December 16, 2016
ENERGY WATCH by Karel Beckman
December 16, 2016
The coming offshore wind boom
Will Scotland Fraxit?
Solar and wind struggling to make money
Gas and wind power US winners
Renewables need storage – same as fossil power
How BP sees EVs
The coming offshore wind boom
Shell’s CEO Ben van Beurden recently admitted that it had been a “mistake” for Shell to get out of wind energy. You may remember that in 2008 Shell got out of the prestigious London Array offshore wind farm. (It opened in 2013 and with a capacity of 630 MW is currently the largest offshore wind farm in the world.) Too expensive, they said. Back then, many people concluded that there was no future for offshore wind as an unsubsidised energy source.
How different things look today. This week Shell managed to win the tender for a 700 (!) MW wind farm off the Dutch coast – Borselle II. Bid price: €54/MWh. Not a world record, as some media reported. Vattenfall won a 600 MW wind farm tender in the Baltic Sea, Kriegers Flak, last month, at the record low rate of €49.90/MWh. But that farm will be built in shallower waters closer to the coast. In September, Vattenfall won a tender for a 350 MW near-shore wind farm in Denmark for €63.80/MWh. In July Dong achieved a then-stunning record with a €72.70 bid for the first Borssele.
The win for Shell (in a joint-venture with utility Eneco, offshore construction company Van Oord and Mitsubishi-subsidiary DGE) is significant for several reasons. It marks the first real step for Shell in the direction of an “energy” rather than an oil company. They are not the first oil company to make that move: Total of France is a big player in solar power. And Shell did make some moves in the past, e.g. in solar in Japan and in wind power in Europe and the US. But the company – the largest oil and gas company in Europe – seems set now on a new course.
For offshore wind this is good news: Shell will bring the huge expertise it has in offshore construction and operations to this sector. That can only help in bringing down the price further.
In addition, Shell will drive the sector forward. The CEO of Shell in the Netherlands, Marjan van Loon, said that after the five planned 700 MW Dutch offshore wind farms have been built (by 2020), the Netherlands should build another 1 to 2 GW every year for 15 years. This could see Dutch offshore wind expand to some 27 GW by 2035. This amounts to a stunning transformation: currently total Dutch large-scale electricity generation capacity stands at just 18.6 GW, most of it gas (13.2 GW) and coal (4.3 GW), and just 600 MW offshore wind.
The low bid price is also good news. The 5.4 cts is a guaranteed price – that is to say, if wholesale electricity prices are below 5.4 cts, the Dutch government will pay Shell the difference. It is not certain yet how much this will be, but the government estimates that it will have to subsidize the project to the amount of €300 million. It had counted on a subsidy of up to €5 billion! Note that connection costs are excluded: they are taken care of by the government. Connection costs are estimated at €14/MWh.
The Dutch Minister of Economic Affairs Henk Kamp said he expects that offshore wind will be weaned off subsidies altogether in about 7 years from now. He expects the government will be paying €6 billion to support its offshore wind program out to 2023. The original budget had been for €18 billion.
The cost reductions are attributed to low financing costs, efficiencies, low steel prices, depressed demand in the offshore oil sector, as well as strong competition. Van Loon said Shell had taken “another good look” at the entire process to see where costs could be cut. She said she did expect the investment to be profitable.
The Dutch auctioning method also has a positive effect, most commentators agree: all permits and connections are taken care of by the government. Companies need only build the turbines and sell the power. Kamp said the government wants to apply the same method to onshore wind, solar parks and geothermal projects.
The success of the second Borssele tender has another additional benefit: The Netherlands expects to be able to employ some 10,000 people in offshore wind projects by 2020. Many of them will come from the “fossil” business. This will increase public support for renewable energy.
For those who are interested in up-to-date figures on renewable energy (indeed all energy) for the Netherlands, I can recommend this website operated by Entrance (the Energy Transition Centre in Groningen, a joint-venture of Energy Academy Europe and the Hanzehogeschool Groningen).
This report from Entrance includes figures up to November 2016. It shows, among many other things, that the Netherlands has only a 5.3% share of renewable energy:
In November 2016, wind energy had a share of just 1.2% in total energy production. The contribution of solar PV was negligible.
With regard to auctioning, In Europe, there is a move away from feed-in-tariffs and other direct subsidies to auction schemes, which have been successful in many places in the world, e.g. in countries like the United Arab Emirates, South Africa and Chile.
