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MR. MICHAEL CEMBALEST: Good afternoon and welcome to the March 2019 Eye on the Market Energy podcast.  This is one of the projects we do here that I enjoy the most.  We write an Energy Paper every year that's a deep dive on several topics in the worlds of energy and climate.  Vaclav Smil at the University of Manitoba serves as our Technical Advisor.  Interesting topics to discuss this year as you might imagine.  First, we get into a little bit of a preamble on the whole concept of the Green New Deal.

So before I tell you what I think, I want to tell you this. The International Energy Agency has a Sustainable Development Scenario for the U.S., in which the following occurs.  U.S. overall energy use declines back to levels last seen in 1988. Solar generation grows by a factor of 11.  Wind grows by a factor of 5.  No nuclear power plants are decommissioned or shut down, even when their licenses expire.  There is a 90% decline in coal use for power and heat because the industrial sector switches to solar thermal and geothermal energy. Electric vehicles currently 1 to 2% today reach 40 to 50% of the passenger fleet.  Oil use declines by 50% because of electric vehicles and a 40% improvement in mileage per gallon.  Another massive 60% decline in truck C02 emissions per ton of freight, and the energy intensity of residential homes and commercial buildings declines by 30%.  In this completely transformational scenario, which would require a herculean unprecedented effort to accomplish, U.S. C02 emissions would go down by about 40% by 2030.  

The Green New Deal suggests that we can get to zero net emissions by 2030. So, for that reason we agree with Vaclav that this Green New deal Goal is not possible.  It doesn't appear grounded in any existing scholarship on energy decarbonization, and it's not really useful foundation for any serious policy discussion.  At best, it's a slogan to galvanize support for change and at worst it's a sign of just how little work all of its proponents have actually done.

So with that, this year's Energy Paper gets into the detail of where energy comes from and how it's used, and the executive summary reviews some of the decarbonization challenges facing the world's industrialized and emerging economies.  And then in terms of the specific topics that we cover, we cover the issue of decarbonization of industry.  The industrial sector is the largest sector globally in terms of energy use.  Decarbonization hasn't happened much at all. And we get into the question of why can't renewable electricity generate more industrial heat and pressure rather than direct fossil fuel use?

And then we get into a whole issue of mountains versus molehills.  The media has reported with a lot of excitement on issues related to carbon sequestration through forests and in underground geological storage.  The issue of cellulosic ethanol, new generations of lithium ion batteries and super capacitors for distributed energy storage, new ways to create aluminum.  We have a new mountains versus molehill section where we analyzed just how impactful some of these things are going to be, grading them each from 1 to 5 in terms of their capacity to deliver real decarbonization changes over the next 10 to 15 years.

Bottom line is that more of the scores were lower rather than higher, and there are some interesting simple parallels we use to explain why.  We also get into a dispassionate assessment of Germany's Energiewende transition. I think it's really important to understand what's happening in Germany.  They are shooting for 65% renewable electricity generation and are one of the only countries in the world trying to do so without substantial use of hydropower. 

If you look, there's probably about 15 or 20 countries around the world that already have renewable shares of electricity above 50% or even above 70%.  And with the exception of Denmark, all of these countries rely not exclusively, but almost exclusively on a combination of hydropower and geothermal.  And so, understanding how Germany is going to get there through wind, solar, and biomass I think is an important exercise for other large developing or developed countries to try to do the same thing. The bottom line is that costs have been high and the challenges both financial and political that remain are pretty steep.  

Lastly we get into some analysis of the latest wildfire research which gets into the question of just how much of the wildfire severity that we've been seeing in recent years is due to man-made climate change, how much of it is due to natural causes, how much of it is due to fire suppression approaches, how much of it is due not so much to human climate change but to human migration patterns in terms of moving into fire prone areas and things like that.  

It's an interesting brief three page section that you could take a look at, and we conclude with a one-pager on Trump's War on Science, in which he is arguably making the American government scientifically illiterate again and you can on one page look at all of the evidence that has been cited in a recent paper as to why that may be the case. 

If you've only got a brief period of time just take a look at the executive summary.  The first three pages walk through where energy comes from, how it's used, and some of the major challenges facing the world's economies as they aim to decarbonize over the next let's say 20 to 30 years.  The key issue to understand here is that electricity is only 17% of global energy consumption, so that even if the world were to figure out a way to substantially decarbonize electricity generation through much higher penetration of renewables, wind, solar, hydro, and nuclear depending upon how you think about it, that would make a much smaller dent an overall global greenhouse gas emissions than you'd think, again, because electricity is only let's say 15 to 20% of total energy consumption.  The rest of energy consumption is coming from vehicles, and by homes, and buildings, and the largest piece by the industrial sector, and understanding how direct fossil fuels feed into those sectors and how they use those really gives you a better understanding of the limits of decarbonizing just the electricity grid by itself.

