Energy Darwinism: Fossil fuels and utilities at risk

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A major new report from investment banking giant Citi has highlighted the dramatic changes sweeping the world’s energy industry, and is being used as a clarion call to review the estimated $37 trillion that will be invested in energy infrastructure and projects over the coming two decades.

In a study titled “Energy Darwinism – the evolution of the energy industry“ – Citi says the global energy mix is shifting more rapidly than is widely appreciated, and this has major implications for generators, utilities, and consumers, and for exporters of fossil fuels such as Australia.

“Consumers face economically viable choices and alternatives in the coming years which were not foreseen 5 years ago,” the analysts write – pointing mostly to the “alarming” falls in the cost of solar.

It says the pace of change in the last five years has been dramatic and will likely accelerate, not slow. These changes will flow through to suppliers. Conventional fuels and technologies are likely to be substituted, or suffer reduced demand in the best case scenario.

(It should be noted here that the six analysts involved are the managing directors of research in Citi’s mining, oil and gas, utilities, commodities and alternative energy sectors, so they are not just a band of beatific beatniks).

Citi says fossil fuels further up the cost curve are most at risk, and new projects built now will face competition with new technologies within the first quarter of their anticipated 25-year life. “These project entail significantly more risk than is widely recognised,” the analysts write.

“There will always be more subjective choice factors involved such as fuel diversity and energy independence that may offset cold, hard economics, but investors, companies and governments must consider the sea change that we believe is only just beginning. “

It says utilities are most at risk because the “very nature” of their business is likely to change. Utilities in their current form could lose half their addressable market to energy efficiency, solar and storage, and other distributed generation.

“Renewables and decentralised energy are impacting not only how utilities can earn money, but also what they do to earn this money,” Citi says. “There are opportunities for new avenues for investment and growth in terms of smart grid, storage, and downstream services. “The question is whether utilities grasp that opportunity and evolve themselves.”

Perhaps the key graph in the report is this one below. It doesn’t mean much at first glance, but Citi says it is critical for understanding the factors at play.

citi darwin

In the first quartile it notes that gas (the light grey line) dominates the first quartile of the integrated cost curve, largely thanks to the advent of shale.  So that is probably true of the US, but not many other places (in Australia, gas is really expensive, or about to be). The key is what happens in the other quartiles.

In the final quartile, it notes that solar is already intersecting with gas, which is why utilities in the US are dumping plans for peaking gas stations in favour of solar (red line). And this also means that solar steal the most valuable part of the electricity generation curve because it produces during the day when prices are highest.

This is already impacting Germany, where gas is expensive and gas-fired generators are going out of business, and it might have cited Australia too, where returns for incumbent fossil fuel generators are falling dramatically and so it their running time. Wind farms such as Collgar in WA are running at higher capacity factors than black coal generators in NSW.

Citi notes that wind (orange line) is already overshadowing coal (black) in the second quartile. But here’s the conclusion that will stun those locked into a conventional view of generation: Citi says that while wind’s intermittency is an issue, with more widespread national adoption it begins to exhibit more baseload characteristics (i.e. it runs more continuously on an aggregated basis). “Hence it becomes a viable option, without the risk of low utilisation rates in developed markets, commodity price risk or associated cost of carbon risks.”

Citi notes that solar is exhibiting “alarming” (for whom!?!?!?)  learning rates of around 30 per cent (that is for every doubling of installed capacity). Wind is evolving at a slower ‘mechanical’ learning rate of 7.4 per cent, and gas is evolving due to the emergence of fracking and the gradual development and improvement of new extraction technologies.

But Citi says that coal is using largely unchanged practices and shows nothing like the same pace of evolution as the other electricity generation fuels or technologies. It notes nuclear has seen its costs rise in developed markets since the 1970’s, largely due to increased safety requirements and smaller build-out.

As Citi notes: “Thus is not a ‘tomorrow’ story. We are already seeing utilities altering investment plans, even in the shale-driven U.S., with examples of utilities switching plans for peak-shaving gas plants, and installing solar farms in their stead,” it says.

“The same is true for other fuels, for example the reluctance on the part of utilities to build new nuclear in the UK, or the avoidance of coal in some markets due to uncertainty over pricing, likely utilisation rates and or pollution.

