James Lawler: [00:00:00] Welcome to Climate News Weekly. I’m here with Julio Friedman and Darren Hau. Hi guys, good to see you again.
Julio Friedmann: Always a pleasure.
James Lawler: We’re going to start today with a story about natural gas. Julio, tell us what we’re seeing with natural gas prices, why it’s happening, and why it’s a surprise.
Julio Friedmann: So, right now, natural gas prices, in particular in the US, are at record lows. It was predicted at one point that there would be incredible demand for LNG. It was predicted at one point that the choke off from the Russian invasion and the decrease of gas to Europe would be a structural change leading to high gas prices, there was a lot of speculation around this. And instead what we’re seeing is that’s not true.
One of the things we’re seeing is that it’s just been warmer than expected. Last winter that was really good news for Europe so that their gas demand was low, and they were able to manage through the Russian embargo and cutoffs. It is also the case that [00:01:00] warm weather has meant very low gas demand here in the United States, too.
There are the occasional Arctic storms that are very cold, but generally speaking, it’s been a warm winter. February was, again, looking like the warmest month of all time. So, it is amazing to see this structural phenomenon did not occur, and that has implications for the energy transition. One of the things that people were saying two years ago is now that gas is forever high, green hydrogen is going to be the go to, green electrons and heat pumps are going to be easily cost competitive, all these other things, now that’s not true. They are facing stronger competition from natural gas. And as long as the prices are low, it’s harder to make the economic case for transition.
James Lawler: And it looks like natural gas production in the U.S. has doubled since 2010, roughly.
Julio Friedmann: Correct. We have also been producing a lot more gas in part in response to the Russia aggression in Ukraine and the global demand response that prompted.
This ties back [00:02:00] to questions around LNG export permits, which we talked about a couple of weeks ago. One of the questions that the Department of Energy has to assess is what’s the impact on the U.S. economy. Would the export of natural gas lead to structurally high gas prices? We are exporting a lot of LNG right now, but we are producing much more than that. So there’s more supply than there is demand, the prices go down.
James Lawler: Julio, one question I have is the binary that you introduced a second ago was renewables, green electrons versus LNG and I’m wondering, is that actually the right way to think about this? So like, what’s LNG going to attack? Well, wouldn’t it first attack kind of other fossil fuel energy sources, in terms of what it’s likely to displace sooner?
Julio Friedmann: This ends up being more complicated than people would like. There is no simple way to represent that in a place like Europe, importing LNG will displace some coal, right. It will also allow more renewables of some kinds to be [00:03:00] loaded onto the grid, but it will also lead to just more gas use.
We are seeing Germany building more gas plants and the low cost of natural gas enables the construction of, of more infrastructure that uses natural gas. In a place like Japan, more LNG imports mean that they just run the coal and the gas at the same time, and it delays the imports of their low carbon ammonia.
So there’s, these things all end up being complicated. One last point on that, though, if U.S. gas displaces Russian gas, Russian gas leaks way more than U.S. gas, so that upstream methane leakage again. Not all things are created equal and you can get climate benefits or climate harms in many contexts.
James Lawler: Right, right. Darren, can you give us an update on what’s new in the world of EVs?
Darren Hau: Yeah, for sure. I’d love to start off with an article from Bloomberg talking about how automakers are starting to compensate fleet management and leasing companies for honestly plummeting EV residual values. [00:04:00] The first canary in the coal mine was Hertz saying that they pulled back from their deployment plan because their Teslas cost too much to repair and that the residual values were completely taken out by Tesla reducing the new vehicle prices.
So what we’re seeing is pretty interesting. Essentially, you have the more legacy automakers agreeing to pay some of these leasing companies in in case the residual values fall further than anticipated. Tesla, of course, being a little bit of a maverick is not doing this, which is probably the primary reason why companies from Hertz and Sixt and SAP are moving away from, uh, from Tesla. There isn’t as much willingness to work between the leadership of those companies.
One thing that’s interesting to note, uh, is the difference between North American and European car markets. In the EU, the majority of new cars, about 60 percent are actually sold for leasing in corporate fleets are not sold directly to consumers. And most people actually will buy used [00:05:00] EVs. So basically, you know, over a trillion dollars is transacted over this kind of leasing model. So it’s really probably much larger in the EU than it is in the North America.
James Lawler: So what do we think is going to happen with leasing companies? Darren do you think that in five years we’ll see mostly EVs from these leasing companies or it’ll still be mostly ICEs, or what sort of future does this news portend in the, in the car leasing space?
