December 23, 2011

Coal Retreats Before Natural Gas

New regulations from the Environmental Protection Agency, together with potent competition from natural gas, are putting pressure on coal plants in the United States, according to The Wall Street Journal. From a global perspective, the low natural gas price that prevails in the United States is something of an anomaly, so the significance of this development should not be overstated. The relative emissions produced, respectively, by coal and natural gas must include consideration of the full cycle of production and consumption, and it is not clear whether the  attached graphic from the Journal does so. From the Journal:

For decades, coal produced more electricity than all other fuels combined, and as recently as 2003 accounted for almost 51% of net electricity generation, according to the U.S. Energy Information Administration.

But its share has dropped sharply in the last couple of years. It fell to 43% for the first nine months of 2011, as natural gas's share has jumped to almost 25% from under 17% in 2003. Meanwhile, gas prices, on average, have fallen 37 cents to $4.02 per million British thermal units so far this year.

Many big utilities have announced retirements of coal-burning power plants, including Southern Co., Progress Energy Inc., First Energy Corp., Xcel Energy Inc., Ameren Corp. and the Tennessee Valley Authority.

Coal consumption by the power sector is expected to fall 2% this year and 4% next year; even small movements are important because utilities burned 92.4% of the 1,071 million short tons of coal distributed last year in the U.S.

American Electric Power Co., the biggest user of coal in the U.S., expects to burn 67 million tons of coal this year but anticipates its consumption will drop to 50 million tons after it retires 25 coal-burning generating units in six states by 2015.

Experts think 10% to 20% of U.S. coal-fired generating capacity will get shut down by 2016.

Some of the soon-to-be-defunct plants have been operating only sporadically because they are old, inefficient and expensive to operate; Duke Energy Corp.'s Beckjord plant in Ohio, for example, didn't even run three of its six generating units in 2010.

Market and regulatory forces are "sounding a death knell for many an older coal-fired power plant," says Hugh Wynne, senior research analyst for Sanford C. Bernstein & Co. in New York.

John Stowell, vice president of energy and environmental policy atCharlotte, N.C.-based Duke, says the EPA rules are triggering "an aging baby-boomer-type situation," that will force a record number of retirements —and soon.

The coal and mining industries have opposed the new EPA regulations as job-killers, though some coal companies have job openings they can't fill. The communities that are home to the closing plants will lose jobs and tax revenues.

Closing Beckjord, for example, will eliminate as many as 120 jobs at the plant, according to Duke. The loss of tax revenues will cost the local school district in New Richmond, Ohio, about $2 million a year, says Teresa Napier, the district's chief financial officer. People are sorry to see the jobs go, but they understand why it is happening, she says, because "people want clean air."

Meanwhile, natural-gas plants are springing up around the country, from Connecticut to California. More are expected to crop up along natural-gas pipelines, especially in places like Texas where demand for power is outstripping supplies.

Duke, for example, is building four big power plants. Two, in the Carolinas, will burn natural gas. One, in Indiana, will convert coal to a cleaner, combustible gas. Only one, in North Carolina, will burn coal.

Cost is a big reason for the shift away from coal. Coal prices have jumped an average of 6.7% a year for the past decade, according to the U.S. Energy Information Administration. Coal cost $12 to $75 per short ton in early December, depending on where it was mined and how hot it burns.

And with energy markets flooded with cheap natural gas from shale rock, utilities have been idling coal capacity and running gas-fired plants harder. Fitch Credit Ratings estimates this is whittling coal sales by 63 million tons a year, equivalent to 6% of 2010 U.S. coal consumption. Fitch says the new EPA regulations could reduce coal sales by another 55 million tons a year, or 5% by 2016, due to plant retirements. Hardest hit: central Appalachian coal, due to its emissions profile.

Coal-firm shares have shown the strain. Peabody Energy Corp.'s stock has dropped by half since April, to $34.54 from a 52-week high of $73.95 set that month, and Consol Energy Inc.'s stock is off by a third since March to $38.38 from a 52-week high of $56.32 set that month.

But the new EPA rules are also significant. On Wednesday, the agency released its latest rule, requiring power plants to slash emissions of mercury, arsenic and other toxic pollutants within three to four years.

Last July, the agency released its final Cross-State Air Pollution Rule, which requires reductions of sulfur-dioxide and nitrogen-oxide emissions in 23 Eastern and Midwestern states beginning next year, as well as seasonal ozone reductions in 28 states.

The EPA also is working on rules to limit the amount of water drawn from natural waterways by power plants for cooling purposes and to control the handling and storage of coal waste. Many state utility commissioners say they fear the agency's recent rules will push up electricity prices or could even hurt electric-system reliability if too many power plants are shut down.

Stan Wise, an elected utility commissioner in Georgia, says "implementation of the rules has got us in a tizzy." He has written the EPA to express his objections.

