Tag Archives: Energy

The Week In Commodities

Global Economy, On the cover, Sin categoría

Despite all the intra-week volatility, which saw Brent reach the highs of $115/bbl and then retreat back the following day, both oil benchmark ended the week up (Brent +2.2%, WTI +0.9%). After more than two months of planned maintenance, the UK’s largest field and contributor to the Forties Blend, has restarted after repeated delays lasting over a month in total. This restart, however, has not been fully flawless and the field began producing between 140-170kb/d, significantly short of its optimal rate of 220kb/d. Elsewhere in the North Sea, Total’s Elgin field is unlikely to restart on schedule, and may be delayed into 2013 instead, the operator has said. This combination is likely to keep supporting Brent time spreads. In the US East Coast, a large number of refineries, terminals and pipelines have reopened after Hurricane Sandy related closures, although some not yet at full capacity. Phillips 66’s 238kb/d Bayway refinery in New Jersey is still out and is not expected to resume operations for at least another 2-3 weeks. Also in NJ, Hess’ Port Reading refinery restart date is not yet known as the operator will need all power infrastructure to be back on line before an estimated time-frame can be announced. Despite some ongoing terminal and refinery outages in the region, supply is normalising after the United States lifted the Jones Act, allowing products to be tankered by foreign-flag carrying vessels from the Gulf of Mexico into the East Coast market.Steam coal markets have staged a moderate recovery this week, as rock-bottom prices triggered some buying and short covering despite what is still a relatively poor physical demand situation globally. China’s Ministry of Railways has reported that railings on the key Daqin line to Qinghuangdao hit a new high of 1.31mt/day on November 6, up from 1.17mt/day in September and 1.01mt/day in August. Meanwhile, McCloskey China Coal Daily has reported that coal stocks at QHD have risen by 17% since 22nd October to a level of 6.06mt. At the same time, coal stocks held by six major power generators in Eastern and Southern China dropped 1.9% from the previous seven day period to 13.886mt. This is equivalent to 23.7 days of consumption, down 0.9 days w/w, however still high by historical norms.UK natural gas prices were largely flat this week. The market was up on Monday due to concerns about LNG availability given nuclear outages in Korea, but it softened through the week on better actual LNG supply into the market. However, expectations of a continuation of a cold remainder to Q4 have provided support for the curve around current levels.

US natural gas prices gained slightly after the market received a much lower than expected storage injection (+21bcf vs. +26bcf expected). Hurricane Sandy remains a net positive factor for natural gas demand as colder-than-normal-weather-induced heating demand has more than offset the power outages in the north-east so far. Furthermore, although power demand edged slightly higher during the hurricane due to the large amount of nuclear shutdowns, about 3.6 GW of nuclear capacity came back on Wednesday, while the rest should also come back to service by the end of the month. Although the boost for demand from nuclear outages is now smaller, the amount of power outages has also been reduced to 750,000 households from 8.5mn at the peak. This represents a very small amount of demand destruction that is by far outweighed by heating demand growth expected for this week.

CO2 was up 2.5% this week. The European People’s Party, the biggest group in the European Parliament, has asked the Commission to delay the set-aside proposal scheduled on 14th Nov until after the Parliament vote in April which would give the Commission the right to intervene in the ETS market. They said that the Commission said in a phone interview that it will not delay the proposal. The news highlights continued tension between the Commission and member states over set-aside. The EPP includes centre-right parties from almost all member states such as France’s UMP, the CDU/CSU from Germany and PP from Spain. The UK Conservative Party is not a member. If correct, this means that set aside proposals including how many credits should be removed will be released as planned on 14th of November. It is unclear when the Climate Change Committee may vote on the proposals, but the CCC could give its opinion on its 13th December meeting. This will be one of the key votes, and will be held on a Qualified Majority Basis. The main question is whether Eastern European countries, led by Poland, will form a blocking minority. should the set aside proposals be passed, it should pave the way to higher CO2 prices which will be especially important for generators in countries where coal sets the electricity prices, such as Germany, the Nordic region and the Czech Republic.

