EYE ON THE MARKET
2021 Annual Energy Paper
MICHAEL CEMBALEST | JP MORGAN ASSET AND WEALTH MANAGEMENT
Future shock. Absent decarbonization shock treatment, humans will be wedded to petroleum and other fossil fuels
for longer than they would like. Wind and solar power reach new heights every year but still represent just 5% of
global primary energy consumption. In this year’s energy paper, we review why decarbonization is taking so long:
transmission obstacles, industrial energy use, the gargantuan mineral and pipeline demands of sequestration and
the slow motion EV revolution. Other topics include our oil & gas views, President Biden’s energy agenda, China,
the Texas power outage and client questions on electrified shipping, sustainable aviation fuels, low energy nuclear
power, hydrogen and carbon accounting.
1
MICHAEL CEMBALEST
Eye on the Market
Chairman of Market and Investment Strategy
. Morgan Asset Management
Welcome to our 11th annual energy paper. Each year, we examine what’s happening on the ground
as the fourth great energy transition unfolds. Our main focus this year: why is the transition taking so
long? Deep decarbonization plans assume massive changes in electric vehicles, electricity
transmission grids, industrial energy use and carbon sequestration, but each faces headwinds often
not accounted for by energy futurists. As shown below, many prior forecasts of the renewable
transition were too ambitious since they ignored energy density, intermittency and the complex
realities of incumbent energy systems. We follow up with an update to our bullish oil and gas call
from last year and examine Biden’s energy agenda. We discuss China’s rare earth metals diplomacy,
US distributed solar power and conclude with last words on the Texas power outage and answers to
client questions on electrified shipping, sustainable aviation fuels, hydrogen and carbon accounting.
As always, I would like to acknowledge the insights and oversight provided by our technical advisor
Vaclav Smil, who has patiently guided my energy journey since this paper’s inception 11 years ago.
This effort has been one of the most rewarding experiences in my 34 years at JP Morgan.
Physicist Bent Sorensen
Amory Lovins, Rocky Mountain Institute
Carter Administration (solar only)
Clinton Presidential Advisory Panel
Intergovernmental Panel on Climate Change
Google 2030 Clean Energy Plan
National Renewable Energy Laboratory
In 2020, Mark Jacobson (Stanford) forecast 80% by 2030
2
3
1
7
65
4
0%
10%
20%
30%
40%
50%
1960 1970 1980 1990 2000 2010 2020 2030
Source: EIA, listed authors, Vaclav Smil, JPMAM. 2019. Renew ables include
w ind, solar, hydropower, geothermal, biomass, w ood and waste.
Overly ambitious forecasts of the 4th great energy transition
Renew able share of US primary energy consumption
Lines start when forecasts were made and end in year of forecast
Actual renewable share of US primary energy
1
2
3
4
5
6
7
2
Executive Summary
President Biden just announced a new GHG emissions target: a 50% decline by 2030 vs a 2005 baseline. This
very ambitious target implies a decarbonization pace in the next 10 years that’s four times faster than in the last
15 years. Even with the amount of money the administration plans to dedicate to the task, it’s an enormous
hurdle. In this paper, we will be discussing some of the reasons why.
2
3
4
5
6
7
8
1990 1995 2000 2005 2010 2015 2020 2025 2030
The Biden plan: halving emissions from 2005 to 2030
GHG emissions, billion tonnes of CO2 equivalent
Source: EPA, UN, JPMAM. 2019.
Biden 2030 plan
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 2019 1998 2020 1998 2019 1998 2020 2005 2019
Source: UN Dept. of Social and Economic Affairs, Worldsteel, PlasticsEurope,
USGS. 2020.
A shift in energy intensive manufacturing to the emerging
world, % of global production
Manufacturing SteelAmmonia Cement
Developed economies
Emerging economies
Plastic
The even more important and larger question: even if the US succeeds, what about everyone else? Over the
last 25 years, the developed world shifted much of its carbon-intensive manufacturing of steel, cement,
ammonia and plastics to the developing world. As a result, developing world adoption of wind, solar, storage
and nuclear power may end up being the primary determinant of future global emissions outcomes. That has
certainly been the case over the last decade: Europe and Japan reduced primary energy use1 by 4%-6% but
developing world increases were 6x higher than their reductions; China/India energy use is still soaring; and
Africa’s energy use is rising from per capita levels seen in Europe in the 19th century. The world gets more
energy efficient every year, but levels of emissions keep rising. That’s why most deep decarbonization ideas rely
on replacement of fossil fuels rather than reducing fossil fuel consumption per capita or per unit of performance.
-400
-200
0
200
400
600
800
EU Japan US Latin
America
SE Asia
ex-
Ch/India
Middle
East
Africa China India
Historical change 2010 to 2019
Projected change 2019 to 2040
Source: International Energy Agency Stated Policies Scenario. 2020.
Change in primary energy use, past and future
Million tonnes of oil equivalent
10
15
20
25
30
35
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: BP Statistical Review of World Energy, Conference Board. 2020.
Global CO2 intensity declining, CO2 emissions rising
Tonnes of CO2 / thousand $2019 GDP Billion tonnes
CO2 intensity CO2 emissions
1 Primary energy refers to thermal energy contained in fossil and biomass fuels and also to thermal equivalents of
primary electricity generated from nuclear and renewable sources. Converting primary electricity to primary energy
can be done by using its thermal equivalent (1 kWh= MJ or 3,412 BTU) or by using an average annual heat rate of
fossil fuel plants (40% efficiency, equal to 9 MJ/kWh or 8,530 BTU). Final energy consumption is equal to primary
energy less (a) energy lost in the conversion of fossil fuels (crude oil refining, natural gas processing) (b) energy lost
in conversion of fossil fuels to electricity, (c) power plant consumption of electricity and (d) transmission losses.
3
How is the global energy transition going? Taken together, the aggregate impact of nuclear, hydroelectric and
solar/wind generation reduced global reliance on fossil fuels from ~95% of primary energy in 1975 to ~85% in
2020. In other words, energy transitions take a long time and lots of money. The IEA expects fossil fuel reliance
to decline at a more rapid pace now, fueled in part by “Big Oil” companies becoming “Big Energy” companies
and by a faster global EV transition. In 2021 renewables are for the first time expected to garner more capital
spending than upstream oil & gas. This process is influenced by diverging costs of capital: 3%-5% for solar and
wind, 10%-15% for natural gas and up to 20% for oil projects.
However, the IEA still projects that 70%-75% of global primary energy consumption may be met via fossil fuels
in the year 2040. Why don’t rapid wind and solar price declines translate into faster decarbonization? As we
will discuss, renewable energy is still mostly used to generate electricity, and electricity as a share of final energy
consumption on a global basis is still just 18%. In other words, direct use of fossil fuels is still the primary
mover in the modern world, as the demise of fossil fuels continues to be prematurely declared by energy
futurists2. As shown in the last three charts, wind/solar capacity is growing and gains in renewable electricity
generation are impressive, but in primary energy terms they are much smaller.
2 An example: the CEO of the Rocky Mountain Institute wrote last year, citing Carbon Tracker, that post-COVID
global fossil fuel consumption may never surpass 2019 levels. Really? The EIA projects a full recovery in liquid
fuels consumption by 2022 and projects the same for natural gas. Global coal consumption is projected to
decline by 240 million metric tons from 2019 to 2025, but the IEA’s projected increase for global natural gas
consumption by 2025 of 390 billion cubic meters is the decline in coal in energy (exajoule) terms. So, even
if liquid fuels consumption plateaus at 2019 levels, world fossil fuel demand has almost certainly not peaked
yet. Also: December 2020 global CO2 emissions were already above December 2019 levels (IEA).
70%
75%
80%
85%
90%
95%
100%
'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 '25 '30 '35 '40
Source: BP Statistical Review of World Energy, IEA. 2020.
The world uses fossil fuels for ~85% of its energy
% of global primary energy consumption from coal, oil and nat gas
Nuclear
adoption
era Solar/wind
era begins
IEA Stated
Policies
Scenario
Pre-existing
hydropower
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
$220
2010 2012 2014 2016 2018 2020
Source: Lawrence Berkeley National Laboratory, IRENA. 2020.
Average power purchase agreement prices for wind and
solar, Real 2019 $ per megawatt hour
US wind
Global wind
US solar
photovoltaic
Global solar photovoltaic Note: PPAs reflect the
benefit of subsidies
such as the US ITC
0
10
20
30
40
50
60
70
1998 2001 2004 2007 2010 2013 2016 2019
Wind and solar capacity additions
y/y change, gigawatts
Source: BP Statistical Review of Energy. 2020.
China
Europe
US
India
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1998 2001 2004 2007 2010 2013 2016 2019
Wind and solar share of total electricity
generation, %
Source: BP Statistical Review of Energy. 2020.
China
Europe
US
India
0%
1%
2%
3%
4%
5%
6%
7%
1998 2001 2004 2007 2010 2013 2016 2019
Wind and solar share of total primary energy
consumption, %
Source: BP Statistical Review of Energy. 2020.
China
Europe
US
India
4
Let’s take a closer look at energy consumption in the US, Europe and China which collectively represent a little
over half of the global total. The charts show final energy consumption by end-user and type of fuel, with the
dotted segments indicating electricity consumption, also broken down by fuel.
United States
Key stats
Quads of primary energy consumption
Quads of final energy consumption
Electricity % of energy consumed 17%
Electricity % of industrial energy consumed 12%
Electricity % of transport energy consumed 0%
Fossil fuels % of primary energy 80%
Passenger car energy % of transport energy 60%
Passenger car energy % of primary energy 17%
Industrial fossil fuels % of primary energy 27%
Renewable % of electricity generation 18%
Renewable energy % of primary energy 11%
Low carbon % of electricity generation 40%
Low carbon energy % of primary energy 20%
Coal to natural gas ratio in primary energy
Hydropower share of renewable electricity 40%
0
5
10
15
20
25
30
INDUSTRIAL TRANSPORT RESIDENTIAL COMMERCIAL
OIL
COAL
NAT GAS
RENEWABLE
NUCLEAR
US energy consumed by end-use sector and fuel type
Quadrillion BTUs of final energy consumed; dotted segments = electricity consumed
Source: Energy Information Administration, JP Morgan Asset Management. 2019. Electricity generation segments are net of thermal conversion, power plant consumption
and transmission losses. "Low carbon" refers to renewable generation plus nuclear generation.
