[Senate Hearing 116-243]
[From the U.S. Government Publishing Office]
S. Hrg. 116-243
THE OUTLOOK FOR ENERGY AND MINERALS MARKETS IN THE 116TH CONGRESS
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HEARING
BEFORE THE
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 5, 2019
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the
Committee on Energy and Natural Resources
Available via the World Wide Web: http://www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
35-553 WASHINGTON : 2020
COMMITTEE ON ENERGY AND NATURAL RESOURCES
LISA MURKOWSKI, Alaska, Chairman
JOHN BARRASSO, Wyoming JOE MANCHIN III, West Virginia
JAMES E. RISCH, Idaho RON WYDEN, Oregon
MIKE LEE, Utah MARIA CANTWELL, Washington
STEVE DAINES, Montana BERNARD SANDERS, Vermont
BILL CASSIDY, Louisiana DEBBIE STABENOW, Michigan
CORY GARDNER, Colorado MARTIN HEINRICH, New Mexico
CINDY HYDE-SMITH, Mississippi MAZIE K. HIRONO, Hawaii
MARTHA MCSALLY, Arizona ANGUS S. KING, JR., Maine
LAMAR ALEXANDER, Tennessee CATHERINE CORTEZ MASTO, Nevada
JOHN HOEVEN, North Dakota
Brian Hughes, Staff Director
Kellie Donnelly, Chief Counsel
Brianne Miller, Senior Professional Staff Member and Energy Policy
Advisor
Jed Dearborn, Senior Counsel
Sarah Venuto, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Brie Van Cleve, Democratic Professional Staff Member
David Gillers, Democratic Senior Counsel
C O N T E N T S
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OPENING STATEMENTS
Page
Murkowski, Hon. Lisa, Chairman and a U.S. Senator from Alaska.... 1
Manchin III, Hon. Joe, Ranking Member and a U.S. Senator from
West Virginia.................................................. 3
Cantwell, Hon. Maria, a U.S. Senator from Washington............. 5
WITNESSES
Capuano, Hon. Linda, Administrator, U.S. Energy Information
Administration, U.S. Department of Energy...................... 7
Book, Kevin, Managing Director, ClearView Energy Partners, LLC... 23
Kavulla, Travis, Director, Energy & Environmental Policy, R
Street Insti-
tute........................................................... 34
Moores, Simon, Managing Director, Benchmark Mineral Intelligence. 48
Zindler, Ethan, Head of Americas, BloombergNEF................... 59
ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED
Annual Energy Outlook 2019 by the U.S. Energy Information
Administration dated January 24, 2019.......................... 109
Book, Kevin:
Opening Statement............................................ 23
Written Testimony............................................ 25
Responses to Questions for the Record........................ 98
Cantwell, Hon. Maria:
Opening Statement............................................ 5
Capuano, Hon. Linda:
Opening Statement............................................ 7
Written Testimony............................................ 10
For the Record information in response to Senator King....... 75
For the Record information in response to Senator Cassidy.... 79
Responses to Questions for the Record........................ 93
Kavulla, Travis:
Opening Statement............................................ 34
Written Testimony............................................ 36
Responses to Questions for the Record........................ 100
Manchin III, Hon. Joe:
Opening Statement............................................ 3
Moores, Simon:
Opening Statement............................................ 48
Written Testimony............................................ 50
Responses to Questions for the Record........................ 102
Murkowski, Hon. Lisa:
Opening Statement............................................ 1
Western Governors' Association:
Letter for the Record........................................ 192
WGA Policy Resolution 2018-09 for the Record................. 193
WGA Policy Resolution 2018-04 for the Record................. 196
WGA Energy Vision for the West............................... 199
Zindler, Ethan:
Opening Statement............................................ 59
Written Testimony............................................ 61
Responses to Questions for the Record........................ 107
THE OUTLOOK FOR ENERGY AND MINERALS MARKETS IN THE 116TH CONGRESS
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TUESDAY, FEBRUARY 5, 2019
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The Committee met, pursuant to notice, at 9:51 a.m. in Room
SD-366, Dirksen Senate Office Building, Hon. Lisa Murkowski,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM
ALASKA
The Chairman. Good morning, everyone. The Committee will
come to order.
This is our first hearing for the 116th Congress. It is
good to be back at work. We have had a little bit slower start
than we anticipated, but we are making up for it today with
both our organizational meeting as well as our first official
hearing.
This is an action-packed energy day because we have an
opportunity to take a cloture vote on a motion to proceed to
our bipartisan lands package. This will happen later this
afternoon. So many of you have been working with us on that,
and we are really very pleased that we are going to be moving
forward with that.
While we wait for a quorum to begin the business meeting
here this morning, I want to acknowledge and thank my former
Ranking Member, Senator Cantwell, who for the past couple of
years has been sitting right here and now she is a couple
chairs down. But thank you, Senator Cantwell, for all that you
have done as we worked together in this Committee to make good
things happen, not the least of which is this lands package
that we have been working on and so many other things. We are
continuing to work in good faith and good measure on that, but
I greatly, greatly appreciate what you have provided.
I would like to recognize my new Ranking Member, Senator
Manchin, a long-time friend and colleague from West Virginia.
We have had more than a couple of meetings already, going
through what the Committee might anticipate for the year ahead
and some of the opportunities. I think we both look at this
from the perspective of coming from states that are producing
states, but we have a lot of challenges within the demographics
of our state, working together to address some of those
challenges and to advance the opportunities is what we are all
about.
I would also like to welcome our new members to the
Committee. We have Senator Hyde-Smith who is with us from
Mississippi, and Senator McSally from Arizona. I think we
always have an Arizonan on the Committee. It must be a
mandatory requirement or something, but we are very pleased to
have you with us. I think you will find that you made an
excellent choice in selecting the Energy Committee. We are a
good committee. We work hard. We work in a bipartisan manner,
and it is always good.
Let me just give a little bit of a rundown in terms of what
we are dealing with this morning. For the business meeting
portion, we need to approve the Committee's funding resolution,
ratify Subcommittee assignments and update our rules and our
jurisdictional listings. These materials were transmitted to
members last week, and copies have been provided.
Our funding resolution in agenda item one authorizes the
Committee to make expenditures out of the Senate's contingent
fund to pay staff salaries, mailing expenses and other
administrative costs. The Rules Committee, which provides the
authorization levels, has requested that we report this
resolution this week.
With regards to agenda item two, the subcommittee
assignments, I welcome our new Chairmen and Ranking Members to
their roles. Senator Cassidy is going to be serving as the
Chairman of the Energy Subcommittee with Senator Henrich as his
Ranking Member. Senator Daines will be back as the Chairman of
the National Parks Subcommittee with Senator King as his
Ranking Member. Senator Lee is again Chairman of the Public
Lands, Forests, and Mining Subcommittee and Senator Wyden will
be his counterpart as the Ranking Member. And then finally,
Senator McSally will serve as the Chairman of the Water and
Power Subcommittee, and Senator Cortez Masto will be her
Ranking Member. So, a great opportunity for all of you. I
congratulate you on that. We are slightly modifying our
jurisdictional listing so that bills relating to outdoor
recreation resources are referred to the appropriate
subcommittee on a case-by-case basis.
Agenda item three contains certain changes to our Committee
rules. As we explained in the materials that were provided, we
are lowering the number of members needed for both a working
and a reporting requirement. This reflects the decrease in the
Committee's membership from 23 members down to 20 members in
this Congress.
Additionally, we are clarifying that an amendment filing
deadline may be imposed for business meetings, if needed.
Typically, we set these deadlines only once or twice a Congress
and always in consultation with the Ranking Member.
We are also making a few technical updates to reflect the
fact that women actually serve on this Committee.
[Laughter.]
So we went through the language and noted that while we
give a lot of support to the hes, maybe we just add an s to
that as well, just kind of updating things.
So before we are able to do any business, Senator Manchin,
why don't I turn to you for a moment for any opening comments
that you might make as we are waiting. Otherwise, once you are
done with that if we still do not have a quorum, we will move
to our hearing. I know that several members have conflicting
obligations here just about ten o'clock.
Senator Manchin.
STATEMENT OF HON. JOE MANCHIN III,
U.S. SENATOR FROM WEST VIRGINIA
Senator Manchin. Well, Chairman Murkowski, first of all, it
is a pleasure to be with you in this position. Also, I want to
thank Senator Cantwell for her leadership in what she has done
and how hard she has worked and gotten the land bill ready to
go. We are going to carry the ball over the goal line, if we
can, today--starting today, anyway.
But anyway, it is an honor to sit next to you. We are
friends. We have been friends for a long time, and this is our
first full Committee hearing in the Congress.
I am honored to serve as Ranking Member of the Committee
which has been around for 42 years as of--yesterday was its
birthday, I believe. Right, Sam?
I look forward to working with you, Madam Chairman, to
tackle the biggest energy and natural resource questions facing
our country, as well as beginning discussions on how we, as a
Committee, can contribute pragmatic solutions to the climate
challenges facing our country and the world.
I would also like to thank Senators Wyden, King, and Cortez
Masto for continuing to serve as Ranking Members on the Public
Lands, Parks, and Water and Power Subcommittees. Also, I am
glad to turn over the Ranking Membership of the Energy
Subcommittee to Senator Heinrich and thank him for agreeing to
do so.
I want to take a moment to briefly touch on one rule change
before us today which allows for filing deadlines to be set for
amendments. I want to be clear that my understanding is that
this is to provide all of our members more notice and time to
consider what they will be asked to vote on, rather than to
limit the ability of our members to offer amendments. We have
drafted this to encourage collaboration and maintain the most
flexibility.
I am excited to welcome those witnesses here today with
Chairman Murkowski and look forward to the conversation.
In 2016, West Virginia, my little state, ranked fifth among
the states in total energy production, according to the EIA.
Our state has also consistently exported more electricity than
we consume. We are a net producer. It is for that reason other
states depend on us for reliable electric generation as well as
coal and natural gas production. In fact, West Virginia is the
seventh largest producer of marketable natural gas in the
nation. Our underground gas storage capacity accounts for
almost six percent of the nation's total capacity, which is
critical in the winter months for the northeast.
West Virginia, along with its neighbors, also has the
historic opportunity to develop an Appalachian Storage Hub.
This innovative regional storage and distribution hub would
attract manufacturing investment, create jobs and reduce the
rejection rate of natural gas liquids to the ethane, thereby
reducing greenhouse gas emissions.
West Virginia also accounts for 11 percent of the nation's
coal production and is among the top three states in the amount
of recoverable coal reserves at producing mines. Despite coal
production declines around the country, Appalachian coal
production increased for the second year in a row based largely
on growth in coal exports to India, the Ukraine, Brazil and
other nations.
Beyond my state's leadership on energy production, I know
all of West Virginia is committed to solving the climate
crisis. The impacts of climate change are felt in every economy
in every community across the world, and that includes my State
of West Virginia.
I have never met a West Virginian who wants to drink dirty
water or breathe dirty air. The urgent need to clean up our
climate is felt by everyone, and there is no reason rural
America cannot be part of the cleaner energy solutions that we
are working toward. We must work together to solve the problem
and act now to lead the world in commercialization of carbon-
reducing energy technology that keeps energy generation
resources cost competitive and reliable, 24/7.
This is especially important during events like last week's
polar vortex, where I know communities around the country are
grateful for the energy supply and reliability that West
Virginia provides.
Last week's brutal cold provided another test case for how
our electricity grid is often stressed and changing. On
Wednesday and Thursday regional grid operators for the
Northeast--which is PJM, and Midwest--which is MISO, put
emergency procedures in place. PJM serves approximately 65
million customers and includes my home State of West Virginia.
On Thursday morning, PJM had one of its top 10 winter peak
demand days in the last five years.
While the system performed well, rising natural gas demand
made it economical to bring on coal to keep the lights on and
homes warm, and coal will continue to be a critical part of the
fuel mix in extreme weather situations like this, even in
states with aggressive clean energy goals. If it gets cold, we
are still going to need to work together.
Events like the polar vortex will continue to happen,
continuing to underscore the importance of reliable energy; but
it is clear as day that the United States does not lead in
developing the technologies that will incentivize China and
India to burn coal and natural gas in a cleaner way. It will
not matter how much we do here.