Japan has also decided now to move away from feed-in-tariffs to a competitive auction system, at least for large-scale solar. The Ministry of Economy, Trade and Industry will invite developers to submit bids to build a total of 500 MW of solar power in projects of 2MW or larger, according to a ministry document, reports Bloomberg New Energy Fiuance. It is hoped that the plan will rejuvenate Japan’s lacklustre solar industry and give greater clarity to developers regarding the tariffs they can expect to receive.
Although the Dutch offshore wind plans may seem impressive, there are countries with bigger plans. This chart from Bloomberg New Energy Finance (BNEF) shows the offshore wind parks currently planned or under development across the world:
China is the most ambitious, but the UK is also very busy. Globally offshore wind capacity will triple over 2016-2020.
What is perhaps the most interesting part about this chart, though, is the virtual absence of countries like the US, France, Norway, Sweden, Finland and Portugal, all grouped together under “other”. That means there is still a huge untapped potential for offshore wind – and with prices having coming down so much over the past few months, chances are that this potential will be tapped soon. Get ready for a worldwide offshore wind boom!
Will Scotland Fraxit?
The Netherlands is of course by no means the first country to have discovered the job potential of renewable energy. Germany and Denmark were there before. Scotland, too, is doing well out of its renewable energy sector, at least according to Scottish Renewables.
This industry body has published research showing that Scottish renewable energy businesses are working in more than 40 countries around the world. They are carrying out projects that include advising the government of Japan, providing cranes to build wind farms in Morocco and South Africa and working with the World Bank in Chile.
Scottish firms have been involved in projects worth £125.3 million in 43 countries and employ staff in 22 of those countries, according to the organisation. “The stretching targets set in Scotland have meant our home-grown green energy industry has developed skills which are in demand on every inhabited continent, bringing investment and income to Scotland from across the world”, said Jenny Hogan, Policy Director at Scottish Renewables. “Countries like Japan, Canada and Chile have seen the lead we’ve built up in wave and tidal energy and now employ Scottish organisations to advise them on developing their own marine energy resources.”
The Scottish Minister for Business, Innovation and Energy, Paul Wheelhouse, said: “Low-carbon industries and their supply chains generated almost £11bn in 2014 and supported 43,500 jobs, according to figures from the Office of National Statistics published recently.”
Meanwhile, the Scottish government is considering whether to allow fracking for shale gas in the country or not. It has issued a moratorium on fracking, and will decide next year whether to lift this. The UK government in London is strongly in favour of fracking.
Peter Strachan and Alex Russell, professors at Robert Gordon University in Scotland, are strongly opposed to the idea and have written a ringing J’accuse (not for the first time), arguing that the UK should “Fraxit”.
Do we really want to see 16,000 or more shale gas wells drilled in the British countryside, they ask, in an article for Energy Post, which has received wide circulation in the UK.
They assess the case for fracking in the UK against six “stress tests”:
- social licence or public support
- economic benefits
- indirect economic effects
- public health and environmental impacts
- climate impact
- energy security
They conclude that it fails in each case.
One interesting argument of theirs relates to the economic benefit of fracking for Scotland. KPMG has done research into this for the Scottish government. The KPMG report, which was published in November, shows the following impacts in the low-case scenario:
- Total spend: £1.5 billion;
- Spend in Scotland: £0.5 billion;
- Total additional economic impact: £0.1 billion;
- Additional jobs created: 470; and,
- Additional tax receipts: £0.5 billion.
Other scenarios are more positive, but still the impact is limited, as can be seen from this chart from the KPMG report (UOG means unconventional oil and gas and GVA means gross value added):
Solar and wind struggling … to make money
Although global investments in renewable energy reached a new record in 2015 at $286 billion, it does not necessarily mean that investors are making a lot of money. According to a Research Paper from Euler Hermes, a globally operating credit insurance company, profit margins in the solar industry have barely recuperated in recent years from three years of devastating losses in 2011-2013:
Wind energy companies are doing a little better:
The research paper also notes that, unlike in solar and wind, global investments in biofuels and biomass have taken a hit over the last decade:
The winners are … gas-fired and wind power
Researchers from the University of Texas in Austin Natural have found that gas and wind are the lowest-cost technology options for new electricity generation across much of the US when public health impacts and environmental effects are taken into account.
The paper they published is part of a comprehensive study coordinated by UT Austin’s Energy Institute titled the “Full Cost of Electricity (FCe),” an interdisciplinary project that synthesizes expert analyses from faculty members and other researchers across the university — from engineering, economics, law and public policy.”
