Navigant Research Blog

Rail Looks to Move the LNG Market

— September 13, 2016

Pipeline (2)The natural gas market in North America continues to have oversupply issues and a much lower price than other regional markets. Natural gas producers in Canada, Alaska, and other parts of the United States that are looking for new outlets for gas deposits may soon see new sales thanks to an old form of transportation—rail.

For the first time in decades, liquefied natural gas (LNG) is being used to power locomotives in the United States, and trains will soon begin delivering LNG by tanker for the first time. In June, the Florida East Coast Railway (FECR) began the first line in nearly 20 years to operate an LNG-diesel duel fuel train in the United States. The train runs between Jacksonville and Miami, and the company intends on converting all of its locomotives to dual-fuel setups.

Displacing Diesel

FECR is currently sourcing its engines from General Electric. Also offering LNG conversion kits to railway operators are manufacturers Energy Conversion, Inc. and EMD. Railroad operator BNSF is also testing LNG locomotives. The use of LNG in locomotives first began in the 1980s by Burlington Northern Railroad, but after several trials, engine conversion efforts lost steam, until efforts to put them back online returned just a few years ago.

The potential market for LNG as a rail fuel is considerable as diesel fuel consumed in the top 7 major freight railroads was about 7% (3.6 billion gallons) of the U.S. total diesel fuel consumption in 2012, according to the US Energy Information Administration (EIA). Supplying engines with LNG fuel while in operation requires the addition or modification of an LNG tender car. LNG tender manufacturers in North America include Westport Innovations of British Columbia and Chart Industries. The EIA expects that switching to cheaper LNG will more than repay the cost of converting the engine and tender car that holds the fuel.

Alternative to Pipelines

Rail is also being proposed as an alternative distribution mechanism to sometimes-contentious gas pipelines. The Alaska Railroad Corp. (ARRC) became the first rail agency to obtain approval from the Federal Railroad Authority (FRA) to transport LNG by rail tanker in October 2015. Transportation of LNG from where it is produced to interior markets in Alaska is likely to begin soon, and Union Pacific Railroad has similarly applied for permission to transport LNG in the lower 48. Specially designed LNG tanker cars are needed to store the fuel during transport, and new designs are currently in use in Japan and in Europe, where companies VTG and Chart Industries are collaborating.

LNG and oil pipelines continue to face opposition for their potential to endanger the environment that they pass through, so transporting LNG by rail could be a less objectionable method of distribution. Switching from diesel to natural gas also has environmental benefits. According to the EIA, natural gas produces 27.4% less CO2 than diesel when being burned.

Utilizing the railways for both delivery and consumption of LNG has inherent synergies, especially if the refueling depots and processing plants can be located near rail terminals. Until this market matures, some natural gas producers in Canada struggling to find options for exporting the abundance of natural gas are moving into the United States and Mexico in order to maintain growth.

 

Should We Worry About Carbon Dioxide Emissions From Natural Gas Surpassing Coal?

— September 13, 2016

Smoke StacksAccording to the US Energy Information Administration, in 2016, CO2 emissions from natural gas are expected to surpass coal emissions in the United States for the first time since 1972. As CO2 emissions from natural gas increase due to growing natural gas consumption in the energy sector, major concerns have developed among environmental groups and others about natural gas becoming a threat to climate change. However, to generate the same amount of power, natural gas emits only 55% of the CO2 compared to coal. As natural gas displaces coal, CO2 emissions that could have come from coal will be cut by half. As long as the growth of natural gas is at the expense of coal consumption, it will help the fight against climate change.

It would be ideal if both natural gas and coal could be replaced with renewable energy such as solar and wind. However, when the sun doesn’t shine and wind doesn’t blow, electricity still needs to be generated. Even with cutting edge technology on energy storage, demand-side management, and energy efficiency, the need for stable electricity generation from reliable sources cannot be fully eliminated. Natural gas is by far the best option for such a reliable source due to its affordability and abundance in the United States. Besides the benefit of fewer  emissions, the price of natural gas is also competitive with coal. The United States is also the largest natural gas producer in the world thanks to the boom of shale gas. In general, as more renewable generation capacity will be added than fossil fuel capacity this year (and likely in the next few years), natural gas is essential as a backstop for grid operators to address the intermittency of renewable energy.

