Any surviving illusion that the US energy industry can remain static without dramatic adaptation to new and unexpected circumstances has been displaced by recent developments. The domestic energy sector today is faced with a host of challenges, including rising costs, coupled with flat consumer demand; a deteriorating infrastructure that is highly vulnerable to physical attack, cyber threats and extreme weather; the introduction of disruptive technologies, outpacing the ability of traditional companies to adapt; cost-saving efficiency measures cutting into bottom lines; water scarcity; on-again-off-again renewable energy policies; and the urgent need to address an aging workforce.
Major trends in the US energy sector have always been driven primarily by fuel availability and by policy/regulatory decisions. This is still true today. However a number of transformative and disruptive "game changers" have emerged recently that are that are fundamentally altering how we approach energy production and use.
Shale gas revolution
The development of domestic shale gas resources has had the single most transformative impact on the US energy sector in recent memory. Just a few years ago, we operated in a paradigm of energy scarcity. Gas prices were highly volatile as domestic production declined. The Federal Energy Regulatory Commission was flooded with applications to construct liquefied natural gas import facilities; the benefits of "clean coal" were touted; wind farms began to spring up across the nation; and federal legislative and agency initiatives set the scene for what we thought would be a nuclear energy "renaissance". Then, quite unexpectedly, the use of a long-standing oil and gas production technique known as hydraulic fracturing, combined with new horizontal drilling technology, allowed the country to unlock natural gas resources that were previously thought to be unrecoverable. This set off an energy boom unlike any the US had ever experienced.
In a very short time, an abundance of cheap, domestic natural gas has redefined the US electric generating sector. With only a few exceptions, gas has brought nuclear development in the US to near standstill. Gas has prompted a decline of coal new builds and retrofits in favor of combined cycle gas turbines (CCGTs), and has done more in the past few years to decarbonize the US generation fleet than tighter environmental regulations, notwithstanding complaints from the coal industry that EPA regulations are killing coal. CCGTs will not replace all generation. Nuclear and renewables will still be needed to decarbonize the US fleet, and local community, water, and environmental issues associated with natural gas production and use need to be addressed in the short term. But, with decades – and perhaps even a century – of supply, gas is becoming an ever-longer "bridge" fuel to take the US to a greener energy economy.
Read about this issue in greater detail in "The Legal Landscape of 'Fracking", published in the Texas Review of Law & Politics.
Resurgence of North American oil
The International Energy Agency has forecast that by 2020, the US will surpass Saudi Arabia in crude oil production for a period of time, and by some predictions, may do so much sooner. Together with the new gas discoveries, this development will allow the US to become "energy independent." Of course, this does not mean that the US will isolate itself, nor that the US will cease to import oil. Among other things, our refineries are designed to process heavy crude from Latin America and other regions, not the light sweet crude that is being produced in North American shale plays. However, it will lead the nation to be a net exporter, and will have significant implications not only for world trade, as export patterns shift, but also for the geopolitical balance of power.
Rooftop solar
How will this game changer play in our domestic energy mix? According to some predictions, up to 220 gigawatts of distributed solar will be installed worldwide by 2018. Executives in leading US utility companies are already witnessing the impact of this trend on their US business models and are examining opportunities to participate profitably in this wave of change, or risk being overtaken by it. Related to this trend, we will also see a revolution in energy efficiency and demand-side management driven by existing low cost technologies, especially in building construction.
Climate change
Increasingly turbulent weather, super-storms, severe droughts and extreme heat and cold are the new normal, according to scientists and industry experts. Whether you believe this is caused by human activity or a natural phenomenon, the fact is that we have already surpassed earlier predictions about rising temperatures. Leading think tanks such as the World Resources Institute are recommending that we focus on adaptation and restoration as well as mitigation. Cities and towns in vulnerable regions are already working on plans to adapt and mitigate the impact of severe weather.
Read an interview with partner Jeff Fort about trends and developments in Climate Change, as well as our latest Climate Change newsletter.
Cloud scale computing, big data, and social media interaction
These are expected to completely revolutionize the energy and utility industries, impacting everything from forecasting to dispatch to storm restoration.
Threats to the power grid and other critical energy infrastructure
Both physical and cyber threats will have a transformative effect on the energy sector. Recent surveys and reports indicate that cyber attacks are already occurring with increasing frequency and intensity and physical threats are beginning to follow. Hardening critical infrastructure against these threats is an urgent, but highly complicated responsibility. The task of defending an industry that is undergoing rapid change, but that is also the foundation of so many aspects of our daily lives, is daunting.
Congressional gridlock
The inability of Congress to pass meaningful legislation has caused a shift in regulation and policy determination in the US, with the legislative branch being overtaken by the executive branch. Significantly, the federal court system is making more energy and environmental policy than either Congress or the federal agencies.. The military, the business and investment community, state and local governments and NGOs all have far greater impact on energy policy than Congress at present. The Obama Administration's "all of the above" approach to energy development has met with mixed reaction. On the one hand, it acknowledges the role that abundant conventional fuel sources can play in transitioning to a greener economy and in securing energy self-sufficiency. On the other hand, it has raised more than a few eyebrows among those who favor a direct shift to a greener energy future, and those who question whether it is a rational energy policy. It appears to establish incompatible goals; among them energy independence, pollution reduction, reliability, job creation, technology leadership, low prices, and low taxes. The policy apparently advocates both expanding and reducing the role of government. Meanwhile, every step that the Administration takes to further its policy is litigated, which leaves the courts to make the final policy call.
China and other emerging economies
Events occurring beyond US borders will have a huge impact on world energy both in terms of scale and pace. China will be particularly significant. In terms of scale, China's population is larger than the combined populations of the US, Canada, the EU and Russia. In terms of pace, China is expected to install more generation capacity in the next 15 years than the entire existing US fleet. China will lead the world in nuclear, clean tech, solar and coal investment. It is estimated that China will use more coal than the rest of the world combined in the upcoming years. China is and will remain the world's largest emitter of greenhouse gases.
In addition to China, other rapidly industrializing and developing countries will have a huge transformative impact. Substantial capacity builds are anticipated over next ten to fifteen years for all fuel sources in these emerging economies. These countries will be major exporters and consumers. We should expect them to bring a lot of renewable technology development to scale. Brazil will develop and export its oil reserves. Russia will continue to export gas. India will be an enormous consumer, with growth likely surpassing China. In the US and worldwide, this will affect climate policies and consumption trends.
Water scarcity
The availability of water will impact not only the power sector, but all industrial activity, economic growth, and world health in coming years. Aggravated by climate change, but also by a growing world population expected to exceed nine billion by the year 2050, this issue is especially daunting.
Innovations, storage technology and super-capacitors
These will transform the energy sector beyond what we are able to imagine right now. These game changers are farther in the future than the others listed
above, but are approaching.
Conclusion
What all of this means is that the energy sector in the future may look dramatically different from how it looks today. The companies that will be best positioned to succeed are those that are taking steps now to anticipate and manage the effects of these game changers. Many of the biggest players, including some utility and oil and gas companies, are moving fairly fast to ensure that their businesses remain productive and profitable. One question, to which there is no answer at present, is whether they will be able to move fast enough. Another open question is the effect that the inevitable regulatory lag will have on these game changers as they develop. Government players must decide the rules of the new game. In some cases, their slow pace may frustrate the ability to take advantage of or respond to developments; at other times, it presents opportunities. A third question is what new technological breakthrough, unanticipated trend, or new market participant will disrupt the industry next. And whether this unknown disruption will be a curse or a boon for the energy sector, the one certainty is that the future will be interesting.
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