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Germany’s RWE to cut one in three jobs in $2.9 billion coal exit deal

FRANKFURT (Reuters) – RWE (RWEG.DE), Germany’s biggest power producer, will cut about 6,000 jobs, or nearly a third of its current workforce, by 2030 as the country moves to phase out brown coal as an energy source, the company said on Thursday.

Germany’s exit from the coal industry marks the second major upheaval for RWE in as many years following the breakup of the .company’s former subsidiary Innogy (IGY.DE) with peer E.ON (EONGn.DE).

It also accelerates RWE’s transformation into a pure renewables group, which – along with its low valuation – could turn it into a takeover target, Goldman Sachs said last week.

RWE said it would receive 2.6 billion euros ($2.9 billion) in compensation from the government over 15 years to soften the blow to its business.

However, this was less than the 3.5 billion euro hit it estimated it would take, even excluding the expected loss of profits, it added.

“RWE stretches to the limits of what is possible,” Chief Executive Rolf Martin Schmitz told journalists on a call. “And we will bear the majority of the burden the German government demands for the coal phase-out.”

After months of wrangling, the German government early on Thursday agreed a compensation plan with energy companies, affected regions and workers to pay for the accelerated shutdown of coal-fired power stations by 2038.

RWE said it expected special writedowns of half a billion euros on power plants and open-cast mines as a result of the agreement. About 350 million euros will be set aside for personnel measures.

Shares in the group were 2% higher at 1508 GMT, the second-biggest gainers among German blue-chips, having earlier touched their highest since Sept. 25, 2014 as traders welcomed the clarity after months of wrangling.

“RWE’s agreement with the German government lifts an important overhang,” Bernstein analysts wrote.

“Some investors were cautious on whether RWE would be able to receive adequate compensation for early mine closures, given the past track record of negotiations with the government.”

Schmitz denied speculation that RWE may now seek to sell its coal assets, adding the firm, which is also Europe’s third-largest renewable group after Iberdrola (IBE.MC) and Enel (ENEI.MI), would stand by its employees.

“There are no such considerations and no talks on the matter,” Schmitz said.

The company has in the past denied claims that its coal-fired plants are loss-making, saying it would not run them unless they generated cash.

Dave Jones, European electricity analyst at Sandbag, a non-profit think-tank, said that it had been clear that coal would have to be phased out even before the Paris Agreement to combat climate change was struck in 2015.

“It’s a pertinent lesson for all other countries: deal with coal now, and save yourself a big bill in the future,” he said.

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OVO completes acquisition of SSE Energy Services

Today (15 January), OVO Energy has completed its acquisition of supplier SSE’s GB household energy business.

The acquisition was first announced in September, and approved by the Competition and Markets Authority (CMA) in December.

The move will see OVO become the second largest supplier in the UK, with five million customers. It said that gaining SSE’s smart technology and exceptional talent in the form of its 8000 staff will help to accelerate OVO’s strategy to bring clean affordable energy to more households.

OVO bought SSE Energy Services for £500 million, which comprises of £400 million in cash and £100 million loan notes. These loan notes will be issued by a member of the OVO group, have an annual interest rate of 13.25% payable in kind and will be due in 2029 if they have not been repaid earlier.

The transaction will be subject to a deduction of £59m reflecting debt-like items, SSE announced, including SSE Energy Services’ accruals in respect of the Capacity Market Mechanism.

Stephen Fitzpatrick, CEO and founder of OVO said that this marks the end of one chapter for OVO but “more importantly, the beginning of the next one together with SSE Energy Services”.

“We have an integration plan that leaders from both companies have collaborated on since September. There is a lot of work to do to bring the two businesses together, but we have a really strong combination of great talent, technology and customer centricity that will enable us to succeed.

“SSE’s history of excellence at scale combined with OVO’s innovative technology and our Plan Zero commitments mean that together, as one team, we can bring millions more people with us on our journey towards zero carbon living.”

OVO was formed in 2009, and has since grown to become the largest independent supplier in the UK. It has committed to eliminating its customer’s household emissions and fit five million homes with flexible, clean energy technologies as part of a wide-ranging carbon-cutting initiative dubbed ‘Plan Zero’ it announced in 2019.

It has continued to grow over the last year, investing in clean energy marketplace Renewable Exchange and energy technology start-up firm Electron. It also announced a partnership with automotive giant Mitsubishi motors last December.

