Outsourcing in “conservative” utilities sector set to increase

The cash-strapped utilities industry will increasingly turn to IT outsourcing over the next year as many organisations finally realise they have no choice but to consider it because of the potential cost savings, according to Ovum.

In a new report*, the independent technology analyst claims that the recent uptick in the number of IT outsourcing contracts awarded by utilities in Europe and North America is set to grow steadily over the next 12 months as the industry faces unprecedented pressure.

Stuart Ravens, Ovum principal analyst and co-author of the report, commented: “The utilities industry is particularly conservative and until recently very few companies had passed significant business to outsourcing companies.

“However, we have already seen a weakening of this conservatism, with a small but significant number of IT outsourcing contracts awarded in recent months. We believe this number will steadily increase over the next year and beyond. With unprecedented pressure to drive down costs, many utilities are realising that they can no longer afford to ignore outsourcing.

“They are being driven down this path by a number of market forces, including the need for new infrastructure investments, ongoing industry consolidation, and increasing interest in smart energy initiatives.”

According to the report, the areas utilities will look to outsource include infrastructure and application projects as well as back-office activities. In addition, utilities implementing smart energy initiatives will present significant opportunities to systems integrators.

Outsourcing projects awarded by utilities over the last few months include E.ON’s $1.4 billion deal with Hewlett-Packard (HP), which was awarded in December 2010 and will see HP deliver data centre operations and workplace services for more than 80,000 employees at the German giant. Meanwhile in March this year Capgemini was awarded a $162 million contract from French energy company EDF to provide service desk, procurement, and managed desktop services to 15,000 IT users.

Ravens added: “This shift in attitude by the utilities sector obviously represents a massive opportunity for vendors. The more effective IT outsourcers will be the ones that can communicate how removing IT capital expense allows for more investment in addressing industry challenges around regulation, the environment, and infrastructure improvements.”

– ENDS –

NOTES TO EDITORS

*Pressures in the Utilities Industry Creates Opportunities for Outsourcing

The report was written by Ovum utilities technology analyst Stuart Ravens in conjunction with Ovum IT services analyst John Madden and is the first or two reports that they will author on the subject.

To arrange an interview or for further details regarding this release, please contact Kelly Livesey in the Ovum press office on +44 (0)161 238 4081, or email kelly.livesey@ovum.com.

ABOUT OVUM

Ovum provides clients with independent and objective analysis that enables them to make better business and technology decisions. Our research draws upon over 400,000 interviews a year with business and technology, telecoms and sourcing decision-makers, giving Ovum and our clients unparalleled insight not only into business requirements but also the technology that organisations must support. Ovum is part of the Informa Group

Growth in the number of CIOs deploying green IT

Almost three-quarters of CIOs have deployed green IT within their organisation, with an additional eight per cent planning to do so by the end of 2012, finds new research from Ovum.

According to a survey* by the independent technology analyst, the number of organisations using green IT grew to 73 per cent in the second half of 2010, up from approximately 68 per cent in the first half, as tightened IT budgets and a sluggish economy forced IT decision-makers to scrutinise spending and wake up to the potential cost savings green IT can deliver.

Looking ahead to the end of 2012, Ovum’s survey revealed that a further eight per cent plan to deploy green IT.

Rhonda Ascierto, Ovum analyst and author of a new report** unveiling the survey findings, commented: “This growth in green IT penetration reflects a change of attitude by CIOs and other IT decision-makers. Previously, they considered green IT optional because they defined its value primarily in terms of corporate image, rather than the bottom line.

“It is now viewed as a core technology that that delivers business value by cutting costs and increasing efficiency. We believe this change has occurred because of constrained IT budgets and a sluggish global economy in the wake of the recession, which forced organisations to scrutinise spending on all types of IT. Many CIOs have for the first time had to calculate a financial return on investment of green IT.”

Ovum surveyed CIOs about five major categories of green IT: data centre virtualisation, data centre power and cooling technologies, desktop virtualisation, printing and paper usage management, and power management tools for PCs and monitors. All will experience growth in penetration over the next couple of years.

Of these different areas of green IT, data centre virtualisation has the greatest penetration, with 52 per cent of the CIOs Ovum spoke to saying they use it. According to Ovum’s survey, this figure will grow to 65 per cent over the next couple of years.

– ENDS –

NOTES TO EDITORS

*Ovum canvassed CIOs and IT decision-makers across Europe, the US, the Middle East and Australia

**Green IT Deployments Across Key Global Markets

To arrange an interview or for further details regarding this release, please contact Kelly Livesey in the Ovum press office on +44 (0)161 238 4081, or email kelly.livesey@ovum.com.

ABOUT OVUM

Ovum provides clients with independent and objective analysis that enables them to make better business and technology decisions. Our research draws upon over 400,000 interviews a year with business and technology, telecoms and sourcing decision-makers, giving Ovum and our clients unparalleled insight not only into business requirements but also the technology that organisations must support. Ovum is part of the Informa Group

Utilities should sell network to claw back high smart meter costs

Utilities should look for ways to generate additional revenues from smart meters in a bid to reduce the impact of the enormous costs associated with them, according to Ovum.

In a new report* the independent technology analyst claims that the business case for rolling out expensive smart meter networks is often thin, so utilities need to find ways to manage costs to retain financial stability.

To do this, the report advises utilities to upsell the communications network of smart meters to other industries, and claw back some of the high capital expenditure needed to deploy them.

Stuart Ravens, report co-author and Ovum principal analyst, said: “For some utilities, the business case for rolling out smart meters can be thin, with high capital costs and questionable revenues as a result. Utilities need to think outside the box in order to investigate potential revenues from non-traditional business models. 

“By selling network capacity on to enterprises in other industries, utilities could potentially offset the considerable impact of costs associated with smart meters.

“This approach does not come without its challenges. It is questionable whether utilities are up to the task of running alternative revenue business models. However, we believe utilities need to investigate them regardless. “

According to Datamonitor, the global smart metering market for residential customers will reach $5.7 billion by 2015; a 350 per cent increase from 2009, demonstrating the huge investments being made.

Selling network capacity, for example to telehealth providers or transportation management enterprises, could help utilities recoup some of the huge outlays they are making. However, according to Ovum’s report, a major ‘road block’ to this would be regulators, who would need to be consulted about any plans to generate additional revenues.

Ravens said: “Utilities wishing to investigate alternative revenue generation opportunities from their smart meter infrastructure will need to engage early with regulators. However, we believe the necessary involvement of regulators is a significant risk for utilities considering such approaches.”

According to Ravens, utilities should start to view their network as a potential revenue-generating asset now, despite having a relatively stagnant business model. He added: “The implementation of smart meters provides the opportunity for utilities to ‘break out’ of that mold. They should consider alternative opportunities when planning rollouts, working with regulators and testing technology.”

-ENDS—

NOTES TO EDITORS

*Profiting from Smart Meter Communications Networks

To arrange an interview or for further details regarding this release please contact Kelly Livesey in the Ovum press office on +44 0161 238 4081, or email klivesey@datamonitor.com

ABOUT OVUM

Ovum provides clients with independent and objective analysis that enables them to make better business and technology decisions. Our research draws upon over 400,000 interviews a year with business and technology, telecoms and sourcing decision-makers, giving Ovum and our clients unparalleled insight not only into business requirements but also the technology that organisations must support. Ovum is part of the Datamonitor group.

Business benefits from competitive energy market

UK businesses are reaping the rewards of an extremely competitive energy market, as new market entrants and specialist small providers drive up standards and lower costs, according to latest research from independent analyst, Datamonitor*.

The research, based on interviews with 2,000 major energy using businesses**, found that suppliers are using a variety of strategies to attract customers in the extremely competitive market. These strategies include extremely competitive propositions from the likes of Gazprom, to exceptional service as seen from SmartestEnergy, Haven Power and Shell Gas Direct.

David Mayne, energy market analyst at Datamonitor, comments: “Small suppliers have entered the market and have been able to set new benchmarks in service delivery by focusing on a small customer base and being able to react quickly to customer demands.

“As a result, small suppliers Smartestenergy and Haven Power achieved first and second place respectively for highest customer satisfaction in 2010. Gas specialist Shell Gas Direct has topped the rankings for highest customer satisfaction for a gas supplier since 2008.

“This has had a knock-on effect, with larger more established players adamant that they are not going to be left behind, and striving to improve their performance. SSE and EDF Energy, in third and fourth place in the rankings table, have shown that this is possible. This is only good news for the end user.

“In the face of the looming questions about energy security and environmental concerns, business customers should be reassured that their suppliers are doing their utmost to provide them with the services and propositions that they need to meet their energy needs,” concludes David.

