Navigant Research Blog

What Does El Niño Mean for the Energy Industry?

— November 6, 2015

One of the strongest El Niño climate patterns in the past 50 years is active and causing irregular weather patterns globally. El Niño is characterized by above-average ocean temperatures in the eastern and central equatorial Pacific Ocean. The weather pattern began to develop in March 2015 and is expected to peak between December 2015 and April 2016, when the equatorial Pacific Ocean temperatures are warmest. What sort of impact will El Niño have on various sectors of the energy industry as it begins to peak?

Reduced Natural Gas Demand

Temperatures are expected to be above-average during the winter in large areas of the Northern Hemisphere as a result of El Niño. In terms of natural gas (NG), the three largest consumers are the United States, Russia, and China. North America tends to see greater increases in temperature during an El Niño event when compared to Asia, but both areas are forecast to have a warmer-than-average winter in significant NG heated areas. In much of the Midwestern and Northeastern regions of the United States—areas that tend to have the strongest demand for NG—a warmer winter is expected. While much of the Southern United States may see slightly colder weather, this will not cause a significant increase in NG demand. Overall, decreased NG demand does not bode well for an already decimated NG market. Inventories for NG are expected to reach all-time highs this winter.

Less Wind Energy

According to the U.S. Energy Information Administration, wind power generation fell 6% during the first half of 2015, despite an increase in wind generation capacity of 9%. The forecast shows more of the same until the spring of 2016, with wind power producing over 4% of electricity generation nationwide. Wind farms have been operating near one-third of capacity so far in 2015 and should expect more of the same through early 2016.

Increased Hydroelectric

El Niño leads to heavy rains and snow along the western coast of the Americas. While this can provide some drought relief, flooding also becomes a major concern. For markets that generate significant electricity from hydroelectric dams, the increased moisture and snow pack from El Niño are a welcome sight.

Potential Reduction in Crops for Biofuels

Palm oil is a primary feedstock for biodiesel production. Over 85% of the world’s palm oil exports are produced in Malaysia and Indonesia. For Southeast Asia, El Niño means warmer, drier weather. This can lead to drought and increased fires in the Indonesian peatlands. Haze from the fires stunts fruit growth and palm oil production. While palm oil is only one of several sources of vegetable oil used in biodiesel production, increased prices of palm oil may lead to higher production prices for biodiesels. Although the fires in Indonesia have some impact on biofuels prices, it is having a much more significant toll on greenhouse gas emissions and air quality across Asia.


Oil Prices Cut Drilling Sector Sharply

— September 17, 2015

Magnifiers_webOil drilling rig numbers in the United States have been declining rapidly, down about 57% from a year ago. The total count was 675 as of last week, up one from the week before. This marks the sixth week that rigs have been added by domestic oil drillers, although the numbers are still far lower than they were at this time last year, when the total number of oil rigs sat at 1,575. The rig count is approaching historic lows: the highest historical rig count was 4,530 in 1981; the lowest was 488 in 1999.

The total quantity of oil produced has not decreased nearly as rapidly as the number of rigs. Due to technology advances and greater efficiency, each rig has been yielding more oil production on average. Additionally, fewer rigs are being shut down in the most productive regions—the Bakken, Eagle Ford, and Permian plays. The U.S. Energy Information Administration estimated a decline of 100,000 barrels per day from June to July. This brought production in June to 9.3 million barrels a day. Overproduction in a tepid marketplace leads to further declines in the price of crude oil.

A Double-Edged Sword

The decline in drill rigs is related to declines in the price of crude oil, which has fallen from $98.15 in August 2014 to $45.63 a year later. Despite the obvious decline in drilling sector jobs, there are benefits to the declining numbers of rigs. Drilling rigs tend to use a lot of fuel, and quite often diesel. Recent regulations proposed by the U.S. Environmental Protection Agency limit the emissions produced by a diesel rig, but the real impact on emissions comes from the declining numbers of engines using the fuel. The decline in diesel use has enormous benefits for other sectors of the economy, including a surplus of diesel fuel to be used for agricultural purposes. Consumers in the United States are experiencing lower retail costs for gasoline and heating oil; worldwide, importing countries are also experiencing economic growth due to the lower cost of oil. Yet, the stronger U.S. dollar prevents this growth from being as dramatic as that in the States. Lowered oil prices are positively affecting many oil-importing countries, while negatively affecting the exporters.

Globally, it appears that the fall in oil prices should have a positive impact. Drastic declines in the price of oil tend to shift extra income to consumers, driving global economic boosts. According to The Moscow Times, whenever the price of oil is halved (as evidenced in recent years 1982–1983, 1985–1986, 1992–1993, 1997–1998, and 2001–2002), it is followed by rapid global growth. The inverse is also accurate, with rising oil prices preceding every global recession in the past 50 years. If trends hold true, the current decline in oil prices could lead to greater economic well-being around the world.

Last week, oil prices began to increase gradually, but a 3-day uptick was followed by a $2.10 fall to $47.10 a barrel. This still marks an increase from the $39.57 price of August 26. Perhaps the decline in oil drilling rig counts will not persist so very long, after all.


