Friday, March 11, 2016

Update January 2016

This is a long overdue post!  The BP Statistical Report came out in April, the Pope’s Encyclical was published in June, oil prices have stayed below $50 a barrel for over a year, the Obama administration issued its Clean Power Plan in August, Climate Talks in Paris were held in December.  Lots of items to cover, so let’s get down to it. 
Overall Energy Use
First, a quick review of the global energy scene in 2014 as reflected in the BP Statistical Review of 2015.  Since 2006, the year for which the data were used in the writing of A Cubic Mile of Oil, energy use has increased from 3.19 cmo to 3.74 cmo. Most of 0.55-cmo increase in energy consumption since 2006 has come from increased use of coal (0.23 cmo), natural gas (0.14 cmo), and oil (0.10 cmo), and not surprisingly, the global emission of CO2 from energy use increased from 31.2 GtCO2 in 2006 to 36 GtCO2 in 2014. The updated pie charts of energy sources are in Figure 1.
Figure 1. Distribution of sources of global primary energy in 2006 and 2014.
Energy consumption in the last 8 years has increased by 17.4%. The period includes the financial crisis of 2008 and a marked decline in energy consumption and economic output for two years. Yet, the net increase in energy consumption corresponds to a compounded average growth rate (CAGR) of almost 2%. I should note that the increase in energy demand in 2014 was less than 1% compared to the 2-3% increases seen in recent years.  The low energy demand reflects a softening in the global market. Annual GDP growth in China is down below 7% and there is considerable economic uncertainty in several European countries such as Greece, Spain, Italy, and Russia.
Nuclear Power
There was a noticeable reduction in the production of nuclear power; from 2806 TWh (0.17 cmo) in 2006 to 2537 TWh (0.15 cmo). The share of nuclear nuclear power to primary energy consumption dropped from 5.4% to 4.0% during this period. Japan shut down all its nuclear power plants following the massive earthquake and tsunami in 2011, which caused a major accident at Fukushima. Japan has now begun the slow process restarting those plants. The plan is to resume generating power from all the plants by 2020 but there remains much public opposition to restarting nuclear power plants. 
Following the general elections in 1998 Germany’s coalition government, which for the first time included the Green Party, adopted a plan to phase out nuclear power. The new Social Democratic Party government led by Angela Merkel reversed that policy in 2009, but reinstated it following the Fukushima disaster. It closed down nine out of the 17 power plants, as a result, instead of providing 25% of domestic electricity, nuclear power provided only 16%. Between Germany and Japan, almost 360 TWh of nuclear power production was lost. Some of the lost nuclear production was made up by increases in China (72 TWh) and India (17 TWh). 

Replacing the loss of 300 TWh of nuclear power by coal would increase CO2 emissions by 0.3 Gt CO2, or about 6% of the increase in emissions since 2006. The steady increase in CO2 emissions does not augur well for climate change. The IPCC reports have been steadily increasing the certainty with which anthropogenic emissions of greenhouse gases (GHG) are expected to cause catastrophic damage. Shutting down nuclear plants at a time when there is an urgency to transition to CO2-free energy is counterproductive.

Low Oil Prices
Starting in mid 2014, crude oil price began a precipitous decline from over $100/bbl to the current price of about $35/bbl. There are a number of factors for this decline. Commentators in the US tend to attribute this decline to the rise in the US production of tight oil (aka, shale oil). Since 2006 the US oil production has steadily increased by about 3 million bbl/day. It may seem a small fraction of the global consumption which is around 90 million bbl/day, but given the tightness in the market between the supply and demand, a swing of 3 million bbl/day is significant.  However, the story of low oil prices a bit more complicated and involves events and policy changes elsewhere in the world as well. Increase in US production took place at a time when global demand was high and when events in the Middle East had constrained the supply. The excess oil in the US more or less offset the loss of oil from Iraq and Libya in the world market. When Iraq oil started to flow and the global demand was softening a global glut was imminent, but that was prevented by the sanctions against Iran. Now with prospects of the nuclear deal and the lifting of the sanctions, 2.5 million bbl/day from Iran would once again flow into the global market and that fact combined with low demand has depressed oil futures. For over 40 years now, the US has had a policy of not exporting crude oil. With the recent availability of excess domestic crude, the US refiners increased their capacity to produce refined fuels—something that was also aided by the increased supply of fracked natural gas. The US recent lifting of the US ban on exporting crude oil only exacerbates the situation and further depresses oil futures.

