China Turning Away from Coal

The US coal industry is facing a wave of bankruptcies.  Nick Cunningham, of OilPrice.com says:

The coal markets have collapsed in spectacular fashion over the last few years due to a perfect storm of factors. U.S. coal producers first had to compete ferociously with shale gas in America’s electric power sector as fracking took off about a decade ago. That forced an array of coal plants to shut down as cheap gas washed over the country. Subsequently a regulatory crack down from the federal government – including forthcoming restrictions on greenhouse gases – further dimmed the growth prospects of coal.

But U.S. coal producers always had the international market, and exports stepped up in concert with falling domestic consumption. Now the foreign buyers are shrinking as well. China, the one country that the coal industry could count on for ceaseless growth in coal consumption, actually burned 2.9 percent less coal in 2014 than it did the year before.

When China, which consumes about as much coal as the rest of the world combined, sees its level of coal burning stay flat or even fall, that raises red flags for the entire industry.

Here are the specifics from IEEFA’s Tim Buckley:

When the largest coal producer in China puts out the kind of numbers China Shenhua Energy Co. just reported, it’s an unmistakable signal that the most populous country on the planet is continuing to step back from coal.

In announcing its 2014 results and its 2015 business targets, Shenhua dropped some bombshells:

  • It sees a 10 percent drop in its domestic coal sales in 2015 (that’s a 47 million tonne reduction to 404 million tonnes).
  • Its capital expenditure plans for coal and power generation in 2015 are down 25 percent over 2014 to $3.2 billion.
  • It expects its ports and rail investment to drop 12 percent year-over-year to $2.5 billion.

The numbers reveal a strategic shift by Shenhua as it reduces its volumes, its operating costs and its capital spending, and the 2015 numbers in particular signal an acceleration in this strategy. These trends are bigger, actually, than Shenhua. The company has a 15 percent share of the Chinese coal market, so it’s a key barometer of the larger picture, and its cutbacks send a clear signal that China is intent on curbing its emissions by a rapid diversification away from coal.

You read that right:  “a clear signal that China is intent on curbing its emissions by a rapid diversification away from coal.”

Gone are the days when Bill Raney, president of the WV Coal Association, can claim that the US doesn’t have to do anything about carbon emissions, because China isn’t.  Gone are the days when Mr. Raney can claim that WV coal miners will be back at work soon exporting coal to Germany and China.

Real world economics have caught up to the coal industry and no amount of US or WV government subsidies can save it.

And where is China turning for energy?  Here it is from Jack Perkowski at Forbes:

According to The Global Status Report, which was released earlier this month by the Renewable Energy Policy Network for the 21st Century, China once again led the rest of the world in renewable energy investment in 2013, spending a total of $56.3 billion on wind, solar and other renewable projects. The report stated that China accounted for 61 percent of the total investment in renewables by developing countries, and that China invested more in renewable energy than all of Europe last year.

Dangerous Holding Companies Rebuilding Empires at the Expense of the Rest of Us

Back in the 1910s and 1920s, Samuel Insull, president of Commonwealth Edison in Chicago, and banker J.P. Morgan put together a network of privately owned holding companies that controlled must of the major electric utilities in the US.  In the late 1920s and early 1930s, this dangerous pyramid of companies collapsed, threatening the stability of electrical service across the country.

In 1935, the US Congress passed the Public Utility Holding Company Act which limited the size and activities of utilities to prevent the collapse of dangerous financial structures that threatened the US electrical and natural gas infrastructure.

This federal law remained in place until the Cheney Administration and the Republican-controlled Congress repealed it as part of the 2005 Energy Policy Act.  The 2005 Energy Policy Act was the same law that granted massive rate payer subsidies to power companies for building new high voltage transmission lines.  Readers of The Power Line are very familiar with the disastrous impacts of this transmission subsidy scheme.

So erstwhile “free market” Republicans passed the 2005 Energy Policy Act to encourage the growth of new, unstable monopoly holding companies in the electricity markets and huge subsidy schemes for those same holding companies to build obsolete and unneeded high voltage transmission, all at the expense of electric retail customers.

We are witnessing the results of the repeal of the 1935 Utility Holding Company Act in real time.  Holding companies AEP and FirstEnergy have dumped obsolete coal-fired power plants onto the captive electric bills of West Virginians.  New post-2005 repeal holding companies are merging into ever fewer monopolies that operate in multiple business lines and exert increasing power in regional transmission organization cartels across the US.  The attempt by Chicago-based Exelon to swallow regional distribution company PEPCo Holdings on the East Coast is just the latest in the holding company monopoly game, and this one even includes Atlantic City.

