Can we construct adversarial electricity portfolios made of new zero-carbon resources that undermine the profitability of specific existing fossil plants? Some version of this is already happening, but it’s incidental rather than targeted. The economics of existing coal and nuclear plants are being eroded by flat electricity demand in combination with cheap gas, wind, and solar. Economical storage and dispatchable demand aren’t far behind. But how much faster would the energy transition be if we actively optimized new energy resources to undermine the economics of existing fossil generation?
A good High Country News story about the problem of orphaned methane wells in Colorado & Wyoming. Well operators “become bankrupt” and walk away, leaving the public to cover cleanup costs. In theory, operators have to put a bond up to get a permit, but the bond isn’t enough to cover cleanup costs. One operator named Atom recently forfeited a $60K bond on 50 wells, which subsequently cost the public ~$600K to clean up. The same problem exists with reclamation bonds covering coal mines on federal land in Wyoming, except the dollar values are three orders of magnitude larger.
If the bond amounts were much larger, the money vs. time curve of a methane well or coal mine would start to look much more like that of a wind or solar installation, from capital’s point of view. Big reclamation bonds would look like part of a big up front investment, which is then followed by a long trickle of income as the mine or well produces over its lifetime.
You can slosh the costs & profits around through PPAs and other arrangements, but at a basic level, that big up front cost + long trickle of income is the fundamental cashflow time series of renewables too. Even if these different energy investments all add up to the same dollar value, the time distribution matters, because capital often just cares about net present value. (See Dave Roberts’ famous Discount Rates: A Boring Thing You Should Know About With Otters!)
From an extractor’s point of view, pushing the reclamation costs into the future makes them unimportant, because they’re discounted to the present. By the time they loom large, the true remaining value of the well or mine is already negative, with cleanup costs included. And the only rational thing to do at that point is to walk away. That’s what bankruptcy is for. But in this case, the counterparty is the public, and we have no upside risk.
The public takes on the environmental or cleanup costs of the mine or well at the outset, rather than internalizing those costs within the business decision. To put energy investments without those environmental or cleanup costs on equal footing, you’d need to give them up front or ongoing subsidies. And here we’re just talking about the traditional “environmental” costs — not the climate costs.
Half of finance and capital markets is just smuggling money through time. We can pull piles of it back from the future. Or we can exile our debts to the future. From and to those people we don’t think are us. The other half of finance seems to do the same thing with risks, extracting certainty from others, pushing uncertainty onto others, moving uncertainty through time. Trying to keep upside uncertainty, and lose downside uncertainty.
If you’ve been paying much attention to the climate policy discussion over the last few years, you’ve probably heard mention of carbon budgets, or greenhouse gas (GHG) emissions budgets more generally. Put simply, for any given temperature target there’s a corresponding total cumulative amount of greenhouse gasses that can be released, while still having a decent chance of meeting the target. For example, the IPCC estimates that if we want a 2/3 chance of keeping warming to less than 2°C, then we can release no more than 1000Gt of CO2 between 2011 and the end of the 21st century.
The IPCC estimates that if we want a 2/3 chance of limiting warming to less than 2°C, then we can release no more than 1000Gt of CO2 equivalent between 2011 and the end of the 21st century.
The reason the IPCC and many other scientist types use carbon budgets instead of emissions rates to describe our situation is that the atmosphere’s long-term response to GHGs is almost entirely determined by our total cumulative emissions. In fact, as the figure below from the IPCC AR5 Summary for Policymakers shows, our current understanding suggests a close to linear relationship between CO2 released, and ultimate warming… barring any wild feedbacks (which become more likely and frightening at high levels of atmospheric CO2) like climate change induced fires vaporizing our boreal and tropical forests.