- Ends -

Notes for editors

* UK Major Energy User Buyer Research

** Defined by Datamonitor as companies spending over £50,000 per year on either gas or power.

To arrange an interview or for further details regarding this release please contact Kelly Livesey in the Datamonitor press office on + 44 (0)161 238 4081, or email klivesey@datamonitor.com

ABOUT DATAMONITOR

The Datamonitor Group (www.datamonitor.com) is a world-leading provider of premium global business information, delivering independent data, analysis and opinion across the Automotive, Consumer Markets, Energy & Utilities, Financial Services, Logistics & Express, Pharmaceutical & Healthcare, Retail, Sourcing, Technology and Telecoms industries. Combining our industry knowledge and experience, we assist more than 6,000 of the world’s leading companies in making better strategic and operational decisions.

Me-too mindset drives smart metering market to $5.7 billion |

UK deployment set to be most expensive in the world

The global smart metering market for residential customers will reach $5.7 billion by 2015; a 350% increase from 2009, according to latest research from Datamonitor.*

Jon Lane, energy director at Datamonitor, comments: “Smart metering has gained an unstoppable momentum. The market is snowballing as policy makers and utilities invest in smart metering because everyone else is doing it. As a result, more than 60 million residential smart meter units will be shipped in 2015, a four-fold increase on last year.”

Datamonitor forecasts that during this period, the value of the residential electricity smart metering market in the UK will rise to $742 million in 2015, up from just $6 million in 2009. This includes the market for residential smart electricity meters and all related infrastructure – from communications modules through to smart thermostats and meter data management software.

However, smart meter deployment in the UK is set to be the most expensive in the world. The smart metering plans are extremely sophisticated, involving a multi-utility roll out with a central communications provider to collect and provide metering data to market participants and a centralised procurement programme to deliver economies of scale.

Jon adds: “All of this makes the UK’s smart metering programme expensive. All-in costs including gas meters were originally estimated at $215 per household but the more recent decision to fit modular meters may push up the cost further. The UK solution looks very expensive compared to, say, France where ERDF expects to drive down the cost of its meters to €32-35. The equivalent figure for the UK’s meters is around €65.

“These higher costs are only acceptable as the government has used carbon savings and an anticipated reduction in demand in its calculations. If consumers don’t reduce usage then the UK system becomes an expensive white elephant.”

Maximising opportunity

The global market is currently being driven by a wave of advanced metering infrastructure (AMI) meters being deployed in the US. This is expected to peak in 2013 but by that time, projects in France, Spain and the UK will be in full swing. By 2015, Datamonitor forecasts that the German deployment will just be beginning and that volume shipments of AMI meters in Eastern Europe will be significant.

Datamonitor states that local presence and knowledge will be key to UK vendors maximising the potential opportunities this growth will bring. As a result the large Chinese meter manufacturers, for example, will have limited success in international smart metering projects before 2015.

“The most successful vendors will be those that have worked with utilities and regulators on the system design and have a track record of understanding the needs of their customers”, concludes Jon.

- Ends -

Notes for editors

*From the report: Global Prospects for metering and advanced metering infrastructure

Jon Lane is available for comment.

To arrange an interview or for further details regarding this release please contact Joe Dixon in the Datamonitor press office on + 44 (0)7825 173 476 or email jdixon@datamonitor.com

ABOUT DATAMONITOR

The Datamonitor Group (www.datamonitor.com) is a world-leading provider of premium global business information, delivering independent data, analysis and opinion across the Automotive, Consumer Markets, Energy & Utilities, Financial Services, Logistics & Express, Pharmaceutical & Healthcare, Retail, Sourcing, Technology and Telecoms industries. Combining our industry knowledge and experience, we assist more than 6,000 of the world’s leading companies in making better strategic and operational decisions.

A new report* by the independent business analyst has found that voluntary markets were well insulated from the failures of the Copenhagen climate change talks, and indeed may have benefited from them. Companies’ desire to take action on climate change in order to appease customers and investors could in fact increase demand in the voluntary market.

Rebecca Reed-Sperrin, Datamonitor energy analyst and report author, said: “Like every other commodity market, growth in the voluntary carbon market was subdued as a result of companies re-evaluating their CSR investments, as well as a lack of finance for new projects. However, the recession only halted new entrants to the voluntary market, while those that were already investing continued to do so at similar rates.”

Pre-compliance buying is expected to fuel the growth in voluntary markets as companies in Japan, Australia and North America prepare for incoming federal legislation.

In particular, Datamonitor expects US pre-compliance demand to increase this year as a result of companies preparing for incoming federal legislation. Any positive movement towards a federal cap-and-trade system would give the voluntary carbon market a boost.

At present, companies in the EU are by the far the biggest buyer of verified emission reductions (VERs), constituting half of the market, illustrating that the creation of an emissions trading scheme does not necessarily mean the demise of voluntary emissions reduction (VER) demand. For this reason, Datamonitor does not expect the implementation of federal cap-and-trade schemes in Japan, Australia and North America to have a negative effect on the voluntary markets.

Ms Reed-Sperrin added: “Considerably higher European carbon prices are expected post-2012 as the EU Emission Trading System (ETS) experiences tighter caps and increased coverage in its third phase.

“The market in projects that generate offsets under the Clean Development Mechanism (CDM) is suffering from post-2012 uncertainty, which will diminish trading in primary certified emission reductions (CERs). Despite great policy concerns, Datamonitor expects growth in primary CER market volumes in 2010 as higher prices tempt those project developers that delayed issuance in 2009”.

Should current Australian and US proposals for emissions trading systems go ahead, in addition to some form of global agreement that would sustain the CDM, or a similar mechanism involving less developed countries, the global carbon market should advance post-2012.

The addition of a number of smaller schemes in Canada, Japan and New Zealand would also add to global transaction volumes. However, the probability of a truly global carbon market remains low. Instead, Datamonitor expects several regional carbon markets with varying degrees of interconnection to co-exist.

The independent business analyst has warned in a new report* that the world gas glut will leave LNG exporters struggling to sell to any market well into 2011. This will impact the future financial viability of any new LNG terminal since such terminals may not be needed due to the depressed demand for gas.

However, Datamonitor anticipates that gas demand will bounce back strongly in the next few years as the global economy recovers from the recession, making new LNG terminals very attractive to investors.

Oliver Dancel, senior energy and utilities analyst at Datamonitor and report author, said: “Our research suggests that LNG exporters are facing a difficult year ahead, but if they tough it out then things will pick up after that.

“France, Italy and the UK are forecast to see the biggest increases in new LNG liquefaction and re-gasification capacity up to 2015 as they look to cope with the anticipated increase in gas demand following the global recession. These countries plan to add individual LNG terminals ranging from about four to 10bcm per annum in size.”

The report found that the global credit crunch of 2007–09 has had a profound impact on investors’ ability to fund new energy assets. A combination of tighter credit, lower energy demand and lower profitability on new and existing energy assets has resulted in the scaling back of all types of investment along the supply chain in most countries. Projects which are perceived to be riskier due to higher initial capital spending such as offshore and large wind-farms are being hit the hardest.

“It is anticipated that lower-risk projects such gas-fired power stations will find it easier to procure the finance needed to complete planned investments in the short term”, said Dancel.

“This is especially the case if electricity demand and fossil fuel prices remain low relative to recent peaks. In contrast, higher-risk projects such as new nuclear build will need significant government backing or potentially a mixture of public-private finance initiatives to secure the necessary finance for such investments.”

However, the independent business analyst believes such a move is highly unlikely despite the ongoing political fallout from the disastrous BP oil spill.

The current production of oil in deepwater areas in the GoM corresponds to nearly 1.8 million bbl/day. Fields expected to come onstream by 2014 in the GoM are estimated to add a further 250,000 bbl/day. As these new fields correspond to virtually 14.0% of the current Gulf of Mexico output, any restrictions on E&P (exploration and production) could have grim repercussions in terms of total output.

Datamonitor, which has just completed research* into the future of oil production in the US, has found that reducing offshore activities in the GoM could represent the loss of business opportunities for equipment manufacturers and suppliers equal to nearly $11 billion per year.

Gregory Lemaire-Smith, associate energy analyst at Datamonitor, said: “If the accident in the Gulf of Mexico triggers a spiral effect, the impact on the global oil and gas offshore industry could be alarming.

“As oil consumption continues to grow worldwide and companies face increasingly difficult challenges – shrinking margins, unfavourable production sharing agreements, and capital intensive fields with high lifting costs – any restriction in the exploration of offshore areas would be bad news.”

