Luncheon Speech by Andrew Weissman, Publisher & Editor-in-Chief, EnergyBusinessWatch

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Climate Change & Energy Security - Tackling a Daunting Challenge Head-on

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Starting Point - Non-Controversial Principles

1. Tackling climate change & energy security requires a comprehensive, integrated solution with well-defined goals & realistic plan to achieve
   • Attempting to address climate change without effectively managing energy costs could cause support for GHG reduction measures to quickly unravel
2. Geo-political & economic repercussions of falling short severe
   • Health & competitive position of U.S. economy in global market
   • Potential to significantly increase U.S. vulnerability, shift balance of power towards Russia/China/Iran & pull U.S. deeper into Middle East
3. Primary objectives long-term oriented
   • Urgent need to significantly reduce projected long-term concentration levels of Greenhouse Gases
   • Need to adjust to major changes in energy mix
     • End of the era of low cost, abundant oil
     • Globalization of natural gas market — & U.S. electricity prices
     • Rapid growth in renewables & improvements in energy efficiency

Cap & Trade Has Major Limitations

• Cap & trade creates illusion of long-term planning
  • Long-term reduction requirement equated with long-term plan
• Strength of cap & trade: short-term optimization
  • Most efficient means of achieving CO2 reduction goals year-by-year
  • To extent banking allowed, additional savings also obtained by capturing "no brainer" (i.e., too compelling to pass up) opportunities for banking
• But – will NOT:
  1. Set accurate long-term price signals
     • Instead, price signals guaranteed to be too low if goals phased in
  2. Plan/encourage optimal level of future long-term investment, even for CO2 reduction
     • Low prices in early years more likely to discourage
  3. Ensure development of most cost-effective strategy for achieving twin goals of long-term CO2 reduction and reliable, reasonably cost energy supply adequate to meet needs of U.S. economy
• Urgent need to development a strategy to better achieve these goals

Need New Era of Integrated Resource Planning

• Key issues:
  • Who will take responsibility for integrated resource planning
  • How should scope be defined
• Neither Congress, U.S. Department of Energy (as currently structured) or "market" equipped to undertake
• Leadership must come from two sources:
  • State & federal regulators
  • ISOs and RTOs
• In current de-regulated, disaggregated industry, only entities with breadth of responsibility and expertise to undertake required planning function
  • Industry can contribute a great deal in the process, but not in a position to lead

Requires New Definition of Resource Planning

• Adequacy & reliability of physical equipment not the only issue
  • Outmoded, 1950's definition
• To provide reliable, affordable energy in compliance with public mandates, just as essential to focus on:
  1. Developing a plan to ensure adequate & reliable fuel supplies
  2. Protecting against prices spikes
  3. Meeting long-term CO2 reduction goals at lowest reasonable cost
• Not rational to treat fuel costs as an independent input into planning process
  • Generation options chosen will have a major impact on costs
  • Especially in carbon-constrained environment in which much of the world plans to increase use of natural gas at same time
• California taught 8 years ago that increased costs due to electricity price spikes can overwhelm potential savings from other steps to improve market efficiency
  • Fuel price spikes often primary cause – including California in 2000

Need to Match Action to Principles

My contention: not on the right playing field yet

• Major shift required in policy-making & public debate

Proposed remedy:

1. Get serious about evaluating adequacy of future U.S. energy supply in a carbon-constrained, post peak-oil world
   • Current analyzes far off the mark
   • Prevent producers and regulators from making sound decisions by giving inaccurate, misleading information
   • Requires creation of National Energy Security Supply Board –akin to Federal Reserve Board
2. Re-focus energy supply planning to give equal emphasis to energy supply risk and price
   • Generation & transmission only ½ the equation
   • Price shocks can disrupt the economy
   • Potential geo-political implications of energy supply strategy huge & likely to increase sharply over next decade as competition increases for oil and LNG
3. Develop new, out-of-the box solutions to accelerate energy efficiency
   • Tinkering around edges not enough
4. Get to bottom now of role wind & solar realistically can play innext 10-15 years
   • Still room for expansion
   • But what really is required to provide back-up power using intermittent resources for a much larger % of total supply?
     • Includes assessment of infra-structure required to store and quickly deliver much larger quantities of natural gas for back-up power & limits this places on expansion
5. Shift primary focus of climate change debate to how to accelerate measures required to achieve large-scale reductions in emissions in a cost effective manner
   • Includes energy efficiency, next generation bio-fuels, carbon capture & storage, nuclear & electric plug-in hybrids
   • Addresses energy security at the same time