EPA Administrator Lisa Jackson said the new mercury and toxics rule will deliver $37 billion to $90 billion in health benefits, per year, when fully implemented after 2016. "These are not abstract statistics or numbers," she said on Wednesday, but mean better health for millions of Americans. . . .

Rebecca Smith, "The Coal Age is Nearer to Its End," Wall Street Journal, December 23, 2011

December 17, 2011

Norway's Butter Shortages and the Dreaded Dutch Disease

Matt Yglesias in Slate, noting the recent shortages of butter in Norway, gives a nice explanation of the predicament that energy-exporting states find themselves in after receiving a fat windfall from oil and gas profits. The butter crisis, which will soon be eased as the Norwegian government relaxes its high tariffs on imported butter, is not "a simple lesson about the virtues of free trade." Norway's protectionism responded to a very real problem:

Norway got rich through the discovery of offshore oil and gas reserves, a bonanza of natural resource wealth. But with such wealth can come problems, most notably the so-called “Dutch Disease” that afflicted the Netherlands after its own fossil-fuel find. A capital-intensive industry that employs relatively few workers became a major export industry. The high volume of natural resource exports pushes up the value of the currency and makes it cheap to buy products from abroad. This, in turn, tends to put all domestic producers of other tradable goods out of business and leave your economy dangerously dependent on the fluctuations of the commodity markets.

In principle, economic orthodoxy would say not to sweat it. Just use the natural resources to generate government revenue, then engage in massive redistribution. To many, though, there’s something depressing about the idea of a whole nation living on the dole. What’s more, many Persian Gulf states who’ve de facto taken this approach have realized over time that it creates problems. Your country is rich, superficially, but it lacks the human capital and organizational skills typical of a modern developed country. When the oil runs out, what will you be left with?

Protecting select product markets from international competition has, for this reason, played a major role in Norwegian economic strategy. The inefficiencies involved in blocking foreign butter are minor at most times, can be relaxed in an emergency, and preserve some kind of non-oil economic base for the future.

The largest Norwegian effort in this regard, however, is something more innovative. A large share of the oil revenues, rather than subsidizing current government operations, is invested via the Norwegian Government Pension Fund, which is thought to own approximately 1 percent of the publicly traded stock in the world. In part, the purpose of the fund is, as its website says, “to safeguard and build financial wealth for future generations,” but this could be accomplished by directly giving the funds to Norwegians instead. The real purpose of holding the wealth in a fund that invests exclusively abroad is to limit the appreciation of the krone in international currency markets and maintain Norway’s industrial competitiveness. What it has in common with the butter tariffs, however, is that Norwegians are accepting lower living standards than they might otherwise enjoy for the sake of a long-term strategy of not becoming a Saudi-style oil monoculture.

December 16, 2011

Keystone Pipeline Stakes

According to Politico, "Greens Call out New Keystone XL Deal," Senate Democrats and the White House have accepted a provision, engineered in the Republican-controlled House of Representatives, mandating that the State Department decide within sixty days whether to approve the Keystone pipeline. The provision was added to a payroll tax cut package that extends the tax holiday on social security, jobless benefits, and the Medicare reimbursement rate to the end of February 2012.

The compromise seems to reverse Obama's decision to put off the decision on Keystone until 2013, but Senate Democrats say it is meaningless because the State Department won't have completed its review in 60 days. On the other hand, the Republicans seem determined to tie the White House's much wanted economic program to approval of the pipeline.

Environmentalists are aghast that Keystone is back on the table so soon and have renewed their threat to sit out 2012 if the pipeline goes forward.  Democrats counter that Obama is playing from a weak hand, made weaker by tepid environmentalist support in the 2010 elections.

(The Democratic in-fighting comes along just as I was getting to really enjoy the internecine conflict among the Republican presidential candidates. "I bet you $10,000 that Newt is an unrepentant sinner" is, let us hope, where it goes next.) 

Meanwhile, David Burwell of the Carnegie Endowment for International Peace restates the case that James Hansen and Bill McKibben have been making about the Keystone pipeline:

Keystone XL is more than a political bargaining chip. It is more than a $7 billion capital energy project. It is the Rubicon that scientists, energy analysts, and environmentalists say we must not cross if we are to keep global warming at or below 2 degrees Celsius from pre-industrial times. Build Keystone XL and we lock ourselves into reliance on "dirty" energy sources that will put us over the 2 degrees tipping point. It is "game over."

This 2 degrees limit is not a random number. It is the limit beyond which settled science says we risk a 50-50 chance of severe planetary harm. Imagine a world with 35 percent of all species going extinct; a sea level rise flooding natural and urban infrastructure alike; forced exodus of more than 500 million people from coastal areas; and a deadly migration of tropical diseases toward populations that have not built up resistance. All this within the lifetime of those we care about most deeply -- our children and grandchildren.

