Editor OilPrice.com
Wed, October 6, 2021
Recent news from the global electricity sector looks grim. South Americans, heavily dependent on hydroelectricity, face drought-induced scarcity. Hard to believe in a continent laced by three enormous river systems. The alternatives for South American electricity users are an increased reliance on fossil fuels or turning off the lights (conservation). And unlike relatively inexpensive hydroelectricity, generating electricity with fossil fuels (apart from the ecological consequences) incurs fuel expense, which raises prices.
The news emphasizes growing inflationary pressures. And this certainly feeds into that narrative. But there is a more worrisome problem for energy planners here. More droughts mean that hydro can no longer be considered a “firm” long-term resource for the electrical grid. Subtracting a major low-cost resource like hydro from a region’s energy mix and replacing it in any other fashion is an enormous financial undertaking. Just as countries are moving to reduce reliance on fossil fuels, one of the cleanest energy sources becomes scarcer.
But there is a distinctly global flavor now to stories of electric utility infrastructure under duress not simply due to extreme weather. Failure of human ingenuity plays a part here. In Puerto Rico, the reorganized and semi-privatized electricity system, PREPA, experiences frequent blackouts. Yet customers seeking to install their own generation (and potentially resell power to the utility at critical times) can’t get the power company to hook them up. India faces an electricity shortage because power companies failed to restock coal inventories. Their executives expected a meaningful decline in coal prices which never materialized so they’re stuck. In the UK the windpower yield was below expectations and that dramatically pushed up power prices.
But winter is coming—when the existing natural gas shortage pushes prices even higher. And then there is China. Electricity demand rose, coal usage increased, and coal prices went way up. But the government puts a ceiling on the price of electricity which causes generators to lose money on power sales in periods of rapidly escalating fuel prices like the present. So who wants to lose money on every KWH sold in the hope of making it up in volume? After experiencing blackouts and other usage reduction measures, the electric companies went to purchase more coal. However, world coal markets are now tight. One obvious short-term solution is a rapprochement with regional neighbor Australia despite a recent chilling in relations between the two governments.
In many places, the price of natural gas determines the price of electricity. If global warming were not a pressing concern, natural gas would be the boiler fuel of choice. In its absence, they would burn coal or oil. Natural gas prices have more than doubled this year in the US and quadrupled in European markets. No doubt a combination of higher demand and more cautious development by petroleum companies has tightened the market. But Europe depends to a great extent on Russian supplied gas and there are indications that the Russians did not fill European storage facilities in order to manipulate scarcity to their advantage. The Europeans do have alternatives to Russian gas, such as pipelines from Algeria (which is not the most stable supplier). Morocco wants to sign a deal but it has a problem caused by the sometimes rebellious Polisario Front which claims to represent the western Sahara region. European countries could sign big gas deals with Israel and Cyprus but would face Turkish objections. As they say, it’s complicated.
These and similar problems are not accidents and do not result from one-off difficulties or calamities. Forget about the perfect storm excuse. The problems arose because electric companies chose to defer capital and maintenance expenses, skimped on adequate fuel reserves, and focused on cost efficiencies. Customers would have been better served had they focused on hardening grid infrastructure and preserving continuous service against an increasingly hostile climate. Excessive focus on creating shareholder value can mean cutting corners to achieve savings. But the implied hope (and whether hope is an adequate basis for corporate strategy is another question) is that nothing untoward happens as a result. It’s like building a house of cards outside assuming the wind will never blow. It was in this vein that electric utilities adopted what amounts to a just-in-time supply system mentality with respect to electricity.
And there is another point to be emphasized. A well-functioning just-in-time inventory management system is a thing of beauty, efficiency, and cost minimization. But because of the extreme interdependency, one factory relies on the output of another, often thousands of miles away, any break in this carefully choreographed manufacturing process results in chaos and dysfunction. This corporate mentality has resulted in electricity systems that are now relatively low-cost but increasingly fragile.
