Energy Mix

Early in June, I wrote about Germany's preparation for a framework that would let energy companies extract oil and natural gas through hydraulic fracturing.  This was in response to Russia's advance into Crimea and the potential for natural gas deliveries being curtailed, which Russia has utilized twice in the last six years.  Well on June 16, 2014, Russia curtailed gas again after a long-running gas-pricing dispute failed to produce a breakthrough in talks.  The Russians wanted payment first.  On June 17, 2014, there was an explosion of a natural gas pipeline in central Ukraine.  The cause was likely poor maintenance of the pipeline system.  Herein lies the problem with altering a country's energy mix without vision.  Germany reacted with a knee-jerk when Fukushima occurred.  Prior to that, Germany's mix was appropriate given the country's economic and energy attributes.  But to shut down 50% of its nuclear capacity within a year, with the rest scheduled to come off line in the future and without a backup plan, was not good long-term strategic planning.  It comes with a huge expense and energy future insecurity.

In the last few weeks, the energy industry in France is pressuring the government to reconsider their ban on hydraulic fracturing.  At issue is the concern over groundwater pollution and cultural values.  For France, they can redirect the pressure onto the energy companies because most of their electrical energy is generated from nuclear power plants.  Despite approximately 80% of their electrical energy being produced from nuclear power plants, France did not overreact to Fukushima, as did Germany.  France actually benefited from not over-reacting as Germany sought most of its make up electrical power from France for the closing of its nuclear power plants.  

The point of illustrating Germany and France, it that the energy debate is complicated and is not one-size fits all.  Each country has its energy strengths and weaknesses.  When governments governed for their constituents and not for themselves, they put long-term energy plans into effect that accounted for population growth, industry growth and supply of energy at hand.  Policies were established based on those projections.  It seems that governments are reacting to emotion and re-election pressures, rather than acting as a collective brain trust to protect us from ourselves. 

Environmental consideration is important, but should be thought through along each country's own supply and demand mix.  Just because the globe is interconnected, does not mean that we should all move in the same direction simultaneously.  There are too many jobs at stake, huge economies at stake, huge taxes at stake.  Watching Europe adjust its energy mix in the last year after making huge, poorly thought through strategies, should be an eye-opening learning exercise.

We do need to cut CO2 emissions and they are being cut in the developed countries (maybe not as fast as everyone wants, but it is a lot faster than expected - thanks to cheap natural gas).  Once solar reaches grid parity (which is not far off), the next big wave of CO2 emissions reductions will take place.  Additionally, changing personal and corporate habits will contribute to more CO2 reductions as new technologies are developed and employed.  In the US, the biggest cuts could come from smaller, more fuel efficient vehicles, but this takes time and money as the turnover of vehicles is between 12 and 14 years.  Make no mistake though, it is happening.  The next big cut could come from reduced energy consumption at home by making the home more energy efficient and smarter  (this takes time and money as well, because not everyone can afford the upgrades or technologies or to leave their large suburban home for a small urban apartment without placing massive pressures across every aspect of business).  For the developing countries, pressure is being applied in many ways - by the developed countries, NATO, WTO, etc.  It is also being addressed by its people, who are leaving the country because of wholesale pollution.  They are also finding their voices and speaking up about the severity of the pollution.

So, how do we get there faster?  While I am not a fan of government heavy-handedness, a carbon tax seems to me to be a better method than carbon trading.  And if appropriately applied, could reduce the CO2 emissions quickly.  If the carbon tax is set up as a trust, like the Highway Trust Fund, then the tax revenues from a CO2 emissions tax would go into the trust fund to be paid out in alternative energy subsidies or be used to replace utilities old, coal-fired power plants with new electrical generating plants.  The worst thing that could be done is creating a carbon trading system.  We lose and the carbon traders at the banks, investment banks, etc. (Goldman Sachs, JP Morgan, etc.) win.  But everyone must remember, nothing is free.  Everything comes with a cost - higher usage fees, taxes, energy consumption mandates, etc.

Germany needs a new energy policy - so does everyone else

Several days ago, I wrote a blog regarding Russia's natural gas deal with China.  That deal will alter Western Europe's energy policies, which are only now being contemplated.  Western Europe's movement to green energy is commendable, however, contingency plans must be place should an unforeseen energy event transpire.  Referring to my blog of earlier in the week, Germany produces 44% of their electricity from coal, 14% from natural gas, 18% from nuclear power, 8% from wind and 16% from other.  While they want their energy to be clean, but are endowed with coal and natural gas, what happens if their energy plan goes awry?

Nuclear power was gathering steam (sorry!), countries were beginning to rethink nuclear power given its safety record.  Numerous new reactors were on the construction books.  Then an earthquake and tidal wave severely damaged Fukushima, reversing the nuclear plans around the world.  Fukushima made such an impact on Germany, that they altered their energy policy.  Prior to Fukushima, Germany produced about 20% of its electricity via nuclear.  Subsequently, they immediately shut down 50% of their capacity by years end and increased their importation of electricity from France (80% nuclear powered); thereby placing a larger reliance on France for electricity.

