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The second path leads to a very different future. Along this path, California’s needs are met through increased energy efficiency, demand response, and renewable energy resources such as wind, geothermal, biomass, solar, and ocean energy – resources that are plentiful in this state. While large investments will be required for the necessary infrastructure, issues such as air pollution, climate change and volatile electricity and natural gas prices become minor or even irrelevant under this path. The “fuel” for energy efficiency and renewable sources of energy will not change in price, providing additional certainty for future economic planning and growth. Moreover, the capital costs for these technologies will only continue to come down as they are adopted more widely. And in a post-9/11 world, decentralized, and non-fuel burning, power plants such as wind turbines and solar panels will be much less attractive targets for terrorists.
California is poised to continue down the first path if it approves the building of proposed import terminals to receive liquefied natural gas (LNG) from foreign sources. Unfortunately, state and federal policymakers seem to consider approval of one or more of these proposed LNG terminals a fait accompli. National and state agencies have drawn attention to the worsening state of natural gas supplies in the U.S. and California, which has caught the attention of elected officials, other policymakers, energy providers, and consumers.
However, the lack of a robust debate over the need for LNG import terminals in California has created a serious blind spot in the state’s energy policy. In fact, program managers within the California Energy Commission – the agency responsible for gathering natural gas information in California and monitoring the success of California’s renewable energy programs – admit that there has not been a serious discussion between the Energy Commission’s natural gas and renewable energy departments on this issue. There has been no consideration of the effect that LNG import terminals would have on meeting California’s stated energy preferences: renewable energy and energy efficiency. Nor has there been sufficient consideration of how increased renewable energy and energy efficiency would affect natural gas prices in California.
Many industry advocates and state and federal policymakers believe California needs LNG, but a quick analysis of the numbers tells a different story:
Californians currently use 6.33 billion cubic feet of natural gas a day to heat our homes and run our power plants. The state Energy Commission projects that by 2016 that number will rise to 6.68 billion cubic feet per day. We need, therefore, to find an additional 355 million cubic feet of natural gas per day in the next decade – or its equivalent.
In California, about half of our power plants use natural gas to generate electricity – which can be generated by other energy sources, such as geothermal, wind and solar power. The balance is used for heating, cooking and industry. Natural gas for electricity generation and residential end use constitute the large majority of natural gas demand increases, so instead of trying to find a source for 355 million cubic feet per day of natural gas in the next 10 years, we can substitute its equivalent: about 38,000 gigawatt hours of electricity and/or conservation measures per year.
California law requires that 20 percent of our electricity come from renewable resources by 2010 -- about 55,000 gigawatt hours per year. This amount is included in the Energy Commission’s assumptions about natural gas demand, which form the basis for most conclusions that LNG import terminals are needed in California. However, the California Public Utilities Commission recently commissioned a report finding that a 33 percent renewable portfolio standard by 2020 is feasible. Governor Schwarzenegger has actively supported this more ambitious goal, as does the state’s 2005 Energy Action Plan, endorsed by the state’s major energy agencies. Also, the state legislature is currently considering SB 107, a law that will formally increase the goal to 33 percent by 2020. If adopted, this would provide about 33,000 gigawatt hours (GWh) of additional generation by 2016, almost as much as the additional natural gas demand projected by 2016 (38,000 GWh). This amount of new renewable generation is not included in the Energy Commission’s natural gas demand projections.
Conservation and energy efficiency measures can also significantly reduce the need for additional natural gas. California’s investor-owned utilities recently received $2 billion in state funding to achieve $5 billion in energy efficiency savings, equivalent to almost 11,000 GWh a year through 2008. The state also plans to save an additional 12,000 GWh per year by 2013.
Under these existing mandates and goals, we will more than offset future energy demand just by following the path that the state and the utilities already have in place. When we consider the full realistic potential for renewables and energy efficiency, our conclusion is reaffirmed many times over.
Our analysis shows that renewables and energy efficiency could produce 133 percent to 381 percent of the projected additional gas demand by 2016.
Some policy advocates argue that renewable energy resources will take more time than anticipated to come on line, despite existing mandates and goals, and that in the meantime California should hedge its bets by continuing to secure new supplies, treating natural gas as a “bridge fuel.”