The US is still highly reliant on fossil fuels which account for 80% of primary energy. Renewable electricity is the
lowest of the 3 regions at 18%, although nuclear adds significant carbon-free electricity. Electrification of
industry is the lowest of the three regions at 12%, and electrification of transport is almost non-existent. Around
5% of transport fuel comes from corn ethanol whose GHG benefits vs gasoline are still hotly debated3. The US
coal-to-natural gas ratio has fallen way below one, a development which reduces air pollution and groundwater
risks but whose GHG benefits are still debated as well. As per LBNL, 50% of the decline in power-related CO2
emissions in the US since 2005 is attributable to coal-to-gas switching, a process which is now ~80% complete.
• Natural gas is preferable to coal from a GHG perspective. In its 2019 assessment of lifecycle emissions from
natural gas and coal, the IEA concluded that over 98% of gas consumed today has a lower lifecycle emissions
intensity than coal when used for power or heat. In its 2020 assessment, the IEA concluded that switching
to gas results in average declines of 33% per unit of heat used in industry and buildings, and 50% when
generating electricity. Moreover, the IEA found that about three-quarters of today’s methane emissions
from the oil and gas industry can be controlled by deploying known technical fixes
• Natural gas GHG benefits vs coal are still unclear. Some climate scientists are re-evaluating the share of
methane emissions that come from pre-Industrial geologic sources vs those from coal and natural gas
combustion. Estimates of the latter are rising4, leading to downward revisions in the methane leakage
break-even rate that renders natural gas better than coal from a GHG perspective. Estimates of natural gas
methane leakage rates range from 2% to 6%, and the break-even rate vs coal may be as low as 1%5
3 EESI, Argonne Labs and the USDA cite 70%-95% reductions in carcinogenic particulates from E10/E85 ethanol
blends and 20%-50% reductions in GHG emissions. However, most “EROI” analyses for corn ethanol range from
to (“energy out” is not much different from “energy in”), implying that ethanol GHG savings are at the
low end of that range. Unlike Brazilian ethanol whose bagasse is used in production, US ethanol production
relies on natural gas. Corn ethanol has one of the lowest EROI measures of all forms of fuel/power; as inexact
as EROI measures are, they suggest that corn ethanol is a political decision and not just an environmental one.
Also: fertilization and irrigation of corn leads to enhanced nitrogen losses and aquifer depletion.
4 “Preindustrial CH4 indicates greater anthropogenic fossil CH4 emissions”, Nature, Hmiel et al, February 2020.
5 “Natural gas is a dirtier energy source than we thought”, NatGeo, Feb 2020 citing Robert Howarth (Cornell).
5
China
Key stats
Quads of primary energy consumption
Quads of final energy consumption
Electricity % of energy consumed 23%
Electricity % of industrial energy consumed 23%
Electricity % of transport energy consumed 4%
Fossil fuels % of primary energy 81%
Passenger car energy % of transport energy 25%
Passenger car energy % of primary energy 3%
Industrial fossil fuels % of primary energy 57%
Renewable % of electricity generation 31%
Renewable energy % of primary energy 17%
Low carbon % of electricity generation 35%
Low carbon energy % of primary energy 19%
Coal to natural gas ratio in primary energy
Hydropower share of renewable electricity 58%
0
10
20
30
40
50
60
70
80
INDUSTRIAL TRANSPORT RESIDENTIAL COMMERCIAL
OIL
COAL
NAT GAS
RENEWABLE
NUCLEAR
China energy consumed by end-use sector and fuel type
Quadrillion BTUs of final energy consumed; dotted segments = electricity consumed
Source: Energy Information Administration, JP Morgan Asset Management. 2019. Electricity generation segments are net of thermal conversion, power plant consumption
and transmission losses. "Low carbon" refers to renewable generation plus nuclear generation.
It would be great news if China succeeds with its plan for 25% EVs as a share of vehicle sales by 2025. Even
though China’s passenger cars represent only 25% of its transport energy consumption vs 60% in the US, that
would still be a lot of Chinese electric cars.
But…put EVs aside for a moment and focus on the elephant in the room: the number one issue for China and
the world is decarbonization of China’s massive industrial sector, which consumes 4x more primary energy
than its transport sector and more primary energy than US and European industrial sectors combined. China
has electrified larger parts of its industrial sector than the US (23% vs 12%), but since China’s grid is so reliant
on coal, electrification provides fewer climate benefits.
In contrast to the US, China uses 10x more coal than natural gas. In 2020, China built over 3x as much new
coal capacity as all other countries combined, equal to one large coal plant per week. China commissioned
GW of new coal plants in 2020, over 3x the amount commissioned in the rest of the world. Its coal fleet grew
by net GW in 2020 while non-China net capacity declined by GW. China initiated GW of new coal
plant proposals in 2020, over 5x the rest of the world combined. You get the point.
There’s a lot of discussion on China’s plan to forge ahead with nuclear as the developed world retreats from it.
China currently has 50 GW of nuclear and plans to increase this figure to 130 GW by 2030. The new nuclear
plants will represent ~6% of China’s 2030 electricity generation and ~3% of its primary energy. So, nuclear is a
material part of China’s decarbonization agenda but hardly a game changer on its own.
-40
-20
0
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
China and coal
Coal capacity: additions and retirements, gigawatts
Source: Centre for Research on Energy and Clean Air. February 2021.
Other additions
China net additions
US/EU net retirements
Other retirements
6
Europe
Key stats
Quads of primary energy consumption
Quads of final energy consumption
Electricity % of energy consumed 19%
Electricity % of industrial energy consumed 19%
Electricity % of transport energy consumed 1%
Fossil fuels % of primary energy 66%
Passenger car energy % of transport energy 50%
Passenger car energy % of primary energy 11%
Industrial fossil fuels % of primary energy 24%
Renewable % of electricity generation 47%
Renewable energy % of primary energy 23%
Low carbon % of electricity generation 71%
Low carbon energy % of primary energy 34%
Coal to natural gas ratio in primary energy
Hydropower share of renewable electricity 46%
0
5
10
15
20
25
INDUSTRIAL TRANSPORT RESIDENTIAL COMMERCIAL
OIL
COAL
NAT GAS
RENEWABLE
NUCLEAR
OECD Europe energy consumed by end-use sector and fuel type
Quadrillion BTUs of final energy consumed; dotted segments = electricity consumed
Source: Energy Information Administration, JP Morgan Asset Management. 2019. Electricity generation segments are net of thermal conversion, power plant consumption
and transmission losses. "Low carbon" refers to renewable generation plus nuclear generation.
Europe is further along than the US and China on renewable/nuclear penetration on the grid and on reducing
fossil fuels as a share of primary energy. Even so, electrification of Europe’s transport sector was still just 1% at
the end of 2019, and its industrial sector is still heavily reliant on fossil fuels.
Europe also faces a unique challenge: while its coal to natural gas ratio is the same () as in the US, this is the
byproduct of large amounts of natural gas imported from Russia every year. As shown below, European oil and
gas imports from Russia have now converged with total European oil and gas production. There are a host of
geopolitical and energy security issues here that are not in Europe’s favor. Europe could import LNG from the
US, Qatar and Australia but at a higher cost than pipeline imports from Russia.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: BP Statistical Review of World Energy, Gazprom, Eurostat, Perovic
et al, JPMAM calculations. 2019. Europe includes EU, Norway and Turkey.
European production vs European imports from Russia
Thousand barrels per day of oil equivalent
European oil and gas production
European oil and gas imports from Russia
7
The world is gearing up to spend trillions of dollars to accelerate the fourth great energy transition6, this time
to renewables. Market valuations of renewable companies skyrocketed in early 2020; I’m not sure all of them
make sense. One example: why did the total valuation of the world’s competitive, high-volume auto industry
gain 70% in market capitalization in the three years ending January 2021? A subsequent selloff eroded some of
the gains but the increases since 2019 are still among the largest on record. Below we compare these renewable
gains to prior episodes, some of which were sustainable while others were not. Generous subsidies, tax
incentives and grid preferences will sustain many of them even if they are unprofitable. For investors, the
challenge will be sorting out the long-term winners that will survive even when/if the subsidies go away.
Collapsed
Collapsed
Collapsed
Unknown
Collapsed
Kept going
Kept going
0%
200%
400%
600%
800%
1000%
1200%
1400%
ELEC VEH (M)
2019-current
ELEC VEH (E)
2019-current
SOLAR
2019-current
HYDROGEN
2019-current
BATTERY
2019-current
NIKKEI index
1985-1989
NASDAQ 100
1997-2000
COMMODITIES
2005-2008
FANG
2017-2021
AGRICULTURE
2003-2006
INTERACTIVE
HOME ENT.
2012-2015
HEALTHCARE
FACILITIES
2009-2012
Renewable stock price surge (2019-2021) vs prior sector/country stock price gains of 200%+ in 3 years or less
Labels indicate what happened 3 years after the stock price surge
Source: Bloomberg, JPMAM. April 26, 2021. EV companies presented both market-cap (M) and equal (E) weighted given Tesla's outsized impact on the former.
Jan 2021 Peak
$
$
$
$
$
$
Jan '18 Jul '18 Jan '19 Jul '19 Jan '20 Jul '20 Jan '21
M
il
li
o
n
s
Market value of global auto industry
Market capitalization, US$, trillions
Source: "Big Market Delusion: Electric Vehicles". March 2021.
EV specialists
Traditional automakers
Total (Traditional + EV)
This year we start with the four big obstacles to faster deep decarbonization: slow penetration of EVs, required
upgrades to transmission infrastructure, geologic carbon sequestration and electrification of industrial energy
use. The overarching message of this paper is not climate nihilism; it’s that the behavioral, political and
structural changes required for deep decarbonization are still grossly underestimated. If so, the companies we
all rely on for dispatchable, thermal power and energy will need to survive and prosper until we get there.
Michael Cembalest
JP Morgan Asset Management
6 The first three: [i] mastery of fire; [ii] a shift from foraging to agriculture and domesticated animals and [iii] a
shift from biomass and human/animal labor to combustion of fossil fuels and to mechanical prime movers.
