The New American Revolution

The New American Revolution

David Koranyi and Madison Freeman
In the US, coal and oil have given way to natural gas, wind and solar energy. Further transformation awaits, though the pace of change will depend on who prevails in the 2016 presidential election

During the past decade, the energy sector of the United States changed dramatically. The period saw a fundamental altering of energy consumption and production and export and import patterns, as well as revolutionary developments in energy technologies. This transformation of energy markets and technologies is likely to continue and accelerate in the coming decade, though the pace with which it will happen is uncertain. Policy changes that might emanate from the 2016 presidential and congressional elections represent the most important unknown. This article provides a brief and incomplete overview of changes during the last decade and looks ahead to the next.

Shifts in fossil fuel consumption

#USA to become an important exporter of #naturalgas in 2017-2018 @DavidKoranyi

Fossil fuel consumption and production patterns have changed quite dramatically since 2005. Coal and oil have declined in favor of natural gas. Coal, once the backbone of America’s energy mix, has witnessed a massive decline in its role in electricity generation from its peak in the late 1980s, a decline that accelerated beginning in the mid-2000s. Generation from coal sources made up only 33% of electricity production in 2015, down from 50.5% in 2005. This change was especially pushed forward by the availability of cheap natural gas, more affordable renewable power, and by stricter environmental regulations. Coal production has declined to its lowest point in 35 years and is forecast to decline by a further 10% this year and 12% in 2017. Coal consumption has declined even more dramatically, falling 13% in 2015, which the U.S. Energy Information Administration (EIA) called "the highest annual percentage decrease of any fossil fuel in the past 50 years." Part of this decline in domestic consumption has been spurred by the increase in exports of coal, which have grown from approximately 60 million short tons annually in 2007 to 125 million in 2012. This has contributed to the significant reduction in CO2 emissions in the United States, which have fallen from 19.6 metric tons per capita in 2003 to 16.6 in 2013 - still twice the European Union average. 2016 is predicted to be the year when natural gas replaces coal as the primary fuel for electricity generation. Unconventional gas extraction has skyrocketed in the last ten years, from 2 trillion cubic feet in 2005 to 12.3 trillion cubic feet in 2014. Technological advances in hydraulic fracturing and horizontal drilling and massive gains in production efficiency helped make gas more competitive vis-à-vis coal. These production increases are projected to continue through 2040, with swelling shale gas production constituting most of this growth. The projected slower growth in demand provides an opportunity for exports of natural gas to expand. Pipelines to Mexico already transmitted 2.9 billion cubic feet per day last year, and this may rise  to 4.4 billion by 2020. The development of liquefied natural gas (LNG) terminals in the Gulf of Mexico has opened new markets across the globe: in Asia, the Middle East, and Latin America, where there is significant natural gas demand growth potential, and in the European Union, which sees U.S. LNG as a potential key to its energy security. Cheniere’s Sabine Pass LNG terminal has been in commercial operation since early 2016, and four other LNG terminals are currently under construction in Maryland, Texas and Louisiana. The U.S. is projected to turn into a net natural gas exporter in 2017 or 2018, and LNG exports are expected to overtake pipeline and truck exports to Mexico by 2019. Oil has also seen significant growth. The shale revolution has spurred a surge in production: from 2010 to 2015, unconventional oil production rose sharply, with 52% of US crude oil production - 4.9 million barrels a day (b/d) - coming from shale (tight) oil in 2015. Drilling productivity and enhanced oil recovery (EOR) techniques have improved dramatically (the average cost per well had fallen by 25 to 30% between 2012 and 2015), bringing down breakeven prices for shale wells across the major plays (Bakken, Eagle Ford, Niobrara, and Permian). It also pushed the U.S. crude oil import ratio to its lowest level (from 9.3 million b/d during the first half of 2010 to 7.3 million b/d during the first half of 2015). Looking ahead, there is considerable uncertainty about the future of U.S. shale oil production, as its sensitivity to external price shocks leaves production levels volatile. Forecasts put crude oil production from U.S. shale formations between mid-2016 and the end of 2018 at 2.4 million barrels higher per year if the market price were $80 per barrel than if it were $30 per barrel. Though sustained low oil prices were predicted to devastate the industry, it has shown unexpected resilience so far, despite mounting financial pressure on many producers. The lifting of the 40-year ban on crude oil exports in December 2015 will also have a marginally positive effect on production. Since the ban was lifted, exports to countries other than Canada (which had already been excluded from the ban) increased seven-fold, though exports did not rise as quickly as experts initially predicted, largely as a result of the global oil glut.

