THE ENERGY INDUSTRY TIMES - APRIL 2017 Final Word 16 Moving with the times can be painful, especially if your timing is off. In the energy industry it is a bit more serious than the embarrassment of wearing flares when your peers have progressed to straights and skinnies. Being slow to adapt can cost billions. German utility E.On recently reported a loss of €16 billion for 2016, more than double the loss for 2015, on the back of write-downs on power generation and higher provisions for Germany’s nuclear clean-up. The company said the fall was mainly attributable to a loss from discontinued operations. While about 60 per cent of this can be attributed to the German government’s decision last year to make the utilities pay €23.6 billion towards the cost of disposing and storing the country’s nuclear waste, it is a one-time payment. The loss due to the write-downs is in many ways a more significant challenge. E.On, along with RWE and its other domestic rivals, has been hit hard by the Energiewende – the country’s accelerated transition to renewables, following the decision to close its nuclear plants. This has seen coal and gas fired generation squeezed out of the market by low priced electricity from subsidised wind and solar. Germany’s transition prompted E.On and RWE to restructure their organisations. E.On split into two, pooling its coal and gas-fired power stations, energy trading and gas production units into a separate company, called Uniper. RWE made a similar move; it spun-off its green energy and grid businesses into a newly-created subsidiary, Innogy, which floated in October last year. The transformation of the two companies is not just the result of domestic market changes but is a reflection of the global climate change movement driven by the Paris Agreement. The agreement on limiting a rise in global temperature to less than 2°C has seen a global shift to a greener economy, which in turn has in turn pushed down the levelised cost of energy from wind and solar to levels that are in some regions below the cost of conventional generation. For example, the UK’s offshore wind sector has already achieved its target of getting below €100/MWh by 2020 – four years ahead of schedule. The solar story is even more impressive. In March the Abu Dhabi Water and Electricity Company (Adwec), the procurement arm of the Abu Dhabi Water and Electricity Authority (Adwea), signed a 25-year power purchase agreement with Japan’s Marubeni and the Chinese firm Jinko Solar for a 1.17 GW solar power plant in Sweihan. Marubeni and Jinko submitted a record low bid of 2.42 US cents/kWh for electricity from the plant. The increasing affordability of renewables is having a big impact on the makeup of the power generation landscape – not just in developed countries but globally. A recent report by Greenpeace, the Sierra Club and research network CoalSwarm revealed that the amount of new coal plant being built around the world fell by nearly two-thirds last year. It noted that the dramatic decline was overwhelmingly due to China and India, where work has been frozen at over 100 sites. In January, China’s energy regulator halted work on a further 100 new coal fired projects, suggesting the trend is not going away. Researchers for the groups also said a record amount of coal fired capacity was retired globally last year, mostly in the US and the EU. Like the coal industry, oil and gas are also under threat from the low carbon energy agenda. Last month the International Energy Agency estimated that a step-change in climate policy away from fossil fuels and towards cleaner sources of energy would leave a total of $1 trillion of oil assets and $300 billion in natural gas assets stranded. There is little doubt many big energy companies might be in better shape today, if they had believed earlier that the shift to green energy was here to stay. Like E.On, RWE and others, oil and gas majors such as, ExxonMobil, BP, Shell, Statoil and Total are now making serious efforts to adapt to the new future in order to combat falling revenues. In the past, some have dabbled in renewables. Today, although perhaps partly forced by low oil prices, almost all are embracing low carbon energy and associated technologies such as storage. Even Saudi Arabia, the world’s biggest oil exporter is now taking its first step towards a goal of generating 9.5 GW of energy from renewables, recently inviting bids for a 400 MW wind farm and a 300 MW solar project. The transition to a cleaner energy future certainly offers opportunities and has economic benefits both for companies and society. Stressing the case for renewables during the launch of ‘Perspectives for the Energy Transition: Investment Needs for a Low- Carbon Energy Transition’, International Renewable Energy Agency (Irena) Director-General, Adnan Z. Amin, said: “Critically, the economic case for the energy transition has never been stronger. Today around the world, new renewable power plants are being built that will generate electricity for less cost than fossil-fuel power plants. And through 2050, the decarbonisation can fuel sustainable economic growth and create more new jobs in renewables.” Danish company Dong Energy, which has its roots in oil and gas, is a prime example of what is possible if you spot and act on trends early. Since its formation in 2006, the company has transformed from one of the most coal-intensive utilities in Europe to a global leader in renewable energy. Dong Energy’s CEO, Henrik Poulsen notes: “We are the company that has come the furthest in the green transformation.” It is a transformation that has been rapid. The proportion of its capital tied up in wind farms has jumped from 16 per cent in 2007 to 75 per cent in 2015. The wind business became its biggest contributor to earnings in the first half of 2016, overtaking oil and gas with 42 per cent of operating profit. Notably, the company is now the world’s largest offshore wind farm company, having built more than a quarter of the capacity in operation globally. Marking a major milestone, in October last year it installed its 1000th offshore wind turbine. Dong Energy is also investing in pioneering technology that turns waste into electricity. It is building the world’s first commercial full-scale waste-to-energy bio plant in Northwich, UK. The plant will use enzyme treatment to convert household, municipal and some commercial waste into biogas, as well as recyclable plastics and metals (see TEI Times January 2017). Further, the company has been converting coal power stations in its utility subsidiary to burn wood pellets and in February announced its power stations would stop using coal altogether by 2023. Now, it is preparing to sell off its oil and gas business by the end of this year, after floating on the Copenhagen stock exchange in 2016. The move follows the divestment of its ownership shares in five producing Norwegian oil and gas fields to Faroe Petroleum Norge AS (Faroe) last July. Dong is betting big on offshore wind. It says it plans to install more offshore wind capacity between 2016 and 2020 than it has in the last 25 years. Some may see it as a risky strategy, considering the construction risk associated with the sector. Nevertheless, the company continues to bet on the future. So far, acting early has proven to be sound judgement. And regardless of the outcome, excessive delay is not an option for energy companies. In a research paper published last year by UK-base think-tank Chatham House, Professor Paul Stevens warned that if large oil companies did not change their business model, what remains of their existence will be “nasty, brutish and short”. The same goes for power generators and integrated energy companies. Wearing flares when they are out of fashion might be seen as retro at best or embarrassing at worst, but standing still in the energy industry while the world around you changes could be suicide. Moving with the times Junior Isles Cartoon: jemsoar.com
Energy Industry Times April 2017
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