Energy Transition: From Oil 🔜 Wind

It is often touted as a truism, that in the effort to migrate our energy production from fossil fuels to renewables, we will have to use natural gas (controversially argued to be the *least* polluting fossil fuel, out of coal and oil) as a bridge transition energy source as we develop the green infrastructure necessary to satisfy our consumption.

Be that as it may, I see a trend run in parallel to this. While cheap and abundant gas is readily available, oil companies are starting to challenge the biggest wind developers in the race to build off-shore wind turbines in the North Sea.

North Sea: Wind is Eating into the Energy Market Share

Shell, Statoil, and Eni are three giants who are moving into multi-billion-dollar offshore wind farms in the North Sea. They’re starting to score victories against leading power suppliers including Dong Energy (I wrote about them branching out of conventional oil exploration into offshore wind here) and Vattenfall in competitive auctions for power purchase agreements (PPA).

The idea seems to be to leverage the know how they used from off-shore oil, into offshore wind. Irene Rummelhoff, EVP for New Energy Solutions at Statoil (see here) said she was convinced global warming was a very serious problem and her company wanted to help find a solution. “We strongly believe oil and gas will still be needed in future but we also know we have to do things differently and are working to reduce the carbon footprint of these operations,” she said.

“It makes sense to utilize our project-management skills from oil and gas to offshore wind which is why we are operating Sheringham Shoals and Dudgeon Sands off the UK. We are also looking at more carbon capture schemes and at solar worldwide.”

Even Exxon Mobil, in spite of having a conservative reputation, has recently unveiled plans to investigate CCS more fully in a new partnership with a fuel cell company. They also have pledged million of dollars to developing photosynthetic algae for transportation fuels.

Italian oil and gas major, Eni has signed an agreement with General Electric (GE) to develop renewable energy projects and hybrid solutions with a focus on energy efficiency. Their objective is to jointly identify and develop large-scale power generation projects from renewable energy sources, covering innovative technologies such as, onshore and offshore wind generation, solar power, hybrid gas-renewable projects, electrification of new and existing assets, waste-to-energy projects, the ‘green’ conversion of mature or decommissioned industrial assets and the deployment of technologies developed by Eni’s R&D department.

Luca Cosentino, VP of energy solutions, had this to say, “It is certainly an area of interest for us because there are obvious synergies with the traditional oil and gas business…As the oil and gas industry we know, we cannot get stuck where we are and wait for someone else to take this leap.”

This shift in business can be attributed to many factors. Firstly, large oil companies have spent millions in R&D for building oil projects offshore, and now that that business is on its way in some areas where older fields have drained, it makes sense to shift from off-shore oil to off-shore wind. Returns from wind farms are predictable because producers enter into long-term PPA which reduce risk by pinning down government-regulated electricity prices, unlike volatile oil prices, as the dramatic fall in the oil price from 2014 powerfully showed, the value of oil and gas assets is variable and uncertain.

Secondly, even as oil production is declining in the North Sea over the last 15 years, economic activity has been buoyed by offshore windmills. The notorious North Sea winds which threatened oil platforms have become a godsend for the new workers to install and maintain turbines popped into the Northern seabed.  According to Bloomberg New Energy Finance, about $99 billion will be invested in North Sea wind projects from 2000 to 2017. A decade ago, the industry had projects only a fraction of that size.

Circling the drain: The terminal decline of North Sea Oil

There is an evident trend going on in the North Sea, in spite of a slight resurgence we’ve seen in the last year.

north_sea_oil
Data from EIA, taken from Investopedia

Energy consultancy Wood Mackenzie said oil companies were likely to stop output at 140 offshore UK fields during the next five years, even if crude rebounded from $35 to $85 a barrel. According to the Financial Times, this compares with just 38 new fields that are expected to be brought on stream during the same period. Industry execs believe that this will be good news for the decommissioning industry, still in its nascent phase. Shell is preparing to take apart the first of four platforms in its Brent field, while Riverstone-owned Fairfield is to abandon Dunlin. As the sector oil declines, service providers anticipate that decommissioning may help them plug the revenue gap left by diminishing exploration.

Oil Decommissioning Frenzy?

