In 2018, expect ‘clean energy’ to be cheap energy

The central fact that will drive the energy industry worldwide in 2018, profoundly affecting businesses, consumers and policymakers, is that “clean energy” is now “cheap energy.”

Fossil fuel extraction is expensive. It is giving way to cheaper, more flexible technologies, primarily renewables like wind and solar, and electric vehicles. These shifts will change investment decisions, business models, household usage, employment patterns and politics.

What we are watching in 2018:

Big investments mean electric vehicles are likely to surge rapidly

{mosads}Technological improvements are driving the price of electric cars down. Most industry analysts are forecasting slow growth in this sector. However, we think change may occur more rapidly than predicted, due to decisions by some major businesses to purchase whole fleets of electric vehicles, an increase in the auto industry’s capital expenditures in these products, and breakthroughs in battery storage technology.

Prices of wind and solar energy will continue to drop

Renewable energy is now driving electricity markets in many parts of the world. 2017 saw a remarkable reduction in solar prices and the renewables industry gained market share in India, Mexico, China and the United States. In the Middle East, South and Central America, and African countries, reliable, safe and affordable renewable energy proliferates. During this growth period, renewables will experience some political and financial setbacks, but the industry will overcome those obstacles, as it becomes a permanent and growing part of the energy landscape.

Coal is facing a market buzz saw

Coal demand for power generation will continue its long decline and bleak outlook. Globally, long term trends, driven by economics, climate and environmental policy, are moving away from coal. Expect to see more cancellations of proposed new plants around the world and more retirements of existing plants.

In the U.S., the coal industry’s public relations efforts won’t overcome the sector’s weak fundamentals, characterized by more coal-fired power plant retirements, low energy prices and unstable export opportunities. Although the U.S. coal industry has recently pointed to modest gains in employment and investments, the improvements are temporary, if not illusory. A few companies that export metallurgical coal for steel may see an upside due to improved prices.

The U.S. industry will not recover despite regulatory rollbacks at the federal level. A key question will be whether leaders in coal country will be able to rebalance slumping economic fortunes and employment losses for coal miners with new broader investments in other industries.

The oil industry is In decline

Oil prices have been on the rise over the past two years, moving from a low of $28 per barrel to over $60 per barrel, after the biggest crash in oil prices in decades. But even as the overall U.S. stock market soared in 2017, the energy sector faltered, competing with telecommunications for the worst stock performance in the S&P 500.

Massive capital expenditures and big tract purchases by the oil and gas industry are history. Instead of its’ traditional “strength through growth” rationale, the industry will focus on how to generate cash, reduce costs, limit investments in oil and gas, and diversify.

Rising prices have brought small comfort to the governments and people of oil-rich nations. Russia and Iran face protests caused in part by difficult economic conditions, and even Saudi Arabia is making plans for growth beyond oil. The long decline of the oil and gas sector has had major implications in Norway, which built its $1 trillion sovereign wealth fund from oil revenues. In 2017, the fund — known as the “Oil Fund” — is weighing whether to take oil stocks out of its investment indexes as the industry outlook falters.

Even if oil prices continue to rise in 2018, they will not rise sufficiently to cover the overall costs of oil and gas companies or state-run organizations. Natural gas assets will continue to be plagued by high demand and a business structure inadequate to the tasks of maintaining sustainable profit levels. How publicly traded companies will cope with diminishing profits and how political leaders in oil producing countries will manage the challenge to their political legitimacy will be important to watch.

Consumer nations now have options other than to accept the economy-destroying effects of rising oil prices, and their responses may surprise the oil producers.

In sum, the pace of change in every sector will only increase as prices for clean energy decline. Attempts to hold back the tide of transition will inevitably fail.

Tom Sanzillo is the director of finance for The Institute for Energy Economics and Financial Analysis (IEEFA).