TODAY’S STUDY: U.S. NEW ENERGY NOW – THE FACTS

Sustainable Energy In America; 2014 Factbook

February 2014 (Bloomberg New Energy Finance)

Executive Summary

A revolution is transforming how the US produces, delivers, and consumes energy. The mix of supply is changing rapidly, with low-carbon sources gaining share, while consumption is declining, despite overall economic growth.

The Sustainable Energy in America Factbook provides a detailed look at the state of US energy and the role that a range of new technologies are playing in reshaping the industry. First published in January 2013, the Factbook is researched and produced by Bloomberg New Energy Finance and commissioned by the Business Council for Sustainable Energy. This represents the second edition of the Factbook.

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In some cases, developments in 2013 cemented trends depicted in the first report. New technologies – such as techniques for extracting natural gas from shale and vehicles fueled by electricity – continue to gain traction. New investment dollars continue to find opportunities – such as residential solar installations on residences and commercial building energy efficiency improvements – that profitably enable this transformation. For some sectors, such as distributed generation and storage, policy continues evolving to accommodate changing conditions or accelerate these changes.

In other cases, 2013 marked a departure. Total energy consumed (up relative to 2012), the amount of emissions associated with that energy consumption (up), the portion of electricity generation from coal (up), and the amount of new investment into renewable energy (down) all bucked longer-term trends. The Factbook explains these changes and highlights why some likely are temporary deviations while others could represent a new trajectory for at least the next several years.

The goal of the Factbook remains the same: to offer simple, accurate benchmarks on the status and contributions of new sustainable energy technologies.

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Key findings

The long-term transformation of how the US produces and consumes energy continues…

● The country’s total annual energy consumption in 2013 was 5.0% below 2007 levels, thanks to advances in energy efficiency. This long-term trend was in part prompted by the economic downturn of 2008-09, but as economic growth has returned energy use has not grown at a commensurate rate. The net result is a far more energy-efficient economy.

● Over that same period (2007-13), use of lower- and zero-carbon energy sources has grown, while other major energy sources such as coal and oil have experienced significant declines. Natural gas production and consumption hit all-time highs in 2013, and natural gas-fired power plants provided 28% of US electricity in 2013, up from just 22% in 2007. Renewable electricity generation, including power from large hydro projects, grew from 8.3% to 12.9% over that period. Since 1997, 94% of new power capacity built in the US has come in the form of natural gas plants or renewable energy facilities.

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● Transportation is being revolutionized by new policies, technologies, and fuels. Federal corporate average fuel economy (CAFE) standards for cars are set to double by 2025, relative to 2011 levels. Sales of hybrids and plug-in electric vehicles are rising and totalled nearly 600,000 vehicles in 2013 (3.8% of US passenger vehicle sales). Natural gas use in the transport sector is up 33% since 2007. These developments, along with a growing role for biofuels, have driven gasoline consumption down 7.7% since 2005.

● These trends have combined to put US CO2 emissions on a long-term downward trajectory. In 2009, President Obama announced a goal of achieving a 17% reduction in greenhouse gas (GHG) emissions by 2020 relative to 2005 levels. With total GHG emissions having peaked in 2007 at 7.26Gt and having dropped by an estimated 9.8% since 2005, the US is now more than halfway to its goal.

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…but there were some noteworthy detours in 2013…

● Energy consumption inched up by 1.4% in 2013 after having declined by 6.3% over the 2007-12 period – but nevertheless likely grew at a slower rate than GDP.

● Total new renewable energy capacity additions stalled with just 5.4GW installed in 2013 compared with 18GW in 2012. New investment of $48.4bn was well off the all-time high of $68.5bn in 2011. Still, a record volume of solar photovoltaic (PV) capacity was added in 2013, including 2GW of utility-scale solar and an equal amount of small-scale installations, and 2014 is forecast to be a stronger year for the two largest renewable energy sub-sectors, solar and wind.

● Natural gas’s contribution to the US electricity mix dropped in 2013 from 2012 levels and coal generation rebounded slightly. Natural gas prices rose from historic lows seen in 2012, allowing coal to be somewhat more cost-competitive. Natural gas accounted for 28% of 2013 generation, down from 31% in 2012. Other natural gas-consuming sectors, though, all saw increased use in 2013, resulting in 2013 natural gas consumption topping 2012 levels.

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…and some major new developments sure to impact sustainable energy growth going forward.

● The Obama administration demonstrated renewed commitment to addressing climate change. In his first term, the President ardently supported research, development, and deployment of low-carbon energy technologies, but rarely cited climate as the rationale behind his policy decisions. In June 2013, he announced his intention to address GHG emissions domestically and internationally – with or without Congressional support. Standards for new-build coal plants as drafted by the Environmental Protection Agency would effectively bar new coal without carbon capture and storage (CCS) technology. Standards for existing coal plants, due in mid-2014, could require facilities to install expensive technologies to reduce ‘criteria pollutants’ (eg, sulfur dioxide, nitrogen oxides and mercury). Though they face legal challenges and hang regulatory uncertainty over the US electricity sector, the proposed policies are already playing a role in the transformation underway: more than 40GW of coal plants have either already been retired or announced plans to do so since 2011 (due to the policies, as well as old age and thinning margins).