8
Table of Contents
[1] Electric vehicles, Will Ferrell, Norway and the rest of the world ...................................................................... 10
Forget about Norway: how is the EV revolution going everywhere else? The latest on EV penetration, vehicle
replacement cycles, ICE car break-even mileage and why hybrids don’t count (as much)
[2] Transmission Dreams .................................................................................................................................... 15
MIT and Princeton have laid out grand scale deep decarbonization ideas that acknowledge the need for massive
electricity grid expansion
[3] …and Transmission Realities .......................................................................................................................... 18
Grid expansion can be a hornet's nest of cost, complexity and NIMBYism, particularly in the US
[4] The Song Remains the Same: geologic sequestration of carbon may face the steepest climb of all .................. 22
The highest ratio in the history of science: CCS academic publications vs real-life CCS implementation
[5] Decarbonization of the industrial sector: costs, challenges and limitations ..................................................... 24
Even assuming greater renewable electricity, only some industrial processes can be easily electrified
[6] Oil and gas update: our bullish call on the sector, one year later .................................................................... 27
As the sector refocuses on profitability, valuations are rising and have more to go
[7] Biden’s energy agenda: how much oil and gas will the US need in the future? ................................................ 30
The energy math on grid decarbonization, Federal land production bans, EV incentives and mileage targets
[8] China’s rare earth metal diplomacy revving up again ..................................................................................... 34
China saber-rattling on rare earth metal exports is leading other countries to develop their own
[9] China: how new laws on residential heating systems actually lead to greater GHG emissions ......................... 35
Replacing coal-fired residential heating with electric heaters solves one problem, causes another
[10] US solar power: distributed small-scale generation is growing, but customers face headwinds ..................... 36
Many utilities no longer pay solar customers at a retail rate for electricity exported to the grid
Epilogue: Last words on the Texas power outage and why I write this paper ....................................................... 37
“What about…”: Answers to client energy questions ........................................................................................... 39
Q&A on electrified shipping, sustainable aviation fuels, low energy nuclear power, Saudi Arabia's green hydrogen
plant and the unintended consequences of MSCI's carbon accounting methodology
9
Acknowledgements and a quick note on our process
Our energy paper is overseen by Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the
University of Manitoba and a Fellow of the Royal Society of Canada. His inter-disciplinary research includes studies
of energy systems (resources, conversions and impact), environmental change (particularly global biogeochemical
cycles), and the history of technical advances and interactions among energy, environment, food, economy, and
population. He is the author of more than 40 books (the latest two, Grand Transitions: How the Modern World Was
Made and Numbers Don’t Lie were published last year) and more than 400 papers on energy subjects and has lectured
in North America, Europe, and Asia. In 2015, he received the OPEC award for research, in 2019 American Energy
Society named him Energy Writer of the Year, and he is described by Bill Gates as his favorite author.
Vaclav and I agreed upfront that we would cover energy sources which reach, at the minimum, early stages of
commercialization. Many ideas work on paper or in small-scale lab settings but are not widely commercialized and
thus have no real world impact, either for cost or operational reasons. Examples include advanced biofuels like
cellulosic ethanol, low energy nuclear reactions, quantum glass batteries, underground thermal energy storage,
geoengineering (solar radiation management), ocean thermal energy conversion, liquid fuels from genetically
modified algae and electricity generated from the coldness of the universe.
Links to topics from prior papers, which you can access here
• The environmental impact of renewable energy (2020)
• Cost declines required to make the hydrogen economy a reality (2020)
• Measuring climate benefits of reforestation (2020)
• How much energy is stored, and how? (2020)
• The water intensity of hydraulic fracking (2020)
• Geothermal update: present and future (2020)
• Germany and Energiewende: A dispassionate assessment (2019)
• Wildfires: anthropogenic climate change and risks for utilities in fire-prone areas (2019)
• High voltage direct current lines: China leads, US lags (2018)
• The Dream Team rebuttal of the Jacobson “100% renewable electricity by 2050” plan (2018)
• Better safe than sorry: sea level rise, coastal exposure and flood mitigation (2018)
• Hydraulic fracturing: the latest from the EPA and some conflicting views from its Advisory Board (2017)
• Forest biomass: not as green as you might think (2017)
• The myth of carbon-free college campuses (2017)
• US hydropower: how much potential for expansion? (2016)
• Nuclear power: skyrocketing costs in the developed world (2014 and 2015)
Acronyms
BEV battery electric vehicle; BTU British thermal unit; CCGT combined cycle gas turbine; CCS carbon capture and
storage; CH4 methane; DACC direct air carbon capture; E&P exploration and production; EIA Energy Information
Agency; EPA Environmental Protection Agency; ERCOT Electric Reliability Council Of Texas; EROI Energy return on
investment; EV electric vehicle; FERC Federal Energy Regulatory Commission; GHG greenhouse gas; GW gigawatt;
HVDC high voltage direct current; ICE internal combustion engine; IEA International Energy Agency; IRENA
International Renewable Energy Agency; kg kilogram; km kilometer; kV kilovolt; kWh kilowatt hour; LBNL Lawrence
Berkeley National Laboratory; LENR low energy nuclear reactions; LMP locational marginal pricing; LNG liquid natural
gas; m3 cubic meter; MJ megajoule; MMT million metric tonnes; mpg miles per gallon; Mtoe million tons of oil
equivalent; MWh megawatt hour; NaOH sodium hydroxide; NGL natural gas liquid; NIMBY not in my backyard; NOAA
National Oceanic and Atmospheric Administration; NOx nitrogen oxides; NREL National Renewable Energy Lab; OECD
Organisation for Economic Co-operation and Development; OPEC Organization of the Petroleum Exporting Countries;
PHEV plug-in electric vehicle; REE rare earth element; RNG renewable natural gas; SUV sport utility vehicle; TWh
terawatt hour; USGS US Geological Survey; Wh watt hour.
10
[1] Electric vehicles, Will Ferrell, Norway and the rest of the world
Passenger cars and light vehicles account for 40%-50% of global transport energy use. Other categories could
be electrified (buses, heavy trucks) while some are more difficult (shipping, see ). A faster EV revolution in
the US could have a large climate benefit since the US accounts for 25% of global transport energy consumption
and since light vehicles represent 60% of this amount, both figures being the highest in the world.
Light-duty
vehicle
Air
Bus
Other
Heavy truck
Marine
Other truck
Rail
0
10
20
30
40
50
60
Passenger Freight
Source: Energy Information Administration. 2016.
World transportation energy consumption by mode
Quadrillion BTUs
Australia / New Zealand
South Korea
Russia
India
China
OECD Europe
US
2%
2%
3%
3%
12%
18%
25%
0% 20% 40% 60% 80% 100%
Passenger vehicle Road freight vehicle Air Marine Rail
Transportation energy consumption by region and mode
% of world transportation energy consumption
Source: Energy Information Administration. 2016.
% of region total by mode (2012)
I enjoyed the Will Ferrell commercial for GM during the Super Bowl which stated that Norway is “eating our
lunch” on EVs. As shown below, they sure are: Norway EV sales were 60% of all vehicle sales last year compared
to 2% in the US. But there are a few things about Norway that are important to understand:
• Norway has 5 million people and a population density that is 5%-15% of most other European nations
• 97% of Norway’s electricity comes from hydropower; its electricity prices are 40%-70% of European levels
• In Norway, EVs are exempt from VAT taxes and receive a 50% discount on toll roads and parking fees while
ICE cars are subject to a 25% VAT, a CO2 tax, an NOx tax and a weight tax. As a result, Norwegian ICE cars
are more expensive to buy and 75% more expensive to operate
• A full conversion to EVs would put its EV subsidies at the second largest gov’t expenditure behind pensions
So, let’s dispense with Norway as a paradigm for the world’s high density, car-loving countries and see how the
EV revolution is going elsewhere. Other than in a few small Northern European countries, EV sales as a share
of vehicle sales are still mostly less than 10%7. Globally, the EV share in 2020 was %, up from ~% in 2018
and 2019. Note how this compares to IEA scenarios of 20%-40% EV shares in the year 2030.
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Source: IRENA, EIA, EV Volumes, JPMAM. 2020.
IEA Stated
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IEA Sustainable
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0%
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20%
30%
40%
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2018 2019 2020 2030 2030
Global EV share of light vehicle sales
BEV and PHEV sales as % of light vehicle sales
Source: EV Volumes, IEA, JPMAM. 2020.
7 Light vehicle sales > 500k units and EV shares < 2%: JPN, INDIA, BRA, RUS, MEX, AUSTRA, TUR, THA and MAL.
11
EV analyses are defined by the scope of what an EV is assumed to be. Our definition includes battery electric
vehicles (BEV) and plug-in hybrid electric vehicles (PHEV) since the prime mover in both cases is the electric
motor, even though some PHEVs have large backup fuel tanks as well. We do not include hybrid electric vehicles
(HEV) since its primary mover is usually an internal combustion engine (this depends on the length of average
trips and other driving behaviors). We include light trucks and not just passenger cars since the former is 75%
(!!!) of all vehicle sales in the US. The next chart illustrates battery capacity by EV type and is another indication
of why we only include BEVs and PHEVs in our EV analysis, and not hybrids.
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Battery electric vehicle (BEV) Plug-in hybrid (PHEV) Hybrid (HEV) Mild hybrid (MHEV)
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Source: Car and Driver, Automotive World, vehicle manufacturers. February 2021.
To be clear, hybrid vehicles can make substantial contributions to fuel economy; the 2021 Toyota Prius is EPA
rated at up to 58 mpg in city driving. But the world envisioned in deep decarbonization plans involves large
fleets of electric vehicles powered by green electricity8, in which case our EV definition is a better measure of
how the transition is going. Answer: in most places with a lot of people, gradually so far.
There has been an enormous decline in battery costs over the last decade, which in principle should boost the
pace of EV sales. Some analysts project EV cost parity by 2023.
$10
$100
$1,000
$10,000
10 1,000 100,000 10,000,000
Lithium ion battery learning curve
Battery cost $ per kWh
Cumulative battery MWh produced
Source: ARK Investment Management. 2021.
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Electric vehicles Traditional vehicles Hybrids
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$, thousands, manufacturer suggested retail price
Source: Edmunds, Car and Driver, CleanTechnica. 2021. Excludes subsidies.
8 Grid expansion required: 40% EV penetration would increase electricity consumption by 440 TWh compared
to current generation of 4,400 TWh (a 10% increase), and by more in the future depending on the growth rate
of the total vehicle stock. Load management investments would be needed to prevent surges in demand that
could overwhelm transmission networks. Households generally consume 1-2 kWh per hour while a Level 2 EV
charger can consume 8-9 kWh per hour.