In 2040, the International Energy Agency predicts that coal
will make up about 51 percent of China's electric mix. For
India, it could be up to 57 percent.
That is why I am encouraged to see leaders like Bill Gates,
who is putting his money where his mouth is, in the clean
energy race, particularly with respect to advanced nuclear
technology.
Climate change is real and communities across our nation
have suffered the destructive effects associated with it. In
2016, our little state was devastated by a flood that took the
lives of 23 West Virginians. In the last four years, I have
asked the White House for emergency funding six times due to
flooding.
There is no silver bullet. And I have spoken with Chairman
Murkowski. I look forward to innovation discussions in expected
climate hearings to see how this Committee can contribute to
the pragmatic solutions that will work for every American.
With that, I look forward to hearing from our witnesses
today.
The Chairman. Wonderful, thank you.
Well it appears, quite clearly, that we are not going to
have a quorum. I think this is what happens when you get back
to work, and we have committee hearings that have just been
stacked up. I know that there are three others that I am
supposed to be at, but this is the one that I am going to be
at.
So let's go ahead and acknowledge that our business meeting
will have to be held off the Floor at some later point in time.
Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Madam Chairman, thank you so much for
your comments earlier. I certainly want to recognize the great
working relationship that existed between us and the great work
in passing both the energy bill out of the Senate and our
determination to get our House colleagues to understand the
importance of cybersecurity, energy efficiency, and so many
other things. I know that work will continue, and I am
certainly very excited that we are apparently going to get to
the lands package and finally get that over the transom.
I did want to mention on the rule change--first I also want
to say congratulations to Senator Manchin. I am looking forward
to working with him and all of his interests, particularly in
the areas of grid reliability and modernization, because I
think there is so much that our nation can do in that regard.
And so, I am very happy with your new role on this Committee.
I definitely plan to, obviously, with the State of
Washington's immense interest in the Committee, continue to be
an active member. I am really looking forward to working with
both of you in that capacity.
On the rule five change, I was just trying to seek a little
clarification. That is, I think we had a 24-hour notice on
amendments. And so, I just want some transparency on--what is
this now? Is it--will it be determined, you know, on a case-by-
case basis about the filing deadline or will it--I am just
trying to get a sense of what that actually means?
The Chairman. Well, Senator Cantwell, we will have staff
also speak to us, but it is my understanding that there was a
discussion about whether or not we wanted this 24 hours to be
hard and fast in terms of a hard and fast deadline or more of a
guideline, if you will. And so, that was why the language
before the Committee to impose the filing deadline is softened
with ``as warranted and in consultation with the Ranking
Member.'' I think that was much of the back and forth and
either Kellie or Sam, if you want to speak to that?
Ms. Donnelly. We did not have a specific rule in the rules
for the filing deadline. The Committee has had a longstanding
practice of trying to work things out on a unanimous case basis
between joint staff.
And so, only a couple of times in Congress have we had to
impose a deadline. This is just a signal in the rules that a
deadline can be imposed, if warranted, but in consultation with
the Ranking Member. So it would be done on a case-by-case basis
and the instructions would go out three days in advance, along
with the business meeting notice, so that everybody has
appropriate time.
Mr. Fowler. And I would simply add that more than two-
thirds of the standing committees of the Senate do have filing
deadlines and none of them are the same, but this is probably
one of the most flexible, most lenient deadlines.
Senator Cantwell. Well, since we don't have an official
adoption of this today, I guess I would hope that we could
think about, you know, how we ensure transparency because you
don't want for one week it to be 24 hours, the next week it be
one hour before the business meeting and another time it's, you
know, different.
I think the fact that we had a standard was good. But, I am
all for exemptions to the standard because I know there have
been moments here in the Committee where we have come up with a
brilliant idea to get out of a jam and wanted to offer the
amendment right then and there. And so, I am not opposed to
having that safeguard, if you will, to get through that
process. But I am more interested in what kind of standard we
can establish so people know and can plan for it as opposed to
it being different from time to time. And then that way,
members don't really plan accordingly.
So I guess that all supposes that we are going to mark up
lots of legislation which I hope we are going to continue----
The Chairman. I hope we are going to.
[Laughter.]
Senator Cantwell. I hope we are going to continue to mark
up things.
I don't know if the other committees have--I think you can
waive the rule, is that right, Sam?
Mr. Fowler. Yes, and I would just point out that the
Committee has never had a filing deadline in the rules before.
Various chairmen and ranking members have agreed to encourage
members to file by a certain deadline which has never been
enforceable. This simply gives the Committee a basis in the
rules to do what the chairs and ranking members have been
trying to do on an informal basis in the past.
The Chairman. Fair enough, and I hear your comments.
Senator Cantwell. Food for thought.
The Chairman. Yes, I hear your comments, Senator Cantwell,
and I appreciate that. I think it just speaks, once again, to
the very collaborative nature of this Committee that we really
have not had an issue with this, that typically things are
worked out between the staffs. And I think that is a real
testament to their efforts as well, but consider that. Thank
you.
Well, let's go ahead and begin our first official hearing
then. I really cannot think of a better way to set the stage
here for this Congress than to welcome this panel of witnesses
to look at the outlook for the energy and mineral markets.
Whether we realize it or not, energy and minerals fuel our
21st century economy and our standard of living. Access to
energy and minerals, or perhaps lack thereof, can impact
everything from health care to poverty levels, to defense
readiness, to the strength of our manufacturing center.
And the markets for energy and minerals are rapidly
changing. In just the past decade we have seen a dramatic
increase in domestic energy production with a corresponding
decrease in energy imports. Our domestic demand has remained
relatively flat, but world demand has risen. So it is a good
thing that we are now the world's largest producer of oil and
natural gas, with renewables growing rapidly as well.
This remarkable shift has been a game-changer. We have
realized substantial economic benefits here at home while also
giving us options to help our allies to achieve a greater level
of energy security. But we also face potential challenges,
including questions about the reliability and resiliency of our
nation's grid system as we lose baseload coal and nuclear.
In contrast to the energy sector, our nation, in my view,
is headed the wrong way on mineral imports. In 2017, we
imported 50 percent of 50 mineral commodities, including 100
percent of 21 minerals. This is a dangerous trend. It is really
our Achilles heel that serves to empower and enrich other
nations, while costing us jobs and international
competitiveness. Over the past several years, our Committee has
sought to call attention to our reliance on foreign nations for
our minerals. The Administration has taken several important
steps, but we must complement their actions with our own
legislative actions.
We have a great panel with us this morning to help us
understand these market trends. Our witnesses are testifying on
behalf of the Energy Information Administration (EIA), the
ClearView Energy Partners, the R Street Institute, Bloomberg
New Energy Finance and Benchmark Mineral Intelligence. We
appreciate your willingness to share your expertise with the
Committee.
Senator Manchin, you had provided your opening comments. I
don't know if you want to add anything at this point in time
before I begin their introductions and have them--let's go
right ahead.
We are joined this morning, as I mentioned, from the U.S.
Energy Information Administration by Dr. Linda Capuano. It is
nice to have you back before the Committee. Mr. Kevin Book has
been before the Energy Committee multiple times. He is with
ClearView Energy Partners. Mr. Travis Kavulla is the Director
of Energy and Environmental Policy at R Street Institute. Simon
Moores is the Managing Director for Benchmark Mineral
Intelligence, and Mr. Ethan Zindler, who has also been before
this Committee several times, is Head of the Americas for
Bloomberg New Energy Finance. Welcome to all of you.
We ask that you provide us your comments and try to keep
them to about five minutes. Your full statements will be
included as part of the record.
Again, we appreciate you being here and helping kick off
this very informative session for the Energy Committee.
Dr. Capuano.
STATEMENT OF HON. LINDA CAPUANO, ADMINISTRATOR,
U.S. ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF
ENERGY
Dr. Capuano. Chairman Murkowski, Ranking Member Manchin and
members of the Committee, I appreciate the opportunity to
appear before you today to provide testimony on U.S. energy.
This is a transformational time for the United States
energy industry. After decades of importing more energy than it
exports, EIA now forecasts that the United States will become a
net energy exporter in 2020. The crossover to net exporter
occurs as crude production increases and domestic consumption
of petroleum products decreases. The U.S. produced almost 11
million barrels per day of crude oil in 2018, and EIA expects
the U.S. crude oil production will remain greater than 14
million barrels per day through 2040. Favorable geology and
recent technological and operational improvements have allowed
petroleum liquids production from tight rock formations within
the Permian region in Texas and New Mexico to grow to an
average of 3.5 million barrels per day in 2018, compared with
2.5 in 2017.
The United States is now the world's largest producer of
crude oil, surpassing Saudi Arabia and Russia. Our natural gas
plant liquids production set an all-time high of 4.4 million
barrels per day in 2018. The combined increases in crude oil
and NGPL output, coupled with our refining capacity, has led
the United States to become a major exporter of petroleum
products. By the fourth quarter of 2020, EIA expects exports of
petroleum products from the United States to exceed imports by
an average of 0.9 million barrels per day.
The steady increase in U.S. crude oil production
contributes to a relatively steady oil price of $73 to $74 per
barrel until 2022, after which crude oil prices are projected
to steadily rise to $108 per barrel in 2050.
U.S. liquid fuels net imports, which include crude oil and
petroleum products, have declined steadily and we estimate they
average 1.2 million barrels per day in the fourth quarter of
2018. This is less than half of the volume the United States
imported last year; however, while imports have declined, the
United States will continue to import crude oil.
Similar developments in domestic shale natural gas
resources have enabled the United States to emerge as a net
exporter of natural gas. In 2017, total natural gas exports
from the United States exceeded imports and natural gas
production reached an all-time high of 30 trillion cubic feet
in 2018. In the longer-term, EIA projects that natural gas
production will initially grow by seven percent per year, then
slow to grow less than one percent per year after 2020. As a
result, net U.S. exports will continue to grow as liquefied
natural gas and pipeline exports increase.
Abundant natural gas supplies and the resulting relatively
low natural gas prices have led to other changes. Despite total
U.S. electricity demand remaining relatively flat over the past
decade, natural gas displaced less economically competitive
sources of electric power generation to become the largest
share of electric power generation in 2016.
Wind and solar capacity and generation also reached all-
time highs in 2018. And under current policies and regulations,
EIA's Reference case in our just-released Annual Energy Outlook
for 2019 projects that renewable sources will surpass nuclear
in 2019 and coal in 2025. As a result, EIA projects that carbon
dioxide emissions will remain about two percent below the 2020
level across the projection period to 2050.
Relative to consumption, the AEO2019 Reference case assumes
1.9 percent compound annual growth rate for real U.S. gross
domestic product through 2050 and total energy consumption
grows by 0.2 percent per year through 2050. Industrial
consumption grows the fastest, taking advantage of relatively
low natural gas prices, while electricity power consumption
increases at a slower rate due to efficiency improvements. EIA
projects that residential and commercial buildings will
maintain relatively flat energy consumption and growth, and
demographic shifts offset policy gains.
EIA projects that the U.S. transportation sector will see a
decrease in consumption through the mid-'30s as fuel economy
increase offsets growth in vehicle miles traveled. However, as
current regulations requiring additional efficiency increases
expire after 2027, we project that motor gasoline consumption
will start rising again, leading to total transportation sector
consumption increases past 2040.
And so, this is an exciting and transformational time for
the United States' energy industry as world energy markets
adjust to the United States becoming a major global supplier
and exporter for the years to come.
[The prepared statement of Dr. Capuano follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Dr. Capuano.
Mr. Book, welcome.
STATEMENT OF KEVIN BOOK, MANAGING DIRECTOR, CLEARVIEW ENERGY
PARTNERS, LLC
Mr. Book. Good morning, Chairman Murkowski, good morning
and congratulations, Ranking Member Manchin and distinguished
members of the Committee.
My name is Kevin Book and I head the research team at
ClearView Energy Partners, an independent firm that serves
institutional investors and corporate strategists. Thank you
for inviting me to contribute to your outlook for energy and
minerals markets. I'm grateful for the work you do to maximize
economic and environmental security. The rapid pace of change
in energy markets can make this task as difficult as it is
important.
