The Big Switch
The devil is in the detail. While British pro-Brexit politicians spent early July resurrecting the idea that German car makers would ride to the UK’s economic rescue, BMW announced a new manufacturing deal in China: the electric edition of the iconic Mini is to be made by a joint venture with the Great Wall Motor Co. The deal follows another little-commented-on announcement from September 2017, when BMW revealed its intention to import its electric sport utility vehicles (SUVs) to China.
Meanwhile, at the most recent NATO summit, all attention was on prime ministerial relations and President Trump’s approach to diplomacy. Away from the presidential press conference, however, US energy secretary Rick Perry was focused on encouraging European states to diversify their energy supplies: less imported gas from Russia, more imported liquified natural gas (LNG) from the Gulf of Mexico.
Occurring just a week or so apart, these two stories neatly encapsulate the global energy industry, its drivers, its diversification, and its occasionally head-spinning changes of direction.
Take the BMW announcement – a sign of the increasing influence that China has in the car-making industry. Tesla has already launched a luxury model in China and Volkswagen is planning to sell more than 15 green vehicle models there by the end of 2018. Since transport is one of the biggest consumers of energy and among the most significant emitters of CO2, what happens in car-making has a direct impact on energy markets.
China’s status as the world’s biggest market for all-electric vehicles (EVs) comes in part from its aggressive clean air policy. Announced in early 2017, its plans to spend $360bn on the renewable energy sector by 2020 and create more than 13m jobs in the process was already regarded as a significant bid for leadership in the renewable energy industry. Its moves to increase EV production further are the latest plank in this long-term energy policy.
However, there’s more at play here. That the EV center of gravity is moving towards Beijing is also attributable to the country’s recent decision to loosen manufacturing restrictions on foreign carmakers, and its desire to reduce its reliance on foreign oil imports. Both these decisions can be viewed through the prism of ongoing trade disputes with the US.
It also reflects a changing global demographic. The growing Chinese middle class, with its disposable income and lifestyle aspirations, is adopting consumer spending patterns that are profoundly changing industrial, manufacturing and energy distribution.
China is not alone: emerging economies the world over are increasing total energy demand. In fact, growth in global energy demand will be led by the increasing electrification of the economy: 55% of the world’s energy demand growth over the next 25 years will be tied to power generation, supporting our increasingly digital and plugged-in lives.
Finally, the BMW-in-China story also tells us something about technology itself. Widespread adoption of EVs is driven by consumer awareness and demand – but satisfying that demand requires more than just the cars. There needs to be a technical infrastructure, from charging stations to distributed energy resources (DER).
In effect, EVs are the mobile edge of the emerging smart grid: storage units and end points that support load balancing and demand response. However, the sensors, connectivity, cyber-security, and cloud-based analytics and data storage needed are not solely to facilitate EVs; they also make it possible to integrate more intermittent energy sources, such as wind, wave and solar, into the energy mix.
The US’s performance at NATO is similarly revealing.
If China is positioning itself as a global leader in renewable energies, the US seems to be actively pivoting towards fossil fuels.
The country is expected to account for more than 80% of global oil production growth in the next 10 years, according to the International Energy Agency (IEA).
‘Make America Great Again’, however, is not synonymous with ‘Make America’s Coal Industry Great Again’. After all, the number of people working in Pennsylvania’s renewable energy industry is greater than the number of those working in mining, oil and gas combined – despite the state’s reputation for old ‘dirty’ energy jobs. Once more, there is more going on than the headlines suggest.
The US has also become a major gas exporter and is expected to produce 30% more gas than Russia in the next 10 years. In fact, natural gas is the world’s largest growing fuel source, and predictions suggest it will fulfill a quarter of global energy demand by 2040.
This growth is partly enabled by new operational technologies; just like renewables before them, shale gas and the LNG that the US wants to sell to Europe are rapidly changing global energy interactions. The abundance and versatility of natural gas is helping the world shift to less carbon-intensive energy for power generation. It’s also disrupting markets, though, and requires a new financial calculus for energy producers and their customers.
In the Middle East, there is also a move away from crude oil exports in favor of higher value gas and refined products. Oil-less Qatar plans to increase its gas production by 30% over the next few years, assuming that the remaining nations of the Gulf Cooperation Council (GCC) lift their embargo. Saudi Arabia – a main instigator of that embargo – has also chosen to diversify in order to build up its renewable energy capabilities.
This brings us back to the US. It, too, has developed extensive renewable capability, but its Environmental Protection Agency has been seriously de-fanged. Will that hamper the advance of renewables in the country with the world’s largest per capita consumption of energy? No one can say with any certainty – although trade wars with once-close allies, the withdrawal from the Paris Climate Agreement and the abandonment of the Iran nuclear deal could all have significant impact. In isolationist or protectionist mode, the US can be a hugely disruptive force.
Add in technology innovation in almost every area of energy production and you have a pattern of energy provision, consumption, production and generation that is in constant flux. For large energy market participants, this continuous swirl of economics, demographics, geopolitics and technologies is both an opportunity and a threat.
After all, how do you keep pace with the latest thinking, the newest innovations and shifting of global alliances, and then predict the possible financial and operational and customer service impacts? How do you direct investment and de-risk strategies when there are diverse environmental levies, taxes, quotas and subsidies to take into account? How do you maintain your organisational reputation when political and social scrutiny is so intense and regulations are yet to be standardised?
In this environment, any effort to buy, sell, produce or transport energy without detailed evidence will lead to sub-optimal results. The moving parts of the world’s interconnected, highly correlated energy sector are too fast for the human eye to make the necessary connections.
Instead, advanced analytics is needed to enable organisations to effectively model all the possible costs, hidden risks and potential outcomes of any given decision. That, in turn, requires accurate real-time data and specialist commodity management software to interpret it effectively.
This is not just about the quantity of data that must be understood in order to make evidence-based decisions – it is also about the variety of that data and the speed with which it arrives.
The goal here is to distinguish the signal from the noise, and then to be able to act upon it. The devil is in the detail: ignore it, or misunderstand it, and navigating the global energy sector will be hellishly hard.