German power prices were up 0.4% this week. Dark spreads continued to ease and are now at the lowest level since August. Nord pool was flat this week, as gains in CO2 were offset by continuing gains in hydro reservoir levels in the Nordic region.

Baltic Dry Index lost 7.1% this week, as the weakness persisted across all the segments. While the situation in coal markets described above explains the continued weakness in Panamax, activity in the Capesize segment has also been weak as the recovery in iron ore prices has reduced the China-international price arbitrage from its peak in early September.

Massive Subsidies Endanger Spanish Energy Reform

Global Economy, On the cover, Sin categoría, Spain,
This article was published in El Confidencial on August 27th 2012 

“If technologies have economic merit, no subsidy is necessary. If they don’t, no subsidy will provide it”. Jerry Taylor.
“Governmental subsidy systems promote inefficiency in production and efficiency in coercion”. M. Rothbard

This week the press has highlighted the discrepancies between two of Spain’s top ministers regarding the much delayed electricity sector reform. The shares of many of the companies involved have moved between +7% and -6% depending on the words of one minister or another.
Let me begin by saying that I do not find anything wrong when a company hires a consultant to defend its interests and that, when they do, they do it with the best. And I believe this controversy creates a great opportunity for the government to demonstrate that their decisions are not influenced by one lobby or another, but focused on the only thing that matters: that Spain cannot continue destroying its competitiveness with a massively subsidized and inefficient energy sector, where the electricity bill has soared by 40% while demand fell and where excessive renewable subsidies count for 39% of the costs (excluding energy component) of the system.
renewables II
To eliminate the tariff deficit accumulated until 2012; electricity bills will have to go up by an estimated 35%.
The Spanish tariff deficit is the difference between the real system costs and those recognized in the tariff, where the result is an IOU from the government that is financed in the balance sheet of the companies until it is settled. This tariff deficit is part of the infamous “Spanish private debt,” which is in no small part made of outstanding commitments from the government and funded by the balance sheet of private companies. It is also the consequence of a highly optimistic central planning of the system that incentivised overcapacity and massive new build that has made companies more indebted, with or without acquisitions, and less and less profitable.
renewables I
The tariff deficit myths are:
– “Companies make billions out of it” We must differentiate between accounted and real profits. We sometimes forget that companies account for the tariff deficit as a “receivable” so their profit and loss is not made of real cash. As such they generate no free cash flow and borrow more and more. Investments in Spain, from generation to distribution, generate less than 7% return on capital employed. However, companies are told by governments to undertake massive investments, but without legal certainty or acceptable returns. And there is always someone willing to build more for less.
–  “It is a temporary problem that goes away with the latest measures.” The latest government measures to reduce the costs of the system seem to look to collect from the efficient and cash generating businesses to cover inefficiency errors, but these measures do not solve a problem of subsidies and overcapacity, as they have been mainly applied on one-off costs, with a maximum impact of 2 billion euros, yet they do not take into account that in 2013 renewables subsidies will rise by another 2 billion to almost 9 billion a year in 2014 due to the plants that are coming on stream, bringing the tariff deficit up again.
–  “Renewables are unfairly demonized.” This is true, in part. The tariff deficit is not an issue created by renewable energy, but by the excessive cost of certain subsidies-particularly solar photovoltaic- where massive premiums were given to build 400 megawatts, ending with 3000 megawatts built – the consequences of an extremely generous aid system and a poorly controlled approval system, where all regional governments gave permits to plants regardless of the 400MW limit. But who pays that “tiny” 5 billion per annum mistake?. No one has anything against renewable energy. I love to read that Spain will build nearly 600 megawatts in solar PV without subsidies. The problem in Spain is the accumulated upfront cost of those subsidies, the fact that the excess cost is not paid but deferred in the tariff, and the claim from some operators to continue with the same scheme of subsidies and installations when all 2020 targets have been fully met. Many renewable companies in Spain have followed a model of builder-developer entering a country, and maximizing capacity to move on and grow in others. But there is no eternal growth in each market.
