Fuel could soon become a deflationary force

Hey and welcome again to Power Supply.

The primary public sale for offshore wind leases alongside California’s shoreline completed yesterday. It was a two-day bidding conflict that finally drew greater than $757mn in profitable presents for the 5 leases up for grabs. The winners embody acquainted names, as European corporations proceed to carry dominance over the nascent American offshore wind enterprise.

Norway’s Equinor gained one of many licences. Germany’s RWE gained one other. France’s Engie and Spain’s EDP Renewables, beneath the snazzy three way partnership identify of Central California Offshore Wind LLC, will develop a challenge collectively. The businesses must deploy floating wind know-how (to date unproven within the US) on the websites due to the comparatively deep waters off the west coast.

Extra offshore wind leases, together with an public sale scheduled for the oil-rich Gulf of Mexico waters, are anticipated subsequent yr because the administration of president Joe Biden tries to spur improvement of the lagging US business.

As we speak’s e-newsletter seems at a shocking reversal on the vitality panorama. Oil costs are all of a sudden down on the yr whereas inexperienced inflation continues to run rampant. There are large implications for the tempo of the vitality transition. And on that very same theme, Amanda reviews that US energy executives see the present renewables provide chain issues persisting no less than till subsequent yr.

Thanks for studying. — Justin

Oil and gas costs pull a U-turn

Brent oil costs closed yesterday at $77.41 a barrel, down almost 20 per cent over the previous month and barely under the place it opened the yr in a giant reversal from the worth rises seen over the summer time after Russia invaded Ukraine. The US WTI oil benchmark closed at $72.34/b.

And it isn’t simply crude. Gasoline costs are coming down as nicely, in contrast to durations of oil promoting earlier this yr when tight refining capability stored diesel and petrol costs elevated.

The common worth on the pump for petrol within the US is all the way down to round $3.35 a gallon, about the identical as this time final yr. Diesel futures in New York are buying and selling at round $2.80 a gallon, down 40 per cent from late October and just under the place they have been earlier than Russia invaded Ukraine, pointing to dropping costs for truckers, farmers and others that depend on it.

Gasoline, a serious driver of the decades-high inflation charge over the previous yr, might quickly really begin to be a deflationary drive within the economic system.

The ahead curve is pointing to extra worth weak point forward. The curve has now flipped from backwardation to so-called contango — which means futures costs by way of subsequent summer time are actually greater than the spot worth. That could be a signal that markets are oversupplied — a bearish sign for costs.

Fears that an financial slowdown will undermine demand are driving costs decrease. A few of that demand weak point is already evident. Within the US, petrol demand is operating nicely behind final yr’s ranges and has been for months now. This week, the Power Data Administration trimmed its international oil demand development outlook. It now expects international consumption of liquid fuels to develop by 1mn barrels per day, a pointy deceleration from the post-coronavirus pandemic restoration and earlier expectations for 2023. The IEA and Opec have additionally minimize their forecasts.

The interval during which runaway post-pandemic demand restoration was outpacing suppliers’ capability to maintain up seems to be passing.

On the identical time, among the large occasions that merchants and analysts warned about haven’t performed out. The oil worth cap on Russian crude and European import and transport restrictions haven’t considerably disrupted the move of crude from Russia as feared — though that danger has not completely handed.

China’s transfer away from its zero-Covid restrictions has been seen as one other potential booster for oil costs. That seems to be taking place now. However it’s more likely to be a gradual course of and the financial harm completed by the prolonged lockdowns gained’t be straightforward to undo.

Low international inventories of crude and gas imply vitality markets stay weak to provide disruptions. However for now the worth bears are in management.

Teslas aren’t getting any cheaper . . .

Whereas oil and gas costs are coming down, battery prices are all of a sudden on the rise, which might gradual the rollout of electrical automobiles and grid-scale vitality storage.

After a decade of sharp decreases, the common worth for a lithium-ion battery pack jumped 7 per cent this yr to $151 per kilowatt hour, in response to Bloomberg New Power Finance’s carefully watched annual survey. The group expects one other small improve subsequent yr as nicely earlier than prices begin to fall once more.

The findings usually are not an enormous shock. Costs for crucial battery inputs, resembling lithium, cobalt and nickel, have soared this yr, largely due to excessive battery demand and Russia’s invasion of Ukraine. Tesla, GM and different automakers have blamed the rising prices for pushing greater costs on to electrical car prospects.

Nonetheless, it’s a giant setback for the sector. The business has used $100/kWh as a form of magic quantity at which level batteries turn out to be broadly value aggressive with inner combustion automobiles. BNEF says the fee will increase imply that milestone now is not going to be hit till 2026, two years later than anticipated.

That forecast assumes that materials prices will stabilise and begin falling after subsequent yr. However analysts at Cowen, an funding financial institution, warn that if commodity inflation persists, that parity won’t be reached till 2029.

Prices are additionally on the rise for conventional petrol-powered automobiles, which complicates this calculus. However the rising value of batteries will make it tough for carmakers to roll out the form of extra reasonably priced, mass market electrical automobiles wanted to propel EVs into the mainstream.

Knowledge Drill

Clear vitality provide chain challenges is not going to disappear any time quickly, says Deloitte in its new US vitality outlook. The consultancy expects challenge delays and rising prices for supplies to proceed into 2023 amid rising demand for renewables.

Over half of US energy executives surveyed within the outlook mentioned it’ll take greater than two to a few years to ease provide chain challenges regardless of development in home manufacturing. Almost a fifth mentioned they didn’t count on provide chains to maintain up with the expansion in demand.

The Inflation Discount Act, the landmark US local weather invoice, included billions of {dollars} in incentives to spur home manufacturing. Plenty of clear vitality initiatives have been introduced for the reason that invoice’s passage, together with a $1.1bn funding from First Photo voltaic, an American photo voltaic panel producer, to construct a facility in Alabama in November.

A mix of commerce points, inflation, challenge delays and rising rates of interest has hampered renewable vitality’s development this yr. In accordance with an IEA report launched earlier this week, US renewable capability additions are anticipated to lower 20 per cent in 2022 as a consequence of greater prices and provide chain challenges.

US producers produced 5GW of photo voltaic modules in 2021, lower than a fifth of whole put in photo voltaic capability that yr, in response to Deloitte. To satisfy demand, the consultancy expects the US to stay reliant on international provide chains even in the long run.

“We’re nonetheless going to wish international provide . . . To satisfy the expansion that we’ve within the US plus the expansion globally, it’s going to be an all the above scenario,” mentioned Marlene Motyka, US renewable vitality chief at Deloitte.

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Energy Factors

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• How a Russian oil tanker tried to disguise itself.

• Australian mining billionaire Andrew Forrest has turn out to be the nation’s largest renewables participant with a $2.7bn wind acquisition

• Petrobras’s chief government is out as president-elect Luiz Inácio Lula da Silva prepares to return to energy, signalling a strategic shift for the state-owned oil producer.