ERCOT released a new 10 yr system assessment. The big news among the renewable community is a “scenario” labeled BAU All Tech with Updated Wind Shapes. In this “scenario”, they have updated the wind profile (capacity factors) for the wind technology option. The surprise from the output was the large swing from the BAU case to install 17,000 MW of wind, which did not occur in the base. In addition, the combined cycle units fell by 10,000 MW. Also solar added 10,000 MW into the system versus the BAU. I have nothing against renewable, in fact I am pro renewable in many ways, however I am skeptical on these results. My skepticism is focused on the one supposed change made by the modelers for this “scenario”. By changing just windshapes, they were able to produce these dramatic swings from the BAU case.
I have been modeling power systems for over 10 years and I cannot rationalize this outcome without more knowledge than what was presented in the paper. Let me start out with the basic concerns before moving over into the technical realm. The BAU case vs. this new wind case drops gas consumption by around 40%. If this wind profile enhancement was driven by turbine technology, then the rest of the country would also add to the lessening of natural gas demand. Anything greater than a 10% change in natural gas demand will surely impact the price of natural gas. A true scenario would iterate and or rationalized this issue. This type of analysis seems to be more of a sensitivity analysis versus a real scenario development. Another fundamental concern is the extent of wind development and the on-going production tax credit (PTC). At some point in the wind penetration, the PTC would be removed. I am sure the non-wind blessed state would like to stop subsidizing states, particularly whose economy is much better off.
Another fundamental missing piece is any discussion on rates. More capital is being spent in the wind shape case than the BAU. This is simple math, as the cost of capital of wind and solar for each MW is greater than gas units. The balancing act is the long-term fuel cost will balance the additional capital. However large capital investments usually require some guarantees. This comes in the form of Power Purchase Agreements with the local utility. The PPA’s are signed and prices set based on the current markets as that time of the contract. Even though wholesale market prices may come down it does not mean rates will change as PPA contracts are typically fixed in order for the investor to know they will recover their capital investment. Over time the PPA deals will begin to look worse and worse as wholesale markets fall. Eventually industrial and commercial customers could become wise and remove themselves from the utilities poor PPA arrangements by creating distributed generation. This then lead to higher residential rates in the face of low wholesale power. This then leads to limited PPA deals. With more than half of the wind and solar build after 2020 one would need to seriously doubt the extent of those developments becoming real, assuming PPA is the mechanism for development.
On a technical basis the major issue lies in how the modelers are treating wind generation. As a panel of experts, including me, in a report done for the Northwest Power & Conservation Council noted wind generation, when sufficiently large relative to the market, should be viewed in a risk analysis as much as in the price of natural gas is commonly analyzed. The dependence on wind to the level seen in this new wind shape case will likely caused some dramatic grid events when the weather decides to not co-operate. This event may be 1 in 10 years to 1 in 100 years, but the point is not if, but when. Given the nature of weather and the sub hourly nature of electricity markets, I would suspect the issue will be closer to 1 in 10 years than 1 in 100 years. It is certainly possible to expect a weather front changing the landscape of wind generation in particular day, adding on top of that a drought situation limiting nuclear and fossil generation. In a stress case, the grid will likely fail in the new wind shape case. The value of the combined cycle will likely be re-gained in risk analysis. This once again will limit the number of wind builds presented by ERCOT in this new wind shape case.
As noted in the NWPCC report, I have had extensive experience in modeling power systems for market forecasting and planning purposes. If you are beginning your resource plan or are looking for another perspective, please do consider reaching out to me for assistance.
Your Energy Consultant,
My last few blogs, I have indicated the need for the manufacturing/producing sector. I want to directly addresse the reason why – beyond the statement “the sector will not make everyone wealthy, but it will allow those who are willing and capable, the pursuit of happiness”. If you are as curious as me, I would continue to be that annoying kid and ask, but WHY? Why can they not pursue happiness in other areas? Why not a service economy? The key words in the title are “OUR SIZE”. We have diverse group of people in the country. Also take note that I ended the statement with the pursuit of happiness. As much as we all have different concepts of religion, we vastly have different concepts of what makes each of us happy.
There are many scholars who believe our economy can be a service economy driven by our minds and intellect. This reminded me of a dinner conversation I had with Dr. Nariman Behravesh, Chief Economist at IHS Global Insight. Nariman has always been very cordial with me and I do believe we have entertaining conversations; so I hold a very high regards for his opinions and thoughts. I did have to ponder and eventually confront him on the statement he once made “we (referring to the US), can be a service industry because we have our minds”. I will take a risk in my statements to perhaps be considered an elitist, but my real life experience is where my response comes from. At AEP, we served some of the worst economic territories in the country.