The Problem of Methane Leakage

Nevertheless, natural gas is not perfect. The methane leakage problem could seriously undermine the climate benefit of natural gas. At the same time, the US Environmental Protection Agency is making crucial progress in setting regulations on restricting methane leakage. With proper regulatory incentives and continuing technology improvement, the effects of methane leakage can be contained to make natural gas a viable complement to a lower carbon future.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part V: Globalisation and Regionalisation of Energy Resources

— September 2, 2016

Oil and Gas ProductionJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. Here we discuss how the globalisation and regionalisation of energy resources is fundamentally changing the European energy industry.

What’s Happening?

The EU is actively aiming to deliver on Europe’s 2030 climate and energy targets while ensuring security of supply and affordable prices. The EU also seeks to be a world leader in renewable energy. Achieving these goals requires a transformation of Europe’s electricity system. To assist in this transformation, the EU must achieve a balance of meeting consumers’ expectations, delivering benefits from new technologies, and facilitating investments in low-carbon generation while also recognising the interdependence of member states. A critical part of this initiative is connecting isolated national and regional electricity systems to secure supply to help achieve a truly integrated EU-wide energy market—a key enabler for the continent and one that goes well beyond precursors such as Nord Pool. While the United Kingdom’s vote to leave the EU raises a number of questions about future policy, it is too early to say what effect Brexit will have on the United Kingdom’s participation in the EU’s future single energy market. (The United Kingdom has, however, been an enthusiastic proponent of this to date.) What is clear is that a focus on greater levels of interconnection (both offshore and onshore) and energy efficiency will continue to be necessary aspects of EU energy policy—and ones that receive much scrutiny.

To get access to the necessary energy supply and resources, more regions, countries, energy markets, and utilities—including those in Europe—are looking beyond the traditional borders of their energy business and territory.

What’s Driving This Change?

The main drivers behind this globalisation and regionalisation of energy resources are:

  • Access to cheaper natural gas globally
  • Accelerated shift of generation resources to renewables, which requires greater system flexibility to maintain security of supply
  • Economic and political imperatives for energy import and export

Access to Cheap Natural Gas Globally

Driven by a technology breakthrough applied in the field, shale gas has transformed the North American gas market and stands poised to significantly affect the global gas market in the future. On February 24, 2016, for the first time in history, liquefied natural gas (LNG) from North America was exported from the contiguous United States—from the Cheniere Sabine Pass facility in Louisiana—to Europe, a historic moment in the North American gas industry.

Globally diverse sources of natural gas and increased movement of these sources—in the form of LNG by ship—is becoming increasingly prevalent from places far from one another. As Australia, the United States, and Canada follow Qatar with plans to export LNG in large volumes, the global gas market is poised for a renaissance. Although the LNG industry has been a victim of its own success as prices have declined, the growing availability of gas to global markets is set to impact places that never previously had access. This movement is bringing with it the opportunity for new gas-powered industries such as petrochemicals and an increased availability of cleaner gas-fired power generation to people and places around the world.

Extensive European infrastructure for gas transmission, including pipelines and new LNG facilities, is helping ensure that cheap gas will be available in most parts of Europe. There is a lag effect as to how this impacts gas generation development; however, in the short to medium term, it at least underpins gas’ ability to remain a key fuel source for heating, industrial use, and flexible power generation. While the latter use may fly in the face of carbon targets, with questions around new nuclear and other baseload low-carbon generation, the net reduction from replacing coal with gas is still significant and may prove to be at least a convenient bridging arrangement.

