111

Energy Realities Facing the United States

Frank Clemente Ph.D.Senior Professor of Social Science & Energy PolicyPenn State Universityfac226@psu.edu

22

Access to Electricity and the Quality of Life

Survive Childhood

LiveLonger

DrinkCleaner Water

EatBetter

Are BetterEducated

Under Five Death Rate/1000

Life Expectancy (years)

Access to Improved Sources

(%)

Under Nourished(%)

Literacy Rate (%)

People in Societies with Greater Access to Electricity:

333

Five Basic Premises

• Worldwide growth in energy demand is unprecedented and will continue for decades

• Coal is the main energy source able to meet this demand in terms of scale, time, reliability, cost and versatility

• Coal conversion to electricity, liquid fuel and NG equivalents can greatly alleviate supply problems

• Carbon capture and storage (CCS) is the technological pathway to the full potential of coal

• The U.S. should rapidly develop CCS and make it available, affordable and deployable to the global community –this is the moral energy issue of our time

444

Two Different Worlds

● “There is no such thing as clean coal” – National Resources Defense Council.

● When asked how China would ever meet the growing demand for electricity, liquid fuel and NG, Du Minghua, Director of the Beijing Research Institute replied: “Coal is the solution to all three”.

55

Out of Poverty: Coal Based Energy has Propelled China Forward

0

1,094

534

Source: IEA, 2007; EIA, 2008

Note: Poverty measure follows World Bank Definition of $1 per day income

“China is an example for the developing world” IEA, 2007

66

India’s Rapidly Emerging Demand for Electricity

Millions of People in India Toil in An Bleak World

Removal of poverty is the greater immediate imperative than global warming” P. Ghosh, Secretary of the Environment, India

77

17.1%

0.5% 0.6% 0.8%

10.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Population (1.15 Billion)

Oil NG Uranium Coal

% o

f W

orl

ds

Pro

ved

Res

erve

sCoal is India’s only Energy Advantage

India’s Share of the World’s Energy Reserves

“Coal is expected to be the mainstay of power generation in the years to come” India’s 11th Five Year Plan (2007-2012)

8888

Steady Drumbeat Of Electricity Demand Across the World

Note: Over 2 billion people do not have adequate access to electricity and 1.6 billion have none at all

0

5000

10000

15000

20000

25000

30000

35000

40000

Bil

lio

n K

ilo

wat

t H

ou

rs

1980 1990 2005 2010 2020 2030

US ROW

99

243

151

8962 53 65

0

50

100

150

200

250

Gig

a w

atts

of

New

Co

al

Bas

ed C

apac

ity

China India OtherAsia

Europe USA ROW

The World Is Turning to Coal

Source: Data Derived from Platt’s Proprietary Database, 2008

China built more coal generation in 2007 than Britain built in its history

101010

Modernization – The Rise of the Automobile

0

50

100

150

200

250

300

350

400

2002 2030

To

tal V

eh

icle

s (M

illi

on

s)

U.S. China India Mexico Brazil

In 2002, there were 812 million vehicles. By 2030 there will be 2.1 billion.

Source (Dargay and Gately 2006)

1111

Everything, Everywhere, All the Time:Increases needed by 2030 to meet demand

● Nuclear power 38%

● Oil production 43%

● Renewable energy 61%

● NG production 64%

● Coal production 74%

12

0

5

10

15

20

25

0

1

2

3

4

5

6

7

8

9

10

1972 1977 1982 1987 1992 1997 2002 2007

dd

d

Cru

de

Oil

Pro

du

cti

on

(m

n/d

)

Oil Production NG

U.S. Oil and NG Production

NG

Pro

du

ctio

n (

Tcf

/y)

Cru

de

Oil

Pro

du

ctio

n (

mm

/d)

131313

WHERE WILL THE ELECTRICITY COME FROM IN THE UNITED STATES?

14

Rising Tide of Electricity Demand in U.S.

Any plan for new generation must account for the pressure of steadily growing demand for electricity

15

The Steady Erosion of Electric Reliability in the United States, 2003-2016

15Number of contiguous states in reliability regions where available

capacity margin meets minimal accepted level -- 15%

By 2016, only one in four states will be in a reliability region meeting

NERC’s minimum acceptable standards

2016

161616

The Danger of Relying on NG for Electricity

1. NG has 4 times the price and 20 times the price volatility of coal

2. Using NG for electricity drives up the price of both electricity and NG for families and businesses.

3. North American NG production may have peaked. If so, LNG imports from risky sources (e.g. Russia, Iran) must balance supply.

17

8%

21%

42%45%

50%53%

55%

67%

0%5%

10%15%20%25%30%35%40%45%50%55%60%65%70%

% o

f E

lect

rici

ty G

ener

atio

n f

rom

NG

PA U.S. OK FL TX MA CA NV

Some States Highly Dependent on NG for Power

1818

This Second “ Dash to Gas” is Real, Risky and Expensive

Source, Platts, 2007

*Note: The Platts survey is the most recent available but does not include many recently proposed NG Plants or many recently cancelled coal plants

19191919

Depletion Sets the Context:Wanted: A New Texas Every Year (6 TCF)

Sources: EIA; EOG; CIBC World Markets

0

2

4

6

8

10

12

14

16

18

20

22

2007 2008 2009 2010 2011 2012 2013 2014 2015

TC

F/Y

- D

ry P

rod

uct

ion

EIA Projected Production Depletion at 32%

New NG

Needed

20202020

The U.S. Bets On A Brave New World

Where new NG supply came from 1993 - 2006

Where new supply is projected to come from

2006-2019

•Source: EIA

“North America is setting itself to import LNG in large quantities” (IEA, 2007)

21

More Global NG Consumption Means Competition: Billions of New Kids on the Block

Source: EIA, International Energy Outlook, 2008

Increases in NG Consumption 2005-2030

“The U.S. is the market of last resort for LNG… we will get the gas Europe and Asia don’t need”-Goldman Sachs, 2008.

