New energy, new markets- as renewables boom globally

Renewables are doing well, supplying over 35% of the EUs electricity, with that expected to rise to 57 % by 2030.  Continued expansion beyond that looks likely,  in the EU and elsewhere-  some say to near 100% of power, or even of all energy, is possible by 2050. 

However, as renewables spread, the existing energy market trading system may no longer be helpful. Globally and regionally it was dominated in the past by coal, then oil and more recently gas, physical commodities, shifted by rail, tanker, truck or (for the fluids) by pipe, with control over access to these resources having major geopolitical implications. Electricity has also been traded nationally, and increasingly regionally e.g. around the EU, and, with renewables expanding, that trade could grow. In part that is because renewable resources are very different from fossil resources. The latter are concentrated in a few geographical locations, the former are more dispersed and so, often, is power generation, with smaller local units. The energy outputs are also often variable, so that there will be an incentive for power  trading by grid between areas where there are surpluses and those where are current lulls.

Global energy transition

There is no question that the energy market and indeed the world will change, as and when the energy transition spreads. For example, IRENA’s Global Commission produced a ‘New World’ report on the geopolitics of the energy transition which says that ‘Just as fossil fuels have shaped the geopolitical map over the last two centuries, the energy transformation will alter the global distribution of power, relations between states, the risk of conflict, and the social, economic and environmental drivers of geopolitical instability.’

Summarising the likely trends, another recent study concluded that ‘because renewable energy resources tend to be more evenly distributed geographically than are fossil and nuclear fuels, the economic and security advantages of access to energy will be more evenly spread among countries, there should be fewer risks related to transportation chokepoints and less reason for great powers to compete over valuable locations. In sum: international energy affairs will become less about locations and resources, and thus less geopolitical in nature.’

However, that does not mean there will be no geopolitical issues. The study added that ‘as renewable energy resources are abundant but diffuse, technologies for capturing, storing and transporting them will instead become more important. International energy competition may therefore shift from control over physical resources and their locations and transportation routes to technology and intellectual property rights’.

Incumbent reactions

Meanwhile though, globally, the fossil energy companies will no doubt seek to maintain their market shares as long as possible, while making some concession to cutting emissions where possible, at the margins, e.g. by reducing gas flaring, improving oil processing efficiency. Carbon Capture and Storage would keep them in the game for a while, but, so far, it seems only of marginal interest to the oil companies: they may see it as too costly. By contrast, with costs falling, as a recent detailed review of oil (and gas) company polices notes, some oil companies are ramping up their at one time very limited involvement in renewables significantly, by acquisitions and by direct venture capital investment e.g. in 2017, BP took a 43% stake in solar PV developer Lightsource and it has also invested in concentrating solar power developer BrightSource. It also has shares in  several US wind farms  Shell  had interests over the years in solar cell production and has recently moved in to large scale solar power generation, but also seems interested in wind energy, including offshore wind.

While the international oil majors may thus play some role, as the green power market expands, national power companies, both private and state owned, will however play a dominant role in it. In some countries it will not be an easy transition, since many of companies have historically focused on fossil fuel, especially coal.  Global political and environmental pressures for an energy transition are already causing problems for some of them, and their host countries. Some (like Poland, Hungary and the Czech Republic) have dug in against rapid top-down imposed change and targets, but Poland, perhaps looking to how power companies might best capitalise on the inevitable expansion of renewables, recently suggested that the EU should move way from centralized ‘single market’ power trading between countries, to local, more decentral, trading between many nodes across the EU. It claims this would be more stable.

Most EU countries now have competitive market auction systems at the national level, setting electricity price levels, but, in theory, it would be possible to have long distance power contracts, transfers and trading between local nodes, as Poland suggests, for example to help with balancing variable local supply and demand. However, it’s hard to see exactly how that would tie in with national trading. The UK’s Capacity Market, for balancing services, might, in principle, be open to external inputs and it already does offer payments for interconnector links, but the Contracts for Difference auction system is only open to UK-based generation projects. The latest round of that seem likely to be dominated by offshore wind projects, up to 6 GW worth, all based in UK waters.

As renewables expand, there will though be surpluses at times, so that international trading will become more attractive, and possibly often more lucrative that energy storage. For example, according to GlobalData, the UKs offshore wind capacity is slated to grow at a Compound Annual Growth rate of 11% to reach 29.7 GW in 2030, from 9.3 GW in 2019. And by 2050 it expects the UK to have 83 GW of renewable capacity in place- that would be enough the meet demand most of the time, with significant surpluses at times.  Somewhat perversely, the UK government is currently blocking new onshore wind projects, but they are expanding across the EU, and on shore wind is likely to offer significant trading opportunities. A recent study suggested that it could supply 10 times the EU’s total power needs. PV solar is more day-time peak-period defined, but it too could generate surplus, for example in summer.

Changing balances

 Leaving aside the issue of what happens in relation to the EU’s ‘single energy market’ after full BREXIT, whether long distance international trading will be lucrative will of course depend on their being local demand and there will at times be national uses for this surplus power, for example for storage. As the new energy system develops new patterns of local demand may also emerge. For example, National Grid’s updated Future Energy Scenarios study looks to the UK having over 35 million electric vehicles by 2050 and, in line with current plans, to heat demand also being met by electricity. However, it warns that there may be problems: although demand peaks can be reduced by smart system management, in some scenarios, ‘the effects of electrifying first transport and then heat become apparent as these outweigh the improvements in energy efficiency peak avoidance’. So, the UK may need retain/store power to deal with this, although it could also import some.  Though of course only if there was some power available when needed.

However, the power balances all look likely to change. If electric vehicle use spreads EU-wide (as seems likely), and electric heating also spreads EU wide (less clear), a new demand pattern will emerge, with new peaks, but also, perhaps, new surpluses. It could be similar world-wide, with a new demand pattern emerging. The specifics will vary locally, but while green power and green gas trading will boom, one thing seems clear- trading in oil for transport uses will diminish in importance. Palm-oil based liquid biofuels are not a brilliant idea in environmental/land-use/biodiversity terms, although trading in biogas and hydrogen and other green gases for vehicles might flourish. All in all, we are in for some big changes.