“Even in China, we believe that coal demand is likely to peak this decade as its generation mix starts to shift,” it says. It notes India’s coal demand will grow much slow than expected, and nuclear – and the capital costs involved – make it unsuitable for markets with such uncertainty.

On solar, Citi says the price fall of solar panels has exceeded all expectations, resulting in cost parity being achieved in certain areas much more quickly. “The key point about the future is that these fast ‘learning rates’ are likely to continue, meaning that the technology just keeps getting cheaper. At the same time, the alternatives of conventional fossil fuels are likely to gradually become more expensive.”

On wind, it says technology is evolving more slowly than solar but it has the advantages of offering more ‘base-load’-like characteristics in running more of the time, and perhaps most importantly is lower cost than solar, allowing the technology to compete against conventional generation at lower wholesale prices.

It says storage is still a nascent industry, but so was solar just 5 to 6 years ago. “The increasing levels of investment and the emergence of subsidy schemes which drive volumes could lead to similarly dramatic reductions in cost as those seen in solar, which would then drive the virtuous circle of improving economics and volume adoption,” it says.

And how fast can evolution take place? Citi provides this graph below to illustrate the point.

citi waterfall

Citi says the history of the energy industry tells us that change is never gradual. New technologies are embraced at the expense of incumbents. Today, as conventional fuels become gradually more scarce and expensive and as new technologies improve, the long term transformation becomes ever more inevitable. It says it would be naive to think otherwise.

“If we look at the situation facing European utilities, the future looks particularly challenging, given a potential halving of their addressable market, an ageing fleet, and deeper questions about what a utility will look like in 5, 10 or 20 years’ time,” it writes.

“In transportation, the emergence of electric vehicles, and more importantly the rise of oil to gas switching show that evolution is not restricted to the power generation market.”

“Given the long term nature of upstream fossil fuel and power generation projects, this substitutional process and the relative pace of evolution is vitally important to understand.

“The sums of capital being invested are vast; the International Energy Agency (IEA) forecast that $37 trillion will be invested in primary energy between 2012 and 2035, with $10 trillion of that in power generation alone. Clearly the value at risk from plant or the fuels that supply them becoming uneconomic in certain regions, both in terms of upstream assets and power generation, is enormous.

“Quite simply the sums of money at stake in terms of investment in energy over the coming decades are staggering, and getting a choice of fuel or technology ‘wrong’ could have dramatic consequences for both countries and companies, be they upstream oil & gas companies, utilities, industrial consumers, renewable developers of power generation equipment providers.”

So, could someone please ensure that this report is stuck under the nose of Australia’s energy ministers, be they federal or state, and all the middle aged engineers and fossil-fuel careerists that advise them? And mark it Must Read.

(Author’s disclaimer: I am middle aged).





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  • Peter B

    Giles, do you have a link to the paper. A web search and a search of can not find it; it only lists this article?

  • Is this an international study? If so there seems to be a major source of energy missing that produces over 12 per cent of world electricity. It’s called uranium.

    • Matthew Wright

      Actually Nuclear was at 17 percent in 1993 and 12 percent pre Fukushima nuclear disaster in 2011. Today (2013) it is less than 10 percent of the world’s ELECTRICITY supply. Nuclear power’s share of
      global commercial PRIMARY ENERGY production plunged to less than 4.5 percent, a very low level not seen since 1984. And nuclear will continue to plunge, ie every reactor in Japan is now idle. How do you factor that into a LCOE (Levelised Cost of Energy) calculation? on why nuclear is a sunset industry and wind and solar are the new sunrise energy industries.

    • Giles

      Yes, the heads of their commodities, mining and oil, utilities and gas and energy research teams are based in London and NY. Nuclear doesn’t get much of a guernsey as i think they looking to the future martin, not the past. And as mentioned in the story, not many people wanting to invest when it is being overtaken by other technologies, people unsure about what energy markets look like in a decade, and how you apply the discount rate to justify the enormous government subsidy needed to build them. That’s why nuclear wasn’t included in the graph i suspect.

      • wideEyedPupil

        As Citi says in the report for those with access to it, Nuclear is hard to make cost projections on because there has been so little investment in it to benchmark in the last decade or two and also because it’s provided with so many country specific govt kisses to get it up. They decided it was imprudent to do the same kind of analysis with Nuclear as they did with FFs and renewables.

        They did make some projects where nuclear generation market share increase. (see graphs attached).