What matters from the climate’s point of view isn’t when we release the GHGs or how quickly we release them, it’s the total amount we release — at least if we’re talking about normal human planning timescales of less than a couple of centuries. This is because the rate at which we’re putting these gasses into the atmosphere is much, much faster than they can be removed by natural processes — CO2 stays in the atmosphere for a long time, more than a century on average. We’re throwing it up much faster than nature can draw it down. This is why the concentration of atmospheric CO2 has been marching ever upward for the last couple of hundred years, finally surpassing 400ppm this year.
So regardless of whether we use the entire 1000Gt budget in 20 years or 200, the ultimate results in terms of warming will be similar — they’ll just take less or more time to manifest themselves.
Unfortunately, most actual climate policy doesn’t reflect this reality. Instead, we tend to make long term aspirational commitments to large emissions reductions, with much less specificity about what happens in the short to medium term. (E.g. Boulder, CO: 80% by 2030, Fort Collins, CO: 80% by 2030, the European Union: 40% by 2030). When we acknowledge that it’s the total cumulative emissions over the next couple of centuries that determines our ultimate climate outcome, what we do in the short to medium term — a period of very, very high emissions — becomes critical. These are big years, and they’re racing by.
Is 1000Gt a Lot, or a Little?
Few normal people have a good sense of the scale of our energy systems. One thousand gigatons. A thousand billion tons. A trillion tons. Those are all the same amount. They all sound big. But our civilization is also big, and comparing one gigantic number to another doesn’t give many people who aren’t scientists a good feel for what the heck is going on.
Many people were first introduced to the idea of carbon budgets through Bill McKibben’s popular article in Rolling Stone: Global Warming’s Terrifying New Math. McKibben looked at carbon budgets in the context of the fossil fuel producers. He pointed out that the world’s fossil fuel companies currently own and control several times more carbon than is required to destabilize the climate. This means that success on climate necessarily also means financial failure for much of the fossil fuel industry, as the value of their businesses is largely vested in the control of carbon intensive resources.
If you’re familiar with McKibben’s Rolling Stone piece, you may have noticed that the current IPCC budget of 1000Gt is substantially larger than the 565Gt one McKibben cites. In part, that’s because these two budgets have different probabilities of success. 565Gt in 2012 gave an 80% chance of keeping warming to less than 2°C, while the 2014 IPCC budget of 1000Gt would be expected to yield less than 2°C warming only 66% of the time. The IPCC doesn’t even report a budget for an 80% chance. The longer we have delayed action on climate, the more flexible we have become with our notion of success.
Unfortunately this particular brand of flexibility, in addition to being a bit dark, doesn’t even buy us very much time. If we continue the 2% annual rate of emissions growth the world has seen over the last couple of decades, the difference between a budget with a 66% chance of success and a 50% chance of success is only ~3 years worth of emissions. Between 50% and 33% it’s only about another 2 years. This is well-illustrated by some graphics from Shrink That Footprint (though they use gigatons of carbon or GtC, instead of CO2 as their unit of choice, so the budget numbers are different, but the time frames and probabilities are the same):
Like McKibben’s article, this projection is from about 3 years ago. In those 3 years, humanity released about 100Gt of CO2. So, using the same assumptions that went into the 565Gt budget, we would now have only about 465Gt left — enough to take us out to roughly 2030 at the current burn rate.
There are various other tweaks that can be made with the budgets in addition to the desired probability of success, outlined here by the Carbon Tracker Initiative. These details are important, but they don’t change the big picture: continuing the last few decades trend in emissions growth will fully commit us to more than 2°C of warming by the 2030s. 2030 might sound like The Future, but it’s not so far away. It’s about as far in the future as 9/11 is in the past.
It’s encouraging to hear that global CO2 emissions remained the same in 2014 as they were in 2013, despite the fact that the global economy kept growing, but even if that does end up being due to some kind of structural decoupling between emissions, energy, and our economy (rather than, say, China having a bad economic year), keeping emissions constant as we go forward is still far from a path to success. Holding emissions constant only stretches our fixed 1000Gt budget into the 2040s, rather than the 2030s.