– “Coal generates no deficit because it is a social cost.” Other subsidies maintain inefficient capacity alive, like coal, which gets 600 million a year. If the rationale to keep coal is “social” it should not accumulate costs to the power bill, but be paid by the regional governments like healthcare or social services. The problem is the habit of subsidizing outdated technologies while building up the deficit that is generated by other new technologies.
–   “The renewable subsidies are offset by the fall in wholesale prices.” The cumulative net reduction in wholesale power prices between 2005 and 2011 was less than 9.2 billion euros, according APPA- while accumulated subsidies to renewable energies shot to 25 billion in the same period. In any case, talking about the benefits of renewable energy on price is almost comical when the power tariff to consumers has risen almost 40% in four years.
–   “The tariff deficit is created by the manipulation of wholesale price by large utilities”. It would be the most disastrous manipulation ever, when wholesale prices have remained exactly in line with the energy mix, below Italy’s, France’s and Britain’s, and in line with Germany.
renewables III
–  “Nuclear and hydro should pay the deficit.” They do, but it makes no sense to use cheap sources of energy to subsidize more expensive ones. And let’s not forget the string of regional and national taxes that traditional utilities suffer.
–   “If nuclear capacity is shut down, there would be no overcapacity.” Sure, and if EDF and France dismantle their 58 nuclear reactors, there would not be any overcapacity there either. And if Saudi Arabia closes Ghwar and Khursaniyah there is no oversupply of oil. We have to take advantage of technologies that are cheap while they work, and work well, because we need cheap, non-interruptible power. We forget that solar and wind are interruptible and cannot be installed exponentially because the land occupied by megawatt is finite. And the cost of adding a network connection is not properly taken into account.
renewables IV
What has led to this problem? 
An optimistic central planning based on demand expectations -2% pa growth- which were completely unjustified, an increase of generation capacity and infrastructure -25 000 megawatts of additional capacity in gas and 35,000 megawatts of renewable- and the joy of subsidies to every technology without control –renewables, coal subsidies, capacity payments, island grants…
As subsidies mounted over each other, capacity rose and demand collapsed, we find a power system in which the annual costs -guaranteed by the state- exceed revenues by c4 billion euros … and regulation has always been modified to tax the efficient to subsidize not only “nascent” technologies, but also “dying” ones.
The solution
The solution to this issue will have to be a compromise between the industry, the entire sector-traditional and renewable-, the State and the consumer, and cancel future subsidies in all technologies. From the existing deficit, part will have to be absorbed by the energy sector, the state-responsible for the optimistic planning- and consumers, who wildly applauded the green economy and coal-mining subsidies without knowing its costs.
The German model is simple: subsidies are paid 100% by retail consumers, so people know the true costs of green energy – and 70% strongly agree- while industries, many highly energy intensive as BASF or BMW, do not pay the cost of those subsidies. Therefore, competitiveness does not sink and the country doesn’t suffer from industries closing down due to excessive power costs. Additionally, unnecessary capacity is removed, while inefficient companies go bankrupt, as they should.
The American model is interesting. Investors are given tax incentives, not direct subsidies, for renewable projects. Thus, if there is no investor interest or projects are not economically viable, the system will be reducing unnecessary capacity by the law of supply and demand and, of course, if a company has to file for bankruptcy, it does.
Spain needs to be absolutely clear in its power sector regulation, guarantee legal certainty and avoid changing rules retroactively to solve past mistakes. But the consumer cannot support all costs if everything is subsidized and if there are no market mechanisms that enable cheaper and more efficient technologies to displace the expensive inefficient ones. Our excellent renewable companies are competing exceptionally well in the previously mentioned international models. So let’s not ask at home what we don’t need abroad.
Seizing revenues from the efficient to give it to the inefficient does not help. More importantly, a couple of years later the need for revenues will make the inefficient of today suffer as well.
I commented a few months ago in my article “the problem of fixing the price of power in government offices and not in markets” that Governments and some companies do not like to liberalize. They live very well asking and giving favours while the bill is either not paid or sent to the consumer. Amazingly, while governments see power costs soar, they are surprised to see that the country’s industries close down and that demand falls.
Mistakes in planning –always from excess, of course- have led to a power sector overcapacity that has many similarities to the housing bubble. The generation fleet overcapacity in Spain is enough to cover demand for years. Let us use this opportunity to end the current tariff deficit through market mechanisms.