Easwaran Kanason

Co - founder of NrgEdge
Last Updated: March 17, 2020
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Business Trends
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There are two items dominating the headlines in the energy sector at the moment: the global Covid-19 pandemic and the alarming decision of Saudi Arabia and Russia to go head-to-head in a price war. Individually, either event is disastrous. Together, they are catastrophic. 

A global rout on equities and commodities has kicked in, with capital fleeing to safe havens while country after country announces lockdowns to halt the contagion. Covid-19 and the oil price war are our current truths. But how long will they last? And what does this mean for the energy industry?

Scenario 1:
Fast Covid-19 containment, Quick resolution to the price war

Covid-19 will be with us for at least another 2 months. Taking China as an example – which enforced a total lockdown on the pandemic’s epicentre in Wuhan in late January – cases and deaths have been slowing down since the start of March. After spiking suddenly, South Korea too seems to be coming under control. All of this took a month or so. If that holds true, then the current spread in Europe could be halted by early April. Immediate resumption of normality won’t happen immediately; China took two months to restart, so the best case scenario is that the world will resume normal service in early May. That’s optimistic, but still possible; especially given how serious governments worldwide are treating the pandemic.

Saudi Arabia can be prone to grandstanding, and its opening salvo to lower the price of its crude dramatically could be seen as a shock-and-awe tactic to remind Russia of just how potent its spare capacity of 2-3 mmb/d is. Russia has alluded to the possibility of the OPEC+ alliance continuing, so talks between the two leading oil producers must still be going on in hopes of striking a deal. The current OPEC supply deal expires on 31 March 2020; there is still time for the two oil giants to agree that the industry’s needs is greater than the sum of theirs, and avoid a flood of cheap oil swamping a fragile global economy.

Brent price forecast (June 2020): US$45-50/b

Scenario 2:
Fast Covid-19 containment but slow resolution to the price war or Prolonged Covid-19 pandemic but fast resolution to the price war

World governments are panicking, particularly in Europe, where a second wave of cases emanated from Italy to the rest of the continent, sparing no one. European governments have responded by issuing travel lockdowns, reinstating border controls and funding emergency medical services to contain the pandemic. But the health system is strained, and it may already be too late. Europe has neither the authoritarian power of China or the meticulous plans that South Korea, Hong Kong, Taiwan and Singapore put in place to deny the virus traction. It may already be too late. With trouble brewing in the USA as well, where the healthcare system is even more unfriendly to pandemics like this and a second wave of infections emerging across the rest of the world, it may very well be 2021 before the virus has truly be contained.

In a war, everyone loses. In a classic instance of the Prisoner’s Dilemma and an illustration of potent Game Theory, Saudi Arabia and Russia should be working together (along with the rest of OPEC+) to keep prices steady. US$50/b oil is better than US$30/b oil, after all. The rise of the US shale patch has its limitations, so ceding some ground to US producers is still acceptable in the context of a growing market. But for various reasons, a desire to wipe out US shale, a want to power-play Saudi Arabia and Russia are at odds on how to proceed. So they may dig their heels in, choosing the path of most benefit for themselves but resulting in a sub-optimal result for the whole industry. A prolonged price war will not be pretty, and there will be many corporate casualties along the way.

Brent price forecast (June 2020): US$35-45/b

Scenario 3:
Prolonged Covid-19 pandemic and slow/no resolution to the price war

The nightmare scenario. Airlines worldwide have said that the global airline industry is at risk of bankruptcy by May, without any state or institutional support. With lockdowns, people are driving less, consuming less and productivity is way down, impacting energy and power consumption. Governments will do their best to keep the economy going, but they are at the mercy of an unsympathetic foe. Some medical experts are already suggesting that Covid-19 may never be fully contained, and could join influenza as a permanent seasonal disease. It took several years for the world to recover from the Spanish Flu in 1918; the same might apply here.

If Saudi Arabia and Russia hold true to their threats to massively increase crude output, there will be a tsunami of crude oil travelling around the world at a time when the world needs less. This is a battle for market share at the expense of profits. Many players that were banking of the cushion of US$50-60/b oil prices will be wiped out, with ramifications for LNG as well. The remaining players will be stronger for the death of competition, though their shareholders will not be happy campers, especially the shareholders of Saudi Aramco. If oil gets pumped without restraint over the rest of 2020, there is only so much that can go into strategic storage. The glut will only be erased when demand recovers. With Covid-19 still a major question mark, there is no telling what the timeline for recovery is.

