- The spread between Brent and WTI became too wide
- Offshore wind development good for the Dutch industry, but tough for utilities
- International agreements necessary to resolve energy production inefficiencies
Brent/WTI spread widened again…
Oil prices moved significantly in recent weeks, with Brent oil staging an impressive rally since the start of November (+9 %) and West Texas Intermediate (WTI) crude initially falling under pressure to a low of USD 91s/barrel before recovering somewhat. As a result, the Brent/WTI spread widened to levels above USD 20/barrel. The rally in Brent oil occurred despite the nuclear programme deal between Iran and the western coalition. Another factor which kept Brent oil elevated is the tense situation in Libya. WTI crude dropped to a low of USD 91/barrel after US inventories continued to increase as a result of the large US and Canadian production. Where in the past WTI was driven by similar drivers as Brent, this correlation has diminished in the last two years. In fact, the direction of Brent hardly has any effect whatsoever on the direction of WTI at the moment. Based on the arguments mentioned above, the rally of Brent oil as well as the pressure on WTI crude is easy to explain. However, the spread has widened too much in our view. During the coming weeks, oil prices will remain mainly driven by supply fundamentals. With demand picking up only modestly based on the moderate economic recovery, the main surprises could come from production disruptions. With the heating season at full steam, we believe that if demand picks up when weather conditions deteriorate to a longer cold spell, WTI prices will be driven higher. For Brent, more sideway trading can be expected. Our expected decline of oil prices is based on overproduction outbalancing the rise in demand in 2014, in combination with easing geopolitical tensions, higher yields and a stronger USD. However, these arguments are only expected to materialise in the course of 2014, and have less of an impact in the very near term. After all, the Iran deal may be out of the spotlights for the next few months, but Libya, Syria, Iraq and other tensions in the region will keep the risk premium alive.
Zooming in on energy sustainability in the Netherlands
According to the latest objectives, 16% of our energy must be generated from renewable sources in 2023 (and 14% in 2020). This is what the Dutch government has agreed with civil society and environmental organisations in the Dutch National Energy Agreement. Of this 16%, some 4.5% has already been realised. Plans have been drawn up for the remaining 11.5% in order to meet this national objective within the set term, and also to comply with the international targets imposed by Europe. According to the Dutch Energy Knowledge Institute (ECN), however, further energy efficiencies may lead to a lower-than-estimated final end use in the Netherlands. The ECN estimates that the final end use could be about 2.5% lower, in which case the amount of renewable, or sustainable, energy required to meet the 16% target will also be lower. This can be an important factor if we look at the total amount of MW of renewable energy to be generated.
National offshore wind
In response to parliamentary questions Minister Kamp recently indicated that he was willing to release a maximum of EUR 18 billion from the SDE+ subsidy scheme for the development of offshore wind. This is sufficient to cover about one fifth of the 16% renewable energy target. SDE is a subsidy scheme to promote renewable energy generation and has been in operation since 2011. Once all projects have been completed, Dutch offshore wind farms will have a total capacity of about 1000 MW.
The Dutch government’s offshore wind objective has been revised downwards in the National Energy Agreement to an installed wind energy capacity of 4,450 MW in 2023. Substantial investments must be made in the coming years to realise this offshore wind target and, given the long construction period of these projects, there is no time to be wasted. Finding other suitable locations for offshore wind is difficult as much of the available North Sea space is already used for fisheries, shipping, sand, oil and gas extraction and military exercises. In addition, nine permits were issued in 2009, giving the developers until 2020 to implement the submitted plans, but no concrete action has been taken so far.
