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China's carbon neutral pledge, Biden's plans for the US power
market, Europe's hydrogen strategy, Oil & Gas companies
overheating renewable M&A, Renewables in Eastern Europe, Coal
phase-out in OECD Asia, Gas in South Africa, Chile's hydrogen
ambition, and the Capacity value of Solar in US power markets
<span/>China's carbon neutral pledge: Setting the stage for another
four decades of transformation
On 22 September 2020 in an announcement to the United Nations,
Chinese President Xi Jinping committed China to a carbon-neutral
future, to be achieved by 2060. This is the first time that China
has pledged a carbon emissions target in absolute terms and is a
historic announcement that is bound to effect major changes to its
energy sector, with global implications. It will require China to
execute a nationwide transformation over the next 40 years, one
that is perhaps even more dramatic than over the past four decades.
If done right, it would not just create a new energy system, but a
new economy.
China will take on the Herculean task of decarbonization when
energy demand is still growing. Unlike many other regions that
committed to similar targets (such as Europe and Canada), China's
per capita energy consumption remains relatively low—roughly
40% below that of Germany and 67% below that of the United States.
New investment in carbon-free energy will need to not only replace
existing fossil resources but also meet incremental demand.
Reducing coal use and decarbonizing the transport sector will be
vital to achieving the goal. In addition, carbon removal as well as
transaction mechanisms, such as emission offsets, will be needed to
address sectors that are the hardest to decarbonize.
The target will require accelerating technological advancements
and radically creative policy formulation, presenting a colossal
challenge to many companies but also immense opportunities.
On 12 December, Chinese President Xi Jinping announced China's
new 2030 carbon targets, as a part of China's new Intended
Nationally Determined Commitment (INDC). Most of the new targets
represent an incremental tightening from those stated five years
ago in Paris and seems far less aggressive than the 2060 carbon
pledge. However, the new 2030 NDCs reaffirmed China's commitment to
the Paris Climate Agreement. In fact, they go beyond the goal of
peaking carbon emission before 2030 and signals a progressively
accelerated pace of transition towards carbon neutrality in the
long run.
<span/>The impact of the development of low-carbon hydrogen on the
European power sector
Following the focus on hydrogen in European COVID-19 recovery
plans, the issuing of multiple hydrogen strategies, and the growth
in the pipeline for power to X (P2X), we have incorporated hydrogen
as an energy carrier in the August 2020 version of the European
Planning Case.
The Planning Case assumes that major industrial consumers start
to convert to hydrogen from 2024 onward and that a diversified
supply mix—incorporating green hydrogen, blue hydrogen, and
imports—develops. In 2050, hydrogen accounts for 12% of final
energy demand in Europe and 40% of direct gas use. However, the
uncertainty associated with this outlook is high—particularly
in the early years.
Power demand for electrolysis and the renewable capacity
required to support green hydrogen are expected to grow strongly
throughout the outlook. By 2050, electrolysis is the largest single
use of power in Europe, with over 600 GW of renewable capacity and
electrolysis developed to supply the sector. Hydrogen production
implies development of an additional 10 GW per year of solar
photovoltaics (PV) and offshore wind from 2025 through 2050.
<span/>A Biden presidency will hasten the US energy transition, but
states remain critical to the pace of change for power and gas
markets
President-elect Joseph Biden will attempt to reset the US energy
landscape with several individual targeted policies aimed at
decarbonization and rejoining the Paris Agreement. The most likely
policy actions will be those that do not require legislation given
the uncertainty surrounding control over the US Senate. Likely
actions that will have meaningful impact on US power and natural
gas sectors this decade are new appointments to the Federal Energy
Regulatory Commission (FERC) and Department of the Interior (DOI),
as well as a higher level of climate risk scrutiny in financial
regulation. While several other plausible actions will be of
foundational importance to the long-term energy transition, they
are less likely to have a significant impact this decade.
A Democratic FERC majority will likely allow for power sector
capacity market constructs that are more accommodative of state
policies that encourage new renewable and storage development (ex
PJM). Importantly though, a democratic FERC majority is contingent
on the Senate confirming Biden nominees. Absent a confirmation
vote, FERC could lack a quorum to conduct business after
Commissioner Indranil Chatterjee's term expires in June 2021.
Biden's appointment to the Department of Interior will likely
accelerate the pace of offshore wind project permitting approvals,
which have stalled under the Trump administration. It is also
likely that the Biden administration will be more accommodative to
the many types of transmission required to integrate offshore wind
onto the land-based grid. IHS Markit's expected 18 GW of new US
offshore wind capacity by 2030, driven by state policies, looks
increasingly likely to materialize
Financial powers assigned to the president under the Dodd-Frank
Wall Street Reform and Consumer Protection Act ("Dodd-Frank") could
intensify pressure and increase the cost of capital for new
fossil-fueled power generation development.
