EEnergy Informer - Menlo Energy Economics · 3 December 2015 EEnergy Informer Page 3 Lama, the...

December 2015 EEnergy Informer

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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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4

6

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15

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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

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2 December 2015 EEnergy Informer

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


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



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


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


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



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


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: Rebecca Smith, As Conservation Cuts Electricity Use, Utilities Turn to Fees, Wall Street Journal, 20 Oct 2015


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


―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


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


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

http://ilsr.org/wp-content/uploads/2014/12/state-limits-on-local-power.002.jpg





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


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


Illustration of peak capacity savings from PacifiCorp’s integration with the ISO



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

https://www.caiso.com/Documents/StudyBenefits-PacifiCorp-ISOIntegration.pdf%20


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



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)


California Renewable Energy Generation From 1983-2014 by Resource Type (In-State and Out-of-State); does not include existing large hydro generation



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


Existing and future Energy Imbalance Market (EIM) players



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


Global and California Temperature Anomalies


http://docketpublic.energy.ca.gov/PublicDocuments/15-IEPR-01/TN206330_20151012T134153_2015_Draft_Integrated_Energy_Policy_Report.pdf


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

http://aceee.org/state-policy/scorecard


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

http://cdn.powermag.com/wp-content/uploads/2015/10/gas-coal.jpg




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



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


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

http://www.irena.org/DocumentDownloads/Publications/IRENA_PST_Age_of_Renewable_Power_2015.pdf


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


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


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

http://www.carbontracker.org/wp-content/uploads/2015/10/Lost-in-transition-Exec-Sumary_221015.pdf


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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