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U.S. President Donald Trump appears before workers at Cameron LNG (Liquid Natural Gas) Export Facility in Hackberry, Louisiana, U.S., May 14, 2019. REUTERS/Leah Millis

U.S. Natural Gas: Once Full of Promise, Now in Retreat

by Guest Blogger for Energy Realpolitik July 2, 2020

This is a guest post by Gabriela Hasaj, Research Associate to the Military Fellowship Program at the Council on Foreign Relations. Tessa Schreiber, intern for Energy and U.S. Foreign Policy at the Council on Foreign Relations, contributed to this blog post. Read More

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Europe

Renewable Energy, Russian Natural Gas and the Lesson of January 2006

The problem with the “energy weapon” is that it is notorious for backfiring. That fact couldn’t have rung truer than this week when it was reported that Germany, a major natural gas importer in Europe, was going to co-finance the construction of a $576 million liquefied natural gas (LNG) receiving terminal in northern Germany. The announcement, billed as a “strategic move,” is the culmination of years of European diversification away from the grip Russia had on Europe’s natural gas market when it briefly cut off supplies to Ukraine in the winter of 2006. It is important to note that back in 2006, commentators were quick to point out that the dispute between Ukraine and Russia did not significantly disrupt Europe’s access to Russian gas and was settled quickly. But the die was cast in the minds of policy makers: Russia held too much leverage. European governments, utilities and private industry responded dramatically. The continent made a crash campaign to build LNG receiving terminals, to promote freer trade in cross-border electricity and natural gas trade, to pass anti-monopoly legislation aimed at Russia’s state firm Gazprom, and to bulk up on renewable energy. More than a decade later, as the U.S. industry prepares a massive wave of LNG exports, Gazprom is sending out the message that its main goal moving forward is to preserve its market share, even if it means sharply discounting its prices. The change in strategy comes in the wake of internal criticism at the highest levels inside the Kremlin that Gazprom suffered market setbacks between 2009 and 2013. After growing steadily since the early 2000s, Gazprom’s market share in European gas markets fell to 23 percent in 2009 in the aftermath of the Ukraine crisis. Market problems continued through 2013 when the state firm started to implement a new price discounting model. That market-oriented response included partial retroactive payments back to customers to compensate them for the gap between natural gas spot market prices and higher oil-linked prices contained in Gazprom’s long-standing contracts. Contract revision demands from European buyers after 2006 has resulted in the volume of spot market and oil and gas hybrid-indexed pricing for European gas purchases to hit over 70 percent of sales, up from less than 20 percent in 2008. In response to these changes in market conditions, Gazprom also postponed indefinitely its Shtokman LNG export project. The origins of Gazprom’s shift were chronicled recently at a presentation at Columbia University’s Center for Global Energy Policy, where Russian energy scholar Tatiana Mitrova told a U.S. audience that the flexibility of Russia’s new pricing and sales regime is a direct result of rising renewable energy installations in Europe, combined with the emerging threat of U.S. LNG exports. The latter prompted the Kremlin to diversify away from reliance on Gazprom for exports with the approval of Novatek’s initiative to develop Yamal LNG in 2013. The project is considered a successful one inside Russia. Gazprom contracts totaling roughly 16 billion cubic meters (bcm) are due to expire in the next few years. Poland, which built an LNG receiving terminal in 2015 with help from Qatar, has already announced it will not be renewing its gas dealings with Russia, likely in favor of U.S. LNG. Lithuania also has a new LNG receiving terminal. It remains to be seen to what extent other European countries will follow suit. Germany’s declaration that it too will expand access to U.S. LNG via a new import terminal is telling, since Germany’s leaders had previously staked out a strident pro-Russian gas position amid U.S. objections to the Nordstream 2 gas pipeline project from Russia to Germany. Europe’s LNG import capacity stands at 20 billion cubic feet per day (bcf/d) and LNG imports averaged 5.1 bcf/d in 2017. Russian pipeline gas represented 35 percent of total European gas use in 2017, slightly higher than the level Russia’s Gazprom says it seeks to maintain. There is much debate about the price point at which U.S. LNG can compete with Russian gas in Europe, and the numbers vary in large measure given different assumptions about how much of the cost of capital will be recovered for U.S. LNG facility developers and what will constitute the value of the U.S. natural gas to be shipped. If one assumes the $2.25 export facilities fee (or higher) that is embedded into early U.S. LNG export contracts, Henry Hub natural gas spot prices, and ongoing transport costs, U.S. LNG needs a $6.00 to $7.00 million British thermal units (mmbtu) price to be competitive to Europe. This past summer, conditions were positive for U.S. shipments; at liquefaction and shipping costs of around $3.00 to $4.00 per mmbtu and spot prices for U.S. natural gas averaging just under $3.00, U.S. LNG could make landfall in Europe at under $7.00 per mmbtu, in line with comparable prices for other supplies. The spot price for LNG in Southern Europe traded between $7.70 mmbtu and $8 mmbtu this summer, a low seasonal demand time. Southern European prices are currently averaging around $9.50 mmbtu as winter approaches. If global natural gas markets got more price competitive over time, some integrated U.S. players are in a position to compete effectively with Gazprom. That’s because they would be able to lower or waive altogether facilities fees and will have access to gas that could be available on a zero cost, or even negative cost, basis since there will be plenty of stranded gas that is an associated waste product of valuable oil and natural gas liquids production and likely to be flared for no value if markets cannot be developed. On that basis, U.S. LNG can land into Europe at below $2.00 to $3.00 mmbtu. Mitrova estimates Gazprom’s hard Siberian production costs are $0.90 and then it has a $1.20 transport tariff cost for pipeline operations between western Siberia and the Russian border. An additional export duty is imposed by the central government of 30 percent of the sales price. This latter charge could presumably be lowered to allow Gazprom to be more competitive with U.S. supplies. In other words, if a global glut of natural gas were to develop in the coming years as some predict, the price point of U.S.-Russian gas competition in Europe could produce dramatically lower prices than today. The outlines of how U.S.-Russian energy dimensions might spill over into international relations are already apparent as European countries, including now apparently Germany, reassess how to manage their overall energy import mix. Some countries may opt to investigate higher use of renewable energy to politely bow out of the geopolitics of natural gas imports. Ironically, that might leave both U.S. and Russian natural gas sellers to duke it out with China, which is positioning itself as an exporter of solar panels and battery storage to Europe. China is also investing in European nuclear plants. Ira Joseph, who leads S&P Global’s European gas and power energy service, told the Columbia University Center for Global Energy Policy forum that the costs of battery storage could become a determining factor in European natural gas prices down the road. That development, if it materializes, was not anticipated in Moscow when it brandished the energy weapon so briefly in 2006. It highlights that energy security concerns can be a strong motivator for substitution of fuels.

