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July 2016 EEnergy Informer
Page 1
19
In this issue Do Oil And Renewables Mix? 1
Humanity Can Survive Without Exxon; Not The Other Way Around 5
Why Saudi’s Vision 2030 Is A Mirage 8
California’s Duck Curve Has Arrived Earlier Than Expected 10
ERCOT Market Makeover 15
EIA’s Latest Outlook: Missing The Mark? 16
Regulation Biggest Barrier To Technological Innovation 18
New York Regulators Take Next Step 20
BP: Coal’s Annus Horribilis Has No End 23
The Future Is In Services, Not Commodity Sales 27
Asset Light, Information Heavy? How Would That Work? 29
IEA: Firing On All Cylinders 32
Future of Utilities: Utilities of the Future 34
Do Oil And Renewables Mix? What should oil majors do if fossil fuels are eventually doomed?
veryone knows that oil and water don’t mix. The question is whether oil and renewables do. And
on this point, like many others, opinions vary. Oil companies, while not threatened to distinction
any time soon, nevertheless must decide if they need to adjust their longer-term investment plans
and business strategies in a future where carbon emissions will increasingly be constrained and/or
costly. And if they conclude that demand for their main products are likely to dwindle as global
economies gradually shift towards lower carbon alternatives, then should they join the booming
renewable bandwagon or stick to their knitting and watch their fortunes fade over time?
As the following 2 articles explain, while the overall trend – a gradual shift away from fossil fuels –
appears likely, the pace of change and the exact form of the substitutes are not. And this partly explains
how different fossil fuel companies are charting their future paths.
In May 2016, French oil giant
Total acquired Saft for €950
million ($1.1 billion),
signaling its entry into energy
storage business. Saft makes
nickel and lithium batteries for
transportation, military and
storage of renewable
generation. It is the latest in a
string of investments starting
with the acquisition of
SunPower Corp, a
manufacturer, assembler and
installer of solar PV panels
with a growing footprint in the
US in 2011.
E
US on top US has been the world's top producer of petroleum and natural gas since 2012
Source: U.S. Energy Information Administration
EEnergy Informer The International Energy Newsletter
July 2016
EEnergy Informer July 2016 Vol. 26, No. 7
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2 July 2016 EEnergy Informer
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According to Total’s CEO, Patrick Pouyanne, Saft will be the company’s spearhead in electricity
storage. Why would an oil major be interested in electricity storage? Because the market for energy
storage is poised for rapid growth as everyone grapples with better ways to integrate variable generation
from solar and wind into the grid – which must ultimately provide reliable service to customers. Total,
which has said it plans to invest $500 million a year in renewables, sees storage as the next big
opportunity. And storage is a good fit for anyone in transportation – which Total totally understands.
Earlier this year, Total announced the formation of a new business unit entirely devoted to renewables
and has said it wants to be among the major players in the growing field within 20 years. Total has
already combined its business units for renewables, gas, power and energy efficiency as the growth of
those markets prompted a “value chain approach to electricity.”
Analysts were broadly
supportive of the
company’s latest move.
Logan Goldie-Scot from Bloomberg New
Energy Finance (BNEF) was quoted in
PV Magazine saying
that the acquisition
gives Total an instant
entry in a market that
will double in size in
2016 in deployed
capacity – and that is
only the beginning of
what is likely to be
exponential growth for
years to come.
“Saft manufactures batteries for a number of applications, but the grid-scale storage division is
likely to be most attractive for Total,” adding, “For Saft, financing is the major rationale behind
the deal (agreeing to be acquired). Total’s €21 billion ($23 billion) balance sheet would
strengthen Saft’s hand when bidding for larger grid-storage contracts.”
Total, of course, is not alone. Many inside and outside the fossil fuel sector are beginning to think outside
the box – although few have spelled out their strategy as clearly as Total has. Its new marketing slogan is
better energy – cute and sufficiently vague. One is reminded of BP’s reference to beyond petroleum –
something that never went beyond a slogan following the sudden departure of its CEO, Lord Browne and
the Deepwater Horizon platform disaster in Gulf of Mexico in 2010.
The diversification towards renewables – while miniscule compared to the overall scale of fossil fuel
industry – is nevertheless significant and appears to be gathering momentum in some circles.
Recently, France's Engie bought an 80% stake in California storage company Green Charge Networks
in early June 2016 following the acquisition of solar developer Solairedirect SA last year. Also in early
June, GE Ventures, an offshoot of GE, bought a minority stake in German battery storage developer
Sonnen GmbH, for an undisclosed amount – showing that money flows in both directions across the
Atlantic in search of potential stars. Utility-scale energy storage appears to be the next big thing in
energy.
Energy history: How fast do you reckon renewables will grow? World energy consumption, 1990-2015
Source: BP’s Statistical Review of Energy, 2016 edition, June 2016
3 July 2016 EEnergy Informer
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Sonnen makes residential lithium storage system and operates an online energy sharing platform. In a
press release, GE Ventures managing director Jonathan Pulitzer described the joint venture as a
blueprint for the “utility of the future,” adding, that Sonnen is “helping to reshape the energy industry”
and the two companies would collaborate to “provide clean and affordable energy to all.”
Sonnen claims over 10,000 installations world-
wide, making it a serious competitor with the
likes of Tesla, Panasonic, LG, Samsung and
others – all of whom are in a race for market
share in the rapidly growing field.
Sonnet is reportedly unique among battery
manufacturers since it offers a platform that
allows solar hosts to share their self-produced
energy with non-solar customers (see article on
peer-to-peer trading on page 28). These types of
sharing platforms are rapidly proliferating since
in many markets more than half the customers
cannot install their own solar panels and/or
batteries due to space restrictions or because they
live in high-rise apartments. Sharing platforms
gives these customers the opportunity to brag
that they are self-sufficient and green.
Nothing wrong with the business model.
However, it is not clear who will pay for
delivering the electrons that are being generated,
shared and stored. That, one assumes, will be
added to the long list of issues regulators of
You ain’t see nothing yet: Renewables on exponential growth World energy consumption, 1990-2015
Source: BP’s Statistical Review of Energy, 2016 edition, June 2016
Renewable generation
Source: BP’s Statistical Review of Energy, 2016 edition, June 2016
4 July 2016 EEnergy Informer
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distribution networks need to sort out, and with increased urgency (see related articles on page 18).
Not to be outdone, Statoil is investing in battery storage for its offshore wind farms. Likewise, Shell is
thinking about a new energy division, not unlike Total.
Major automakers, also concerned about the potential disruptions of autonomous cars and rapid
evolution of electric vehicles, are increasing joining or acquiring their potential competitors. The CEOs
of German automakers, for example, recently had a high level meeting with the German Chancellor
Angela Merkel. The topic of discussion was “what to do about Tesla?” The German auto industry is a
major source of employment, and is treated with respect.
The reasons for the executive concerns are not to be dismissed. According to Irene Rummelhoff,
Statoil’s Ex VP for New Energy Solutions, “The transition to a low carbon society creates business
opportunities and Statoil aims to drive profitable growth within this space.”
This explains the rush by some oil majors to diversify away from oil. Renewable energy, energy storage
and electric vehicles offer opportunities and may be good substitutes for oil in the critical transportation
sector.
But will such efforts succeed? Will oil and renewable ultimately mix? History of prior ventures by oil
companies into renewables and other fields does not offer much encouragement. Why would they succeed
now?
The skeptics point out that it may be too little, too late for oil majors to establish a beachhead in the
already crowded
renewable business since
there are so many
established players such
as the likes of SolarCity,
now being acquired by
Tesla.
Others argue that despite
the late start, now is the
time to get into the
thriving renewable and
energy storage business
even if it is crowded. So
much growth potential
remains to meet the
targets of Paris agreement
as described in article on
page 16.
Electric transportation and
storage appear as especially good fit for oil companies – after all they already know something about the
transport business. Moreover, for many cash-starved startups, having the deep pockets of a super major is
a huge blessing – given the expected exponential growth.
In the end, no pain, no gain. Companies that do nothing or wait too long may end up with fewer, or
ultimately no options.
