At BTU Analytics we write many Energy Market Commentary (EMC) pieces on detailed production results in specific plays, today this post will back-off and look at larger trends in the energy markets – specifically how gas and renewables drive US decarbonization trends. First in this post we will look at world fuel consumption compared to US fuel consumption over time. In developed countries, fuel switching in energy markets is continuously changing driven by technology, production costs, and regulation to name a few. However, the over arching trend is cleaner fuels with lower emissions, typically replacing higher emissions fuels over time. Looking at world fuel consumption shows another trend: as aggregate fuel demand rises in emerging economies, most individual fuel types move with the rising tide and increase as well.
While a rising tide, lifts all boats, the data below also shows that every fuel has its day. For example, wood consumption in the U.S. peaked in 1870 and was replaced by coal, a cheaper more bountiful resource at the time. Today in the U.S., coal’s best days may be behind us, as natural gas and renewables are taking coal’s market share for electric generation.
In the slide below, world energy consumption is mostly met by oil. However, coal and gas have shown impressive growth over the last 50 years with gas growing the most over the last 5 years at 9%. Meanwhile, hydro, renewables and nuclear play supporting roles to the world energy mix, with renewables growing the most over the last 5 years at 115%. For world energy consumption, renewables have already passed nuclear and will soon pass hydro. Again growing global economies mean growing fuel consumption for most fuels.
In the US, highly competitive markets and regulation result in different trends in fuel consumption over time. In the US, oil, gas, and coal also make up the largest components of consumption, however gas has overtaken coal as the second largest component. Also note that in the last 5 years oil consumption has been flat, while gas consumption has climbed 15% while coal consumption has declined 25%. Low-cost shale gas undercutting coal’s market share is partially to blame. Regulations like CAFE standards likely impacted oil consumption, while the Clean Power Plan likely impacted gas consumption positively and coal consumption negatively.
In a recent EMC post I wrote about the impact of large solar and hydro impacting gas demand in California, where the state has already shut down all coal generation and now relies on natural gas, nuclear, geothermal and renewables to generate electricity. However, to stick to the decarbonization trend, the next fuel to be pushed from the generation stack may be natural gas. The graphic below shows utility scale solar PV is seeing structural increases in generation meanwhile natural gas generation is showing lower peak summer demand days and lower shoulder season lows as well.
If we look at the amount of greenhouse gas emissions to meet load for the California ISO since 2014, we can see structural steps down in the amount of emissions year over year – see slide below. With no coal in the California ISO generation stack, natural gas is the primary fuel to see pressure as the decarbonization evolution continues.
As these trends unfold further here are some items to watch: 1) global coal use peaks and declines, 2) global renewables pass hydro and close in on coal next 3) in the US, renewables pass nuclear 4) in the US, coal use declines further 5) in the US, renewables climb towards coal and 6) in the US, renewables slow natural gas consumption growth. To learn more about natural gas supply and demand dynamics request a copy of BTU Analytics Henry Hub Outlook.