A year in review

2015 – when volatility in energy markets became the ‘new normal’. By Joanne Smalley

2015 has seen a sea change in global energy markets – with the long talked about ‘Energy Trilema’, balancing cost, carbon and security, becoming something of a multi-dimensional polyhedron! The end of 2015 saw oil at its lowest point in four years, gas and power prices following suit, and despite great advances in technology ‘normalising’ the costs surrounding solar and wind generation, the continued downward trajectory in commodity prices makes renewables look increasingly expensive next to low priced fossil generation. The phrase ‘the new normal’ seems a perfect description of where we are today.

From a UK perspective, the energy world has never seemed so complicated! A new Conservative government in May 2015 set about reversing some of the renewable and self generation subsidies (feed in tariffs, large scale solar, and on-shore wind are all examples) that the previous governments had implemented, as well as appearing to indicate that gas should be the fuel of the future for the UK. These policy u-turns, designed to reduce the stress on consumer bills, had a catastrophic effect on the UK energy efficiency and renewable industries, with job losses and bankruptcies. UK Energy Minister Amber Rudd herself has commented that she expects the UK to miss its renewables targets.

The 2nd Capacity Market Auction, finalised in December 2015, and designed to bring on spare capacity to back up intermittent renewable energy methods and ageing fossil fuel generation which will come offline in the next few years, didn’t yield the expected results, with no large-scale additional gas fired capacity reaching the market. It had the added problem of bringing through a surge of investor backed diesel generation; investors sought out loopholes in the tax rules which led to double subsidies on this generation type, after the Government closed down tax breaks on solar and onshore wind. Dirty diesel was not what the UK government had in mind when they implemented plans for the Capacity Market. So the UK looks to face a looming energy gap, and increasing emissions over coming years, in a direct contradiction to stated aims.

In Europe, the situation is no less complicated. The long-heralded European Energy Union took a big step forward with the publication of a ‘plan of action’ in February, outlining steps to be taken to bring about cross border collaboration in this area. The Energy Union is designed to reduce dependence of EU members on single suppliers (and therefore a single point of failure) of energy supply, facilitate free flow of energy across borders, and promote energy efficiency and a low carbon economy across the EU.

The problem will come in reconciling the different priorities of the member states – the UK position being a case in point! Renewable adoption and acceptance is at very different levels across the EU, and each country has their own preferred method of keeping the lights on. France is still holding onto its fleet of nuclear, the majority of the electricity generation coming from this method. Germany, EU’s largest consumer of electricity, on the other hand is going through its own energy transformation, or Energiewende and is getting an increasing amount of its electricity from renewables, whilst attempting to phase out nuclear altogether.

Some of the Eastern European states however, are still heavily reliant on gas flows coming from Russia, and geopolitical issues have played heavy on the minds of energy leaders in those countries. Despite this, late in 2015 Russian state gas provider Gazprom agreed a fixed price gas contract with Ukraine for the 2015/2016 winter, which has hopefully offered security to the pipeline running through Ukraine and into central Europe – for the next few months at least.

These are just a few of the many issues that face European leaders over the coming months and years as they aim for a true ‘energy union’. The political future of the European Union as a whole is only one part of the puzzle that has to be completed.

In the rest of the world, geopolitics is one of the major causes of the volatility we’ve seen over the past year. OPEC and North America have been locked in an oil production war that has seen prices tumble to lows not witnessed since the 1990’s and the Middle East driven oil cartel’s strategy of attempting to choke US production off via low pricing seems set to backfire. The sudden glut in oil production is a result of the US exploiting new, ‘non-traditional’ drilling technologies such as fracking and has meant that for the first time in 40 years, the country is planning to export its own homegrown ‘black gold’. Their self-sufficiency, as well as the threat of export into the open market, has panicked OPEC into over-production, and this shows no sign of abating going into 2016.

Global economics is also playing a role – China’s sudden economic ‘slow down’, which gathered pace (or should that be lost!) throughout 2015 has meant that the world’s biggest consumer of oil and petrochemical products has reined back its demand for oil products, which has contributed to the global glut.

This bottoming out of oil prices has had sudden and dramatic impacts on the oil and gas industry globally – and the depression looks to continue. With the prospect of Iran joining the oil exporting world once export sanctions are lifted, and global oil storage almost full, there is little sign of the situation stabilising in the near future. Current market observers are taking an even more bearish position – whilst forecasts of the $40 dollar barrel of oil were mocked at the beginning of 2015, reports only 12 months later are of the possibility of a $10 barrel!

The year wrapped up with the long awaited COP21 conference in Paris. Leaders from around the world came together to define what a legally binding climate commitment to limiting global warming to two degrees looked like. And it appears a resolution was reached after days of late night negotiations. However, the current low prices of traditional fossil fuels – oil, gas and coal (echoing the worldwide depression in commodity prices) – means that the promises made in Paris may soon only become words on paper as countries rush to secure their future energy supplies at the lowest possible cost to consumers. So where does that all leave us going into 2016? Global energy infrastructure, methods of generation and extraction, and changes in regulation around carbon emissions are all at a turning point. Countries are still struggling to balance the complexities of the trilemma – carbon, cost and security, and it’s not going to get any easier as the goalposts continue to move.

2016 will be focused on answering some of the questions that the global move away from traditional fossil fuel poses. Battery storage on a consumer level came to the market in 2015 with the launch of Tesla’s Powerwall technology and whilst no-one expects this to solve the problem of intermittent generation from renewables on its own, it is clear that we are on the cusp of a major leap forward when it comes to answering the question of where we source our electricity when the sun doesn’t shine, or the wind doesn’t blow. So after the roller-coaster year that was 2015, it looks like 2016 will see even more change and technological advances – that will bring us toward the new energy future. Volatility looks set to be the ‘new normal’ for a long time to come!

Joanne Smalley is the Head of Energy as Aspectus, looking after the strategy and communications needs for a broad spread of clients across the energy sector. She’s spent the last 12 years working in marketing and communications roles within the energy industry, for the likes of E.ON, EDF Energy, British Gas and ELEXON. Her experience covers European and global energy issues, energy regulation, metering, smart grids, retail, generation (traditional, renewables and nuclear) and trading.

For further information please visit: aspectuspr.com