Electricity

 

Shell's CEO  Ben van Beurden

Shell's CEO Ben van Beurden  © Getty Images

Royal Dutch Shell’s decision to sell electricity direct to industrial customers is an intelligent and creative one. The shift is strategic and demonstrates that oil and gas majors are capable of adapting to a new world as the transition to a lower carbon economy develops. For those already in the business of providing electricity it represents a dangerous competitive threat. For the other oil majors it poses a direct challenge on whether they are really thinking about the future sufficiently strategically.

The move starts small with a business in the UK that will start trading early next year. Shell will supply the business operations as a first step and it will then expand. But Britain is not the limit — Shell recently announced its intention of making similar sales in the USRead more

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The Energy Transitions Commission, an independent group of distinguished global citizens, has just published a report, Better Energy, Greater Prosperity, which describes how the transition to a low carbon energy system can be achieved. The paper is undeniably worthy and well intentioned but its contents are so detached from reality as to be dangerous. Read more

Theresa May

Theresa May  © Getty Images

Theresa May needs an energy policy adviser. I hasten to add that this is not a job application – but someone is needed to pull together the necessary reforms and to help the UK prime minister avoid self-destructive mistakes such as an attempt to take charge of fixing energy prices.

The predominant view in Whitehall – from the Treasury to the business department which is now responsible for energy – is that current policies are mistaken and require radical reform. Those policies take no account of the structural fall in energy prices; the failure of new nuclear to live up to its promise; the changing pattern of demand; and, most important of all, the transformation in the global energy market being brought about by a range of new technologies. Read more

Workers decontaminating Japan's Fukushima Daiichi plant five years after the nuclear disaster

Workers decontaminating Japan's Fukushima Daiichi plant five years after the nuclear disaster  © Getty Images

On Wednesday, Toshiba, one of Japanese largest companies, announced that it was placing Westinghouse — its US based nuclear power subsidiary — into Chapter 11 bankruptcy. It had already said that it would withdraw from the nuclear construction business and that Westinghouse, presumably with all its existing liabilities stripped out, was up for sale. All these moves follow the discovery of large-scale liabilities within Westinghouse’s operations in the US which have forced Toshiba as the parent company to take a write-down of at least ‎¥700bn (some $6.3bn) and to postpone the publication of its annual results.

The question is what happens next, and the key player in answering that is the Japanese government which must now decide whether it wants the country to remain a significant player in the business of civil nuclear power. Read more

Investment in renewables is essential for the global energy transition

Investment in renewables is essential for the global energy transition  © AFP/Getty Images

The UK’s Green Investment Bank is to be privatised. That has provoked predictable criticism about the sale of public assets and the risk of asset stripping. The result has been a long delay — the idea of a sale was first floated as early as 2011. The process has crawled forward with the government pushed into setting criteria to “protect” the bank and requiring solemn and binding commitments from any buyers, probably backed by the retention of a golden share. Indecision surrounds the question of whether the GIB, which invests in renewable energy projects, will be sold to a single buyer or floated.

All this has distracted attention from the real issues at stake. Far from needing protection the bank needs the freedom and funding to build on what it has achieved. The key subject missing from the debate has been the question of what it could and should do once in the private sector. Read more

Johannes Teyssen, chief executive, after Eon's annual results on 15 March

Johannes Teyssen, chief executive, after Eon's annual results on 15 March  © Getty Images

Last week’s results from the German utility Eon offered a stark reminder of the costs of the changes taking place in the energy market. Eon posted a loss of €16bn as a result of the transformation of the German energy market (known as the Energiewende) over the last decade.

But we are not at the end of the story. To pursue its chosen policy objectives, Germany needs to expand the scope of the system it has created. Companies and investors across Europe who assume that the status quo will persist should take a careful look at Eon’s experience and be prepared for radical change.

