What crucial trends are driving the industry cost?
Energy cost has started to decrease till more than one year, power, gas, oil, coal. Is this bearish trend profitable to the industry? Yes, of course but a significant part of this potential saving is captured by all governments to invent or discreetly increase taxes, while another part is used to increase national grid transportation cost for gas and power. The goal is to compensate big deficits connected to previously incentivize green energy contracts and to recover maintenance budgets for the network. Only a part of this saving is reserved to the industry.
In this context for the next energy budget 2016, some surprises are pending when all these different added costs will be added to finalize the plant budget.
What market segments will experience the most growth?
The energy market segment will depend on incentive contracts and tax exemptions, proposed by Governments, country per country.
Generally, biomass, biogas and waste incinerations are going to take a significant market share. This energy will profit the company able to implement big CAPEX. They are avoiding CO2 cost refunds, as it’s an added sizeable bonus. Gas usage reached today is market share. Consumption is going to stay flat. A good tracker is the forecast gas price on the market with a small spread between the spot price and the long-term price. Over-capacity on the market leads the price to come down. Coal development in industrialized countries is banned through environmental regulation, license authorization (which is difficult to get), and CO2 cost. Development could be only in emerging countries because of poor regulation. Power volume will stay as usual with a yearly increase from 2-3%.
What are the key challenges?
The calm before the storm:
Saudi Arabia has started to destroy the shale gas and petrol production with a petrol over-flow on the world market. Many American private drilling companies are yet in a bankruptcy situation, and major oil companies have postponed their exploration budget and stopped current projects. And yet, the OPEC goal to recover the world oil prices control is moving in the right direction. Therefore, sacrifice for Saudi Arabia wasn’t free in a middle term vision.
We know now that the oil prices, the gas price and other indexed energy are going to increase again in a middle term time.
What we can do to avoid this programmed increase?
We don’t control the future energy increases but we can minimize its effect or postpone it. The first step is to put in place long-term (3-4 years) physical indexed supply contract with energy suppliers. Liquid Index has to be used, for example, could be NBP, TTF, NCG, Brent, and WTI.
The second step for a larger company is to use financial hedging. The task could be done internally or with external support. Fixed and unfixed positions allow them to take advantage of the current long term cheap energy market. For a medium size company a dedicated project team has to be implemented to take the decision to fix (Swap) positions directly with the energy supplier.
In a bearish market trend it’s banned to deal with a fixed price contract or to fix one-year volume in one swap. To be clear, all companies which have contracted energy fixed prices for one or 2 years have lost big money and are going to lose their competitiveness till their contract ends!
The last challenge is to perform with efficiency projects to minimize the energy consumption, LED lighting for power reduction, plant insulation, air balancing control in the plant to limit the heating during winter, heating recovery on the air exhaust, heating recovery on the boiler fume… these are very good challenges but, as we all know, the best saving is energy not consumed, which can be achieved through large or small invest.