Fuel For Thought – 17th Jun 2011

17 Jun, 2011

The global gas supply glut may be waning

Rapid demand growth, fuelled by non-OECD country investment in gas fired generation, and plentiful reserves across a range of geographies adding to energy security of supply is the world presented in the Golden Age of Gas scenario published by the IEA earlier this month. The eye watering $8 trillion investment requirement under this scenario will present a challenge in the current capital constrained environment.  There must also be a case for stronger global price convergence than that presented by the IEA as it is hard to conceive of average regional price differentials being significantly above transportation costs over the long term.

The impact of turning away from nuclear generation

The knock on effects from renewed anti-nuclear sentiment are not as environmentally friendly as the headlines. In the short term there will be a substantial rise in carbon emissions from Germany as a result of the revised nuclear closure timeline. In the longer term it seems impractical to expect thermal and nuclear capacity replacement to be met solely by renewable generation, particularly in the developing world. As governments pull back on new nuclear build plans it is likely that carbon emitting gas fired capacity will step in to fill the baseload capacity gap.

The risks of UK electricity market reform

There are some key risks from UK electricity market reform from the perspective of institutional investors. A lack of policy clarity clearly poses a threat to achieving power sector decarbonisation. But it is also poses a threat to maintaining an orderly market capacity margin. More than 11 GW of thermal capacity is scheduled to retire by 2016 as a result of LCPD closures.  Four years is not a long lead time to implement and build confidence in a new policy structure which will ensure investors deliver the replacement capacity required.

‘Win-win’ decarbonisation of the power sector

Power sector decarbonisation action and debate is focused on expensive replacement of wholesale market supply. But there is a huge opportunity from relatively cheap and accessible efficiency savings in the building sector as set out in a recent report from the IEA. Upgrading of heating and cooling equipment involves small scale conventional technology. Upgrade programs would also offer a much needed injection of life to a depressed European building and construction industry. But where is the policy support ?