EU powerless to tame prices 💥 UK energy crisis deepens

Plus: Expensive gas = expensive hydrogen, scarcity erodes trade barriers, bitcoin ‘revolutionising’ energy + MORE

Oct 15, 2021

First up: Expensive gas means green hydrogen is theoretically cheaper than blue. But the interplay between renewables, gas, power and carbon prices complicates matters. That’s this week’s breakout story:

Energy Flux

Expensive gas = expensive hydrogen

Expensive gas has put fossil-based hydrogen out of the money. At today's inflated prices, green hydrogen is *in theory* already cheaper to produce in Europe than both blue and grey H2. Using models developed by Australian math modelling outfit Keynumbers…

a year ago · Seb Kennedy

In this email: The global energy crisis has exposed the shortcomings of energy policy and regulations both in the European Union and the UK. The difference between the two is that the EU Commission is paying lip service to problem-solving, while the UK government is barely pretending to have a plan.

And: Spiralling coal prices are forcing China to rethink its trade embargoes with Western rivals. The deteriorating power situation in India also deserves our attention — and I’ve even squeezed in a fresh snippet on my favourite subject: the blossoming bitcoin-energy nexus.

Here’s the line-up (apologies for length — click here to view in your browser):

⚡Transition lines

EU powerless to tame energy prices
UK plays politics as crisis deepens
China relaxes trade embargoes to secure supplies
And energy headlines from around the world

🧠Energised minds

‘Bitcoin mining is revolutionising energy and no-one is talking about it’

Decarbonisation stories you need to read

EU POWERLESS TO TAME ENERGY PRICES: EU member states are on their own when it comes to soaring wholesale energy prices. That’s the message from the European Commission, whose ‘toolbox’ of remedies to the energy crunch turned out to be full of sticking plasters and fig leaves.

In the near-term, there’s not much Brussels can do aside from remind members states of the tools they are already wielding. Governments may cut levies on energy bills or shift them into general taxation, offer state aid to energy-intensive industries, or “facilitate a wider access to renewables power purchase agreements … by aggregating end-user demand”, the EC’s toolbox paper says.

The key message is that accelerating clean energy expansion is the only way to reduce reliance on fossil fuels. This is a logical long-term response to the explosion in global gas prices. But it won’t help much this winter, and can’t insulate the bloc from commodity volatility.

Still, the toolbox’s slow-burn solutions are worth examining. The Commission will take a cursory look at the design of the wholesale electricity market, in response to Spanish demands to review the EU’s ‘pay-as-clear’ pricing mechanism.

Under pay-as-clear, all electricity producers in the same zone bid their short-run marginal costs, and are all paid the same final clearing price provided they bid below this.

This mechanism grants renewables priority dispatch. Wind and solar have zero marginal costs (i.e. wind and sunlight are free) so can bid more competitively than thermal generators, which must cover fuel costs. Since all generators receive the higher clearing price set by fossil fuels, wind and solar farms profit from gas/coal commodity price surges. In fact, they rely on them.

Wholesale prices often crash or turn negative when renewables flood the grid, prompting thermal generators to switch off. But when wind/solar output dips or demand surges, thermal generators fire up and set the pay-as-clear price as the most expensive power source.

This curtails the benefits of supposedly ‘cheap’ renewables from being passed through to consumers when they most need it, because ratepayers must cover the cost of paying (today’s very high) clearing price to all generators.

Without this hidden subsidy, investment in energy technologies with high capital outlay and low operating costs would stop. But don’t take my word for it: ACER, the EU’s Agency for the Cooperation of Energy Regulators, said as much in this week’s response to high energy prices:

“‘High CAPEX, low OPEX’ technologies [rely on] the clearing price being significantly above [their] marginal costs for a significant number of hours during the year. In the absence of that, such investments will likely not be financially viable without significant subsidy support.” – ACER

The Commission says there is no evidence that ditching pay-as-clear for something else would improve matters, but tasked ACER to take a look and report back by next April anyway. Cue the deafening silence of inaction.