Possible longer-term actions include tightening the regulation
of GHG emissions from existing fossil-fueled power generation, and
the possibility for reviving plans for federal greenhouse gas
emission regulations, accelerating the electrification of
transportation and other end uses, and energy efficiency
investments.
<span/>Racing for growth: Are oil and gas companies overheating the
renewables sector?
Many large and primarily European oil and gas (O&G)
companies have significant expansion plans for renewable energies
over the next decade, and the M&A activity of oil and gas
companies in the renewables space has recently surged. This uptick
comes at a time when many renewable markets globally are suffering
from dampened power demand, low wholesale power prices, reduced
government support, high competition, and low project margins. This
incongruity creates concerns that oil and gas companies are pushing
up renewable project valuations and overheating the sector.
Aggressive growth targets, competition from power utilities, and
limited experience force O&G
companies to meet their green commitments primarily through
M&A. This urgency among some O&G companies reverberates
into renewable project and company valuations and could lower
profit expectations. But over time, O&G companies can shift
renewable investments from the M&A space to their own
greenfield projects, hence calming activity in the secondary
market.
<span/>How will power markets evolve in Australia, Japan, and South
Korea amid the phaseout of coal?
Coal-fired power is projected to lose its position in Australia,
Japan, and South Korea with the phaseout of an aging fleet and lack
of new additions thanks to the policy push for the energy
transition, reduced economic competitiveness, and environmental
concerns. Renewable energy is expected to play a more predominant
role, but concerns around the challenges that intermittent energy
bring to balancing grid operations remain. Gas-fired generation,
battery storage, and pumped hydro are expected to firm power grids,
but each country's unique circumstances create multiple development
paths for the evolving power markets.
In Australia, Japan, and South Korea, operating coal fleets have
a combined capacity of 115 GW, of which 106 GW is expected to
retire before 2050 based on current government plans. As Japan and
South Korea plan to add 18 GW over the next decade, a combined
capacity of 27 GW is expected to remain, across the three markets,
by midcentury.
To achieve deep decarbonization in the power sector, Japan and
South Korea need continued government support to make solar and
wind cost -competitive with conventional fuels. Additionally, green
ammonia and hydrogen; carbon capture, utilization, and storage
(CCUS); and even new nuclear reactors are pivotal for achieving
carbon neutrality by 2050.
In Australia, high operating costs associated with running an
aging coal fleet, environmental concerns, and the low levelized
cost of electricity (LCOE) of renewables mainly due to favorable
solar resources (average capacity factor of 22%) will drive coal
phaseouts in the next two decades.
As a result of coal phaseouts, countries need bespoke renewable
integration measures to improve grid flexibility. In South Korea,
improving system reliability through the assessment of renewable
energy sources in the capacity credit mechanism is a high priority.
In Australia, battery storage has the potential to grow up to 17 GW
by 2040, as the Australian Energy Market Commission's (AEMC) new
five-minute settlement rule is expected to create increased
opportunity for storage.
<span/>Renewable power in Eastern Europe: Growth potential over the
next decade
Despite cautious positions on the energy transition adopted by
certain governments in the region, the potential for growth in
renewable power in Eastern Europe toward 2030 is significant. Even
Poland - where the government has so far held off from agreeing to
the EU's 2050 net-zero target - activity in the power sector itself
gives cause for optimism.
IHS Markit's planning case expects higher renewable capacity
deployment than envisaged in the national targets of several
countries as a result of government incentives, such as tenders.
Approximately 8.3 GW of capacity is expected to be auctioned in
Croatia, Hungary and Poland in the next 18 months, with Poland
being the single largest constituent with almost 6.5 GW.
<span/>Luiperd:
A game changer for South African gas monetization?
In October 2020, the Luiperd discovery was announced, leading to
a potential twofold increase in South African gas reserves. To
date, South African gas consumption has been predominantly limited
to PetroSA's gas-to-liquids refinery and Sasol's chemical plants
and today only accounts for 1% of the power generation mix.
However, pervasive power outages and an aging coal fleet have
created a need for new base-load power. The discovery of large gas
volumes, so close to the recent Brulpadda discovery, has the
potential to ease the country's security of supply concerns, but
discovery is only the start of the gas monetization process. A
challenging technical operating environment and an unclear domestic
monetization route could delay the near-term development of these
reserves and maintain the country's expected reliance on pipeline
and potential LNG imports into the 2020s and beyond.
