Detroit Panicking at China’s Ultra Cheap EVs

From This is Not Cool (used to be Climate Denial Crock of the Week, or what I used to call Climate Crocks)

They're talking about the BYD Seagull in particular, but it applies to Chinese EVs in general.  The legacy carmakers and politicians in key car manufacturing countries were contemptuous about EVs, refused to take them seriously, and refused to embrace the EV market.  It was obvious that the EV market share was doubling every 18 months, had been for a decade, and that it would likely continue to double.  But they ignored this.  And what do they do now?  They run squealing to mama and papa government for protection.  They might be able to protect their home market, but they can kiss exports goodbye.

Bloomberg:

The car’s most extraordinary feature, though, is its $9,698 price tag. That undercuts the average price of an American EV by more than $50,000 (and is only a little more than a high-end Vespa scooter). Such aggressive pricing by BYD, which surpassed Tesla Inc. in late 2023 to become the world’s largest producer of electric vehicles, is indicative of how Chinese auto manufacturers will likely force US makers to pivot away from mainly producing expensive second cars for the affluent and toward more reasonably priced EVs for the Everyman.

Just as the long-feared prospect of a revolutionary EV from US tech giant Apple Inc. has receded, American carmakers now face a possibly greater challenge from Asia. China, long a manufacturing hub for Western companies’ products, is hellbent on expanding its own companies’ reach around the globe. It’s already the biggest market for EVs, and it’s using that scale and manufacturing know-how to help expand sales of competitively priced Chinese models to an increasingly climate-conscious world.

For now, the Chinese onslaught is being kept at bay in America by stiff tariffs and moves to erect even tougher trade barriers against the US’s geopolitical adversary. But the Chinese market accounts for about 70% of all EVs sold globally, so China’s push to lower prices is causing a ripple effect that can’t be ignored in the long term—even if political maneuvering by American lawmakers manages to slow the Asian giant’s automotive advance toward the US, the world’s most profitable car market.

“This threat has put everybody on alert,” says Jeff Schuster, global vice president for automotive research for consultant GlobalData. “It forces innovation in a way that might not have happened as quickly.”

Auto executives and politicians in Washington are sounding the alarm about a potential existential threat to American car brands—and the millions of workers employed building them. The Alliance for American Manufacturing, a trade group backed by major manufacturers and labor unions, is calling for new protectionist trade measures against China to prevent an “extinction-level event.”

“Chinese companies are ultra-competitive today,” says Michael Dunne, an auto industry consultant who previously worked for General Motors Co. in Asia. “The question in every boardroom right now is, how do we compete with them?”

Ford Motor Co., Tesla and other carmakers are quickly tearing up their EV playbooks to compete against these cheap new vehicles sold outside the US. Ford Chief Executive Officer Jim Farley calls the Seagull “pretty damn good” and cautions that any automaker that can’t compete with the Chinese globally in the near future risks losing as much as 30% of its revenue. One of Farley’s top EV executives called Chinese EVs “a colossal strategic threat.”

South China Morning Post:

BYD, the world’s largest electric vehicle (EV) maker, has priced another model under the 100,000 yuan (US$13,912) threshold as a discount war in China’s EV market intensifies.

The Shenzhen-based company, backed by Warren Buffett’s Berkshire Hathaway, announced on Wednesday that the updated fully electric e2 model will start at 89,800 yuan, 12.6 per cent less than the previous price of 102,800 yuan.

The compact sport-utility vehicle, with a range of 405 kilometres, becomes the fifth BYD model available for less than the psychologically important threshold price – viewed as affordable even for low-income wage earners in the mainland China market.

“BYD appears to be extremely aggressive in driving a transition from petrol cars to EVs in the country’s automotive industry,” said Eric Han, a ­senior manager at Suolei, an advisory firm in Shanghai. “The cheap models will also draw middle-income consumers who have become price sensitive amid a bearish economic outlook.”

The lethargic legacy carmakers can sleep slightly better knowing that the cheap EVs in China are not so cheap when they're sold outside China.    In Australia, the Seagull will prolly be sold for around $31 K, which removing sales tax and allowing for the US/A$ exchange rate, is roughly US$18K.   

Remember, CATL (the world's largest lithium-ion battery maker)  has halved the cost of batteries this year, to just $56/kWh.  Battery costs will continue to fall.  The fierce competition in EVs in China will not go away, and since Chinese carmakers have much higher margins on exports, expect them to export as much as they can.  The US and Europe might be able to protect their domestic car markets, but the rest of the world will, if they have no domestic carmakers, embrace cheap EVs, or, if they do have a domestic car industry, will persuade BYD and others to set up car plants in their countries. 

Carbon offsets hit by fresh scam allegations

Headline from Bloomberg 15/09/2023 

The imminent petrol car bloodbath

 A fascinating video by The Electric Viking.   China has already achieved price parity between EVs and petrol cars.   Its car exports are up 4-fold over the last 3 years.  Most legacy carmakers are still losing money on EVs, because they have left it too late to transition.   The EV S-curve is flexing up, and heavily indebted legacy carmakers just can't keep up.  They didn't listen.  They didn't accept that EVs would triumph.  And now it's too late.

Toyota faces disaster

From The Driven

The world’s largest automaker made two major announcements last week which signal that it finally recognises that the future is electric. But it may be too little too late for the company that revolutionised manufacturing half a century ago.

The first announcement was that Toyota would develop a dedicated EV platform after its disastrous half-hearted attempt with the BZ4X.