Thirty years ago, North Sea production helped shape the UK’s energy landscape in a way similar to what the shale boom has done for the United States. In the 1980s, offshore production propelled the UK  to become a net crude exporter of oil and then of gas. But today, it’s a net importer of both oil and gas as the North Sea matured and their productivity declined.

As assets reach the end of their useful lives, company resources will become increasingly drawn into the expensive and at times technically complex activities required to cease production, safely remove subsea and surface infrastructure, and ensure that wells are permanently and safely abandoned.

According to a 2017 KPMG report,

The decommissioning era has now dawned in mature oil and gas provinces such as the North Sea – worsening economics, deteriorating infrastructure, technical limits on further recovery and regulatory pressure will make change inevitable. Industry forecasts suggest an unprecedented scale and pace of decommissioning activity in the years ahead.

The North Sea strategy seemed to be to delay the decommissioning of many offshore platforms, preferring to continue squeezing out increasingly small amounts of oil and gas rather than incurring the massive costs of decommissioning and bringing that equipment back onshore.

But those decommissioning delays mean only that oil companies have been kicking the can down the road and set up a more dramatic decline in North Sea production which will still be true even if prices increase.

This makes the shift into offshore wind all the more interesting.

Advertisements

The Employer of the Year is….(Renewable Energy)

I have heard it said:

“The [traditional] energy system employs millions of people!”

“Renewables will create massive job losses!”

“Fossil fuels may not be good for the planet, but at least they employ millions!”

and last but not least:

“Green jobs are the miracle that never happened”

Far be it for me to assess whether green jobs were ever meant to be “miraculous”, but I will say that “green jobs”, defined by the US Bureau of Labor Statistics (BLS) as either “jobs in business that produce goods and services that benefit the environment or conserve natural resources” or as “jobs in which workers’ duties involve making their company’s production process more environmentally friendly or use fewer natural resources”, are increasing at unprecedented levels.

capture
Number of Jobs in Renewably Energy, Irena, 2016

The International Renewable Energy Agency (IRENA) published their annual report detailing employment in the IRENA’s 2016 report, (link here – to learn more about their methodology, I suggest you check it out) estimated total employment in the RE sector to amount to 8.1m people. Adnan Amin, director-general or IRENA commented on the report stating, “The continued job growth in the renewable energy sector is significant because it is in contrast to trends across the energy sector. The increase is being driven by declining RE technology costs and enabling policy frameworks.”

Most of these jobs are in China, Brazil, USA, India, Japan, Germany, Indonesia, France, Bangladesh, and Colombia.

capture1
Renewable Energy Jobs by Country, Irena, 2016

Jobs in renewable energy increased by 18% from the estimates reported two years ago with a steady regional shift towards Asia.

In 2014, the Solar PV emerged as the largest employer in the energy sector accounting for 2.8 million jobs, an 11% increase from last year, and two-thirds of which were in China. Solar PV grew the most in USA and Japan while decreasing in Europe. Indeed, the global aggregate production of solar panels keeps increasing and pushing further into Asia, with lower costs of installations driving that accelerated growth. Global wind employment crossed the 1m job mark, fueled mainly by deployment in China, Germany, the USA, and Brazil.

Although, it’s good news (mostly) all around, the winner this year is:

🇨🇳Gold Medal: China

China has firmed up to be the leading renewable energy job market in the world, with 3.5m people employed. Domestic deployment and rising solar PV demand solidified that growth at 4% to 1.4m jobs. Chinese Solar PV jobs are focused on manufacturing (with 80%) following by installations and operations. The largest solar water heating technology industry and market are in China since they provide for both domestic and international demand. Half of the global wind jobs are in China, and more than 70% of those are in manufacturing.

Moreover, China is also is a leader in hydropower employment, as they add 75 GW of new projects between 2014-2017. Construction and installation account for 70% of the countries large hydropower employment.

Indeed, China has and installed 65 gigawatts more in renewable energy in 2015, shift the labor force from oil and gas, towards renewables. Now, China employs 3.5m people in renewable energy and only 2.6m in oil and gas, that 35% more people in RE than in oil and gas (coal excluded).

capture
Source: Irena, taken from Bloomberg

Although the lion’s share of the RE labor force is employed in manufacturing, this growth rate is likely to begin to contract, in spite of growth in technological deployment due to:

  1. market consolidation in favor of large suppliers/ manufacturers resulting in economies of scale;
  2. automation of process will make manufacturing more efficient, which will make it less labor intensive.