The company’s problems stem from two specific policy decisions made in Berlin — the determination to press ahead with the transition to a low carbon economy in a way that gives priority to technologies such as wind and solar power, and Chancellor Angela Merkel’s edict issued after the Fukushima accident in 2011 to accelerate the closure of Germany’s nuclear power stations. Read more

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Every strategy reaches the point where renewal is necessary. Time erodes what once seemed logical. Technology transforms the range of possibilities. Assumptions turn out to have been false flags. That is the situation now for the UK’s energy policy as spelt out in a report published last week by the economics committee of the UK House of Lords*.

The existing strategy flows from the 2008 Climate Change Act, which gave priority to the reduction of carbon emissions. A target of an 80 per cent reduction by 2050 was entrenched in law and, although it has never been clear how it would be enforced, the existence of a legally binding target has shaped decision-making in Whitehall. The goal, to be reached in five-year steps, overrides every other consideration — including cost and security of supply. Read more

Electricity pylons seen from Hinkley Point

Electricity pylons seen from Hinkley Point  © Getty Images

The prospect that Toshiba will withdraw from the nuclear power business after its embarrassing and expensive experience with the American company Westinghouse poses a serious problem for the UK’s plans to make new nuclear the core of future energy supply. If those plans are to be delayed, as looks almost certain now, the government will have to come up with an alternative.

Toshiba‘s planned new station at Moorside in Cumbria was to have been the second step in a strategy that, as the last government set out, would have produced some 16GW of nuclear-generated electricity by the mid 2030s. That would have more than replaced the old nuclear plants which are due to retire and would have made a material contribution to Britain’s decarbonisation targets. If Toshiba puts Westinghouse, the company holding the key nuclear expertise, up for sale the question arises as to whether President Donald Trump will support the transfer of US knowledge to a country as such as China. The process could take a long time and until there is a resolution, Moorside cannot move forward. Read more

Long-term thinking is needed: the London Metropolitan Underground railway in 1863

Long-term thinking is needed: the London Metropolitan Underground railway in 1863  © Getty Images

This week, the UK government will launch an industrial strategy designed to help the economy as we leave the EU. To be effective, policy in this area needs to be sustained. Short-term incentives are not enough to create new industrial strengths. This raises the whole question of how policy-makers deal with long-term issues. How do governments, companies or investors assess the value of assets with a long or very long life?

Looking around the world, the infrastructure we use every day from the internet to the road network defies the presumptions of standard analysis by growing in value as time passes rather than declining.

But markets are increasingly focused on short-term returns — after all, many pension funds and similar investment vehicles need a steady inflow of money to meet their obligations. Hedge funds and venture capital investors expect new or turnaround businesses to produce a good return and an exit opportunity in five to seven years. Chief executives have to concentrate on quarterly results and annual dividends. What chance is there for investments with a life expectancy of 100 years or more, particularly if they have high up-front capital costs on which payback and profits will only be generated over decades? The whole methodology of discounting future cash flows favours short-term activity. Read more

Saudi Deputy Crown Prince Mohammed bin Salman

Saudi Deputy Crown Prince Mohammed bin Salman  © Getty Images

The downbeat mood of the times was confirmed before Christmas by the publication of the Bloomberg Pessimist’s Guide to 2017. The guide lists some of the things that could go badly wrong across the world in 2017. Last year the Guide predicted both Brexit and Donald Trump’s election as US president. This year the possibilities range from the collapse of the Mexican economy after Mr Trump pulls the US out of Nafta to the election of Marine Le Pen as the next president of France. Some of the predictions, such as California’s decision to declare independence from the US (Calexit), to the forced departure of the Saudi Deputy Crown Prince Mohammed bin Salman could be seen as ambivalent outcomes that many would welcome. Pessimism, however, has its limits and so here, are a few notes of hope for the New Year. As ever, I have focused on the core issues of energy but politics are never far away. Some of the possibilities listed seem to me highly likely to occur to one degree or another. Others are long shots – but then Donald Trump was a long shot a year ago. Read more

Anne Hidalgo (left), Mayor of Paris,  and French energy minister Segolene Royal celebrate the Paris COP21 climate accord.

