It’s January, so that means it’s time for BNEF to look forward in time – and try to predict what 2018 will hold for the clean transition in energy and transport. Luckily, there is a new Star Wars film out, and I have tracked down the far-sighted Master Yoda on LinkedIn.
To summarize, the Force will be with clean energy and transport this year, but there is also a Dark Side.
OK, not all of this forecast comes from Master Yoda. My colleagues from Bloomberg New Energy Finance’s analyst teams have also had a hand in it, and their detailed predictions are set out below, covering everything from solar and wind, to battery storage and electric vehicles, to intelligent mobility and North American gas and international LNG, to U.S. policy and the dynamic markets of China and India.
But first, here are a few broad-brush pointers on what could drive the transition forward in 2018, and what could disturb it. The continuing plunge in costs for solar and wind energy, and for lithium-ion batteries, means that market opportunities will keep opening up for clean power, storage and electric vehicles. In 2017, we saw new records set for the tariffs in renewable energy auctions around the world, at levels – for instance $18.60 per MWh for onshore wind in Mexico – that would have been unthinkable only two or three years ago.
In batteries, we estimate that lithium-ion pack prices fell by no less than 24% last year, opening up the prospect, with further cost improvements, of EVs undercutting conventional, internal combustion engine cars on both lifetime and upfront cost by the mid-to-late 2020s.
Detailed analysis by our teams suggests that these cost reduction trends are set to remain in place in the years ahead, thanks to economies of scale and technological improvements – although no trend is a straight line, given the importance of the supply-demand balance and commodity prices.
The upswing in the world economy in recent months could also be helpful for the transition in energy and transport, since it has bolstered oil and coal (and, to a lesser extent, gas) prices, so tipping the competitive comparison a little further toward wind, solar and EVs. Investor confidence in our sectors has certainly been quietly improving, with the WilderHill New Energy Global Innovation Index, or NEX, which tracks the performance of around 100 clean energy and transport stocks around the world, climbing 28% between the end of 2016 and January 11 this year.
However, and this is where the Dark Side comes in, there is room for concern about some of the risks in the wider world at the start of 2018, and about how waves created outside could wash into the energy transition. One particular risk is the uneasy co-existence of the most buoyant financial markets for more than a decade with the potential for a political or geopolitical shock – perhaps a collision between President Donald Trump and Robert Mueller, the special counsel investigating Russian interference in the U.S. presidential election; or a miscalculation on the Korean peninsula; or a military clash between Iran and Saudi Arabia.
There is a more conventional market risk. A healthier world economy has raised the likelihood of tightening monetary policies in not just the U.S. but also Europe and Japan. Long-term interest rates have recently been rising – the U.S. 10-year up from 2% in September to more than 2.5% now – and a bigger move in the same direction could start to affect the cost of capital, and therefore the relative competitiveness, of high-capex, low-opex technologies such as wind and solar.
With that preamble, and the unoriginal observation that the progress of the transition in energy and transport is sensitive to the successes or otherwise of its leading companies and to countries’ ability to manage a changing energy mix, here are BNEF’s ‘10 Predictions for 2018’. (Anyone wanting to check how we did with last year’s predictions can read our 2017 review here.
1. $330 BILLION CLEAN ENERGY INVESTMENT, AGAIN
BNEF’s clean energy investment figures for 2017, published today, show that last year came in pretty strongly – at $333.5 billion, up 3% on a revised total for the previous year and within 7% of the all-time record, set in 2015. I am going to plump for a very similar number in 2018, because the factors pushing for a higher figure this year appear to be fairly well matched against those arguing for a lower one.
First, on the bearish side, the remorseless reductions in solar (and to some extent, wind) project capital costs mean that the same billion-dollar sum will buy more gigawatts than a year earlier. And offshore wind investment could fall short of last year’s $20.8 billion, unless the French projects come out of the slow lane and get financed in 2018.
On the bullish side, public markets investment could well be higher than 2017’s modest $8.7 billion, the lowest for five years – unless, of course, we do get a general stock market upset. One firm, electric vehicle battery maker, Contemporary Amperex Technology, has filed for a $2 billion initial public offering in Shenzhen. Also, our solar team is predicting further growth in additions in 2018, and so are its colleagues in energy storage (see the specific predictions from both below). These may be enough to cancel out the capital cost reductions.
