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Global Energy and Environmental Markets and
Chile’s Energy Policy
Frank A. WolakDirector, Program on Energy and Sustainable
Development (PESD)and
Professor of Economicswolak@zia.stanford.edu
http://www.stanford.edu/~wolak
2
Purpose of Talk• Massive changes in global energy markets
over past decade• Growing concern for environmental
implications of greenhouse gas emissions in many countries
• How should Chile’s energy and environmental policies respond to these trends?– Given initial conditions Chile’s energy sector– Accounting for the costs and benefits to Chile of
the policies chosen
3
Outline of Talk• Review major changes in global energy markets
– Global Implications of US Shale Gas Revolution• Coal to Natural Gas Switching in US Electricity Sector• Gas to Coal Switching in European Electricity Sector• Costs and Benefit of US Shale Gas Exports
– Shale gas revolution and global coal market• Coal on gas competition in global coal market
– Shale gas revolution and renewables• Case study of Californian experience
• Review major changes in global environmental policy
• Initial conditions in Chile• Suggestions for adapting Chile’s energy and
environmental policies to new regime
Unconventional Natural Gas and Oil Revolution
US Natural Gas Supply
Tight gas is another source of unconventional natural gas
2004
Difficult to predict where and when innovation in fossil fuel supply will occur
Liquefied Natural Gas (LNG) Is Essential to California’s Energy FutureDecember 2004
“…at current rates of consumption in the United States and Canada, the estimated natural gas reserves in North America are expected to run out in fewer than 15 years.
“Although it is unclear if natural gas prices higher than $5.50/MMBTU… will continue into the future, it is difficult to imagine prices ever getting below the breakeven price for an LNG [import] facility on the Pacific Coast.”
Don’t Bet Against Innovation in Energy Sector
US Natural Gas Supply
Tight gas is another source of unconventional natural gas
2004
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Major North American Shale Plays
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US Monthly Shale Gas Production
Monthly U.S. Natural Gas Withdrawals(January 1980 to June 2014)
Source: http://www.eia.gov/dnav/ng/hist/n9010us2m.htm
Jan-1980
Jan-1982
Jan-1984
Jan-1986
Jan-1988
Jan-1990
Jan-1992
Jan-1994
Jan-1996
Jan-1998
Jan-2000
Jan-2002
Jan-2004
Jan-2006
Jan-2008
Jan-2010
Jan-2012
Jan-2014
1400
1600
1800
2000
2200
2400
2600
2800
Mon
thly
Wit
hd
raw
als
(in
Mill
ion
s of
MM
BT
U)
Jan-1997
Jan-1998
Jan-1999
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jan-2013
Jan-2014
0
2
4
6
8
10
12
14
16
18
Hen
ry H
ub
Nat
ura
l Gas
Sp
ot P
rice
(D
olla
rs p
er
Mill
ion
Btu
)
Real Price of Natural Gas at Henry Hub. (Monthly Average Prices)
(August 2014 dollars)
Source: http://www.eia.gov/dnav/ng/hist/rngwhhdd.htmConsumer Price Index, All Urban Consumers (1982-1984=100)
Monthly US Oil ProductionMillions of Barrels per Day
Virtually all domestic oil production Increase is from shale oil
Prices at Cushing and BrentDollars per Barrel
Implications for US Energy Sector
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
0%
10%
20%
30%
40%
50%
60%
Coal Gas Nuclear Hydro Renewables Other
In April 2012, Coal provided 34% and Natural Gas 32% of Total US Generation
Increasing Role of Gas in US Power SectorShare of Total US Generation by Input Fuel
What Explains Increasing US Gas Use?– Economics favors natural gas-fired generation
versus coal-fired generation• Average heat rate of typical coal-fired unit significantly larger than
that for combined-cycle gas turbine (CCGT) unit– Heat Rate = MMBTU of input fuel per MWh of electricity produced
» MMBTU = millions of British Thermal Units» MWh = Megawatt-hour
• Average heat rate of an existing coal unit could be twice that of CCGT generation unit– Even if price of coal is less than price of natural gas, economics
could favor running CCGT unit because of lower heat rate» 12 MMBTU/MWh x $2/MMBTU coal = $24/MWh from coal» 7 MMBTU/MWh x $3/MMBTU gas = $21/MWh from gas» Variable O&M cost for coal > Variable O&M cost for gas
