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EIA Annual Energy Outlook: Takeaway #4

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This article is the final installment of a four-part series covering the Annual Energy Outlook from the United States Energy Information Administration (EIA). The 2018 edition covers predictions through 2050, offering insights for energy decision makers.

4 Takeaways 

The 2018 Energy Outlook offers four key takeaways:

  1. Net Exports

  2. Increased Efficiencies

  3. Production Growth

  4. Generation Capacity

In the first two, we covered how in most projections, the United States will become a net energy exporter in the next few years, what stagnant energy demand might mean for large businesses and the implications of continued domestic liquids and natural gas production. In the last post of the series, we will examine why most new electricity generation capacity will come from natural gas and renewables, and what that means for your business.

The Basics of Generation Capacity and What it Means for Power Forecasting

Electricity is a key component of global energy markets. It’s so critical, in fact, that the Energy Information Administration's 2018 Annual Energy Outlook devotes an entire section to electricity forecasts. 

How do experts forecast prices? By looking at the collective generation capacity and capacity factor of power plants. 

Generation capacity represents the maximum amount of energy a plant can produce. Capacity factor indicates reliability and efficiency, or how often a plant actually runs at maximum capacity. 

For example, of over eight thousand power plants in the United States, only about 60 of them are nuclear plants. But because nuclear plants have an extremely high capacity factor – usually 90 percent or greater – they actually supply approximately 20 percent of the country’s energy. 

The difference between capacity and actual production is important to forecasters. Actual production statistics help calculate energy imports and exports, but capacity, as a measure of potential output, tends to be a better indicator for long term opportunity and future investments.

How Natural Gas and Renewables are Taking Over Capacity Generation

One of the Outlook’s central projections is that natural gas and renewable energy sources will become primary domestic sources for electricity generation capacity starting in 2022. Electricity demand is projected to grow at just under one percent through 2050, thanks in large part to steady economic expansion.

The majority of new demand will be met with gas and renewables. Nuclear power, on the other hand, is projected to be a major loser. While global nuclear capacity may continue rising until 2040, nuclear power is becoming increasingly noncompetitive in the United States compared to other sources. Coupled with a continued decline in coal capacity, and the domestic stage is set for natural gas and renewables. 

Policy Influences on Electricity Capacity

Government influence may be the single biggest factor affecting electricity generation in the near and long-term future. Take tax credits for example:

“Federal tax credits trim the cost of solar by 30 percent. Five million U.S. homes are now powered by solar; that is expected to double with projects now under contract, and many more are in planning stages, the association reports. Wind power also has benefited from federal tax credits. The U.S. now produces enough wind energy to power about 17.5 million U.S. homes, said the American Wind Energy Association.”

The EIA cites one example in which the Clean Power Plan (which currently faces an uncertain future and was therefore not included in the reference case) upsets the entire energy landscape, touching everything from renewable capacity to the prices of energy sources. On the other hand, plans like the recently announced subsidy of coal and nuclear power could once again shift the focus away from renewables and toward traditional energy sources.

Low Natural Gas Prices Drive Capacity 

In addition to policy changes, natural gas prices are sure to drive competition in the electricity market. The EIA reports:

“Coal-fired generating capacity decreases by an additional 65 GW between 2017 and 2030 as a result of competitively priced natural gas and increasing renewables generation, before leveling off near 190 GW in the Reference case through 2050.”

The same is true of nuclear capacity retirements, which tend to accelerate as natural gas prices drop. 

The Dropping Costs of Renewable Production

Renewable energy is becoming the dominant power source for two reasons:

  1. Businesses and individuals are becoming more sustainable and energy efficient

  2. Renewables are becoming more affordable 

If we take a high-level view, the dropping cost of renewables makes perfect sense. Renewables are still a growing industry, while coal, nuclear, and even gas are all mature or declining. Renewables can still benefit from significant technology advances, while the latter depend on potentially diminishing resources. Every single reference case from the EIA projects growth in renewable electricity generation, even in cases of lower-than-expected demand, few technological advances or low natural gas prices. 

Business Lessons in Electricity Capacity

The rise in energy choice programs in deregulated states has made it especially important for businesses to plan purchases not just in terms of volume, but also source.

Renewables are set to play a key role in electricity markets for years to come. Natural gas shows promise as a major player, as well. Powering your business with either one may be a sound choice now and in the future.

Studies show tangible benefits to investing in renewables, especially for organizations with complex energy needs. The same tends to be true for natural gas, typically due to advantages of low prices. Business leaders who understand the potential for growth in these energy sources will invest early and see benefits in the long term.

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Posted: July 12, 2018

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