Report: climate change poses risks to US energy sector

Climate change poses significant risks to U.S. energy infrastructure, and the reliability and cost of the services it enables, according to a report released yesterday by the U.S. Department of Energy.

The report - U.S. Energy Sector Vulnerabilities to Climate Change and Extreme Weather Report (4.2MB PDF) was developed as part of the Obama Administration’s efforts to support national climate change adaptation planning and to advance the U.S. Department of Energy’s goal of promoting energy security. These efforts are embodied by the Interagency Climate Change Adaptation Task Force and Strategic Sustainability Planning process established under Executive Order 13514.

The report is predicated on the findings that the U.S. climate is changing, and that these changes impact energy resources and infrastructure. As the report states, "Climatic conditions are already affecting energy production and delivery in the United States, causing supply disruptions of varying lengths and magnitude and affecting infrastructure and operations dependent upon energy supply." The report provides over 30 recent examples of energy infrastructure adversely impacted by climate change-related events such as power plant outages due to high temperatures or low water availability, storm damage to transmission lines, oil wells, pipelines and generators, and flooding-related disruption of fuel transportation systems.

Building on these findings, the report identifies a broad set of risks posed by climate trends, including increasing temperatures, decreasing water availability, and increasing storms, sea level rise, and flooding, as well as the current and potential future impacts of these climate trends on the U.S. energy sector. According to the report, each of these trends will independently, and in some cases in combination, affect the ability of the United States to produce and transmit electricity from fossil, nuclear, and existing and emerging renewable energy sources. These changes are also projected to affect the nation’s demand for energy and its ability to access, produce, and distribute oil and natural gas.

In particular, significant risks identified include:

• Thermoelectric power generation facilities are at risk from decreasing water availability and increasing ambient air and water temperatures, which reduce the efficiency of cooling, increase the likelihood of exceeding water thermal intake or effluent limits that protect local ecology, and increase the risk of partial or full shutdowns of generation facilities
• Energy infrastructure located along the coast is at risk from sea level rise, increasing intensity of storms, and higher storm surge and flooding, potentially disrupting oil and gas production, refining, and distribution, as well as electricity generation and distribution
• Oil and gas production, including unconventional oil and gas production (which constitutes an expanding share of the nation’s energy supply) is vulnerable to decreasing water availability given the volumes of water required for enhanced oil recovery, hydraulic fracturing, and refining
• Renewable energy resources, particularly hydropower, bioenergy, and concentrating solar power can be affected by changing precipitation patterns, increasing frequency and intensity of droughts, and increasing temperatures
• Electricity transmission and distribution systems carry less current and operate less efficiently when ambient air temperatures are higher, and they may face increasing risks of physical damage from more intense and frequent storm events or wildfires
• Fuel transport by rail and barge is susceptible to increased interruption and delay during more frequent periods of drought and flooding that affect water levels in rivers and ports
• Onshore oil and gas operations in Arctic Alaska are vulnerable to thawing permafrost, which may cause damage to existing infrastructure and restrict seasonal access, while offshore operations could benefit from a longer sea ice-free season
• Increasing temperatures will likely increase electricity demand for cooling and decrease fuel oil and natural gas demand for heating

Looking on the brighter side, the report notes that while climate change will, on balance, create challenges and costs for the energy sector, there are potential benefits to the energy sector as well. Examples include reduced average heating loads during the winter in parts of the United States, such as New England, and the opening of new regions to offshore oil and gas exploration due to shrinking sea ice cover in the Arctic. The report also covers adaptation actions underway, as well as other major opportunities to prepare for climate change through adaptation. Nevertheless, on balance, the report finds that the magnitude of the challenge posed by climate change on an aging and already stressed U.S. energy system could outpace current adaptation efforts, unless a more comprehensive and accelerated approach is adopted. Will the U.S. follow that path? What measures will it include? Will it make a difference?

Tackling New England natural gas pipeline constraints

Natural gas offers consumers a relatively low-cost energy source with fewer environmental impacts than coal or oil.  Throughout most of the United States, natural gas is displacing other fossil fuels in electric power generation, heating, and transportation.  But as a recent federal report found, inadequate pipeline infrastructure into New England is keeping prices for natural gas and electricity in the Northeast higher than in other regions.