2. SOLAR TO 100GW – AND BEYOND!
Global solar installations will be at least 107GW in 2018, up from the higher-than-expected 98GW last year, and new countries will become established as significant markets. In the total global forecast for PV this year, China still dominates, with 47-65GW. However, this is the year that Latin America, south-east Asia, the Middle East and Africa will make up a measurable slice of the total. For instance, Mexico is likely to be a 3GW-plus market in 2018, and Egypt, the U.A.E. and Jordan between them at 1.7-2.1GW.
China’s boom, which saw an extraordinary 53GW installed in 2017, is still fundamentally irrational – the mechanism to collect the subsidies to be paid out has not been determined, and many of these projects are being built before they have secured ‘quota’ from the government to have access to the subsidy pool. However, it looks as if Chinese state-owned developers and investors will build them anyway, on the assumption that the government will find a way and, if not, compensation for the power itself will prevent a total loss.
A mandatory Renewable Energy Credit may be introduced in 2018 in China, and might answer part of the ‘where does the subsidy come from’ question. About half the new build in China will be distribution-grid-connected, ie smaller projects with the ability to sell to local power consumers. These are not subject to quota, but are limited by the ability of large developers to put together volumes of small deals.
(Jenny Chase, head of solar)
3. WIND INSTALLATIONS EDGE HIGHER AGAIN
Global wind installations – onshore and offshore – were some 56GW in 2017, slightly above 2016’s 54GW but well below the record of 63GW reached the previous year. We expect the slow recovery to continue in 2018, with additions reaching about 59GW, before a new record is established in 2019 at around 67GW, as the U.S. Production Tax Credit nears expiry. China and Latin America are likely to be the two regions seeing growth between 2017 and 2018.
In offshore wind, the main markets will continue to be the U.K., Germany, the Netherlands and China, but with more signs this year that the U.S. and Taiwan are preparing the ground for a string of projects in the 2020s. One of the highlights in 2018 will be the result of the Netherlands zero-subsidy auction for the Hollandse Kust I and II sites, totalling some 700MW. Two bidders (Vattenfall and Statoil) have confirmed their participation, and we expect others to emerge. Competition between a strong selection of developers would be another sign of the much improved cost-effectiveness of offshore wind.
(Tom Harries, senior analyst, wind)
4. BATTERY PACK PRICES FALL, DESPITE METAL PRESSURE
Lithium-ion battery pack prices will continue to drop in 2018, but at a slower pace than in previous years. Cobalt and lithium carbonate prices rose 129% and 29% respectively in 2017. This will start to increase average cell prices in 2018, leading to many headlines about how the EV revolution and the rise of energy storage are under threat. Despite this, we expect average pack prices to decline by 10-15%, driven by economies of scale, larger average pack sizes and energy density improvements of 5-7% per year.
Falling capex costs, an increasing need for flexible resources and greater confidence in the underlying technology will continue to drive energy storage uptake. Global storage deployments in 2018 will exceed 2GW/4GWh, and South Korea will be the single largest market, for the second consecutive year. The market is still fragile, however, and some expectations about the speed of deployment are not realistic. Batteries are hyped as the answer to all problems with intermittent renewables, including price cannibalization caused by the merit order effect, system-level balancing and network constraints. Policies rather than economics alone will determine the rate of uptake. Energy storage remains poorly understood by many within the energy sector and by policy-makers. This matters hugely since investing in alternatives such as natural gas power plants with a 25-plus year lifetime will either create a long lock-in period that would limit opportunities for other flexible resources such as storage, or result in stranded assets further down the line.
(Logan Goldie-Scot, head of storage)
5. ELECTRIC VEHICLE SALES AT 1.5 MILLION
Global EVs sales will be close to 1.5 million in 2018, with China representing more than half of the global market. This will represent a rise of around 40% from 2017, a slight slowdown in the growth rate as China tapers off direct subsidy support in preparation for the introduction of its EV quota in 2019. Sales there will probably drop in the first quarter and then recover during the rest of the year. Europe will hold its spot as the number-two EV market globally. Urban air quality concerns are mounting in European capitals, and diesel’s fall from grace will benefit the EV market. Watch Germany in particular as EV sales there doubled in 2017 and could double again in 2018. North America should finish 2018 with EV sales of around 300,000, but Tesla is the wildcard there. If it can deliver on its production targets, U.S. sales could be much higher.
