America’s Energy Future According to AEO 2010

The USDOE Energy Information Administration (EIA) issued its twice yearly update of its long term energy outlook which it calls in typical bureaucrat speak AEO2010.[1] As a good energy geek I read and analyze this update each time it is released and you can read my January 2010 assessment here if you want to examine forecast over forecast differences.[2]

My first reaction to this forecast was gloom and doom.  The forecast foretells a slow recovering America of diminished economic capacity and momentum.  I read through it and then went to brood over it.  My second read saw glimmers of hope fortified, I admit, by happy hour ranting over what I had read.  My third read uncovered the hidden ammo to push back on the questionable assumptions and subtle spin which creep into this forecast!

“We’re mad as hell as we’re not going to take this anymore!”

So my advice is read AEO2010 and prepare to get depressed.  Read it again and get pissed off!  Then read it a third time and you will see the foundation of America’s energy future is still there strong as ever with a resource rich foundation of domestic oil and natural gas, coal, plenty of wind and sunshine and the technological genius to put them to work to meet America’s growth needs for the future if we just do it!

What is the EIA Reference Case?

US EIA uses a traditional “reference case” approach to its forecasting to enable the user to track and assess the implications of changing supply and demand fundamentals, regulatory or legislative changes and market conditions.  This means that the reference case itself assumes that current laws, regulations and policies in effect in 2010 will continue unchanged through the 25-year forecast. While we know this will not likely be true such a consistent methodology is best practice and allows the reference case to be the foundation for additional scenarios, sensitivities and policy impact cases.

The EIA reference case is a generally accepted benchmark for energy market analysis of long term supply and demand used to compare almost every other energy forecast products available.  This does not mean that other forecasters accept all of EIAs modeling assumptions, we don’t.  Nor does it mean that EIA always gets it right, it does not.  But it remains a consistent, trusted baseline for analysis. EIA ran 38 additional “sensitivities” to test key variables and you will find them on the US EIA website in the Appendix to the report.

Despite my ranting, EIA has done good work in the AEO2010 framing the issues we face and forecasting the expected outcome from the current policies we have in place.  The bad news for the EIA bosses is that those current policies just are not going to work out that well.

So read AEO2010 as a wake up call, America!

Key Takeaways from the EIA Annual Energy Outlook 2010-2035

  • Power Generation Output Dropped for the Second Year in a Row falling 3% in 2009 after a 1% drop in 2008 representing the first time in the 60 year history of this data gathering process this has happened.  The recession was a major cause of the drop, but weather and other factors also affect results. .  By comparison, EIA’s short term energy outlook update from December 2009 forecasted expected consumption of electricity across all sectors to grow by 2.7 percent during 2010 and by 1.3 percent in 2011 (U.S. Total Electricity Consumption Chart) as the nation emerged from the recession and returns to historic load growth by 2011.
  • Expected Power Consumption Growth Slows to 0.5% in the AEO2010 Forecast, but is this Spin? If historic load growth has been 1% to 1.5%, and the SEO2009 says it expects a return to historic load growth by 2011 why does AEO2010 drop to 0.5%? This seems like spin to me. EIA says the nation will reduce energy intensity over the forecast period by improved energy efficiency and energy use regulations.  Forecasters will argue the veracity of this assumption.  California is the undisputed leader in energy efficiency standards and the California experience has been that energy intensity was indeed reduced to about 50% of the US average.  But it has taken 20 years of relentless effort to achieve that result.  I think it arguable that the rest of the US will catch up to California and reduce energy intensity to this 0.5% which is only 20% of the expected 2.4% GDP growth. My view is a safer forecast bet would be the historic growth rate of 1% to 1.5% instead of the AEO2010 0.5%.
  • Renewable Energy Market Share Growth Cuts Fossil Fuel Use in the Energy Mix.  AEO2010 forecasts that use of renewable energy will increase over the forecast period enough to reduce fossil fuel use from 84% in 2008 to 78% in 2035. The major driver of this market share change will be Federal renewable fuels standard (RFS), State renewable portfolio standard (RPS), Federal stimulus money and subsidies as well as rising fossil fuel prices.  To get to this AEO2010 forecast result, the EIA Reference case assumes that current subsidies for renewable energy including production and investment tax credits end with the current expiration of their authorization in 2012 for wind energy and 2013 for solar and other technologies.  AEO2010 says the reference case assumptions result in renewable generation accounting for 45 percent of the increase in total generation from 2008 to 2035. If renewable energy subsidies are continued, AEO2010 forecasts (in an alternative case) that renewable energy would be between 61-65% of all power generation additions during the forecast period.
  • Growth in Unconventional Natural Gas is a Game Changer for US.  AEO2010 acknowledges what the energy industry knows for fact, the spectacular rise of US domestic production of natural gas from unconventional sources such as shales is ample evidence of the importance of continued domestic E&P development, continued technology applications to improve energy extraction potential and efficiency, and the energy security imperative of control over our energy future.  In the AEO2010 reference case, total domestic natural gas production grows from 20.6 TCF in 2008 to 23.3 TCF in 2035. Assuming natural gas prices of $8.06/MCF unconventional natural gas production grows to 6 TCF in 2035, more than offsetting declines in other production from depleted conventional wells.  The reference case forecasts that by 2035, unconventional gas provides 24% of US gas demand up from 6% in 2008 (See Figure 3).
  • Greenhouse Gas Emissions Trend down even without Cap and Trade.  The AEO2010 forecast finds that the combined effect of lower growth in energy consumption and expanded market share for renewable energy leads to slower forecast growth in U.S. CO2 emissions by 0.3 percent per year from 2008 to 2035, or a total of about 9 percent even without cap and trade legislation or other carbon taxes. EIA says that even though total energy-related CO2 emissions increase from 5,814 MMT in 2008 to 6,320 MMT in 2035, emissions per capita fall by 0.6% per year. CO2 growth in emissions in AEO2010 comes primarily from power generation and transport sectors (See Figure 4).