Energy analysts are increasingly alarmed at the rate that the world is getting "locked-in" to fossil fuels as its primary energy source. The International Energy Agency, in its annual World Energy Outlook 2011, estimates that we have only until 2017 -- just five years from now -- to fundamentally turn capital investments in energy assets away from fossil fuels if we are to stay within this limit. If not, the best we may be able to achieve is a 3.5 degrees increase. If we delay this shift until 2035, we will be on track for a 6 degrees increase, the consequences of which approach planetary suicide. If we continue to mine tar sands -- the unconventional oils Keystone XL will transport at a rate of up to 800,000 barrels a day -- the lock-in occurs even earlier.

The 2 percent limit is also a legal limit. At the UN climate change summit in Cancun one year ago conferees signed an accord to keep global temperature rise to below the 2 degrees threshold. This commitment was reconfirmed and strengthened at Durban last week. Keystone XL requires a permit from the U.S. state department -- the same agency that negotiated the Cancun and Durban agreements. Given the warnings that scientists, energy analysts, and even insurance company executives are now urgently urging policymakers to heed, the state department has a duty to assess permit issuance against its commitments.

With global consensus now consolidating around the 2 degrees limit, you would think both public and private sector leaders would act -- fast. Yet, as noted recently by Lord Nicholas Stern, former chief economist of the World Bank, major oil, gas, and coal companies proceed to extract these fossil fuels on a business as usual basis. Shareholders seem oblivious to the fact that conversion of resources into proven reserves increasingly relies on risky or destructive exploration in the Arctic, deep oceans, and sensitive ecosystems. Sir Nicholas' conclusion: "either the market has not thought hard enough about the issue or thinks that governments will not do very much."

Environmentalists, understanding that neither private markets nor the political system is capable of responding to the challenge posed by climate change, are determined to stop this pipeline using whatever legal tools are available. If markets, international accords, and public policy won't respond by developing a plan to keep fossil fuel emissions within safe limits, then these resources must simply stay in the ground until an enforceable plan is adopted. Unconventional oils are at the frontline of the fight and Keystone XL is the point of the bayonet. Environmentalists are preparing themselves for trench warfare.

* * *

Even if the Obama administration does not approve the Keystone XL pipeline, it does not mean the project is dead. According to John M. Broder and Dan Frosch of the New York Times, "Politics Stamps Out Oil Sands Pipeline, Yet It Seems Likely to Endure," the oil sands will likely be exploited even if the initial decision at the end of February is negative:
As eager as TransCanada is to build the new pipeline, there is sufficient pipeline capacity for now to carry current production of crude from the Alberta oil sands to American refineries. With relatively minor adjustments, there will be enough space on existing transborder pipelines to handle expected flow until 2018 or later, analysts said.

It is only after 2020, when production of Canadian crude is expected to double from today’s 1.5 million barrels a day, that the pipeline crunch becomes severe. Canadian companies are already planning to expand current pipelines and build new ones to carry oil to the coast of British Columbia for export to Asia.
Notably, however, one such proposed project, Enbridge’s Northern Gateway pipeline from Alberta to Kitimat, British Columbia, has been stopped for at least a year by the Canadian government because of strong opposition on environmental grounds from local landowners and indigenous populations.
Nonetheless, Stephen Harper, the Canadian prime minister, said in a television interview this week that if the United States blocked the Keystone pipeline, Canada would look to China as a market for its oil. “I am very serious about selling our oil off this continent, selling our energy products off to China,” Mr. Harper said.. . .

[E]xperts in oil economics say that the oil is coming out of the ground in any event because of steadily growing global demand and the heavy investment in infrastructure already made in Alberta.
Andrew Leach, an associate professor of natural resources at the Alberta School of Business, said that Canada would continue to develop its oil resources, but that it would need additional pipeline capacity in coming years to meet export demands, whether to the United States or Asia. Slowing or stopping a particular project — Keystone or Northern Gateway, for example — could temporarily slow production in the oil sands, but eventually that resource will be tapped, he and others said.. . .

The oil industry continues to invest in Canadian oil sands because such projects are expected to produce a steady stream of crude for decades, said Philip Budzik, a research analyst at the Energy Information Administration, a federal research organization. He said that over time, costs and the energy required to extract the oil would come down as technology improved.
“In an era of limited accessibility to overseas oil resources and in contrast to conventional oil fields that produce at their peak production level for only three to six years before going into decline,” Mr. Budzik said, “long-lived productive assets such as oil sands provide a company some insurance as to its long-term financial viability.”
He said that canceling Keystone would probably slow the rate of increase of oil sands production, but only until new routes to Asia or North America were found.