Oil prices depressed in 2015, global renewable investments set new record Global renewable investment set new $286 billion record in 2015, annual in $ billion
Source: Global trends in renewable energy investment 2016, UNEP Bloomberg New Energy Finance
5 July 2016 EEnergy Informer
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Humanity Can Survive Without Exxon; Not The Other Way Around Oil majors face increased pressures from shareholders to face climate realities
aving given up on the management, for a number of years, environmental activists have tried the
next best thing: to get enough shareholders to force new thinking at the top. And gradually, they
are getting closer to a majority vote – which will force top management to take notice and
respond. At this year’s annual shareholder meetings in May, 41% of Chevron shareholders and
38% of ExxonMobil supported such resolutions – a percentage that has been growing over time and is
expected to cross the 50% mark soon, perhaps as early as 2017.
Some oil majors including Royal-Dutch Shell have already made public concessions, while Total has
instituted dramatic change in its future direction. But the top 2 American oil majors stubbornly stick to
their old line that signing the climate agreement in Paris may be good but it is unlikely to change the
market realities any time soon, if ever. They prefer to carry on as if Paris agreement did not exist, or
matter.
It is yet another
example of large and
successful companies
who are very good at
what they have always
done, until the
environment around
them begins to change
– and in this case, it is
the environment and
climate change that
will exert pressure on
traditional
fundamentals of supply
and demand for oil and
fossil fuels over time.
John Watson, the
CEO of Chevron told
shareholders in late
May 2016 that while
signing agreements in
Paris was a “good start,” he personally doubts the signatories will achieve their goals. He said, among
other things,
“You can sign agreements in Paris, that’s a good step. But when you sign agreements and create
the impression that it’s going to be implemented … it’s just not clear that’s going to deliver.”
Referring to shareholder resolutions that were rejected by Chevron’s management and the board, Watson
said,
“We don’t think this proposal will advance our thinking.”
H
Sovacool says transition away from fossil fuels may be much faster than historical ones Global energy supply by fuel source as a% of total, 1830–2010 Coal surpassed the 25% mark in 1871, 500 years after the first commercial coal mines in England. Crude oil surpassed the 25% threshold in 1953, nearly a century after Edwin Drake drilled the first commercial well in Titusville, Pennsylvania in 1859. Hydroelectricity, natural gas, nuclear power and renewables have yet to surpass the 25% threshold.
Source: http://www.sciencedirect.com/science/article/pii/S2214629615300827
6 July 2016 EEnergy Informer
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His message to the shareholders, in other words, was
not to worry. Fossil fuels are here to stay. And
Chevron will be around to deliver, as it always has.
It was a reassuring message for those who don’t
think the Paris accord will have much impact.
Shortsighted if you believe that COP21 spells the
beginning of the end for the fossil fuel age.
Rex Tillerson, the CEO of ExxonMobil, who also
faced similar resolutions from shareholder activists,
and who also rejected them outright, went even
further stating that until there were better substitutes
for fossil fuels, “… just saying ‘turn the taps off’ is
not acceptable to humanity.”
In dismissing shareholders’ and activists’ attempts to
force ExxonMobil to acknowledge the impact of
climate change on company’s future investments and
longer term strategy, Tillerson argued that oil and
gas would provide 60% of the world’s energy needs in 2040 – suggesting the need to invest trillions more
to meet the growing demand.
Pointing that Exxon had already invested $7 billion in green technology, he confessed that the science and
technology had not yet achieved the breakthroughs needed to replace fossil fuels.
“Until we have those (breakthrough technologies), just saying ‘turn the taps off’ is not acceptable
to humanity,” adding, “The world is going to have to continue using fossil fuels, whether they
like it or not.”
Nobody, of course, is asking the oil majors to turn the taps off – certainly not immediately – but merely to
begin to think about the end game before it is too late – and many are convinced that it will arrive much
sooner than Mr. Watson and Tillerson believe.
What is especially striking about the intransigence of the big oil – this editor has nothing against oil
majors – is that breakthroughs are
already here or just around the corner,
and are already competing with fossil
fuels in selected applications in many
parts of the world. Renewable energy
is already cost competitive with fossil
fuels in electricity generation – while
few challenges such as more storage
and transmission investments remain.
Adding a reasonable carbon tax, you
pick the number, will make them even
more competitive. Perhaps managers
of big oil are not reading the same
news this editor is.
By rejecting to at least acknowledge
the need for new thinking, companies
like Exxon and Chevron are doing
Would you fancy a carbon tax?
Source: Long-Term Costs of Cutting Emissions Grow Hazy by Amy Harder and Greg Ip, 24 Apr 2016, The Wall Street Journal
7 July 2016 EEnergy Informer
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themselves, and their shareholders, a great disservice. Despite what Mr. Tillerson said, chances are good
that humanity will survive long after Exxon ceases to exist, or becomes a shadow of its former self – that
is if it carries on doing business as usual. What Mr. Tillerson misses is that Exxon needs the humanity to
survive, and not the other way around.
The good news is that despite the intransigence, some oil companies – most notably Total – are
beginning to work on a plan B, just in case plan A does not pan out. Others – including Shell – appear
schizophrenic in their thinking. On the one hand, they like to hang on to the status quo, the business they
know and like, while at the same time betting against it. Or maybe that is the best that can be expected at
this early stage of the game.
Speaking at the recent shareholder meeting, Shell’s CEO Ben van Beurden said, “We cannot do it
(transition away from oil) overnight because it could mean the end of the company.”
His message to shareholders was to stick with him and the status quo. He warned that making a switch to
other forms of energy would take time, adding that the world's top 10 solar companies represent $14
billion in capital employed and invested $5 billion in solar energy, but none had so far paid any
dividends.
And shareholders overwhelmingly agreed, with 97% voting against a resolution to invest profits from
fossil fuels to become a renewable energy company. Not surprising since most shareholders are used to
stable stock price and hooked on receiving steady dividends – oblivious to what may lie ahead.
Mr. van Beurden assured them that the oil industry needs to spend up to $1 trillion a year in oil and gas
exploration and development – the sorts of numbers that Exxon and Chevron would agree with. He said,
“If collectively we find a way to stay within the 2-degree Celsius limit, we will still need
significant investment in oil and gas…I am talking about up to a trillion dollars every year.”
The “if” in his statement is the key. Fossil fuel companies are still fixated on the “if,” not ‘when” or “how
soon.” And as long as there is no change in that mindset, they will want to carry on business as usual –
continue to expand their fossil fuel portfolios.
Hedging his bets, however, Royal Dutch Shell has
created a new division, which will focus solely on
investing in renewable and low-carbon energies.
Not unlike Total, Shell is combining its existing
hydrogen, biofuels, and related divisions as it
begins to explore renewables.
Responding to activist pressures, it published a
report, Energy Transitions and Portfolio
Resilience, which addresses how Shell is
positioning itself for a low-carbon future. In the
report’s introduction van Beuden highlighted
Shell’s “track record of successfully adapting our
business model, and delivering profitable growth,
over more than 100 years.”
In the report, Van Beuden says that the company’s
assessment of the current energy climate is that
(emphasis added),
Source: In the dark ages, The Economist, 6 Feb 2016
8 July 2016 EEnergy Informer
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“… there will continue to be commercial opportunities for Shell in oil and gas for decades to
come, providing a foundation to position the company successfully for the energy transition to a
lower-carbon system.”
Not everyone agrees that investing a $trillion a year on oil and gas exploration is a good idea. Some 41%
of Chevron and 38% of Exxon shareholders voted in favor of the company providing an assessment of the
companies’ investment portfolios in view of the Paris accord requiring a 2°C climate change scenario.
The percentage has been steadily rising and may cross the 50% mark next year.
Andrew Logan, director of oil and gas program at Ceres, a Boston-based nonprofit advocacy group that
organized the shareholder campaigns, believes that “… that the deck is stacked against you (oil majors) in
these votes,” adding,
“This (growing shareholder sentiment against the status quo) adds up to a wave of pressure on
these companies that people (the management) will find hard to ignore.”
The Paris accord, many experts believe, has added momentum to keep global warming to as low as 1.5°C,
which requires rapid shift towards a low carbon future – fundamentally at odds with Big Oil’s modus
operandi. The nascent pressure from shareholders, investors and activists over their climate change
policies and their risk of stranded assets has just begun.
Logan’s message to CEO’s of oil majors: “We’ll be back.”
Why Saudi’s Vision 2030 Is A Mirage For Saudis, the transition away from oil-based economy won’t be easy, or fast
ohammed bin Salman, the Saudi Prince, the de facto ruler of Kingdom of Saudi Arabia and
apparent heir to the crown – his father is old and apparently failing – has embarked on a
journey to reshape the future of his country. His plan for the future, Vision 2030, is bold,
ambitious and exciting, and the 31-
year old prince is apparently impatient
to have it implemented quickly. The
problem, as described by ex-Shell
geoscientist Jilles van den Beukel in
the 20 May 2016 issue of Energy Post
is that – unless you believe in miracles
– the vision may be a mere mirage.