In its 2012 State of the Markets report, the Federal Energy Regulatory Commission described how the availability of low-cost natural gas drove electricity prices downward last year.  However, as power plants, businesses, and homes convert to natural gas for their energy needs, growing competition between heating and electric load for a limited natural gas supply drives prices of both gas and electricity upward during the winter season.

New England's demand for natural gas peaks in the winter, due primarily to heating demand from the residential and commercial sectors.  As electric generators have increasingly turned to natural gas as the fuel of choice, total demand for gas has increased correspondingly.  In recent years, to meet peak demands for natural gas, New England has relied on imports of liquefied natural gas (LNG), as well as natural gas produced from Canada's offshore Sable Island field.  But last year, low domestic natural gas prices led to low imports of LNG and Canadian natural gas.  LNG imports hit their lowest level since 2002.  Sendout from the with Canaport LNG facility in St. John, New Brunswick, was drastically reduced, as LNG shippers chose to send their cargoes to higher-priced markets in Europe and Asia.  As FERC found: 

Lack of LNG and natural gas from Canada exacerbated pipeline constraints into New England from the southern supply corridor, including Marcellus Shale natural gas production, as New England relied more heavily on these pipelines for supply. This led to concerns that extreme cold weather could result in some service interruptions, particularly to power generators that generally rely on interruptible pipeline capacity to meet their fuel needs.

In particular, during cold snaps, demand from power plants coincides with peak residential and commercial natural gas demand.  Despite an unusually warm winter that suppressed residential and commercial load during the first quarter of 2012, demand reached pipeline capacity for part of the winter.  As a result, last winter New England consumers paid over a billion dollars more for natural gas and electricity than they would have if adequate pipeline capacity existed.

Unless LNG imports once again become economic, or domestic pipeline constraints are relieved, this situation is likely to repeat itself in New England next winter.  As consumers find wider uses for natural gas -- from converting vehicles and the transportation sector to compressed natural gas, to increased access to natural gas for home heating -- the number of days when demand reaches pipeline limits will likely grow.  This reality has led states like Maine to stimulate the development of new pipeline capacity by authorizing its Public Utilities Commission to enter into contracts for natural gas capacity.  While it may be several years until the constraints can be relieved, other states are likely to follow Maine in addressing the problem.

FERC reports on 2012 electricity, natural gas markets

The Federal Energy Regulatory Commission has released its 2012 State of the Markets Report.   The 77-page document reviews developments and trends in U.S. electricity and natural gas markets.  Trends highlighted in this year's report include the replacement of coal for electric power generation with natural gas, decreased prices for natural gas and electricity, and reduced demand for electricity.

The report's findings include:

• Record natural gas pricing led to lower natural gas prices.  In 2012, driven by the increase in shale gas production, domestic production of natural gas reached a new record.  As a result, natural gas prices reached 10-year lows throughout most the nation.  For example, the spot price at Louisiana’s Henry Hub averaged $2.74/MMBtu for 2012, a 31 percent decrease from 2011.


• Electric generators relied on natural gas instead of coal.  As a result of the low natural gas prices, combined with tighter environmental regulations, natural gas's share of electricity production rose to 31 percent in 2012.  Meanwhile coal-fired power generation fell to its lowest level in 30 years -- just 39 percent of total generation.


• Electricity demand fell.  The nation consumed 1.7 percent less electricity in 2012 than 2011.  This reduction amounted to 62.9 TWh in 2012.  The report attributes the decrease in demand to three primary factors: a decrease in residential demand, lack of demand growth in the commercial and industrial sectors, and increased energy efficiency.


• Electricity prices declined due to lower-cost natural gas and reduced demand.  Because natural gas typically represents the marginal fuel in electric generation, reducing the price of natural gas usually reduces the wholesale price in electricity markets.  Generally speaking, Eastern prices were between 1 percent and 31 percent lower than in 2011 while Western prices fell between 6 percent and 23 percent.  Likewise, reductions in the demand for electricity due to a relatively warm winter, economic trends and increased energy efficiency contributed to lower electricity prices in 2012.

UK opens world's largest offshore wind farm

The United Kingdom has officially opened the London Array, the world's largest offshore wind project. 