(Colin McKerracher, head of electric vehicles)
6. AUTONOMOUS CARS NEAR 10 MILLION-MILE MARK
By the end of 2017, based on Waymo’s latest update and our analysis of other companies’ activities, we estimate that autonomous cars globally had achieved just over 5.2 million miles driven in autonomy mode. By the end of 2018, we expect this number to reach 8.3 million miles. The majority of autonomous miles thus far have been from test vehicles, but this may change in 2018. The leading contenders for more autonomous miles are Tesla vehicles. Tesla has not enabled the “Full Self-Driving” package it has already been selling. And the performance of the “Enhanced Autopilot” feature currently enabled in its cars has deteriorated since its partnership with Mobileye ended in September 2016. If Tesla overcomes these challenges in 2018, the company would have a commanding lead in autonomous miles driven by cars owned by private consumers.
An additional source of autonomous miles will be the Level-3 semi-autonomous cars that GM, Mercedes, Toyota and VW are starting to sell. Contributions from these vehicles will probably be lower than from Tesla’s fleet, as these automakers have put in more restrictions limiting the circumstances where consumers can use the self-driving features. Privately owned cars could become a major source of autonomous miles in 2018, potentially pushing the cumulative miles driven in fully autonomous mode beyond 10 million miles. However, there are risks with consumers misusing the technology – as happened with the Tesla Model S fatal crash in May 2016 – and more accidents could result in tighter restrictions on the further roll-out of autonomous vehicles.
(Ali Izadi-Najafabadi, head of intelligent mobility)
7. FURTHER RISES IN U.S. GAS OUTPUT AND GENERATION
BNEF expects the Nymex natural gas Henry Hub price benchmark to average close to $3 per million British Thermal Units (MMBtu) in 2018, with 10% variations around this average, driven by seasonal demand and short-term market shifting events. The natural gas markets will continue to evolve in 2018, led by both rising domestic production and growing demand, all while our expectation is that prices will remain in a similar range to 2017.
2017 was a monumental year for domestic U.S. output, with a new peak production of 77.3 billion cubic feet per day (Bcfd) based on BNEF’s estimates. This achievement was the result of producers putting rigs back to work as recovering prices and technological advances led to improving production economics. We expect this trend to continue in 2018, with the Northeast’s Marcellus/Utica and West Texas Permian leading the way, driven by production break-evens well below $3/MMBtu. In total, BNEF expects that U.S. dry natural gas production will hit a new record as it crosses 80 Bcfd by the end of the year.
Last year was also a remarkable one for U.S. natural gas consumption and exports. The 18% recovery in natural gas prices to a 2017 average of $3.02/MMBtu helped reverse the strong levels of coal-to-gas switching the U.S. markets experienced in 2015 and 2016. In 2018, we expect gas generation once again to pick up by 4% to average of 26.6 Bcfd, even as 17GW of new wind and solar installations are set to destroy some natural gas demand. The increase is primarily a function of new, efficient gas generation coming online in the U.S., pushing coal further out of the power mix. Exports will yet again play a significant role in stabilizing natural gas balances and prices, with the addition of two new LNG liquefaction projects.
(Het Shah, head of North American gas)
8. LNG TRADE TOUCHES $120 BILLION
The global LNG market will see another year of significant growth. Demand jumped 10% in 2017 to reach 285MMtpa – the fastest growth since 2011 –and we anticipate another 7-10% rise in 2018. Growing volumes coupled with higher prices will take LNG trade close to $120 billion – a 15% increase in value from last year. The main factors to watch will be China’s demand growth and the competitiveness of LNG (prices of which are influenced by oil and Henry Hub) compared to oil and coal.
