Fossil Fuels and Utilities At Risk In New Report — Energy Darwinism At Work

by Giles Parkinson


Originally published on RenewEconomy

A major new report from investment banking giant Citi has highlighted the dramatic changes sweeping the world’s energy industry, and is being used as a clarion call to review the estimated $37 trillion that will be invested in energy infrastructure and projects over the coming two decades.

In a study titled “Energy Darwinism – the evolution of the energy industry“ – Citi says the global energy mix is shifting more rapidly than is widely appreciated, and this has major implications for generators, utilities, and consumers, and for exporters of fossil fuels such as Australia.

“Consumers face economically viable choices and alternatives in the coming years which were not foreseen 5 years ago,” the analysts write – pointing mostly to the “alarming” falls in the cost of solar.

It says the pace of change in the last five years has been dramatic and will likely accelerate, not slow. These changes will flow through to suppliers. Conventional fuels and technologies are likely to be substituted, or suffer reduced demand in the best case scenario.

(It should be noted here that the six analysts involved are the managing directors of research in Citi’s mining, oil and gas, utilities, commodities and alternative energy sectors, so they are not just a band of beatific beatniks).

Citi says fossil fuels further up the cost curve are most at risk, and new projects built now will face competition with new technologies within the first quarter of their anticipated 25-year life. “These project entail significantly more risk than is widely recognised,” the analysts write.

“There will always be more subjective choice factors involved such as fuel diversity and energy independence that may offset cold, hard economics, but investors, companies and governments must consider the sea change that we believe is only just beginning. “

It says utilities are most at risk because the “very nature” of their business is likely to change. Utilities in their current form could lose half their addressable market to energy efficiency, solar and storage, and other distributed generation.

“Renewables and decentralised energy are impacting not only how utilities can earn money, but also what they do to earn this money,” Citi says. “There are opportunities for new avenues for investment and growth in terms of smart grid, storage, and downstream services. “The question is whether utilities grasp that opportunity and evolve themselves.”

Perhaps the key graph in the report is this one below. It doesn’t mean much at first glance, but Citi says it is critical for understanding the factors at play.


In the first quartile it notes that gas (the light grey line) dominates the first quartile of the integrated cost curve, largely thanks to the advent of shale.  So that is probably true of the US, but not many other places (in Australia, gas is really expensive, or about to be). The key is what happens in the other quartiles.

In the final quartile, it notes that solar is already intersecting with gas, which is why utilities in the US are dumping plans for peaking gas stations in favour of solar (red line). And this also means that solar steal the most valuable part of the electricity generation curve because it produces during the day when prices are highest.

This is already impacting Germany, where gas is expensive and gas-fired generators are going out of business, and it might have cited Australia too, where returns for incumbent fossil fuel generators are falling dramatically and so it their running time. Wind farms such as Collgar in WA are running at higher capacity factors than black coal generators in NSW.

Citi notes that wind (orange line) is already overshadowing coal (black) in the second quartile. But here’s the conclusion that will stun those locked into a conventional view of generation: Citi says that while wind’s intermittency is an issue, with more widespread national adoption it begins to exhibit more baseload characteristics (i.e. it runs more continuously on an aggregated basis). “Hence it becomes a viable option, without the risk of low utilisation rates in developed markets, commodity price risk or associated cost of carbon risks.”

Citi notes that solar is exhibiting “alarming” (for whom!?!?!?)  learning rates of around 30 per cent (that is for every doubling of installed capacity). Wind is evolving at a slower ‘mechanical’ learning rate of 7.4 per cent, and gas is evolving due to the emergence of fracking and the gradual development and improvement of new extraction technologies.

But Citi says that coal is using largely unchanged practices and shows nothing like the same pace of evolution as the other electricity generation fuels or technologies. It notes nuclear has seen its costs rise in developed markets since the 1970’s, largely due to increased safety requirements and smaller build-out.

As Citi notes: “Thus is not a ‘tomorrow’ story. We are already seeing utilities altering investment plans, even in the shale-driven U.S., with examples of utilities switching plans for peak-shaving gas plants, and installing solar farms in their stead,” it says.

“The same is true for other fuels, for example the reluctance on the part of utilities to build new nuclear in the UK, or the avoidance of coal in some markets due to uncertainty over pricing, likely utilisation rates and or pollution.

