Each year, JP Morgan writes a “deep dive” piece on energy. The report is a well-researched analysis that covers several specific topics. We find the report to be informative and useful as a basis for understanding current issues and forming opinions pertinent to our industry. This year’s topics include the history of energy development and the eventual transition to renewable energy, the impact of US shale oil on US energy independence and the latest trends in nuclear, wind, solar and energy/electricity storage. In this issue of The Producer, I offer a much condensed summary of the topics discussed in the JP Morgan report.
While the world has become twice as energy efficient over the last 50 years, global consumption of primary energy is three times higher than in 1965. The finite nature of fossil fuels, the increasing cost of extracting them and their environmental impacts are prompting the US and other countries to plan for greater reliance on renewable energy. What is on the horizon, and what factors will determine our energy future?
1. US energy independence in light of increasing domestic oil and gas production.
Rising US shale oil production makes US energy independence feasible by 2025. It has brought down the marginal cost of oil, and coincided with slowing oil demand for both cyclical and structural reasons.
Since 2006, the US has reduced its net oil imports from 60% of our supply to less than 30%, providing enormous savings to our nation’s economy and citizens. However, the ability of US producers to continue to ramp up production at the pace of the last decade will depend on several factors: robust industrial growth in the US and other countries, oil prices that provide adequate profit margins to producers, relaxing the ban on oil exports, and increasing light-oil refining capacity.
2. The rising cost of nuclear power.
Once thought of as a long-term bridge between fossil fuels and renewable energy, rapidly rising costs have slowed capacity additions outside of Asia. An analysis from France shows rapidly increasing capital and operational costs over the last decade. A prior assessment using data from the year 2000 estimated overall costs at $35 per megawatt-hour (MWh). The French audit report set out in 2012 to reassess historical costs of the fleet. The updated audit costs per MWh are 2.5x the original number.
In 1945, physicists predicted that nuclear breeders would be man’s ultimate energy source. A decade later, the chairman of the US Atomic Energy Commission predicted that energy produced by atomic reactors would be “too cheap to meter.” Today the picture is clear: the days of nuclear energy being a cheap way to add base load power are likely a thing of the past.
3. Wind power and the issue of questionable continued government subsidies.
US wind capacity was growing rapidly, and was ahead of the DOE’s “20% by 2030” plan until new capacity additions collapsed in 2013. A variety of factors make the next decade more uncertain for wind than the prior one.
Every year, Lawrence Berkeley National Laboratory publishes an annual wind study on the US, which gets 4% of its electricity from wind. There are factors which favor increased deployment of wind turbines: declining upfront capital costs, declining instances of involuntary wind power curtailment, and increasing transmission line deployment. However, those issues obscure the “elephant in the room”: continued reliance on subsidies to maintain capacity growth. Subsidies have been in place almost continuously since 1994. Whenever subsidy extension was unclear, capacity additions fell in the following year by 79%-90%. Without subsidies, it would probably be difficult to mobilize private sector capital for wind projects without cash grants, production tax credits, or investment tax credits.
4. Solar power in the US: An early look.
Analysts at Lawrence Berkeley National Laboratory now have enough critical mass to look at solar costs, capacity factors and growth potential. While costs have declined sharply, photovoltaic solar energy is starting from a very low base and relies heavily on continued subsidies and the continuing decline in module process costs.
Although sunlight has the highest theoretical potential of the earth’s renewable energy sources, its real-world limitations and costs have made its adoption slower than wind. The US gets just 0.2% of its energy from utility-scale and large commercial solar installations. Capacity forecasts from the Energy Information Administration and the Solar Energy Industries Association imply that solar’s contribution will rise only to 0.6%-0.9% of US electricity generation by 2016, which would still leave solar behind biomass.
5. Electricity storage.
Renewable energy intermittency can be mitigated by increased interconnectedness of electricity grids, or through advances in energy storage. The latest update from Sandia National Laboratories indicates that the going has been slow thus far, but there has been some progress in the lab.
Most electricity is used when generated and not stored. Storage facilities are equal to just 2% of installed global generating capacity, and most can only store minutes to a few hours of supply. The most common approach is pumped storage: pump water uphill into a naturally-occurring or man-made reservoir at night when electricity prices and demand are lower, and discharge the water downhill to spin a turbine during the day when prices and demand are higher. According to the Electric Power Research Institute, pumped storage accounts for 99% of all electricity stored around the world.
Other methods of energy storage include compressed air, thermal storage, batteries, hydrogen storage, and flywheels. All may have potential use in specific instances, but large scale storage is still more of a concept than reality.
It remains to be seen if any prospective energy source or method of delivery will make significant inroads on the use of fossil fuels, especially for transportation, in the foreseeable future.