Let me briefly summarize several takeaways from my written
testimony.
First, over the decade from 2008 to 2018, U.S. liquids
supply vastly outgrew U.S. liquids demand. Supply rose by 9.3
million barrels per day, a compound growth rate of 7.6 percent.
And as EIA has noted, roughly 68 percent of global supply
growth came from the U.S. Demand grew a little less than one
million barrels per day, a compound growth rate of 0.5 percent,
whereas global demand grew at nearly three times that rate.
That is one case for exports and here is another. The oil
we add to global supply benefits U.S. producers and overseas
buyers but also U.S. drivers because U.S. pump prices tend to
reflect global oil balances.
Second, thanks to diversification and efficiency,
generating $1.00 of U.S. GDP today requires about four-fifths
as much oil as it did a decade ago. From a personal consumption
standpoint, the average American now puts 17 percent less of
his or her wallet into the gas tank and compared to other major
consumer nations. U.S. demand looks more price responsive and
less GDP bound. Put another way, overseas demand looks robust
and pretty stable. ``Peak demand'' zeitgeist today may be as
premature as peak supply seemed a decade ago.
Third, for all that, demand risks do loom. Instead of
gasoline leading global demand growth as it did from 2013 to
2017, jet fuel and liquid petroleum gases drove demand growth
last year. This may reflect efficiency gains and demand
responses to higher prices, especially in countries with weaker
currencies.
Weaker global growth prospects could bring demand headwinds
this year. So, too, could trade war. Import adjustments like
steel tariffs can impair producer economics. It could be hard
to see in a favorable price environment, but when price is
weakened tariffs can deter or delay investment in production
and infrastructure. Trade war can diminish market access.
Oil tends to be highly fungible but not perfectly
interchangeable. Mismatches between crude quality and refinery
configuration can force producers to sell at discounts. And
because LNG requires specialized regasification infrastructure,
it can be particularly trade vulnerable.
Trade war can also chill global activity economically by
introducing frictional costs and stalling investment. This too
is hard to measure, but deals that don't happen today may
explain future export opportunities that fail to materialize.
Fourth, OPEC continues to play a major role. Last year
Saudi monthly output ranged from 9.9 million barrels per day at
the low end to 11.1 million barrels per day at the high end.
Full compliance with the targets OPEC and cooperating parties
set last December imply output cuts totalling 1.3 million
barrels per day.
Meanwhile, unplanned outages are rising, Venezuela's output
was collapsing before the latest U.S. sanctions, and new
sanctions seem likely to accelerate production declines. Even
so, new projects in Angola and Nigeria could help to offset
Venezuelan losses, as could a continued output surge in Iraq.
Thus, our firm currently anticipates a slightly
oversupplied crude market for the year as a whole with key
uncertainties remaining, Iran and Saudi Arabia.
To close with three observations.
For one, we are seeing a newfound energy security giving
American diplomats greater flexibility to address geostrategic
rivals by an economic statecraft. This is a big difference.
Second, thanks to the demand changes I mentioned, high oil
prices don't hurt our economy as much as they used to, but
thanks to the supply changes I mentioned, low oil prices may
start to hurt it more. Let me be very clear, few people want
higher gasoline prices, but we may not want rock bottom crude
prices either.
Last, in 10 years the U.S. went from trying to survive
scarcity to adapting to adequacy. Thanks to your strong
leadership, Madam Chairman, and your colleagues, the Congress
reconfigured America's energy security policy. The coming era
of net exports that the Administrator mentioned promises even
more opportunity, but realizing it could require even bigger
policy changes.
For example, as regulators reinterpret old laws for new
realities, legal challenges create investment delays and
uncertainty, especially for energy transportation
infrastructure. Maximizing the benefits of exports may require
greater regulatory clarity concerning the pipelines that move
liquids and natural gas resources to export facilities, and to
the extent that energy transportation has become a proxy
climate battleground, such pipeline challenges may prove both
less economically efficient and less politically durable than
market-based price signals.
Madam Chairman, this concludes my prepared testimony. I
look forward to answering any questions you or your colleagues
may have at the appropriate time.
[The prepared statement of Mr. Book follows:]
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The Chairman. Thank you, Mr. Book. We always appreciate
your input.
Mr. Kavulla.
STATEMENT OF TRAVIS KAVULLA, DIRECTOR, ENERGY & ENVIRONMENTAL
POLICY, R STREET INSTITUTE
Mr. Kavulla. Thank you, Madam Chairman and Ranking Member
Manchin, for the opportunity today.
As Dr. Capuano noted, the electricity market is wrapping up
a decade that has seen tremendous change that few analysts
would have projected at the beginning of the decade. That fact,
the unpredictability of the energy economy, suggests that it is
important to have an electric market that does not pre-ordain
outcomes through mandates or subsidies. Yet in some parts of
the country, such as the western United States, many power
plants still obtain contracts not through market-based pricing
or competitive solicitations but instead based on regulators'
guesses about what energy will cost over the next 20 years.
Nearly all of these guesses have turned out to be wrong and
consumers have suffered because of it.
The Public Utility Regulatory Policies Act, or PURPA, was
modified 15 years ago by Congress to allow FERC to update its
implementation for changing market conditions. It is now time
for FERC to do so by allowing states to use a robust system of
competitive solicitations to meet their PURPA obligations.
Elsewhere, states rely on regional transmission
organizations, or RTOs, to deliver price signals to indicate
whether a power plant should be built or an existing one should
be retired. Because of this, Ohio and Pennsylvania have seen
huge investments in shale gas and the Great Plains have seen a
surge of wind.
Unfortunately, not everyone is satisfied with competition.
The sector is seeing a growing number of state legislatures
intervene to stack the deck in favor of a particular outcome.
We now have a sorry situation where many states are either
mandating that certain resources enter the market or
subsidizing other resources to prevent them from leaving the
market. Some states are doing both at the same time.
The unfortunate result of this trend is that nearly
everywhere consumers are paying more than they need to for
power plants that are not necessary to deliver them energy. In
fact, NERC reports that all but a single region of the country,
Texas, has generating capacity well in excess of customer
needs. Wholesale prices reflect this glut of power capacity. In
PJM, the RTO that spans from Virginia to Illinois, wholesale
prices declined 40 percent over a decade. But even so,
regulated retail rates, the dumping ground for the costs of
these subsidies which consumers pay, have risen in the same
area.
Subsidizing uneconomic power plants leaves the remaining
unsubsidized plants at a competitive disadvantage. FERC has
attempted to deal fairness in the situation, but the proposals
that it is now contemplating are sadly a road to nowhere. For
example, FERC is now entertaining a proposal by PJM called,
``carve out and repricing.'' Under this market design PJM would
``carve out'' subsidized resources from participating in the
capacity auction and ``reprice'' the auction's outcome as if
those power plants simply did not exist. The PJM proposal thus
invents a kind of parallel universe in order to get the right,
which is to say higher, price.
In the meantime, FERC has a lot of other work it could and
should be doing. It has no more important job than to ensure
the prices on wholesale electric markets actually reflect the
system conditions underlying them, especially in times when the
grid is stressed and resources are scarce. To give an example,
last week parts of the United States saw the coldest
temperatures in decades. Energy emergencies, as Senator Manchin
pointed out, were declared by governors and the mid-continent
independent system operators scrapped business as usual
practices to ensure power plants were available.
And yet, prices did not appear to reflect these stressed
conditions. Market data from MISO and PJM show that at the
Minnesota and Chicago pricing hubs, where temperatures were
very cold, prices on January 31st peaked at $167 and $126 per
megawatt-hour, respectively. These are four to six times higher
than the average annual prices but they hardly reflect an
emergency or anything close to stressed system conditions. In a
grid that will eventually be more volatile because of a
significant number of weather-dependent renewables, it is
important that the prices actually reflect real-time system
operating conditions and reward generators that are online
during these times.
Finally, as Mr. Book pointed out, the electricity markets
operate across a physical network that needs to be robust in
order to ensure the grid is reliable. There are too many
examples where one state's siting and permitting decisions
effectively act to obstruct one or more states' energy
policies.
Here it is worth contemplating the role of the Federal
Government. There is a strong economic and reliability case
that certain areas, such as New England, need more natural gas
capacity while other areas, such as the West, could use more
electric transmission. If efficient siting of this
infrastructure cannot occur, then the robustness and
reliability of the electricity market will always be in
question.
Madam Chairman, Ranking Member Manchin, I appreciate the
opportunity and I've filed a full set of written testimony.
[The prepared statement of Mr. Kavulla follows:]
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the record.
Thank you for joining us.
Mr. Moores, welcome to the Committee.
STATEMENT OF SIMON MOORES, MANAGING DIRECTOR, BENCHMARK MINERAL
INTELLIGENCE
Mr. Moores. Great, thank you very much, Chairman Murkowski,
Ranking Member Manchin, fellow Committee members. It's a
pleasure to be back and for you to welcome Benchmark Mineral
Intelligence.
We are in the midst of a global battery arms race in which
so far the U.S. is a bystander. The advent of electric vehicles
(EVs) and energy storage has sparked a wave of battery
megafactories that are being built around the world.
Since my last testimony only 14 months ago, we have gone
from 17 lithium-ion battery megafactories to 70. So, 17 to 70.
In gigawatt-hour terms we have gone from 289 gigawatt-hours to
1,549 gigawatt-hours which is equivalent to 22 million pure
electric vehicles worth of battery capacity in the pipeline.
The scale and speed of this growth is unprecedented, and it
will have a profound impact on the raw materials that fuel
these battery plants. The scale of investment will also drive
the cost of lithium-ion battery production down below $100 per
kilowatt-hour in this year. This adds extra impetus to this
mega trend of battery megafactories and the impacts on the
demand for critical battery raw materials of lithium, cobalt,
nickel and graphite, have been unprecedented. For example, in
the next decade the demand for lithium is set to go up nine
times--this is lithium used in the battery industry. Cobalt is
set to go up six times, nickel, set to go up five times and
graphite anode, set to go up nine times. The question is how
much of this mineral to EV battery supply chain does the U.S.
control?
So the way I view the battery supply chain is in three main
elements: you've got the mine where the minerals come from,
you've got the chemical refining aspect which is absolutely key
to using those minerals or chemicals in the batteries, and then
you've got the battery plants.
For stage one, how much of that mined supply does the U.S.
control? For nickel it's zero, for cobalt it's zero, for
graphite it's zero, and for lithium it's one percent or
something.
For the chemical stage, where the know-how comes in for
using these minerals in batteries, how much capacity does the
U.S. control? Nickel it's zero percent, cobalt it's zero
percent, graphite it's zero percent, and lithium it's seven
percent.
Battery capacity stage, where they make the actual
batteries, the consuming plants: in 2018 the U.S. had nine
percent, that was mainly from the Tesla Gigafactory in Nevada
and by 2028 we're only forecasting 10 percent. So we're
forecasting a relative flatline as this industry grows.
Incidentally, China is on track to have 65 percent of
battery capacity by 2028. It already has 51 percent of lithium
chemical capacity, 80 percent of cobalt chemical capacity, 100
percent of graphite anode capacity, and a third of nickel
chemical capacity.
Those that control these supply chains will hold the
balance of industrial power for the 21st century auto and
energy industries. And the question I have for this Committee
is, does the U.S. or--what role does the U.S. want to have in
this global energy storage revolution? Because it starts with
these supply chains.
I would like to extend my appreciation to Senator Murkowski
and the Committee for holding hearings like this because they
are vitally important to the industry and the supply chains.
[The prepared statement of Mr. Moores follows:]
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The Chairman. Thank you, Mr. Moores, for reminding us so
clearly and directly of the importance of these significant
minerals.
Mr. Zindler, welcome.
STATEMENT OF ETHAN ZINDLER, HEAD OF AMERICAS, BLOOMBERGNEF
Mr. Zindler. Good morning, Madam Chair, and thanks so much
for having me here at the first hearing of the year.
I'm here today in my role as analyst at BloombergNEF
(BNEF), a division of financial information provider Bloomberg
L.P. Our group provides investors, utilities, oil majors,
policymakers, and others with data and insights on the energy
world and other sectors of the global economy undergoing rapid
transformation.