If we’d started reducing global emissions at 3.5% per year in 2011… we would have had a 50/50 chance of staying below 2°C by the end of the 21st century. If we wait until 2020 to peak global emissions, then the same 50/50 chance of success requires a 6% annual rate of decline. That’s something we’ve not yet seen in any developed economy, short of a major economic dislocation, like the collapse of the Soviet Union. And unlike that collapse, which was a fairly transient event, we will need these reductions to continue year after year for decades.
The Years of Living Dangerously
We live in a special time for the 2°C target. We are in a transition period, that started in about 2010 and barring drastic change, will end around 2030. In 2010, the 2°C target was clearly physically possible, but the continuation of our current behavior and recent trends will render it physically unattainable within 15 years. Barring drastic change, over the course of these 20 or so years, our probability of success will steadily decline, and the speed of change required to succeed will steadily increase.
I’m not saying “We have until 2030 to fix the problem.” What I’m saying is closer to “We need to be done fixing the problem by 2030.” The choice of the 2°C goal is political, but the physics of attaining it is not.
My next post looks at carbon budgets at a much smaller scale — the city or the individual — since global numbers are too big and overwhelming for most of us to grasp in a personal, visceral way. How much carbon do you get to release over your lifetime if we’re to stay with in the 1000Gt budget? How much do you release today? What does it go toward? Flying? Driving? Electricity? Food? How much do these things vary across different cities?
Featured image courtesy of user quakquak via Flickr, used under a Creative Commons Attribution License.
So, it’s been quite a while since our last long policy post, focusing on utility revenue decoupling in connection with Xcel’s current rate case (14AL-0660E) before the Colorado PUC. That’s because we’ve been busy actually intervening in the case!
A Climate Intervention
We filed our motion to intervene in early August. As you might already know, in order to be granted leave to intervene, you have to demonstrate that your interests aren’t already adequately represented by the other parties in the case. Incredibly, CEA’s main interest — ensuring that Colorado’s electricity system is consistent with stabilizing the Earth’s climate — was not explicitly mentioned by any of the other parties!
In our petition we highlighted our mission:
…to educate the public and support a shift in public policy toward a zero carbon economy. CEA brings a unique perspective on the economics of utility regulation and business models related to mitigating the large and growing risks associated with anthropogenic climate change. In addition, CEA has an interest in transitioning away from fuel-based electric generation in order to mitigate the purely economic risk associated with inherently unpredictable future fuel costs.
…and we were granted intervention. So far as we know, this is the first time that concern over climate change has been used as the primary interest justifying intervention at the PUC in Colorado. In and of itself, this is a win.
A Long and Winding Road
Throughout the late summer, we spent many hours poring over the thousands of pages of direct testimony. Especially Xcel’s decoupling proposal, but also (with the help of some awesome interns), the details of the company’s as-of-yet undepreciated generation facilities — trying to figure out how much the system might be worth, and so how much it might cost to just buy it out and shut it down (were we, as a society, so inclined).
Early on in the process, the PUC asked all the parties to submit briefs explaining why we thought it was appropriate to consider decoupling in the rate case, whether it represented a collateral attack on decisions that had already been made in the DSM strategic issues docket, and how it would interact with the existing DSM programs. We pulled together a response, as did the other intervening parties, and kept working on our answer testimony — a much longer response to Xcel’s overall proposal. The general consensus among the parties that filed briefs, including CEA, SWEEP, WRA, and The Alliance for Solar Choice (TASC, a solar industry group representing big installers like Solar City) was that decoupling was not an attempt to roll back previous PUC decisions related to DSM — and that addressing it in a rate case was appropriate. Only the Colorado Healthcare Electric Coordinating Council (CHECC, a coalition of large healthcare facilities and energy consumers) told the PUC that decoupling ought to be considered an attack on previous DSM policies.
The PUC staff unfortunately came back with a reply brief that disagreed and suggested, among other things, that maybe it would be better if we just went with a straight fixed/variable rate design to address utility fixed cost recovery. Never mind the fact that this kind of rate would destroy most of the incentives customers have to use energy efficiently.
