Having followed the energy scene in the UK for many years, it is sometimes difficult to pinpoint certain events that one remembers. Some years ago, I suggested to a civil servant that, with environmental concerns building up, perhaps energy and environment should come together. The response was that energy and environment couldn’t be in the same room! Therefore, I was amused later to hear of the formation of DECC – the Department of Energy and Climate Change.
DECC came to an end in July 2016 even though its website is still up and seemingly running, when it was then rebadged as BEIS – The Department for Business, Energy and Industrial Strategy, where it still is, with the same Minister, the Rt Hon Greg Clark, doing more or less the same role.
Last month, Richard Harrington was Minister responsible for Energy, but this month it’s Claire Perry. If we look back over the years, perhaps the longest-serving tenure is no more than two to three years, and over time one can assume that we shall have a new minister at least once each year. Ministers are appointed with no prior experience, although everyone knows something about energy and depend upon briefings by civil servants. By the time that they have grasped the situation, it’s time to move on and continuity is lost.
In the UK, the electricity and gas markets were “privatised” in 1990 but not deregulated, and the final minister responsible for this at the time has since stated that “he took the files home on Friday and by Monday knew what he had to do”. That took effect on 1st April 1990 and here we are now, almost 28 years later, working our way through the Helm report, looking at the next move that might get it right!
The point of all of this is to accept that as the face of energy and environment continues to be amended, the fundamental issues remain, many unchallenged and little changed, in the background. We still need energy to be sustainable, low-carbon, and cheap, but in which order do we prioritise? So, it’s worth looking around the industry to see what is going on.
The BP presentation this week, covering the results for 2017, clearly showed how the company is back on track again after a record year with profits over £2bn. Remembering back to the Deepwater Horizon disaster in 2010, one wonders to what extent the action taken since then, as a result, and particularly on health and safety, has put the company where it is today.
Costs are down by 46%, and this lower level will apparently be maintained into the future. The price of oil is up over $60, and the outlook is good, although as the market rebalances and shale returns, the price will probably fall back around the $55 level. The focus is no longer solely on oil and gas. Shell likewise has reduced costs and is supposedly operating as well with oil prices below $60 as it did when they were at $100.
BP recognises the appetite for the low-carbon market, as does Shell, not only as a threat but as a market it needs to diversify into. Electrification and digitalisation have been recognised. Charging points are being installed at service stations, and the company is moving back into solar. Perhaps it may even reconsider Carbon Capture and Storage in the UK, has pulled out some years ago. There is recognition across the board that technology is playing an ever-important role in developing the global energy market and meeting changing aspirations. Shell, too, has recognised the desire for change by taking over NewMotion, which sets up charging points around Europe and, similarly, investing in solar power.
There are many theories on “peak oil”, but that now depends upon whether we are looking at “peak” supply or demand. Oil companies thrive on oil and gas and tend to focus on where supplies will come from and how refined products will be consumed. My guess is that the emphasis today is on demand and not the traditional supply aspect.
Over the years, OPEC has been the self-styled controller of the oil market. On many occasions, it has been written off, but only recently, with the support of Russia, it has managed to regain some control, which, in all probability, will be short-term. However, organisations like OPEC and the oil majors and market traders have made one fundamental mistake, and that is to assume that requirement for oil will follow the same course and that consumers will pay whatever price is demanded.
OPEC allowed the price to rise to $100 and beyond and assumed it would stay there for a good while. Oil companies and traders followed on in the same vein. However, the market responded by investing in energy conservation, alternative sources for oil .and alternative kinds of energy, too.
Ten years ago, when the oil and gas from shale in the US caught the market by surprise, there was no real recognition of the impact it would have. Now, output from the US is set to match that from Saudi Arabia and Russia, perhaps not as sustainable but certainly in the short-term a serious competitor to the traditional sources.
Energy conservation likewise has kicked in with a vengeance, and from the motoring aspect, vehicles are far more efficient than they were ten years ago when 30mpg was considered acceptable. Now we are looking at 60mpg.
Environmental controls are moving in at an alarming rate. The emissions scandal from leading car manufacturers, which started with VW, is gaining momentum, and manufacturers will find themselves under increasing pressure to modify designs. In the UK, having been pushed into switching to diesel-powered cars 18 years ago, we are now being penalised by the government for having done so. Yet, some diesel-powered cars are actually more efficient than their petrol counterparts. Then, out of nowhere, has come the electric car to tempt us further, if we can afford it.
A fully laden Tesla will have a range of around 300 miles, comparable to a luxury petrol-driven car, and can take off from 0 to 60 mph in less than 2.5 seconds if anyone needs to be in such a hurry! However, the top of the range Tesla sells for around £120,000, some way over the normal corporate or family budget, but there is a new baby version supposedly coming along at around £30,000, and that will appeal across the board.
