Peering into the Energy Future: US EIA

US EIA issued its updated Long Term Energy Outlook for 2010. You can find the full forecast report and appendices here [1]

Like any credible forecast US EIA has a consistent methodology applied over time to provide a “reference case” to enable the user to track and assess the implications of changing supply and demand fundamentals, regulatory or legislative changes and market conditions.  While forecasters can and do argue over assumptions, US EIA is the starting point for every responsible forecast analysis used in North America today.

Here’s what the latest forecast just released has to say about our energy future:

“Our projections show that existing policies that stress energy efficiency and alternative fuels, together with higher energy prices, curb energy consumption growth and shift the energy mix toward renewable fuels,” said EIA Administrator Richard Newell. “However, assuming no new policies, fossil fuels would still provide about 78 percent of all the energy used in 2035.”

Some of the key findings are:

Moderate Energy Consumption Growth and Greater Use of Renewables:

In the US EIA reference case total primary energy consumption grows by 14 percent between 2008 and 2035, as the fossil fuel share of total U.S. energy consumption falls from 84 percent to 78 percent (Figure 1).

Even though fossil fuels market share is dropping, this number is still large enough to suggest that achieving the emissions reduction goals being discussed at COP15 will be very tough without material changes in our driving behavior and substantial continued export of our industrial base. This is the global competitive market share game being played between the first world and the second world countries.

Declining Reliance on Imported Liquid Fuels:

Total U.S. consumption of liquid fuels, including both fossil liquids and biofuels, grows from 19 million barrels per day in 2008 to 22 million barrels per day in 2035. Biofuels account for all of the growth, as consumption of petroleum-based liquids is essentially flat. As a result, reliance on imported oil declines significantly over the next 25 years (Figure 2).

I don’t know if I believe this biofuels forecast. Corn-based ethanol is proving a bad choice both economically and sustainably and is propped up solely by subsidies and fuel mix mandates.  Like feed-in-tariffs someday these will go away and the unsustainable market will collapse.

Reduced imports are more likely to come from growth in domestic production using horizontal drilling and other 3D seismic techniques to go after the smaller plays. A move by BIG OIL into the unconventional gas space such as EOM’s recent announcement of its purchase of XTO means that unconventional oil production should rise along with unconventional gas, in my view.

Shale Gas Drives Growth in Gas Production and Reduces Reliance on LNG:

Total domestic natural gas production grows from 20.6 trillion cubic feet in 2008 to 23.3 trillion cubic feet in 2035. With technology improvements and rising natural gas prices, natural gas production from shale grows to 6 trillion cubic feet in 2035, more than offsetting declines in conventional production (Figure 3).

Unconventional natural gas is a key to our clean energy future enabling a smoother transition, more energy security and reduced imports. Unconventional gas expansion to date has largely undermined the market for LNG in North America.  North America was the market of last resort for LNG suppliers taking the leftovers from EU and Asia but unconventional gas production growth ended any pretext of LNG growth here with the additional supplies available on the global market moderating LNG prices. Unconventional natural growth has been the best news in North American energy markets in a long time.

Energy-Related CO2 Emissions Grow, Assuming No New Policies

CO2 emissions from energy grow at 0.3 percent per year under the US EIA Reference Case forecast, assuming no new policies to reduce CO2 emissions. Total energy-related CO2 emissions grow from 5,814 million metric tons in 2008 to 6,320 million metric tons in 2035, although per capita emissions fall by 0.6 percent per year. Most of the CO2 growth in the AEO2010 reference case is accounted for by the electric power and transportation sectors (Figure 4).

This growth is due largely to the EIA assumption that total electricity consumption, including both purchases from electric power producers and on-site generation, returns to its historic average growth of 1 percent per year over the projection period, from 3,873 billion kilowatthours in 2008 to 5,021 billion kilowatthours in 2035.

Natural gas and renewables lead electricity generating capacity additions.

The natural gas share falls slightly due to the completion of coal plants under construction, and the addition of new renewable capacity. However, by 2035 the share of generation from natural gas again increases to 21 percent.  Renewable generation shows the strongest growth between now and 2035, spurred by incentive programs in more than half the States. The renewable share of generation grows from 9 percent of generation in 2008 to 17 percent of generation in 2035 (Figure 5).

The differences between the US EIA gas fired generation and the recently released NERC forecast (see earlier post) are largely the result of the categorization of gas growth as peaking or mid-merit load following plants.

My own view is that it is more likely than not that we will see larger than forecast growth in gas fired generation given the risks over the forecast period for higher inflation, stiffer emissions regulation, not enough new transmission lines actually built, and the need for back up for renewables integration.

I think a key strategy question unanswered today is what happens when states reach their RPS targets. Will they boost the targets as California has done or feel the need to diversify their portfolio to mitigate reliability risk. If reliability is a concern most will choose to build much more gas while continuing to build renewables. But if utility rate spike and ratepayers clamor for action we could see a pullback from renewables, smart grid and other subsidy based strategies in reaction.

So what?

  1. Long term renewable sustainable growth is dependent NOT on Smart Grid but upon building the new transmission lines required to get it to market and move it around the country.
  2. Electricity demand is more likely than not to return to historic growth levels of 1-2% depending upon region.  Regional energy shortages are possible by mid-forecast
  3. Get Gas! Combined cycle gas fired power generation will be built everywhere to take market share from coal, back up renewables, reduce portfolio risk and assure reliability. Continued growth in unconventional gas E&P is the key to resource diversity, reliability and price stability.
  4. The big bet in renewables is being made in Wind, but Solar is the key disruptive technology which can threaten the traditional utility central station business model by enabling distributed gen.
  5. The base load empire can strike back with capacity creep additions from nuclear life extension and uprating and installing scrubbers to avoid New Source Review at coal plants.  Even though fewer coal fired base load plants are being built they are larger and the persistence of coal players can make a material difference in coal’s long term market share.

[1] http://www.eia.doe.gov/oiaf/aeo/index.html