwide over the forecast period. By 2017, lower prices will result in an initial impact of 2.9% higher industrial production. By 2035, industrial production will be 4.7% higher.

On a larger scale, Spanish “investment” in renewable energy didn’t make the country more competitive from a manufacturing perspective nor did it reduce the cost of energy to the average homeowner. It created a class of economic parasites that evaporated as soon as the subsidies went away. The Spanish companies that thrived off the boom are now moving overseas to attempt to compete with local entities in other countries where subsidies still exist that could make renewables viable.

Read more

Natural Gas: Past, Present, and Future

by


The hot energy story of the last few years has been the vast expansion in the available supplies of natural gas, and the very significant economic implications thereof. I though it might be interesting to take a look at the past, present, and future of this commodity.
The first known use of natural gas was by the Chinese, circa 500 BC…they captured gas from places where it was seeping to the surface, transported it in bamboo pipelines, and burned it for a heat source to distill seawater and capture the resulting salt and fresh water. The modern gas era began circa 1800 with the use of gas for lighting–initially of streets and later of homes and other buildings. Since there was no network of gas wells and long-distance pipelines, the gas used for these applications was usually not true natural gas, but rather “town gas,” made by heating coal. (Gas stoves seem to have become popular circa 1880, and apparently had quite an impact….I’ve read that the term “gas-stove wife” was enviously applied to women who were so fortunate as to have one of these appliances and were thereby spared the labor of tending a wood or coal stove, and hence had some leisure time available.)


The transition from coal gas to true natural gas had to wait on the build-out of a long-haul pipeline network, which took place mainly from 1920 to 1960. Although electricity became the glamor “fuel” and displaced gas in many cases for cooking and heating, the generation of electricity itself has in recent years become a major source of gas demand. Natural gas is also important as a feedstock for the production of fertilizer and of various plastics. By the early 2000s, there were serious concerns that the US was running out of natural gas–see for example this 2003 TIME Magazine story. The article cites Alan Greenspan’s concerns that high nat gas prices would make us uncompetitive in many industries, as well as citing direct economic pain inflicted on consumers. The only solution seemed to be large-scale imports of natural gas via LNG (liquified natural gas) ships. (Gas is far more difficult to transport than oil, because it needs to be liquified in order to make the volumes manageable, which in turn requires refrigerating it to very low temperatures.) In late 2005, US natural gas prices hit an inflation-adjusted level of almost $16 per million BTUs.


The price is now about $2.50 per million BTUs. What happened?

Read more