He added: “Our research clearly demonstrates that the state of the oil market doesn’t allow the US the luxury of closing offshore regions to activity – a fact that both political parties are all too aware of.

“The Deepwater Horizon explosion may have caused one of the worst spills in living memory and shaken the very foundations of the world’s most significant piece of environmental legislation, the US climate bill, but eventually oil will emerge as the winner.”

Datamonitor believes that safety improvements being worked on in the wake of the Deepwater Horizon oil rig explosion should not only focus on spill-containment, but also control of gaseous emissions, aqueous discharges and non-aqueous drilling fluids.

Latest research* by the independent business analyst suggests that while improved interconnections within Europe and continuing advances in energy efficiency should ensure security of supply is reasonably well assured, collective reliance on external gas supplies will increase to unprecedented levels.

Kash Burchett, energy analyst at Datamonitor, said: “It appears that the period 2016-20 will see problems emerge. The construction time required for new nuclear reactors and even new combined cycle gas turbine plants, in conjunction with a planned nuclear phase-out and coal-fired generation shutdown, present potential capacity constraints in many countries.

He added: “Reliance on non-EU gas supply in the total primary energy mix will be greatest at this point. Should an unforeseeable interruption to supply appear at this time, the consequences could be dire.

“In light of this, it seems increasingly likely that, although governments have not yet admitted it to their electorates, nuclear phase-out will be delayed in many member states.”

Datamonitor’s research also reveals that Europe’s security of supply hinges to a large extent on the continued expansion of global LNG output and limited competition from the US for deliveries within the Atlantic basin.

Given the shale gas revolution, this seems a reasonable assumption to make for the next five years, but it becomes riskier after that; well-decline rates may yet limit the long-term impact of unconventional extraction techniques.

Furthermore, slowing investment in global liquefaction capacity as a result of the recession will make itself felt around 2017 and Asian (specifically Chinese and Indian) demand for LNG remains a wild card. The current LNG glut may well tip into a seller’s market just at the point at which Europe shuts down coal and nuclear plants and dependence on LNG reaches its peak.

“This reinforces Datamonitor’s conclusion that European nuclear phase out must be delayed”, added Mr Burchett.

“The ‘perfect storm’ brewing on the horizon is well recognized in European capitals and many governments have already announced plans to push back the shutdown of their plants. Those which have not, particularly Spain, Germany and Belgium, need to make the case to their electorates and soon.”

On the first trading day of May, the EU carbon contract price climbed to a 17-month high of E16.52, a 26% increase on April 1 prices.

And on May 3, the price of EU Allowances (EUAs) reached E16.52 – the highest price since November 24, 2008 – having largely traded sideways between E12.41 and E13.75 since January 2010. Driven by higher energy prices, structural concerns over Phase III of the European Union Emission Trading System (EU ETS) and anticipation of tightening EU emission reduction targets, prices are again on the rise, but remain significantly lower than the pre-recession high of E29.33.

In January, Datamonitor anticipated that EUAs and Certified Emission Reduction (CER) prices and volumes would strengthen in Q2 2010, as post-Copenhagen sentiment died off and as fundamentals re-exerted themselves. Over the past month, the December 2010 contract has risen steadily, with prices touching levels not seen since May 2009.

Alex Desbarres, senior renewables analyst at Datamonitor, said: “Higher oil and gas prices in April 2010 have led to some of the EU’s suppliers switching away from natural gas in favour of cheaper (albeit twice as polluting) coal power.

“The resultant increase in demand for EUAs by power sector compliance buyers to offset higher emission levels has driven prices upwards steadily over the past month. With EUA prices widely expected to be markedly higher in Phase III, compliance buyers are locking-in at the current low prices and retaining their existing allowances with a view to banking them for use in the next phase.”

Further tightening the gap between supply and demand is the anticipation that suppliers’ emission thresholds might be reduced further on the back of a possible move by the EU to tighten its 2020 emissions reduction target, from 20% below 1990 levels to as high as 30%. The idea has gained the support of several heavyweight EU members, including Germany and the UK, with EU climate commissioner Connie Hedegaard stating that such ambitions would be “technically feasible and economically affordable”. However, latest reports suggest a decision on deepening the EU’s emission target is unlikely to come before October.

Mr Desbarres added: “In the short term, EU carbon prices will be challenged by market worries over Greece’s sovereign debt crisis, as well as the possibility of sovereign default in Spain and Portugal. However, as discussed in Datamonitor’s upcoming Global Carbon Market Update research brief, EU carbon prices are expected to trade around their current levels throughout Q2 and Q3 2010. However, prices will gradually rise towards the back end of Q3 to break through the E20.00 psychological barrier by the end of the year, driven by heightened industrial output and expectations of much tighter conditions in Phase III.”

A report* by the independent business analyst predicts that the regulator’s Green Energy Certification Scheme will help to rebuild trust among businesses faced with a complicated legal framework and unclear tariffs.

Datamonitor’s senior energy analyst and report author Maria Dias said the certification scheme, which labels green electricity tariffs that comply with Ofgem’s 2009 Green Supply Guidelines, has “raised the bar” for the UK’s green energy market.

She said: “The implementation of a label may actually enforce effective changes to green tariffs, while the guidelines alone did not.

“A lack of clarity has weakened consumers’ trust in green energy, but certification can help to rebuild that trust.

“The bar has been raised, so now other accreditation schemes may emerge, hopefully bringing credibility and informed choices to electricity consumers.”

Ms Dias added that while the Ofgem scheme represents an encouraging step forward, it must be broadened to include industrial and commercial (I &C) customers as well as domestic and small businesses in order to have maximum impact.

The Datamonitor report, entitled Marketing Green Energy in B2B Markets, finds that certification and increased transparency are key to rebuilding trust in green energy in the UK.

“Green energy is still in demand”, added Ms Dias. “What has changed is the need for clear, credible and visible proof of green supply. It is not enough to be green: businesses need to show they are green.

“All stakeholders in the market would benefit from clearer and certified green business tariffs, and the Ofgem scheme is a definite step in the right direction.”

A new report* by the independent business analyst predicts that investment in the cleantech sector in 2010 will exceed that in 2009 by a healthy margin of as much as 35%, despite significant current uncertainty in US and EU carbon markets.

Alternatives to emissions cap-and-trade frameworks have emerged in the form of sub-national mandates and incentives for clean energy. Datamonitor expects progress on new global and US climate regimes will be slow and unconvincing this year, but that the race to dominate the emerging clean economy will accelerate regardless, fuelled by unprecedented quantities of green and clean stimulus funding.

Utilities will continue to combine strong balance sheets, technical knowhow and access to credit to leverage the current strong regulatory landscape. Non-utilities will see cleantech projects as an attractive investment from both a commercial and environmental credibility perspective.

Alex Desbarres, senior renewables analyst at Datamonitor, said: “Copenhagen did not deliver the low-carbon vision, clear policy landscape and regulatory frameworks that the energy cleantech investment community had hoped for.

“For all its flaws, however, the Copenhagen accord gave the cleantech community the sense that private investors will drive the transition to a low-carbon economy.”

Cleantech market leaders no longer concern themselves with trading their way out of the carbon crisis. Instead, they are driven by the prospects of bringing innovation to market, attracting inward investment and positioning themselves as hubs of cleantech growth.

As the most commercially and technically mature form of cleantech, wind power will continue to attract the highest levels of investment, having been singled out by many governments and championed as part of several wider fiscal stimulus packages.**

Mr Desbarres added: “Energy cleantech is central to the mitigation and adaptation strategies needed to address climate change. As a result, the business community is becoming increasingly involved with issues relating to clean technology, carbon markets, energy efficiency, demand-side management, and voluntary emission reduction commitments.

“Investors and national and sub-national policies will become increasingly crucial in efforts to tackle climate change, particularly as COP16 in Mexico is expected to deliver yet more stalemate.”

A new report* by the global industry analyst suggests that while UK consumers are increasingly aware of the opportunities to recycle phones, the focus now tends to be on the financial rather than environmental benefits.

The UK is the most developed and competitive handset recycling market in the world. Ovum estimates that over a quarter (26.5%) of the 30.2 million devices recycled in Western Europe in 2009 were from the UK.

Jeremy Green, practice leader for mobile at Ovum and report co-author, said: “The UK has seen an influx of online players that offer cash for old mobile phones.

“This increase in competition has resulted in a more cut-throat market and a commercial business model that has moved away from the original intention of responsible recycling and reducing landfill.”

The rise of specialists such as Envirofone means consumers increasingly recognise the value in old mobile phones, to the detriment of operator-led collection schemes and charities which cannot compete on price.

Two years ago the majority of reusable handsets were destined to end up in Africa. However, most are now sold via auctions in Hong Kong, which appears to be the hub for handset resale. The sale of devices to third-party wholesalers via auctions means the majority of handsets are no longer traceable after this point.

The independent business analyst claims many householders can’t afford high installation costs, even with the £400 discount offered under the scheme plus further incentives from major energy retailers.

In addition, some vouchers that have been awarded may have gone unused – making it extremely difficult to measure the scheme’s true impact at the moment.

Although the scheme has reportedly received great interest, as of February there were still over 70,000 vouchers left, worth a total of £28m. That means less than half of the vouchers had been awarded, despite the unusually cold winter.

Maria Dias, senior energy and utilities analyst at Datamonitor, said: “Even with the government subsidy and further energy retailer discount*, a new boiler is still extremely costly.

“The scheme aims to replace G-rated boilers with more efficient ones, but a significant amount of people may not have the financial capacity to pay £2,000 to £3,000 upfront for installation – even with an overall £800 discount.”

Datamonitor points out that vouchers awarded have not necessarily been used. The householder has 12 weeks to redeem it, and should they not do so, the voucher is reallocated.

“Therefore,” said Ms Dias, “only in a few months will the true impact and success of the scheme be seen.

“That success will depend in part on the contribution from the major energy retailers, which can use their well-established brand, customer apathy in searching for other providers, and their strong marketing campaigns to ensure that they benefit from the opportunity given by the scheme to sell their central heating service contracts.”

Recovery from recession

The global economic recession and its destabilizing effect on oil and gas demand had severe repercussions in the offshore drilling industry.

Last year saw across-the-board deflation in prices and delays in both shallow and deep water projects.

However, in early 2009 the supply/demand balance for oil had already stabilized, and by the end of the year service rates had ceased to decline, although parts of the industry remained vulnerable, especially the low-end rig sector.

Datamonitor’s projections, contained in a newly-published report**, point to a return to overall stability in 2010 within the industry.

Numbers game

Nearly 18,000 offshore wells were drilled over the last five years, with numbers peaking in 2007. The forecast is of a recovery in 2010, followed by consistently rising numbers up to 2013 to total over 20,000 wells over the five-year period.

“Around $291 billion was spent over the last five years on offshore drilling”, said Dr Michael Smith, report author and consulting oil and gas advisor at Datamonitor.

“Spend surged in 2005 to 2007 but rose only slightly in 2008 and declined in 2009.

“The forecast for 2010-2014 is a surge in 2011 and 2012 followed by a return to previous levels of growth but with a small drop-off in 2014.”

Regional breakdown

Since 2005, when it overtook North America for the first time, Asia has attracted the highest volume of drilling spending (see graph). Around 60% of this occurs in Southeast Asia and the remaining is split between North Asia (primarily China) and South Asia (mainly India).

Datamonitor forecasts that spending in Asia will rise 24% over the next five years, after the sharp decline in 2009. Well numbers for the whole period could increase by 9%.

North America will attract the second highest volume of spending over the next five years, the majority directed at the Gulf of Mexico. A rise in spending of 30% is forecast over the period 2010-2014. Well numbers will jump by 7% after exceptional lows last year.

Africa now attracts the third highest volume of drilling spending having just surpassed Western Europe. Nearly 75% is directed at West Africa – primarily Angola and Nigeria – while Egypt attracts most of the remainder.

Spending is forecast to rise 55%, after small decline in 2009, while well numbers are forecast to increase by 29%.

Dr Smith said: “Africa has enjoyed rapid growth in deep water spending which should continue over at least the next four years, despite a slowing of exploration activity in the older deep water regions.

“Continued high spending levels are expected as ultra deep water discoveries are developed and as additional countries begin to drill deep exploration wells.

“The African market continues to boom for deep water services with high specification rigs still in demand and many opportunities for a wide range of services in a wide range of countries.”

Eastern Europe & the Former Soviet Union (FSU) attracts only a small share of global offshore drilling expenditure.

“This is due”, said Dr Smith, “to the region’s limited offshore areas outside the Caspian Sea, Sakhalin Island, the Russian Arctic and the Black Sea.”

However, spending is forecast to rise a substantial 74%, after an only modest decline in 2009. Well numbers for the whole period could increase by nearly 55%.

In Western Europe, by contrast, spending is forecast to rise just 5% and well numbers for the whole period are projected to fall by 8%. In the Middle East, where spending and well numbers are forecast to rise 63% and 40% respectively, the Persian Gulf region will once again become fundamental to supporting oil supply, increasing output to satisfy world demand.

“Over the long term Saudi Arabia, Iran and UAE will need substantially more wells than have been drilled in previous years to maintain and increase both oil and gas supplies”, said Dr Smith.

Smart new world

In addition to allowing consumers to reduce their energy consumption, smart meters are designed to make energy grids more robust and cost-effective and enable countries to integrate alternative technologies into their energy systems.

It is often argued that smart meters are the enablers of the eventual transition to a low-carbon economy.

For now, however, the challenge is to maximize the benefits and cost effectiveness of smart-meter rollouts as the utility industry embarks on one of its biggest undertakings.

Alex Desbarres, senior renewables analyst at Datamonitor and co-author of the report, said: “This is not just a gas and electricity engineering project – it is a telecommunications and IT project to rival the creation of the internet.

“Effectively what we are talking about is the construction of a machine-to-machine communications infrastructure to rival the ‘online’ facilities that we have come to enjoy.”

Learning from the pioneers: communication is key

The report finds that quickly establishing a “pro-active, co-ordinated dialogue” with consumer groups and the general public is a crucial step in delivering mass rollout projects.

Certainly, the failure to communicate the financial, social and environmental benefits of smart metering was partly to blame for the public outcry which threatened the Netherlands’ rollout and led to litigation in parts of the US, where the public associated smart metering with increased costs.

The province of Ontario and the state of Victoria, however, managed to retain public confidence in smart metering by communicating the benefits from an early stage.

In particular, Datamonitor’s report highlights the importance of addressing energy customers’ concerns over privacy and security issues prior to rollout. In Ontario, such concerns were addressed by stripping out customer information fields from the data before onward transmission by distribution network operators.

The Italian job

In Italy, the 30m household rollout proved that power line carrier (PLC) implementation works well and is cost-effective.

However in supply-led markets such as the UK, where energy suppliers will be responsible for installing smart meters in all 26 million British homes by 2020, PLC has struggled to capture as much attention as general packet radio service (GPRS) and utility radio, currently the preferred options in the UK.

“Yet the Italian experience would indicate that PLC technology option is worthy of further consideration”,  said Mr Desbarres.

“A significant proportion of the required asset infrastructure for PLC is already in place in the UK.”

Irresistible attraction

Datamonitor believes the scale of the smart-meter market will prove an irresistible attraction for most utilities, meter providers and communication infrastructure providers. 

In the UK the planned creation of a centralized communication provider (CCP) represents an opportunity to simplify and streamline the energy industry and rectify long-running data transfer issues between different players in the market. 

Government role

Datamonitor believes governments and regulators must decide what they want the smart meter rollout to achieve and then marshal the players to deliver it.

“The success of national smart meter roll-out projects is contingent upon the ability of governments to define objectives clearly and communicate them effectively to the various market stakeholders across the entire value chain”, concluded Mr Desbarres.

Harsh realities

The stalemate between rich and developing countries over who should fund the shift to a green global economy means a final agreement on a new, credible and meaningful framework for combating climate change is unlikely to be reached at Copenhagen.

Instead, the conference will forge a rough international understanding to be finalised in the months and years to come.

Alex Desbarres, senior renewables analyst at Datamonitor and author of the white paper, said: “Certain developing nations have claimed rich country governments should pledge more funds as they bear historic responsibility for climate change.

“However, the notion of the industrialized world parting with billions of dollars of taxpayer money in the midst of a recession for their rapidly rising industrial rivals lacks credibility.”

Given the scale of the challenge, the short timeframe at Copenhagen and Western nations’ zero-sum approach, it is highly improbable that Copenhagen will resolve the seemingly intractable challenge of financing climate change mitigation in developing countries.

Technology transfer

Datamonitor believes Copenhagen will almost certainly fail to deliver the significant technological resources needed by developing countries to combat climate change.

Indications suggest that the scale of low-carbon technology transfer from developed to developing countries will largely be limited to “token” joint research and development (R&D) programmes, such as the recent $150m US-China energy partnership agreement.