The people in those regions are still happy and they do things for which many parts of the country should take note. Consumption does not necessarily drive their happiness. I noted to Nariman, not everyone has ambition or even the desire to drive a fancy car. There will always be people who just need something to do, no matter how mundane the task from 8-5, Monday-Friday. Their enjoyments come from hunting, TV watching, raising their kids, enjoying the outdoors, etc…We cannot transform to 100% service industry because of this. If we lived in Cambridge, MA for many years, I can see perhaps how one can envisioned this. However the US is vast and its own vastness offers a plethora of individuals who hold their own goals in life.
And as our Declaration of Independence state “Life, Liberty, and the pursuit of happiness” – to each his own on what happiness is. There is something admirable when the pursuit of your happiness is not part of the rat race to accumulate wealth. This reminds me of a recent clip I saw while channel surfing from the movie Con Air – “Garland Greene: What if I told you insane was working fifty hours a week in some office for fifty years, at the end of which they tell you to piss off; ending up in some retirement village, hoping to die before suffering the indignity of trying to make it to the toilet on time? Wouldn’t you consider that to be insane?”
I never stated we need to be 100% manufacturing, but I think it is reasonable to say we have dwindled our capabilities of manufacturing too low. I understand productivity advancements and automation reducing the amount of people required to do a task. This actually supports my thesis for having to create more of a manufacturing base. People cannot be allowed to sit around and lose hope and desire to be productive. And then be expected to be able to jump back on the ship as it passes by. As much as prisoners can be institutionalized to their environment, people can be institutionalized to their routines. They need to know how to work. They need the pattern of waking up Monday-Friday while adding some productivity to society. With that added productivity, they will be allowed to pursue their happiness on the weekends and nights. The manufacturing sector gives this capability. A service industry is lean and mean. It cannot ever measure up to the scale that a manufacturing sector can do whether it is chemicals, textile, paper, etc…
The latest thinking among many economists is that the US economy will grow sub 3% for many years to come. This creates increasing unemployment each year by 1%+ with the status quo setup we have. We need to think about creating jobs that create an added value and some social stability. This means you can’t just create jobs by creating inefficient process – spoons instead of shovels or even bulldozer in moving and clearing land. Jobs cannot be priced way above the net value to society. We cannot have a job paying $40K/yr for a mundane task – e.g. screwing in bolts. At the same time executive compensation is also taking many of the jobs away and forcing outsourcing in order to balance the unequal productivity to capital. CEO’s not bringing new ideas and concepts that actually work, but being paid at 800 to 1 their average worker is unsustainable. Mass institutional holding and crony boards are much to blame for this trend. I digress slightly, but I did not want to be picking on the lower class exclusively. There is much blame to pass around in all parts of society for our lack of “real” productivity.
I hope I have rationalized to some extent of my thoughts on the value and the requirement of a strong manufacturing base. We are not all over-achievers, in fact there are probably more under-achievers. These people, for society sake, need to be part of the productivity cycle, so their kids can have the opportunity to be over-achievers, if so desired. This is the American dream in my mind – To be given the opportunity to be successful and to create the most fair and balance system to make sure those who cheat the system do not sustain themselves in the upper class. The last part we have failed given the lack of prosecution in the banking sector. We can still right the ship by re-aligning our economy from less financial engineering to real engineering.
Perhaps we don’t always agree on seeing things, but it is always good to continually examined different viewpoints. I look forward to hearing your views. In the meantime please do consider All Energy Consulting for your consulting needs. We will always have you in mind once you are our clients.
Your Energy Consultant,
Macroeconomic Impacts of LNG Exports from the United States report done by NERA for the EIA brings to mind my saying- It is better to know what questions to ask than to have all the answers. There are many wise sayings that are very similar. One missing from that list is “It is better to ask some of the questions than to know all of the answers.” James Thurber.
There are several issues I could comment on in the report, but many are already discussed by the several commentators . A good acquaintance of mine, Carlton Buford, does a fine job highlighting his concerns with point 4 resonating with my response. However, as I discussed above, the report should have asked a bigger question beyond energy markets impact.
