By Matt Gamache, Chief Operating Officer
As we enter 2024, the global and domestic energy landscape appears increasingly uncertain. International relations and the global flow of goods has been marked by conflicts in Israel and Gaza and ongoing war in Ukraine. While 2023 began with the Federal Reserve raising interest rates and many economists expecting recession, recent economic data has pointed to a potential “soft landing,” with inflation rates beginning to subside. Politically, 2024 will bring a U.S. Presidential election, which will carry enormous implications for the future. There’s clearly plenty of critical news stories to watch in 2024, but from an energy standpoint, here are three big stories we’ll be keeping a close eye on.
New Global Energy Flows
Ongoing conflicts in Ukraine and Gaza have disrupted energy commodity markets, leading to a realignment of global energy trade. These new market dynamics will be tested in the coming year as hostilities in Europe and the Middle East continue, and forecasters expect 2024 could be the hottest year on record. While natural gas and oil prices have recently shown more stability from record highs in 2022, the coming year could bring new periods of volatility due to potential further economic and political instability.
The natural gas industry has undergone a significant change in the last couple of years. The natural gas commodity market has historically been a domestic market in the U.S., not directly tied to global geopolitics. However, recent years have seen rapid growth in the trade of liquified natural gas (LNG) in order to meet growing global demand and displace Russian gas in European markets. To supply this LNG, the U.S. has rapidly developed new LNG export terminals to become the largest exporter of natural gas in the world, with Australia and Qatar also growing their export capacity. Meanwhile, Europe and Asia have invested in import “regassification” terminals in order to receive this gas. During the first half of 2023, for the first time on record, Europe imported more gas via LNG than by pipeline. This expanded global market for natural gas means that prices in the U.S. are more susceptible to global supply and demand dynamics than ever before. If 2024 brings expanded demand due to extreme weather and increasing reliance on gas for electricity generation, it will put pressure on U.S. inventories and production.
Meanwhile, oil dynamics have had a rockier end to the year as they reacted to concerns of expanded conflict in the Middle East and disruption of the Red Sea trade route. Prices have bounced around the $80 per barrel mark thanks to rising U.S. production and slowing global demand, primarily driven by economic slowdown in China but offset by OPEC’s cuts to production. OPEC will likely continue to look at ways to reduce production and support higher price points in 2024, but we have seen U.S. oil production reach all-time highs in recent months which has helped keep markets in check. Further disruption in the Middle East could certainly tip the scale, leaving us with a number of possible directions for oil prices given the uncertainties heading into 2024.
Finally, these fossil fuel commodity markets are operating amid growing concerns about climate change. The recent UN Climate Change Conference of the Parties (COP28) saw the first explicit, global acknowledgement that the world needs to transition away from fossil fuels. While this is unlikely to result in immediate, drastic changes in energy policy around the world, there is increasing motivation to reduce and replace fossil fuels, as the next two storylines further highlight.
Renewables Market in Flux
As the world attempts to move beyond fossil fuels and increase reliance on renewably generated electricity, renewable project development must accelerate. However, in the U.S. many projects are looking at extended delays and cost overruns. For the first time in decades, the average cost of new solar and wind projects generally increased in 2023, and renewable energy companies have reported reduced profit margins on projects. This is not welcome news at a time when many organizations and businesses, as well as laws and policies, are demanding more renewables. There may be reasons for optimism in the medium to long-term, thanks to the landmark incentives provided in the Inflation Reduction Act (IRA) and recent developments in grid planning.
Coming out of the pandemic, supply-chain disruptions were widespread, and many industries had to get accustomed to higher costs and longer lead times. The Russia-Ukraine war worsened these supply chain challenges, especially in the energy industry. This has impacted renewable development across the country, perhaps most obviously in offshore wind. Those of us on the East Coast have seen state legislatures set ambitious offshore wind targets and make recent awards to project developers for numerous project contracts and leases along the Eastern seaboard. However, of the nearly 5,000 MW of awarded offshore wind project capacity in New England, over 3,000 MW saw project contracts terminated in recent months due to rising costs and project delays. The supply chain in the U.S. has struggled to keep pace with demand, which has only been exacerbated by increased borrowing costs due to high interest rates. Renewable projects require significant upfront capital, which becomes much more expensive in a high interest rate environment. While 2024 may bring gradual supply chain improvement and a potential reduction in interest rates, these factors are likely to continue to elevate project costs and stall renewable project development timelines for the near-term.