Blog Post by Amy M. Jaffe October 26, 2018 Energy Realpolitik

Saudi Arabia

Déjà vu, Saudi Style

The longer I write about oil, the more I have become convinced that names and faces can change but the basic storylines repeat themselves. For students of history, it might be tempting to say that this is because each generation of new blood comes without the experiences of the past. But perhaps it is just the nature of oil. The inexorable boom and bust pattern of the oil market follows a geopolitical cycle that has proven next to impossible to break. Geopolitical events of the past few weeks look poised to show both the U.S. president and Middle Eastern leaders how difficult it is, even with so many structural changes in energy markets, to avoid debacles of the past. Famous TV anchor and Saudi media figure Turki Aldarkhil wrote on government-owned news service AlArabiya, “If U.S. sanctions are imposed on Saudi Arabia, we will be facing an economic disaster that would rock the entire world.” The commentary continued, “Riyadh is the capital of its oil, and touching this would affect oil production before any other vital commodity. It would lead to Saudi Arabia’s failure to commit to producing 7.5 million barrels. If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure.” He continued, “An oil barrel may be priced in a different currency, Chinese yuan, perhaps, instead of the dollar. And oil is the most important commodity traded by the dollar today.” In larger print, a summary statement warned, “There are simple procedures, that are part of over 30 others, that Riyadh will implement directly, without flinching an eye if sanctions are imposed.” No doubt, rising tensions between the United States and Saudi Arabia surrounding the circumstances of missing journalist Jamal Khashoggi has become an oil matter of rising importance. The escalating incident has laid raw an uncomfortable fact: serving as the central bank of oil requires a steady hand. Global oil markets were already tense upon speculation that the kingdom’s spare capacity, the amount of extra oil production that can be brought online quickly within 30 days and maintained for 90 days, was lower than previously thought. For years, Saudi Arabia has maintained it has the ability to raise production to 12 million barrels a day (b/d) and stay at that level. But analysts have recently said the kingdom may be currently producing almost at its maximum, and would need to make investments to be able to raise production further. Energy Intelligence Group reported earlier this month that “producing beyond 11 million b/d will take significant drilling and require more rigs.” The oil newsletter also reports that the kingdom will be able to add more oil to markets once the repaired Manifa field can come back on line in January 2019. Its expansion at the Khurais field is due to add 300,000 b/d by mid-2019. The Saudi oil minister has stated production is currently at 10.7 million b/d and sources report the kingdom has also sold oil from storage in September and October. Prior to the new U.S.-Saudi tensions, U.S. President Donald Trump had repeatedly expressed frustration over Twitter regarding Saudi Arabia’s wavering hand on global oil markets. Twice in recent months, the kingdom’s statements of intended closer oil collaboration with Russia to support oil prices have been met with marked public displeasure from the White House, prompting the Saudi oil minister to reverse course at recent gatherings of oil producers in a sign that Riyadh viewed its long standing relationship with the United States more critical than its newer ties to Moscow. But in an example of how difficult oil diplomacy can be, oil prices continued to rise on fears that any new supply disruptions could not be physically met by either increases in supply from Saudi Arabia (based on capacity constraints) or from the United States whose production increases are temporarily stalled by pipeline bottlenecks. With oil as the backdrop to new additional strains in the U.S.-Saudi relationship over other matters, President Trump told supporters in a highly personal reference at a rally last week, “King, we’re protecting you. You might not be there for two weeks without us. You have to pay for your military.” The escalating rhetoric between Saudi Arabia and the United States is bound to harken back to memories of past colossal oil debacles of 1973 or 1979, for those old enough to recall those turbulent times. My book with Rice University econometrician Mahmoud El-Gamal has a chart on page 35 in chapter 2 that might give solace to U.S. policy makers. It shows how U.S. real per capita gross domestic product recovered quickly in the 1980s while that of Saudi Arabia collapsed and did not start recovering until the mid-2000s. But there is another lesson in my book as well. National oil companies (NOCs) that face a geopolitical collapse take years, if not decades, to recover, if they recover at all. Today, there are many NOCs at risk simultaneously, whether from war, international sanctions, financially destabilizing policies of populist leaders, or via anti-corruption campaigns that have left some important NOCs rudderless. That situation has lowered the resilience of oil markets, even with the positive role of U.S. oil and gas exports and emerging oil-saving digital technologies. The reverberations would be large if an erratic U.S.-Saudi relationship or any internal Saudi domestic political or economic issues were to damage the future operational efficiency of state oil firm Saudi Aramco. That said, the United States has shown on many occasions that it has many other values that supersede oil, including international norms of behavior, free democratic elections, and freedom of speech. U.S. sanctions against Russian metals firm Rusal and its officers will be one such case. Those sanctions were imposed by the Trump administration despite a large impact on global aluminum markets and Russia’s important role in oil markets. In a prior Republican administration, justice for the families of victims of Pan Am flight 103 took priority over oil holdings in Libya. Generally speaking, history has judged taking a stance on democratic principles in precedence over oil positively, even when outcomes are less than positive in the immediate aftermath. Virtually no American historian looks back on 1973 and suggests the United States should have backed down on its foreign policy to avoid an oil embargo. More disagreement exists on whether U.S. support for the Shah of Iran’s top down modernization program, implemented via massive repression across Iranian society, was smart or misguided. Active U.S. support for the Shah’s nuclear power aspirations and its Bushehr nuclear plant still haunts U.S. national interests four decades later. Much is at stake in the current escalating diplomatic crisis between Saudi Arabia and its long-time ally and backer, the United States. So far, oil traders appear to be assuming cooler heads will prevail. History would suggest that this sentiment might be mistaken. Middle East conflicts, once begun, tend to spiral towards disaster, regardless of the hard work of well-meaning diplomacy. Let’s hope this one proves to be the exception.

