Navigant Research Blog

Reading the Oil and Natural Gas Ratio Tea Leaves

— June 9, 2012

One of the key energy trends that Pike Research has been tracking over the last few years is the rising volatility in the oil-gas price ratio.  Measuring the difference between the price of a barrel of oil and an mmBtu of natural gas, the oil-gas ratio has held relatively constant over the last 25 years, with oil trading at 8 to 10 times the price of natural gas.  While a barrel of oil’s relative energy density to an mmBtu of gas suggests that the ratio should really be about 6 to 1, oil trades at a premium due to global demand and its relative convenience as an energy carrier.

Beginning in 2009, that historical correlation started to disintegrate in the United States, due mostly to a combination of rising global crude prices in response to Middle East and North African geopolitical events and a surge in domestic production from unconventional shale gas.

As illustrated by the chart below, the ratio has reached 50 to 1 in recent months (touching as high as 52 to 1 in April 2012), more than five times the historical average:

As energy commodities, crude oil and natural gas should logically have a high degree of correlation.  In reality, key market differences translate into diverging drivers.  On one hand, oil is a global commodity with macro-level demand drivers, and its price is acutely sensitive to above-ground, geopolitical forces.  Natural gas, on the other, is closely tied to regional markets with prices primarily driven by local forces.

The divergence is significant on many levels, but at the heart of this shift is a fundamental imbalance in energy markets that has yet to run its course.

Writing for the Wall Street Journal, Carolyn Cui explains:

“Customers who burn cheap U.S. natural gas as a fuel currently enjoy a competitive advantage, and buyers of other fuels have a rising incentive to try and switch.  That may eventually narrow the gap again, but it could be a costly and time-consuming process.”

For clean energy, volatility in the oil-gas ratio points to a substantial shift in market dynamics, which even if short-lived, will have substantial implications for cleantech growth over the coming decade.

Consider that one of the key drivers behind the growth in the clean energy sector in recent years was a purported shortage of fossil fuels, specifically oil and gas.  Facing the prospect of Peak Oil and predicted natural gas shortages across the United States just five years ago, stimulus dollars and public policy coalesced around clean energy.  With a scarcity-propelled rise in fossil fuel prices and innovation across the clean energy landscape driving down costs, price parity for grid, fuel, and other applications seemed just around the corner.

While parity can be fleeting, it has been achieved in some applications; in others, a precipitous drop in natural gas prices across North America has raised significant barriers for still growing industries like landfill gas-to-energy (LFGTE), solar, and geothermal, that remain relatively expensive.  As depicted by the sharp increase in the oil-gas ratio, this shift happened almost overnight, and in some instances, caught investors and project developers completely by surprise.  In other applications, such as the use of LNG fuels in place of diesel for captive fleets, lower natural gas prices could actually benefit clean technologies such as biomethane production.

Although the ratio has fallen in recent months, it remains unclear whether a return to the status quo will lead to business as usual or a more permanent diversion will result in a significant paradigm shift.  Some experts argue that current volatility is only a short-term anomaly and that forces will act to bring prices back into their long run equilibrium, while others question whether or not a stable long run relationship between crude oil prices and natural gas prices even existed in the first place.

Amid the uncertainty, many project developers appear to be taking a wait-and-see approach, especially U.S. policy will coalesce behind natural gas away from the traditional fossil juggernauts, coal and oil.  In the first case, unfolding regulations from the EPA targeting coal plants suggest that this shift may be underway; in the latter, time will tell.

While my colleagues Dr. Kerry-Ann Adamson and Dexter Gauntlett and I have examined the natural gas phenomena and its impact on Smart Energy (see Natural Gas – Boon or Bane for Smart Energy?) as well as biogas (see Biogas and the Natural Gas Bonanza), the widening gap between relative prices is certainly worth monitoring.  As Boon or Bane points out, however, it may still be too early to tell which technologies stand to benefit and which may suffer.


EV Case Studies Offer a Snapshot of a Developing Market

— June 9, 2012

Highlighting initiatives to promote EVs in 16 cities in the United States, Europe, and Asia, 14 of the world’s top economies have released an EV City Casebook.  The casebook, produced by the Electric Vehicles Initiative (EVI), one of 11 clean energy initiatives sponsored by the Clean Energy Ministerial, is meant to serve as an example for other cities or regions that want to promote electric vehicle deployment.  The Clean Energy Ministerial is just what it sounds like: a formal gathering of very high level government officials, who are cooperating on the drive to clean energy.  The participating countries account for 80% of global greenhouse gas emissions and 90% of global clean energy investment.