12
Now that battery costs have fallen, many countries and car companies have made commitments to rapidly
ramp up EV penetration and production in the years ahead. We’ll see; I think it makes more sense to track
how quickly EVs are actually selling and actual CO2 emissions from the transportation sector rather than tracking
non-binding future milestones9. There are four key things to understand about the EV revolution:
[i] the good news: in most parts of the world, EVs entail GHG benefits per mile vs internal combustion engine
(ICE) cars irrespective of the fuel composition of the electricity grid; but…
[ii] the lifecycle of today’s light vehicles is getting longer which delays vehicle replacement
[iii] EVs still cost more than comparable ICE vehicles when looking at the highest selling cars/trucks in the US
[iv] some research indicates behavioral issues which may reduce assumed GHG benefits from the EV transition
Let’s take a closer look.
[i] EV GHG benefits per mile generally exist irrespective of the fuel composition of the grid
Throughout most of the US and Europe (but not necessarily China), EVs entail positive GHG benefits per mile vs
most ICE cars. How can we tell? The Union for Concerned Scientists estimates “break-even” mileage by US
region, which is the mileage your ICE car must achieve to produce the same emissions as the average EV10.
See the blue and gold dots in the chart: from California at the top of the range to the Midwest at the bottom,
the mileage of all top selling US cars and light trucks are way below these break-even levels. The only overlap
is the grey dots: Toyota and Hyundai hybrids in coal- and gas-dependent regions. As more renewables are added
to the grid and if EV fuel efficiency improves, these break-even figures may rise. However, ICE mileage could
improve as well, such as Mazda’s SkyActiv-X engine which may improve fuel economy by 20%-30%.
CaliforniaFlorida NYCLong Island NY
Texas Northwest
Illinois
Rockies
Virginia/Carolina
New EnglandMidwest Southeast Penn./Delaware
1 2 3 45 6 789101112
20 30 40 50 60 70 80 90 100 110 120 130
How efficient does your ICE car need to be for its emissions to be the same as an EV?
Miles per gallon
Source: Union of Concerned Scientists, US Department of Energy. 2021. ICE = internal combustion engine
Note: Miles per gallon = combined city/highway mileage
Top selling cars and light
trucks in the US sorted
by miles per gallon:
1. Ram 1500
2. Ford F-150
3. Chevrolet Silverado
4. Toyota RAV4
5. Honda CR-V
6. Chevrolet Equinox
Highest mileage cars:
7. Honda Insight
8. Toyota Camry Hybrid
9. Toyota Corolla Hybrid
10. Hyundai Elantra Hybrid
11. Toyota Prius Eco
12. Hyundai Ioniq Blue
ICE car mpg at which emissions = average EV emissions
mpg of top
selling US cars
and light trucks
mpg of highest
mileage cars
9 Example: Japan had a very low share of EVs in 2020 at just % of vehicle sales. The Japanese government
plans to phase out ICE cars in the mid 2030’s at which point all cars must be hybrid or fully electric. That’s an
aggressive timetable compared to current production.
10 UCS analyzed emissions from fueling and driving both types of vehicles. For ICE cars: emissions from extracting
crude oil, moving oil to refineries, gasoline refining, gasoline distribution and tailpipe emissions. For EVs: power
plant emissions and emissions from production of coal, natural gas and other fuels.
13
[ii] Longer vehicle lives delay the EV revolution
My college roommate bought a new Ford Mustang in 1983. It was a not a very good car; it was in the shop a
lot, and one day I recall someone almost punching a hole through the door. Since then the quality of domestic
and imported cars has improved, leading to longer useful lives. The average age of light vehicles in operation
has doubled since 1972. That’s great for productivity and household wealth but has the unintended
consequence of delaying penetration of new technologies like EVs. Misunderstanding of this dynamic may
partially explain why so many projections of the US EV share of sales in 2020 made ten years ago were wrong
(Deutsche Bank 11%, PwC 10%, BNEF 9%, Roland Berger 7%, BCG 5% vs actual 2020 US levels of 2%).
The chart on the right shows a proxy for the vehicle replacement cycle in years (., divide the stock of cars by
annual sales, and that’s the number of years it could take for the entire stock to be electrified if EVs were 100%
of new vehicle sales). EV penetration as a % of the stock depends on projections of the annual EV share of total
sales, the growth rate in overall vehicle sales and vehicle scrappage rates. Bloomberg New Energy Finance
(BNEF) now projects 30% US EV penetration by 2037, and I think they will be too high again.
6
7
8
9
10
11
12
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Average age of US light vehicles in operation
Years
Source: US Bureau of Transportation Statistics, IHS Markit. 2020.
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30
35
40
Vehicle replacement cycle in years
Total light vehicle registrations divided by light vehicle sales
Source: European Automobile Manufacturers Association, country departments
of transportation, EV Volumes. 2019.
[iii] When considering the kind of cars and light trucks US buyers prefer, the EV price gap is still large
In some research we’ve seen, analysts compare the price of a Toyota Camry to an EV like the Chevy Bolt or
Nissan Leaf to illustrate the declining price gap between EVs and ICE cars. However, as mentioned earlier, SUVs
and other light trucks account for 75% of US light vehicle sales. As a result, the Bolt and Leaf are not really
product substitutes for people buying light trucks and SUVs. The table shows what we see as more relevant
comparisons. The price gaps (measured in dollars and % terms) are larger than Camry-Bolt comparisons, and
the range differentials in miles are often larger as well. Learning curves may drive all EV costs down further, but
we consider the most relevant ICE-EV price gaps to be larger than the ones often reported.
Electric vehicle: Chevy Bolt Ford F150 EV Chevy Silverado EV Dodge Ram EV SUV EV Composite SUV EV Composite
ICE vehicle: Toyota Camry Ford F150 Chevy Silverado Dodge Ram Toyota RAV4 Honda CRV
EV price ($, thousands) $ $ $ $ $ $
ICE price ($, thousands) $ $ $ $ $ $
Price gap ($, thousands) $ $ $ $ $ $
Price gap (%) 23% 129% 72% 130% 64% 69%
ICE range - EV range (miles) 193 320 208 268 155 134
ICE units sold (2020) 294,000 787,000 593,000 564,000 430,000 324,000
Sources: Car and Driver, JPMAM. 2021. EV and ICE model costs based on entry level vehicles. ICE mileage from Department of Energy.
SUV EV composite based on average of Volkswagen ID4, Hyundai Kona EV and Volvo XC40 Recharge.
Note: the IEA concluded that by 2040, the global ascent of SUVs has the potential to offset carbon savings from
more than 100 million EVs
14
[iv] Research points to behavioral issues which may reduce GHG benefits from the EV transition
Tracking actual CO2 emissions from the transport sector will be the best way of measuring the contribution of
EVs to climate mitigation.
• Will EVs replace ICE cars or supplement them? In Norway, subsidies promoted new EV purchases but two-
thirds of families supplemented their ICE cars instead of replacing them, with 60% of driving miles by two-
car families via their ICE cars vs 40% from their EVs11. Other analyses on Norway found that EV subsidies
resulted in a sharp reduction in public transit and bicycle use compared to people owning ICE cars
• What kind of cars would most EV buyers have bought instead? A study from UC Davis found that many EV
buyers would have bought higher mileage cars instead, which could mean that the emissions savings from
EV transitions could be overstated by as much as 50%12
• Why do EV owners tend to drive their cars for much fewer miles per year than ICE cars? Whether the answer
is range anxiety or their status as a second car rather than a replacement, the implications are not positive
for EV adoption trends and GHG benefits. University of Chicago researchers extrapolated miles driven by
monitoring their electricity bills before and after purchase. Adopting an EV increased household electricity
consumption by kWh per day. After correcting for out-of-home charging, this translated to
approximately 5,300 miles traveled per year by EV owners, which is under half of the US fleet average13
Pulling it all together
Biden’s policies (see Section 7) may substantially increase US EV penetration. But as things stand now, the US
has the highest share of global transport energy consumption, the highest vehicle share of transport energy, the
highest number of vehicles per capita, the longest distance driven per capita, the lowest public transit usage,
the lowest gasoline prices AND almost the lowest EV penetration as well. No wonder Will Ferrell is so mad.
EV share of
light vehicle
sales
Avg
gasoline
price
% income
spent on
gasoline
Cars per
1,000
people
Vehicle
km per
capita
Biking
frequency
Public
transit
usage
Road fuel
consum.
per capita
Australia 1% 741 10,800 27 580
Canada 3% 667 8,500 23 886
Denmark 14% 508 6,300 – 244
France 9% 590 6,250 28 106
Germany 13% 610 7,000 33 222
Italy 4% 707 6,250 – 158
Japan 1% 718 4,000 31 329
Netherlands 22% 543 6,150 – 242
Norway 62% 754 6,500 – 213
Sweden 30% 542 7,000 32 302
UK 9% 544 6,250 37 220
United States 2% 875 14,000 12 1,106
Source: California State University, EV Volumes. 2020.
11 Statistics Norway, August 15 2019
12 “Correcting Estimates of Electric Vehicle Emissions Abatement: Implications for Climate Policy”, Muehlegger
and Rapson (UC Davis, NBER), January 2021
13 “Low Energy: Estimating Electric Vehicle Electricity Use”, Burlig et al. (University of Chicago), February 2021
15
[2] Transmission Dreams
Most deep decarbonization plans acknowledge the need for massive transmission grid updates. In this section,
we look at two recent ones: an MIT study on electricity optimization between Canada and New England, and a
Princeton analysis aiming for full decarbonization by 2050.
MIT: Electricity optimization in New England14
The goal: decarbonize New England electricity and
examine benefits of new transmission to allow
greater trade of Canada hydropower and New
England wind/solar power. The first chart shows the
capacity mix required for 80% decarbonization of
New England electricity by 2050.
Now let’s look at generation. The chart below (left)
shows modeled New England electricity generation
for a 2-week period in October 2050 resulting from
the new capacity mix. There’s some bilateral trade of
hydro, wind and solar using GW of existing cross-
border transmission capacity (red & green segments),
but it’s pretty small. New England CO2 emissions
would fall from million metric tons (MMT) per
year today to MMT per year in 2050.
0
5
10
15
20
25
30
35
40
45
50
2019 2050 w/ 80%
decarbonization
2050 w/ 80%
decarbonization &
4 GW transmission
Other
Solar
Wind
Hydro
Nuclear
Coal
Petroleum
Natural Gas
New England capacity mix by energy source
Gigawatts
Source: EIA, Emil Dimanchev, MIT Center for Energy and Environmental
Policy Research. February 2020.
