Reflections on London’s flagship Energy Intelligence conference
As another tumultuous week in the energy market closes, it’s worth reflecting on some of the key themes and insights from London’s flagship energy conference Energy Intelligence. I love this conference because it always has stellar speakers (including many CEOs, Ministers, and more) but it is also small enough to be intimate and facilitate deep conversations. If you were there, let me know what you think!
Here’s a summary of the conference, broken down into 5 themes:
- Where are we today? “Everything is in a state of flux, including the status quo”
- How is the world responding? “Subsidies and a Catholic marriage between renewables and gas”
- What needs to happen in the medium term? “We need to chew gum and walk at the same time”
- What are the implications? “Energy anxiety and depression in Europe and beyond”
- What about the long term? “Platform players, silo busters and the unthinkable”
Thanks to Alex Schindelar and his fantastic team for an incredible conference.
Where are we today? “Everything is in a state of flux, including the status quo” (Dev Sanyal, Varo)
- Today we face at least three crises: a climate crisis, an energy security crisis, and a cost-of-living crisis. This is dramatically stressing populations around world, and a key component of inflation. As Lord Stern pointed out, the world is seeing storms, flooding, heatwaves, crop failures etc., at unpredicted and unprecedented levels.
- Energy has underpinned the growth story of the 20th century – and it is likely to continue to underpin growth going forward.
- The challenges around energy are typically framed around the “trilemma” of affordability, availability (or security) and sustainability. Whilst some might think these competing needs are trade-offs, as Lord Stern pointed out, they can be complementary and mutually-reinforcing
- As Kingsmill Bond (RMI) pointed out, Putin has helped to accelerate the “collapse” of the trilemma triangle – with renewables now being lowest cost, low carbon and secure – at least, in principle. “Thanks to Putin, this trilemma has been solved – we are now low cost, green, and local – solved by renewables – that’s why we see extraordinary levels of growth”.
- We should note that although a pure “LCOE” approach to costing renewables needs to account for the high capital cost of back-up (from peaking plants, or possibly interconnectors, batteries and demand-side reduction). In practice, we need to solve this intermittency – and scale up investment radically.
- Whilst the most obvious cause of the current energy crisis is Putin’s war in Ukraine, as many have pointed out, the current situation is a result of systematic underinvestment. Underinvestment in fossil energy for 5+ year (CAPEX is down from $800 billion to $400 billion), and underinvestment in renewables (vs where we need to be, especially given the first point).
- The root cause of the immediate problem is of course Europe’s dependency on Russia. Whilst there were other supply sources available, Germany plumped for low-cost gas to underpin its heavy industry (and on a belief that trade was a post-war political stabiliser after Yeltsin and Gorbachov).
- With Putin’s gas supply severely reduced (most recently from the Nordstream sabotages), there are limited sources of gas that can be brought to market quickly, although US and Qatar LNG are all poised for rapid expansion. Qatar’s Energy CEO Saad Sherida al-Kaabi outlined the projects that will double Qatar’s LNG exports in the next few years (next major chunk is Q3/4 2025).
- Several speakers (notably Allyson Anderson Book from Baker Hughes) and Byrony Worthington (House of Lords) talked about energy efficiency, there was only a sideways glance to minimising waste in the oil and gas supply chain. Yet flaring, venting and leaking gas represent a 266 BCM source of gas that almost no one talks about, and much of which could be brought to market quickly if investment were to be unlocked (see recent paper on Egypt’s successes).
How is the world responding? “Subsidies and a Catholic marriage between renewables and gas”
- Governments are (rightly) intervening with major subsidies. Charif Souki (Chair of Tellurian) notes that “Europe is spending 500-600 billion subsidising gas for consumers. For a fraction of that cost it could acquire gas at cost”. This is a major wake-up call for a series of monumental policy and market failures.
- Since demand curves are relatively inelastic (partly due to Government price caps), constrained supplies mean changing energy supply routes and dramatic increases in prices. New trading routes are – almost by definition – likely to mean higher consumption of primary energy to supply primary energy, building in inefficiencies.
- Several participants noted that “the cure for high prices is high prices” that stimulate both new supply and demand destruction (which is likely to happen most quickly in several sectors, e.g. fertiliser manufacturing).
- Natural gas delivered by LNG is ever-more important in clearing markets, as major LNG exporters compete to maximise profits and as countries compete to secure supplies. LNG contracts.
- The tension between countries and blocks is, however, starting to get ugly – recently an LNG cargo destined for Bangladesh was diverted within in the last mile to higher-paying European buyers – leaving people to suffer.
- At the same time, nuclear plants are being revived, coal plants restarted (and closures deferred) and some countries switch from gas- to oil-fired power generation.
- As a result, the energy transition is being stalled – the hopes from some that the crisis would accelerate the transition has, as Bob Dudley (OGCI Chair) says, been put on ice, at least for now.
- Whilst delegates are on-edge for how economies will cope through this winter (and it will likely depend on the weather), of even greater concern is winter 2023/4. With limited Russian supply and low storage this is likely be a bleak midwinter.
- There was also lots of discussion around proposed price caps on the price of oil – and the general feeling from speakers was that it will be ineffective and hard to enforce (and we are already seeing a rise in ship-to-ship transfers of oil at sea, a classic method to diffuse origins of crude).
What needs to happen in the medium term? “We need to chew gum and walk at the same time”.