However R&D policies alone will not produce the required shift in investment, suggesting the Copenhagen talks will fall short of agreeing an adequate and binding international framework on technology transfer.

EU environmental policy has failed

Datamonitor believes the Emissions Trading Scheme (ETS) – Europe’s flagship policy in the fight against climate change – is flawed but will most likely survive Copenhagen as a well established framework through which the wider international community could tackle climate change.

The white paper also questions the basis of Europe’s “20-20-20” climate action proposals, which aim to reduce the EU’s overall emissions by 20%** and increase the share of renewables in energy use to 20% by 2020, suggesting they are “more political slogan than credible environmental policy.”

Mr Desbarres said current renewable targets are extremely costly, indicative of short-term thinking and unlikely to be met.

He added: “Having picked wind power as their preferred political low-hanging fruit, European policy makers then fell short of deploying arguably the more successful elements of policy at their disposal, namely credible and long-term carbon price frameworks, incentives for long-term low-carbon baseload power generation and rewarding R&D frameworks.

“Failing such redress at Copenhagen, the market will continue to fall short of delivering the infrastructure required to meet the EU’s short and long-term energy and climate policy goals.

“The public purse will once again be left to bridge the gaping disconnect between the threat of climate change, the important role that select low-carbon technologies must play and the current European policy approach.”

Established technology

Despite some claims to the contrary, carbon capture and storage (CCS) technologies present few technical barriers. The technologies are established and have already been successfully demonstrated in a number of cases, even if they have not yet been proven together as a chain or on the scale necessary for a commercial fossil fuel power station. Be that as it may, the energy industry does not expect CCS to make much of a contribution before 2020. Moreover, Europe’s current weak and wavering policy responses as far as CCS is concerned are likely to cause the technology and its much-needed contributions to be pushed back further still, says Datamonitor renewable energy senior analyst Alex Desbarres. “Today, the most significant limiting factor standing in the way of the technology’s wide-scale deployment is the lack of credible policy incentives across European member states,” he says.

In itself, CCS is a recognition that widespread coal-powered generation is here to stay and that energy policy must focus on making fossil fuel burn less damaging to the environment while promoting other sources of low-carbon power generation, Mr. Desbarres says. “And so it should be, because at a global level coal makes up the bulk of new power generation capacity, particularly in China, where the country’s economic growth depends on its scalability.

“Let us be clear: global dependence on fossil fuels will persist well past 2050,” he says.

Coal here to stay

It is estimated that oil, coal and natural gas will provide 80% of the world’s power demand in 2030, with gas and coal providing 50% of this. In absolute terms, the yearly average demand growth of two percent for coal-fired power generation is currently rising more than demand for any other fuel, and its share of global energy supply is predicted to climb to approximately 30% in 2030.

“With 85% of the growth in global coal consumption expected to come from the power sector in China and India, fossil fuels will remain a vital part of the world’s power generation mix,” Mr. Desbarres says.

For this reason, increases in global carbon emissions as far as the power generation sector is concerned will come principally from coal burn. “Because CCS is the only technology able to significantly de-carbonize widespread fossil fuel power generation, it must play a pivotal role in any credible climate change policy, particularly since its renewable rivals [mainly wind and solar] will fail to forestall the increasing use of hydrocarbons worldwide, at any cost. Quite plainly, there is no solution to global CO2 emission increases without a solution to coal,” he says.

“That is to say nothing of the fact that CCS is the only technology theoretically able to deliver large-scale carbon abatement, energy security, significant peak load supply and a non-disruptive transition to low-carbon energy systems.”

However, EU member states have thus far done little more than pick the lowest hanging fruit by implementing policy incentives that back the wide-scale deployment of wind power generation, while doing too little to give true credence to the notion of the widespread use of CCS in coal-fired power generation, Mr. Desbarres says. “The current policy landscape lacks credibility; it does not set out targets past the 2020 Kyoto timeframe, is overly expensive and delivers a slow level of renewable uptake pre-2020. Crucially, the EU 20-20-20 targets do not deal with coal or China, yet CCS could.”

EU ETS: evidence of incoherence?

The EU Emission Trading Scheme (EU ETS), Europe’s flagship policy instrument in the fight against climate change, is a prime example of Europe’s incoherent policy approach. Aside from the fact that its constrained pricing format has led to highly volatile and inefficient carbon prices and little discernible carbon abatement, the EU ETS has also failed to provide any price signals, credible or otherwise, post 2020. This is a key issue, Mr. Desbarres says, “for it is only then that new low-carbon generation technologies [such as nuclear and CCS] will come on stream, with power generation capabilities that stretch several decades into the future. In the absence of any other form of direct subsidy, the lack of a credible carbon price over the CCS investment period is an obvious barrier to its wide-scale deployment.”

The current gap between the role that CCS must play in tackling climate change and the current policy approach suggests that CCS might not make it past a handful of demonstration projects.

“It also suggests that global power generation emissions are unlikely to be diverted from their current path of rapid growth until well after 2020,” Mr. Desbarres says.

Leading the way?

Therefore, it was expected, particularly after the oil price shocks of mid-2008 and the impact of the US recession, that American consumers would be leading the way in terms of changing their personal energy consumption behaviours and usage – particularly as European consumers have a significant head-start over their US colleagues in most matters relating to energy efficiency and the environment.  According to the Energy Information Administration, in 2006 the US accounted for 21% of global energy consumption, more than double UK per capita consumption.  Indeed, over the period from 1980 to 2006, US energy consumption rose overall by 27%, compared to only 11% in the UK and only six percent in Sweden – emphasising the fact that the US has a much greater scope for conserving energy than most developed economies.

However, according to research undertaken as part of Datamonitor’s Recession and Recovery programme, US consumers are still not embracing energy efficiency and ‘green’ initiatives to anywhere near the extent of consumers in Australia, Canada and the UK, says Datamonitor global consulting director Neil Hendry.  “For example, only 12% of Americans claim to have used public transport more over the last year, compared to 31% of Britons,” he says.

“Whilst this in part can be put down to differences in the geography of the UK and the US, it does not explain why over 20% of consumers in similarly vast countries such as Australia and Canada say they use public transport more frequently than previously.”

A similar pattern is evident when consumers are asked whether they have increased the frequency with which they walk or cycle to work:  27% of UK respondents say they are now walking or cycling to the office more often than before, but only 12% of US respondents claim to be doing the same.

There is a contradiction in the numbers when automobile journeys and mileage are taken into consideration, however.  Twenty nine percent of US consumers state they are taking fewer car journeys now than they were a year ago, compared to 21% of Britons.  This apparent paradox can be explained by the fact that once the convenience and relative affordability of car ownership are taken away from US consumers, lifestyle elements that were facilitated by the car reduce in importance, thereby forcing a fundamental reassessment of recreational and shopping behaviours.  Whilst consumers in Australia, Canada and the UK will find other ways of ensuring that their lifestyle is not affected by rising petrol prices and an increased social awareness of issues such as climate change, US consumers are tending to ‘stay-at-home’ and are finding other ways of working and socialising.

Herein lies the problem for the Obama administration; whilst US consumers begin to use their homes as more of social hub or as a place of work, over the last twelve months 25% of US consumers say they have not reduced the amount of time they have the heating on at home, compared to 13% of Britons and 19% of Canadians, Mr Hendry says.  “Even the argument of a harsh winter does not carry much truck when trying to defend these findings when it is considered that the winter of 2008/9 was relatively as harsh across all three countries.”

Americans lagging behind on energy efficiency

But this is only part of the story. On every indicator of home energy efficiency examined by Datamonitor, from use of energy saving light bulbs to investment in solar panels, the US comes out bottom of the list compared to Australia, Canada and the UK.  Whilst arguments can be made around the age and design of housing stock and the cost of domestic energy supplies across the countries, the underlying fact is that at present US consumers have a long way to go when it comes to ensuring that they are using precious gas, fuel and electricity resources in the most efficient and ‘green’ means possible.

Basically, what this means is that US consumers are actually trading off energy consumption in one part of their lives for increased energy consumption in other areas, rather than seeing what they can do from a holistic perspective.  According to a University of California study in 2008, whilst this may have the desired effect of reducing carbon dioxide emissions, it has the negative effect of resulting in more nitrous oxide emissions because of the increased use of home electronics equipment and other gadgets.

Whilst initiatives being undertaken by the US Department of Energy to offer tax credits, rebates and financial incentives to consumers looking to save energy and go green are to be praised, it is apparent that more of a co-ordinated approach needs to be made at a local, state and federal level to encourage consumers to not only understand the impact that energy efficiency can have on their back pockets, but also more broadly on US energy security and global warming generally, Mr Hendry says.

