Fuel for Thought – Sep 16th

16 Sep, 2011

Look to China for a view on commodity prices: Given that China dominates marginal demand for most commodities, the evolution of Chinese growth and commodity prices will be inextricably linked. It is unclear whether the recent slowdown in Chinese growth is a transitory effect as a result of the Chinese authorities tightening monetary policy, or is the start of a more serious downturn. But it is worth considering the impact on oil, coal and LNG prices of a rapid slowdown or even contraction in Chinese growth. We explore some of the dynamics here and suspect that the downside impact on energy prices would be very pronounced.

Shift from coal to gas generation is not enough: The climate impact of a global transition from coal to gas fired generation may be marginal according to a recent study. The study emphasises the importance of accounting for emissions across the fuel production life cycle as well as the potential cooling impact of particles released from coal fired generators. While gas will need to play an important role in the transition to decarbonisation, these factors emphasise the importance of the energy efficiency side of the equation. Unfortunately Europe in focusing on renewable energy is desperately lacking in a co-ordinated policy approach to energy efficiency.

Libya gas back online for winter: With Gadaffi on the run, ENI has announced its ambition to ensure that the flow of Libyan gas to Europe is re-instated in time for winter. Success in achieving this will likely be an important factor influencing European gas spot prices over the next 6 months. With maintenance at Qatari LNG trains and Asian LNG prices soaring, a cold winter in Europe may result in European hub tightness and significant price volatility.

Cable orders don’t bode well for UK offshore wind: The UK government has focused its recent Electricity Market Reform policy announcement on reducing investment uncertainty for renewable investors. We have explored the reasons why we are sceptical as to the effectiveness of EMR in promoting investment here. Early evidence would seem to support this view given the relative weakness in UK submarine cable orders, a key component of offshore wind projects. Weak growth in offshore wind investment would be a big blow to the UK government’s renewable goals, given that this technology is arguably the most important in achieving the 2020 renewable output targets.

Picture of the week:

Workers attempt to clear ice from the Sayano-Shushenskaya hydro dam in Siberia. Sayano-Shushenskaya was the largest power station in Russia (6.4 GW installed capacity) until a catastrophic accident in 2009 where pressurised water breeched the turbine casing destroying the machinery hall, killing 75 people and hobbling the power station. The station is slowly being repaired but the local weather is a challenge given winter temperatures can fall to below minus 60 degrees.