Darren Hau: Yeah, well, ultimately the transition I think is going to be dictated by a combination of policy and consumer demand. I think you’re just going to have to see more collaboration, right? Between insurance companies, between the leasing companies and between the automakers like we’re starting to see today.
This article pointed out one organization called residual value insurance, which creates a form of specialty insurance. It’s exactly what is in their name, they insure against residual value loss. And for those who aren’t familiar [00:06:00] residual value is basically what your piece of equipment is worth after several years of usage, so everything has a residual value. Your factory equipment has a residual value, your aircraft has residual value and your vehicles have residual value.
When you’re actually leasing your car, what dictates the amount that you pay per month in your lease is what the automaker or the, uh, financial arm expects the residual value to be at the end of your, say, three year lease. The other thing that’s going to be interesting is whether we’re going to move more towards a lease based or user shape based modeled in North America as well as Europe, especially because as technology advances, people may be less willing to commit themselves to a specific EV technology at a given point in time, right?
James Lawler: So this story, Darren, is consistent with a theme that we’ve touched on many times in different contexts on the show, which is that this transition is turbulent and there are [00:07:00] ups and downs and there’s a lot of dynamism.
Julio Friedmann: The energy transition will not just require innovation in technology, it will require innovation in business model, it will require new forms of cooperation and new forms of partnerships and these kinds of pivots, these kinds of new ways of doing business incredibly important and lay the groundwork for future growth. This kind of turbulence drives these kinds of new ideas and new partnerships as well.
Darren Hau: Yeah. Cooperation and creativity.
James Lawler: Yeah. It’s part of market development, right? When we say market development, we talk about the whole market.
Julio Friedmann: The last thing I’ll say is that the way that Europe and the U S respond to these different markets and these different setups in part also reflects the underlying infrastructure. If you have a lot more charging infrastructure, then the resale value of an EV looks a lot better because there’s a more likely that people will buy it. So these infrastructure investments also affect the way that these market issues play out.
Darren Hau: Another thing just to point out [00:08:00] is Bloomberg put out this really great interactive article highlighting the tightrope that the Biden administration and automakers are trying to walk in establishing a domestic supply chain while enabling cheap EVs.
You have these two different important goals here, but they kind of conflict right now, right? It’s very hard to build a cheap EV without Chinese components. So how you walk that line to establish kind of domestic manufacturing capability while not keeping prices super high for super long while you’re doing that is really tricky. Julio, I’m curious if you have any thoughts on that.
Julio Friedmann: Right, well, it points to another story out there, which the Wall Street Journal discussed around Forvia uh, a tier one parts manufacturer laying off 10, 000 people, which is again, the fact is because of decreased demand for these auto parts, they are tightening their belts, they are laying people off. Those will have political consequences. They will have economic consequences and it’s part of this energy transition.
So on one level or another, [00:09:00] people have the carmakers saying we need Chinese parts. On another point, you have U. S. saying we’re losing jobs in automobile manufacturing. You have this change around the lease models, and then you also have this tightrope walk that Darren pointed to trying to balance these political goals across these constituencies, and it’s phenomenally hard. Nothing about the energy transition is easy or cheap, and this idea that it’s inevitable and straightforward and it’s cheap, so everybody will love it like that simply doesn’t happen and has not happened.
James Lawler: Mm hmm. Yeah. So, following this theme of the turbulence in the energy transition story, we have another story from Canary Media. EVs are on track to meet U. S. climate goals, but clean power is lagging. Julio, any thoughts on that?
Julio Friedmann: Yeah, so this is again an old story, but there’s always new data, there’s always new analysis. If you take a look at [00:10:00] our climate targets and what we need to do to get to them, you can look at any given pathway because we need lots of pathways and lots of technologies and lots of deployment to make it. You could look at any given one of those and say, hey, are we on track or not? And generally speaking, we are not on track.
For a long time EVs have been on track, they are still on track. All of this turbulence in the market, all of these pushbacks that we’ve been talking about for weeks now. We’re still selling the EVs and I mean around the world as well as in the US as well as in Europe and China like all these places were actually on target in the US and globally to hit our goals and then when you look at renewables, we’re not. It could also be said we’re not on track for nuclear, we’re not on track for green hydrogen, we’re not on track for sustainable aviation fuel, we’re not on track for carbon capture, but for a long time we were on track for renewables and now we’re not, we’re not deploying at the rate and speed necessary to hit our climate goals,
James Lawler: Julio, if you’re going to wave a magic wand and do one thing [00:11:00] to make the biggest difference to help us catch up on those clean energy deployment goals, what would that be?
