EC Electricity Won’t Save Us From Our Oil Problems

Almost everyone seems to believe that our energy problems are primarily oil-related. Electricity will save us.

I recently gave a talk to a group of IEEE electricity researchers (primarily engineers) about the current energy situation and how welcoming it is for new technologies. Needless to say, this group did not come with the standard mindset. They wanted to understand what the electricity situation really is. They are very aware that intermittent renewables, including wind and solar, present many challenges. They didn’t come with the preconceived notion that oil is the problem and electricity will save us.

It wasn’t until I sat down and looked at the electricity situation that I realized how worrying it really is. Intermittent wind and solar cannot stand on their own. They also cannot scale up to the necessary level in the required time period. Instead, the way they are added to the grid artificially depresses wholesale electricity prices, driving other forms of generation out of business. While intermittent wind and solar may sound sustainable, the way that they are added to the electric grid tends to push the overall electrical system toward collapse. They act like parasites on the system.

We end up with an electricity situation parallel to the chronic low-price problem we have for oil. Prices for producers, all along the electricity supply chain, fall too low. Of course, consumers don’t complain about this problem. The electricity system also becomes more fragile, as we depend to an ever greater extent on electricity supplies that may or may not be available at a reasonable price at a given point in time. The full extent of the problem doesn’t become apparent immediately, either. We end up with both the electrical and oil systems speeding in the direction of collapse, while most observers are saying, “But prices aren’t high. How can there possibly be a problem?”

Simply removing the subsidies that come from Production Tax Credits doesn’t fix the situation either. In one sense, the problem reflects a combination of many types of direct and indirect subsidies, including state mandates and the requirement that intermittent renewables be allowed to go first. In another sense, the problem is that, in a self-organizing economy, energy prices (including electricity prices) can only rise temporarily. The increase in energy prices is made possible by a growing debt bubble. At some point, this debt bubble collapses. Raising interest rates, as the US is doing now, is a good way of collapsing the debt bubble.

Furthermore, the subsidies for intermittent wind and solar discourage other innovation because they lead to terribly low wholesale prices for innovators to compete against, particularly in areas where hour by hour competitive rating is done. The ultimate problem is that if one type of electricity production is subsidized (even if in subtle ways), all electricity producers must be subsidized. Governments cannot possibly afford such widespread subsidies.

A PDF of my presentation can be found at this link: An Electricity Perspective on the Fragile State of the Economy. In this article, I offer some comments on these slides.

 

Slide 2.

 

Slide 3.

 

Slide 4.

We have all heard the story on Slide 4 so many times that few people stop to question whether the story is really true. My analysis suggests that it may be mostly wrong.

 

Slide 5.

The big takeaway from this slide is that electricity companies planning for new generation should expect much higher electricity prices in the future. I discuss some of these items separately, on Slide 6.

By way of background, the US Energy Information Administration publishes “levelized cost of electricity” estimates that companies producing electricity are expected to use for planning purposes. When new generating capacity is added, planning needs to be started several years in advance. This is why what is being published now is the EIA’s calculation of expected wholesale costs (at a 2017 price level) for 2022.

Current wholesale prices for “dispatchable” electricity (the opposite of intermittent electricity) seem to be in the 3 to 4 cents per kWh range in the continental US, so all of the amounts shown assume that electricity prices will be much higher in the future. This thinking is in parallel with the “high oil prices will save the oil industry in the future” view that is prevalent in the oil industry. This thinking has helped keep the prices of shares of energy stocks up: “Even if there are problems now,” the thinking goes, “certainly higher prices in the future will fix the situation.”

CCS = Carbon Capture and Storage. CCS techniques are designed to remove a specified percentage of the CO2 generated when coal or natural gas is burned to provide electricity. The unwanted CO2 is stored underground. If the CO2 escapes, it can suffocate the population in the surrounding area. I would not make bets on the technique’s widespread adoption.

 

Slide 6.

Slide 6 shows a wholesale cost comparison for some particular pieces from Slide 5. All of the costs shown are very high compared to current prices. Wholesale prices tend to be in the 3 to 4 cents per kWh range because of the low cost of fuel (2 to 3 cents per kWh) and the low cost of already built generation. With recent changes in regulations, new generation is expected to be very expensive.

