The energy debate in general and the energy transition discussion in particular have long been dominated by advocates rather than analysts. This results in more misinformation than useful analysis which keeps us busy trying to do and convey, well, useful analysis.
The two tribes fighting it out in the public square may not like my characterization of their contribution, but their continued misses in forecasting energy supply by source says otherwise. On the one hand, organizations like the International Energy Agency (IEA) still can’t come to grips with why ALL types of fossil fuel demand keep hitting new highs. Coal demand is the latest of these “surprises” for the IEA[i]. Meanwhile, their opponents keep misunderstanding why wind and solar power, even without subsidies, continue to grow (hint: they have low costs). Their singular focus on supply-side dynamics (and blame) shields their view of the more important and more complex dynamic of demand.
Higher demand for always-available 24/7 electric power to drive new data centers is not that hard to understand (see: Nuking the AI Data Centers), but why is the electric power industry trying to meet this demand with intermittent wind and solar? Answer 1: because it’s cheaper[ii] (see: Economic Shutdown in the Energy Transition). Answer 2: intermittency isn’t the merchant generator’s problem since the U.S. created deregulated electric power markets about 30 years ago. Deregulated markets do not have reliability obligations for producers who deliver commodities to designated market locations. Not for aluminum, not for pork bellies, not for electrons.
Was deregulation a failure then? Not from the standpoint of costs. Since the early 1980s when the first steps toward deregulation began, the price of wholesale power has declined by about 70% in real terms[iii]. Deregulated markets often drive efficiencies but not necessarily reliability. So how do we get both?
At the federal level, various agencies like the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Council or NERC, (their chosen Electric Reliability Organization -ERO- under the Energy Policy Act of 2005) analyze, study, meet, hold hearings and recommend reliability standards and even have the ability to levy fines. But these agencies have no ability to direct actual capital to build actual equipment.[iv]
That responsibility lies with the states[v] who can offer cost-recovery to their utilities to secure the equipment that will ensure reliability. That dynamic is driven as much by the political process as a legal one as voters will blame their local utility and their governor when the lights go out (see: The People’s Republic of Texas). So, whether a state has vertically integrated utilities that can get cost recovery on generation and transmission or has only poles-and-wires utilities that can get cost recovery on a 25-year power purchase agreement with a merchant power generator, that’s where to look to see how and by whom this extra demand for reliable power will be met. Recent contracts signed by big data companies indicate that the vertically integrated states with access to natural gas and related infrastructure seem to have an advantage. (See The Exxon Electric Company)
Either way, with 50 states, real understanding of the problem requires some measure of an attention span. And let’s face it, it’s hard for either side of the energy debate to hold the attention of their audience without simple blame game narratives about how stupid the other side is.
Let’s shift to a more global view of the energy transition.
That the growing demand for coal seems to surprise everyone is probably because the ultimate driver of demand is 2-3 steps removed. Everyone knows electric power demand is driving coal consumption in places like China, India and Southeast Asia. But the goods being produced by this electricity are being consumed around the world including the OECD[vi] countries. Europe, in particular, seems flummoxed by this, yet it is their de-industrialization and outsourcing of manufacturing to places like China, which have a much higher portion of electric power coming from coal, that is the dynamic at play.
Perhaps because this dynamic is playing out slowly, it doesn’t seem to get noticed. But 12 years ago, Dieter Helm, Professor of Energy Policy at the University of Oxford was already onto this trend and wrote in his book The Carbon Crunch “Whilst Europe has been deindustrializing its own production, it has not decarbonized its consumption. Indeed, once imports of carbon-intensive goods from countries like China are taken into account, the reality is that Europe’s carbon consumption has been going up.”
So, while the UK (the epicenter of the fossil-fuel powered industrial revolution) celebrated the closing of its last coal plant a few months ago[vii], and Europe’s coal consumption continues to fall[viii], total global demand for coal continues to rise. In fact, the IEA just raised its forecast for 2026 thermal coal demand by 503 million tons (from 8,344 to 8,847)[ix]. To put that in perspective, total 2023 demand for coal in the U.S., European Union and Japan was 798 million tons[x].
The entire focus of policy makers on the supply of fossil fuels rather than the demand for fossil fuels is what leads to all this confusion (see: The War on Drugs and Carbon). Consumers don’t combust fossil fuels because companies like ExxonMobil and Peabody coal produce them, companies produce these fuels because there is demand for them (see: Energy Transition Motivational Speaking). And those companies exist for the sole purpose of getting a competitive return on their owner’s capital, not making the world safe for democracy.
