BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.
Current and Future Pathways for U.S. Energy (and Environmental) Policy
The Automotive & Fleet Leasing Association 2012 Annual Meeting – San Antonio, Texas – September 11, 2012
Timothy K. Webster (202) 736-8138; [email protected]
Agenda
• Energy Policy Pressures • State of Petroleum, Natural Gas, and Electricity • Mobile Source Regulatory Initiatives Impacting
Energy – Fuel economy standards – Emission standards – Renewable fuels – State standards
• Other Pressure Points • Take Aways
2
Energy Policy
3
Now: 83% of Energy Consumption is Fossil Fuels 2010 total U.S. energy use = 98.0 quadrillion Btu
Source: EIA, Annual Energy Review 2010
Primary energy demand by fuel Primary energy demand by sector
Natural gas 25.2%
Coal 21.3%
Renewable 8.2%
Nuclear 8.6% Petroleum
36.7%
Electricity – Residential
15.6%
Residential and Commercial 11.2%
Electricity – Commercial
14.3%
Electricity – Industrial 10.4% Industrial
20.4%
Transportation 28.1%
4
Future: Slow Grown, Increased Efficiency U.S. primary energy consumption quadrillion Btu per year
Source: EIA, Annual Energy Outlook 2012
History Projections 2010
37%
25%
21%
9%
7%
1%
32%
26%
20%
11%
9%
4%
Shares of total U.S. energy
Nuclear
Oil and other liquids
Liquid biofuels Natural gas
Coal
Renewables (excluding liquid biofuels)
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What’s Driving Energy Consumption?
• EIA reports that first quarter CO2 emissions from energy use fell to lowest level since 1992
• What are the drivers? – Decline in heating demand due to mild winter – Decline in coal consumption due to low natural gas
prices – Decline in gasoline demand
• Conclusion – market forces and weather can play a large role – Comparative pricing between energy alternatives – Significant weather impacts (e.g. ongoing drought)
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The Petroleum Update
7
U.S. liquid fuels supply million barrels per day
Projections History
Natural gas plant liquids
Petroleum production
Biofuels including imports
Net petroleum imports
15%
12%
36%
36%
10%
49%
36%
5%
Liquids from coal 1%
2010
Source: EIA, Annual Energy Outlook 2012
Imports Down; Natural Gas and Biofuels Up
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U.S. liquid fuel supply million barrels per day
Projections History 2010
Consumption
Domestic supply
Net petroleum imports 49% 36%
60%
2005
Source: EIA, Annual Energy Outlook 2012
Reliance On Imports Drops Significantly
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annual average price of light low sulfur (LLS) crude oil real 2010 dollars per barrel
Source: EIA, Annual Energy Outlook 2012
Projections History 2010
High Oil Price
Low Oil Price
AEO2012 Reference
Wide Range of Potential Future Oil Prices
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annual average price of light low sulfur (LLS) crude oil real 2010 dollars per barrel
Source: EIA, Annual Energy Outlook 2012
Projections History 2010
High Oil Price
Low Oil Price
AEO2012 Reference
Wide Range of Potential Future Oil Prices
11
The Natural Gas Update
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The Shale Gas Revolution
• Major driver of changes in stationary source energy consumption
• Contributor to current low prices of natural gas
• Important to domestic energy and environmental policy
• Many environmental and community concerns
13
2%
U.S. dry gas production trillion cubic feet per year
Source: EIA, Annual Energy Outlook 2012
Non-associated offshore
Projections History
Associated with oil Coalbed methane
Non-associated onshore
Shale gas
2010
10%
6%
9%
7%
21%
