Expect the Unexpected in the Future of Energy
By Brydon Ross, Director of Energy and Environmental Policy
The crystal ball is murky when it comes to predictions about energy consumption, markets and future trends.
Consider hydraulic fracturing, for example. Ten years ago, the U.S. Geological Survey estimated resource potential in the Marcellus Shale region was off by 70 times, according to current federal surveys.
“I think it’s essentially impossible to anticipate what energy markets are going to look like in 20 or 30 years, because the rate of change in technology and potential for climate change are so great and so disruptive that the world is going to be fundamentally different than it is now,” said John Petersen, the founder of the Arlington Institute, a nonprofit research organization that focuses on future global trends.
Howard Gruenspecht, administrator of the U.S. Energy Information Administration, echoed similar thoughts about the future.
“Predicting a particular game-changing technology is difficult, if not impossible, to do,” he said.
Despite this limitation, Gruenspecht said his analysts spend a significant amount of time thinking about how technological change might occur in North American energy markets, where crude oil prices have exceeded natural gas prices by a 4-to-1 ratio on an energy-equivalent basis—converting the current price of crude oil to its natural gas equivalent rate.
“The implication is that there currently exists a four-fold price advantage for substituting natural gas for oil-based products,” he said. This price disparity could potentially last for some time, triggering the deployment of natural gas vehicle infrastructure because of favorable market signals to investors.
Futurists like Petersen believe the electric grid and energy markets are especially susceptible to wild card events like drastic changes in consumption, geopolitics, solar flares and changing societal values.
“There is a new generation of young people who see their relationship to the environment, to the Earth and their social relationships with one another in a really different way than all of us old guys,” he said.
Their strong reaction to a wild card event could galvanize them to say “never again” in the same way that Three Mile Island impacted the nuclear power industry.
“Industries and policymakers need to be sensitive to this,” Peterson said.
Expect the Unexpected
State policymakers can prepare to deal with this unpredictable future in several ways, Petersen said.
“Resilience is extraordinarily important, not only for physical shocks to the system, but there also needs to be resilience in terms of technology,” he said. Decision-makers also need a “mechanism for anticipation, as well as a commitment to use foresight in planning.”
That’s true, also, for utilities.
“I know this sounds antithetical to many utilities, but they need more agility, even in such a capital-intensive industry,” Petersen said.
Capital-intensive industries with large sunk-costs—things such as construction and overhead that are difficult to recover—that are heavily reliant on energy prices can create opportunities for unconventional solutions, such as the development of electric cars.
“When you get a breakthrough in battery technology, it will create a dramatically different energy landscape with vehicles that not only run on electricity, but can also produce electricity that can be sold or managed on the grid,” Petersen said.
But David Wright, vice chairman of the South Carolina Public Service Commission and president of the National Association of Regulatory Utility Commissioners, believes the ability for electric cars to change the energy landscape is still far off until more advancements are made in battery storage technology. Wright said more research and development funds in this area are needed and states must make complex regulatory decisions to develop the battery charging infrastructure.
Increasing amounts of distributed generation from solar power on homes would allow people to charge their electric cars and generate more power off the grid. Petersen said that indicates changes coming to the system.
State Energy Future
While it may be difficult to predict the nation’s energy future, state energy officials must track the markets not just in the U.S., but also around the world.
“Energy markets in states are affected globally,” said Wright. “From a regulator’s perspective, we have to monitor what’s going on, but keep an open mind and a watchful eye that utilities are doing smart planning.”
Natural gas costs, he said, may not remain as cheap as they are now.
Wright lamented that state utility regulators often face tough choices with promoting new technology and alternative energy development because of their obligations to maintain reliability and keep rates low.
“We have $4 (trillion) to $5 trillion in investments, maybe more, that need to be made just in the utility sector over the next 15 years,” he said.
Those investments, he said, are needed to upgrade and replace the electric grid, water systems, pipelines and telecommunication infrastructure. Investments in new technology have to compete with the same capital resource pool as basic infrastructure maintenance, which is a difficult balancing act for independent voices like state commissions—especially in a weak economy.
