Caveat emptor!
Beware the perils of signing long-term energy deals under duress + MORE
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First up: There is renewed appetite for long-term energy procurement, which on balance is probably A Good Thing. But buyers should beware the pitfalls of making rash decisions in desperate circumstances. Also: The UK government is starting to grapple with the thorny issue of how to pay for net zero. And there’s fresh data on bitcoin’s energy footprint. That’s all right here in this email.
Plus: Inflation and volatility are roiling the market for green power purchase agreements (PPAs). Corporations are being urged to lock in power prices as wind and solar costs soar. That’s this week’s breakout story — click through for more (~7 minute read):
Here’s the full line-up:
⚡Transition lines:
Beware the perils of dealmaking under duress
UK faces up to net zero tax bill
Will the bitcoin energy debate ever be settled?
Roundup of global energy transition headlines
🧠Energised minds:
‘Surging energy prices won’t ease until next year’
⚡Transition lines
Decarbonisation stories you need to read
Beware the perils of dealmaking under duress: The global energy crunch made import-dependent countries think twice about short-term energy procurement. Importers of natural gas that shunned the premium prices of long-term contracts in favour of spot purchases are realising that resilience might be worth paying for after all.
China is leading the charge to secure long-term supplies of American liquefied natural gas. Sinopec signed two major LNG sales and purchase agreements with Venture Global for 3 mtpa over 20 years (see here) and another 1 mtpa over three years (see here). Separately, Shenzhen Gas signed a 10-year supply deal with BP. These came hot on the heels of ENN’s deal with Cheniere for 0.9 million tonnes per annum over 13 years (as covered in last week’s issue).
It’s a seller’s market for gas, and buyers are back at the table. They are there out of desperation and must tread carefully. Negotiating high-stakes long-term contractual commitments in the depths of an extraordinary global energy crisis is a recipe for epic misjudgement.
Two decades is nothing in the grand scheme of the energy transition, but an eternity in increasingly volatile energy markets. By 2041, the ten-year ‘secular bull market for natural resources’ that some are excitedly anticipating could be a distant memory.
Today’s anxiety and high prices might prompt a splurge of exuberant investment in new oil, gas and coal infrastructure. But energy shocks also tend to lead to recession and lower demand. The ‘roaring 2020s’ that fossil producers are salivating over could quickly give way to a morose decade of underutilised assets, write-downs and recriminations in the 2030s.
If buyers underwrite this buildout, the consumers they serve will pick the tab. If not, buyers will default on contracts, triggering arbitration and potentially a credit event. Lives and livelihoods will be affected by big commercial energy decisions being made at a moment of extreme asymmetry in market power.
Buyers must stress-test new long-term purchase commitments against the many ways in which energy markets can and will contort over the coming years. Resilience tends to come at the expense of flexibility, which could prove valuable as boom-bust cycles accelerate. While LNG supply contracts are becoming more flexible, there are still restrictions.
India is discovering this the hard way. State-run Petronet LNG has reportedly asked Qatar Energy to send around 50 cargoes of LNG – a veritable armada – next year. Petronet declined these shipments when spot prices fell in 2015, using downward flexibility in two long-term deals for 7.5 mtpa that expire in 2028.
Now India desperately needs more gas, but Petronet can’t force Qatar Energy to respond because the missing cargoes may be delivered at any time over the next seven years. Right now, Qatar can make better returns prioritising spot buyers.
This is not to say that long-term deals should be avoided. Some economists are rightly warning that the demise of 15 or 20-year deals that priced in the cost of replenishing lost reserves contributed to today’s volatility. The shift to buying short-term created the illusion of cheap energy but prices covered only short-run marginal costs. This has embrittled the global energy economy.
Actuary and economist Gail Tverberg argues that spot prices “don’t build in sufficient funding for replacement of depleted fields or the full cost of a 24/7/365 electrical system”. Author and blogger Tim Morgan makes a similar argument about the deceptively low marginal cost of renewables versus the overall system cost of relying on variable-output technologies with a 20-year lifespan. There is missing money and the global energy system is stalling.
Filling that gap will require long-term commitments between buyers and sellers. These will ensure adequate supplies of affordable conventional energy during the clean energy transition, a multi-trillion-dollar megatrend that will play out over decades. But when market conditions give energy producers enormous bargaining power, the phrase that springs to mind is caveat emptor.
RELATED: India is seeking a long-term oil supply deal with OPEC+ to ensure price stability of crude imports, India’s minister of petroleum Tarun Kapoor said. State and private refiners could pool their buying power in a bid to extract better crude import deals, he told Reuters. India is also considering strategic coal and gas reserves.
UK faces up to net zero tax bill: The UK government is making great fanfare of its Net Zero and Heat and Building Strategies ahead of the COP26 climate summit it is hosting in Glasgow, while quietly warning that it throws up some rather, ahem, taxing questions.