While the expected production rate from the joint development is
currently uncertain, any gas monetization will need to be
underpinned by robust offtake contracts in excess of 450
MMcf/d.
IHS Markit estimates approximately 2.5 GW of gas capacity,
serving 11TWh of demand in 2025, an amount that can be supplied by
240 MMcf/d under 50% plant utilization. If the Ankerlig, Avon,
Gourikwa, and Dedisa OCGT plants are converted to run on gas, then
571 MMcf/d may be absorbed, including Sasol's current gas
demand.
<span/>Big ambitions: How Chile aims to be among the largest exporters
of green hydrogen in the world
On 3 November, Chile's Ministry of Energy presented a "National
Strategy for Green Hydrogen for Chile" with three main objectives:
have 5 GW of electrolysis capacity under development by 2025;
produce the cheapest green hydrogen in the world by 2030; and be
among the world's three largest hydrogen exporters by 2040. These
grand ambitions come with proposed measures including extending
US$50 million to pilot projects, promoting hydrogen in end-user
applications, and launching "green hydrogen diplomacy" to position
Chile internationally.
Chile has the renewable resources and power market environment
to produce among the cheapest hydrogen in the world, but favorable
new legislation and international partnerships will be essential to
launch a dominant hydrogen industry. Debate over a new constitution
and the global economic crisis threaten Chile's ability to attract
foreign investment for its hydrogen ambitions.
<span/>Assessing
the capacity value of solar in US power markets
Solar is expected to be the fastest-growing technology in the US
power sector in the future. Understanding how solar impacts
resource adequacy will be crucial to system planners, and the
decisions made about how to credit solar's capacity contribution
will be key to developers attempting to monetize that value.
Regional transmission organizations (RTOs) value solar through a
wide range of methods to estimate how much capacity solar
contributes to capacity needs. Currently, solar capacity credits
typically range from 30-70% in the summer, while solar is assumed
to provide little capacity or none in the winter. However, most
RTOs are already discussing future market rules or capacity credit
changes to address growing volumes of intermittent resources.
IHS Markit has developed a methodology for adjusting the
capacity credit for solar across regions and over time. In our
Planning Case, average capacity credits for solar drop below 20% by
2035 for most regions as solar deployment weakens its ability to
provide capacity. Yet, all regions will continue to add solar
capacity long after it stops adding meaningful amounts of firm
capacity.
The dynamics of rising solar capacity penetration levels in
power markets have implications for both system planners and
investors in solar capacity. Failing to anticipate the reduction in
the solar capacity credit would increase the risk of load shedding
as solar penetration levels increase. The value for investors will
vary substantially depending on the project completion year and
method used to develop capacity credits.
Other hot topics from IHS Markit's fourth quarter research
include:
Client reports:
Europe's energy market embarks on a decade of growth and
opportunity (
Blog post)
Cathedrals in the desert: The outlook for Concentrating Solar
Power (
Blog post)
US utilities ramp up EV infrastructure spending and shape
evolving power demand
South Korea's new net-zero target: Transforming the energy
economy
US utility capital allocation trends: Assessing the shift to
safety (
Blog post)
Cloudy future for solar under Italy's renewables support
scheme
Japan announces a 2050 net zero emissions target
Gas-fired power tariff reduction in some Chinese provinces: Not
a sign of less government support
Right-of-way? The increasingly troubled legal route for
pipeline projects in North America
Will Spanish solar PV survive the fallout of COVID-19?
How batteries are making money in US power markets (
Blog post)
Portuguese solar auction: Innovative design and zero-subsidy
contracts
COVID-19 pressures Egypt's power and gas sectors (
Blog post)
Green, flexible, and economical: India's strategies for
large-scale renewable integration (
Blog post)
Corporate US renewable procurement outlook: Optimism amid a
pessimistic year
Ireland's renewable auction unlocks solar PV pipeline (
Blog post)
Selling renewable power in California's decarbonizing power
market: Deliverability and bundling value streams
Pakistan's draft Indicative Generation Capacity Expansion Plan
2047: Unrealistic and overambitious (
Blog post)
Client webinars:
North American power and renewable markets in the decade ahead:
Navigating a new policy and fundamentals landscape
Global renewable power outlook to 2050: What has changed?
Waste to power in China—What are the future
opportunities?
Europe's proposed new 2030 emissions target—What impact for
Europe's proposed new 2030 emissions target?
Major reforms seek to transform South America's large gas and
power markets—where will they lead to?