With respect to wind, there are two reasons why variable wind can be sold in Power Purchasing Agreements (PPAs) for 2 to 3 cents per kWh. The first is the substantial subsidies that have been available, making this pricing arrangement profitable to wind producers. The second is the low value that intermittent electricity provides to the grid. In fact, prices locked into these PPAs are slightly below the bottom of the range of expected future natural gas prices (Figure 1, below). This suggests that the primary value of wind generation is to replace natural gas as a future fuel.

 

Figure 1. Median PPA prices compared to forecast future natural gas prices. Chart by Department of Energy (Chart 54) in its 2017 Wind Technologies Market Report.

Somehow, miraculously, the EIA forecasts that the value of this intermittent wind will rise to 4.1 – 7.8 cents per kWh. In Figure 1, above, this would compare to 41 to 78 $/MWh, which is above the forecast gas price range.

 

Slide 7.

Notice how low and stable the green coal line is, compared to natural gas prices.

Natural gas comes from two types of producers: (1) those drilling specifically for natural gas, and (2) those drilling primarily for oil, and producing natural gas as a (mostly unwanted) low-value byproduct from drilling for oil. The second type of producer is willing to almost give away natural gas. If it becomes necessary to rely on production from companies whose primary focus is on natural gas production, prices will need to be higher.

 

Slide 8.

These are all very important assumptions that are not really true.

There is one reason why it might make sense to somewhat believe the first item, “Rising cost of electricity production will be no problem.” This has to do with the cost-plus type of electricity pricing (“regulated pricing”) that is used in some states of the United States. When cost-plus pricing is used, higher costs can, in theory, be passed on to consumers. The catch is that higher electricity prices tend to raise the price of finished goods and services. If wages are not rising rapidly enough, this can lead to an affordability problem. Industrial users of electricity are especially likely to cut back their electricity demand because higher prices make their products less competitive in the world economy.

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Moon Kil Woong 3 weeks ago Contributor's comment

It is funny that natural resource energy from solar and wind farms actually encourage the use of fuel as back up power because it can be turned on and off faster and more efficiently than nuclear, water, and giant generators built by burning other things like coal. Likewise electric cars that require short term use of energy also encourages this power generation. Thus, we really have a growing need for oil driven power with most "clean energy solutions". This is ironic although most people are unaware of the end results of their clean energy drives without thinking through the whole issue.

In the end, if you want to help the environment you must cut your energy use. Most other things just tend to displace your carbon footprint not decrease it. As we can see with France's protests. Doing this is not popular in the least and the ones with the biggest footprint are actually the wealthy including those who are so gung ho on electric cars and solar panels. Their footprint is often over 100% greater than the magnitude of a guy living in a 3 bedroom house with a family driving a Humvee. How? Heating and cooling a giant house. Flying her and there (travel and vacations). and consumption (especially if most things you buy are made elsewhere). It all adds up. Especially if you include construction, services, and transportation.

We need a rational discussion on global energy use. Right now most of this stuff is piecemeal and largely tokenism. I enjoy this author's discussions on energy. They are worth the the read even if you disagree with her.

Mark Borkowski 3 weeks ago Contributor's comment

Ms. Tverberg has presented well researched information and put forward some strong opinions. The whole Electricity issue is of concern for Americans, not most Canadians. The Canadian infrastructure and landscape for generating electricity is more favorable in the major Canadian provinces, Quebec and Ontario. Both provinces sell electricity into the grids of the Northern states, especially the State of New York. A concept that is not easily accepted by some Americans is the "nationalization" of electrical power resources. This concept, albeit has caused large government deficits, but cheaper electrical power for hungry industry and consumers. Canadians subsidized the development of solar and wind, a return that will likely not come back. Despite all of the theories, the future for North American electricity will likely be Natural Gas. Just saying.

William K. 3 weeks ago Member's comment

THIS POST IS BOTH EDUCATIONAL AND QUITE DISTURBING. Most of the predictions are unpleasant and quite unhappy as well. While I would be able to live by my wits and selling my skill sets, I am an age where that would not be fun. And watching things fall apart is never fun, even when it is enemy forces doing it. The disturbing part is that the evidence presented is certainly believable.