The Energy Information Administration’s annual energy outlook, which was released last week, is like manna from heaven for geeky industry analysts and commentators, most definitely including myself.
Like any projection—as I have discussed in prior posts (see this piece in particular)—it is probably outdated essentially from the minute it is finished. But to EIA’s credit, it doesn’t oversell the analysis, noting instead that its forecasts “are not statements of what will happen, but of what might happen, given the assumptions and methodologies used for any particular case.” In addition, and here EIA gets extra credit, the agency takes a policy-neutral approach in its analysis, using current law in its projections; there are no assumptions about new legislation, executive orders or extensions of policies with sunset dates. As such, EIA’s analysis is about as fair as it can get.
Despite these limitations, there are a number of fascinating items in EIA’s Annual Energy Outlook 2015 (which can be found here).
CO2 Emissions In Check
For example, EIA estimates that total U.S. carbon dioxide emissions will remain below their 2005 level of 5,993 million metric tons through the forecast period, which extends to 2040. Overall, the agency projects that U.S. energy-related CO2 emissions will climb from 5,405 million metric tons in 2013 to 5,549 million metric tons in 2040—still almost 450 million metric tons lower than 2005’s level. And this estimate, it is worth pointing out, does not factor in the administration’s still-pending Clean Power Plan.
Perhaps the most interesting forecast in the overall outlook is the one concerning gasoline consumption. Overall, EIA projects that U.S. gasoline consumption will be 21 percent lower in 2040 than it was in 2013 due to the administration’s groundbreaking 2012 rulemaking raising the automotive fuel economy standard to 54 miles per gallon beginning in 2040. Factoring in these mandated increases in fuel economy standards, EIA said it expects gasoline consumption to be 1.8 million barrels per day (mb/d) lower in 2040 than it is today—even though it also projects an increase in total vehicle miles traveled (VMT) and average VMT per licensed driver during the forecast period.
The sharp decline in motor vehicle gasoline consumption will be more than enough to counteract small increases in other transportation fuel use, EIA continued, and consumption in the sector as a whole is expected to drop from its 2013 level of 27 quadrillion British thermal units (roughly 13.8 mb/d) to 26.4 quads (13.5 mb/d) in 2040. If this pans out, it would turn past U.S. consumption trends upside down, EIA said, pointing out that overall transportation energy use grew at an average annual rate of 1.3 percent per year from 1973 to its 2007 peak (just prior to the massive recession that began in 2008) of 28.7 quadrillion British thermal units (Btus).
In other words, efficiency works, and works well.
Embracing Electric Efficiency
Efficiency isn’t just a transportation fad, either. Residential customers also stand to benefit from significant improvements in heating equipment efficiency and lighting improvements.
According to EIA, even though the number of households in the U.S. is expected to increase by 23 percent between now and 2040, and the square footage of the average home is expected to climb by 11 percent, energy consumption for space heating is expected to fall to 4.2 quads, 1.7 quads lower than the 2013 level. That’s certainly good news for homeowners, but not their local electric and gas suppliers. Similarly, energy use for lighting is expected to tumble by 57 percent between now and 2040, dropping from 1.8 quads to 0.8 quads with the continued spread of light emitting diode technology. And here again this is despite the expected increase in the size of the average home during the same time frame.
Coupled with the previously discussed decline in transportation sector energy use, this is expected to lead to an average annual reduction in energy use per capita of 0.4 percent per year from 2013 through 2040, even as the economy grows at annual estimated rate of 2.5 percent That’s a pretty good combination.
Electricity Sales On Hold
Efficiency improvements are clearly going to have a major impact in the electric utility arena as well. Looking ahead, EIA projects that overall electricity sales are only likely to rise by 0.8 percent a year through 2040, which is almost a rounding error. And the outlook is even worse in the residential sector, with EIA forecasting only a 0.5 percent annual increase here through 2040. This will be driven in part by the efficiency improvements noted above but also by the continued influx of distributed energy generation, particularly solar PV. On this front, EIA says growth will be particularly strong through the end of 2016, when the federal investment tax credit is slated to drop from 30 percent to 10 percent. During this period, EIA said, residential installations are likely to climb at a rate of about 30 percent per year. And even after the 2016 deadline, EIA said it expects growth in this sector to average about 6 percent a year through 2040. By the end of the forecast period, the agency added, it expects more than 36 gigawatts of solar PV capacity to be installed at residential and commercial sites—hardly good news for electric utilities looking for sales wherever they can find them.
Also, while there has been a great deal of concern about the supposed death of coal and increasing worry about the nation’s growing reliance on natural gas, EIA’s forecast paints a much different picture, one that is more diverse and likely more secure than in years past. For reasons never well explained, many in the industry would say we were better off when coal’s share of the electric generation market topped 50 percent, as it did for years until the mid-2000s. But that is certainly not a diverse market; that is a one-fuel dependent market.
Looking forward, EIA sees a much more balanced portfolio (see chart above). Given that all the fuels are domestically produced, it is hard to argue that this is a bad thing. It may be bad for the coal guys who are being forced to adjust to a smaller market share, but mind you coal still is expected to generate 34 percent of the nation’s electricity in 2040 (larger than any other single fuel). And the reality is, a balanced portfolio makes good business sense—just ask your financial advisor.
A Needed Dose Of Salt
Finally, it is worth ending this post with the following chart, which underscores my overall concern about projections from any corner of the energy industry. Try as it might, EIA ends up giving us a range for Brent crude oil prices in 2040 that start at a low of $76 per barrel (in 2013 dollars) to a high of $252, with the reference case ending up roughly in the middle at $141 per barrel. In other words take the EIA (and all other forecasts as well) for what they are worth—a valiant effort to predict the unpredictable.