• $/MW of capacity cost for coal-fired power unit greater than $/MW of capacity cost for natural gas-fired unit
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Increased US Gas Use in Power Sector• Many coal-fired generation unit owners are retiring units
and proposing unit retirements• Many claim that EPA regulations are causing these retirements
– Environmental Protection Agency (EPA) rules• Mercury and Air Toxics Standards (MATS) for coal-fired power
plants• Cross-State Air Pollution Rule (CSAPR)
– Reduce SO2, NOx, and Particulate emissions• At many existing power plants substantial new capital investments
are necessary to meet these standards– Economics (low-priced natural gas) appears to dominate
these retirement decisions• Most of these units are very old, 40 to 60 years old• Have very high heat rates
– Replacing these units with modern natural gas-fired units makes economic sense and has environmental benefits• Hedge against future carbon policy
17
Greenhouse Gas EmissionsBenefits of Innovation in
Unconventional Natural Gas
18Most of reduction due to coal-to-gas switching
Start of Rapid Growth in Shale Gas Production
Impact on Global Energy Sector
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Estimated Landed LNG Prices for June 2015 in $/MMBTU
US Coal delivered to Europe and Asia produces electricity at lower variable cost relative to Liquefied Natural Gas (LNG)Currently, there are no operating LNG export facilities in Continental US to sell US natural gas in global market
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US Coal Exports
• Virtually all US coal exports leave through Atlantic coast ports in spite of thefact that the vast majority of US Coal Production occurs West of Mississippi River
• Limited West Coast Coal Export Capacity
Coal Use in Europe– According to US Energy Information
Administration (EIA), from 2009 to 2012 coal use in Europe increased by 6 percent
– Despite of massive deployment of renewables brought about the Energiewende, coal consumption in Germany increased by 8 percent from 2009 to 2012
– In UK coal consumption increased by 30 percent between 2009 and 2012
– Cheaper BTUs delivered to Europe from imported coal relative to natural gas• No net change in GHG emissions from European
electricity sector between 2009 and 2012
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Asia and Global Coal Market
All others
India
China
China’s Future Coal Demand
Nuclear
Wind
CoalHydro
Global Liquefied Natural Gas (LNG) Market
29
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Global Natural Gas Market• Natural gas moves typically moves across
continents as liquefied natural gas (LNG)• Liquefaction reduces volume to 1/600th of volume in
gaseous state• Liquefaction is an energy intensive process
– Waterborne transportation requires• Construction of liquefaction facility at origin and re-
gasification facility at destination – Both are extremely capital intensive facilities involving a
significant siting and construction lag• Roughly $3/MMBTU to $4/MMBTU is average cost of
liquefaction, transportation, and re-gasification– Both factors allow large delivered natural gas
price differences across locations to persist
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Global LNG Market
MTPA = Millions of tons per annum1 Million tons of LNG = 49,257,899 MMBTUIn a combined-cycle natural gas-fired power plant 7 MMBTU produces roughly 1 MWh
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Global Natural Gas Market– Recall $3/MMBTU to $4/MMBTU average cost
of liquefaction, transportation, and re-gasification and need for specialized export and import facilities
– Implications of the high cost of global LNG trade• Regions where LNG is marginal source of natural gas
supply, BTU-arbitrage will continue to favor imported coal over LNG in all virtually uses
• As more regions develop their domestic shale gas resources, the economic case for coal in the remaining regions will become stronger – Lower price of coal in global markets
– Can the US become a major LNG exporter?
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Can the US become a major LNG exporter?