In 2016 natural gas will surpass coal as the main hydrocarbon for Energy production in the US confirming that consumption and production patterns have changed quite dramatically since 2005.

Rapid rise of wind and solar

Fossil fuels remain the predominant source of energy in the United States, representing 82% of primary energy consumption. In 2015, wind and solar shares of total electricity generation capacity amounted to 6.7% and 2.0% respectively, while shares of actual generation in 2015 were only 4.7% and 0.9%, reflecting the intermittent nature of these resources. However, the share of energy generated by renewables is growing rapidly across the United States. Between 2009 and 2015, wind capacity grew by 100% and solar capacity by 900%.  Nationally, wind (4%) and solar (26%) made up the majority of electric generation capacity additions in 2015. A record amount of distributed solar photovoltaic (PV) capacity was added on rooftops throughout the country in 2015. In Texas, wind has taken a serious place in the energy mix, now providing 11.7% of cumulative energy generation. On December 20, 2015, wind energy provided 40% of Texas’s electricity for 17 hours straight. Oklahoma, one of the top natural gas-producing states, ranked fourth in net electricity generation from wind in 2015, which provided almost 17% of the state’s net generation. Kansas, another major gas production hub, saw 21% of its net electricity generation coming from wind. California alone produces half of the nation’s solar electricity generating capacity, with 9,976 ts (MW) of total solar capacity, more than the following 12 states combined. It was the first state to generate at least 5% of its electricity from utility-scale solar plants, which makes up more than two-thirds of its solar capacity. In 2015, renewable energy made up almost all new electric generation capacity in the state, with wind accounting for 41% and solar accounting for 26% of total additions. With the increasing competitiveness of both wind and solar, coupled with the extension of tax credits in the December 2015 congressional budget, this growth trend is likely to continue well into the next decade. The potential is certainly there: the National Renewable Energy Laboratory (NREL) estimated that the economic potential of renewable energy ranges from one third to over ten times the total 2013 U.S. generation from all sources. However, in the longer run, major questions remain regarding price and cost levels for competing fossil fuels, particularly gas in the absence of carbon pricing, the development of the grid so that it can accommodate growth in renewables, the necessary political and regulatory framework on national and state levels, and ways to spread renewables beyond the electricity sector.

A Democratic win in the 2016 elections may put more emphasis on supporting renewables through either a continued regulatory approach or nipartisan support/legislative action.

