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Ashburn

In the world of energy, there comes a time of chaos

Began the transformation of world energy is accompanied by a sharp "interspecific" and "intraspecific" fight: new sources of energy are competing with the old. In turn, the producers announced "leaving" (even if not immediately, but in the long term of several decades) of oil and gas is also actively compete among themselves for fear that in twenty or thirty years, their products will not be needed in such volumes and will remain partially unrealized. This is especially evident in the LNG sector, when an acute crisis has postponed a new wave of projects. Nevertheless, the company plans to resume construction of new plants even in the face of possible risks of overproduction.

How to understand who will be more successful in this competition? In a zero approximation the first lower non-market support measures for low-carbon energy sources. Then we can assume that the one will win who will offer a minimum price for their goods. The minimum price is, in turn, is determined by the cost. It would seem that everything is simple. In fact in such capital-intensive areas as energy, especially renewable energy, the cost of production/production of energy carriers or directly electricity depends crucially on the value of the invested money, as already in simple examples we discussed earlier.

A recent example: the work dedicated to the analysis of the Economics of wind energy in Spain, was handled large number of projects. The authors have demonstrated the influence of value of money: the cost of the megawatt-hours of electricity generated was changed almost three times in the range of from about 46 to $ 127, if you change the cost of financing from zero ("free money" from the point of view of payment of interest on the loan or return on capital employed) to 15 per cent. The spread is impressive.

But what is the cost of capital invested in reality? It is clear that, first, it depends on the cost of credit. And the cuts in key interest rates down to negative around the world, what we are seeing now, in varying degrees, will be broadcast in the interest rates on loans. All of this supports renewable energy projects as one of the most capital-intensive in the energy sector.

But this is only half the story. Invested capital consists of the sum of equity and debt. The return on equity should be higher than for credit (more risks to own funds, as the loan is returned in the first place). Hence there is another correlation: the greater the proportion of borrowed funds, the cheaper (estimated) cost of production of energy or electricity.

In the same paper on wind energy is an example not for the model calculation and the analysis of real projects: when the share of borrowed funds in 85 percent of the cost of turns in the region of 40-60 euros (per megawatt hour) and, in contrast, is approaching the 160 euros if the share of loans only ten to fifteen percent.

For classic oil and gas projects are also on the rise in the share of borrowed funds up to 70 percent, sometimes less. But why not fully Fund a loan, since it is cheaper and more profitable? The reasons are clear: risks. In case of failure, the participation of private capital allows in many cases at least to pay its creditors. On the other hand, and the lenders are willing to issue loans if invested in and own the company, this project implements.

And here it becomes clear why renewable energy projects can be a high proportion of borrowed funds and a small loan. Their risks are minimal. First, at least, it was until recently, electricity is bought at fixed rates. Second, as in the long term for decades they have believed to be no risk of falling demand in the context of the decarbonization of energy. Not necessarily the events will develop exactly (for example, electricity prices fall, and a guaranteed buy-is increasingly rare), but this is the logic used when making decisions.

All the same applies to the oil and gas, only with a minus sign on the background of fears of energierecht and decarbonization. In connection with the foregoing, the company is ready to take investasinya only with high expected yield of new oil and gas projects. This reflects the known regulatory risks, and allows at least break even, if prices will be lower than expected (because the yield depends on the future price, which is difficult to predict). The result needed to make investasinya rate of return for new offshore oil production already exceeds 20% of LNG — more than ten percent. For comparison: for "wind" and "sun" — have less than five percent. And the more rate of return, the greater the cost, ceteris paribus.

The consequences of such circumstances? In a recent loyal to the new energy research Carbonomics investment Bank Goldman Sachs among others are the following conclusions.

First, it is expected a sharp shift of investment of oil and gas TNCs in the field of new energy. We have already discussed that, despite numerous statements about commitment to green energy and willingness to Energoproekt, in fact oil and gas companies spend only about three percent of its capex on renewable energy. But in the coming years, in 2020-2021 years, according to Goldman Sachs estimates that this share will increase sharply to ten to fifteen percent.

For its part, noted that a strong deficit in the area of LNG remains in question (too many who want to participate: it's for Qatar, excess gas, and the USA, which still can not be accepted until the end of market solutions). But in the field of oil shortage on the background of current low prices and under-investment is very real.

American multinational corporations, ExxonMobil and Chevron decided to cheat and replace part of its traditional production worldwide shale production. Here is a short investil, it is easier to respond to a possible drop in demand in the future. But at current prices, and this solution is not the best way.

To summarize. Simple answers — what is the source of energy is cheaper — no. It all depends on the required yield, but it can vary from project to project even within one type of energy source. And at times differ when comparing oil and gas and new energy. In the simplified variant of this opposition, when a new renewable energy project can get a cheap loan, while the new coal project will not be able to obtain under any interest — some banks refuse to Finance coal. In turn, the yield in any case depends on future prices, which are only forecast. As a result, the cost turns out to be a thing in itself.

If the reader has the impression that discussing above circumstances are poorly promoted it in the projections of future global energy, as it should be. Lots of uncertainty now facing the energy sector, is the new normal. And partly paradoxical conclusions from the described financial aspects underscore this uncertainty.