Would a CES Raise Electricity Prices?
At the request of House Science and Technology Committee Chair Ralph Hall (R-TX), the Energy Information Administration (“EIA”) released a study this week on the potential impacts of a clean energy standard (“CES”). In January’s State of the Union address, President Obama called for Congress to pass legislation creating a CES, which would require that utilities generate 80% of their electricity from “clean” sources by 2035. “Clean” sources would include not only renewables but also nuclear, natural gas and coal-fired power plants employing carbon capture and sequestration technology.
The EIA report analyzed a potential CES based on several assumptions provided by Representative Hall. Under these assumptions, he report found that a CES would increase electricity bills $115 annually by 2025 and $211 by 2035. Additionally, a CES would reduce the gross domestic product by $127 billion from 2025 to 2035.
Undoubtedly, the report will be used by critics of a CES to argue that the costs of such a standard outweigh any environmental or health benefits. It should be noted that EIA’s report is based on a number of assumptions requested by Representative Hall that could contribute to the cost projections described above. Arguably most importantly, the report assumes that CES credits earned in one year cannot be banked, or used, in subsequent years, and that utilities would be prohibited from selling excess credits to other utilities. Advocates for allowing utilities to bank credits contend that it would reduce compliance costs by allowing utilities to save money by storing up credits during the early years when the clean energy generation requirements are still low. Additionally, credit trading could provide flexibility for utilities to comply with a CES.
While President Obama’s proposal didn’t specify as to whether credit banking and trading would be permitted, previous CES proposals from the last Congress did allow for credit banking and trading in some form. Notably, these proposals came from two Republican Senators – Lindsay Graham (SC) and Richard Lugar (IN). Moreover, the Senate Energy and Natural Resources Committee passed legislation in 2009 that would have established a renewable energy standard with support of both the Chairman Jeff Bingaman (D-NM) and the Ranking Member Lisa Murkowski (R-AK). Under this legislation, utilities would have been permitted to bank and trade credits for renewable energy generation. Thus, Representative Hall’s assumption that trading of CES credits would be prohibited is dubious given previous bipartisan support for this concept in the debate over both a clean and renewable energy standard.
Senator Jeff Bingaman has requested another EIA analysis of a CES. This analysis is expected to be released next month and could be based on the assumption that utilities would be permitted to bank and trade CES credits. If this assumption is included in EIA’s analysis, then this analysis could provide a better outlook of the cost implications of a CES.
New York Times vs. the Wall Street Journal on Shale Gas
On Sunday, the New York Times and the Wall Street Journal published pieces that provided starkly different portraits of the natural gas industry. The NYT's article, the first of a two-part series, suggested that projected shale reserves might be inflated, which could in turn lead to an Enron-esqe bust. Journalist Ian Urbina cites emails from industry analysts, Energy Information Administration (EIA) staff and geologists to support his contention that extracting shale gas may be more costly and difficult than claimed by the industry. The WSJ editorial, on the other hand, contended that the shale gas boom is creating jobs and enhancing energy security. The article suggests that sustainability concerns related to new development are unfounded and are being pushed by environmentalists and EPA Administrator Lisa Jackson's "anti-fossil fuel" agenda.
The NYT's article finds that natural gas producers are overstating the amount of recoverable reserves in order to spur investment in new projects. Evidence from a variety of credible sources, including not only EIA but also IHS CERA and MIT, among others, conflict with the NYT's allegations. Certainly a degree of uncertainty pervades any projection of future production, but data on current production demonstrates the meteoric rise in development over the past several years. For instance, shale gas currently constitutes 25% of total domestic natural gas supplies compared to 1% in 2000. Moreover, production in the Barnett Shale has doubled over the last four years, even as the number of wells has decreased by 60%. Additionally, the author relies on data from the Barnett, Haynesville and Fayetteville shales in arguing that “many wells are not performing as the industry expected.” Highlighting production in these three shales to fit the author’s conclusion while not mentioning significant production in the Marcellus Shale raises concern. This oversight is particularly disconcerting in the context of recent reports that some wells in Susquehanna County are producing at record levels for the Marcellus Shale. The NYT’s article is correct in identifying low natural gas prices as a risk for producers and investors. Prices are, however, at historic lows spurred in part by both a glut from new development and decreased demand from the economic downturn.
The WSJ editorial is correct in touting the economic, energy security and environmental promise of shale gas. Given the scale of new production, particularly in areas unaccustomed to oil and gas development, the natural gas industry faces questions regarding the environmental and health concerns associated with hydraulic fracturing and other aspects of drilling. The WSJ editorial, however, downplays the need for the industry to actively engage with the public, regulators and environmental groups regarding concerns with new development.