Brent price forecast (June 2020): US$30-35/b

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The United States consumed a record amount of renewable energy in 2019

In 2019, consumption of renewable energy in the United States grew for the fourth year in a row, reaching a record 11.5 quadrillion British thermal units (Btu), or 11% of total U.S. energy consumption. The U.S. Energy Information Administration’s (EIA) new U.S. renewable energy consumption by source and sector chart published in the Monthly Energy Review shows how much renewable energy by source is consumed in each sector.

In its Monthly Energy Review, EIA converts sources of energy to common units of heat, called British thermal units (Btu), to compare different types of energy that are more commonly measured in units that are not directly comparable, such as gallons of biofuels compared with kilowatthours of wind energy. EIA uses a fossil fuel equivalence to calculate primary energy consumption of noncombustible renewables such as wind, hydro, solar, and geothermal.

U.S. renewable energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Wind energy in the United States is almost exclusively used by wind-powered turbines to generate electricity in the electric power sector, and it accounted for about 24% of U.S. renewable energy consumption in 2019. Wind surpassed hydroelectricity to become the most-consumed source of renewable energy on an annual basis in 2019.

Wood and waste energy, including wood, wood pellets, and biomass waste from landfills, accounted for about 24% of U.S. renewable energy use in 2019. Industrial, commercial, and electric power facilities use wood and waste as fuel to generate electricity, to produce heat, and to manufacture goods. About 2% of U.S. households used wood as their primary source of heat in 2019.

Hydroelectric power is almost exclusively used by water-powered turbines to generate electricity in the electric power sector and accounted for about 22% of U.S. renewable energy consumption in 2019. U.S. hydropower consumption has remained relatively consistent since the 1960s, but it fluctuates with seasonal rainfall and drought conditions.

Biofuels, including fuel ethanol, biodiesel, and other renewable fuels, accounted for about 20% of U.S. renewable energy consumption in 2019. Biofuels usually are blended with petroleum-based motor gasoline and diesel and are consumed as liquid fuels in automobiles. Industrial consumption of biofuels accounts for about 36% of U.S. biofuel energy consumption.

Solar energy, consumed to generate electricity or directly as heat, accounted for about 9% of U.S. renewable energy consumption in 2019 and had the largest percentage growth among renewable sources in 2019. Solar photovoltaic (PV) cells, including rooftop panels, and solar thermal power plants use sunlight to generate electricity. Some residential and commercial buildings heat with solar heating systems.

October, 20 2020
Natural gas generators make up largest share of U.S. electricity generation capacity

operating natural-gas fired electric generating capacity by online year

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Based on the U.S. Energy Information Administration's (EIA) annual survey of electric generators, natural gas-fired generators accounted for 43% of operating U.S. electricity generating capacity in 2019. These natural gas-fired generators provided 39% of electricity generation in 2019, more than any other source. Most of the natural gas-fired capacity added in recent decades uses combined-cycle technology, which surpassed coal-fired generators in 2018 to become the technology with the most electricity generating capacity in the United States.

Technological improvements have led to improved efficiency of natural gas generators since the mid-1980s, when combined-cycle plants began replacing older, less efficient steam turbines. For steam turbines, boilers combust fuel to generate steam that drives a turbine to generate electricity. Combustion turbines use a fuel-air mixture to spin a gas turbine. Combined-cycle units, as their name implies, combine these technologies: a fuel-air mixture spins gas turbines to generate electricity, and the excess heat from the gas turbine is used to generate steam for a steam turbine that generates additional electricity.

