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					    Energy Realities Facing the
    United States

Frank Clemente Ph.D.
Senior Professor of Social Science & Energy Policy
Penn State University
fac226@psu.edu


                                                     1
Access to Electricity and the Quality of Life
                  People in Societies with Greater Access to Electricity:
   Survive                  Live               Drink              Eat         Are Better
  Childhood                Longer          Cleaner Water         Better       Educated




  Under Five           Life Expectancy       Access to      Under Nourished    Literacy
Death Rate/1000             (years)      Improved Sources          (%)         Rate (%)
                                                                                           2
                                               (%)
            Five Basic Premises
• Worldwide growth in energy demand is unprecedented
  and will continue for decades

• Coal is the main energy source able to meet this
  demand in terms of scale, time, reliability, cost and
  versatility

• Coal conversion to electricity, liquid fuel and NG
  equivalents can greatly alleviate supply problems

• Carbon capture and storage (CCS) is the
  technological pathway to the full potential of coal

• The U.S. should rapidly develop CCS and make it
  available, affordable and deployable to the global
  community –this is the moral energy issue of our time
                                                          3
       Two Different Worlds

● “There is no such thing as clean coal”
  – National Resources Defense Council.

● When asked how China would ever meet
  the growing demand for electricity, liquid
  fuel and NG, Du Minghua, Director of the
  Beijing Research Institute replied: “Coal
  is the solution to all three”.

                                               4
             Out of Poverty: Coal Based Energy has
                    Propelled China Forward
                               “China is an example for the developing world” IEA, 2007
                                                                              1,094




                 534




                                                                                          0




Note: Poverty measure follows World Bank Definition of $1 per day income                      5
Source: IEA, 2007; EIA, 2008
                                              India’s Rapidly Emerging Demand for
                                              Electricity
                                                                                                           917
                                            Removal of poverty is the greater
                              1000          immediate imperative than global
                                            warming” P. Ghosh, Secretary of
                              900           the Environment, India

                              800                                               668
                                                                                                    Equals
                                                                                                  Population
Millions of People in India




                              700
                                                                                                      of
                              600                                       Equals                       the
                                               412
                                                                       Population                  Western
                              500                                           of                    Hemisphere
                                                                          USA
                              400
                                         Equals                            UK
                              300
                                        Population                        Italy
                                            of                         Germany
                              200         USA                           France
                                           UK                            Japan
                              100         Italy

                                0
                                     No Electricity             Cook with Wood or Dung         No Refrigeration


                                                      Millions of People in India Toil in An Bleak World
                                                                                                                  6
                                         Coal is India’s only Energy Advantage
                              20.0%

                              18.0%      17.1%         “Coal is expected to be the
                                                       mainstay of power
                              16.0%                    generation in the years to
% of Worlds Proved Reserves




                                                       come” India’s 11th Five
                              14.0%                    Year Plan (2007-2012)

                              12.0%
                                                                                               10.2%
                              10.0%

                              8.0%

                              6.0%

                              4.0%

                              2.0%                                                    0.8%
                                                         0.5%              0.6%
                              0.0%
                                       Population         Oil               NG       Uranium   Coal
                                      (1.15 Billion)

                                        India’s Share of the World’s Energy Reserves
                                                                                                       7
                                  Steady Drumbeat Of Electricity Demand
                                            Across the World

                         40000

                         35000

                         30000
Billion Kilowatt Hours




                         25000

                         20000

                         15000

                         10000

                         5000

                            0
                                 1980      1990      2005         2010    2020       2030

                                                      US    ROW


                                    Note: Over 2 billion people do not have
                                    adequate access to electricity and 1.6 billion
                                    have none at all                                        8
                                     The World Is Turning to Coal

                                       243
                               250
                                                        China built more coal
                                                        generation in 2007 than
      Giga watts of New Coal




                               200
                                                        Britain built in its history
         Based Capacity




                                               151
                               150

                               100                     89
                                                                  62           65
                                                                         53
                               50

                                0
                                     China   India   Other     Europe   USA   ROW
                                                     Asia


Source: Data Derived from Platt’s Proprietary Database, 2008                           9
                                        Modernization – The Rise of
                                        the Automobile
                            400
                                     In 2002, there were 812
                            350      million vehicles. By 2030
                                     there will be 2.1 billion.
                            300
Total Vehicles (Millions)




