Energy market analysis October 1st 2024

01-10-2024

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Game-Changer? Global megabanks support nuclear power.

“Recognizing the key role of nuclear energy in achieving global net-zero greenhouse gas emissions/carbon neutrality by or around mid-century and in keeping a 1.5°C limit on temperature rise within reach.” – Declaration to Triple Nuclear Energy, COP28

Introduction

The revival of nuclear power generation could get a huge boost. More than a dozen of the largest global banks and financial institutions are pledging to support new projects aimed at tripling global nuclear power capacity by 2050. According to the Financial Times, these include Bank of America, Barclays, BNP Paribas, Citi, Morgan Stanley and Goldman Sachs. BNP told the FT it did not know of “any scenario” in which the world would be carbon neutral by 2050 without nuclear electricity. Barclays backs nuclear because wind and solar are less reliable and not available 24/7.

Energy experts say nuclear power is crucial for AI data centers, electric cars and other rapidly emerging electrification trends. According to George Borovas, board member of the World Nuclear Association, banks have so far been reluctant to finance new nuclear projects.

Meanwhile, the West will have to wake up and stand up to climate activists who are anti-nuclear and fossil fuel. As a result, energy prices have skyrocketed. This while Asia continues to use fossil and expand its nuclear capacity alongside solar and wind power. This allows China to increase its economic power while the West remains in energy chaos.

Uranium shares still rose sharply in the run-up to the COP28 declaration in late 2023. After this, they ended up in a downtrend.

Crude oil

”Sovcomflot cannot be regarded as an ‘offender’ nor as a tool to undermine sanctions.”

Over the past period, Russia has used an increasing number of oil tankers that are not allowed to export oil under Western sanctions. According to tanker-tracking data compiled by Bloomberg, Russian oil was transported through 6 sanctioned oil tankers in August. Another 6 tankers were able to do the same in September. Since late April, at least 17 sanctioned tankers left Russian ports. This trend now seems to be accelerating with most tankers owned by Russia’s state-owned tanker fleet operator Sovcomflot (SCF). In doing so, the country appears to be successful in circumventing both U.S. and EU restrictions, including the minimum price of $60 per barrel.

Russia’s “dark fleet” is estimated to consist of more than 600 tankers that have carried sanctioned oil at least once. Sovcomflot says it has no connections with Western countries, which means these sanctions do not apply. In 2023, 86% of Russian oil exports went to friendly countries such as China, India and Turkey. In 2021, this figure was 40%. For petroleum products, it was 84% in 2023, compared to only 30% in 2021. According to Kpler data, 83% of crude oil and 46% of petroleum products were shipped by shadow tankers in April 2024. The Western price limit is thus undermined by the declining role of the mainstream fleet.

The shadow fleet is a collection of obsolete and often poorly maintained vessels with unclear ownership structures and lack of insurance. With 85% of tankers older than 15 years, the risk of oil spills at sea has increased. The Danish Foreign Ministry argues that the Russian shadow fleet is an international problem that requires international solutions.

Goldman analyst Lina Thomas identifies these four short-term drivers for the crude oil market:

  • Easing monetary policy
  • Stocks continue to be withdrawn
  • Positioning and valuation remain low
  • Oil markets underestimate the risk of geopolitical disruptions

This higher risk comes at a time when speculators have set up record bearish bets, or are betting on a downward movement in oil prices.

The Brent oil price delivery November is trading above $70 and around the summer lows of 2023. Given the above short-term drivers, the price could rebound sharply here.

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

Elec­tricity

“The need for data centers over the next five years is going to be double what is currently in the markets. Overall energy consumption will increase by about 50% in the next 10 years across Asia Pacific.” – Brad Kim, managing director BlackRock’s Asia Pacific.

BlackRock expects the growth of AI and data centers to lead to a 50% increase in energy consumption in the Asia-Pacific region over the next 10 years. Technology giants have already started securing long-term electricity contracts in Asia. Here, energy demand will increase faster than expected, particularly due to demand for data centers and AI development.

