Energy market analysis October 15th 2024

15-10-2024

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IEA: The world is not going to meet tripling renewable energy by 2030.

“This is not quite sufficient to reach the goal of tripling renewable energy capacity worldwide established by nearly 200 countries at the COP28 climate summit.” – IEA

Despite the increase in renewable energy additions, the world is not yet on track to triple renewable capacity by 2030. This according to the Renewables 2024  report by International Energy Agency (IEA).

Global renewable capacity is expected to increase 2.7 times by 2030. That is more than the present national ambitions of appromixatley 25%. This while climate and energy security policies have boosted the attractiveness of renewables to make them cost-competitive with fossil fuels.

The agency’s base case, assuming existing policies and market conditions, forecasts 5,500 gigawatts (GW) of new renewable capacity operational by 2030. This means that global additions of renewable capacity will continue to grow each year. Nearly 940 GW per year will be reached by 2030. That is 70% more than the record level from 2023, according to the IEA.

Solar PV and wind are expected to account for 95% of all renewable capacity growth until the end of this decade. This is due to increasing economic attractiveness in almost all countries. As a result of these trends, nearly 70 countries, representing 80% of global renewable electricity capacity, are expected to meet or exceed their current renewable ambitions for 2030.

That is still less than the COP28 pledge of nearly 200 countries to triple renewable capacity. Growth is plentiful. However governments need to increase their efforts to integrate variable renewable sources, also called “wiggle power,” into electricity systems. The IEA also indicates that the rate of curtailment of renewable electricity generation recently has risen substantially . This curtailment is already 10% in several countries.

Previously, IEA reported that the global goal of tripling renewable energy capacity by the end of the decade is still within reach. However, this will require huge investments in power grids and energy storage.

Crude oil

“A historic short squeeze in oil has only begun.”

Early October the Brent price rose the hardest in almost 2 years. The cause was a historic imbalance with a record number of short sellers suddenly wanting to hedge their positions.

With the rapidly deteriorating situation in the Middle East, oil prices Brent and WTI rose more than 5% from the lows. Goldman’s research desk noted that the rise in oil prices reflected an average risk premium as real production disruptions remain limited and spare capacity high.

Despite the record number of short positions a few weeks ago, when many traders were the most negative ever on oil prices, the volume of short-covering is virtually nonexistent. Total net managed money deposited at hedge funds is barely above record lows. This concerns 4 major oilcontracts: Brent and WTI traded on both the physical Nymex and the financial ICE.

All eyes are now on news of a possible attack on Iran’s energy infrastructure according to Goldman Energy specialist Ryan Novak. That would pose further upside risk to crude and equities.

Conclusion: the unwinding of these short positions has only just begun. Record short positions are now in a painful squeeze due to upward momentum in the energy sector. And this is already happening without Israel doing anything. If this country attacks Iran’s oil infrastructure or nuclear industry, the coming explosion in oil prices could even surpass the Volkswagen short squeeze of 2008.

Short squeeze Volkswagen in 2008

After 2 weeks of a sharp price rally, the price has bounced back a bit. If the upward trend holds, the price will remain above €75 per barrel.

Price Crude oil – Brent December 2024 ($/barrel) – week cloud candle, log scale

Elec­tricity

“The one thing I’m consistently hearing from industrial application end users is that they don’t want to own and operate a nuclear plant.” – Todd Abrajano, CEO U.S. Nuclear Industry Council

Amid growing demand for low carbon baseload electricity, nuclear power is increasingly seen as a clean and reliable option. But multi-year regulatory approval processes, lack of capital and chronic cost overruns in building new plants have made power companies reluctant to build.

For many in the nuclear power industry, getting smaller is a way to address these issues. Small Modular Reactors (SMRs) are nuclear reactors composed of prefabricated components, typically 300 megawatts or smaller. They are designed to be cheaper and more flexible than large nuclear power plants. In addition, they are equipped with advanced safety features such as automatic shut-down technology.

SMRs offer the ability to speed up regulatory processes and construction time. This in contrast to most nuclear reactors that are designed only for a specific site. This will substantially reduce costs. The designs of SMRs are modular says Abrajano, top executive of U.S. Nuclear Industry Council, an industry lobby group. Most construction can be done in-house and assembled on site. This takes much less work and much less custom design.