The runner up is:

🇺🇸Silver Medal: United States

Renewable energy jobs in the USA have increased at a historic pace, owing to large consumer demand and constantly declining prices of RE, especially solar. The Solar Foundation’s National Solar Jobs Census 2016 found that the solar industry accounts for 2% of all jobs created in the US over the past year, with the absolute number of solar jobs increasing in 44 of the 50 states. As of November 2016, there were 260k solar workers employed in America, “representing a growth rate of 24.5% relative to November 2015” according to the report.

This is great news all round since it signals that solar is receiving investments and creating thousands of high-skilled jobs, ultimately driving growth, strengthening businesses and reducing emissions (pollution) in cities. Moreover, wind recovered from a policy-induced slump in new installations and saw wind jobs rise by 43%.

Moreover, according to the annual U.S Energy Employment Report, published January 2017, more people are employed in solar power last year than in coal, gas, and oil combined. They report found that 43% of the total electric power generation workforce was employed in solar energy while fossil fuels accounted for a mere 22%. The report goes on to say that the US solar installation sector alone employs more than the domestic coal industry. Since 2014, solar installation has created more jobs than oil and gas pipeline construction and crude petroleum and natural gas extraction combined.

sourcesirenausbofstatisticsbloomberg
Source: Department of Energy, BLS, taken from Bloomberg

The electricity mix in the USA is shifting decisively in the direction of renewable energy, driven by the transition from coal-fired power plants, to gas and now, steadily in low-carbon energy sources.

🇧🇷Bronze Medal: Brazil

Employment in RE in Brazil is concentrated in the cultivation and production of biofuels. I am aware that there is a huge debate regarding whether of not biofuels production (especially from sugarcane..etc) is considered a real “green job” but that is an argument for another day, but today, I will be counting them as green jobs.

With 821,000 jobs, Brazil continues to have the largest liquid biofuel workforce by far. Reductions of about 45,000 jobs in the country’s ethanol industry (due to the ongoing mechanization of sugarcane harvesting, even as production rose) were only partially offset by job growth in biodiesel. Biofuel production, especially in a developing country tends to be labor intensive, on account of inefficiency and poor access to technology, which have explained why those working in biofuels in Brazil are just under 1m people.

However, Brazils wind energy sector is growing rapidly, which power capacity expanding from 1 GW in 2010 to 6 GW in 2014. Moreover, while there was one mere wind power equipment manufacturer, there were ten in 2007, indicating the sector is maturing. Most of these jobs are in construction and manufacturing.

Brazil’s solar heating market is expanding strongly in the past decade. In 2013, there were an estimated 41k people employed, between manufacturing and installation.

🇪🇺Consolation prize: European Union

Owing to a mélange of adverse policy conditions, regulatory uncertainty and a sharp decrease in investment, the number of RE jobs in the EU declined from 1.25m to 1.2m. Germany, however, is the euro leader in terms of job, with 271k jobs in RE. This is more than double the runner-up, France, which is ahead of UK, Italy, and Spain. RE employment in France fell by 4%- primarily because solar PV installations dwindled by 45%). We are likely to see a shift, due to Denmark and the UK’s ambitious off-shore wind plans which will (if they go through with them) likely create expansion in the near future. The EU has been suffering consistent defeats against China in terms of lower manufacturing competitiveness and a weaker installations market, leading to a net decrease in solar jobs… for now.

“But Jobs!”

Growing awareness of the harmful effects of GHGs on the environment and on our health, coupled with consumer preferences are pushing investment into renewable energy, leading to logical increases in employment in RE.  Conversely, the tumbling price of oil has led to a slowdown of industry expansion (too expensive deep off-shore, arctic projects, and unconventional drilling) and the corresponding reduction in capital expenditure and operational expenditure has had significant effects on the oil and gas labor force.

I do not think that the “But what about the jobs!” argument to be complete without merit. But a growing trend and body of evidence point to the fact that potential job losses in the traditional energy sector can be compensated by green jobs, however, an argument runs in parallel with this reasoning. And that is the fact that energy jobs are geographically and personally specific, meaning you can’t plug a worker out of an oil field in Texas and jettison them into a solar PV role easily. Re-skilling, training, and compensation for job losses are some of the conversations we will have to have in the next few years.