So what?

There is a lot to consider in this AEO2010 and it will provoke debate.  Some of the findings in the forecast reference case will seem like convention wisdom, but the lessons are sobering.  For example:

Renewable Energy Market Share Grows but Coal still has 44% share by 2035. We know that renewable energy has been the major growth factor in power generation because of the triple whammy impacts of state RPS standards, Federal subsidies and then the ARRA Federal stimulus money.  So seeing renewable energy market share grow is no surprise. And the bias against coal in a world obsessed with greenhouse gas emissions reduction could not be stronger.  Despite that coal survives the 25 year AEO2010 forecast period with only a 4 point reduction in market share from 48% to 44%.  What is this telling us? It tells us that renewable energy subsidies can buy market share but do not assure that it will be sustainable by 2035.  Without the subsidies the economics of coal still provide a substantial baseload floor we are wise to hang onto to assure our energy reliability.

Unconventional Oil and Natural Gas is America’s Energy Security Superstar.  The genius of America is that our belief in technology advancement has once against saved our behinds by overcoming the policy bias against domestic oil and gas production to demonstrate that horizontal drilling, 3D seismic E&P methods, and hydraulic fracturing can unlock trillions of cubic feet of domestic natural gas and millions of barrels of previously thought uneconomic domestic oil to meet our energy needs.  There is no denying the success of unconventional oil and gas and no politician can ignore it.  Yes, there are environmental challenges and the need for effective safety and regulatory practices to reduce the risk of oil spills in the Gulf or water contamination from fracking.  We can solve those problems a lot easier than bringing peace to the Middle East or contending with Iran’s nukes.  Just do it!

Plug in Hybrid Electric Vehicles are forecast to be 50% of the market by 2035. Think about that.  AEO2010 says we not only must meet our power generation requirements for the future but now we must accommodate the electrification of the transport fleet.  And AEO2010 says we will do this with less than one-third the historic load growth in power consumption over the forecast period by improved energy efficiency and stricter government regulations on energy intensity.  And we will meet that power generation need with more renewable energy that is intermittent, not dispatchable, priced above market cost and requires heavy government subsidies.  Does this sound sustainable? Does this sound like a formula for electric reliability at affordable rates?

Fuel Demand for Power Generation will grow and America will face Energy Shortages. That is my conclusion because I do not believe AEO2010 can reduce power consumption below historic levels unless the American economy is perpetually in the tank nor make the government so efficient and effective that its regulatory regime will drive down energy intensity as fast as we will need it by the forecast.  With a bias against coal and nuclear power baseload additions and a bias for much more renewable energy we risk creating a widening gap between historic load growth and reliable supply.  Yes, energy efficiency and reduced energy intensity will buy time and improve performance but it will not be enough.  Add PHEV to the power generation demand and even if those cars are recharged overnight we still will need more power generation to meet the expected needs when the sun don’t shine and the wind does not blow.  So we will build natural gas fired combined cycle power generation. Prices will be more volatile but capital costs will be less.  Dynamic pricing and smart grid technologies will help with demand response, but there is no substitute for adequate supply reliability at prices we can afford.

Greenhouse Gas Emissions will trends down even without cap and trade, but it will require the heavy hand of government regulation to mandate change.   Even with all these new regulations and a dramatic lowering of energy intensity in the economy, emissions still grow by 9% over the forecast period in the US.  We do not know from AEO2010 how much emissions will grow globally as a result of exporting US manufacturing and energy intensive uses and then importing those finished goods from China or elsewhere.  It sounds like we won’t have COP15 and Waxman-Markey but we will get all of their impacts in federal regulations and state mandates if the government has its way.

There ends the rant!