The BZ4X design, which shared its platform with petrol and hybrid cars, meant its first fully electric offering had redundant components that resulted in much higher manufacturing costs compared to Toyota’s “clean slate” EV competitors.

Japanese newspaper The Asahi Shimbun reported Toyota doesn’t expect to launch its EV range until 2027-28. At the rate at which global EV market share is growing, Toyota will be lucky to retain a tenth of its 10 million unit market share in major market on that timeframe.

The second announcement made last week was that Toyota’s CEO, Akio Toyoda will stand down in April to make way for a new generation for the company.

“The new team can do what I can’t do,” he said in a statement.  ”I now need to take a step back in order to let young people enter the new chapter of what the future of mobility should be like.”

The grandson of Toyota’s founder Kiichiro Toyoda, Akio has received a barrage of criticism in recent years for his failure to identify the world’s shift to EVs while pouring billions of dollars into white elephant technologies like hydrogen.

In the 1970s, Toyota led a manufacturing revolution that changed the world. 50 years on and the automotive giant has grown complacent, taking its market dominance for granted and developing a false sense of security.

In 1991 a group of MIT researchers published a book called “The Machine that Changed the World”. The book was the result of a five-year, five-million dollar research project to identify and understand key manufacturing principals that had enabled Japanese automakers to dominate their US and European rivals since the 1970s.

Engineering students around the world are encouraged to read the book as it provides an excellent history of automotive manufacturing, from Henry Ford’s development of mass production through to the lean manufacturing revolution which forms the basis of modern advanced manufacturing around the world.

You can’t talk about modern manufacturing without talking about Toyota and the 100 year Toyoda dynasty.

Born in 1867, Sakichi Toyoda, considered the “father of the Japanese industrial revolution”, reinvented the loom, dramatically increasing its productivity and set up factories to sell his inventions to the world.

Sakichi’s son Kiichiro Toyoda then expanded the family business to automotive manufacturing and founded the Toyota Motor Corporation in 1937.

In 1967, Kiichiro’s cousin and mechanical engineer Eiji Toyoda took over the presidency of the company and with Toyota’s chief engineer Taiichi Ohno, is largely credited with the development of lean manufacturing principals including the “Just-in-time” Kanban system, “Kaizen” continuous improvement and 5S organisational housekeeping.

These developments lead to a step change in innovation and productivity in the Japanese automotive ecosystem and enabled Toyota to dominate the global car market for the next 50 years.

At the time, US and European carmakers had to scramble to learn and copy Toyota’s manufacturing methods or face wipeout. Projects like the MIT study enabled them to make the necessary changes and survive.

A disruption like the one Toyota inflicted on US and European carmakers in the 1970s is now about happen to Toyota itself, but with one important caveat. While US and European carmakers were able to survive the lean manufacturing revolution, Toyota could struggle to survive the current disruption which is now well underway.

The disruption, which seems to have been largely undetected by Toyota’s top executives, is the exponential growth in market share of electric vehicles coupled with China attaining a new stage in its industrial transformation.

Nothing articulates the challenge Toyota faces better than some recent key figures. In December, fully electric vehicles made up 33% of all new car sales in Germany and the UK, up from less than 10% in both markets just 2 years earlier.

In China BEVs made up 25% of the market in December 2022. Up from just 5% in 2020.

What these numbers reflect is that technology shifts don’t happen in a linear fashion and that once certain market thresholds are reached, growth can accelerate dramatically. In the case of Germany and the UK, EV share was below 5% for ten years but once that share reached 5-10%, it then grew rapidly to a 33% in just 2 years.

And that speed of market share growth is getting even faster. In Norway, which has lead the world in EV growth, it took three years for EV market share to go from 12% (2014) to 32% (2017). The much larger German and UK markets saw an even faster uptake over just 2 years from 7% (2020) to 33% (December 2022).

Automotive manufacturing is incredibly complex and it’s much easier and faster to scale up existing production than it is to develop new production lines for new products.

Therefore as global EV demand surges its much easier for companies like Tesla and BYD, who already produce EVs in high volumes, to scale up their existing production to capture that new demand than it is for companies who don’t already produce EVs at any significant volume.

This is a major problem for Toyota where EVs make up just 0.2% of total production. Despite being the largest automotive manufacturer in the world, Toyota doesn’t even make the top 20 when it comes to EV production.

By October, Toyota had only sold around 14,000 BEVs globally in 2022. An annualised production rate of less than 20,000. For comparison BYD produced 911,140 BEVs in 2022. Tesla produced 1,310,000 around 650 times more fully electric vehicles than Toyota.

One third of new car sales in Germany and the UK are now fully electric vehicles. That equates to Toyota losing almost a third of its addressable market in those countries in just a few years. This could climb towards 50% by the end of this year.

BEV sales in Norway went from 30% market share in 2018 to 80% in 2022. That’s 50% of the market in just 5 years. If the global EV market share follows a similar S-curve, by the time Toyota launch its EV range in 2027-28, over 50% of the world’s car sales will be BEVs and virtually none of those will be coming from Toyota.

Cathy Wood, from Ark Invest, forecasts an even more dire situation for Toyota. She predicts that fully electric vehicle sales will reach 90% of global car sales in 2027 as consumers become aware of the shift taking place, causing demand for petrol and diesel cars to collapse completely.

In that scenario, Toyota will have little to offer to a rapidly changing market, but would be just one of many problems facing Toyota. The company is one of the most indebted companies in the world with $US170 billion in current liabilities on its most recent balance sheet.

On the asset side of the ledger, Toyota is showing $US215 billion in property, plant and equipment. These assets are largely factories that produce internal combustion engine vehicles which the world is rapidly moving away from.