Nevertheless, the writing is on the wall.


Cover picture: Alex Wong, Getty Images

What I’m up to…

Firstly,

Happy New Year to everyone, thank you for your e-mails!

I wanted to run you through what articles I am working on at the moment, feel free to chime in at any time if there is something you would prefer to read about ⚡️

  1. How to Handle a Climate Change Skeptic – You guys are requesting this, so I will definitely write about it, although I admit I really resent having to add my two cents on how to handle people who categorically reject fact based evidence;
  2. Solar Securitization – Due to the rise of third-party leasing and Power Purchase Agreement (PPA) models, whereby energy clients can enter long-term developers that install, own and operate solar equipment on their roofs. In return, the host customer pays the developer for the solar system’s electric output, similar to how they would pay a utility for their services. These models lend themselves to the securitization of solar assets, a financing technique that puts together pools of underlying assets and transforms the future cash flows into a security. Once the risks are elaborated and understood, there would be many benefits for all parties;
  3. The Tyranny of Short Termism – There are so many things to say on this topic, on the one hand, a greater long-term focus, a growing body of empirical evidence pointing to, companies’ financial performance becoming more predictable, read: more profitable3.  If your focus on profit is sufficiently long, it starts to become more and more genuine representative of the long-term benefits and costs. But there is a growing appreciation of the massive economic threats posed by climate change, the ultimate long-term risk;

  4. Insurance and Climate Change – The $600 billion reinsurance (insurance for insurance companies-yes, it’s a thing) industry helps insurance companies pay damage claims from hurricanes and floods and can help people and companies get back on their feet after disasters,  which are getting more frequent, and deadly on account of climate change. Swiss Re data shows natural disasters caused an average $180 billion in economic damage per year over the last10 years, of which 70%  was uninsured. I wanted to look at these numbers and explore why insuring climate change was is challenging;
  5. Macquarie’s purchase of the Green Investment Bank – Aussie investment bank Macquarie closed a 2b deal to privatize the UK government backed Green Investment Bank. This will lead to interesting developments fo UK green infrastructure;
  6. An overview of the feasibility of the biofuel industry

Also, I realize that I am not as active as I ought to be, and I promise you, I will publish more regularly!

Stay awesome⚡️

cover photo from the Jimothy Wiggins Archive

Trend #1: Investment in Renewable Energy 2015

Old critiques, die hard. For the longest time, renewable energy (RE) has been viewed as too expensive and un-scalable, as a luxury energy source, that will not be deployed in developing countries. As a matter of fact, how many times did you hear the criticism, that by diverting investment away from so-called “cheap” fossil fuel energy, we would be depriving developing countries of their right to develop?

The numbers quantifying investments in RE are in! It should be no surprise that RE investment is increasing significantly and the developing world, especially China, is leading the way.

The findings of the United Nations Environment Programme (UNEP) Global Trends in Renewable Energy Investments 2016 confirmed that RE set new records in 2015 for dollar investments, the amount of new capacity added and the relative importance of developing countries in the context of that growth.

Record-breaking uptrend in Renewable Energy Investments

Global investment in RE rose 5% to $285.9 billion from 2014 to 2015, breaking the previous record of $278.5 billion reached in 2011 (FYI that’s double the dollar allocations to new coal and gas generation, which was an estimated $130 billion in 2015) when the famous ‘green stimulus’ programs in German and Italian were in full throttle. The figure below shows that the 2015 investment increased sixfold since 2004 and that investment in RE has not been below $230b since 2010.

GLOBAL NEW INVESTMENT IN RE BY ASSET CLASS, 2004-2015, $BN

global-investment-in-re-asset-class-2004-2015-b
Source: UNEP, Bloomberg New Energy Finance

*Asset finance volume adjusts for re-invested equity. Total values include estimates for undisclosed deals.

Over the course of the 12 years shown in the chart, the cumulative RE investment has reached $2.3 trillion.

Moreover, in 2015 some 134GW of RE excluding large hydro were commissioned, equivalent to some 53.6% of all power generation capacity completed in that year – and this is worth mentioning because it is the first time it has represented a majority. Of the renewables total, wind accounted for 62GW installed, and solar photovoltaics 56GW, highest ever figure and sharply up from their 2014 additions of 49GW and 45GW respectively.