Now let’s add some more transmission. The chart on the right assumes 4 GW in new transmission lines which
would allow New England to double its electricity imports/exports. MIT estimates that the financial cost of
building new transmission would be offset by lower cost Canadian hydropower, and that New England CO2
emissions would fall from MMT per year to just MMT per year. So: it looks like there’s a positive
cost/benefit from a lot more transmission in this decarbonized system. Sounds great on paper, until the New
Hampshire siting committee gets involved…which we discuss in the next secetion.
-10
-5
0
5
10
15
20
25
10/1 10/2 10/3 10/4 10/5 10/6 10/7 10/8 10/9 10/10 10/11 10/12 10/13 10/14 10/15
Curtailment IMPORTS CCGT CCS Pumped Hydro Hydro Solar Offshore Wind
Onshore Wind New CCGT Existing CCGT Existing Nuclear Storage Charging EXPORTS
Modeled hourly New England generation using 2050 capacity mix
Gigawatt hours
Source: "Two-Way Trade in Green Electrons: Deep Decarbonization of the Northeastern US and the Role of Canadian Hydropower." Emil Dimanchev et al., MIT. February 2020.
-10
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5
10
15
20
25
10/1 10/2 10/3 10/4 10/5 10/6 10/7 10/8 10/9 10/10 10/11 10/12 10/13 10/14 10/15
Modeled hourly New England generation using 2050 capacity mix +
4 gigawatts of new transmission, Gigawatt hours
14 “Two-Way Trade in Green Electrons: Deep Decarbonization of the Northeastern US and the Role of Canadian
Hydropower”, Dimanchev et al, MIT Center for Energy and Environmental Policy Research, February 2020.
16
The Princeton paper proposes Net Zero primary energy by 205015 (., not just decarbonization of electricity,
but decarbonization of everything). As illustrated in the first chart below, this transformative proposal includes
a 14x buildout of wind and solar capacity and a 3x-5x buildout of transmission capacity16.
Consider the pace of Princeton’s transmission expansion relative to history. The base case $76 billion per year
cost of this proposal is three times higher than prevailing spending on transmission infrastructure (second
chart). Furthermore, some current investment is replacing old transmission infrastructure rather than adding
new capacity. The third chart is quite the hockey stick: from 2004 to 2020, US transmission grid miles only grew
by % per year and would have to accelerate to %% (these are very big differences when compounded
over decades). Finally, look in the fourth chart at where this new capacity would need to be built: Texas, but
also California and the Northeast, regions with NIMBY and other obstacles to development. As a result, any
analysis of Transmission Dreams also has to confront Transmission Realities…which we address next.
Current (2020)
Base case (2030)
Base case (2040)
Base case (2050)
Land constrained case (2050)
Renewable case
(2050)
0 1 2 3 4 5 6
Princeton Net Zero plan
Transmission lines > 345 kilovolts, million gigawatt-kilometers
Source: "Net Zero America", Larson et al., Princeton. 2020.
Wind and solar capacity installed (terawatts)
Base case: net zero, fossil fuel
CO2 emissions offset by CCS
Renewable case: net zero, no
fossil fuels, no CCS
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
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1
9
2
0
2
0
2
0
2
0
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0
5
0
p
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je
c
te
d
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
Historical and projected transmission investment
US$ per year, billions
Source: Edison Electric Institute, "Net Zero America", Larson et al.,
Princeton. 2020.
Princeton base case
annual transmission
investment
Base case (2030)
Base case (2040)
Base case (2050)
2020
Base case: no CCS (2050)
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1978 1988 1998 2008 2018 2028 2038 2048
Princeton Net Zero
Historical
US transmission infrastructure
Thousands of gigawatt-miles
Source: DOE, UT Austin, "Net Zero America", Larson et al., Princeton. 2020.
Dept. of Energy UT Austin
Montana
Maine
Nebraska
Missouri
New Mexico
Massachusetts
New York
New Jersey
California
Texas
$0 $20 $40 $60 $80 $100 $120 $140 $160
Bulk transmission
Solar connections
Onshore wind connections
Offshore wind connections
Princeton plan transmission required by state
Top ten states sorted by required investment from 2020-2050
Source: "Net Zero America", Larson et al., Princeton. 2020.
2018 US$, billions
15 Larson, Greig, Jenkins, Mayfield, Pascale, Zhang, Drossman, Williams, Pacala, Socolow, Baik, Birdsey, Duke,
Jones, Haley, Leslie, Paustian and Swan, “Net-Zero America: Potential Pathways, Infrastructure, and Impacts”,
interim report, Princeton University, December 15, 2020.
16 Other Net Zero proposals have lower transmission targets for 2050 than Princeton but they are still enormous
relative to today’s grid. Examples include the Zero Carbon Consortium Deep Decarbonization Pathways Project
and the Carbon Neutral Pathways Project from James Williams at the University of San Francisco. Both entail
transmission buildouts that are 65%-80% of Princeton levels.
17
A brief comment on the pace of wind and solar expansion assumed in the Princeton paper
The primary purpose of Sections 2 and 3 is to examine new transmission required in deeply decarbonized
systems. That said, it’s also worth examining the generation expansion in the Princeton report. The chart below
shows generation capacity additions measured as watts per capita per year, highlighting peaks by fuel type. The
challenge with the Princeton plan is not just its level but its consistency: while peak capacity additions in the US
were 2/3 of the 300 watt figure in the Princeton plan, they were only sustained for a couple of years. The
Princeton plan requires 300 watts every year for 30 years. It remains to be seen if the climate threat (see
bottom chart on warming oceans) translates into support for this magnitude of capacity expansion.
For anyone thinking that energy efficiencies will reduce electricity demand, remember the parable of the airline
industry: despite a 75% decline in jet aircraft fuel consumption per kilometer since 1960, aircraft fuel
consumption and related CO2 emissions quadrupled as declining ticket prices led to a surge in aviation. In other
words, increased use can more than offset any efficiency gains.
0
50
100
150
200
250
300
350
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Historical (US)
Historical (Germany)
Historical (China)
Source: "Net Zero America" (Princeton study), American Public Power Association, EIA, China Electricity Council, Fraunhofer
ISE, Clack et al. (pre-2014 data). 2020.
Historical rates of installed electric-generating capacity per capita
Capacity additions, watts per year per capita
Coal and nuclear peak
2nd nuclear peak
Natural gas
peak Germany solar
PV peak
Germany
wind peak
Princeton Net Zero by 2050 base case
wind and solar capacity additions
-150
-100
-50
0
50
100
150
200
250
1958 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Source: Cheng, L. et al., Advances in Atmospheric Sciences; Dahlman and
Lindsey, National Oceanic and Atmospheric Administration. February 2020.
Warming oceans
Zettajoules
Ocean heat content change in upper 2000 m
vs 1981-2010 baseline (Cheng)
Ocean heat content change in upper
700 m vs 1955-2006 baseline (NOAA)
1940 1950 1960 1970 1980 1990 2000 2010 2020
Global carbon dioxide emissions from aviation
Billion tonnes of CO2 emissions
Source: Our World in Data. 2018.
18
[3] …and Transmission Realities
While MIT and Princeton assume rapid growth in transmission infrastructure, actual development can be a
hornet’s nest of siting challenges and legal costs even when projects are eventually built after years of planning.
Let’s start with HydroQuebec’s plan to sell hydropower to the US. New York shares a border with Canada and
is planning a GW transmission line from the Quebec-NY border to NYC, buried under Lake Champlain and
the Hudson River. Same for Minnesota, which increased its imports of hydropower from Manitoba via a new
500 kV transmission line completed in 2020. However, a state like Massachusetts has no such luck.
Take Northern Pass, a GW transmission project to bring hydropower from Quebec to the Northeast through
New Hampshire (80% via existing right-of-ways or underground lines). Hydropower that displaces natural gas
has clear climate benefits given lifetime hydropower CO2 emissions that are 5% of natural gas levels [IPCC].
Assuming 5% transmission losses and 83% utilization17, Northern Pass could deliver TWh of hydropower to
New England and reduce emissions by million metric tons of CO2 every year. The chart below on neighboring
generation mixes makes it clear why cross-border electricity trading could result in more optimal outcomes.
However, a New Hampshire siting committee blocked Northern Pass18, giving new meaning to New
Hampshire’s state motto “Live Free or Die”. Now Massachusetts is trying to import Canadian hydropower
through Maine (“New England Clean Energy Connect”) but has already run into an injunction due to opposition
from environmental groups. As described on , MIT believes that the best answer for New England is 4 GW
of new two-way transmission lines between New England and Quebec. So, 4 new Northern Pass projects?
Good luck with that. Offshore wind planned for completion by 2035 in New England could eventually replace
Canadian hydropower multiple times over, but there’s a long way to go from today’s demonstration projects19.
Note the path of the offshore wind learning curve vs onshore wind at the lower right.
0%
20%
40%
60%
80%
100%
Massachusetts Quebec
Other
Hydro
Solar
Wind
Biomass
Nuclear
Natural gas
Electricity generation by source
% of total
Source: EIA, Canada Energy Regulator. 2019.
$10
$100
$1,000
0 1 10 100 1,000
Levelized cost of energy (LCOE) vs installed capacity
LCOE (2019 US$/megawatt hour)
Source: NREL, Beiter et al. February 2021.
Total installed capacity (gigawatts)
Onshore wind
Offshore wind 2008
2019
2019
2002
1983
2008
Wind learning curves
17 “Cost benefit and local economic impact of Northern Pass transmission project”, London Economics, 2015
18 The Death of Northern Pass. The project was killed by the “New Hampshire Site Evaluation Committee”. Our
understanding is that primary objections came from environmental groups and also from New Hampshire
power generators concerned about surplus Canadian hydropower putting downward pressure on electricity
prices within the New England ISO.
19 Offshore wind. While there are only two small offshore wind pilot projects operating in the US right now,
Eastern US states have committed to build 25-30 GW by 2035. Projects require approval from the Bureau of
Ocean and Energy Management; the Biden administration will reportedly accelerate approvals more quickly
now. Around GW are planned for MA and CT; assuming a 50% capacity factor, offshore wind could generate
23 TWh per year compared to TWh from Northern Pass. Currently, LBNL estimates offshore wind costs at 8
to 12 cents per kWh compared to the most productive onshore wind projects at 3-4 cents per kWh, and
compared to Canadian Hydropower at 6 cents per kWh.
