UK Energy Market Analysis - Home - Rushlight Events€¦ · · 2017-01-26UK Energy Market Analysis ... 2016 towards 3.2% by 2020. ... • Global oil demand is forecast to increase

Copyright © 2017 Accenture. All rights reserved.

UK Energy Market Analysis

Helen Wallace-Fisher

International Energy Risk Manager – Accenture


GDP and oil


Global economic growth remains subdued with emerging markets

leading the pack

-6

-4

-2

0

2

4

6

8

10

2009 2009 2010 2011 2012 2013 2014 2015 2016 2017 2021

% c

ha

nge

Real GDP

World Advanced economies Emerging markets UK

Source - IMF


GDP and oil demand growth disconnected

Historically global GDP growth and oil demand growth have been very closely related.

However, amid a turbulent history, the one constant is reducing product intensity.

As oil consumption efficiency improves, and the substitution of oil for alternatives

increases oil demand growth will become disconnected from GDP growth.

OPEC forecast % growth per annum

GDP Oil demand

2014-2020 3.6 0.96

2020-2030 3.6 0.67

2030-2040 3.3 0.47


Global oil demand and production moving into balance, ending

over two years of surplus

Source - IEA

90

92

94

96

98

100

102

104

2015 2016 2017 2018 2019 2020 2021

Millio

n b

arr

els

pe

r d

ay

World oil demand and supply

Demand Supply


Are we heading for a new oil bull cycle?

There will be another bull cycle emerging around 2018-19

The gap between demand and production capacity remains tight.

Current spare production capacity is approximately 1.5 million bbl/d, compared to the

6-10 million bbl/d of the 1980s.

The steep decline in upstream investment means less supply growth, which combined

with rising demand will reduce oil inventories.

The bear cycle will continue for another decade

The global oil supply cost curve has moved lower due to increased, and still rising,

supply from low cost producers, in particular the Gulf 5 and Russia. Combined with

low cost USA oil, supply growth will be sufficient to meet demand at $40-$55 oil.


Prices expected to return to ~$70/b by 2020

Steadily rising oil demand of 1+MMb/d underpins our outlook for rising prices.

Source - Accenture

0

20

40

60

80

100

120

2009 2012 2015 2018 2021

$/b

bl

Annual average Brent prices


Global economy and oil summary

• Despite the global economic risks, there will be an increase in global economic growth from 2.4% in

2016 towards 3.2% by 2020. The Asia-Pacific region will make the strongest contribution to global

economic growth.

• UK growth is expected to slow as ongoing uncertainty around Brexit leads to trimmed investment and

employment plans.

• Risks include turbulence in financial markets, China’s rising debt and excess capacity, conflicts in the

Middle East and Africa, high Eurozone debt burdens, and stagnation in developed countries.

• The oil market is expected to remain finely balanced in terms of supply and demand through 2017-

2018 with no rapid price recovery.

• Global oil demand is forecast to increase by around 1 million bbl/day each year through to the mid-

2020s.

• By 2030 the world will need nearly 30 million bbl/day of new upstream oil projects to have been

completed in order to meet demand.

• Despite reducing upstream costs as a result of the current low price, we expect oil price to return to

near $90/bbl ($2015) by 2025 in order to make these required projects financially viable.


Gas


LNG liquefaction capacity continues to outstrip demand

0

50

100

150

200

250

300

350

400

450

2015 2016 2017 2018 2019 2020

Mill

ion m

etr

ic tons

Global LNG liquefaction capacity and demand

Capacity Demand

New gas projects under construction today will increase supply capacity by ~50%

while gas demand is stalling and is below expectations of supply projects. Source - IEA


Europe to act as the “clearing house” for global gas markets

Large gas market ~500bcm

Liquid traded markets

Third party access to infrastructure

Underutilized regas capacity

Purchase contracts with volume flexibility

Price responsive demand


Europe’s gas demand decline reversing

6.33 6.33 6.52 6.63 6.70 6.72

7.24 8.54 9.15 9.75 10.04 9.96

4.214.30

4.895.94 6.93 8.67

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2012 2020 2025 2030 2035 2040

Trilli

on

cu

bic

fe

et

European gas demand outlook

Industrial Buildings and transportation Electric Power

Source - EIA

Copyright © 2017 Accenture. All rights reserved. 13

Global oversupply weighs on traded market prices – forecast to remain low through mid-2020s

20

25

30

35

40

45

50

55

60

65

70

2009 2012 2015 2018 2021

pp

t

UK spot gas prices

Source - Accenture


Gas summary

• European and global gas markets should be well supplied at least to the end of the

decade.

• Europe is the global gas market’s “clearing house”. Europe will play a key role in

managing excess LNG.

• Global gas fundamentals are the driver for European prices – and they look weak.

• Even if coal / oil prices rise, the global gas supply / demand balance is the main

driver; the market looks oversupplied for the next few years meaning prices are

expected to be weak.

• Forward curves appear to be largely driven by changes in prompt prices.

• However, current low prices are not expected to support the new gas supply

projects that the world will need. In the long term prices will ultimately increase –

the question is when.


Power


Slow demand growth forecast to 2040

Source - EIA

-6

-4

-2

0

2

4

6

8

10

12

14

UK andIreland

CentralWest

Europe

Iberia Italy andAlps

Nordics EasternEurope

Baltics Balkans Turkey

Com

po

un

d a

nn

ua

l gro

wth

rate

(%

)

Power demand outlook

2010-2012 2012-2015 2015-2040


Renewable additions dominate

Source - EIA

0

200

400

600

800

1000

1200

1400

2010 2015 2020 2025 2030 2035 2040

GW

Europe - installed capacity

Liquids Gas Coal Nuclear Hydro Wind Geothermal Solar Other renewable


Governments are turning to national carbon mechanisms as EUA prices forecast to remain flat

UK – carbon price floor, emissions

performance standards prevent

new coal; all existing plants to

close by 2025.

France – likely introduction of

targeted measure to reduce coal-

fired production.

Sweden – set up a fund worth

€30m to cancel EUAs out to 2040

(~7mt/yr).

Germany – lignite reserve, ongoing

debate about future of coal

capacity.

Netherlands – early closure of coal

plants likely.


Prices expected to remain low in coming years

Source - Accenture

30

32

34

36

38

40

42

44

46

48

50

2010 2012 2014 2016 2018 2020

£/M

Wh

UK power baseload spot


Power summary

• Power demand growth is expected to be moderate.

• Renewable capacity will account for around three quarters of new additions by 2021 – national

support schemes will determine technology and the pace of additions, headed for widespread

competitive selection of projects.

• The future of thermal capacity is also defined by national support schemes – the outlook for

existing coal is particularly uncertain. Wholesale power prices will remain below operating cost

for many plants. No new build is expected without support from capacity mechanisms.

Existing plant remains at risk of closure.

• Prices will remain low across European markets for the short to medium term across with

reduced spreads between markets, a reduction of seasonality within the curve and increased

volatility in tight markets such as the UK.

• Watch for demand growth, renewable deployment and the relevance of the carbon market.

• The investment landscape in the power sector continues to be very risky with investors

unwilling to take wholesale price exposure. Will capacity markets provide a solution. Are we

heading for a long-term price shock?


Looking beyond wholesale prices


Looking beyond wholesale prices …

Increasing non commodity costs and opportunities to avoid and/or optimise

• Forecast to increase from 50% to 63% of delivered costs in UK by 2019

• Avoidance or optimisation significantly driven by time of use / generation and forecast

accuracy

Balancing services opportunities – demand and generation

• The faster the response, the higher the payment

Applied analytics through Connected Facilities

• Central governance control tower

• Centralized facility management workflows, energy efficiency programs and continuous

optimization in Control Tower

• Dynamic maintenance model based on equipment lifecycle and facility condition index

• Centralized data repository to track energy consumption and emissions

• IoT platform and smart grid to continuously monitor energy patterns and savings

opportunities

• Real-time predictive analytics automatically modify BMS settings to manage demand and

predict equipment failure

• Can result in 15-20% emissions reduction, 10-25% reduced energy consumption, 10-25%

reduction in maintenance costs, improved employee satisfaction and productivity


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Copyright © 2017 Accenture

All rights reserved.

23


Disclaimer

© 2017 Accenture

Accenture is not regulated for the purposes of giving investment advice, and we do not give

investment advice. If this document and any related documents contain data relating to energy

prices you should note that expectations and forecasts of out-turn prices and ranges of possible out-

turn prices are based on analysis of market conditions which involve risks and uncertainties and are

not guarantees of future performance. Actual out-turn prices and trends may differ materially from

what is forecast due to a variety of factors. Accenture does not accept liability for errors and

omissions in such data and in no circumstances can we be liable for losses, either direct, indirect or

consequential, as a result of your use of such data. You must exercise all due diligence and rely

upon your own interpretation and judgment when taking commercial decisions.

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UK Energy Market Analysis - Home - Rushlight Events€¦ · · 2017-01-26UK Energy Market Analysis ... 2016 towards 3.2% by 2020. ... • Global oil demand is forecast to increase