23%
9%
9%
6%
49%
Alaska 1%
Tight gas 26%
22%
Major Increase In Shale Gas Production
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-5
0
5
10
15
20
25
30
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
U.S. dry gas trillion cubic feet per year
Source: EIA, Annual Energy Outlook 2012
Projections History 2010
Consumption
Domestic supply
Net imports
U.S. Poised to Become Net Exporter of Natural Gas
15
Wide Range of Future Natural Gas Prices
16
…But Transportation Use of Natural Gas Will Remain Small
17
U.S. dry gas consumption trillion cubic feet per year
*Includes combined heat-and-power and lease and plant fuel. **Includes pipeline fuel. Source: EIA, Annual Energy Outlook 2012
Projections History
Industrial*
Electric power
Commercial
Residential
34%
17%
14%
32%
3%
31%
21%
13%
33%
3% Transportation**
The Electricity Update
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percent growth (3-year rolling average)
Projections
History Period Annual Growth 1950s 9.8 1960s 7.3 1970s 4.7 1980s 2.9 1990s 2.4 2000-2010 1.0 2010-2035 0.8
2010
Source: EIA, Annual Energy Outlook 2012
0
2
4
6
8
10
12
14
1950 1960 1970 1980 1990 2000 2010 2020 2030
Growth of Electricity Generation Continues to Slow
19
18%
15%
electricity net generation trillion kilowatthours per year
Source: EIA, Annual Energy Outlook 2012
2010
24%
20%
45%
10%
1%
38%
28%
1%
Nuclear
Oil and other liquids
Natural gas
Coal
Renewables
Move to Lower Carbon Options
20
Major Increase In Renewables non-hydropower renewable generation billion kilowatthours per year
Source: EIA, Annual Energy Outlook 2012
Wind
Solar
Biomass
Geothermal Waste
Industrial CHP
Power sector
Advanced biofuels cogeneration
2010
21
Greenhouse Gas Regulation
22
Contributors to domestic GHG emissions --EPA 2010
31% of CO2 is from the transportation sector --EPA 2010
Fuel Kg CO2/ mmBtu
Bituminous coal
93.4
Petroleum coke
103.5
Natural gas 53.0 Gasoline 70.1 Biodiesel 73.8 Ethanol 68.4
CO2 emissions by fuel type (kilograms per million Btu) --EPA 2010
GHG Primer
23
Transportation Energy Consumption By Type of Vehicle
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U.S. transportation energy consumption million barrels per day oil equivalent
Source: EIA, Annual Energy Outlook 2012
Rail Air
Projections History
Heavy-duty vehicles
Light-duty vehicles
Marine
2010
5%
66%
2%
9%
18%
GHG Roadmap Petition for regulation of
CO2 emissions from cars
Denial by EPA
Reversed by the Supreme Court – CO2 is a pollutant
Denial by the D.C.
Circuit
Endangerment Rule
Challenges denied by
D.C. Circuit
LDVR Heavy-Duty Vehicle Rule
D.C. Circuit Challenge Pending
LDVR2
Challenge? Supreme Court?
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EPA GHG Rules
• Endangerment Finding Rule – Final Rule - December 15, 2009
• Light-Duty Vehicle Rule Standards – MY2012–2016 – Final Rule – May 2010 – Combined EPA/NHTSA standards
• Light-Duty Vehicle Rule Standards 2 – MY2017–2025 – Final Rule – August 2012 • Average fleet standard of 54.5 mpg • MY16: 35.5 mpg • MY25 vehicle would emit ½ GHGs of MY10
• Medium & Heavy-Duty Truck/Engine Standards – MY2014–2018 – Final Rule – September 2011 – Combined EPA/NHTSA standards
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Fuel Economy
CO2
LDVR2
What if today’s models were built in 2025?
* EPA estimates; city/highway not specified 27
Model 2012 mpg 2025 mpg*
Honda Fit 27 city/33 highway 61.1
Ford Fusion (non hybrid) 22/ 30 54.9
Chrysler 300 18/27 (3.6 L 5-spd) 48
Ford Escape (4WD) 21/28 (2.5 L auto 6-spd) 47.5
Nissan Murano 18/24 43.4
Toyota Sienna (2WD)
19/24 (2.7 L) 39.2
Chevy Silverado (4WD)
14/18 (4.3L 4-spd) 33
LDVR2 (cont.)