● Natural gas continued its remarkable boom. The emergence of new technologies has enabled the commercially viable extraction of unconventional natural gas resources including shale – a domestic, abundant, fuel. Production continues to be strong, although the rate of growth of production has slowed compared with recent years as prices have softened and as producers have increased focus on oil- and liquid-rich plays. Investments by the upstream portion of the industry – exploration and production – have been on a steep upward trend; and investments in the midstream portion – including storage capacity and pipelines that connect supply basins and storage to centers of demand – totalled $15bn in 2012.

● Demand for gas reached an all-time high in 2013 and is on pace to rise further in 2014. Natural gas demand grew by more than 3Bcfd in 2011-12, and grew yet again by 0.8Bcfd in 2013. Low prices have made it the fuel of choice for new power plant build, spurred fuel-switching for homes and businesses, and captured the attention of fuel-hungry transport industries. It has led companies to seek permission to export liquefied natural gas (LNG) and piqued the interests of energy-intensive industrial consumers. Since 2010, there have been 10 restarts or expansions of industrial plants in the US across the gas-intensive ammonia, methanol, and ethylene sectors, including six in 2013, and there are many new-build industrial plants planned for 2015 and beyond.

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● Renewable electricity generation costs touched all-time lows allowing renewable in some locations to underprice fossil-fueled competitors. Prices of solar modules have declined by 99% since 1976 and by about 80% since 2008. Total system costs for global, best-in-class utility-scale solar installations are now $1.55/W and expected to continue falling. As a result, power-purchase agreements (PPAs) for projects that are expected to be completed around 2016 have featured prices below $70/MWh. The results for wind have been even more startling; utilities in Texas, the Southwest, and the Midwest signed PPAs in the $20-35/MWh range for wind projects that are coming online in the 2014-15 period; these prices are well below the levelized cost of electricity of thermal technologies (eg, low $60s for natural gas). The benefits of these economics, which are made possible with the support of tax credits, can flow to the consumer; a Michigan utility recently announced that it is lowering customers’ electricity rates by 6.5% in 2014, citing low-cost wind as one of the major factors.

● US renewable energy investment showed it remains highly responsive to policy. Record-high investment in 2011 in renewable and energy efficiency-related technologies was an outcome of the 2009 federal stimulus package, but those programs are mostly finished. Investment in 2013 was hit hard by uncertainty that lingered throughout 2012 over the fate of an important incentive for renewables, the Production Tax Credit (PTC). Though the PTC was renewed at the beginning of 2013, it has taken a while for project developers to reconstitute their pipelines and refresh the wave of financing activity. Furthermore, since different technologies have different lead times, some sectors see quicker responses to policy changes in terms of financing and deployment levels. A bright spot for renewable energy investment was PV, which enjoys longer-term policy certainty; its chief federal incentive, the Investment Tax Credit, is on the books through 2016. In terms of actual legislative activity in 2013, most efforts stalled, with the exception of two bills focused on streamlining hydropower projects.

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● Energy efficiency policy is maturing, and investments are ramping up, to the benefit of buildings and industries. As of 2013, 26 states had energy efficiency resource standards (EERS); 31 states, covering 77% of the US population, had legislation enabling energy efficiency deployment to be paid through property tax bills, or PACE (although PACE financing is not yet available in most of these states); and 7% of US commercial sector floor space was covered under policies requiring buildings to achieve energy efficiency benchmarks or mandating disclosure of energy consumption. Energy efficiency financing (not captured in Bloomberg New Energy Finance’s numbers) across two major frameworks – utility spending to comply with resource standards and energy service companies’ (ESCOs) investments – has been on an upward trend and amounted to more than $12bn in 2012. Energy intensity in key industrial sectors has been falling; while manufacturing industrial output decreased by 3% over 2002-10, energy consumption fell by 17%. For buildings, meanwhile, electricity intensity has increased, likely owing to an increase in the number of electricity-consuming appliances within modern buildings. Yet the rate of Energy Star certification has accelerated since the mid-2000s to the point that over 3bn square feet of floor space is now covered.

● Distributed generation emerged as a transformative phenomenon – if not yet in substance, then as a foreshadower of what’s to come. Most of the country’s electricity continues to come from large-scale, centralized power plants. Distributed generation sources have a relatively modest presence by comparison; small-scale PV, for example, accounts for less than 1% of electricity sales in all states save for Hawaii. But the total addressable market is gigantic, and the category is attracting investors; from 2008 to 2013, third-party solar financiers raised $6.7bn to install systems. The rise of distributed generation is ushering into the US power industry new players and new business models, and testing the durability of old ones. The stakes are high, as evidenced by the intense regulatory battles that played out across the country in 2013 over the relative costs and benefits of distributed PV. Other distributed technologies are also seeing momentum. Combined heat and power, which makes up 8% of US generating capacity, saw 870MW installed in 2012 and potentially more in 2013. Increased attention to energy resilience, along with improved economics and favorable policy, have led to a growing interest in microgrids – small versions of power systems that can combine various technologies, such as distributed solar, storage, CHP, diesel back-up, fuel cells, and smart grid systems – to meet a local electric load.