OVO also claims that it installed the world’s first domestic vehicle-to-grid charger in a customer’s home.

The CMA launched an investigation into the company’s acquisition of SSE Energy Services in October, to ensure that it would not lessen competition in the UK.

Alistair Phillips-Davies, CEO of SSE said: “We are very pleased to have completed this transaction, which we firmly believe is the best outcome for the business, its customers and its employees.

“The sale is in line with our clear strategy, centred on developing, operating and owning renewable energy and electricity network assets, along with growing businesses complementary to this core.

“SSE enters the new decade as a more focused group, even better positioned to lead the low carbon transformation required to achieve the UK’s vital net zero commitment in the years to come.”

In a blog post today, Philips-Davies said that SSE’s strategic focus had shifted to developing, building and maintaining low carbon assets.

He continued: “For SSE, our core purpose in the years ahead is clear. We are providing the energy needed today while building a better world of energy for tomorrow.”

The company has struggled in recent years, with a loss of profit of £284.6m in 2018. It has started to bounce back, with its interim results statement in November reporting a 14% increase to adjusted operating profit.

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Sadiq Khan launches his own green energy company – London Power

Sadiq Khan has launched his own green energy company, claiming it will save the average household £300-a-year on bills.

The mayor of London today unveiled London Power, in conjunction with Octopus Energy, as a part of his Energy for Londoners programme.

Read more: New Octopus Energy tarif aims to slash the charging cost of electric cars

The company – which will only be available in London – will act as a non-profit company, with all profit “reinvested into community projects”.

The service will be provided by Octopus Energy and will rely on 100 per cent renewable energy.

Khan said the new energy provider would be within the cheapest 10 per cent of similar tariffs in the market and would save the average household £300 on bills.

“It is a disgrace that many Londoners pay too much to heat and light their homes, with more than a million living in fuel poverty,” he said.

“For the first time we have a fair, affordable, green energy company specially designed for Londoners.”

London Power enters a market that is already home to 64 active suppliers, according to Ofgem.

The energy market watchdog’s 2019 report on the energy market found 53 per cent of consumers had never switched energy companies.

However, the figure for London – where energy prices are among the most expensive in the country – is not known.

Peter Earl, head of energy at Compare the Market, said he welcomed the extra competitio, but that it may be difficult to attract new customers.

“It’s an industry challenge to activate the large section of people who have never changed their energy company,” he said.

“[Khan’s] got an offering that should be attractive to people, but it’s not going to be easy.”

The formation of London Power won plaudits from green energy advocacy groups the Renewable Energy Agency (REA) and National Energy Action.

REA chief executive Nina Skorupska said: “By adopting this model, City Hall has shown themselves to be one of the pioneers in the move towards a Net Zero UK.”

Caroline Russell, Green Party leader in the London Assembly, on the other hand said Khan’s plans did not go far enough.

She said the mayor should have set up the company without the help of Octopus Energy so City Hall could have greater power over the company’s energy resources.

Read more: Sadiq Khan has increased press office spending by 26 per cent in four years

“I’ve argued with him to set up a fully-licensed company – which means wholly owned byLondon – to get the best benefits for Londoners,” she said.

“The mayor seems cautious that there will be any profits to be reinvested, but a company owned and run by the Mayor would be able to support investment in green technologies and create green jobs.

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Targeted Charging Review: Decision and Impact Assessment

We are modernising electricity network charging through two closely-linked reviews: 

  • The Access and forward-looking charges review is looking at the ‘forward-looking charges’ which sends signals to users about the effect of their behaviour, encouraging them to use the networks in a particular way; and
  • The Targeted Charging Review (TCR) has examined the ‘residual charges’ which recover the fixed costs of providing existing pylons and cables, and the differences in charges faced by smaller distributed generators and larger generators (known as Embedded Benefits).

Today we are publishing our final decision on TCR. We have decided that:

  • Residual charges will be levied in the form of fixed charges for all households and businesses.
  • We will be removing liability for the Transmission Generation Residual from Generators and making changes to one of the ‘Embedded Benefits’ received by Smaller Distributed Generators in relation to balancing services charges.

The decision document and Impact Assessment were updated on 18 December to correct a further error in the data provided to us by our consultants. This primarily affects table 1 of the Impact Assessment and tables 6 and 7 in the decision document. This affects the indicative charges for LV HH, HV and EHV consumers.