I will agree with the overall conclusions of the report – exporting LNG will benefit the country to some extent. However, this should never have been the goal or the premise of the report. NERA cannot be faulted in terms of answering the question. However, as a consultants, there is somewhat a responsibility to address the clients’ real concerns.
I directly addressed this issue with another consultant’s report done on renewables about green jobs, where I discussed with the author about not addressing net jobs. The author told me they did not do it, because they were not asked to. In both of these reports, someone at the consulting companies should have brought up the real issue to each of these clients. A true consultant will make sure their client is asking the right question before setting out and answering the question asked. The real concern for LNG is whether exporting LNG is the BEST option for the country in terms of maximizing the economic potential for the US. This question is not just an economic study to impact the energy markets, but it should be about getting the US back onto the path of economic prosperity.
Even if natural gas prices were to minimally changed, as the report indicated, the next question should be:” Will the US be better benefited from consuming its own resources knowing it is a net consumer of most products?”. This question was not addressed in the report. It is the crucial benchmark of deciding to export. It does not take a massive model to understand the holistic value of using your own resource. If you know you will have to consume products which are made from the natural resources that you have available; could you not economically increase the internal value of your system by using the resource to produce what you plan to consume? Perhaps if the outside system can more effectively produce a good above and beyond the cost of shipping both the goods and resources to make it –the outside system could be a better option economically.
This then leads to the question:” why can they produce/manufactures goods we need with our resources more effectively? labor policies, subsidies, etc.. “. Is there a better way for us to produce and manufacture products in this country versus outsourcing? In addition, simple economics typically do not cover the social economic issues at hand. As I mentioned in my previous blog – Energy Independence Misguided Focus – the value of manufacturing a good goes beyond the simple economics of making the product. Manufacturing offers a level of social economic stability while still giving people the opportunity to aspire if they so wish. We need to make sure we take this into account. Many countries do value being able to keep their people at work. They know social unrest is likely when mass amounts of people sit around. I will further address this issue in my next blog.
The report fails to address the root of the issue which the leaders of this country should be asking and thinking about – how best to maximize the US economic well-being using the resources available. I will contend we should do what we can to offer incentives to use our resource locally first and foremost. If our ineptness to do the right thing by restructuring our society to allow for manufacturing continues, I would then support the exportation of LNG through a strategic approach. First, there is an obvious US outlet for LNG. Right now Puerto Rico – one of the poorest regions in the US – has to purchase LNG at oil related prices. This brings to mind the technical concerns of LNG vessel. Will the LNG vessels be US flagged vessels – none so far? If not given the Jones Act, the US territories could not even benefit from the liquefaction facilities.
The largest deficiency in the report, as many of the others have commentated, is not considering the chess move made by the largest exporter of LNG – Qatar. This would be akin to forecasting oil markets with no consideration of Saudi Arabia – do we not remember the 70’s oil crisis or 1998 when Saudi Arabia showed the rest of OPEC what it meant to take market share? The plain fact is the cost of natural gas in Qatar is likely below or near $0.50/mmbtu. In the US, even with greater shale development, the cost will still be greater than $2/mmbtu. Even if we subtract some value for liquids, development cost may approach $1/mmbtu, still twice as large as Qatar. Who in their right mind can see grounds to compete with Qatar without some internal subsidy/incentive or it being a niche play? Unless foreign money is financing the projects, I would be skeptical on the extent of LNG exports vs. the report’s conclusions in terms of the economic value to the US.
It is not an either/or issue in terms of export LNG versus using it domestically, but the report was done as if LNG exporting was the only issue. Ultimately a portfolio option with more of the portfolio balance to what will add value is the best approach. If the goal is to maximize the US economy, domestic uses of resources should be the number one priority, LNG exports should be examined in the context of first supporting the US territories, and only after those issues are resolved we should examine the exportation of our resources. I am optimistic that our consumption levels are high enough to support the use of all our domestic resources. Plus, I anticipate that we can become a net exporter of products, keeping further margins in supplying products to the world.
As with everything I put out, this analysis was done given the current construct that exist today. There are many levers that could change my mind to believe LNG exportation is the BEST path for this country; but at this time I believe it is best to maximize our natural gas resources first. States in the US will also benefit from this message – e.g. Ohio. I would not let your resources easily leave the boundaries of your system if you are to maximize your potential economic value. Whoever advised the Houston Mayor, Anise Parker, was wrong in her response. Houston could significantly gain more, if more industrial and manufacturing complexes were built near and around Houston than a few liquefaction facilities. The same can be said for comments made by Senator Jake Corman and State Representative Matthew E. Baker.