Julio Friedmann: Permitting reform.
James Lawler: Okay, and how would you reform it?
Julio Friedmann: Permitting reform has a couple of different bits inside of it but right now we cannot load renewables onto the grid, we cannot build transmissions, we can’t permit actual plants like solar plants and wind farms onshore or offshore. And this is the stuff that environmentalists are most in favor of, but also environmentalists locally push back against is getting caught up in culture wars like we just need to figure out how to get there.
We need tens of thousands of facilities. This isn’t something that can be done with an executive order or through an administrative process, you actually need to change by law the way that these things are permitted. And it’s going to look more like a wartime footing kind of thing and unfortunately that raises everyone’s most hated phrase, which is eminent domain.
At [00:12:00] some point or another, you’re going to say, well, we’re going to, it’s going to push this transmission line through, or we’re going to take this land and build a solar farm on it and reasonably people object to that, but we’re behind. We are not going to hit our targets, we’re going to continue to admit at the rate we’re admitting now if we don’t reform the way that we permit these things.
And the last thing I’ll say about this, I don’t want to underrepresent the concern that people in the environmental justice community have about such things. What I just said sounds great to an economist or on paper, but those go through people’s lands, it affects people’s housing values, it affects people’s health. There are trucks that bring in parts that affect people’s breathing and cause asthma. Like there are real tradeoffs around this, but, but we still need to do it. We have to figure out how to do this right and how to do this fast.
James Lawler: Yeah, that’s a very important point and couldn’t agree more with that. Another story that is about [00:13:00] something we need a lot more of is a story in Bloomberg on the state of sustainable aviation fuel. So again, this is the idea that aviation should be powered by hydrocarbons but drop in hydrocarbons. So the idea is that we could produce forms of kerosene, e- kerosene for example, or e-fuels or biofuels that can work in the same engines without requiring retrofits. Problem is right now, there’s very, very little supply of sustainable aviation fuel and CEOs are pleading for more of it. Julio, what are your thoughts on this article from Bloomberg?
Julio Friedmann: The International Air Transport Association and their general director, Willie Walsh is ringing the bell. It is a bell that has been rung by CEOs of airlines, by the International Civil Aviation Organization, which is a UN body. Anybody who can do arithmetic can figure this out pretty well. If every sustainable aviation fuel plant that had been announced was built, [00:14:00] we would not have enough fuel. And of course, they’re not all going to be built and they’re going to be delayed and they’re going to be more expensive than expected.
In part, this is being driven by a global compact on aviation fuel called Corsia, which is managed by the UN ICAO. And the Corsia standard mandates by 2027, everyone has to hit a certain amount of SAF and there’s just not enough in the pipeline and it’s risky to build and it’s risky to buy and it’s expensive. What this means is that we’re going to miss those targets too and it is not clear what that means.
James Lawler Right.
Julio Friedmann: It is not clear what it means when all aviation bodies everywhere in the world fail to hit their targets according to a mandatory UN standard, we’re in uncharted waters when that happens. So there’s two things that I would want the listeners to keep in mind here.
One, today, jet fuel is actually pretty cheap. It’s three to four dollars a gallon, okay. To make it out of [00:15:00] plant matter, these biofuels, it basically costs twice that. Six to eight dollars a gallon. E fuels are like 10 times more expensive today, 30 to 60 dollars a gallon, way more expensive than the biofuels. And, they need green electrons, the same way that the biofuels need sustainable biomass. We’re starting to get into these tradeoffs again, what’s the best use of these biomass, what’s the best use of the electrons, what should we prioritize? Right?
There’s no easy answer to this. My answer is we should stop talking about what we should do and start talking about what we can do. We can build these facilities, so let’s build some. We are nowhere close to the biomass sustainable harvesting limit. We are nowhere close to the renewable generation limits like can have those questions in a decade when we have some facts and we’ve built some stuff.
James Lawler: Good point. Maybe we have to wrap up here. Thanks for joining us, Darren and Julio. Great to have you guys on as always with your fantastic perspectives and minds to untangle these stories. Really [00:16:00] appreciate it as always.
Darren Hau: Good to be back.
James Lawler: That’s it for Climate News Weekly. We hope you’ll join us tomorrow for our deep dive episode on electric vehicle charging.