Unprecedented Challenges/Exceptional Risks

Energy = Lynchpin for Economic Growth

• Global energy use expected to triple by 2050
  • Driven by emerging market economies
  • Cannot join 21st century without significant growth
    • Requires $ 20 trillion of new infrastructure by 2030 (IEA est.)

Huge Potential Gap Between Supplies & Need

• Growing recognition oil supplies likely to fall far short of needs of global economy
  • 3.2 million b/d in new supplies needed each year just to offset declines in existing fields

• Global LNG supply gap could be just as severe
  • Projected to account for all of net growth in U.S. natural gas supplies next 10 years, twice over

Status Quo Can't Continue

• Many discussions of climate change largely miss the point
• Continuation of “business as usual” thru 2050 not an option
  • Large scale CO2 and methane emissions have just begun
  • 50% stay in atmosphere > 100 years
• Would "lock in" estimated 10–12 °F increase by 2100

Requires Huge Cuts in Future Emissions

• Requires 50 to 80% cut in emissions at same time global energy use expected to triple
  • IEA estimates $50 trillion cost by 2050
  • Ave. temp. still might increase by 4-5 °F by 2100

First Step — Develop Accurate Understanding of Potential Energy Supply & Price Risks

EIA Estimates Far Off the Mark

• EIA thoroughly misjudging likely future global oil supply
  • Substantial risk supply will not keep pace with global needs
• NYMEX forward delivery price curve indicates EIA under-estimating U.S. oil costs by $1.5 trillion over next 10 years
  • Don't be surprised if its ultimately 2-3X this amount
  • Potential devastating impact on balance of payments deficit, interest rates required to financial imports

LNG & Electricity Risks Potentially Just as Severe

• Could prove to be "tip of the iceberg"
• Electricity & natural gas = 60% of total U.S. energy use
  • LNG expected to be marginal source of supply in both markets

• EIA has not yet provided any reliable assessment of:
  • Future demand for natural gas in carbon constrained world
  • Potential price & supply risks associated with LNG
• Creates huge, needless risks for U.S. energy supply strategy

Severely Underestimates Growth in Demand

• Even in "status quo" scenario, EIA severely underestimates likely growth in power sector demand for natural gas
  • Prior to taking into account coal-plant cancellations & carbon constraints, reasonable to expect year-over-year growth of 1 Bcf/year
  • 3 Tcf/year + in 10 years
• EIA projects little or no growth next 5 years

EIA Projections Difficult to Justify

• Forecasts have considerable impact, even though based upon:
  • Prices no producer believes are plausible even now
  • A future world that never will exist

• Will drive electricity prices and cost of CO2 reduction

Analysis of McCain Lieberman No More Realistic

• Recent analysis of S. 280 profoundly flawed.
• Premised on series of indefensible assumptions, including:
  1. Price & Demand for natural gas in "business-as-usual" scenario
  2. No federal bio-fuels program
     • Critical assumption, since EIA relies on bio-mass as primary source of new power & insufficient resource to do both
  3. Nuclear build-out of heroic proportions
     • Requires companies with limited market cap to finance $ trillion + construction program
  4. Nearly unrestricted availability of offsets from other countries
• Underestimates likely gas increase by at least an additional 3-5 Tcf/year