Here is one way to think about it.  Even if renewable energy rose to 50% of all electricity generation, right, fossil fuels could still represent 70% of total energy use unless there is a lot of the decarbonization in both the transportation and industrial sectors as well. So, take a look at the executive summary, and at the end of the executive summary there are some links that you can use to read about the individual topics.  We have a handful of hard copies of this report for anybody that wants them so you can contact your sales coverage if you want to see that, and I look forward to talking to many of you again in April about some general market and investment developments.  Thank you very much and have a great day.

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Preamble on the Green New Deal

There has been progress de-carbonizing electricity due to declining wind and solar power costs.  However, de-carbonization of industry, transport, agriculture and buildings, the sectors which consume over 2/3 of fossil fuels, has been minimal given the technical, physical and practical challenges in the way.  To assert that the US can reach zero net emissions by 2030, as the Green New Deal does, and for the entire energy sector (not just from electricity generation), and while phasing out nuclear power and relying heavily on carbon sequestration by forests1, sets a goal that cannot in our view be achieved.  We agree with our science advisor Vaclav Smil that Green New Deal goals are not in the realm of the possible, that they do not appear grounded in existing scholarship on energy de-carbonization, and that they are not a useful foundation for a serious policy discussion.

Some on the right are accused of being “intellectually bankrupt” on climate issues, and I do see evidence of that.  But being intellectually dishonest about the viability of the Green New Deal does no one any favors either2.  At best, it’s a slogan to galvanize support for change; at worst, it’s a sign of how little work its proponents have done.  This year’s paper gets into the details of where energy comes from, how it’s used, and the de-carbonization challenges facing the world’s industrialized and emerging economies.

This line graph tracks CO2 emissions in the United States from 1990 to the present and projects three different scenarios, depending on policy changes) to the year 2030. The chart suggests that the most ambitious goals will not be met.

Why the Green New Deal’s 2030 goal is unattainable

Consider the International Energy Agency’s “Sustainable Development” scenario for the US (blue dotted line), in which:

  • overall US primary energy use declines to 1988 levels
  • solar generation grows by a factor of 11x
  • wind generation grows by a factor of 5x
  • nuclear generation is unchanged (no decommissioning)
  • 90% decline in coal use for power and heat (industrial sector switches to solar thermal and geothermal energy)
  • electric vehicles reach 40%-50% of the passenger fleet from today’s 1%-2% levels
  • oil use declines by 50% due to electric vehicles and 40% improvement in gasoline/diesel mileage per gallon
  • 60% decline in truck CO2 emissions per tonne of freight
  • energy intensity of res./comm. buildings declines by 30%

In this highly transformational scenario, which would require a Herculean effort to accomplish, US CO2 net emissions decline by 40% by 2030, and not to zero as imagined by the Green New Deal

Mountains and Molehills: Achievements and Distractions on the Road to De-Carbonization

Executive Summary

Impressive global wind and solar milestones have been reached in the last few years: declining upfront capital costs, electricity auction prices comparable to natural gas, rising capacity factors and capacity additions which have exceeded coal and natural gas for the 5th year in a row.  These trends, shown on page 6, are the by-product of scale, innovation and plenty of subsidies.

Here’s the “but”: electricity is less than 20% of global energy consumption.  Unless progress is made reducing direct fossil fuel use by industry and transport, de-carbonization goals might not be met in the timeframes often cited.  Let’s take a closer look.

The first chart shows primary energy used to generate electricity on a global basis, measured in “quads” (quadrillion BTUs).  In 2017, the renewable share reached 25%.  Hydroelectric power accounted for 16%, and wind and solar combined accounted for 5%, up from 0.5% in 2004.

The second chart shows how electricity gets generated: 225 quads of primary energy are required to generate 75 quads of electricity.  Where did the rest go?  150 quads are lost to thermal conversion3, power plant consumption and transmission.

This chart breaks down the primary generators of electricity around the world. In 2017, renewable sources (25%), nuclear (12%), natural gas (20%), coal (40%) and petroleum (3%), were responsible for generating electricity.

These side-by-side bar charts show the amount of electricity-generating energy lost to thermal conversion, power plant consumption and transmission. End-user electricity represents only about 1/3 of its primary energy inputs.
While fossil fuels are used to generate electricity, they’re also used to power combustion engines, for heating/smelting and as raw materials.  In the third chart, we break down global energy consumption into the three major users of energy (industry, transportation and residential/commercial buildings), and their energy sources. These charts highlight the limits of just de-carbonizing the electricity grid.