The research team “adopted a holistic approach to probe the key factors affecting the total direct and indirect costs of generating and delivering electricity”, according to the university. “For the white paper on power generation costs, researchers used data from existing studies to enhance a formula known as the Levelized Cost of Electricity (LCOE). In addition to including public health impacts and environmental effects — which the LCOE typically does not — the research team used data to calculate county-specific costs for each technology.” The team also “developed online calculators to facilitate a discussion among policymakers and others about the cost implications of policy actions associated with new electricity generation.”
The result are shown in this graph:
The Environmental Defense Fund drew some key conclusions from the report:
- Wind is the least-cost option in the most number of counties.
- Coal plants are never the least-cost option.
- Natural gas combined cycle (NGCC) plants are the least-cost option in counties where the wind isn’t as strong.
- Utility-scale solar photovoltaic (PV) plants are the least-cost option in counties where it’s particularly sunny and/or there is a lack of cooling water availability, which is needed for thermal generation like coal.
- When a county faces siting challenges that prevent other technologies from being built, residential solar PV plants (like rooftop solar) are the least-cost option. Put another way, rooftop solar is a viable option in every county; other power sources are not.
Nuclear power, incidentally, is the least-cost option in 400 out of 3110 countries.
Interestingly the research also shows what happens if you leave out public health and environmental costs:
EDF notes that “even without accounting for the environmental and public health costs, wind remains the least-cost option in over 1,000 counties – that’s about one third of U.S. counties. And solar appears on the map nearly five times as much as coal.”
How much storage will we need? As much as we do now
“How to integrate variable renewable energies” is of course a question that has been studied for many years now. It is probably fair to say that views on this are evolving: whereas in the past many experts believed the share of renewables would need to be severely limited, they now tend to agree that renewables penetration can be a lot higher than previously thought.
The International Energy Agency (IEA) has added to the knowledge on this topic this week with a new report: “Next Generation Wind and Solar: from cost to value”. The paper highlights that successful renewables integration will require “strategic action” in three areas:
- System-friendly deployment, aiming to maximise the net benefit of wind and solar power for the entire system
- Improved operating strategies, such as advanced renewable energy forecasting and enhanced scheduling of power plants
- Investment in additional flexible resources, comprising demand-side resources, electricity storage, grid infrastructure and flexible generation
Not shocking news, to be sure, but still a welcome message – and the full paper provides more detail for policymakers who might still not be convinced.
The IEA also notes, interestingly, that “unlocking the contribution of system-friendly deployment calls for a paradigm shift in the economic assessment of wind and solar power.”
According to the IEA, “the traditional focus on the levelised cost of electricity (LCOE) – a measure of cost for a particular generating technology at the level of a power plant – is no longer sufficient. Next-generation approaches need to factor in the system value of electricity from wind and solar power – the overall benefit arising from the addition of a wind or solar power generation source to the power system. System value is determined by the interplay of positives and negatives including reduced fuel costs, reduced carbon dioxide and other pollutant emissions costs, or higher costs of additional grid infrastructure.”
Which is of course exactly what the researchers at the University of Texas have done (see above).
A closely related question to that of system integration is what the role of storage will need to be in a future renewables-based system.
A new authoritative Australian study from CSIRO (Commonwealth Scientific and Industrial Research Organisation) and Australia’s electricity network owners, released earlier this month, shows, according to the website Reneweconomy, that “the best way to deliver reliability, bring down costs and lower emissions in Australia is through a national grid powered almost exclusively by wind and solar.”
It projects the following electricity mix for Australia out to 2050:
Reneweconomy also looked at the implications for electricity storage from this study. It quotes CSIRO’s energy chief economist Paul Graham as saying that “additional storage is not needed for up to 40 to 50 per cent wind and solar penetration. That’s because the grid can rely on existing back-up ( built to meet peaks in demand and for when coal and gas “baseload” generators trip or need to be repaired).”
Beyond those levels, writes Giles Parkinson of Reneweconomy, “storage needs to be part of the equation. But again, not as much as many would think. As the back-up generators gradually exit the grid, they can be replaced by various storage types, until storage then becomes the principal form of back-up and grid security on the grid.”
Graham said that the CSIRO modelling showed that at very high levels of wind and solar, a maximum of half a day’s average demand was needed for storage. In some areas of the grid, only around three hours might be needed.