19
What about outside the Northeast?
We’ve written before about the fate of Clean Line’s Plains & Eastern project which aimed to connect Oklahoma
wind and Tennessee. While Federal courts eventually overrode Arkansas landowner objections, mounting court
costs crippled the project’s finances. The Tennessee Valley Authority declined to support it (reportedly at the
urging of Ten. Senator Lamar Alexander), and the TVA stuck with its mix of nuclear, gas and coal. Clean Line
sold the project to NextEra Energy, but they were unable to get anywhere either: Arkansas Senators Cotton and
Boozman argued to Trump Energy Secretary Perry that the Obama administration violated Arkansas property
rights in approving the project in the first place. The project was finally euthanized in 2018, and Clean Line
eventually sold or liquidated its other projects after years of endless court fights at state and county levels20.
Another legacy Clean Line project is on the ropes as well: the Grain Belt Express, designed to bring wind power
from Kansas to the East Coast by joining SPP, MISO and PJM grids. In February 2021, the Missouri State House
passed a bill banning the use of eminent domain for above-ground utility projects; its State Senate will review
next. Meanwhile, five hundred Missouri landowners along the route continue their fight against the project.
Easement payments of $150,000 have been offered (110% of assessed land value) and landowners can continue
to farm or build on the easements, but so far only a third of landowners have accepted.
Some developers take advantage of corridors used for existing infrastructure. Siemens is working on a 350-mile
GW underground HVDC connection between Iowa’s wind farms and Chicago. The majority of the line will
run alongside a railroad corridor right of way, which should make it easier to obtain permits, a strategy used to
expand high-speed internet networks. Other good news: the Southern Cross project will join ERCOT with the
SPP region (OK, KS, NE and the Dakotas) and begins construction in 2022.
However, even when projects are approved, they’re built at a snail’s pace compared to deep decarbonization
requirements. The TransWest Express project, designed to bring wind power from Wyoming to California, has
been in development since 2007 despite being fast-tracked by the Obama administration, despite being only
15% reliant on private lands, and despite having been granted eminent domain status by the 4 states it traverses.
TransWest is projected to begin delivering power in 2023.
Transmission challenges in Germany were addressed through underground cabling and legislation. In some
places, burying transmission cables reduced resistance although at a large increase in cost. Germany passed an
“acceleration law” in 2019 to streamline and simplify transmission approval procedures. As of Q3 2020,
Germany had completed 20% of planned transmission build-out with another 11% approved for construction.
Even so, bottlenecks hamper transmission of its wind generation: Germany is reportedly exporting wind power
to Denmark and paying Danish wind farms not to generate power. Reports cite Danish wind curtailment as
high as 6% as a result21. Germany intends to shut down its last remaining nuclear plants in 2022 which will
amplify the importance of completing North-South transmission lines for wind.
China relocated million people during the construction of the Three Gorges Dam and related transmission
networks. China does not face the same constraints as Western countries with respect to building transmission
lines over objections from local municipalities. Let’s just leave it at that.
20 “Ambitious Clean Line energy: Wrapping Up”, Wind Power Monthly, February 2019.
21 “Germany’s Maxed-Out Grid Is Causing Trouble Across Europe”, Greentech Media, March 31, 2020.
20
The transmission road not taken: Federal override of state objections
• Unlike natural gas pipelines in the 1930’s and the interstate highway system in the 1950’s, there is no broad
legislation supporting Federal eminent domain for electricity transmission projects
• Since 2005, transmission projects can qualify as “national interest electric transmission corridors” according
to the US DoE, in which case FERC statutes allow such projects to proceed even if states do not grant
approval (Section 1221 of the Energy Policy Act)
• However, 2010/2011 Court of Appeals judgments limited Section 1221 FERC backstop siting authority and
provoked a state backlash. National interest electricity corridors haven’t been used since
• A former NYU law professor now at the DoE believes that Section 1222 can be used instead. While its
geographic scope excludes the Northeast and Florida, this statute involves the Federal gov’t participating in
the project itself, in which case it has pre-emptive siting authority that overrides any state objections. A
Federal District court in Arkansas upheld this statute in 2017. We’re watching to see if it’s used more actively
by the Biden administration
What about distributed storage?
Distributed storage can make sense (it certainly would have helped Texas last February), and can be a partial
alternative to transmission upgrades in some locations. Storage ideally moves power from off-peak periods to
peak periods, in which case transmission capacity does not always have to equal peak demand. But in a deeply
decarbonized system, you still need a lot of transmission to handle 10x-15x increases in wind and solar capacity.
There’s also the issue of cost. MIT published a study on the value of storage in deeply decarbonized systems22.
The authors found that storage can displace transmission investment at low levels of storage penetration, but
that its value is quickly exhausted: once storage capacity reached 4% of peak demand, further storage
investment didn’t reduce transmission requirements further when assuming lithium ion battery costs of $320
per kWh for 4 hours of storage. Assuming future costs of $150 per kWh for 4 hours of storage, cost-effective
storage penetration ranged between 4% and 16% of peak demand. In other words, you still need a lot of new
transmission in deeply decarbonized grids.
0
500
1,000
1,500
2,000
2,500
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
2018
Q1
2019
Q1
2020
Front-of-the-meter
Non-residential
Residential
US energy storage deployments
Megawatt hours
Source: Wood Mackenzie, US Energy Storage Association. Q4 2020.
Energy storage comparisons
It costs $15-$18 per barrel to purchase an oil
storage tank. To store an amount of electricity
equal to the energy in one barrel of oil (1,700
kWh), it would cost $510,000 based on the $300
per kWh cost of the Tesla Megapack, software
costs included.
22 “Long-run system value of battery energy storage in future grids with increasing wind and solar generation”,
Mallapragada et al, Applied Energy, July 2020.
21
What can happen when there isn’t enough transmission in areas with a lot of renewable energy?
Negative wholesale electricity pricing…and the jury is out on consequences for consumers
The map shows US regions according to frequency of “negative marginal pricing”. In other words, the
percentage of time power producers are paid below zero for their generation. You might think, “why would a
power producer ever accept negative prices??” One example23: wind operators flooding Midwestern grids at
the same time since there’s not enough interstate transmission to export surplus electricity to other places, and
not enough distributed storage to save it for periods of higher demand. As a result, wind operators might accept
negative pricing of -$5 per MWh since without it, they would not collect tax credits worth $24 per MWh that
are only payable if they generate electricity.
CAISO
ERCOT
MISO
PJM
NYISO ISO-NE
SPP
Source: Ryan Wiser, Lawrence Berkeley National Laboratory. March 2021.
AT
BE
BG
CY
CZ
DK
EE
FI
FR
DE
GR
HU
IE
IT
LV LTNL
PL
PT
RO
SK
SI
ES
SE
BA
UK
0% 10% 20% 30% 40% 50% 60% 70%
European household electricity prices vs wind and solar
penetration, Euros per kilowatt hour
Source: Eurostat, EMBER. 2020. Electricity prices include all taxes and levies.
Wind and solar generation as % of electricity generation
Negative wholesale electricity prices sound like a good thing, but are they? Not necessarily; negative prices
mean that at certain times of day, there’s so much wind/solar oversupply in that location that prices decline
until some producers (wind, gas, solar or nuclear) agree for economic reasons to cut back until generation equals
demand. Later that day, there could be a sharp decline in wind/solar generation, in which case other forms of
dispatchable power are still needed (that’s what happens in California for those familiar with the “duck curve”).
That power could come from natural gas; or from utility-scale pumped storage, lithium ion batteries or fuel cells;
or imported from other regions. Either way, it has to come from someplace. And if there are too many hours
of low or negative prices for thermal producers, they may stop adding new capacity to the grid, leaving it
exposed to brownouts and instability.
Ultimately, the price of electricity incorporates the cost of the ecosystem needed to meet demand, including
periods of unanticipated spikes, and including whatever backup thermal capacity, storage capacity and new
transmission are needed to accompany growing renewables. That’s the reason that I do not pay much
attention to “levelized costs of energy” as estimated by the EIA and Lazard, since they do not incorporate the
entire cost implications of highly renewable grids. Europe is further along in its renewable transition, and higher
shares of wind and solar are in many cases associated with higher electricity prices (see chart above right).
23 Another reason: nuclear facilities cannot be easily ramped up and down during the day. To be present on the
grid when intraday prices are high, nuclear operators also participate during periods of negative prices.
22
[4] The Song Remains the Same: geologic sequestration of carbon may face the steepest climb of all
After 20 years of planning and conjecture, by the end of 2020 carbon capture and storage (CCS) facilities stored
just % of global CO2 emissions. Challenges include cost overruns, failure of bellwether projects (Kemper
Mississippi), the US Dep’t of Energy withdrawing support for demonstration projects (FutureGen), cancellations
in Europe, legal uncertainties about liability and a 20%-40% energy drag required to perform CCS in the first
place. Norwegian Authorities just approved the Northern Lights sequestration project involving Total, Equinor
and Shell whose 2024 capacity will be just % of global emissions. The highest ratio in the history of
science: the number of academic papers written on CCS divided by real-life implementation of it.
0
200
400
600
800
1,000
1,200
1965 1975 1985 1995 2005 2015
Academic papers on carbon capture
Number of papers published per year
Source: PubMed. 2020.
Princeton CCS proposal for the US
Buildout = 850 million tonnes of CO2 stored per
year via 65,000 miles of pipeline infrastructure
Supercritical CO2 storage = 800 kg/m3
Supercritical CO2 stored per year = billion m3
US annual oil production
2019 = 746 million tonnes distributed and
refined across 190,000 miles of pipelines
Density of oil = m3 per tonne
US annual oil production = 858 million m3
As a result, I’m not sure what to make of the Princeton study’s sequestration assumptions. The authors assume
that 65,000 miles of CO2 pipeline infrastructure will divert 929 million tonnes of CO2 each year from cement,
gas-powered generation, natural gas reforming and biofuel production facilities to centralized locations where
they will be mostly sequestered underground (a small amount is assumed to be converted into synthetic fuels).