Tech giant Microsoft aims to have 100% of its electricity consumption, 100% of the time, covered by zero-carbon-emission energy purchases by 2030. Last month, Microsoft signed a Power Purchase Agreement (PPA) to purchase 100% of renewable energy from EDP Renewables, a Spanish company, to be delivered to the grid by EDP’s renewable SolarNova 8 project in Singapore. With the current AI expansion, BlackRock says Asia will offer great opportunities for infrastructure investment, including energy infrastructure.

For more information on PPA’s and applications, read our blog on the subject.

 

Electricity prices in France were negative for hours on Tuesday, Sept. 17, due to low demand in a struggling economy and on increasing renewable generation. The French intraday electricity price saw a low of – € 20 per megawatt-hour (MWh) on the Epex spot exchange. So far this year, French electricity demand is lower than forecasted by grid operator RTE as French and European economies show little or no growth.

France, which gets 70% of its electricity from nuclear power, returned to the top spot among European electricity exporters last year. Its nuclear fleet was back from maintenance and, in addition, domestic demand was lower. Despite high electricity exports, supply can exceed demand. European electricity markets saw the most hours with a price of zero or lower this year. This is due to the increasing supply of renewable energy and a mismatch between supply and demand hours of solar generation.

Negative prices occur when there is more supply of electricity than demand. This situation is increasingly common in an increasing number of European countries due to the push toward renewable energy. The number of tradable hours in which the price was negative or zero increased this year in Germany, France, the Netherlands, Spain, Finland and southern Sweden, according to LSEG data by Reuters.

Negative wholesale prices cause slower investment in additional capacity. This includes investments in storage, which means producers do not have to curtail electricity (curtail) or pay to feed in (offload).

Read more about negative power prices and possible solutions in our blog.

 

The rapid expansion of solar and wind capacity is reshuffling the energy landscape. On days when both sources generate at high levels, the market can become saturated with cheap electricity. This drives prices down to the point of even becoming negative. This is a short-term benefit for consumers. But it also demonstrates the challenges of managing an energy grid that is increasingly dependent on renewable sources with variable availability.

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

Natural gas

“While China has emerged as Russia’s top energy customer, Beijing is reassessing its dependence on Russian gas. Geopolitical concerns, the risk of over-reliance, and China’s interest in diversifying its energy sources are driving this reconsideration.”  – Julianne Geiger – Oilprice.com

Russia is accelerating its natural gas exports toward China through the Power of Siberia pipeline. The country is targeting maximum capacity by the end of this year, a full year ahead of schedule. Russian state giant Gazprom has agreed with China National Petroleum Corporation (CNPC) to increase its December supply. This will achieve the intended capacity of 38 billion cubic meters (bcm) per year.

Russia is also developing a second pipeline to China via Mongolia. This Power of Siberia 2 could add another 10 bcm by 2027. This would increase Russian exports to China to nearly 100 bcm. However, negotiations between Russia and China on this new pipeline have stalled due to disagreements over prices.

Nevertheless, China will continue to play a central role in Russia’s future plans. Indeed, European markets’ interest in Russian gas continues to decline under sanctions and investments in alternative energy.

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

Coal

“Ten years ago, coal was the leading source of this country’s power – generating a third of our electricity.” – Dhara Vyas, Deputy CEO Energy UK

Britain is the first G7 country to go for a complete phase-out of coal. Britain’s last remaining coal-fired power plant will close at the end of September. It marks the end of 142 years of dependence on the fossil fuel for electricity generation. The decision is part of Britain’s commitment to net-zero emissions and the transition to renewable energy sources such as solar and wind.

Thepower plant Ratcliffe-on-Soar has generated electricity for about two million households since 1968. This plant is the last of its kind as of September 2023, after Kilroot power station in Northern Ireland stopped generating electricity through coal. Ratcliffe’s closure puts a complete stop to the use of coal for electricity that started in 1882.

Coal played an important role in the national energy supply during the 20th century. The fuel accounted for about 80% of Britain’s electricity in 1990. By 2012, it accounted for just 39%. Since then, 15 coal-fired power plants have gone offline or started using another fuel. Last year, coal accounted for just 1% of the UK’s supply, according to data from the national grid operator. The phase-out of coal has reduced power sector emissions by nearly 75% since 2012.

Meanwhile, renewables, especially wind and solar, make up more than 50 percent of the electricity mix, according to government statistics. Gas also plays an important role in the switch. The gas share rose from 28% in 2012 to 34% last year.