In addition to economic challenges, most renewable projects have also had to contend with a difficult grid interconnection processes characterized by long study timelines and transmission bottlenecks. Interconnection queues across the country have grown significantly as projects await study results and capacity upgrades before being allowed to interconnect. Many of our clients in Maine are very familiar with this issue at the local level. Nearly all of the small distributed solar projects currently under development in Maine’s net energy billing program have had to navigate “cluster studies,” where projects have been grouped based on geography and analyzed in bulk in order to determine potential impacts on grid infrastructure. These studies take time and in some cases, the high grid upgrade costs identified through the study process result in the need to renegotiate contracts or terminate projects. Even renewable projects that are already online have seen rising congestion costs and generation curtailment, caused by generation exceeding the grid’s carrying capacity. Without improvements to the interconnection process and rapid expansion of existing infrastructure, renewable development will be hindered.
While this recent outlook for renewable projects is not as sunny (or perhaps, windy) as it was a few years ago, there are developments that should provide a significant boost to renewables over the medium and long-term. First and foremost are the incentives provided by the Inflation Reduction Act. The legislation provides a long runway for projects, with significant federal tax credits available through at least the early 2030s, and the U.S. Treasury Department has finally released much of the needed guidance on exactly how projects can qualify for the various credits and bonuses. For many projects, these credits could help to fund 30-50% of upfront project costs. The domestic content bonuses and IRA money dedicated towards U.S. manufacturing has led to a surge in domestic supply chain investment, which should also help to reduce costs in the coming years.
In addition to new and expanded incentives, in July, the Federal Energy Regulatory Commission (FERC) issued order 2023 which is aimed at reducing the backlog of renewable projects waiting in transmission queues, by updating the procedures and agreements used in the interconnection process. The order went into effect in November. This is a small step towards improving study timelines and speeding up interconnections and we expect the interconnection process will continue to be reviewed and refined by both the FERC and state regulators in the coming years, as they attempt to keep up with rapid renewable deployment.
Electrification Gaining Momentum
To complicate the picture for future grid planning, we expect electrification of heating and transportation to continue to accelerate, thanks to new incentives, local decarbonization commitments and technological improvements. Many Competitive Energy Services’ (CES) clients have begun exploring electrification options to reduce or replace their fossil fuel consumption, and we expect these projects will continue to proliferate in 2024 and beyond.
The financial costs associated with electrification have previously been a major obstacle to proceeding with projects. That financial picture should improve in 2024 and beyond. The Inflation Reduction Act provides tax credits for air and ground source heat pumps, in addition to rebates and other incentives that should make residential installations more affordable. With growing interest and political support for heat pump adoption, technology has also continued to improve. In addition, air-source and ground-source heat pumps are being explored and developed at the commercial and district level, such as Eversource’s recent pilot project in Framingham, MA.
Further, IRA incentives have inspired significant investment in domestic manufacturing for electric vehicles and battery storage. While there will be challenges in keeping pace with demand, this should help bring down the costs of these technologies, while at least partially insulating U.S. markets from future supply chain volatility.
Electrification will not only be driven by improved technological applications and reduced costs, but also increasing requirements to reduce and eliminate fossil fuel use. Local governments and organizations have led the way on this front, with municipal ordinances in cities like Boston, Washington, D.C., St. Louis, and New York, implementing fossil fuel bans or emission reduction requirements for buildings. CES covered this trend in detail a few months ago in a blog piece titled “Municipal Ordinance: The New Wave of Compliance.” In 2023, New York was the first to do this at the state level, passing a law that will phase-in prohibitions on fossil fuel equipment in new builds. State and local laws will likely continue to expand in response to growing concerns about climate change. These laws complement the numerous voluntary carbon neutrality and net-zero commitments made by businesses and organizations, which have also continued to drive interest in electrification of fossil fuel-based heating and transportation.
There remain numerous impediments to an explosion of electrification, as investments are still costly, especially when existing equipment and infrastructure is not near end-of-life. Some car dealers have reported a recent slowdown in EV sales due to high prices and consumer range anxiety. EV charging patterns and required infrastructure are still being understood by many system planners and consumers alike. Similarly, full electrification of heating systems has come with concerns regarding reliability of the electricity grid. As reliance on electricity increases, our electricity grid will need to keep up through improved grid planning and continued investment to expand and harden existing infrastructure. These factors will keep electrification in check, while the pace of adoption continues to accelerate.
From new global energy market dynamics to renewable deployment and beneficial electrification, our energy systems are undergoing massive and rapid changes to address climate change while navigating geopolitical events, economic conditions, and evolving regulation. The upcoming year is certain to bring further changes. Understanding and dissecting these changes is a challenge that the CES team embraces every day. To understand how these trends might impact your organization in the new year and beyond, please reach out to a CES Energy Services Advisor today.
Photo by The National Aeronautics and Space Administration (NASA)
2] Wilson, Adam. Curtailment, congestion costs rise as transmission upgrades lag renewable growth. S&P Global Market Intelligence Energy