And then we waited.
With baited breath each Wednesday morning we tuned in to the Commissioners’ Weekly Meeting, streaming live over the interwebs from the Windowless Room in Denver. We watched regardless of whether anything related to our dear little 14AL-0660E was on their agenda. Just in case they tried to sneak it by. Weeks passed. And then a month. The deadline for submitting our answer testimony approached.
Finally on October 29th, six weeks after submitting our brief, the commissioners finally brought up the issue of decoupling at their weekly meeting and in a couple of minutes, indicated that they’d be severing it from the proceeding, with little explanation as to why. However, because there were no details, and the order isn’t official until it’s issued in writing… we continued working on our answer testimony. The final order came out on November 5th, and prohibited submission of testimony related to decoupling. Answer testimony was due on November 7th.
Where to From Here?
Xcel might come back to the PUC with another decoupling proposal before the next Electric Resource Plan (in fall of 2015) . Or they might not. This means that a good chunk of the work that we’ve been doing since this summer will have to come to light in a different way. So for the next few posts, we’re going to explore some of the issues that came up in the preparation of our answer testimony, including:
Decoupling and Distributed Energy: How would decoupling interact with distributed energy resources like rooftop solar? What are the implications for utilities as the costs of those resources continue their precipitous decline?
Decoupling and Demand Side Management: How would revenue decoupling interact with demand side management programs in general — both utility and privately or locally funded — and what particular issues with Xcel’s DSM programs could decoupling address? What issues can’t it help address?
Can Revenue Decoupling Scale?
Why doesn’t revenue decoupling as a policy really scale up to the point of taking existing generation facilities offline, or preventing new facilities from being built?
Decoupling as a First Step:
Even if it can’t scale, why might decoupling still serve as a useful starting point for the decarbonization process? Can it give us a little bit of breathing room while we start the real negotiation? Or is it just another layer of financial protection for utilities who want to delay change as long as possible?
Realism and Equity in Carbon Budgets for Colorado:
What is the true scope of the decarbonization challenge, in the context of the carbon budgets recently published by the IPCC in their Fifth Assessment Report (AR5), but localized to Colorado so we can actually wrap our heads around it. Why is this conversation so hard?
With the release of the Environmental Protection Agency’s proposed rules limiting carbon pollution from the nation’s electricity sector, you’ve no doubt been hearing a lot of industry outrage about “Obama’s War on Coal.”
Don’t believe it.
Despite the passionate rhetoric from both sides of the climate divide, the proposed rules are very moderate — almost remedial. The rules grade the states on a curve, giving each a tailored emissions target meant to be attainable without undue hardship. For states that have already taken action to curb greenhouse gasses, and have more reductions in the works, they will be easy to meet. California, Oregon, Washington, and Colorado, are all several steps ahead of the proposed federal requirements — former Colorado Governor Bill Ritter told Colorado Public Radio that he expects the state to meet the proposed federal emissions target for 2030 in 2020, a decade ahead of schedule. This isn’t to say that Colorado has particularly clean power — our state has the 10th most carbon intensive electricity in the country, with about 63% of it coming from coal — but we’ve at least started the work of transitioning.
Furthermore, many heavily coal dependent states that have so far chosen to ignore the imperatives of climate change (e.g. Wyoming, West Virginia, Kentucky) must only attain single-digit percentage reductions, and would be permitted to remain largely coal dependent all the way up to 2030. Roger Pielke Jr. and others have pointed out that in isolation, the new rules would be expected to reduce the amount of coal we burn by only about 15%, relative to 2012 by 2020. By 2030, we might see an 18% reduction in coal use compared to 2012. Especially when you compare these numbers to the 25% reduction in coal use that took place between 2005 and 2012, and the far more aggressive climate goals that even Republicans were advocating for just two presidential elections ago, it becomes hard to paint the regulations as extreme. Instead, they look more like a binding codification of plans that already exist on the ground, and a gentle kick in the pants for regulatory laggards to get on board with at least a very basic level of emissions mitigation.