Simply put, Saudi Arabia’s cultural
and institutional setting are unlikely to
deliver anything remotely as good as
the blueprint, certainly not by 2030,
especially now that the kingdom has
fallen on hard times with the current
low oil prices. Van den Beukel argues
that only realistic, gradual reforms can
save Saudi Arabia from the apparent
dead-end it is in, and even that may
prove a daunting challenge for a
country that depends on oil revenues
M
http://www.mapsofworld.com/saudi-arabia/
9 July 2016 EEnergy Informer
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for 3/4th of its government’s budget and lacks a private sector to speak of.
“For its security,” van den Beukel writes, “it relies on two pillars: oil money buying internal and
external support as well as the Wahhabi religious establishment, legitimizing the Al Saud
regime.”
“Both (of) these pillars are under threat. No one knows how long the global energy transition will
take but it has become increasingly clear that relying solely on oil money is unsustainable. The
measures enforced by the religious establishment (e.g., women not allowed to drive) are
becoming an increasingly heavy price to pay for their support.”
According to van den Beukel,
“Culturally, Saudis are not being asked to be competent or successful. They are asked to
comply; to their family, tribe, religion, the Al Saud regime, and to their husbands or
father/brothers (if they have the bad fortune to be female).”
“Economically, the country is not competitive in any industry, except for oil or industries
(petrochemicals, metal processing) that benefit from cheap oil and power.”
The prince’s 2030 vision is based on Saudi Arabia – Beyond oil, a December 2015 McKinsey report
that attempts to address the country’s chronic shortcomings “in the way that McKinsey looks at a western
company that has issues with its outdated business model.”
Referring to the McKinsey’s ambitious – unrealistic or Herculean may be more appropriate – blueprint,
van den Beukel asks,
“How realistic is it to expect that a complex military industry can be built up in a little over 10
years? How realistic is to expect tourists to come to a country where alcohol is prohibited? Do
they really expect a population that has lived in a rentier state for decades to change their
behavior overnight?”
Some elements of the plan, say the development of a
tourism industry, are laughable for a country that
does not issue tourist visas – and has even has
difficulty issuing legitimate business visas for anyone
who has had the misfortune of visiting a barren land
with few attractions aside from the holy sites, which
are essentially off limit to non-Muslims.
His assessment is that “Saudi Arabia deserves better
than (McKinsey inspired) Vision 2030. The
fundamental issues need to be addressed – in a
realistic way with achievable targets. Reducing the
current dependency on oil and emulating Dubai will
take decades, not years.” He says,
“Perhaps (the prince) … can be forgiven for thinking that he can change a country in the way that
he can implement change in his royal household: by ordering it. But the McKinsey consultants
should know that such a plan cannot work and should do more to justify their royal fees.”
On this point, McKinsey – and the business school community in general – deserve the criticisms they
often get. That turning around a big and failing business is not as simple as moving a few pieces around,
Top 10 global oil producers
https://en.wikipedia.org/wiki/List of countries by oil production
10 July 2016 EEnergy Informer
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reorganizing and introducing key performance indicators (KPIs) – or whatever is the latest fad – as they
teach through case studies in business schools. For a country with the sorts of problems facing Saudi
Arabia, a successful turnaround strategy will be far more daunting.
On a positive note, however, the Prince must be congratulated in seeing the light at the end of the long oil
tunnel. Unlike some oil industry executives, he at least realizes that the time has arrived for a new path
forward. One can fault him on the details or the pace of change, but not on the necessity or urgency of a
different vision for his country – if in fact it has one.
California’s Duck Curve Has Arrived Earlier Than Expected What was anticipated for 2020 is already here
s early as 2013, California Independent System Operator (CAISO) was predicting that with
so much new solar generation expected by 2020, the mid-day hours on sunny days would be
inundated with a flood of solar power displacing thermal generation. CAISO was originally most
concerned about the sunny spring days when California’s demand tends to be low due to cool
temperatures while solar generation could be high.
The grid operator was also
concerned about the late
afternoon ramping required to
make up for the loss of solar
generation as sun sets with peak
demand following in early
evening hours. The so-called
California duck curve (left) has
become well-known around the
world. Similar patterns are now
common in other countries,
including Australia, for
example.
That was before the state
lawmakers passed a bill to raise
California’s renewable
portfolio standard (RPS) from
33% by 2020 to 50% by 2030,
promptly signed by Governor Jerry Brown, who is as green as you can get despite his brown name.
As it turns out, CAISO was spot on in predicting the deepening belly of the duck but under-estimated the
speed of solar uptake by at least 4 years. The data from March-April of 2016 confirms that the belly of the
duck is getting fatter much earlier than originally estimated.
In a Blog titled “The Duck Has Landed” posted on 2 May 2016, Meredith Fowlie of University of
California at Berkeley examined the hourly data for the period 28 March28 to 3 April for 2013-2016 and
as illustrated on page 11, the 2016 belly is far more pronounced that in prior years and already on par with
what CAISO had projected for 2020.
In her Blog, Fowlie notes,
A
11 July 2016 EEnergy Informer
Page 11
“In the 2016 duck
season, we saw mid-day
net loads at or around
predicted levels.
Increased solar
penetration on both
sides of the meter
(utility scale and
distributed) has been
driving net loads down
when the sun is up.
Fortunately, the ramp
from 5 – 8 pm has not
been quite as steep as
projected because
electricity demand in
the evening hours has
been lower than
projected. Perhaps this
is due to unanticipated
demand-side energy efficiency improvements.”
With the new 50% RPS for 2030, California’s renewable march to green nirvana is set to accelerate,
making the duck even fatter by 2030 – which explains why CAISO, in collaboration with the regulator,
California Public Utilities Commission (CPUC) and other stakeholders is embarking on an ambitious
agenda to prepare for the challenges imposed by
variability of so much new renewable generation
added to network over a relatively short span of
time.
CAISO’s current energy mix (visual on right),
already clean and green, will become even more so
over time. Coal, virtually nil and historically
imported from out of state, will essentially be
phased out entirely, while renewables’ portion will
continue to increase by 2030. Solar’s contribution
already exceeds that of wind and expected to
continue to grow.
Adding behind the meter or distributed solar –
that is rooftop solar PVs on customers’ houses,
office buildings, car parks, schools, etc. – will
further eat into thermal generation and utility
revenues and CAISO’s net load. The growth of this embedded generation is completely hidden from
CAISO, who must increasingly guess how much its net load – that this the amount it should dispatch
from central plants under its control – is going to be.
In this context, among the challenges facing CAISO is what to do with the minimum load problem. As
illustrated on visual on page 12, bottom, the grid operator is already approaching the forbidden zone – that
it hours during mid-day when net load is dipping into resources that it cannot easily ramp down, turn
away or reject for variety of contractual, operational and other reasons.
The duck has landed
Data taken from CAISO website. Graph summarizes hourly data, 28 March – 3 April, 2013-16 Source: Blog posted by M. Fowlie, 2 May 2016
CA: Already clean and getting greener
Source: CAISO
12 July 2016 EEnergy Informer
Page 12
Nuclear, combined heat-and-
power (CHP), contracted QFs,
geothermal, biomass and biogass
and a number of other generation
resources either cannot ramp down
or have binding contracts that
allows them to operate at full
throttle even if CAISO does not
need their output.
The mid-day dip, shown for 2013
and 2015 is expected to get much
worse by 2021, eventually cutting
into these types of generation.
And yet the peak demand remains
peaky and potentially getting
worse (visual on left). As recently
as February 2016, CAISO
experienced roughly 11 GW of
ramping capacity during a 3-hour
period to meet peak demand. The
same graph shows actual net load
experienced on 24 April of
around 12 GW – more or less in
line with what was projected for
2020. This is the same point
illustrated by Fowlie in her Blog.
The other challenge will be how
to avoid curtailing zero cost,
green renewables during times when there is simply too much supply and too little demand.
During the hot summer months,
when demand peaks in California,
usually in July-Sept, virtually all
renewables, solar, wind, hydro,
geothermal, biomass, biogass, are
used and useful. As illustrated in
graph on right, for month of
August, typically a peak demand
period, there is no need for
curtailment as all the generation is
typically needed to run the state’s
massive air conditioning load.