I have posted a number of times, here, here, here and here, about the Exelon merger, because the forces at play in this case offer real insight into the train wreck that is West Virginia’s electrical system.  In the last few years, the WV PSC and the two Ohio-based holding companies that control WV’s electric utilities have played West Virginians for chumps.  AEP’s and FirstEnergy’s coal-fired power plants can no longer compete in wholesale electricity markets, so friendly regulators have forced their WV customers to pay for much more power plant capacity then customers will need for the next thirty years.

Exelon is moving to create that same situation for the customers of PEPCo’s companies.  Exelon’s shaky holding company structure is almost entirely dependent on expensive and obsolete nuclear power plants.  Like coal-fired power plants, nukes are struggling to compete in the free market.  Exelon is paying billions of dollars above PEPCo’s stock value because it wants access to PEPCo’s captive rate payers in stable regulated retail markets.

Wall Street bankers have seen the dangers facing unstable electric holding companies and their obsolete generating plants.  Starting last May with Barclays Bank, major investment banks have been downgrading the bonds of the entire electrical generation sector because they can no longer compete with natural gas plants, investment in energy efficiency and renewable power.

Last week, the Institute for Energy Economics and Financial Analysis published an in depth report by WV’s own Cathy Kunkel describing exactly how and why Exelon wants to control a captive PEPCo Holdings for its own profit.

Also last week, the always entertaining and informative David Roberts provided an overview of the Exelon/PEPCo merger, plus some important history and context.

If you are interested in real electricity innovation in the US, you need to understand the massive forces that are arrayed against us.  Understanding the newly hatched monopoly holding companies that control electricity in our country is essential for identifying who is resisting change and why they are doing it.

While the new holding companies still control most of the US electrical grid, they are becoming increasingly desperate as their market base erodes and their financiers get weak in the knees.  These companies have become the enemies of the free market in electricity.  Their only hope is to manipulate the political and regulatory process to maintain their slipping grip on power, as their industry association recommended back in 2013.

Look closely at the links in this post, and you will be able to see beyond the misleading information that pops up in the media (most of it from power company press releases) to see what is really at stake.  As I have always said here on The Power Line, knowledge is power.

EEI Report Shows US Demand Remains Flat

It is not good news for the US electric industry when the Edison Electric Institute begins its 2013 annual review (the last full year report available) of the industry’s financial health with this statement:

As shown in the table U.S. Electric Output, in 2013 the U.S. electric industry made available for distribution in the continental U.S. 3,993,521 gigawatt-hours (GWh) of electricity, an increase of 0.1% over 2012’s total of 3,991,408 GWh. This is the first time since 2010 that there has been a year-to-year increase in U.S. electric output, and 2013’s total was barely above 2005’s 3,992,966 GWh.
Yes, you read that right: “2013’s total was barely above 2005’s”.  That is eight years of essentially flat US load growth.
Here’s the regional summary:
On a regional basis, four of the EEI regions experienced increases in electric output in 2013. The South Central region saw the largest year-to-year gain at 1.9%, with the New England, Mid-Atlantic, and Pacific Northwest regions also showing growth. The Pacific Southwest region saw the largest decrease in output, at -1.5%. The Central Industrial, West Central, and Southeast regions also experienced decreases in output for the year.
In EEI’s system, WV is divided between the Central Industrial region (northern and western WV) and the Southeast (southeastern WV).
When EEI normalized its data for 2013 weather conditions, here’s what happened:
On a weather-adjusted basis, electric output actually declined in 2013 by 0.6%.
Here’s EEI’s explanation:
The anemic rebound [in the economy] continues to impact electricity sales in every sector, although increases in the adoption of energy efficiency are also contributing to the protracted weakness in sales.
When the industry identifies energy efficiency measures as “contributing to the protracted weakness in sales” look for the kinds of political and regulatory attacks on efficiency standards that we have seen in OH from FirstEnergy.  Big holding companies don’t like “protracted weakness in sales.”  If EEI is saying outright that energy efficiency is hurting the industry’s profitability, then it is.
The era of flat demand represents a whole new world for the US electricity industry, and the corporations that dominate the industry are having a very hard time adjusting to it.

German Power Giant E.on Shedding Coal Burners

Here’s the story from Reuters.

Germany’s top utility E.ON (EONGn.DE) said it would split in two, spinning off power plants to focus on renewable energy and power grids, in a dramatic response to industry changes that could trigger similar moves at European peers.