                            250

                            200

                            150

                            100

                            50

                              0
                              2002                                                              2030

                                                    U.S.      China   India   Mexico   Brazil


Source (Dargay and Gately 2006)
                                                                                                   10
Everything, Everywhere, All the Time:
Increases needed by 2030 to meet demand



● Nuclear power             38%

● Oil production            43%

● Renewable energy           61%

● NG production              64%

● Coal production            74%


                                          11
                                             U.S. Oil and NG Production

                                 10                                                                      25

                                  9

                                  8                                                                      20
   Crude Oil Production (mm/d)




                                  7
Crude Oil Production (mn/d)




                                                                                                              NG Production (Tcf/y)
                                  6                                                                      15




                                                                                                                     ddd
                                  5

                                  4                                                                      10

                                  3

                                  2                                                                      5

                                  1

                                  0                                                                      0
                                      1972   1977   1982   1987         1992        1997   2002   2007

                                                           Oil Production      NG                            12
WHERE WILL THE
ELECTRICITY COME FROM IN
THE UNITED STATES?




                           13
                                                   Rising Tide of Electricity Demand in U.S.
                                        5,500
                                                       Any plan for new
                                                       generation must account
Billion kWh of Electricity Generation




                                        5,000          for the pressure of steadily
                                                       growing demand for
                                                       electricity
                                        4,500


                                        4,000


                                        3,500


                                        3,000


                                        2,500


                                        2,000
                                                1990     1995     2000      2005      2010         2015   2020   2025   2030
                                                                             Electric Generation

                                                                                                                               14
                                                      The Steady Erosion of Electric Reliability in the
                                                      United States, 2003-2016
                                                               48
                                            50
Number of States Meeting at Least Minimum




                                            45                                             By 2016, only one in four states will
                                                                                            be in a reliability region meeting
                                            40                                                NERC’s minimum acceptable
                                                                                                         standards
                                            35
            Relieability Levels




                                                                                  25
                                            30

                                            25

                                            20
                                                                                                     14
                                                                                                                       12
                                            15

                                            10

                                            5

                                            0
                                                        2003               2007               2011                 2016
                                                                                                                  1016


                                                 Number of contiguous states in reliability regions where available
                                                                                                                                   15
                                                     capacity margin meets minimal accepted level -- 15%
       The Danger of Relying on NG
       for Electricity

1. NG has 4 times the price and 20 times the
   price volatility of coal

2. Using NG for electricity drives up the
   price of both electricity and NG for
   families and businesses.

3. North American NG production may have
   peaked. If so, LNG imports from risky
   sources (e.g. Russia, Iran) must balance
   supply.
                                               16
                                            Some States Highly Dependent on NG for Power

                                      70%                                                   67%
% of Electricity Generation from NG


                                      65%
                                      60%                                            55%
                                                                              53%
                                      55%                               50%
                                      50%                        45%
                                      45%                 42%

                                      40%
                                      35%
                                      30%
                                      25%          21%
                                      20%
                                      15%    8%
                                      10%
                                       5%
                                       0%
                                            PA    U.S.   OK     FL     TX     MA    CA     NV


                                                                                                17
                                                      This Second “ Dash to Gas” is Real,
                                                             Risky and Expensive
                                                62
                                                     61 GW of NG and Rising
          Gigawatts of New Generation Planned




                                                60
                                                                                         Since 2002 the price of
                                                                                         NG to produce electricity
                                                                                         has increased over 160%
                or Under Construction




                                                58

                                                     Dozens of
                                                56   NG Plants
                                                     Have Been
                                                     Proposed in                                         53 GW of Coal
                                                     2007-2008                                           and Falling
                                                54

                                                                                                          Dozens of
                                                52                                                        Coal Plants
                                                                                                          have been
                                                                                                          Cancelled in
                                                50                                                        2007-2008


                                                48
                                                         NG     NG                                          Coal
                                                                                                             Coal

                                                               Gigawatts Planned or Under Construction by Fuel
         Source, Platts, 2007

*Note: The Platts survey is the most recent available but does not include many recently proposed
                                                                                                                         18
NG Plants or many recently cancelled coal plants
                                       Depletion Sets the Context:
                                       Wanted: A New Texas Every Year (6 TCF)