The decision document and Impact Assessment were updated on 9 December to correct some data provided to us by our consultants. This primarily affects table 1 of the Impact Assessment and tables 6 and 7 in the decision document. This affects the indicative charges for the North East Region only and is for LV HH and HV consumers.

Further information

For media, contact:

Stephen Roberts, 07990 139516

Media out of hours mobile: 07766 511470

General enquiries (non-media)

If you are an energy customer looking for help and advice, including complaints about energy firms, please see our Household gas and electricity guide. Citizens Advice also provide a free, impartial helpline service across a range of issues on 03454 040506.

We also regularly share news and post general advice to help consumers get the most out of their energy services via our @Ofgem twitter and Facebook pages.If you have an enquiry or complaint relating to Ofgem’s policies or functions, contact us at consumeraffairs@ofgem.gov.uk or on 020 7901 7295.

For all other non-media related enquiries, please visit our Contact us page.

About Ofgem

Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.

For facts, figures and information about Ofgem’s work, see Energy facts and figures or visit the Ofgem Data Portal.

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Energy users save £1 billion on bills in 2019

11 million customers have saved as much as £1 billion on their energy bills in 2019, according to new data to mark the first anniversary of the government’s energy price cap

  • government’s energy price cap safeguards 11 million people, often the most vulnerable and elderly, from overpaying on their gas and electricity
  • combined saving of as much as £1 billion on energy bills in the first year of the price cap
  • new data also shows 4.4 million electricity and 3.6 million gas customers switched supplier in first 9 months of 2019, saving even more

11 million customers have saved as much as £1 billion on their energy bills in 2019, according to new data to mark the first anniversary of the government’s energy price cap.

Research has shown that the cap has saved families on default energy tariffs around £75 to £100 on dual fuel bills this year. This comes as the government pledges to build on the success of the price cap and do more to lower energy bills including by investing £9.2 billion in the energy efficiency of homes, schools and hospitals and giving the Competition and Markets Authority (CMA) enhanced powers to tackle consumer rip-offs and bad business practices.

However, with around 60 suppliers now competing in the retail energy market, consumers who switch can still make the biggest savings. Around 4.4 million electricity customers switched supplier in the 9 months to September 2019. Around 3.6 million gas customers switched. Typical households would have saved an average of around £290 on their bills if moving to one of the cheapest deals.

In order to shield those least likely to shop around – including the elderly and most vulnerable – from being charged extra on their dual fuel bills the government introduced the energy price cap on 1 January 2019.

Minister of State for Business, Energy and Clean Growth, Kwasi Kwarteng, said:

Our bold action to ensure all consumers pay a fair price for their energy is making a real difference to the budgets of up to 11 million households and driving increased competition and innovation in the market which will help keep bills down.

Record numbers of customers have also decided to switch suppliers this year saving themselves an average of around £290 on their bills.

Chief Executive of Ofgem Dermot Nolan said:

The price caps give consumers who are on default deals peace of mind that they pay a fair price for their energy. Ofgem set the cap at a level which required suppliers to cut energy bills by around £1 billion.

Consumers can save more money this winter by shopping around for a better deal. While the cap remains in place, Ofgem will continue to work with government and industry to put in place reforms to get the energy market working for more consumers.

Notes to editors

Research by the Competition and Markets Authority has shown that consumers had been overpaying the ‘Big Six’ energy companies some £1.4 billion a year.

The price cap, continuing through 2020, is set by energy watchdog Ofgem, which review it every 6 months to reflect changes in the cost of supplying energy. This ensures those who do not shop around, often elderly and low-income households, are protected from paying over the odds.

The latest ceiling was set by Ofgem at £1,179 per year for a typical dual fuel bill paid by direct debit.

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Expert team to advise Citizens’ Assembly on climate change

Three groups of experts have been appointed to advise the soon-to-be-established Citizens Assembly on climate change, an initiative that has been jointly commissioned by cross-party MPs on six parliamentary committees.

The new body will be advised by an academic panel, an advisory panel and a group of four “expert leads”, headed by Chris Stark, chief executive of the Committee on Climate Change.

Letters are being sent to 30,000 households across the UK inviting people to put themselves forward, and a group of 110 citizens that accurately represent the UK population will then be selected.