“Even in China, we believe that coal demand is likely to peak this decade as its generation mix starts to shift,” it says. It notes India’s coal demand will grow much slow than expected, and nuclear – and the capital costs involved – make it unsuitable for markets with such uncertainty.

On solar, Citi says the price fall of solar panels has exceeded all expectations, resulting in cost parity being achieved in certain areas much more quickly. “The key point about the future is that these fast ‘learning rates’ are likely to continue, meaning that the technology just keeps getting cheaper. At the same time, the alternatives of conventional fossil fuels are likely to gradually become more expensive.”

On wind, it says technology is evolving more slowly than solar but it has the advantages of offering more ‘base-load’-like characteristics in running more of the time, and perhaps most importantly is lower cost than solar, allowing the technology to compete against conventional generation at lower wholesale prices.

It says storage is still a nascent industry, but so was solar just 5 to 6 years ago. “The increasing levels of investment and the emergence of subsidy schemes which drive volumes could lead to similarly dramatic reductions in cost as those seen in solar, which would then drive the virtuous circle of improving economics and volume adoption,” it says.

And how fast can evolution take place? Citi provides this graph below to illustrate the point.


Citi says the history of the energy industry tells us that change is never gradual. New technologies are embraced at the expense of incumbents. Today, as conventional fuels become gradually more scarce and expensive and as new technologies improve, the long term transformation becomes ever more inevitable. It says it would be naive to think otherwise.

“If we look at the situation facing European utilities, the future looks particularly challenging, given a potential halving of their addressable market, an ageing fleet, and deeper questions about what a utility will look like in 5, 10 or 20 years’ time,” it writes.

“In transportation, the emergence of electric vehicles, and more importantly the rise of oil to gas switching show that evolution is not restricted to the power generation market.”

“Given the long term nature of upstream fossil fuel and power generation projects, this substitutional process and the relative pace of evolution is vitally important to understand.

“The sums of capital being invested are vast; the International Energy Agency (IEA) forecast that $37 trillion will be invested in primary energy between 2012 and 2035, with $10 trillion of that in power generation alone. Clearly the value at risk from plant or the fuels that supply them becoming uneconomic in certain regions, both in terms of upstream assets and power generation, is enormous.

“Quite simply the sums of money at stake in terms of investment in energy over the coming decades are staggering, and getting a choice of fuel or technology ‘wrong’ could have dramatic consequences for both countries and companies, be they upstream oil & gas companies, utilities, industrial consumers, renewable developers of power generation equipment providers.”

So, could someone please ensure that this report is stuck under the nose of Australia’s energy ministers, be they federal or state, and all the middle aged engineers and fossil-fuel careerists that advise them? And mark it Must Read.

(Author’s disclaimer: I am middle aged).


Repost.Us - Republish This Article

This article, Fossil Fuels and Utilities At Risk In New Report — Energy Darwinism At Work, is syndicated from Clean Technica and is posted here with permission.


About the Author

Giles Parkinson is the founding editor of, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia’s energy grid with great interest.

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$5.7 Trillion Worth of Renewables With No Added Grid Costs

by Giles Parkinson

Originally published on RenewEconomy

Analysts at Citi have produced a detailed report which suggests another 900 gigawatts of solar installations, and another 1,500GW of wind farms could be installed around the world with little added cost to electricity grids. This amounts to an investment opportunity of $US5.7 trillion – and it only relates to those investments that can be achieved without much added expense to existing infrastructure.

The estimate is based on Citi’s assessment that most electricity markets could – on average – integrate 20 per cent of wind generation with little problem, and around 10 per cent of solar – although some generation assets are likely to find themselves stranded because they are being priced out of the market.

The wind penetration assessment, by Citi’s own admission, is conservative, because many studies say 30 per cent is possible and countries such as Denmark have already gone well above that. But Citi says it is a global average based on the fact that many developing countries may struggle to integrate more without added expense.

It cites coal and nuclear as being victims of increased wind generation, because it tends to eat into baseload demand. It says solar is most likely to sideline peaking gas generators because it is the most cost-effective way to address peak demand. Gas is either already too expensive in many countries, and even in the areas like the US where gas is now cheap, utilities are investing in solar anyway because they are wary of the risk of future gas price rises, and coal and nuclear cannot meet that demand.