36
The Challenge of Natural Gas Exports– Bringing on-line an LNG export facility can take
from 6 to 10 years• From conception to initial production• Environmental and regulatory hurdles in countries
outside of the US likely to be less stringent than US– Liquefaction of natural gas and regasification at
destination involves energy losses– Total cost for liquefaction, transportation, and
regasification estimated to around $3-$4/MMBTU – At current LNG prices in Europe and Asia, US
price of natural gas plus $3-$4/MMBTU average infrastructure cost implies significant potential profits for US LNG exports• US LNG export projects are under construction
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The Rest of the World Has Substantial Shale Gas Reserves
39
The “Other US Export”– Horizontal drilling, hydraulic fracturing, and better
seismic modeling technologies can be exported– US firms excel at developing new technologies
and exporting them to rest of the world• Many US firms are currently attempting to apply these
technologies around the world– China has substantial shale gas reserves
• China has goal of meeting 6 percent of its energy needs from shale gas by 2020
– India also has shale gas reserves– Several Latin American countries have significant
shale gas reserves• Argentina estimated to have as many reserves as US
40
Don’t Bet Against Ingenuity of US Firms– Investing in LNG export facility is a bet against the ability of
US firms to deploy horizontal drilling, hydraulic fracturing, and seismic modeling technologies outside of US
– Likely that by the time significant US LNG export facilities are built, a sufficient amount of shale gas resources will have been developed near large consuming regions• If gas can be delivered by pipeline, the energy losses from
liquefaction and regasification can be avoided– More difficult for US LNG supplies to compete with domestic sources
• Some of these new sources of shale gas can enter LNG export market more quickly because of lower environmental and regulatory hurdles to constructing facilities in these countries– US LNG suppliers will face greater competition from these LNG suppliers
– US firms could face a “build it and no one comes outcome” with LNG export facilities• Similar to US experience with LNG import facilities a few years ago
41
The Case Against the Triumph of the Ingenuity of US Firms Abroad
– US legal and regulatory institutions are unique• Long history of property rights definition and enforcement in US• Private ownership of mineral rights in US creates stakeholder interested
in shale gas development• Government ownership or muddled ownership of mineral rights creates
only opposition– US infrastructure is unique
• Natural gas transportation, storage, access to water and fracking chemicals
– Foreign governments may not allow US firms to access shale gas resources on commercially attractive terms
– These factors clearly make shale gas development abroad more difficult than it is in the US• Experience of US firms with deploying oil extraction technology around
the world strongly supports argument that these challenges will be overcome
• Current price differential between imported LNG and expected domestic shale gas price is too attractive
– US LNG export facilities closest to completion are financed with revenues from long-term contracts to export US natural gas (to Asia)
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Renewables and the Shale Gas Revolution
43
Blue = Residential Systems Yellow =Commercial
According to California Solar Initiative (CSI) Data: Average Cost of Residential System is $4/Watt Average Cost of a Commercial System is $3.5/Watt(Note: These costs exclude any tax credits or subsidies)
Solar PV Prices in California
44
But Wind is Major Renewable Resource in US
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US Wind Installations 1998-2014
Production Tax Credit (PTC) Renewals Explains Investment Patterns
46
Wind Project Costs $/kW
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Technical Change for All – Cheap natural gas reduces levelized cost of
energy from combined cycle natural gas-fired technology in US• Roughly a $55 to 60/MWh levelized cost of energy
– Although both solar and wind have experienced cost reductions, gap between levelized cost of wind and solar versus natural gas-fired generation has increased as a result of unconventional natural gas boom
– Important lesson—Competition to find least expensive energy services can reduce prices of both carbon intensive and low-carbon energy sources
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Shale Gas and Economics of Renewables• Majority of solar panels are produced in China
In 2014, 6 of the top 10 of solar panels producers were located in China.