“If the Obama administration’s efforts to engage with the rest of the world on climate change are to have real resonance, US consumers need to lead the world in embracing change and need to start to show real and meaningful shifts in behaviour for his words not to sound like proverbial hot air,” he says.

]]> http://about.datamonitor.com/media/archives/2822/feed 0 http://about.datamonitor.com/media/archives/2157 http://about.datamonitor.com/media/archives/2157#comments Wed, 25 Mar 2009 13:33:19 +0000 sdellarosa@datamonitor.com http://about.datamonitor.com/media/?p=2157 London – The European Union has finally signaled its willingness to finance Nabucco; the proposed gas pipeline linking the Caspian Basin with Europe via Turkey. At a summit in Brussels on the weekend, leaders gave final approval to a €200 million finance package intended to kick-start the controversial project. However, according to Datamonitor energy & utilities Kash Burchett, the pipeline is still by no means guaranteed as a number of other obstacles, including ensuring reserves, remain.

Important step for Nabucco

The money that the EU has pledged to provide comes from a larger pot of five billion euros earmarked for investment in energy and telecoms infrastructure as part of the wider European stimulus package. This is an important step forward for the Nabucco project and brings an intergovernmental accord closer to reality. However, the agreement was not reached easily, and comes after weeks of tortured wrangling and negotiations between heads of state.

In the wake of the Russia-Ukraine gas crisis in early 2009, eastern European governments reiterated their support for the pipeline at a meeting in Budapest in late January. In response to eastern Europe’s pledged support, German Chancellor Angela Merkel, backed by Italian Prime Minister Silvio Berlusconi, moved against the project. Both leaders attacked the proposals on the grounds that the construction of Nabucco is unlikely to begin for many years, undermining the stated objective of providing jobs and stimulating economic growth. This position belies a wider truth; neither Germany nor Italy is keen to invest in energy diversification projects, having secured bilateral energy treaties with Russia.

Somewhat ironically, Chancellor Merkel’s insistence on the money being spent on projects with immediate economic impact may actually speed up the construction of the pipeline. If the Nabucco consortium is to receive the funds, they will need to bring the project’s start date forward to early 2010.

EC hopes for big returns

The €200 million will be made available to the Nabucco consortium via the European Investment Bank. The consortium consists of OMV (Austria), MOL (Hungary), Transgaz (Romania), Bulgargaz (Bulgaria), BOTAS (Turkey) and RWE (Germany), each with a 16.67% share. In early 2008 GDF-Suez’s attempt to gain a stake in the pipeline was vetoed by Turkey on political grounds. However, the State Oil Company of Azerbaijan Republic and Polish gas company PGNiG plan to join the project in the future.

The money being given to this consortium is essentially a loan, intended to be used to generate further cash. Somewhat optimistically, the EC estimates that this could eventually yield some two billion euros. Even if the final figure is only half that, it is symbolically important, Mr. Burchett says. “The loan comes at a time when credit markets have all but seized up and securing finance for any project, let alone one as risky as Nabucco is difficult. The EC, which has continued to back the project in the face of mounting obstacles, can legitimately view this as a victory.”

It will also be seen as a victory for the eastern European states that view Nabucco as a means of escaping dependency on Russian gas. Poland, Slovakia and Romania in particular see reliance on Gazprom as the central threat (as opposed to transit through politically unstable Ukraine). This distinction was made explicit last week when a draft document presented at the EU heads of state summit replaced references to Nabucco with a more generic proposal for pipelines through the “Southern Energy Corridor”. This implied tacit support and indeed potential funding for the Russian-backed South Stream pipeline, the latent rival to Nabucco; feeding Russian gas to Europe through Bulgaria. This proved unacceptable to the former Soviet satellite states, which insisted on explicit reference to Nabucco.

Their success in excluding South Stream is a set-back for Gazprom, which has until now proved adept at promoting its alternative (and for that matter Nord Stream) though divide and rule tactics. Deputy chief Alexander Medvedev was quick to point to Nabucco’s continuing lack of secured upstream reserves. He is in fact correct to highlight this as a major obstacle. Furthermore, the finance agreed this weekend is a drop in the ocean compared to the estimated €10.2 billion required overall. However, the bigger problem may reside closer to Europe.

As the critical transit state, Turkey is demanding a pre-emptive right to buy 15% of the Azeri gas that will pass through the Nabucco pipeline en route to Europe. Furthermore, Ankara insists on paying less than European netback prices for that off-take portion, and on taxation rates higher than those proposed by other states through which the pipe would flow. These demands may cause turbulence in the future.

In recent months, Turkey has started to voice these demands more confidently. Buoyed by the damage done to Russia’s reputation in Ukraine and Georgia, and by the potential for energy exports from an increasingly stable Iraq, Prime Minister Recep Tayyip Erdogan envisages Turkey as Eurasia’s energy hub. Concurrently, he sees Europe as increasingly amenable to Ankara’s objectives. Mr. Erdogan’s confidence in the future of Nabucco was manifest two months ago when he essentially threatened to withdraw from the project if EU leaders were not more forthcoming over Turkey’s accession to the club.

As well as revealing how Ankara sees itself, this willingness to ‘play the energy card’ also poses two deeper questions, Mr. Burchett says. “Firstly, will Turkey follow Ukraine’s example and become more bullish in exacting transit fees? If so, this could prove an even bigger obstacle to Nabucco’s eventual realization than securing upstream reserves.

“Secondly, and perhaps more importantly, does shifting dependence from Russia and Ukraine to Turkmenistan and Turkey necessarily improve security of supply?”.

London – A tangible air of inevitability surrounded the latest gas dispute between Russia and Ukraine. The brinkmanship which has marked relations between the two states and their respective energy champions put both parties in such a position that neither would, or arguably could back down. To a certain extent, that suits Kiev better than Moscow but Ukraine’s leaders cannot play politics much longer, according to Datamonitor energy & utilities analyst Kash Burchett.

Claim and counter claim

On the morning of January 7, Russian gas supplies to Europe via Ukraine were halted completely. Precisely which party is responsible for the shutdown is unclear. Gazprom claims that Naftogaz Ukrainy unilaterally closed its export pipelines to Europe. Naftogaz retorts that Russia turned off the taps despite receiving full payment of outstanding debts. Since neither the Euro-Ukraine nor Russo-Ukraine gas metering stations are independently monitored, there is no way of verifying either party’s claim. Regardless of who initiated the suspension, its effects are now clearly being felt. Poland saw an 11% decline in its Russian gas imports. In Bulgaria, twelve thousand homes were left without central heating in icy conditions whilst fertiliser producers Neochim and Agropolychim have been forced to halt production.

This represents an escalation in a crisis which had until now been characterised by some parties as a bilateral technical affair. Kiev’s court’s nullifying a transit agreement on Monday and Moscow’s angry accusations of Ukraine stealing gas represent the two parties playing hard-ball.

For both Russia and Ukraine the stakes are extremely high. Since 2005 Gazprom has been seeking full “market rates” from Naftogaz for its gas but those demands have taken on greater urgency now. The Russian economy, which relied heavily on hydrocarbon exports and foreign capital, has struggled to deal with the tumbling price of oil and the collapse of credit markets. The ruble has lost 15% of its value since June and foreign currency reserves have shrunk by more than 25% to just under $160 billion. Hence, exacting all possible revenues from Ukraine has become a pressing priority. The temptation for belligerence was reinforced by a further cooling in relations when Ukraine supplied arms to Georgia during Russia’s August invasion.

From Kiev’s perspective the gas prices being proposed by Gazprom would undoubtedly cripple an already nose-diving economy. GDP has contracted an agonising 15% since November 2007 and the hryvnia (Ukraine’s currency) has tumbled in value. The $4.5 bn loan from the IMF in December came on the condition of a current account surplus in 2009 and strict foreign reserve requirements, such that government social-spending has effectively been frozen.

Although Gazprom is currently asking for $450 per 1000 cuM, the firm had earlier offered a rate of $250/1000 cuM. Naftogaz balked at that, since gas prices are essentially indexed to oil prices with a six to nine month time lag. Consequently, gas prices are expected to fall across Europe in 2009; hence Naftogaz proposed $202/1000 cuM.

Even at that rate, the economy can be expected to contract further by a politically unaffordable 2.7%. Steel and fertiliser (both gas intensive industries) account for over 40% of the export currency inflows and 20% of tax collections alone, but at such a gas price (and in the context of stiff Chinese competition) the industry will become unviable.