But spring and early summer
months of March-June may prove
difficult. Under a 40% RPS
scenario by 2024 – roughly in line
with what it will take to reach 50% RPS by 2030 as mandated under current law – CAISO is projecting
CA story: Mid-day dip, followed by evening peak
Typical Spring Day
Net Load 12,546
MW on April 24,
2016
Actual 3-hour ramp
10,892 MW on
February 1, 2016
Source: CAISO
Over-generation is worse in cool & sunny spring when cooling demand is low
Source: CAISO
Solar PVs: Behind the meter, and growing
2015 2016 2017 2018 2019 2020 2021
BTM Solar PV 3,695 4,903 5,976 7,054 8,146 9,309 10,385
0
2,000
4,000
6,000
8,000
10,000
12,000
MW
Estimated Behind the Meter Solar PV Build-out through 2021
Source: CAISO
13 July 2016 EEnergy Informer
Page 13
massive amounts of surplus capacity on many days. The over-generation goes as high as 13-14 GW on
some days as illustrated in this
simulation.
This is explained not only by ample
sunshine in the spring and little demand,
since there is no cooling load to speak
of, but also because spring months tend
to be windy and wet, with lots of run-of-
the-river hydro and wind flooding an
already saturated renewable energy
bonanza.
So what is CAISO doing to prepare for
this fast approaching future? Broadly
speaking 4 major ideas are being
explored:
Encouraging more flexible ramping generation resources, the type that can fill the 13 GW
ramping requirements in 3 hours to meet peak evening demand;
Increased reliance on existing pumped storage while expanding other kinds of storage both
utility-scale and behind the meter including the mandated 1.3 GW of storage already in the
works;
Expanding CAISO’s footprint – a central component of the energy imbalance market
(EIM) – which allows increased reliance on capabilities of the regional network to
export/import the shortfall/excess supply to neighboring states when feasible and economical
to do; and
Increased reliance on retail tariffs to encourage load shifting and demand curtailment
through more sophisticated rate structures including time of use (TOU) and real-time-
pricing (RTP).
Curtailment of renewables will
be attempted only as a last
resort, if all else fails.
Many believe that the arrival of
affordable utility-scale or
distributed-scale storage will
save the day. A large fleet of
electric vehicles charged at
proper times, for example, will
be a big help. Chilled water
storage systems will also make
sense. As will prices that better
reflect the scarcity or abundance
of generation in different
seasons and times of day.
CAISO is collaborating with
CPUC, the utilities and other
stakeholders to design retail rates that will be sorely needed to encourage consumption during certain
times while discouraging it at others as illustrated in visual on bottom of page 13.
More storage is the answer
Source: CAISO
Tariffs that reflect scarcity and abundance of generation
Off-Peak Peak
Super PeakSuper Off-Peak
Source: CAISO
14 July 2016 EEnergy Informer
Page 14
All of these efforts, and more,
will, of course, be needed. For
now, a lot is riding on the fate of
CAISO’s expanding EIM (map
on right).
Many experts are convinced that
it will be a matter of time and
necessity for a much bigger
regional wholesale market to
emerge, one that may eventually
cover substantial parts of the
Western US, possibly with a
different name and
organizational structure
acceptable to a wider group of
stakeholders who are skeptical of
CAISO being California-centric. It is a valid concern and one that needs to be addressed sooner rather
than later.
That will take time,
and patient
perseverance. All
indicators, however,
are that the benefits
will outweigh the
costs. But convincing
the various
stakeholders will take
some effort with the
sovereignty of
various states and the
governance of the
emerging
organization at its
core.
Other regional
wholesale markets in
the US, most notably
PJM, MISO and SPP
have grown
substantially over
time to cover large multiple state parts of the US, and in the case of MISO, extending into Canada (map
above). There is no reason a similar approach will not work in the West.
The Duck has Landed posted on May 2, 2016 by Meredith Fowlie
Expended CAISO footprint will help
Source: CAISO
If other wholesale markets can do it, so can CAISO
https://www.wapa.gov/newsroom/NewsFeatures/PublishingImages/ISO-RTOmap_slider.jpg
15 July 2016 EEnergy Informer
Page 15
ERCOT’s Market Makeover For now, all seems well with Texas’ energy–only market
ack in 2011, regulators and politicians in Texas were rightfully concerned whether the lights
would remain on in the Lone Star State given falling capacity reserve margins and alarms from
the grid operator, Electric Reliability Council of Texas (ERCOT) that something had to be done
to avert impending disaster. Study after study showed that not enough new capacity was being
built to meet future demand growth.
Among the options considered were to introduce a capacity payment scheme to ERCOT’s energy-only
market, where generators only get paid for energy when and if they are dispatched, the classic missing
money problem. As often happens in such cases, the issue became heavily politicized.
The ensuing debate lasted several years at the Public Utility Commission of Texas (PUCT) on how best
to guarantee long-term grid reliability, and decide whether to supplement Texas’ energy-only market with
a forward capacity market similar to those in PJM, New England and New York.
In 2014, PUCT decided against a formal capacity market, instead opting for an operational reserve
demand curve or ORDC, essentially a day-ahead, real time mechanism that identifies looming supply
scarcity and provides extra revenues to available generating capacity. They also decided to gradually raise
ERCOT’s wholesale energy offer price cap to $9,000/MWhr, the highest of any market in the US. Only
Australia’s National Electricity Market (NEM) has a higher offer cap, currently AUS$12,500/MWhr.
As illustrated in graph on right, the fixes
appear to have done the job. Successive
estimates of reserve margins suggest they
have recovered with a reasonable safety
margin for the years ahead. Looking
ahead to 2022, the forecasted reserve
margin has risen from virtually nil to
20.5% against ERCOT’s target of
13.75%. And by some estimates, the
scheme has saved Texas electricity
customers billions relative to the cost of a
formal capacity mechanism.
More stunning is the drop in projected
peak demand. In 2012, forecasted peak
summer demand for 2022 was 80,700
MW. The latest estimate puts it around
72,800 MW. Far less capacity is needed to
meet demand.
The dramatic drop in peak demand is partly explained by depressed oil prices, which have reduced
economic activity as well as efforts to make customers pay higher demand charges for their peak demand,
now a feature of many tariffs offered by competing retailers in Texas.
On a related note, a report produced by The Brattle Group for Texas Clean Energy Coalition and
released in mid-May 2016 concluded that “natural gas and renewable energy can provide all of the new
electric power that Texas will need for the foreseeable future, at little increased cost to consumers,”
adding that existing “market forces are largely driving Texas toward a cleaner electric grid.”
B
All is well in ERCOT Texas Regulators Save Customers Billions
Source: America’s Power Plan, 23 May 2016
16 July 2016 EEnergy Informer
Page 16
The report, Exploring Natural Gas and Renewables in ERCOT: The Future of Clean Energy in
ERCOT, looks at the Texas electric grid over the next 20 years and forecasts how market and regulatory
factors will affect future electricity generation, how much it will cost, and how much CO2 will be
emitted.
Texas Energy
EIA’s Latest Outlook: Missing The Mark? The latest EIA Outlook, acknowledges change, ever so slowly
he energy business is changing faster than our existing tools, forecasting models, historical trends
and imagination allows. That may be the best way to describe the latest World Energy Outlook
to 2040 released in mid-May 2016 by the Energy Information Administration (EIA) without
being too critical or judgmental.
The report, while
acknowledging many of the
fundamental changes taking
place at accelerated speed,
nevertheless falls short on
imagining exciting and bold
new realities – perhaps because
the pace of change is simply too
fast to be captured by existing
forecasting models, which in
turn are based on historical data,
trends and assumptions, all of
which are based on historical
trends and expectations. Call it institutional inertia.
For example,
Does it capture the recent announcements by Saudi Arabia, the world’s biggest oil exporter
to move away from oil?
Or Total’s vision to become a major player in renewable energy?
Or the fact that the number of electric cars, now barely 1 million globally, will double, triple,
quadruple – your guess is as good as ours – much faster than many expect?
Or the accelerated transition to low carbon renewables, not just in the rich countries but
increasingly among the developing countries?
Or projections of major breakthroughs in energy storage?
Or advances in improved management and control allowing much more efficient use of
energy in transport, heating, cooling, lighting, and motor drive?
Or the rapid shift away from energy intensive industries and towards services?
Or the emergence of new logistical means of delivering and distribution of goods and
services?