However, this argument overlooks the projected increase in domestic natural gas supplies, the 16 new LNG import terminals already approved by regulators elsewhere in the U.S. (13) and Baja California (3), as well as plans for gas pipelines from Canada and Alaska – all of which could funnel more natural gas our way if needed. It also overlooks the fact that there is no guarantee that the LNG imported to California through the proposed terminals would stay in California. The gas will, through market forces, be sold to the highest bidder, whether or not the bidder is in California.
Perhaps most importantly, this argument also overlooks the possibility that investing so heavily in LNG import terminals could endanger the future road for renewables by diverting attention – and investments – from renewables and energy efficiency and contravening the state’s official policy of preferring energy efficiency and renewable energy over other sources.
Regarding safety issues stemming from LNG terminals, anytime you concentrate a fuel and put it near or in the ocean, there are of course concerns about safety and environmental protection. We do not focus on those concerns in this paper, as they have been addressed adequately by others. But safety and environmental concerns aside, our analysis shows that building LNG terminals simply isn’t necessary.
This report looks critically at natural gas supply and consumption projections and concludes that California’s energy efficiency and renewable energy mandates could readily meet expected additional natural gas demand and, therefore, eliminate the need for LNG import terminals along our coast. The following chart and table outline how.
MORE FOSSIL FUEL USE AND “BUSINESS AS USUAL” IS BAD FOR CALIFORNIA
Liquefied Natural Gas (LNG) is natural gas that has been cooled to the point where it becomes a liquid, making it easier to transport. In California, four energy companies have current proposals for constructing LNG import terminals, two of which would be on the South Coast. One is planned for a site about 14 miles offshore from Oxnard by BHP Billiton, an Australian energy company. The other has been proposed for Platform Grace, a retired oilrig off of Ventura, by Houston-based Crystal Energy. A third terminal, which would not include a gasification facility, has been proposed 22 miles offshore from Malibu, by Australia’s Woodside Energy. A fourth proposal for a terminal in the Port of Long Beach was put forward by Sound Energy Solutions, a partnership between Chevron and Mitsubishi. In addition, 16 new LNG import terminals have already been approved by federal regulators elsewhere in the U.S. and Baja California, many of which will likely be built. One Baja terminal is currently under construction by Sempra, Inc., a San Diego-based company. It was originally approved as a one billion cubic feet per day facility, but Sempra recently requested an expansion to 2.5 billion cubic feet per day – enough natural gas to satisfy almost one half of California’s needs.
Why do some policymakers advocate LNG?
Why are so many LNG terminals being proposed – with state and federal policymakers largely supportive of these proposals thus far? On the surface, it seems to be an issue of simple supply and demand.
The California Energy Commission projects a 0.55 percent annual growth rate in natural gas demand between 2006 and 2016, while natural gas production in California is expected to remain flat or decline. With demand growing from 6.33 billion cubic feet per day (cf/d) in 2006 to 6.68 billion cf/d by 2016, California needs to plan for an increase in natural gas demand – or its equivalent – of 355 million cf/d by 2016.
The core question is how to best meet this increased demand. Increasing California production would be one place to look; however, the California Energy Commission paints a bleak picture:
California’s dependence on imports will increase, because in-state natural gas production is slowly declining and only meets 15 percent of the state’s total natural gas demand. Total U.S. production from conventional sources has flattened despite increases in drilling and wellhead prices. Canada’s natural gas production statistics indicate similar resource depletion trends. Remaining North American natural gas supplies will be more costly, because the less expensive resources have already been produced.
However, U.S. domestic production of natural gas, outside of California, is projected to increase through 2016 (the temporal extent of the Commission’s projections), according to the Energy Commission, which stated in its most recent natural gas assessment:
Natural gas production from the Lower 48 is expected to increase by about 1.6 percent per year. Imports of Canadian supplies are expected to decrease over the same period at an annual average rate of 2.3 percent even though the MacKenzie Delta supplies show significant potential and could provide about 0.8 trillion cubic feet per year to Canadian markets if regulatory approval is obtained.