Because much of Western Europe has reserves and resources of coal, coal has been used for decades.  With Russia's growth in energy exploration and production over the same decades, Western Europe was able to gradually reduce its use of coal in favor of natural gas, which Russia was happy to supply.  However, Crimea marked the second large change to Germany's and Western Europe's energy policy.  Much of Western Europe's natural gas needs have come through Ukraine and Belarus and two pipelines directly from Russia to Poland (Germany imports about 90% of its natural gas).  Russia has twice ceased transporting natural gas from Russia through Ukraine to Western Europe over the past 6 years, over "taxes owed."  With Russia's brokering of a new natural gas deal with China, Germany and Western Europe's reliance on Russia for natural gas is in jeopardy, forcing Germany and Western Europe to rethink their energy policies.  The big problem with natural gas is that not only is it used for electricity generation, but more importantly, it is used for heating Europe.  This is problematic.

That brings me to the change in Germany's energy policy and why moving to green energy needs to move with technological advances and not through mandates.  Here is a perfect example.  After several years of barring the oil and gas industry from drilling for natural gas through hydraulic fracturing, Chancellor Merkel is preparing a framework that would let energy companies extract oil and natural gas by hydraulic fracturing.  This is quite an energy policy shift.  Germany's Federal Natural Resources Agency has estimated that Germany has 2.3 trillion cubic meter, or 81 trillion cubic feet, of shale gas resources.  Forming and setting an appropriate extraction policy is a wise move.  Other countries with shale gas should rethink their policies.  The UK is ahead of Germany on the exploration of shale gas, because their North Sea output has been declining for years and they are looking for a replacement.  At the end of the day, when people can't logon to their PCs and cell phones because of electricity shortages, or worse they can't keep warm, then they will scream the loudest for changes to their country's energy policy.

So what started out as being a green energy strategy has been disrupted by global politics.  The rest of Europe would be wise in following Germany's path of energy diversification of all kinds.  Each country will have a different plan given its geological make up and consumer conservation should be a big part of that.

Russia's natural gas deal with China

While this information is a couple of weeks old, it should have come as no surprise to anyone, especially those in the energy industry.  This deal has been in the works for years, but with little success - until now.  It is no small coincidence that the deal gets agreed to so soon after Crimea.  With Europe and the US working together to apply economic sanctions to Russia, the Russia/China deal will allow Russia to diversify their customer base.  This should render the sanctions meaningless, when the pipeline is completed.  And it should worry Europe.  As I have mentioned in previous blogs, Russia has and will likely use its gas supplies as leverage on Ukraine and Western Europe.  With Europe responding to Fukushima Daiichi by shuttering some of their nuclear power plants, there is an increasing likelihood that they will have to reverse such actions and restart those nuclear power plants.  What most electrical power consumers do not know, is, over the years each country has developed their electrical power grid based on those natural resources that were abundant and cheap.
Please refer to the table below.  Each country has its own unique mix of energy sources.  For France, it nuclear power.  For Norway, it is hydropower.  For Spain, it is a blend of natural gas, nuclear, wind and hydropower.  For the UK, it is a blend of their production of coal, oil and natural gas.

When the world gets a collective conscience and moves and functions as one, you begin to destroy the economic advantage that each country enjoyed with its unique resource mix and abundance.  The demand moves in the same direction for the same energy source.  Should Russia capitalize on its natural gas resources and begin to divert an increasingly larger share of natural gas to China, prices in Europe will begin to rise, as they did in Japan when Japan completely shuttered its nuclear power generations.  Liquified natural gas (LNG) skyrocketed to all time highs in Japan.  A similar situation could occur in Europe.  This would force them back into nuclear power, if they have continued to maintain the power plants.  If they have not been maintaining them, then the result could be rolling brownouts or blackouts.

Breakdown of Electricity Generation by Energy Source
Percent	Coal	Oil	Gas	Nuclear	Biomass	Wind	Hydro	Other	Total
Austria	9%		20%		10%		55%	6%	100%
Belgium	5%		28%	54%	7%			6%	100%
Denmark	37%		17%		14%	29%		3%	100%
France	4%		4%	79%			8%	5%	100%
Germany	44%		14%	18%		8%		16%	100%
Italy	11%	26%	39%				13%	11%	100%
Poland	88%		3%		5%	2%		3%	101%
Spain			35%	20%		16%	11%	18%	100%
UK	25%	8%	40%	18%				10%	101%
Finland	20%			31%	15%		17%	17%	100%
Norway			3%			1%	95%	1%	100%
Sweden				39%	8%	4%	44%	5%	100%
Netherlands	21%		60%		8%	5%		6%	100%
TWh	Coal	Oil	Gas	Nuclear	Biomass	Wind	Hydro	Other	Total
Austria	6		12		6		33	4	61
Belgium	4		23	46	6			5	84
Denmark	13		6		5	10		1	35
France	21		19	420			45	29	534
Germany	258		82	103		47		91	581
Italy	40	93	139				46	40	358
Poland	133		5		8	3		4	153
Spain			94	55		42	30	48	269
UK	91	29	146	66				36	368
Finland	14			22	11		12	12	71
Norway			4			1	120		125
Sweden				57	12	6	66	7	148
Netherlands	23		65		9	5		7	109
Total	603	122	595	769	57	114	352	284	2,896
Total as % of Total	21%	4%	21%	27%	2%	4%	12%	10%	100%
Source:  The Shift Project Data Portal (data sources are from EIA and The World Bank), 2011