These asset valuations assume that Toyota will maintain its 14% share of the $US3 trillion global car market.

As EVs continue to take large chunks of market share away from 19th century ICE technology, Toyota’s ICE factory valuations are going to become impossible to justify.

Like coal and gas power plants, Toyota’s ICE factories are stranded assets. The ramifications of this will be enormous, especially for Japan whose economy is dominated by ICE vehicle exports.

Decreasing sales from a vanishing addressable market will mean Toyota will find it harder and harder to service its debts. A vicious circle right when Toyota needs to spend billions developing EV production.

Can Toyota perform a miracle pivot to EVs?

Tesla is the fastest growing car company in history.

In 2013 Tesla produced 22,477 electric vehicles which is roughly the same number of BEVs Toyota produced in 2022.

When discussing production growth during an interview with Financial Times in May 2022, Tesla CEO Elon Musk said “Our growth rates are faster than any large manufacture production in the history of the earth, We're faster than the (Ford) Model T”

Scaling automotive production is hard. Even with record production growth rates it took Tesla 9 years to go from 22,000 to 1 million EVs per year.

So even if Toyota is somehow able to match Tesla's production growth rate on BEVs, it would only hit 1 million EVs by 2031, by which time many analysts believe the global car market will be 100% electric.

Toyota currently produce around 10 million petrol and diesel cars per year.

If the predictions about EV market share growth are accurate and if Toyota is somehow able to reach an annual production rate of 1 million EVs by 2031, it would still result in a 90% drop in sales for Toyota.

50 years ago Toyota spearheaded a manufacturing revolution that enabled it to become the world's largest automotive manufacturer.

It's difficult to see how Toyota will survive the electric vehicle revolution.

 

IRENA vs Lazard's solar costs

 The chart below is derived from two different sources:  IRENA  and Lazard.  The biggest difference between the two is that the Lazard report covers just the US, while IRENA's data covers the globe.  Another difference is that IRENA (in recent years) has used actual contracts instead of LCOE calculations as Lazard does, though in fact contract costings in the US have been broadly similar to Lazard's LCOE calcs.

The costs have been plotted on a log scale in the chart, which means that a similar percentage decline is the same distance on the chart.  This means that a sustained constant rate of decline produces a straight line.  

IRENA's costs for solar globally have until recently been higher than Lazard's in the US, but recently, this gap has closed, and assuming that the recent 5-year rates of decline are extrapolated forward, the average cost of solar internationally will fall below the cost in the USA.   This presumably reflects the expansion of solar into poorer countries in low latitudes, whose solar resources are way better than the Northern Hemisphere developed countries which are higher latitude.  It's ironic―and good news!―that developing countries which have hitherto been at an energy disadvantage will now start to benefit from really cheap energy.  If the extrapolations do reflect reality, by 2025, electricity from solar will cost just $17/MWh.  In 2010, it cost $378/MWh. 

One final point: the lowest fossil fuel cost is $50/MWh (presumably for gas in the US).  The highest is $177.  They are already uncompetitive, though gas at least is complementary to renewables, and will get more uncompetitive as costs continue to decline.  Anybody who invests long-term in fossil fuels―as opposed to holding trading positions―will lose their money.

BHP coal assets fall $1 billion in 2 years

 From IEEFA

Another global investor, the UK’s biggest public pension fund NEST, has withdrawn funds from BHP this week because the company is profiting “from digging coal”.

This follows BHP being put on a watch list by the Norwegian Sovereign Wealth Fund as a firm not adopting business strategies aligned with the Paris Agreement.

Pressured by investors to commit to global decarbonisation, BHP has put its last two loss-making Australian and Columbian thermal coal operations up for sale at a time when buyers are wary and global financial institutions are increasingly refusing to fund thermal coal.

Both Adani Australia and Yancoal made offers well below expectation for BHP’s Mt Arthur mine in Australia, signalling a dramatic change in market expectations and the realisation of stranded asset risk in the coal sector, and growing rehabilitation liabilities.

Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis (IEEFA) and author of a new report: Divestment vs Sterilisation: What to Do With BHP’s Stranded Coal Assets, says the deterioration of the thermal coal market coupled with increasing stranded asset and climate risk has put BHP into a tight spot.

“Investor pressure of leading companies to align with the Paris Agreement has encouraged BHP to put its last two thermal coal assets on the market, yet buyers are coming in under expectations,” says Buckley.

“Reading the rapidly deteriorating fundamentals of the gas market, BHP sold its U.S. shale gas for US$10.6bn in July 2018, taking an asset write-off of US$2.94bn in the process.

“Although it signalled a consideration of exit from the declining coal sector in 2018, BHP failed to divest its thermal coal mining operations quick enough.

“Any buyer of its thermal coal assets would be well aware of previous optimistic valuations suggesting a price tag could reach over $2bn just for Mt Arthur just 2-3 years ago.

“Today, the market could be well under $1bn, even if a strategic buyer with a strong balance sheet can be located. Net of a sinking fund for rehabilitation costs, this figure could be halved.”

Buckley says coupled with the massive but necessary cost of mine rehabilitation due at each mine’s end of life, BHP faces a choice between retaining, selling or spinning-off the mines.

Will China build hundreds of new coal power stations?

From Carbon Brief

China’s 14th five-year plan (FYP), setting out its national goals for 2021-2025, will arguably be one of the world’s most important documents for global efforts to tackle climate change.

The overarching plan for economic and social development in the world’s largest emitter is to be finalised and approved in early 2021, followed by more detailed sectoral targets over the next year. A power sector plan can be expected around winter 2021-22.