This compares to current US CCS infrastructure of 5,280 miles and 80 million tonnes per year, mostly used for
enhanced oil recovery24. The Princeton CCS buildout, just to sequester an amount equal to 15% of current US
GHG emissions, would require infrastructure whose throughput volume would be higher than the volume of
oil flowing through US distribution and refining pipelines, a system which has taken over 100 years to build
(see box). Princeton’s CCS projections are not that different from the ones found in pieces from Morgan Stanley,
Goldman and other research houses.
We had a conversation with Peter Haugan, Director of the Geophysical Institute at the University of Bergen
(Norway). We talked about the Sleipner Field in the North Sea, one of the few existing CCS locations on the
planet. As it turns out, CCS is a very complex process: some nearby CO2 injection sites were abandoned since
they turned out to be much less permeable than originally anticipated, in which case higher levels of pressure
could have caused cracks; and in other locations, polluted water injection sites did cause cracks since injected
water was found at the surface of the ocean. In other words, the success of Sleipner so far is not a clear signal
regarding the ease of CCS injection, even in well-known formations like the ones in the North Sea.
24 A 2021 paper by David Victor (Brookings/ Deep Decarbonization Initiative) and a group of colleagues examined
attempted CCS projects and found that capital cost, technological readiness and credibility of project revenues
were the most important factors in getting projects completed (compared to population proximity, employment
impact or local opposition).
23
What about carbon mineralization? Carbon mineralization is a form of storage in which carbon dioxide, rather
than being stored as a compressed gas underground, reacts with certain rocks (magnesite, basalt, etc) and is
permanently mineralized. It’s not as easy as it sounds…
• In ex-situ versions of this idea, billions of tons of calcite or magnesite would need to be mined each year
even if just a small amount of annual CO2 emissions were removed from the atmosphere. To mineralize
15% of global CO2 emissions, much more magnesite would need to be mined every year than annual global
mining of iron ore, for example. The materials handling costs would be enormous, and efforts to accelerate
the chemical reaction vs its natural rate have been very challenging
• The in-situ version of the idea involves injection of CO2 (mixed in water) into basalt rocks, and in which the
carbon mineralization reaction can occur in just a year or two. However, while you don’t have to mine and
move rocks in this version, you do need to move the CO2 to where the basalt rocks are… which brings us
back to the need for a massive build-out of CCS infrastructure (pipelines, compression, storage etc) to make
even a small difference
What about direct air carbon capture as an option for gathering CO2 emissions from distributed sources (.,
vehicles)? Some net-zero studies allow for small amounts of fossil fuel combustion that are offset by direct air
carbon capture (DACC). However, the material and energy demands of DACC are beyond daunting:
• The most promising direct air capture method is based on aqueous hydroxide solutions
• Let’s assume that 10 gigatons of CO2 are captured each year, around 25% of global emissions
• Somewhere between and gigatons of NaOH (caustic soda) would be needed; NaOH reacts with CO2
to create water and sodium carbonate Na2CO3, which can be heated to produce a gaseous CO2 stream…
• This amount of NaOH is 20-40 times its recent annual production, and also equivalent to 40%-67% of recent
global crude oil extraction by weight
• Electrolysis required to produce the NaOH would consume 25%-40% of world electricity, and hydroxide
regeneration (used to reduce NaOH requirements by regenerating and reusing most of the reactant) would
claim another 11%-17% of global primary energy. Putting both pieces together, NaOH electrolysis plus
regeneration would require 15%-24% of global primary energy to capture 25% of CO2 emissions
• A last nail in the coffin: 2,400 – 3,800 kWh per tonne of captured CO2 via DACC would be needed before
whatever energy is required to actually store the CO2 underground; DACC energy needs appear to be 6x-
10x higher than traditional CCS energy estimates, a process which itself is stuck in neutral
As per authors of the paper cited below, “DACC is unfortunately an energetically and financially costly
distraction in effective mitigation of climate changes at a meaningful scale” 25.
Sequestration summary
• To sequester 15%-20% of US CO2 emissions, CCS volumes would need to exceed oil production, refining
and distribution volumes
• Mineralizing 15% of global CO2 emissions would require more tons of mined magnesite and basalt than
current global mined tons of iron ore
• Sequestering 25% of global CO2 through direct air capture would require 25%-40% of the world’s
electricity generation plus 11%-17% of its primary energy
25 “Unrealistic energy and materials requirement for direct air capture in deep mitigation pathways”, Chatterjee
and Huang, Nature Communications, 2020.
24
[5] Decarbonization of the industrial sector: costs, challenges and limitations
The industrial sector is the largest fossil fuel end-user on a global basis. Could some industrial processes be
electrified to eventually use more renewable energy as the grid is decarbonized?
In 2018, Lawrence Berkeley Laboratory outlined the possibilities: some primary metals, secondary steel,
machinery, wood products, plastics and rubber. What do they have in common? Most use fossil fuels primarily
for “process heat” which could be replaced by electric heat. We also assume high electrification potential for
certain mining activities related to transport, excavation, pit crushing and belt conveying systems.
For other uses, it gets harder. Chemicals, pulp/paper and food take advantage of integrated systems in which
fuel combustion waste heat powers related processes, referred to as CHP (combined heat and power). CHP-
intensive sectors are harder to electrify since producers would need to purchase energy previously obtained at
little to no cost, and/or redesign the entire process. Other hard to electrify sectors include non-metallic minerals
such as glass, brick and cement which require temperatures in excess of 1400°C, and which are non-conductive
solids (., harder to electrify production of things that do not conduct electricity). Finally, oil/coal refining
exploits “own-use” fuel consumption, a source of energy lost when switching to electricity.
Industrial sectors with high electrification potential
Sector
Heat
requirement HVAC
Process
Heat CHP
Primary metals ex. steel 1200°C 6% 75% 7%
Fabricated metal 430°C-680°C 20% 61% 7%
Machinery 730°C 46% 39% 4%
Secondary steel 1425°C-1540°C 4% 87% 0%
Wood products 180°C 10% 50% 14%
Vehicle parts (drying) 150°C 31% 33% 12%
Plastics and rubber 260°C 20% 33% 24%
Source: LBNL, "Electrification of buildings and industry ", March 2018.
Fuel consumption shares:
Industrial sectors with medium/low electrification potential
Sector
Heat
requirement HVAC
Process
Heat CHP
Food/beverages 120°C-500°C 4% 25% 40%
Chemicals 100°C-850°C 1% 32% 43%
Pulp and paper 650°C 2% 21% 63%
Non-metallic minerals 870°C-1600°C 3% 90% 1%
Oil/coal products 220°C-540°C 0% 58% 22%
Source: LBNL, "Electrification of buildings and industry ", March 2018.
Fuel consumption shares:
The challenge: low/medium electrification potential sectors use the energy as high potential sectors.
Even if we assume that all sectors are eventually electrified using new technologies26, there’s still a large increase
in cost. In addition to upfront switching costs, industrial companies would face costs per unit of energy that are
3x-6x higher for electricity than for direct natural gas. Electric heating efficiency gains vs combustion could
offset part of this cost, but not all of it.
High
23%
quad
BTUs
Medium (Chemicals,
food processing)
33%
quad BTUs
Low
(Refining, paper,
cement, glass,
primary steel)
28%
quad BTUs
US industrial energy use by electrification potential
Source: EIA (2020), LBNL, "Electrification of buildings and industry", 2018.
Includes: iron,
secondary steel,
aluminum, metal
products, wood,
plastics and
mining
T
e
x
a
s
C
a
li
fo
rn
ia
L
o
u
is
ia
n
a
In
d
ia
n
a
Il
li
n
o
is
O
h
io
P
e
n
n
s
y
lv
a
n
ia
U
K
G
e
rm
a
n
y
It
a
ly
F
ra
n
c
e
J
a
p
a
n
C
h
in
a
0x
1x
2x
3x
4x
5x
6x
7x
Source: EIA, Eurostat, IAEE, CEIC, IFPEN, JPMAM, World Bank.
2019. States shown are largest industrial users of US primary energy.
Electricity is 3x-6x more expensive than natural gas
Cost per megajoule of energy, electricity price divided by
natural gas price; for industrial users
26 For cement (8% of global CO2 emissions), there are pilot projects underway to (a) use less limestone, less heat
and more clay; (b) cure cement with captured CO2 instead of water; (c) add bacteria to concrete that absorbs
CO2 from the air; and (d) create cement bricks from bacteria and aggregate. Some approaches could only be
used for light-duty load-bearing materials such as pavers, facades and temporary structures.
25
Bottom line: chemistry and cost explain the low rate of industrial electrification around the world, and why the
electricity share of US industrial energy use has been roughly unchanged at 12%-15% since the early 1980’s.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1950 1960 1970 1980 1990 2000 2010 2020
Industrial energy use by type
Share of industrial energy use
Source: EIA. 2020.
Natural gas
Electricity
A comment on primary steel production
Secondary (recycled) steel is produced in electric arc furnaces, which allows for green electricity to be used
when available. However, primary steel production accounts for ~70% of global steel production and is much
harder to decarbonize. Most primary steel production relies on coke ovens and blast furnaces that use carbon
as a reducing agent to strip oxygen from iron oxide, a process which produces CO2. Around 5% is produced
using direct reduced iron (DRI) whose CO2 footprint per ton is roughly half of the blast furnace method. DRI
uses natural gas to generate carbon monoxide and hydrogen, which is used to reduce iron ore in a furnace,
which is then combined with scrap steel in an electric arc furnace. The lower carbon content of natural gas vs
coal is part of the reason for DRI’s lower carbon footprint.
Some pilot projects aim to decrease the carbon footprint of primary steel by using green hydrogen as the
reducing agent to strip oxygen from iron oxide. A consortium of Swedish companies (Vattenfall, LKAB and SSAB)
aims to do just that, planning for some commercial production in 2026. However, the Nordic steel industry
produces just 6 million metric tons per year, which is % of global production. So, even if the entire Nordic
steel industry adopts this new approach by 2045 (the stated roadmap), it won’t have much of an impact unless
other countries adopt the same approach, and do so much faster.
As a reminder, China and other emerging country production methods will be the primary drivers of future
global emission changes given Western deindustrialization over the last 25 years. At last count, China made
50% of the world’s steel, 33% of the world’s ammonia, 61% of the world’s cement and 31% of the world’s
plastics. Its transition to cleaner energy and more modern production methods may be the single largest
determinant of the planet’s future over the next two decades.