Or the full implications of shared economy, autonomous cars and similar alternatives to the
historical patterns of energy use?
T Evolving, but not fast enough
Source: International Energy Outlook to 2040, EIA, May 2016
17 July 2016 EEnergy Informer
Page 17
As this editor sees it, the
EIA, along with everyone
else who is attempting to
forecast the future, is bound
to fail with the current fast
pace of change in costs as
well as the emerging
technologies and
disruptions. And EIA’s
latest projections are
indicative of the challenge
of incorporating the three
major drivers of change,
namely,
The rapid push towards low carbon energy sources, now broadly acknowledged as a
commitment most signatories to the Paris accord intend to comply with as best as they can;
The rapid advances in renewable technologies that has made them virtually cost-competitive
with fossil fuels even without an actual carbon tax or price; and
The rapid pace of technological and business disruptions – the shared economy,
autonomous cars, electric transportation, building energy automation and energy
management systems, energy storage to name a few – that suggest we can get by with far
less energy while enjoying high standards of living and wealth creation.
Take future of coal. The
EIA says coal’s share of
global electricity generation
will drop from the current
40% to 28-29% by 2040,
roughly equal to natural gas
and renewables. That is
good for the environment
but woefully inconsistent
with the Paris agreement.
To its credit, the EIA for the
first time acknowledges that
China’s coal consumption has already peaked and will decline, but fails to consider an even more
dramatic fall over time.
India is shown as
increasing its
consumption over time
(graph on left). During
his recent US visit,
India’s Prime Minister
Narendra Modi signed
an agreement to build 6
more nuclear plants and
announced the
cancelation of several
coal-fired plants. Both
Coal’s future is, well, history, trillion kilowatthours
Source: International Energy Outlook to 2040, EIA, May 2016
Cleaner, but not fast enough, trillion kilowatthours
Source: International Energy Outlook to 2040, EIA, May 2016
Electricity’s future is increasingly renewable, trillion kilowatthours
Source: International Energy Outlook to 2040, EIA, May 2016
18 July 2016 EEnergy Informer
Page 18
China and India are rapidly moving away from coal – as fast and as best as they can – and will do so even
more expeditiously if financially assisted by the global community. Other major coal consuming
countries are doing the same, albeit at different speeds and for different reasons.
In the US, future of coal is likely to be far bleaker than shown in graph on bottom of page 17.
Similarly, EIA’s projections of global CO2 emissions (below) is a relic of the past. It does not reflect
what needs to happen with the passage of Paris accord. Perhaps like many oil executives, the EIA also
assumes that the Paris accord is a mere feel-good agreement that puts the pressure off politicians for what
remains on their terms in the office. And perhaps they are correct.
Many companies, cities
and organizations,
however, believe
otherwise and are doing
their best to reduce their
carbon footprint with or
without government
mandates or regulations.
Many companies are
convinced that operating
more efficiently and
sustainably – whatever
that means – is simply
good business.
In a presentation to the Center for Strategic and International Studies in Washington DC on 11 May,
Adam Sieminski, the EIA’s Administrator, acknowledged the many challenges and uncertainties in
projecting energy demand and mix to 2040. For example, he noted that by 2030 natural gas will surpass
coal as the second global source of energy behind oil.
EIA, like everyone else who has been in the energy business for long, is simply incapable of envisioning
alternative futures where coal, oil and eventually gas will play second fiddle to renewables and energy
efficiency.
EIA has done a commendable job given its outdated models, database, and assumptions about the future.
2040 is likely to look quite different than what is predicted in 2016.
EIA
Regulation Biggest Barrier To Technological Innovation Uber’s experience begs how and whether to regulate the digital economy
irst, the good news: in early June 2016 Uber Technologies Inc. raised $13.5 billion in additional
equity and debt, including $3.5 billion from a Saudi sovereign-wealth fund designed to wean the
kingdom away from its over-dependence on oil (see article on page 8). Clearly, investors are
excited about Uber’s business prospects and are willing to put their money where their mouth is.
Now the bad news: A court in France fined the company $1.1 million – not much by Uber’s standards –
for violating French transport and privacy laws forcing the company to halt its popular car hailing service
F
How do you reconcile this against the Paris accord? world energy-related carbon dioxide emissions, billion metric tons
Source: International Energy Outlook to 2040, EIA, May 2016
19 July 2016 EEnergy Informer
Page 19
in France, one of its most lucrative markets outside the US.
Uber’s business model, which is highly disruptive to existing monopoly taxi operators, offers customers
better service at cheaper cost. That, in essence is the problem. And what do taxi drivers do to compete?
They complain to regulators, city officials, whoever they can find, to protect them against cheaper, faster
service offered through Uber’s sophisticated apps that allows customers to get rides with private car
drivers on their mobile devices.
As succinctly stated by The
Wall Street Journal (10 June
2016) the latest legal challenge
– Uber has been fighting the
regulators and bureaucrats in
cities and countries across the
globe since day one – “… is a
blow to San Francisco company
in the broader legal war
between Silicon Valley firms
and governments world-wide
about how and whether to
regulate the digital economy.”
Uber’s approach has been not
to ask for permission first – as
it would take years to get a
response and the answers may
not be what it wants to hear.
Instead, the company does what
it thinks would appeal to customers – and fight it out in the courts only when challenged, which is often.
According to the WSJ,
“In response to these challenges, Uber has deployed an army of lawyers and lobbyists and
organized groups of its customers to pressure local lawmakers into passing pro-Uber ordinances
in over 70 jurisdictions in the U.S.—including cities and states—as well as parts of Mexico,
Canada, Australia, India and the Philippines. The first place to pass a ride-hailing law was
California in 2013.”
What a dumb way to “protect” citizens, who are
basically shielded from receiving superior service at
lower cost.
Why talk about Uber in an energy-focused newsletter?
Because technology innovators in the electricity sector
are beginning to run into similar obstacles – where
powerful incumbents with deep pockets are pleading
regulators to intervene to protect them against similar
disruptive technologies that promise to deliver superior
services at lower cost.
The situation will only get worse and the regulators will
fall further behind as the pace of technological
innovations accelerates, and not just in taxi hailing services but in delivering a host of useful energy
Guilty of providing superior service at lower cost Uber executives Thibaud Simphal & Pierre-Dimitri Gore-Coty
Source: Uber suffers blow in legal fights, by Sam Schechner, Diuglas MacMillan & Nick Kostov,The Wall Street Journal, 10 June 2016; Reuters photo
When are you going to get Uberized? Number of London black cab drivers vs. Uber targets
Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016
20 July 2016 EEnergy Informer
Page 20
services in the so-called grid’s edge – meaning on the customer end of the distribution network.
Being a regulator was never glamorous or fun. It is getting decidedly more complex, more taxing, more
critical and definitely a lot less fun. And in this context, many are asking the same question posed by the
WSJ article, namely how and whether to regulate the digital economy.
New York Regulators Take Next Step Reforming the Energy Vision is gradually taking shape
s previously reported, regulators at the New York Public Service Commission (NYPSC)
launched the basic outline of an ambitious new regulatory framework called Reforming the
Energy Vision or REV following the devastation of superstorm Sandy. In mid-May 2016, they
issued a new Order Adopting a ratemaking and Utility Revenue Model Policy Framework,
the details of which may be found at the NYPSC website.
The latest order addresses what steps are needed to align
The regulated distribution utility’s business model and revenue streams in view of the
rapidly changing competitive environment; and
The rates that customers should pay for services derived in view of the evolving competitive
forces, new offerings, new service needs and Commission’s own policy goals
REV, which was launched 2 years ago under the leadership of NYPSC chair, Audrey Zibelman, seeks to
chart a new path for the regulation of New York’s electric utilities, who like their counterparts
everywhere, are entering new and uncharted territory.
As stated in NYPSC’s original order,
“The confluence of cost, reliability, and environmental concerns… lead to a conclusion that
conventional utility and regulatory practices no longer represent the best approach to satisfying
our responsibilities.”
With this as the context, the NYPSC embarked on new approaches to regulating, especially the critical
utility-owned monopoly distribution network. Among the REV’s objectives were to facilitate the
incorporation of distributed energy resources (DERs) in the distribution network.
