For most of the last 40 years, the mention of “energy” and “real estate” in the same sentence evoked discussion of conservation and efficiency. Today, generation and transmission of power are coming to be viewed as critical real estate intensive activities. How we fuel electric power creation is coming to affect all facets of property use and development.
As background, we revisit the birth of the Environmental Protection Agency (EPA) in 1973. The EPA confirmed a growing consensus that US dependence on fossil fuels was no longer sustainable. Burning gas and oil both depleted a finite resource and led to visibly damaging air and water pollution. For a solution we looked to policies supporting conservation and efficiency.
Of course demand for energy only increased as prices rose with constrained supplies. By the turn of the new century, a growing number of middle-class consumers in emerging economies now demand the same energy intensive products and lifestyles the West has long enjoyed. Going forward, by some estimates, the incremental energy demand from China, alone, is projected to equal the combined existing energy demand from the US and Japan today.
As for what fuel(s) for power to use, the consensus has echoed President Obama’s stated policy of an “all of the above” strategy. This means oil, gas, coal, nuclear and renewable energy are all in the mix.
Traditional fossil fuels still retain a substantial subsidy advantage, worldwide, over renewable energy alternatives. Yet, the full range of renewable sources: solar, wind, hydro-power and biomass, have emerged as real contributors to meeting electricity demand. Renewable energy sources now account for 13% of total electricity generation in the US, and are expected to grow. However, coal (39%) and natural gas (27%) will continue to provide at least 60% of US fuel needs well into the foreseeable future. Oil contributes only 1% to electricity generation, but is a dominant fuel source in the transportation sector. (see US Energy Information Administration, http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3)
So, since the 1970s, the nexus of public policy and public utilities came to support the concept of “renewable” energy as the panacea to both sate global consumption and mitigate global warming. But really, just since the recovery began from the 2008-9 recession, this consensus has been disrupted by the phenomenon of hydraulic fracturing (“fracking”). Fracking has unlocked heretofore unimagined reserves of natural gas in the US. While not technically a “renewable,” abundant natural gas may displace coal as a cleaner thermal alternative. According to a recent PIRA Energy Group study:
The reshaped character of U.S. natural gas supply will generate a commensurate revolution in demand along with wide-ranging pricing implications. PIRA identifies a U.S. natural gas demand “super cycle,” marked by annual growth of nearly 4 billion cubic feet/day (BCF/D) for a period of several years later this decade, spawned especially by gas-intensive manufacturing and liquefied natural gas (LNG) exports.
How “Fracking” Alters the Energy Landscape
Fracking is the often-controversial process of injecting chemicals and large volumes of water at high pressure into subterranean rocks, boreholes, etc., so as to force open existing fissures and extract oil or gas.
Fracking gas has emerged as a major energy source that is changing the US, and to a lesser degree, worldwide, energy supply outlook. Fracking is not an overnight sensation, having first been tried in 1947. What is new are technological advances that enable horizontal drilling. This technology has allowed economic extraction of gas, if not oil, from extensive shale beds that underlie much of the central and eastern continental US.
While coal is still the largest source of electricity generation capacity, in the 10 years between 2000 and 2010, over 80% of new electricity generation was derived from natural gas, a dramatic shift from prior decades. Renewable energy sources also contributed incrementally to electric generation capacity as coal’s contribution dropped.
Some have termed the prevalence of fracking, a “revolution.” Indeed, the implications of a paradigm shift can be widespread. Some of the economic implications include:
- Natural gas (“NG”) has become the top source of new electricity generation. Environmentally, NG is preferable to coal because it burns substantially cleaner and its extraction is considered less obtrusive than coal mining. This is good for gas turbine manufacturing, pipeline and railcar interests, but a mixed blessing for railroads as tonnage of coal transport threatens to shrink
- The availability and price of natural gas have the potential to slow the development of renewable power generation. How big of an issue is this to the renewables industry, and what policy responses are likely?
- With substantial natural gas price differentials worldwide, how far and fast will US natural gas exports grow? What metropolitan regions will win as the exports markets grow, and what environmental and other problems might result?
- Will natural gas prices stay relatively low in the US, and if so, will lower natural gas prices really increase manufacturing? Which industries and regions are likely to benefit?
- “Fracking” and related increases to natural gas energy development has generated substantial direct job growth (even when offset by coal job losses) and the potential for substantial indirect growth from consumer spending, lower cost energy supplies for businesses, increased state tax revenues, and other sources.
- “Fracking” benefits are not free, with potential contamination of ground water, the depletion of fresh water, possible degradation of the air quality, local noise pollution, the migration of gases and hydraulic-fracturing chemicals to the surface, the contamination of the surface lands with spills and flow-back, and the possible health effects of these environmental risks upon people as often cited concerns.
- How will states and cities react to fracking’s competing potential for job and economic growth and the related environmental and health concerns? Answers will affect potential long and short-term real estate prospects in these geographies.
Real Estate Implications of Energy Changes
Energy has always been an important part of our economy–the US energy spend in 2010 was $1.2 trillion, about $4,000 per person. However, the implications of recent US energy trends on real estate investment and patterns of land use will be profound in varied and unique ways not seen historically. Not only will the transitions and changes in mix create lots of spatial use and reuse issues, but the strengths and weaknesses of states, cities, and even buildings will be fundamentally altered depending on the magnitude and timing of changes now underway. Some of the key questions we confront include:
- Which states and cities will be the winners and losers in energy related employment growth? Will fracking related employment be a short-term boom with long-term negative consequences on quality of life, or a sustainable foundation of the economy?
- How will state regulatory controls influence the magnitude and timing of fracking related growth benefits?
- How will land and real estate prices be impacted by energy siting decisions? Will the biggest winners be participants in local economies not directly contiguous to energy extraction, transmission or distribution facilities? Is this an area of future litigation as value is taken from some and transferred to others?
- However widespread fracking activities become, the industry remains fragmented and begs for consistent environmental regulation. Land is typically leased and royalties paid once the resource is extracted. Will fracking leases prove as sustainable as traditional oil plays? Will they trade and how? How will the often short-term duration of fracking wells affect local community and individual economics, health, and culture?
- NG is best conveyed by pipeline. Are current corridors and right-of-way adequate? Where will surface conveyance by tanker-truck or rail tanker be expanded or extended?
- As with oil refining, US capacity for processing LNG (liquefied natural gas) has been constrained by environmental regulation and hence cost. Where will new plants be built to create necessary scale to process supply?
- Coal-fired power plants were often built close to the loads they serve. In spite of our dependence on that fuel, few plants have been built in last 30 years. The existing coal fleet is acknowledged obsolete and prone for replacement. How can these sites be reused or adapted to different fuels such as NG?
- Reduced cost if not mere availability of fuel such as NG changes the economics of off-shoring some manufacturing. Where will the new factories be built? Can rust-belt infrastructure be adapted? Or will population shifts to resource rich areas accelerate?
- How will the growing availability and improved pricing of natural gas affect the development of alternatives such as coal, nuclear and renewables? How will states, metropolitan areas, and even buildings whose economics emphasize research and production of these sources fare?
- Aside from electric power generation, is the complex issue of power transmission. The US power grid is fragmented, regionalized and heavily regulated. In many places it is at capacity, yet building new transmission is profoundly encumbered with environmental protection process. Resolution of this conflict is a real estate question about location, value and impact.
May the discussion begin.
The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.