Far beyond these daily news and narrative centered upon the trajectory of oil prices there is a field; where the short-term worries pales into significance and the broader, long term concerns takes hold. There are many questions. While fear of future supply in the wake of cuts in CAPEX in upstream E&P runs common along with the growth prospects of Shale in US and elsewhere in the world, what seems to be more plausible and parlous is the current and future circumstances in Middle-East that remains the world’s leading oil producing region since 20thcentury.It seems that the region is a cauldron of ambitious and whimsical potentates and leaders and it is on the whims of these that supply of one of the most strategic commodity depends.
What we are witnessing now is not new. There have been even more serious incidences: The 1967 war, The Yom-Kippur war,1973’s oil embargo, 1979 Iranian Revolution, Iraq-Iran war in 1980’s, this and many more. The region rarely enjoys any long span of stability. However, Middle-East of today is utterly different from Middle-east of the past century in many ways. We have a young potentate, Muhammad Bin Salman, in Saudi Arabia who is ready to help his country to step into future. We have a devastated Syria. Iran is the same, ambitious but checked. While the internal crevices have only widened with gulf countries cutting diplomatic ties with Qatar. What is more relevant for oil is that US is, anew, ready to join the ranks of world’s top oil producers namely Saudi Arabia and Russia. It might do so next year.
Middle-East, in any case, is not going to lose its significance. Firstly, U.S. no matter how much it grows cannot quench world’s oil thirst alone. Secondly, OPEC, even a little shaky, still wields the power to if not manipulate but effect global oil dynamics. Thirdly, the reduction in Capital Expenditure in Exploration and Production budgets, reaching trillion dollars is a cause of future concern. Some say, as mentioned in the starting, seeds for another supply crunch are already being sowed.
There are other reasons that oil markets will remain interesting in the near future. Kingdom of Saudi Arabia is becoming a cynosure for the investors of the world. MbS is determined to change the structure and system of Kingdom’s political and economic machinery. His ambitions might keep the Middle-East in a continuous commotion. There is war in and on Yemen, confrontation with Iran. KSA itself is planning to build 60 Nuclear Reactors. Will Iran keep a mum? Questions abound.
What about Kurds if they rise again? Another thing to consider is that all these countries are also party to the very pact that has been preventing oil prices to fall: Vienna agreement. What about its future? Will it become a victim of political maneuverings? If yes…what about the oil prices and what about the Saudi Vision 2030? Also, where does Russia goes then? Russia and KSA are trying to form a long term friendship/alliance to be enshrined in some form of institution. Will Russia and KSA be able to steer oil prices away from problems? If oil prices sink the Saudi Vision 2030 and NPT sinks with it too. MbS fails. The whole experiment fails. Can KSA let that happen? I think no. Last but not the least, the impending, date for Iran deal, May 12th, when Mr. Trump will decide about whether to re-impose sanctions or make a new deal. Enough excitement.
We can expect a very volatile and interesting oil markets in the near future.
How will the electricity market of the future work?
Authors: Kieran McNamara, Valentina Ferlito and Alberto Toril
Our energy destinies rest in the hands of governments – and this is particularly true in power markets. More than 70% of future investments in global energy supply will be made by state-directed entities or respond to regulatory incentives. If we narrow this view to the power sector, more than 95% of global investment will be made in sectors that are fully regulated or affected by mechanisms to manage the risk associated with variable prices on competitive wholesale markets.
Traditionally, electricity markets developed and operated within strictly regulated frameworks, in which vertically integrated utilities handled all or most activities from generation to transmission to retail. Over the past 35 years, however, many parts of the world have gradually moved towards competitive markets as a means to generate and procure electricity alongside many of the support services required to operate a power system.
Today, countries that rely on competitive markets to maintain efficient operations in the short term, either through bilateral physical contracts, power exchanges, or co-ordinated spot markets, account for 54% of the world’s electricity consumption. Once China completes implementation of its power sector reform, this share will increase to almost 80%.