Brussels is lukewarm towards another Spanish proposal: pooling gas purchasing across EU member states to increase buying power. The Commission will “explore the possible benefits of joint procurement” but only for “strategic reserves”. Participation would be voluntary and the scheme would have to “respect competition rules”.

Squaring that circle might prove difficult and ultimately pointless. ACER says centralised gas buying would have limited impact because in a seller’s market, any collective buying effort would still need to outbid Asia for LNG or somehow convince reluctant pipeline suppliers to increase their flows.

Unsurprisingly, the toolbox snubs Greece’s proposals to auction additional carbon allowances (EUAs) or offer “advance payment” of future revenues from the Emissions Trading System (ETS).

Energy-intensive industries support these calls but neither made much sense, as columnist Alessandro Vitelli recently pointed out:

“Inventing new EUAs tells the market that the EU can at any time alter supply without reference to the actual demand for allowances. Market confidence would evaporate, and I wouldn’t expect the price to remain in double-digits for long.
“Giving member states a hefty advance on their EUA revenue [equates to] an interest-free source of short-term revenue to plug fiscal holes, pay for pre-election largesse or balance the budget. You think member states would stop at helping stave off an energy crisis?”

The Commission is at pains to blame gas for the energy crunch and ruled out ETS reform, saying the carbon price accounts for only 10% of power price movements.

Officials should talk to Belgium-based zinc producer Nyrstar, which halved output at its three European smelters due to runaway power costs. Nyrstar cited “the cost burden of carbon … which is passed on to industrial and domestic customers” for putting its plants at a competitive disadvantage to non-EU producers.

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UK PLAYS POLITICS AS CRISIS DEEPENS: At least the EU has something resembling a plan. Last week I wrote about the “squalid compromise at which politicians and regulators excel”. Well, here in the deregulated utopia known as the UK, we are watching that play out in real-time.

The Treasury is considering bailing out steelmakers and other energy-intensive industries struggling with spiralling costs. Any assistance would be in sharp contrast to the way the government turned its back on “badly run” insolvent energy suppliers.

In both cases we are talking about companies that failed to hedge their exposure to wholesale energy prices and were caught swimming naked when the tide went out. So, what’s the difference between a small energy supplier and a glass or ceramics manufacturer?

The answer: jobs. Or more precisely, politics. Independent energy retailers don’t employ many people in the politically sensitive category of blue-collar workers. Since much of the UK’s remaining industrial activity is located in northern constituencies that gave prime minister Boris Johnson a sweeping Conservative majority at the last election, some jobs are deemed more ‘valuable’ than others.

This won’t stop the rot creeping up the UK energy value chain. This week saw three more energy retailers cease trading. One was Pure Planet, which was left high and dry by its Big Oil backer BP. With insolvent suppliers piling up, their suppliers are also going under:

Ben Chu @BenChu_

BREAKING @BBCNewsnight has learned that gas shipping firm CNG @CNGenergyUK has written to its domestic supplier company customers saying it will no longer be providing them with gas - and they should seek alternative shippers...

CNG Group shipped gas to around 20 retailers, some of which went out of business – leaving CNG out of pocket. CNG’s remaining customers might have to source gas in today’s tight wholesale market, without being able to pass sky-high costs to residential consumers. With more insolvencies seemingly inevitable, regulator Ofgem must be squirming. This is going to get messy – unless the weather comes to the rescue.

RELATED: A UK newspaper printing factory is reportedly cutting winter output after failing to hedge its gas purchases. Considering the tsunami of bad news emanating from post-Brexit post-lockdown Britain, might the Johnson administration quietly let this particular industrial energy consumer go to the wall? 😆

CHINA RELAXES TRADE EMBARGOES: Scarcity of gas and coal is threatening to leave large parts of China and India in the dark. Chinese coal power stations were already operating at a loss before the imminent arrival of cold weather that could push thermal coal prices to fresh record highs.