Combined-cycle generators generally operate for extended periods; combustion turbines and steam turbines are typically only used at times of peak load. Relatively few steam turbines have been installed since the late 1970s, and many steam turbines have been retired in recent years.

natural gas-fired electric gnerating capacity by retirement year

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Not only are combined-cycle systems more efficient than steam or combustion turbines alone, the combined-cycle systems installed more recently are more efficient than the combined-cycle units installed more than a decade ago. These changes in efficiency have reduced the amount of natural gas needed to produce the same amount of electricity. Combined-cycle generators consume 80% of the natural gas used to generate electric power but provide 85% of total natural gas-fired electricity.

operating natural gas-fired electric generating capacity in selected states

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Every U.S. state, except Vermont and Hawaii, has at least one utility-scale natural gas electric power plant. Texas, Florida, and California—the three states with the most electricity consumption in 2019—each have more than 35 gigawatts of natural gas-fired capacity. In many states, the majority of this capacity is combined-cycle technology, but 44% of New York’s natural gas capacity is steam turbines and 67% of Illinois’s natural gas capacity is combustion turbines.

October, 19 2020
EIA’s International Energy Outlook analyzes electricity markets in India, Africa, and Asia

Countries that are not members of the Organization for Economic Cooperation and Development (OECD) in Asia, including China and India, and in Africa are home to more than two-thirds of the world population. These regions accounted for 44% of primary energy consumed by the electric sector in 2019, and the U.S. Energy Information Administration (EIA) projected they will reach 56% by 2050 in the Reference case in the International Energy Outlook 2019 (IEO2019). Changes in these economies significantly affect global energy markets.

Today, EIA is releasing its International Energy Outlook 2020 (IEO2020), which analyzes generating technology, fuel price, and infrastructure uncertainty in the electricity markets of Africa, Asia, and India. A related webcast presentation will begin this morning at 9:00 a.m. Eastern Time from the Center for Strategic and International Studies.

global energy consumption for power generation

Source: U.S. Energy Information Administration, International Energy Outlook 2020 (IEO2020)

IEO2020 focuses on the electricity sector, which consumes a growing share of the world’s primary energy. The makeup of the electricity sector is changing rapidly. The use of cost-efficient wind and solar technologies is increasing, and, in many regions of the world, use of lower-cost liquefied natural gas is also increasing. In IEO2019, EIA projected renewables to rise from about 20% of total energy consumed for electricity generation in 2010 to the largest single energy source by 2050.

The following are some key findings of IEO2020:

  • As energy use grows in Asia, some cases indicate more than 50% of electricity could be generated from renewables by 2050.
    IEO2020 features cases that consider differing natural gas prices and renewable energy capital costs in Asia, showing how these costs could shift the fuel mix for generating electricity in the region either further toward fossil fuels or toward renewables.
  • Africa could meet its electricity growth needs in different ways depending on whether development comes as an expansion of the central grid or as off-grid systems.
    Falling costs for solar photovoltaic installations and increased use of off-grid distribution systems have opened up technology options for the development of electricity infrastructure in Africa. Africa’s power generation mix could shift away from current coal-fired and natural gas-fired technologies used in the existing central grid toward off-grid resources, including extensive use of non-hydroelectric renewable generation sources.
  • Transmission infrastructure affects options available to change the future fuel mix for electricity generation in India.
    IEO2020 cases demonstrate the ways that electricity grid interconnections influence fuel choices for electricity generation in India. In cases where India relies more on a unified grid that can transmit electricity across regions, the share of renewables significantly increases and the share of coal decreases between 2019 and 2050. More limited movement of electricity favors existing in-region generation, which is mostly fossil fuels.

IEO2020 builds on the Reference case presented in IEO2019. The models, economic assumptions, and input oil prices from the IEO2019 Reference case largely remained unchanged, but EIA adjusted specific elements or assumptions to explore areas of uncertainty such as the rapid growth of renewable energy.

Because IEO2020 is based on the IEO2019 modeling platform and because it focuses on long-term electricity market dynamics, it does not include the impacts of COVID-19 and related mitigation efforts. The Annual Energy Outlook 2021 (AEO2021) and IEO2021 will both feature analyses of the impact of COVID-19 mitigation efforts on energy markets.

Asia infographic, as described in the article text


Source: U.S. Energy Information Administration, International Energy Outlook 2020 (IEO2020)
Note: Click to enlarge.

With the IEO2020 release, EIA is publishing new Plain Language documentation of EIA’s World Energy Projection System (WEPS), the modeling system that EIA uses to produce IEO projections. EIA’s new Handbook of Energy Modeling Methods includes sections on most WEPS components, and EIA will release more sections in the coming months.

October, 16 2020