From BOE REPORT

January 13, 2022 6:45 AM Terry Etam

The start of a new year is often a time of reflection, quiet, and goal setting. Minus 30 temperatures and pants that no longer fit do make a person contemplative, and we look back to learn from the year past, calibrate where we are at, and put ourselves vigorously on a new path, to the extent that there is not a new year’s bonanza on Netflix. 

The hydrocarbon sector is more aptly described as shell-shocked rather than reflective. Despite rebounding commodity prices, the ground-shift beneath over the past two years has been monumental. The sector is supposed to be dying like a stabbed Shakespearean character. It is supposed to be the seventh mass extinction. That was the plan – divest fossil fuels, starve the industry of capital, retrain the workforce, “strand some assets.”

Mark Carney, former investment banker and head of the Bank of England, announced in November that he had aligned financial institutions with $130 trillion of capital towards net-zero pledges, aligning that monetary firepower with the International Energy Agency’s roadmap to net-zero by 2050. That roadmap stated quite clearly that there could be no new hydrocarbon investments, period.

That storyline was firmly entrenched in the media. Six months ago, leading up to COP26, pretty much the whole world could see the planned roadmap. Build Back Better, European Green New Deal, Trudeau’s new Greenpeace-trained economic termite in place…all the pieces were coming together. Armchair energy quarterbacks declared oil consumption had peaked in 2019, and that stranded assets should be the hydrocarbon industry’s most pressing concern.

Yet here we find ourselves in the new year sitting under desks, nuclear-fright style, wearing helmets, scouring the web for supplies, watching the world bid to unfathomable prices every hydrocarbon molecule, watching the greenest of nations introduce ‘fossil fuel subsidies’ to prevent civil unrest, and watching one country literally dissolve into anarchy for not doing so (Kazakhstan – though the anarchy appears to be part of a much deeper story). The only thing keeping Europe from following suit is newly introduced fossil fuel subsidies.29dk2902lhttps://boereport.com/29dk2902l.html

That’s right, the world is now upside down, at least compared to the view from a year ago. Not only is oil consumption heading for record heights, but so is coal, and natural gas. Coal, in particular, had a noose placed around its neck at COP26, but it broke free and is running wild –  a scant few months after its planned global demise, we see major exporters like Indonesia halting exports to preserve critical supplies, and consumption in Europe and North America increasing substantially over prior years. 

Renewed interest in coal is just the tip of the iceberg. Europe and Asia are outbidding each other for scarce LNG cargoes. Rising energy costs have decreased production of a vast array of industrial products from textiles to aluminum to fertilizer. These shortages and price hikes are destabilizing supply chains for everything, including renewable energy and EV components that were the lynchpin of reducing hydrocarbon demand in the first place.

Even if the supply chains were functioning properly, Europe has shown with savage proof that the idea of reducing emissions by abandoning hydrocarbons and embracing renewables is a recipe for disaster.

On that note, here is some fairly significant irony.  Despite the ‘bring out your dead’ hydrocarbon sector diagnosis, the sector is adapting rapidly – making massive strides towards global emissions reductions by developing new technology. The irony comes from the fact that renewable-heavy jurisdictions are heading in the opposite direction. Consider the two trajectories.

Setting the stage for hydrocarbon sector emissions reduction initiatives, it should be perfectly clear by now that meaningful emissions reduction will come from emissions mitigation techniques and technologies as opposed to supply strangulation. (First and foremost, countries should switch from coal to natural gas, the biggest bang for the emissions reduction buck, as the US has shown, but that’s another story.)

To proceed meaningfully, we must do something about emissions that are part of the system that cannot be wished away. Developments on that front are happening at remarkable speed.

Alberta’s carbon trunk line is operational, and plans have been drafted to capture/sequester CO2 from mega-production sites like the oil sands in a proposed huge CO2 transportation system. New emissions reduction technology is being developed hand over fist; Carbon Engineering, co-founded by oil sands titan Murray Edwards, is currently building its first commercial direct air carbon capture facility in Texas that will sequester 1 million tonnes/year of CO2.

