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Coal citi-waterfall

Published on October 4th, 2013 | by Giles Parkinson

10

Fossil Fuels and Utilities At Risk In New Report — Energy Darwinism At Work

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October 4th, 2013 by  

Originally published on RenewEconomy

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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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • JohnInMA

    I wonder how much a factor policies played in the analysis for Citibank. Granted, capital costs are coming down for a number of technologies, and fastest for solar (which had the largest opportunity given earlier costs). And utilities are finding ‘social’ or cultural benefits in making more renewable investments. But as is the case for residential installations, utilities also react to incentives across the board. It isn’t clear what assumptions and predictions were made regarding such policies. Perhaps the analysis considers a range of costs (fuels, materials for renewables, etc.), incentives, demand growth, etc. A Monte Carlo analysis of those multiple factors, of sorts.

    Most striking is that the claim for rapid or accelerated adoption or change still doesn’t translate to 50% supply from hydro/nuclear/others until as late as 2070 or 2080. Yes, that’s a lot of terrawatts of electricity. But it just doesn’t seem as aggressive as other projections I have seen.

    • Bob_Wallace

      Incentives (subsidies) for renewables are going away fairly soon. Solar drops from a 30% ITC to 10% in 2016. It’s likely that neither wind nor solar will be subsidized in the US after 2018. But that won’t matter, wind and solar will be the cheapest new capacity and cheap enough to cause installed capacity to shutter.

      Figure 4 seems divorced from reality to me. By 2035 we should be well underway with eliminating petroleum from our highways. Coal should largely be dead everywhere but China and rapidly dropping there. Nuclear should have greatly thinned out. Most of the US and European reactors will be worn out and not replaced. And we’re about to see an explosion in solar and wind as the world catches on to how inexpensive they’ve become.

      I suspect the world will be 80%+ renewables by 2050. That’s about 40 years away. Think back 40 years – 1973. No personal computers, internet, cell phones. Cars had carburetors and none of the safety systems we now require. TVs were expensive and got only a few stations. Cancer was a death sentence.

      Now we make changes must faster than was possible in 1973. We have immensely better communication and transportation systems.

      All we’re waiting for is better storage technology and we’ll start a rapid discard of thermal generation and further accelerate the installation of renewables. An affordable 200 mile range EV will flip the car market in five years. Fifteen years later gasmobiles will be niche products like film cameras now are.

  • Ross

    That chart shows “other renewables” which must include wind and solar at only 30% by 2100.

    Jayzus lads have some vision.

  • JamesWimberley

    Some of Citi´s language is careless. ¨Factors … such as fuel diversity and energy independence may offset cold, hard economics …¨ Fuel diversity and energy independence are either neutral or positive factors for new renewables. There is now considerable cross-border trade in hydroelectricity (Quebec to New England, Paraguay to Brazil) but it makes little sense for of wind and solar.
    The importance of this report is who it´s from. Deutsche Bank, Citi, McKinsey, USB, and Warren Buffett are all saying the same thing. Wall Street surely won´t fund new coal plants and is getting cold feet about other fossil options. The rising cost of capital will be self-reinforcing: the less investment in fossil fuels there is, the more marginal and risky they become. Conversely solar and wind are becoming the safe options.

    factors involved such as fuel diversity and energy independence that may offset cold, hard economics,
    Read more at http://cleantechnica.com/2013/10/04/fossil-fuels-utilities-risk-new-report-energy-darwinism-work/#6dxJFfG4qp6fDxlX.99
    factors involved such as fuel diversity and energy independence that may offset cold, hard economics,
    Read more at http://cleantechnica.com/2013/10/04/fossil-fuels-utilities-risk-new-report-energy-darwinism-work/#6dxJFfG4qp6fDxlX.99
    fuel diversity and energy independence that may offset cold, hard economics,
    Read more at http://cleantechnica.com/2013/10/04/fossil-fuels-utilities-risk-new-report-energy-darwinism-work/#6dxJFfG4qp6fDxlX.99
    fuel diversity and energy independence that may offset cold, hard economics,
    Read more at http://cleantechnica.com/2013/10/04/fossil-fuels-utilities-risk-new-report-energy-darwinism-work/#6dxJFfG4qp6fDxlX.99
    fuel diversity and energy independence that may offset cold, hard economics
    Read more at http://cleantechnica.com/2013/10/04/fossil-fuels-utilities-risk-new-report-energy-darwinism-work/#6dxJFfG4qp6fDxlX.99

