Nicholas Newman Energy journalist and copywriter www.nicnewmanoxford.com
Predicting the direction, let alone the degree of change in energy prices is tricky and revisions are common. Transport, power and industry, as the major consumers of fossil fuels will be the major beneficiaries of any reduction or plateauing of oil and gas prices. Coal-fired power output has been flat for several years but it is still the world’s number one. Coal’s share of the global power mix was 41 percent in 2001 falling just slightly to 39 percent in 2016. Increasing electrification and tighter regulations on pollution should favour gas at the expense of coal. In response, oil majors have noticeably increased gas as a proportion of their output. According to the IEA outlook, renewable energy will grow by about 1000 GW by 2022, meaning that the share of renewables in the world’s electricity mix will increase from about 24 percent in 2016 to 29 percent by 2022. In terms of marginal growth, coal is losing out to gas and rising renewables, which now account for the majority of growth in global electricity output. The cost of renewable technology is expected to fall and this, together with its scalability and speed of build, boosts its attractiveness.
Institutions such as the World Bank and the IMF differ in their projections for the direction of coal prices in 2020. The World Bank expects the price of coal to fall from $60 per metric tonne today to $55.4 whilst the IMF sees coal prices rising to $63.1 per metric tonne. The availability and cheapness of coal, low carbon prices, and a big legacy of coal-fired plants ensures that coal remains a major feedstock despite efforts to curb carbon emissions in Europe, China, and latterly India. In contrast, in the US, proposed changes in regulations are intended to boost coal output and hold up the price.
Gas prices in Europe are around $5 per MMBtu and are projected to rise slightly by both the IMF and World Bank to $5.57 and $5.63 respectively by 2020. The investment boom in LNG plants of recent years and optimistic demand projections have contributed to the current supply glut and depressed prices, which are expected to continue into the early 2020s on current output, never mind new capacity coming on stream. As a result, there is now a buyers market for gas today. In addition, a period of low LNG prices, plus ongoing innovations that have allowed smaller scale projects to be profitable, may yet create market demand in new markets and LNG-to-power projects in Africa and elsewhere. Nevertheless, gas- fired power is likely to be squeezed by increasingly cost-competitive renewables in coming years.
Opec’s latest report shows growing confidence that oil prices will recover from their lows of 2016 as production cuts and rising global demand erode chronic oversupply. The cost of a barrel of Brent crude reached nearly $60 in October though it has since fallen back slightly. The IEA forecasts a roughly balanced oil market in 2018 but increasing output and exports of US crude may keep Brent crude at below $60 a barrel according to both Credit Suisse and Morgan Stanley forecasts. The IMF’s Primary Commodities Projections released in July, forecast oil at $53.5 a barrel by 2020. This could be realistic given a decline in the power sector’s consumption of oil, by ongoing improvements in energy efficiency and anticipated reshoring which could cut maritime freight traffic.
The dramatic reduction in price and rise in productivity of renewables has surprised most industry analyst. “For instance, in 2010 it cost $55 million to build a solar farm in California.Today a similarly sized installation is likely to cost just $15 million and it will produce at least 40 percent more energy,” says Jim Long, a partner at Greentech Capital Advisors, a global clean energy advisory firm. According to Bloomberg New Energy Finance, the cost of renewables is likely to fall even further over the coming years as an increasing number of countries abandon expensive subsidies guaranteeing set prices for generators in favour of competitive auctions or tenders. Already, the amount of renewable power that is auctioned has tripled since 2015 and the price of solar has crashed as a result.
Grid-scale battery prices are expected to fall by up to 30 percent by 2020 according to Enel. This price reduction should improve the economics and reliability of solar and wind, since surplus power could be stored for later sale to the grid at higher prices. In a joint project, due for completion in 100 days on 7 January 2017, Tesla is providing a grid-scale battery linked to the 315 MW Hornsdale Wind Farm to make good on his claim to supply sufficient power for the coming summer and relieve the inhabitants of South Australia from frequent power shortages. Should Tesla prove successful, this will further boost the economics of solar and wind in power generation.
Absolute and comparative prices of different fuels, government policy, and technology are the crucial factors in shaping supply and demand and ultimately price.