WUEG March 2015 Newsletter

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