Parkinson notes that “this is an important point, because some renewable critics say that about a week’s worth of storage is needed, and multiples of wind and solar capacity required for back up. These would be the same people that argue that climate science is a hoax, but it is a view that has more traction than it should.”
According to Graham, “the CSIRO modelling indicated that at those very high levels, about 0.8GW of back-up was required for about every GW of wind and solar capacity. This is around the same amount of back up capacity currently needed by centralised power plants to meet peak demand and outages.”
The good news in Australia’s renewable energy scenario is that the storage capacity will likely be paid for anyway by households and businesses reducing their dependence on grid load, and reducing their bills, notes Parkinson. The CSIRO and ENA study expects rooftop solar to rise five-fold between now and 2026 to reach 20GW, before nearly quadrupling again to nearly 80GW by 2050.
Battery storage is forecast to reach 32GWh by 2026, and 87GWh by 2050. Much of this will be “behind the meter” and will need to be harnessed by networks to achieve grid security, meet demand and balance the output of renewables.
Graham says that battery storage costs are falling so quickly that the CSIRO team already had to upgrade its forecasts and bring forward recommended action by five years. “What you need to be able to do is to meet is average load. You don’t necessary need to size batteries to cover the capacity of everything that is built. We will be relying on dispatchable solutions for a while yet, because it is there and it is valuable to use it. As it slowly phases down, then we will replace it with battery storage.”
It is no coincidence, then, that the world’s largest “virtual power plant” (VPP) is being created in Australia, according to Reneweconomy.
It’s being built by utility AGL Energy, which first announced its plans to develop the VPP project in August: a centrally controlled network of 1,000 residential and business battery storage systems with a combined total of 7MWh capacity that would both store rooftop solar power and help manage grid stability in the state.
The project will be carried out in three phases, and the first phase is already a big success, with 150 battery storage systems from households connected. Another 350 additional systems are now being gathered. AGL says it expects customers with “sufficient excess solar generation” to achieve system payback of less than 7 years.
Ultimately, as solar power spreads in Australia, virtual power plants could be rolled out across the country.
How BP sees EVs
“Consider a time in which electric vehicles account for a third of all vehicles on the road. And in which electric cars outsell gasoline cars ten to one.
An encouraging milestone on the road to a cleaner, low-emissions future?
Or a remote possibility that will take far longer to reach than the current hype would have us believe?
Neither! Rather, it refers to the US car market at the end of the nineteenth century.”
Very clever, surely, how Spencer Dale, Group Chief Economist of oil major BP, started a presentation at a conference on 5 December, entitled “Back to the future: electric vehicles and oil demand”, in which he gave his views on the development of electric cars.
But what did he have to say about the future?
Before we turn Dale’s presentation, it is important to note that BP in its influential annual Energy Outlook projects very limited uptake of EVs out to 2030 – at least many analysts feel BP’s projections are far too modest. In his presentation Dale did not update these projections – that, he said, will be the subject of the next edition of the Outlook in January.
What he did instead was calculate what the impact of EVs might be on the oil market. And his conclusion, in a nutshell, was that whatever scenario might occur, even a high-growth scenario, impact on the oil market would be limited.
He gave a number of reasons for this. Most importantly, he said that the 900 million passenger cars on the road today use only 19 million barrels of oil per day (mbpd), which is only about one-fifth of total oil use. Total transportation, which also includes rail, shipping, air and road haulage, accounts for a little over half of total oil demand, while industrial demand accounts for almost a third:
Dale then went on to say that electrification is only relevant for passenger cars: “It’s possible that electrification may gradually spread to other forms of transportation, such as light trucks, long-distance road haulage, marine transportation. But the distances travelled and loads transported greatly increase the demands made on electric batteries, making an early electrification of these markets less likely. Over the next twenty years, the biggest concentration of EVs will be cars [i.e. passenger cars], which account for a fifth of total oil demand.”
Now the BP Energy Outlook assumes that the total number of electric cars will increase from around 1.2 million today to around 70 million in 2035, accounting for a little under a tenth of the total increase in the global car fleet. Obviously, if this is true, the impact on the oil market will necessarily be very limited.
But what if EV uptake is much stronger than BP’s outlook projects? Dale did address this question as well. He referred to the so-called 450 scenario from the IEA’s World Energy Outlook – the one scenario aligned with the 2-degree warming target that the world agreed to in Paris last year. This projects that the stock of EVs will reach around 450 million by 2035, said Dale. “Some 380 million vehicles more than we envisage in our Outlook, with EVs accounting for half of the total increase in passenger vehicles over the next 20 years.”