To put Citi’s forecast is some context, there is currently just more than 100GW of solar installed in the world, and around 282GW of wind energy. Bloomberg New Energy Finance today issued a new forecast saying it expects about 37MW of solar to be installed this year, and  about 36GW of wind.

It also comes as a new report from the National Energy Renewable Laboratory in the US releases a study that says 33 per cent wind and solar penetration in the western grid of the US would save $7.5 billion in fuel costs, but would add little in added costs of “spinning reserve” or “cycling – dismissing one of the major objections of wind energy opponents, and lending some support to Citi’s contention that this amount of variable renewables can be installed with little added cost. You can read Eric Wesoff’s excellent report on that analysis here.

Citi notes that its 30 per cent assessment is not a blanket rule for all markets, because of different geographies and weather conditions. For instance, it notes that solar could account easily for 10 per cent of output for countries closer to the equator with better solar resources, but just 5 per cent for countries where solar produces little in winter. (Many analysts would content that solar could do a lot more, and will).

Citi cites Germany as an example of a country that might have gone “too far” too quickly, noting that it will likely have to change the structure of its markets to ensure that some form of “capacity” payments are made to ensure that enough fossil fuel generators remain in production.

The biggest markets for solar and wind energy investment are China and the US, which is natural considering they have the biggest economies and biggest electricity grids, with greater capacity to absorb variable renewables.

Using 2013 $ prices, Citi sees a near $1 trillion market in the US (consisting of $US366bn solar and $US560bn wind) and a $US1.5 trillion market in China ($US542bn solar and $US906bn wind).

But it suggests the most interesting regions for growth are areas such as Latin America, Japan and India, which all have “decent sized” electricity demand, a small installation base of renewables and a sizeable opportunity to grow significantly.

Japan in particular is an extremely attractive location for renewables after the country closed most of its nuclear fleet and now is scrambling for affordable energy while it burns imported gas at $16/mmbtu (vs. $3.5 in the US). The country has shown its support for renewables and in particular solar through the implementation of generous feed-in tariffs for renewables generators.

On solar, Citi says Japan and Latin America are the only markets where utility-scale solar is clearly competitive at a wholesale level.

In areas with strong solar resources, such as western US.  the region studies by NREL – it says utility-scale solar will compete with peaking gas – even though gas prices are low in the US. Utilities want to hedge themselves against the risk of volatile fuel prices.

The real game changer is being felt at residential level, where solar is already at socket parity in many nations – meaning it is cheaper than retail prices. It notes that in Australia, households are facing the choice between (a) buying electricity from the socket at a rate of $30ct/kWh or (b) producing solar electricity at a cost of $18.5ct/kWh. “By installing solar panels a household would save $11.5ct for every kWh consumed from solar,” it notes. (We have more on the Australia story here, and see also Warwick Johnston’s latest market update).

As for wind, Citi says onshore wind cost is only attractive as an investment on an unsubsidised basis in Latin America (Brazil), the UK and Canada, although Argentina and Italy will follow suit by 2020.

However, there are secondary reasons why utilities might prefer wind over baseload fuels such as coal and nuclear: “Coal is environmentally questionable, and similar concerns combined with uncertainty over costs and remuneration make nuclear hard to build in many markets.” Citi writes.

“In a meaningful comparison between coal and wind CO2 costs should arguably be included in the analysis. Unfortunately, the economic costs are not captured by current carbon markets and hence these carbon prices do not provide a good indicator for the true economic cost of carbon emissions on the environment.”

It says nuclear reactors do not emit any CO2, but pose an investment risk because the cost of generation is very sensitive to discount rates due to the scale of back-end liabilities and the cost of capital, which is pricing in the low visibility of what future costs nuclear might impose on society.

Citi says onshore/offshore wind shows limited seasonal variability and its generation profile is much more similar to baseload generation than solar. “For these reasons we do not consider wind as a peak shaving resource but rather as a substitute to baseload capacity such as coal and nuclear.”

Repost.Us - Republish This Article

This article, $5.7 Trillion Worth of Renewables With No Added Grid Costs, is syndicated from Clean Technica and is posted here with permission.

About the Author

Giles Parkinson is the founding editor of, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia’s energy grid with great interest.

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