Despite their imperfections, markets have largely succeeded in the goal of providing reliable electricity at least cost to consumers. Nonetheless, some regional markets have come under strain. Without policy measures to address this shortfall, there is a risk to future security of supply. This is a topic that is examined in much greater detail in the electricity focus of the World Energy Outlook-2018.
Since 2010, some electricity markets have experienced a decline in wholesale energy prices brought about by stagnant demand, low natural gas prices and higher output of generation with low marginal costs. This situation is not unique to Europe, for example, our analysis points to similar outcomes emerging in regions such as the United States and Australia.
Ensuring sufficient investment in competitive electricity markets
The decline in market revenues experienced in many markets raises some questions about the ability of competitive markets to provide adequate returns to sustain the existing fleet and to provide adequate signals for timely and efficient investment. The problem arises from the low wholesale market prices that have occurred in many markets, as a result of rapid deployment of variable renewables, the requirement for high levels of reliability (through healthy capacity margins), and, in some cases, low natural gas prices.
While periods of reduced profitability are a natural part of competitive markets, declining revenue in lean systems where investment is needed – which we see in some markets today – may signal a need to re-evaluate market design and its ability to deliver investment and electricity security, especially since the main conditions that have depressed wholesale prices are likely to continue at least in the near term. With new sources of capacity and flexibility in power systems becoming more widely available and cost-competitive, future regulatory frameworks or market reforms should strive to ensure a level playing field for all system resources, including power plants, energy storage systems and demand-side response.
Furthermore, wholesale markets are responsible for non-energy revenues that come from providing a variety of products commonly referred to as system or ancillary services. These products safeguard against unforeseen changes in demand or available supply (primary and secondary reserves), as well as products that support the quality of power (reactive power, frequency regulation and inertia). They provide revenues to sources that, even if not essential for the adequacy of the system, support the reliability of supply and quality of power delivered.
Recent trends suggest that some markets may be unable to deliver investment signals that guarantee resource adequacy. For example, in markets in the European Union, the share of total production costs covered by electricity sales fell from 77% in 2010 to about 60% in 2017, and looks set to continue declining. Such unsatisfactory market signals led many European utilities to broaden their exposure to global markets by means of deep business restructuring and reorganisation, in addition to giving large space for capex optimisation and high investments in operational efficiency, renewables and digitalization. In fact, even if in 2017 the missing money gap narrowed, as wholesale electricity prices and total electricity sales increased by about 20%. This relief was temporal, however, mainly a result of a rebound in natural gas prices, lower contribution than usual of hydropower to the generation mix and extended nuclear plants outages. Unfortunately none of these underlying causes of partial remuneration recovery is likely to continue.
In the United States, the share of total generation costs covered by wholesale electricity sales is also declining. Stagnant demand and the rising share of variable renewables, led by wind power, have added to the downward pressure on wholesale electricity prices in several US electricity markets. Electricity sales may continue to recoup less than the total cost of generation, owing to an expected growth from solar PV and wind generation and a persistence of low gas prices, despite the possibility of a return to growth for electricity demand spurred by space cooling and the electrification of heat and transport.
In Australia, the recent experiences have been quite different; mostly due to scarcity pricing – which also constitutes a key signal for new investment required – that has more than offset an increasing share of renewables during the last seven years and has covered a rising portion of total costs in generation.
Where do we go from here?
The experience of established competitive markets provide useful examples of potential concerns and solutions for countries looking to transition to competitive markets. For example, Japan is pursuing electricity market reforms that establish a set of markets for baseload, transmission usage, capacity, balancing and zero emission credits, which will provide a basket of complementary revenue streams. Mexico is also pursuing market reforms that aim to transition away from regulated to competitive markets and that take account of the experience of other countries.
These points lead to the obvious question: how will the electricity market of the future work? It is very likely that over the medium to long term, many markets will continue to experience further downward pressure on wholesale energy prices as more zero-cost power generation enters the market alongside new energy service providers and innovative technological solutions. Policy makers, regulators and energy sector stakeholders need to understand the changes underway and seek new solutions and market designs that can support the transition towards low-carbon electricity markets while at the same time ensuring the security and adequacy of power systems.
*Valentina Ferlito IEA consultant and Alberto Toril IEA consultant
A Just and Fair Energy Transition: An opportunity to tackle climate change and create prosperity
Holding the UN climate conference COP24 in Katowice sends a strong signal as it provides the international community with an opportunity to learn from an on-going energy transition in a traditionally fossil-fuel intensive region. At the same time, it reminds us of the imperative of a just energy transition on our pathway towards a climate-safe future.
The global energy landscape is truly witnessing rapid and wide-ranging changes driven by an unprecedented growth of renewables. Last year alone, a record-breaking 168 gigawatts of renewable energy capacity was added globally, making it the sixth year in a row in which new power generations from renewables outpaced conventional sources including from coal.
Renewable energy is driving an energy transformation that is creating new socio-economic opportunities for countries, regions and local communities across the world. It is also key to address climate change, which is becoming ever more urgent. The widely cited recent Special Report on Global Warming of 1.5°C by the UN Intergovernmental Panel on Climate Change (IPCC) urges for a rapid scaling-up of renewables to avoid irreversible climate impacts.
Poland has a vast potential of renewable energy resources, such as biomass and wind energy, and is therefore well positioned in this changing landscape. Countries that lead this transformation will also be the ones to reap most of its benefits. While coal fuelled an intensive industrialisation in the 18th century, wind energy could become a new point of industrial departure for Poland. The launch of a parliamentary commission on offshore wind as well as the most recently announced plan by Polish authorities to develop 8 gigawatts of offshore wind by 2030 point in this direction.
Indeed, building new wind energy installations makes compelling economic sense for Poland as technology costs continue to fall dramatically. Today, onshore wind represents one of the lowest-cost sources of new power generation globally. Cost for wind turbines alone declined by a remarkable 30% since 2010, the cost of power from onshore wind fell by 23% globally. Innovation and breakthroughs in wind technologies are creating new deployment opportunities and driving cost reductions across the industry further. The International Renewable Energy Agency (IRENA) estimates that offshore wind cost could fall by an additional 14% by 2020, making all commercially-available renewables cost-competitive with fossil fuels.
Beyond the strong business case, growing the offshore renewable energy sector will create jobs and revenue in communities across the country. The development of a typical 500-megawatt offshore wind farm requires around 2.1 million person-days of work. A wide range of skills are needed for the successful completion of such a project, from planning, procurement, manufacturing, transport, installation and grid connection as well as operation and maintenance. Jobs which puts countries like Poland in a favourable starting position as it can build on solid local manufacturing capacity.
To put this in concrete numbers in the Polish context, the development of 6 gigawatt of offshore capacity in Poland could create more than 75 000 new jobs and contribute about PLN 60 billion to the economy, according to a study by McKinsey. Developing wind farms in Poland could also increase demand for products from many Polish companies, thereby reviving industries in regions such as Upper Silesia.
It is encouraging to see that Poland is beginning to tap into its enormous wind energy potential, especially in the Polish Baltic Sea, by boosting its existing offshore wind supply chain. It is also already leveraging its local industry to serve the nearby North and Baltic Sea markets, mainly in territorial waters of Germany and the United Kingdom.
Overall, shifting the global energy system to renewables would grow the world economy by one per cent till 2050, translating into a cumulative gain of more than USD 52 trillion. IRENA also estimates a total of 29 million jobs in renewables by 2050. With 500 000 new jobs, more jobs were created in renewables 2017 than in all fossil fuel technologies combined, surpassing the 10-million-benchmark for the first time. If we add social welfare benefits like better health, air quality and reduced pollution, potential gains more than outweigh additional costs.