The assembly will meet on 24 to 26 January in Birmingham, and at three further sittings, with the outcome of their discussions reported back to Parliament

The assembly will consider how net zero can be achieved by 2050 and make recommendations on what the government, businesses, the public and wider UK society should do to reduce carbon emissions.

The “expert leads” are responsible for ensuring that the information provided to Climate Assembly UK is balanced, accurate and comprehensive, and that discussions are focused on the key decisions facing the UK about net zero.

The four members of the group are:

Chris Stark, chief executive of the Committee of Climate Change;

Jim Watson, professor of Energy Policy and Research Director at the UCL Institute of Sustainable Resources;

Lorraine Whitmarsh, professor of Environmental Psychology, University of Cardiff, and director of the UK Centre for Climate Change and Social Transformations

Rebecca Willis, professor in Practice, Lancaster University

The advisory panel supports the expert leads in ensuring the accuracy of the information provided to Climate Assembly UK, and provides feedback on key aspects of the assembly’s design, such as who is invited to speak, what they are asked to cover, and the scope of the debate.

The advisory panel has already met on two occasions. Its members are:

Fernanda Balata, New Economics Foundation

Tanisha Beebee, Confederation of British Industry (CBI)

Patrick Begg, National Trust

Allen Creedy, Federation of Small Businesses (FSB)

Audrey Gallacher, Energy UK

Professor Michael Grubb, University College London (UCL) Institute for Sustainable Resources

Eamonn Ives, Centre for Policy Studies

Ann Jones, National Federation of Women’s Institutes

Ceris Jones, National Farmers Union (NFU)

Chaitanya Kumar, Green Alliance

Kirsten Leggatt, 2050 Climate Group

Matthew Lesh, Adam Smith Institute

Nick Molho, Aldersgate Group

Luke Murphy, Institute for Public Policy Research (IPPR)

Tim Page, Trades Union Congress (TUC)

Doug Parr, Greenpeace

Dr Alan Renwick, Constitution Unit, University College London (UCL)

Dhara Vyas, Citizens’ Advice

Rebecca Williams, RenewableUK

The academic panel will reviews the written briefings created for assembly members . Panel members were chosen on the basis of their expertise on areas of climate change that Parliament and the “expert leads” felt Climate Assembly UK should examine.

Its members are:

Professor Jillian Anable, professor of Transport and Energy, University of Leeds

Professor John Barrett, professor of Energy and Climate Policy, University of Leeds

Professor John Barry, professor of Green Political Economy, Queen’s University Belfast

Professor Jason Chilvers, professor of Environment and Society, University of East Anglia

Professor Nick Eyre, professor of Energy and Climate Policy, University of Oxford

Dr Clair Gough, senior Research Fellow with the Tyndall Centre for Climate Change Research, University of Manchester

Dr Rosie Green, assistant Professor in Nutrition and Sustainability, London School of Hygiene and Tropical Medicine

Dr Jo House, reader in Environmental Science and Policy, University of Bristol

Professor Tahseen Jafry, professor of Climate and Social Justice and Director The Centre for Climate Justice, Glasgow Caledonian University

Professor Carly McLachlan, professor of Climate and Energy Policy, University of Manchester

Professor Dale Southerton, professor in Sociology of Consumption and Organisation, University of Bristol

Professor Benjamin Sovacool, professor of Energy Policy at the Science Policy Research Unit (SPRU) at the University of Sussex 

Rachel Reeves, chair of the Business, Energy and Industrial Strategy (BEIS) Committee, one of six select committees who commissioned the climate assembly, told the BBC that a clear roadmap was needed to achieve the net zero goal.

“Finding solutions which are equitable and have public support will be crucial. Parliament needs to work with the people and with government to address the challenge of climate change.”

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UK SMEs aiming to ramp up sustainability actions

Lloyds Bank Commercial Banking’s Business Barometer surveyed 1,200 companies in November 2019, exploring attitudes towards environmental sustainability. While 64% claimed they wanted to become more sustainable, 63% have already taken steps to improve environmental performances in the past 12 months.

According to the survey, which first launched in 2002, 24% of SME respondents have improved the energy efficiency of their premises in the last year, while 22% have utilised suppliers that offer greener products and services.

Lloyds Bank Global Transaction Banking’s head of asset finance Keith Softly said: “With environmental sustainability high on the agenda for firms of every size – whether that means they’re doing what they can to reduce energy consumption or cut waste – businesses understand there is often a financial benefit to making their operations greener.

