Let me start with the elephant in the room: the recent Texas energy crisis.
To be sure, ALL energy sources had their problems.
With natural gas accounting for 45-50% of the state’s actual power generation, pipelines froze and Texas’ gas production dropped 45% during the week.
This left many gas plants unable to get fuel and forced Governor Abbott to halt exports out of the state.
But we must realize – and other states and even countries that import gas from Texas should indeed be thankful for – that Texas has exhibited remarkable restraint when it comes to relying on more gas.
For example, even though Texas’ marketed gas production since 2010 has soared nearly 40% to 25.3 Bcf/d, gas power capacity has stayed flat (Figure).
Therefore, over that time, a wind and and solar build-out has lowered gas’ share of Texas’ power capacity from 62% to 53% today.
In other words, despite being the largest gas producing state, gas’ share of power generation in Texas is only on par with import-dependent and green-tinted California.
For reference, non-gas producers Florida and Massachusetts lean on gas for a whopping 75-80% of their power generation.
Strident wind defenders in the media and academia, who suspiciously have seemed to take personal offense at the suggestion that renewables in Texas had problems too, demand a wakeup call.
Not the only reason for the crisis, of course, but wind turbines surely did freeze in Texas.
But the bigger and undeniable problem is the low expectations that are assumed for them, showing renewables as much more “supplemental” than “alternative.”
For example, ERCOT, the independent power grid operator that covers 90% of Texas, has ~25,000 megawatts (MW) of wind power capacity but goes into winter expecting that only 6,000 MW of that will be available for peak demand times.
And it is good that some 4,000 MW of Texas’ wind did deliver at times for ERCOT during the crisis.
But still, the defense for wind power is perplexing, going something like this: “you can’t blame wind because 75% of it wasn’t expected to be available anyways.”
I have noticed on Twitter that nuclear advocates especially have had a field day with this line of defense for wind for what happened in Texas (you cannot blame them, nuclear leads with a staggering 94% capacity factor).
And lest we forget: it is not just a winter cold problem for wind power in Texas.
Going back to the Texas heat wave in September 2019, only 5% of wind capacity was available when needed most:
- “As a heat wave continued to plague the Electric Reliability Council of Texas with triple-digit high temperatures Friday afternoon, output from ERCOT’s 22-GW [22,000 MW] wind fleet plunged to less than 1.2 GW [1,200 MW], resulting in real-time prices soaring into quadruple digits for almost two hours,” S&P Global, September 6, 2019
The real-life limitations of wind power experienced in Texas are extremely telling and a warning for other states (and even countries) that “only renewables” is not a serious energy position.
Now easily the main source at ~40% of U.S. electricity (coal and nuclear are each second at ~20%), natural gas will remain integral for grid reliability.
As wind and solar grow from being 13% of U.S. generation this year to 30-35% by 2030 in an optimistic scenario (a pretty wide consensus at the recent CERAWeek), the value of gas’ flexibility to meet their natural intermittency will grow.
California as “The Model”
Indeed, speaking of states naturally gifted with more renewable energy resources than others (in this case solar), the Biden administration is once again looking at California as the model.
We have seen this movie before.
To me, one of the big mistakes the Obama administration’s EPA made under Gina McCarthy (now Climate Advisor to President Biden) was to push undeniably unique California as the “clean energy” template for others to follow (e.g., the collapse of the Clean Power Plan).
Despite having much higher prices (Figure), Californians do enjoy generally lower electricity bills, stemming from the fact that the state uses about half the electricity that other states do, at ~7,000 kWh/capita/year.
But while the California Public Utilities Commission and environmental groups insist on crediting the state’s many energy efficiency measures for this, regression analyzes have proven that unique factors within the Golden State are really the reason Californians use less electricity, namely mild weather and more people per household.
As an everyday example, only 55-60% of homes in California utilize central air conditioning, compared to 95-98% in hot Texas or Florida, for instance.
Mild California, for instance, has just a third of the cooling degree days that the U.S. southeast has.
In short, California enjoys a very unique situation that inherently allows its residents to need LESS electricity (FYI: I lived in San Diego for eight years and experienced all of this first hand).
This is all explained unemotionally by Dr. Arik Levinson of Georgetown University: “California energy efficiency: Lessons for the rest of the world, or not.”
In fact, this low need for electricity has allowed California to install very questionable electricity policies that surge prices and threaten grid reliability but can still mostly avoid the electricity crises like the state saw in August and September of last year and the massive one back in 2000-2001.
The movie continues.
In a year, Texas generates ~480 TWh of electricity, compared to ~205 TWh for California. But California imports an additional 75-100 TWh.
Thus, California is easily the highest power importing state, at ~30% of its total needs.
This reliance on neighbors for energy to function really hammered California badly during last summer’s blackouts when supplying states confronted the same heat wave and needed to keep their own electricity.
Lightly headlined by the The San Diego Union-Tribune: “A lesson from the blackouts: California may be too reliant on out-of-state energy imports” and something I warned about years ago: “California’s Growing Imported Electricity Problem.”
California’s energy policies are actually a cautionary tale.
Thanks to the vaccine rollout, stimulus packages, extra 1 million b/d production cut from Saudi Arabia, weaker dollar, etc. oil prices have been on the rise.
Both WTI and Brent crude have hit above $65/barrel as of late, widely expected to sail into the $70-75 range in high demand summer (“the travel bounce back is coming”).
With no material substitute, the reports of the death of the world’s most vital fuel have been greatly exaggerated: in a V-shaped recovery, “Oil stocks are destroying clean energy in 2021.”
The U.S. shale oil industry, however, must be sure to not overproduce as prices increase.
Our crude production has been hovering around 11.0 million b/d for months, down from the record highs of 13.3 million b/d seen in late-2019.
In particular, the smaller independents needing cash are under pressure to stay disciplined with CAPEX spending while strengthening balance sheets.
If prices average ~$55, it should a solid rebound year for the U.S. oil industry.
Wood Mac reports that the focus to cut costs last year lowered breakeven prices to ~$38, down from ~$55 pre-Covid.
Higher oil prices have the industry ready for a recovery in free cash flow, maybe even topping $140 billion in 2021, the most since 2006.
Indeed, in our goal to lower greenhouse gas emissions to fight climate change, a healthy U.S. oil industry is a necessity.
Many journalists, academics, and climate suit-happy governments want us to go after “Big Oil,” i.e., our own western international oil companies (IOCs), such as BP, Chevron, Total, ExxonMobil, Royal Dutch Shell, and more generally including the larger independents.
Not just as a critical employer, mutual funds mainstay, taxpayer, and thin line between domestic supply and the requirement for imports to meet our ~20 million b/d consumption level, there is an obvious need to support our oil companies.
In reality of course, “Big Oil” is their competition: the national oil companies that have endless backing from their own governments.
Think OPEC, Russia’s national champions, and China’s state-owned enterprises.
As it turns out, “Big Oil” is those that thrive on monopolistic power, not playing by international norms, few environmental regulations, and manipulating the global market to advance their own governments’ political interests.
This also explains why the environmental, social, and corporate governance (ESG) movement must proceed extremely cautiously in pushing the IOCs and independents, at risk of just handing the global oil market to such rogue players.