Blog Post by Amy M. Jaffe October 15, 2018 Energy Realpolitik

Energy and Climate Policy

The Trump Affordable Clean Energy Policy: Deciphering Emissions Math

This post is co-written by Daniel Scheitrum, an assistant professor at the University of Arizona’s Department of Agricultural and Resource Economics. In the U.S. Environmental Protection Agency document summarizing the newly proposed Affordable Clean Energy rule (ACE), the notice correctly points out in the background section of the executive summary that carbon dioxide emissions in the U.S. power sector have steadily declined in recent years “due to a variety of power industry trends, which are expected to continue.” The EPA document specifically mentions an expectation that the price of natural gas will remain low and solar capacity will continue to grow. It notes that some power plant generators have announced plans to change their generation mix “away from coal-fired generation towards natural gas fired generation, renewables and more deployment of energy efficiency measures” and cites the U.S. Energy Information Administration’s (EIA)’s 2018 Annual Energy Outlook, “the cumulative effect of increased coal plant retirements, lower natural gas prices and lower electricity demand in the AEO2018 reference case is a reduction in the projected CO2 emissions from electric generators even without [implementation of] the [CPP].” These same market trends have been noted by independent experts who also contend that the ACE is unlikely to change the trajectory for U.S. coal. S&P Global Market Intelligence reported last week that it saw no evidence that electric and municipal utilities were going to reevaluate plans to shut down coal generation as a result of the shift to the new ACE plan. S&P Global’s analysis forecasts that 23,700 Megawatts (MW) of coal-fired capacity is scheduled to be retired between 2018 and 2032, including thirty-six coal units expected to shut down prior to 2020. Some major utilities have already publicly confirmed retirement plans will continue unchanged. For example, AEP and Dominion Energy have announced that they will not adjust plans. Dominion still plans to retire its Yorktown coal units while Duke Energy will retire coal at Asheville, North Carolina and bring on natural gas-generation in the same location. Duke also has plans to retire plants in Gaston County, North Carolina and Citrus County, Florida in a business decision the company says was not related to the CPP. Notably, First Energy Corporation has said the new proposed ACE will not change the planned retirement or transfer of the 1,300 MW Pleasants coal plant in West Virginia. FirstEnergy Solutions announced it plans to shut down four coal fired power plants, including three in Ohio, by 2022. Colorado’s Public Utility commission also gave preliminary approval this week for Xcel Energy to close 660 MW of coal fired generation and replace it with renewable energy plus battery storage. The utility says the plan will save ratepayers $213 million. While there seems to be a lot of agreement on these basic trends, the numbers on anticipated emissions reductions from the U.S. electricity sector between now and 2035 vary considerably. We take a closer look at the differences and offer some background. The Clean Power Plan, proposed by the Obama administration in 2014, prescribed that each state would meet specific standards for carbon dioxide emissions based on their individual energy consumption. States were free to determine how to achieve the reductions through a state action plan to be approved by EPA. The plan was challenged in court by twenty-seven states. At issue, among other objections, was the plan’s broad scope covering actions that went beyond regulating steps to be taken at the individual plants themselves. The new proposed ACE rule limits regulation to plant-specific compliance to performance standards. Estimates for the emission reductions that will come via the ACE diverge from other forecasts for the U.S. power sector and are lower than reductions projected for the Clean Power Plan. To delve into the differences, we start by pointing out that estimates from 2015 regarding the CPP’s expected effect on emissions are considered out of date. That’s because so much change in fuel sources for U.S. generation has already taken place