Saudi Arabia has traditionally played the role of the swing producer and. as recently as 2013, dropped its production by a million bbl/day to stabilize oil prices. In June 2014 Saudi Arabia reversed its policy and decided in favor of retaining market share by increasing oil production back up to over 10 million bbl/day. This oversupply caused the oil prices to tumble and while it has been largely a boon to oil consumers, the price drop is causing economic hardship in many oil producing countries, including Russia, Brazil, Venezuela, Iraq, and also Saudi Arabia itself.  

Saudi Arabia’s has sufficient cash reserves to support running the current level of deficit for about five years. It is counting on the fact that many of its competitors will not be able to sustain their deficits that long, and will be driven out of business. Under the current circumstances it makes little sense to drill for new oil, particularly in hard-to-produce resources like tight formations, deep water, or under the Arctic Ocean. Companies will produce oil only from wells whose up-front costs have already been paid and for which the cost of continued production can be recovered at the prevailing price of oil.  Wells that are no longer economical will be shut down.

Saudi Arabia’s strategy has already had an impact in the US where rigs used for fracking oil is down from 1900 in January 2015 to 650 in December. The total oil production dropped by 400,000 bbl/day. That the drop in rig count is far more precipitous than the drop in production reflects the fact that there is little appetite for digging new wells, and it is wells with poor productivity that get shut down first. If and when the oil price increases oil from fracked formations can resume in a short time. This quick start-up and shut-down of production allows fracking companies to act as the new swing producers. However, if the low prices continue for several years and investments in new production and distribution facilities are not made, any future rise in oil prices will likely be very steep.

Rise of Renewables
The past eight years have witnessed a marked increase in the production of electricity from wind, solar and geothermal energy sources, from 138 TWh in 2006 to 992 TWh in 2014.  The installed capacity of wind increased five-fold from 74 GW to 373 GW, and for solar it soared 27-fold from 6.7 to 180 GW. The last eight years have seen a substantial drop in the cost of electricity from these technologies. In 2006, PV panels used to sell for about $3/watt, their price has dropped to about $0.75/watt.  The levelized cost of electricity from solar in 2006 was around 36¢/kWh; in 2015 it is below 10¢/kWh.  Many Power Purchase Agreements (PPAs) from solar facilities in 2015 have electricity priced at less than 5¢/kWh. Most notably perhaps are the two agreements signed by the utility NV Energy, owned by Warren Buffet’s Berkshire Hathaway: one with SunEdison for power from a solar plant in Colorado for 4.6¢/kWh; and the other with First Solar for power from their plant in Nevada for 3.87¢/kWh. Wind power prices have also come down over these years.  In 2006, wind energy costs were about 15¢/kWh; in 2015 PPAs signed for wind power in the interior states in the US having a purchase price of about 2¢/kWh. These low prices do come with subsidies in the form of a 30% investment tax credit for the solar power and a 2.3¢/kWh of production tax credit for wind power.  