Ahead of the FYP’s publication, powerful stakeholders, such as the network operator State Grid and industry body the China Electricity Council, are lobbying for targets that would allow hundreds of new coal-fired power stations to be built. And a recent update to the “traffic light system” for new coal-power construction signaled further relaxation of permitting.

This is all despite significant overcapacity in the sector, with more than half of coal-power firms already loss-making and with typical plants running at less than 50% of their capacity.

The push for more coal power also appears at odds with China’s climate goals, including a target to peak its CO2 emissions no later than 2030. To reach this goal, low-carbon sources will need to cover any increases in energy demand, meaning less need for additional electricity generation from coal.

As the country grapples with the coronavirus pandemic, however, controls on overcapacity may be vulnerable to the political priority of propping up economic growth. As a result, the restraints on another coal power boom are likely to be financial and economic, rather than regulatory.

China’s coal-power overcapacity dates back to the 12th FYP. This was formulated in the early 2010s as part of the largest economic stimulus programme in history, launched in response to the global financial crisis. It targeted a huge expansion in coal mining and coal-fired power generation.

Then, from 2014, the authority to approve new coal-fired power plants was transferred from the central government to the provincial level, in a drive to cut red tape.

Many local governments jumped at the opportunity to prop up [local] GDP and create demand for locally mined coal with new power projects, leading to around 210 projects with a total capacity of 169GW being rubber-stamped in less than a year.

China’s economic system is based on abundant and cheap capital being made available to the state-owned sector with little concern for economic viability, as long as the investments made are broadly aligned with the five-year plans.

This system can mobilise vast amounts of resources, but is prone to over-investment, as companies and local governments use capacity expansion to boost GDP and gain market share. The planning machinery limits overcapacity with control policies – with varying levels of success.

Many experts and industry bodies argue for a move away from top-down targets and controls, to investment driven by market forces. However, the spending needed to fuel a new stimulus program can only be mobilized if investment is directed at the behest of the state, rather than the market – as a rule, China does not fund stimulus with on-budget spending, but by directing state-owned enterprises and commercial banks to spend more. In these circumstances, lack of controls on capacity additions runs a high risk of over-investment.

While the planning machinery appears to lean towards another wave of coal-power expansion, the industry itself seems more cautious, given the current economic and institutional situation.

Moreover, CO2 emissions depend on coal consumption, not the amount of generating capacity. This means that even if there is a surge of new coal-plant construction, there is no guarantee that China’s coal-power CO2 emissions will rise.

China’s coal-fired capacity currently stands at around 1,050GW, so the targets being pushed by some imply a net increase of 150-250GW. At least 100GW of capacity built before 2000 can be expected to retire by 2030, putting the amount of new capacity being proposed at 250-350GW.

There is already 100GW of new coal power under construction, meaning that another 150-250GW of capacity would have to secure permits and financing and go into construction.

Yet even before the economic havoc wreaked by efforts to contain the coronavirus, Beijing was expected to freeze regulated electricity prices for the next year or two, to help the manufacturing industry and other economic sectors, but undermining the profitability of power generation.

Meanwhile, the annual operating hours of coal power are expected to decline further over time, due to competition from renewable energy and severe overcapacity of the whole system.

With coal plants averaging around 4,000 hours of operation per year, less than half of the 8,760 theoretical maximum, the profitability of major power companies is already extremely low. Last year saw the first bankruptcies in the sector, with pressure from wind and solar one of the key factors.

Electricity market reforms, due to be implemented over the next few years, make the profitability of new coal plants even lower and more uncertain, as the power system moves away from guaranteed operating hours and prices.

The need for capacity to meet peak demand will also be substantially reduced when cross-region transmission and flexibility increases, instead of every province building capacity as if it was an island. Many of the proposed capacity targets and projections appear to ignore these changes.

Chinese energy data published in late February made it clear that clean-energy investment will need to accelerate substantially to meet China’s climate goals. CO2 emissions increased for the third year in a row in 2019, by around 2%, and only 35% of the increase in energy demand was covered by low-carbon sources.

This share will have to reach 100% or more for emissions to peak and decline, especially as the focus on energy security limits the scope for switching from coal to gas and oil.

Taken together, the evidence points to multiple reasons why some of the major state-owned coal power developers are hesitant to commit to new coal. This is fundamentally different from the assumptions of the policymaking bodies and lobby groups mentioned above.

In a recent magazine interview [no longer online, but cached in summary], a researcher within China’s official thinktank, the Energy Research Institute (ERI), argued that new coal-power development should cease and that coal power should be phased out altogether by 2050. This interview appeared on Chinese social media site WeChat only a few hours before it disappeared, exposing the sensitivity of the issue.

China and coal are key to preventing global temperatures from rising 2 degrees C or more.

New coal capacity in China is trending lower (note that the chart shows gross new capacity not net—globally, net additions are close to zero)  However, there should prob'ly be no new capacity given how low current capacity utilisation is.  And since this year, and going forward, the cost of new-build solar has reached "grid parity", i.e.,  its cost is now below the wholesale price of a predominantly coal-powered grid, it makes no sense.   However, bureaucratic institutions like to do things the way they always have done.  But if China and the world are to cut emissions to zero by 2050, the rate at which new coal capacity is installed in China needs to fall faster than it is.

Gas peakers stranded assets by 2030

Source: Vox -- Clean energy is catching up to natural gas.The natural gas “bridge” to sustainability may be shorter than expected.

