Note from the CEO - Reflections on 2022 and what's next?
What’s up, what’s down and what’s next in 2023?
Everyone has a plan until they get punched in the face. Mike Tyson’s famous line has never been more applicable than in the energy industry in 2022. The sector has bounced from one significant, unexpected event to the next, all year long.
The backdrop to 2022 was the downward shock on energy demand – a result of the global pandemic – which initially slashed energy investments by 30%. Then, energy spending came back while corona-isolated families spent their savings on goods rather than services. This sparked a squeeze on global supply chains and sent inflation soaring to levels not seen in four decades. Gas and electricity prices skyrocketed to record highs a year ago. At the outset of the year, the Omicron variant of Covid-19 released the world from the iron grip of the Delta variant, and it looked as though society would soon be back to normal. Russia, however, threw a spanner in the works in February when it invaded Ukraine, creating new turmoil in international markets. Gas supplies to Europe were disrupted, and 15% of Europe’s industrial sector was forced to shut in.
As though that were not enough, an extraordinarily hot summer dealt a significant blow to hydropower generation. This, combined with nuclear outages, removed another 210 Twh of power generation in Europe, leading to the highest power prices ever in August, followed by a new peak at year-end and with extreme forward prices for the entirety of 2023. These forward prices reveal that the market has little confidence that France’s nuclear sector will recover or that Europe will be able to import enough gas in the short to medium term. Even for 2024 and 2025, forward prices in electricity and gas markets are at abnormally high levels. Our data, however, shows that capacities within power generation and gas export and import are rapidly recovering, while energy users are taking significant steps to reduce consumption. In sum, this should soften these markets more quickly than the extreme forward prices would suggest.
The oil market, meanwhile, is currently at a softer level, driven by higher-than-expected output from the US and Venezuela, while Russian oil still manages to find markets in spite of the oil embargo. Given this supply picture, along with uncertainties surrounding oil demand in China early next year, the markets might still be soft in the first quarter of 2023. If China achieves full recovery later in the year, however, we could see product prices soar as refinery capacities will be the bottleneck.
But 2022 was not all bad news for the energy transition. Aggregate investments in renewable energy capacity exceeded upstream oil and gas investments for the first time. Huge renewable energy hubs – especially solar and wind – also came online, and new plans are steadily being unveiled, including exciting projects driven by technological advancements. Nuclear fusion has been making headlines lately, but we don’t expect it to contribute new electrons before at least 2040 – and even then it will probably be too late, too expensive and with too low flexibility to be of any relevance for the global energy system.
The biggest renewable investment areas this year were pumped storage and utility-scale battery projects. On average, five utility-scale batteries were connected to the grid per week in 2022, with the US and China leading the way. Although policies have lagged, 2022 saw two serious government commitments to the energy transition. The EU and the US put their money where their mouth is with the REPowerEU and Inflation Reduction Act initiatives, providing strong investment signals and meaningful incentives for industries and customers. In all, 47 new solar PV module manufacturing projects were announced in 2022 – 10 of which were in the US and five in Europe – showing that North Atlantic countries are starting to catch up in the solar supply chain. China, however, still dominates the market with 90% of polysilicon capacity, 98% of wafer capacity and 82% of module manufacturing capacity.
Energy is on everyone’s mind, and that isn’t going to change any time soon. We will continue to analyze and dive into these markets in depth. The energy landscape is quickly and continuously changing, but data can help us navigate our way forward with certainty and capitalize on the many opportunities that change presents.
Wishing all friends and contacts the very best for the holidays and the New Year.