in the power sector that emissions reductions have gone beyond estimates for the current time made four years earlier. There are even notable differences between the EIA’s AEO 2017 and AEO 2018 estimates which makes sense since market driven changes in the sector are happening so rapidly. One important input variable producing differences in analysis for 2025 to 2035 is assumptions about future U.S. domestic natural gas prices. The EIA reference case assumes natural gas prices of $3.40-$5.00 per million Btu (mmBtu) while its “high resource” case projects natural gas prices in the range of $2.90-$3.30/mmBtu. We believe the high resource case estimate for U.S. natural gas prices is most likely given that prices have averaged $3.15/mmBtu over the past five years. Futures prices out to the year 2025 range from $2.91/mmBtu at the end of 2018 to $2.70 in summer 2025 and while they are not predictors per se, they reflect the amalgamation of current bets by natural gas traders. Barclays raised its natural gas forecast for fourth quarter 2018 to $2.83 mmBtu, up from $2.58 mmBtu, noting that injections of natural gas to storage this year have been the lowest in almost a decade. Cheniere’s new liquefaction trains at Corpus Christi, Texas and Sabine Pass are also expected to come on line soon ahead of schedule, originally scheduled for early 2019. A new plant at Elba Island will also start operations this year. The three projects together will boost U.S. export capacity by about 1.5 billion cubic feet a day. Barclay’s also notes that U.S. natural gas production will reach record highs next year, growing by 4.5 bcf/d. EIA’s 2018 reference case for greenhouse gas emissions without the CPP in place expected emission reductions of 694 million metric tons (MMT) by 2025 compared to 2005, 662 MMT in 2030, and 683 MMT in 2035. By comparison, the high resource case without the CPP projects emissions reductions of 807 MMT in 2025 compared to 2005, 751 MMT in 2030, and 738 MMT in 2035. The EPA’s ACE proposal does not provide estimate of total levels of emissions, but rather changes in the baseline emissions. EPA’s models differ from those of EIA and focus on changes on a state by state, facility by facility level and caps only existing sources. That is in contrast to EIA’s model which looks across state lines at regional balances and projections for competition among new sources. EPA’s estimates in the rollout of the ACE projects that repealing the CPP would increase emissions by 45 MMT in 2025, 67 MMT in 2030, and 60 MMT in 2035. The proposed emissions reductions of the ACE program are provided in comparison to these values. For instance, the ACE scenario of Replacing the CPP with Heat Rate Improvements of 4.5 percent at a cost of $50/kW projects emissions to increase by 34 MMT by 2025, 55 MMT in 2030, and 50 MMT in 2035. The contribution of the ACE in 2025 is then reducing emissions by 11 MMT compared to replacing the CPP with no policy. Jason Bordoff of Columbia University’s Center for Global Energy Policy (CGEP) noted the gaps in these estimates in a recent op-ed, and compared them to Rhodium Group’s baseline forecast, which anticipates higher emissions reductions of about 35 percent by 2030 and assumes similar natural gas prices as the high resource case for EIA. In his op-ed, Bordoff notes that a recent joint Columbia-Rhodium study calculated that a carbon tax starting at $50 per ton and rising each year by 2 percent could double the 36 percent emissions reduction previously expected from the CPP by 2030 by accelerating the switch to renewables. The bottom line is that there is much uncertainty about the ultimate level of emissions changes that could result by 2025 depending on both market trends and policy frameworks. One interesting aspect of the proposed rule-making under the ACE is that it would give individual states up to two years to develop and submit their climate action plans for the power sector to EPA for approval. That would kick the can into the next U.S. presidential election cycle. Since polling shows that a majority of Americans are in favor of some kind of climate policy and climactic weather events are likely to stay in the news through 2020, it’s anyone’s guess how individual states will choose to proceed. This fall’s midterm elections could provide some hints.

