Mankind is finding more and more uses for energy as demand grows, while the energy sector is seeing huge changes and trends that business leaders need to consider. The energy sector is experiencing dynamic changes in how energy is generated with renewables competing with fossil fuels and nuclear options, and growing concern over reducing emissions. Balancing the energy supply and demand, with its implications for grid stability is becoming a key issue, and as renewables gain more traction, considerable discussion is given to the role of shale oil/shale gas, and global emissions. The key for business leaders is to understand, anticipate, and exploit these energy trends to improve their business while remaining good stewards of the environment.
Energy Mix Changing:
As the world accepts more and more renewable energy into the mix as shown in Figure 1, industry must monitor the grid integration costs to maintain a reliable transmission and distribution system.
Figure 1 – World Energy Mix 2016 vs. 2040
Solar, Wind, and Battery Prices Are Declining:
We have seen huge advances in the solar, wind, and energy storage technology space as prices have declined and performance has improved. Each time the solar industry has doubled the global installed capacity, the world has seen solar prices decline by 16%, with the wind price decline of 14% with a doubling of installed wind capacity as shown in Figure 2. The energy sector is fast reaching parity between combined cycle gas turbine/coal and renewables.
Figure 2 – Renewable Energy Price Decline
Along with renewable energy generation price declines, rising production of lithium-ion battery packs and increasing electric vehicle sales have driven prices down to just under USD 200/kilowatt-hour (kWh) in 2018. A projected drop in price to USD 109/kWh is anticipated by 2025, as shown in Figure 3. One of the key concerns for this battery energy storage movement is the future availability of the specific metals key for increased battery production, use, and recycling.
Figure 3 – Lithium-ion Battery Price Decline Journey
Not only are batteries becoming cheaper, they are increasing in energy density as future batteries pack more energy capacity into the same space as shown in Figure 4. With lower price and greater energy output, the trajectory of technology is driving increased use in applications, cars, buses, trucks, and industrial mobile equipment.
Figure 4 – Lithium-ion Battery Energy Density Growth
We have seen changes in 2021 as wind turbine capital costs increased and the use of coal for energy generation saw a huge spike, as shown in Figures 5 and 6, respectively.
Figure 5 – Wind Turbine Prices, $ Million Per MW
Coal power generation rose by 9.0% in 2021 to 10,042 TWh, marking the biggest percentage rise since 1985. With Europe’s continuing problem acquiring adequate natural gas supply, the use of coal in Europe alone in 2022 could also reflect a higher global use for 2022.
Figure 6 – Coal Electricity Generation
Renewable Energy Impact On The Electric Grid:
Countries and states are moving to higher penetration rates of renewable energy into the energy mix of their grids. California anticipates 100% renewable energy supplying its grid by 2045, however, it is also creating what is known as the “Duck Curve”. It gets its name due to the resemblance of a duck profiled moving through water.
The “Duck Curve” is a 24-hour graph of the net energy in megawatts (MW) demanded by the grid and not supplied by intermittent solar, or that which must be generated by fossil-fuels or nuclear to supply the balance of energy required. Although the net energy needed by the grid in the early morning, early evening, and nighttime hours is high, the impact of solar generation during the daylight hours greatly reduces the need for other energy sources during those periods.
In the actual graph of 2019, the grid operator estimated only about 7,000 MW of energy capacity was required at the peak of the daytime solar energy period as shown in Figure 7.
Figure 7 – California Duck Curve 2019
The problem is that the difference between solar energy generation and the actual market demand must be met by nuclear and natural gas generation. Other than natural gas peaking plants designed for sporadic use, the nuclear and gas generators were designed for a 24/7 operation for maximum energy efficiency and lower-priced energy generation. Especially for nuclear plants, these two types of generation were not designed for a ramping down in the morning as solar energy production increases and ramping up in the late afternoon as solar energy production ceases.
Renewable Penetration Price Increase:
As the world moves toward more renewable energy generation, consumers must look at the grid’s operation and reliability impact, but also the price of delivered energy for the grid as a whole. Several good examples are available to help calibrate what the future of 100% renewable energy could resemble: 1) the German electricity market as shown in Figure 8, and 2) the California electricity market as shown in Figure 9.
During the ramp-up period of German solar energy into their grid, high “feed-in” tariff rates were instituted to incent solar installations. For some German farmers, the income from the solar energy sold into the grid from their solar installation exceeded their agricultural revenue. As a result of this ramp-up, German electricity prices rose by an annual compounded 3.5% from 2006 to 2018, rising from $0.195 per kWh in 2006 to $0.294 per kWh in 2018.
Figure 8 – Rise Of German Electricity Prices 2006-2018
In California, electricity prices rose at a 3.6% annual compounded rate from 2011-2017 from $0.131 per kWh to $0.162 per kWh. As California electricity rates were climbing at a 3.6% compounded rate, the average U.S. electricity price increase was only 0.67% per year, or one-fifth of the California rate increase. The U.S. overall average rate also included the high California rate, which would indicate without the California rate of increase, the U.S. rate of increase would have been even lower. Current California residential retail rates are around $0.26/kWh and that market has seen an 11% annual price inflation for 2021 and 2022.
With the increase in the percentage of renewable energy in the overall energy mix, the rise in electricity prices has implications for both state and U.S. 100% renewable goals and its impact on consumers’ electricity bill.
Figure 9 – Rise Of California Electricity Prices 2011-2017
Shale Revolution In U.S.:
The U.S. shale revolution has changed the energy picture in the country, but also impacting crude oil, natural gas liquids (NGL), and natural gas supply and prices worldwide. The combination of horizontal drilling with hydraulic fracturing to unlock hydrocarbons from tight rock has made a huge impact.