“As ever, before making significant investments, businesses should consider all the available funding options to decide which is most appropriate for them. When it comes to going green there are options such as government grants and asset finance solutions that help spread the cost of an investment over its lifetime, and initiatives like our Clean Growth Finance Initiative which offers discounted lending for green purposes.

Just under a quarter (23%) of respondents admitted that the organisation is primarily driven by making long-term costs savings, and that any investment into sustainability would have to generate such returns. However, 22% claimed they are primarily motivated by customer and consumer pressure regarding sustainability and climate change, which has heightened in recent months due to the climate strikes and new net-zero legislation introduced by Government.

However, barriers to match these ambitions with action and investment do exist. More than a third (34%) of SMEs say they plan to use cash reserves to become more sustainable. Meanwhile, 13% say they will rely on government grants.

Action areas

One key area of action for SMEs is that of waste management. A major survey of more than 1,000 UK SMEs last summer found that while the majority of businesses understand the importance of reducing single-use plastics, 40% are yet to carry out basic measures to reduce plastic waste.

The YouGov data, commissioned by Keep Britain Tidy and Brita UK has found that SME action to combat single-use plastics has been sluggish. The survey of more than 1,000 SME decision-makers found that only 52% are doing “all they can” to reduce single-use plastics.

Another key focus will be that of energy and heat. Last year, a programme was launched by the government’s Energy Systems Catapult centre to assist SMEs in developing low carbon heating and cooling.

The package, dubbed Incubator and Accelerator, offers SMEs support to secure investment for smart energy systems with expertise from the Catapult offered alongside a network of partners to help with business growth.

Matt Mace

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Renewables beat fossil fuels on 137 days in greenest year for UK energy

Energy produced by the UK’s renewable sector outpaced fossil fuel plants on a record 137 days in 2019 to help the country’s energy system record its greenest year.

The report by the Carbon Brief website found that renewable energy – from wind, solar, hydro and biomass projects – grew by 9% last year and was the UK’s largest electricity source in March, August, September and December.

The rise of renewables helped drive generation from coal and gas plants down by 6% from the year before, and 50% lower from the start of the decade. Meanwhile, the number of coal-free days has accelerated from the first 24-hour period in 2017 to 21 days in 2018 and 83 days last year.

The report’s findings come after National Grid confirmed that “low-carbon” electricity – including energy from renewables and nuclear plants – made up more than half the UK’s energy mix for the first time last year.

Although the UK’s low-carbon electricity production doubled over the last 10 years and despite the 2019 record, growth slowed sharply in the last year of the decade because of a string of outages at the UK’s ageing nuclear power plants. Carbon Brief warned this could slow progress in the years ahead.

Simon Evans, the author of Carbon Brief’s report, said: “Our analysis shows that rapid gains in decarbonising the power sector can’t be taken for granted and won’t just continue to magically happen forever.

“The government’s seemingly ambitious target to roll out 40GW of offshore wind by 2030 won’t happen without policies to back it up – and it may not be enough on its own to meet UK climate goals, without contributions from onshore wind, solar or further new nuclear.”

Audrey Gallacher, Energy UK’s interim chief executive, said the report was a “stark reminder” that the energy industry must go “much further and faster” to help meet the UK’s climate target.

Britain has set a legally binding target to create a carbon-neutral economy by cutting emissions to net zero by 2050. This means the UK must only emit as much carbon as it is able to capture and store.

The target will require a huge increase in low-carbon generation to help meet the UK’s rising need for clean electricity for transport and heating. However, the government’s delayed energy white paper is yet to emerge.

“The amount of low-carbon power produced has doubled over the last decade but we need to go above and beyond that to keep pace with our climate change targets, especially with overall demand set to increase, rather than falling as it has done in recent years,” Gallacher said.

“This underlines the urgency of increasing all forms of low-carbon generation – and why we need to see [the government’s] energy white paper as soon as possible, with action and policies that can enable the required investment and innovation to make this happen.”

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Recession Fears Cap Oil Prices In 2020

Overall, I expect that oil and other commodity prices will remain low in 2020. These low oil prices will adversely affect oil production and several other parts of the economy. As a result, a strong tendency toward recession can be expected. The extent of recessionary influences will vary from country to country. Financial factors, not discussed in these forecasts, are likely also to play a role.

