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8 October 2020

What would you give for an energy forecast that was spot on?

We understand that for the past 20 years it has made sense to rely on forecasts in and around energy, by those expert in the oil industry, such as Platts, which today is part of S&P, and Wood MacKenzie. Today we are making the case that it is insane to trust their forecasts for energy going forwards, as they are totally out of kilter with the way the world is moving – away from oil, to a world based on renewables and hydrogen, and they have no experience of either, or more importantly, still emphasize old energy over new.

Actually WoodMac and Bloomberg New Energy Finance, remain the market leaders in advice about renewables, and yet they do an appalling job of it. They are about as useful as the IEA, a carbon dioxide apologist society.

Here is their process. Assume things will more or less stay as they are. Forecast based entirely on today’s price, assuming prices will only change very slowly over a long time period. They acknowledge that renewables, hydrogen and Electric Vehicles will have some sway, although it will be minimal, then bemoan the fact that the world will miss all of its CO2 reduction targets, but what else can happen in a world where Donald Trump is the major influence? Well we all know he’s not – he’s little more than a blip on the dial.

It is one thing to say that the world cannot move fast enough to meet the IPCC 2 degree target and then say, we at least “We should make money forecasting business as usual,” and it is quite another to warn the oil, gas and utility industries, and offer them advice on how to plan their way through the transition.

When an oil CEO asks his team for help, all he hears is everything his sales force has used to beat up renewables for the past 20 years. They cannot find anything good to tell him, so he continues on the path of the past. Today that is not doing the share price of any oil company any good, so they are not being served by WoodMac, S&P or BNEF and they need another voice. Rethink Energy has become that voice.

The process in play right now is for typical Us forecasters to make a forecast, and then change it when renewables, or hydrogen or EVs inevitable do better than expected. This is what we call a “begrudging forecast.” It accepts change, but only after the fact. And this is what you get if you accept the US position as the leader in all things, and if you base your models on today’s prices, not tomorrow’s.

How does that help any business plan things. A year ago WoodMac told us that hydrogen was not doing anything don’t bother with it, now it says that its price will fall by 86% by 2040. In other word’s it’s not doing much, and you have plenty of time to make money selling hydrogen from natural gas.

But it does not take much research to talk to people who already plan to cut the price of hydrogen by 66% and are plotting to go past that 86% next year. If scale is applied to a variety of moves in the hydrogen market, and the European Union is planning to provide the money to help that happen, it’s not good saying to your US clients, we’re sorry, we shall change our forecasts next quarter, as they always do. If they understood how change works, they would be able to see this ahead of time, and predict it, not follow it.

The interesting things about forecasting in a transition, is that if something changes, such as an unexpected pandemic arrives, and either slows things down, or speeds things up, there can be no going back. This is not a kink in your adoption curve, it is either a drop in its intensity, or an acceleration. And it’s permanent.

So if oil is used less often, at a time when many countries are looking to do away with it, it cannot go back to $70 a barrel and excessive demand. Not ever. And if gas is so cheap that no-one can make money out of it, and lots of companies go bust, then gas cannot recover and suddenly output more gas than ever. Not if carbon tax is introduced globally, and hydrogen is anointed as its chosen CO2 free replacement.

That’s the beauty of energy. It is all joined up. You cannot, on the one hand model hydrogen as growing by several 1000% in volume, and call the 2020s the decade of hydrogen, and at the same time say that LNG will double in the next 20 years. One negates the other. But that’s what these companies do (actually have done in the last two weeks).

Surely if the energy market is one interrelated market then they should be running one global model, and they should be able to see that. When we were first taught how to analyze markets the first lesson is to be clear – there is no room for one consulting group to have two opinions on one subject. That leads to a position where everyone is being told what they want to hear, and it leads to bad decision making. That’s what we have in energy today.

At Rethink Energy we think about the entire market for energy, what will grow, at the expense of which others, and then when we have a generic shape for transition, we begin to do more detailed work to establish the genuine rate of growth or shrinkage that is likely to occur, and try to allocate it by region.

Gas is an interesting case in point. Today the price in Japan and Australia is too high and yet Japan seems intent on trying to shift its energy base to natural gas. Australians are selling gas outside their country for less than they are supplying consumers, who naturally complain.

In July this year it was obvious that the global fracking conspiracy to turn the US and Canada into the center of the natural gas global community, needed some $196 billion in financing for LNG terminals. But already Japan’s latest LNG terminal which needed $20 billion of investment, will not be completed, because of fears that the terminal would never repay the money.

America has tried to addict China to LNG, at a time when China has announced to the United Nations that it will decarbonize by 2060.

Production work on 29 LNG terminals has been halted either permanently or temporarily since 2014, mostly due to the massive amounts of money involved in each investment and the sudden realization that these specialized ports are likely to be left idle within a few years of opening, as renewables undermine natural gas as an economically viable technology.

But it took the COVID-19 pandemic to point this out to banks clearly and unequivocally as natural gas prices fell further, destabilizing the market. And yet we have just seen Mozambique cobble together $20 billion for its own LNG terminal, which we are making bets will never see the light of day.

So while LNG terminals under development, doubled last year the capital required to complete them leapt from $83 billion to $196 billion and today’s price cannot support that. And with dreams that the world will largely accept gas as a “bridge fuel” largely in tatters, WoodMac puts out a report this week saying the market is set to double.