- The recent Inflation Reduction Act bill in the USA is very promising (and is $400 billion in scale) and timely, but funding and subsidies alone are insufficient – major planning reform is required. But regulation is more than subsidies – it’s also policies, leadership, commitment and enabling new business models. Ben Harris (US Treasury) highlights, for example, that the transmission network in the US needs to expand by 2.5x by 2030 – a staggering investment.
- To alleviate the energy crisis and accelerate the energy transition, many speakers (Maarten Wetselaar, CEPSA being the first) highlighted the need to remove red tape and speed up planning processes. It’s promising to see however that the German Federal Government permitted a new LNG regasification terminal in 12 days – something unthinkable a year ago.
- Particularly for new technologies such as green H2, Governments need to provide clarity on policies – and urgently, and green H2 needs to get to $1 per kg to be competitive (it is miles off).
- Without the right policies, the many announcements made on projects will not adequately move towards Final Investment Decisions. Disappointing, governments can’t even agree on a definition of green hydrogen (for example). Occo Roelofsen (Power2X) notes that “the only people making money in Hydrogen these days are conference organisers”.
- The finance community is responding to the moment, but rapidly needs to align around a set of “simple” metrics, independent measurement and reporting. Hard to do given that companies frequently choose to make their own interpretations/nuances on metrics in their own favour – despite many efforts to standardise.
- Growing recognition that divestment is not the answer (since it shifts emissions from listed companies to unlisted ones with lower scrutiny), and it’s the “glide path” or rate of change for “greening brown” companies that is arguably more important (Meg Starr, Carlyle Group).
- Some optimism about CCUS from some parties, but a bleak challenge from Martin Jagger: “7.6 gigatonnes at 2-3 million tonnes per project means we need a new CCS project to start every 2-3 days and we’ve delivered 26 in 51 years”. No wonder the Energy Transition Commission’s view is summed up by its title “Vital, but Limited”.
- Some concerns raised about switching from a reliance on Russian gas to a reliance on minerals from China, as expressed by Patrick Allman-Ward (Dana Gas): “We’ve just learnt that relying on Russia for 40% of gas supplies is a bad idea, and we are now shifting to a reliance of China for 80% of battery technology – is that wise?”. The solution is to make at home, diversify supplies, or hold inventories (Jason Bordoff, Colombia). Cost inflation for renewables is an issue, but not a technology killer, so say several.
- Some serious consideration needs to be given to developing countries around the topic of a just transition. Several speakers were concerned by arrogance from the west “we are not going to help you to prosper [through your own development as we did]”, yet everyone has a right to better their standard of living (and not to do so is a [climate] injustice).
What are the implications? “Energy anxiety and depression in Europe and beyond” (?)
- Russia’s war has dramatically, structurally and irreversibly changed the politics of energy. Putin and others are rapidly undertaking a “deWestification”. Lavrov is travelling to non-aligned states to promise Russia as a reliable energy partner and to secure its long-term markets.
- These moves are leading to a global divide. Europe is losing not only its supply of low-cost energy, but also its confidence. Arguably, as Alastair Cooke (Conflicts Forum) points out, Europe has been slow to recognise that it is not the centre of gravity of energy – and that the 700 million people in Europe plus North America are outnumbered by the 7 billion people in Africa and Asia (Narendra Taneja, Energy Policy Institute). 800 million people don’t have electricity for their kids to do their homework, and many millions rely on wood or dung for cooking.
- Europe is likely to try and build an energy fortress and move to protectionism (which will be a mistake). Europe has refused to engage in proper dialogue. There are also serious implications for the industrial heartlands of Europe, especially Germany.
- German industry in particular will be undergoing a major fight for survival, with major industries likely to disappear quickly. As Graham Weale (Ruhr University) puts it, geography matters a lot.
- Supply chains are likely to be totally reinvented, with the cost of the green electron determining where industry and manufacturing takes place. Wind and solar productivities are the new oil and gas resource bases. Recently 2 MOUs have been signed between Germany and Australia to send green fuels to Germany for Germany to make green steel – but how sustainable is this?
- We will see a major relocation of industries towards new low-cost renewables countries that need to make a choice as to whether they supply energy (e.g. Morroco’s high voltage power export project to Europe with Xlinks) or whether they supply green products. This is a massive rethink and will impact the structure of society.
- Several speakers expect 20 years of energy chaos, deep fragmentation, major challenges on security and affordability, leading to mass unemployment and more.
- Serious questions are likely – “the west does not have the right to define what is right and what is wrong, and to set the rules of the world”.
What about the long term? “Platform players, silo busters and the unthinkable”
- Much debate in the room about the long-term demand for fossil fuels. Tensions between die-hard proponents of fossil fuels vs renewables advocates, with a strong view from Kingsmill Bond (RMI), “as soon as Putin’s fog of war clears, fossil fuels will be in decline”.
- Bill Brown (8 Rivers Capital) notes that the top 20 companies of today are “platform players” and “silo busters”. If this is the way to go, the question is do the incumbent oil and gas companies have the capacity to use their global reach, capital might, project capabilities and networks to become platform players. Ben van Beurden (Shell) is optimistic that a “customer-first” approach (to help customers to decarbonise) is the way to go – but notes that it’s critical to avoid the valley of death en route.
- Lord Stern reminds us of the urgency to accelerate the energy transition. 3-4 degrees (which we are on track for) will be devastating and will lead to massive human migrations and deaths on the scales of hundreds of millions or billions, raising the unthinkable question (as he put it): “what is the process to go from a global population of 10 billion to 4 or 5 billion?”.
Thanks again for an exceptional conference. Much to think about – and much more to do!