Nathalie Casali analyses the changing world of energy
JP Morgan analyst Nathalie Casali gives us her view of the changes that are currently shaking up the energy sector, from turbulent markets to governments whose hesitation to commit prevents the forward visibility required for confident investment.
And then there’s the overwhelming influence of China and American shale gas on the European energy mix
The fact that investors are now attracted to Asia is because it offers a more promising outlook than Europe, according to Nathalie Casali, who analyses the position of China this way: “China has restructured its mining industry and invested heavily in infrastructure projects. […] Its domestic market consumes 3.5 billion metric tons of thermal coal, and even a slight imbalance between internal supply and demand in China can have major repercussions for international trade. […] Last year’s reduction in Chinese imports shocked world trade flows. At the same time, American shale gas has led to American coal producers exporting more to Europe, which has depressed prices. The convergence of these two factors, together with the very low price of carbon emissions permits, has made coal more attractive to European power generators than natural gas.”
The US shale gas revolution
“The situation varies widely in the USA, because different states have different market structures. In Texas, for example, where capacity markets don’t exist yet, we see relatively low wholesale prices for electricity due to the strong emergence of renewable energies, rather like in Europe. […] The extremely low price of shale gas has brought down the price of electricity very considerably. But overall, the market has not been particularly buoyant for utilities, which has benefited consumers and industrial buyers of electricity.
The problems of energy transition in Germany
Nathalie Casali sees the case of Germany and its need to offset the complete withdrawal from nuclear power by 2022 as instructive: “In demonstrating its wish to do without nuclear power, Germany has turned to coal, and has subsidized renewables at extremely high cost by guaranteeing priority access to the grid at feed-in tariffs substantially higher than the market price. […] The market price for solar power has gone through the roof, triggering problems of distribution system stability. It’s true that 23% of German electricity now comes from green sources, but it is intermittent and is sold at some of the highest prices in Europe. […] Beyond the cost of electricity, there is also the enormous cost involved in adapting existing power distribution systems. […] The energy transition in Germany is based primarily on decentralized renewable energy. Whether we look at the restructuring of power distribution systems at national level or interconnection at European level, this poses major problems in terms of investment and public acceptance.
Nuclear or renewables: the impact of political choices on the energy market
“Utility companies have to look a long way into the future in terms of investment, and will therefore prioritize operations in high-growth countries that can offer the forward visibility and stability they need,” explains Nathalie Casali. “In Europe, new capacity is focused solely on renewables, with the exception of the UK and Turkey, both of which are engaged in nuclear projects, although the first kilowatt hours will not be generated until 2025 at the earliest. […] In 10 to 20 years’ time, the European power generating industry will be more tightly regulated, following the introduction of capacity markets that reward generating plants for their ability to maintain security of energy supply, rather than the need for continuous generation.”
“Every renewable energy plant and facility is subsidized, which can only increase prices for domestic consumers and companies. In the meantime, the nuclear power generating base must be managed on the combined basis of sound economics and safety. Nuclear power has very solid economic fundamentals, and generating plants are built to run for 60 years, so shutting down a working reactor is financially irrational.” she adds.
Nathalie Casali remains prudent about the future energy landscape in France: France is able to limit its CO2 emissions thanks to the combination of nuclear and hydroelectric power. Onshore wind power is progressing well, with solar and offshore wind power developing at a slightly slower rate, but politicians must wake up to the impact of the choices they make: regulatory and tax pressure is increasing, and the freeze on regulated tariffs is preventing operators from passing on increases in the costs they face. Energy generators that have invested heavily in facilities that do not operate at normal capacity are in a difficult position, and cannot take the risk of investing further.”
Energy efficiency, the anti-CO2 lever
Nathalie believes that the approach adopted by politicians at European level lacks consistency and long-term vision. “Lower energy costs in terms of price per unit seem unlikely. The real levers are the CO2 markets and energy efficiency, because these are the most effective and cheapest tools available for reducing emissions in Europe. […] In the context of the energy transition, the cheapest way of reducing CO2 emissions is to reduce consumption through energy efficiency. This is an attractive market that requires little in the way of investment, unlike the traditional activities engaged in by utilities. As a result, there are few barriers to entry and competition is fierce, although return on capital employed is excellent.”
“From around €20, the price per metric ton of CO2 has slumped to €4: it’s a disaster. […] Too many carbon credits have been introduced into the market, encouraging the downward pressure on their value. Having done everything to encourage a cleaner energy mix through subsidies for renewable energies, will governments now be able to consider reforms that boost the price of CO2, which would inevitably raise the cost of consumption?,” muses Nathalie Casali.
Does liquefied natural gas (LNG) offer a solution in response to rising demand for energy?
The liquefied natural gas sector should be able to respond very significantly to rising demand. According to Nathalie Casali, “GNL production costs are subject to strong inflationary pressures, especially in terms of very large liquefaction projects. LNG has a promising future, but many questions still remain: will Japan return to nuclear power and reduce its gas imports? Will Europe and China start extracting shale gas? Will the US become an exporter of natural gas?”