That’s because China, Europe and a number of OECD countries including Japan, Singapore, the Philippines, and Vietnam, remain committed to imports of LNG that might use a record 70 million metric tonnes more per annum.

All of those countries will need more energy, so WoodMac could advise their customers to push renewables, hydrogen and nuclear at them, but instead it talks up the possibility that money will be somehow found for the stalled LNG projects, which are withering on the vine, and paints it as good news.

But the report admits that longer-term, intensifying interest in green hydrogen and other technologies casts long term doubt on the sustainability of gas demand. Which begs the question, “Is the WoodMac advice to find the cash for these LNG terminals and then abandon them before they make any money?” just to save the loss-making US fracking industry? Wow, that’s a pretty cynical view.

There remain two main forecast drivers, price and anything that will affect the price in future. So we have to look at the cheapest local price of a resource and anything on the horizon that may affect that, both soon, and in the distant future. In particular we always must understand what regional governments have as a policy toward energy, how that may change pricing, and how the policy itself may change, under pressure from public opinion, government change, and industrial pressure.

The USA in 2021 will either be no-change under a trump second term, or it will be a huge set of policy changes under the democrats. Looking at voter surveys we would be shortsighted if we assumed there would NOT be a green new deal or something very like it. And a US president that rejoins the Paris accord would be applying pressure on each of those countries to get their policies in line with 1.5 degrees, and to implement a carbon tax, both of which run counter intuitive to an LNG surge. We presume WoodMac knows something we don’t about President Trump’s re-election.

So here we have WoodMac saying there will both be a record hydrogen market, and a record gas market. Two opinions for the price of one, leaving you to pick one. That’s about as much help as a chocolate teapot.

Rethink last week forecast that by 2030, the total demand for hydrogen just in Europe, and purely for the transport sector would be 1,350 kilotons a year, up from just 2 kilotons today and kick on into 2040 up another 7-fold to 13,800 kilotons, driven by trains, trucks, light commercial vehicles, buses and some cars.

At the same time, WoodMac has come up this year with two opinions on Energy Storage – in January citing a leap from 4 GW to 15 GW by 2024. We actually baulked at this. Surely it had the wrong dimensions, and it meant 15 GWh, which is way too low? After a frantic back and forth between us and the press office they refused to bend – “We checked with the analysts, it was from 4 GW to 15 GW, now leave us alone.” We assumed it was 90 GWh by 2024, applying the rule of most installations on the grid offering 4 hours of operation.

This week a different division came out with a second forecast, with global energy storage climbing to 741GWh by 2030. At least this time it used the correct acronym. But it puts almost all of that down to front of meter activity, which has virtually been frozen during the pandemic.

It seems to have missed WoodMac entirely that US only Grid projects totaling more than 50 GWh of grid battery energy storage are already planned and in the pipeline for the end of 2022. Take that to 2030 and it becomes an enormous 253 GWh in the US alone, on grid alone. What has happened here is that WoodMac has failed to notice how US BES storage has NOT stopped on the grid, during the pandemic, and instead has accelerated massively. A scan of the newswires alone would confirm that. But strangely, while almost all of this BES is based on Lithium Ion batteries made in China and the Far East, it also believes that no-one there has the know how to install them, and that the US will have a 50% global market share.

This will create a massively skewed view of BES for its clients. Never mind that WoodMac has issued two differing opinions in the same year, it has completely blanked most other major markets. The Rethink Energy BES forecast showed that 1.47 TWh of battery will be installed globally by 2030, double the forecast of WoodMac.

So you can either ONLY buy the WoodMac research, and watch it change its forecast every quarter, upping the estimate, until it matches our own in around 7 or 8 years, or you can buy a second opinion now, and take the WoodMac numbers with a pinch of salt.

It’s the same for EVs, with WoodMac suggesting 323 million globally by 2040, and BNEF some 470 million, while our forecast is 563 million. Just modeling Europe with all of its laws which will prevent companies selling Internal Combustion Engines in most EU countries by 2030, you end up with 204 million by 2040. That makes the WoodMac numbers just look plain silly.

As we said before, forecasting in energy is mostly about understanding the types of volumes simulated by gradually lowering prices. So when two weeks ago Tesla said it would have a $25,000 priced EV for sale in the US within 3 years, it should have changed all of these forecasts – except perhaps our own, which was predicated on cars either coming from Tesla or from China at under $30,000 from 2026 onwards, which is why we have come up with such a high figure. It was also due to the fact that Q3 numbers of EV sales in Europe show a marked increase over last year, not the drop that both WoodMac and BNEF had relied on for their forecast.

Forecasting is not rocket science, it is purely common sense, but someone at WoodMac has looked at those laws passed in Europe and convinced himself that they won’t happen. But this is not how the world works.

Which is why that Tesla price point is so contentious. The idea of Tesla selling 20 million cars by 2030 and passing the $25,000 price tag in 2023, completely throws out all WoodMac calculations – not just on EVs, but therefore by association on oil, and if more trucks and trains run on Hydrogen, that throws out petroleum further, and starts attacking natural gas. As we said the markets are all connected. Forecast one wrong, and they are all wrong.

If you are interested in discovering the forecast capability of Rethink Energy, why not drop product manage Simon Thompson an email at [email protected].