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Last year was an interesting year for energy and climate change! Traded oil and coal prices fell to multi-year lows, while there were record global installations of wind and solar power. On the climate front, 2015 was a record hot year, partly fuelled by a fierce El Nino, and was rounded off by an unexpectedly robust Paris Agreement, which committed to phase out greenhouse gas emissions this century.
What does 2016 hold? Largely in the spirit of fun, but also to force us to think about these trends, we make predictions here. Comments are welcome!
1. Oil prices stabilise
Our view is that the oil price will remain volatile over the next months but that it will stabilise and rise this year, as production begins to fall in the United States and other, higher cost regions. That price is likely to settle in and around $60 over the next 18 months which is the price that oil companies are using as their base case for future investments. The wildcard remains the Saudis and OPEC, which may decide together to reduce production, pushing up the oil price sooner.
2. Big name bankruptcies in U.S. shale
We already noted in 2015 that U.S. shale companies will struggle at sustained oil prices below $50. Even if market prices rise above this level in 2016, risks will be compounded as more lucrative hedges expire, exposing exploration and production companies more fully. We expect several major Chapter 11 bankruptcies in 2016 (mentioning no names), as one option for firms seeking to restructure their debt.
3. Coal comes under yet more pressure
We may see countries like Germany and the Netherlands put in place clear decommissioning timetables for existing coal mines and power plants, following Britain’s announcement last year that it would end coal-fired power by 2025. Coal is already the fall guy for climate action, both as the highest carbon-emitting source of energy, and because of health co-benefits from cutting consumption. In 2016, we expect increased pressure coming from investors, particularly on coal-burning utilities which will force these users to clean up their image and move to cleaner alternatives.
4. No silver lining for the over-supplied Asian LNG market (thanks to Laurent Segalen for this one)
Asian liquefied natural gas (LNG) prices are at five-year lows and may fall further this year. Indian, Pakistani, Chinese and Korean buyers have been busy renegotiating long-term contracts, and sellers, chiefly Qatar and Russia, have largely caved in. This year could be worse, as more U.S. (Cheniere) and Australian (Gorgon) cargoes hit the market. The LNG Buyer of last resort, since Fukushima, has been Japan. But Japan is poised to restart several nuclear power plants, including the largest in the world, Kashiwazaki-Kariwa (8GW). The oversupply is such that spot LNG freight charter rates for a 160,000 cubic metre LNG carrier are at $32k/d early 2016, down from $72k/d in 2014 and over $100k/d in 2013.
5. European wholesale power prices to fall further
In Europe, it is large electric utilities that are exposed, to plunging wholesale power prices as a result of rising grid penetration of low marginal cost renewables, and weak demand growth. We expect the wholesale price to continue the trend lower, and see the day ahead power price below €30/MWh across central Europe in 2016.
6. An M&A surge across energy
Bankruptcies and restructuring leads to consolidation and M&A activities. We have seen very little of that in either shale gas and oil in the United States, or the utility sector in Europe. We expect Asian utilities, particularly from China, to make investments and acquisitions in Europe, and oil majors to make big acquisitions across shale and gas. A wildcard prediction is that Saudia Arabia’s Aramco begins to make acquisitions outside of Saudi.
7. A record year for global renewable energy installations
Wind and solar power will continue to grow, with record installations for each this year. We see the combined market for wind and solar this year hitting 120 GW, from c. 115 GW in 2015. Drivers for growth include falling costs; lower prices of storage; and technology improvements which allow grids to integrate more renewables into the power system.
8. Batteries and hybrid power solutions will have a big year, with the first big IPO
We saw a lot of activity in storage last year, and significant investment. Given rising investor interest, we are likely to see the first big IPO in this area, with the U.S. fuel cell and energy services company Bloom Energy. We may also see announcements of gigawatt-sized battery factories from the likes of Daimler.
9. More climate volatility: higher food prices
We have already noted that 2016 will probably be a record warm year, as the effects of a strong El Nino linger. The global weather effects of El Nino include flooding in the eastern Pacific including Peru, and drought in the western margin, including Indonesia and Australia; drier conditions in northern Brazil and eastern Africa; and a weaker Indian monsoon. We have a (vague) hunch that this weather volatility will trigger grain harvest failures, somewhere, leading to higher food prices in 2016 compared with 2015, as measured by the FAO Food Price Index.
10. Growing commitment to energy efficiency: a step-change for UK smart meters
For a decade or so energy analysts have been pointing out that massive investments in energy efficiency are the only way to meet climate action targets cost-effectively. Policymakers have struggled to translate that consensus into action, partly because costs are borne in the near term. We expect a rising focus on climate action, partly as a result of the Paris Agreement, to benefit the efficiency sector. For example, we expect a massive jump in long-delayed smart meter deployments in Britain this year, aided by lower energy prices. As of Sept 2015, some 1 million electric smart meters had been installed in Britain; we expect that number to pass 3 million by Sept 2016.