                           22
                           20
                           18
  TCF/Y - Dry Production




                           16
                           14
                           12                                                                New
                           10                                                                 NG
                           8
                                                                                            Needed

                           6
                           4
                           2
                           0
                                2007   2008   2009    2010      2011     2012    2013       2014     2015

                                              EIA Projected Production   Depletion at 32%



Sources: EIA; EOG; CIBC World Markets
                                                                                                            19
                The U.S. Bets On A Brave New World

                                                      Where new supply is
      Where new NG supply came
                                                     projected to come from
           from 1993 - 2006
                                                            2006-2019




                      “North America is setting itself to import
                        LNG in large quantities” (IEA, 2007)



•Source: EIA                                                                  20
                        More Global NG Consumption Means Competition:
                        Billions of New Kids on the Block




                       “The U.S. is the market of last resort for LNG… we
                       will get the gas Europe and Asia don’t need”
                       -Goldman Sachs, 2008.




                                    Increases in NG Consumption 2005-2030
                                                                            21
Source: EIA, International Energy Outlook, 2008
             If Aubrey McClendon is Correct, The U. S.
             Faces Significantly Higher Electric Rates

● “U.S. natural gas producers can increase supplies by 5 percent a
  year…there is plenty of natural gas to burn to make electricity”

● “We think gas prices stay in the $9-$11 range…aggressive 35% to
  40% first year declines are going to kick in” “An average of $10 is
  a pretty good price”

●   But NG prices have averaged only $6.22 over the past 5 years
    and electric rates have still increased 27%.

● $10 NG will dramatically increase the cost of NG for electricity as
  well as the cost of NG for families and business.



                                                                        22
                                                  What $10 NG Would Mean to American
                                                  Consumers? - $70 Billion Dollars More in Costs


                                                    “An average of $10 is a pretty good price”                    $230 B
                                     $250           Aubrey McClendon, CEO, Chesapeake
                                                    Energy, July, 2008
Total Cost of NG to U.S. Consumers




                                     $200
                                                                                                 $160 B

                                                                           $132 B
                                     $150


                                                        $88 B
                                     $100



                                     $50



                                      $0
                                                 2001                  2004                   2007            200?
                                            ($3.96)                 ($5.89)                ($6.97)         ($10.00)

                                                                  Total cost of NG to U.S. Consumers ($)
                                                                                                                           23
       Show Me The Gas: Failed Optimism
       has surrounded NG

● In 2000---U.S production would significantly
  increase and lead to $2.58 NG in 2008

● In 2004---LNG imports would significantly
  increase and lead to $ 3.67 NG in 2008

● In 2008---LNG and shale gas will increase
  and lead to low cost NG

● But NG prices are still twice as high as
  predicted just 4 years ago
                                              24
           Systematic Bias: Since 2000, EIA
           has:

● Overestimated NG production in 23 of 28
  forecasts

● Underestimated NG used for generation in
  27 of 28 forecasts

● Underestimated price of NG to generators
  in 27 of 28 forecasts

See our article in Public Utilities Fortnightly, July, 2007

                                                              25
                                                   If Boone Pickens is Correct and we are at
                                                   Peak Oil –The long run price of NG/LNG

                                    $30.00                                                                                 $28.19
                                             “Natural gas prices are anchored in a long-term
                                             relationship with crude oil prices” Stephen Brown,                  $25.50
                                             Federal Reserve Bank of Dallas, 2007
                                    $25.00
    Price of Henry Hub NG ($/MCF)




                                                                                                       $22.82

                                                                                             $20.13

                                    $20.00                                       $17.45

                                                                     $14.76

                                    $15.00
                                                         $12.08
                                               $9.70
                                    $10.00



                                     $5.00



                                     $0.00
                                             $70        $90        $110        $130        $150       $170      $190      $210
                                                               Price of W TI Oil in Dollars per Barrel
                                                                                                                                    26
Source: "The Relationship Between Crude Oil and Natural Gas Prices," Hartley et. al, Rice University, 2007
                                       Coal Is the Cornerstone Of
                                       Electricity Generation In The U.S.