Puerto Rico, for example, is a simple case of underinvestment. The electric company, PREPA, would have had to raise prices substantially to improve the network. If the UK had sufficient gas reserves in storage low wind conditions would not have been a big problem for power generation. But new construction and adequate gas reserves cost money. And UK regulators have worked heroically to keep down capital spending.
The Europeans signed up voluntarily for Russian gas and nixed other projects. More pipelines serving their market meant paying the overhead on several competing gas transport lines which were not deemed economically efficient. As for Chinese and Indian utilities, having at least a 90-120 day coal inventory may become part of normal operations if one burns coal. But again all that adds substantially to costs.
Roughly four decades ago, neo-liberal economic principles were introduced to the electricity sector. The industry gradually changed from one dedicated to serving the public and encouraging economic development to one focusing instead on maximizing profits. Along the way, the political and regulatory systems seem to have become unusually obliging with respect to corporate interests as big money in US politics exerts its corrupting influence. Where will this lead? Well, sadly we don’t think it will lead to any serious evaluation of the structure of the electricity markets, or natural gas networks, or government policies that control them. Introspection or reflection about better utility arrangements takes time possibly even for trial and error. But our present system lurches from crisis to crisis.
So where does that leave us, the electricity consumers? First, power users will try to disassociate themselves from increasingly expensive and unreliable networks. There are two reasons for this, reliability and price. As we wrote recently in reference to Entergy’s four- to six-week power outages following hurricane Ida, repeated outages of this duration are unacceptable in that it makes those regions both commercially disabled or even uninhabitable for protracted periods. We believe for this reason alone those who have the means will increasingly look for alternatives to the local power company.
In addition, we’re also now witnessing rapid fuel price increases which are driving escalating electricity prices. Installing individual, non-fuel power generation and storage systems provide the energy user with long-term price stability. Once installed, a solar and battery storage system provides long-term price stability for the life of the system, possibly 20 or 30 years! This is a gigantic inflation hedge— although not looked at that way at present. In inflationary times self-generation permits power users to cap their (self-generated) rates for an extended period—a considerable benefit against a backdrop of volatile energy prices.
Lastly, we should mention the resurrection of nuclear power generation technologies both small-modular and gigawatt-scale. New and existing nuclear is heralded as the perfect low emissions, base load complement to intermittent wind or solar. It is relatively unaffected by the variabilities of nature and does not rely on fossil fuels with volatile prices. Nor need its fuel be imported from unfriendly nations which may suddenly turn off the “spigot” so to speak. As the notion of energy independence once again gains currency, widespread nuclear new-build may actually resume. But there is always something. The resumption of interest in new nukes is occurring against a backdrop of rampant price inflation. We will conclude by saying that the last time those two teamed up in the 1980s it wasn’t pretty.
By Leonard Hyman and William Tilles
Why India is on the brink of an unprecedented power crisis
Arunoday Mukharji -
What is the likely impact?
Experts say importing more coal to make up for domestic shortages is not an option at present.
"We have seen shortages in the past, but what's unprecedented this time is coal is really expensive now," said Dr Aurodeep Nandi, India Economist and Vice President at Nomura.
"If I am [as a company] importing expensive coal, I will raise my prices, right? Businesses at the end of the day pass on these costs to consumers, so there is an inflationary impact - both direct and indirect that could potentially come from this," he added.
If the crisis continues, a surge in the cost of electricity will be felt by consumers. Retail inflation is already high as everything from oil to food has become more expensive.
Vivek Jain, Director at India Ratings Research described the situation as "precarious".
In recent years, India's production has lagged as the country tried to reduce its dependence on coal to meet climate targets.
India's Power Minister RK Singh, in an interview with The Indian Express newspaper, said the situation is "touch and go" and that the country should brace itself for the next five to six months.
A senior government official, on the condition of anonymity, confirmed to the BBC that the situation is worrying.
If this persists, Asia's third largest economy will struggle to get back on track, warns Ms Zohra Chatterji, the former Chief of Coal India Limited - a state-run enterprise responsible for 80% of the country's coal supply.