But that doesn’t mean states shouldn’t invest in incentives for alternative energy, Wright said.
“I’m a free-market guy and it’s not that I’m opposed to renewable energy; where it’s available, states should go for it,” he said, noting regional differences in the availability of resources like wind and solar.
He used his home state as an example of the difficulty regulators face in promoting alternative energy and new technology through the rate-making process.
“By and large, South Carolina is a poor state,” said Wright. “Our median income levels are below the national average and we have lots of housing with old, inefficient heating and cooling systems. Many of our residents don’t have insulated windows, because then they have to make a choice between buying food and clothes for their kids or even their own medicine.
“One of the real tragedies of many federal (energy) incentive programs is that tax dollars go to support them, but (some taxpayers) can’t really afford to participate in them.”
Wright, like others, is frustrated by the lack of a federal energy policy. Part of the problem, he said, is that many federal regulators look at energy and environmental issues in silos and make decisions in a vacuum.
“They’re not looking at how overall costs and rapid implementation will not only impact an industry’s bottom line, but the consumer as well,” he said.
The absence of a comprehensive federal energy policy, however, isn’t stopping states from trying to innovate.
“When conducting EIA’s (Energy Information Administration) analysis, we attempt to reflect the impacts of state policies as much as possible,” said Gruenspecht.
Key state policies include renewable portfolio standards, electricity efficiency standards, state and regional carbon dioxide cap-and-trade programs, industrial energy-efficiency rules and clean energy regulations.
“Together, these programs are slowing electricity demand growth, and together with federal tax incentives, stimulating increased use of renewable fuels for electricity generation,” he said.
“States are also leading the way in several appliance efficiency standards for residential and commercial products. Eleven states and the District of Columbia have adopted energy efficiency standards for products not currently covered by federal standards, “ said Gruenspecht. “Recent history has shown that several product types covered by state standards are eventually addressed by federal standards.”
Connecticut, for instance, is developing a legislative plan that will offer some potentially transformative changes in the state’s electricity market and provide redundancy for critical energy infrastructure that is cleaner, cheaper and more reliable. Snowstorms that caused billions of dollars in damages and left more than 1 million people without power for two weeks in 2011 spurred the action. The storms showed state leaders they needed to do more to enhance the resiliency of the grid.
“The human and economic cost of that storm was enormous to the state,” said Jessie Stratton, policy director in the Connecticut Department of Environmental Protection. “Despite the terrible impact of the storms, it forced the state to look at our preparedness, particularly for an era of when we may have stronger storms. A category 3 hurricane could knock out power for a month.”
Proposed legislation by Gov. Dannel Malloy would direct the department to develop a plan for promoting distributed power generation through connected microgrids at critical facilities across the state. The Connecticut initiative could potentially create a shift to small, local, distributed, clean power generation that operates independently and uninterrupted, even when the power goes out.
In South Carolina, Wright sees nuclear power playing a big role in the state’s clean energy future.
Two new reactors are scheduled to go online in 2016 and 2019 respectively.
“One of the benefits of the new nuclear plants coming online will be the retirement of older, dirty coal plants that will bring significant clean energy and improved air emissions benefits,” he said.
He also suggested that states may want to look at small, modular nuclear reactors as a way to avoid the large expenses associated with new nuclear power plants, which often cost several billion dollars. Some nuclear engineering firms are designing concept reactors that could be about the length of a bowling lane and could power tens of thousands of homes for a fraction of the cost of building a large, conventional nuclear plant.
But nuclear power takes time. “You can’t have a renaissance in nuclear power without a federal license,” he said. The Nuclear Regulatory Commission takes nearly four years to review a new license and only recently approved the construction of the nation’s first new nuclear power plant in 33 years.
State and federal policymakers will need to embrace creative solutions to regulatory or policy challenges as they plod their way to the future of energy in the U.S.
“Ultimately, I think an all-of-the-above strategy is the best way to go,” said Wright.