These charts show the sources of energy used by the industrial, transport and residential/consumer sectors. While industry uses natural gas, coal and petroleum in almost equal quantities, with electricity and renewables in lesser roles, the transport sector is almost completely dependent on petroleum at present. In the consumer/retail sector, the smallest of the three, electricity and natural gas are the primary energy sources, with coal and petroleum less important and renewables not yet a significant factor.

This pie chart shows that nearly three-quarters of fossil fuels are used for purposes other than electricity generation.
  • Electricity is only 17% of global final energy consumption, and accounts for less than one third of global fossil fuel use
  • Globally, the industrial sector is the largest user of energy and is heavily reliant on direct fossil fuel use; transportation is almost 100% reliant on petroleum products
  • Fossil fuels accounted for ~85% of global primary energy in 2017.  Starting in 2010, fossil fuel shares began to decline at the rate of 0.25% per year, mostly due to the rise in renewable power generation
  • Energy solutions need to be designed for increasingly urbanized societies, rendering discussions about “off-the-grid” approaches much less relevant

While these statistics are global, electricity shares of total energy use and fossil fuel shares are similar in the US, China and Europe4. Hence the challenges Germany faces as it aims for a 40% decline in emissions by 2030, and challenges the US faces with any plan that aims for zero net emissions by the same year.

This line chart shows the decline in fossil fuel usage between 1965 and today, and includes estimates of usage in 2025 and 2040. Though fossil fuels accounted for 94 percent of global energy production in 1965, nuclear, solar, and wind power have lowered fossil fuel usage to about 85 percent of energy production today. By 2020, the Energy Information Administration estimates fossil fuel usage will fall to 82 percent; and to around 76 percent by 2040.

This chart displays urbanization trends from 1950 to 2050 in the United States, Japan, China, Europe, South America, Africa and India. All areas are increasing, with China’s urban population growing most rapidly.

Where does that leave us?  With hard-to-reach de-carbonization targets, for two main reasons:

  • The energy mix doesn’t change that fast.  Over 125 countries have renewable energy regulations in place for the power sector, up from 50 a decade ago.  But even if renewable sources rose to 50% of electricity generation, fossil fuels could still represent ~70% of total energy use unless transport and industry decarbonize as well.  On transportation, the IEA has one of the most optimistic EV forecasts.  However, its New Policies Scenario for 2040 does not show substantial de-carbonization of global energy use: while coal plateaus and renewable energy doubles, natural gas meets most of the world’s growing energy demand.  Petroleum use doesn’t decline either, despite the anticipated rise of EVs.  Even when including bioenergy5, the IEA renewable share forecast expands from 14% in 2016 to just 20% by 2040.  While CO2 emissions grow more slowly in this scenario, they still rise.
  • Increased energy use.  The IEA projects global energy demand to rise by ~25% from 2017 to 2040 as emerging economy increases dwarf energy use reductions forecast for Europe and Japan. 

Hard to reach de-carbonization targets argue in our view for significant funds spent on flood prevention/ remediation projects, which we discussed in detail last year (see links below).

This table shows the extremely modest growth in renewable energy sources between now and 2040. The energy source expected to grow the most is natural gas.

This bar chart shows that between 2017 and 2040, energy use is expected to decline in Europe and Japan, to remain unchanged in the United States, and to increase in other regions the world. India and China are projected to experience the most growth, trailed by Africa, the Middle East, Southeast Asia, and Latin America.

This line chart looks at global CO2 emissions from 1990 to today, and projects scenarios to 2040.

This bar chart shows expected sea level rise by the year 2100 according to different models. Depending on the model, total estimated sea level rise ranges between a low of below 2 feet and a high around 6 feet.

With this backdrop, we look this year at “Mountains vs Molehills”: what could provide substantial pathways for de-carbonization, and what might end up being distractions along the way.  While renewable penetration of the grid will continue to rise, the charts on page 3 cast considerable doubt on the viability of German (Energiewende) and US “Green New Deal” de-carbonization timetables, particularly if nuclear power is not considered a permanent part of the solution.

Table of Contents

Click here to read the full document, or select a link below to read a specific section.