Russia and China have taken the lead in this area. They are the only countries that already have SMRs operational . Western countries are trying to catch up. They see large new markets for both domestic energy production and exports. Today, more than 80 SMR designs are under development in 19 countries, including America, Britain, Canada, Japan and South Korea. This according to the International Atomic Energy Agency.

A report by Natural Resources Canada predicts that the global market for SMRs could exceed $150 billion by 2040. According to Valuates, a market analysis company global, the SMR market was $4.13 billion in 2023. It is expected to reach $10.23 billion by 2030. That represents an annual growth rate of about 14 percent.

Companies and military are seriously considering SMRs

While electricity production is often the domain of energy companies, the business community is becoming more interested in SMR’s. Tech companies are signing contracts for a stable and reliable supply of electricity. They often choose nuclear energy as such a source. Various tech companies are looking at SMRs to power their data centers.

  • In September Microsoft signed a deal with Constellation Energy to restart the Unit 1 reactor at Three Mile Island. This reactor will supply electricity exclusively to Microsoft for 20 years.
  • On October 14, 2024 Google placed an order for SMRs for a total capacity of 500 megawatts for carbon-free electricity for its energy-intensive data centers at Kairos Power. This deal is the first where a tech company has commissioned the construction of a SMR. The first is expected to go online by 2030, the rest by 2035.

Other potential customers for SMRs are oil and gas companies, steel companies, and chemical companies. In March 2023, Dow and X-energy signed a joint development agreement for a SMR at Seadrift, the company’s industrial site in Texas.

SMRs are the ideal choice for companies that want a smaller, dedicated electricity source on-site instead of relying on the electricity grid. However, these companies lack the expertise to operate these plants. They also do not want to take responsibility for the waste problem or be liable for the ownership of a nuclear reactor. This presents the following opportunities according to Abrajano. They will need a grid operator that manages the SMR. Several other companies are now emerging as pure-play development companies looking for locations and customers. They will either own and operate these reactors and sign long-term power purchase agreements or find another way to bring a SMR online through a grid operator.

The military apparatus is also a market for SMRs. A White House fact sheet from May 29th  reports that small modular nuclear reactors and microreactors can provide defense installations with resilient energy for several years, despite threats from physical or cyberattacks, extreme weather events, pandemic biological threats or other emerging challenges that can disrupt commercial energy networks. SMRs can be used to provide uninterrupted electricity to large military bases as well as operational bases in remote locations. Microreactors are currently used for submarines and aircraft carriers. They can be transported on an 18-wheeler.

The convenience of SMRs and microreactors means they can be transported to, for example, areas that have lost electricity due to a natural disaster. While the grid is being restored, smaller reactors can provide essential facilities with electricity such as hospitals and supermarkets. The ‘left’ of the political center is pleased because a SMR is a low-carbon energy source. The ‘right’ is pleased because a SMR can provide a continuous source of baseload electricity to meet escalating demand.

Now that the nuclear electricity industry is ready to bring this new technology to the market, it is also being assessed whether the required infrastructure and human talent are still in place. In America, there are 54 facilities containing 94 nuclear reactors. The average age is 42 years.

Meanwhile, China has made significant progress in expanding its nuclear fleet. In the past decade, the country has added more than 34 gigawatts of nuclear capacity. There are now 55 operational reactors with 23 additional reactors under construction, according to the Energy Information Administration (EIA). China has added the same amount of nuclear capacity in the past 10 years compared to the U.S. that has taken the past 40 years to achieve this. With the last 3 in the past 20 years.

The electricity price, like the gas price, has also found support well above the low point in February. A higher floor has formed. Now, a higher peak above €105 per MWh is still needed.

Baseload electricity price year of delivery 2025 (eur/MWh) – week cloud candle, log scale

Natural gas

“As electric generation capacity from renewable sources grows, natural gas is used increasingly to balance the intermittent nature of electricity produced from wind and solar.” – EIA

Low natural gas prices in America, warmer summer weather, and new generation capacity led to a new all-time high in natural gas use for electricity production last summer. On some days, gas-fired electricity generation accounted for nearly half of the total power output. The peak was reached on August 2nd, when U.S. natural gas plants generated over 7 million megawatt-hours (MWh) of electricity, according to the U.S. Energy Information Administration (EIA). This surpassed the previous summer record of July 28th 2023, by 6.8%, according to the EIA. Nine of the ten days with the highest gas-fired electricity production occurred this summer, of which 6 days were in August 2024.