Blog Post by Amy M. Jaffe and Guest Blogger for Energy Realpolitik August 30, 2018 Energy Realpolitik

Energy and Climate Policy

What States, Cities, and Corporations can do in the Face of Federal Resistance to the Clean Transportation Transition

Stefan Koester is an intern with the Energy Security and Climate Change program at the Council on Foreign Relations. He is a graduate student at the Fletcher School of Law and Diplomacy at Tufts University. Today the Trump administration published proposed rulemaking rescinding the authority of California to set its own tougher vehicle emissions standards along with the state’s Zero Emission Vehicle (ZEV) mandate. Under what the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) are calling the One National Standard, California and nine other states following its lead, would no longer have the authority to set GHG emissions standards or ZEV mandates that are different from a federal standard. California and other states have promised to sue the Federal government, likely leading to years of litigation and market uncertainty. While this battle plays out in the courts, there are lessons that can be learned from the clean electricity transition to see how states, cities, and corporations can spur EV adoption in the absence of federal leadership. There are unique differences between the electric power and transportation sector, but there are broad lessons from the electric power sector to apply to the burgeoning transportation transition. In the absence of the authority of states to set ZEV mandates, there are ways states, cities, and corporations can work collaboratively to drive the clean transportation transition. State-level taxes on gas guzzlers and rebates for EVs can send the right market signal to consumers and spur automakers. Strong and public EV procurement commitments on the part of logistics and transportation companies would show corporate leadership. And finally, U.S. automakers may realize competitive difficulties in managing multiple, parallel business platforms if automakers do not focus more attention on the global EV market. All this is to say that U.S. automakers could ignore federal rules, regardless of federal policy, and stay the course to comply with the California standard. Where Renewables and EVs are today Wind and solar are now the second and third fastest growing energy sources in the United States, respectively. Since 2010, nearly half of all new capacity additions have been from renewables. This year, under the less-than favorable conditions of the Trump administration, wind and solar are the second (1,956MW) and third (1,921MW) largest source of new generation after natural gas (6,646MW). In total, wind and solar made up 36 percent of all new generation this year. With the falling cost of wind and solar, along with battery storage technology, it is likely that renewable energy will hit grid parity with natural gas, on a levelized cost basis, in the next five to ten years. Renewables still only make up 7.3 percent of the electricity sector to date, but several states, like California, Iowa, and Massachusetts, are well on their way to reaching 50 percent in the coming decades. Electrification in the transport sector, even in California which has had incentives for several decades, is not matching the success of renewables. Today, there are roughly 269 million registered motor vehicles in the United States, and while EV (both plug-in and pure-battery) sales grew by 20 percent in 2017, they only make up 0.3 percent of total vehicle stock. Even the most optimistic projections out to 2040 show that EVs will only make up a third of global vehicle fleets. The EIA’s more modest growth trajectory shows EVs growing to 6 percent of total sales by 2040. The Trump administration’s proposed rule will likely slow this development even further, with estimates of an additional 2.2 billion tons of greenhouse gas (GHG) emissions through 2040. While Mandates worked for Renewables, they haven’t worked for EVs It is unclear what the legal outcome of the EPA/NHTSA rule will be and it is unclear whether the courts will issue a stay in California’s favor, allowing the standards to remain in place during litigation. However, it’s clear that while state mandates worked in the clean energy transition, their success in the transportation sector is limited. Renewable portfolio standards (RPS) for power generation have been around for more than two decades and now apply to 29 states. State RPSs created long term contracting and investment certainty for project developers and utilities, and ensured market demand. Between 2000 and 2016, RPS programs were responsible for roughly 56 percent of total U.S. renewable energy deployments, with estimates that RPSs will drive an additional 4GW of annual generation between now and 2030. States are now building more renewable resources than required under RPS statues due to falling costs and acceptance of wind and solar technologies by utilities and regulators as valuable grid contributors. The spectacular success of the RPS, however, is not easily transferable to EV adoption. In