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Renewables and California– California has a 33% of load renewables goal by 2020
• Currently approximately of 25% annual load from renewables– To provide an idea of the cost of this policy in new
shale gas regime consider• Average price paid by residential consumer in Pacific Gas and
Electric (PG&E) and Southen California Edison (SCE) service territory in 2014 is $0.21/KWh
• Average cost of wholesale energy in California ISO market in 2014 is $0.05/KWh
• Average cost of distribution network and electricity retailing is $0.04/KWh
• Average cost of transmission network is $0.02/KWh– Remaining $0.10/KWh goes to pay for renewables
procurement, other sunk costs, and social programs– California giving up substantial retail electricity savings
from shale gas revolution to pursue renewables goals
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Global Environmental Policies
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Global Environmental Policies– Top-down versus bottom-up carbon policies
• Top-down--United Nations Conference of Parties global climate policy
• Bottom-up—Each region adopts their own policy– Trend towards regional carbon policies
• Regions with their own carbon policy– European Union Emissions Trading System (EU-ETS)– California, Quebec, British Colombia
» California and Quebec linked policies on 1/1/2014– Many other regions considering adopting their own policies
• Modest price of carbon– EU-ETS ~7 Euros per metric ton– California/Quebec ~12 US Dollars per metric ton– British Columbia 30 Canadian Dollar per metric ton carbon
tax
52
Global Environmental Policies– Little indication of success of top-down
approach to setting a global price of carbon– Bottom-up, regional policy approach seems
more likely to lead to success– Cost/Benefit analysis implies that the bottom-up
approach should set a modest price of carbon until sufficient number of regions join• Regions that initially set a high price of carbon harm
their economies with little global environmental benefit– Note that British Columbia carbon tax if primarily a gasoline
tax as province receives more than 90% of its electricity from hydroelectric facilities
53
Chile’s Energy and Environmental Policies
54
Initial Conditions in Chile– Chile has no significant fossil fuel
deposits• Virtually all fossil fuels must be imported• Chile has constructed several LNG import facilities
– Chile’s electricity supply industry dominated by hydroelectricity• Difficult to site and built new hydroelectric facilities
– Fossil fuels have an increasing energy share• Coal, and more recently, natural gas provide this
electricity– Chile has a growing demand for electricity
relative to industrialized countries• Historical growth at around 4 percent per year
55
Chilean Energy Policy– In spite of shale gas boom in US, LNG imports
to Chile are still likely to be in $8/MMBTU or higher over medium to long term• Current delivered price to Chile is higher because
deliveries are occurring under long-term contracts negotiated in higher LNG price regime
– Global coal prices are significantly lower on dollar per MMBTU basis• Current delivered price in Chile likely to be
approximately $3/MMBTU • Calculation based on current delivered European
prices shown earlier and average heat rate of imported coal plus an $1.00/MMBTU adder for Latin American delivery
56
Chilean Energy Policy– Imported coal likely to beat imported LNG at
$8/MMBTU price in dispatch order even at highest global price of carbon
– If assume heat rates for natural gas unit of 7 MMBTU/MWh for and for coal unit of 10 MMBTU/MWh• Variable fuel cost of natural gas is $56/MWh• Variable fuel cost of coal is $30/MWh
– At these variable fuel costs, at least a $52/ton price carbon would be required for natural gas to be lower cost than coal• Exceeds highest price global price of carbon
– Conclusion—Coal is likely to continue to be the least variable cost fossil fuel for Chile
57
Chilean Environmental Policy– Setting a price of carbon in Chile imposes a
significant expense on Chilean economy with little global environmental benefit• This is true for any small country
– It makes economic sense for Chile to put in place mechanisms to measure GHG emissions in preparation for future global carbon market
– If Chile would like to invest in new fossil fuel generation in a global carbon-neutral manner it could require new fossil fuel generation unit owner to purchase allowances from any of the currently existing global carbon markets• GHG emissions are a global stock pollutant
– Existing fossil fuel generation units need not be subject to this requirement
58
Chilean Environmental Policy– As case of California demonstrates, support
mechanisms for construction of wind and solar photovoltaic (PV) facilities using existing technologies can be expensive• Wind turbine and solar PV technologies are mature • Further cost reductions due to learning-by-doing for
either technology seem unlikely– Fall in global price of fossil fuels likely to make
renewables support mechanisms more even expensive
– Renewables support mechanisms for Chile make sense to the extent that they take of advantage of unique Chile-specific renewable resources
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Conclusions/Summary– Global supply of fossil has increased
dramatically• Only likely to increase more as shale oil and gas
technology spreads to the rest of the world– Global price of carbon is unlikely to exist for
some time• Number of regional carbon policies is likely to
continue to increase, but these favor a modest price of carbon
– At prices of carbon likely to exist in these markets, coal is still a very viable, if not most viable, option for baseload electricity generation in Chile
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Conclusions/Summary– Developing carbon measurement system for
Chile makes sense for eventual global carbon market
– To the extent that Chile wants zero carbon expansion of fossil fuel generation capacity, it can require new unit to purchase GHG allowances on any regional carbon market
– Significant renewable energy goals using existing wind and solar technologies difficult to rationalize for Chile given current global fossil fuel prices
– Focus of developing renewables that take advantage of unique Chile-specific resource
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Questions/Comments
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