Entropy Inc., a subsidiary of Canadian producer Advantage Energy, is commercializing point-source modular carbon capture/storage equipment that will be economic for relatively small emitters across many industries; Entropy’s geological expertise is pairing new technology with the ability to economically dispose of captured CO2 in underground reservoirs. The company recently announced that they have nine scoped projects that could reduce CO2 by 1.8 million tonnes/year. Entropy’s growth rate is rapid indeed, and the company recently raised $300 million.

Out of the University of Calgary comes something with far more potential. In conjunction with “the gas separation industry”, scientists have developed a new material, a metal-organic framework, that, in one test, captured 95 percent of the emissions from a Vancouver cement plant. If this material really works, and is scalable, we might have the holy grail – the ability to capture emissions without destroying the trillions in infrastructure that currently get the job done.

Compare that progress with the goat rodeo that is the central planning committees of western governments. Renewable energy development – including the at-gunpoint transition to EVs – is going to require, per the IEA’s net-zero 2050 roadmap, four times as many mines as are now in existence to extract the minerals needed for renewable technology. The very idea is absurd; ask anyone involved in permitting a new mine anywhere.

The IEA report itself mentions a historical average of 16.5 years to get a new mine into production, a number that will only increase as regulations tighten against habitat destruction. As but one very current example, Chile’s new leader slammed the brakes on development of a new copper mine, and copper is absolutely critical to renewable transition. At the same time, the IEA report, the one that is becoming the bedrock of nations’ net-zero-2050 plans, notes also that “Today’s supply and investment plans are geared to a world of more gradual, insufficient action on climate change…They are not ready to support accelerated energy transitions.”

The report points out that resource quality is declining, meaning mines will have to be bigger and more environmentally intrusive to get similar yields (“For example, the average copper ore grade in Chile declined by 30% over the past 15 years.”). To cap it all off, China has been playing mineral chess for years and now controls much of the world’s mineral processing capabilities (“China’s share of refining is around 35% for nickel, 50-70% for lithium and cobalt, and nearly 90% for rare earth elements.”).

In other words, if the west wants to pursue a net-zero-2050 pathway by abandoning hydrocarbons and embracing renewables and renewables’ mineral requirements, it will have to not just transition energy systems but create a new mineral production/processing industry – or risk being held captive by Chinese strategic pursuits (In an article entitled “China May Ban Rare Earth Tech Exports on Security Concerns” it is noted that “The Chinese government is currently conducting a review of its rare-earths policy. Officials view the technology needed to refine and purify the raw materials as a more powerful weapon in protecting state interests than the actual minerals.”).

Here’s the energy transition options in a nutshell: should a transition utilize fully $ trillions of existing infrastructure and leverages the knowledge that comes with it? Or should it rip up the world with new mines, build a vast array of new processing facilities, rewire hundreds of thousands of miles/facilities for EVs/wind/solar, pay much higher prices, and pretend that intermittent power is not so bad?

Yeah yeah, I can hear it already – the choice need not be binary. Well, that’s the rational view, and it’s correct, but that doesn’t mean the world is acting that way. COP26 “excluded polluters from the summit”, though hydrocarbon companies sent delegates anyway to hear what their fate would be.

Germany just shut down three nuclear reactors at the start of 2022 in their drive to go all renewable, which is irrational on any plane, never mind when the continent is in the midst of an energy crisis. That very European energy crisis is leading for improbably loony calls to accelerate the rush to renewables, despite the fact that there are no minerals to make that possible. Prime Minister Trudeau unilaterally pledged to reduce Canadian emissions by 40-45 percent by 2030, one-upping the lunacy of the IEA’s projections, and at the same time put green-energy exec Jonathan Wilkinson in charge of the natural resources portfolio and the aforementioned Greenpeace-addled Steven Guilbeault in charge of the environment/climate change file, which is the same thing as granting Kim Jong Il authority-levels over the economy. 

