WUEG March 2015 Newsletter

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WUEG

March 2014 Newsletter

Solar Grid Storage LLC

Connor Lippincott--Senior Member, Academic Committee

For the second entry in the Sustainable

Startups series, I decided to look at a recently

acquired company working on solar energy

storage, Solar Grid Storage LLC. But first, let’s

take a look at who acquired them. SunEdison’s

March 5th acquisition of the Philadelphiabased

company made SunEdison “the first

renewable energy company to offer solar, wind

and energy storage.” They had previously

acquired First Wind, a company which

specialized in wind energy. By the end of the

year, they hope to have 2,300 MW capacity of

solar and wind energy projects. For

comparison, Exelon reached 35,137 MW in

total capacity and about 1,660 MW solar and

wind capacity in 2013.

The Solar Grid Storage acquisition is one of the

first big moves in a growing solar energy

storage field. However, using batteries to store

solar energy is not a new concept. For most of

the 1970s to the 90s, battery storage of solar

energy was the norm. Once California began

to incentivize solar energy being connected to

the grid in 1996, the prevalence of batteries

began to subside. Now, only 1 percent of solar

installations include battery storage.

Solar Grid Storage LLC looks to change that.

Their technology works in tandem with the

grid, allowing a PV system to have backup

power during outages and to meet demand

during peak energy times. Their projects range

from 150 kW to 10 MW, meeting commercial

demands rather than residential, which would

only require up to 10 kW. Solar Grid Storage

actually owns and operates the inverter and

battery and makes money by providing

services to the grid. Their technology also

prevents the PV developers from having to pay

for a solar inverter, as that cost is shared by

both parties.

Solar Grid Storage currently has four projects

completed with five more in negotiations

throughout the eastern coast. However, there

is still much more potential for this technology.

The number of PV systems in the country is

skyrocketing, yet the number of PV systems

with storage numbers only in the dozens. This

number will continue to rise with the continued

drop in lithium-ion battery technology and as

more companies sign on. Elon Musk recently

announced that Tesla was working on a solar

storage option for individual residences.


However, there is some concern about the

effect of solar-storage systems as the primary

energy sources. These residences could in

theory become completely independent of the

grid. Although this may sound appealing to

some, the overall effect on our energy system

would be negative. Having a connected grid

still is necessary. If the technology is used in

tandem with the grid, it becomes a positive.

This is why Solar Grid Storage is able to make

money, as energy providers not only get their

services but also allow them to keep customers

on the grid.

People seem excited about the solar and

storage option, with Solar Grid Storage

winning multiple awards in the months leading

up to their acquisition. The technology will

continue to improve, and will definitely be a

part of the energy system going forward.

Sources:

SolarGrid Storage

Clean Technica

Greentech Media

Cap-and-Trade in Europe: Getting It Right

Charlie Gallagher – VP, Academic Committee

The European Union Emissions Trading

Scheme (EU ETS) is a cap-and-trade system,

which 'caps' the total amount of carbon

emitted and requires that firms exceeding

individual limits purchase—or 'trade'—credits

from other firms who have extra carbon

emissions to sell. In other words, the European

Commission sets a desired level of total carbon

dioxide emissions for the year (and for each

firm)—a level that will not be surpassed. If, for

example, a coal power plant wants to emit one

ton of CO 2 beyond the level designated for

them, another firm must not emit (abate) one

ton of CO 2, so the net effect is zero. The power

plant can achieve this net zero effect by

purchasing a credit on the EU ETS market, and

the company that cuts their ton of CO 2 can

make a profit by selling a credit in this market.

Thus, firms that can cut their emissions more

cheaply can sell credits to those firms that

would rather buy a credit than incur the costs

of abatement. Politically and economically, this

is a popular alternative to a carbon tax, which is

simply a $-per-ton price on any CO 2 emissions.

Theoretically, the two policies achieve the

same two results: there is less carbon in the

atmosphere, and any product or service that

emits carbon becomes more expensive.