Built by a consortium of developers including DONG Energy, utility E.ON, and Masdar, the $2.3 billion project consists of 175 Siemens 3.6-megawatt turbines with a nameplate capacity of 630 megawatts. Each turbine sports three blades with an overall diameter of 117 meters.  The project is located about 20 kilometers off London.

The project is owned by its lead developers.  DONG Energy, Denmark's largest energy company, owns 50%.  E.ON, parent of the world's largest investor-owned electric utility, owns 30%.  Masdar, Abu Dhabi's renewable energy company, has a 20% stake in the project.

The addition of the London Array brings the United Kingdom to about 3.3 gigawatts of installed offshore wind capacity. 

Obama's climate action plan

Today President Obama unveiled his climate change action plan.  The outline of his plan was set forth in a 21-page written document, couldpled with a speech delivered at Georgetown University and broadcast online at whitehouse.gov/live, presents his vision for a unilateral approach to controlling carbon emissions and mitigating the effects of climate change.

The Washington Monument.

President Obama's plan has three main focuses.  First, he proposed measures to reduce the emission of carbon dioxide and other greenhouse gases from domestic industry.  These measures include strict standards for carbon emissions from new and existing power plants, promoting investment in renewable energy, and improving energy efficiency in homes, businesses, and industry.  The plan calls for accelerated permitting and development of renewable electricity generation projects on federal lands ranging from Department of Defense properties to lands managed by the Department of the Interior.

Second, he proposed measures to prepare the country for the effects of climate change.  These measures include infrastructure improvements, such as preparing buildings and communities for sea level rise and more intense storms.  These measures are also designed to protect the economy and natural resources, for example conserving land and water resources, preparing for floods and drought, and managing agricultural sustainability.

Third, he called for the U.S. to lead international efforts to address global climate change.  Measures in this category include expanding international use of clean energy and energy efficiency technologies, negotiating global free trade in environmental services and goods, and strengthening global resilience to climate change.

While some of the measures are likely to find widespread support, others such as the power plant emissions standards are controversial.  The plan states that President Obama will issue a Presidential Memorandum directing the U.S. Environmental Protection Agency to "work expeditiously to complete carbon pollution standards for both new and existing power plants.”  The standards, which may be put into place by mid 2015, are likely to hit coal-fired power plants hardest. If they are imposed, the effect may be to force power plants with marginal economics to close or convert to other fuels such as natural gas.  Some fear the impact of new EPA regulations on the cost of electricity, while some proponents of climate action support efforts to price the cost of carbon emissions into electricity produced from coal to encourage a switch to natural gas and other lower-carbon fuels.  Indeed, the plan calls for promoting natural gas as a “bridge fuel” to help domestic and international markets move away from coal and oil, calling for the U.S. to "promote fuel-switching from coal to gas for electricity production and encourage the development of a global market for gas."

Notably, some elements that observers had speculated might be included in the plan were omitted.  For example, the plan does not call for taxing carbon emissions or imposing a federal cap-and-trade regime for carbon.  Likewise, the plan outline does not conclusively address current issues such as whether or not the Keystone XL pipeline or coal export terminals will be approved.  Rather, the outline is relatively bullish about the opportunities to help foreign nations develop projects featuring natural gas, nuclear power, clean coal, and energy efficiency without mentioning the U.S.'s role as importer or exporter.  That said, in his oral remarks, President Obama said that Keystone XL can only be approved if it is found to be in the national interest, including whether or not it exacerbates climate change-related problems.

All eyes are watching whether President Obama is able to implement his plan effectively.  In the coming months, we can expect the federal administration to roll out significant new policies outlined in the plan.  Whether the policies can be put into action, their impacts, and whether they are able to achieve his goals, remains to be seen.

Obama to unveil climate change plan

President Obama is expected to unveil his second-term plan to address climate change tomorrow.  In a video released this past weekend, President Obama announced that he will speak at Georgetown University on Tuesday to present his plan "for the steps we need to take to prepare our country for the impacts of climate change and lead the global effort to fight it."  While the details of his plan are not yet public, its scope and specifics may have a significant impact on both the environment and the economy.

The U.S. House of Representatives.

This is not the first time President Obama has spoken about climate change.  In his second inaugural address, he vowed to "respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations."  Similarly, in his 2013 State of the Union address, he asked Congress to develop a market-based solution, but vowed to take executive action if necessary.