In response, Beijing is relaxing its unofficial ban on importing coal from blacklisted Australia and is seeking to lock in imports of LNG from the US — signalling an end to the Trump-era trade war that all but halted shipments.

Chinese independent ENN this week signed a long-term sales and purchase agreement with US LNG export pioneer Cheniere, the first such deal since the Trump administration ramped up trade tensions. Many more could follow, it seems, as sky-high spot prices remind gas buyers of the value of long-term fixed price deals.

But this alone isn’t enough. China is also curbing fuel exports amid a spike in domestic demand from an ad-hoc rollout of diesel generators, and reducing imports of mineral ores that require energy-intensive processing into refined metals. China’s lower output is fuelling commodity inflation that’s dragging down the global economy.

In India, state-run Coal India has suspended coal supplies to non-power customers as the country battles one of its worst power supply deficits in years. Grid frequency, a critical measure of stability, is going haywire.

The upshot is the misery of rolling blackouts — and renewed interest in long-term LNG contracts. These are vital for liquefaction projects that need to leverage debt to finance construction, but state buyers such as Petronet LNG have been reticent to enter such commitments.

Bottom line: Spurning willing energy suppliers for political reasons makes little sense in times of scarcity. The same goes for relying on spot tenders. High prices erode demand, but renewed interest in long-term deals could underpin investment in new LNG supplies.

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Also worth reading:

International

IEA forecasts surge in oil demand for power generation amid global gas shortage, calls for more investment in oil capacity, says clean energy progress is too slow
Nickel demand to outstrip supply by 2024, causing headaches for EV manufacturers
Major gas traders seek cash to cover margin calls
The other COP: UN biodiversity conference opens in China

Americas

State and federal regulators urged to tackle growing orphan well crisis
Chevron irritates activists with modest 2028 emissions intensity target
Lightsource BP to power Colorado steel mill ‘almost entirely on solar’
APA Corp ends routine flaring, says future wells must have ‘adequate gas takeaway capacity’

Europe

Repsol to invest €2.6 billion in green hydrogen, partners with Enel
Breaking down barriers to geothermal heating in the Netherlands
France aims to build first small modular reactors by 2030
Vestas unveils prototype for ‘world’s largest’ 15 MW offshore wind turbine
Vattenfall aims to recycle all wind turbine blades by 2030; Vestas targets ‘zero-waste turbines’ by 2040

South Asia

Indian hydrocarbons giant goes on solar buying spree: Reliance Industries has acquired Norwegian PV panel company REC Solar, taken a 40% stake in project developer Sterling & Wilson Solar, and invested in monocrystalline wafer developer NexWafe

Russia & CIS

Russia to open vertically integrated solar PV factory in Kaliningrad
Gazprom and Russian government sign agreement on blue hydrogen

Australasia

BHP partners with South Korea’s POSCO on ‘green’ steel, shareholders endorse climate plan
Plug Power and Fortescue form 50-50 joint venture to build 2 GW proton exchange membrane (PEM) electrolyser factory

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🧠Energised minds

Critical thinking on crucial energy issues

‘Bitcoin mining is revolutionising energy and no-one is talking about it’ – Bitcoin is quickly converging with the energy sector, spurring innovation that will decarbonise both the cryptocurrency and electricity grids, writes Nic Carter of Castle Island Ventures. “Instead of turning on gas turbines to make up for a sudden interruption of wind, grid operators can instead ask mining operators to dial down their consumption.” (See also this paper from software company Lancium)

RELATED: The US is officially the top destination for bitcoin miners, after China expelled them this summer. China’s share of the energy-intensive ‘hashrate’ (computing capacity) has crashed to zero, while the US now accounts for 35%, per this dataset. Within the US, miners are flocking to New York and Texas – home to lots of curtailed renewables and stranded gas.
RELATED #2: North Vancouver will be the world’s first city heated by bitcoin. Harnessing heat from mining rigs is a novel way to electrify building heating.
ICYMI: Energy Flux has been talking about the bitcoin-energy nexus for some time. If you need a primer, this gem from the archive has you covered: