By Angus McCrone
No one loves the messenger who brings bad news, said the playwright Sophocles nearly 2,500 years ago. What a relief, therefore, that in this year’s 10 Predictions, BNEF is bringing you a positive message on the world’s likely progress in 2019 toward what we call a “cleaner future”.
We expect the low-carbon transition to advance steadily this year, fueled by remorseless reductions in the costs of solar and wind electricity and of lithium-ion batteries – and also by a widening realization on the part of investors and corporations that there is this “sustainability thing” and, for reasons of self-interest, they just need to do it.
If “steadily” sounds dull, then it is unlikely to be – because 2019, at least viewed from mid-January, has all the hallmarks of being a turbulent year in the wider world of economics and politics. Against that backdrop, steady means resilient, a safe haven.
To mention a few of the dark clouds on the 2019 horizon, we have the recent, near-20% plunge in the S&P 500 Index in the three months to December 26, in the face of slowing global GDP growth. OK, the financial markets are famous for anticipating more recessions than we actually get, but it is at least a warning sign. There are other dark clouds too: from a viewpoint in mid-January, it’s hard not to feel queasy about the risk of a political crisis in the U.S., as the Democrat-led House investigates President Donald Trump, or one in Europe triggered by Italian economic policy or by a disorderly Brexit. Oh, and there are the economic strains increasingly visible in debt-soaked China.
Economic and political troubles during 2019 might influence the flow of investment in the “cleaner future”, but they will not halt it. In fact, I expect this year to see more innovation than ever before on challenges such as how to balance a wind/solar-heavy electricity system, how to make zero-subsidy renewables investable, and how to decarbonize heat.
Below, I set out BNEF’s 10 Predictions for 2019, encompassing clean energy generally, solar and wind, battery storage, electric vehicles, U.S. natural gas, international LNG, oil markets, digitalization, and energy in China – all hot from the keyboards of my colleagues who run those respective analyst teams.
Another of Sophocles’ nostrums was: “A short saying often contains much wisdom.” Unfortunately, I can’t promise to live up to that in this article, certainly not the brevity. But please bear with me.
1. Lower costs, lower dollar investment
Each year, clean energy investment has to run faster just to stand still. With wind and, particularly, solar costs falling all the time, the world has to order more and more capacity just to match the previous period’s dollar investment total. It often manages it: for instance, capacity added rose sharply in 2017, and dollars committed also increased. However, only the first of these (capacity) increased in 2018. I expect that to be the case again in 2019.
We should get more gigawatts of both wind and solar installed this year than last (see predictions 2 and 3), but solar capital costs fell particularly sharply in 2018 – by some 12% – as manufacturers slashed module prices in the face of a glut. Also, 2018 was a stellar year for high-ticket offshore wind, with $25.7 billion invested thanks to five European projects in the $1-3.5 billion-dollar range and no fewer than 13 arrays in Chinese waters. It will be a struggle to surpass that total in 2019, despite the bullish medium-term outlook (see prediction 3). More likely, 2019 will fall modestly short. In addition, the shaky stock market might mean public markets investment in clean energy undershoots 2018’s $10.5 billion.
So I expect a respectable 2019 for clean energy investment, close to reaching $300 billion for the sixth successive year, but not matching last year’s $332.1 billion. (See our press release, published today.)
– Angus McCrone
2. Solar additions rise despite China
BNEF reckons that solar installations in 2018 will end up at about 109GW, once the final numbers come in during the next few weeks. The year ahead is likely to see growth to the 125GW to 141GW range. Europe is building more PV once again, and India, the Middle East, North Africa and Turkey are continuing to expand their deployments.
The world’s largest PV market, China, is in disarray as the government tries to reconcile future solar support with a deficit in the renewable energy fund of 150 billion yuan ($23.4 billion) at the end of 2017. Clients can read more on these links (web | terminal). Meanwhile, new countries are holding auctions and tenders all the time to buy cost-effective solar power, although governments hoping to set new records may be disappointed in 2019. Incremental improvements in cost and performance will continue, but the big price fall of last year, on the back of the sudden Chinese slowdown, will not be repeated. Some firms may exit the market as module manufacturing becomes even more competitive. Technologies in the news will include floating solar, bifacial modules and combining utility-scale storage with solar.
– Jenny Chase, head of solar
3. More consolidation in onshore wind
The wind market is set to see a leap in new capacity added, from about 53.5GW in 2018 to more than 70GW in 2019, with Northern Europe, China and the U.S. all boosting the onshore element, many of those projects already financed in 2018. The offshore additions are likely to rise from 4.8GW to 8.5GW.
In offshore wind, Europe is set to install 4.9GW in 2019, compared to 3.5GW in Asia, both record figures. This will be the last year before Asia takes over as the leading market, on our forecasts installing 25% more capacity than Europe during the 2020s. Offshore wind is the ‘must-have’ technology of 2019, spurred by eye-catching price drops and awe-inspiring scale.
In onshore wind, turbine prices have dropped steeply. Since December 2016, they are down 17% according to the 2018 BNEF Wind Turbine Price Index (web | terminal). We forecast a temporary stabilization at just below $0.8 million per MW in 2019. Despite this, the year will be a moment of truth for onshore wind turbine makers and their suppliers. To fill order books in the last two years, industry players have made aggressive bets on the cost savings and efficiency gains they could achieve. These bets are now being called on. This is likely to lead to further cuts and consolidation, especially in China and India
– David Hostert, head of wind
4. Energy storage adds 10GWh for first time
Annual global energy storage deployments in 2019 will exceed 10GWh for the first time in the history of the market. This includes both utility-scale and behind-the-meter assets, and will be up from last year’s estimated 8GWh (or 4GW) of new installations.
Chinese battery producers will establish a truly global presence, despite the threat of trade wars. Automotive companies will expand relationships with Chinese suppliers as they ramp up sales in that country. International energy storage developers and integrators will head to China in search of batteries, as the Korean domestic market keeps its champions busy. Fierce competition and the recent easing of cobalt and lithium costs will push average prices below $150/kWh, undershooting the experience curve, while EV-only battery prices will be even lower than that. At the end of 2018, battery pack prices reached a record low at $176 per kWh.
– Logan Goldie-Scot, head of energy storage
5. Electric vehicle sales up by “only” 40%
There are now almost 5 million passenger electric vehicles on the road globally (over 5 million including buses and other commercial vehicles). We expect another 2.6 million to be sold in 2019. This will represent around a 40% growth rate, down from the 70% growth rate in 2018. China will again lead, with some 1.5 million of those sales, representing around 57% of the global market.
China’s market is in transition, and the recent annual doubling of sales every year looks unlikely to hold in 2019. We expect subsidies to be cut in February, but with a phase-out period that lasts until the end of 2Q. The ‘New Energy Vehicle’ quota takes effect this year but the requirements for 2019 are relatively modest. Broader macroeconomic factors (higher interest rates and slowing consumer spending) will also impact global sales. In markets like the U.S. and the U.K., direct purchase subsidies are already starting to wind down.
We expect European EV sales to come in just under 500,000. Growth should be strong in the Nordics and Germany. Sales in Italy have been slow but should start picking up in 2019, while sales in the U.K. will likely be flat or declining after the government eliminated support for popular plug-in hybrid models. North America sales should come in around 425,000, up modestly from 405,000. The Tesla Model 3 surge boosted 2H 2018 sales but the momentum will be difficult to maintain unless a lower-cost model can be introduced quickly. Sales in Japan and South Korea combined should be around 100,000.
– Colin McKerracher, head of advanced transport
6. New infrastructure to boost U.S. gas exports
BNEF expects the U.S. natural gas Henry Hub price benchmark to average between $2.50 and $3.50 per million British Thermal Units (MMBtu) in 2019, depending on how weather compares to normal. Once again, rising demand in the South is expected to be met by stronger production in the Northeast.
2018 was a year of unlocking more natural gas volumes from the Appalachian basin bound to the Midwest. The upstream impact was higher prices for the basin, which will support further production growth in 2019. The downstream impact was cheaper prices in the Midwest and a stronger competitive advantage for natural gas in that historically coal-heavy electricity-producing region. This penetration of natural gas in the Midwest will continue in 2019.
In the South, West Texas Permian production will remain constrained as new midstream capacity to take gas to the Gulf Coast will likely not come online until 2020. Weak gas prices should therefore prevail in West Texas for 2019. However, I expect exports from the Gulf to benefit from three new additions: 1) a second liquefaction train at the Corpus Christi LNG terminal, 2) the commissioning of three other new LNG export facilities, and 3) the completion of a 2.6 Bcfd underwater pipeline to export gas to Mexico.
– Laurent Key, head of North America gas
7. LNG to grow strongly for third year
Global LNG demand leapt 10% in 2018 to reach 313 million metric tons per annum – despite higher LNG prices (averaged at $10/MMBtu) than 2017 (averaged at $7/MMBtu). In 2019, we expect the global LNG trade to expand by a further 8% to reach 340MMtpa.
China will remain the key driver thanks to its policy to cut pollution from burning coal. South and Southeast Asia will continue to see their LNG imports rise on the back of higher power gas demand, infrastructure expansion and falling indigenous gas production. With its nuclear restart proceeding more slowly than expected, Japan will be taking contracted volumes from its newly commissioned LNG supply projects in Australia. Europe will further increase its imports, especially as it currently looks to be a more profitable destination than Asia for U.S. supply. In 2018, Europe imported 6MMt more LNG to reach a total of 50MMtpa, the highest since 2011.
Demand is being supported by the relative price level of LNG (largely influenced by oil and Henry Hub prices) compared to coal prices. The persistently high range of coal futures prices ($90-100/t) due to tight supply makes LNG imports an attractive option. The additional 30MMt of new LNG supply capacity scheduled to come online in 2019 will be more than sufficient to support anticipated demand growth and keep LNG prices in check in the spot market.
– Maggie Kuang, head of global LNG
8. Firmer oil price on Iran, fed, shipping
Crude oil had a rocky 2018. Both Brent and WTI rose gradually during the first nine months of the year but gave up all of their gains in the fourth quarter, ending the year down by 19% and 26% respectively. The volatility was driven by increasing U.S. production, flip-flopping around U.S. sanctions on Iran, and uncertainty around OPEC’s response to falling prices. These factors are being compounded by growing macroeconomic risks.
These drivers of oil price volatility will continue into 2019, but we expect crude to end the year in positive territory as renewed resolve from OPEC coincides with the expiration of waivers for U.S. sanctions on Iranian oil exports. If a more dovish stance from the Federal Reserve causes the dollar to give back some of its 2018 gains, and the risks hanging over emerging markets from U.S.-China trade tensions recede, we expect oil prices to recover further.
An additional upside risk for crude is the looming commencement of the International Maritime Organization’s global sulfur content limit from January 1 next year. This is likely to increase demand for middle distillates, which will require increased refinery runs and boost demand for Brent-like crude.
– Richard Chatterton, head of oil demand analysis
9. Industrials splash out on IoT
Industrial equipment manufacturers have recently spent billions of dollars on Internet of Things, artificial intelligence, asset automation, robotics and sensors. This has helped them get a small portion of their revenue from selling digital software to existing customers. However, the ambition of companies like GE, Siemens, Hitachi, ABB and Schneider was much larger than this, and has been dampened in part due to strong competition from software startups, and big tech giants.
Industrials do not often have the best or cheapest IoT software products, and buying software from equipment manufacturers is not an ideal fit for customers. In 2018, Schneider and GE both spun out their digital technology IP into separate companies – Schneider put its asset software into Aveva (of which it now owns 60%), and GE announced in December the creation of a yet-to-be-named independent entity. Schneider sought to create a nimbler software firm that could sell to non-Schneider clients. GE might achieve the same, but its nearer-term aim was more defensive – to trim the industrial parent’s broad focus.
BNEF expects that in 2019 other large industrials will invest heavily in their digital platforms, through acquisitions, mergers and venture investing. Most will probably double down on digital transformation, rather than spinning out software businesses. In December last year, ABB sold its grid business to Hitachi in order to focus more on software, automation and robotics. We expect other significant IoT investment from Siemens, Toshiba, Hitachi, Honeywell and Rockwell Automation, with a focus on mergers and acquisitions.
– Claire Curry, head of digital industry research
10. Steps forward on China’s long energy transition
Although China will remain the world’s largest deployer of new renewable energy capacity, the 40GW of solar and 20GW of wind that we expect this year will not shatter any previous records. Instead, watch for the subtle but far more meaningful changes that will reshape the world’s largest power system.
The government’s main dilemma is how to ensure the country’s wind and solar industries continue to thrive on strong domestic demand without costly feed-in tariffs to support them. The goal is to push renewable energy toward wholesale grid parity (which in China is defined as parity with each province’s mostly coal power projects) so that it no longer relies on subsidies.
The most significant new effort toward this is peak shifting, which is to encourage thermal power plants to lower their output to allow more renewable energy dispatch. In other words, coal power plants now need to make way for wind and solar. The government wants to implement this nationwide in 2019.
Other measures to ensure greater renewable dispatch are more familiar, including building more projects closer to demand centers (such as rooftop solar or distributed wind), making more flexible power sources available (such as hydro, retrofitted coal peaking plants, or energy storage), new transmission lines, and enforcing the renewable portfolio standard.
China is becoming like any other power market where the key challenge toward renewable energy is not how to build more of it, but rather how to integrate what’s already there into a clean, reliable and cheap system.
– Nannan Kou, head of China
So there we have it, 10 Predictions for 2019. We have not included a forecast on world emissions in the year ahead. On that, much will depend on whether the world economy suffers a puncture. However, BNEF sees a broadening-out in the effort to curb emissions, and to work toward a “cleaner future”. That is why we have built new analysis teams covering areas such as corporate sustainability, sustainable finance, heat, digitalization, oil demand and new materials. You’ll be hearing a lot more from us in these areas in 2019.
A Happy New Year to all our clients and readers!