"Electricity powers everything, so the entire manufacturing sector- cement, steel, construction - everything gets impacted once there is a coal shortage."
She calls the current situation a "wake-up call for India" and says the time has come to reduce its over-dependence on coal and more aggressively pursue a renewable energy strategy.
What can the government do?
The question of how India can achieve a balance between meeting demand for electricity from its almost 1.4bn people and the desire to cut its reliance on heavily polluting coal burning power plants has been a major challenge for the government in recent years.
The vast scale of the problem makes a short-term solution unlikely, according to Dr Nandi.
"It's just the sheer scale of things. A huge chunk of our energy comes from thermal [coal]. I don't think we've reached that stage yet where we have an effective substitute for thermal. So yes, it's a wake-up call, but I don't think the centrality of coal in our energy needs is set to be to be replaced anytime soon, he said.
Experts advocate a mix of coal and clean sources of energy as a possible long-term solution.
"It's not completely possible to transition and it's never a good strategy to transition 100% to renewables without a backup. You only transition if you have that backup available because then you're exposing a lot of manufacturing to many risks associated with the environment", Mr Jain said.
Long term investment in multiple power sources aside, former bureaucrats like Ms Chatterji say a crisis like the current one can be averted- with better planning.
She feels there is need for closer coordination between Coal India Limited - the largest supplier of coal in the country and other stakeholders.
From ensuring smooth last-mile delivery to demanding more accountability from power companies in India, Ms Chatterji adds, "power producers must stockpile coal reserves, they must have a certain quantity at all times.
But in the past we have seen that has not happened, because maintaining such an inventory comes at a financial cost."
What could happen next?
It is unclear how long the current situation will last, but Dr Nandi is cautiously optimistic.
He says "with the monsoon on its way out and winter approaching, the demand for power usually falls.
So, the mismatch between demand and supply may iron out to some extent".
Vivek Jain adds, "This is a global phenomenon, one not specifically restricted to India. If gas prices dip today, there could be a switch back to gas. It's a dynamic situation".
For now, the Indian government has said it is working with state-run enterprises to ramp up production and mining to reduce the gap between supply and demand.
The government is also hoping to source coal from so-called "captive" mines. Captive mines are operations that produce coal or minerals solely for the company that owns them and under normal conditions are not allowed to sell what they produce to other businesses.
The overwhelming verdict from experts is that short-term fixes may help to get India through the current energy crunch but the country needs to work towards long-term alternatives to ensure its growing domestic power needs are met.
As India works to climb out of one of the worst recessions among the world's major economies the country will aim to avoid any further hurdles.
Arunoday Mukharji -
BBC News, Delhi
Wed, October 6, 2021,
Electricity pylons at sunrise in Delhi, India.
India is on the brink of an unprecedented power crisis.
More than half of the country's 135 coal-fired power plants are running on fumes - as coal stocks run critically low.
In a country where 70% of the electricity is generated using coal, this is a major cause for concern as it threatens to derail India's post-pandemic economic recovery.
Why is this happening?
This crisis has been in the making for months.
As India's economy picked up after a deadly second wave of Covid-19, demand for power rose sharply.
Power consumption in the last two months alone jumped by almost 17%, compared to the same period in 2019.
At the same time global coal prices increased by 40% and India's imports fell to a two-year low.
The country is the world's second largest importer of coal despite being home to the fourth largest coal reserves in the world.
Power plants that usually rely on imports are now heavily dependent on Indian coal, adding further pressure to already stretched domestic supplies.
Wed, October 6, 2021,
Electricity pylons at sunrise in Delhi, India.
India is on the brink of an unprecedented power crisis.
More than half of the country's 135 coal-fired power plants are running on fumes - as coal stocks run critically low.
In a country where 70% of the electricity is generated using coal, this is a major cause for concern as it threatens to derail India's post-pandemic economic recovery.
Why is this happening?
This crisis has been in the making for months.
As India's economy picked up after a deadly second wave of Covid-19, demand for power rose sharply.
Power consumption in the last two months alone jumped by almost 17%, compared to the same period in 2019.