The spot LNG price in Asia, the region that consumes around 75% of this fuel, averaged $9/MMBtu in 4Q 2017, up 35% from 4Q 2016, signalling a tighter winter LNG market. The key driving factor was China, where industrial and residential consumers accelerated their coal-to-gas switching efforts at the same time as winter heating demand shot up in other parts of the world. In January 2018, the spot price has risen further in North Asia, to cross $11/MMBtu, raising the question of whether the market will be tight again this year. On one hand, various factors will support demand growth – increased consumption in China to improve air quality, slower than previously expected nuclear restarts in Japan, new demand centers like Pakistan and Bangladesh and a favorable South Korean energy policy for gas. On the other hand, 35MMtpa of new liquefaction capacity will come online in 2018 – indicating that the market should get looser.
(Maggie Kuang, lead analyst, APAC LNG)
9. COAL SLIPS THROUGH TRUMP’S FINGERS
The Trump administration will continue to pull every policy lever it can find to revitalize U.S. coal-fired power generation – but will not slow coal’s inexorable and inevitable decline. We are not sticking our noses out too far on this one, actually. Already, 2018 is scheduled to be the second biggest year in U.S. history for coal plant retirements, with 13GW of projects slated to shutter. A particularly cold first week of 2018 could boost the overall coal megawatt-hours a bit, but the total amount of coal capacity online will continue to decline. In addition, on January 8, the Federal Energy Regulatory Commission rejected a request from Energy Secretary Rick Perry to have U.S. power markets reward coal and nuclear plants for the supposed “resilience” they provide to the grid. FERC, which historically prides itself on independence, rejected Perry’s request with a bipartisan 5-0 vote.
The critical supports for U.S. wind and solar remain their tax credits, which survived last year’s tax-cut legislation relatively intact. While there are outstanding questions on how U.S. projects will now get financed in the wake of the tax changes, the pipeline looks relatively healthy for 2018. However, if Trump chooses to impose trade tariffs or other penalties on foreign-manufactured PV cells, it could boost local prices for PV modules and render a meaningful portion of the U.S. solar project pipeline economically unviable. Ironically, Trump would likely justify such a move by professing his support for solar as two companies with U.S.-based manufacturing are pushing for the tariffs.
(Ethan Zindler, head of Americas)
10. COAL MAKES A LAST STAND IN INDIA, CHINA BUILDS SMALLER SOLAR
The energy transition will continue apace in Asia’s two largest power systems, India and China, though the two countries face very different opportunities and challenges. India had a mixed 2017. While a decent 12GW of renewable energy were built, new investment in clean energy fell by 20%, as a result of a number of canceled auctions and power contract renegotiations. On the other hand, India also had a poor year on fossil fuel additions in 2017, with a significant number of projects slipping on their commissioning deadlines. The lag between financing and construction means that Asia’s third-largest economy is likely to see only about 10GW of renewable capacity built in 2018, while as much as 13GW of fossil fuel plants are commissioned, many of them the uncompleted projects from last year.
However, 2018 will be the last year in which fossil fuels outpaces renewables in India. From 2019 onwards, greater policy certainty for renewables and a shrinking coal pipeline will mean more renewables built than fossil fuels each year. This will be a major milestone for a country that most see as a key battleground for the fight to stabilize global greenhouse emissions growth.
China’s solar fever will continue to rage in 2018 (see Prediction 2, above). In 2018, China will also reach a turning point where it will build more “distribution-grid-connected” solar projects than the larger “transmission-grid-connected” projects and it will also double the volume of behind-the-meter solar projects built.
The difference between the two, distribution versus transmission, is more than just about the size. As the terms imply, distribution-grid projects are connected to lower voltage grids, which allows them to be physically closer to their end-users, meaning they are subject to less curtailment. They are smaller, and about 70% of them are installed on rooftops. More importantly, the fastest growing segment of distribution-grid projects are the behind-the-meter rooftop systems, which we predict will double to 14GW in China in 2018.
(Justin Wu, head of Asia-Pacific)
So there we have them: BNEF’s 10 Predictions for 2018. We will look back later in the year, and own up to what we got right – and wrong. In coming days, some of my colleagues in sector teams will be publishing more detailed predictions and “things to watch” in the year ahead.
In the meantime, a happy and prosperous 2018 to all our clients and readers – or rather, may the Force be with you! We hope to see many of you at BNEF’s Future of Energy Summit in New York on April 9-10. See this link.
I can’t promise Master Yoda as a guest speaker. But you never know….