So, in isolation, there’s a limited amount to get either excited or angry about here. Thankfully, the EPA’s rules will not be operating in isolation!
The geology part of classifying coal as reserves is a lot of work, but it’s doable — with enough drilling logs and other data, you can determine where the coal is, how much of it there is, and its general quality. Once you’ve got that concrete geologic understanding, it’s unlikely to change drastically — it might be refined modestly over time, maybe increasing as mining technology improves… but if you’ve done the work well, you’re probably not going to suddenly discover that 90% or 99% of the coal you thought was there actually isn’t.
The economic part part of classifying coal as reserves is fundamentally different, and more changeable with time, because market conditions change much more quickly than geology! I think the experiences of the UK and Germany are particularly interesting, because they were both early large coal producers, part of the first wave of fossil fueled industrialization. They’re extremely mature hard coal mining provinces that have fallen off their peak production dramatically — they’re ahead of the curve that most of the rest of the world is still on.
The drastic downward revisions that both the UK and Germany made were due to changes in economic policies and domestic politics — not geology. Both nations historically had strong labor interests tied to coal mining, and the desire (like most nations) to maintain an indigenous energy supply. But as the cost of supporting the industry grew and its productivity fell, the political logic of maintaining the illusion of a viable coal-based energy system faded away. In Germany, it seems likely that popular support for the nation’s ambitious Energy Transition made it easier for the nation to face up to geologic reality. In the UK the politics seem to have been influenced by the Thatcher government’s desire to privatize previously nationalized industries like coal mining, as well as the discovery of massive offshore natural gas reserves in the North Sea. In both cases the “proven reserve” numbers appear to have vastly overstated to begin with, but the political desire to support the industry and maintain the illusion of long-term energy independence was a powerful incentive to ignore the geologic reality.
However, in the end, geology wins.
Where are we headed?
The EIA’s admission that we have not, as a nation, officially and transparently evaluated the economics of extracting our vast coal resources opens the topic up for discussion. The economic and political forces at work today in the US may be different than they were in 1980s Britain, or early 2000s Germany, but they’re pushing in the same direction. A powerful incumbent coal industry is weakening both financially and politically — because of their own increasing production costs, low natural gas prices, flat electricity demand, plummeting renewable energy costs, and concerns about both traditional pollution and greenhouse gas emissions. This gives us the opportunity to re-evaluate our policies around them. What should we change?
Even if we ignored traditional environmental impacts and public health consequences, and just applied the modest $37/ton social cost of CO2 calculated by the US Office of Management and Budget, that would add roughly $60 to the cost of a ton of coal! With current PRB production costs in the neighborhood of $10/ton, and operating margins often less than $1/ton ($0.28/ton in the case of Arch last year), this — or even a smaller carbon price — would likely be a crushing blow to the fuel.
Given the current state of the industry, even without these “drastic” policy changes it’s possible that we are headed for our own major downward reserves revision. This isn’t “running out of coal”. Britain and Germany both still have enormous amounts of coal — it’s just not worth digging much of it out of the ground, given the available alternatives. It’s time to figure out whether we’re in the same boat, admit it to ourselves and the world if we are, and move on to the task of building real solutions.
Two Possibilities, One Course of Action
There’s an irony in all this, which is that regardless of whether we’re running short on economically recoverable coal, we need to expunge the fuel from our energy systems as quickly as possible in order to avoid catastrophic climate change. If the global reserves numbers reported by the WEC are accurate, then we need to leave 60-80% of those reserves in the ground. This was highlighted most famously by Bill McKibben in Rolling Stone in 2012, and implies that a huge fraction of the world’s fossil fuel assets are in fact worthless, unburnable carbon, and most of the world’s coal companies and unconventional hydrocarbon extraction projects are destined for bankruptcy. On the other hand, if the reserve numbers need to be revised downward because most of the listed coal isn’t economically extractable, then a lot of the coal industry’s supposedly bankable assets are worthless and the industry’s growth potential is seriously constrained.