In its major new order in early 2015, the NYPSC adopted a regulatory policy framework that described
the need to reform the utility business model and to align ratemaking practices with evolving policy
objectives. The centerpiece of the order was the establishment of a distributed system platform (DSP)
A
Aloha to Yeloha: Peer-to-peer trading is coming Sunshine delivered from host to recipient is only a few clicks away
Source: Yeloha website
21 July 2016 EEnergy Informer
Page 21
structure by which
Utilities will facilitate the growth of DERs;
Limited utility ownership of distributed resources to mitigate market-power concerns;
Required utilities to create distributed system implementation plans (DSIPs) outlining
relevant system information and investment plans; and
Established interim energy efficiency targets.
The latest order represents the next step toward implementation of that vision. Needless to say, regulators
across the US and beyond are examining NY’s REV for useful insights to apply in their own jurisdictions,
as appropriate.
By way of background, distribution utilities in the US – many of whom are still vertically integrated –
tend to operate under so-called rate of return regulations. Basically, they are allowed to recover their
costs through a reasonable return on the invested capital. In practice regulators periodically adjust
customer tariffs so that regulated utilities can cover costs.
Whilst the simple mechanism worked reasonably well in the past, it has become apparent that it will no
longer work in an environment when demand may be flat or falling due to energy efficiency, distributed
generation and a host of new products and services including energy storage and peer-to-peer trading are
being offered.
Moreover, NYPSC, like regulators elsewhere must increasingly recognize that many assumptions about
the nature of business are no longer applicable in whole or part including the fact that
Customer demand is largely outside the influence of the utility;
Economies of scale favor utility-scale investments;
Large expenditures to create redundancies are necessary to support reliability; and
End-use customers are the only substantial source from which system costs – most critically
the fixed costs of critical distribution networks – can be recovered.
By rejecting these
outdated assumptions,
NYPSC plans to begin to
realign the revenue model
of New York’s utilities
with desired outcomes.
The Commission
recognizes that survival of
the distribution utilities is
critical to its vision of
proactive customers in a
changing business
environment.
Mindful that a lot is at
stake, the latest order
proposes a gradual
transition path with the
following 4 main
components:
DERs on the rise, one way or another
© Earth Policy Institute/Bloomberg Reproduced from Giles Parkinson’s Renew Economy, 7 Feb 2016
22 July 2016 EEnergy Informer
Page 22
Revenues tied to performance – The Commission has proposed establishing a new
Earnings Adjustment Mechanism (EAM), New York’s version of performance-based
incentives, to better align utility financial incentives with priority near-term outcomes:
system efficiency, energy efficiency, improved data access, and interconnection;
New source of revenues – The Commission Platform Service Revenues (PSRs) by which
utilities can earn revenues from operating and facilitating distribution-level markets;
More granular rates – The Commission is intent to transition customers in New York
toward more granular rates including time-based pricing options; and
Sharing customer data with DER providers – The Commission wants DER providers to
have better access to customer data, with permission from the customers, of course.
Few would argue with the Commission’s intent or its motivations. Yet the end result remains a rather
complicated mix of the old style regulation plus new requirements to allow new services and service
providers to find a footing on the grid’s edge.
For example, NYPSC has proposed the establishment of a scorecard tracking at least 10 measures of
utility performance – consistent with REV’s desired outcomes. Things get complicated in practice as the
text below suggests:
In the near term, as the DSP market is being established, PSRs may come primarily from the
utility’s ability to develop non-wires alternatives to traditional infrastructure investments, but
over time PSRs may be available. The NYPSC makes clear that PSRs are available to monopoly-
related services, and may be approved by the PSC "in limited areas of competitive services" as
stipulated by specific criteria in the Order.
Observing the merits of REV and NYPSC’s objectives, the Rocky Mountain Institute, in an article in
RMI Outlet dated 20 May 2016, wrote:
“The NYPSC’s recent order represents a major step forward in realizing the future of New York’s
electricity system. While New York is a national leader in comprehensive regulatory reform,
many states are tackling similar questions at varying levels of scope and scale. The latest
development in New York’s REV proceeding provides insights for regulators, utilities, and
stakeholders in states and localities that are facing similar challenges and opportunities in today’s
quickly evolving electricity system.”
It remains to be seen how the proposed changes will be implemented in practice and whether they will
lead to the intended outcomes.
As outlined in the preceding article on the difficulties facing Uber and frustrations it must overcome from
regulators, the key question in the face of rapid technological change is indeed how to regulate the
emerging digital economy, if at all. While the case of Uber may seem obvious, the logic and types of
regulations applied to regulated distribution utilities is much more convoluted and far less clear.
For those looking for clarity or simplicity, the REV may prove disappointing.
NYPSC Order Adopting a Ratemaking and Utility Revenue Model Policy, 19 May 2016
23 July 2016 EEnergy Informer
Page 23
BP: Coal’s Annus Horribilis Has No End BP’s latest statistical review confirms energy world in transition
he 65th edition of BP’s Statistical Review of World Energy was released with the usual fanfare
that it deserves in London on 8 June with an introduction by the CEO, Bob Dudley and a
presentation by Spencer Dale, BP’s Group Chief Economist. The Review, which originally
focused exclusively on oil was expanded to cover all forms of energy starting in 1981. That was a
tacit acknowledgement that BP – not unlike all other oil majors – is in energy business, not merely oil.
And that oil increasingly competes with other fuels and energy sources on multiple dimensions across the
globe. Renewables, initially of marginal interest, have been slowly gained some prominence in the last
few years.
Having gone through a bruising 2015,
BP’s 2016 Review is full of humbling
lessons learned and insightful
observations about the rapidly
changing energy future. Despite
continuing to learn from the past 65
years, however, BP – like the EIA, the
IEA and others – appear to be at a loss
to fully embrace the tectonic
disruptions that continue to outpace
their ability to predict the future.
To his credit, Dale is spot on when he
says, “If energy demand is in a process of transition, global supply is surfing a technological wave.” As
the title of his presentation – Energy in 2015: A year of plenty – suggests, “This is truly the age of
plenty.” Globally, there is too much oil, coal, gas and increasing amounts of renewables, which explains
the depressed prices (graph above right).
As Dales sees it, much of this plenty,
low energy prices and rapid pace of
change both on the supply and
demand side can be explained by the
confluence of 3 major developments:
US Shale revolution –
which precipitated the
global oil supply glut;
Rapid growth of non-
fossil fuels – which he
acknowledges as “even
more striking;” and
COP21 – The Paris
climate agreement signed in December 2015 and ratified at the UN in May 2016, which is
likely to become a significant milestone in the annals of energy history as a major turning
point away from fossil fuels and carbon emissions – our words not his.
As everyone knows, lower GDP growth, improvements in efficiency of energy use, shift away from
heavy industry to light manufacturing and services, and rapid fall in the cost of renewable energy
resources – to varying degrees in different parts of the world – explain the complex story of supply,
demand and prices. The Review does a good job of explaining the history, not so in predicting the future.
T
Times are a changing …
Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 2016 edition, BP June 2016
Coal’s Annus Horribilis Has No End
Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 2016 edition, BP June 2016
24 July 2016 EEnergy Informer
Page 24
It is not a happy story for coal no
matter how you look at it. And as this
editor sees it, the story is likely to get
grimmer over time as more countries
begin to move away from the carbon-
loaded coal despite current low
prices. The Paris accord is a major
driver, but so are growing concerns
about health and environmental
effects of coal mining and
combustion.
Dale called 2015 “annus horribilis”
for coal – referring to a famous uttering by Queen Elizabeth during a horrible year for her Kingdom
when nothing seemed to be going well. A few highlights for 2015:
Global coal consumption fell nearly 2%;
Global production fell nearly 4%;
Coal prices plunged nearly 20%;
US coal consumption fell nearly 13%; and
China’s coal consumption – representing roughly half of global demand – FELL for the 2nd
year in a row.
The speed and scale of change in
coal supply and demand continues to
surprise nearly everyone (graphs on
page 23). In May 2016, for example,
solar electricity generation exceeded
coal in the not so sunny UK. How
can that be possible?
In the US, historically reliant on coal
for roughly half of its electricity
generation, natural gas has caught up
(graphs above) – and the future
looks bleak especially if the
Environmental Protection Agency (EPA) perseveres
in implementing its Clean Power Plan (CPP),
currently held up in the courts, and pending a decision
after the US national election in November.
Renewables, by contrast, had another field day in
2015 – and are likely to enjoy continued robust
growth, albeit at different rates in different regions of
the world. Global renewable generation rose 15% in
2015, simply stunning, meeting 38% of the increase in
global energy consumption, according to BP.
