Five Trends Shaping the Energy Sector in 2014
Energy is the backbone of any economy, making it imperative for decision makers to understand the sector’s dynamics for both short- and long-term planning. In an effort to help our clients stay on top of these dynamics, we have highlighted a key trend from each region that is likely to shape the energy market in 2014.
Europe: Rising Import Bills
“Our continent is buffeted by a resource worth renewable gold – the wind, and is currently a world leader in wind energy technology. We must transform our energy system and reduce our expensive and polluting energy dependence. Wind power is one of the best answers to this necessary transformation.” – Thomas Becker, EWEA CEO, May 2013
The European market is likely to be troubled by high reliance on expensive fossil fuel imports. The EU annual spend on foreign oil and natural gas, already more than $500 billion a year, is expected to grow approximately 10% and will sap 2.3% of the GDP by 2035. The price of natural gas in the EU is now triple the price in the US, which is a huge disadvantage for energy-intensive industries, such as iron, steel, petrochemicals, and concrete. However, to overcome this mounting challenge, Europe has been focusing on improving its capabilities to reap the benefits of renewable energy. Europe is at the cutting edge of renewable energy technology and a world leader in wind energy. Wind energy is already meeting 7% of the EU’s electricity demand and its potential is enormous. Several countries in Europe have a target to increase investments in renewable energy. France is aiming to reduce the share of nuclear sources in its electricity production from 75% to 50% by 2025, and to increase the country’s energy efficiency by about 20% and produce about 23% electricity from renewables by 2020. Meanwhile, Germany plans to stop producing any energy from nuclear power by 2022 and aims to produce at least 50% of its electricity from renewables by 2030.
Things to ponder upon are, whether these policies will be able to change the reliance of Europe on imported fuels? Will these be implemented as planned? Only time will tell.
US: Challenged by Regulations
US energy companies may face regulatory challenges with aggressive enforcement by regulators, increasing role of the Federal Energy Regulatory Commission (FERC) and the US Commodity Futures Trading Commission (CFTC), and new approaches being implemented by The North American Electric Reliability Corporation (NERC). Since the enactment of the Energy Policy Act of 2005, government regulators have been steadily expanding their power and influence over the industry. This can be seen in the sharp increase in regulatory fines between 2007 and 2013 (civil penalty imposed by the Federal Energy Regulatory Commission (FERC) was $39.8 million in 2007, which increased to $734.6 million in 2013). Further, most of these changes are recent and many energy companies may lack the experience and knowledge to deal with an investigation or enforcement. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires companies to report energy swaps to the US Commodity Futures Trading Commission (CFTC).
However, most energy companies have never dealt with the CFTC before. Hence, when contacted by the commission, they do not know who should respond. Neither do they know how to respond nor what departments need to be involved. The CFTC will now be overseeing energy companies and may resolve basic compliance issues—involving maintaining and updating records—as well as monitor price manipulation and similar higher-level issues. Many energy companies are striving to better understand what regulators deem illegal and inappropriate behaviour. Although detailed regulatory documents and guidelines have been issued by regulatory authorities, energy companies still find them ambiguous and broad. Adding to the woes of the industry, the NERC is stepping up enforcement of electric grid in two areas—first, maintaining the reliability of the physical electric grid, such as electric poles and transmission lines; and second, enhancing the grid’s cyber security or critical infrastructure protection (CIP).
Dealing with the changing and stricter regulatory requirements can be challenging! Will companies with operations in several regions be able to address regulatory practices and processes differently are something that one can watch out for this year.
Asia Pacific (excluding China): Coalgate
“Coal is emerging as the fuel of choice because of its relative abundance and affordability in the region.” – Maria Van der Hoeven, Executive Director, IEA (October 2013)
Coal is becoming the preferred energy source in the fastest-growing region of the world. Rising oil and gas prices, and increasing need for sustaining rapid economic growth are a few key reasons encouraging Asian economies to shift to coal. According to the International Energy Agency (IEA), ASEAN countries—with energy demand growing at more than twice the global average—are increasing their dependence on coal and are aiming to generate 49% power from it by 2035, compared with 31% in 2011. Even India has planned to increase domestic coal production by 240 million tonnes per annum (mtpa) by 2022 to compensate for fuel shortages.
Asia-Pacific countries are also expanding their renewable energy bases (driven by policies) to increase share in the energy mix. For example, the Philippines target shifts to 100% renewable energy and Thailand aims to increase renewable energy share to 25% by 2023. However, economic growth remains the prime driver for energy policies in the region and will therefore favour cheaper coal over other sources.
“Coal is so cheap and abundant; you need a strong, dedicated climate policy with a high carbon price to defeat it.” – Laszlo Varro, Head (Gas, Coal and Power Division), IEA (October 2013)
“China is throwing the kitchen sink at diversifying its energy sources. It is spending five times what the French did at the peak on a new nuclear program, and eight times what the Germans spent at the peak on wind energy.” – Laszlo Varro, Head (Gas, Coal and Power Division), IEA (October 2013)
If there is any nation that is looking to build a diversified energy mix, it is China. While it is the largest consumer of coal, accounting for about 50% of the global consumption, according to the IEA, it will also build more renewable power plants through 2035 than the US, EU, and Japan combined. China is also aggressively adopting natural gas due to increased supply availability from shale (as it has the largest reserves) and larger LNG markets. This trend is also being driven by efforts to replace coal with natural gas for greater environmental sustainability.
Environmental sustainability is also driving the trend towards renewable energy. It has a renewable energy law in place that sets renewable energy targets, creates renewable power purchasing obligations for utilities, authorizes feed-in tariffs for wind and solar, and creates a mechanism for cost sharing by spreading the cost of incentives for renewables to both producers and consumers of electricity. It aims to increase renewable energy share in its primary energy mix from 8% in 2013 to 15% in 2020.
In the near future, we can hope to see diverse energy investments in the country, as it continues expanding its non-renewable and renewable energy bases.
MENA: Transition to Renewables
“North Africa and the Middle East are at the beginning of an impressive energy transition based on wind and sun.” – Paul van Son, CEO, Dii (November 2013)
Political turmoil in the MENA region is undermining future energy investments in the region. While oil and gas will continue to be the most preferred source of power in the region due to its easy availability, countries have begun to realize the merits of renewable energy. There are more than 100 non-hydro renewable energy projects in the pipeline across MENA, and together they are expected to produce 7.5GW of power—about a five-fold increase over the renewable energy capacity in 2013.
Leading the way in the region is Saudi Arabia, which has pledged an investment of $109 billion to help generate as much as one-third of the country’s energy demand using renewable energy. However, the lack of any long-term policy plans for implementing renewable energy will be an obstacle for attracting investors—a story that is quite common in the region. Notwithstanding rising oil costs and finite reserves, the growth of renewable energy in the region seems assured.
A lot has been happening in the energy sector across the globe and every region is dynamic, facing its own unique problems. In 2014, companies will be required to stay a step ahead and manage their energy strategies proactively so that they are not victims of this complex scenario.