The following are pieces of my energy forecast for 2020:

[1] Oil prices can be expected to remain generally low in 2020. There may be an occasional spike to $80 or $90 per barrel, but average prices in 2020 are likely to be at or below the 2019 level.

Oil prices can temporarily spike because of inadequate supply or fear of war. However, to keep oil prices up, there needs to be an increase in “demand” for finished goods and services made with commodities. Workers need to be able to afford to purchase more goods such as new homes, cars, and cell phones. Governments need to be able to afford to purchase new goods such as paved roads and school buildings.

At this point, the world economy is struggling with a lack of affordability in finished goods and services. This lack of affordability is what causes oil and other commodity prices to tend to fall, rather than to rise. Lack of affordability comes when too many would-be buyers have low wages or no income at all. Wage disparity tends to rise with globalization. It also tends to rise with increased specialization. A few highly trained workers earn high wages, but many others are left with low wages or no job at all.

It is the fact that we do not have a way of making the affordability of finished goods rise which leads me to believe that oil prices will remain low. Raising minimum wages tends to encourage more mechanization of processes and thus tends to lower total employment. Interest rates cannot be brought much lower, nor can the terms of loans be extended much longer. If such changes were available, they would enhance affordability and thus help prevent low commodity prices and recession.

[2] World oil production seems likely to fall by 1% or more in 2020 because of low oil prices.

The highest single quarter of world oil production was the fourth quarter of 2018. Oil production has been falling since this peak quarter.

To examine what is happening, the production shown in Figure 3 can be divided into that by the United States, OPEC, and “All Other.”

OPEC’s oil production bobs up and down. In general, its production is lower when oil prices are low, and higher when oil prices are high. (This shouldn’t be a surprise.) Recently, its production has been lower in response to low prices. Effective January 1, 2020, OPEC plans to reduce its production by another 500,000 barrels per day.

Figure 4 shows that oil production of the United States rose in response to high prices in the 2010 to 2013 period. It dipped in response to low oil prices in 2015 and 2016. When oil prices rose in 2017 and 2018, its production again rose. Production in 2019 seems to have risen less rapidly. Recent monthly and weekly EIA data confirm the flatter US oil production growth pattern in 2019.

Putting the pieces together, I estimate that world oil production (including natural gas liquids) for 2019 will be about 0.5% lower than that of 2018. Since world population is rising by about 1.1% per year, per capita oil production is falling faster, about 1.6% per year.

A self-organizing networked economy seems to distribute oil shortages through lack of affordability. Thus, for example, they might be expected to affect the economy through lower auto sales and through less international trade related to automobile production. International trade, of course, requires the use of oil, since ships and airplanes use oil products for fuel.

If prices stay low in 2020, both the oil production of the United States and OPEC will likely be adversely affected, bringing 2020 oil production down even further. I would expect that even without a major recession, world oil supply might be expected to fall by 1% in 2020, relative to 2019. If a major recession occurs, oil prices could fall further (perhaps to $30 per barrel), and oil production would likely fall lower. Laid off workers don’t need to drive to work!

[3] In theory, the 2019 and 2020 decreases in world oil production might be the beginning of “world peak oil.” 

If oil prices cannot be brought back up again after 2020, world oil production is likely to drop precipitously. Even the “All Other” group in Figure 4 would be likely to reduce their production, if there is no chance of making a profit.

The big question is whether the affordability of finished goods and services can be raised in the future. Such an increase would tend to raise the price of all commodities, including oil.

[4] The implosion of the recycling business is part of what is causing today’s low oil prices. The effects of the recycling implosion can be expected to continue into 2020.

With the rise in oil prices in the 2002-2008 period, there came the opportunity for a new growth industry: recycling. Unfortunately, as oil prices started to fall from their lofty heights, the business model behind recycling started to make less and less sense. Effective January 1, 2018, China stopped nearly all of its paper and plastic recycling. Other Asian nations, including India, have been following suit.

When recycling efforts were reduced, many people working in the recycling industry lost their jobs. By coincidence or not, auto purchases in China began to fall at exactly the same time as recycling stopped. Of course, when fewer automobiles are sold, demand for oil to make and operate automobiles tends to fall. This has been part of what is pushing world oil prices down.Related: Why Pirates Are Giving Up On Oil

Sending materials to Asia for recycling made economic sense when oil prices were high. Once prices dropped, China was faced with dismantling a fairly large, no longer economic, industry. Other countries have followed suit, and their automobile sales have also fallen.