  • will

    last year I electrified my house, solar panels, air to water heatpump, for heating and warm water. induction cooking. the gasconnection removed. no more fossil no more energy bill. I get energy payback 50 euros every month.
    next year EV car and solar on the garage for my own loading point. no more fuel to pay.
    very easy to do and money to be made for me. no more pollution, no more money going lost to far away companies.
    will save me about 5000 to euros a year. every year.

  • jdavies

    Excellent! I’ve been so pessimistic for so long about the lack of movement away from fossil fuels, with a largely apathetic public and no hope of any meaningful action from the governments of the world, and vested interests undermining or frustrating any efforts to make progress. but it seems I needn’t worry, the technologies are advancing fast enough that they will be merrily adopted voluntarily as the sheer harsh truth of their economic benefits knocks the fossils into history where they belong. If we avoid the carbon catastrophe, it won’t be down to politicians or activists, it will be down to the scientists and engineers and forward thinking companies who made this tech viable. The outcome is inevitable.

    • Bob_Wallace

      I agree. The solution is to price fossil fuels out of existence.

      Wind and solar are already cheap enough to displace new coal capacity. They will start cutting into the profits of existing coal plants causing them to go offline for extended periods. Some more affordable storage could deliver the coup de grace.

      We’ve very close to having EVs and PHEVs that will kill the petroleum industry. We could cut our personal use of petroleum by more than 75% with the technology we have right now. We just have to get the price of batteries down some more to make that happen.

      I think that within five years it will be very obvious to almost everyone that the transition away from fossil fuels is strongly underway and due to the economics of renewables.

      I need to add, though, were it not for the activists and those politicians who have helped we might not have given the scientists and engineers the backing and motivation to do what they are doing.

      • Scotland

        Yes, agreed. It is good to see the analysts coming around. In a few years, the mainstream business press (many of whom are currently shills for the fossil fuel industry) will also come around.

        After Fukishima, the Economist magazine correctly pointed out something that is key to the transition – that renewable installations scale very well from very small (single homeowner in developed world; small community in developing world) to utility scale – giving them potentially incredible economies of scale. In the article, they described how Nuclear has never had this advantage (nuclear plants always being large scale) and never achieved any economies of scale in any case. Their conclusion was that nuclear, as a technology was a dead-end. This same analysis also applies to fossil fuels – the beginning of the end is near. Soon (in the next 5-10 years), they will begin to be starved of new investment, ultimately undermining their ability to compete.

        Exciting times, indeed.

        @Mr. Parkinson – good luck getting the new coalition government in Oz to listen. They are determined to bury their head in the sand.

        • Bob_Wallace

          There are hundreds of millions of people not connected to the grid and unlikely to be connected to the grid for many years if we continue business as usual. Those people would gladly purchase a small solar system that let’s them move away from kerosene and candles while costing them less than kerosene and candles.

          This is an enormous market. And it’s starting to be served. Over one million people so far in Bangladesh. Other programs underway in many countries.

          These systems will start small and many will build in size as people use their savings and additional income to grow their systems.

          Villages are finding that they can install solar and wind generation and turn off their diesel generators, saving them for backup purposes.

          What we need to kick this movement into high gear is a better battery. If Aquion’s saltwater electrolyte battery ($300/kWh, 20,000 cycles) or EOS System’s zinc-air battery ($160/kWh, 10,000 cycles) tests out then we can leave lead-acid behind. (Both are currently being manufactured and going into field testing.)

          • Scotland

            Yes, exactly. It would be surprising to see energy storage not have similar economies of scale that are coming into place for renewables (and hence why there is so much investor activity in this area). Developing/emerging countries will probably never develop centralized energy systems as we currently have in the developed world. Renewables + storage with a decentralized grid will bring power for the first time to many people who have never had access to electricity previously.

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