        The thing which makes this report really suspect from a renewables POV is they do not explicitly include assumptions about carbon pricing, and while they point to energy-storage developments as likely eroding gas-peakers, they assume this will mean more of a role for baseload coal and nuclear for grid frequency maintenance — this is one very big assumption.

        They do mention the “alarming” disruption to generation caused by plummeting solarPV prices but only “suspect” this will happen in the battery (not to mention other) storage space and do not quantify the role of storage at all. Big externality to their equations right there.

    • Jeremy

      Nuclear is included – it is shown as a light grey colour in the chart, between Hydro and Biomass.

      • JonathanMaddox

        It is included in Figure 4, not in Figure 2, which is what Martin Nicholson questioned.

  • John Murray

    Change is coming. Dirty energy is now competing with renewables and it will only get tougher for fossil fuels in the future.

  • Al

    WTF is LCOE ?

    • Bob_Wallace

      Levelized Cost Of Energy. It’s the standard way of comparing the cost of various ways to generate electricity.

      It includes capital costs, financing, operating costs (including fuel) and capacity (the percentage of time each technology is expected to operate).

      It does not include transmission, although there is a less often used “Total LCOE” which figures in transmission cost.

      LCOE also does not include real estate costs and owners’ profits. It’s not a selling cost, just a generation cost.

    • wideEyedPupil

      From the report:

      What is LCOE?

      LCOE is the ‘Levelised Cost of Electricity’, which attempts to compare different methods of electricity generation in cost terms on a comparable basis. Different technologies vary materially in the proportion of upfront capital expenditure vs. fuel cost or operating costs, as shown in Figure 1. LCOE incorporates all of these costs and calculates the ‘price’ of electricity needed to give a certain rate of return.

  • Peter B

    Does anyone have a link to the Paper please?

  • Yes, Giles, as Peter B queried you, where does one get a copy of the report? thanks

    • Giles

      Understand your frustration. There is no web link that i am aware of, you probably need to be a client of Citi to get hold of it. The copy i have is received on basis i don’t republish in full.

      • wideEyedPupil

        I manage to find a link consulting Dr Google. It seems to be blocked now so I won’t post it.

  • Adrian Pinder

    good question. Can anyone find the report? Would be good to read. Giles: any chance you could post it? Thanks

    • adam

      +1 – if it goes public and anyone finds it please post. I’ve searched a couple of times last few days and Renew is the only news source talking about it.

  • Ken Lawshe

    He failed to mention that while Germany is closing NG power plants they are opening Coal power plants. Lignite a dirtier form of coal. Often called brown coal and Germany’s emissions went up last year and are on tract to be even worse this year.

    He also failed to mention that Germany’s grid is so unstable companies are spending hundreds of thousands of dollars to protect themselves from the grid fluctuations. And their neighbors are installing switches to block Germany from dumping electricity on them and destabilizing their grids.

    How bad is it, when they block you from giving them free energy?

    You can google “Germany renewable problems”

    Or check out the two articles here. the first is their energy chief calling the present plan “insanity” and how much more expensive than the people were told.

    The second is a 3 piece article looking at various aspects.

    German Energy Agency Chief: ‘We’ll Need Conventional Power Plants until 2050’
    Stephan Kohler, the head of the German Energy Agency,

    Germany’s Energy Poverty: How Electricity Became a Luxury Good


    • Bob_Wallace

      Germany’s new coal burning plants are replacing (not adding to) the older plants that either have been or will soon be decommissioned. These new plants were planned and construction was started prior to the decision to close nuclear plants.

      By 2020, 18.5 gigawatts of coal power capacity will be decommissioned, whereas only 11.3 gigawatts will be newly installed.
      Furthermore those plants will be more efficient, releasing less CO2 per unit electricity produced than are the ones they are replacing. And the new coal plants are partially load-following.

      Apparently the “surge” problem is not due to Germany pushing excess renewable generation on to its neighbors’ grids, but what problems there are result from market forces. Money, not wind.

      “Poland and the Czech Republic charge that surges in renewable power are becoming uncontrollable, but the researchers could not confirm these findings.

      On page 76, they note that loop flows with Poland exceeding 2.5 gigawatts only occurred in 2011, when wind power production was between four and eight gigawatts. And “significant loop flows of up to 2,000 megawatts” occurred when wind power production was “virtually negligible.”