The 1.6 percent increase in domestic supplies will far outweigh the 2.3 percent decrease in Canadian imports because imports are a small fraction of the United States’ total use. The Energy Commission also discusses the impact on California’s gas supplies from proposed Alaskan natural gas pipelines – and LNG – but fails to make any conclusions regarding the need for LNG terminals in light of projected increases in domestic natural gas production and LNG import terminals constructed elsewhere in North America.
Accordingly, it is not very clear what has motivated state and federal policymakers to advocate LNG as a solution to our energy needs – if we are looking at supply and demand projections from the most pertinent state agency for California. We discuss natural gas supplies from domestic U.S. sources, Alaska and Canada, in more detail below, subsequent to our discussion of the potential for renewable energy and energy efficiency to meet future natural gas demand.
What’s wrong with this picture?
The conclusion that flat or declining California production requires building LNG import terminals in California fails to take into account several key points, in addition to those mentioned above.
First, the California terminals would far exceed the 355 million cf/d of LNG needed in the next decade – with each terminal capable of funneling 800 million to one billion cf/d. The infrastructure created could lock California and other states served by the terminals into natural gas generated electricity for decades to come and give a false sense of comfort, making it difficult to pursue other, more preferable, options such as renewables and energy efficiency.
Second, the California Energy Commission’s projections do not include all of the state’s plans, from the California Public Utilities Commission (CPUC) and other state departments, to reduce energy demand through funded demand response and energy efficiency programs, (which have reduced statewide power equivalent to twenty 500 MW power plants since 1975 ), as well as plans for generating more energy from renewable sources. The Energy Commission’s projections do include the CPUC’s energy efficiency programs through 2008, but do not include additional targets through 2013 or later. Similarly, the projections do include the 20 percent Renewable Portfolio Standard (RPS) by 2010, but not the 33 percent RPS by 2020 that has been called for by the Governor, the state’s 2005 Energy Action Plan, and SB 107. Nor do the projections include Governor Schwarzenegger’s mandate that all state-owned buildings reduce energy demand by 20 percent by 2015, or his strong encouragement that non-state owned buildings meet the same goal.
Third, the state has made it clear that energy efficiency, demand response, and renewable energy generation are preferred over additional fossil fuel generation. The state’s Energy Action Plan II (2005), a document jointly produced by the Energy Commission, the CPUC, and the Independent System Operator (an independent agency that manages California’s electricity grid) states, in no unclear terms:
The loading order identifies energy efficiency and demand response as the State’s preferred means of meeting growing energy needs. After cost-effective efficiency and demand response, we rely on renewable sources of power and distributed generation, such as combined heat and power applications. To the extent efficiency, demand response, renewable resources, and distributed generation are unable to satisfy increasing energy and capacity needs, we support clean and efficient fossil-fired generation.
Demonstrating the seriousness of this loading order, the CPUC recently approved $2 billion for energy efficiency and demand response programs for the state’s largest three utilities, expected to save $5 billion for consumers and eliminate the need to build three large power plants.
Fourth, some California cities will likely increase energy efficiency targets and markets for renewables even further through implementation of the Community Choice Aggregation law (AB 117). This permits cities to aggregate the electric loads of residents, businesses and municipal facilities, allowing cities to negotiate better rates on behalf of their constituents and/or to purchase renewable electricity in higher amounts than would otherwise be the case. Aggregation may also create business opportunities for renewable energy, energy efficiency and conservation by providing new markets for these services. Over 20 local governments examining Community Choice Aggregation in California have adopted an RPS target of 40 percent by 2017 as a pre-condition for obtaining a low-cost feasibility study, making it likely that aggregation will lead to a higher level of renewables than without.
These areas -- energy efficiency and conservation goals, the Renewable Portfolio Standard, and community choice aggregation -- will greatly reduce the demand for traditional forms of electricity generation, particularly natural gas-fired generation, as well as demand for natural gas for heating and cooking.
Energy policy by default
The pie is only so big for electricity demand – and emphasizing one type of generation over another will necessarily lead to less from other types of generation. In this case, the state is emphasizing both LNG and renewables and energy efficiency, leading inevitably to competition at some level, for policy attention, investments, and public awareness.