My remarks today represent my views alone, not the
corporate positions of Bloomberg L.P. And, of course, they do
not represent investment advice.
As you've all heard, and I very much agree with the panel,
how the world has been generating, delivering, and consuming
energy are all evolving very, very quickly and radically. These
changes have allowed new industries to flourish. The wind and
solar sectors, for instance, now employ over 450,000 Americans
while over 2.2 million Americans perform work related to energy
efficiency. Meanwhile, major capital flows are flowing into the
sector. Our firm counted $332 billion invested in new energy
technologies in 2018 and have counted over $3 trillion,
cumulatively, over the last decade.
We believe that more change, much more change, inevitably
lies ahead. In fact, the riskiest bet that investors,
utilities, carmakers, oil companies, and even policymakers can
make is to assume that the energy world that we live in today
is the one that we will have tomorrow.
To take one example, consider how personal transportation
is changing and the implications for motor fuels demand. In
2013, pure electric vehicles--that's EVs, not hybrid cars--
represented well under one percent of total vehicle sales in
the U.S. By the fourth quarter of 2018, they topped four
percent. China, which is the world's largest auto market, added
1.1 million EVs in 2018 alone and there are now about 5 million
of these cars on the road worldwide. By 2030, we project 1 in
11 cars will be electric and by 2040, 1 in 3.
Growth will be propelled by declines in the cost of
lithium-ion batteries, the most expensive components of any EV.
Typical battery prices have already dropped 85 percent since
2010. As China, South Korea and others ramp up production,
economies of scale will depress prices further. By the mid-
2020s, consumers will choose EVs purely based on price, not
subsidy like today, and this important crossover could occur
sooner if oil prices rise.
We at BNEF are hardly alone in our outlook. The major oil
producers have repeatedly raised their own projections for EV
sales in recent years. More importantly, Total, BP, Shell, and
Chevron have all invested in or outright bought, acquired,
vehicle charging companies or even power utilities.
One potential reason: electric transportation will by 2040
subtract 7.5 billion barrels a day of demand for crude products
by our estimate. We also think that much more change is
inevitable in the power sector driven by cost declines and a
move toward ``decentralized energy.''
Prices for photovoltaic modules (PV)--the solar panels you
might put on your roof--have fallen from approximately $4.50 a
watt in 2008 to $0.25 a watt as of year-end 2018. For millions
of U.S. businesses and homeowners, the decision to ``go solar''
is being driven by the chance to cut monthly electricity bills
or lock in fixed rates for power. I'd also note that PV panels
actually function perfectly well in cold weather. By the end of
the next decade, solar will be cost competitive in most parts
of the U.S. without the benefit of subsidies. PV generation
will grow from about three percent today to approximately one-
quarter by 2050.
The wind industry can tell a similar story as its
generation costs have sunk by more than half since 2009 thanks
to more efficient turbines, and we expect that eventually wind
will grow to about 14 percent of generation by 2030.
Of course, it's needed to accompany all this as greater
penetration of ``flexible resources'' such as batteries, demand
response, and pumped hydro. And along those lines, companies
like AES, AEP, Southern California Edison, and Southern Company
and others are already deploying large-scale batteries on the
grid, or at smaller scale ``behind the meter'' in homes and
businesses.
I'd just like to close with one quick point about energy
consumption and its role in climate change, because I would
argue that no responsible conversation about energy policy can
take place without thinking about CO2 emissions. Last year,
U.S. CO2 emissions bucked what had been an 11-year trend
generally downward. Instead, they rose 2.5 percent from the
prior year, based on our preliminary analysis.
The economy grew much faster in 2018 and that probably
played a role. But the year also saw more extremely hot and
cold days and, of course, last week we saw the same in 2019 and
these appear to have prompted greater use of heating and air
conditioning. That, in turn, boosted CO2 emissions. This raises
the possibility that as we live with the effects of climate
change today, it is becoming more challenging to cut emissions
and address climate change tomorrow.
As you can tell, I am fundamentally optimistic about the
transformative potential of new energy technologies. But I am
under no illusions. The dramatic changes we anticipate over the
next three decades will not sufficiently cut CO2 emissions in
the U.S. or worldwide to curtail the worst impacts of climate
change as detailed by the scientific community. In other words,
technology and economics alone cannot save us. New and better
policies are needed to accelerate the transition. But that is
where policymakers, not energy analysts, must have their say.
And so with that, I'll stop and say thank you, Madam Chair.
[The prepared statement of Mr. Zindler follows:]
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The Chairman. Thank you, Mr. Zindler.
Your comments this morning remind us that what we are
talking about this morning is the outlook. I was reading an
article from a few days back that was throwing rocks at the EIA
analysis and saying, oh, you know, ``it underplays how rapidly
coal will retreat from the market,'' ``fails to grasp the scale
of growth for renewable energy,'' and ``it paints a picture of
the future few utilities and energy analysts actually expect to
see.''
I am just reminded that whenever anybody gets out there and
provides an analysis or an outlook, it is what you are dealing
with at that moment in time. It is difficult to forecast what
changes in policies we may see.
So much of what all of you have outlined on the panel here
this morning just reminds us that this is very much
forecasting. In the political world we pay attention to those
pollsters that we think are usually right and amongst the
pollsters they have little side bets, I think, as to who is
closest to being right. Maybe we need to do some kind of a pool
for our analysts to see how close we got to the mark at the end
of the year. But again, recognizing that we have an opportunity
at the policy level to help change some of this in ways that,
perhaps, we cannot even anticipate.
I wanted to ask about some of the variables that are out
there. Obviously there is a great deal of discussion and
speculation about the impact of the situation in Venezuela as
we are seeing those sanctions there. The impact, clearly, of
the Iranian sanctions and how these all factor in.
There have been multiple articles over the past couple days
about what it means to our U.S. refineries and our ability here
to do the mixing that goes on within our own infrastructure and
structure.
So, Dr. Capuano, Mr. Book, if you want to just comment real
briefly on some of these external forces. I think you raised
the issue--maybe both of you spoke to OPEC and that influence--
but you have some really external forces here that are
difficult to factor in.
Dr. Capuano. We put out our STEO monthly which does
adjustments for production changes or shocks to the market. And
if you read our last STEO, and our next one will be coming out
in the next week, what we see are adjustments. So as production
declines in some areas, we're finding that production in the
U.S. will increase or production in other locations will
increase. So we're finding that while it's disruptive, that
there are adjustments that get made. And so, the oil and gas
are flowing.
But the question around the refineries gets into fuel mix
so, you know, of course Venezuela has a heavy crude. Our
refiners use the heavy crude in order to produce products. But
there are other sources of heavy crude, for example, from
Canada and others.
And so, so far, if you read our STEOs we're seeing that
adjustments are being made and while prices are changing
modestly, that things are happening.
The Chairman. Good.
Mr. Book.
Mr. Book. Just to amplify what the Administrator said, the
heavy crude tends to price at a discount to the light, sweet
crude that is the benchmark price you see on TV. And so, when
refiners are bidding up for heavy crude, they're essentially
buying a lower quality product that requires more processing.
That eats into their margins.
It happens to be occurring at a time when gasoline demand
is weakening for a variety of reasons, probably some cyclical,
some that I mentioned, efficiency-based. And so that's hurting
their margins a little bit, having to chase heavy crude around
the world where it can be found means a frictional cost.
If the sanctions have an unexpected effect of shutting down
production at a far greater rate, then it isn't just a question
of Venezuelan barrels not coming to the U.S. but it actually
becomes a question of Venezuelan barrels not going into the
world. And in that shortfall environment the heavy price goes
up still higher and actually you start to see some, sort of,
secular move throughout the petroleum pricing structure upward
because, in general, there's going to be less product in the
world and folks are going to have to bid for it. The effect
could still be very modest. There's a lot of dynamism in the
system. One of the dynamics is that we have a strategic
reserve. It's not perfect for heavy crude but it could add to a
volumetric shortfall. The other dynamism is OPEC. The partners
that we have in the Middle East are sensitive to our economic
situation and sometimes respond.
The Chairman. Thank you.
Senator Manchin.
Senator Manchin. This is going to be an interesting
discussion because you all have a unique position in looking at
the practical end of what we need to do.
Mr. Moores, on the rare earth minerals, the challenges that
we face right now--you kept saying zero, zero, zero, one. We
are more dependent on that if we are going to reduce our
footprint in the climate arena but not having any, you know,
with batteries and storage and things of this sort, of not
having control of our destiny. Should we be doing more with the
rare earth minerals as far as strategically mining or basically
processing them in the U.S. so we have our own reserves?
Mr. Moores. Yes, that's a good point.
Yeah, I think, I mean, to get U.S. supply security for
these supply chains, the answer is simply, yes. The key is to
value add, though, and try and build that supply chain within
the U.S. So you have the resources but then you have to add on
the two or three steps to get to a battery-grade chemical
level.
Senator Manchin. Sure.
Mr. Moores. And I think that's the true challenge. But the
U.S. does have the resources and in the main has the know-how.
So really, it's got to have the impetus, and right now it's
coming from the industry in a stop and start way. They're, kind
of, almost waiting on demand to be even bigger and even more in
their face than it is now. And so, there needs to be more
impetus from, certainly from a government level, I think.
Senator Manchin. What I would like to ask--maybe any of you
who want to chime in on this--is what is the lowest hanging
fruit that you see in the energy arena as far as reducing
carbon pollution and being more efficient in what we are using?
What is the lowest hanging fruit that we have that you all see?
People make a decision to drive an electric car or not.
They make personal decisions instead of taking a practical
approach to what really needs to change. What moves India? What
moves China? Their demand on using fossil fuels is greater than
ever. Their appetite for it is well into 2040, 2050 in all
predictions that you, Dr. Capuano, have mentioned.
What is the low hanging fruit and what would drive us to
make it more efficient in view of how we pollute, I guess?
Kevin, you might want to start----
Mr. Book. Sure, I'd be happy to, Senator.
The importance of EVs is easy to overlook when it's such a
small part of the base. As Ethan rightly noted, it will be a
big part of the long-term picture. But while it is a small part
of the base, it also isn't a big part of the solution. Every
million electric, light duty vehicles is about 25,000 barrels
per day of oil demand destruction, which isn't very much in a
100 million barrel per day world. And right now, particularly
in the U.S., consumers of electric vehicles tend to be wealthy
and to use them less than typical users of primary cars.
There's been a lot of efficiency gains in buildings and for
that matter in industrial infrastructure in response to high
prices, but there's a lot more room to be had in efficiency.
Part of the issue----
Senator Manchin. That is one of the lowest hanging fruits
that you--I mean, we have identified and talked about that also
is right there----
Mr. Book. Absolutely.
Senator Manchin. ----for the picking.
Mr. Book. Yes.
Mr. Kavulla. Maybe, Senator, rather than calling out a
particular technology in terms of a regulatory structure,
you're seeing the greatest decarbonization trend happening in
the states that allow customers to go directly to the market to
access sources of clean energy.
So if customers don't have to rely on a utility which has a
supply monopoly but can instead execute power purchase
agreements or rely on retailers, that's seldom clean energy.
You're seeing the greatest decarbonization happen there.
So not a technology but rather a regulatory----
Senator Manchin. What is the biggest challenge to that
power purchase agreement? If a person wants to produce their
own off the grid, then they want to sell back, they have to pay
a price to get back in at the grid, correct?
Mr. Kavulla. That's right----
Senator Manchin. That has been the biggest obstacle----
Mr. Kavulla. That's right.
Senator Manchin. ----or challenge we have.
Mr. Zindler?
Mr. Zindler. Well just, the panel, both made some great
points.
Definitely on the corporate PPA side, or power purchase
agreement, we saw a record last year and you see large
technology companies, like Microsoft, Google and others, who
have giant server farms that they can provide entirely clean
energy for. You may have seen the Budweiser advertisement
during the Super Bowl--they're bragging about their use of wind
power as well. So that trend has definitely been something
we've seen going up.
You did mention something about China and I did want to
just jump in and say one quick thing about that is that China
does everything really big.
Senator Manchin. They have to.
Mr. Zindler. You're right, they are a consumer of fossil
fuels.