The truth will indeed be in the middle, though governments will run the world to the ragged edge of meltdown before admitting it (see Europe for proof – after demonizing oil/gas to the point of a catastrophe, leaders in mittens are now starting to see the value of natural gas). New-energy architects have convinced leaders that hydrocarbons are no longer relevant, and the divest-fossil-fuels campaign grew unchecked with the encouragement of the likes of Mark Carney. So the binary aspect was, at a minimum, implicit.

The hydrocarbon industry’s solutions then will be the building blocks of the path forward, once reality sweeps aside the false prophets. So hats off to everyone that is putting the wheels of progress in motion. 

Come 2050, the hydrocarbon industry will be sequestering carbon all over, will have developed new emissions reduction technology, will coexist with a reasonable level of wind and solar, and will still be fuelling the world.

How did we get in such an energy quagmire? Find out how, and how to get out – pick up  “The End of Fossil Fuel Insanity” at Amazon.ca, Indigo.ca, or Amazon.com. Thanks for the support.

Read more insightful analysis from Terry Etam here.

Europeans have squandered untold $billions on chaotically intermittent wind and solar. The only evident results being routine power rationing, blackouts and power prices doubling every 12 months, or so.

The article below from Bloomberg lays it out fairly clearly: those countries obsessed with wind and solar are literally reaping the whirlwind, as power prices spiral out of control.

Bloomberg is, of course, a propaganda outlet for renewable energy rent-seekers, so don’t expect to see it ever name the culprits for Europe’s self-inflicted renewable energy disaster. In the piece below, the closest Bloomberg gets is when it points out that the “crisis was also aggravated by lower than normal wind speeds”. No joke!

Because the likes of Germany, Spain and the UK heavily depend upon wind and solar, output collapses triggered by, you guessed it, sunset and/or calm weather are driving demand for power from reliable sources, such as coal, gas, nuclear and hydro. The owners of those generation systems, who have suffered at the hands of subsidised wind and solar, are bound to cash in when opportunity knocks.

The total collapse in wind power output across Western Europe that started in late September and ran into early November, forced the UK and Germany to bring their coal-fired power plants back online, in an embarrassing hurry.

In response, Europe’s grid managers pulled the plug on energy-hungry industries, unable to provide them with the power essential to their operations.

With freezing, dead calm weather biting across the Continent, Europeans can expect wind and solar’s contributions to power demand to remain somewhere between trifling and risible.

So much for the ‘inevitable transition’.

Unless, of course, what they meant was a transition to an energy-starved world, where power prices are so obscene that only the super-rich can afford them.

Power costs in Europe soar to record high in 2021
The National News
Bloomberg
31 December 2021

Europe has never paid so much for electricity as in 2021.

The average cost of power for delivery in the short term soared to record levels this year, rising over 200 per cent in Germany, France, Spain and the UK. In the Nordic region – where vast supplies of hydro power tend to cap prices – costs surged 470 per cent from a year earlier.

The crunch is leaving consumers and heavy industrial users with rising bills heading into 2022. Metals smelters from France to Spain have already been forced to curb output, while some fertilizer producers were forced to halt output altogether. Norsk Hydro’s majority-owned plant in Slovakia was the latest casualty, announcing on Thursday that it would further curb production.

And there is little relief in sight. Even as the year ends with mild weather – easing demand for heat and power – households are set to face eye-watering price increases next year when wholesale costs get passed on. Industries will also need to grapple with even tighter supplies in January, when about 30 per cent of the French nuclear fleet will be offline.

Day-ahead power prices in Germany averaged €96.85 a megawatt-hour this year, while costs in France were €109.17, according to Bloomberg calculations based on daily auctions. Spanish users paid €111.93, prices in the UK averaged £117.82, while costs in Nordic region came to €62.31.

Europe’s energy crunch was a result of shortages of natural gas just as demand rebounded following 2020’s Covid-19 lockdowns. The crisis was also aggravated by lower than normal wind speeds and nuclear power outages that have strained power grids, forcing the region’s energy companies to burn polluting fossil fuels.