Anne Hidalgo (left), Mayor of Paris, and French energy minister Segolene Royal celebrate the Paris COP21 climate accord.  © Getty Images

The Paris agreement on climate change has been ratified, earlier than most people expected. Some believes that means the issue is on its way to being resolved. That is absolutely not the case.

Donald Trump’s election as president is a major setback because it removes any sense of American leadership on the issue. But that is not the only cause for concern. The inconvenient truth is that the use of coal in growing emerging economies continues to outpace anything being achieved elsewhere. The global energy market is changing; oil demand is coming to a peak and renewables are getting cheaper. But that, however important, is as yet having no more than a minor effect on the climate issue. We have to be realistic and prepare accordingly. Read more

Simon Henry, Royal Dutch Shell CFO

Simon Henry, Royal Dutch Shell CFO  © Getty Images

On November 2 Simon Henry, the chief financial officer of Royal Dutch Shell and one of the most respected figures in the industry, told analysts on a conference call for the Shell results presentation that he believed “oil demand will peak before supply and that peak may be between five and 15 years hence”. I think he is right, and that the peak of demand will come within five years and possibly by 2020. The reasons for what sounds like a very radical challenge to the conventional wisdom are clear and the advance warning signs are already evident in the data.

Oil demand in the developed OECD world has already peaked and is 9 per cent below the level reached in 2005. In Europe, oil demand is down 17 per cent over the same period. Read more

 

How the proposed Hinkley reactor could look, according to an EDF computer-generated image  © AFP Photo / EDF Energy

The Downing Street review of the Hinkley Point nuclear power project is coming to an end – and a decision will soon have to be made, probably before the end of September. The latest wave of public relations activity from EDF, the company that hopes to build the plant, shows how nervous the company is about the outcome. Given the range of doubts about the costs, the construction risks, the reactor technology and the involvement of the Chinese, that nervousness is well justified. Can EDF come up with an offer that deals with the doubts? If it focuses on substance rather than spin, it is just possible. The choice will be made in Paris. Read more

The Apple logo on display at the Worldwide Developer's Conference in San Francisco this month

The Apple logo on display at the Worldwide Developer's Conference in San Francisco this month  © Getty Images

Revolutions often begin with small prosaic steps. Three weeks ago, a company filed for permission from the US Federal Energy Regulatory Commission to sell electricity to individual consumers. Hardly an exceptional event – except that the company’s name is Apple and the move marks the beginning of a restructuring in the energy market that will reshape the sector across the world over the next decade.

Two years ago I wrote a column headlined Google Energy, Amazon Power about the possibility of new players disrupting the settled landscape of the energy business. The piece provoked some interest and much scepticism. Why would companies that knew nothing about energy want to venture into a specialist market where they would have to compete against powerful vested interests? Read more

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After two years of unrelenting gloom it is good to see that at least one part of the global energy business is booming. The price of lithium carbonate in China has risen by 253 per cent in the past year and there is intense takeover activity among the limited number of companies that control lithium production. Goldman Sachs has called lithium “the new gasoline”. Is the hype justified?

Lithium is a soft white metal that provides a small but for the moment essential element in battery technology. Production comes from mineral rock or from salt water, with supplies concentrated in Argentina, Australia, China, Chile and the US state of Nevada. That production is controlled by a very small number of companies, led by Albemarle, FMC and Chile’s Sociedad Quimica y Minera (SQM) in Chile. Between them they produced 90 per cent of total supplies outside China last year. Read more

Russian Gas Supplies Through Ukraine Turned Off

Russia locks on gas supplies to Ukraine  © Getty Images

Is Europe trapped in a state of dependence on Russian gas? What would happen if by some accident, let alone a strategic decision taken in Moscow, the gas stopped coming. Would eastern Europe grind to a halt, and would the west, led by Germany, sue for peace on any terms ?