Since 2000 wind and solar power have enjoyed an exponential growth in production. The growth has been driven by market forces—falling prices—as well as government policies like Energiewende in Germany and Renewable Portfolio Standards in many states across the US. Advocates of of these energy sources project this growth to continue at this level or even at an accelerated pace such that electricity production from these sources will soon provide the majority of global electricity, which in 2014 was 24,000 TWh. The graph below (Figure 2) shows the amount of electricity produced by wind and solar plants on a logarithmic scale. While it is true that for a period solar installations were doubling every two years and wind every four, the doubling rate has slowed down. The slow down since 2011 relative to the growth during the preceding five years is a sobering reminder that once the installation base gets large enough resource constraints—such as material supplies, labor and capital—slow down the process. Rosy forecasts by proponents notwithstanding, unless drastic policy measures are taken, it does not look like wind and solar will generate even 10,000 TWh/yr by 2025, by which time total electricity demand could well exceed 36,000 TWh.
Figure 2. Growth of wind and solar power generation has been remarkable, but current rate is not fast enough to allow wind and solar to be the dominant electricity producers by 2030.

Battery Storage
Storage of electrical energy is an important factor for increasing the penetration of intermittent sources like wind and solar.  The only significant electrical storage capacity in the grid currently is in the form of pumped hydro. Although there are a number of battery systems, such as flow cells and liquid metal cells, in early stages of development, they currently do not provide any grid-level storage. 

Noteworthy advances in Li-ion batteries have also been made in these intervening years. In 2006 Li-ion batteries cost about $1000/kWh, and that was a serious impediment to their broad application electric cars. Cost of Li-ion batteries has now dropped to about $300/kWh. The 24-kWh battery pack in Nissan Leaf cars, which cost an estimated $18,000 in 2010 can now be replaced for $5,500 plus the used battery.  If we include the $1,000 for value for the used battery, the cost of the new battery pack would be $6,500 or $270/kWh.  Life of the battery packs has also increased through better management of heat and charging/discharging currents.  A lifetime of over 1000 deep-discharge cycles is now quite typical. For residential applications Tesla announced its PowerWall units in April 2015. Each $3,500 unit can store 7 kWh—there is also a 10 kWh unit available for $3,500. The price is still steep for use as a simple backup power system during power outage; the main value of these units is for homes with PV systems as they extend the use of solar power during nighttime and largely eliminate the need for grid power. 

CO2 Emissions
There has been increasing pressure on the world’s largest emitter, China, and the largest per capita emitter, the US, to curb emissions. US and China emissions of CO2 in 2006 were 6.4 and 6.9 Gt respectively. In 2014, the US emissions were down to 6.0 Gt, but China’s emissions had risen to 9.8 Gt. On a per capita basis, US emissions still far exceed those of China—18 metric tons per capita in the US versus 8.2 metric tons in China. In Nov. 2014 presidents Obama and Xi Jinping signed an accord under which the US would reduce its GHG emissions to 28% below 2005 level by 2025 and China would peak its emissions by 2030 after which it would reduce them. President Obama followed up that pledge by issuing the Clean Power Plan (CPP) in Aug. 2015 under which there would be a federal standard for reducing CO2 emissions from power generation by 32% over 2005 levels by 2030, but it would be up to individual states to determine the mix of technologies to achieve those goals.

It is not clear how successful CPP will be in cutting down GHG emissions. Market forces have already led to a substantial reduction of emissions in the US by the switch from coal to natural gas, and perhaps more could be achieved with further decline in the cost of wind and solar power. Politically, the CPP has not garnered much support.   Many state governors have already announced their opposition to The CPP. Nevertheless, the joint agreement with China and the CPP have helped pave the way for the COP21 Climate Talks in December.

The Papal Encyclical issued in July also drew attention to the growing threat of climate change and its disproportionate impact on the impoverished.  Pope Francis noted, that “… our industrial system, at the end of its cycle of production and consumption, has not developed the capacity to absorb and reuse waste and by-products,” and called for “changes of lifestyle, production and con­sumption, in order to combat this warming or at least the human causes which produce or aggra­vate it.” His statements about combating climate change received much attention, but there was another deeper message in his statement, the one about consumerism and social injustice it engenders when “(w)e fail to see that some are mired in des­perate and degrading poverty, with no way out, while others have not the faintest idea of what to do with their possessions, vainly showing off their supposed superiority and leaving behind them so much waste which, if it were the case everywhere, would destroy the planet.” The pope recognized the need for vastly expanding renewable energy sources, but also noted that, “(f)or poor countries, the priorities must be to eliminate extreme poverty and to promote the social development of their people.” 