Elections looming

With elections due in the next 12 months, neither Yulia Tymoshenko nor her nemesis Viktor Yushchenko are willing to be labeled as the politician who caved in to Muscovite aggression and sentenced thousands to unemployment. This political calculation is the main reason why both Prime-Minister and President were so willing to push negotiations over the edge.

Furthermore, Ukraine put an amazing 17bcm into storage (at $179/1000 cuM) which is enough to meet domestic needs until around April. This clearly made it easier for Ukraine to hold out for a better deal than Russia. In this sense, there was more pressure on Gazprom to bring the crisis to an end. Even if the prospect of legal action against Gazprom is low (nothing happened in 2006 despite a volley of threats), each passing day represented a loss of an estimated US$9.5 million profits for Gazprom. Add to this the reputational damage done in turning off the gas altogether, and one might conclude chairman Alexi Miller may have played his hand too soon.

However, that does not imply that Kiev’s intransigent stance has not also come at a cost. During the 2006 crisis, Ukraine attracted far more sympathy for its predicament than today. Gazprom’s actions two years ago were read as ‘Kremlin Inc.’s’ punishment for the Orange Revolution. This time, the bitter divisions which mark Ukrainian politics have precipitated a clear readiness amongst the Ukrainian elites to exploit the inevitable gas dispute and score points. Such pettiness has allowed Moscow to frame the conflict as partly the fault of Kiev and cast Ukraine as an unreliable transit state, unfit for EU accession. This has not gone unnoticed; EU Commission President, Jose Manuel Barroso went so far as to suggest that such games may delay Ukraine’s accession to the EU – something both Tymoshenko and Yushchenko would urgently seek to avoid.

The likely outcome is that Naftogaz will pay somewhere around the $225/1000 cuM mark. This is cheaper than European prices but still a massive hike from the $179/1000 cuM paid throughout 2008, and of course comes on top of the $600m Naftogaz is being fined by Gazprom for late payments. Ukraine will almost certainly end up paying European market rates by 2010, not only because Naftogaz will have to pay more but also because European rates will decline throughout the coming year on account of lower oil prices. The increases may well be staggered, as was initially penciled in October. It’s also likely that a deal could be struck in which Ukraine pays a higher rate for Russian gas in return for a higher transit fee on exports on to Europe.

The bigger question mark hangs over the fate of the shadowy RosUkrEnergo (formerly EuralTransGas). The Swiss-registered intermediary has monopoly rights on the export of Russian gas to Ukraine and is an unnecessary additional cost which Ms. Tymoshenko sought to remove in earlier negotiations with Mr Putin*. Eliminating RosUkrEnergo seems to be a necessary precondition to any settlement from Kiev’s point of view but Moscow will likely be reluctant to relinquish the firm given that it is two-thirds owned by Gazprom, says Datamonitor energy & utilities analyst Kash Burchett. “Both sides will have to make concessions.

“Theoretically, Kiev is operating with a marginal advantage, in that they can afford to delay longer than Moscow would wish. Yet the longer Ms. Tymoshenko and Mr Yushchenko continue to play games, the less goodwill either can expect in Brussels or Washington,” he says.

Red rag to a bull, or is that a bear…

During a stampeding bull market up to July 2008, traders failed to let news of sharp falls in US employment figures or weakened growth in Asia cool the market, as speculators piled into oil as a hedge against the weak dollar amid rising inflationary pressures. The longer term cause of this upward run was the fact that financial investors were convinced that tight supply-demand fundamentals could be exploited as they built up a large net long position in crude oil futures from 2004 onwards.

Every scrap of geopolitical friction was seized upon to push prices up; the hijacking of a small Japanese oil ship passing through the Gulf of Aden prompted the market to hit $117/b while intractable conflicts in Iraq and Nigeria alongside exotic statements from Libya, all supposedly served to bring supply-demand fundamentals closer together. Rumblings in Latin America were billed as a potential ‘Andean cataclysm’ rather than a largely predictable and well rehearsed contratante between Venezuela and Colombia. Even failed Presidential candidate, Hillary Clinton, managed to move the market by firing a virtual warning shot across Iranian bows as a desperate attempt to increase her poll ratings against Barack Obama after the markets had previously brushed aside US National Intelligence Estimates casting doubt on Iranian nuclear capabilities. Contractual instability in Russia and Central Asia also came as a supposed ‘surprise’ to the market in restricting Non-OPEC supply, which admittedly, still has more mileage than the death of Benazir Bhutto drawing supply-demand fundamentals closer together when pushing the markets to brink of $100/b in the closing hours of 2007. 

Time to talk it up

Little wonder then, that despite a lack of any major change in market fundamentals (beyond Saudi Arabia working towards a record 12.5m b/d output) investment banks started to hint towards forecasts of $200/b. Not to be ‘outdone’, Gazprom nudged estimates a little higher hitting $250/b, a figure that many analysts started to present as a self fulfilling prophecy as the markets approached the $150 mark in July 2008. 

But just as the bull market wouldn’t let weak employment figures or dampened growth forecasts stop the oil markets meteoric rise, it is now highly unlikely that a bear market will let ‘minor’ inconveniences such as heightened contractual instability in Russia, North Africa or Central Asia, or major geopolitical flashpoints in the Caucuses between Russia and Georgia (and ‘associated’ PKK attacks on the BTC pipeline), stem its decline as investors look for safer waters on its way down. Long standing OPEC stubbornness to increase output no longer appears to be a major problem, nor does entrenched difficulties in the Niger Delta. The fact that Evo Morales has been fighting for his political life in Bolivia as Pervez Musharraf desperately clung onto his last vestiges of power in Pakistan has barely touched the sides as the oil price slipped to $112/b. Iran’s threat in early August to block the Strait of Hormuz should Tehran be attacked also failed to register, (a point which stands in stark contrast to the $6 spike following Iranian missile tests merely a month earlier). Even the specter of Hurricane Gustav wiping out the Gulf of Mexico, has failed to rally the market. The slow road to US recovery from the credit crunch is also failing to make much traction in recalibrating oil prices on an upward trajectory.

Wall Street runs its course

This all points us towards our first inconvenient truth; namely, that speculation has added a sizeable chunk on the oil price in capitalising on tight market fundamentals. Given that the latest ‘price signals’ emanating from the Caucuses over the fraught existence of the BTC pipeline and access to Central Asian oil reserves that feed it, or looming storms in the Gulf of Mexico, have actually prompted the oil market to drop even further (hitting $106/b), provides unequivocal evidence that the market is currently being dictated by financial investors unwinding their net long positions to realise capital gains and release liquidity, rather than any shorter term price signals in play.

The strategy, as far as the market is concerned, is simple. It is actively looking to steer itself back towards a fundamental correction (probably to around the $85-95/b mark), which remains a truer reflection of the supply-demand fundamentals to hand with OPEC pushing production to its highest level in 48 years to 33mb/d. But what remains remarkable about this correction, is the extent to which the market is once again willing to ignore genuinely seismic events (such as those in the Caucuses), which, even a month ago, would have made prices above $170/b entirely conceivable. While it might be a little strong to say the market is broken, the degree to which speculation has forced the market up, now means that it having to break all the rules in order to restore a semblance of rationality.

So what next? OPEC is back on, as is the ‘market’

Once prices become reattached to the fundamentals in play, shorter term price signals will re-enter market sentiment. This will come as welcome news to OPEC, and in particular, Saudi Arabia, which prizes notional control over the market more highly than receipt maximisation. Indeed, the fact that OPEC earned as much in the first half of this year as they did in the whole of 2007 – putting $645bn into state coffers in six months – underlines the fact that they have more petrodollars to recycle than they actually know what do with.  

But with speculators taking a back seat, and market fundamentals starting to act as price signals once more, the downside for OPEC is that it will come under renewed scrutiny to increase output when it next meets on September 9^th, particularly as non-OPEC supply continues to lag. Unfortunately, this brings us to our second inconvenient truth; OPEC is likely to continue to put a floor under prices by further restricting output.

This is either because most members of the cartel are already producing at maximum capacity, or more pertinently, because all producers (including Saudi Arabia) are enjoying elevated prices and are becoming increasingly confident that demand will remain relatively inelastic in the midst of an economic downturn. Admittedly, Saudi Arabia might increase output on an ad hoc basis to cool the political ardour of Iran on geopolitical issues such as Lebanon or nuclear proliferation, but this will remain a short term play rather than a revision to flooded markets in the 1980s. In effect, the days of ‘price moderates’ could be over.