This was the core topic for debate last week at a seminar organised by the Geopolitics Forum at Corpus Christi College in Cambridge as part of their series on nightmare scenarios. With wide participation from within the university and beyond, we were able to go beyond the headlines to build an analysis based on facts. It is worth setting out a few of those facts. Read more

George Osborne Visits North Sea oil in Scotland

George Osborne on the Montrose Platform in the North Sea  © Getty Images

On Wednesday, George Osborne will present the UK budget to the House of Commons. At a moment of deep uncertainty for the country’s energy industry — which is discouraging investment and creating quite unnecessary risks for the future. From the North Sea to Hinkley Point and shale there is confusion and doubt. Mr Osborne should come forward with a package of messages to restore confidence. Here are four obvious steps the chancellor should take.

First, the North Sea is now on the verge of a serious cutback in activity that will reduce energy supply and lead to lost jobs as well as much lower tax revenues. The hopes expressed in Sir Ian Wood’s report two years ago for an renaissance in the North Sea and the development of the billions of barrels of remaining resources will be lost. Read more

FRANCE-POLITICS-GOVERNMENT

Emmanuel Macron  © Getty Images

The most interesting comment at Davos this year came from the French economy minister Emmanuel Macron who said that he simply did not believe for a second the figures put out by the Chinese government claiming that their economy had grown by 6.9 per cent in 2015. To anyone familiar with Chinese statistics the comment is welcome because it brings into sharp focus the fact that no one can trust the data being produced by what is now one of the world’s largest economies. The doubts are not limited to macro economic numbers. Chinese data on the energy sector also deserve to be regarded with great scepticism.

There are three reasons why Chinese data might be inaccurate. The first is that it is simply extremely hard to gather reliable data across a country which is so vast. Good data is hard to come by. In Nigeria gross domestic product was revised upwards in 2013 by 89 per cent because the old basis of calculation was inaccurate. There are many issues even in much smaller and more developed countries. Read more

Hungarian engineer Miklos Sziva checks t

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Markets are inherently prone to volatility. Prices and valuations do not proceed in an orderly and linear fashion. Most important of all, they do not proceed in one direction for very long. The aim of any serious investment strategy should be to call the turning points and buy or sell accordingly. The energy market is at such a turning point and it will be fascinating to see who has the nerve and confidence to invest.

To say that this is a time to buy may sound odd following the criticism of Shell’s purchase of BG Group, which was reluctantly nodded through by fund managers last week. The issue is that the BG deal was based on prices roughly two and a half times above the current level and depends on an incredible forecast of future price trends. The result: a pyrrhic victory for Shell. That mistake, however, does not mean that other potential buyers of energy assets should be put off. At current prices, the time to buy is now. That applies to oil and gas but in different ways the same conclusion can be drawn for almost every part of the energy sector. Read more

FRANCE-ECONOMY-ENERGY-GAS-OIL

A tunnel at the LNG terminal under construction at Dunkirk, France  © Getty Images

If you think the fall in the oil price is dramatic and disruptive, take a moment to consider the natural gas market. The world’s three main gas markets — in Europe, the US and Asia – may be distinct but the growth of trade in liquefied natural gas which can take it across the world has linked them. The impact of a swing in one market soon spreads across the globe.

According to the excellent analysis from Energy Aspects, prices for LNG in the key north-east Asian market – the supply into Japan and Korea – are down this year by more than 50 per cent to between $7 and 8 per million British thermal units (Btu), even allowing for a slight seasonal ramp up in the fourth quarter. That is almost 70 per cent down from the peak in 2013.

Unfortunately, at the time of that peak many companies got carried away and set in train dozens of new LNG projects worldwide. The complex technology of liquefaction means that each project is expensive – costing at least $5bn and often much more. Of the projects planned dozens have been cancelled, often forcing investors to write off substantial sums. But the bad news is that many are still under construction. Once work has begun, it is very hard for companies to go back on a major investment decision. Read more