Europe’s power sector has been hit by weak energy demand in a sluggish economy, low wholesale power prices and a surge in demand for cleaner renewable energy which is replacing gas and coal-fired power plants.

 

Brattle Group Says Stagnant Demand Is Here to Stay

The Brattle Group is an industry consulting firm that knows what it is talking about, most of the time.  Here is a link to a presentation by a Brattle Group engineer, Ahmad Faruqui, at a June 2014 electric industry conference.

Mr. Faruqui starts with something what we have been saying on The Power Line for the last six years, but that a lot of industry people still won’t let themselves admit:

Normal electricity growth has not resumed four years after the Great Recession ended

  • According to Dr. John Caldwell of the Edison Electric Institute, normal growth usually resumes within five months after the recession ends; the longest it has ever taken has been twelve months
  • The EIA’s May 2014 Short-Term Energy Outlook (STEO) projects that electric retail sales will grow by 2.3% in 2014 and 0.0% in 2015; in the residential sector, the corresponding growth rates will be 3.1% and -1.5%
 The graph on the next slide tells the tale clearly –
screenshot-www brattle com 2014-09-01 20-44-08
So all that stuff we heard from PJM back in 2010 and 2011 about how demand would recover when the “recession” ended just hasn’t happened.
And, of course, this is all part of a long term trend that started back in 1950.
screenshot-www brattle com 2014-09-01 20-46-46
Mr. Faruqui was speaking to an industry group, so he tried to point to four solutions that electric utilities could employ to save themselves in this new future of stagnant demand.  After identifying the five forces that have combined to create the industry’s nightmare scenario, he posits four responses that utilities could take:
What are the options for electric utilities?
To deal with the five forces, utilities can pursue one of four strategies
1. Stay the course
2. Push electrification
3. Become a wires company
4. Become an energy services utility
Mr. Faruqui essentially dismisses the first three options as all having failed to save utilities’ bacon in the past.  The rest of his presentation describes what he means by an “energy services utility.”  You can go to the power point slides and see his description for yourself.  I think you will come away, as did I, with the feeling that this really isn’t a practical solution either, for most utilities.
The fact that a very smart engineer from the Brattle Group can’t really come up with any good solutions to utilities’ current problems is a sign that power companies are in real trouble.

Stagnant Demand Now Well Established in US Electrical System: Bleak, or Not Bleak?

I have been citing Rebecca Smith’s excellent reporting on falling electricity demand in the US for almost five years.  The Wall Street Journal’s editors deserve credit for keeping Ms. Smith on the electricity beat so she has the time to develop a deep understanding of the industry.  Most media outlets don’t allow this kind of growth, and their reporters simply reprint industry press releases instead of doing real journalism.

Last week, Ms. Smith updated her longstanding coverage of the decline of US electricity demand and its dramatic impact on the US electrical industry.  Here is a link to her story, but you will have to have a subscription to the WSJ to view it.

Ms. Smith’s story is a status report on the now well established disconnect between US load growth and economic growth, which I have also been covering here on The Power Line.  A graph in her article, taken from the Dept. of Energy’s Energy Information Agency, shows that 2008 was the peak for annual US electrical production, with a total of 3.77 trillion kwh.  Production has not reached that level in the five full years since then, and the EIA does not project any change in that trend in the future.

US power company mouthpieces claim that electricity demand will continue its past upward trend “when the economy turns around,” but the disconnect between economic growth and electrical load growth shows that this is unlikely to happen.  So the US is now “past peak” in electricity demand.

As Ms. Smith puts it:

Utility executives across the country are reaching the same conclusion. Even though Americans are plugging in more gadgets than ever and the unemployment rate had dropped at one point to a level last reported in 2008, electricity sales are looking anemic for the seventh year in a row.

Sluggish electricity demand

Sluggish electricity demand reflects broad changes in the overall economy, the effects of government regulation and technological changes that have made it easier for Americans to trim their power consumption. But the confluence of these trends presents utilities with an almost unprecedented challenge: how to cope with rising costs when sales of their main product have stopped growing.

Sales volume

Sales volume matters because the power business ranks as the nation’s most capital-intensive industry. When utilities are flush with cash, they buy lots of expensive equipment and raise dividends for investors. When they’re selling less of their product, they look for ways to cut or defer spending. Regulators typically allow utilities to charge rates that are high enough to cover their basic expenses, but that doesn’t guarantee them strong profits. Utilities typically need to expand sales volume by 1% or more a year just to maintain their expensive, sprawling networks of power plants, transmission lines and substations, says Steven Piper, an energy analyst for SNL Energy, a research company. “That’s where the existential crisis is coming from,” he adds.
Historically, economic expansion meant expanding electricity sales. In fact, during the 1950s and 1960s, energy demand outpaced the growth in the gross domestic product. Then, from 1975 to 1995, GDP and electricity sales grew in tandem.

