We’re constantly hearing about the “energy transition” in the corporate and public domain. There’s a general understanding of the energy transition, yet there are several questions we first need to consider:
There’s no shortage of media articles referring to companies and their stated goal(s) of striving to be carbon neutral by a certain time frame. While we all strive for clean air, water, and overall environment, we need to consider the practical aspects of this goal.
“FOSSIL FUELS WILL CONTINUE TO BE A NECESSARY COMPONENT OF THE ENERGY TRANSITION NOW AND IN THE FORESEEABLE FUTURE.”
While companies and our government officials have raised public awareness of the issues, the transition began over 20 years ago with certain states deregulating power and, in certain instances, natural gas. At that time natural gas-fired generation and wind farm development accelerated at a rapid pace, which opened the door for independent power producers to impact the power markets. Further, states began to add requirements for renewable power generation through the enactment of Renewable Portfolio Standards, which require electric utilities and other retail electric providers to provide a specified percentage or amount of customer electricity with eligible renewable resources.
According to the Center of Sustainable Systems at the University of Michigan, in 2020 renewable energy sources account for 11% of domestic power generation with fossil fuel plants (excluding coal) accounting for 69%. The remaining 20% comes from nuclear and coal. Today, renewable energy sources account for a small percentage of the overall power generation capacity. As advancements in wind, solar and battery storage evolve this percentage will grow over time. However, can the U.S. realistically eliminate or minimize the need for fossil fuels in the foreseeable future.
As discussed above, fossil fuel power generation accounts for 69% of current capacity. The capital requirements to replace this capacity and add new capacity would be substantial. Renewable energy providers will have to demonstrate to investors a reasonable return on investment before securing capital commitments to justify building out new capacity.
Pre-COVID, worldwide crude oil demand was forecast to be approximately 100 million barrels per day (MMbbl/d) with U.S demand about 20%, or 20 MMbbl/d. These barrels are converted into products used in our daily lives, in particular, gasoline and, for those that travel by air, jet fuel. Natural gas is used by consumer households for heating and cooking.
“RENEWABLE ENERGY PROVIDERS WILL HAVE TO DEMONSTRATE TO INVESTORS A REASONABLE RETURN ON INVESTMENT BEFORE SECURING CAPITAL COMMITMENTS TO JUSTIFY BUILDING OUT NEW CAPACITY.”
On a much larger scale, many consumer products are made from plastics, a byproduct of fossil fuels, as well as many of the components found in the cars we drive. Even a complete shift from fossil fuel cars to electric vehicles will not eliminate the plastic components derived from petroleum that’s used in car manufacturing.
Fossil fuels will continue to be a necessary component of the energy transition now and in the foreseeable future. It’ll be costly to replace existing fossil fuel generation and add capacity to meet demand as the U.S. moves away from fossil fuel cars to electric vehicles. What material will replace heavily used plastics in our everyday lives? U.S. demand for fossil fuels will continue despite the energy transition mantra and it will remain a key component of the energy mix for many years to come.
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