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● The need for flexibility in how electricity distribution is managed to ensure grid reliability is becoming more apparent. Ensuring ongoing reliability will become an even tougher challenge for electricity market operators and regulators, given the diminished role for coal and the increased presence of variable resources (ie, variable renewables). Yet other changes afoot – including reduced electricity demand through energy efficiency and a growing role for dispatchable resources such as natural gas plants, hydropower, and demand response (now a 28GW-sized market) – can help the electricity industry meet this challenge. Policy may need to adjust, however, as most market structures do not yet fully recognize the benefits of some of the technologies offering increased flexibility, such as energy storage.

● The age of intelligent homes and a more intelligent grid is on the horizon. Some 53m smart meters have been deployed in the US, though the pace of deployment is slowing as stimulus spending is largely exhausted, and untapped market potential is shrinking. Other investment areas in the smart grid industry include distribution automation, home area networks, and smart grid analytics software. Investments in distribution automation focus on management of grid assets, improved grid optimization, and fault location, isolation, and restoration. Home area network deployments include in-home displays, smart thermostats, smart appliances and other load control devices. Smart grid data analytics offer utilities the ability to achieve improved customer segmentation, better theft detection and improved program targeting. The smart grid industry also plays a role in infrastructure resilience; smart grid technologies can help a utility more quickly and accurately identify areas with outages or other service issues during and after storms, facilitating the recovery process and allowing utilities to prioritize critical areas.

● Other advanced energy technologies have made important progress. Biogas, already used selectively in the power sector, could also have a role to play in transport. Stationary fuel cells (144MW of cumulative capacity) while representing very much a nascent technology, had their strongest year ever for deployment in 2013, thanks in part to grants, credits, or other incentives offered by states. Non-hydropower storage technologies (409MW cumulative) – including batteries, flywheels, and compressed air – are more expensive than pumped hydropower. But their costs have declined markedly in the recent years, and, in specific regions, their business case has been strengthened by state procurement mandates and by policies that call for compensation for frequency regulation. In the case of CCS (12 projects operational), the largest, most advanced project in the US, Mississippi Power Kemper (582MW net), has had a difficult journey but is now approaching completion.

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This long-term transformation has major implications for the US economy, US energy security, and global concerns over climate change

● Total US emissions peaked in 2007 and have fallen 9.8% since 2005. Even without a legislated federal carbon reduction policy, the US is more than halfway to its goal of a 17% reduction on emissions by 2020, relative to 2005 levels, due in large part to the contributions of natural gas, renewable energy, and energy efficiency. While 2013 emissions actually ticked up, they are expected to continue to drop over the medium to long term as more coal capacity comes offline and is replaced by lower-carbon alternatives. Whether the 17% cut can be achieved remains an open question.

● Participation in this transformation is far from evenly distributed across the country. Texas and Louisiana are among the states that sit on the richest reserves of shale gas while the Marcellus shale in the Northeast has singlehandedly more than offset declines in dry gas production from elsewhere in the US. From 2006 to 2012, over half of all US renewable energy investment occurred in just six states: California, Texas, Iowa, Illinois, Oregon, and Arizona. Installation of renewable energy projects has favored regions with excellent resources, attractive policies, high electricity prices, or, as in the case of California, all three. A scorecard that measures energy efficiency policies across the 50 states shows that states in the Northeast and along the Pacific coast lead the way in terms of strength of policy positions.

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● Seemingly overnight, the transformation has awakened the prospect of greater energy security, as the US has become more self-reliant. Net energy imports are estimated to have fallen by 15% between 2012 and 2013 and by more than 50% since 2005. October 2013 marked the first month since early 1995 that US crude oil production surpassed imports. Since 2003, US natural gas pipeline exports to Mexico have doubled, and to Canada have more than tripled. This trend at least directionally towards some form of greater energy independence has substantial implications for economic competitiveness and for geopolitics. Policies, infrastructure, and strategies that were designed before this trend took shape may need to be re-examined and perhaps overhauled.

● Investors in publicly-traded companies that are a part of this transformation saw share prices appreciate in 2013. After five years of dismal returns for clean energy stocks, shares for many publicly traded clean energy companies surged in 2013, a reflection of greater investor confidence both in the sector and the economy overall. Clean energy indexes across the board saw returns well above market benchmarks. For example, the NEX, a global index of publicly traded companies active in renewables and low-carbon energy, gained 53.9% in 2013, far outpacing gains of 29.6% for the S&P 500, 26.5% for the Dow Jones Industrial Average, and 20.3% for the MSCI World & Emerging Markets Index.

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