With dramatic forecasts being made as to how sales of such a vehicle will take off and its impact on the oil market, the industry has been slow to respond. Yet, the view is that as demand for oil products from passenger vehicles moves towards electricity, demand from the distribution, aviation, and marine sectors will increase to make up the loss.
Much of the long-term predictions made by oil and gas companies, the IEA, OPEC, the EIA, and various banks and consultancies around the world have not really recognised the role of alternative energy sources or the switching from one to the other. Gas has replaced oil and most of the coal for generations in the UK, and although people think of it as a “green” option, it is still half as dirty as coal.
BP has indicated that, as of today, by 2035 oil, gas, and coal will have an equal share of the market at around 75 to 80% of the market. Demand for oil and gas will continue at the expense of coal. Renewables will come from nowhere, expanding at the fastest rate, with nuclear to take up the remainder. Yet, in spite of the changes in technology, fossil fuels will continue to enjoy a substantial sustainable although lower market share. Such predictions are based on today’s thinking and, as that continues to change with each new generation, so too must the prediction, while many of those responsible for the predictions today will not be with us when the time comes.
Away from the fundamental world, the Helm report is set to change the way in which energy is traded, and technology will continue to bring about new and unexpected ways of managing supply and demand.
Ofgem is taking a leading role in the new transition, and Dermot Nolan, the Regulator, is proposing the concept of peer-to-peer trading of energy. That is not to say that we shall all be trading with our friends and neighbours but that groups, like housing associations, may be able to trade amongst themselves without third party intervention. Investment in digital electricity infrastructure has developed significantly in the last five years, bringing in a wealth of new precision control systems.
Battery storage has continued to develop at an amazing rate as having fast charging systems. The difference between, perhaps, five minutes to refuel a car with petrol or diesel, against fifteen minutes to recharge an electric car is reducing. Energy can be stored and moved around as required. For example, an electric car may be fully charged but not needed, so its electricity can be fed back into the grid during periods of high demand and cost and then recharged later when rates are cheaper. Smart technology can be programmed for this to happen.
The transfer of data and energy can take place through blockchain technology, a system that follows on from Bitcoin. The latter has been around for many years but only recently came to public awareness. However, it is slow and cumbersome, unlike Blockchain, which is fast and ultra-secure.
Data from different sources is stored together in blocks that are then linked together by codes. If any component within a block is changed, then the system immediately halts until the amendment has been corrected or the codes updated. This is a very simple view but, it would seem that, ultimately, the use of the blockchain concept will allow data exchange and energy trading to take place on a peer-to-peer basis without the need for third-party intervention or charging. Such new concepts will probably not take place in the immediate future but will come about later.
As part of the environmental challenge in recent years, local authorities in the UK have adopted recycling policies whereby residents can separate out certain items of waste, which will be technically recycled. However, much of this waste is plastic-based, and with the level of confusion over what is technically recycled and what is “not yet” recycled means that not all general waste is being sent to recycling.
The real challenge to the industry has recently come from China, which until January of this year took in the bulk of Europe’s waste plastic but has now stopped, and waste plastic mountains are building up with nowhere to go. Meanwhile, as people become aware of the environmental impact of plastic, demand for its products is being curtailed. Legislation in the UK has annihilated the use of plastic bags while one large hotel group has just announced that plastic straws will no longer be used within its group.
Moving further across the environmental spectrum, people in the developed world are changing their habits to meet not only environmental but their own personal health goals. Cycling, along with walking and jogging, is gathering momentum and so too is the change in diet. Emissions from livestock play a serious role in climate change. In recognition of this, there is a concerted move towards vegetarianism.
Within this article, I have discussed some of the topics that I come across day-to-day and that are predominantly floating around in my head in the hope that a greater understanding will materialise as they all come together. I am sure that many of the changes referred to were unexpected when the energy supply-demand forecasts were being made, but such trends will continue as consumers drive the new concepts. The article, therefore, is not intended as a definitive guide to the energy/environmental market but more to open up the discussion, which will hopefully result in comments back from those of you who care to read it.
By John Hall
John joined Alfa Energy Group in 2013 as Chairman, where his specific interest is the development of the company’s profile in the areas in which it primarily operates – across the EU and the US. He is Fellow of the Energy Institute, a Member of the Parliamentary Group for Energy Studies, an Associate Member of the Chartered Institute of Purchasing and Supply, and a Member of the Market Research Society. He began his long career in the industry when he set up John Hall Associates in 1973, a company which merged with Energy Quote in 2009 and currently trades as Energy Quote JHA.