22

If Aubrey McClendon is Correct, The U. S. Faces Significantly Higher Electric Rates

● “U.S. natural gas producers can increase supplies by 5 percent a year…there is plenty of natural gas to burn to make electricity”

● “We think gas prices stay in the $9-$11 range…aggressive 35% to 40% first year declines are going to kick in” “An average of $10 is a pretty good price”

● But NG prices have averaged only $6.22 over the past 5 years and electric rates have still increased 27%.

● $10 NG will dramatically increase the cost of NG for electricity as well as the cost of NG for families and business.

23

What $10 NG Would Mean to American Consumers? - $70 Billion Dollars More in Costs

“An average of $10 is a pretty good price” Aubrey McClendon, CEO, Chesapeake Energy, July, 2008

2424

Show Me The Gas: Failed Optimism has surrounded NG

● In 2000---U.S production would significantly increase and lead to $2.58 NG in 2008

● In 2004---LNG imports would significantly increase and lead to $ 3.67 NG in 2008

● In 2008---LNG and shale gas will increase and lead to low cost NG

● But NG prices are still twice as high as predicted just 4 years ago

2525

Systematic Bias: Since 2000, EIA

has:

● Overestimated NG production in 23 of 28 forecasts

● Underestimated NG used for generation in 27 of 28 forecasts

● Underestimated price of NG to generators in 27 of 28 forecasts

See our article in Public Utilities Fortnightly, July, 2007

26

If Boone Pickens is Correct and we are at Peak Oil –The long run price of NG/LNG

Source: "The Relationship Between Crude Oil and Natural Gas Prices," Hartley et. al, Rice University, 2007

Price of W TI Oil in Dollars per Barrel

“Natural gas prices are anchored in a long-term relationship with crude oil prices” Stephen Brown, Federal Reserve Bank of Dallas, 2007

27272727

Coal Is the Cornerstone Of Electricity Generation In The U.S.

1% 2%

7%

19%20%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

U.S

. E

lect

ric

Gen

erat

ion

Oil Renewables Hydro Nuclear NG Coal

U.S. Electric Generation

282828

The Scale Needed to Replace Coal in the U.S.

● NUCLEAR: 250 more reactors ● NATURAL GAS: 17 more Trillion Cubic Feet

● HYDRO: 500 facilities size of Hoover Dam.

The reality of physics is that electricity cannot be stored in large quantities – an inevitable constraint on solar and wind generation.

29

Nuclear Power: Four bottlenecks will significantly delay the construction of new nuclear power plants in the United States

1. High Level Waste management, transportation and

storage

2. Entrenched Opposition at both national and local levels

3. Supply chain issues

(a) availability and cost of fuel,(b) scientific expertise and skilled labor(c) global competition for nuclear grade components

4. Societal inertia, litigation and bureaucratic creep –we have not built a nuclear plant for decades.

30

Bottleneck: Competition with the rest of the world for nuclear grade components, fuel and expertise –we are behind the curve and falling

Source: World Nuclear AssociationNew Reactors which will come online by 2015

31

“Will Weather Provide Reliable Electricity?”

Energy Policy journal, August,2008: Findings from UK wind analysis

1. Wind output can be very low at the moment of

maximum demand.

2. Expect power swings of 70% within 12 hours

3. This volatility will cause backup NG plants to go on

and offline frequently, reducing efficiency and

reliability

4. These reductions will lead to increases in the cost of

electricity and offset environmental benefits

32323232

Wind Generation’s Performance During 2006 California Heat Wave

* Adapted and estimated from Dixon, U.S. DOE (2006)

250 325

89 90 110 113

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Meg

awat

t P

rod

uct

ion

7/13/2006 7/15/2006 7/17/2006 7/19/2006 7/21/2006 7/23/2006

Date of Heat Wave (2006)

Rated Wind Capacity (2500 MW) -- CA Independent System Operator

When California’s Daily Peak exceeded 45,000 MW, in no case did wind provide more than 325 MW despite rated capacity of 2500 MW.

33

Distance Between Major Wind Farms(In Miles)

* Note: Distance between Altamont and San Gorgonio is 370 miles

0 25 40 45* 95 295 315 415* 425 436 505

Montezuma Hills

California

San Diego

Horse Hollow (TX) Elk River (KS)

350

34343434

Lest We Forget : US Coal Reserves vs. Oil and NG Reserves

0

1000

2000

3000

4000

5000

6000

Qu

ad

rill

ion

BT

U

USACoal

Russia I ran Qatar SaudiArabia

Venezuela

Natural Gas Crude Oil Coal

Source: EIA, 2008

35

Over 70 Billion Barrels of Stranded Oil Recoverable Through CO2 – EOR *

Bil

lio

n B

arre

ls

Texas has over 30 billion barrels of oil potentially recoverable with CO2 - EOR

* Excludes Alaska and Offshore