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Prospects Are Dim For Climate Treaty Later This Year
Electricity Currents A survey of trends and insights in electricity restructuring
With So Much Cheap Gas, Who Needs Coal? Will unconventional gas supplies prove a lasting game changer? This analyst originally posed the question in August 2009. The issue has become even more relevant today, as many believe that the so-called unconventional gas could in fact be a game changer with significant energy and environmental implications. What is stunning is the speed and scale of change that has taken place over a relatively short span of time. As recently as a decade ago – merely yesterday in the energy infrastructure investment business – there were serious concerns about the gradually dwindling supplies of domestic natural gas in the U.S., which, like domestic oil, has been on a slow declining trajectory (see figure below). The only way out was to import increasing amounts of liquefied natural gas (LNG) from faraway places like Qatar, Nigeria, and Indonesia in direct competition with traditional LNG importers in Japan, Korea, and Europe. Prices for natural gas were high and expected to rise. That picture has changed rather dramatically in a relatively short span of time, with significant discoveries of seemingly abundant supplies of domestic unconventional gas, which comes in a number of flavors including shale
Continued on page 5
May 2010, Vol. 23, Issue 4
In Electricity Currents This Month: With So Much Cheap Gas, Who Needs Coal? . . . . . . . . . . . . . . . . Prospects Are Dim For Climate Treaty Later This Year . . . . . . . . . . . . The Stick Is Mightier Than the Carrot – But Only if You Dare Use It . Unanticipated Outcome? Wind’s Gains Are Proving To Be Natural Gas’ Loss. .
. . . . .1 . . . . .1 . . . . .2 . . . . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Prospects Are Dim For Climate Treaty Later This Year There is more bad news for those who were disappointed at the failure of the Copenhagen summit to reach a binding international treaty to address climate change. The prevailing belief, following a reassessment of why Copenhagen failed, suggests that – barring a miracle – not much can realistically be achieved in Mexico at the end of 2010. The reality is that climate change suffered a serious setback in Copenhagen, partly due to the UN’s ineffective process, which essentially gives a veto power to each country, no matter how small or insignificant. This allowed a handful of 1040-6190/$–see front matter
1
dissenting countries to sabotage an international agreement, no matter how flawed, inadequate, or imperfect it might have been. Moreover, public expectations in the runup to the event had been inflamed to a level that was simply unachievable – also contributing to the disillusion of those who wanted an ambitious and concrete outcome. More important, and unsurprisingly, the rapidly developing economies led by BASICs, Brazil, South Africa, India, and China, stuck together with the unequivocal message that current economic development and rising standards of living takes precedence over climate – a distant and abstract threat to today’s hungry and needy. This position was made to seem justified in view of what developing countries perceived as lack of adequate resolve by the developed countries, especially the U.S., whose position was weakened by the Senate’s refusal to even take up the climate bill seriously before Copenhagen. As with his unsuccessful bid to bring the next Olympic games to Chicago, President Obama wasted considerable political capital in pursuit of a doomed agenda in Copenhagen. In hindsight, many believe he would have been better off staying away, especially from the anticlimactic ending. Pushing climate legislation in the U.S. Senate, always an uphill battle, will be so much harder now. With the next major UN summit scheduled for December 2010 in Mexico only seven months away, the expectations for progress are modest to none. Speaking to The Financial Times in early March, Connie Hedegaard, Denmark’s environment minister and an active participant at Copenhagen, said she does not expect a new treaty this year, adding that the price of another failure, should diplomats push hard for a treaty, could be ‘‘too high.’’ & doi:/10.1016/j.tej.2010.04.009
The Stick Is Mightier Than the Carrot – But Only if You Dare Use It Utilities across America, as well as in a number of other countries, are investing billions installing a 2
1040-6190/$–see front matter
new generation of smart meters as an integral part of their smart grid modernization agenda. Smart meters offer a host of new and useful features including the ability to be read, turned on and off remotely, and to enable the introduction of real-time pricing (RTP) – not possible with the older meters still in use in 94 percent of U.S. homes. Pricing specialists have been waiting for the day they could introduce RTP to large segments of customers not only because they are cost-reflective, but also because higher prices during peak demand periods will encourage energy conservation and load shifting – with potentially big cost savings for both the utilities and consumers. Since a kWh consumed during a hot summer afternoon is more expensive than the same kWh consumed at midnight, RTP could be a godsend to utilities with needle-sharp summer peak loads, such as those in California. Countless experiments have empirically demonstrated that when given differentiated price signals, most consumers respond. In an experiment involving Pepco – it used to be called Potomac Electric Power Company when utilities had names people could actually recognize – the utility serving the greater Washington, DC, area, a group of consumers were placed on a variable pricing plan based on the wholesale price of electricity, which varied from 5 to 37 cents/kWh. Another group was placed on a critical peak pricing (CPP) rate, which offered a flat rate of 11 cents/kWh for all hours except certain hours on a handful of days during the year where rates could rise to 75 cents/ kWh. A final group was charged 11 cents for each kWh used and rewarded 75 cents for each unit saved. As reported in The Wall Street Journal in February, customers on CPP reduced their overall consumption 22 to 34 percent, the higher range attributed to consumers with programmable thermostats. The corresponding figures for those given rebates were 9–15 percent. The lesson from this, and countless other pilot studies, is that people are far more responsive to penalties – the threat of being charged 75 cents/kWh The Electricity Journal
With So Much Cheap Gas, Who Needs Coal? Will unconventional gas supplies prove a lasting game changer? This analyst originally posed the question in August 2009. The issue has become even more relevant today, as many believe that the so-called unconventional gas could in fact be a game changer with significant energy and environmental implications. What is stunning is the speed and scale of change that has taken place over a relatively short span of time. As recently as a decade ago – merely yesterday in the energy infrastructure investment business – there were serious concerns about the gradually dwindling supplies of domestic natural gas in the U.S., which, like domestic oil, has been on a slow declining trajectory (see figure below). The only way out was to import increasing amounts of liquefied natural gas (LNG) from faraway places like Qatar, Nigeria, and Indonesia in direct competition with traditional LNG importers in Japan, Korea, and Europe. Prices for natural gas were high and expected to rise. That picture has changed rather dramatically in a relatively short span of time, with significant discoveries of seemingly abundant supplies of domestic unconventional gas, which comes in a number of flavors including shale
Continued on page 5
May 2010, Vol. 23, Issue 4
In Electricity Currents This Month: With So Much Cheap Gas, Who Needs Coal? . . . . . . . . . . . . . . . . Prospects Are Dim For Climate Treaty Later This Year . . . . . . . . . . . . The Stick Is Mightier Than the Carrot – But Only if You Dare Use It . Unanticipated Outcome? Wind’s Gains Are Proving To Be Natural Gas’ Loss. .