Renewable energy milestones

Comments from our technical advisor Vaclav Smil

  1. De-carbonization of Industry
    Electrification of industrial heat and pressure is technically possible, but costs of such a transition could be prohibitive given the cost of electricity vs direct use of gas. New electrochemical means of chemical production are promising but in their infancy
  2. Mountains vs Molehills
    The media has reported with great excitement on CO2 sequestration through both forests and underground geological storage; cellulosic ethanol; lithium ion batteries and supercapacitors for distributed energy storage; and new ways to create aluminum. But how impactful will they really be?
  3. Germany and Energiewende
    A dispassionate assessment of the world’s most ambitious de-carbonization policy
  4. Wildfires
    Anthropogenic climate change has roughly doubled the number of US hectares burned
  5. Trump’s War on Science
    Making America’s government scientifically illiterate again

Sources

Links to select topics from prior Eye on the Market energy editions

Executive Summary supplementary materials: renewable energy milestones

  • The last decade has seen impressive declines in capital costs of solar/wind power and energy storage.  While improvements in storage costs have slowed over the last couple of years, our contacts at the Electric Power Research Institute believe that cell engineering and scale improvements will continue in the years ahead, with battery pack storage costs possibly reaching $100 per kWh by 2025.
  • In the US, onshore wind auction prices have declined to 2 cents per kWh (mostly for projects in the Midwest wind corridor), and even offshore wind prices have fallen to new lows, reaching 6.5 cents per kWh in a 2018 Massachusetts project
  • Rising US wind capacity factors reflect larger rotor diameters, higher hub heights and locations with better wind speeds
  • Modest increases in US solar capacity factors reflect increasing use of tracking rather than fixed tilt panels, and greater inverter loading ratios to maximize AC generation.  Capacity factors have reached 30% in California and the Southwest

This three-line chart shows the declining upfront costs of wind, solar, and storage.

This chart shows changes in the prices paid at auction for wind and solar photovoltaic (in dollars per MWh). Between 2012 and 2017, the prices of both have fallen, with solar PV prices falling more significantly.

This bar chart shows the wind capacity factors by project vintage year from 1989 to 2016. In the 1989–99 period, we used 25 percent of capacity. By 2016, that had grown to approximately 43 percent.

This bar chart shows the year-by-year capacity factor, from project inception to 2017. It also shows the percentage of tracking, rather than fixed tilt, panels in use. In 2010, the figure was around 22 percent of capacity and tracking panels accounted for 14 percent of panels in use. In 2016, we were at 27 percent of capacity and tracking panels accounted for 78 percent of the total.

Why all the focus on de-carbonization?

I asked Vaclav to articulate for our clients why de-carbonization is so important.  His response is useful for those who are convinced by consensus views on climate science, and for those still on the fence:

“Underlying all of the recent moves toward renewable energy is the conviction that such a transition should be accelerated in order to avoid some of the worst consequences of rapid anthropogenic global warming. Combustion of fossil fuels is the single largest contributor to man-made emissions of CO2 which, in turn, is the most important greenhouse gas released by human activities. While our computer models are not good enough to offer reliable predictions of many possible environmental, health, economic and political effects of global warming by 2050 (and even less so by 2100), we know that energy transitions are inherently protracted affairs and hence, acting as risk minimizers, we should proceed with the de-carbonization of our overwhelmingly carbon-based electricity supply – but we must also appraise the real costs of this shift. This report is a small contribution toward that goal.”

Acknowledgements: our technical advisor Vaclav Smil

As always, our energy Eye on the Market was overseen by Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the University of Manitoba and a Fellow of the Royal Society of Canada.  His inter-disciplinary research includes studies of energy systems (resources, conversions, and impacts), environmental change (particularly global biogeochemical cycles), and the history of technical advances and interactions among energy, environment, food, economy, and population.  He is the author of more than 40 books (the latest one, Growth, will be published by the MIT Press in September) and more than 400 papers on these subjects and has lectured widely in North America, Europe, and Asia.  In 2010, Foreign Policy magazine listed him among the 100 most influential global thinkers.  In 2015, he received the OPEC award for research, and is described by Bill Gates as his favorite author.

Acronyms used in this paper

AC alternating current; BTU British thermal unit; BTX benzene/toluene/xylene; CCS carbon capture and storage; CO2 carbon dioxide; DC direct current; EIA Energy Information Agency; EPA Environmental Protection Agency; ERCOT Electric Reliability Council of Texas; EV electric vehicle; GHG greenhouse gas emissions; GW gigawatt; GWh gigawatt-hour; IEA International Energy Agency; IPCC Intergovernmental Panel on Climate Change; IRENA International Renewable Energy Agency; ISO independent system operator; kg kilogram; km kilometer; kW kilowatt; kWh kilowatt-hour; L liter; MJ megajoule; MMT million metric tons; Mt metric tonnes; Mtoe million tons of oil equivalent; MW megawatt; MWh megawatt-hour; NREL National Renewable Energy Lab; TWh terawatt hour; VAT value added tax; Wh watt-hour