They also, as Simon mentioned, they are the largest
manufacturer, and soon to be much bigger, and we agree with his
research in terms of batteries. And that's because they're
actually serving the domestic market. It's the largest market
for electric vehicles and they're making a lot of batteries
because they're going to sell a lot of them to cars. We don't
have that same demand pull here in the United States, at least
not yet.
Senator Manchin. Doctor, do you have any input on that?
Dr. Capuano. Well, when you look at--I think the low
hanging fruit is gone but if you look at our graphs, and we've
submitted some of these, you'll see that through technology
investment and policy combined, we have been driving down the
carbon intensity both of the grid, transportation and
residential.
And I think the very encouraging piece of data is that as
you get out toward the next 10 or 20 years as our reference
case, which is the base case to refer from, where you see the
rolling off of policies, the investments in technology combined
with the polices have allowed costs to come down so that you
see that solar and wind, for example, are economically
competitive and continue to grow at a slower rate.
So the expectation is there will be more policy, but our
reference case shows that there have been some successes now
and that that's very encouraging. And the same thing in
residential, it's, you know, we're seeing the shifts in
demographics in terms of where people live, houses are getting
bigger, and so, as a result the per square foot energy
efficiency may be going down but the square footage is
increasing. And so, again, more investments and more
encouraging policies would reduce the energy intensity.
There's no magic, I guess.
Senator Manchin. I know that. Thank you.
The Chairman. Thank you, Senator Manchin.
Senator Barrasso.
Senator Barrasso. Thank you, Madam Chairman.
Several months ago, the U.S. became an energy exporter for
the first time in half a century. According to projections, the
U.S. is going to be a consistent energy exporter by 2020. To
achieve this and ensure reliable, long-term energy supply to
our allies, I think we need to build out the infrastructure to
transport and export our energy sources.
Dr. Capuano, do the EIA's projections consider expanded
export infrastructure, including additional LNG export
terminals and expanded pipeline networks?
Dr. Capuano. Yes, LNG terminals and pipeline networks are
included as they become approved or are getting very close to
execution. They're included in our models.
Senator Barrasso. And are there things that Congress can do
to ensure that the United States maintains the title of energy
exporter into the future, basically energy being the master
resource that it is and our role in the world?
Dr. Capuano. Pardon me, I didn't quite get that?
Senator Barrasso. What are the things that Congress can do,
I think, as a fact of energy being the master resource because
it is a force multiplier? It could be used in so many ways as
other countries use it as a weapon, as Putin has done. Are
there things that Congress could do?
Dr. Capuano. Yeah, I think the EIA data shows that policies
have had an effect, because as they roll away you see changes.
And so, I think that data can be used to help support your
conversations about what kind of policies to execute.
And again, EIA would be very happy to provide more details
from our data. We publish our data but help explain the data in
more detail.
Senator Barrasso. Thank you.
Mr. Kavulla, in your written testimony you note that states
can sometimes unilaterally frustrate multistate energy
projects. You highlight the millennium bulk export terminal as
an example. In this case the State of Washington blocked
construction of a coal export terminal that would ship Powder
River Basin coal, much of it mined in my state, to Asian
markets. We have it, the United States has it, Asian markets
want to purchase it.
How can states work together to ensure that the success of
American energy is not threatened by a conflict between the
states, because that is what we have going on right now with
Washington State and its blockage of something that is a U.S.
export that others want to buy and are happy to pay for but one
state is unilaterally blind.
Mr. Kavulla. Senator Barrasso, I think a good way to think
about this is to consider those situations that you've just
identified, where a state's energy policy is preconditioned or
antecedent on a particular type of infrastructure which can be
frustrated by another state, say by exercises of their Clean
Water Act authorities. Trying to find those situations where
those blockades can occur, whether it be on export terminals or
electric transmission or natural gas pipelines, and then find a
way for Congress to intervene or states to work together.
Congress has previously tried to do that for electric
transmission by building in shock clocks. The Federal
Communications Commission does this for communications
infrastructure siting, but sadly, there's a real lack of
parallels to that that have really stuck in the federal courts
based on their interpretations for energy infrastructure.
But I think the framing that you've put on it is correct.
It's really, it's become a state versus state conflict which
seems to require some kind of federal oversight for
intervention. And it will ultimately hamper not just the
development of coal exports but even renewable electricity from
interior states that have robust renewable resources.
Senator Barrasso. Thank you very much.
Thank you, Madam Chairman.
The Chairman. Thank you, Senator.
Senator Heinrich.
Senator Heinrich. Madam Chair, I know you know that I am
reticent to differ with you, given your expertise on these
issues, but with regard to this particular issue you said it is
kind of like forecasting. I want to suggest that predictive
analytics should not be about forecasting. It should be about
modeling, and we should be asking about these models and what
goes into them and how that impacts what comes out of them, and
then comparing what comes out of them to the patterns that we
actually see in the industry.
I have long been incredibly concerned with the wild
inaccuracies in EIA's projections in the electric power sector
and the failure to factor in the trends and technology to lead,
not only to lower generation, to lower cost generation, but
also early retirements of uneconomic generation. And year after
year, we have seen EIA spectacularly estimate, underestimate,
growth in renewable energy and gas generation, and this year's
version seems to be no better, frankly.
For example, the idea that coal will still provide 17
percent of electric power in 2050, I think for most people in
the industry today, is not credible. We have no new coal plants
that are planned. Existing plants will be well past their
useful lifetime. We are shutting down plants in my region of
the country. I see similar trends in other regions of the
country. So, more fundamentally, is it time, Dr. Capuano, to
revisit your underlying model?
Dr. Capuano. So I would point out that we do something that
no one else does in the United States or, I think, globally, is
we do a base case. It's a reference case. It tells you what
will happen if nothing changes. That is not a forecast of where
things will go. It's not trying to do a probability of where
things are going.
Senator Heinrich. But is that useful?
Dr. Capuano. It is useful.
Senator Heinrich. Because we all know that----
Dr. Capuano. I would hope that it would be.
Senator Heinrich. ----change is the only thing that we can
truly rely on.
Dr. Capuano. I would hope it would be useful to help you
understand how much work has to be done to get to where you
want to go. So where else do you go to find out how impactful
your policies are or whether your policies are being effective
or what happens if they go away?
Aspirational or visionary models or statistical or
probability models of what's the probability it's going to
happen are rampant, and they are very useful but no one else
does one that says this is what happens if everything stays the
same.
Senator Heinrich. I think my challenge is that for the vast
majority of businesses, as well as the public, most people
don't understand that there is a reference case or what that
even means.
So they look at examples such as wind energy, and in this
model you see almost no additional capacity either onshore or
offshore after 2022. And yet, we look around at what is going
on right now and you have the Department of the Interior
awarding wind leases for up to four gigawatts off the
Massachusetts coast in the last few weeks. You have New Jersey
planning a gigawatt. You have Virginia planning multiple
gigawatts. You have New York announcing a wind target of nine
gigawatts. And you look at the testimony today from Mr. Zindler
who suggests that wind power is probably going to grow from 6.5
percent of generation to 14 percent of generation by 2020 which
is roughly double your base case estimation.
And if people see that, I don't know that this is a useful
exercise for us to go through when the base case is so far
removed from reality, especially given the fact that many
people will look at that and they will make business decisions
about where to place bets, where to invest, based on a
misinterpretation of a model.
Ms. Capuano. Thank you.
Senator Heinrich. Mr. Zindler, let me go to you.
How do your clients at Bloomberg New Energy Finance view
EIA's Annual Energy Outlook in terms of its usefulness for
making business decisions?
Mr. Zindler. Well, let me try and be diplomatic here and
just say that----
[Laughter.]
----first of all, as was noted, making predictions is hard
as Yogi Berra once said much more artfully than I just did. And
we, as a firm, have been forecasting the price of solar for 10
years and we've been much more aggressive in our projections of
how fast prices will come down and how fast adoption will pick
up. And we have been consistently wrong on the low side.
Senator Heinrich. On the low side.
Mr. Zindler. Right.
So, it's hard to do. I just want, sort of, to preface that.
The second point I would make is that with well respect, we
actually, our forecast, we do think is actually, is policy
neutral. We assume policies sunset. Well, for instance, we
don't assume that production tax credit sticks around forever.
And third, small correction, which is that we think that
wind gets to about 14 percent by 2030, not by 2020.
Senator Heinrich. Yes. My mistake, not yours.
Mr. Zindler. But to your question, I think the short answer
is, it is the EIA, yes, has been a source of frustration to
those in the clean energy sector for a long time and, I think
increasingly, in the conventional energy sector as well.
We forecast coal doesn't disappear by the way. We think it
does eventually drop to about 10 percent of generation but not
17 percent.
Senator Heinrich. Thank you, Madam Chair.
The Chairman. Thank you, Senator Heinrich.
I can take that. It is okay. We are going to be just fine
this Congress.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you, Madam Chair and
thank you and welcome to the new Ranking Member. I look forward
to working with this Committee.
Let me open this up to the panelists. One thing I am very
excited about which has been brought up, specifically in Mr.
Simon's testimony, is the recent rise in the use of electric
vehicles. Last year there were, I think, about 361,000 electric
cars sold, which is up 81 percent over 2017.
But despite this exciting growth, Dr. Capuano notes in her
testimony that assuming no further policy action, the
plateauing of fuel efficiency gains in 2027 is projected to
result in increasing consumption of motor gasoline after that
time.
I think we need a broader national outlook and strategy to
increase the adoption of zero emission vehicles to ensure we
can compete with countries like China and the EU.
So my question for the panelists is, what are some
challenges with differing state by state approaches to energy
markets and regulation that need to be overcome to help develop
a consistent national framework for integrating electric
vehicles and their infrastructure into our energy system?
I don't know where we would like to start, if anybody has
comments on that or can provide enlightenment on this?
Mr. Kavulla. I can start on the regulatory framework
because I'm a former public utility commissioner (PUC); you're
right that it's all over the map with PUCs.
Some PUCs have regarded their regulated utilities as
central investors in electric vehicle charging infrastructure,
something that would go in rate base, be paid for by their
captive set of customers. Other people favor a more liberalized
model of electric vehicle charging stations. That's a policy
debate that right now is being resolved on a state by state
level. Obviously, if we hope to have nationwide deployment of
electric vehicles and across state transport with electric
vehicles, much will depend on how that question is resolved in
the state level.
Senator Cortez Masto. Right.
Mr. Kavulla. And I think other people would probably have
something to say about the technical aspects.
Senator Cortez Masto. Anyone else?
Mr. Book. I would just say that there's, when you look at
EV penetration, there's a lot of factors to consider. The
hardware cost is higher. The variable cost is lower. So, the
average cost will start to become very competitive with
conventional vehicles when the hardware cost converges to the
cost of conventional vehicles.
One of the things that changes those is the variable cost
of those conventional vehicles. The more efficient internal
combustion engines get the more it pushes back that organic
break-even point. The reason that's important is that part of
the policy question you're asking is theoretical in nature
right now and it will become a panic when it stops being. The
curve doesn't go gently upward. It hits a kink and then it
rockets off the page. There's essentially a point where the
economic proposition dominates and consumer choice probably
takes us into a very different vehicle mix. And so, not having
policy set ahead of that time can be problematic, but setting
the wrong policy ahead of time is also problematic.
Senator Cortez Masto. Right.
Mr. Book. So you don't want to get too far ahead of it.
Senator Cortez Masto. Are there things we should be doing
at a federal level to help address this or take a look at this
and plan for the long-term?
Mr. Zindler. I mean, I'm not quite sure I know enough about
the law to know how you could intervene on some of these state
questions. But to me, one of the interesting ones to your
original question is who gets to sell electricity?
You know, certain states it's very heavily regulated about
who can actually have those responsibilities. And you know,
we're going to need a lot more charging infrastructure and it
would sure be nice to be able to charge my electric vehicle at
Starbucks every time I went there or where ever that is, you
know, where I spend a logical half hour, you know, every week
or two. So, there's not always the freedom to do that kind of
thing.
