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China declares energy bidding war
Plus: ‘The decarbonisation horse is out of the barn’ – interview with Ardour Capital and New American Energy
First up: The global energy crunch won’t stop the flow of capital into energy transition technologies. That’s the message from two cleantech finance gurus at twin investment houses Ardour Capital and New American Energy, in this month’s breakout interview.
And: Europe is now fighting China for energy supplies. Decarbonisation is quickly being deprioritised ahead of what is shaping up to be a very tough winter. That’s right here in this email.
Here’s the line-up:
China launches bidding war as energy crunch goes global
And lots more…
‘Europe must be realistic about what the energy transition can do for it’
‘The decarbonisation horse is out of the barn’
INTERVIEW: Energy and commodity inflation might be running rampant, but today’s market turmoil can’t derail the decarbonisation megatrend that is funnelling ever-greater sums of capital into clean energy technologies. That’s according to Walter Nasdeo, a straight-talking veteran cleantech investment analyst from New York-based Ardour Capital, and Nick Rohleder, co-CEO of New American Energy.
Decarbonisation stories you need to read
CHINA LAUNCHES BIDDING WAR AS ENERGY CRUNCH GOES GLOBAL: Earlier this month, I wrote a piece warning that natural gas was “pricing itself out of the energy transition” because expensive gas was being ditched for coal and other cheaper fuels in power generation.
That premise holds true; Dutch gas hub TTF broke new price records this week and CME’s November-dated TTF futures contract is making a run towards €100/MWh. This is clearly unaffordable for the vast majority of European energy users.
Now witness how the gas price surge is spilling over into other commodities. Europe is scrambling to fire up coal plants to preserve what scant reserves of gas are left in depleted underground storage facilities. The same is happening in parts of Asia.
Brent is pushing towards $80/barrel for the first time since 2014. Coal prices have nearly tripled this year and Argus API2 futures are trading above $200/tonne. The US propane spot price is at its highest since 2014. Diesel is at an all-time high in India and petrol is not far behind.
The northern hemisphere winter is not yet upon us. What happens if there is a global shortage of all fuel types? People in north-east China are frightened of freezing to death amid widespread power rationing, prompting the government to open “key emergency coal mines” in three northern provinces.
More significantly, Beijing has in effect declared a bidding war, ordering state energy companies to secure winter supplies at all costs:
Meanwhile, Chinese steel smelters, cement factories and even tin producers are curtailing output. This is as much a function of wild coal prices as it is a policy measure designed to deliver Beijing’s Blue Skies policy in time for the winter Olympics.
How can the world hope to decarbonise if it stops making the materials necessary to build the technologies that the clean energy transition requires?
The irony is that there is not enough cheap coal available to produce energy-intensive metals at reasonable prices, and yet ditching coal is exactly what China needs to do to reduce air pollution and climate emissions. Clearly it is not yet possible to transition Chinese industry off coal.
Reuters analyst Andy Home summed up the Catch-22 in a column this week: “How to produce more metals to go green when the price of going green constrains metals production?”
It is hard to avoid the conclusion that the competing elements of the ‘energy trilemma’ are irreconcilable. The energy industry is currently failing at all three components of the trilemma: supplies in most energy markets are today a mixture of unaffordable, dirty and unreliable.
These market realities stand in stark contrast to the assertions made in the International Energy Agency’s roadmap to carbon neutrality in China, which was published this week.
The IEA’s plan, developed at the behest of Beijing, would see electricity generation from renewables (mainly wind and solar PV) increase “seven-fold between 2020 and 2060, accounting for almost 80% of China’s power mix by then”. IEA executive director Fatih Birol talked up the benefits:
“China’s efforts to achieve its ambition of carbon neutrality will result in even greater flourishing across a wider array of low-carbon technologies and a significant decline in fossil fuel use in the coming decades.”
The roadmap describes a world in which batteries, pumped hydro storage and demand-side response (DSR) provide most of the flexibility needed to balance variable-output renewable supply with fluctuating Chinese power demand.
By 2060, storage provides 40% of China’s grid stability, with “dispatchable renewables” and hydrogen providing another 50%. This presumably leaves DSR – i.e. powering down factories – to do the rest.
But that’s not all. Very short duration ramping flexibility is also needed to balance supply and demand at short notice. Here, DSR provides over 50% of ramping capacity, and is typically used for small, momentary ramping needs.
So, Chinese factories and other energy-intensive consumers would be rewarded for shutting down for a few minutes with little or no notice.
This might work for large hydrogen electrolysers and electrified furnaces, but interruptible supply is incompatible with sensitive facilities and industrial processes: think production of high-purity silicon for semiconductors, at which China excels.
Pegging our fortunes to the weather
Let’s take a step back. In a decarbonised world where wind and solar power provide the bulk of primary energy supply, and industrial output is contingent on variable power generation profiles, the weather could become the single biggest factor influencing economic productivity.
And we all know that the weather will get more extreme and unpredictable, regardless of how quickly we manage to reduce earth-heating emissions. Two centuries of unabated industrialisation mean weather chaos is already baked in.
Prolonged or unexpected periods of cloud cover, low winds or lack of rainfall could have cascading impacts on energy and fuel prices, energy-intensive commodities and the availability or affordability of shipping fuels (e.g. ‘green’ hydrogen, ammonia or methanol derived from renewable electricity).