      So what is the problem? The researchers found that prices are high when production is also great. The way the market is designed, power might then be imported from neighboring countries (such as Denmark) if import prices are lower. This power then hits a congested part of the grid and is rerouted along a path of lower resistance. This outcome is not infrequent but also not directly related to surges in wind or solar power production as charged.

      Once again, price – not technical capacity – is the culprit. A number of Eastern European countries had even proposed that Germany and Austria, which currently share a power trading platform, be split – a demand that the researchers take as a clear indication that the market’s design, not surges in renewable power, is causing loop flows.”

      This is from a very interesting multi-part piece on Germany’s role in Europe’s electricity system. The quoted bit above is from the third part.

      Der Spiegel has been published a lot of der poop. They’ve made claims about Germany industry moving to the US due to electricity prices, but when pushed they have not been able to name a single company.

      They’ve published stuff about how high German electricity prices are but failed to mention that German retail prices were high long before renewables started coming on line. And they failed to mention that the price of electricity for industries has been dropping since 2009 and is less than the EU27 average.

      Do you have another wheelbarrow load of stuff to dump, Ken?

      • Ken Lawshe

        When countries spend their own money to block your free energy you have a problem. When your Energy chief call your system insanity I don’t care who writes it. it the energy chief.

        The economist seems to agree.
        Europe’s dirty secret
        The unwelcome renaissance
        Europe’s energy policy delivers the worst of all possible worlds
        Jan 5th 2013

        The Economist While coal production and use plummet in
        America, in Europe “we have some kind of golden age of coal,” says
        Anne-Sophie Corbeau of the International Energy Agency. The amount of electricity generated from coal is rising at annualised rates of as much as 50% in some European countries.

        “In Germany, RWE, the biggest user of coal in Europe, generated 72% of its electricity from coal and lignite (a dirtier, low-grade form of coal) in the first nine months of 2012, compared with 66% over the same period in 2011. Germany needs new capacity because it is closing down its nuclear plants:”

        Probably the plants will be made cleaner but are using a dirtier source of energy I don’t know which will be better in the end.

        Over time Germany will clean up their problems but not soon cheap or easy.

        Oh yes your “Report ”
        Impacts of Germany’s nuclear phase-out on electricity imports and exports
        Report commissioned by Greenpeace Germany

        Yeah that’s an unbiased source for sure.

        • Bob_Wallace

          The report was written by the Oeko-Institut

          “Oeko-Institut is a leading European research and consultancy institute working for a sustainable future. Founded in 1977, the institute develops principles and strategies for realising the vision of sustainable development globally, nationally and locally.”

          You are correct that Germany increased its use of coal during the winter of 2013. Early closing of nuclear plants will slow the move away from coal a bit. Things will look a lot better as the new coal plants which produce more power from a unit of coal come on line and more renewables are installed.

          And, of course, you select out what fits your needs in the Economist paper and eliminate the parts that give lie to your claims. As is reported in the article many European coal plants will be closing in the next few years and there is a rush to generate what profit can be pulled out before the closure.

          Got a third wheelbarrow full Ken?

          • Ken Lawshe

            Dozens but as you have produced none, I don’t see the point.

          • Bob_Wallace

            Well, I’m heartened to know that you’re aware of the makeup of your inventory… ;o)

          • Ken Lawshe

            No Bob I’m aware that anyone who believes that the German govt. would allow an international News source such as Der Spiegel to misrepresent the German Energy Agency Chief in a direct quote and not retract the statement, is deluded.

            Good luck with the real world.

          • wideEyedPupil

            Actually even in Germany there are cohorts of bankers and captains of industry and yes even allied politicians and sympathetic journalists who seek to advance their individual interests at the cost of of the greater good. You’d never guess, right.

  • Andrew Cox

    Has anyone found a copy of the report yet.

  • Trevor Brown
  • APEppink

    Pretty ignorant stuff. Who’s going to control frequency absent large scale power/envy storage schemes, none of which appear on the horizon except pumped storage which is pretty well tapped out. Of course things can change but this a typical cheerleading report, very short on hardware specifics.

    • wideEyedPupil

      Citi (who literally write US Energy policy) and whose client base is fossil fuels are ignorant about extent of exposure of FFs and nukes to renewables, okay.