theory, ZEV mandates, like the RPS, could drive investment and certainty into burgeoning markets by ensuring that if automakers design, build, and market EVs, then there will be a market for them. Ten states have a ZEV mandate, but even the most ambitious, California, will require roughly 6 percent of total vehicle stock to be battery-electric vehicles by 2025 and 5 million by 2030, about a quarter of the state’s 20 million vehicles. California only has 366,000 EVs on the road today. The failure of ZEVs to spur the clean energy transition in the same way that RPSs have is for a number of reasons. Unlike the electric power sector, which has a couple dozen state-wide utility and regulatory actors, the transportation sector has millions of consumers, thousands of dealers, dozens of large global manufactures, and little existing infrastructure to adequately support deep EV penetration. ZEV mandates have failed to lead to widespread consumer adoption of EVs due to inadequate supporting policies for charging, dealer resistance to marketing EVs, higher upfront costs, limited available model options, and continuing consumer preferences in favor of large internal combustion engine (ICE) vehicles. In addition, turnover of the vehicle stock, which is roughly once every twelve years, requires that the consumer have market access to a perfectly substitutable EV when purchasing a new car, something that is not available today. It is unlikely that stronger mandates, regardless of Federal action, would help drive further EV adoption in the absence of supporting state and local policies to help overcome additional barriers. A state ‘feebate’ program where consumers pay a fee for gas guzzling cars and receive a rebate for EVs is likely both immune to federal interference and would spur greater consumer demand for EVs than state-wide ZEV mandates. Feebates are analogous to federal and state tax subsidies for renewable energy and, where it exists, carbon pricing that serves as a fee on fossil-fuel generation. Tax subsidies and carbon pricing helped spur investment in renewables above and beyond state RPSs. Feebates could jump start the clean transportation transition. Corporate and Public Procurement Strategies Can Drive Demand While ZEV mandates have been disappointing, corporate and public procurement policies could increase EV adoption by driving market demand, lowering technology cost, and helping overcome consumer preference barriers. When large corporates publically committed to investing in renewables, states and cities competed to adopt clean energy policies to attract investment, leading corporates to invest billions in renewables across the country. Google and Apple made headlines last year when they announced, separately, that they were 100 percent powered by renewable energy. Google signed its first renewable contract in 2010 and rapidly increased its share of renewables with investments totaling more than $3 billion, for more than 2.4 GW of renewables. Apple followed up soon thereafter announcing that they were 100 percent renewable across their global operations with over 1.4GW of renewable capacity. In total, more than 140 international corporations have pledged 100 percent renewables, driving 19GW of renewable energy demand since 2008. While these companies may be investing in renewable energy for the green bona fides, they are ultimately doing it because renewables are cheap. Strong procurement commitments on the part of large corporate entities could do the same thing for EVs. UPS, FedEx and DHL are now conducting large-scale testing of EVs in their trucking fleets and their doing it because their delivery costs will fall. Total ownership cost of EVs is lower due to fuel, maintenance, and operations savings. EV trucks are also smarter than ICE vehicles, through IoT sensors and routing technologies, allowing for increased efficiency and reduced delivery times. Finally, consumers may come to demand it as the environmental costs of same-day shipping are more widely appreciated. Corporates can drive EV adoption in the passenger fleet as well. Uber recently announced a pilot program in seven cities that pays drivers an extra dollar for each ride they do in an EV. Lyft has an ambitious, multi-year plan to become a carbon-neutral transportation company, predicting that by 2025 they will provide one billion rides per year in electric vehicles. In the same way that corporations leaned on states and cities for favorable renewable energy policies, corporations interested in electrifying their fleets could put pressure on states and cities to invest in electric vehicle infrastructure such as public charging, preferential lane access, and license fee waivers. Cities could also require that ride-sharing services switch to EVs over a certain number of years, effectively shifting millions of drivers into vehicles that are cleaner and cheaper to operate. Cities also did their part to drive demand with commitments to 100 percent renewable energy. More than seventy U.S. cities made 100 percent renewable energy pledges, including Atlanta, Madison, Portland, and San Diego. Similar