In either case, the right thing to do is stop planning as if today’s coal plants are going to continue operating for much longer, figure out a way to take them offline, and replace them with cost-effective, low risk, zero-carbon generation resources and energy efficiency.
In my last post, I recounted some of the indications that have surfaced over the last decade that US coal reserves might not be as large as we think. The work done by the USGS assessing our reserves, and more recently comments from the coal industry themselves cast doubt on the common refrain that the US is “the Saudi Arabia of coal” and the idea that we have a couple of centuries worth of the fuel just laying around, waiting to be burned. As it turns out, the US isn’t alone in having potentially unreliable reserve numbers. Over the decades, many other major coal producing nations have also dramatically revised their reserve estimates.
Internationally the main reserve compilations are done by the UN’s World Energy Council (WEC) and to some degree also the German equivalent of the USGS, known as the BGR. Virtually all global (publicly viewable) statistics on fossil fuel reserves are traceable back to one of those two agencies. For instance, the coal reserve numbers in the International Energy Agency’s (IEA’s) 2011 World Energy Outlook came from the BGR; the numbers in BP’s most recent Statistical Review of Energy came from the WEC.
Of course, both the WEC and the BGR are largely dependent on numbers reported by national agencies (like the USGS, the EIA and the SEC in the case of the US), who compile data directly from state and regional geologic survey and mining agencies, fossil fuel consumers, producers, and the markets that they make up.
Looking back through the years at internationally reported coal reserve numbers, it’s surprisingly common to see big discontinuous revisions. Below are a few examples from the WEC Resource Surveys going back to 1950, including some of the world’s largest supposed coal reserve holders. In all cases, the magnitude of the large reserve revisions is much greater than annual coal production can explain.
In my previous post I highlighted the recent, quiet admission by the US EIA (in a fine-print footnote to Table 15 of their 2012 Annual Coal Report) that they do not know what fraction of our nation’s large store of coal resources might be economically accessible, and thus potentially classified as reserves.
CEA has long highlighted indications that a revision like this might be in the works, including in our most recent round of coal reports issued last fall (see: Warning: Faulty Reporting of US Coal Reserves). But we’re not the only ones. Plenty of other people have pointed out the same thing over the years. Including…
At the end of 2013, the US Energy Information Administration (EIA) acknowledged that it does not know whether the vast majority of US coal can be mined profitably. If coal mining isn’t profitable, then barring some grand socialist enterprise the black stuff is probably going to stay in the ground where it belongs.
You might think this kind of revision would have warranted a press release, but the EIA’s change of heart was buried in a fine-print footnote to Table 15 of their 2012 Annual Coal Report, which tallies up all the coal resources and reserves in the US, state by state. The new footnote says:
EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions, and after applying assumed mining recovery rates. This estimate does not include any specific economic feasibility criteria. [emphasis added]
EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions or currently economically unattractive for mining, and after applying assumed mining recovery rates. [emphasis added]
PEAK COAL REPORT: U.S. COAL “RESERVES” ARE INCORRECTLY CALCULATED, SUPPOSED 200-YEAR SUPPLY COULD RUN OUT IN 20 YEARS OR LESS
Federal Estimates Overstate Reserves by Including Coal That Cannot Be Mined Profitably; Production Already Down in All Major Coal Mining States… And Utility Consumers Are Facing Rising Energy Bill Prices.
WASHINGTON, D.C. – October 30, 2013 – America does not have 200 years in coal “reserves” since much of the coal that is now left in the ground cannot be mined profitably, according to a major new report from the Boulder, CO-based nonprofit Clean Energy Action (CEA). The CEA analysis shows that the U.S. appears to have reached its “peak coal” point in 2008 and now faces a rocky future over the next 10-20 years of rising coal production costs, potentially more bankruptcies among coal mining companies, and higher fuel bills for utility consumers.