Accelerated Shift of Generation Resources to Renewables

In Part III of this series, we discussed the changing generation mix across Europe. Virtually all net growth in recent years has come from renewables. To achieve this while managing the system security of supply requires much greater flexibility in the way the electricity systems are managed across Europe. Flexibility is essential and the key underpinnings of this are interconnection, storage, and demand response. To date, the most prevalent of these has been the rapid growth in interconnection—for example, the import of French nuclear power to support Germany’s solar boom and the HVDC interconnection to enable the United Kingdom and Denmark to rapidly develop their wind generation sector. It can be argued that without access to hydro reserves from Norway and Sweden, neither country would be able to accelerate their current offshore wind program. This interconnectedness is a strength of the European system, but it also means that, in effect, each nation relies on others for their ultimate security of supply. In the future, the impact of storage will complement this and aid renewables integration and system stability. Storage and the ongoing development of demand response will also lead to local regionalisation, whereby markets at a more local level are necessary to deal with increasingly decentralized generation and the local flexibility enabled by smarter metering.

Economic and Political Imperatives

The third driver may be obvious to some but is the most challenging to achieve in practice in many ways. Greater affordability for consumers across Europe is promoted through a more regional approach to energy supply. However, macroeconomic theory and national politics do not always pull in this same direction. It sounds simple for Norway to increase its exports to the United Kingdom via a new interconnector as both countries gain overall; however, if this leads to higher wholesale prices in Norway through a reduced surplus, then consumers may see an impact on their retail price. To date the economic efficiency of Europe’s market coupling has proven a sound platform for rapidly improving the regionalisation of energy resources across the continent while political will has held firm in most respects. Some initiatives such as the North Sea Grid may work on a region-wide basis yet do not translate into a commercial rationale that leads to specific profitable projects for investors. Given the importance of a united energy policy for maintaining affordability and energy security across the continent, this needs to remain a critical area of policy and regulatory attention as 2030 targets come firmly into focus.

So What Does This Mean?

It is worth reminding ourselves of the underlying objectives as defined by Europe’s Energy Union:

  • Electricity systems will become more reliable, with lower risk of blackouts.
  • Money will be saved by reducing the need to build new power stations.
  • Consumers’ increased choice will put downward pressure on household bills.
  • Electricity grids will be able to better manage increasing levels of renewables, particularly variable renewables like wind and solar.

Looking forward, the EU market, national policymakers, and utilities first need to adapt their long-term resource plans and incorporate regional scenarios for power supply, while also building in a rapidly changing fuel resource mix toward renewables and natural gas. Second, they must think outside the box with regard to securing fuel or access to renewables well beyond their traditional territory borders. Third, to effectively develop system plans, the planning processes need to take into account the entire regional transmission system. Regional entities should find a way to bring together players such as distribution network operators, municipalities, and other smaller industry players to ensure their needs are also addressed and more holistic solutions are presented. Finally, to facilitate and enhance emerging market offerings such as enterprise information management, the planning toolkit needs to expand to better address the challenges of large-scale renewables integration across multiple regions.

This post is the sixth in a series in which we discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. Our next blog will be about merging industries and new entrants. Stay tuned.

Learn more about our clients, projects, solution offerings, and team in our Navigant Energy Practice Overview.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part III: Shifting Power-Generating Sources

— August 17, 2016

Energy CloudJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this third blog in the series, we discuss the shift in power generation fuel mix and how this is transforming the European power industry.

European electricity-generating facilities that use oil, coal, and nuclear are devaluing and at risk of becoming stranded as generation sources shift to less expensive renewable generation and natural gas generation. This shift is playing out in different ways across Europe.

Generation Fuel Mix Shift Is Accelerating

According to the US Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity TippingPointcomes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While new coal (16%) and gas (6%) capacity was added, far more coal assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent subsidy cuts have tempered solar’s growth, wind is marching onward. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, as storage solutions and grid interconnection/active management are still lacking penetration at scale. Natural gas is the bridging fuel during the shift to renewables, supported by the abundance of natural gas available globally, lower long-term prices, and increasing import capacity in Europe.

What Are the Drivers Behind This Shift?

We see five main drivers for the shift in generation resources described above:

1. Climate Change Policy: Europe has taken definitive steps to decarbonize its power generation, including relatively generous support for renewables and economic penalties for carbon emitters via the EU Emissions Trading System (EU ETS). See our previous blog on the rising number of carbon emissions reduction policies and regulations.

2. European Market Coupling: A second aspect of Europe’s power sector is the physical and economic integration of markets. Interconnection growth has been strong, and the economic incentives via use of power exchanges for dynamic price signaling has provided further support for low-carbon generation.