To Kevin's point also, I would just agree that there's a
lot of ways to look at what the economic crossover point will
be and in a perfectly logical, economic world, the consumer
would look at the sticker price of the vehicle, do the math of
how much gasoline they might have to buy, do the math on how
much electricity they'd have to buy. Net that all out and then,
you know, make a decision.
We tend to think consumers are just more likely, like Kevin
said, the moment they walk into the showroom and the EV is
cheaper, then they'll buy it. And that's probably what will
influence behavior going forward.
Mr. Kavulla. One very concrete idea for you, Senator, would
be and it's somewhere where the federal Congress would be
involved is the prohibition on any commercial activity or most
commercial activity at federal highway rest stops. Obviously,
the introduction of electric vehicle charging stations there
could facilitate some of the cross-state aspirations of
drivers. Right now, they face an impediment because of that
prohibition.
It's something my R Street colleagues and I have been
working on, and I'd be happy to follow up with you.
Senator Cortez Masto. Thank you.
Thank you to the panelists. I notice my time is up.
Thank you.
The Chairman. Thank you.
I understand Senator Cassidy is going to defer to Senator
King?
Senator Cassidy. He owes me his first-born child.
[Laughter.]
Senator King, it is up to you.
[Laughter.]
Senator King. Thank you, Senator, I appreciate it.
We are talking about a lot of the studies about exports and
imports. We are now exporting a great deal more. Do you have
any data on exports of natural gas and where that has gone?
There has been a lot of talk in the last two or three years;
are those LNG facilities actually being built and are they
exporting and, of course, what I am interested in, in the long
run, is will those exports reach a point where they will have
an effect on domestic prices?
Dr. Capuano. So you're asking what's happening with the----
so in my opening remarks I did----
Senator King. We know oil is being exported. Is natural gas
being exported in a substantial----
Dr. Capuano. Yeah, yeah.
So in my opening remarks I did comment on the fact that
natural gas--let's see, where are they?
Senator King. I apologize.
Dr. Capuano. Yeah, that's okay.
So, that same developments in domestic shale and natural
gas resources have enabled the U.S. to emerge as a net exporter
of natural gas. The total natural gas exports from the U.S.
exceeded imports and our production is at an all-time high of
30 trillion cubic feet in 2018. And we project that it will
grow, initially, by seven percent per year and then slow to one
percent per year after 2020.
And so, we now are seeing an increase in both pipeline and
liquefied natural gas and there are going to be more facilities
built.
Senator King. What I would like to urge you to do in your
data collection is to integrate those projections with price
projections.
My concern is that we start to export and reach a point
where supply is tighter and domestic prices go up. So perhaps
that is something we could follow up later.
Dr. Capuano. Yes, we can follow up with you when we do
address that in some of our projections. What we're seeing is
that production, as the prices go up, production will increase
and so, we do not see a lot of that.
But yes, we have more details that we can provide to you,
yes.
Senator King. I would appreciate that. Thank you.
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Senator King. Mr. Moores, we were talking about raw
materials components. In your testimony you talked about the
greater demand. Are we adequately prepared for a rapid
transition to greater electrification which is going to require
more of these battery materials?
Mr. Moores. Yes, quite simply.
Senator King. I mean, are we prepared for it, do you think?
Mr. Moores. No, sorry, you are not prepared for it.
Senator King. I was surprised.
[Laughter.]
Mr. Moores. No, no.
You have the ingredients, the raw material, the know-how,
but there's just no impetus to link that all together in the
moment. There's no encouragement of converted integration in
the supply chain from the mine to the lithium-ion battery
plants. So, yeah.
Senator King. Do you foresee a bottleneck here as
electrification increases, that the minerals for the batteries
will be a bottleneck?
Mr. Moores. Yes, globally actually, not just for the U.S.
but the U.S. has zero of these raw materials, almost zero of
these raw materials actually being mined at the moment. So----
Senator King. That is obviously a concern I think we have
to be thinking about so we are not cutting off a promising
development.
On the question of electric vehicles, one of the things
that has always occurred to me is that when will most--I am
asking a question. When will most people charge their cars? At
night.
The grid is grossly inefficient in the sense that it has
great excess capacity at night. We have excess generating
capacity at night. It seems to me one of the keys to this would
be time-of-day pricing to make it even more economically
advantageous and to benefit all ratepayers, because the grid
doesn't need much in the way of additional wires and poles to
accommodate this if we come in at night when there is so much
excess capacity.
What are your thoughts about that as a former state
regulator?
Mr. Kavulla. I absolutely agree. I mean, we're not
sending----
Senator King. That's great. I like that.
Mr. Kavulla. Yeah, we're not sending efficient price
signals in general to consumers, only----
Senator King. I mean, power at night has no value, almost.
Mr. Kavulla. That's right. And the fact is we were talking
earlier about the cold last week. Retail customers were paying
the same retail rates when it was cold and the system was
stressed as they will when the system has tons of surplus
capacity.
There's good policy reasons and equitable considerations to
make sure that retail customers don't experience volatile price
spikes, but there is some good sense in trying to send signals
to certain customers that could have their own cars or homes
act as resources to help balance the system and provide
reliability. And time of use pricing gets you there.
Senator King. You are singing my song, distributed energy,
more self-healing grid, national security, all of those things.
I am old enough to remember when phone rates went down at 9
p.m. and people sat around and watched their watch and when it
crossed 9 p.m., you called mom. People will adjust their
behavior given the proper price signals.
And right now, at least in most places in the electrical
sector, those signals do not exist.
Sir? Mr. Zindler?
Mr. Zindler. Can I just add a real quick thing which is, I
wholeheartedly agree although I will add one other point which
is that I think actually, a lot of electric vehicle charging
will take place overnight anyway. I mean, I've had an EV in my
garage for five years and I think we've used a public charging
station about two or three times because we can just literally
plug it in the wall when we go to bed. We all sleep. It's a
good time to charge your car.
So, yeah, you could incentivize it and I think that's a
great idea. It definitely helps.
Senator King. I wouldn't call it an incentive. I would call
it rational economic pricing.
Mr. Zindler. Agreed, totally--it may not help, but I think
the consumers will trend that way anyway which is a good thing
as long as they have a garage. That's a big asterisk there.
Senator King. I have an EV and don't have a garage, so I
have to pay the Senate an arm and leg to charge it here at the
garage.
[Laughter.]
Thank you, Madam Chair.
The Chairman. I don't know, Senator King, what does it say
about those of us that still wait until after 9 p.m. to make
that telephone call?
[Laughter.]
Senator King. Those price signals stick with us, Madam
Chair.
The Chairman. They do. They do.
But I am on Alaska time too.
Senator Cassidy.
Senator Cassidy. It could mean you don't want to call your
mother, but that is another issue.
Thank you all, great testimony.
Dr. Capuano, there has been a lot of discussion regarding
the increased use of renewables but as I understand, the
physics of our current technology, kind of, top out as to the
efficiency both the wind turbines and the ability of the
batteries to store energy and that these are immutable, if you
will, there are laws of physics which in turn will top out the
contribution that renewables can make to an overall energy mix.
I think I know that IEA has, kind of, begun to taper off
the growth in renewables as a mix of U.S. economy.
Any comments on that? Would you agree, disagree?
Dr. Capuano. So when you look at the EIA projections out to
2050, what you're seeing is the roll off of policies that are
causing the slow down and the renewables are being absorbed
into the grid.
And so, that obviously, there are mechanisms that can
change that.
You're not seeing that the physics limits are not causing
the slow down out to 2050. And I, you know, the investments in
technology are causing improvements and cost reductions. And
so, out to 2050 we're not seeing those limits.
Senator Cassidy. But let me, kind of, quote here and I just
say that because obviously for increased use of renewables
there will have to be substantially increase in efficiency, not
marginal, not going up 6 percent or even 10 percent, but rather
50 percent, if you will or more deployment. But I am also told
that, for example, where wind is deployed the choicest places
have been filled, if you will.
So, let's see if I have it right here. Of course, if I look
for it, I won't find it.
Oh well, that the, suffice it to say, well for example here
for the batteries. ``The physics of using silicon to convert
photons into electrons ends at about 33 percent conversion
called the Shockley-Queisser Limit. The most recent
announcement of high efficient silicon sells with 26 percent
efficiency are approaching the limit. More efficiency is
possible but no tenfold gains left.'' This is out of the
Manhattan Institute.
Would you dispute that or kind of acknowledge it and say
maybe we will find something else to do?
Dr. Capuano. So, EIA is not really the technology end of
the DOE. So if I can get you from DOE the answers to where
these physical limits are, but since we're doing, we do
modeling of the energy production, energy consumption and we're
not hitting those limits, we do, definitely, put technology
improvements into our models.
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Senator Cassidy. Okay.
Dr. Capuano. Okay.
Senator Cassidy. But you rely upon others to say what those
technology improvements have the potential to deliver? That is
fine. That is fine.
Mr. Book, I really liked your testimony because I think
that we oftentimes divorce emissions from carbon intensity and
from GDP growth. We can lower emissions if we go back to a
stone age economy, but most do not wish to do that. And so, I
like your pointing out that over the last period of time we
have actually decreased in several sectors the energy intensity
by about 20 percent.
You also point out that India and China are going in a
different direction. Is that inherent as to the state of their
economy relative to ours or could they also begin accomplishing
some of that which we have accomplished?
Mr. Book. Well, Senator, their energy intensities are also
falling largely, but they're falling from a much higher place
and not always at the same slope.
From the perspective of whether they're doing better or
worse, they're doing a lot worse from an economic perspective.
So, that energy intensity that they face is more of an economic
problem for them because per capita incomes are lower.
So, we really have it good two ways, right? We're more
efficient users with higher per capita incomes.
I think also just to your prior question, I sense that your
question is about the physical limits and I think the
Administrator's point was that that's not what's breaking the
model.
One of the things though is that energy has tradeoffs. So
we don't necessarily buy the 33 percent efficient solar panels,
and there's barely any that I think that have ever been made.
The highest are in the high 20s. We mostly buy them in the
teens, and it takes a lot more space as a result.
So the tradeoff when you have energy that is renewable is
often that you're going to have to use more space or there's
other aspects of renewable energy that, just like conventional
energy, there's a downside that comes with the upside. And one
of the things that's hard to see when you're at a small
penetration level is what that downside is like. But as we get
to a higher penetration level, long before we're stopped by
those physical limits, we run into real problems. And these are
some of the problems that you can see in developments where
environmental challenges against solar arrays in the desert
because of biodiversity concerns are showing up. That's what
it's like to be big time. And so, there are definitely other
factors that create drag on some of the projected growth rates.
Senator Cassidy. I am out of time. I agree with you. I am
all for renewables, but I do think we have to be sensible if we
are going to promote economic growth which obviously requires
energy. So again, I thank you for your testimony.
I am out of time. It is the deference of this.
The Chairman. Go ahead.
Mr. Zindler. Let me just jump in real quick on solar.
Just first, I don't think the numbers you quote are wrong
in terms of the efficiencies and the 33 percent cell is
probably what you'd find on a NASA, you know, space mobile. As
Kevin says that we're looking more like 19, 20 percent.
But very importantly, I think it's important to understand
and acknowledge what's going on with batteries right now
because the price of batteries has absolutely collapsed in the
last seven or eight years. And we forecast that they will
continue to decline very rapidly. And that's not because I have
some sort of Messianic religious belief in technology, it's
because China is about to swamp the market again with battery
manufacturing. That's going to push prices down.
And if you look at some of the bids to provide power on a
more round the clock basis in places like Arizona and, most
recently, in Hawaii, the cost and the bids that are coming in
are very, very low for solar plus storage.
I think, to be clear, that's being subsidized with a
federal tax credit which is helping to depress those prices but
it's getting much cheaper. And we view that crossover as
coming, for sure.
So you're right, the system is limited in how much you can
just throw a ton of solar on, but eventually we'll have enough
storage to help address that.
Senator Cassidy. But going back to Mr. Book's point, that
will be a lot of space for that storage.
Mr. Zindler. Batteries are, by comparison to the acres that
you need for photovoltaic panels, batteries are relatively
small.
Senator Cassidy. Thank you.
The Chairman. Thank you.
Senator King. Madam Chair?