In theory, the price of the credit should reflect

the ‘social cost’ of that ton of carbon in the

atmosphere, such as acid rain lowering crop

yield or the medical costs of treating a patient

with lung disease in Beijing. However, the EU

ETS has had less-than-optimal results so far, as

over-allocation of free allowances—permits

distributed by the government to allow firms to

emit for free—has caused an over-supply and

thus a low price for these credits.

In an effort to amend the system and ensure a

proper price of emissions credits, the

European Parliament voted earlier this month

to introduce a Market Stability Reserve. Under


this mechanism, the EU would remove free

allowances from the market (lowering supply)

when there are too many in the market and put

them in a ‘reserve,’ or bank. When there are

too few and the credits are trading at too high

a price, the EU will take carbon credits from the

reserve and inject them in the market

(increasing supply), thus lowering the price.

Through regulatory control of supply, the

market should more accurately reflect the true

cost of carbon emissions. This program plans

to roll out in 2018, and with luck, a worldwide

cap-and-trade system will follow in the years to

come.

Sources:

The European Parliament

Interfax Global Energy

Oil Prices Will Rise by Year’s End

Max Isenberg – senior member, Academic Committee

The extended fall in oil prices has many

clambering that this rop represents a paradigm

shift in commodity pricing and that prices will

remain low if not fall further through the end of

the year. However, despite the lack of a

rebound so far in 2015, by the year’s end, oil

could make up much of its loss since

November, returning more than halfway to

$100 oil from the WTI bottom around $40.

The price of oil will be ultimately driven by

changes in supply and demand, and the low

prices will necessarily force an equilibration.

Recent reports from American shale

production sources have shown large declines

in rig count (6% of total capacity coming off

line in the span of a single week). While it’s true

that the wells that are being shut off first are

the most marginal and least profitable ones,

the quick drop off in production from wells

means that in the medium term, rig count

drops will start squeezing supply as the

remaining wells start to decline. Additionally,

continued unrest in Iraq and the Middle East

has left some supply unreliable and thus a drag

on production.

On the other side of the equilibrium equation

is demand. With prices lower, one would

expect consumption to increase, even of

staples which have relatively inelastic demand.

Indeed, a spike in demand did occur, as

consumption increased by over 1 million

barrels in February, reducing the size of the

monthly surplus in production by two-thirds.

While there is still an oversupply of oil, the rate

by which this oversupply is growing is slowing

and, by year’s end, can be expected to reverse,

allowing prices to once again rise.

Additionally, the US Federal Highway

Administration released driving data for the

month of December, the first full month after

the price collapse, with a new record number

of vehicle miles traveled. Finally on the

demand side, sales of SUVs increased by 5% in

February over the previous year. Though not

the gas guzzlers of the past, light trucks still

consume much more fuel than sedans and are

becoming increasingly popular with the recent


drop in gas prices. With more trucks on the

road, more gas will need will be inevitably

demanded. Along with poor weather in the

Eastern US and steady growth in Chinese and

Middle Eastern demand, the price has

significant upward pressures.

Finally, much has been made of storage

shortages in Cushing, Oklahoma. The thinking

goes that should shortage run out, oil will be

sold in a fire-sale as producers will do anything

to get rid of their unstorable product. While

the local storage around Cushing (desirable for

its close proximity to the oil hub) may fill, oil

remains a global commodity, and so the price

will not be greatly affected as long as global

storage remains available, which is the case.

Also, there is nothing stopping storage from

coming online in the next several months to

help store even more inventory.

While $100 WTI may not be around the corner

for perhaps years to come, a meaningful

rebound of oil prices to $70 this year seems in

order. High cost production such as in

American shale deposits will necessarily come

offline as wildcatters find it increasingly

uneconomical to produce. Demand has

already surged and will continue to increase to

help soak up the glut of oil, driving prices up.

While storage may be scarce in the short term

in particular locations, the potential for a fire

sale remains distant.