Total electricity generation for summer 2024, from June to August, increased by 3% compared to summer 2023. The daily average for gas-fired electricity production this  summer also rose year-on-year by 3% to 5.9 million MWh, according to the EIA’s Hourly Electric Grid Monitor. U.S. electricity producers generated a total of 55.6 million MWh from gas plants between January and September. This was 5% more than the same period last year, according to an analysis by Reuters. This is the highest gas-fired electricity output since at least 2021.

In recent years the electricity demand in America, primarily supplied by gas plants, has increased significantly. Demand is expected to continue to rise with the increasing electrification and higher consumption for powering and cooling data centers.

The weekly chart of TTF gas for delivery year 2025 looks constructive. The market clearly wants to move upward after a long downward trend. The price has found support at the bottom of the cloud during the recent correction.

Price TTF gas year of delivery 2025 (eur/MWh) – week cloud candle, log scale

Coal

“Over the past few years, the balance of sources of electricity generation in the United States—especially in the summer—has shifted to more renewables and natural gas and less coal.” – EIA

Cold winter weather is forecasted in America. EIA expects a 5% increase in natural gas demand for the winter season. Due to the higher heating demand, natural gas prices will rise. These prices are in a multi-year dip due to high supply and unusually warm weather.

The Natural Gas Supply Association (NGSA) expects the November-March period to be 7% colder than the previous winter. Based on these low temperatures, the group predicts a 14% increase in residential and commercial demand as well as a 7% increase in industrial demand. As a result, the demand for coal could rise for an extended period at the expense of gas due to economic reasons. This is because rising gas demand increases natural gas prices which in turn will make coal relatively cheaper.

Last month, North American Electric Reliability warned that it remains concerned about maintaining sufficient natural gas supply during extreme winter conditions. In mid-August, Farmers’ Almanac published the “Wet Winter Whirlwind,” the 208th edition. The weather forecasting formula used by Farmers’ Almanac revolves around a climate pattern known as La Niña. Their expectation is a lot of precipitation and storms, depending on location.

Price ICE Coal year of delivery 2025 (usd/t) – week cloud candle, log scale

 

Emission certificates

“A negotiated solution would definitely be preferable to the imposition of tariffs, no matter how calibrated they are.” – Jorg Kukies, economisch adviseur Bondskanselier Scholz.

Germany has not yet decided whether it will support the EU’s plans to officially introduce tariffs on electric vehicles imported from China. This according to the chief economic adviser to Chancellor Olaf Scholz, speaking to Bloomberg TV. 

Earlier this year, the EU imposed provisional tariffs of up to 36% on EVs from China, on top of the regular 10% import duty. The EU had found that China heavily subsidized its EV manufacturers. Germany, the largest economy and car manufacturer in Europe, is worried that the tariffs could trigger a broader trade war with China. This can have serious implications for the major car manufacturers in Germany. The country has already voiced opposition to the EV tariffs several times. Recently, Spain joined Germany in indicating that both countries would abstain from voting on these new import duties.

German car manufacturers have a large market in China. They are integrated into the global supply chain. Jörg Kukies believes that for this reason, the tariffs are not a good idea. VDA, an association of German car manufacturers, also says that the goal of ensuring fair competition and protecting domestic industry from unfair practices will not be achieved through anti-subsidy tariffs. He adds that the European anti-subsidy tariffs will not only affect Chinese manufacturers but also European companies and their joint ventures.

The price of CO2 permits has risen by almost 10% the past four weeks. The upward movement is more impulsive than corrective in nature. The price is heading towards the lower end of the weekly cloud, around € 70 per ton emissions.

Price of emission permits – Dec-24 contract EEX (EUR/t) – weekly cloud candle, log scale

Renew­able

“Developers who choose not to co-locate their wind and solar PV power parks alongside battery storage or other sources of flexibility may see a drop in potential revenues during peak generation – hampering profits and discouraging investment.” – International Energy Agency (IEA)

Europe saw a record number of negative energy price moments this year because the pace of solar and wind energy development is greater than the region’s ability to manage this oversupply. Electricity prices were negative for 7,841 hours during the first 8 months of 2024. Sometimes the price dropped to as low as – € 20 per megawatt-hour, according to consultancy ICIS. The main culprit has been the solar sector, driven by inconsistencies in electricity supply due to its unstable nature. Although the deployment of utility-scale batteries could help address this challenge, it could take several years. In the meantime, countries must learn to deal with these price dips.

