Sunday, February 1, 2015

All change - as oil gets cheap

With oil prices being cut, the energy policy scene is getting increasingly fraught.  Keeping OPEC oil production levels high has forced prices down as oil seeks to see off the boom in coal use. That in part has been due to the shale gas boom in the USA- which has been able to export more cheap coal.  But these market manipulations are set in the context of climate change polices which seek to reduce fossil fuel use (coal especially) and promote the use of renewables.  That has had a big impact in Germany, where, with the Feed In Tariff system supporting renewables,  gas plants find it hard to compete and coal plants are frowned on- though still used. And nuclear is on the way out. One results has been that, following the lead of RWE and Siemens, who exited nuclear some while back, E.ON, the largest utility, is to back away from nuclear and fossil fuels- hiving them off into a separate new company, the rump company then focusing on renewables and smart grid management systems:                 

There was speculation that this might be an attempt to abandon uneconomic nuclear plants and their associated decommissioning debts, but more likely it was just a case of following the market.  Nuclear and fossil plants had no long-term future, although the question does arise, who will provide the power input for grid-balancing services for variable renewables? Some just saw it cynically as an exercise in chasing green energy subsidies- although equally it may be that operating marginal cost renewables will be much more lucrative than trying to rely on capacity market balancing payments.

Nevertheless, not everyone likes this trend anti-fossil trend. And fossil fuels are clearly far from dead. Indeed they make stage a comeback. In this context it is interesting that the competition to replace Maria van der Hoeven as head of the International Energy Agency (IEA) has heated up, with Fatih Birol, a former Opec oil technocrat, emerging as a potential candidate. van der Hoeven has overseen a what some see as a radical shift in the IEAs views, with renewables and energy efficiency heavily promoted, but it still backs nuclear and has strong links to oil. Will those be strengthened, given current oil issues?

There are certainly worries. It was bad enough Russia playing market and geopolitical games with gas exports, threatening European energy security, but oil price cuts can have major impacts on all economies- beneficial for most in the short-term, but no so welcome long term, especially for oil and gas exporting countries. Russia has been hit hard for example. More worryingly, they could impact on renewables. Peter Atherton, utility analyst at Liberum Capital, says a prolonged period of $60 oil could drive down UK electricity prices below £45/MWh, which ‘would destroy value on existing renewable energy projects and make it difficult to raise financing for future projects’. But this may all also be the last straw for well as undermining the case for shale gas.             

Meanwhile there are those who worry about relying on renewables, and want to see gas and even coal used, along with nuclear, instead. In the UK, the Civitas think tank has made this sort of case yet again. In the USA, Forbes warned that superficially attractive comparisons of renewables and fossil fuel costs, based on using Levelised costings, disguised the cost of dealing with variable renewables:

By contrast it is often taken as a matter of faith that shale gas will carry all before it. Certainly shale gas continues to flourish in the USA, with shale gas overtaking conventional natural gas production, a big change from 2007 when it only produced 8% of the total.  And the U.S. Energy Information Administration  says that new technology has enabled producers to lower the market price of natural gas: Whether this will be a short lived speculative bubble remains to be see: well productivity falls off quickly so more wells have to be drilled.  It’s also unclear if the same thing will happen elsewhere. Gas was always expensive in the USA, unlike in the EU, and the geology is different. And population densities are generally much higher. But as noted above, the economic impact of cheap US shale gas has spread widely.  Optimist may see shale gas as offering a lowish carbon interim option while renewables are ramped up, pessimists will see it as delaying just that, and environmentalists worry about local and global impacts.
Overall then there’s a bundle of conflicting beliefs, pressures and concerns, although the fossil lobby’s power remains strong…stronger maybe than the multifaceted climate lobby.


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