Sweden and Belgium were the first European countries in Europe to completely phase out coal. Britain is the first country in the G7 bloc of major world economies to reach this milestone. By comparison, France has given itself until 2028 to complete the phase-out. Canada will still need coal through 2030. Germany, with its current plans, will not connect until after 2038. Christine Shearer, research analyst at Global Energy Monitor, says a lot of work remains to meet global targets and phase out coal. Most developed countries are targeting 2035.

Four coal-fired power plants are currently still running in the Netherlands, including at the Maasvlakte and Eemshaven in Groningen. The Dutch plants are a lot smaller than Ratcliffe. According to national legislation, all coal-fired power plants in the Netherlands must close by Jan. 1, 2030. The share of coal in Dutch electricity generation is already declining. According to CBS, the amount of electricity generated from coal fell by almost 40 percent last year.

Despite more and more countries saying goodbye to coal, global use of the fossil fuel for electricity generation increased 1.1% by 2023, according to energy analysis firm Ember. This increase was mainly driven by China, accounting for 54.9% of global coal-fired generation.

China also added 7 times more renewable than coal last year. So even the world’s largest coal user is finally shifting toward clean energy.

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

Emission certificates

“The downturn in EVs is putting carmakers like VW and Renault SA at risk of hefty fines as tighter European Union fleet-emissions rules are set to kick in next year.” – Bloomberg

Germany is sliding toward recession, with the latest indicator flashing red. According to the European Automobile Manufacturers’ Association (ACEA), recent figures August show that the demand for electric cars has fallen sharply. ACEA reports a 69% decline in EV deliveries last month in Germany to just 27,000. The entire region saw a 36% contraction. The declining demand is caused by the removal of incentives that have made EVs less affordable for the average German.

The EV crash in Germany last month provides an ominous reality for the EV market and highlights the problems piling up for Europe’s largest economy. On the continent, new car registrations fell 16.5% compared to a year ago. A continuing trend of shrinking market share for electric cars in the EU is an extremely worrying signal for the industry and policy makers, ACEA said. Adding that carmakers should call on EU institutions to come up with urgent relief measures before new CO2 targets for cars and vans take effect.

The dip in new EV sales could derail the EU’s zero emissions deadline in the coming years. It has already caused Volkswagen to consider closing factories in Germany. The timing of the EV slowdown in the EU comes at a time when the German economy is already in recession. The third quarter had a very “weak start” for construction & manufacturing and saw disappointing spending by households.

The price of CO2 allowances has been moving upward for several days. The market has been in a corrective phase since May, which may be completed. After that, the price may move to a new high above €105 per ton of emissions. This upward movement will be partly politically driven.

Price Emission permits – Dec-24 contract EEX (eur/t) – day cloud candle, log scale

Renew­able

“We haven’t seen the market for blue hydrogen materialize and decided not to progress the project.” – Shell

Shell Plc has scrapped plans to build a low-carbon hydrogen plant on the west coast of Norway. Lack of demand is cited as the cause, according to Reuters. The announcement comes just after a similar decision by oil and gas giant Equinor ASA. This Norwegian state energy multinational announced it would not proceed with plans to build a pipeline to transport hydrogen from Norway to Germany. Partner RWE gives as reasons a lack of customers as well as an inadequate regulatory framework. Equinor would build hydrogen plants that would allow Norway to send up to 10 gigawatts of blue hydrogen a year to Germany.

Over the past decade, climate experts have proclaimed that hydrogen could play an important role in limiting global warming. According to net-zero models, hydrogen could contribute up to 20% of global, primary energy supply by 2050. That’s almost as much as all renewable sources in the current U.S. energy mix. There is no shortage of big hydrogen ambitions.

The hydrogen sector is especially struggling with high costs. According to Bloomberg New Energy Finance (BNEF), only 12% of hydrogen plants have customers with off-take contracts. Even for projects with off-take deals, there are non-binding arrangements that can be quietly rejected if potential buyers pull out.

Green hydrogen, manufactured by electrolysis of water with renewable energy, costs nearly 4 times as much as gray hydrogen made with natural gas or methane. As a result, the demand for green hydrogen is disappointing. Building hydrogen infrastructure will be another challenge.