3. Generation Economics: While policy and regulatory support for low-carbon generation has taken centre stage, the economics of various forms of generation have also been shifting. Within 7 years, solar power has gone from a heavily subsidized resource to a key component of the generation mix, even with zero or minimal subsidies. Europe continues to lead the world in development of offshore wind, particularly in the North Sea. Thermal generation economics have also changed—despite relatively low gas and coal prices, low marginal cost renewables are increasingly forcing thermal plants to shift from stable baseload operation to less efficient cycling and reliance on ancillary service contracts.

4. Decentralization of Generation: The scale of distributed energy resources (DER) is not yet huge across Europe; however, this trend is already shaking the traditional utility business models. The rise of the prosumer is gathering momentum, be it an industrial customer who invests in combined heat and power, a new commercial building with a biomass boiler, or a housing development with rooftop solar panels.

5. Public Sentiment: This driver cannot be underestimated given the prevalence of democratically elected governments in Europe. Public support for action to curb climate change despite the costs has been most obvious in Germany, where the changes via nuclear shutdowns and solar growth have been massive—and expensive. In the UK, it is more expensive to construct offshore wind than onshore, but the public and political preference is that location trumps economics.

How Does This Play Out Across Europe?

Navigant Research forecasts that 66% of European installed renewable generation capacity in 2016 will be in five countries—Germany, Italy, France, Spain, and the UK. In the struggling economies of Portugal, Italy, and Greece, the rate of renewable growth has slowed to just 0%-2%. Countries that are still dependent on coal as a fuel source face economic and fuel supply obstacles.

Beyond the recognized elements of the shifting power generation trend in Europe, there are a series of potential tipping points that will have pronounced consequences depending how they fall:

  • New Nuclear: This is a topic of much debate in the UK and France. Germany has all but made its mind up, barring a major political reversal. Until recently, the UK Department of Energy and Climate Change (now part of the Department of Business, Energy and Industrial Strategy) was a strong supporter of new nuclear in a portfolio of low-carbon generation. The new Hinkley Point C nuclear facility was planned to begin a renaissance of new nuclear, but with new skepticism rearing its head in the UK media, there is still a chance that the nuclear renaissance will stall and the UK will turn to a mix of more gas and offshore wind. France is another country to watch given its historic strength in nuclear power. Unless the struggling Flamanville facility can turn the corner soon and get commissioned, the growing renewables may get a massive boost that goes beyond current political support. Public sentiment is also an important card to play in the nuclear game. As the power system shifts from the traditional centralized model toward a more dynamic, distributed environment, there are both significant strengths and significant weaknesses in retaining large inflexible baseload generators. Ultimately they are likely to look increasingly out of place in the new world order.
  • Electricity Storage Technology and Economics: Elements of storage in the electricity system are not new, but pumped hydro storage and fuel storage to provide thermal generation are increasingly being surpassed in the perceptual stakes by other new technologies. The recent National Grid Enhanced Frequency Response tender in the UK was massively oversubscribed. Among all the disruptive technologies that affect the electricity system, a breakthrough in electricity storage technology and economics offers perhaps the greatest potential to radically change the power system of the future. The US Department of Energy is so convinced of this that it is funding 75 breakthrough research projects developing electricity storage solutions. These include radical new options such as organic flow batteries, which avoid the need for costly and rare metals such as lithium and vanadium. The race is on to find ways to bring storage costs down below $100/kWh or €90/kWh at present exchange rates.
  • European Shale Gas Developments: Shale gas has proven revolutionary in the United States; however, it remains questionable in Europe. Even though it is highly unlikely to have the same supply and economic characteristics as it does in the United States, it may indeed prove a further tipping point in favour of gas-fired generation if significant quantities of shale gas are produced within Europe. Security of supply is always of paramount importance, so the notion that countries in Europe would produce then export most of their supply would be hard to comprehend. Whereas coal is struggling to find favour other than in countries with little alternative, Europe has a great deal of relatively modern gas-fired generation that is not being well utilized. There may be a trend toward smaller, more flexible plants, but gas-fired generation has a viable future under most scenarios for many decades yet.
  • Carbon Target Commitments for 2030: While COP21 was a major milestone in global climate change, when the microscope is turned on European national commitments to decarbonize power generation, the image is less rosy. Some countries such as Spain and Italy appear to have reached peak renewables, where their appetite to push on and manage the ongoing system impacts are not high. Germany is struggling to digest its huge solar investment and accept the consequences on battling local firms such as RWE, E.ON, and Vattenfall. The UK has repeatedly backed away from committing to 2030 carbon targets, preferring to stick with existing 2020 and 2050 numbers. Until firm 2030 commitments by country are made in early 2017, there is insufficient muscle to power Europe forward.
  • Interconnect and Brexit: No article about Europe is complete without a mention of Brexit. The immediate question and a potential tipping point is how European interconnect developments will fare, especially those proposed in the North Sea to connect Scandinavia, Germany, the Netherlands, France, and the UK. These projects greatly affect the larger renewable generation economics, allowing easy and unrestricted export and import of power between countries as wind, sunshine, and other renewable sources vary between nations. Most commentators assume that the UK will retain its close ties to European energy markets; however, if this changes, it could precipitate an unravelling of arrangements with far-reaching consequences.