commitments can drive increased EV adoption. Cities could commit to converting their municipal vehicle fleets to EVs. The public sector can drive down battery costs through electric public bus procurement commitments, in addition to fleet-wide conversions of public vehicles. Cities all around the country are already transitioning to electric buses, but they are not doing it fast enough. New York City aims to switch all 5,700 MTA buses to electric by 2040. San Francisco, Washington, D.C., Salt Lake City, and other have made similar pledges. The average life span of a public bus is twelve years. Speeding these commitments up to within the next decade would fuel growth in the EV bus sector and drive down costs throughout the technology stack. Electric buses are popular with city transit officials because they are cheaper, cleaner, quieter, and popular with riders. In addition, city school boards could push to electrify the nation’s 480,000 diesel school buses. This alone would save roughly $2.9 billion, annually, in fuel and maintenance costs, money cities can reinvest into schools. Corporate and public commitments like these can move the needle on EV market demand, battery technology costs, and public infrastructure requirements. In addition, states and cities could begin to compete with one another to have the most favorable EV policies, attracting investment from logistics and transportation companies, automakers, and utilities. Large Corporates Don’t Like Managing Multiple Platforms When Xcel Energy CEO Ben Fowke announced last year that the western utility with 3.3 million customers would be backing a long term business strategy centered around “steel for fuel”, investors and industry analysis were supportive. The strategy refocuses the utility through massive long term investments in cheap wind and solar, while divesting from expensive coal. A number of other utilities have announced similar plans to back away from costly fossil generation and focus heavily on renewables. Ultimately, some utilities see running two platforms, a fossil-fuel one and a renewables one, as a long term losing strategy. The major U.S. automakers are currently running multi-platform businesses with ICE vehicles that serve the dominant segment of the market and smaller EV design, production, and marketing divisions. As consumers and corporates begin to demand increased EV options automakers could find that running multiple, parallel production platforms is costly and inefficient. China, as one senior official noted, is working to end the production and sale of ICE vehicles, increasing the pressure on major U.S. car makers like GM, Ford, and Chrysler to build and sell more EVs. In addition, major foreign automakers like Volkswagen, Diamler, Volvo, and BMW have made ambitious commitments to transition away from ICE vehicles and toward all electric platforms. The Big Three automakers have been slow to adapt, but they may find that maintaining two parallel assembly lines, one that builds traditional ICE vehicles and one the builds EVs, is increasingly more expensive and less profitable than optimizing production on just one line. With the global focus on increased EV adoption, together with state, city, and corporate policies to drive further growth in the United States, automakers might start feeling the pressure to compete on their EV offerings. Focusing only on ICEs, as the Trump administration is doing, is not a good global business solution. While ICEs are cheaper today throughout the world, EV costs are falling rapidly. U.S. car manufacturers may lose global market share if they are not able to keep up with global EV demand. In addition, ongoing federal litigation will increase regulatory uncertainty for automakers. Just as some utilities have made the choice to invest in renewables for future generation, it is important for U.S. automakers to keep forward looking global strategies. Federal policy should not discourage American automakers from a transition away from fossil-driven technologies if it becomes too costly to maintain two engine platforms or they risk being placed at a global competitive disadvantage to foreign automakers. The Clean Transportation Transition Going Forward The Trump administration has shown its hostility to state-level emissions and electric vehicle mandates. While the legal challenges work their way through the court, states, cities, and corporations, including U.S. automakers, can drive the clean transportation transition forward through ‘feebates’, procurement commitments, supportive state EV policies, and a transition away from multi-platform business strategies. Using lessons learned from the successes of the clean energy transition, states, cities, and corporations can advance EV adoption in the absence of Federal leadership. In addition, the clean energy transition shows that an economy-wide shift in a major sector of the economy is possible and can happen within a short amount of time. While a potential compromise between California and the Federal government is conceivable, in its absence there is much that states, cities, and corporations can do.