The good news is that many in the industry are working to address these concerns. A first step is gaining the public's trust, which can be achieved in part by disclosing more information related to the process. Some in the industry worked with Texas legislators and environmental organizations in passing a bill that will require the disclosure of chemicals used in hydraulic fracturing. Similar measures in other states can help to mitigate some of the public’s concern related to new development.
Credibly addressing environmental and health concerns is essential to guard against states adopting knee-jerk reactions to the prospect of new development, such as costly moratoriums. Shale gas is an important strategic asset that can create jobs, enhance energy security and reduce emissions of both CO2 and other air pollutants if done correctly.
Ancillary Benefits of a "Golden Age of Gas"
On Monday, the International Energy Agency (IEA) released a report entitled “Are We Entering a Golden Age of Gas?” Much of the initial coverage on the report has been focused on the potential for natural gas to displace coal in the power sector, and IEA’s conclusion that increased use of natural gas “on its own” will not limit average global temperatures from rising by 2 degrees Celsius.
While the coverage is focused generally on these two conclusions, the IEA report also discussed the potential for natural gas to replace coal and oil in the industrial sector. The report projects that natural gas demand will increase by approximately 75% in the industrial sector by 2035. The increased demand for natural gas in the industrial sector is driven largely by non-OECD countries, primarily by China as it transitions from coal to shale gas. One particular sub-sector that could use more natural gas is the chemical industry. The report notes that with stable prices chemical companies could replace natural gas with oil as a feedstock into petrochemicals. India, in particular, could boost demand for natural gas as a feedstock in fertilizer.
While IEA’s report centered on the growth of natural gas usage in non-OECD countries, a recent American Chemistry Council (ACC) study suggests that new shale production could provide domestic chemical companies with significant economic benefits. U.S. chemical manufacturers primarily rely on ethane and propane derived from natural gas liquids as a feedstock to produce ethylene, which is used in thousands of consumer products from tires to clothes. Stable natural gas prices can provide U.S. chemical companies with a competitive advantage over European companies, many of whom rely on naphtha, a more expensive feedstock derived for crude oil. ACC’s study noted that U.S. plastic exports increased by 10% in 2010 due in part to low prices for ethane. The study projects that a 25% increase in ethane supply would generate the following benefits:
- 17,000 jobs in the U.S. chemical industry;
- 395,000 jobs indirectly related to new investment and production in the chemical sector; and
- $4.4 billion more in federal, state and local tax revenue.
This study demonstrates the potential economic benefits of increased natural gas usage in the chemical sector, while not even noting the energy security and climate benefits of decreased usage of oil.
Reports such as IEA’s focus understandably on the power sector in discussing increased shale gas production. Increased natural gas usage in the industrial sector, however, also offers significant economic, energy security and environmental benefits both domestically and internationally.
Can the Nat Gas Act be a Political Panacea for rising crude oil prices?
Rising gasoline prices, often sparked by instability abroad, typically cause the issues of energy security and oil dependence to gain more attention among lawmakers. While our nation has long lacked a national energy policy, rising gasoline prices can sometimes result in Congressional action. Thus, today’s rising gasoline prices would seem to make this current moment ripe for bipartisan action.
Yet, a wide chasm exists between most Congressional Republicans and the Obama Administration on energy policy. Republicans are advocating for ratcheting up domestic production through authorizing more onshore and offshore exploration and production. These proposals include rehashing politically-charged proposals such as authorizing drilling in the Arctic National Wildlife Refuge and in the outer continental shelf. Some Democrats are urging that the Obama Administration release crude oil from the Strategic Petroleum Reserve. For its part, the Obama Administration is attempting to forge a middle path by approving more permits for offshore development in the Gulf of Mexico, while also arguing for increased investments in clean energy technologies. Given these differences between Republicans and Democrats, comprehensive energy legislation likely faces a very difficult path to passage.
If gasoline prices continue to rise, pressure will, however, mount on the Republican-led House and the Obama Administration to pass some type of legislation. Currently most of the attention politically is focused on the effect rising gasoline prices are having on President Obama’s approval ratings and how it might affect his reelection prospects in 2012. Republicans, though, also face political peril if they fail to act as the Obama Administration and Democrats are attempting to tie Republicans to major oil companies. Specifically, Republicans could face increased public backlash for their support for tax incentives for oil and gas development, particularly when many of the majors are expected to announce strong quarterly profits over the next several weeks.