Reserve Margins Undermined by Climate Change in the West

— June 10, 2015

A recent Arizona State University report has found that estimated reserve margins across the Western states will be far lower than previous estimates suggest. Reserve margins are a measure of available generation capacity over and above the capacity needed to meet normal peak demand levels. Regulatory bodies usually require producers and transmission facilities to maintain a constant reserve margin of 10% to 20% of normal capacity as insurance against breakdowns across the system or sudden increases in energy demand.

The study, which looks at power delivery over the next 50 years for the 14 Western states served by the Western Electricity Coordinating Council (WECC), found that extreme heat events and drought are occurring with greater frequency and duration, putting a significant strain on installed and planned generation capacity.  According to estimates published in the study, power providers may be overestimating planning reserve margins by as much as 20% to 25%.

For a system designed to deliver safe, affordable, and reliable power, this is a problem. Power providers do not currently account for climate change impacts in their operations, which could leave utilities and grid operators more exposed to unforeseen weather events than previously thought.

Varied Impacts

According to the study, forecasts about the impact on specific generation sources vary. Baseload nuclear and coal power plant capacity would be most impacted by reduced cooling water during the hottest days. Reduced stream flow would is also expected to reduce hydroelectric capacity in drier regions, but increased precipitation, particularly in the Pacific Northwest, could temper these losses. Although, combustion turbines – fueled by natural gas or renewable natural gas (RNG) in some cases – and solar PV lose output as air temperate rises, the impact on solar PV capacity is expected to be negligible. The researchers also concluded that potential changes in wind speed and air density would not have a major impact on wind generation capacity.

The study points to increased momentum behind the power grid becoming more distributed and dynamic. Not only are solar PV, energy efficiency, and other distributed energy resources (DER) a powerful tool for reducing greenhouse gas emissions across the grid, with the emergence of the energy cloud, they will help utilities and grid operators deliver on their obligation to provide safe, affordable, and reliable power.

A Way Forward

Increased penetration of DER also reduces the impact of line loss, a key issue across the West. As bulk high-voltage power cable shoulders the burden of moving capacity from remote areas to population centers dispersed across the expansive Western region, aging high-voltage power cables are prone to expansion and sagging, causing more resistance across the system and requiring increasing levels of generation. Severe heat events could exacerbate the situation further, eventually posing a threat to public safety.

Although the Arizona State University study is worrisome, many of the innovations and tools necessary to mitigate the impact of climate change on the grid are available today. Efforts by the U.S. Environmental Protection Agency to regulate carbon emissions in the power sector through the Clean Power Plan (CPP) are expected to force utilities and regulators to shift the generation mix away from heavily polluting generation sources, which would help insulate the WECC region from the impact of severe heat and drought.


In Golden Age, Natural Gas Becomes Generation Workhorse

— March 9, 2015

The promised golden age of natural gas has begun to take hold globally. Fortunately, rising natural gas demand will not require a corresponding increase in infrastructure spending across the United States, according to a recent report from the U.S. Department of Energy. These findings hold even as the U.S. electric power sector—currently the largest consumer of natural gas in the country—saw generation from natural gas replace that of coal in recent months. This corresponds with a sharp increase in demand for natural gas from multiple end-use sectors.

With the Henry Hub reference price for natural gas in the United States lingering below $5 per million Btu (mmBtu) since the early part of 2014, a demand surge is expected to continue across the power generation sector.

Renewables and Gas

The United States, already the largest consumer of natural gas in the world, is expected to see a 33% increase in demand by 2040, according to the U.S. Energy Information Administration’s Annual Energy Outlook 2014 reference case. Growth is expected to be 42% for the electric power sector between 2012 and 2040 under the same scenario.

Living up to its promise as a bridge fuel to a low carbon future, natural gas is helping backfill baseload generation, especially in areas where coal plant retirements are highest. The combination of wind or solar power and gas-fired generation, meanwhile, has emerged as an option for states looking for more access to lower-carbon electricity. This hybrid approach is playing out across the expansive areas of the West, where electrical grid transmission bottlenecks have made it difficult to export renewable generation from areas of high productivity (e.g., Wyoming) to population centers on the West Coast, for example.

Not Laying Pipe

The increased use of natural gas in the electric power sector, however, is not without potential challenges. Unlike competing fuels, natural gas is delivered as it is consumed, and cannot be stored onsite like coal. Furthermore, adequate infrastructure is needed to maintain electric system reliability. The investment of $65 billion in new interstate pipeline construction over the past 18 years appears to be sufficient to deliver natural gas from producing regions to end users across the country without substantial new investment.

Unlike the U.S. electrical grid, natural gas power plants and natural gas production are both broadly distributed rather than geographically concentrated, reducing constraints on interstate pipeline capacity. What’s more, lower-cost investment options, such as improving the utilization of existing infrastructure and rerouting gas flows, are far cheaper than building new pipelines.

As the U.S. power sector faces several concurrent transitions—retirement of coal-fired generation, aging electrical transmission infrastructure, and a surge in the use of intermittent renewables—these findings suggest that natural gas will continue its emergence as the workhouse on the modern electrical grid.


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