No standards yet for time traveling DeLoreans
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U.S. light car and truck sales millions
Source: EIA, Annual Energy Outlook 2012
0
5
10
15
20
2000 2010 2015 2020 2025 2030 2035
Gasoline-only vehicles without hybrid technologiesE85 flex fuel
Mild hybrid electric
Diesel
Hybrid electric
Plug-in hybrid and all-electric
Gaseous and fuel cell
Gasoline-only Vehicles Without Hybrid Technologies Decline As A Share Of New Vehicle Sales
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2005 2020 2035 Energy-related CO2 emissions
6.00 5.55 5.81
% change from 2005 - - -7.5% -3.2%
Energy-Related CO2 Emissions Don’t Return to Pre-Recession Levels for at Least 25 Years
30
billion metric tons carbon dioxide
Source: EIA, Annual Energy Outlook 2012 Early Release
Projections History 2010 2005
Congressional Action to Address GHGs
• Prospects have steadily diminished, mid-2009 to the present
• American Clean Energy and Security Act (Waxman-Markey) – Passed U.S. House June 26, 2009
• American Clean Energy Leadership Act (Bingaman) – Passed Senate Energy & Natural Resources Committee July 16, 2009
• Clean Energy Jobs and American Power Act (Boxer-Kerry) – Introduced September 30, 2009
• Kerry-Graham-Lieberman bill – Graham abandoned process April 2010; bill never acted on
• Cap and trade now seems moribund
• Attempts at targeted bills (utility only, RPS only) as well as bills going in the other direction (e.g., Rockefeller bill to slow or stop EPA action) may continue
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Renewable Fuels
32
Renewable Fuel Standard (“RFS”)
• Established in 2005 Energy Policy Act and revised Energy Independence and Security Act of 2007 – Mandates sale of significant volumes of four types of renewable fuels:
“renewable fuel,” “advanced biofuel,” “cellulosic biofuel,” and “biomass-based diesel”
• To qualify, fuels must have low “lifecycle greenhouse gas emissions,” which include all emissions related to production of the fuel
• Sets minimum volume requirements for blending renewable fuels with gasoline and diesel fuel – Total volume increasing from 9 billion gallons (2008) to 36 billion
gallons (2022) – Minimum volume requirements for specific fuel categories – EPA approval of renewable fuels based on life cycle analysis
• Creation of Renewable Identification Number (RIN) trading program • Monetary penalties for failing to meet fuel blending targets • EPA adopts a rule each year that requires refiners to sell specified
percentages of each fuel type
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Other Advanced
billions ethanol-equivalent gallons
Legislated RFS in 2022 Biodiesel Net imports
Cellulosic biofuels
Corn ethanol
AEO2011 AEO2012
Sources: EIA, Annual Energy Outlook 2012 and EIA, Annual Energy Outlook 2011
Biofuels fall short of the RFS target in 2022, but exceed 36 billion gallons by the early 2030s
34
Corn Ethanol and Drought
• 43% of U.S. corn crop used to make sufficient ethanol to meet RFS requirements
• Severe drought creating conflict between ethanol production and other uses – Corn production projected to
decrease by 15% or more – Corn futures prices increased by
35% over summer – $0.22 drop in “crush spread”
between corn and ethanol prices • Pressure on EPA to waive the RFS
standard – Industry – States – Delaware, Maryland,
North Carolina, Arkansas request waiver
– House of Representatives – letter from 165 members
35
RIN Fraud
• Renewable fuel producers “generate” renewable identification numbers (RINs) that are transferred with fuel or sold on open market
• Rodney Hailey, Clean Green Fuels, LLC – Convicted in June, 2012 of selling 32 million fraudulent
RINs for more than $9 million – Several additional companies charged with RIN fraud
• Enforcement actions possible throughout supply chain • Efforts to prevent RIN fraud
– EPA revising program to prevent RIN fraud – Energy and Commerce Committee hearings – National Biodiesel Board task force
36
E-15
37
EPA Approval of E-15 Gasoline
• All Fuel Additives Must Be Approved by EPA (CAA Section 211
• EPA Issued Two Partial Waivers Allowing E-15 for MY 2001 and Newer Vehicles
• Concern: Corrosivity of Ethanol May Damage Engines
• Necessary to Meet Renewable Fuel Standard?
38
EPA Conditions for E-15 Approval
• Prohibition on use of E-15 in engines not covered by waiver
• Fuel pump warning labels required for all retail facilities selling E-15
• Requires specific product transfer documents to ensure E-15 is handled safely
• E-15 sellers must conduct surveys to ensure that retail facilities comply with labeling and other safety requirements
39
Grocery Manufacturers of America v. EPA
• Diverse coalition of trade associations challenged EPA waiver decisions in D.C. Circuit – Manufacturers – Petroleum producers and refiners – Food products industry
• Bases for Legal Challenge – EPA lacks authority to issue partial waivers – Vehicles using E-15 cannot meet emissions standards
• D.C. Circuit dismissed challenge due to lack of standing (but was sympathetic on merits)
• Appeal?
40
Other Standards
41
The Rise of Selective Catalytic Reduction
• In 2001, EPA issued new tailpipe emission standards for medium and heavy duty diesel engines
• One major change was a 90%+ decrease in emissions of nitrogen oxides (NOx), which contribute to the formation of ground-level ozone (smog).
• Manufacturers were given until MY2010 to fully develop and implement reduction technology
42
SCR and DEF
• Technology used at power plants uses a catalyst together with ammonia or urea to reduce excess NOx to nitrogen and water – Called selective catalytic reduction (SCR)
• Turned out to be the only technology that worked for diesel engines
• Requires both a catalyst and a supply of “diesel exhaust fluid”
• Metered into the exhaust at a rate of about 2% of fuel consumption
43
Is DEF Here to Stay?