Disruptive technological changes

The United States has been at the cutting edge of energy innovation since the birth of the country, and the spirit of Benjamin Franklin and Thomas Edison lives on today in the competitiveness of the National Labs and Silicon Valley. Public and private actors in the United States play a leading role in technology changes in battery science, information technology, and nuclear energy technology that may have a disruptive effect on both energy production and consumption patterns, not only domestically but on a global scale. By far the most consequential development is the battery technology evolution spearheaded by the Department of Energy’s National Labs, change increasingly fueled by the private sector. Affordable storage is key to the competitiveness and sustainability of a higher share of intermittent renewables in energy production. Recent improvements in battery technology have brought down costs of storage and are projected to continue doing so. Grid-scale energy storage costs are declining rapidly: by 2020, the cost of lithium-ion battery systems for the grid may drop by 50%, from about $500 per kilowatt-hour (kWh) today to less than $230. The tech company Tesla has built its ambitious business plan on the production of low-cost batteries.  Its Gigafactory, which is being built in Nevada, will be able to produce enough battery packs for 1.5 million electric vehicles annually, and it is projected to lower the costs of its batteries by 30%, a game-changer for electric vehicle and home renewable energy installation competitiveness if successful. Information technology is also shaping major changes in companies’ approaches to energy hardware and supply and demand management. Utilities have been exploring ways to use big data analytics to approach an improvement of energy services, including projections of solar production and forecasts of demand. In trying to improve efficiencies along the value chain, companies are considering ways to capitalize on the concept of the internet of things. Information technology in energy hardware can help facilitate major changes in the approach to shifts in demand and efficiency. By adapting energy use to maximize efficiency through "smart" systems, energy companies can change consumption patterns among consumers. Tech giants have played a pioneering role in this space: Google’s inroads to the energy sector with its purchase of Nest is a prime example of spurring growth of the market for home systems that can adapt to typical patterns of consumption and reduce energy use. In nuclear energy, small modular reactors (SMRs) may offer a possible new future for otherwise struggling nuclear power generation in the United States. SMRs are transportable, small-scale reactors that produce less than 300 MW, as opposed to the 1,000 produced by a typical reactor. They can be mass produced, assembled offsite, and can easily change output rapidly to respond to fluctuations in demand. SMRs could fill energy gaps by providing power in remote places or to small towns or buildings, and can be more flexible, cheaper, and safer than the traditional model. Their flexibility in responding to surges or reductions in demand would allow them to complement renewable energy. Though the principle of economies of scale would suggest that smaller reactors would be less economically efficient, International Atomic Energy Agency estimates have put costs for construction, maintenance and operation far lower than traditional reactors. Proponents argue that they are a safer and more efficient model that would change the entire makeup of energy production in many regions. Though there is much promise in SMR technology, there is little implementation so far. The U.S. Department of Energy has supported the accelerated deployment of SMRs and has promoted the NuScale SMR model of a lightwater reactor. The Tennessee Valley Authority submitted the first permit application for a SMR to the U.S. Nuclear Regulatory Commission in May of 2016, but there are currently no SMRs in use in the United States. Nuclear energy has witnessed a general stagnation in the percent of electricity generation it produces since the late 1980s, and while SMRs could help add to this, there is considerable political difficulty in rolling out new reactors that may significantly retard their adoption. The United States also plays a leading role in trying to advance and commercialize carbon capture and storage, the only technology to capture 90% or higher of the emissions from existing fossil fuel infrastructure. The Kemper project – though struggling with major delays and cost overruns – aims to gasify low calorific value lignite.  The resultant  syngas is  burned to generate electricity with considerably lower amounts of CO2 and other emissions, and the electricity can then be captured and sold or stored. The technique - if it proves to be technologically and commercially viable - could provide a longer term climate friendly future for coal from Poland, South Africa, India and China. The United States has also made measurable improvements in energy efficiency, but gains have been slow so far, due to poor insulation and low efficiency in transportation in the United States.  Transportation’s low efficiency  is especially due to heavy reliance on single-rider transit and the low growth in public transit, trends that undo the benefits from significant improvements in corporate average fuel economy standards, particularly since 2010.

Accelerated transformation amidst policy uncertainties

The major trends identified in this article - revolutionary realignment in fossil fuel consumption patterns, rapid growth of renewables albeit from a low base, and potentially game-changing developments in energy technology - together point to the acceleration of the energy transition to a lower-carbon economy in the coming decade. The continued decline of coal looks certain, and oil consumption will likely stagnate or further decrease in light of stricter fuel economy standards and the spread of electric vehicles. The future of cleaner burning natural gas looks brighter, at least as long as it replaces coal, though significant uncertainties exist in the longer run, as many dispute the bridge fuel role for natural gas. Though the shifts of the last decade appear to be principally market-driven, public policies play a major role in the development and early deployment of new, disruptive technologies such as unconventional oil and gas or batteries. The professed goals in the United States intended national determined contributions (INDCs) in the United Nations Framework Convention on Climate Change (UNFCCC) process and particularly the long term decarbonization goals will also require more robust public policies to fast-track the energy transition. As the U.S. presidential and congressional elections approach, there are considerable uncertainties about the U.S. climate and energy policies post-November 2016. One can only speculate about the election outcomes and corresponding policy directions. A Democratic win in the 2016 elections may put more emphasis on supporting renewables through either a continued regulatory approach (along the lines of the Clean Power Plan) or - in case of Democratic control of both chambers or bipartisan support - legislative action (e.g., in the form of a carbon tax or a cap-and-trade system). While a Republican win may slow progress in reducing carbon emissions in the energy sector, technological and market trends will make it hard to cement a fossil-fuel based economy in the medium- and long-run.