Finding the right energy mix

2nd September 2017

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Russel Drakeley

Energy markets are turbulent, often fuelled by politics as much as by economics, says Colin Cooper

When President Donald Trump withdrew US support for the historic Paris Climate Agreement – citing his responsibility for the citizens of Pittsburgh, not Paris – it was no surprise. The surprise came when city mayors and state authorities immediately promised to follow the tenets of the agreement even if the federal government would not, thereby ensuring that renewable energy would continue to grow in the US.

Meanwhile, in the Gulf region, Qatar’s neighbours have embargoed the country for allegedly supporting terrorists, although there has been speculation that the real reason its oil-trading neighbours have put the embargo in place is Qatar’s plans to increase natural gas production by 30% over the next few years. Yet the move to increase production makes sense as technology evolves and competing countries develop cheaper methods to produce natural gas. Politics, technology, and economics continue to push energy markets in new directions.

Road to renewables

France has just announced that the sale of cars with internal combustion engines will no longer be allowed after 2040. China-based Volvo will stop manufacturing and selling combustion-engine autos in 2019. Together with Tesla, the company aims to replace 1.5 million petrol or diesel cars a year with electric cars. The use of electric vehicles (EVs) is getting closer to the tipping point.

This swing towards EVs is, in itself, a harbinger of bigger changes. Not only do battery-run cars reduce consumption of gasoline and diesel fuels, but they are in effect mobile energy storage units – which, in turn, enables greater use of more intermittent renewable energy to be introduced safely into the energy mix.

Generation capacity for renewables continues to grow. Again, the signs are there. Large companies, such as Google and Apple, are pushing for 100% renewable energy for their offices, and are investing heavily to achieve their goal.

Sweden now leads the way in renewable energy: half of its energy comes from renewables in its gross final consumption. Next door, Finland gets 39.3% of its energy from renewables. In Southern Europe, Portugal managed to power the entire country for a whole 24 hours using just renewable energy sources.

Reputations are changing fast. Earlier this year, China announced plans to spend $360bn and create more than 13 million jobs in the renewable energy sector by 2020. For the world’s biggest emitter of greenhouse gases, this was a significant bid for leadership in the renewable energy industry.

Chinese companies, with their vast domestic market, are already among the world’s dominant players in the field. Chinese manufacturing has caused costs in the wind and solar industries to fall to a level that is much more competitive with power generation from fossil fuels.

Just as China develops plans to lift the cloud of Beijing smog, Saudi Arabia, the world’s top crude exporter, is looking to diversify away from oil and into renewable energies, as set out in its Saudi Vision 2030 roadmap. As the country prepares for the IPO of Saudi Aramco, the state oil company, it has kicked off a $50bn (£38.43bn) push for renewable energy. The near-term goal is to increase the country’s generation capacity to 9.5GW of solar and wind energy, to dampen domestic use of oil to meet energy demands.

Shift on fossil fuels

In an interconnected global market, the actions of countries such as the US and the Saudi kingdom do not take place in isolation. Technological advances in the past few years have made US shale oil profitable at much lower levels – causing the united OPEC-Russia front to feel the squeeze of reduced crude prices.

Profitable at $40 to $50 per barrel, US shale oil has created a new world for international crude producers – one in which OPEC and non-OPEC players have agreed to extend their cuts to output by nine months to March 2018.

At the same time, many countries in the Middle East recognise that exporting crude is a low value-add activity. Gas is a more cost-effective and less environmentally damaging means of generating power, and those countries with gas reserves are looking to maximise output.

Qatar, as stated above, plans to increase natural gas production by 30% over the next few years to cement its position as the leading gas producer in the world. Other countries, that lack natural gas reserves of their own, are looking at refining opportunities to optimise profits from every molecule of oil and gas. With Qatar under embargo by its neighbours, it seems the cooperation aspect of the Gulf Cooperation Council is in short supply. How this will affect its ambitions as a gas producer are not yet clear.

The indications, big and small, are all there. The energy mix is changing. More innovative, diverse, and much more complex, it is less beholden to cartels, but still subject to economic and geopolitical pressures.

For large purchasers of energy products, staying on top of these shifting energy markets is essential to ensure they secure what they need at the best price – a price that must increasingly take environmental levies, taxes, quotas, and subsidies into account, alongside corporate social responsibility commitments and reputation management. At the other end of the deal, sellers need to navigate shifting markets to ensure they maintain their profits – not least because, as the way we produce and consume energy changes, it will require further investment.

In this environment, neither party to a transaction can afford to make buying or selling decisions without recourse to detailed evidence, in the form of advanced analysis of all potential costs, hidden risks, and likely outcomes. They require access to accurate real-time data, the ability to find the signal among the noise, and specialist commodity management tools to interpret it.

Unprepared companies that are not using specialist technology can soon find that reality bites back – with painful environmental, financial, and reputational consequences.

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