This has implications for downstream segments of the economy. Product supply chains, stocks and inventories, staffing and employment levels would all be exposed to weather-related risks and shocks.
Companies in even the most niche segments might need to develop in-house meteorological expertise to understand and manage day-to-day business risks. The labour market could come to demand flexibility (i.e. more zero-hours contracts), exacerbating job insecurity and climate-induced economic migration.
How much consideration is being given to these potential challenges in the push to decarbonise?
Keeping a global population of 8 billion-plus people fed, sheltered, healthy and mobile has proven unachievable even in pre-pandemic decades blessed with an abundance of hydrocarbons.
Eliminating coal, oil and gas from the world’s primary energy supply, while seemingly essential to the long-term habitability of the planet, creates a host of new challenges that call for more than just a new era of innovation and invention. We are looking at a wholesale rewiring of the global economy.
In fact, that seems to be happening already. The pandemic has shattered supply chains, and repairing these is accelerating change in many unexpected ways. The immediate concern in Europe and North Asia is to ensure secure energy supplies this winter, and ideally at something resembling affordable prices.
Only then does the question of emissions come into play. That’s because the ‘clean’ element of the energy trilemma is, and always has been, a luxury endeavour. Decarbonisation is ‘nice to have’, but not when furnaces go cold and households are plunged into darkness.
Of course, climate action hasn’t caused the energy crunch and decarbonisation is not at odds with economic stability — or at least, it shouldn’t be. There is growing momentum behind industrial decarbonisation that heralds significant progress in areas such as green steel. But we need to keep the lights on while transitioning. Balance, as ever, is key.
Anyone labouring under the misconception that climate change is an overriding short-term priority for humankind is being given a rude awakening. Extremely expensive fossil fuels might make people wish for a world of abundant renewables, but they slow down our ability to make it a reality.
Also worth reading:
‘This is just the first inning of a decade-long commodities super-cycle’ – Jeff Currie of Goldman Sachs is feeling very bullish
‘What on Earth is going on in commodities?’ – Morgan Stanley sees “further instability and squeezes in the future” as the world decarbonises
Argentina’s Vaca Muerta is the world’s quickest growing shale play – The dead cow is alive and kicking, says Rystad Energy
Mapping non-hydro renewables projects in Latin America – Interesting visualisation of wind, solar and geothermal developments in the region (note the many *huge* PV projects across Brazil, and smaller ones dotted along northern Chile)
NGOs push Brussels not to buckle on green label for natural gas – EU taxonomy must not deem gas-fired power stations to be sustainable investments, non-profits urge in the face of eye-watering European gas and power prices
Analyst warns of lower SSE earnings due to low wind speeds – Jefferies sees “at least 5 per cent downside risk to the current full fiscal year adjusted earnings of 88p a share” after utility reported 32% dip in wind and hydro output over summer
‘TotalEnergies leaves the Paris Accord to be met by others’ – Activist investor group Follow This turns up the heat on the French IOC’s “refus[al] to commit to achieving the Paris Accord” (see also Follow This founder Mark van Baal’s recent interview with Energy Flux)
Wintershall Dea investigates using North Sea natural gas pipelines for CCS – Existing offshore pipes “could be safely and efficiently repurposed for transport of liquid CO2” captured from steel, cement, or chemical industries
China’s NOCs are balancing support for Beijing’s decarbonisation agenda with energy security – Columbia University’s Center on Global Energy Policy dissects how state oil companies are adapting to the energy transition
China's power crunch dwarfs Evergrande's troubles in investors’ eyes – The collapse of the Chinese real estate market can be managed internally, whereas energy shortages have global implications (see also this, and this excellent analysis of China’s ‘looming economic disaster’)
ADNOC Drilling IPO raises $1.1 billion – Offering was oversubscribed, with demand in excess of $34 billion
Russia & CIS
Norway exporting carbon capture expertise to Russia – Equinor partners with Rosneft to develop low carbon solutions and reduce the carbon footprint from joint projects
Russia signs 15-year gas supply agreement with Hungary – While the rest of Europe scrambles for molecules, Kremlin-aligned Hungary will start receiving Gazprom’s gas via the TurkStream gas pipeline as soon as tomorrow 🤔
BHP shareholders urged to reject mining group’s climate plan – Glass Lewis criticises lack of detail on Scope 3 emissions, even after BHP sells its petroleum business to Woodside Energy (that merger deal was the subject of last month’s Energy Flux deep-dive)
Critical thinking on crucial energy issues
‘Europe must be realistic about what the energy transition can do for it’ – Decarbonisation is no release from the messy geopolitics of energy, nor an isolation from other parts of the world, writes Nikos Tsafos of the Center for Strategic and International Studies. “No matter how far Europe advances its progress toward climate neutrality, the need to balance the energy system will remain, with all the challenges and price volatility that such a task entails.”
Amid the failure of another three energy retailers and rapidly tightening gas supplies, the UK government is mulling shifting decarbonisation surcharges away from consumers’ electricity bills and onto gas bills. The words ‘Titanic’ and ‘deck chairs’ spring to mind…
That’s all for now. Energy Flux returns to your inbox this time next week.
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