What is driving the growth of renewables? Improved
technology, falling costs, and policy – bolstered by the
Paris Agreement. If carbon prices/taxes are introduced,
Renewables are here to stay
Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 20R16 edition, BP June 2016
Will the pace of change be as it has always been?
Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 20R16 edition, BP June 2016
US coal: Best times are behind
Source: Spencer Dale, Energy in 2015: A year of plenty, BP, 8 June 2016 and BP’s Statistical Review of World Energy 2016 edition, BP June 2016
25 July 2016 EEnergy Informer
Page 25
it will further improve their prospects.
Dale concluded his presentation by looking at past for clues to future trends. Nothing wrong with that,
especially given that BP’s annual exercise is retrospective, it does not attempt to forecast as do others
such as the EIA (article on page 16), IEA, BP, and Exxon.
Setting the philosophical points aside, Dale identifies 3 major drivers for change:
China;
Pace of growth of renewables; and
Implementation of Paris Accord and carbon emissions.
Dale main observations and conclusions may be summarized in the following 3 statements with emphasis
added:
“The key lesson from history is that it takes considerable time for new types of energy to
penetrate the global market. Starting the clock at the point at which new fuels reached 1% share
of primary energy, it took more than 40 years for oil to expand to 10% of primary energy; and
even after 50 years, natural gas had reached a share of only 8%.”
“The growth rates achieved by renewable energy over the past 8 or 9 years have been broadly
comparable to those recorded by other energies at the same early stage of development. Indeed,
thus far, renewable energy has followed a similar path to nuclear energy.”
“The simple message from history is that it takes a long time – numbering several decades – for
new energies to gain a substantial foothold within global energy.”
The problem with looking at the past for clues for the future, however, is that it only works well if you
believe that the future will be similar to the past – i.e., no major disruptions or discontinuities. This
clearly is NOT the case today. Even BP admits rapid change and major disruptions in supply and demand.
As this editor sees it, the pace of
change coming from both supply and
more important the demands side, are
historically unprecedented. Past
trends are no longer helpful. They are
in fact misleading and lead one to the
wrong conclusions.
For example, the rise of nuclear
energy – referred by Dale in the
second paragraph above – is totally
irrelevant in deciding the future
penetration of renewables. This
editor was stunned reading Dale’s
assessment.
For one thing, nuclear was expected
to gain a major share in global
electricity generation and heralded by
some as “too cheap to meter.” But instead of experiencing falling costs with replication and enjoying
economies of scale, its costs escalated over time and the time it took to build reactors ballooned rather
than declining.
What happens now that we have an agreement to reduce carbon?
Source: UN
26 July 2016 EEnergy Informer
Page 26
Today – aside from handful of cases that cannot be explained by their economic merits – nuclear energy
is not considered an option in the west not only because it costs too much but because nobody knows how
long it will take or how much it will cost to build a new reactor.
Moreover, Dale’s statement that” it takes a long time – numbering several decades” for change to take
place for all the obvious reasons, is also misleading for anyone looking beyond the next quarter or a few
years ahead.
Yes, it took 70 years for
Alexander Graham
Bell’s telephone to
become mainstream, but
Apple’s iPhone and
similar devices gained
phenomenal acceptance
by global customers in a
matter of years not
decades. Tesla “pre-sold”
nearly a quarter million of
its next model car in 3
days even before it had a
prototype to show
prospective car buyers.
Yes, energy sector may be slower to change – but that is only helpful to managers of the oil sector who
prefer the comfort of the historical knowns to the future unknowns and disruptions.
All indications are that major disruptions are to be expected, and a lot sooner than many believe as
described in the lead article in the June issue:
The transportation sector – the bread and butter of oil majors including BP – is likely to
experience major disruptions not only by rapid electrification supplied by renewable energies
but also the introduction of autonomous cars, which will increasingly be shared rather than
owned;
The electric power sector – never the focus of oil majors – will increasingly be supplied by
renewables and is likely to undergo major evolution in energy management, decentralization
and more efficient utilization; and
Concerns about climate change – codified and ratified by Paris Agreement – are increasingly
taken as de facto requirements by an increasing numbers of organization, companies, cities
and non-state stakeholders who are no longer waiting for top-down regulations.
In this context, looking at history for clues for future trends is as if you were looking in the rear-view
mirror of the car, rather than the winding road ahead.
BP-statistical review of world energy 2016 and BP energy economics/energy outlook 2016
Nuclear vs. renewables: There is no comparison
Source: Energy Information Administration, Monthly Energy Review
27 July 2016 EEnergy Informer
Page 27
The Future Is In Services, Not Commodity Sales Facing shrinking sales, incumbents are looking for growth out of the box
ears ago, the energy efficiency guru Amory Lovins pointed out that utility sector is focused on
the wrong thing, namely selling kWhrs while customers need and want affordable energy
services. His colorful quote was that what customers ultimately want is “a hot shower and a cold
beer” – hence selling them kWhs of electricity or therms of natural gas is only meaningful in so
far as they can convert it to useful energy services – the cold beer and the hot shower.
With all the turmoil in the utility
sector and the growth of distributed
energy resources (DERs) energy
storage, micro-grids and other means
of distributed self-generation and
consumption, Lovins’ saying is more
appropriate than ever. And the
message is being taken up in more
places by utilities and their
competitors.
Writing in 3 May 2016 issue of
Energy Perspective, Edmund Reid
of Lazarus Partnership asks,
“Who wants to just sell
commodity products like gas
and electricity when there are
better service opportunities—
higher margin, lower risks
and far less political scrutiny—in selling home energy services?”
While his focus is on the retail electricity market in the UK, his insights are broadly applicable especially
now that passive consumers are becoming proactive prosumers – and who knows – with the emergence
of storage we may be entering the
age of prosumage.
In a report released in April 2016
titled The smart shift to services:
Transitioning from commodity to
service provision, Reid argues that
utility companies transitioning to a
service model are likely to grow,
whereas those that continue with the
business-as-usual model may find that
they are left behind.
Reid says utility companies are facing
unprecedented challenges as both
regulation and technological change
undermine their existing business models.
Making matters worse, over the last 10 years’ domestic gas and electricity demand in the UK have fallen
Y No growth in commodities in UK or elsewhere Annual domestic energy usage (tonnes of all oil equivalent per household)
Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016
Connected home
Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016
28 July 2016 EEnergy Informer
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by 33% and 16% respectively, with the biggest reduction in energy usage for space and water heating
(graph on page 27 top).
Moreover, Reid argues that the smart home, which for years has seemed like science fiction, is fast
becoming a reality: the required technologies are commercially available and the real question is the
deployment rate. These technologies – based on smart meters, smart thermostats and microgeneration –
transform the home services market to proactive management of the home and, these kinds of services
have a far wider appeal to a growing number of customers.
Reid says the market for home energy management systems and smart thermostats is also growing
rapidly. Google’s Nest, for example, is able to self-program a schedule based on past preferences that
continually adapts to the user’s life, turning down when nobody is at home and recording an energy use
history to help users understand what they used and when.
The third type of technology,
microgeneration, is currently mainly solar
PV, with over 814,000 domestic solar
installations in the UK as of January 2016,
a 30% increase in 2015 despite the
uncertainty over solar tariffs.
In the US, reportedly a new solar PV is
installed every minute.
The bottom line? “Whereas the traditional
utility model has been based on providing a
commodity to a passive, price inelastic
customer, in the smart home world, not
only are customers producing and
potentially storing their own energy, they
can also more easily monitor and manage
usage,” according to Reid.
As described in the May 2016 issue of this newsletter, a number of companies including Edison Energy
are now developing a new business model
totally focused on delivering energy as a
service, rather than bulk commodity as in
kWhrs.
In describing Edison Energy’s new mission,
Ted Craver, the CEO of Edison
International, the parent of Southern
California Edison Company (SCE) said,
“… gone are the days of simply
taking power and paying the going
rate. Distributed generation and
distributed storage have taken on
central roles in corporate energy
management—especially as a means
of reducing energy costs—but that
means a new array of challenges that
non-energy firms aren’t well positioned to meet.”
UK PV installations Sub 4kW UK solar PV installations
Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016
Go where the money is GDP ($) per household and number of households (m)
Source: Edmund Reid, The smart shift to services: Transitioning from commodity to service provision, Lazarus, 21 April 2016
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Edison Energy is trying to reinvent the energy business by identifying and exploiting opportunities to
lower energy costs, reduce complexity of energy management, and meet the basic needs of large
commercial and industrial (C&I) customers. As a non-regulated entity, the new enterprise is free to
serve clients where ever it can find them, and not just within the parent’s service area in Southern
California. Nor is it limited in the range of products or services it can offer.