In order to right the economic ship of the United States, we must find better ways to use our resources be it fossil, renewables, or human capital. Perhaps beyond the scope of the Department of Energy, but the real issue at hand is to transform our economy back into a balance economy with a strong producing/manufacturing sector. The DOE does have the capability to jump start the sector by continuing to signal there will be cost effective resources for some time to come and support the use of our resources domestically. A strong and vibrate manufacturing sector will go a long way in creating a more stable and prosperous society. It will not make everyone wealthy, but it will allow those who are willing and capable the pursuit of happiness.
We really need to apply some common sense when dealing with complicated issues. Huge models allow one to bias and obfuscate the truth through manipulation of inputs and relationships. Models do have value – being a modeler myself – but the models should never drive the outcome; they are there to enhance the understanding. Ultimately, someone needs to be accountable for the decision and not use models as their excuse for making a decision.
Please do consider All Energy Consulting for your energy consulting needs. We ALWAYS have our client’s best interest in mind. We know the questions to ask and can help find the right answers to them.
Your Energy Analyst,
The most used tool for new comers to the power market is the dispatch stack. The dispatch stack is basically the variable cost of production of power by each generating unit, stacked from least cost to most cost. Clearly units with low fuel to no fuel cost will be the lowest to the least efficient, highest fuel cost being the far right. EIA put out the hypothetical 2011 stack – http://www.eia.gov/todayinenergy/detail.cfm?id=9430
Those not directly involved in power markets will first take note of the low cost of renewables. However, you will also note nuclear being near zero cost. The stack does not take into account the capital cost portion of the project. As economic nature would have it, the high capital cost projects typically have the lower fuel cost and vice versa. The best of both worlds is very hard to achieve, hence a complicated process of developing a cost effective resource plan to balance the various tradeoffs. Besides the stack not accounting for capital cost therefore the typical dispatch cost does not account for operational issues.
Once again economic nature also produces higher variable power cost units as the unit becomes more flexible (the ability to turn off and on and ramp quickly). Case in point, most coal or nuclear plant cannot quickly ramp or turn off and on rapidly to account for the fluctuations of the market whereas inefficient gas units have extreme flexibility, but it comes with much higher power cost. If the market had constant energy level than perhaps supply stacks would be useful tools for analyzing power markets. However that is not the case as documented in my other blog. A deeper analysis is needed for the power markets – http://allenergyconsulting.com/blog/2012/06/05/levelized-cost-of-electricity-lcoe-analysis-potentially-misguides-you-in-the-power-markets/
Detailed analysis is needed on at least an hourly basis to really understand what is going on in the power markets. Another important feature of the power market due to the instantaneous issues is how the market gets priced. In the power market, all generators get the marginal price. As an example, if we had a system with 500MW of demand with only three power plants. Each power plant is sized at 200MW of capacity. Plant A bids at $50/MWh. Plant B bids at $5/MWh. Plant C bids at $35/MWh. If we assume a flat load the following outcomes occur based on varying demand.
Demand 550MW – Plant A gets to dispatch 150MW. Plant B and C gets to dispatch at 200MW each. They all get $50/MWh.
Demand 300MW – Plant B gets to dispatch 200MW. Plant C gets to dispatch 100MW. Plant A does not get dispatch and gets no revenue. Plant B and C get $35/MWh.
With this bidding mechanism, many of the renewable plants given that they only get their tax credit when they produce power will actually bid into the market to a NEGATIVE $22/MWh to ensure they are dispatched to collect their tax credit. Renewable plants typically already have a fixed power purchase agreement with the rate payer typically paying the bill. This dispatch price just impacts the wholesale market. The only concern utilities should have is when the wholesale price diverges so far away from the arranged power purchase contracts. At this point commissions should step up and question the decision making from the utilities and perhaps even their own mandates. This difference is really the true cost impact of renewables on society. Calculating wholesale power price as the cost to society from renewables is misleading and misrepresenting reality given most renewable deals are fixed. Another potential outcome of large digression between wholesale prices and retail prices is further push for more de-regulation.
There is much to discuss in how power markets work, but in a nutshell I tried to explain at high-level the dispatch stack and the realities of the market place. If you have further questions or are in need of examining the power markets please do consider All Energy Consulting.
Happy New Year – May you have a prosperous year!
Your Energy Analyst,