As mentioned, the state’s Energy Action Plan explicitly calls for energy efficiency, demand response and renewable energy to be the first three items in the state’s “loading order,” specifying what energy sources are to be preferred. Natural gas supply is number six in the loading order. Rather than focusing on natural gas for new electricity and natural gas demand, the state should follow its stated loading order and emphasize the fact that renewable energy and energy efficiency, under existing goals, can meet future energy demand without additional natural gas supplies.
Since renewable energy and energy efficiency are the officially preferred options, the need for LNG in California should be fully examined because of its potentially detrimental impact on meeting the state’s renewable energy and energy efficiency goals and because it is a less desirable fuel source from an environmental and energy security perspective.
Unfortunately, no such examination has been performed by any of the state’s energy agencies. Despite this fact, in September of 2004, the CPUC tacitly approved LNG as an option for California. In its decision, D.04-09-0922, the CPUC states:
[T]oday’s decision authorizes the gas utilities to release upcoming capacity contracts that are expiring so long as they fulfill the requirements of meeting their core procurement needs as discussed in this decision. [Southern California] Edison is granted the same authority so that it can take advantage of opportunities to better fulfill its gas procurement needs for electric generation.
This statement, and the decision as a whole, set the gears in motion to provide customers for proposed LNG import terminals, by endorsing LNG as a fuel source for California in theory – without actually endorsing any particular LNG project (which was not at issue in the decision):
[W]e point out that we are not deciding in this decision whether certain proposed LNG projects should be built in California, or on the West Coast. Instead, today’s decision is only addressing what needs to be in place for potential sources of LNG supply to connect to the gas transmission and distribution systems of the California gas utilities. Such an analysis furthers the Energy Action Plan’s goal of ensuring that California has a reliable supply of reasonably priced natural gas.
The Commission also states that it “discussed [in D.04-09-022] how diverse gas supplies, including potential sources of LNG, can benefit California.” The discussion in the decision is, however, cursory at best and does not even mention the detailed analysis provided by the California Energy Commission in its 2003 Public Interest Energy Strategies Report and other official documents regarding the potential of energy efficiency and new renewables to meet future demand instead of new natural gas supplies.
The Commission also states, on this issue:
The focus of this proceeding is to ensure that policies and rules are in place to ensure long-term supplies of gas. The focus of the [previously] mentioned rulemaking proceedings has been energy efficiency and renewable energy programs. It would be duplicative for this [rulemaking] to address the additional energy efficiency and renewable energy concerns raised in this proceeding. We therefore decline to address those concerns in this proceeding.
A similar argument has been made by many LNG proponents, an argument which ignores the fact that LNG import terminals in our state will likely be detrimental to achieving the state’s goals for energy efficiency and renewables (the preferred energy sources). Accordingly, an examination of the effect of LNG on achieving the state’s preferred energy policies should be conducted, instead of cursorily dismissed as a concern.
As Ratepayers for Affordable Clean Energy (RACE) noted in a brief in their lawsuit against the CPUC, for violating its own rules in the proceeding that produced the decision: the CPUC “failed to conduct a single evidentiary hearing on LNG’s safety, quality, cost, alternatives, or environmental impacts, or on the need to rely on LNG as a fuel source given the availability of domestic natural gas.” This matter is still pending court resolution.
It is due to the lack of any comprehensive review of the need for LNG in California that a bill, SB 426 (Simitian), was proposed in 2005, requiring that the Energy Commission conduct a detailed “needs assessment” for LNG, and a ranking of existing LNG proposals, should a need be found for one or more terminals. This bill is pending in the Legislature as of March, 2006 and is expected to be voted upon in July of 2006, and if not vetoed by the Governor would come into effect January 1, 2007. Because of time that will elapse before the passage of this bill, if it does pass, which seems unlikely given the Governor’s strong support for LNG, it is imperative that the Energy Commission and other appropriate entities look at these issues prior to deciding on any of the pending project applications in California.
In short, the Public Utilities Commission set the state policy gears in motion for construction of LNG import terminals in California after a relatively cursory examination of whether LNG is actually needed in the state, now or at any point in the future. The decision issued without an examination of the effect of LNG terminals in our state on meeting the preferred energy options: renewables and energy efficiency.
Part 2 of this article will be published tomorrow on EnergyPulse.