Developing Countries Leading the Way

The investment which led to record-breaking levels came from China, which lifted its investment by 17% to $102.9 billion, about 36% of the global total. In the Middle East and Africa, investment was up a total of 58% at $12.5 billion, helped by project development in especially in South Africa and Morocco; and in India, up 22% at $10.2 billion.

More significantly, 2015 was the first year in which investment in RE (excluding large hydro) was higher in developing economies than in developed countries. The figure below shows that the developing world invested $156 billion last year, some 19% up on 2014 and a remarkable 17 times the equivalent figure for 2004, of $9 billion.

INVESTMENT IN RE: DEVELOPED/ DEVELOPING COUNTRIES, 2004-2015, $BN

global-new-investment-in-re-developed-vs-developing
source: UNEP, Bloomberg

The key contributors to this shift from developed to developing are the big three: China, India, and Brazil, who saw an investment rise of 16% to $120.2 billion

A large part of the record-breaking investment in developing countries took place in China. Indeed China has been the single biggest reason for the strong increasing trend for the developing world as a whole since 2004. In spite of low market fundamentals and much talk of decreased investment in RE, China has been a key contributor to these figures. China invested $102.9 billion in 2015, up 17%, representing well over a third of the global total.

Likewise, India enjoyed a second successive year of increasing investment, breaching the $10 billion for the first time since 2011.

Other developing countries, excluding the big three, lifted their investment by 30% last year to an all-time high of $36 billion, some 12x their 2004 investment, the biggest players are:

  • South Africa also deserves an honorable mention as it’s RE investment is up 329% at $4.5 billion significantly ramping up their solar PV, in the context of their auction program. In June last year, the government in Pretoria launched a tender for an additional 1.8GW for its renewables program. One of the signal deals later in the year was the financing in September of the 100MW Redstone solar thermal project for an estimated $756m, helped by loans from the World Bank’s International Finance Corporation and Overseas Private Investment Corporation of the US;
  • Mexico saw a 105% increase at $4 billion, aided by investment from the development bank Nafin for 9 wind projects. Moreover, Mexico is emerging as an important location for bond issues to back renewable energy projects. In November last year, National Financiera issued $500 million worth of five-year bonds to contribute towards the development of nine wind farms with a total capacity of 1.6GW;
  • Chile saw an increase of 151% higher at $3.4 billion, thanks to a sizable uptrend in solar project financings;
  • Morocco, Turkey, and Uruguay also saw investment increases in excess of the $1 billion milestone in 2015.

Developed world downward trend (mostly)

In the developed world, however, we are witnessing a downward trend quite consistently, since 2011, when it peaked at $191 billion, some 47% higher than the 2015 outturn. Developed countries invested $130 billion in 2015, down 8% and their lowest figure since 2009. This decline is due to two major factors:

  1. because of the US, where firstly; there was a rush of investment in 2011 as projects and companies tried to catch the Treasury grant and Federal Loan Guarantee programmes before they expired and secondly, the US Supreme Court’s decision in February 2016 to allow all legal objections to the Environmental Protection Agency’s Clean Power Plan to be heard before it can be implemented may be deterring investment in 2016.
  2. but much more to do with Europe, where allocations fell by 60% between 2011 and 2015. That big drop was caused by a mix of factors including retroactive cuts in support for existing projects in Spain, Romania and several other countries, an economic downturn in southern Europe that made electricity bills more of a political hot potato, the cut of government subsidies aimed at incentivizing RE in Germany and Italy, and the big fall in the cost of PV panels over recent years.Italy, in particular, saw renewable energy investment of just under $1 billion, down 21% on 2014 and far below the peak of $31.7 billion seen during the PV boom of 2011.

Retroactive cuts to feed-in tariffs really weaken support for solar energy investments. Spain, scene of particularly painful retroactive revenue cuts imposed by the government during the 2011-14 period, and the end of all support for new projects, saw investments of just $573 million in 2014. This was slightly up on the previous year but miles below the $23.6 billion peak of 2008.

But it’s not all bad in Europe, especially since the UK has not seen a significant slowdown in RE investments in recent years, and is actually pushing in the opposite direction. Moreover, in spite of the fact that offshore wind in the North Sea has seen massive investments amounting to $17b, Europe’s aggregate RE investment is still in decline.