However, to ensure that costs and benefits are fairly distributed, the on-going, large-scale global energy transformation has to be accompanied by policies enabling a just transition. A just transition must create alternatives to people and regions trapped in fossil fuel dynamics through new economic opportunity, education and skills trainings and adequate social safety systems. Governments and local authorities will have to engineer new job opportunities for job losses caused by replacing fossil fuels with climate-safe power sources. With its ambitious plans to accelerate offshore wind energy, Poland is sending a powerful signal to other countries not only in Central and Eastern Europe but also to the rest of world that moving forward on renewables makes economic sense and can be designed in a socially just way.
Far from having to choose between mitigating climate change and economic growth, it is more evident than ever that an opportunity exists to ramp up renewable energy technologies, decarbonize economies and shift the global development paradigm to one of shared prosperity.
Carbon capture, utilisation and storage finally catches the spotlight
The recent Green House Gas Technologies Summit (GHGT), the biggest global event on carbon capture, was a good place to reflect on a technology that perhaps has the biggest gap between the aspiration of energy models and the investment reality on the ground, between the disappointments of the past decade and a gathering new wave of optimism.
In some circles, it is fashionable to write down this technology, carbon capture, utilisation and storage (CCUS). For some, CCUS is everything that needs to be left behind in the clean-energy transitions: big centralized facilities based on chemistry and mechanical engineering rather than big data, ongoing investments by large conventional energy companies that should be going the way of dinosaurs, and the continuous use of fossil fuels.
Some scepticism is understandable. The first IEA CCS roadmap, from 2009, makes for sobering reading. Consistent with the Group of 8 commitments adopted a year earlier, the report expected CCS projects totalling 22 GW in power generation and 170 million tons in industry by 2020 With a year to go, the current status for CCS falls well short of these goals: only 0.4 GW in power and around 32 million tons in industry.
But we should not dismiss this technology – in fact, CCUS is going to be critical to the global clean energy transitions, and why the IEA held a major CCUS Summit, with the UK Government, on 28 November in Edinburgh bringing governments and industry together to give the technology a new start.
Theoretically it is possible to achieve climate goals without CCUS. The recently published IPCC report has a pathway (P1) that arrives at climate stabilization without CCS by emphasising restraints on energy demand. However, this pathway entails energy demand declining to an extent which as the IPCC righty emphasised would be unprecedented. For example, the average annual decline of oil demand from today till 2030 in this scenario would be twice as large as the decline triggered in 2008/2009 by a combination of USD $140 per barrel and the global financial crisis.
A robust energy efficiency effort is certainly the first pillar of any serious climate policy and it is very much incorporated into the IEA’s analysis. For example in our Energy Technology Perspectives a high speed train network replaces a third of domestic aviation in the United States by mid-century. Even with such assumptions, the decline in oil demand is much slower than what the IPCC scenario described above would demand. It would be highly desirable to achieve this without a recession by global cooperation and bottom up, voluntary lifestyle changes. Nevertheless, ancient Greek dramas are so enjoyable today precisely because there has been much less change in human nature than in our technological capability. We better have technological solutions ready for the eventuality that human nature remains unchanged for another 20 years. The other IPCC pathways, which don’t have such demand restraint, have large scale application of carbon capture to deal with ongoing fossil fuel consumption, and eventually remove carbon from the air.
At this stage it is also useful to dispel some misunderstandings. Carbon capture is not an alternative to wind and solar deployment and should not stop reallocating investment from fossil fuels to clean energy. A credible climate stabilization pathway like the IEA’s Sustainable Development Scenario has an amazing scale up of wind and solar as the backbone of the transition, deployment way above the current investment activity that will stretch the limits for mobilizing investment and require major changes in electricity network.
Likewise, CCUS is not a pretext to stop investment reallocation. From a financial point of view the largest fossil fuel asset by far is oil upstream, which is intimately connected to transport, a sector where, due to dispersed and mobile emission sources, CCUS will not play any meaningful role. The largest application of CCUS is likely to be on coal whose upstream has an order of magnitude smaller financial valuation.
