Renewable Energy Set To Reshape The U.S. Power Sector

1. Renewables shift to accelerate

- The shift towards renewable energy in the U.S. will accelerate over the next two to three years, according to an IEEFA analysis.

- Solar and wind are the least cost option in most of the country. "Coal will be pushed out of the electricity sector completely, with gas set to decline as well," said Dennis Wamsted, an IEEFA analyst. "Cleaner and lower-cost wind and solar, coupled with battery storage, will drive fossil fuels out of the market."

- IEEFA forecasts coal's share of the electricity market will fall to 10 percent by 2025.

- The report points to Texas as an example of what will unfold. In 2011, wind was already 8.5 percent of the market, and coal was 39 percent. By 2020, wind was 22.8 percent and coal fell to 17.9 percent.

- "The Texas transition will not be replicated precisely in other areas of the country, but the broad themes are certainly going to hold true, particularly the surge in new wind and solar generation through 2024," one of the authors said.

2. Oil majors remain cautious in Permian

- ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are still exercising restraint in the Permian basin. The two oil majors accounted for 28 percent of drilling activity last spring, and that is now down to less than 5 percent.

- "We essentially hit a pause button," said Chevron Chief Financial Officer Pierre Breber, according to Reuters.

- Chevron reiterated its 1-mb/d Permian production goal by 2025, but Exxon cut a similar target to just 700,000 bpd.

- Chevron will ramp up in the years ahead, but remain restrained this year, keeping 5 rigs in action, down from nearly 20 last year.

- Instead, much of the industry is turning to already-drilled wells, as a way of bringing production online with less costs.

3. Metals rally stalls

- Industrial metals have seen an extraordinary rally over the past year, and the momentum continued into 2021 on the rising expectations of a "super cycle" commodity boom.

- But the rally has recently stalled out. Short-term factors are at play. "Strength in the US dollar and fears related to a third pandemic wave in Europe drove some of that retreat," Scotiabank wrote in a note.

- The investment bank sees Biden's infrastructure bill having mixed impacts, with corporate tax increases offset by a jolt to the economy and higher industrial demand, thereby boosting metals.

- There is some hesitancy on Chinese industrial demand, which has helped drive bullish momentum. "The release of Beijing's latest Five-Year Plan-which called for reductions in carbon emissions intensity, of which steelmaking is a major source-caused some apprehension about the durability of the recent strength in iron ore values," Scotiabank said.

4. EVs set to soar, but still long way to go

- The surge of solar and wind, plus the rising share of sales for electric vehicles, will require big upgrades to the electric grid.

- Morgan Stanley says that utilities' spending on transmission and distribution (T&D) will rise by roughly 5% CAGR through 2030. "But this increase risks not being enough," Morgan Stanley said.

- The bank says Europe and the U.S. need an additional $535 billion just on T&D for the energy transition, on top of existing spending plans by utilities.

- By 2030, annual EV sales will capture 40%of the market in Europe and 25% in the U.S., rising to 95% and 62%, respectively, by 2040.

- Still, by then, EVs will only hold 38% of the entire auto fleet in Europe, and 33% in the U.S.

5. Gold and silver under pressure

- While industrial metals have seen their rally stall (as mentioned above), gold and silver are also seeing downward pressure.

- Gold fell below $1,700 per ounce this week, a psychologically important threshold, dropping to a nine-month low.

- "The gold price is still facing a lot of headwind," Commerzbank wrote in a note to clients, referring to rising bond yields. Another factor is outflows from gold-related ETFs.

- U.S. vaccinations are also going well. The dollar could still strengthen further.

- "For as long as the current market environment remains unchanged, we believe that gold will find it hard to regain any lost ground," Commerzbank wrote.

6. OPEC+ Skewing Price Risks to Upside

- Oil demand hopes have taken a hit in recent weeks due to a renewed surge in Covid cases in Europe and associated lockdowns.

- Still, most analysts remain optimistic about the rest of the year. "We think a month ago most traders thought USD 65/bbl was so high that OPEC+ would be nervous about choking off the demand recovery and stoking up US shale oil; today, we think the dominant perception is that OPEC+ sees USD 65/bbl as a floor rather than a ceiling," Standard Chartered wrote in a note.

- The investment bank pointed to demand forecasts from the IEA, EIA, OPEC and its own internal forecast. "All the forecasts show demand close to 99mb/d in six months from now, 6mb/d higher than our estimate for actual January demand," Standard Chartered said.

- "By protecting the floor and focusing on the weakness of current demand and downplaying the 6mb/d of growth to come, we think OPEC+ is skewing price risks to the upside in Q2," the bank said.

7. Solar stock rally cools

- Investors have poured money into renewable energy stocks over the past year, reflecting more bullish expectations about energy transition.

- The prospect of the end of the pandemic has investors giving fossil fuel stocks a second look, taking some of the sheen off of solar.

- The Invesco Solar ETF gained more than 230% between April 2020 and the early part of 2021. But it has lost 14% so far this year.

- The WilderHill Clean Energy Index grew sixfold in 11 months through February 9, but has since lost 30%.