The Casebook highlights efforts to promote EV uptake in 16 sites around the world.  After I had a quick read through of the case book, a few thoughts came to my mind:

  • Overall, the EVI has set fairly ambitious deployment targets.  The EVI has set a goal of 20 million EVs on the road worldwide by 2020.  This is actually a bit less ambitious than the International Energy Agency (IEA) goal of 27 million.  But both are higher than Pike Research reckons we’ll be seeing by then.  As long as these are not trumpeted too loudly as the sole measure of success for EVs, this is not necessarily a bad thing.  But as we’ve discussed already in several blog posts, the fact that PEVs did not hit the rather lofty first-year sales targets that the automakers set, gave the impression of a market falling short, when in fact, the first year sales outpaced the first year of hybrid vehicle sales.  So targets are a tricky business.  A good example of how to set a target and meet it is the Kanagawa Prefecture in Japan.  Based on sales of hybrid vehicles, which reached 3,000 within five years of being introduced, Kanagawa set a target of 3,000 EVs by 2013, and 2,100 EVs were in use as of the end of 2011.
  • It’s not just about cars.  Cities are looking to spur deployment of passenger cars, yes, but also buses, two-wheel vehicles, neighborhood electric vehicles (NEVs), and various work or utility vehicles.  For example, BrabantStad in the Netherlands aims to have a zero emission public transit fleet by 2020 – perhaps another aggressive goal.  Pike Research has been marking the booming market for electric two-wheelers, projecting that 382 million will be sold in Asia Pacific alone through 2018.  The Case Studies on Shanghai reports that there are around 130 million electric bicycles in China.
  • Fleets and car sharing will play a key role in early EV adoption.  We’re hearing lots of stories about cities promoting car sharing programs that use EVs, like Car2go, Daimler’s car sharing program that uses both the gas and electric versions of the Smart fortwo.  According to the U.K. case study, the two main EV dealerships in North East England indicate that 85% of EVs sold in the region have been purchased by businesses as fleet and pool cars.

The Case Study report also highlights the range of incentives and subsidies available for electrified vehicles.  In all, the report is an interesting look at a market in development.  Some cities have moved quickly to adopt EVs and charging equipment, others are still in early trial stages.  The case studies make clear the need to set appropriate expectations for market development and for a range of private and public stakeholders to pitch in during these early days.


A Glimmer of Hope for a Cap-and-Trade Scheme in the United States?

— June 9, 2012

Without the support of a national policy and having faced numerous obstacles over the years, U.S. cap-and-trade programs have lingered, most of them managing to survive despite many setbacks.  With California’s upcoming launch of the nation’s first economy-wide carbon market, new vigor (and hope) is being injected into the struggle to develop and foster a carbon trading scheme in this country.

In 2010, Californians reaffirmed by a vote of 61% to 39% their intention to implement cap-and-trade auctions for greenhouse gas (GHG) emissions by 2012.  They are getting ready to hold a “practice” carbon allowance auction in August, followed soon by the first official auction in November.  A few months later, the state’s cap-and-trade program will formally kick off in January 2013, when GHG emissions will start to be counted against the cap.  But this achievement has not been without difficulties and court battles, with various neighborhood and environmental justice groups claiming that the program will allow industrial plants to avoid installing much tougher pollution controls. Originally scheduled to start in January 2012, the program was delayed one year to give the state’s Air Resources Board (ARB) extra time to make sure that all the necessary steps had been taken and to protect the program from potential market manipulation and fraud.

Championed by former Governor Arnold Schwarzenegger, the cap-and-trade program is the cornerstone of California’s effort to reduce GHG emissions to 1990 levels by 2020.  It will affect 600 power plants, factories, and other industrial facilities and accounts for one fifth of the planned cuts under the state’s 2006 Global Warming Solutions Act, AB 32.  In 2015, the state will include transportation fuels.  Besides setting an emissions limit on sources responsible for 85% of the carbon footprint, ARB is providing a financial incentive for investments in clean technology and energy efficiency initiatives.

But as the August auction is rapidly approaching, one key issue is emerging.  What is the state going to do with the revenues from this and future auctions held on a quarterly basis?  Considering that these auctions could generate as much as $1.8 billion in the first year and the state already has a $16 billion budget deficit, this revenue question has become a very serious matter indeed.  Although the law requires that the money be invested in carbon reduction programs, a fierce debate is already going on among the state’s lawmakers and other stakeholders, along with intense lobbying from various clean energy and environmental groups. Both ARB and the utility companies want the money to help offset the rate increases that will result from the trading scheme, while the California’s public utility commission proposes to return 90% of the revenues to customers as rebates and use the remaining 10% for energy efficiency upgrades in buildings.  Other proposals have included funding for California’s high-speed rail project, establishing a “green bank” for alternative energy projects, and (not surprisingly) reducing the state’s budget deficit. To complicate matters, the California Chamber of Commerce claims that the allowances are a form of tax, so ARB has no legal right to impose it.