Around the same time as the Pope’s Encyclical, the World Bank also issued Sustainable Development Goals for the world which lists goals and targets in 17 areas: eradicating poverty, providing adequate food and clean water, reducing gender inequality, taking urgent action to combat climate change, and ensuring access to affordable reliable energy is listed among the goals. Achieving most of these goals requires increasing global energy supply. Speaking about the enormous progress the world already made Dr. Jim Yong Kim, president of World Bank noted that over a billion people have been lifted out of poverty in the last 25 years, and he could foresee lifting another billion in not too distant future. 

The progress Dr. Kim noted was made on the backs of coal and oil. Can we afford to do the same to help the next billion? The SDG of removing poverty runs up against the need to curb CO2 emissions. Unfortunately, the one CO2-free energy source that is capable to generating the required scale of power, nuclear, is something that the World Bank does not support developing. In view of its policy of not funding nuclear power I have to wonder how serious is the World Bank about the SDGs.
In early December 2015 with much fanfare about 200 nations signed the COP21 Agreement to curb global GHG emissions. It was an unprecedented achievement given the previous failed attempts.  All nations acknowledged the peril the world faces from climate change being engendered by continued emission of GHG, principally from the use of fossil fuels. The countries pledged to cut down their GHG emissions either in absolute numbers or relative to an expected business-as-usual (BAU) scenario. The individual countries determine the GHG reductions they pledge to make. However, there is no mechanism of punitive action to force the countries to stick to the pledged contributions except a public shame. The intended nationally determined contributions (INDCs) are reported to the UN and the emissions of each country are measured and reported in an agreed-upon standard way, and both these are in the public domain. The lack of enforcement is a recognition of political realities; any Agreement that had forced compliance would not have had the support of many countries.
COP21 Agreement sets a goal of limiting the rise in global to temperature to 2°C above the pre-industrialization level, with a stretch goal of limiting the rise to 1.5°C. Even achieving the 2°C target is a daunting challenge, and requires a major upheaval of the global energy system. It would require achieving a net zero emissions by 2050, and limiting total emissions to about 350 Gt CO2

The world currently consumes about 3.6 cubic miles of oil equivalent (cmo) of primary energy and emits over 36 Gt CO2 from energy use.  Under BAU the annual energy consumption is expected to rise to more than 6 cmo by 2050. Burning of each cubic mile of oil releases 12 Gt CO2, about 17 Gt if it is from coal and about 8 Gt CO2 if natural gas is the source of the energy. Even under an all-renewable, all-electric scenario, which could conceivably avoid two-thirds of the primary energy, an energy consumption of 6 cmo/yr would lead to a requirement of generating of 82,000 TWh of electricity relative to 24,000 TWh in 2014; in other words, more than tripling the current global electricity production.

I found it appalling when it was brought to my attention (thanks to Morgan Bazilian)  that the word energy appears only three times in the 31-page Agreement. The word appears twice on page two where the Conference of Parties “acknowledges the need to promote universal access to sustainable energy in developing countries, in particular in Africa, through the enhanced deployment of renewable energy.” The third time the word is used is on page 31 as part of the the name of UN’s IAEA:  International Atomic Energy Agency. No wonder then that there is such huge chasm between the target reductions in CO2 and the pledged INDCs.

I paint a rather gloomy picture, but I would like to end on a more hopeful note. Perhaps the most important outcome of COP21 was the formation of the Mission Innovation fund by many prominent philanthropists like Bill Gates, Richard Branson, Jeff Bezos, Mark Zuckerberg, and others to help innovative solutions cross the “valley of death” and transition to commercialization. They have been joined by 20 governments to double the collective annual budget of energy research from $10 B to $20 B. It may be too little too late, but I can only hope some of the Mission Innovation funds will provide the necessary support to bring the nascent nuclear power technologies that are inherently safe and scalable to market.