The sprawling strategies, published by the Department of Business (BEIS), set out a target to mandate the shift to electric vehicles, new funding for heat pumps, and renewed zeal for nuclear and carbon capture. See here and here for good summaries, although I like this one the most:
Meanwhile, the Treasury is flagging up the “material fiscal consequences” of the transition:
“There will be demands on public spending, but the biggest impact comes from the erosion of tax revenues from fossil fuel-related activity. Any temporary revenues from expanded carbon pricing are unlikely to be sufficient to offset the structural decline in tax revenues…”
Uptake of EVs will erode fiscal revenue from petrol and gasoline sales and vehicle excise duty, which raised £37 billion per year – equivalent to 1.7% of GDP.
Without new taxes, “tax receipts from most fossil fuel related activity will decline towards zero during the first 20 years of the transition,” the Treasury said. It also ruled out additional borrowing, which means new taxes such as (unpopular) road tolls.
There is a social justice question in all this. EV rollout will be incentivised by tax perks that are phased out over time, meaning early adopters that can afford the initial outlay will reap the biggest benefits. Other incentives will come from cheap power via smart charging that flattens the power demand curve.
As EV uptake increases these benefits will all taper off, meaning those that follow – i.e. ordinary people that can’t afford a new vehicle – won’t receive any help and will be shouldered with road pricing. The trade-offs inherent in rebalancing such inequities will over time become pressing political issues.
RELATED: The UK needs nodal pricing in the British power market to spur investment in generation, networks and flexible energy resources. That’s according to Energy Systems Catapult, which is calling for “more efficient, dynamic and granular market signals in short-term wholesale markets to reflect power system status accurately by time and location”.
Will the bitcoin energy debate ever be settled? The world’s leading cryptocurrency hit a fresh all-time high of >$66,000 per coin this week, which can only mean one thing: more FUD about the energy footprint of mining.
But things are changing. Now that the US hosts the world’s biggest share of bitcoin miners, the sector is improving its PR efforts. The Bitcoin Mining Council, an new alliance of the world’s biggest mining companies, this week published a survey of bitcoin’s power consumption and sources.
The bottom line? Bitcoin uses an “inconsequential” amount of energy, is rapidly becoming more efficient, and is powered by a higher mix of “sustainable energy” than any major country or industry (58%, per the BMC).
Globally, mining consumes 188 TWh, or 0.12% of global primary energy production. This is less than the energy consumption of gold mining (571 TWh), computer games (214 TWh) and Christmas lights (201 TWh), the BMC said. Moreover, bitcoin miners actively seek the cheapest power, which means stranded resources such as flare gas or curtailed renewables.
Might the facts finally start to seep into the mainstream discourse about bitcoin and energy?
Also worth reading:
International
Energy-related CO2 emissions predicted to rise over the next 30 years, while the gap between fossil fuel production and climate targets is widening
Americas
Greencoat Capital enters US with $5 billion green investment pledge
Investors shy away from $1 billion carbon capture project in North Dakota
TechnipFMC and Talos Energy form CCS strategic alliance on US Gulf Coast
ExxonMobil to ‘thrive for the next 135 years’, ebullient CEO tells staff, as new board reconsiders investment strategy
Chart Industries and Saulsbury partner on hydrogen liquefaction engineering study
‘Clean coal’ gasification plant that never worked partially demolished at cost of $7.5 billion (don’t miss this awesome drone footage)
Europe
Norwegian green hydrogen projects already competitive with grey, says Aker (see also last week’s Energy Flux story on H2 costs)
Nord Stream 2 fills first line with gas ready for export
Vitol acquires stake in biogas producer Waga Energy, signs 10-year purchase contract
Germany slashes green electricity levy, with abolishment in sight
BW Group finances 3 GWh battery storage project pipeline in UK
TotalEnergies ‘promoted climate doubt’ in 1970s, research finds (word of the day: “agnogenesis” — the social and cultural study of the production of ignorance)
Asia-Pacific
China coal futures slump on government intervention to ease power crisis
Singapore rolls out ‘extraordinary’ pre-emptive measures to ensure energy security
Middle East
Israel considering new pipeline to boost gas exports to Egypt
Australasia
Rio Tinto to splurge $7.5 billion by 2030 on renewables and electrification to decarbonise Australian smelters
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🧠Energised minds
Critical thinking on crucial energy issues
‘Surging energy prices won’t ease until next year’ — Gas shortages are rekindling the memories of the 1970s energy crisis and complicating an already uncertain outlook for inflation and the global economy, write Andrea Pescatori, Martin Stuermer and Nico Valckx of the IMF. “Blackouts, particularly in China, could dent chemical, steel, and manufacturing activity, adding to global supply-chain disruptions during a peak season for sales of consumer goods.”
🙃And finally...
Who knew that a ‘post-oil future’ could be so much fun?!
That’s all for now. Energy Flux returns to your inbox this time next week.
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