As these debates and arguments continue to rage in the coming months along with new amendments, California’s cap-and-trade program should send a strong message to the U.S. government that the time has come to reconsider a national carbon trading scheme and join other major economies, such as the European Union (with the world’s first and largest cap-and-trade system), Australia (which passed a carbon tax in 2011 that will shift into an emissions trading scheme in 2015), and China (which plans to start seven pilot carbon emissions trading programs in five major cities and two provinces in 2013). The success of the California carbon market could have a significant impact on the future policy decision-making of adopting a nation-wide carbon trading scheme in the United States.


The Slow Process of EV Charging Standardization

— June 9, 2012

We recently wrote about the imminent arrival of a combination EV charging connector that would enable charging AC or DC vehicles through a single charge port.  When it arrives, this equipment, based on a standard that’s expected to be approved and generally available by August, will contrast with the two ports currently in use on some plug-in vehicles such as the Nissan Leaf.  (The ports are known in the industry as the AC J1772 connector and the DC CHAdeMO connector.)

At industry events during the past year, I’ve been hearing a lot of talk about which DC charging connector will prevail, with several folks alleging that the “battle” between the Society of Automotive Engineers (SAE) and CHAdeMO (designed by the Tokyo Electric Power Company) is more about who gets to call the shots in the PEV market than about technical or business concerns.  But, the issue is really about bad timing in the rush to get PEVs to market, engineers’ philosophical differences, and the slow process of standardization – and not something more nefarious.  After more discussion about the DC charging evolution at the EVS26 conference, I went back and read the notes of my conversation a year ago with SAE standards participants to clarify the technical reasons why SAE didn’t adopt CHAdeMo.

In that conversation, I spoke with Rich Scholer (then at Ford and now at Chrysler), who was heading up the SAE working group on developing the messaging aspects of PEV standards, and Gery Kissel (at General Motors), who was heading up the working group on the connector aspects.  They explained that the CHAdeMO connector has two additional terminals that allow controller area network (CAN) bus communications (used for communications inside vehicles) between vehicles and the off-board charging equipment.  According to the CHAdeMO website, its engineers chose a redundant design with an analog signal transmission and a digital communication via CAN to ensure safe operation.  (The SAE system similarly has both analog and digital communications.)

When it began developing a standard connector in 2007, which was long before any of this generation of PEVs had hit the market, the SAE decided it wanted a connector with few pins and that was as small as possible so it would be consumer friendly.  When the SAE first began its standards work, the CHAdeMO specification was presented and considered for adoption, but the group ultimately preferred a single connector and chose to develop its own standard.

SAE began relying on power line carrier communications (PLC) when it began to work on an AC charging connector, and the group continued that philosophy with its DC charger development.  PLC piggybacks digital communications information over the power line for communications with equipment off the vehicle.  The new combo AC and DC connector will take the CAN messages and change them into PLC messages that are governed by the charger’s control pilot equipment.

In addition to these technical issues, the two groups had clearly differing philosophies on the urgency of providing a DC connector standard.  Nissan, Mitsubishi, and other CHAdeMO backers wanted PEVs to launch with a fast charging DC option.  At the time, SAE’s work was likely years away from completion. Since a CHAdeMO specification was available, they began shipping CHAdeMO-compatible vehicles in 2010 and were comfortable with a two-port solution.

Other automotive OEMs (largely in Germany and the United States) were not in as much rush to deliver vehicles or a DC charging standard.  According to the SAE’s Kissel “the priority was always AC,” and that decision has led to the broad adoption of the J1772 connector.

More than 1300 CHAdeMO DC fast chargers have been installed globally, and Nissan and Renault are in the process of giving away 400 DC chargers in Europe so that CHAdeMO will become further entrenched in the region.  Without referring to any specific technology, three European automotive groups (ACEA, CLEPA, and EURELECTRIC) said in late May that they “jointly agree on the need for a single harmonised plug system for the recharging of electric vehicles.”

The U.S. Department of Energy’s EV Project has also installed several CHAdeMO chargers.  Any installed CHAdeMO charger would have to be upgraded to accommodate the new combo connector.  New DC chargers featuring both CHAdeMO and the combined charger ports are expected out this fall.


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