At the same time global coal prices increased by 40% and India's imports fell to a two-year low.
The country is the world's second largest importer of coal despite being home to the fourth largest coal reserves in the world.
Power plants that usually rely on imports are now heavily dependent on Indian coal, adding further pressure to already stretched domestic supplies.
What is the likely impact?
Experts say importing more coal to make up for domestic shortages is not an option at present.
"We have seen shortages in the past, but what's unprecedented this time is coal is really expensive now," said Dr Aurodeep Nandi, India Economist and Vice President at Nomura.
"If I am [as a company] importing expensive coal, I will raise my prices, right? Businesses at the end of the day pass on these costs to consumers, so there is an inflationary impact - both direct and indirect that could potentially come from this," he added.
If the crisis continues, a surge in the cost of electricity will be felt by consumers. Retail inflation is already high as everything from oil to food has become more expensive.
Vivek Jain, Director at India Ratings Research described the situation as "precarious".
In recent years, India's production has lagged as the country tried to reduce its dependence on coal to meet climate targets.
India's Power Minister RK Singh, in an interview with The Indian Express newspaper, said the situation is "touch and go" and that the country should brace itself for the next five to six months.
A senior government official, on the condition of anonymity, confirmed to the BBC that the situation is worrying.
If this persists, Asia's third largest economy will struggle to get back on track, warns Ms Zohra Chatterji, the former Chief of Coal India Limited - a state-run enterprise responsible for 80% of the country's coal supply.
"Electricity powers everything, so the entire manufacturing sector- cement, steel, construction - everything gets impacted once there is a coal shortage."
She calls the current situation a "wake-up call for India" and says the time has come to reduce its over-dependence on coal and more aggressively pursue a renewable energy strategy.
What can the government do?
The question of how India can achieve a balance between meeting demand for electricity from its almost 1.4bn people and the desire to cut its reliance on heavily polluting coal burning power plants has been a major challenge for the government in recent years.
The vast scale of the problem makes a short-term solution unlikely, according to Dr Nandi.
"It's just the sheer scale of things. A huge chunk of our energy comes from thermal [coal]. I don't think we've reached that stage yet where we have an effective substitute for thermal. So yes, it's a wake-up call, but I don't think the centrality of coal in our energy needs is set to be to be replaced anytime soon, he said.
Experts advocate a mix of coal and clean sources of energy as a possible long-term solution.
"It's not completely possible to transition and it's never a good strategy to transition 100% to renewables without a backup. You only transition if you have that backup available because then you're exposing a lot of manufacturing to many risks associated with the environment", Mr Jain said.
Long term investment in multiple power sources aside, former bureaucrats like Ms Chatterji say a crisis like the current one can be averted- with better planning.
She feels there is need for closer coordination between Coal India Limited - the largest supplier of coal in the country and other stakeholders.
From ensuring smooth last-mile delivery to demanding more accountability from power companies in India, Ms Chatterji adds, "power producers must stockpile coal reserves, they must have a certain quantity at all times.
But in the past we have seen that has not happened, because maintaining such an inventory comes at a financial cost."
What could happen next?
It is unclear how long the current situation will last, but Dr Nandi is cautiously optimistic.
He says "with the monsoon on its way out and winter approaching, the demand for power usually falls.
So, the mismatch between demand and supply may iron out to some extent".
Vivek Jain adds, "This is a global phenomenon, one not specifically restricted to India. If gas prices dip today, there could be a switch back to gas. It's a dynamic situation".
For now, the Indian government has said it is working with state-run enterprises to ramp up production and mining to reduce the gap between supply and demand.
The government is also hoping to source coal from so-called "captive" mines. Captive mines are operations that produce coal or minerals solely for the company that owns them and under normal conditions are not allowed to sell what they produce to other businesses.
The overwhelming verdict from experts is that short-term fixes may help to get India through the current energy crunch but the country needs to work towards long-term alternatives to ensure its growing domestic power needs are met.
As India works to climb out of one of the worst recessions among the world's major economies the country will aim to avoid any further hurdles.
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