California Dreaming: Is the State Senate Bill 100 achievable?
As part of a series of blogs on the energy transition, I want to take a look at several aspects of the energy industry in California. This state in the USA is particularly interesting entity because of a generally greater environmental awareness of its citizens compared to some other states, and particularly the recent State Senate Bill 100, The 100 Percent Clean Energy Act of 2018, which sets further targets for increasing the proportion of renewable and “zero-carbon emissions fuels” [my quotes] used in the generation of retail electricity (see the chart below). I am also interested in California because it is very well endowed in oil and natural gas reserves and contrary to the thinking of “stop fossil fuel extraction now” position, I believe and will argue below that there is part to play for both oil and particularly natural gas.
Historical usage by fuel source of electricity in California with projected usage, targets from SB100. Sources: Californian Energy Commission, Californian Legislative Information and EIA.
From a simplified point of view, all it takes is for the exponential growth of the renewables contribution to continue and those targets look easy. Of course, it’s not at all as simple as that. There are remaining concerns about the cost-of-supply of renewables, although the more recently the data suggests that wind and solar have become competitive with natural gas (see the chart below). There is a need for further technological development in energy storage to manage peak demand when the wind isn’t blowing or it’s cloudy. A further issue is that about one quarter of California’s electricity comes from out-of-state generators; I imagine that supply will need to be replaced or contracted differently.
Historical Levelized Cost of Energy showing the increasing competiveness of Wind and Utility-Scale Solar in the last decade. Source: Lazard’s Levelized Cost of Energy Analysis Version 11.0.
So the targets of SB100 don’t look like unachievable dreams, but it’s clear that concerted and collective effort from both business and government will be required to make the dream reality. However, there are other issues that need to be addressed. First and foremost, While elimination of natural gas from retail electricity is certainly a potential win on GHG emissions reduction, it is only a small proportion of the challenge. As the next two charts illustrate, natural gas and oil and related petroleum products contribute the other power, transportation and industrial uses other than retail electricity and eliminating natural gas as fuel for electricity only accounts for 16% of the state’s GHG emissions.
Natural gas usage in California during 2017 when a total of 2.11 TCF of gas was consumed. Source: US Energy Information Administration
Emissions by industrial sector in California. (Source: California Air Resources Board)
Continued electrification of energy using clean (zero emissions) should be, as the DNV-GL Energy Transition Analysis points out, part of the solution. Although it’s not clear in the bill text, perhaps that’s why “zero-emissions” sources was added in addition to the defined renewable source, as an additional solution looks necessary. Across the world, this pragmatism that renewable energy can only form part of the solution, has been recognized by both industry and government with increasing focus on Carbon Capture and Storage (CCS). There are now 43 large-scale CCS facilities around the world – 18 in commercial operation, 5 under construction and 20 in various stages of development. About a dozen of those are in the US.
There is real possibility of a breakthrough for California, if one allows for net zero emissions and hence is able to combine Carbon Capture and Storage (CCS) schemes with natural gas production and consumption in related industries. I offer two examples as ideas for California. Firstly, for bigger new developments of gas reserves, why not co-locate the industrial plant or power station adjacent to the gas field? In the very same way that produced water, too saline to be used as potable or agricultural water, is re-injected today into suitable reservoirs in the subsurface in California, why shouldn’t CO2 and other emissions from the plant by collected, separated and re-injected into the subsurface? Ironically CO2 is often used as an agent to reduce oil viscosity in the subsurface to enhance oil recovery (EOR) and a variant of this first idea has started up in Texas recently (Petra Nova Project) where CO2 is captured from a coal-fired power plant, transported and re-injected into a mature oil field southwest of Houston. This project was catalyzed by the collaboration of state government, two oil companies and the power generation company.
Essential framework for the Acorn CCS Project in Scotland (Source: Pale Blue Dot)
The second idea is a larger scale version of the first and is based on one emerging example in Scotland - the Acorn ACT Project. Based on this increasing belief that CCS is an essential technology for the mitigation of CO2 emissions from large-scale fossil fuel use and is the only decarbonisation option available for many industrial sectors, Acorn will use the unique combination of legacy circumstances in North East Scotland to engineer a minimum viable full chain carbon capture, transport and offshore storage project to initiate CCS in the UK. The project will seek to re-purpose an existing gas sweetening plant with existing offshore pipeline infrastructure connected to a well understood offshore basin, rich in storage opportunities. Could something similar be engineered in a cost-effective way to decarbonize Californian natural gas-dependent industries? There is an enormous amount of surface infrastructure, industrial complexes in addition to plentiful subsurface carbon sequestration opportunities in the San Joaquin valley and other parts of the state. This opportunity has clearly been recognized by some in California (e.g. West Coast Carbon Sequestration Project), but is not clear to me that any real projects are forthcoming. (If anyone knows better, please feel free to make comment on this blog). According to their website, the Californian Air Resources Board (ARB) “is currently developing a quantification methodology for CCS and is considering the option that the CCS quantification methodology could be adopted for use in the Cap-and-Trade and Low Carbon Fuel Standard programs as determined appropriate in rulemaking(s) specific to these programs.” Perhaps the ARB should follows Christine Lagarde, the Managing Director of the International Monetary Fund, who has suggested (three years ago) “Policy makers need to price it right, tax it smart and do it now,”. A central theme to my review of these topics is the assertion that rule making alone is insufficient, and rather collaborative, integrated and integral solutions, involving government, business and communities will only provide realistic and achievable results.
Finally, a point of view on investment opportunities. If the market share of renewables is indeed to grow in California the way SB100 targets, and if other states follow California’s leadership, then there are some investment opportunities for those willing to handle what remains a volatile sector. For the accredited or sophisticated investor, able to meet hefty minimum subscriptions, there are some interesting venture capital / private equity funds, both in the technology and deployment areas. I have been focused more on companies, publicly listed on one or more exchanges, that are therefore more easily accessible to the individual investor with modest means. While I am keen on US generation and projects, particularly California, I also like international presence. Similarly, while I am attracted to First Solar and Vestas Wind Systems A/S, pure players in solar and wind, respectively, I sense diversity is an advantage so integrated enables (+/- conventional) is my preference. While I should disclose that I do not yet have shares in any of the companies mentioned in this article, I am keeping a close eye on the following companies. Clearway Energy is a US firm with wind and solar projects across the nation. Clearway Energy’s Class C and Class A common stock are traded on the New York Stock Exchange under the symbols CWEN and CWEN.A, respectively, and are designed to provide stable and growing dividend yield (7.35%). NextEra has a broader spectrum of energy sources, including natural gas, and has a US and international presence. The current yield is lower at 2.43%, but a P/E of ~17 suggests earnings growth potential. They have a long history as a utilities company and appear to be developing a strong suit in energy storage. Similarly TerraForm Power have a big and diverse portfolio, a forward P/E of about 37 and a current yield of 6.65%. Finally, Atlantica Yield is another yieldco based on a diverse range of energy sources across the world. Atlantica’s yield is 7.28% and their dividend has grown 52.48% in the last three years.
This writing of this article, particularly with respect to CCS, benefited from some education by John Pooler, one of a number of people I had the pleasure of working with in the petroleum industry, and is now focusing his knowledge, experience and energy on CCS. The blog reflects my early research into these topics and any factual errors are my mistake, and I welcome commenters to correct me with reference please.