Fuel for Thought – Aug 19th

19 Aug, 2011

Commodity market reaction to financial market turmoil: There was a mixed reaction of commodity prices to the selloff in financial markets earlier this month as explored by Reuters here. Energy prices are sharply lower this week as the selloff continues. It is interesting to note that the associated capital ‘flight to safety’ has not caused a significant rally in the USD so far. This has to some extent dampened the impact of turmoil on commodity prices. But the real threat comes from a rapid slowdown in global growth which on the basis of recent US and European data is looking increasingly likely. It takes great optimism to envisage a world where developing economy growth continues to support coal, oil and LNG prices if the US, Europe and Japan return to recession.

More obstacles to UK utilities delivering new capacity:  UK utilities are facing renewed pressure of policy intervention in their retail businesses as unfair billing practices make headlines. The Labour Party has picked up on the idea of requiring utilities to auction a portion of their electricity. Reforms such as this may win political points but they threaten utility margins and their integrated business models. Utility investment in generation capacity is critical to maintaining security of supply.  So major political intervention that weakens utility businesses is likely to be counterproductive.

Which countries are driving demand for solar PV? The importance of subsidies in driving global demand for solar PV cells is impressive. Financial support has helped reduce the cost of solar PV as a technology but this support so far has come from European countries where load factors average around 10%. The reduction in cost and pace of rollout in Europe highlight the potential for solar PV technology in countries with a more accesible solar resource such as the US, China, Australia and the Middle East.

Dutch Bergermeer gas storage project delayed: Scientific reports showing the potential for gas injection to cause earth tremors will delay commissioning of the largest gas storage faciity in the Netherlands.  Requirement for gas flexibility at TTF will almost certainly increase as the fleet of Dutch gas fired plant provide backup for intermittent power generation across North West Europe. In the short term the nearby newly commissioned GATE LNG terminal is unlikely to provide much additional flexibility as the divergence between Asian and European LNG prices continues to rise.

Picture of the week:

Construction of one of the reactors at EDF’s Flamanville nuclear plant. EDF’s initial project estimates were for the plant to cost €3.3 billion and start commercial operations in 2012. The latest estimated cost has now increased to €6 billion, with commissioning delayed to 2016. Either EDF’s engineers are incurably optimistic or there would appear to be substantial project risk in delivering the next generation of nuclear plant.