Senator Cassidy, one thing you mentioned about wind, the
choicest places have been filled and to some extent that is
true on land, but there is a gigantic, untapped potential for
wind offshore. That is--it dwarfs what is on the land. The wind
blows, the efficiency, the capacity factor is higher. So I just
want to point that out that we've done a lot on land, but
offshore is where the future is, I think, in terms of really
large scale.
Senator Cassidy. Which is why, Senator King, Senators
Murkowski and Cassidy want you to get on our revenue sharing
bills.
[Laughter.]
Senator King. So we can share some of those revenues from
those wind turbines.
The Chairman. That's exactly right.
[Laughter.]
Exactly right.
Senator Hyde-Smith.
Senator Hyde-Smith. [off-mic]--serving on this Committee,
and I look forward to working with you and think good things
will happen. Thank you.
The Chairman. Thank you, Senator Hyde-Smith. Again, we
welcome you to the Committee and look forward to your
engagement.
Talking about those policy changes that we can actually see
are coming. Some of them are a little bit speculative, but we
know that at the end of this year we have a regulation coming
at us from the International Maritime Organization, IMO. This
is this IMO 2020. It is going to go in effect overnight. On the
31st it is business as usual, and on the first we switch over
to a further capping of the amount of sulphur that is allowed
in marine fuel. It is a pretty significant drop down with the
cap, down to 0.5 percent from 3.5 percent that it is now. So
this is significant. We know that it is going to produce some
real positive benefits.
I have been talking to some of the U.S. refiners who have
been working to incorporate this and they have made the
investments based on these regulations that they know are
coming at us. But give me your, again, your assessment and this
is directed to you, Dr. Capuano and Mr. Book, the best estimate
for what this shift is going to mean for the middle distillate
market and the impact on pricing for diesel for jet fuel and
recognizing that we are leading up to this as well.
I am assuming this is all factored.
Dr. Capuano. Well, you actually pointed out that the United
States' refiners have been positioning. We have many complex
refiners who deal with heavy, sour crude and we also have
balancing crude here in the U.S., light and sweet. So not only
do they, would they put them through the crackers but they
could also do blending.
So the refiners, in general as a class, the refiners are
able to accommodate this. There, of course, is a big shifting
at the global level in terms of the flow of fuel since the
location and the bunkers that will have the lower sulphur fuel
will be in different, you know, different places. And so,
things will have to be moved around at a different rate.
And so, I'm going to leave it to you----
[Laughter.]
The Chairman. What is going to happen to the prices? That
is what people want to know.
Dr. Capuano. Yeah.
Mr. Book. Okay, well, you know, with the, I think the
important caveat that Senator Heinrich established that models
tend to be fraught with peril, particularly the further you go.
We just yesterday published a projection of a range between
9 and 26 percent diesel increases for perhaps a short-term with
a central tendency around 21 percent.
The Chairman. But during what time period? Beginning this
year or next year?
Mr. Book. So, then that's the key question really. There's
a couple of factors. One is compliance rates. The second, of
course, is government intervention and if there's an agreement
to push things back. But right now, we expect the adoption to
begin well before the first and probably by 3Q.
The Chairman. Because this is not just adoption by the
United States.
Mr. Book. No, no, no, no, no.
The Chairman. This is actually globally. So it is a big
market.
Mr. Book. And it takes a while for these big ships to clean
out their tanks and to test out new fuels.
And so, some of the stress that we could see will start to
emerge, probably if there is stress, in the third and fourth
quarters ahead of the cutover.
By the time things start to normalize, there's a lot of
offsetting factors. One is the ships can steam slower. They can
be more fuel efficient. There's truly people who could choose
to disobey the law, although we think compliance is probably,
you know, 70 to 80 percent, globally.
But in addition, there's also the call on distillate. You
can run refineries harder. And when you run refineries harder,
you start to get to less of a shortfall. So the volumetric
shortfalls, marine bunker fuels are roughly 3-3.5 million
barrels of consumption a day. And the shortfall could be
somewhere in the half million range in the most, sort of,
beneficial workout for a short period of time while the
transition continues. It might be as much as 1.5.
And so, there's a lot of factors that determine it. We're
thinking it's going to be closer to, sort of, about the one
million barrel per day. And that exerts a price effect,
probably. Without that price effect, though, you don't get
further transitions in the refining kit around the world to
make the conversion.
So it's a complicated problem. And in essence, as you say,
there is an environmental signature to doing this. Here in the
U.S. and in Europe we're already at a much lower sulphur level
in our environmental regulations in coastal areas as it is.
The Chairman. I am just very keenly aware that even with a
looming deadline, sometimes you have the view or the attitude
that well, we will just push that deadline off. Well, we are
not quite ready for it.
I think it is important to recognize that, again, this is
not just something that Congress or the Administration has laid
down. This is an international maritime agreement, if you will,
in terms of these regulations. How we are teed up to abide by
that and not to be shocked when we see this change come into
place is something that we need to start paying attention to.
Senator Manchin.
Senator Manchin. On the refineries, I just need to ask the
question. Even with the refineries that we have in the United
States today and our newfound position as far as crude
production, we are still importing, correct? Is that because of
the refinery capacity, the type of refineries we have, or
because we have not been able to make the adjustments, or are
they making the adjustments since we have----
Mr. Book. It's not a question of not able to make. It's a
question of optimizing. So, to make the most money here at
home, create the most jobs here at home.
What they're doing is they're set up so that they can bring
in imported crudes at a lower price, heavier, sourer crudes,
process them, mix them with their light. They are definitely
tooling up to use more light oil and expanding capacity here in
the U.S., but the continued use of heavy crudes as to enable
them to make more profitable products across the slate.
Senator Manchin. Sure.
Mr. Book. So we will continue to import those heavy crude.
Senator Manchin. For economic purposes?
Mr. Book. Yes.
Senator Manchin. But not for strategic----
Mr. Book. Well, if you want to count barrels that have the
net balance be zero, we're going to get to that point by their
projection at the end of the next year, potentially. But in
terms of zeroing out total gross import flows, that's not
really in our economic interest.
Senator Manchin. Gotcha.
Mr. Book. We want to make the most money, create the most
jobs.
Senator Manchin. The current nuclear fleet faces severe
economic challenges in today's market. Since 2013 five nuclear
plants have closed, and six plants are scheduled to shut down
by 2025 due to economic challenges.
Some states have been able to prevent shutdowns with state
policies like zero emission credits. Even with this assistance,
the high price tags of nuclear plants and high operating cost
have put a great deal of financial strain on nuclear plants.
It appears to me that in order to harness the benefits of
nuclear power as well as expand in this space, we must ensure
that the Department of Energy is developing the technology and
partnership with the private sector to lower the cost for the
current fleet and develop the next generation of nuclear
technology.
So I think, Mr. Book, this question might be to you. How
can we better direct federal dollars to ensure the current
reactor fleet can become more economically competitive?
Mr. Book. I would actually turn to my colleagues on the
panel who might know more about nuclear power than I.
Senator Manchin. Okay, who would like to take that?
Mr. Kavulla?
Mr. Kavulla. I'll go first.
You are seeing greater operating cost reductions and
capital productivity out of the merchant utility fleet that is
coal and natural gas as opposed to nuclear. I'm not fully sure
why that is--I assume nuclear's unique regulatory status under
the NRC, the operating requirements that are imposed on it, the
relatively limited size of the fleet and its lack of
modularity, probably all had something to do with it.
But you're correct Senator that it's bigger, it's clunkier
and if they're going to survive in a competitive market, they
need to find those same kind of cost reductions that other
people have in order to stay afloat in markets like----
Senator Manchin. Do you have any knowledge of the
development of small modular reactors?
Mr. Kavulla. Only that it's often been touted as the next
generation technology, but none of them have been, so far,
cleared into the market and there are a couple of those that
are awaiting deployment.
But I'll put it this way, no one is sinking their own
private risk capital----
Senator Manchin. Mr. Bill Gates is. He is putting billions
in, and he is committed to put billions more. He is looking for
a partner. I think the DOE is where he is looking for this
partnership, and I want to know if any of you have knowledge of
that or if you have been looking into that?
Mr. Zindler. A bit. And then I would echo what Travis is
saying which is that the small modular reactors, SMRs, have
been through the technologies of the future for, I think, 15,
20 years now. And we shall see.
I think it's important technology. I would just echo your
original point though and add one, amplify one point, which is
to note that, you know, nuclear represents this huge portion of
zero carbon energy when it's produced.
Senator Manchin. Right.
Mr. Zindler. And if we're serious about climate change, we
have to have a very rational policy about existing nuclear
plants and what we can do to keep them online.
Senator Manchin. Well, Mr. Gates, I think,----
Mr. Zindler. Thank you, I'll take that.
Senator Manchin. I know.
[Laughter.]
No, I said we had a meeting with Mr. Gates concerning his
development of reactors using spent fuel. So disposal would not
be a problem and it would be universal internationally.
Do you know any of the challenges for advancement of these
projects?
Mr. Zindler. Yeah, I would agree with Travis' point which
is that such a venture requires a lot of private capital and it
would be good if someone brings that to that conversation.
Senator Manchin. And then the last thing was basically on
the grid system.
I have been hearing for years and years and years that we
have a tremendous amount of shrinkage or waste as we deliver
our power on the grid system. Have there been any upgrades you
have seen?
I mean, I always thought that ceramics would be much more
efficient transporting our power than what we're using, the old
conventional methods. And there's been no changes for years.
Mr. Book. Well, I mean, technology shifts to a wholesale
new technology tend to be expensive, particularly for the early
adoption of those shifts and socialized rate bases don't
generally welcome newly expensive increases.
So there have been----
Senator Manchin. That is a low hanging fruit, same as
energy efficiency, basically. You are not wasting the fuel.
Mr. Book. There's been a lot of distribution build out
that's helped to rationalize the grid and improve its
efficiency, but moving it to next generation materials which, I
mean, I don't know if you have comments but there's definitely
price impacts that can be dissuasive.
Senator Manchin. Thank you very much.
Mr. Kavulla. I'll also make the point, if I may, that
regulatory model is different. You don't necessarily get
rewarded for efficiencies in deploying that type of capital
like you would be rewarded for efficiencies if you're operating
a power plant in a competitive restructured market. And so,
there's certain regulatory elements that impact here.
Senator Manchin. Sure.
Mr. Kavulla. But I'll look at your witness list for
Thursday and make sure someone is prepared to answer that
question.
[Laughter.]
Senator Manchin. Thank you.
The Chairman. We better make sure that that one is
addressed.
Senator Heinrich.
Senator Heinrich. I am just glad we are talking about
bunker fuel and small modular reactors and things that need
some of this attention. When it comes to bunker fuel, you
almost never hear about that in the energy conversation. Some
of the stuff that gets burned in the hulls of ships around the
world, if it were being burned in your hometown, you would be
absolutely out on the streets with signs up because of the
quality or lack of quality of some of that fuel. So I am glad
you are bringing some attention to these issues.
I do want to go back to the physics issues for a minute,
and I am sorry that Senator Cassidy is not here. I have had a
little bit of experience with solar. I started with some
students. We built a carbon fiber solar car that we raced from
Dallas to Minneapolis in 1992 and 1993. I think we were doing
very well if our efficiency of those actual cells were in the
double digits, right? I mean, they were like the low double
digits. And now I have a company in Albuquerque that is up in
the 30 plus range for efficiencies.
But when you look at what has really driven penetration, it
hasn't been changes in efficiency, and certainly the limits of
the physics are real, but it has been all the other things that
some people call Swanson's Law which says every time we double
our manufacturing capacity we see a 20 percent drop in the cost
of these systems.
Some of that comes from how we pay for those systems and
financial models, and some of it comes from manufacturing
improvements. Some of it comes from improved soft costs of just
being able to work with your local utility and your local
municipality to actually get this stuff installed on your roof.
And that, I would suggest, is probably a bigger impediment than
the physics in many of these arenas, which is why policy
matters.
Mr. Kavulla, I want to ask you a question with respect to
policy that I am very curious about. In your written testimony,
you suggest the possibility of FERC acting as a backstop for
siting of new interstate transmission power lines.
