This is one of those weeks in which I had a well-organized agenda, and, among other activities, I was ready to publish a Blog about the reality of projects with Hydrogen and the energy market (prepared carefully and well in advance).
However, panic has taken over the media and markets. My agenda has “blown away” and I think it would be more useful to talk about the situation in which we find ourselves.
That said, I want you to put some attention at the most psychological part of the ones we follow the markets. We have already spoken countless times about the unpredictability of markets. I will not repeat myself. However, I want to highlight the fact that the decisions we make are based largely on our ability to be faithful to strategies and contain our most emotional part.
For a buyer who makes decisions in markets, the slogans are clear; buy when the price falls and sell when the price goes up (it would be the opposite for a seller). Based on this, the emotional cycle that a buyer has to face is the following:
The buyer has to know how to make decisions in moments of falling markets, moments in rising markets, moments in flat markets, short, medium and long term … this implies having to deal with the feelings of the attached graphic.
In the last 5 years we have spent moments of euphoria and moments of discouragement, for several reasons. At this time, it seems that the market has broken all technical support and has fallen to minimum values:
Oil below $ 35 / bbl, the European reference gas TTF (Cal Y + 1) rubbing € 13 / MWh.
The price of the coal is still well below $ 60 / ton and the US ETS market for emission rights sinks to € 23.5 / ton. All this leads European electricity markets to interesting values for a buyer.
What are the reasons?
There are many summaries in the media about the reasons that are leading the markets to these values. I will summarize them:
- We are in a macro scenario of global deceleration that has led to the continuous downward revision of consumption levels.
- Financial markets try to avoid the word “recession” but are recovering the stimulus policies they decided to withdraw just some months ago.
- Coronavirus is creating widespread panic. We are one step away from declaring it a pandemic. Its consequences (beyond the number of infected and deceased) is the blockade of a globalized economy. Trips are reduced, visits, meetings and movements are restricted.
- Open war in the oil market: Saudi Arabia lowered the official price of crude oil and threatens to increase production to record levels. While Russia’s largest producer announced that it will increase production next month. The International Energy Agency warns that the demand for crude oil will fall this year for the first time since the financial crisis. Given this price scenario, US shale oil is the least benefited and could erode its production leadership.
- The price of gas fell due to the brutal fall in the price of crude oil, the largest since 1991. We have already had a period of oversupply of LNG and that has coincided with a very mild winter period. So soft that it has not managed to reduce the European reserves and we started the injection season without large requirements and with a large amount of Gas in the markets.
However, what should I do?
If we had been asked this question in 2016, when the markets sank, the answer was clear. Buyers had to close long positions to take advantage of the price situation.
But we are not in 2016 and the situation has changed substantially. The buyer has long been deciding, if he has not already done so, if he is part of this energy transition in which we have all embarked. That leads us to the implementation of investments in Generation, Self-consumption, PPA’s facilities… and the role that to date has been “a consumer”, becomes partially “a producer” as well. Therefore, the low-price scenario puts companies in difficulty.
Thus, what until now was a beneficial scenario, becomes a risk scenario. What happens now with the PPA we sign or are about to sign?
With this scenario of energy prices, the return on investment of the self-consumption facilities skyrockets.
We have already seen some opinions saying “… I already said that a PPA was too risky …”, “… the cost of self-consumption is too high …”. But let’s be fair, this market situation is temporary and to think that it is going to be maintained is a lot to be assumed. A PPA responds to a strategy, such as self-consumption and should not be measured by a market unique moment but by a reasonable time horizon.
Are these market Price levels sustainable?
The answer is NO.
Yes, I know something daring to be so absolute. But let’s keep in mind that energy policies, investments and the sustainability of business models in the sector require solid price signals.
Maintaining this price level would mean a paradigm shift worldwide. The oil industry would be reconfigured. There is a price war that could occur as of April 1rst in which all members (of OPEC) could pump whatever they wanted. What is the biggest problem? That very few producers are profitable at a price level of $ 30 per barrel.
Energy transition policies, in the absence of a healthy market, would require more support from governments through incentives (premiums, subsidies, etc.). Nothing suggests that the short-term fundamentals that have led to this market situation are perpetuated. Spain, in order to achieve the decarbonization objectives for 2030, it must install annually of the order of 3,000 to 5,000MW per year. That is a great investment and must be supported, either in a market with solid prices, or with a scheme of regulated stimuli.
The markets will continue to suffer ups and downs, rising and falling. We will not have to get used to greater volatility, but it is “part of the game.” The question we must ask ourselves is, when will it last?
We have already experienced similar situations in the past. If we take the oil market as a reference, we can remember important milestones:
And we should not divert our attention from the medium long-term strategies. Companies must know how to extract themselves from the current situation and understanding the risks, take the right decisions:
- In procurement, take advantage of low prices and be careful with strategy you’ve got on a bullish market trend (the 2016-2018 scenario could be repeated).
- At the PPA’s firm, always look for the best product and do not expose the entire volume consumption. Diversify.
- In Self-consumption, take a long vision within the transition of the market. Take some decisions, spread the risk on different technology maturity moments.
In short, from Magnus we always help our clients to position themselves in medium-term strategies, without forgetting the risks and opportunities of the short.
What decisions have you made o are you going to make?
Alejandro De Roca | Energy Consultant