We share views from Christopher Sheeron - The first-ever guest author for C-MACC's most recent ESG and Climate report titled "Does DC Understand Economics – Energy Proposals Suggest No".
Main Points from this report include:
In the exhibit below, we see another chart that we find unhelpful when looking at the path to net-zero or something close. It is not an either/or game with fossil fuels and renewables. Those promoting this idea are setting impossible goals for the renewable industries, which will keep severe upward pressure on all energy costs. Wood Mackenzie may not mean what is implied in the chart below but taken at face value it suggests that more pressure will be placed on an underfunded materials market to supply an underfunded renewable power market, in which any opportunity to use decarbonized fossil fuels will be frowned upon. It would be good to see an analysis of how much global power could be generated from decarbonized natural gas and how much pressure that would take off the renewable industries.
The renewable power space is heading for a very bad year in the US and Europe, as supply chain issues and raw material inflation will impact not only the amount of business that gets completed, but also the margin on that business. The trade issues between the US and China on solar panels have essentially brought the industry to a halt for the moment and suggests that all forecasts of the growth in renewable power contributions in the US in 2022 are too high, and consequently demand estimates for natural gas and coal for power generation are too low – see out comments in the energy section of today's daily report. The EIA forecast below likely fails to take into account the current woes and if governments, at the federal and the state levels act on the information in the chart they may be unprepared for some power shortages later in the year. Overestimation of the rate of renewable power installation as well as its operating rate is responsible for many of the current power shortages that we see in most regions.
Shell issued its 2021 energy transition progress this morning and the report contains a lot of detail about what Shell has done so far and what the company intends to do. The report is a record of progress and intent and is targeting both general stakeholders as well as the Shell board and annual meeting, where approval of the plan will be sought. When compared with other reports we have seen from other companies, this summary is comprehensive. It provides some concrete steps to achieving emission goals in 2030 – exhibit below - while remaining appropriately vague about getting to 2040 and 2050 targets. However, we would note how much portfolio changes likely added to the 2016 to 2021 progress – likely proportionately much more than they are expected to contribute from 2022 to 2030. Both renewable power and CCS figure in the 2030 projections below and Shell will need to get moving on the CCS front of it is to sequester 3-6 million tons of CO2 per annum by 2030. The expectations are likely based on the European offshore projects, as it may take longer than 8 years to get permits and investments in place in the US. The US could move faster but the EPA would likely need to grant primacy to at least Louisiana and Texas for things to speed up and we are not convinced that this will happen soon. Like many of the other company 2030 plans that we have seen, it is likely that much of Shell’s progress will come in the last couple of years of the decade – especially on CCS.
We have written extensively about carbon prices over the last two years and followers of our dedicated ESG and Climate service will know that our expectation is for all CO2 markets to see prices rise to levels that justify large investments to avoid CO2 production or sequester it. We see that price closer to $100 per ton than the $50 per ton that 45Q will rise to by 2026. The California price shown below has much more upside as credits demand rises. Many of the net-zero pledges made by manufacturers and energy producers today cannot be achieved without buying some sort of credit and we expect demand to rise relative to supply through the balance of the decade and possibly quite quickly.
Looking at the Sempra chart below, we reflect on some research that we wrote several months ago that talked about a lost opportunity in the US because of the lack of cooperation and coordination in Washington. Energy demand is growing, the demand for materials is growing and the demand for re-shoring is growing, and if the US political and permitting system is either too hostile towards new investment or too cumbersome companies will look for workarounds. The Dow investment in Canada was partly justified by the easier regulatory environment as well as the proposed carbon price. Sempra is looking at Mexico because the ease of permitting for LNG is advantageous and we note Mattel's “near-shoring” in Mexico rather than reshoring. The opportunities for both Mexico and Canada are very significant if we remain mostly directionless in the US. For more see today's daily report.
The EIA renewable diesel projections are based on a couple of things – who plans to make it and who will pay for it. All eyes are focused on the California market today as that is where the incentive lies – through the LCFS credit – and production plans plateau associated with that opportunity. As other states in the US adopt similar programs – which seems likely – we would expect to see production plans increase and the EIA will likely adapt its market view model and the chart will change. Note the dominance of renewable diesel over time, and this is where we would expect all future growth to occur. The plug-and-play nature of renewable diesel makes it a far more attractive option for refiners assuming the cost works. See more in today's daily report.
The back-end loading of the power projects for the US for 2022, as shown in the chart below leaves us somewhat skeptical concerning how much will come online this year. Supply chain problems and materials costs and availability are causing all sorts of problems with renewable power projects and installed capacity expectations for 2021 were too ambitious. We believe that companies are pushing projected start-ups later in the year to give them more of a chance of completion, but this creates the risk that they slip into 2023 or beyond. The most significant issue here is that as these plans get delayed, natural gas demand goes up, as one of the swing suppliers. This is fine as long as the US natural gas industry and shale oil industry is investing so that gas availability rises. Otherwise, we could see gas prices spike in the US next winter and another year where we use more coal than we expected. For more see this week's ESG and Climate report.
One of the subjects that we will cover at length in the ESG and Climate report tomorrow (to be found here) is the significant need for CCS globally, but especially in the US, as we see more balanced forecasts of energy supply emerging which show more use of fossil fuels for longer – especially, but not limited to natural gas. These forecasts recognize the current energy momentum as well as some of the more practical realities around the rate of construction of renewable capacity relative to energy demand growth. The CCS plans that are appearing all over the place are nothing more than plans right now and if the EPA permit activity is a true barometer – not much has moved beyond planning. This needs to change and we likely need both an increase in CCS incentives – which could take many forms – as well as some streamlining around the permitting process. Simply waiting and hoping for a renewable miracle is not going to work – nor is some sort of CCS cost breakthrough.
The annual review of World energy from bp shows a stark reversal of the company’s position only a short while ago. When the pandemic hit, bp went on record suggesting that we may have seen peak oil demand in 2019. It was an interesting theory and one that we discussed at the time, but it underestimated the impact that aggressive COVID-related stimulus would have on consumers globally and we suspect that bp, like many others, overestimated the rate at which renewables could be added. Now the company is exploring a very different scenario, one in which the current momentum in the energy market continues and the rate of renewable additions slows, either because of more limited capital or because of material constraints – or a combination of both.