. . . . .1 . . . . .1 . . . . .2 . . . . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Prospects Are Dim For Climate Treaty Later This Year There is more bad news for those who were disappointed at the failure of the Copenhagen summit to reach a binding international treaty to address climate change. The prevailing belief, following a reassessment of why Copenhagen failed, suggests that – barring a miracle – not much can realistically be achieved in Mexico at the end of 2010. The reality is that climate change suffered a serious setback in Copenhagen, partly due to the UN’s ineffective process, which essentially gives a veto power to each country, no matter how small or insignificant. This allowed a handful of 1040-6190/$–see front matter
1
dissenting countries to sabotage an international agreement, no matter how flawed, inadequate, or imperfect it might have been. Moreover, public expectations in the runup to the event had been inflamed to a level that was simply unachievable – also contributing to the disillusion of those who wanted an ambitious and concrete outcome. More important, and unsurprisingly, the rapidly developing economies led by BASICs, Brazil, South Africa, India, and China, stuck together with the unequivocal message that current economic development and rising standards of living takes precedence over climate – a distant and abstract threat to today’s hungry and needy. This position was made to seem justified in view of what developing countries perceived as lack of adequate resolve by the developed countries, especially the U.S., whose position was weakened by the Senate’s refusal to even take up the climate bill seriously before Copenhagen. As with his unsuccessful bid to bring the next Olympic games to Chicago, President Obama wasted considerable political capital in pursuit of a doomed agenda in Copenhagen. In hindsight, many believe he would have been better off staying away, especially from the anticlimactic ending. Pushing climate legislation in the U.S. Senate, always an uphill battle, will be so much harder now. With the next major UN summit scheduled for December 2010 in Mexico only seven months away, the expectations for progress are modest to none. Speaking to The Financial Times in early March, Connie Hedegaard, Denmark’s environment minister and an active participant at Copenhagen, said she does not expect a new treaty this year, adding that the price of another failure, should diplomats push hard for a treaty, could be ‘‘too high.’’ & doi:/10.1016/j.tej.2010.04.009
The Stick Is Mightier Than the Carrot – But Only if You Dare Use It Utilities across America, as well as in a number of other countries, are investing billions installing a 2
1040-6190/$–see front matter
new generation of smart meters as an integral part of their smart grid modernization agenda. Smart meters offer a host of new and useful features including the ability to be read, turned on and off remotely, and to enable the introduction of real-time pricing (RTP) – not possible with the older meters still in use in 94 percent of U.S. homes. Pricing specialists have been waiting for the day they could introduce RTP to large segments of customers not only because they are cost-reflective, but also because higher prices during peak demand periods will encourage energy conservation and load shifting – with potentially big cost savings for both the utilities and consumers. Since a kWh consumed during a hot summer afternoon is more expensive than the same kWh consumed at midnight, RTP could be a godsend to utilities with needle-sharp summer peak loads, such as those in California. Countless experiments have empirically demonstrated that when given differentiated price signals, most consumers respond. In an experiment involving Pepco – it used to be called Potomac Electric Power Company when utilities had names people could actually recognize – the utility serving the greater Washington, DC, area, a group of consumers were placed on a variable pricing plan based on the wholesale price of electricity, which varied from 5 to 37 cents/kWh. Another group was placed on a critical peak pricing (CPP) rate, which offered a flat rate of 11 cents/kWh for all hours except certain hours on a handful of days during the year where rates could rise to 75 cents/ kWh. A final group was charged 11 cents for each kWh used and rewarded 75 cents for each unit saved. As reported in The Wall Street Journal in February, customers on CPP reduced their overall consumption 22 to 34 percent, the higher range attributed to consumers with programmable thermostats. The corresponding figures for those given rebates were 9–15 percent. The lesson from this, and countless other pilot studies, is that people are far more responsive to penalties – the threat of being charged 75 cents/kWh The Electricity Journal