The increased NGL supply, lower-priced petrochemical feedstock, and low energy (natural gas) prices are a direct result of horizontal fracking to increase the natural gas supply in the U.S.
The U.S. is #1 in the world in both oil and natural gas production, while being the #1 exporter of LNG. There are several key drivers for this transformation:
- US and Canada are the only 2 countries in the world that allow private citizens to profit from mineral rights
- Capital formation is available via a robust financial market
- Existing and expanded oil and gas infrastructure
- Tandem technology development of horizontal drilling and fracking
Figure 10 demonstrates the dramatic increase in U.S. Oil Production from 1980-2021, Figure 11 shows the increase in U.S. Oil Exports from 1980-2021, and Figure 12 depicts the increase in U.S. Gas Production from 1980-2021.
Figure 10 – U.S. Oil Production 1980-2021 (000 barrels/day)
Source: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=a
Figure 11 – U.S. Oil Exports 1980-2021
Figure 12 – U.S. Gas Production 1980-2021
Abundant and cheap natural gas providing low-cost petrochemical feedstocks and increased U.S. investment an jobs:
With the abundant production of U.S. ethane, the domestic ethane price has a distinct advantage vs. higher-priced, foreign crude-based naphtha for petrochemical use in ethylene plants. Perhaps an overlooked collateral benefit to the U.S. of this development is the impact on the domestic petrochemical industry, capital investment, economic growth and employment.
Figure 13 – Existing and Planned U.S. Petrochemical Industry Throughput in Thousand Barrels Per Day
Why is this important to the U.S. economy? The U.S. is once again using its technical and logistical expertise in petrochemical feedstock production, and price advantage to generate higher-value products for export. The ability of the U.S. to produce a reliable supply of reasonably-priced petrochemical feedstock positions it to export higher-value finished products into the international market at a competitive advantage.
During the last 10 years over $89 billion was invested in the U.S. in 210 chemical projects due to the shale gas / gas liquids boom. New ethylene plants by Dow, ExxonMobil, Chevron Phillips, OxyChem, and Formosa provide for a future investment of over $18 billion.
Methane Flaring Has Lowered:
Methane or natural gas is about 2.5-10% of U.S. greenhouse gas (GHG) emissions, with gas contributing ~31.5% of U.S. electricity supply, the largest single source of electricity in the country. Carbon dioxide (CO2) makes up about 82% of U.S. greenhouse gas emissions.
The shale gas revolution has provided an ample supply of relatively-cheap natural gas that has been used in the U.S. to replace coal for electricity generation. Although natural gas power generation produces 40% less CO2 than coal to produce the same amount of energy, it has also raised concerns on the problem of methane leakage from its production.
Without shale gas since 2000, if the same energy was replaced with coal, the annual U.S. CO2 emissions would have increased by 120-582 million tons of CO2 per year, after netting methane leakage. Figure 14 shows that although global natural gas production is increasing, the ratio of emissions to gas production has decreased from 2000-2017.
Figure 14 – Global Emissions/Production Ratio 2000-2017
The “price” of methane leakage (although not ideal in a perfect world) is well worth the benefits of natural gas use for U.S. electricity production at the present time as a way to reduce CO2 emissions.
Shale Gas Has Lowered Emissions, While Reducing Electricity Costs:
Since 2008, coal use for electricity has declined, as shown in Figure 16, while natural gas has increased due to the shale gas revolution. From 2010-2020, the U.S. / EU retired 49,200 MW coal 2001-2010, while China is building 250,000 MW new coal-fired plants in 2020-2030.
Figure 15 – Electricity Generated in U.S. by Source (Gigawatt-hours per year)
The main reason for this reduction in coal generation is the price of natural gas. As natural gas price volatility was drastically lowered due to the large supply of gas, it became more attractive and economical for utilities to make the switch from coal, as shown in Figure 16.
Figure 16 – U.S. Natural Gas Price History, 2000-2021
This lowering of natural gas price along with its abundant supply has accelerated the closing of coal-fired electricity generators, as shown in Figure 17, providing both a benefit to U.S. ratepayers in lower energy pricing while reducing the CO2 emissions. As the U.S. reduced CO2 by 2.80% in 2019, China and India continue to contribute over 35% of global emissions.
Figure 17 – CO2 Emissions From U.S. Energy Consumption, 1975-2020 In Metric Tons
Prior to the shale revolution from 1990 to 2008, U.S. retail electricity prices increased at annual rate of 3.31%. Since 2008, U.S. retail electricity prices increased by annual rate of 0.51%, as shown in Figure 18.
Annual electricity inflation rate 2008-2020 is a fraction (37%) of the electricity inflation rate during 1990-2008, and U.S. retail electricity price annual increases declined by 63% benefitting U.S. electricity consumers by $480 billion in electricity costs
Figure 18 – U.S. Retail Electricity Cost History, 1990-2020 in Cents per kWh
Summary
- Renewables are getting cheaper, but need energy storage to integrate with grid and provide a 24/7 reliable energy supply
- The globe needs an “All-of-the-above” energy strategy, as it is very unlikely that worldwide energy demand will reduce by 50% to align energy supply with demand
- For many industrial facilities, energy costs can be the #2 operating cost, and therefore deserves to be efficiently and aggressively managed both from a cost and emissions basis
- Although shale gas is not totally emission-free, its reduced emissions vs. other fossil fuels offer a pathway to lowering CO2 emissions
- The U.S. shale oil and shale gas revolution has sparked increased investment in the U.S. while reducing CO2 emissions due to low-cost gas replacing coal, and lowering electricity costs for American consumers
- The U.S. reduced CO2 by 2.8% in 2019, while China and India represent over 35% of global emissions
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