Given this political context, the Nat Gas Act could gain serious consideration as Democrats and Republicans attempt to find consensus on energy policy. This bipartisan legislation – introduced several weeks ago by Representative John Sullivan (R-OK), Representative Dan Boren (D-OK), Representative Kevin Brady (R-TX) and Representative John Larson (D-CT) -- would provide tax incentives for the production of natural gas vehicles and for the installation of natural gas fuel pumps, among other provisions. Two of the bill’s most vocal proponents include T. Boone Pickens and President Obama, who has touted it in several recent speeches on energy policy. The bill already has 178 cosponsors that are as diverse as members of the Republican Study Committee and Representative Diana DeGette (D-CO), who has advocated for enhanced federal oversight over hydraulic fracturing. Senator Robert Menendez (D-NJ) and Senator Orrin Hatch (R-UT) are reportedly working on introducing a companion bill.
Despite the rosy forecasts for the bill’s prospects some significant hurdles still remain. The bipartisan political support for the bill also existed in the previous Congress, yet disputes over how to offset the incentives resulted in the bill stalling. The current legislation does not provide for any offsets and reaching a compromise on either spending cuts or revenue raisers will be difficult. Another issue will be whether critics of hydraulic fracturing might attempt to use this bill as an opportunity to add provisions to increase the federal government’s authority over the practice. Moreover, major accidents or incidents connected to new shale gas development could temper Democratic and Administration support for this legislation.
Nonetheless, the existing political climate does seem to suggest that that Nat Gas Act could be that political panacea that could allow both Republicans and Democrats to claim to voters that they are addressing rising gasoline prices.
The Picken's Plan - A Look at Energy Realities
T. Boone Pickens has an energy plan and he should be commended for it. More policy makers and influential individuals should do so. Visions and ideas should be explored and discussed.
The essence of the Pickens Plan is to replace one-third of our foreign imports of oil with natural gas fired vehicles. In turn, natural gas produced electricity is replaced with wind power. Pickens believes that this transition can be accomplished in 10 years.
Wind power currently produces some 1 percent of the nation’s electricity. So, to produce an additional 21 percent in the next 10 years would require a gargantuan effort. But, what would be the impact on natural gas?
Let’s look at the numbers involved for natural gas. According to the Pickens Plan, we use 21 million barrels of oil per day of which 70 percent is imported. (I note that the Energy Information Administration uses 60 percent net imports, 30 percent of which comes from Canada and Mexico.) Thus, according to Pickens, we use approximately 15 million barrels of imported oil per day. At the same time, we consume on average about 62 billion cubic feet of natural gas per day. A barrel of oil is equal to 5,487 cubic feet of natural gas. Thus, to displace one third of our imported oil would require approximately 27 billion cubic feet of natural gas per day or close to 44 percent of our current natural gas consumption. This doesn’t take into account that gas consumption to produce electricity is projected to increase by 10 to 25 percent in the next 10 years.
Under the Picken’s Plan, since wind would replace natural gas used for electricity, theoretically it would be a wash in terms of our natural gas supply and prices. But, I wonder whether this is feasible in light of certain energy realities.
Here are three points to consider:
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A significant amount of natural gas fueled electricity is for summer peaking units. These units are held in reserve and turned on instantaneously during peak usage periods, generally in the summer. Without innovations in storage, it is doubtful that wind power would be able to perform this critical function for electric utilities; Wind power is intermittent and is non-dipatchable. This means that it can’t always be used when it is needed. To make matters worse, electricity traditionally peaks during July and August, which is the lowest month for sustained winds. Thus, natural gas would be required anyway as a back-up fuel. And, finally, wind is more difficult to transmit and would require substantial and expensive new transmission lines.
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Wind is considerably more expensive than natural gas -- some put wind at five times the price of natural gas, especially when you factor in the price of new transmission and the cost of so-called shadow generation. Thus, already high electric bills will be strained.
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Natural gas prices are already at record highs. In the summer, natural gas is used to meet both electricity demand and to fill storage for winter consumption. If 44 percent of natural gas is used for motor fuels, which itself peaks during the summer, the strain on natural gas prices may be well substantial. This would both adversely impact residential consumers as well as industrial and commercial end-users who must rely year round on natural gas.
Don’t get me wrong. Personally, I am all in favor of wind power and think it is a critical element to a balanced energy plan. It’s just that broad and ambitious plans require a fuller understanding of energy realities.