And even for coal, as one compares a “business as usual” trajectory with the Sustainable Development Scenario, around 85% of the reduction in coal plant emissions came from efficiency and renewables, leading to fewer coal plants running less hours and only a minority from capturing the emissions from continuous operation.
The role of CCUS is something different and focuses on overcoming three often neglected asymmetries. The first is the age profile of coal. There are countries that implement coal phase out policies, but they tend to be ones like the UK where coal mining peaked a century ago, and where the last coal plants were built in the 1970s. However, due to the massive investment wave of developing Asia, one third of coal plants in the world are less than 10 years old. They each represent a USD $2 billion capital investment and run on a cheap, well distributed and geopolitically secure energy source. Shutting them all down would be unrealistic given their role energy security. Retrofitting them with CCUS could be a feasible alternative.
The second asymmetry is between the truly amazing success of wind and solar and the slow progress in low carbon options for the heavy industry that represent a third of global emissions. To produce steel without carbon emissions would require the equivalent of all the solar panels in California to produce hydrogen and use it instead of coal in steelmaking – all for a single steel plant. This is possible and certainly worth researching and innovating, but should not be framed as an obvious cheap and easy alternative.
Last but not least, the third asymmetry is between the current momentum of the energy system and the uncomfortable facts of climate science. In the absence of a sudden transformation of social and political attitudes, the CO2 concentration will overshoot and carbon will need to be removed from the air.
The GHGT summit displayed an exciting mixture of a sense of urgency, an appreciation of the scale of the challenge but also a “this time for real” feeling due to positive developments in policy and technology. The most important policy development is in the United States, which introduced new investment incentives for both carbon storage and utilisation.
Importantly, whereas previous approaches tended to support specific projects, handpicking technology and location with a mixed tracked record to put it mildly, the new policy is a broad-based tax incentive putting a value on avoided emissions and unleashing the creativity and innovativeness of the private sector. It was refreshing to meet people who were hired as Head of CCS Business Development by major corporations, a job title inconceivable not long ago. A lot of the new US capture investment seems to go to gas rather than coal, which is understandable in the light of the unfolding gas revolution in the US economy.
GHGT also had a strong participation and commitment from China, the country representing half of global coal demand and perhaps the most advanced coal technologies. China took the first step towards CCUS with the first large scale integrated coal conversion/carbon capture project now under development. It has a very smart approach focusing on capturing an almost pure CO2 stream from a coal to chemicals process, enabling the high value added and clean utilisation of the country’s abundant coal resources. Game changer is an overused term, but China moving to CCUS in a systematic fashion would certainly qualify for it.
It was also very visible how innovation into both technology and business models are reshaping the prospects of CCUS, especially the interactions between carbon capture and hydrogen. The resurgence of strategic interest to hydrogen is strongly connected with carbon capture in multiple ways. The most basic is the source of hydrogen: today it is fossil fuels with over 10 tons of CO2 emitted for a ton of H2.
Capturing it is one of the possible pathways for clean H2. There are already operating projects in Canada, the United States and the United Arab Emirates. Those use the hydrogen locally in an industrial process, but there is a serious initiative to produce H2 from Australian coal with CCUS and export it to Japan.
The other pathway, wind and solar based electrolysis, is gathering momentum and likely to become robustly competitive. And even that has a carbon capture connection: in regions that have a large heavy industry but less attractive storage geology, attention and investment are shifting towards carbon utilisation. In many cases the basic concept is to combine the captured CO2 with renewable based H2 and then let imagination fly around various chemical pathways. All of these still require innovation and investment to scale up, but the commitment and optimism was already visible.
After the decade of disappointments, there may be some legitimate scepticism. Still, CCUS’s moment has arrived. And we should hope so, for the stake of the global energy transition.
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