(Dec. 20, 2010)  The US Department of Energy (DOE) released its early summary of its 2011 Energy Outlook this morning. There is great deal in this new release that matters to Canada and the Canadian economy.

The DOE long-range forecast shows US electricity sector coal demand continuing to grow through 2035—just a little under the rate of overall energy demand growth.  The result is that coal falls slightly from 45% to 43% of all electricity demand, but actual power sector demand for coal grows 30% from 2009 levels.

The report says that no new coal-fired power plants will be built in the US between now and 2035, other than those that are under construction today.

The report implies, therefore, that upgrades and modifications of existing plants will lead to the forecast expansion of coal-fired generation capacity. But because a significant share of US coal-fired power generation capacity was built before 1970 and discharges 1.25 to 1.3 TCO2e/MWh, simple modifications that adopt 1995-era coal combustion technology (super critical coal) can result in 30+% reductions in GHGs/MWh generated at the modified plants—before accounting for the potential for many of those plants to co-generate steam/hot water to feed district heating networks.

The US’s GHG Target for 2020 is “in the Bag”, though this is not revealed in the DoE 2011 Outlook

The DoE 2011 Outlook suggests that the DoE anticipates that US energy-related GHGs will be 3.4% below 2005 levels by 2020 on a BAU basis (called the “reference case”, without any new regulations or market measures).  This forecast suggests that the US -17% reduction from 2005 GHG levels target will be much easier to achieve than the same percentage reduction in Canada.

The significant difference between Canada and the US is the high age and relative state of disrepair of US electricity generation and industrial stock, by comparison to Canada’s younger, better-maintained stock.  But I think the US DoE published forecast overstates the US BaU GHG level for 2020.

I forecast—as previously posted—that US energy-related GHGs will be closer to 15% below 2005 levels by 2020 on a BaU basis. With landfill gas utilization, H-gas and process emission reductions that should also be realized on a normal stock turnover basis, I believe that the US’s 17% reduction by 2020 target is “in the bag” even without any new GHG regulations.

It appears that the official Energy Outlook forecast does not account for the 36 state-level Renewable Portfolio Standards (RPSs) that are in law at this. The DoE report discloses that it does not anticipate the nation will achieve compliance with the legally-binding federal Renewable Fuel Standard (RFS), anticipating that the RFS cellulosic ethanol target for 2022 is too optimistic.

The DoE Outlook does not appear to anticipate much in the way of GHG reductions/energy efficiency gains in the US oil refining, iron & steel or aluminium sectors between now and 2020.  But I estimate as much as 60% of the equipment in these sectors has to be replaced on a normal stock turnover/maintenance basis over the next 10 years.  If the replacement technology performs at only 1995-2000 technology efficiency levels, there should be a significant BaU GHG reduction in the US industrial energy demand accounts that does not appear to be reflected in the current DoE “reference case” forecast.

I also anticipate higher rates of industrial heat cogeneration than is indicated in the DoE forecast.

In summary, this means that if/when the US locks Canada into a treaty that binds both nations to cut GHGs, absolutely 17% from 2005 levels by 2020:

• the US could simply be binding to a realistic BaU 2020 emission forecast, while
• Canada’s already significantly more efficient economy could be penalized due to the fact that we will have to write-off relatively new equipment and processes to achieve the incremental reduction.

Please note that at this time, Canadian producers of carbon-intensive products have smaller global GHG footprints than our US competitors in almost every commodity class.  Binding to a treaty that defines “performance” in % absolute reductions from a base year will drive capital investment out of more efficient Canada into less efficient USA.  It will also subject our more efficient products to export tariffs, while protecting US domestic producers who are less efficient now and will still be more GHG-intensive producers than their Canadian counterparts after the US achieves its 2020 GHG goal.

Using Old Coal-Fired Generation Capacity to Supply Heat Into District Heating Networks

Please note that all US emissions regulations—including existing SO2 regulations and proposed GHG regulations—exempt coal-fired power generation units entirely from unit-level emission limits if:

• the generation unit sells 15% of more of its output to non-US-utility customers (i.e. export markets), or
• the generation unit produces electricity at 33% or less of its nameplate capacity and co-generates steam or hot water for district heating.

A typical existing 35-year old US coal-fired power plant currently produces only electricity, operates at 75+% of nameplate capacity and operates at a 30% to 35% efficiency rate.  When the same old coal plant generates steam and converts it to hot water to be transmitted to space heating and hot water customers, the operating efficiency of this old plant can increase to 80% to 90%.

The US can significantly cut nation-wide GHG emissions by ensuring that any old coal- or gas-fired electric utility or industrial boiler that is in proximity to a viable space and water heating market remains in operation but is modified to co-generate steam and hot water before 2020.  While electricity sector emissions fall only about 10% with a standard upgrade—and may even increase after the upgrade if the plant’s capacity to co-generate heat is expanded—the use of these old boilers to generate steam and hot water for district heat can massively displace industrial, commercial and residential demand for natural gas for space and water heating.