But the connection now appears to be broken. The U.S. Energy Information Administration said recently that it no longer foresees any sustained period in which electricity sales will keep pace with GDP growth. [emphasis in original]

Ms. Smith points to a number of factors, including customer generated solar power and energy efficiency investment, as major causes of the industry’s problems:

Local Solar Power Generation

Increasingly, both residential and business customers are making their own power rather than buying it from utilities. In Arizona, for example, solar companies are siphoning off utility customers. Sherry Pfister, a retiree who once worked at the Palo Verde nuclear power plant 45 miles west of Phoenix, says she didn’t hesitate to lease solar panels for her home in Waddell, Ariz., and says the panels have cut her utility bill by a third. “Why isn’t everybody doing it?” she wonders. Her supplier, Sunnova Inc., wooed her with
solar panels that cost 70 cents a watt, a fifth of the cost in 2008. Solar energy “is the next shale gas,” says Sunnova Chief Executive John Berger, predicting it will upend the utility business.

Energy efficiency

Energy efficiency blunts the impact of population and economic growth, because upgrades in lighting, appliances and heavy equipment reduce energy needs. In 2005, the average refrigerator consumed 840 kilowatt-hours of electricity a year, according to the U.S. Energy Information Administration. A typical 2010 replacement needed only 453 kilowatt-hours of electricity.

Higher rates

As their sales have lagged behind, utilities have raised prices, and that, too, is discouraging use. Most U.S. households pay 12 cents a kilowatt-hour today, up one-third from a decade ago, according to EIA data. A 2012 study from the California Public Utilities Commission found that customers have had a “strong response to price changes.”

Consumers fight back

To fight rising costs, Washington, D.C., has hired a consultant to help cut its electricity use 20% by 2015—and to save $10 million a year. FirstFuel Software sniffs out waste at the district’s 400 buildings with the help of smart meters and special software. “We’re not going to win the grand innovation prize,” says Sam Brooks, head of energy and sustainability for the District of Columbia, but he adds that just turning off the lights and shutting off furnaces when buildings are unoccupied turns out to be an easy way to save money.

And Ms. Smith concludes with a quote from our old friend, FirstEnergy CEO Tony Alexander, trying desperately to put a happy face on the company’s future.

New utility business models

Utilities aren’t waiting for better times. They’re increasing spending on big solar projects and energy-efficiency programs for which they earn income as investors or managers. And many executives are searching for new services to offer. “The industry has been pretty resilient the past hundred years,” says Bill Johnson, chief executive of the Tennessee Valley Authority, which furnishes electricity to nine million people in seven states. “I wouldn’t count us out quite yet.”

Electricity demand also isn’t bleak everywhere. FirstEnergy Corp. based in Akron, Ohio, says demand is increasing from such industries as steel, auto, oil refining and chemical production. But that hasn’t been enough to make up for losses elsewhere. Anthony Alexander, the company’s chief executive, forecasts that it will take until 2016 at the earliest for its electricity sales to recover to prerecession levels. “It’s pretty much a lost decade,” he says.

I find it hilarious that Ms. Smith introduced the FirstEnergy paragraph with the words “isn’t bleak.”  Go to yesterday’s Power Line post on UBS’s downgrade of FirstEnergy’s stock.  In his analyst report, UBS industry specialist Julien Dumoulin-Smith said about FirstEnergy’s future, “It looks bleak.”  Oops.

10 States Have Already Met New Carbon Targets

The NYT reports this morning that ten states had already met the new federal targets for carbon emissions reductions by 2012.  This is an indication that the choice of 2005 was an easy way to let states off the hook for real reductions.  Much of the carbon emissions reductions has happened because electricity demand has fallen, not from any other changes in behavior or generation.

Although reductions from falling demand indicate how weak the new EPA standard is, they also illustrate the kind of impact demand management, including investment in energy efficiency and conservation, can have.  The whiners need to stop whining and get to work.

The NYT story also illustrates that multi-state agreements like RGGI work:

Maine, Massachusetts, New Hampshire and New York cut their power-sector emissions more than 40 percent from 2005 to 2012, according to the Georgetown Climate Center, with Maryland close behind at 39 percent. The states are part of a nine-state project called the Regional Greenhouse Gas Initiative and, like much of the country, have benefited from the recent abundance of cheap natural gas.