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Your Weekly Juice: Five Energy Stories For The Third Week of January, 2020

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Less future finance for the fossil beast.  On the heels of multiple insurance companies and banks migrating away from the hydrocarbon sector, the letter last week from BlackRock’s CEO Larry Fink may - looking back from the future - prove to have been a critical turning point.  

Maybe we’ll wave goodby to the old ways of investing

Blackrock manages over $6 trillion, so it’s big and it’s influential.  And Fink’s comments were definitive: “Climate change has become a defining factor in companies’ long-term prospects,” he stated and went on to say (his emphasis) “awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.  The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” 

He goes on to comment that, “Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock,” and predicts that “we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” (also Fink’s emphasis)

Fink may be right.  It seems these days that many occurrences happen in phase changes, an apparently slow and barely visible build-up, followed by a rapid transformation and subsequent consolidation of the new dynamic.  Morgan Stanley indicates the transformation to address climate change will cost $50 trillion over the next three decades on five technologies: renewable energy, electric vehicles, hydrogen, carbon capture and storage, and biofuels.  Which rather strongly suggests that capital will shift from elsewhere.  Hmm, where might it come from? Still plenty of capital sloshing around in hydrocarbons, for now...

“Connexit?” Connecticut talks about leaving ISO-NE

Connecticut’s energy and environmental official last week commented that state officials are considering withdrawing from grid operator ISO-NE and distancing themselves from previously pro natural gas policies. 

Taking the toys and heading out?

Katie Dykes, commissioner of Gov. Ned Lamont’s energy and environmental agency, commented on a “lack of leadership” at ISO-NE with respect to fossil fuel use, pushing policies for investments in gas pipelines and generating plants that Connecticut “doesn’t want and doesn’t need.” 

This stance is similar to the that of states like New Jersey and Illinois that have at times recently threatened to withdraw from PJM.  This dynamic is only going to accelerate in the coming years as states – responding to citizens who want clearly articulated and serious policies to address climate change – increasingly come up against grid operators who live by the Economics 101 principle of free and undistorted markets.  Until markets incorporate externalities related to emissions, though, they haven’t fully priced the entire equation.  Enter carbon pricing, such as that proposed by New York?  

We may see an interesting bifurcation between grids that span multiple states, and thus trying to navigate multiple state policies, and those ISOs that are contiguous within their own states, such as California, Texas, and New York.  Even in those cases, sailing is not always smooth.  Take the recent Order 841 from the Federal Energy Regulatory Commission on energy storage, directing each grid operator to establish operating models for storage.  In that instance, state policymakers and the utility commission criticized the NYISO’s stance on energy storage and specifically its policy making storage in wholesale markets subject to buyer-side mitigation rules in order to minimize potential for market manipulation.  Expect this tension to grow in the years to come as pressure on climate-related issues continues to rise.

New Jersey Drives EV Adoption 

Last week, New Jersey’s legislature pushed the electric vehicle issue front and center with a target of 2 million EVs by 2035, and establishing a pot of $300 million in incentives over the next decade.  

Let’s electrify this

Buyers will receive a rebate of $25 per mile of range for an electric vehicle, with a maximum of $5,000 at point of sale, and a sales tax exemption.  These will be the most generous rebates in the country.  Other articulated policy goals include: 

330,000 light-duty electric cars or truck sales by 2025, with 2 million by 2035, and 85% of all new light-duty vehicles sold to be electric by 2040.

400 fast chargers (150 kW) in 200 charging stations by 2025, to be established in a network with none more than 25 miles apart.

15% of all multifamily residential properties would have chargers.

10% of new buses for NJ Transit are to be zero emission vehicles by 2024.

It’s a pretty aggressive program, but let’s take a look at one stat from China for a moment to put that in perspective: the China Electric Vehicle Charging Infrastructure Promotion Association indicates that its members have 496,000 public EV charging stations.  Over the first 11 month of 2019, 365,000 charging stations were installed, so that translates to more than 1,000 per day.

That’s what aggressive looks like…

Writing on the wall?  No, the change is already here

The Energy Information Administration forecasts that new renewables will crush the competition in 2020.  Of the 42,000 megawatts of new generating capacity to be installed in 2020, solar will grab 32%, wind will take 44%, with natural gas trailing at 22%.  Interestingly, the EIA mentions battery storage for the first time (watch this trend), noting that the remaining 2% of capacity comes from hydroelectricity and batteries.  

No clouds in the future yet

Much of this surge is driven by the declining federal tax credits (though wind is up for a one-year extension).  Although this “last call at the bar” is sure to be followed by a hangover, the numbers for the ensuing years don’t look too bad, as the tech continues to get more efficient – declining costs will eventually compensate for lost subsidies.  The addition of storage will help as well, since it will firm up renewables and provide a better and firmer production profile for sale into wholesale markets.

The EIA projects that over 50% of wind capacity will be installed in five states: the liberal hotbeds (yeah) of Texas, Oklahoma, Wyoming, Colorado, and Missouri.  Meanwhile, solar capacity will be concentrated in Texas, California, Florida, and South Carolina.  In other words, for wind and solar installations, it’s largely about where the free fuel is located – the windier and sunnier states.

Meanwhile, 70% of the 9,300 MW of new gas installations are in Pennsylvania (Really? PJM needs more capacity?  It already has a 26% reserve margin), Texas (makes more sense, with its 2019 reserve margin of 8.6% and some $9,000/MWh prices), California (they need new dispatchable capacity to address the Duck Curve) and Louisiana.

Waste Not, Want Not in New York

The Empire State just approved $2 billion for five years of energy efficiency programs, focusing on technologies such as LED light bulbs, high efficiency appliances, and heat pumps.  The money will come from a surcharge on the electric bill.  Since efficiency is still the most cost-effective electric energy investment (it’s considerably cheaper to save a kWh than to generate one), the move should make the state economically better off.  The devil will be in the details.  

An efficiency program worth smiling about

One of the goals will be to wean the state off natural gas, and move towards ‘beneficial electrification’ (a phrase Orwell would probably have applied to the electric chair), which simply means using the more efficient electron in place of other fuels like home heating oil or natural gas. 

Since this inevitably involves cross-subsidization, there will be issues related to how to treat low-income customers, how the utilities are compensated, and how to make the actual implementation as cost-effective as possible. to ensure society gets the biggest bang for the buck.  

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