Sources:

Yahoo! Finance

OilPrice.com

Wall Street Journal

Bloomberg

Oil Prices Will Remain At Current Levels

Sheetal Akole – Senior member, Academic Committee

After reaching a peak of over $105 per barrel in

June 2014, WTI Crude Oil prices have been

dropping rapidly, with the price currently less

than half of its peak. Increasing oil supplies

have contributed greatly to this drop in prices,

especially as production in the United States

has nearly doubled over the last six years.

Looking forward, there is no indication of

prices increasing by much in the short term, let

alone reaching the highs of 2014. Instead, we

will see an L-shaped recovery of oil prices,

where they will continue to fluctuate between

$40 and $55 per barrel in the short term.

OPEC’s decision to not reduce production in

November was the first indicator of these short

term prices – by continuing current production,

they continued to add to the global supply

glut, driving prices further down. Despite

OPEC’s refusal to cut back production, global

production, and especially production in the

United States, was expected to fall, as it was no

longer as profitable to produce oil. While we

have seen the number of oil rigs currently

producing crude in the United States fall

dramatically over the last few months, this

reduction of oil rigs has only affected

production capacity, leaving actual output

relatively unchanged. In fact, the United States

oil production has been steadily increasing

recently. Supplies in the United States rose to


the highest levels on record, and the U.S.

Energy Information Administration announced

in its weekly report that U.S. crude oil

inventories rose by 8.2 million barrels in the

week ended March 20th, compared to an

expected 5.2 million barrel increase. With no

signs of a decrease in global oil production,

fears of an increase in the glut have

exacerbated, and oil prices remain low.

However, the main factor that will continue to

keep oil prices low over the next few years will

be the dominance of shale oil, making up

about half of total U.S. output, and 5% of

global output. Shale has both low barriers to

entry and barriers to exit, making shale

producers extremely flexible and responsive to

changes in crude oil prices. A shale well only

takes several million dollars and a few weeks to

extract oil and gas, compared to as long as 10

years and billions of dollars for offshore wells.

Thus, shale producers can quickly cut back

costs (and production) in a downturn, and

increase output at the slightest positive change

in prices.

Ongoing negotiations between Iran, the

United States, and others could also have a

significant impact on future oil prices. Relaxing

the sanctions against Iran could further drive

down global oil prices and increase the glut.

Iran has almost 10% of the world’s proven

reserves, but the sanctions have made it

difficult for Iran to attract the foreign

investment needed to extract the oil from the

ground, and sanctions on Iranian shipping have

also made it difficult for Iran to grow the

industry. Despite this, The British tanker

company Gibson’s estimates Iran has about 37

million barrels of oil ready for immediate

export. Lifting the sanctions would allow

investment to flood into the country and oil to

pour out of the country.

Oil demand has also been growing slower than

usual, with demand in developed countries

such as the United States falling due to

increased efficiency and weakening

economies. China, who has been the main

driver of the oil demand growth over the past

few years, has also experienced weakening

demand. India’s oil demand doesn’t seem to

be strong enough in terms of absolute barrels

to replace China’s demand, albeit strong

growth in demand and encouraging policies.

The combination of no visible decline in global

oil supplies in the near future and tepid oil

demand indicate there won’t be a strong

recovery in oil prices for the next few years.

Sources:

Wall Street Journal

Vox

Statista

Bloomberg

The Binary Response of Shale to Oil Prices

Arthur Chen – senior member, Academic Committee

The precipitous decline in crude oil prices

worldwide has sent ripples across the

economic landscape, but the effects of $40 oil

has been felt more strongly by no one other

than oil and natural gas producers here in the

US. However, the response has not been

unified in one direction or another.

Some oil and natural gas producers are putting

the farm for sale, so to speak, and beginning to

auction off some of their most valuable assets


in their pipelines and processing plants. With

oil prices falling - and with no end in sight -

producers have been forced to sell pipes and

plants for some quick cash in order to stay in

the black (on top of layoffs and spending cuts).

One such deal involved Canadian gas giant

Encana Corp., who solds its Bakken pipeline

network for $3 billion to Kinder Morgan last

month. Back in December, Encana also sold

gas pipelines and plants in Western Canada’s

Montney shale region for a sum of $328 million.