What Does This Mean for Generators?

More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal without carbon capture and storage, every scenario looks at best bad and at worse grim. As evidenced by Navigant’s Generation Knowledge Service (GKS), the average capacity factor of coal plants has declined by 20%-30%, which translates to a 20%-30% drop in gross revenue opportunity. To deal with the combination of lower realized revenue and higher operating costs, companies are evaluating their plants to determine if they can survive in the new world. They are actively seeking new ways to reduce costs through staffing changes, fewer planned outages, and higher operating efficiencies while maintaining high reliability to support the increased use of variable generation. Older coal plants are being phased out and others converted to burn biofuel. Revenue support from capacity contracts and better ancillary service contracts such as black-start capability is also becoming crucial.

Nuclear power today accounts for 25% of all European electricity produced, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear also highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet may still enjoy a renaissance in the UK; new plants are under construction in France, Finland, and Slovakia.

As a result, the economics have changed and some of the existing (coal and nuclear) assets are experiencing eroded profit margins. These margins are resulting in challenging economics and, in some cases, significant devaluation. More generation assets are increasingly at risk of becoming stranded investments, as the fuel mix is shifting more quickly than envisioned.

And to Make Things Worse: The Move from Big to Small Power

With the rapid growth of distributed generation (DG), all central generation (coal, gas, hydro, nuclear, and wind) will face more changes in its role on the grid. DG installations are expected to reach 256 GW in 2016; thus, DG is growing faster than central station generation (7 GW additions, minus 8.5 GW retirements, using the EIA forecast). On a 5-year basis (2015-2019), DG in Europe, with some variance by region, will grow almost twice as fast as central generation (47 GW vs. 28 GW), excluding retirements.

Path Forward

As a path forward, generators must clearly define the mission of each generating unit to understand their new role and how to survive economically. To succeed, we believe companies must do the following:

  • Conduct a strategic review of generating assets and determine what, if any, changes need to be made in their generation portfolio and/or how these assets are managed under several regulatory and commodity pricing scenarios.
  • Find innovative ways to reduce O&M costs while maintaining the reliability required by the independent system operators during target operating periods (for plants that will continue to run in the near term).
  • Seek new sources of revenue to replace the capital-intensive position for large generating plants by considering investments in renewables and DER, particularly energy storage, and optimizing commercial contract opportunities with system operators.
  • Have a strategy to manage significant reductions in staffing levels and loss of critical experience across the board, including dealing with the impacts on funding pensions and local economies when plants are retired.
  • Plan for a changing workforce that will include deeper knowledge of digital technology and an understanding of how to optimize operations in a more variable power market.
  • Assess options for global asset diversification given the changes and new opportunities in traditional parts of the value chain such as transmission and distribution.

An understanding of the above disruptive trends and how they affect your company and the rest of industry is crucial to shaping our energy future. Navigant aims to help our clients understand, progress, and protect their business’ future in the context of this massive amount of change.

This blog is the third in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Stay tuned for our next blog in this series.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

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