• One manufacturer – Navistar, Inc. – challenged virtually every aspect of the use of SCR – Lawsuits against EPA and CARB
• Navistar had invested in a competing technology based on exhaust gas recirculation – Worked well but could not meet the standard
• Navistar lost a major court case, Mack Trucks v. EPA, in May 2012
• Navistar subsequently dropped all of its challenges to SCR and announced that it would adopt that technology
44
State Regulations
45
California Mobile Source Regulation
• California can set its own standards under the CAA – CARB independently certifies engines sold in California
– Other states can and do follow California’s regulations • For example, 14 other states adopted California’s MY2009-2011 vehicle emission
standards (the LEV II) to varying degrees: Maine, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Delaware, Maryland, New Mexico, Arizona, Oregon, and Washington
• LEV III – Sets fleet emission standards for cars, light- and medium-duty vehicles
– Lower PM standards than LEV II
– Zero evaporative emissions for cars/light-duty; lower standards for medium-duty vehicles
– Fuel economy same as EPA MY2012-2016 standards with additional regulations for CO2, CH4, and N2O
– Similar technology incentive and credit system as EPA
46
California Mobile Source Regulation
• Advanced Clean Cars program
– Applies to MY15-25 cars sold in California
– Reduces smog-forming pollutants by 75%; will be classified as “super ultra-low-emission vehicles” (near 0 emissions) by 2025
– Reduces GHGs by 34% in 2025 • Emission decreases will be mostly from electric and hydrogen cars
47
Alternative Fuels Infrastructure California Clean Fuels Outlet Regulation
• Market for low emission vehicles (LEVs) impeded by lack of fueling infrastructure
• Lack of fueling infrastructure could threaten ability to achieve goals for LEV production
• California Clean Fuels Outlets
– Owners and Lessors of retail gasoline outlets required to install and maintain alternative fuel outlets
– Regulatory trigger (20,000 vehicles) has not been met
– 2012 Proposal would shift regulatory obligation to gasoline refiners and importers
48
Other Pressures on Energy
49
Name Effective New Sources
Existing Sources
GHG Prevention of Significant Deterioration and Title V Permitting
1/2/2011 Yes No
Cross-State Air Pollution Rule
1/1/2012 stayed
Yes Yes
Mercury Air Toxics Rule 4/16/2012 Yes Yes Proposed GHG New Source Performance Standards
At time of proposal (3/12)
Yes, at time of proposal
Yes, following final rule
National Ambient Air Quality Standards
Upcoming PM, SO2, and Ozone revisions
Selective Stationary Source Regulations
50
Petroleum Bottleneck
• Petroleum Bottleneck in Cushing, Oklahoma – Changes in Domestic Oil Supplies
• Canadian Oil Sands • Bakken and Williston Shale Oil
– Pipeline infrastructure not prepared for increased North American supply
– Low prices in Midwest; high prices in Gulf of Mexico
• Industry Responses – TransCanada – Keystone Gulf Coast Project – Enbridge & Enterprise – Reversal of Seaway Oil Pipeline
51
Crude Supply & Refinery Capacity: Disparate Impacts
• Little investment in increased refining capacity over past 30 years
• Significant reduction in East Coast refining capacity – Changes in crude oil composition leading to reduced
profitability – Refining capacity may be reduced by 50% – Potential for significant localized price increases
• Increased crude oil supply in Midwest leading to improved profitability
• 8.7% increase in gasoline prices in Bay Area after fire at Chevron refinery
52
Energy Subsidies
• Subsidy/government investment – expect less government support – Serious budget and deficit issues – Significant political support for subsidy phase-outs
• Examples • Volumetric Ethanol Excise Tax Credit (VEETC) – phased out • Wind production tax credit – scheduled to expire by 2013
– Obama wants to extend – Romney wants to end
– Solyndra fallout
53
Role of the Election
• Pre-election regulatory calm in Washington, D.C. • Are major changes coming November 6th?
54
Take Aways
• Fuel economy standards are being ratcheted up to reduce domestic greenhouse gas emissions from both cars and trucks
• Significant increases in domestic natural gas production are driving the increased use of natural gas for energy production, but petroleum is still the king of the road
• The push for renewable fuels and alternative fuel vehicles is strong, but is tempered by demand and an other constraints
• Multiple layers of federal and state regulation are creating an increasingly complicated regulatory landscape for vehicle and engine manufacturers
• The election may significantly alter the executive branch’s approach to environmental regulation, but don’t expect Congress to make dramatic changes
55
Questions
Timothy K. Webster
Sidley Austin LLP 1501 K Street, N.W.
Washington, D.C. 20005 202-736-8138 (phone)
202-736-8711 (fax) [email protected]
56