                           50%                                                          50%

                           45%
                           40%
U.S. Electric Generation




                           35%
                           30%
                           25%                                                    20%
                                                                           19%
                           20%
                           15%
                                                              7%
                           10%
                                   1%         2%
                           5%
                           0%
                                 Oil     Renewables       Hydro        Nuclear   NG       Coal

                                                      U.S. Electric Generation

                                                                                                 27
        The Scale Needed to Replace Coal
        in the U.S.
● NUCLEAR: 250 more reactors

● NATURAL GAS: 17 more Trillion Cubic Feet

● HYDRO: 500 facilities size of Hoover Dam.


The reality of physics is that electricity cannot
be stored in large quantities – an inevitable
constraint on solar and wind generation.

                                                    28
          Nuclear Power: Four bottlenecks will
          significantly delay the construction of new
          nuclear power plants in the United States

1. High Level Waste management, transportation and
   storage
2. Entrenched Opposition at both national and local levels
3. Supply chain issues
   (a) availability and cost of fuel,
   (b) scientific expertise and skilled labor
   (c) global competition for nuclear grade components

4. Societal inertia, litigation and bureaucratic creep –we
   have not built a nuclear plant for decades.
                                                             29
                          Bottleneck: Competition with the rest of the
                          world for nuclear grade components, fuel and
                          expertise –we are behind the curve and falling

        18          17
                                                     U.S. will be “miniscule” in the global competition for new
                                                     nuclear grade components (Power Engineering, 2007)
        16


        14
                                                           “We have nothing to offer other countries when it
                                                          comes to nuclear power” David Barry, Shaw Group
        12
                                    10       10

        10                                                9


         8                                                            7
                                                                                  6

         6
                                                                                             4

         4


         2                                                                                                  0

         0
                China       Russia       Japan       Europe      Korea       India      R.O.W.       U.S.

                                         New Reactors which will come online by 2015                              30
Source: World Nuclear Association
            “Will Weather Provide Reliable Electricity?”

            Energy Policy journal, August,2008:
            Findings from UK wind analysis

1. Wind output can be very low at the moment of
   maximum demand.
2. Expect power swings of 70% within 12 hours
3. This volatility will cause backup NG plants to go on
   and offline frequently, reducing efficiency and
   reliability
4. These reductions will lead to increases in the cost of
   electricity and offset environmental benefits
                                                           31
                                               Wind Generation’s Performance During 2006
                                                         California Heat Wave

                           2,600
                           2,400       Rated Wind Capacity (2500 MW) -- CA Independent System Operator
                           2,200
                           2,000
     Megawatt Production




                           1,800                                            When California’s Daily Peak
                                                                            exceeded 45,000 MW, in no case
                           1,600
                                                                            did wind provide more than 325 MW
                           1,400                                            despite rated capacity of 2500 MW.
                           1,200
                           1,000
                            800
                            600
                            400        250           325
                            200                                      89              90              110            113

                              0
                                   7/13/2006     7/15/2006      7/17/2006       7/19/2006       7/21/2006        7/23/2006

                                                             Date of Heat Wave (2006)

* Adapted and estimated from Dixon, U.S. DOE (2006)                                                                          32
                  Distance Between Major Wind Farms
                               (In Miles)


                                    California
 0    25    40      45*   95             295     315         415*   425   436   505


Montezuma Hills                                                            San Diego




                                                       350

Horse Hollow (TX)                                Elk River (KS)




* Note: Distance between Altamont and San Gorgonio is 370 miles                  33
                                            Lest We Forget :
                                US Coal Reserves vs. Oil and NG Reserves

                         6000


                         5000


                         4000
       Quadrillion BTU




                         3000


                         2000


                         1000


                           0
                                 USA    Russia     Iran          Qatar       Saudi    Venezuela
                                 Coal                                        Arabia

                                          Natural Gas     Crude Oil   Coal

Source: EIA, 2008                                                                                 34
                     Over 70 Billion Barrels of Stranded Oil
                     Recoverable Through CO2 – EOR *



                       Texas has over 30 billion barrels of oil
                       potentially recoverable with CO2 - EOR
   Billion Barrels




* Excludes Alaska and Offshore                                    35

				
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