Companies operating ships that transport manufactured goods to high-income countries were adversely affected by the loss of recycling. When material for recycling was available, it could be used to fill otherwise-empty containers returning from high-income countries. Fees for transporting materials to be recycled indirectly made the cost of shipping goods manufactured in China and India a little lower than they otherwise would be, if containers needed to be shipped back empty. All of these effects have helped reduce demand for oil. Indirectly, these effects tend to reduce oil prices.

The recycling industry has not yet shrunk back to the size that the economics would suggest is needed if oil prices remain low. There may be a few kinds of recycling that work (well-sorted materials, recycled near where the materials have been gathered, for example), but it probably does not make sense to send separate trucks through neighborhoods to pick up poorly sorted materials. Some materials may better be burned or placed in landfills.

We are not yet through the unwind of recycling. Even the recycling of materials such as aluminum cans is affected by oil prices. A March, 2019, WSJ article talks about a “glut of used cans” because some markets now prefer to use newly produced aluminum.

[5] The growth of the electric car industry can be expected to slow substantially in 2020, as it becomes increasingly apparent that oil prices are likely to stay low for a long period. 

Electric cars are expensive in two ways:

1. In building the cars initially, and

2. In building and maintaining all of the charging stations required if more than a few elite workers with charging facilities in their garages are to use the vehicles.

Once it is clear that oil prices cannot rise indefinitely, the need for all of the extra costs of electric vehicles becomes very iffy. In light of the changing view of the economics of the situation, China has discontinued its electric vehicle (EV) subsidies, as of January 1, 2020. Prior to the change, China was the world’s largest seller of electric vehicles. Year over year EV sales in China dropped by 45.6% in October 2019 and 45.7% in November 2019. The big drop in China’s EV sales has had a follow-on effect of sharply lower lithium prices.

In the US, Tesla has recently been the largest seller of EVs. The subsidy for Tesla is disappearing in 2020 because it has sold over 200,000 vehicles. This is likely to adversely affect the growth of EV sales in the US in 2020.

The area of the world that seems to have a significant chance of a major uptick in EV sales in 2020 is Europe. This increase is possible because governments there are still giving sizable subsidies to buyers of such cars. If, in future years, these subsidies become too great a burden for European governments, EV sales are likely to lag there as well.

[6] Ocean-going ships are required to use fuels that cause less pollution as of January 2020. This change will have a positive environmental impact, but it will lead to additional costs that are impossible to pass on to buyers of shipping services. The net impact will be to push the world economy in the direction of recession.

If ocean-going ships use less polluting fuels, this will raise costs somewhere along the line. In the simplest cases, ocean-going vessels will purchase diesel fuel rather than lower, more polluting, grades of fuel. Refineries will need to charge more for the diesel fuel, if they are to cover the cost of removing sulfur and other pollutants.

The “catch” is that the buyers of finished goods and services cannot really afford more expensive finished goods. They cut back in their demand for automobiles, homes, cell phones and paved roads if oil prices rise. This reduction in demand is what pushes commodity prices, including oil prices, down.

Evidence that shipowners cannot really pass the higher refining costs along comes from the fact that the prices that shippers are able to charge for shipping seems to be falling, rather than rising. One January article says, “The Baltic Exchange’s main sea freight index touched its lowest level in eight months on Friday, weighed down by weak demand across all segments. The Index posted its biggest one day percentage drop since January 2014, in the previous session.”

So higher costs for shippers have been greeted by lower prices for the cost of shipping. It will partly be shipowners who suffer from the lower sales margin. They will operate fewer ships and lay off workers. But part of the problem will be passed on to the rest of the economy, pushing it toward recession and lower oil prices.

[7] Expect increasingly warlike behavior by governments in 2020, for the primary purpose of increasing oil prices.

Oil producers around the world need higher prices than recently have been available. This is why the US seems to be tapering its growth in shale oil production. Middle Eastern countries need higher oil prices in order to be able to collect enough taxes on oil revenue to provide jobs and to subsidize food purchases for citizens.

With the US, as well as Middle Eastern countries, wanting higher oil prices, it is no wonder that warlike behavior takes place. If, somehow, a country can get control of more oil, that is simply an added benefit.