Steel production volumes by type, MMT per year
Primary
Blast furnace: basic oxygen
furnace (BF-BOF)
1,186
Primary
Direct reduction of iron: electric
arc furnace (DRI-EAF)
89
Primary Other 8
Secondary Electric arc furnace 388
Secondary Basic oxygen furnace 60
Total 1,731
Source: World Steel Association. 2019.
Blast furnace:
basic oxygen furnace
Direct reduction of iron:
electric arc furnace
Electricity 87 312
Coal 1,592 44
Natural gas 50 508
Total 1,729 864
Current primary steelmaking emissions
Kilograms of CO2 per ton of steel
Source: Resources for the Future, "Potential of hydrogen for
decarbonization ", 2021.
26
What about fossil fuels used as raw material feedstocks?
In addition to using fossil fuels for process heat, industrial producers also use them as raw materials. It’s
tempting to believe that since they’re embedded into physical products (., plastic in soda bottles or the rubber
in your car tires), they would not contribute to increased GHG emissions. But none of these products lasts
forever, and usually end up in waste incineration plants, in decomposing landfills or in the ocean27. As a result,
there’s research underway to replace fossil fuels with (for example) CO2 captured from industrial emitters, which
is then converted into polyethylene using a “methanol to olefins” approach. Another approach involves
gasification of crop residue to produce olefins, which are used to make plastics. However, the cost of such
feedstock alternatives may be prohibitive and few have been commercialized at any meaningful scale.
Hydrocarbon
gas liquids
(HGLs)
45%
Natural gas
10%
Coal
9%
Coke and
breeze
2%
Other
(fuel oils, asphalt,
lubricants, waxes,
petrochemicals)
34%
Energy sources used as raw materials by US industrial
producers
Source: EIA. 2020.
Industrial use of fossil fuels as raw materials
Metallurgical coke
Pig (cast) iron smelting (carbon
source), which eventually
becomes steel
Methane
Synthesis of ammonia
(hydrogen source), mostly
used for fertilizing crops
Methane, naphtha
and ethane
Synthesis of plastics (sources
of monomers)
Heavy petroleum
products
Production of carbon black
(rubber filler), used in tires &
other industrial products
Lubricants derived from crude oil minimize friction in everything from airline turbofan engines to
miniature bearings, and differ from other fractions of crude oil by their very high boiling point. They
can be for intermittent use (motor and aviation oils) or continuous service (turbine oils). Globally, the
auto industry is the largest consumer, followed by textiles, energy, chemicals and food processing.
Annual use of lubricants surpasses 120 megatons; for comparison, global output of all edible oils such
as olive oil and soybean oil is 200 megatons a year. Synthetic lubricants made from simpler compounds
are more expensive, so demand for lubricants from crude oil may keep rising.
Another product derived from crude oil: asphalt. Global output is now around 100 megatons, with 85
percent used for paving and most of the rest for roofing.
Source: Smil, V. 2022 (forthcoming). “How the World Really Works”
27 The DoE and EIA made detailed permanent carbon storage assumptions by product in a 260-page document
in 2008 which is still in use today. Carbon in asphalt is considered 100% stored while for lubricants storage is
assumed to be 50%. The IPCC assumes 80% carbon storage in plastics, but as described above, actual storage
rates may be lower due to incineration or decomposition in landfills.
27
[6] Oil and gas update: our bullish call on the sector, one year later
In last year’s paper we made a bullish call on the oil & gas sector. Since then, energy rebounded and
outperformed the overall market. We recommend that investors stick with the oil & gas sector for now.
During the prior decade, investing in the US shale revolution was often a train wreck. Take a 23-stock universe
of companies associated with the US shale boom from 2010-201928:
• As a group, their aggregate free cash flow was negative in every year
• Seven of these companies never experienced a single year of positive cash flow
• Another eleven companies only experienced positive free cash flow in 3 or fewer years out of 10
We felt that this poor performance was based on (a) the collapse in capital discipline by management and by
investors and (b) the supply shock from hydraulic fracturing rather than (c) a sign that demand for fossil fuels
was at a permanent, downward inflection point. In other words, investors and management could solve this
problem after a period of bankruptcies, consolidation and a renewed focus on free cash flow. Since last
summer, signals are mostly positive. The industry is now more focused on generating cash flow for investors,
and both rig counts and capital spending have bottomed out.
-$80
-$60
-$40
-$20
$0
$20
$40
$60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
T
h
o
u
s
a
n
d
s
Source: Bloomberg. 2020.
Shale revolution: a revolution in supply, not profit
Select cash flow measures for 23 shale companies, US$, billions
Operating cash flow
Capital expenditure
Free cash flow
-$12
-$8
-$4
$0
$4
$8
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Bloomberg. Q4 2020. Dots represent estimates.
Energy sector free cash flow
US$, billions
S&P 1500 Oil and Gas E&P Index
Shale revolution portfolio
(23 companies)
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Baker Hughes, Bloomberg. April 23, 2021.
Number of US oil and gas rigs
Jan 1, 2020
-80%
-60%
-40%
-20%
0%
20%
40%
60%
2016 2017 2018 2019 2020 2021
H
u
n
d
re
d
s
Source: Federal Reserve Bank of Dallas. Q4 2020.
E&P year ahead capital spending expectations
Share of firms expecting increased capex - expecting decreased capex
Jan 1, 2020
28 The 23 companies in our shale universe: Antero, Apache, Cabot, Callon, Chesapeake, Cimarex, Continental,
Denbury, Diamondback, EOG, EQT, Hess, Laredo, Marathon, Matador, Murphy, Oasis, PDC, Pioneer, Range, SM,
Southwestern, and Whiting. The following 6 companies were included in the shale analysis in our 2020 energy
paper, but have since been acquired: Anadarko, Carrizo, Concho, Noble, WPX and QEP.
28
Market results. Shale stocks rebounded from 2020 lows and outperformed the broad market since our energy
paper last year. However, these gains are eclipsed by the rise in renewable energy stocks. Despite the rebound,
the oil & gas sector still trades close to the largest discount vs the market in its 90-year history.
0
100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Bloomberg. April 26, 2021.
Energy rebound vs the market since June 2020
Cumulative total return index, January 2013=100
S&P 500
Shale revolution portfolio (23 companies)
Avg. of 5
renewable
energy indexes
63%
40%
123%
Returns since
June 2020
1928 1938 1948 1958 1968 1978 1988 1998 2008 2018
Source: Empirical Research Partners. March 2021. Equal weighted portfolio.
Energy sector valuations at all-time lows vs the market
Energy stocks price to book divided by market price to book
1928-2021
average
We recommend that investors stick with oil & gas for now. World demand for liquid fuels should continue to
rebound as COVID vaccinations increase and economies reopen. As demand grows, we expect supply to recover
more slowly. “Big Oil” return on capital fell to single digits by 2016 due to excess competition; we expect these
returns to rise back to 1990’s levels of 10%-15%. And while publicly traded oil companies only represent 2/3 of
global production, their trends are notable: 60% decline in reserve lives since 2014, steepening oil cost curves
since 2017 and declining capital commitments29.
$0
$20
$40
$60
$80
$100
$120
$140
$160
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
Cost curve for new oil projects (pre-sanction, under development and producing) 2009-2020
Breakeven prices (US$ / barrel)
Source: Goldman Sachs. 2021. Identified projects (pre-sanction, under development and producing) are evaluated each year and assigned a
breakeven price and peak oil production. The oil cost curve depicts the cumulative peak oil production of identified projects.
Cumulative peak oil production (thousand barrels of oil equivalent per day)
2009
2011
2013
2020 2015 2019 2017
29 “Top Projects 2021: Shrinking Reserves and Rising Profits”, Goldman Sachs, March 24, 2021. See Exhibits 1-4.
29
Lastly, the world is not on track to strand a lot of oil and gas in the future and is much closer to the IEA Stated
Policies scenario than its Sustainable Development scenario30. Only in the latter are oil, gas and coal assets
projected to be left stranded in the ground, which you can see in the table. As a result, peak oil demand
forecasts may end up being just as wrong as peak oil supply forecasts were a generation ago31.
75
80
85
90
95
100
105
110
2018 2019 2020 2021 2022
World liquid fuels consumption
Million barrels per day
Source: EIA Short-term Energy Outlook. March 2021.
Comparing stranded asset risks in IEA scenarios
Proven
reserves, 2018
Cumul. extraction,
2019-2070
Stranded
in 2070
Percent
stranded
Oil 235,931 265,353 0 0%
Nat gas 169,334 228,266 0 0%
Coal 596,540 197,890 398,650 67%
Proven
reserves, 2018
Cumul. extraction,
2019-2070
Stranded
in 2070
Percent
stranded
Oil 235,931 137,478 98,454 42%
Nat gas 169,334 125,259 44,075 26%
Coal 596,540 77,560 518,980 87%
Source: BP, IEA, JPM. Units show n are million tons of oil equivalent. 2019.
Sustainable Development Scenario: large amounts of stranded oil, gas & coal
Stated Policies Scenario: only coal assets stranded
This is the “oil wedge” chart: it shows different projections of future oil demand and the amount of oil supply
from existing fields assuming no new development. Even in the IEA’s highly ambitious Sustainable Development
scenario, world oil demand in 2040 is still twice the level of supply from existing fields. Is everyone sure that
we should starve this industry of capital starting now?
20
40
60
80
100
120
140
1970 1980 1990 2000 2010 2020 2030 2040
Oil "future production wedge": demand vs existing field supply
Million barrels per day
Source: BP. 2019.
Oil supply
Oil supply (assuming
no new development)
Demand forecasts
BP (base case)
Wood Mackenzie
BP
(Even Faster
Transition)
EIA
IEA Current Policies
OPEC
IEA New Policies
IEA Sustainable Development
30 The IEA Stated Policies scenario is not the status quo; it reflects some far-reaching and ambitious targets that
have been legislated or announced by govt’s around the world. The IEA Sustainable Development scenario is
even more ambitious, and assumes the following by 2030: global primary energy use declines 7% from 2019 to
2030 (compared to a 20% increase over the prior 11 years); solar generation grows by a factor of , wind
generation grows by a factor of ; nuclear generation increases by 23% (no decommissioning); coal use for
power/heat declines by 51%; and electric vehicles sales reach 40% from today’s % levels.
31 See Vaclav’s 2006 “Peak Oil: A Catastrophic Cult and Complex Realities”. Global oil production has risen by
20%-60% since the dates of various peak oil supply forecasts made in prior decades.
30