Reid’s analysis suggests that the time has arrived to focus on providing energy services rather than selling
bulk commodity. It is a message that needs to be heard.
Asset Light, Information Heavy? How Would That Work? Electricity business is not as simple as Airbnb
s incumbents and newcomers jockey for market share in the emerging electricity service sector
(preceding article) a debate is emerging about the future role of assets. Utilities, historically
vertically integrated and operating under rate of return (ROR) regulation – still prevalent in
many parts of the US and elsewhere – craved to invest in capital infrastructure.
As further explained in articled on New
York’s REV proceedings, the more assets
they could get away with the better since
their income, profits and ultimately
dividends were tied to how much
investment they had in their so-called rate
base, on which they could earn an allowed
rate of return.
In this context being asset heavy was
considered good not only by shareholders
but also rating agencies and the investment
community, who liked the stable returns that
the industry could generate.
This model may still apply to
portion of the industry that provide
natural monopoly services, such as
transmission and distribution, but
not to competitive retail or
generation in markets where these
functions have become
competitive.
Speaking at DistribuTECH2016
Conference in early May 2016,
Zarko Sumic, an analyst with
Gartner, predicted that by 2020
the largest power utility will not
own generation or network assets.
Hmm.
Pointing to new digital economy
stars such as Facebook – with
A
Have you got one on the roof?
Lot more energy on the rooftops
Source: John Farrell, Institute for Local Self-Reliance
30 July 2016 EEnergy Informer
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market capitalization of $230 billion – Uber – estimated worth $50 billion – and Airbnb – estimated
value around $24 billion – he observed that none own assets – in this case content, cars or rooms.
Welcome to strange virtual world, the sharing economy.
The sharing economy uses IT to distribute, share and reuse excess capacity in goods and services. In this
context, information is the fuel and the digital platform is the engine of business. Hmm.
Moreover, according to Sumic, the sharing economy operates in a market with customers and sellers and
the value of the goods and services shared is determined by the network effect – also called the
Metcalfe's law – and increases as the square of the number of nodes, say number of customers and
sellers.
That explains why Facebook has virtually no rivals – why would anyone worth his/her name want to put
his/her pictures somewhere else when billions are glued to their Facebook page?
Sumic, who probably understands the workings of the sharing economy, took a leap by making an
analogy with the electric power industry. He says as we move toward a future where energy flows are
increasingly determined by market forces – he made references to the nascent concept of transactive
energy previously covered in this newsletter – assets
become less important while managing and controlling
the flow of information becomes critical.
Where Sumic went next, while intriguing, may not be
entirely based on physical realities of the electric power
sector or the flow of electrons – which so far as this
editor can fathom, still depends on physical assets,
infrastructure and investments in hardware.
Using Facebook, Uber, and Airbnb analogy Sumic said
that by 2020, the largest energy company by market
value in the world will not own any network or grid or
generation assets. As he sees it, such new enterprises,
whatever they may be called, will primarily or solely
manage information about energy sources and
consumers.
He does not see any technical barriers to this vision. The
only thing standing in the way at the moment is current
regulation – a critical issue described in accompanying
article on page 18.
Sumic said, in part,
“ … the utility digital distribution platform creates new value by enabling an open energy
market, which brings together those who have energy with those who want it. It requires a
network operator who manages and ensures the reliability of the grid (similar to the role of
Network Rail in the UK) and a sharing energy economy platform operator (like Facebook, Uber
and Airbnb) who brings together energy providers and buyers including prosumers, and
calculates transaction and delivery costs.’
Would a nice guy like this disrupt your monopoly business?
Source: The Wall Street Journal 2 May 2015
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Clearly, there is room for new players to
enter the archaic utility space with its
outdated regulations and bizarre, asset-
heavy business model, long protected
from competition, slow to innovate and
historically insensitive to the needs of its
customers.
Moreover, as others have correctly
observed, the industry under-utilizes its
assets far more than any other. The
infrastructure is designed to be
essentially fail-proof and with ample
capacity plus a decent reserve margin on
top so that it can meet the highest peak
demand imposed on the network.
Nobody wants the lights to go out on
their watch for lack of investment or
infrastructure, politicians, regulators,
utility CEOs or the grid or network operators.
But this is not Airbnb, where you can rent a spare bedroom to a guest. Sharing the assets, or even the
information about the flows, with outsiders could lead to less reliability or hacking. Until a host of safety
and reliability issues are addressed, no regulator is likely to want to relent control or change the protocols
that keep supply and demand in balance on a sophisticated network around the clock.
Sumic can say all he wants – and he is now widely quoted – but the power sector is not yet ready for
shared economy invasion a la Airbnb model.
Many entrepreneurs are already developing platforms for peer-to-peer trading and other forms of
sharing the electrons as previously noted in this newsletter. And there is no doubt that many will succeed.
But these platforms still critically and solely rely on physical assets – 130 wooden poles and millions of
miles of copper wires in the case of
US – to deliver the juice or
accomplish the transactive energy
trading that Sumic envisions.
Electrons are not packets of
information and cannot be digitized
and zipped wirelessly, effortlessly
and instantly among and between
parties.
If anything, we are likely to need
more assets – smart meters, smart
devices, poles and wires plus
distributed storage and distributed
generation – to handle the emerging
DER revolution.
The biggest challenge is how do we pay for the network that will critically be needed to support the types
of services Sumic envisions.
Will regulators stay on top of fast changing issues?
Michael Picker, President of CPUC with the editor in San Francisco
Energy independence in Freiberg
Source: Timo Leukefeld from Christoph Burger, ESTM Berlin
32 July 2016 EEnergy Informer
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Right now, those who are developing the platforms for peer-to-peer trading are assuming they can get a
free ride on the existing network – or someone else will pay for it. That may work for a while, but not if a
large portion of customers begin to self-generate, store and trade.
Regulators, whether we like it or not, are in a critical position to decide and define the future of the
industry. Looking at the REV proceedings in New York, this editor is not encouraged that
They will get the pieces right; and
They will do it in time.
But perhaps visionaries like Sumic have a better crystal ball.
http://www.pittsh.com.au/latest-news/cedex/
IEA: Firing On All Cylinders Meeting the Paris targets no easy task
sustained global effort is needed if the goals of the Paris Agreement are to be reached,
according to the
International Energy
Agency’s latest Energy
Technology Perspective (ETP),
released in early June 2016.
With a record 150 GW of new
renewable capacity installed in
2015, the IEA says far more is
needed. And even that won’t be
enough. The IEA recommends an
“all of the above” strategy
consisting of a mix of renewables,
energy efficiency, fuel switching –
to cleaner fuels – nuclear and carbon capture and sequestration (CCS).
Even the IEA admits that CCS is not “on track” – it has largely fallen out of favor of late as being too
costly and not available on large enough scale to make a dent in the near future.
Since so much of the global energy
is used for heating and cooling,
mostly in buildings, the IEA has
identified it as a prime target. The
transportation sector, another
major emitter of carbon, is also
identified as critical.
As everyone knows, without
electrifying transport fueled by
renewable energy resources, there
is no hope for achieving the so-
called 2 degrees’ scenario (2DS) in
the graph on the left.
A
Meeting Paris target won’t be easy
Source: Energy Technology Perspective, IEA, June 2016
Electrified transport a MUST
Source: Energy Technology Perspective, IEA, June 2016
33 July 2016 EEnergy Informer
Page 33
IEA, not unlike everyone else, has gotten into cities. It says cities in emerging and developing economies
can lead the low carbon transition while reaping many benefits. Who can disagree?
Special 30% discount offer for EEnergy Informer subscribers
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EEnergy Informer
Copyright © 2016 July 2016, Vol. 26, No. 7 ISSN: 1084-0419 http://www.eenergyinformer.com
EEnergy Informer is an independent newsletter providing news, analysis, and commentary on the global electric power sector. For all inquiries contact Fereidoon P. Sioshansi, PhD Editor and Publisher 1925 Nero Court Walnut Creek, CA 94598, USA Tel: +1-925-256-1484 Mobile: +1-650-207-4902 e-mail: [email protected] Published monthly in electronic format. Annual subscription rates in USD: Regular $450 Discounted $300 Limited site license $900 Unlimited site license $1,800 Student/special rate $150
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