Is oil the new carbon?
For all the angst expressed by some business sectors here and abroad about the economic impact of a carbon price, it really seems to be the least of their problems. New research this week from HSBC economist Nick Robins suggests the surging price of crude oil is having an economic impact the equivalent of a carbon price of €153t/Co2-e ($A190) – that compares to a EU carbon price at the moment of around €8.6/tCO2 (driven down by “economic permafrost”, he notes) and the forthcoming Australian price of $23/tCO2. Robins says the current European price is equvalent marco-economic impact of an oil price rise of just €3.3/barrel.
“We should be much more concerned about the growth destroying effects of oil price hikes compared with the still modest and depressed carbon price,” Robins writes, noting that the EU carbon price has fallen 37 per cent at the same time that oil prices have jumped 57 per cent to all time highs in Europe. Unfortunately, the flip side of the argument, higher oil prices leading to less consumption and less emissions, doesn’t work. It’s inefficient and it has unacceptable welfare costs.
The best way to counter the impact of the high oil price is through energy efficiency, which would cut both the oil burden and reduce emissions. A basket of measures including tighter auto fuel efficiency standards, reforming fuel and car taxation, and a switch to the electrification of both vehicles and rail networks, could reduce the oil import bill for the five largest importers (China, the EU, the US, India and Japan) by around €5.6 trillion from 2011-35.
The merit order effect is killing gas in Europe
The dynamics of the European energy market are changing rapidly, thanks to that economic permafrost, the surge in gas prices and the growing traction of renewable energy. Bloomberg reported many gas-fired plants in Europe are now losing money and analysts says up to 25 per cent of Germany’s gas-fired capacity may be closed, even with the planned phase out of its nuclear capacity. EON, Germany’s largest utility, says the boom in solar and wind capacity, coupled with rising gas costs, mean new gas-fired plants aren’t economical to build. Germany already has more than 25GW of solar and the government wants to lfit the share of renewables to 35 per cent by 2020. Analysts say between 6,400MW and 10,000MW of gas fired and coal-fired generation may have to close in Germany alone in the next give years. In the UK, two utilities have announced closures of around 1,000MW of gas-fired capacity due to falling returns.
Meanwhile, the “merit order” effect of solar PV continues to impact the returns of leading generators. This week, Italian energy giant Enel fingered the proliferation of solar PV – which surged by a estimated 9GW in 2011 and is expected to grow to 15GW in 2012 – for driving down energy prices, compounding the impact of demand weakness caused by the economic downturn. Enel said the impact on its gas-fired generation would translate into a fall of spark spreads (the difference between average system costs and variable costs of a CCGT plant) of about €5/MWh in 2012 compared with 2011. This would translate into a one third slump in generation earnings from the generation division this year. On the flipside, earnings from its renewables division would increase by around 20 per cent.
Solar losses are even bigger
The losses from the gas generation industry pale in comparison to those of solar manufacturers. German solar producer Q-Cells announced a year loss of $1.1 billion earlier this week, and said it did not expect a return to profitability until at least 2013. It was the largest loss reported by any international PV group, and deeper than its international rivals such as SolarWorld (€233 million), Yingli ($599.4 million) and SunPower ($603.9 million). However, Suntech, the world’s biggest manufacturer of solar panels, nearly beat it on Thursday night with a loss of $1.0 billion for the 201 year.
Suntech lifted revenues to $US3.2 billion, as a 33.3% increase in shipments of PV products was offset by a decline in the average selling price of PV products, amid fierce competition across the globe. Gross margins were 12.3% in 2011 compared to 18.7% for 2010, and have fallen even further – to 3-6% – in the first quarter of 2012. Suntech expects production to remain around stable this year, as growth from the US, China, India and Japan offsets declines in the European market. “The challenge is profitability,” CEO Zhengrong Shi said during a conference call. “Excess capacity in the global industry has pushed the international solar companies to sell at unsustainable pricing levels in an effort generate cash and maintain viability.”
Solar will be cheaper than coal sometime soon
In the US, Energy Secretary Stephen Chu said wind was already cheaper than coal-fired generation in the US, and solar may be able to match gas by the end of the decade, when falling production costs will take it to a cost of around 6.5c/KWh. Recent news from a California solar auction, where developers contracted to build 250MW of utility scale capacity at less than 10.9c/KWH, suggests solar PV already matches the cost of new coal-fired power. The significance of Chu’s comments were that it means that the three biggest consumers of energy in the world – China, the US and India – all agree that solar will undercut coal and gas in the next few years, and Chu suggested that transformation of the energy sector could be as quick and dramatic as the transformation in the transport sector when the internal combustion engine replaced the horse.
In China, the government recently predicted that the cost of utility scale PV could undercut the wholesale cost of coal-fired generation by the end of the decade. But the results of two solar auctions – one for a 20MW plant near Beijing, and another for a 30MW plant near Ningxia, sugests that the cost of modules is at 70c/watt, putting it well on the way to matching the cost of coal even sooner. In India, the government suggests that wholesale parity may come as soon as 2016, because of the high cost of thermal coal imports, and their inability to transport coal at an efficient cost. A recent solar auction in India put the cost of new-build solar PV at just 20 per cent above the cost of new build coal. As Tim Buckley noted in this report, KPMG recently suggested that India could be installing 23GW of solar per annum by 2022.
Our coal miners are crazy … if they think coal demand will continue unchecked
Despite all the above, Australian thermal coal miners remain convinced that demand for their commodity will continue undiminished into the future. And Australian politicians appear to feel obliged to feign horror that anyone would suggest otherwise, as we discovered when it was revealed this week that Greenpeace was passing round the hat for an anti-coal campaign. But if the prospect of carbon budgets, real action on climate change and the plunging cost of renewables do not cause those pouring tens of billions of dollars into coal infrastructure to reflect, then perhaps these quotes from the head of the Tata Power, the largest private power producer in India, and the largest company too.
Bloomberg quoted S. Padmanabhan as saying that the company favoured wind and solar over coal. Longevity was not guaranteed for coal-fired plants, and renewables were a better way to expand into new power markets because the investment tends to be smaller, the plants are built faster, and costs are usually more uniform globally. “Why would anyone want to invest at this stage in a coal project?” Padmanabhan said in a March 6 interview in Mumbai. “Investment has stopped.”
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