[8] The year 2020 is likely to bring transmission line concerns to the wind and solar industries. In some areas, this will lead to cutbacks in added wind and solar.

A recent industry news item was titled, Renewables ‘hit a wall’ in saturated Upper Midwest Grid. Most of the material that is published regarding the cost of wind and solar omits the cost of new transmission lines to support wind and solar. In some cases, additional transmission lines are not really required for the first additions of wind and solar generation; it is only when more wind and solar are added that it becomes a problem. The linked article talks about projects being withdrawn until new transmission lines can be added in an area that includes Minnesota, Iowa, parts of the Dakotas and western Wisconsin. Adding transmission lines may take several years.

A related issue that has come up recently is the awareness that, at least in dry areas, transmission lines cause fires. Getting permission to site new transmission lines has been a longstanding problem. When the problem of fires is added to the list of concerns, delays in getting the approval of new transmission lines are likely to be longer, and the cost of new transmission lines is likely to rise higher.

The overlooked transmission line issue, once it is understood, is likely to reduce the interest in replacing other generation with wind and solar.

[9] Countries that are exporters of crude oil are likely to find themselves in increasingly dire financial straits in 2020, as oil prices stay low for longer. Rebellions may arise. Governments may even be overthrown.

Oil exporters often obtain the vast majority of their revenue from the taxation of receipts related to oil exports. If prices stay low in 2020, exporters will find their tax revenues inadequate to maintain current programs for the welfare of their people, such as programs providing jobs and food subsidies. Some of this lost revenue may be offset by increased borrowing. In many cases, programs will need to be cut back. Needless to say, cutbacks are likely to lead to unhappiness and rebellions by citizens.

The problem of rebellions and overthrown governments also can be expected to occur when exporters of other commodities find their prices too low. An example is Chile, an exporter of copper and lithium. Both of these products have recently suffered from low export prices. These low prices no doubt play a major part in the protests taking place in Chile. If more tax revenue from the sales of exports were available, there would be no difficulty in satisfying protesters’ demands related to poverty, inequality, and an overly high cost of living.

We can expect more of these kinds of rebellions and uprisings, the longer oil and other commodity prices stay too low for commodity producers.

Conclusion

I have not tried to tell the whole economic story for 2020; even the energy portion is concerning. A networked self-organizing system, such as the world economy, operates in ways that are far different from what simple “common sense” would suggest. Things that seem to be wonderful in the eyes of consumers, such as low oil prices and low commodity prices, may have dark sides that are recessionary in nature. Producers need high prices to produce commodities, but these high commodity prices lead to finished goods and services that are too expensive for many consumers to afford.

There probably cannot be a “one-size-fits-all” forecast for the world economy. Some parts of the world will likely fare better than others. It is possible that a collapse of one or more parts of the world economy will allow other parts to continue. Such a situation occurred in 1991, when the central government of the Soviet Union collapsed after an extended period of low oil prices.

It is easy to think that the future is entirely bleak, but we cannot entirely understand the workings of a self-organizing networked economy. The economy tends to have more redundancy than we would expect. Furthermore, things that seem to be terrible often do not turn out as badly as expected. Things that seem to be wonderful often do not turn out as favorably as expected. Thus, we really don’t know what the future holds. We need to keep watching the signs and adjust our views as more information unfolds.

 

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Consumer Perceptions of the Energy Market Q3 2019

Publication date2nd December 2019Information types

  • Charts and data
  • Reports and plans

Policy areas

  • Domestic consumers
  • Electricity – retail markets
  • Gas – retail markets

Related LinksRelated Links

Ofgem in conjunction with Citizens Advice uses a quarterly survey to monitor domestic consumers’ perceptions about the quality of service in the energy market. Ofgem uses this information to support its monitoring and compliance activities.

The survey commenced in Q4 2018. This is the fourth wave of the study, conducted in Q3 2019.

The survey covers a range of topics including satisfaction with energy suppliers, perceptions about energy tariffs, use of price comparison websites and awareness and understanding of the default tariff price cap.  

The survey is conducted by Accent Research on behalf of Ofgem and Citizens Advice. Each quarter we survey approximately 3200 household energy bill payers across Great Britain.

read more here: https://www.ofgem.gov.uk/publications-and-updates/consumer-perceptions-energy-market-q3-2019

Please contact consumer.first@ofgem.gov.uk for further details.