The valuations of the electric utilities in the U.S. have increased over the last year as investors have begun to see the benefits of higher demand growth[xi]. Since natural gas fired power generation will play a critical role, gas pipeline company valuations have risen as well (see: The Exxon Electric Company). But until this recent increase in power demand became apparent to the average portfolio manager, investors were inundated with narratives about the demise of conventional fuels because policy makers, organizations like the IEA, and the financial press, convinced them that demand for these fuels had peaked. Wrong on natural gas, wrong on oil and wrong on coal.
Even the Inflation Reduction Act (IRA) took the approach of subsidizing supply via tax credits rather than altering demand via a carbon tax or cap and trade scheme. Subsidizing the supply of wind, solar, batteries, fuel cells, etc. has not been good for the producer’s margins, which is why their stocks have done so poorly. The result of the policy, then, has been to increase their financing costs, offsetting much of the benefit of the subsidy.
Most agree that a lower carbon world will have more energy delivered in the form of electricity, and to some degree the rapid growth in power generation in China and the rest of the non-OECD, and now in the U.S. bears that out. If only we had an always available, zero carbon source of electricity. Oh wait, we do. It’s called nuclear power, and we invented it. High cost? Yes. But so too was shale gas, wind, solar and batteries before the adoption curve known as Wright’s Law worked its magic. And that “magic”, in each case, including shale, had help from government mandates and subsidies[xii].
We are now witnessing a backlash against current climate policies as the facts of demand growth are beginning to affect the debate. These facts provide a counterweight to the prognostications of those that simply do not understand that the energy industry, like all industries, is made up of profit maximizing companies selling goods and services to utility-maximizing consumers who care about price, reliability, safety, and yes, sometimes, emissions. Policies that do not recognize this basic dynamic are unlikely to succeed.
Nonetheless, beneath all this noise and vitriol are two policies related to energy and the environment that now seem to have bi-partisan support in Washington: a carbon border adjustment tax (aka tariff) that affects demand for products imported from carbon-intensive economies like China, and nuclear power.
You see, the world can “count on the Americans to do the right thing…after they have tried everything else.”[xiii] Such is the benefit of an open, transparent, bare-knuckle governance system designed to protect the health, safety and welfare of its constituents in the form of a representative democracy whose powers are divided between the federal and state level and amongst three separate and equal branches of government. It’s a mess. But it’s OUR mess. And I love it.
Check out the EIP Expert Corner for short videos from EIP’s Thought Leaders.
This information presented contains EIP’s opinion which may change at any time and without notice.The information provided above is based on data obtained from third party publicly available sources that EIP believes to be reliable, but EIP has not independently verified and cannot warrant the accuracy of such information. In providing the information, EIP has made several assumptions that if changed, materially affect the information and conclusions provided. The above includes publicly available information about certain companies. EIP may or may on invest in such companies. The information provided is for informational purposes only and is not an offer to purchase or sell particular securities or securities of a particular company. Investors are encouraged to do their own research and consult with their own advisors prior to making an investment decision. Past performance is no indication of future performance.
[i] Source: IEA “Coal 2024 Analysis and Forecast to 2027” December 18, 2024
[ii] More economic where wind and solar resources are ample
[iii] EIA Electric Power Monthly data series
[iv] 42 USC 15801 (Energy Policy Act of 2005), §215i at 2 ”This section does not authorize the EROC or the Commission to order the construction of additional generation or transmission capacity or to set or enforce compliance with standards for adequacy or safety of electric facilities or services.”
[v] 42 USC 15801 (Energy Policy Act of 2005), §215i at 3 “Nothing in this section shall be construed to preempt any authority of any state to take action to ensure the safety, adequacy, and reliability of electric service within that State…”
[vi] Organization for Economic Co-operation and Development
[vii] Reuters September 30, 2024
[viii] IEA “Coal 2024 Analysis and Forecast to 2027” December 18, 2024
[ix] Source: IEA “Coal 2024 Analysis and Forecast to 2027” December 18, 2024 and “Coal 2023 Analysis and Forecast to 2026) December 2023
[x] IBID
[xi] Bloomberg and EIP estimates
[xii] State Renewable Portfolio Standards in about 35 states, federal tax credits for renewables and batteries and Section 29 tax credits for drilling in unconventional reservoirs like shale.
[xiii] This quote is often ascribed to Winston Churchill, but evidence points to a speech given by Israeli politician and diplomat Abba Eban in Japan in 1967 – Quote Investigator