Decision-Makers Flying Blind

• Bottom line: EIA potentially understating future U.S. gas demand by as much 6 to 10 Tcf/year (16-27 Bcf/day)
  • Leaves producers, regulators without any reliable basis for decision-making
• Potential adverse consequences include:
  1. Misleading signals to both producers & end users
  2. Much higher prices than would be likely if market better informed & could better anticipate demand
  3. Risk of periodic supply shortages
  4. Rapid increase in dependence upon LNG, in a market in which supplies likely to be limited and global competition fierce
     • Large portion of world turning to LNG as incremental source of supply at same time, as part of GHG strategy
• Worst case scenario: much of U.S. energy supply becomes tied to global price of oil in a post-peak oil world
  • Not just transportation fuels, but electricity & natural gas

Imperative to Maximize U.S. Production

• Over past 2 years, U.S. producers have shown impressive ability to expand U.S. production
• Not a short-term phenomenon – sustainable for many years
  • Reflects expansion into new basins, success in horizontal drilling

• But huge investments & high expansion rate required to offset losses from Canada and declines from conventional fields
• Requires far more accurate demand forecasts, higher prices, longer-term contracts, more storage

High Risk Strategy

• Risks of depending upon imported natural gas as incremental source of supply for U.S. natural gas & electricity markets include:
  • Likelihood of sharp, "feast or famine" swings in supply
    • Gas dumped onto U.S. market in times of excess supply, forcing U.S. producers to cut back on drilling
    • U.S. gas companies outbid by Asian or European buyers during periods of peak demand
  • Much higher price volatility
  • Pricing increasingly tied to global oil prices
  • Periodic supply shortages – with no ready substitute
  • Far greater leverage for Russia, Iran, Nigeria and other major suppliers to global gas market
  • Significant increases in U.S. balance of trade deficit
  • Increased risks if control threatened over Straits of Hormuz

Need to Rethink the Scope and Methods for Integrated Resource Planning

Major Change in Focus Required

• Three fundamental changes:
  1. Reliability of fuel supply & fuel cost minimization should be a major focus of every resource planning effort.
     • Generation & transmission only part of delivery cycle
     • California should've taught us early in decade that fuel costs can dwarf other issues
     • Power plants useless if there is no fuel to run them
  2. Deployment of energy efficiency measures must be greatly accelerated.
     • Must set far more aggressive goals
     • Requires out-of-the-box solutions, outside scope of regulation alone
  3. Critical need nationally to assess potential constraints on ability to provide back-up power to intermittent resources.
     • Constraints on availability & deliverability of natural gas, required increases in storage capacity = key issues
     • Could significantly limit potential penetration of wind & solar

Don't Put Off Dealing With Difficult Issues

Most Important Issues Largely Being Ignored

• Easy course is to focus only on renewable energy & energy efficiency
  • Not sufficient to meet long-term emission reduction goals on a global basis
• Even "cap & trade" does relatively little to accomplish long-term goals at any time in next 10 to 15 years
• Instead, essential to focus now on steps required to accelerate large scale long-term reductions in GHG emissions
• Menu of potential options already reasonably clear. Includes:
  • Greatly accelerated, far more aggressive energy efficiency
  • Advanced, next generation bio-fuels that don't yet exist
  • Electric plug-in hybrids and other advanced low mileage vehicles
  • Rapid deployment of next generation nuclear
  • Large-scale deployment of carbon sequestration
  • Sequestered IGCC and coal-to-liquids
• Same steps essential to energy security and avoiding energy price dislocations that could seriously weaken U.S. economy

Additional Discussion

• Article addressing issues in more detail:
  • Climate Change & Energy Security – What's Really at Stake in the 2008 Election
    • EnergyPulse™

How to Contact Andy for Questions

Mailing Address:
Andy Weissman
Editor-in-Chief & Publisher, Energy Business Watch
Senior Energy Advisor
FTI Consulting, Inc.
1101 K Street NW
Suite B100
Washington, DC 20005

E-mail: Andy.Weissman@FTIConsulting.com
Office Phone: 202/589-2391
Cell: 202/744-1956
Fax: 202/312-9101

Check out my new website at: http://www.energybusinesswatch.com