Read more about negative power prices and possible solutions in this blog

 

European countries have invested heavily in wind and solar energy projects in recent decades. This because the price of these clean energy sources has fallen along with decreasing installation costs. The cost of solar (PV) has dropped by 90% in the past decade. The cost of offshore wind has decreased by 70%. And batteries by more than 90%.This is largely due to the rapid increase in wind and solar production over the past 10 years. Data comparing the increasing global production to the costs of solar and wind energy show that costs have decreased by about 20% with each doubling of the cumulative capacity. Over the past four decades, solar electricity has shifted from being one of the most expensive energy sources to one of the cheapest.

As countries increase their renewable energy capacity, they face other financial challenges in the energy transition. Due to volatile production, the market can become oversaturated with cheap electricity on sunny and/or windy days. This drives the price of electricity down sharply and  increasingly below zero. During times of low or no production, no electricity is supplied to the grid. The grid then relies on stable energy sources like natural gas.

This has some advantages, as consumers can enjoy lower energy prices in areas where grid operators offer off-peak discounts. Grid operators are increasingly encouraging customers to use more energy during high production hours and to reduce their demand during peak usage and low-production hours, or “peak shaving.” This can be done by offering lower energy prices during certain hours of the day. This provides an incentive for energy-intensive applications, such as charging electric vehicles when there is abundant renewable energy.

Nevertheless, the weather dependence of many clean energy sources represents a clear challenge for grid operators striving for a stable electricity supply. Although investments in solar and wind energy projects continue to grow as governments around the world promote this transition by offering financial incentives, some parties are pausing their renewabe projects due to uncertainty about energy prices.

Several producers in Europe have been forced to reduce their electricity output or they have to pay to get rid of their electricity due to a full grid, also known as grid congestion. This discourages new additions of solar and wind farms. It highlights the clear need to increase energy storage in line with the growth of renewable energy capacity. The EU expects that energy storage will need to increase more than threefold between 2022 and 2030 with a predicted share of 69% renewable electricity. The rollout of battery storage could be further supported by increased investments in AI-powered smart grids and meters. This would allow energy efficiency to be better managed for consumers.

The IEA’s Special Report on Batteries and Secure Energy Transitions states that battery storage was the fastest-growing technology in 2023. The rollout more than doubled year on year. A total of 42 GW of battery storage was added globally. The key markets contributing to this growth are the European Union, China, and the United States.

However, the pace of this rollout does not match the growth of global renewable energy capacity. This results in volatile energy prices in countries with a large share of renewable energy on the grid.

In the Netherlands, the number of battery systems doubled in 2023 according to the National Smart Storage Trend Report 24/25. The total number of battery systems stands at around 40,000, with a total capacity of 621 megawatt-hours. It looks like the beginning of a growth curve. In the base scenario of Dutch New Energy Research, sales are expected to grow to an additional 942 megawatt-hours of storage capacity in 2024. More and more Dutch PV owners are expected to invest in energy storage as the technologies are complementary, congestion issues are increasing and the net metering scheme is expected to be abolished, probably by January 1st 2027. For large, commercial battery systems, there are more challenges such as transport tariffs, lengthy permit processes and unclear government policies.

To address the issue of negative prices for solar and wind energy, producers need to take proactive measures to mitigate the effects of this challenge. This could be done by investing in battery storage or working with grid operators to switch consumers from fixed to variable energy contracts and encourage usage during low-production hours. This should be supported by stronger national policies regarding battery storage and the incorporation of clean tech to strengthen global power grids.

Denmark postpones hydrogen pipeline to Germany.

Denmark aims to commission a cross-border green hydrogen pipeline to Germany by 2031, three years later than the previous timeline according to the Danish government.

Local transmission system operator Energinet is collaborating with Gasunie in the development of the Danish-German hydrogen network. Initial plans aimed for a cross-border transmission link between Denmark and Germany to enable the transport of green hydrogen by 2028.

Green hydrogen has recently faced several setbacks in Europe. This is due to a lack of customers. Just recently, Shell and Equinor cancelled their plans for the production and transport of low-carbon hydrogen in Northern Europe due to a lack of demand. Uncertainty around demand and incentives, together with cost pressures, weighs heavily on the global adoption of low-carbon hydrogen. This despite higher final investment decisions over the past year, according to the International Energy Agency (IEA).

Read more about hydrogen in our energy analysis of October 1st, 2024, section Renewables.