This is something I have wrestled with for a long time, and
I do think you are correct in that the incentives for the
nation as a whole and the incentives for individual states,
oftentimes, don't match up and that is limiting our ability to
develop transmission, in particular, as well as other energy
projects. One option might be to link eligible projects to
those that have been developed as part of a regional
transmission plan required under FERC's Order 1000. Is that
something that you have thought about, and what are your
opinions on that matter?
Mr. Kavulla. It is, Senator, something that I've spent a
lot of time thinking about and a lot of time that FERC has
spent thinking about as well.
Unfortunately, the ambitions of Order 1000 to encourage
greater regional integration and planning are largely
unfulfilled. FERC, I understand, is thinking about looking at
Order 1000 again. I think it's a worthy consideration for them
to do.
I hope they'll sharp shoot it to particular concerns rather
than trying to reopen the entire book on it, because the hours
of life that many lawyers, myself, others spent trying to
implement Order 1000 are hours that we're not going to get
back. And I'm almost positive that the transaction cost spent
on it overwhelms whatever benefits it may have delivered.
But you know, you can go back to WEX modeling from 10 years
ago for the United States West and see again and again models,
again, taking them for what they're worth, models which
suggested it is overall better for consumers for remotely
sourced renewables to be developed for the urban population
centers, so the Western United States.
Senator Heinrich. Right.
Mr. Kavulla. But we've never been able to get our act
together.
Senator Heinrich. I am running out of time quickly so one
last one for you, Dr. Capuano.
In the past, AEO has always included charts with
projections of economy-wide total carbon emissions. Those
charts seem to be missing from this document. Why were they?
Why did you decide to drop those?
Dr. Capuano. Sorry, I'm not aware that there are charts
missing. In fact, we've included a carbon intensity graph in
our AEO. So, I'm not----
Senator Heinrich. There used to be a total carbon
projection graph that was included along with the base
projection and that doesn't seem to be in this.
Dr. Capuano. Oh, okay, we substituted the intensity graph
because we thought it was more informative for that graph.
Senator Heinrich. Okay.
Well I think total carbon emissions matter, so I would love
to see them both in there.
Dr. Capuano. Thank you.
The Chairman. Thank you, Senator Heinrich.
Senator Cortez Masto.
Senator Cortez Masto. Thank you.
Let me follow up on one discussion on the solar piece
because I think we, as a country--and I so appreciate this
conversation--we have to figure out how we take advantage in
this space, moving forward. We are competing, as we know, with
other countries, China in particular, when it comes to this
space. From my perspective, I am always looking at ways we, at
the federal level, can incentivize, support and move forward.
The technology is constantly changing, and I think there is
technology out there that we are not even thinking about, but
we want to make sure we make it flexible enough for that
innovation.
I'm curious if any of you are familiar with the Crescent
Dunes Solar Energy Facility that is outside of Tonopah? Senator
King had brought it up once before.
Senator King. Is that the one with the mirrors?
Senator Cortez Masto. That is correct.
Are any of you familiar with that?
Mr. Zindler. Molten salt.
Senator Cortez Masto. That is right.
And so, here we have been talking about batteries and
battery storage, but this facility uses molten salt for thermal
storage, and it is connected to our grid in the State of
Nevada. It is a different technique. It is this idea of solar
thermal versus what we have been talking about, which is the
solar PVs.
It is a new technology. It has energy storage. And
something that I know after visiting that site is that they are
also trying to address the environmentally-friendly piece of it
as well.
This is an example of why I say we should not be
restricting any of this innovation. We should be figuring out,
as a country, how we work together to make sure we are
incentivizing and allowing that flexibility, but with the
necessary guard rails that might be there for protection.
I am curious if anybody has any comments?
Mr. Zindler. Just real quick, as luck would have it,
actually last week I was visiting a similar plant in Morocco
where they've just completed in August what's called the Noor
Plant which is similarly, you know, a bunch of mirrors focused
up on a heliostat, boil some fluid then there's molten salt.
It's a spectacular looking project. It has the potential to
provide power into the evening hours. It's still pretty costly
and there's a lot of moving parts and there are risks
associated with solar thermal technologies as a result of that
and there have definitely been some challenges over the last 10
years with getting those projects financed and completed and
operating successfully. But you're exactly right that it has
that potential.
The one thing I would say is, and I mentioned this earlier,
is photovoltaics plus large-scale lithium-ion batteries could
potentially provide some of the similar types of services into
the evening with less moving parts, a little less risk and
potentially lower cost as well, though we'll have to see on the
costs.
Senator Cortez Masto. Thank you.
I am not saying one is better than the other. Believe me,
lithium mining in the State of Nevada and the battery storage
we are looking at, we support that as well. I am just saying,
from the perspective of the federal level, we should be
exploring all of it. We should be figuring out how we allow
that innovation to occur and not really cede this country's
priority and our ability to take the lead around the world in
this space. That, to me, is one of the most important things
that we should be looking at as well.
Thank you.
The Chairman. Thank you, Senator, I certainly agree with
that.
Senator King.
Senator King. [Off-mic]
The Chairman. So just to follow on with the mineral
dependency, Mr. Moores, I really appreciate your testimony,
your focus on that. Mr. Zindler, how you have knitted that in
with the focus on the renewables and our efforts to reduce
emissions.
I recognize that part of our challenge is not just the fact
that we are not accessing the resource here but nowhere within
this supply chain are we really engaged. And somebody used the
terminology, you know, we are absent here.
And what did you say, Mr. Moores, because I actually wrote
it down. ``Those that hold the supply chain will control the
balance of power, but we're basically a U.S. bystander.'' It
kind of reminds me of the view that I think some in this
country and this Administration have of the Arctic. We are
just, kind of, the U.S. is just, kind of, a bystander here. And
we cannot afford to be a bystander when we are looking, really,
at the future here.
So much of this goes back to investment, because if people
are not interested in investing you can have great ideas, you
can have great resources but you, we don't get anywhere.
So I guess this is a question to both you, Mr. Moores, and
Mr. Zindler, whether it is investment in our mineral
opportunities and the multiple stages within that supply chain
or whether it is the investment in the new energy technologies.
Mr. Zindler, you mentioned that worldwide investment in
these new energy technologies is around $332 billion. I am
curious what the breakdown is of the global number in terms of
what comes from the U.S. compared to other countries. Are we
keeping up with the investment level like we see from China?
Let's just talk about investments for a second here.
Mr. Zindler. So just on those numbers, about a third of
investment typically in a given year in clean energy technology
or new energy technologies is usually it's China.
The Chairman. Is coming, is going to China?
Mr. Zindler. Is investment into China and about $65 billion
last year was the U.S. So there's a gap and there has been
pretty consistently over the last three or four years in
particular with China leading just on pure dollars deployed. To
be clear, a lot of that money comes out of China and goes into
China.
The Chairman. Right.
Mr. Zindler. So China development bank, state-owned
enterprises, various domestic companies are plowing money into
their own operations there.
The Chairman. How about investment on the mineral side, Mr.
Moores?
Mr. Moores. Yes, it's a balance of investment in the
incentive to source raw materials in the U.S. Okay, right now
the raw materials to batteries aren't available from the U.S.
So then you have to build the resource base, because it is
present.
But investment globally in battery raw materials is
happening, it's just at present better opportunities of the
tier one opportunities from a resource perspective are not in
the U.S. and that's primarily some of it's down to geology,
some of it's down to the fact it hasn't been much of a mining
industry in the U.S. for a long, long time. And so, at present
the U.S. is almost at the back of the queue for the battery
supply chain.
A good example of how this can work is the Tesla
Gigafactory. So that's a lithium-ion battery plant that Tesla
built with Panasonic in Nevada, and that's a good example of
investment. Tesla put up some money. Panasonic put up some
money. There was state level incentives and that battery plant
can't make enough lithium-ion batteries for the vehicles that
it sells. And so, that's almost, should be a case study for the
EV supply chain within the U.S., and you should be replicating
that time and time again in different states and then also
encouraging the supply chain from the battery up to the mine to
actually build out and build every step and drag in knowledge
from the chemicals industry, from the mining industry. And a
key part of that is the discussion. A key part is hearings like
this that need to continue. We're just at the start.
The problem is China and Japan and Korea, we spend a lot of
time there at Benchmark and it's happening at an incredible
pace the last two years and it would just continue. It will
just get more intense.
The Chairman. It is just such a reminder to me. We have
some pretty good source material in Alaska for rare earth
elements, but our reality is that we are not processing
anything in this country so if we were able to extract it,
where do we send it? To China? Only to get it back here.
So we are looking at a pretty significant pilot in the
sense of being able to do something very different, but it is
pretty small. But again, it is just a reminder that it is more
than just having the resource itself, it is the access, it is
the investment that can allow it to happen. But it is also the
process, it is the workers that are trained. It is, as you
point out, the whole supply chain.
My last question. When I talk about the Arctic and the U.S.
role which, in my view, is still absolutely lacking, but where
we have seen stepped-up interest in the Arctic and pursuing
opportunities is with our neighbor, Russia, who has more than
doubled its LNG exports. And by mid of this year I am told,
they are scheduled to produce 26 million tons of LNG per year.
This is going to be 10 percent of worldwide LNG exports. Two-
thirds of this oil and gas is in the EEZ in the Arctic there,
up in the Yamal Region, primarily.
I guess this is to you, Mr. Book or Dr. Capuano, just
speaking to the Russian investment in the Arctic that we are
seeing, the impact sanctions are having or perhaps not having
on that development, what it means for the world energy
markets. We have hit a little bit on Venezuela and Iran, but
obviously Russia is out there as well. So and then, more broad,
what do you see as the global Arctic energy future?
Mr. Book. Well, Madam Chairman, to the first question, the
Russian supply, you can be of two minds about it. And I think
in the formation of our sanctions we were. On the one hand, we
want to punish Russia for malfeasance in Ukraine. On the other
hand, we don't want to leave global supply short. And so,
there's a structure of the sanctions to, sort of, leave the
existing production alone and go after the future, the frontier
production, the Arctic deep water and shale resources and
technologies that are an investment from the U.S. companies.
And what it's shown is that the vastness of their resource was
such that with the things that they already had they could
continue moving. The Yamal projects were years in the making
and proceeded the implementation of sanctions.
I think that when you look into the difficulty in
sanctioning a country with such a vast resource base, such a
willful disregard for our economic state craft and, to be fair,
even such a large market that depends on that, there's a lot of
challenges in trying to structure something more punitive
without having a deleterious price effect for the world.
There's more power in some of the sanctions that are directed
against Iran because the third-party nexus is in our reach. The
Treasury can get into banks that transact in U.S. dollars on
behalf of Iranian counterparties, and that has helped to, sort
of, augment the effectiveness.
In terms of the Arctic, I think it would be a mistake to
overlook a fifth of the world's petroleum resource, at the
vastness of the opportunity. A lot of the challenge, I think,
is always in investment, finding the fastest return with the
highest degree, the highest probability of success.
And so, a lot of the changes that you have pioneered and
the steps that have been taken are opening up new options. And
I think that we'll really start to see when investor interest
shows that there's going to be dollars put into some of the new
developments that have been opened up in the Arctic where
things can go. The vastness of the resource is not to be
questioned, and I think it would be a mistake to not look for
more oil because we're going to need it.
The Chairman. Dr. Capuano, anything to add?
Dr. Capuano. We look forward to modeling it.
[Laughter.]
The Chairman. Senator Cortez Masto, any final comments?
I want to thank you all. Very informative, very helpful to
start off our new year here on the Committee.
I think, Dr. Capuano, you have used the appropriate term.
This is a transformational time for us in this country. There
is so much going on. It is exciting. It is fluid and perhaps
sometimes difficult to predict because so much is happening as
rapidly as it is.
What we want to try to do here in the Congress, in the
legislative body, is make sure that our policies are as up-to-
date and current as what is happening with the technologies.
And my assessment on that is we are way behind the innovators
out there in terms of policies that keep pace with our modern-
day realities.
Thank you for your guidance as we try to shape our policies
going forward, and thank you for your expertise and the time
that you have given the Committee this morning.
With that, we stand adjourned.
[Whereupon, at 11:48 a.m. the hearing was adjourned.]
APPENDIX MATERIAL SUBMITTED
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