The difference between the two forecasts is illustrated in this chart (on the right-hand side):
Dale says, “As you would expect, this more rapid penetration in EVs dampens the prospective increase in oil demand. We estimate that the growth in oil demand in this case would be almost 5 Mb/d lower relative to the case in which the stock of EVs didn’t increase at all.”
The effect is illustrated in this chart (although I confess I fail see why he puts in “200 million extra EVs” here rather than 380 million):
The upshot: “This reduction in the pace of growth is by no means trivial – it is enough to erase most of the projected growth in oil demand from cars over the next 20 years”, says Dale. “That said, even under this scenario of very rapid growth, the emergence of EVs doesn’t look like it will stop global oil demand from growing significantly over the next 20 years.”
In short, BP’s Chief Economist is not losing any sleep over the impact EVs may have on the oil market. Not for the next few decades at any rate.
But how realistic is Dale’s view? Chris Goodall, an author and climate change expert for The Guardian, countered Dale with a critical review of his presentation for his blog Carbon Commentary. He makes some very good points.
For example, as Goodall points out, Dale “completely ignores the growing evidence of rapid EV development in light vans and buses. Spencer Dale says that only cars can be easily electrified at the moment. But, to give the most obvious example, La Poste in France and Deutsche Post in Germany are both making a transition to near-100% electric fleets for local deliveries. This is logical. Post vans have relatively short daily runs and usually return to a depot. The same argument holds for urban taxis and delivery vehicles. Buses are also moving to battery power as urban pollution becomes a central political issue. London is a good example as it moves to buy more electric buses. Purchase costs are sharply down and will cross diesel vehicle prices within a few years. Fuel costs are, of course, much lower and this is a more substantial element of bus running costs than a car.”
What is also very odd in BP’s forecast, says Goodall (and you can see this for yourself in the chart above, number 5), is that “BP forecasts EV sales volumes rising to 6.2 million a year between 2025 and 2030 but then falling to less than half this level – 2.8m per annum – between 2030 and 2035. This may be what BP hopes will happen, but what can possible be the logic behind this collapse in EV sales over a five year period?”
Goodall has more sound criticisms. Thus, he notes that Dale does not at all discuss the car market in China nor the cost declines in batteries. Goodall also makes at least one error: he writes that the Netherlands will ban non-electric car sales in 2025, but this is not correct. (Latest plans from the Dutch government are to do this in 2035.) Goodall also does not discuss Dale’s assessment of the impact of the 450-scenario on the oil market, other than to say that the IEA “is almost as slow as the oil companies in adjusting to the evolving reality”. That may be true for the IEA’s central scenario, but it is much less true for its 450-scenario.
More climate risks, more fossil fuel divestment
The Task Force on Climate-Related Financial Disclosures (TCFD), set up by the G20’s Financial Stability Board (FSB), chaired by Bank of England Governor Mark Carney, released a report on 14 December, in which they ask companies to disclose how they manage risks to their business from climate change and greenhouse gas emission cuts.
It recommends that listed companies disclose how they identify, assess and manage climate risks and opportunities and how risks in the short-, medium- and long- term impact their business, strategy and financial planning. They should also describe the potential impact of limiting global temperature rise to 2 degrees Celsius on their business, and how greenhouse gas emission cuts will impact their bottom line, it said.
“It remains the case that only one third of the top 1,000 U.S. companies produce broadly comparable information on the climate risks they face,” Carney said at the launch of the report.
The measures recommended by TFCD are voluntary, although some of its members argue they should become mandatory, reports Reuters. “Only then will climate risk become integral to corporate governance and how we all do business,” Mark Wilson, chief executive of insurance firm Aviva said in a statement.
Climate NGO 350.org announced the release of a report on 12 December, Global Fossil Fuel Divestment and Clean Energy Investment Movement, asserting that “the global movement to divest from fossil fuels has doubled in size since September 2015.”
Global commitments to divest have reached 688 institutions across 76 countries, representing $5 trillion in assets under management, according to the report, prepared by Arabella Advisors.
Meanwhile, as Bloomberg New Energy Finance reports, “heavyweight investors including Bill Gates and Richard Branson are plowing capital into a $1 billion investment fund to power clean energy production. The aim of the 20-year fund, dubbed Breakthrough Energy Ventures, is to pump money into risky, long-term energy technology with the potential significantly to reduce greenhouse gas emissions, according to a statement by the fund.”