Other companies that have done the same

include Royal Dutch Shell and Devon Energy.

Meanwhile, fellow producer Pioneer Natural

Resources is seeking a similar deal for its Eagle

Ford shale interests for an expected sale price

of over $3 billion.

Conversely, some shale producers are

continuing to pump the black gold out of the

ground, with the US shale oil industry as a

whole pushing output to 30-year highs and

contributing to stockpiles that are at their

largest since tracking first began in 2004. It

appears at first to go against business sense to

do so with oil prices where they are, but

studies suggest that doing otherwise would

leave the producers severely in debt.

Many in the industry have borrowed to risky

levels of leverage, at more than three times

operating profits. From a paper by derivatives

expert Satyajit Das, if firms don’t meet existing

debt commitments, then the resulting

decrease in available funding and higher costs

as debt markets close for these firms will create

a negative spiral. Inability to borrow sharply

reduces production capacity, and this lower

production combined with low prices reduces

cash flows to the point of possible default.

Another study out of the Bank of International

Settlements similarly revealed that American

oil companies have developed quite the

appetite for debt, with capital expenditures far

exceeding cash flow. Thus, “highly leveraged

producers may attempt to maintain, or even

increase, output levels even as the oil prices

falls in order to remain liquid and to meet

interest payments and tighter credit

conditions.”

But the US isn’t the only country where shale

producers are continuing to pump at a loss.

Russia’s Rosneft and Brazil’s Petrobras are also

overleveraged due to annual increases in

borrowing by 13 percent in Russia, 25 percent

in Brazil, and 31 percent in China. However,

these companies have a distinct advantage in

that they are all government-backed, so their

financing needs are met by treasury or

sovereign funds.

Most forecasts for oil prices have crude staying

fairly low for the near future, with futures

markets as of writing putting WTI prices sub-

$60 through December 2016. Therefore, one

can expect both trends to continue as long as

the market stays constrained. However, with

the furious activity in the industry that has

taken place, there may be a breaking point

approaching where companies reach some

sort of new normal where $50 oil is the

benchmark, at least until oil’s next big move.

Sources:

Bloomberg

Economonitor


CFL - an Amazing Investment

Josh Haghani – Senior members, Academic Committee

By replacing incandescent light bulbs with

compact fluorescent lights (CFLs), a 476% taxfree

annual return can be achieved. The EIA

estimated that in 2012, 461 billion kWh were

used to light both U.S. residential and

commercial sectors. Lights amounted to 17%

of total electricity consumption for the

residential and commercial sectors, and an

amazing 12% of total U.S. electricity

consumption. A typical incandescent light bulb

produces 1,600 lumens using 100 watts, while

standard CFLs produces the same 1,600

lumens using only 23 watts.[ii] By implementing

CFLs instead of incandescent light bulbs, a

77% energy saving can be achieved. An

average household can save 13.09% of their

electricity bill by switching to the more efficient

CFLs. Total U.S. electricity consumption could

be reduced by 9.24%, while giving consumers

an annual tax-free return of 476%.

Without taking into consideration the energy

efficiency of CFLs, incandescent lights are still

more expensive in the long run because

incandescent light bulbs have a shorter

expected lifetime. Richard A. Muller, in his

book Energy For Future Presidents, explains

“A tungsten bulb lasts typically 1,500 hours…

that means that over the 10,000 hour lifetime of

the CFL, you would have to buy more than six

ordinary bulbs at a total cost over $2.”

However, for my calculations I will give CFLs a

handicap and only use the greater efficiency to

calculate the annual return a consumer would

achieve by switching to CFLs. I will compare a

1,600 lumens, 26-watt Longstar brand CFL

costing $3.89, to a 1,600 lumens, 100 watt GE

brand incandescent light bulb costing $0.83.

For my calculations I used 5 hours a day of

typical light use, and $0.11 per kWh.

Effective interest rate = (100%/payback period)

= 476%

Try earning a 476% return with any other

investment!

Sources:

Energy Information Administration

Home Depot

Energy for Future Presidents

Bulbs.com

Amazon

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