As companies burned coal, lignite and even oil to keep the lights on, the cost of buying permits to pollute surged. Carbon futures – already facing price increases because of the Brussels climate agenda – more than doubled this year to about £80 per metric ton ($90.5), boosting the cost of electricity.
The National News

Peer-Reviewed Publication

UNIVERSITY OF CHICAGO PRESS JOURNALS

A new paper published in the Journal of the Association of Environmental and Resource Economists provides empirical evidence that risk aversion plays an important role in the coal contracting behavior of US power plants.

In “Regulatory Induced Risk Aversion in Coal Contracting at US Power Plants: Implications for Environmental Policy,” author Akshaya Jha notes that from 1983 to 1997, US power plants purchased the majority of their input coal from long-term contracts, consistently paying contract prices in excess of prevailing spot coal prices. Jha proposes a regulatory mechanism for why power plants specifically might exhibit risk aversion when purchasing inputs, arguing that regulators in practice are less likely to incorporate high input cost realizations into the output price they set for utilities. Utilities respond to this regulatory practice by taking costly actions to reduce the variance of their input costs.

Jha specifies an illustrative model in which an expected profit-maximizing firm receives a regulated revenue stream. This regulated revenue stream only reimburses the firm for total costs below a particular “prudence” threshold. Jha demonstrates that the price-regulated firm in this framework does not minimize expected total costs, instead expressing preferences for both a lower expected total cost and a lower variance in total.

Jha estimates the degree of risk aversion exhibited by US power plants using transaction-level data on the coal purchases made by virtually every power plant in the United States from 1983–97. The spot price uncertainty faced by each plant in each month is estimated using a panel-data version of a third-order autoregressive model for the growth rate of spot prices; both the mean and the variance of this growth rate are allowed to vary by the region where the plant is located and month of year.

Jha finds that power plants facing more spot coal price uncertainty sign longer duration coal contracts, purchase contract coal from a larger number of origin counties, and pay higher contract coal prices on average. To put his estimates in perspective, Jha notes, “if every power plant purchased all of their coal from the spot market, the annual aggregate cost savings would be $2.9 billion on average.”

The results indicate that a 10% increase in spot price uncertainty is associated with 0.9% increase in contract coal prices, and that both risk aversion and relationship-specific investments are important determinants of the coal contracting behavior of US power plants. “This suggests that any empirical analysis of contracting should account for the roles played by both transaction costs and risk aversion,” Jha writes. His estimated effect of spot price uncertainty on contract prices implies that plants are willing to trade off a $1.62 increase in their expected total costs for a $1 decrease in their standard deviation of total costs. “This is far larger than the risk premiums traditionally paid in commodities markets, suggesting that price regulated electric utilities have an especially low tolerance for risk.”

Jha uses his estimate of risk aversion to conduct a simple simulation analysis of the cost-effectiveness of a carbon tax relative to cap and trade.  The inputs to this simulation analysis are plant-level risk aversion, the mean of the permit price, volatility in the permit price, and the correlation between the permit price and the spot coal price. The carbon tax is set equal to the mean permit price, noting that the conditional variance of the carbon tax is equal to zero.  At the central parameter values, the ratio of the aggregate costs incurred by plants under cap and trade relative to the carbon tax is 1.27. When the risk aversion parameter is set to 50% of his estimate, the relative cost-effectiveness ratio is 1.13. This relative cost-effectiveness ratio is thus highly sensitive to the assumed level of risk aversion. He concludes, “The results of my simulation analysis highlight that risk aversion should play an important role in the decision regarding which of these two policy instruments are implemented.”

JOURNAL

Journal of the Association of Environmental and Resource Economists

DOI

10.1086/715885 

METHOD OF RESEARCH

Data/statistical analysis

SUBJECT OF RESEARCH

Not applicable

ARTICLE TITLE

Regulatory Induced Risk Aversion in Coal Contracting at US Power Plants: Implications for Environmental Policy

ARTICLE PUBLICATION DATE

3-Nov-2021

From EurekAlert!