This essential and low cost efficiency/GHG reduction measure is so well recognized by US Congress and the EPA, that the following exemption appears in the existing US SO2 regulation (since 1991), and has reappeared, directly or indirectly (through reference to section 700 of the US Clean Air Act) in every US GHG statute that has been tabled in the US House or Senate since 2006, and will appear in any final US EPA regulation that caps GHGs at existing stationary sources:

(From the US Acid Rain Program regulation, as it appears in the US Code of Federal Regulations)

“(B) The following types of units are not affected units subject to  the requirements of [Aldyen’s note: in other words, not covered by the obligations to surrender allowances outlined in] the acid rain program:

(1) Any simple combustion turbine that commenced commercial operation before November 15, 1990…

(4) Any cogeneration facility

[Aldyen’s note: a facility that, in addition to producing electricity,  “co-generates” heat/steam/hot water that is sold to heat space or water] which:

(a) For a unit that commenced construction on or prior to November 15, 1990, was constructed for the purpose of supplying equal to or less than one-third its potential electrical output capacity equal or two hundred nineteen thousand MWe-hrs actual electric output on an annual basis to any utility power distribution system for sale (on a gross basis)….

(b) For units that commenced construction after November 15, 1990, supplies equal to or less than one-third its potential electrical output capacity or equal to or less than two hundred nineteen thousand MWe-hrs actual electric output on an annual basis to any utility power distribution system for sale (on a gross basis)…

(5) A qualifying facility that:

(a) Has, as of November 15, 1990, one or more qualifying power purchase commitments to sell at least fifteen per cent of its total planned net output capacity…

(6) An independent power production facility that:

(a) Has, as of November 15, 1990, one or more qualifying power purchase commitments to sell at least fifteen per cent of its total planned net output capacity…

(7) A solid waste incinerator, if more than eighty per cent (on a Btu basis) of the annual fuel consumed at such incinerator is other than fossil fuels…

(8) A non-utility unit. [Aldyen’s note:  which, in this law, is a unit that sells 15% or more of its output to non-US-utility customers, i.e. sales for which the unit owner does not enjoy a regulator set and guaranteed return to capital, whre “capital ” includes the costs of complying with this regulation.]

where “non-utility” unit is defined as a unit owned by a “non-utility power producer”, and:

“nonutility power producer — A corporation, person, agency, authority, or other legal entity or instrumentality that owns or operates facilities for electric generation and is not an electric utility. Nonutility power producers include qualifying cogenerators, qualifying small power producers, and other nonutility generators (including independent power producers). Nonutility power producers are without a designated franchised service area and do not file forms listed in the Code of Federal Regulations.”

This existing regulatory incentive for operators to use old coal- and gas-fired plants to cogenerate heat explains how US electricity sector coal consumption can actually go up while realizing a related significant net reduction on space and water heating (residential, commercial and industrial sector) energy use-related GHGs.

US DoE Weaning the US Off Canadian Natural Gas Imports by 2035

The early release Energy Outlook forecasts US natural gas imports declining to next to nothing by 2035.  I have previously reported how various previously tabled draft US climate change bills have proposed US GHG quota allocation methods to discriminate against imported biofuels and fossil fuels while effectively subsidizing US exports, even when the imports are lower carbon and other wise lower cost energy supply options.

The Protectionist Approach to GHG Regulation Looks As Follows

In general, US “suppliers” (both domestic producers and importers) of petroleum products and natural gas are the parties obliged to surrender US GHG allowances to the EPA covering their US consumer end-use GHGs.  Then US GHG quota is freely allocated to different combinations of US refineries, US power generators, natural gas distribution companies, economically vulnerable US industrial energy users, etc.

In some climate change bills presented to the Senate or House to date, US GHG allowances are also freely allocated to US coal producers.  US importers of the regulated energy products must surrender allowances covering US end-use emissions, just like US domestic producers.  But US importers do not receive any free allowance allocation.

The potential exists, therefore, that US importers of Canadian natural gas will be required to buy US GHG allowances from the secondary market, where the surplus allowance holders/vendors might be US coal producers, refinery operators and relatively high-emitting coal-fired power generators.

The US EPA employed this discriminatory allowance allocation procedure for all of the leaded gasoline, CFC and HCFC phase outs, to Canadian exporters’ significant disadvantage.

It will be important to monitor the emerging US EPA GHG regulations to determine if we are going to see a replay of this discriminatory GHG allowance allocation if/when the EPA proceeds to that stage of GHG market rule design.

Please note that the US economy suffered significant off-shoring and job losses in its goods-producing sectors well in advance of the 2008/09 fiscal crisis. What was unique about the US was that 1990 – 2007 GHGs continued to increase while the nation shed goods-producing jobs.  The loss of goods-producing jobs explains close to 100% of the GHG reductions realized in the European nations included in the graph.

What I find most startling is the increase in the taxpayer financed-to-goods-producing-jobs ratio realized in the US between 1990 and 2007.  At 1.43:1 taxpayer funded job per goods producing job in 2007, up from 0.74:1 in 1990, the US had made a massive long before the fiscal crisis was understood to be occurring.  Whether or not this pre-fiscal crisis reality is front of mind for US politicians, this reality will likely drive them towards an increasingly protectionist policy set, particularly if reducing the size of government becomes a priority.

Given the successful US history of using emission quota/allowance allocations to protect domestic emitters at the expense of foreign suppliers, I anticipate we will see a consensus on a US GHG quota allocation and trading rule emerge before the end of 2013, regardless who is in the White House—that is if Congress actually ever looks at their job stats.

Boy I hope to be proved wrong.

Aldyen Donnelly, December 20, 2010