Potential elements of his plan range in scope and impact.  President Obama has already issued an executive order promoting industrial energy efficiency; increasing support for energy efficiency is relatively likely to garner widespread support.  Potentially more impactful -- both in terms of potential to reduce carbon emissions and to increase costs -- are proposals to revise the rules for carbon emissions from existing power plants.  Some Republican Congressional leaders, like House Speaker John Boehner, have already called the climate change plans "absolutely crazy" and certain to increase the cost of energy, driving manufacturing and jobs overseas.

Tomorrow's speech will give us a better sense of Obama's policy direction on carbon emissions and climate change.  It is certain to be followed up a significant dialogue about both the importance of issue and the balancing of costs and benefits that is fundamental to policymaking.  Whether Congress acts, the president uses his executive powers to change policy, or both, remains to be seen.

FERC report shows investment in natural gas

This week the Federal Energy Regulatory Commission issued its monthly energy infrastructure update covering May 2013.  The report details highlights in expansions of energy assets, ranging from natural gas pipelines to electric generation and transmission facilities.  It provides a monthly snapshot of recent activity, and can be used to spot trends in domestic energy development.  The current report illustrates increased investment in natural gas-related infrastructure, ranging from proposed new liquefied natural gas export terminals to newly installed natural gas-fired power plants.

The iconic U.S Capitol dome, where policies are made that shape energy investment.

Natural gas exports poised for growth.  Last month two facilities to liquefy natural gas for export advanced through the FERC regulatory process:

• Jordan Cove Energy requested authorization to construct and operate four liquefaction trains and storage facilities at a proposed export terminal in Coos Bay, Oregon.  If authorized and built, the project could export up to 900 MMcf per day of liquefied natural gas (LNG).  This gas would likely be destined for Asian markets.
• Golden Pass Products proposed a larger project in Texas.  Along with Golden Pass Pipeline, Golden Pass Products commenced the FERC prefiling process to construct and operate a 2,100 MMcf per day liquefaction facility for export at an existing import terminal located in Sabine Pass, Texas.  The Golden Pass project also includes proposed modification of an existing pipeline system to enable 2,500 MMcf per day of bidirectional capacity to the proposed export terminal.

These projects demonstrate increased interest in exporting natural gas to overseas markets.  The boom in domestic shale gas production has led to low natural gas prices in the U.S.  Domestic pricing is roughly one-third of the price that exporters can get by sending LNG to Europe or Asia.  Whether and to what extent the U.S. will allow exports remains to be seen, but in the interim, developers are scrambling to secure permits for export. 

New electric generation, mostly fueled by natural gas.  Last month a total of 33 new electric generation units came online.  Nearly three-quarters of the newly installed capacity is fueled by natural gas, adding 2,529 MW of new natural gas-fired electric generating capacity.  The new gas projects vary widely in scope:

• The largest, Mitsubishi Corporation’s 850 MW CPV Sentinel Energy Expansion in Riverside County, consists of eight 106.25 MW units.  Mitsubishi’s generation is sold to Southern California Edison under a long-term contract.
• In the middle, Procter & Gamble Company developed a 64 MW natural gas fired project to produce power for its paper products manufacturing facility in Wyoming County, Pennsylvania.
• At the opposite end of the scale, two landfill gas-fired projects came online in New York.  Wehran Energy Corp.’s 4.5 MW Brookhaven facility consists of three 1.5 MW Caterpillar Inc. generators.  The Brookhaven project was also joined by a 1.6 MW expansion of Waste Management Inc.’s Oneida-Herkimer project.

These projects illustrate the diversity of new natural gas fired projects being developed this spring.  The abundance of low-cost natural gas drives interest in the utility scale gas projects, while a desire to capture landfill-produced methane and put it to use as biogas supports the smaller projects.  As a result, natural gas’s share of total installed operating generating capacity grew slightly to 42.56%.  Despite a resurgence of coal as a fuel for electric generation, coal remains in second place in the installed capacity race, representing 28.9% of total U.S. installed capacity.

While each monthly energy infrastructure update represents only one data point, in the aggregate, they paint a picture of the direction of U.S. energy infrastructure development.  Natural gas is squarely in the center of this picture.  Based on consensus projections that natural gaswill remain the most cost effective fuel for decades to come, increased expansion of natural related infrastructure is likely to continue for some time.