Offshore wind in surrounding countries
Our neighbouring countries have also set high offshore wind ambitions. The European objective for offshore wind is an installed capacity of 40 GW in 2020. Particularly Germany and the UK have already made major progress and are planning a further enormous expansion of their offshore wind energy capacity in the coming years. As part of the amended Erneubare Energie Gesetz (EEG), the new German coalition government has expressed the ambition to generate 40-45% of the country’s energy from renewable sources by 2025 and 55-60% by 2035. Germany currently has a total offshore wind capacity of 460 MW. In addition, projects for a further 5,740 MW have been started up, bringing the rated capacity to 6,200 MW (compared with about 1,000 MW in the Netherlands). The objective for 2023 is to have about 10,000 MW in place, about 2.5 times more than the target in the Netherlands, while the Germans are aiming for a total capacity of 15,000 MW in 2030. The initial target was 25,000 MW, but this has been lowered significantly by Chancellor Merkel’s new coalition. According to environment minister Altmaier (CDU), this adjustment was necessary to make the energy transition more manageable, predictable and affordable. Consumers and businesses are currently confronted with high power bills because the costs of subsidies are being passed on in the form of a levy called the ‘Ökostrom-Umlage’.
The UK is aiming to generate 15% of its energy consumption from renewable sources in 2020. Of this, 3.3% had been actually realised in 2010. The UK Renewable Energy Roadmap assumes that offshore wind will account for 14-25% of the total renewable energy generated in the UK. This means that the offshore wind capacity must grow to 16,000 MW by 2020, and to as much as 39,000 MW by 2030 if the costs decline.
Good for the Dutch offshore industry
There is currently an electricity overcapacity, partly due to the major investments in the transition towards a more renewable European energy mix. In the past year, partly thanks to the Energiewende, the German energy industry made a huge positive contribution to Germany’s economic growth.
The development towards a more sustainable energy mix in Europe is also beneficial for the Dutch offshore industry. The Netherlands has a long tradition of knowledge development in the offshore oil and gas industry. According to the Netherlands Wind Energy Association (NWEA), Dutch industry is particularly good at foundation construction, installation and maintenance. The manufacture of wind terminals mostly takes place abroad. Nevertheless, Dutch companies can be involved in, and benefit from, about 60% of the European offshore wind energy chain. Apart from being used for the large planned investments in Dutch offshore wind, Dutch knowledge is also very suitable for exportation to other countries that are steadily stepping up their investments in this industry. In other words, the German and UK ambitions to significantly grow their offshore wind industry can give an impulse to the Dutch economy and the entire chain involved in the construction, transportation and maintenance of offshore wind turbines.
National objectives lead to further overproduction
Our September Energy Monitor dealt at length with the energy mix and the consequences of such major developments as the German Energiewende for the Dutch electricity market. Our main conclusions were that the national energy agreement is a splendid first step, but that the electricity overcapacity is confronting electricity producers with problems and that agreements must be made at an international level in order to achieve a better energy balance.
In the September update we noted that in the Netherlands is feeling the impact of the German energy transition, particularly at times when the Germans cannot get rid of all their wind energy and export the surpluses at sharply reduced prices to the Netherlands. This leads to our own gas- and coal-fired power stations being temporarily shut down, As a result, their profitability comes under pressure. Nevertheless, investments in these power stations remain necessary as the supply of energy from Germany or wind and solar energy from other regions is not stable. Given the need to maintain full back-up capacity, the current surpluses in Germany and the further planned increase in our own wind and solar energy capacity, we risk creating a substantial energy surplus in the coming years. This is based on the situation as it stands today but there are further developments to consider, including the planned expansion of wind capacity in the Netherlands (from about 1,000 MW to 4,450 MW offshore wind and from 2,140 MW to 6,000 MW onshore wind). Added to this, the co-burning of biomass in coal-fired power stations and solar PV also contributes to the creation of extra renewable energy. This overproduction is an international problem and partly the consequence of the ransition to a renewable energy mix. A further contributing factor is the weak economy, which has reduced demand for energy. The energy mix will probably become more balanced as soon as the economy picks up. However, as countries do not look beyond their own national objectives, and fail to properly consider the supply in surrounding countries, inefficiencies in the form of over- or underproduction will continue to exist from time to time. By making international arrangements and integrating electricity grids across borders, it will be easier to find the right balance between energy supply and demand. This would promote energy efficiency and permit radical cost reductions. Unfortunately, the existence of national objectives alongside European objectives impedes international cooperation and creates significant problems for the power sector. It is important for the sector that international electricity networks become more connected and integrated. This will help to improve the efficiency of investments while also promoting a reliable supply of renewable energy throughout Europe.