From IEEFA:

Europe’s power system will look very different in 2030, with energy storage supporting the “dominance” of wind and solar generation, according to new research from Wood Mackenzie.

The big five European markets—Germany, the U.K., France, Italy and Spain—will get the majority of their power from wind, solar and other variable renewable energy sources as early as 2023, WoodMac says. By 2040, Europe is expected to add another 169 gigawatts of wind and 172 gigawatts of solar.

As that variable output surges, Europe has four options for balancing out its grid: pumped hydro, gas peakers, energy storage and interconnectors. Only the final three of the quartet are likely to be the focus of new investment.

For now, “gas peakers are more essential than ever,” said Rory McCarthy, Wood Mackenzie principal analyst. “They can ramp up to full output from warm in a couple of minutes for modern systems, have increasing efficiency levels at part loading and boast unlimited duration, assuming a reliable gas supply.”

But by the end of the decade, battery storage will be the cheapest option for balancing Europe’s grid, overtaking gas peakers, according to a new long-term energy storage outlook. Europe’s energy storage capacity across all segments is expected to grow from 3 gigawatts today (excluding pumped hydro) to 26 gigawatts in 2030—and 89 gigawatts by 2040.

“By 2030 energy storage will beat gas peakers on cost across all our target markets, resulting in a cloudy outlook for any new future peaking turbines,” McCarthy said. “Fuel and carbon prices are on the up, technology costs are not set for any major decreases and net-zero policies will eventually target the decarbonization of all power market services.”

The moral of the story:  we should keep existing gas power stations whle we wait for battery prices to fall even further, but not build new ones.  Unless we use synthetic natural gas, or green methane, produced via the Sabatier process using green hydrogen made from electrolysing water using renewable electricity.  And perhaps not even then.

Renewables pass coal in USA

In the USA in 2019, for the first time since the late 19th century, energy produced from renewable sources passed energy produced from coal.

Look at the steep decline in coal!  Nearly halving in just 5 years.  And the equally steep ascent in renewables.  This is likely to be a repeated pattern everywhere as the cost of renewables continues to decline.  Beware stranded assets!

German coal capacity factor plunges

From Philipp Lotz, from the German energy thinktank Agora.

In Q1 2020, Germany's lignite fleet had an average capacity factor of only 34%. This is half of the traditional 65-70%. You don't need to be a psychic to see what this means for profitability... 

This decline in the capacity factor of the coal generating fleet is not confined to Germany.  As renewables continue to get cheaper, it will get worse for the industry, until there is no alternative to closing down coal power stations.

Oil majors protect renewables expenditure

BP Chargemaster fast chargers

From GreenTech Media

Shell just did the thing CEO Ben van Beurden said no leader of the company would ever want on their record: cut its shareholder dividend for the first time since World War II.

In slashing Shell's dividend on Thursday from 47 to 16 cents per share, van Beurden made a dramatic statement on the global oil industry's current predicament. But what the supermajor and its peer BP are not cutting is also very telling.

Both BP and Shell released their earnings results this week, their first since the oil price crash and the emergence of the coronavirus pandemic — and since declaring their own net-zero ambitions. Despite the chaos in global oil markets, the pair of supermajors have committed to maintaining their low-carbon investment plans and spoken of an accelerating energy transition.

Oil companies around the globe are slashing their capital expenditures in response to the oil price collapse. The largest share of Shell's cuts — 45 percent — are coming from its upstream exploration business.

A quarter of Shell's planned $5 billion of capex savings will come from its integrated gas and new energies business unit, which is home to its renewable energy ventures. But van Beurden said Thursday that the new energies businesses would be mostly untouched. 

“I wouldn’t say we have ring-fenced them; that would be too much,” he told reporters. “[But] there is an energy transition underway that may even pick up speed in the recovery phase of the crisis, and we want to be well-positioned for it."

Meanwhile, BP’s new CEO Bernard Looney said his firm has not shrunk its pot of money for energy transition investments this year.

“We've left our $500 million of low-carbon investment unchanged [and] untouched this year," Looney told investors on a Tuesday call. "Where we cut elsewhere, we did not cut that back. So we will, over time, be working hard to do more in that space.”

BP stuck to its own dividend when it published its own results earlier this week, but said its next dividend would be up for discussion. Last week Norwegian firm Equinor cut its dividend by the same proportion as Shell did.  

Looney said BP's resolve to execute on the net-zero strategy it announced in February has only become “stronger” in the face of the multiple crises facing the sector.

“We talked a lot about the negative prices for WTI [West Texas Intermediate, a light sweet crude oil blend] just a few weeks ago. At the same time as that was happening, Lightsource BP was doing 400 megawatts of solar contracts in the U.S.," Looney said. "That sector continues to attract investment. It attracts investments because of its risk profile and its resilience."

Capital flows away from coal into renewables

From IEEFA:

A tipping point for the future of fossil fuels may have been reached this year as financial markets massively down-rated traditional energy companies, with their slumping share prices destroying “staggering” amounts of shareholder wealth.

That is the view of Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis, who argues in his new report Tipping Point: Global Renewable Energy Leaders Outperform on Global Markets that professional investors now recognise the inevitability of thermal coal’s decline and the uptake of clean, renewable energy.

Investors in coal-fired power plants, he notes, “are banking on questionable premises. First that governments will not put a substantial price on carbon emissions or pollution, and secondly, that the double-digit deflation in renewable energy and battery technologies will cease.”

Buckley contrasts the performance of eight of the world's largest listed renewable energy asset owners/investors that are aggressively decarbonising their holdings with diehard fossil fuel stocks, showing that renewable energy investments vastly outperform them.

The stock price of Australia’s Macquarie Group, a leading investor in green energies, has risen 129% over the last five years, quadrupling the Australian equity market’s growth. But in 2019 alone, Australia’s four main coal miners – Whitehaven, Yancoal, New Hope Corp and Coronado Coal, have declined between 18% and 37%.

“As the capital flow moves to predominantly bankrolling renewable energy, the capital market derates the incumbent industry now owning stranded thermal power plants,” say Buckley.

“The world could well look back on 2019 as the tipping point: The moment when global capital markets accepted the technology-driven inevitability of a crossover from polluting thermal coal and increased uptake of sustainable, clean, renewable energy.”

Coal power set for record fall in 2019

From another of CarbonBrief's in-depth analyses. 

Global electricity production from coal is on track to fall by around 3% in 2019, the largest drop on record.

This would amount to a reduction of around 300 terawatt hours (TWh), more than the combined total output from coal in Germany, Spain and the UK last year.

The analysis is based on monthly electricity sector data from around the world for the first seven to 10 months of the year, depending on data availability in each country.

The projected record is due to… 

• Record falls in developed countries, including Germany, the EU overall and South Korea, which are not being matched by increases elsewhere. The largest reduction is taking place in the US, as several large coal-fired power plants close.

• A sharp turnaround in India, where coal power output is on track to fall for the first time in at least three decades.

• A flattening of generation growth in China.

The main counteracting force is from continuing increases in coal generation in south-east Asia, but demand from these countries is still small relative to the global total.

The global decline means an economic hit for coal plants due to reduced average running hours, which are set to reach an all-time low.

The record drop also raises the prospect of slowing global CO2 emissions growth in 2019. Nevertheless, global coal use and emissions remain far higher than the level required to meet the goals of the Paris Agreement.

2009 fall due to GFC (global financial crisis), 2015 to China slowdown.
Source: Carbon Brief

China

In China, electricity demand growth has slowed to 3% this year, down from 6.7% over the past two years. Non-fossil energy sources have met almost all this demand growth.

The country’s demand for coal-fired power depends on the interplay between clean electricity growth and rising demand. The gap between the two, if any, is filled with coal.

This means that when electricity demand is growing strongly, coal dependence comes to the fore. With these conditions, 2017-2018 saw coal-fired power generation grow at an average of 6.6% year on year.

However, 2019 has so far seen strong nuclear, wind and hydro power generation and relatively weak overall electricity demand growth, with coal use in electricity flatlining.

At the same time, Chinese power firms have been continuing to add new coal-fired power plants to the grid at a rate of one large plant every two weeks. This has driven coal-fired power plant utilisation rates – the share of hours in the year when they are running – back down to record lows of 48.6%. This is the fourth year in a row that the Chinese national average has been below 50% – and also below the global average, which stands at 54%.

2019 has also seen the first contracts for wind and solar plants that will generate power at the same price as coal power plants, putting China on a path to renewable energy “grid parity” as those projects come online in 2020.

[I fear that the slowdown in growth in coal power generation in China is mostly due to slow economic growth, and as China recovers, its coal burning will continue.  That is prob'ly why the thermal coal price  is once again rising]

US

The US is on track this year for one of its largest annual declines in coal-fired power generation. Year-to-date August 2019, coal-fired power is down 13.9% compared with the same period in 2018. The month of August 2019 saw coal-fired power generation down 18.2% year-on-year.

Coal unit retirements have continued this year at near record rates. Year-to-date data shows 57 units, with a capacity of 14.0 gigawatts (GW), that are all retiring in 2019 – some 5.8% of the US coal fleet. This compares with 15.5GW (6.0%) of retirements in 2018.

India

Electricity demand growth in India has continued to slow dramatically across the first ten months of 2019. In October, electricity demand actually fell by 13.2% against the same month last year.

Collectively, power from all non-coal sources grew by about 12% in January-September, leading to a downturn in coal-fired generation that is accelerating sharply. Coal-fired generation in October fell by 19% year-on-year to the lowest level since 2014. 

Heavy monsoon rains have affected industrial power demand, but as demand has continued to plummet in November, a broad slowdown in industrial output is becoming increasingly apparent. This suggests that the country’s CO2 emissions growth is slowing further from the already low annual rate of 2%, which we estimated from data for the first half of 2019.

The average thermal power plant utilisation rate in India is below 58%, meaning substantial idle coal capacity.

EU

The European Union has experienced an unprecedented 19% year-on-year decline in coal-fired power generation in the first half of calendar year 2019. This is accelerating in the second half of the year to an estimated 23% fall in 2019. Around half the fall in coal reflects the impact of new wind and solar. The other half is due to a switch from coal to gas.

The coal-gas switch has happened as the carbon price in the EU Emissions Trading System rose above €20 per tonne of CO2 and gas prices fell, pushing gas generation to be cheaper than coal throughout 2019.

Because very few new gas plants are being built in Europe, further coal-gas switching will be constrained in subsequent years. The expansion of wind and solar is increasing, however, and this will be the driving factor displacing not only coal generation, but also output from gas in the future, as long as demand growth remains tepid or negative.

All western European countries have seen big percentage falls of coal use – from 22% year-on-year in Germany to 79% in Ireland – in the first half of 2019.

There were times of zero or near-zero coal generation in many western European countries. For example, coal has been less than 2% of the electricity mix in Ireland, France and the UK, and only 6% in Spain and Italy, across the first half of 2019. The UK had two weeks in May with all its coal plants switched off for the first time since the Industrial Revolution began. 

Germany has seen by far the biggest cut in coal generation in absolute terms, with both hard coal and lignite falling substantially.

[Read the full article here]

It was always likely that a pincer movement would decimate coal.  On the one hand, the public's awareness of the climate emergency (and therefore politicians' willingness to act) was likely to rise inexorably as the world warmed.  Record droughts, floods, heatwaves and bushfires have seared themselves into our memory.  We know that the world is getting too hot, whatever the soothing lies from denialists.  

Simultaneously, the costs of wind, solar and storage are plunging.  10 years ago, in the USA, electricity generated by solar cost 3 times per MWh the cost of electricity generated by (new) coal power stations.  Now it costs 1/3rd.  In Los Angeles, recently, a contract was signed to provide "near firm" electricity from solar at less than the cost of a new gas plant and about the same as the operating cost of coal.  At that point it stops being economically rational to keep coal power stations going.  And with rising awareness of global heating, the political pressure to replace coal with renewables is only going to intensify.  The huge financial risk for any developer of a new coal power station, or a new coal mine, is that they will be stranded assets, unable to pay back the loans they used to get built.

Battery costs dropping faster than expected

Wind, solar and storage.
Source: Forbes

From Forbes:

The global energy transition is happening faster than the models predicted, according to a report released today by the Rocky Mountain Institute, thanks to massive investments in the advanced-battery technology ecosystem.

Previous and planned investments total $150 billion through 2023, RMI calculates—the equivalent of every person in the world chipping in $20. In the first half of 2019 alone, venture-capital firms contributed $1.4 billion to energy storage technology companies.

“These investments will push both Li-ion and new battery technologies across competitive thresholds for new applications more quickly than anticipated,” according to RMI. “This, in turn, will reduce the costs of decarbonization in key sectors and speed the global energy transition beyond the expectations of mainstream global energy models.”

RMI’s “Breakthrough Batteries” report anticipates “self-reinforcing feedback loops” between public policy, manufacturing, research and development, and economies of scale. Those loops will drive battery performance higher while pushing costs as low as $87/kWh by 2025. (Bloomberg put the current cost at $187/kwh earlier this year.)

“These changes are already contributing to cancellations of planned natural-gas power generation,” states the report. “The need for these new natural-gas plants can be offset through clean-energy portfolios (CEPs) of energy storage, efficiency, renewable energy, and demand response.”

New natural-gas plants risk becoming stranded assets (unable to compete with renewables+storage before they’ve paid off their capital cost), while existing natural-gas plants cease to be competitive as soon as 2021, RMI predicts.

RMI analysts expect lithium-ion to remain the dominant battery technology through 2023, steadily improving in performance, but then they anticipate a suite of advanced battery technologies coming online to cater to specific uses:

Heavier transport will use solid-state batteries such as rechargeable zinc alkaline, Li-metal, and Li-sulfur. The electric grid will adopt low-cost and long-duration batteries such as zinc-based, flow, and high-temperature batteries. And when EVs become ubiquitous—raising the demand for fast charging—high-power batteries will proliferate.

Many of these alternative battery technologies will leap from the lab to the marketplace by 2030, the report predicts.

Some of these changes will be driven outside the U.S., specifically in countries like India, Indonesia and the Philippines that prefer smaller vehicles.

RMI analyzed the four major energy-storage markets—China, the U.S., the European Union and India—and found two major trends that apply to each: 1) “Mobility markets are driving the demand and the cost declines,” and 2) “the nascent grid storage market is about to take off.”

[Read more here]

Technological change is often driven by demand.  When there is profit to be made from a shift in production techniques or new ways of doing things, then new ways are found.  The first industrial revolution was powered initially by the need to expand one side or other of spinning and weaving.  John Kay's Flying Shuttle in the 1730s increased the need for spinners.  The invention of Richard Arkwright' Water Frame and James Hargreaves' Spinning Jenny flipped the imbalance the other way.   This meant further improvements in weaving machinery were necessary.  This led to a need for more powerful motors, and the invention of the steam engine, which in turn required better processes for making iron and steel, which in turn led to the development of the railways, themselves heavy users of iron and steel and coal. 

Now, the need is for batteries which can store lots of energy and release it quickly enough to drive EV motors while also being lightweight and easy to charge quickly.  This is driving very rapid technological advance, which mean batteries are getting much cheaper and better every year.  Cheap and efficient storage, combined with similarly rapid advances in wind turbine and solar PV technologies, will drive the internal combustion engine, and gas/coal-fired power stations, out of the market.  The only question is, how quickly—no longer whether, just when.  From an investment perspective it is always very painful to be on the wrong side of a rapid technological revolution.

Incidentally, battery costs have been falling by 20% plus per annum for a decade now, and forecasters who assumed this process would slow have been repeatedly wrong.  Of course, one day it will slow, but usually when technological advance slows, it doesn't hit a brick wall, it decelerates gently and we approach the limits asymptotically.  There is no sign of that happening yet with lithium-ion, and even if it did, there are numerous new technologies being developed right now which will enter commercial production within the decade.  If we assume that the 20% per annum decline continues, by 2030, battery storage will cost 1/12th what it costs now.  Which means that by 2030, no petrol/diesel cars will be sold, and no coal or gas power stations will be any longer in use.  They will all be stranded assets.  You have been warned.

Coal's last hope: carbon capture

CCS (Carbon capture and storage/sequestration) is a process whereby CO₂ is extracted from the exhaust flues of fossil fuel power stations and pumped into underground caverns.  The argument goes that if we could only stop emitting CO₂ when we burn fossil fuels, then we could go on burning those fuels.  Unfortunately, it's not that easy.

From OilPrice.com:

Coal usage continues to fall and the coal industry wants to do something about that. So does the Trump administration. Their proposed solution to the problem of waning coal usage is carbon capture and sequestration (CCS)—a technology that has been around for a long time.

The basic idea behind CCS is to remove the carbon dioxide from the exhaust stream after burning the coal. Then the “captured” CO2 can be redirected.

But in the US, the Southern Company and others attempted to develop an additional process. Their ultimate goal was to use cheap and plentiful Mississippi lignite and convert it chemically into clean-burning synthetic gas. The CO2 produced from combustion would also be captured. One actual use is to pump CO2 into older, less productive oil field reservoirs to enhance oil recovery. One suggestion is to replace the oil with CO2 storage after the field has been depleted.

At present Southern Company’s Kemper County facility is synonymous with failure. A proposed $2.5 billion CCS plant was eventually completed at a cost of over $7 billion. What’s even worse, operation of the coal gasification unit has been suspended and the plant burns purchased shale gas. And there is no carbon capture whatsoever.

The first problem with CCS is the cost.  The gas must be extracted from the exhaust gas of power stations, compressed (which uses a lot of energy), transported (which uses more) and then pumped into underground caverns.

This is ultimately being described in the language of finance. Coal-fired power plant owners are stating that their assets are relatively new. And their expectations are for a continued, long productive life. If not the assets would have to be written down. This would imply negative financial implications at the corporate level for both earnings and balance sheets.

Leaving aside the question of whether past (not fully depreciated) power plant investment should influence future decisions (the sunk cost issue), the real policy question is: what are we doing—limiting greenhouse gas emissions at the lowest possible cost or saving the coal industry?

One recent study by the Institute for Energy Economics and Financial Analysis produced these approximate costs (in cents) per KWH:

  Wind power with storage                         2.1
  Coal                                            3.0  
  Solar power with storage                        3.5
  Coal with sequestration (long term goal)        6.3        Coal with sequestration (current)               9.6 

The absolute numbers in this table are not as important as their relative values and their credibility. Builders are already bidding on wind and solar at relatively low numbers, so the quotes can be depended on as can costs for coal since we know how to build those plants.

The problem simply is that electricity produced by coal-fired plants using the latest CCS technology is several times the cost of other existing carbon-free technologies. With respect to a commodity product like electricity, these numbers are politically and financially untenable. To overly simplify, coal is already losing on price to wind. The CCS advocates propose to double the price of coal (from about 3 to at least 6 cents per kwh).

The second problem is that no one is sure just how long CO₂ pumped into underground caverns will stay there.  What if it all just leaks back into the atmosphere? 

CCS is a delusion.  It won't make coal or gas "clean".  And it will cost us 2 or 3 times as much as wind and solar with storage.  But we will need carbon capture to reduce levels of atmospheric CO₂ already emitted, storing the CO₂ by dissolving it in water and storing it as rock.  And it will be costly.  Will society pay for it?  Only when the cost of the climate emergency becomes so great that the political pressure to act will be irresistible.  And if people are still whinging about the cost of wind turbines when they're actually cheaper than fossil fuels, what hope is there?

Stranded assets

Source: Lazard
My estimate for a grid 50/50 wind/solar (green line)

For a few years now, analysts have been warning those involved in coal, either as miners or as operators of coal fired-power stations, that the rapid cost declines in wind, solar and batteries would led to coal assets becoming worthless, long before the debt raised to buy them was repaid.  What is happening with BHP's [Australia's largest mining house] as it attempts to offload its coal interests is a good example.

When you’re in the business of buying and selling, timing is everything. That’s the costly lesson facing BHP Group, which is looking at options to divest its thermal coal assets according to a report by Thomas Biesheuvel of Bloomberg that cited people familiar with the matter.

Arch-rival Rio Tinto Group raised $2.7bn selling mines in the Hunter Valley north of Sydney to Yancoal Australia Ltd., in a process that started in 2016. BHP could get far less: Macquarie Group Ltd. estimates $1.6bn. That’s despite the fact that BHP’s Mount Arthur and Cerrejon mines, in the Hunter Valley and Colombia, post roughly the same Ebitda as the ones Rio Tinto sold.

What’s changed? More or less everything.

Back in 2016, coal was still the lowest-cost way of delivering new generation in most major markets. The slumping price of wind and solar generation since then has changed the game. Thermal coal will fall to 11% of U.S. generation by 2030 from the mid-20s at present, S&P Global Ratings wrote in a report; outside of Spain and Germany, most European coal-fired plants will be retired by 2025.

North Asian markets supplied by Mount Arthur look like an exception, with Japan, South Korea and China making up about 80% of Australia’s thermal coal exports. The first two countries are rare cases where falling renewables costs have failed to undercut the black stuff.

Even there, though, the picture is dimming: Japan’s coal-fired capacity will go into decline starting 2023, and actual demand should fall faster since its most recent plants use fuel more efficiently, according to a report this week by the Institute for Energy Economics and Financial Analysis, a research group opposed to fossil fuels. South Korea now has taxes on coal amounting to $60 a ton and imports will fall by half by 2040, according to the IEA.

[From IEEFA]

Something similar is going to happen with oil and eventually with gas, too.  As sales of EVs grow, oil demand will decline, and only low-cost oil producers will remain profitable.  In the USA, we've already seen how plunging coal demand and prices has led to bankruptcies.  This trend is likely to extend world wide.