The upshot is that prices are unlikely to ease much into 2009-10, with further pressure expected by 2011-12, not least as OPEC will struggle to match demand with actual supply. Needless to say, this is all getting ‘peak oilers’ very excited, but in reality, it is not so much the physical availability of resources that is in question, but amassing the necessary capital and political conditions needed in order to make major investments. This brings us to our third inconvenient truth; the frequently quoted IEA figure that $22 trillion of investment will be needed in resource development, generation and infrastructure in order to meet global demand by 2030 remains as distant, as it is daunting. So far, attempts to raise investment in the energy sector have been self defeating with cost inflation usurping increases in nominal spending. This means that the world is struggling to invest in sustaining current supply, let alone meeting projected demand growth of 50% over the next 25 years. 

Even now, analysts continue to make the assumption that the availability of funds for new investment is linked to prices. But this basic assumption overlooks the fact that the flow of private and state investment depends to a great extent on domestic stability and the political outlook of producer states. Indeed, as far as International Oil Companies (IOCs) are concerned, the greatest risk already pivots around limited access to low-cost reserves with IOCs having gone from holding well over half the world’s oil reserves in the late 1970s, to less than 10% today. Opening offshore reserves in the US, or greater development of the North Sea will help to stem this decline a little, but remain insufficient to level the playing field between International and National Oil Companies (NOCs). Whoever eventually ‘wins the Arctic’ could tip the balance in either direction, but at this stage, few would bet against Gazprom taking the lion’s share of reserves.

‘Geopolitical peak’ is the real concern

To reinforce this point, around 53% of the world’s proven oil reserves reside in four countries. Of these, Kuwait and Iran had tried to encourage IOC investment but the process has stalled because of domestic politics or international friction. Saudi Arabia refuses to allow investment from abroad in upstream oil, while Iraq remains particularly challenging for IOCs to make concrete commitments. The other major opening is Russia, which has increasingly cut IOCs out of Production Sharing Agreements; BP is set to become the latest contractual casualty as TNK-BP relations deteriorate. Meanwhile, Mexico will not relax a constitutional ban on outsiders, even as PEMEX production plummets.

Governments with heavy demands on their domestic budgets have also failed to resist the temptation to over-tax exploitation of natural resources, inhibiting further investment. Venezuela, Angola, Algeria, Bolivia, Kazakhstan, Libya and Nigeria are merely a short list of states that have already bitten into the ‘contract renegotiation apple’. Even in producer states where the door to reserves remains ajar, invariably the risk profile attached is simply too high for IOCs to take on. This explains why Gazprom has filled Total’s boots in Iran (a role it would also like to perform in Nigeria at Shell’s expense) while CNPC, ONGC and Petronas surpassed Talisman in Sudan and CNOOC is conducting offshore drilling in Somalia. Similarly cavalier risk appetites from Asian NOCs can be expected in Iraq. 

But those waiting for NOCs to fill the supply breach by virtue of reserves, could prove to be disappointed. Even in states not running an active ‘depletion policy’, NOCs will still find it difficult to extract sufficient reserves out of the ground. The point here is not to champion the role of IOCs (who are arguably paying a heavy price for focusing on shareholders rather than exploration for too long). Nor is it to denigrate National Oil Companies whose governance standards often leave much to be desired when operating overseas, and remain politically expedient at home when cutting IOCs in and out of production agreements. But rather, to highlight the fact that without a seismic shift in political capping of developing reserves, we are likely to meet our fourth and final ‘inconvenient truth’; namely, that speculation will be the last thing the world needs to worry about as supply-demand fundamentals run headlong into the limits of a ‘geopolitical peak’.

Wind is at the threshold

Concerns about the security of energy supply and climate change, rising demand for power as well as record energy commodity prices are all driving the development of renewable energy generation. While the total power output of these energies remains very small compared with traditional power generation, the growth of global wind energy generation has outpaced that of total global energy generation 10-fold over the past fifteen years. With the majority of new capacity now outside Europe, wind power has become one of the broadest-based renewables technologies with installations in more than 70 countries.

Wind is often considered an unreliable generation technology, yet Datamonitor research shows that while wind turbine load factors might vary from site to site and country to country, they need not be unpredictable. Turbine load factors are typically very consistent, albeit low, says Datamonitor energy and utilities senior analyst Alex Desbarres. “Over the past eight years, European wind turbines have returned consistent load factors of 18-20%. This consistency and predictability have played a large role in underpinning recent record investment levels in wind assets.”

Under pressure?

The global wind energy industry is facing several challenges – rising costs, supply chain difficulties and skills shortages – due mainly to booming demand. Yet increasing regional and state-based climate policies and support mechanisms are instigating long-term wind strategies split between domestically-focused wind generators complying with regulatory requirements, and companies applying global strategies to tap major growth opportunities. Strong growth therefore continues on the back of record sustainable energy investments, yet with wind development costs and valuations at an all time high, the economics of some projects can be marginal at best.

In the UK the Government has failed to enact regional climate policies that encourage and optimize the proliferation of wind projects, particularly offshore. Indeed, the promotion of wind investment structures has been undermined by the generous yet overly complex quota and certificate subsidy mechanism, and severe planning permission limitations. Reactions have been mixed: Shell, the oil giant, has abandoned the largest offshore project in the UK on the grounds of sub-optimal returns and planning permission difficulties. In contrast, Scottish & Southern Energy (SSE) is reportedly going ahead with the construction of a record size offshore wind farm on the basis that it would meet the company’s “rigorous investment criteria”.

New UK offshore projects will be dependant on new UK draft legislation, optimal financing structures, and leveraging lucrative power purchase agreements to boost the economics of such projects. Failing that, companies are likely to rapidly deploy exit strategies that would see them sell part or entire project equity just as wind farm valuations reach all time highs, Mr. Desbarres says. “For now, the UK government will have to act decisively to make wind farm projects more attractive in the short term or risk losing key wind farm developments to countries such as the US, which offer more attractive wind development project investment conditions.”

In Germany, a stable feed-in tariff, well-organized legislation, and frameworks for allowances and grid connection have facilitated the record development of capacity for electricity from renewable sources. Recently proposed amendments to the Renewable Energy Sources Act (EEG) – which provides for increased feed-in tariffs – will drive further innovation and investment. In the long term, Datamonitor believes recent draft amendments will facilitate the government’s target of expanding offshore wind generation capacity through new build development projects. In the shorter term, however, these amendments are more likely to generate increased levels of offshore M&A activity against a backdrop of limited offshore new build prospects. Indeed, the world’s offshore industry has now reached a critical phase which requires major investments to increase new build capacity and free up current supply and installation bottlenecks.

Runaway train

Despite recent escalating wind power capital costs, wind is still very competitive against coal and gas. When the cost of carbon is ignored, gas and coal are cheaper than wind. However, in markets where fossil fuels do carry a carbon penalty, wind power beats thermal power generation. Therefore, as primary energy costs soar the attraction of wind power as a generation technology with no fuel price risk has never been greater, Mr. Desbarres says. “In the current context of soaring generation costs and until true demand-pull can be created, it is however worth remembering that the wind industry is increasingly driven by public policy trends and is at the mercy of government programs that drive artificially stimulated demand.”

With demand for wind power generation at an all time high and record dependence on a burgeoning array of tariff and fiscal support initiatives, escalating valuation multiples in the wind sector are now driving dotcom comparisons. This raises the question as to whether current onshore and offshore wind market entry strategies are still profitable, as talk of a renewables bubble spreads across the industry, he says.

“Whilst the speculative IT bubble was driven by investors focusing on multiples of forecast profits, wind farms differ in that they generate actual profits and more predictable long-term returns.”

However, the recent decline in the share price of Iberdrola Renovables and EDF Energies Nouvelles – the renewables divisions of major European utility companies – might suggest enthusiasm for renewables is on the decline. This could echo market doubts as to whether these companies will be able to deliver on their ambitions to strategically grow renewable generating capacity, or growing concerns over recent record acquisition and development prices.

Applying conservative financing standards and typical turbine load factor characteristics and subsidy prices, Datamonitor’s cost and profitability model shows that onshore wind farm projects can be profitable and competitive, provided capital costs are kept below the US$1.75million per megawatt threshold, whereas offshore has become a high risk, high margin business. The model also shows that acquiring onshore wind can deliver more value for money than new build development, provided the cost is kept below US$2.35m per megawatt. However, the high premium paid for the acquisition of offshore wind farms often makes the overall investment less attractive than new build, Mr. Desbarres says.

“Historically wind generation technology has been seen as a chair with solid feet, yet it is now on the tipping point of having to undergo some share price correction, particularly if national and state-based support policies disappear or fail to keep up with price increases, both of which are admittedly unlikely scenarios.”