Blog Post by Guest Blogger for Energy Realpolitik August 2, 2018 Energy Realpolitik

Iran

Free Flow of Oil, Strait of Hormuz, and Policing International Sea Lanes

The premium appears to be creeping back into international oil prices as markets wait to see who will be policing the sea lanes in the aftermath of a Saudi announcement that it would temporarily halt oil shipments via the Bab el-Mandeb Strait. The Saudi announcement came after two of its oil-laden tankers were attacked by Yemeni Houthi militias. Shipments in the Bab el-Mandeb Strait, which connects the Red Sea and Suez Canal with the Persian Gulf and Indian Ocean via the Gulf of Aden, is a major sea route for oil shipments of close to five million barrels a day (b/d) of crude oil and petroleum products in both directions, including 2.8 million b/d flowing from the Mideast to Europe. Refined products from Saudi Arabia’s Yanbu refinery on the Red Sea are frequently exported south through the Bab el-Mandeb Strait to Asia. The Strait can be bypassed for northern traffic by sending ships on a longer, more expensive route around the southern tip of Africa. Yemeni rebel attacks on shipping in the Bab el-Mandeb Strait are not a new occurrence but take on new importance in light of the U.S. withdrawal from the Iran nuclear deal (JCPOA) and subsequent planned reimposition of sanctions against Iranian oil sales. Iran has threatened that the United States would be mistaken if it thinks Iran would be the “only” country unable to export its oil. Iran explicitly mentioned its ability to close the Strait of Hormuz through which over eighteen to nineteen million b/d of Mideast crude oil transits. The United States has the capability to reopen any blockage of the Strait by military means and provided minesweepers and military shipping escorts to reflagged Kuwaiti oil tankers in the 1980s during the eight year Iraq-Iran war. Saudi news outlets have run headlines in recent days that the United States was “weighing” its military options to keep the sea lanes open. The headlines, also published in Israeli newspapers, are referring to a statement made by U.S. Defense Secretary James Mattis who told Pentagon reporters on July 27 in discussing Iran’s threats to a different waterway chokepoint, the Strait of Hormuz, “They’ve (Iran) done that in years past; they saw the international community put dozens of nations’ naval forces in for exercises to clear the strait…Clearly this (closure) would be an attack on international shipping and could have an international response to reopen the shipping lanes…because the world’s economy depends on those energy supplies flowing out of there.” Mattis called upon Iran to abide by international rules. Analysts say the U.S. withdrawal from the JCPOA has strengthened unity and coherence of the various factions within the Iranian government, moving Iranian President Hassan Rouhani to the right. Thinking about succession down the road for aging Supreme leader Ayatollah Ali Khamenei is influencing how the current line-up of political and religious leaders inside Iran are responding to the country’s current problems, Iran watchers say. Still, in private briefings, Iranian officials are throwing around the term “strategic patience” as a guide to current thinking and noting that Iran has weathered sanctions for decades and will take no drastic measures against the United States or its regional allies. The argument goes that Tehran can afford to wait out the Trump administration, which will face a new election in 2020, and that Iran’s priority in the interim should be to avoid direct military clashes with the United States—which it believes U.S. allies Saudi Arabia and Israel would like to provoke. That raises the question regarding how much control Tehran has over its many armed proxies in Iraq, Yemen, Syria, and Lebanon. The relative independence of such proxies increases the risk of unintended or inadvertent clashes across a range of flash points, complicating U.S. responses. In the intervening years since the Iraq-Iran war, several Arab oil exporters have built oil pipeline bypass routes so that a portion of their crude oil exports could avoid the Strait of Hormuz. Saudi Arabia’s Petroline, which can carry five million b/d of Saudi crude oil from eastern fields to an export facility on the Red Sea, is being expanded to carry seven million b/d by year end. Use of drag reduction agents can augment flows by as much as 65 percent. Abu Dhabi also has a 1.5 million b/d crude oil pipeline from Habshan to Fujairah that bypasses the Strait. Oman is building an oil storage hub at Duqm, and several Gulf Arab producers keep floating oil storage in tankers off the coast of Fujairah. Industry estimates are that Saudi Arabia also has over seventy million barrels in operational and strategic storage in Asia and Europe, among other locations. Saudi leaders have been hoping that a military victory at Yemen’s port of Hodeidah might pave the way for intervention by the United Nations, progress on diplomatic negotiations, and by extension, a reduction in the risk to shipping in the Red Sea. So far, this goal has not been reached; hence, headlines in official news outlets about the U.S. role in the sea lanes. President Donald Trump has actively tweeted about oil prices in recent weeks including a tweet that specifically mentioned how the United States protects regional countries. More recently, Presidential tweets have included warnings to Iran not to “threaten the United States.” The United States plays a critical role defending the global sea lanes and ensuring the free flow of oil around the world. Yemeni attacks on Saudi shipping make it harder for oil prices to recede, and saber rattling between Iran and the United States is on the rise as the November oil sanctions deadline approaches. This geopolitical backdrop is currently keeping oil markets on edge, despite increases in supply. As U.S. midterm elections approach, high oil prices might not be the only factor that enters voters’ minds as they prepare to vote. The American public is weary of costly military engagement across the Middle East and could wonder why the United States is so unable to extricate itself from its role defending Middle East oil shipments, especially in light of rising U.S. domestic oil and gas production. Less than 10 percent of U.S. oil imports came from Saudi Arabia in 2017, with an additional 600,000 b/d originating from Iraq. But, Saudi Arabia remains a major oil supplier globally and most of the world’s spare oil production/export capacity sits in Saudi Arabia, Kuwait, and the United Arab Emirates. That means any disruption of oil supplies in the Persian Gulf would be a major threat to the global economy and would hurt U.S. trading partners, thereby damaging the U.S. economy as well even if the United States could more easily replace its limited Saudi and Iraqi oil imports. Hence, U.S. oil and gas production and exports have not reduced the U.S. need to police the free flow of oil from the Middle East. Oil commodity prices are also set globally which means like a swimming pool, where taking out water in one end of the pool affects the water level across the entire structure, an oil price rise due to the loss of supply in one part of the world is reflected in U.S. price levels as well all other locations across the globe. Rising oil prices still put U.S. consumers and important industries like the automotive sector under pressure, even if they are less negative for the overall U.S. economy. Ironically, the more successful the United States is in convincing the major economies to shun Iranian crude oil purchases, the more it could need to talk to the very same countries about sharing the financial or military burden of defending the sea lanes for oil flows from the Middle East. Without taking such action, it will be hard to convince Iran or its proxies that it is counterproductive to escalate threats to international shipping. Although the United States has appeared to shun international cooperation of late, continuing to maintain a very broad the coalition of European and Asian countries in sea lane navigation matters could discourage risky brinksmanship activities by all parties that could benefit from a direct confrontation between the United States and Iran.

Blog Post by Amy M. Jaffe July 30, 2018 Energy Realpolitik